FinecoBank Banca Fineco SpA

MIL:FBK

Earnings Call Transcript 2018-Q3

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the FinecoBank Third Quarter 2018 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 thanks for joining our Third Quarter 2018 Results Conference Call.

Adjusted net profit in the first 9 months 2018 at EUR 178.8 million, plus 13.9% year-on-year despite a more complex environment compared to last year. Once again, this set of results confirms the soundness of our business model, able to deliver sustainable and industrial growth in every market condition. The comparison with the previous quarter is not meaningful, given the annual contribution to the Deposit Guarantee Scheme accounted in the third quarter. We generated around EUR 465 million of revenues in the first 9 months, up 7.8% year-on-year, supported by investing and banking area. Adjusted operating costs at EUR 182.8 million, well under control despite the continuous expansion in assets and clients. Cost/income ratio as of September 2018 at 39%, down 1.2 percentage points year-on-year, thanks to our strong operating leverage and the scalability of the platform.

Now please go through the following slides to analyze more in details all the dynamics of our results. Net interest income. Net interest income in the first 9 months 2018 increased by 6.6% year-on-year, supported by strong volume growth, both sticky sight deposits and high-quality lending. Volume dynamics more than offset the expected reduction in gross margins. As you can see at the bottom right of the slide, average gross margins on interest-earning assets lowered from 1.35% in 2017 to 1.31% this year. Despite the rising trend in place in the banking system to remunerate liquidity, our cost of funding remains very low at 4 basis points due to deposits in foreign currencies. Please let me remind that our cost of funding related to deposits in euro, which represents 96% of our total deposits, is 0.

In the following slide, you can find the focus on our government bond portfolio, which now includes also France, Ireland, U.S., Poland, Austria, Germany and supranational agencies. In addition to Italy and Spain, our strategy to move into a more diversified investments portfolio through a blend of European government bonds and the nonrenewal of expiring UniCredit bonds is progressing very well. In 2018, we confirm a low single-digit increase in net interest income, supported by lending and volume effect on valuable sight deposits that more than offset declining margins, mainly due to the runoff of the existing bond portfolio. Let me also remind our sensitivity to a potential increase in interest rates, a parallel shift of 100 basis points would generate EUR 113 million of additional net interest income.

Slide 8. Fees and commissions increased almost 10% year-on-year with management fees up 12.6% year-on-year, thanks to a better asset mix, as asset under management grew 10% year-on-year with a strong contribution of Guided Products & Services, which were up 19% year-on-year. For the first time, this quarter benefited from the contribution of the new asset management company. The profitability on asset under management, calculated as management fees net of taxes on assets under management, improved by 4 basis points quarter-on-quarter, reaching 45 basis points in the third quarter. Please let me highlight that our investing fees are strongly sustainable, as for the most, represented by recurring fees and to fees only weight around 4% of investing revenues. And our business model does not rely on them, as not aligned with the interest of clients, but they are just an anticipation of future profitability for the bank. Brokerage performance was in line with the very low market volatility recorded in the period. As expected, the third quarter was also slightly affected by the introduction of new ESMA regulation, which impacted for a couple of millions. Please remind that we are setting up new products and solutions to offset these effects going forward.

Moving to Slide 9. We have a detailed overview on cost evolution. Adjusted staff expenses were at EUR 63.1 million as of September 2018, 7.5 percentage more compared to the same period 2017 mainly due to the increase in the workforce related to the business development and cost related to Fineco Asset Management not in place in 2017 and the new long-term incentive plan. Other administrative expenses at EUR 112.4 million, plus 3.6% year-on-year, despite the enlargement of assets and clients confirming their operating leverage, has a distinctive competitive advantage for our bank. In terms of future evolution, we confirm our guidance on a continuously declining cost/income in the long run, thanks to the scalability of our platform and the strong operating gearing we have.

On Slide 10, commercial loans grew 71% year-on-year with the usual strict control on credit quality. Let's remind 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 translate into commercial cost of risk very well under control at 23 basis points as of September 2018, much lower compare the system. At the year-end, we're expecting stabilization of our cost of risk in the range between 23 and 28 basis points.

Let's move now in analyzing our lending offer more in depth. As you can see in Slide 11, mortgages reached almost EUR 800 million in the first 9 months, almost 123% more year-on-year, with almost a 7,800 mortgages granted with an average loan-to-value of 52% and average maturity of 19 years. For 2019, we expect in a yearly new production of around EUR 350 million as we prefer not to compete against the system in red zones, characterized by aggressive prices, high loan-to-value and longer maturities. As regard pricing, we think current market conditions will lead to increasing rates on new production. Personal loans grew more than 27% year-on-year, and margins remain very attractive. Our expectation in terms of new production is around EUR 250 million per year, which means EUR 90 million net in terms of delta stock. In terms of yields, same uplift trend in terms of repricing is expected. Lombard loans at EUR 910 million increased by 98% compared to 1 year ago, thanks to the introduction of the new Credit Lombard. In 2019, our expectation is to grow around EUR 500 million with an average yield of around 110 basis points.

Moving to Slide 12. Fineco confirmed a solid and stable capital position. On the wave of the safe balance sheet, transition of common equity ratio Tier 1 amounted at 20.46% and common equity Tier 1 ratio fully loaded was at 20.39%. Total capital ratio transitional at 28.88%, including the addition of Tier 1 issued at the beginning of 2018. The implementation of the look-through approach is progressing, leveraging on our best-in-class internal operational skills. Let's remind that this approach allows us to drift down the underlying assets provided by clients as collateral to Credit Lombard, reducing, therefore, the risk-weighted assets absorption according with the real underlying assets. The look-through covers now around 67% of the collateral with an additional benefit on our core Tier 1 ratio by 14 basis points in the quarter, leading to 208 basis points since the implementation. For year-end, we expect an additional positive contribution by look-through.

On Slide 13, we show an overview of the total financial assets growing trend, supported by the healthy expansion in [ European ] plus. We gathered EUR 27.7 billion net sales since 2013, leading total financial assets close to EUR 71 billion as of September 2018. This powerful performance confirms Fineco's potential to further consolidate its position and take advantage from structural trends in place in Italy, the increasing demand for advanced advisory services and growing digitalization. Our market share on total financial assets increased at 1.67% as of June 2018 from 1.61% as of December 2017.

Moving to Slide 14, we summarize the breakdown of total financial assets. In [ concurrence ] with the ongoing initiatives to improve the productivity of the network, the asset mix moved in the right direction with a better mix. As of September 2018, total financial assets were at almost EUR 71 billion, 8.4% more compared to September 2017, with asset under management up 9.9% year-on-year. Guided Products increased their penetration rate to 66% on total assets under management, a 6 percentage points more than 1 year ago.

As announced last month, in September, we gathered EUR 4.8 billion of net sales with a mix in line with a more complex market environment compared to the previous year. For 2018 year-end, we confirm our expectation of a robust net influx growth, driven by structural trends and the high quality of our proposition. Clearly, expected mix will be more skewed in direction of asset under casualty and deposits. The recent launch of some brand-new products and services, such as Plus and CORE Target, is helping us in offsetting the higher propensity of clients to remain in a wait-and-see mood.

Slide 16. As you know, our growth strongly leverage on the organic component, thanks to the unmatched quality of our services. In the first 9 months 2018, out of EUR 4.8 billion of net sales, 84% was organically generated through the existing financial plans or directly by the bank and 16% come from recruits made in the last 24 months.

Now I would skip directly to Page 26. Innovation is one of the pillars of which would be of Fineco, allowing us to better position our bank in advance when we perceive that the structural trend is coming. This is why our strategy has strongly focused on 3 main concepts: continuous improvement of the quality of products and services to be recognized by the clients as a premium brand, allowing us to retain a premium price; strong increase in the productivity of the network; further increase of our operational efficiency through the establishment of the new asset management company in Ireland.

Let's now deep dive in these concepts in the following slides. Since the beginning, quality of services and innovation have been distinctive selling points on our business model, leading to an outstanding customer satisfaction. Improved quality of services never stops, and every day, we're hardly working to offer to our clients better products and an improved unique customer experience. On Slide 27, you can find, for example, what we are internally developing to enhance usability and front-end efficiency.

Slide 28, leveraging on our cyborg-advisory approach. Productivity of the network continuously increased. As you can see in the left-hand side of Slide 28, total financial assets per Personal Financial Advisors grew more than 9% year-on-year, of which 10% asset under management and plus 20% related to Guided Products & Services. In addition, the quality of our network is constantly improving. As you can see on the right-hand side of the slide, despite the stable number of financial planners, Personal Financial Advisors with total financial assets are both EUR 20 million, which represents 44% of the network, increased by 12% year-on-year and hold 73% of the total financial assets.

Let's now move on Slide 29. To deal with existing clients more effectively is an additional evidence of success of the strategy. As you can see in the graph on the top left of the slide, the percentage of net sales from existing clients more than doubled in the last couple of years. On the right side, you can find the breakdown of our total financial assets per cluster of clients. The brand repositioning we are carrying on bring around 80% of our assets in the hands of affluent and private banking clients. As you know, the segment in which we are growing the most is the private banking, plus 9.7% total financial assets year-on-year. On the right-hand side, you can find the more details on our private banking clients for the most represented by clients with assets below EUR 5 million.

Moving on Slide 30. The third key concept on which we are focusing to deal with pressure on margins is to further increase the operational efficiency of the bank through our new asset management company. As you know, Fineco Asset management is hardly working in fully implementing its strategy. With regard to CORE Series, Fineco Asset Management is already actively working on the improvement of efficiencies and portfolio rationalization. The process of sub-advised funds with the best global investment management -- managers is progressing up to speed.

The third 17 strategies, already implemented; 14 expected by year-end. This translates into better condition for clients, full visibility of underlying assets and an improved risk monitoring. New building blocks will be released by year-end to our network and our clients. In addition to better deal with the continuous evolution of the market environment, Fineco Asset Management is working to create its own generation of new passive strategies, fully developed in-house and so with attractive margins and lower prices for clients.

Finally, through an -- through adopt agreements with external partners, Fineco Asset Management will offer vertical [ performing ] products, such as individual portfolio solutions without any need for external M&A activities. As expected and already highlighted in the first part of the presentation, the increased operational efficiency through Fineco Asset Management leads to higher asset under management profitability, net of taxes, from 41 basis points in the second quarter to 45 basis points in the third quarter.

Moving to Slide 31. Finally, quick update on Fineco U.K. and Patent Box. In U.K., we acquired over 2,700 clients with a very interesting mix, 53% is represented by non-Italians, of which 39% are native British. Considering the steady level of revenues constantly generated, we're now approaching the second phase of this initiative with more boost on marketing and commercial activities.

No news yet on Patent Box. The closing of the process is in the hands of the Revenue Agency, which is now focusing on trademark for all the banking sector. Let me remind you that we applied both for intellectual properties, as our platforms are internally developed, and also for the trademark. The fiscal benefit will cover 5 years, from 2018 to 2019 (sic) [ 2015 to 2019]. Intellectual properties are renewable, according to international guidelines.

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

[Operator]

[Operator Instructions] The first question is from Giuseppe Mapelli with Equita.

[Giuseppe Mapelli, analyst]

I have some questions. The first one is on October, if you can give us some color on what was the scenario for the brokerage division according to the new scenario on the markets. The second question is on the penetration of Guided Products. You can -- if you can give us an idea of your targets on that penetration because we are seeing a sort of stabilization of this increasing penetration towards 65%, 67%. And my last question is regarding Fineco Asset Management. I would like to understand, let's say, a little bit better. What kind of passive strategy are you starting with Fineco Asset Management? And what could be the cost of such strategies as, let's say -- and some color on the possible cannibalization of such strategies to other kind of products that you are already selling?

[Alessandro Foti, executive]

So let me start from the begin, can you give some color on the month of October. So the brokerage has produced an absolutely an excellent mark currently with the uptick in volatility, so no surprise. Brokerage is clearly -- very clearly driven by the level of volatility. So October has been absolutely an excellent month. In the meanwhile, we are working for being able, in the next few months, deliver brand-new solutions and products for fully offset, then small impact produced by -- with the introduction of the new regulation by ESMA. Regarding Guided Products, our guideline here remains unchanged. So we expect clearly to continues in improving the level of penetration on Guided Products. It's clear that the more we grow, in terms of penetration, and there's more ways to pays because clearly -- and in our digital world, clearly, our digital world is a world in which Guided Products represents 100% of the assets under management products, but clearly, this is not possible. But clearly, what you can expect is a continuous increase of the penetration of the Guided Products on the overall assets under management. On Fineco Asset Management, on the passive strategy, we -- our plan is to -- because passive strategies, so passive plans, clearly, are theoretically dangerous products for the profitability, unless you are not in the control of the value chain. Because clearly, if you are proposing and you are using passive strategies in your portfolio solutions, that there are passive strategies produced by someone else externally is, clearly, it's not great. But as you probably know very well, in a passive strategies, if you are in control of the value chain, there is a lot of value. And then one thing -- one just for -- as example. The fact that you are in control of the securities lending and everything that is related to the manufacturing on the funds, so this means then these are products that they are able to produce an absolutely decent profitability for the bank, again, assuming that you are in full control of the value chain. And these are going to be used in -- as creating a kind of a blend in our advisory solutions and, we think, that are going to help us a lot in lowering overall the total expense ratio for the clients but without sacrificing the profitability of the bank. And again, the key element is the operational efficiency generated by our asset management company in Ireland. Regarding the cannibalization with other products, these products are going to be used as a component of advisory solutions, are not going to be sold on a stand-alone basis because this -- in case it's not current with the philosophy we are using in managing our clients. So they are going to represent an additional component in our advisory solutions and, again, helping us in becoming more efficient. That means to reduce the total expense ratio for the clients but maintaining untouched the profitability for the bank.

[Operator]

The next question is from Elena Perini with Banca IMI.

[Elena Perini, analyst]

First of all, I would like to ask you about the trend of net inflows in the month of October. Then the second question is about your loan-loss provisions. They are still very, very low. So I was wondering if you can provide us with an outlook about next year, also considering the guidance that you have given on lending. And then the third question is about Fineco Asset Management. You provided us with P&L split. So you -- also about it, if you can give us some sort of guidance for next year. Because in the contribution of the first 9 months of the current year, we only had the third quarter basically. So these were my questions.

[Alessandro Foti, executive]

Yes. So regarding net sales of October, so October, we are going to release the number tomorrow. And unfortunately, we are not been able to give you the number of net sales of October today because we are just finishing of elaborating all the numbers. In order to have the perfect picture of net sales, we need to have 1 day more. And in case, net sales for tomorrow, for October, there have been absolutely -- has been a good month, so with robust net sales. In terms of overall dimension, it's been -- they've been a touch lower respect to the same month of last year. But again, as we say that we are not too much concerned to have a few tens of millions more of net sales. Plus, the trend remains pretty strong, and so we are absolutely quite satisfied by these numbers of October. Also considering that with the existing environment is extremely challenging because we have, on one hand, financial planners, that they are deeply involved in managing existing clients, because clearly, as you can imagine, considering what's going on in the market, the clients -- so that is the client is a little bit more nervous respect the previous month. Second, that there is -- and a huge amount of banks that there are very -- a large amount number of banks, that they are quite aggressive in offering high interest rates on deposits, not only the regional banks, but also asset gatherers and banks that are in absolutely in decent shape. And nevertheless, our net interest are -- they are remaining extremely robust, stronger, perfect in line with our expectation. And this, again, because with our business model, it is based on the concept of taking onboard clients, thanks to the quality of services. Regarding the loan loss provision, we had to make a little bit of distinction. So regarding the expected cost of risk, we expect our cost of risk remaining pretty low, so in the range that between 23 and 28 basis points and must -- definitely, very well below the average of the industry. And again, the secret is because we are absolutely concentrated just on our existing very well-known clients and also because the bank is leveraging massively on the big data analytics capabilities. Our debt capital rising capabilities are clearly putting us in -- definitely, in a great position for evaluating the credit quality of our clients. In terms of the -- clearly, on the loan loss provision, there is also the impact produced by the -- there is some volatility that is being generated by the probability of default of UniCredit bonds.

[Lorena Pelliciari, executive]

Current accounts.

[Alessandro Foti, executive]

Current accounts?

[Lorena Pelliciari, executive]

Yes, current account.

[Alessandro Foti, executive]

I give the floor to the CFO, that is -- to share much more precise than me on this point. So please, Lorena.

[Lorena Pelliciari, executive]

Thank you. So we have to say that loss loan provision are not fully comparable with 2017 as they now include also exposure to banks and forward-looking information, following the introduction of new accounting standard, IFRS 9. So in these P&L items, we now have to account also provision related to loans to banks related to the entire IFRS 9 on UniCredit current account. In the first 9 months, we had a positive impact, 9 months of this year. We had a positive impact of around EUR 1.5 million due to this evaluation.

[Alessandro Foti, executive]

Before finishing it, just a couple of additional words on the net sales of October. Clearly, net sales are very good in terms of net inflows, and clearly, the mix is as we anticipated, excluding direction of liquidity and assets under custody. And on Fineco Asset Management, to give you a split in terms of results between Fineco SPI and Fineco Asset Management is clearly the [ list ] in the annex. But in terms of my -- our suggestions is to use as a guidance the progression we are going to have in terms of margins after tax on our asset under management products, because clearly, it's there where you can have enough perfect idea of the real impact produced by Fineco Asset Management on our assets under management business, because clearly, we -- at a consolidated level, clearly.

[Operator]

The next question is from Alberto Villa with Intermonte.

[Alberto Villa, analyst]

Three questions for my side. The first one is on net interest income. How do you see, I mean, the net interest income developing in 2019 according to your plans of growing into the lending that you guided us today and your assumptions on margins? So do you expect margins to decline further or you think these levels are sustainable? So just indication of what could be the expected growth for net interest income going into next year. The second one is more broader question, if you want. It is about the uncertainty on the markets and wanted to ask you, in your experience, you were not listed at the time, but when there has been sort of volatility of markets in past periods, what are the main, I mean, drivers in Fineco, like customer behaviors or asset mix, or opportunities for you eventually to, I mean, grow the share of wallet or the market share in the asset gathering you are expecting maybe to happen again this time?

[Alessandro Foti, executive]

So let me start from the net interest income. So net interest income with concern for 2019, as a guidance, a growth of low single digit. And this is going to be the results of negative components that is represented by gross margins expected to keep on declining. Because until we are not in the beginning of the rise in short-term interest rates, clearly, gross margins are expected to keep on declining. So we expect -- and so a negative component generated by declining gross margins. But on the other end, we expect positive contribution produced by the positive volume effect, because we expect to continuously -- to continue to gather transactional liquidity, paid 0. At the same time, we expect to keep on expanding our lending book and, again, maintaining our extremely conservative approach. Really, I want to also to remind that in this guidance is embedded also the continuation of our policy that not renewing our expiring UniCredit bonds and keeping on diversifying our European govies exposure. So this means that we are not going to increase our exposure on Italian govies. And so progressively, the -- in terms of weight on our own portfolio debt, the weight of the Italian govies are going to be further diluted in the coming months. And so this is the guidance on the net interest income. Regarding the environment, clearly, the environment we are experiencing right now is not fully comparable with the past. Because in the meanwhile, we had some structural changes in the market. So for example, in the past, usually -- in any case, if the market remains difficult in terms of uncertainty, correction and volatility, what you can expect, clients remaining in a wait-and-see mode. And this -- clearly, this can wait on the business mix of the net inflows. On the other side, the net inflows is expected to remain strong because, for example, differently from the past, clearly, now the clients are less and less interested in capturing the opportunities produced by the offer of high interest rates by other banks. Because now clients are more aware that when there is a bank offering in high interest rates is because there is something else on the horizon. And so clearly, there are no free lunch in the market. So we -- clearly, we expect the brokerage doing pretty well and -- particularly considering that the bank currently with the -- how our DNA of innovator in the brokerage industry, we are going to launch and we are launching right now brand new solutions for making our brokerage business even more efficient and so on. So in summary, what we can expect to have is there are discontinuation. Net inflows remaining pretty strong. Business mix remaining skewed more in direction of the asset under custody, and brokerage keeping on doing well. At the same time, I continuously -- we are going to continuously enjoy the additional contribution introduced by Fineco Asset Management, clearly, is more and more the running and is going to play and a constantly growing impact on our results.

[Alberto Villa, analyst]

Okay. If I may follow up, just on private banking. You are putting more emphasis on growing the, let's say, assets into this kind of segment. What do you think -- you think you are okay to continue to grow, you need to invest more to change something, or it's just a matter of time, and you will continue keep on growing?

[Alessandro Foti, executive]

The reason behind our growth is because the mindset of the so-called affluent and rich people is changing, because now the affluent and rich people are looking for value for money, and Fineco is a great place for getting this kind of solutions. At the same time, we don't expect significant investments, some material investments on -- in this direction. But clearly, we are going to have a much and continuously growing focus on this kind of business. So for example, we are going to launch in the next few -- during the - in the next few months and tailor-made solutions for then private banking clients. And as we mentioned during the presentation, and again, we are going to use the same approach we have been using over the last few years. So we are not interested in, for example, buying directly companies specialized in providing these services. But we are going to keep on leveraging on our products and open platform, so creating agreement with companies specialized in providing extremely sophisticated solution for this segment plans. Probably, we are going to announce the first agreements in the next few weeks going towards the year-end.

[Operator]

[Operator Instructions] Mr. Foti, there are no more questions registered at this time.

[Alessandro Foti, executive]

Thank you very much for your questions. As usual, then if you are interested in having a follow-up, in getting a little bit more details, call the numbers. Please don't hesitate to contact us. Our team is, as usual, fully available for giving you the assistance you need for better modeling our numbers and figures.

Thank you very much.

[Operator]

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