FinecoBank Banca Fineco SpA

MIL:FBK

Earnings Call Transcript 2019-Q3

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the FinecoBank Third Quarter 2019 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 2019 results conference call. Before we start going through the details of the presentation, let me please underline the key messages of the quarter.

First of all, our 9-month results recorded our best net profit ever, confirming once again the sustainability of our sound business model, able to deliver solid results in every market conditions. Second, the growth of our very well diversified stream of revenues has been supported by all business areas. Please note that our brokerage business has strongly performed in the third quarter, the best one since the introduction of ESMA regulation, showing that the in-depth review of our product offer is already producing tangible results.

Third, operating cost, as usual, well under control, with cost/income ratio declining by 1.4 percentage point to 37.9% and confirming operating leverage as a key strength of the bank. Fourth, net sales confirmed solid and robust commercial activity with Guided Products reaching 70% of our stock of assets under management.

Let me please underline that Fineco Asset Management is increasingly becoming the cornerstone of our inflows in asset under management, as confirmed both in September and October. Finally, we will later dive into some industrial measures we are undertaking, namely stronger push in moving customers' liquidity and asset under management. A closer look to a possible smart repricing of our banking services, preserving our price quality premium and redesigned brokerage offer.

Let's now move to Slide 7 and start commenting our 9-month results. Adjusted net profit as of September 2019 reached EUR 198.1 million, plus 10.8% year-on-year, reaching record results despite the 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 conditions and shows how the actions we have recently undertaken are already delivering. Let me please underline that the quarter is impacted by the annual contribution in the third quarter of the Deposit Guarantee Scheme estimated [ in ] EUR 17.5 million. Therefore, quarterly comparison is not relevant.

As of September 2019, we generated EUR 489 million of adjusted revenues, up 5.2% year-on-year, mainly supported by investing and banking area. Brokerage has recorded plus 10.5% quarter-on-quarter, thanks to an in-depth renewal of our product offer. Operating costs stood at EUR 185.2 million, plus 1.3% year-on-year on adjusted basis, and cost/income decreased to 37.9% despite the continuous expansion in assets and clients, thanks to our strong operating leverage into the scalability of our platform. Please go through the following slides to analyze more in details [ on ] the dynamics of our results.

Slide 8, net interest income. Net interest income increased by 1.9% year-on-year, supported by strong volume growth, high-quality lending and sticky side deposits even more valuable given the current interest rate environment. Volume dynamics more than offset the reduction in gross margins. As you can see at the bottom right of the slide, average gross margins on interest-earning assets lowered from 1.31% in the first 9 months of 2018 to 1.23% as of September 2019. 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 90% of our total deposit is 0.

Net interest income in the third quarter of 2019 is flat year-on-year and down 2.2% quarter-on-quarter. The latter, mainly due to the strong decrease of interest rates registered in the third quarter. As an example, one month Euribor moved from minus 37 basis points to minus 42 basis points in the quarter, the strongest quarterly decrease registered in the last 3 years. As for the fourth quarter, we expect net interest income increasing again on the back of volume effect and benefits coming from ECB gearing. For 2019 as a whole, we confirm our guidance of a low single-digit yield increase in net interest income. We will deep dive on this later on during the presentation.

Moving to Slide 9. In Slide 9, you can find a focus on our bond portfolio. We are progressive -- we are progressing very well in our strategy to run-off [ for ] the UniCredit bond portfolio and move into a more diversified and low-risk investment portfolio through a blend of European govies and covered bonds. Our bonds portfolio now includes also France, Spain, Ireland, U.S., Poland, Austria, Germany, Belgium, Portugal, supranational agency and covered bonds in addition to Italy. Let me also remind our sensitivity to a change in interest rates. Parallel shift of 100 -- plus 100 basis points would generate EUR 125 million of additional net interest income, while a parallel shift of minus 100 basis points would generate a minus [ EUR 114 ] million of net interest income.

Let's now move to Slide 10, fee and commissions. Fee and commissions grew by 11.1% year-on-year with management fees up 12.1%, thanks to a larger contribution of Guided Products & Services on assets under management, which increased by 4 percentage points year-on-year to 70% and to the contribution coming from Fineco Asset Management.

Let me highlight once again that our investing fees are strongly sustainable as 98% of investing revenues are recurring fees and we have no performance fees. The profitability calculated as management fees net of taxes on assets under management is flat quarter-on-quarter at 47 basis points, with customers looking for more conservative solution. Let me please highlight that our priority is to move as much as possible our customer liquidity into assets under management. For this reason, we are launching a new set of products aimed at speeding up the conversion rate of customers' deposits. We will come back to this point later in the presentation.

As for 2019, we confirm our guidance of flat margins after tax, but revenues growing low double digit, thanks to volume effect and to the contribution of Fineco Asset Management. For 2020, we expect a low double-digit revenues growth boosted by higher volumes. Trading income, net of nonrecurring items, is down 11.9% year-on-year due to lower market volatility and to the new ESMA regulation in place since the second half 2015. Let me please underline the good performance of brokerage in the third quarter 2019, which recorded a growth of 16.3% quarter-on-quarter and of 40.6% year-on-year following the deep offer reshape that we announced earlier this year.

Let's jump to Slide 39 for a focus on brokerage. Overall, third quarter 2019 brokerage revenues recorded the best quarter since the introduction of ESMA and the first 9 months of the year almost recovered compared to the previous year. This was possible, thanks to the initiatives undertaken by the bank to improve the business, such as further enlargement of our offer. For these reasons, we updated our guidance on brokerage, which is expected to be slightly increasing year-on-year and around plus 15% in 2020.

Let's now move back to Slide 11 for a detailed overview on cost evolution. As you can see from the slide, once again, our results confirm efficiency as a part of our DNA and core in our bank, representing a clear and unique competitive advantage. Staff expenses stood at EUR 66.6 million as of September 2019, plus 5.6% on yearly basis, mainly due to the increase in workforce related to the business development, in particular to costs related to Fineco Asset Management [ not ] fully in place in the first 9 months of 2018 and to the internalization of some services after the exit from UniCredit Group like, for example, the audit.

Non-HR cost at EUR 118.6 million, down 100% (sic) [ 1% ] year-on-year, despite the enlargement of assets and clients. 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 to the strong operating gearing we have.

The third quarter of 2019 has been characterized by low seasonality and different distribution of marketing expenses among the quarters compared to the previous year. For the last quarter of the year, we expect costs to increase again due to seasonality and staff expenses. Therefore, for 2019, we expect the overall cost to increase low single digit, and this trend is expected also for 2020.

Let's now move on Slide 12. As you can see, on the left-hand side of the slide, commercial loans grew by 24.7% 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 of clients. And our deep internal [ Internet ] culture allows us to fully leverage on big data analytics. This translates into commercial cost of risk very well under control, up 15 basis points as of September 2019, due to the improvement in the quality of credit. For 2019, we expect our cost of risk, further decreasing at a much lower level compared to the system.

Let's now move in analyzing our lending offer more in-depth on Slide 13. Mortgages grew by more than 29.6% year-on-year, more than EUR 1 billion at the end of the first 9 months. Average loan to value on total outstanding is equal to 53% and average maturity to 19 years. Personal loans grew 9.7% year-on-year with very attractive margins. Lombard loans totaled EUR 1.2 billion as of September 2019, increasing by 30% in 1 year, driven by Credit Lombard.

As for our 2019 guidance on volumes on mortgages, we confirm a new production of around EUR 300 million, EUR 350 million (sic) [ EUR 330 million, EUR 380 million ] as we prefer not to compete against the system in red zones characterized by aggressive prices, high loan-to-value and longer maturities. On personal loans, new production of around EUR 200 million, EUR 250 million per year. On Credit Lombard, we are adjusting our guidance to around EUR 300 million, EUR 350 million annual growth as during the third quarter some customers closed their credit line to take profits on the underlying collateral, mainly Italian govies, thus confirming once again how Fineco best-in-class brokerage platforms -- how the Fineco best-in-class brokerage platform is massively used by our clients.

With regards to 2020, we expect a new production on mortgages of EUR 200 million to EUR 250 million, on personal loans of EUR 250 million and for Credit Lombard a normal growth of EUR 500 million. Let me remind you that the latter can be impacted by our brokerage platform as it was the case in the third quarter. As for the expected yield, please keep in mind that in the case the market environment changes, we would have to move accordingly.

Slide 14, capital ratios. Fineco confirmed once again a rock-solid capital position on the wave of safe balance sheet. The slight increase of risk-weighted assets in September is related to credit and operational risk, the latter due to a more prudential interpretation compared to June 2019. In fact, as you know, following the exit from UniCredit Group, we applied a basic -- we are applying now a basic approach. Let me please stress that this impact is only driven by the process of changing applied methodologies, while the risk profile of the bank has not changed at all. In any case, we are working on the process to adopt the standardized model, and this is expected to absorb lower capital.

Common equity Tier 1 ratio stood at 17.37%, down by 47 basis points, mainly due to operational risk. At this regard, we confirm that going forward, we expect common equity Tier 1 ratio above 70%, a level that we deem appropriate and massively above industry average. Leverage ratio at 3.85%, and we confirm our guidance to maintain it at 3.5% by mid-2021 when the regulatory 3% threshold will come in force. Please note that we are stepping up our initiatives in order to improve the asset mix of our clients, which we will describe later. Finally, total capital ratio stood at 32.58% as of September 2019.

Slide 15. On this slide, we show an overview of the total financial assets growing trend, supported by the healthy expansion in new inflows. We gathered EUR 31.1 billion net sales since 2013, leaving total financial assets at EUR 78.6 billion as of September 2019. Guided Products increased their penetration rate to 70% on total assets under management from 67% on December 2018.

Jumping to Slide 18. Out of EUR 4.3 billion of net sales as of September 2019, 89% was organically generated through the existing financial planners or directly by the bank and 11% came from recruits made in the last 24 months. Let me please spend a few words on recruiting as we are observing once again an aggressive approach in the industry. In our opinion, overpaying for recruiting is not sustainable for the business. For these reasons, we are not interested in following this approach. Estimated net sales in October were solid and great quality, above EUR 380 million, driven by inflows in asset under management, which are expected to be above EUR 510 million.

In this regard, it's worth mentioning Fineco Asset Management contributed for more than EUR 350 million, recording a new high on retail net sales for the second consecutive month. We will come back later during the presentation on the growth potential of Fineco Asset Management. As for the remaining component, estimated direct deposits stood at minus EUR 150 million, due both to the conversion into assets under management and tax payments by clients, assets under custody, minus EUR 20 million.

Finally, we move to the next slide. Before we move to the next slide, let me please give you more color on 2019 net inflows. We expect robust net inflows, driven by structural trends and by the high quality of our [ proposition ] . The recent launch of some brand-new products and services by Fineco Asset Management together with that upcoming insurance capital guarantee product offer are helping us in offsetting the higher propensity of clients to remain in a wait-and-see mode in this complex market environment and improving our asset mix.

Now I would skip directly to Slide 22. In this slide, we summarized our expectations in terms of net interest income and industrial measures we are undertaking going forward. For 2019, we expect the net interest income growing by low single digits. For 2020, we expect a resilient net interest income with the following assumptions. First, our bond portfolio has been built in a very conservative way, meaning that its run-off is very gentle with no major cliffs.

Second, we expect the continuation of the positive effect coming from the building up of volumes and -- of the lending book, which will be continued to be offered only to our well-known base of clients. Third, we will benefit from the effect of ECB decisions, namely the tiering and the gentle steepening of the yield curve. Fourth, no change in our investment policy, as we will continue to invest in a blend of diversified European govies and covered bonds with no increase in the bank's risk profile. In particular, the exposure towards Italian govies would be in the region of EUR 5 billion.

Last, our sensitivity, a parallel shift of plus 100 basis points would generate EUR 125 million of additional net interest income while a parallel shift of minus 100 basis points would generate a minus EUR 114 million of less net interest income. All these assumptions are key making our net interest income very resilient and low risk. Please let me also remind you that it leverages on very valuable and sticky deposits, thanks to our sustainable and long-term commercial strategy. Let me also remind you that it could decrease by a few millions according to the current forward interest rate [ school ]. This is absolutely manageable by the bank, also thanks to the industrial measures we are undertaking from which we expect our revenue mix to change leading to higher contribution from investing and banking fees, at the same time, further lightening of our balance sheet.

In the next slide, we will deep dive on the measures we are setting up to accelerate the conversion of customer deposits towards assets under management and the room we have for a possible smart repricing of our banking services that would preserve our positioning as best price/quality offer in the market.

Let me now move on to Slide 23. On this slide, we summarized the main actions we are undertaking through the -- our Assisted Selling Platform to accelerate as much as possible the improvement of our customer asset mix. Let me underline that the conversion of deposits into assets under management is our key priority, and our actions are already delivering. In fact, October assets under management sale is expected to be the best one since the beginning of 2018.

First of all, we are launching the new generation of products with a very conservative risk profile, [indiscernible], for customer with a cautious stance. Among the new offer, it's worth mentioning Fineco Asset Management Target, decumulation product recently launched by Fineco Asset Management, allowing to [ progress ] and invest in the financial markets. The upcoming insurance capital guarantee project and a remunerated solution with a flexible exit window of [indiscernible] for customers with short-term horizon, Fineco Asset Management Megatrends that allows customers to invest in [ secular ] trends. And finally, pension funds that will be offered directly to customers.

Second, we are delivering new software developments in order to fully exploit our main competitive advantage coming from Big Data analytics. In particular, we will be able to automatically analyze the behavior patterns of our customers and to better target our [ low-touch ] clients. This will allow Fineco to take more directly the driving seat in helping financial advisers developing their customer more efficiently, with a strong improvement of the effectiveness of our commercial strategy.

Finally, let me please highlight that our very first initiatives are already delivering as Fineco Asset Management Target and Fineco Asset Management Megatrends have represented the lion's share of our strong assets under management net sales goal in September and October.

Moreover, we have already started the stress test of our brand-new platform offering Fineco Asset Management Megatrends directly through our assistant selling and upcoming insurance capital guarantee products will come next.

Let's now move to Slide 24. Fineco Asset Management is key in our move to accelerate the conversion of deposits into assets under management. Our latest net sales results confirm that Fineco Asset Management is gaining commercial momentum. And in the last couple of months, it has further accelerated its contribution to Fineco's interest. This, thanks to its ability to create modern and innovative multi-manager solutions, reinforcing our guided open architecture platforms and enhancing our time to market in developing our offer to meet the evolving customer needs.

At this regard, let me please underline that September was the best month of ever for Fineco Asset Management in terms of retail net sales. And our estimates for October are even better as retail net sales were above EUR 350 million, reaching around 50% of Fineco's net sales. Again, Fineco Asset Management Target and Fineco Asset Management Megatrend were the best seller products, confirming that net sales are structurally skewed towards retail classes.

Please let me also underline that following the success of Fineco Asset Management Target, we just launched a second edition of the product. Finally, I would like -- I would like to highlight that the penetration of Fineco Asset Management retail class total assets reached [ 19% ] from Fineco's asset under management, and we expect it to grow even further.

Let's now move on to Slide 25 to deep dive on other potential industrial initiatives that the bank could undertake. As you know, our goal is to offer our customers the best price/quality convenience through a fair and transparent approach. This allows us to make our customers even more satisfied and to generate long-lasting relationship, which translates in sustainable results in the long run for the bank. As a result, Fineco really enjoys a customer satisfaction rate equal to 97% and is the #1 bank in terms of reputation, a key indicator that allows us to affirm ourselves as a premium brand and generate a positive dividend on business results.

On top of this, we are continuously upgrading our banking services with a number of initiatives in order to improve our already best-in-class customer experience. Our positioning and long-term approach with our customers give us room to eventually think about the possible smart repricing to further support and diversify our revenues generation.

Let me please spend a few words on the 2 main pillars of our smart repricing. On one end, it will not be linear on all our customers as we will leverage on our deep internal IT culture to clusterizing customers according to their relationship with our bank. And in this regard, our full control of data management is critical.

Second, on the other hand, we will preserve our best price/quality ratio. At the bottom right of the slide, we represent an average cost for online operations of the main Italian banks. As you can see, we are the most convenient in relative terms and we have plenty of room for maneuvering, also considering that all the other banks are moving in the direction of charging higher cost to clients. Let me please underline that this is not a brand-new story for us. In the past, we managed some smart repricing as it was the case when we -- when the cap on interchange fees on credit cards was introduced few years ago.

Let's now move on to the next slide. In Slide 26, we summarize the results we have achieved after the in-depth reshape of our brokerage offer over the last few months. Brokerage business suffered the change in the market structure due to persistently low market volatility and to the introduction of ESMA regulation. As you can see from the slide, we have been, as usual, quite proactive in completely redesigning our product offer with the launch of new option products, the enlargement of our multicurrency basket and the optimization of our systematic internalizer.

More recently, we also repriced our ForEx, lowering the spreads to have a better commercial grip and introduced the 24-hour brokerage platform, which is key for the upcoming launch of our offer on Asian markets. Important to note, our actions have already delivered. And the third quarter 2019 was the best one in the last year. This, once again, confirms our strong track record in dealing in a timely and efficient way with structural changes in the market where we operate.

Let's now move on to Slide 27, developing opportunities. On this slide, a quick update on Fineco UK and Patent Box. In U.K., we are growing nicely with about 6,000 clients and 87% of the new customers acquired are non-Italian of which 76% are native British. With regards to the offer side, we just launched our first funds, and we will progressively complete our open architecture investing platform over the coming months. The platform is very convenient, also in terms of cost, with a competitive pricing of 25 basis points per year. In order to further improve the offer, we are evaluating the possibility to open a permanent presence in U.K. In any case, we will take the final decision only after Brexit outcome becomes clear. I remind you that U.K. offer leverage 100% on the Italian platform, meaning that we have no additional fixed cost.

A quick update on Patent Box. The closing of the process is still in the hands of the Revenue Agency. Let me remind you that we applied both for the intellectual properties as our platforms are internally developed and also for the trademark. The fiscal benefit will cover 5 years from 2015 to 2019. Intellectual properties are renewable accordingly to international guidelines. We are still working very close with the Italian Fiscal Authority to sign the agreement for the 5 years by the end of 2019. Alternately, we cannot exclude the option to self-determine the Patent Box benefit in 2019 tax declaration as set by the Decree "Decreto Crescita," definitively approved in law #58 of 28th of June 2019.

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

[Operator]

[Operator Instructions] The first question is from Gian Luca Ferrari with Mediobanca.

[Gian Ferrari, analyst]

Yes. The first question is probably the second time I'm asking this in a call. But your leverage ratio went down 18 basis points in Q3. So with an additional 4 quarters, we might be very close to the 3% Basel III threshold. So I understood the project of converting deposits into asset management. But even assuming you managed to convert couple of billion, you are only earning 1/4 of additional flexibility. So what are your expectations regarding these switch into asset management? And what are the sensitivities you made in order to avoid getting to the dangerous threshold of 3%?

The second is on non-HR cost. These are pretty low. If you look at Page 11, EUR 35 million in Q3 but also EUR 39.8 million in Q2 are well below the results reported last year. So it is all due, in my opinion, to development costs. So I was wondering if we have to set new base here, a much lower base compared to last year or there is the postponement of some costs in Q4. But what is the current run rate we should think about going forward with reference to non-HR cost?

And the last question is on the smart repricing. I think you put a chart where your current account is among the cheapest, I would say, EUR 25 per year. The repricing, I guess, applied across the board to all the 1.3 million customers, with some exceptions, I guess. Can you elaborate a bit more about this [indiscernible] there you applied to your clients?

[Alessandro Foti, executive]

So let me start on the leverage ratio. So first of all, the -- we had considered that we had in the past few months some extraordinary effect impact on the liquidity generated by massive disinvestments of clients of their assets under custody positions that has been generated by clients taking profits on their mainly the Italian govies, the tightening of the spreads on the Italian govies. And so this has generated starting from the month of June and going through July and into August a massive impact on this. And clearly, this is a temporary effect, and we expect that this is going to be progressively reabsorbed going forward.

Second, I would like to underline the strategy we are putting in place for absorbing liquidity are starting on producing quite relevant results because both the month of September -- September is usually is not a great month for assets under management, nevertheless, has produced an absolutely amazing results, but even better has been the results we achieved in the month of October because more than EUR 500 million of assets under management has been exactly generated by the beginning of these new initiatives gaining momentum.

I'm referring to the new generation of products and also the fact that the bank is becoming more and more efficient in interacting more directly with clients. And so what we expect, we confirm our guidance of remaining in the region of 3.5% leverage ratio mark, going through 2021. And clearly, this is current with a growth in our base of deposits in the range of between EUR 2.5 billion and EUR 2.7 billion per year. That is pretty much a run rate that is perfectly in line with the most -- the recent history of the bank, if we exclude the temporary effect caused by this massive reduction in assets under custody by the clients. And this is not taking fully -- is not fully considering any additional possible positive impact produced by the new initiatives.

Moving to the non-HR cost. Clearly, the non-HR cost are affected by seasonality. If you remind in the first 6 months, we were commenting that the cost have been a little bit above the expectations because we added a marketing cost anticipated at the beginning of the year. And so clearly, it's not just -- so this lower level of cost is not being generated by postponing cost, but we anticipated the cost in the first half. And the third quarter is seasonally low in terms of this kind of cost. And so we confirm that our overall costs are going to grow in the region of low single digits by year-end and the same path for next year. Clearly, we expect, but as we explained during the call, we expect for the fourth quarter higher cost compared to the previous quarter, but this clearly is mainly related to the staff expenses.

And coming to repricing. Repricing is, as we presented, is going to -- we label this repricing as smart repricing because it's not going to be linear. It's going to be repricing in which the most valuable clients are going to remain excluded by this repricing. So for example, clients with the investment products or lending products or they are good clients for brokerage and so on, clearly, they're not going to be part of this repricing. In any case, it's going to be a flexible repricing because all the clients that in the meanwhile are going to join the cluster of the good clients are going to be clearly -- they're not going to be charged with this repricing.

Clearly, this is an approach that can be managed just by an extremely efficient bank. Because from an operational point of view it's very complex because it means that you have to make the year to go through in a quite in-depth clustering of your clients. And second, it's extremely complex from the billing point of view because every month, practically, you have to change the way you are billing your clients considering that the clients they are continuously changing their behaviors and approach.

[Operator]

Our next question is from Elena Perini with Banca IMI.

[Elena Perini, analyst]

Yes. I've got actually 3 questions. The first is about your CET1 ratio, which was down quarter-on-quarter. I was wondering about the dynamics of this decline.

The second question is about your outlook for brokerage. If I understood correctly, you mentioned a 15% year-on-year growth you expect in 2020. Actually, big American players have reduced their fees on brokerage. What would you expect could happen here in Europe or in Italy?

And then finally, you mentioned some figures about your net inflows for October. Can you give us an overall rounding figure?

[Alessandro Foti, executive]

So let me start on the core Tier 1. So the core Tier 1 ratio went down just for a technical reason because clearly, this is still the follow-through of the change of the methodology because after the exit from the group, we moved from the advanced model to the basic model. And so the final calculation has produced an additional reduction in the core Tier 1. And so I want to repeat that this is not being driven by an increase of operational risk for the bank, but just by technical reason.

By year-end, we are clearly, as we explained to the market, we are working for moving from the basic approach to the standardized approach. That is an approach that is going to -- when the process is finalized is going to make for us able to recover core Tier 1 ratio in the region between 100 and 150 basis points. And so this clearly. And -- but this is going to happen by the year-end.

Brokerage. Brokerage, we confirm that we expect for 2020, growth in the -- in -- above 15% year-on-year. And this is mainly driven by the reshape of the product offer. And regarding your point on what's going on in U.S., I would like to remind that the structure of the U.S. market is totally different from Europe because U.S. is in a quote-driven market and Europe is an order-driven market. So what does it mean? In Europe, the book of the order is made by the orders of the clients, and this is what is making the -- what is generating the price. And so for this reason, Europe is -- remains mainly in commission-driven market.

U.S. is a quote-driven market in which the book is produced by directly by the market makers that they are collecting the orders and then [ there ] [indiscernible]. And so the most part of the revenues are generated by the market-making activity. And so the recent move that has been initiated by interactive brokers because interactive brokers is one of the most active market maker on the U.S. market. So that decision has been to take advantage by this and lowering the commissions in order to get more on the market making side and taking volumes. And so -- and this has been generating the immediate [indiscernible] by the other [ players ] .

In Europe, it's a different story because, as I was explaining, it's an order-driven market. And so we -- and from a purely theoretical point of view, there's only one player that theoretically is in the position to make such a kind of a move for increase even more the volumes we have is Fineco because Fineco is the only one that thanks to the volumes and the quality of the volumes we are able to internalize the orders. That is a kind of [ a casing ] of market-making activity in which we are taking advantage from the spread.

Clearly, we don't need to take such kind of a move. But theoretically, for us, this is more an opportunity than a threat because from a technical point of view, Fineco is the only one player that can take such a kind of bold step because it's the only one player in Europe that is directly internalizing orders. And so we don't expect in the coming future any kind of change -- significant change in the commission structure in Italy.

Regarding the number of October, the number of October has been absolutely very, very strong because -- so net fees more or less EUR 380 million. But this number is particularly robust because we had also this month a higher-than-expected amount of tax paid by our clients in the region between EUR 16 million and EUR 17 million that is huge. And also, we had some impact that has been produced by the most recent launched bank limit [ that is get on ] liquidity, considering the very high interest rates they're offering in the region of EUR 40 million. Clearly, this is absolutely not a matter of concern because it's touching the clients that are historically, we call them the free riders that they are continuously chasing for the opportunities that the most convenient opportunity in the market. And so the net sales have been very robust. But the most amazing part of the story is being, for sure, the assets under management because more than EUR 0.5 billion that is of assets under management is the tangible heaviness that what we are putting in place is starting working pretty well. And so the bank is starting in the process of absorbing the excess liquidity, so generating higher revenues and assets under management and making the balance sheet lighter.

And third, another very important point that Fineco Asset Management is accelerating more than we were expecting because it's now with EUR 350 million of net sales means that the largest part of the front book, the net inflows in asset under management has been captured by them. And this clearly, it's very great -- it's a great news, also considering that our penetration -- the penetration of Fineco Asset Management of the overall assets under management of our clients is still pretty low, so just 19%. And so we have a very large room for growing.

[Elena Perini, analyst]

Okay. Sorry, may I add another question? Because I'm not sure to have understood correctly about your net interest income. For next year, you would expect it to remain basically flattish.

[Alessandro Foti, executive]

We -- just to give you any more precise numbers, assuming that the situation of interest rates and this local interest [ scores ] pretty much what we are experiencing right now, we are going to stay -- we can expect worst case a reduction just in the region of few millions of euros. So that is not far away from practically from being nearly flat, yes.

[Operator]

The next question is from Domenico Santoro with HSBC.

[Domenico Santoro, analyst]

I do have a number of questions. So I might go one by one, if you don't mind. First of all, on your revenue guidance for next year, did I get correctly that you expect low double-digit growth in terms of revenues, also, [ given ] your guidance on brokerage revenues, please?

[Alessandro Foti, executive]

No, we expect low double-digit growth in the investing revenues and a growth in revenues on brokerage, that is going to be above 15%.

And on the net interest income, as just we discussed with your colleague, we expect that's something that is going to be net interest income being between flat and just modestly negative by few millions of euros.

[Domenico Santoro, analyst]

All right. That's very clear. On your capital instead, given this is a topic for questions, is this 17.4% a bottom at this point, given that you just mentioned that you expect some 100, 150 basis points from moving to standardized your model. And if I remember correctly, there is going to be another minus 80 [ instead from the book chase recovered from the ] UniCredit brand.

[Alessandro Foti, executive]

Yes. Yes. No, this correct them. So just in order to give you a little bit longer-term picture because, clearly, the core Tier 1 ratio is affected by clearly the lease on one side, the operational discount continuously growing because they are calculated as a percentage of the revenues generated by the bank. Then there is some lending. But on the other hand, there is no organic capital generated by the bank. So considering putting everything together, we expect that our core Tier 1 ratio, looking forward on a little bit longer term, can be expected to be stabilizing in the region of 17%.

[Domenico Santoro, analyst]

All right. That's clear as well. Beyond 2020, I got all your comments about what you expect in the future. Also that you might probably want to sacrifice a bit NII in favor of generating more fees going forward. How should we consider this? Do you expect just a recomposition of your P&L or actually sacrificing also your NII in absolute terms in order to have a lighter balance sheet? And also some comments on the dimension on your balance sheet on the bond portfolio would be very useful.

On this topic, then I saw the slide of FAM and the migration of assets to FAM. How do you expect margin also going forward to benefit from this migration, given that only 19%, if my understanding is correct are now generated from FAM? And then on this topic as well, is there any sort of deposits that you might switch into assets under management volumes in the short term? Just to understand a bit how you can -- might change going forward?

[Alessandro Foti, executive]

So let me start from the revenue mix on 2020. So I would suggest to split the point in 2 components. The first one is clear that when we -- what is related to the possible introduction of the smart repricing. In this case, what is going to be generated by this smart repricing is going to increase the expected revenue -- overall the expected revenues of the bank because it's not going to -- it's not expected to cannibalize in a significant way the net interest income. So this is the first point.

The second one is related to the absorption of liquidity through their asset under management products. In this case, every EUR 1 of liquidity that is absorbed by asset under management products is better to generate all in all and increasing revenues, which is clearly what we are going to get in terms of additional revenues on asset under management products is going to be expected to be -- to -- expected to more than offset regarding the decrease in the net interest income. So the more effective we are in direction of moving clients, in direction of asset under management products, and what you can expect is both balance sheet becoming lighter; and second, an increase in terms of revenues -- overall revenues generated. I don't know if I had been clear enough in the -- on these two points.

Regarding the dimension of the balance sheet. Clearly, the dimension of the balance sheet is strictly related to the -- our capability to move as much as we can in direction of asset under management products. It's clear that, for example, if we are assuming that we are able, but clearly, this is not a guidance. But clearly, if we are able to replicate the month of October continues, clearly, this would generate a massive change in the balance sheet of the bank and also a massive change in the revenues generated by the bank. This is not -- please, it's not the guidance, but just to give you an idea of how does it work the relationship among the different components of our revenues. So again, the repricing is going to generate nearly 100% additional revenues for the bank because it's not going to generate any kind of cannibalization of net interest income.

Assets under management, the more we sell of asset under management products to clients and the more -- and what you can expect a combination of lightening balance sheet, at the same time, growing revenues because the additional revenues generated by asset under management products are going to -- are expected to more than offset the cannibalization generated on net interest income.

On Fineco Asset Management. So we -- on Fineco Asset Management, we expect the margins are expected to remain relatively flat because clearly, there is -- there are -- Fineco Asset Management clearly is characterized by being more efficient and producing higher margins. But on the other hand, there is that, in any case, the continuation of the structural for the industry pressure on margins. And second, clearly, clients are characterized by low appetite in terms of risk. And clearly, the clients are more interested in more conservative solutions. So putting everything together, we expect the revenues generated on the overall asset under management products growing in the region of low double digit but with margins remaining practically flat after tax.

And this clearly can be changed by the product mix. So for example, if we -- we have clients becoming a little bit less conservative. In this case, you can expect a slight increase also of the margins. But we are not able to predict now there. Now we are assuming cautiously clients remaining -- maintaining the same kind of approach that have characterized them until now.

[Operator]

Next question is from Alberto Villa with Intermonte.

[Alberto Villa, analyst]

A few from my side left. One is on the -- well, it's totally off the table, the possibility of introducing negative rates. So you're moving on smart repricing, I guess, to counter the current situation in interest rates. And when will you take the decision to implement or not the smart repricing? What is the, let's say, the scenario in which you will move or not to introduce this measure?

And the second question is on -- I was quite impressed about the switch of assets and growth of Fineco Asset Management. It's clearly a success story. I wanted to ask you how are you incentivizing, if any, the network to sell these kind of products. And if you can give us an idea of the profitability of the different products you are launching, so the decumulation, [ FAM ] Megatrend, [ FAM ] Target and so on. So just to have an idea of -- and if there are significant different profitability margins between these products?

[Alessandro Foti, executive]

So we are not considering to introduce any kind of negative interest rates because introduction of negative interest rates, there is a -- it's impossible to make smart repricing tailored for the clients because, for example, if you want to be effective in introducing negative interest rates you have to hit the most valuable clients that is exactly the opposite we want to do. And so clearly, we have not on the table any plan of introducing negative interest rates. Regarding the smart repricing, we -- it's expected probably to be in place probably to be announced to the clients by the year-end and becoming fully operative, probably during the first quarter of next year.

Regarding the growth of Fineco Asset Management and the speed at which it's growing the asset under management products, clearly, we are not surprised by the direction because this is perfectly current with the anticipation we gave to the market because we -- the market, we anticipated the implementation of the new platforms of the new products. And so what is going on is exactly the result of this kind of activity. Clearly, we have been taking a little bit by surprise by the dimension of the -- by the impact in terms of volumes. And so we are very pleased. And in terms of the success of Fineco Asset Management is driven by very simple concept that, for example, the Fineco Asset Management products are -- they are characterized by being more -- they are more convenient for clients because they are less expensive because thanks to the recovery of operational efficiency, we are able to give to our clients better products but with a lower level of commission. And this is perfect for going through the challenges of the market.

And second, Fineco Asset Management is extremely efficient because the main [ dividend of ] Fineco Asset Management that is an extremely fast, quick and agile company. And so we are able to continuously generate new solutions for our clients, so for example, the fact that we have been so fast introducing this very efficient decumulation product. This has been thanks exactly to the efficiency of the company.

The Megatrends, the same concept. So there is no specific different incentive for the network on the Fineco Asset Management products. So the incentive scheme is exactly the same on all the products we have on the platform. The reason of the success is driven by the fact that Fineco Asset Management is able to give more efficient products, so that they are less expensive and more performance for the clients. And then second, that we are very fast in tapping what are the continuously emerging new demands by clients because the market is a fast-changing market, and so you have to be very fast and flexible to give to your clients and your financial planner exactly what they need.

[Alberto Villa, analyst]

In terms of margins for you of the different products, are there differences?

[Alessandro Foti, executive]

So the -- clearly, on the margins, the same answer I gave before to Domenico that is clearly the Fineco Asset Management products, thanks to the higher level of efficiency are more profitable. But on the other hand, clearly, we have a couple of headwinds represented by the fact that clients are more skewed in direction of conservative solutions. And second, that clearly, there is a structural pressure on margin. So putting everything together cautiously, we expect then the margins remaining almost flat going forward. Also because we are not taking this approach, we are not using as a shortcut to move the clients in direction of taking more risk. So if the clients are fully convinced and that they are interested in taking more risk, it's a story. Another story is to move clients in a nontransparent way in direction of risky products. And this is not really what we are doing.

[Alberto Villa, analyst]

Okay. And I was wondering if between Megatrends and Target, for example, there is a huge...

[Alessandro Foti, executive]

Clearly, there is a quite significant difference, so Megatrend, but very reasonable because in Megatrend, the clients are investing immediately 100% from the market. On the FAM Target, the clients are investing progressively over the time on the market. So by definition, Megatrends is more profitable than FAM Target.

[Operator]

Next question is from Luigi De Bellis with Equita SIM.

[Luigi De Bellis, analyst]

Two quick questions for me. The first one on the repricing strategy. Do you expect or not some churn rate from this potential move, also looking at what happened in the past? And could you quantify the potential impact of this strategy or the perimeter in terms of customers?

And second question on the Patent Box. Could you quantify the impact expected on capital ratio or in another way if the positive impact is included in the 17% CET1 indication?

[Alessandro Foti, executive]

Regarding the repricing, clearly, it's -- by definition, we expect some churn rate. But because as we say, that is not a brand-new story for Fineco because Fineco probably someone that is more familiar with our history they know that for a very long period of time, we had [ the ] pricing on our banking services. And so we expect a churn rate in the region of a few tens of thousands of clients are concentrated in the low end clients that they are totally irrelevant in terms of profit generation for the bank. So it's a move that -- move probably that we -- as we -- the opportunity to discuss with some investors in the past month. It's a move to take in any case, also without considering the situation in interest rate because it's a move in direction of improving furthermore the quality of our base of clients. Because -- and so the churn rate is expecting just a few tens of thousands of clients, but represented -- but mainly represented by absolutely marginal clients in terms of what is their contribution to the profitability of the bank. So regarding the Patent Box, the core Tier 1 ratio. In 2019, we expect to be around actually above 17%, considering also the benefits from the Patent box.

[Luigi De Bellis, analyst]

Okay. And, if any, on the repricing, could you quantify the potential impact from the strategy?

[Alessandro Foti, executive]

Finishing on the core Tier 1 ratio, clearly, this is not considering the possible positive impact produced by the message [Technical Difficulty] price model. As I was explaining, [Technical Difficulty] the condition [Technical Difficulty] as model, we can expect an additional improvement on the core Tier 1 ratio between 100 and 150 basis points [Technical Difficulty] 17% [Technical Difficulty] that clearly is considering also the Patent Box.

On the pricing -- excuse me, that we...

[Luigi De Bellis, analyst]

Yes, if you could quantify the potential impact expected from the repricing strategy or perimeter in terms of customer?

[Alessandro Foti, executive]

A few tens of millions of euros.

[Operator]

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

[Alessandro Foti, executive]

Thank you very much for joining our call. And as usual, if you want then having any follow-up in deep diving numbers and figures, please, the team is available. Thank you again.

[Operator]

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