Mediobanca Banca di Credito Finanziario SpA

MIL:MB

Earnings Call Transcript 2019-Q1

[Alberto Nagel, executive]

Good afternoon, and thank you for joining the call. The key messages of this first quarter for Mediobanca Group are that we continue on our growth road map, focusing on some, in particular, 3 highly specialized growing business whose growth is driven by -- more by long-standing trends and is less affected by the volatility and uncertainty of the market. This we coupled with a low risk profile and a low sensitivity to Italian macro. KPI are that we have had quite a robust growth in loan, up 3% Q-on-Q to EUR 42 billion and in total financial assets. In particular, net new money in the quarter was in the region of EUR 1.9 billion, equally guided by the Affluent and Private Banking segment. Funding was up 2% to EUR 50 billion, with cost of funding under control, slightly lower than the historical.

Growth in revenue was 7% year-on-year and 3% Q-on-Q, driven by all business segment. This reverted, coupled with a very low cost of risk in a growth in GOP after loan loss provision of 7% compared to a year ago and 26% compared to the last quarter.

Net profit was in the region of EUR 250 million, not having any extraordinary nor a current capital gain.

Asset quality further improved with gross NP in the region of 4.5%. Core Tier 1 stood at 14.2%. So without any material impact from the recent volatility and dislocation of the market. LCR and NSFR were in the region of 161% and 108%.

So the key element was -- one of the key element was the strong loan origination that reverted into a growth in loan book and in NII. So this was evident in all the segment, with mortgages up 8%, new loans, 22%; consumer loan up 6%; and Wholesale Banking loan up 13%. This reverted also into a further increase boost in NII, was up 4% year-on-year, but take into consideration also the impact of IFRS. So we had EUR 2 million less because of the new standard. So this 4% would have converted into more than 5% increase, being equal all the rest.

The funding increased to EUR 50 billion on the back of strong wholesale bank -- wholesale -- wealth management deposits, up 9%. We have refinanced some bonds at -- that were coming to maturity at lower cost. And we have also to take into consideration the future TLTRO that represents EUR 4 billion, so marginally only 10% of the loan book. And we'll be having a number of maturity, well spread, starting from '21 -- 2020.

We have continued to invest in the franchise. So growing our distribution network, digital. We have had quite an important increase in new customers harvest by CheBanca! 10,000 customer in the quarter, 40% are coming from web. On top of that, we have invested and we are hiring private bankers, financial adviser. And we have been opening new branches, light branches of the consumer finance. We had always had a very prudent approach in terms of exposure to govies. So this is nothing new, but it has, of course, a different impact when there is a market dislocation.

Our EUR 2.8 billion of -- in banking book with a duration of EUR 2.5 -- sorry, 2.5 year, made that the impact was negligible on our core Tier 1.

GOP was up 7%. You'll see it on Page 5. All the business contributed positively. All the sources contributed positively. So we had NII, fee income, profit from trading, Generali contribution, all contributed to this 7% increase in GOP.

In terms of business, we have had a positive start from all business. The lower write-backs that we had this quarter compared to the first quarter of last year made that we had a marginally negative in CIB whose revenue trend was more than okay.

NII was up 4% on the back, as we said, of strong new loan production. So we had also to take into consideration -- we have to take into consideration this NII, the early funding cost, so we had done some part of the refinancing of our bond maturity earlier on. So we are booking -- we are having in the book a longer impact of this early funding. So this is mainly evident in Holding Function NII.

As we said, the group loans was up 9% to EUR 42 billion. New loans, up 14% to EUR 5.6 billion in the quarter. This is also driven by lower repayment of Wholesale Banking. We do expect that in the next few quarter this phenomenon will be less evident, there will be more less-bulky production of Wholesale Banking compared to the first one. All the other segment contributed positively, even Specialty Finance that, as you have seen, is contributing more and more to the Wholesale Banking results.

Funding. As we said, we managed to keep the cost of funding 5 bps below last year cost of funding. So the overall cost is -- was 85 bps compared to 90 bps of the year before and 100 bps of the 2017. We have also a comfortable funding position supported by the fact that we have quite a good amount of liquid assets. EUR 10 billion of assets that are eligible for any kind of, I would say, extra funding. And on top, given the fact that we have done already 50% of our refinancing as of today, our new funding would be opportunistic and will be more led by the cost, rather than by the need.

Fee income up 12%. The driver is -- while in NII the drive is consumer. In fee, definitely, is now Wholesale Banking -- is Wealth Management. That now contributes as much as 44% of our group total, so it's by far the largest contributor of the fee stream. Here, we have to -- on one end, to take into consideration the natural growth of this line -- business line because of new companies that are going to be consolidated or have been consolidated compared to a year ago.

On the other end, we have also to take into consideration the time needed, in particular, in a volatile environment to convert new deposits into managed asset. That is, of course, a bit delayed taking into consideration what is happening to the market. But overall, quite a good trend in Wealth Management. That was also coupled with the sound performance in CIB, in particular, in advisory and in mid-cap activity as well as in the fee trend in Consumer Banking.

Total financial assets was up 2% to EUR 65 billion. As you can see here in this slide, EUR 1.9 billion divided equally between the different segment with EUR 0.5 billion of negative market impact.

Costs are driven by -- up 3% like-for-like, driven by increasing operation in distribution enhancement. So CheBanca!, Consumer Banking, Specialty Finance have hired additional stuff to foster distribution and risk management.

Cost/income was anyhow stable at 43%. And in the meantime, as you remember, we have taken out some synergies -- cost synergies from the optimization of a function linked to the merger of Esperia into Mediobanca and also other optimization that we did on overall staffing of the group.

On COR, we had another positive quarter, better than expectation. This is led by further very low industrial cost of risk in Compass that was, as you see, in the region of 180 bps. So below or substantially below our internal guidance of 200. This was coupled with some write-backs so that were in -- were taken in CIB. And this led to overall cost of risk of less than 60 basis points. The coverage went up also because, as you may know, this is our first quarter of the application of the new GAAP. And hence, we took the opportunity to increase the coverage.

You can see it on Page also 13, where asset quality further improved in terms of coverage, in terms of percentage of net loans and gross loans. So all positive. As well as in capital, on Page 14, the 2 picture of phased-in and fully loaded. Retained earnings, positive; IFRS 9, only 1 bps; spread impact of widening of GOPs only 2 bps; the 22 negative is related to the consolidation of the quarter results of Generali. As you know, this is a seasonal effect that then when we get the dividend, it's going to go down. So it's transitioning. We also have, I think, a quite sound capital ratio on a fully loaded trend. Here, we show that 13% is the level that we're going to go, take into consideration not only the full application of IFRS 9 but also the full deduction of Generali. And in this table, without taking into consideration, of course, basically 100 bps, 80 to 100 bps that we can get and we will get when we sell the shares, the 3% of Generali.

As a closing remarks, we wanted to highlight that based on numbers, based on confirmation of quarter results one after the other, we can say that we have some diverging elements within our business model compared to the previous one because of structural reshaping, but also less sensitivity from Italian banks to macro and in particular to the spread widening and also in terms of growth trend compared to universal bank in Europe.

This, you can see also in the deep reshape summarized on Page 17, where now retail business accounts for 58% of funding and 56% of loan. Then we have, as we said, the 2 completely different engine in terms of source of income. So NII for above 60% is Consumer and Wealth Management for over 40% is fee from -- is the contributor of fee. This is, of course, totally different from the picture of Mediobanca as it was some years ago, and you can see it on Page 17.

The low sensitivity to macro is already -- has been already mentioned for the govies for the Generali exposure because is 80% deducted, will be totally entirely deducted in a few months, is also to be explained into less dependency from Ita macro. Why? Because consumer finance proved to be, over the cycle, an anticyclical business where personal loan tend to be even more robust when GDP trend is less buoyant. And also in terms of loans, if we analyze with attention the book, we can say that 75% of CIB loan are given to Italian companies that have more than 50% of their revenue outside Italy or to non-Italian companies. Of course, all this has to be then, as it is, coupled with good asset quality, capital generation and ability to fund at the right cost the balance sheet.

In a nutshell, we think that even in market dislocation, in market volatility, we have the possibility to continue well our growth because of our position in the market and because also of the feature of the vision, which we are specialized. So Italy, we remain, no matter what, one of the biggest saving market in Europe. Mediobanca is a very strong brand for the Italian families in private banking that is even more powerful if coupled, as it is coupled today, with NIB that is much more geared and focused on mid-caps, but it has also a very technological new brand, CheBanca!, that can cope very well with the fast-changing environment of MiFID II technological-driven product revolution and fair pricing.

Consumer Banking is still a business where we see growth. Why? Because there is an underrepresentation of this kind of product business in -- on the Italian family compared to most of European peers. Of course, to enter in this market, you need sophistication in risk management and data analytics that, for sure, Compass has; much more than others. So we think that Compass, in particular, for the new kind of product that will be needed in the market and segment that are not covered by main competitor can further increase its market position.

Lastly, growth in CIB. As we said, the mid-cap segment is one of the most important part of the economy in Italy, is very dynamic, is a real interesting source of revenues from CIB and Private Banking standpoint. Here, we have been investing in the last 2 years, and now we are harvesting the first sizable results, 20% of our corporate finance fee are coming from this segment. A lot of events of investment banking are becoming also a revenue opportunity for Private Banking, as we said.

So thank you for your attention. And I am now available for your questions.

[Operator]

[Operator Instructions] We will now take our first question from Giovanni Razzoli from Equita.

[Giovanni Razzoli, analyst]

I have 2 very quick questions. The first one is a clarification on your funding strategy. You've mentioned that you do have a EUR 4 billion of TLTRO outstanding. I was wondering whether you can just share with us what is your strategy in terms of prepayment of these funding source. If I'm not mistaken, I've seen that you issued a EUR 1.3 billion of bonds in the Q1 at 100 basis points of spread. I mean, you are in a very comfortable position, but I was wondering if you can share with us what could be the strategy going forward? And more general comment, do you see this as a kind of challenge for the Italian banks given the very large and the much larger banks you have in relative terms exposure to the TLTRO? That's my first question. And the second one is, if you can provide us an update on your M&A strategy and the latest transaction you have made. You have acquired a minority stake into a foreign business, which was quite a surprise to me. I was wondering whether in the future you may continue to prioritize the acquisition or -- of continental companies with a majority stake? So whether shall we factor in also the other deals as we have seen in August with the acquisition of minority stakes?

[Alberto Nagel, executive]

So Giovanni, as of the TLTRO question, the EUR 4 billion are due starting from 2020, so in a couple of years. And we have EUR 1 billion basically per quarter. So we don't have, I would say, the concentration of the repayment in 1 quarter. In terms of funding structure, as of today, we would like to prioritize the kind of funding that will not structurally worsen our cost of funding. So basically, CheBanca! and Private Banking first and then all work can be done in terms of collateralized funding with using good quality of our book in corporate book, consumer book and mortgage book. In terms of M&A strategy. No, I would say that the minority stake of BFI is not, I think, the model that you should see as the typical M&A of Mediobanca. In fact, the typical M&A of Mediobanca is acquiring the control of company that are generating synergies with what we have. So we stick to the fact that in terms of distribution and in alternative, also in production, we are always careful to see acquisition in Wealth Management. We are also interested in all other the so-called, capital-light, high-margin business. So advisory for, in particular, mid-caps and capital market activity, boutique may be also on our radar screen. And for Compass, apart from BFI, the typical possible deals are taking over control of company that can be then integrated into the total platform of Compass itself.

[Operator]

We will now take our next question from Alberto Cordara from Merrill Lynch.

[Alberto Cordara, analyst]

Well, the first question is regarding Generali. I assume that the current market dislocation may have put the sale of what's taken Generali in the back burner. And I don't think you need any capital at all, but please let me know if this consideration is correct or not? Or if maybe there are some possible deals available, maybe in Italy, where you can still [ launch ] Generali to carry out these deals? The second question is a bit desanitized. I do apologize for the question. But the general feeling that all of us have, all of us working in the market is somehow there is not an efficient layer of communication between the Italian government and the business world and the financial world. So I would like to know from you if it is possible for you to give an advice to these people that we have at the government on the best way to reduce the spread because now, obviously, the spread moment is what has driven sector evaluations and whatnot?

[Alberto Nagel, executive]

Thank you for posing me, Alberto, these questions. First, our book value is higher than today's price, but not so much higher. So as you know because we have cleared it to our investor and also it's clear in the board, we look at Generali always benchmarking what they can bring to us in terms of EPS, DPS, but also what we can get in terms of contribution from other growing banking business should we recycle this capital. So the reality is that we will not most likely do a disposal booking at us on one end, but we are not far in terms of price. And the other is important to see where we put the capital. So in other in -- it's more important to find a good opportunity and then do a transaction to dispose Generali shares even without booking a great, I would say, capital gain and recycle this capital into a business like wealth management rather than the amount of capital gain we are fishing for. Of course, then to conclude, a sizable deal in Wealth Management, we need to have a lot of, as we know, condition aligned. First, availability of seller; second, assets that are for us ideal or good; third, impact of MiFID II on revenue -- recurring revenues and recurring profitability. It's very important for us to understand where is the baseline of, I would say, revenue and pretax or after-tax profit. Whereas, today, as we all know, there are a number of question mark at least that has to be cleared. Second question, I think one good advice, I mean, for the actual situation is to continue to be adamant, consistent in removing any doubts of re-denomination that the markets investor may have when they look at Italian govies. This is already important if it is done as the government has started to do systematically because it will help to reduce the spread of Italian govies.

[Operator]

[Operator Instructions] We will now take our next question from Domenico Santoro from HSBC.

[Domenico Santoro, analyst]

I do have 4 questions. The first one is on the cost of funding. In the presentation, you show that the EUR 1 billion that you had, they were at the cost of 1%, more or less. And to my knowledge, you just issued a covered bond of EUR 500 million at the cost of 1.1%. I was just curious, what are the other instruments that you issued? And at which cost at this point? Also considering that I read somewhere before the conference was starting that you issued actually -- you prefunded half of the maturity for 2019. So a little bit of color on this. Then the second, also in light of the comments that you might make on the cost of funding and the way it's moving. I was just wondering how you expect the NII to move from this level. Because that was quite a surprise for me. On deposits, you said that the huge inflow that you had in the quarter, it made me remember a little bit when a number-or-so years ago, CheBanca! was set up, you had big inflows from the other banks. Is it happening, again? And maybe you see some trend that you would like to comment? And then a technical question, the risk weighted. Given that your corporate risk weighted are now under IRB or a large portion of them. I was wondering whether you would expect some negative impact here in the second quarter of the year from the recent downgrade of the sovereign rating.

[Alberto Nagel, executive]

Domenico, thank you for your questions. Cost of funding, as you rightly pointed out, we have issued a coverage bond that was done in the region of EUR 750 million at 82 bps. Then we have done another 250 retail senior bond. As we had higher cost of funding that were a legacy, the net-net was that we went down 5 bps. In addition, we have raised in the same few months another EUR 1.2 billion in some transaction for collateralized funding and some other with Interbank's relationship because, as you know, in particularly, Compass is having a lot of interest from -- they always had a lot of interest from banks to fund part of their operation. Then we had EUR 2.2 billion in Wealth Management, EUR 200 billion in -- EUR 250 billion in CheBanca!, EUR 1.4 billion in Private Banking and another EUR 0.6 billion in other short-term funding. So overall, as you know, now that our funding mix is very much differentiated in different category. And so for the future, as we said, maybe you were not in the call, we will not prioritize new bond issuance if the market or the spread are too severe because we don't need them and they will penalize our NII for the future. We will favor sort of retail deposits and collateralized. We had a lot of feedback related to collateralized. For instance, consumer book or mortgage book or even good quality corporate book. This leads to the second question that is NII trend. We confirm what we said in the last call. So our revenue should grow in the mid single-digit area where with this different mix, NII growing in the low single digit, while fee growing in double digit. So for the time being, we confirm this because the evidence we are having as of today are as good as or even better, in particularly, in NII than what we expected. Deposits, there is some sort of brand effect because Mediobanca Private is a very strong brand and also CheBanca! is taking new clients in this moment of volatility and new deposit. With a big difference because the bigger ticket are more in Mediobanca Private, while in CheBanca!, it's more not sizable and more affluent type of deposits. RWA, possible inflation. Well, we should say that we think that there won't be much. On the contrary, we think that we have very few position that have a rating that could be lowered. And as you know, we don't know the quarter, because it's up to ECB to decide on that, if and when. But this year, in terms of RWA, we are wishing for the further deflation, because it's not true that our group is mainly validated. I would say that is mainly nonvalidated. So we still have a lot of room because we had, of course, a very good piece last year, 120 bps of saving in CIB. But we still have the mortgage activity, the consumer activity, the private banking activity, the leasing activity. So it's a project that will cover another 2 or 3 years where we have more to gain or to save if we want to be precise rather than the opposite.

[Domenico Santoro, analyst]

Okay. Just as a follow-up question. The EUR 1.2 billion transaction collateralized fund that you were mentioning before, presumably, these are more short term. I was just wondering whether this contributes or not to the net stable funding ratio in a way? And thanks actually for giving us the number, the precise number. Just a question whether you have these recalculated without the TLTRO, if you have the number at hand?

[Alberto Nagel, executive]

Sorry, I don't have the number of NSFR with, but I don't think -- I don't remember a huge or big swing. To come to the first question, this collateralized type of lending is 4 to 5 years, so it's long and it is contributing to the ratio.

Thank you, thank you. So sorry, I have been asked by Jessica that -- she's adding that if we, back of the envelope, we take out the TLTRO, we go to 100.2% of NSFR. Thank you. Bye.

[Operator]

This will conclude today's conference call. Thank you all for your participation. You may now disconnect.

[Alberto Nagel, executive]

Thank you very much for attending the call. I hope that you can all attend; the next one will be for the Q2 in February. Bye.