FinecoBank Banca Fineco SpA

MIL:FBK

Earnings Call Transcript 2020-Q2

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the FinecoBank Second Quarter 2020 Results Conference Call.

[Operator Instructions] At this time, I would like to turn the conference over to Mr. Alessandro Foti, CEO of FinecoBank. Please go ahead, sir.

[Alessandro Foti, executive]

Good afternoon, everyone, and thank you for joining our second quarter 2020 results conference call. Before we start going through the details of the presentation, let me please underline the key messages. This set of results confirms once again the soundness of our business model, able to deliver sustainable and industrial growth in every market condition and to accelerate growth in the current complex situation.

Gross operating profit stood at EUR 275 million in the first half of this year, plus 40% year-on-year. Adjusted net profit stood at EUR 181 million in the first half of the year, plus 30% year-on-year, thanks to the growth of our very well diversified stream of revenues.

Operating costs were under control, with cost income ratio declining by 6.9 percentage points year-on-year to 32.5% and confirming operating leverage as the key strength of the bank. The first half of the year recorded a strong acceleration in commercial activity, with net sales equaling EUR 4.7 billion, plus 42% year-on-year.

Let me please remind you that these results has been reached with no aggressive commercial offer and with a strong contribution from assets under management, and also thanks to the success of the new generation of products launched by Fineco Asset Management. Our net sales have been generated organically as in the first half of the year, and only 7% came from recruits, mainly over the last 24 months.

Those dynamics were confirmed also in the month of July, with net interest extremely robust and extremely solid asset mix as assets under management flows are estimated above EUR 600 million. Let me also highlight that the brokerage recorded a strong performance, with expected revenues in the month of July increasing by more than 50% year-on-year.

Let's now move on to Slide 5 and start commenting our first half results. As announced, our diversified business model has allowed us to reach, once again, very strong industrial results, despite the complex scenario. Adjusted gross operating profit reached EUR 275 million in the first half of this year, increasing by 40% year-on-year, and adjusted net profit totaled EUR 181 million, up 30.1% year-on-year.

Adjusted revenues stood at EUR 407 million, up 25.8% year-on-year, supported by all business areas. Operating costs stood at EUR 132.2 million, plus 3.7% year-on-year. Cost income decreased to 32.5%, despite the continuous expansion in assets and clients, thanks to our strong operating leverage into the scalability of our platform. Please now go through the following slides to analyze more in details all the dynamics of our results.

Slide 6. Let's start, in the second quarter, net interest income stood at EUR 70.1 million, increasing by 2.8% quarter-on-quarter, thanks to the first positive contribution coming from a more active management of our treasury, on which we will deep dive later and through a lower cost of funding due to the decrease of the U.S. dollar LIBOR.

Net interest income in the first half of this year remained resilient, at EUR 138.2 million, despite the lower interest rate environment. It decreased only by EUR 3.5 million, due to the continuous enlargement of our sticky sight deposits to the quality lending book and through the positive contribution from treasury activities.

The lower interest rate environment led to a reduction in average gross margins on interest-earning assets, from 1.26% in the first half of 2019 to 1.06% in the first half of 2020. As an example, 5-year Eurirs moved from plus 4 basis points a year ago to minus 27 basis points in the first half of 2020.

Finally, cost of funding decreased to 1 basis points in the quarter due to the lower U.S. dollar LIBOR. Please let me remind you that our cost of funding related to the deposits in euro, which represents 96% of our total deposits, is 0.

Let's now move on to Slide 7 to deep dive on our treasury management. As you know, one of the positive outcomes from being a public company is that we can couple our low-risk investment strategy with the more flexible management of treasury. Thanks to our high-quality balance sheet, we are able to undertake yield management strategies, which help us in sustaining our net interest income in an industrial way.

Before deep diving into these strategies, let me first remind you that our investment strategy remains unchanged. Our goal is to run off the UniCredit bonds portfolio and move into a more diversified and low-risk investment portfolio through a blend of European government bonds, supranational agencies and covered bonds. In this regard, we decided to further diversify our bond portfolio in direction of investment-grade non-European govies and financial corporate senior bonds.

We also confirm our conservative decision to account as held to collect almost 100% of our financial investments, thus neutralizing any effect on the P&L and balance sheet due to the widening of sovereign spreads. The yield enhancement strategies we are undertaking are possible, thanks to our strong liquidity position, which leveraged on a quality balance sheet and on valuable and sticky deposits, allowing us to have a quality investment portfolio.

Leveraging on this, we can set up operations like collateral switch or unsecured lending in order to get an extra-yield on the top-quality paper in our portfolio. As usual, we are managing these transactions with our strict and low-risk approach, and we are choosing very solid primary counterparties.

Let's now move on to Slide 8 to deep dive on our noninterest income. Fees and commissions grew by 32.2% year-on-year, driven by whole product tariffs as we have been able to capture the acceleration in the structure of clients in place. Trading income, net of nonrecurring items, increased by more than 155% year-on-year, driven by the strong brokerage performance in the period. We will deep dive more in depth in the following slides.

Let's move on Slide 9 for a focus on brokerage. Brokerage acted once again as the perfect counter-cyclical business, and it is producing structurally higher revenues compared to the recent past. In the first half of this year, overall brokerage revenues stood at EUR 127.9 million, increasing by 107% year-on-year. Please note that July has been another robust month, with revenues increasing by more than 50% year-on-year.

On the top of the slide, you can find the chart showing the monthly brokerage revenues since our listing. As you can see, brokerage revenues in the period are structurally higher. And this is true, regardless of the level of volatility, thanks to the contribution of 3 structured companies.

First, the client base using our platform is widening because the structure of the market is changing after the recent events and there is an increasing interest into financial markets by clients. In addition, a big jump into a much more digitalized society is in place. As you can see from the graph at the bottom of the slide, both new clients and sleeping clients are becoming active on our platform faster than in the past.

Let me highlight that more than 85% of the new active clients are investing on plain vanilla instruments, meaning that they are not speculative traders, but common people realizing that the current situation makes it more compelling to actively manage their savings. This is a very interesting trend and we are observing an overlap between investing and brokerage clients, more active investor rather than active traders.

The second reason is the increase in our market share. For example, our market share in Italy in equity traded volumes has increased to 28% in June 2020 compared to 26.6% in June 2019 as recently confirmed by Assosim.

The third and final reason is the deep reshape of our brokerage offer we have undertaken in the recent months. Please note that this is a never-ending process and that, in the coming months, we will continue to provide our clients with new instruments and best-in-class features.

So let's now move on Slide 10 for focus on investing. Investing revenues amounted to EUR 117.8 million in the first half of the year, increasing by 5.4% year-on-year, thanks to the volume effects driven by the higher contribution of Guided Products & Services and taking assets under management.

Please note that in the second quarter of the year, investing revenues decreased by EUR 4 million quarter-on-quarter only for a technical reason, as management fees were impacted by the negative market performance at the end of March, reducing the average assets under management of the quarter and the equity component.

This, coupled with the increased penetration of conservative solution among our offer of guided products, explains the slight decrease by 0.5 basis points of management fee margins in the quarter, standing at 62 basis points.

Let me please highlight that the underlying trend of investing is very solid, and we expect the revenues to grow again, starting from the next quarter, and to be higher than the first quarter of 2020. This as the result of the combination of a strong volume effect, driven by the solid acceleration in assets under management net sales and the progressive increase of our network productivity.

Let's now move on to Slide 11. As you can see from the Slide 11, our results once again confirm efficiency to be part of our DNA and core in our bank, representing a clear and unique competitive advantage. In the first half of this year, staff expenses stood at EUR 48.9 million, plus 10.9% on a yearly basis, mainly due to the increase in the workforce related to the business development and to the internalization of some services after the exit from the UniCredit Group. Non-HR cost stood at EUR 83.3 million, flat year-on-year.

Let's now move on Slide 12. In this slide, we summarize the breakdown of the bottom line in the second quarter. We have been recently contacted by the guarantor for Competition and the Market Authority, asking us to delay till the end of the year the application of the smart repricing for 2020 to a cluster of clients that opened the current account in the past years under an online commercial initiative.

Also, we are fully convinced that our decision was correct. We maintained our usual prudential approach not to challenge the regulators. This led to a EUR 4 million of provision for risk and charges in the second quarter, due to the refund of past banking fees charged from February to June 2020, and we expect not to charge around EUR 5 million of fees in the second half, due to the -- the delayed application.

Let me please confirm that the full effects of this market repricing on the whole customer base will be in place starting from January 2021. In the second quarter, we also recorded EUR 4.7 million of higher provisions, which were not driven by the underlying quality of our lending and bond portfolio, but by the accounting process related to the IFRS 9, under which we are to update the macroeconomic scenario after the COVID-19 outbreak.

Please note that provisions on commercial loans only reached EUR 0.3 million confirming, once again, the quality of our lending book. The remaining EUR 4.4 million of higher provisions refer to our sovereign and institutional exposure.

Let's now move on to Slide 13. As you can see on the left-hand side of this slide, commercial loans grew by 30.4% year-on-year, with the usual strict control on credit quality. Let me remind you that our lending is offered exclusively to our loyal customer base and our deep internal IT culture allows us to fully leverage on Big Data analytics.

This translates into commercial cost of risk very well under control, stable, at 14 basis points as of June 2020, in line with our guidance for the cost of risk between 10 and 15 basis points, which is confirmed also considering the present context of COVID-19 outbreak.

Expected losses for mortgages and personal loans remain very low, thanks to the quality of our lending portfolio. As a confirmation of the quality of our lending book, we granted only less than 300 requests for mortgages moratorium. We will deep dive more in-depth in analyzing our lending offer on the next slide.

Let's now move on to Slide 14. In the wake of the recent events, our cautious approach is becoming even more conservative. Therefore, we rightly reviewed our 2020 guidance. On mortgages, we further increased our guidance on new production in the range between EUR 600 million and EUR 700 million, due to a backlog in request from 2019, as clients were choosing mortgages in a period characterized by very low fixed interest rates.

We confirm our expected yield in a range between 55 and 70 basis points. Our expected credit loss on this product is very low, at around 19 basis points, thanks to the strength of our Big Data analytics and to the quality of our lending book. At this regard, let me please highlight that after 42 months from the launch of our mortgage offer, only 4 clients are accounted in NPLs.

On personal loans, we confirm our guidance of a new production in the range between EUR 150 million and EUR 200 million per year, with a net growth in the range between minus EUR 20 million and minus EUR 60 million, with average yield consumer between 380 and 410 basis points. The expected credit loss is very low, also on personal loans at around 55 basis points.

On Credit Lombard, we confirm normal growth in a range between EUR 300 million and EUR 350 million, with expected yield between 75 and 85 basis points. Please keep in mind that for expected yield in the case the market environment changes, we would like to move accordingly.

Let's now move on to Slide 15 for a focus on our capital ratios. Fineco confirmed once again a rock solid capital position on the wave of a safe balance sheet. Let me remind you that following the extension of the recommendation by ECB and Bank of Italy on July 28, we will refrain from paying dividends until January 1, 2021. In any case, our intention is to give back our excess capital to our shareholders at the first window of opportunity.

For this reason, we will comment pro forma figures, which includes the dividend payment. Common equity Tier 1 ratio performance stood at 18.36%, and total capital ratio performance stood at 33.11% (sic) [ 33.12% ] as of June 2020.

Now I will skip directly to Slide 23. In this slide, we summarized our guidance for 2020. Please note that this does not include the revenues and costs related to the U.K. business development. Net interest income is expected to remain solid and resilient or slightly decreasing by a few millions, on the back of volume effect and the benefits coming from ECB tiering.

Let me remind you that this assumption incorporates no change in our investment policy, no increase in our risk profile and a more dynamic management of our treasury. Deposits are expected to increase in the region of EUR 2 to EUR 2.5 billion per year and new production on lending is expected to be in the range of EUR 1 billion to EUR 1.2 billion per year equal to EUR 0.7 to 0.9 billion net growth.

For investing fees, we give a sensitivity for every EUR 1 billion change of assets under management, which generates around EUR 2.5 million of revenues, starting from July 1 until year end.

Brokerage revenue is expected to remain strong with a floor that is definitely higher than in the past for 3 main reasons. First of all, the deep reshape of our product offer; second, the strong growth of the new customer, driven both by the enlargement of the market and by the increase of our market share; third, the levels of volatility, which will probably be higher than the extremely low level registered in the past years.

Banking commissions, related to the smart repricing, are expected to be around EUR 11 million this year and around EUR 20 million to EUR 22 million starting from 2021. We can see in our guidance on operating cost to a yearly growth in the region of 4%, thanks to our strong operating leverage.

Let me please highlight that this guidance does not include marketing expenses related to U.K., which are expected up to EUR 6.5 million. In terms of future evolution, we confirm in our guidance a continuously declining cost income in the long run, thanks to the scalability of our platform and give strong operating gearing we have.

We can see in our floor of the core Tier 1 ratio equal to 17%, a level that we deem appropriate and mostly above the industry average, but we expect to stay in the region of 18% for 2020.

Leverage ratio stood at 3.76% in June 2020, and is expected to remain above 3.5%, thanks to all the initiatives the bank is undertaking. We are extremely relaxed about our leverage ratio, considering our organic capital generation after dividend distribution and payment of AT1 coupon.

Also in the case of an extremely adverse scenario and assuming EUR 5 billion of deposit growth, our leverage ratio would remain around 3.5%. Cost of risk is confirmed in a range between 10 and 15 basis points, given this environment, thanks to our high-quality lending book. Finally, we expect a robust and high-quality net sales, reflecting the acceleration of the structural trends in place.

Let's now move to Slide 24 to deep dive in how the current situation is impacting our business. Current situation is creating the conditions to further enlarging our growing opportunities. As we are seeing a strong acceleration in industrial trends, which were already in place. First, increasing demand for financial advice, as Italians are even more aware of the need to get the better management of their wealth.

This is building up an interesting bridge between investing and brokerage as we are observing an increasing participation in financial markets by Italians, making it easier in the future to explain the advantages of professional wealth management. Second, digitalization, which is continuing to be a wave of no return, as Italians have been forced to discover the huge advantages of the digital world.

Third, disruption in traditional banks, which are not ready for the new paradigm, and thus, are suffering from a flight-to-quality. The situation is generating a gigantic opportunity to increase the speed at which we are growing, being born already digital and with a strong business model based on innovation, quality and efficiency and the maker of financial advisory already used to work in a digital world.

Fineco is already positioned in the sweet spot for capturing the acceleration of these gigantic trends. This is the reason we have in the world characterized by robust net sales with a good asset mix, brokerage revenues structurally higher, and acceleration in the acquisition of high-end clients looking for some players with quality offer and declining cost income.

Let's now move to Slide 25. Our key priority going forward remains to structurally improve the quality of our net sales and client base in order to increase better quality, recurring revenues, and keep growth and our balance sheet under control.

Our focus on improving the asset mix is clearly delivering since the second half 2019, but in the first 6 months of 2020, we have recorded a strong acceleration in our net sales dynamics and quality mix. The first evidence you can observe from the 2 graphs on the top of the slide is the accelerating net sales in the first half of the year, together with a robust and steady contribution from assets under management, with the only exception of March, given the exceptional volatility in the month.

Let me please remind you that our net sales have been extremely positive also in July, with asset under management above EUR 600 million. The second evidence is the strong acceleration in the productivity of our nature. As you can see from the graph on the bottom of the slide, the net sales per financial advisers in the first half of 2020 have increased by more than 40% year-on-year.

Let me add that this acceleration in underlying net sales dynamics is the result of our industrial measures as we have not undertaken any aggressive and short-term commercial offer in the period and have not leveraged it on overpaying on liquidity.

Let's now move to Slide 26 to analyze more in-depth Fineco Asset Management. Fineco Asset Management is continuing to be the key in our move to accelerate the conversion of the targets into assets under management. Our latest net sales results confirm once again that Fineco Asset Management is gaining commercial momentum, giving a strong contribution to Fineco's inflows also in a complex environment like the present one.

This is possible, thanks to its ability to create modern and innovative multi-manager solutions, reinforcing our guided open architecture platform, and enhancing our time-to-market in developing our offer to meet the evolving customer needs.

Finally, I would like to highlight that the penetration of Fineco Asset Management retail class, total assets reached 22% on Fineco total assets under management, and we expect it to grow even further. The penetration on assets under management, excluding insurance, reached 32% in June 2020, increasing by 6 percentage points in 1 year.

Let's now move on Slide 27. And at this point, I leave the floor to Paolo Di Grazia, Deputy General Manager of the bank, to deep dive into the development of our U.K. business. Please, Paolo.

[Paolo Grazia, executive]

Thank you, Alessandro. And good afternoon, everybody. Our business in U.K. is proceeding very well and our one-stop solution is boosting our cross-selling activity, providing to be a strong driver for our growth. In the left-hand side of the slide, you can see the improvement of the breakdown of active clients in the quarter.

Clients active on the OTC were 8% out of total active clients, 83% of them came from cross-selling, mainly from listed products. Here, the target market is relatively small, but with an extremely high level of revenues per client. On the listed products, the addressable target market is wide, and revenue per client are very interesting.

Active clients in this segment increased to 68% in the second quarter, thanks to both direct acquisition and powerful cross-selling for lower profitable multicurrency, bringing 53% of new active clients in the segment. Finally, the multicurrency is our powerful entry gate and is the engine of our cross-selling. Its target market is extremely wide, and we can leverage on our very competitive offer. In the second quarter 2020, 24% of our active current accounts were acquired through this segment.

The strengthening of cross-selling, thanks to our marketing activity, translated to increasing and better quality revenue generation. As you can see from the graph at the bottom of the slide, listed products and OTC are now taking the lion's share of our U.K. revenues.

Please note that we are profitable on all segments, thanks to our operating efficiency and economy of scale, that allow us to be sustainable even with a competitive -- very competitive pricing. On top of this, we have room to improve cross-selling from listed products to OTC and this will help us increase our revenues per active current account, which, at the moment, are around EUR 740.

Let me remind you that we are still missing one very important part of the story and in the investing with the ISAs and SIPPs coming through, and you can find the details on Slide #29.

Let's now move on to Slide 28. In this slide, we will deep dive on our first marketing campaign, which showed a very positive feedback with only EUR 1.4 million of pure advertising costs. The graph on the left-hand side on top of the slide shows the acceleration of the customer acquisition following the start of the marketing campaign, recording a growth of about 3x higher in the quarter.

Our marketing campaign is delivering those in terms of the quality of our client base as active clients, active current accounts in the period between March and June increased by 56% year-on-year.

Let me underline that active clients on trading services increasing even more, with a growth of 3x higher year-on-year. Current accounts grew by 21% quarter-on-quarter, reaching 7,600 total accounts at the end of June. Please remind that our first target is to achieve in 2, 3 years' time horizon, 30,000, 35,000 good clients in order to have a sustainable acquisition through the word of mouth.

Finally, let me remind you that our new customers came from traditional bank looking for quality services and pricing as shown by the graph on the bottom of this slide.

I can now leave the floor to Alessandro for the final comments. Thank you very much.

[Alessandro Foti, executive]

Thank you, Paolo. Jumping into Slide 31. Let me please spend a few minutes on sustainability, which is at the heart of our business model, built to remain in the market with a long-term horizon and aiming to generate a positive impact for all our stakeholders and the overall society in the long run.

Our sustainability strategy is set on 2 different levels: a macro and the micro level. The macro level is related to our business model, which, as you know, is built on 3 pillars: transparency and fairness; efficiency; and innovation. This has allowed us to be from the very beginning perfect in line with the ESG trajectory based on a sustainable long-term view on our revenue generation.

Then we have a micro level, which refers to the single details which are key to differentiate an organization in ESG world, ranging from a market-friendly corporate governance to ESG product offer and strong focus on the cyber security and other ESG risk. And you can find more details on the Slide 32.

Thank you for your time. And now we can open the call to questions.

[Operator]

[Operator Instructions]

The first question is from Domenico Santoro of HSBC.

[Domenico Santoro, analyst]

Domenico from HSBC. A couple of questions from my side. First of all, on the brokerage side, you are giving us a very simple narrative that people are using the brokerage more and more to looking at their savings rather than just doing trading online because they are locked down in their flats.

I see the qualitative guidance that brokerage is going to be very strong, I'd really appreciate if you could give us a sort of floor in terms of monthly revenues in the brokerage business because this is getting more important. And of course, I don't want you to take it provocatively, but there are also sort of investors that they think this is a sort of a one-off sort of revenue stream. So more visibility on this sort of numbers for year-end, but also beyond 2020, it will be very useful.

Then on the NII, I see your total bond portfolio being flattish -- sorry, your -- the contribution from the financial bonds to be fattish more or less quarter-on-quarter. But of course, there's a change in the mix because of the run-off of UniCredit bonds. So I'm just wondering, in which kind of assets you are investing in order to keep the contribution stable quarter-on-quarter?

Can you give us more detail about the duration, about the country in which you are investing or corporate? And then looking forward, how much was the Tier 3 that you took and what is the margin attached to that if you are -- given that is the ECB part of this liquidity. And then also this repo transaction, can you give us a bit more details about the notional, the yield, just to give us a better sense?

Then on the dividend, I understood that you want to distribute the excess capital next year, presumably, if the ban on dividend is lifted. What formula that we should consider? Are you going to increase the payout compared to the level that we have seen over the last couple of years?

You might be more generous or you might want to keep part the capital to keep your leverage ratio high? And then sort of curiosity on the charge that you take on this govies portfolio, the EUR 3 million. Can you give us more details? Is it under IRB because I didn't get the sensing of the charge on a govies portfolio because of the IFRS?

[Alessandro Foti, executive]

So let me -- so let me start from the brokerage. So to give, I understand that the [ other ] word in which we can give you an extremely detailed level, but on brokerage opportunity, it's not possible because clearly it's a business that -- in which, clearly, what we are presenting is that we are extremely confident that going forward, the floor, also assuming the return of the market in a much lower volatile environment, the floor of the business is going to remain -- is going to be definitely higher.

In order to have an idea of this, this is the reason why we, in the presentation, we presented the history of the -- of our revenues generation and starting from the listing. And as you can see, there is a very clear, you can have a very clear idea of what can be considered as a kind of floor for the business. So it's not difficult to get a reference number for this.

Clearly, we think that we cannot give an official precise guidance because clearly, it's a market, it's a business in which the volatility is playing a role. But I think if you look to the graph, we think that it's extremely easy to draw a line, understanding where is more or less the floor and understanding what you can expect looking forward.

So the -- what -- for us, what it is very important to explain to the market because on brokerage, recently, there has been a lot of noise because we are continuously receiving, for example, questions by some investors that they are looking to players like Robinhood, something like that.

They are talking a completely kind of -- this is a completely different kind of business, because in our case, it's a business, as we explained, in which the most part of the clients is related to absolutely normal clients that we prefer to nickname them as active investors more than active traders.

The portion of clients represented by very highly speculative clients is just in the region of few thousands of them out of several hundreds of thousands of clients that are using the brokerage platform. Probably, it's not needed to understand this point, because as we are explaining the key element for understanding what's going on is the message which we are explaining that there is in place a structural change in the market, the reason -- but it is something that has happened in the U.S., in which now investors are starting on becoming more active in dealing directly with markets.

And clearly, Fineco is by far is the best possible position for observing, taking advantage by these trends. But in any case, if you look to the graph that we presented, I think that you can very easily to try to make an -- to have an idea of the -- of where is the floor of the business.

On net interest income, I can just repeat what we explained during the guidance. So the -- we know that the net interest income has been by the beginning the most controversial part of our equity story because there is some that are a little bit skeptical regarding the possibility to maintain the net interest income resilience but -- so in terms -- but again, we have a combination of, first of all, an extremely high-quality base of deposits.

And this is very important because it's the base that is allowing to us to then build up an extremely sticky and high-quality portfolio. Second, there is an organic growth that is extremely sound because is remunerated 0.

And third, there is all the components we were referring in terms of the yield announcement that is, and in any case, we can -- if you are interested, we can give you a little bit more of colors. But I think that it's a little -- as a matter of time, it would be a little bit time consuming to enter in describing perfectly in the single detail every single transactions.

In terms of countries, as we're saying, we are concentrated on European govies. At the moment, we are starting on enlarging the scope of our investments because we are targeting also high-rated countries outside of Europe that, with ratings that, in many cases, are above the rating of the European countries. So for example, recently, we take part to an auction, investing some in Israel that is in a high rated country.

And this country, for example, the higher yield rating is the lower impact on risk-weighted assets. For example, we have several countries that have an impact on risk-weighted assets that is close to 0. And in any case, the more we are diversifying the portfolio the better is also in terms of sustainability of the Pillar 2 requirements.

The duration is more or less stable, is in the region of 5 years, and there it's going to stay. And so based on this rationale, we are confirming the guidance on a resilient adjusted net interest income declining by a few millions of euros.

Regarding the TLTRO, we didn't participate to a TLTRO III for a very simple reason. First of all, we don't need to do that. And second is just a strategy based on a concept of the carry trade. As we explained, we are here for delivering industrial results and that they are -- and TLTRO is not something that is an industrial result, it's just financial transaction.

And so we are not -- we don't think that this is going to give a great contribution in creating shareholder values. We are here for delivering sustainable industrially-driven revenues and this is the reason why we have no interest for the TLTRO III.

Repo transactions, more details on notional yields. The yields of these repo transaction can range between 10 up to 30 basis points, accordingly, with the kind of paper that is involved in the transaction. And so this is the, this is this one.

Regarding dividend, the guide with the indication we gave has been perfectly current, with the strong accommodation received by the regulators. And clearly, we kept an extremely cautious wording regarding the future distribution, but just for a very simple reason because another component of the more -- the strong recommendation made by the regulators is to avoid to take any kind of binding commitment in the dividend distributions. And so we think that regarding dividends, it's pretty clear that the ball is in the court of the regulators.

It's what we want to make very clear that as soon as possible, as soon as this is possible, we are going to give back to our shareholders the maximum amount of excess capital we have. So our goal is to remain on an extremely narrow hedge of remaining in high-speed growing company, at the same time, keeping and distributing a very generous dividend.

So this is our goal. We are absolutely perfectly in the position to keep on doing that. But clearly, we think that, considering the extremely continuously -- extremely volatile position of the regulators, it's better to be cautious in the wording and this is the reason why we are using this kind of a wording.

Regarding the charges in total that we do, is not related to any specific market-related items. It's just, is a technical accounting reason. Because according with the IFRS 9 Accounting Principle, we have to incorporate in our results, the change in the forward-looking information. And in the forward-looking information clearly are the kind of a temporary lag because there is -- at the moment, they are incorporating the deterioration of the macro scenario.

At the same time, probably they are not incorporating yet the effect, the recent intervention made by the Central Banks and so on has for example, driven down the spread on Italian govies. But this is based on -- we have to comply with the accounting rules and so this is the rationale. So there isn't anything else behind.

[Operator]

Next question is from Gian Luka Ferrari of Mediobanca.

[Gian Ferrari, analyst]

Alessandro, Paolo. The first question is on the EUR 4 million provisions for clients. Actually, I didn't really understand why Assosim asked you to delay the repricing to those clients. What is the reason? Was it improper communication of the repricing? Or what is underlying this? And also, I saw that you are supposed to report another EUR 5 million in the second half. Is this going to be booked again in the provisions or is going to be in terms of lower commissions, the accounting of this EUR 5 million?

The second question is on the strategy on the banking book. I understood in the speech that you want to increase the -- EUR 900 million corporate bonds portfolio and the financial bonds. Why only financials and not utilities and infra or other kind of asset classes and where the EUR 900 million in your mind should go over the next 12, 18 months?

The third question is on page 28, Fineco U.K. if I get it right on the chart, basically, with the campaign, you got some 1.7 thousand new current accounts. But on the right-hand side, it seems that 400 accounts were closed in the past 3 months. So annualizing that number, there is a pretty high churn of people shutting down the accounts. Was this guided by you making some portfolio pruning and closing some accounts? Or is it just physiologic? So people also opening, but also closing accounts there.

The fourth and final question is related to the initiative of 1 of your competitors that recently launched a challenger bank for younger customer base and for new generation. Given that you are native digital and you should be the guys launching this kind of initiatives, I was wondering what you think, Alessandro, about this kind of initiatives? Do you think they are successful in the long-term or simply a waste of time?

[Alessandro Foti, executive]

Let me start from the first question. The reason why we have, so the in the past, we -- in the past years, we had some marketing campaigns that were marketing an 0-cost current account for clients, mainly through online campaigns. And so the Assosim has come to the conclusion that in their opinion, it was fair to give to these clients that have been addressed directly by this marketing campaign a more, a longer period of time for taking the decision if closing or not closing the account.

And in the meanwhile, they have pointed that it's fair that we don't charge to them the new price. So this is their position, Assosim. For us, we are absolutely pretty convinced that we have been right in charging these clients. But clearly, as we explained, this is clearly is part of the DNA of the bank.

We never we make a challenge to the regulators. So we prefer considering that is just a small delay in revenue, is not a structural change in our revenues because starting by the beginning of 2021, the full contribution of the repricing is going to be fully in place. So we thought that it was a good position to comply with this proposal by the regulator and not making them a challenge and in the second half, the EUR 5 million are going to booked in terms of lower commissions, yes.

Banking book, corporate bond portfolio, why only financials and not utilities? I'm not the biggest expert for answering to these questions. But I assume that what is driving our decision of investing in a certain kind of bonds or another is driven by, we are extremely -- for us what is extremely important is the consumption of risk-weighted assets. And so clearly, we -- for us, what is important is to have an investment that is combining together the consumption of risk-weighted assets and the return we are getting, we can get at least a modest, but in case, a positive EVA generation.

So this is what is driving and so we are continuous, for example, the decision to invest in some extra outside of Europe govies because, for example, there are some countries that they are characterized by very high ratings. And that for this, for example, with an impact on risk-weighted asset which is close to 0 but offering a pickup in respect what you can get with the same consumption of risk-weighted assets by European govies, just for a very simple reason because the European govies are stretched by the intervention of the CB.

And so this is leaving the possibility to make some extremely efficient investments and with maintaining an extremely strict discipline regarding the consumption of risk-weighted assets.

On the U.K. clients, I'll give you an answer then, but I'm inviting Paolo to add some more if I'm not getting perfectly, the point. I think that the main reason is that, clearly, is the number of clients we are closing are still clients that they are the clients acquired in the very initial phase of our activity in U.K., in which the proposition was not still what is at the moment. But is, Paolo, if you want to add...

[Paolo Grazia, executive]

Yes, I think the churn rate in reality is very low. So the point is that on the chart on the left side, is taking account 4 months and the chart on the right side is 3 months. That's why you see the difference, they are different time frames.

[Alessandro Foti, executive]

Excuse me, there is a last 1 meaning. So we are -- as usual, we are extremely [ embarassed ] in commenting what is done by other players. The only comment we have to make is clearly that this initiative is not a brand-new 1 because it's a long period of time that we have initiatives like those in the market.

For example, there has been any similar initiatives launched also by our previous parent company [ BdI ] bank. And if we want to look at upside there is, for example, we have [ revolut ], something in place like this. So the point is that, clearly, we are talking about a business that is, first of all, is a vertical business so in which you are offering just 1 single product and characterized by practically non-existing margins. And also, we think that if -- so if the goal is to make, is to build up a profitable business, we don't think that this is the right direction.

Second, if the idea is to capture the young generation in order to make this your future clients, we have to remind that the clients are by definition are becoming very, very volatile. So the fact that you are capturing a client right now with an extremely opportunistic offer, extremely not rewarding -- it's not giving for granted that this client is going to remain with you also in the future.

So we think that our strategy, our strategy remains to keep on offering and an horizontal offer to clients. So the broad range of services, in order to make all the clients we are acquiring extremely sticky and resilient in staying with us. And we prefer to compete against this high flyer in continuously enhancing our banking offer.

For example, the banking offer of Fineco is accelerating dramatically. Now we are progressively introducing solutions that they are cutting-edge in terms of client experience with what is offered by these vertical specialized plays. So we prefer to keep on doing in this direction.

[Operator]

Next question is from Filippo Prini of Kepler.

[Filippo Prini, analyst]

Yes. Can you hear me now?

[Alessandro Foti, executive]

Yes.

[Filippo Prini, analyst]

Sorry. I got 2 questions. The first is on brokerage revenues for July. You mentioned plus 50% in your growth. Could you share with us also the absolute value in euro millions just to compare the run rate with the previous month?

[Alessandro Foti, executive]

Yes.

[Filippo Prini, analyst]

And the second, if I may, is on your new commercial offer of brokerage in U.K. Could you share with us if any of the established competitors there reacted somehow after a few months that you launched the new offer with by far lower prices than what they are charging the client?

[Alessandro Foti, executive]

On brokerage revenues, if I remind correctly because clearly, the numbers are not -- the reason why we gave an indication of plus 50% is because clearly, the demand has not finished yet, so we have not the final number. But correct me if I'm wrong, Paolo, but we expect the revenues in the region of EUR 16 million...

[Paolo Grazia, executive]

EUR 17 million...

[Alessandro Foti, executive]

EUR 17 million, EUR 17 million. So clearly, the -- so this is going to be the results. Last year, in the same period year, the number was Paolo, do you remember? EUR 11 million?

[Paolo Grazia, executive]

Almost EUR 10 million in the...

[Alessandro Foti, executive]

Yes, almost EUR 10 million, yes. So clearly, this is more or less is the numbers that you have to compare. Regarding the competitor, Paolo, if you want to make a comment on this point?

[Paolo Grazia, executive]

Yes, sure. No, we didn't see any reaction also because it's quite difficult to react to our stock broking pricing. We have taken advantage of our operating leverage. But for now, there is no reaction yet.

[Alessandro Foti, executive]

We think that consider our proposal is so aggressive that for the established players to react immediately it would be absolutely incredibly damaging from their P&L. So we think that until our numbers are not becoming really big, they are not going to make any -- they're not going to put in place any reaction.

Honestly speaking, I would be extremely happy to see a reaction by them because this would mean that our numbers are becoming really big. But at the moment, this is not the case.

[Filippo Prini, analyst]

Just a follow-up on this point. So basically, as long as you not reach a critical mass, the 35,000 clients that you used to indicate, it's fair to assume that no strong reaction from the competitors can be seen...

[Alessandro Foti, executive]

No, no, is a different point. So the 30,000, 35,000 of clients is what we can see that a kind of critical number. Because U.K., in terms of population, is not too different from Italy. And based on the experience we made in Italy, because when you reach, when you are able to put together that number of good, extremely satisfied clients, then the word of mouth starts on working pretty well.

But this is not directly related to the -- because, for example, if you put together either of this 30,000, 35,000 of clients, you have 20,000 they are really active in brokerage. This is going to start on making and generating some, raising some attention and reaction by competitors because -- so the 2 numbers are not related.

[Operator]

The next question is from Luigi De Bellis of Equita SIM.

[Luigi De Bellis, analyst]

Four question for me. The first 1 on the capital. Can you explain the reason for the increase in risk-weighted asset quarter-on-quarter, particularly credit risk-weighted asset, if I'm not wrong? And what do you expect going forward?

The second question on the new clients, what do you expect in terms of new clients in the coming months? And could you elaborate on the quality of the new clients acquired year-to-date? And do you think that the trend of increase of network productivity will continue at the current pace in the coming months?

The third question on the NII. Can you provide an update also looking in 2021 with the current interest rate curve? And the last question on investing, can you elaborate on the management fees margin evolution in the coming quarters?

[Alessandro Foti, executive]

Yes. On the increase of the risk-weighted assets, and I -- so I before leaving the floor to our CFO that is going to give you the details of increase of risk-weighted assets, regarding what we expect going forward. What we expect going forward is exactly embedded in the guidance we are giving on the evolution of our core Tier 1 ratio.

So that is going to stay in the region of 18%. So we don't expect any kind of significant pressure on our capital ratios by the increase of risk-weighted assets. But regarding the detailed components of increased the risk-weighted assets, please, Lorena, in if you want to give some more details?

[Lorena Pelliciari, executive]

Yes. Thank you, Alessandro. Good morning to everybody. Regarding the increase of the credit and counter-party risk-weighted asset in the second quarter, we had an increase of EUR 179 million.

This is mainly driven by higher mortgages because we had a new production in this period of around EUR 270 million of new mortgages which are mainly related to the backlog in the requests that we have from December 2019. Then we have a normal increase in credit card, loan -- bad loans. And for the first time, we had also an impact, quite low, but a low impact on unsecured lending on new activity that we have started inside our treasury.

[Alessandro Foti, executive]

Clearly on, Lorena?

[Lorena Pelliciari, executive]

The impact is related to mortgages.

[Alessandro Foti, executive]

Yes. Regarding mortgages, we expect progressively the -- our production going down because, as Lorena was correctly representing, has been driven mostly by the backlog of the pipeline accumulated in the past. So clearly, as we said, at the moment, we are becoming more and more cautious on the market. So we expect that the speed at which our initial mortgages are growing are going to moderate going forward.

[Lorena Pelliciari, executive]

Yes.

[Alessandro Foti, executive]

On the new clients in coming months, what we can say, we expect in respect last year as a continuation of the existing trend. So with a slightly lower number of clients acquired, but definitely of a much better quality. So it's, so I don't know, Paolo, what we expect in terms of client acquisition. We expect a decline in terms of adjust number not in terms of percentage by how much?

[Paolo Grazia, executive]

This year you mean?

[Alessandro Foti, executive]

Yes. But the new clients in the coming months.

[Paolo Grazia, executive]

New clients in the coming -- at the end of the year, we expect 90,000 clients. So we expect 5,000 new clients basically.

[Alessandro Foti, executive]

No. But the new clients, so the in comparison with respect to last year. So on a monthly basis, we have a decline...

[Paolo Grazia, executive]

I'm sorry decrease of 20%, 25%.

[Alessandro Foti, executive]

Exactly. So we -- what you can expect in terms of absolute number, the new clients are expected to grow by 20%, 25% lower, respect last year, but of a much better quality. But this was exactly -- is exactly what we were looking for. So the rationale behind the repricing is this.

And in any case, what is emerging is very clearly that Fineco is gaining momentum in taking on more the high-quality clients. So practically, we are progressively exiting by the -- from the mass market segment. And more and more, the clients we are getting on board are represented by mass affluent, affluent and private banking clients.

And this trend is accelerating, and it is another outcome driven by the recent events because now the clients are starting on seriously looking to the quality of services they are receiving by their banks.

So this is what you can expect. So -- and this clearly in any case is emerging pretty clearly by the dynamics of our net inflows. We are growing on average by more than 40% year-on-year in terms of net inflows within a lower number of clients acquired because definitely, we are taking on board the better quality clients.

The productivity of the network. You expect it to -- is going to remain very high, clearly. Yet you consider a word of cautiousness because sometimes that clearly regarding the -- we have to take into account some seasonality. So by definition now, we have entered in the third quarter that is, by definition is, from a seasonal point of view in terms of net inflows is, by far, the weakest of the year.

July has been pretty strong. So now we have just 2 months remaining, but I want to remind that August and, particularly, September are among -- September, particularly, is by far from a seasonal point of view, the weakest months of the year.

But excluding this seasonal effect, we definitely expect the productivity of the network is going to keep on going up because this is current with the continuous improvement of our Platform Solutions and this -- and there is a still plenty of room for increasing their productivity because as I was saying, we are seeing our financial planners are, by far, the most productive in the industry, but they are still characterized by a low level of productivity because there the room for increasing productivity still remains huge.

Net interest income next year, given, considering the existing situation, we expect a continuation of what we have experienced in 2020. So net interest income remaining resilient and just declining by a few millions of euros, thanks to the combination of all the components.

Investing management fees, the evolution, as we said in the presentation, the third quarter, we expect a third quarter that is going to be characterized by revenues higher with respect the revenues we generated in the first quarter because the technical impact generated by the March correction is going to be completely fully digested, and so we expect the journey of, in terms of growth of revenues resuming going forward.

So the third quarter we -- unless we have some huge massively disruption in the market, but assuming decently normal market condition, we expect the investment management fees in the third quarter are going to be higher. We expect the management fees we had in the first quarter, not in the second, but in the first.

[Operator]

The next question is from Angeliki Bairaktari of Autonomous Research.

[Angeliki Bairaktari, analyst]

Questions, just 3 left on my side, please. First of all, looking at your CET1 capital, this has only increased by EUR 6 million quarter-on-quarter. So I was wondering if you could remind me whether you have accrued for the 2020 dividend?

And if yes, at what payout level? And is the net income of the quarter included -- or has there been any other sort of fair value toward C/I reserves move, et cetera, that could explain the small increase?

And then second question, you mentioned with regards to the U.K., you mentioned revenue per active accounts, EUR 740, and then you have 7.6 thousand accounts. So is it correct enough to just say you've got EUR 5 million of revenues in the U.K. on sort of annual run rate? Or is the number of active accounts actually smaller than the 7,600?

And then last question on the mortgages. You mentioned that there is a backlog which you're now processing. And I was just wondering, was that not processed in the beginning of the year because of the virus? Or have you changed anything with regards to sort of how many mortgages you want to give for the attractiveness of those mortgage customers to you?

[Alessandro Foti, executive]

On the journey on the CET1 ratio, I don't know, Lorena, do you want to give the detail on the...

[Lorena Pelliciari, executive]

Yes. So related to the retained earnings, we had an estimation of EUR 14 million. And in addition of that, you have to consider that in this quarter, we had the impact related to the AT1 coupons paid in June for around EUR 10 million. And then the other impact is related to the higher risk-weighted asset that we have already discussed before, related to the higher lending activity that characterized this quarter.

[Alessandro Foti, executive]

Lorena, another point is -- another question was which kind of payout is embedded in this [ summary ].

[Lorena Pelliciari, executive]

Is quite high because it's 75%. It is -- and this is the EUR 14 million of -- the generated EUR 14 million of retained earnings.

[Alessandro Foti, executive]

Regarding U.K. I don't know, Paolo, if you want? Clearly, the EUR 5 million revenues is not the run rate because the number of active clients is -- because the clients coming right now are extremely, is the process of accumulating, accelerating acquiring clients. It's just at the beginning. And so clearly, the active clients are expected to progressively building up. So the EUR 5 million of revenues is not the existing run rate. I don't know, Paolo, if you want to give some more color on the point?

[Paolo Grazia, executive]

Yes. No, no, that's right. EUR 5 million of revenues as the run rate is not the correct one for the moment. And of course, we have to work on everything we said, cross-selling, keep on acquiring, keep on investing to get Fineco known in the U.K. where we're just starting and nobody knows Fineco. So we will get there. But it's not the right number right now.

[Alessandro Foti, executive]

Yes, because the point is just because all the process is just at the beginning. So clearly, but -- and so the process of activation of clients is clearly is gaining momentum and is building up. So we can expect clearly, a progressive acceleration of the run rate of revenues going forward.

On the backlog of mortgages, the reason of the backlog is just an operational one because at a certain period, we had during the fall of 2019 and a big jump in a request of mortgages by our clients. And at least 5x more than usual we were getting, despite the fact that we our offer was absolutely not the best one on the market.

But clearly, there is something that is -- in many cases, the clients are driven by the concept of one-stop solutions, so they are not crazy in order to get the lowest possible, the best possible condition. And so during the fall of 2019, there has been, if you remind, there has been a big drop in interest rates on the fixed rate. And so the clients jumped in order to take advantage by the incredibly low level of fixed rates.

And this has caused a massive increase of the backlog and requesting us to make an upgrade in the operational machine, taking care of our mortgages because we were not for ready for managing such a huge amount of request. Now the situation clearly has been -- is normalizing, and we expect to return to the normal pace in the next few months.

[Operator]

The next question is from Federico Braga of UBS.

[Federico Braga, analyst]

Yes, 3 questions, please. 2 follow-ups on the NII. The first 1 is in the last 18 months, if I'm not wrong, the percentage of govies with the floating rate increased from 0% to 30%, roughly. So 30% of your govies now are floating rate. I just wanted to understand what was the rationale of increasing the contribution from floating rate bonds in the last 18 months? And going forward, what we should expect on this point?

The second question on NII, if you can please tell us what was the average yield of the purchases that you made in Q1 and in Q2, please, if possible?

And then the last question, if I'm not wrong, in Q2, you had EUR 6 million of trading income, which was not related to brokerage. If you could please give us some color on this EUR 6 million, if it was capital gains on your govies and what we should expect going forward with regards to trading income which is not related to brokerage?

[Alessandro Foti, executive]

Yes. So let me start by the net interest income. So the reason of the increase of the floating is just because it's just related to the runoff of the UniCredit bonds portfolio because the UniCredit bonds portfolio are floating rate.

So that clearly -- and the more we are running off because we, clearly, we have to maintain a balance between fixed and floating and this is in order to keep on running in a very well balanced asset and liabilities management position.

And the reason of the increase of floating is just driven by the fact that the more you have in UniCredit bonds expiring, then clearly this is going to be substituted by something else. I don't know, Lorena, if -- do you want to add some more on this point?

[Lorena Pelliciari, executive]

I think that is complete, your answer. I don't know if...

[Alessandro Foti, executive]

Yes. The average yield of mortgages in Q1 and Q2 is -- has been, again, Lorena, if you can give me...

[Lorena Pelliciari, executive]

It's in the region of...

[Alessandro Foti, executive]

On the govies, not on the mortgages.

[Federico Braga, analyst]

Yes, on the govies. On the purchase of the bonds.

[Alessandro Foti, executive]

On the purchase of a bond. So the recently purchased bonds, which is in the average number.

[Lorena Pelliciari, executive]

We are in the region of 30, 40 basis points because the average yield of the spot at the end of June including govies supranational agency is 0.74% and the new investment, the average yield of new investment that we made in the quarter, was 0.30 basis points.

[Alessandro Foti, executive]

Yes. Clearly, a very important point to consider that, and this is a very interesting component that -- because when you are buying high-quality bonds, the downside, the yield is pretty low. On the other side, clearly, the positive component that you can use for entering a yield enhancement strategy.

So when we are considering what we are doing, we are considering the overall package. So for example, you can buy a bond that is yielding particularly close to 0, but is a very high quality, you can use these bonds for entering in a yield enhancement strategy. And so at the end of the yield -- but in case the recent appreciation of bonds, the average yield is what Lorena was referring, so in the region of between 30 and 40 basis points.

And the EUR 5 million trading profit is related to -- on the portfolio govies because we are -- clearly, there is activity. This is related also the activity of making the maintenance on the portfolios of restructuring the portfolio because there are some bonds that they are becoming eligible to be sold. They are either becoming less liquid and so on.

So in this process, clearly, the portfolio is so huge that clearly, this process of continuous rebalancing the portfolio tends to generate a modest trading profit and in a structural way. But this is not driven by any kind of market timing and so on. It's just related to the continuous process of making the fine-tuning for keeping on having an efficient portfolio.

And another question, and what about going forward? Yes, probably is going to be that this is going to remain, in part, because these activities related to making the fine-tuning of the portfolio is going to clearly -- is going to be continuing also in the future. So it's going to stay.

[Federico Braga, analyst]

So EUR 5 million per quarter, more or less from capital gains on govies.

[Alessandro Foti, executive]

It can make sense, yes.

[Operator]

[Operator Instructions]

Mr. Foti, there are no questions registered at this time.

[Alessandro Foti, executive]

Thank you very much to everybody. And as usual, everyone that needs to make some more deep dive, clearly, we are available anytime. So thank you again.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.