Mediobanca Banca di Credito Finanziario SpA

MIL:MB

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the Mediobanca First Quarter 2019/2020 Results Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, the 24th of October 2019.

And I would now like to hand the conference over to your speaker today, Mr. Alberto Nagel, CEO. Please go ahead, sir.

[Alberto Nagel, executive]

Thank you very much, and welcome to the call. In a nutshell, this quarter confirms that the pillar of the so-called value cycle of Mediobanca are working very nicely in the sense that business that are very vertical and specialized, focused on high margin and whose trend of growth is linked to long-standing factor play in the right way in order to continue to grow the top line of the group. So this is important because, as you know, we have entered in a very tough framework of interest rates, and so understanding the resiliency of our business model was an important test. Well, this test was very positively passed during the quarter and we think that it will be also in the next one.

We have seen growth in revenue-generating assets. So the total financial assets were up 5% year-on-year to EUR 68 billion with EUR 1.1 billion of qualified net new money in affluent and in Private Banking segment. Loans as well were up 6% year-on-year and 1% Q-on-Q. This asset -- revenue-generating asset has created a bottom line and coupled with the optimization -- the ongoing optimization of RWA, reverted into above 14% quarter 1.

But more than that, we have delivered 7% growth in revenue with a 3% combined growth in NII and fees. This was possible also because we continue to grow in terms of people, so head count up 3% year-on-year; innovation and distribution reinforcement; keeping a strict -- under strict control both cost-to-income. So banking cost-to-income is 50%. And COR is at 58 basis points. This led to an increase in profit that was EUR 271 million and an overall ROTE of the group in the region of 10%. If I have to point out one -- a few important features of the quarter, I will for sure look at the performance -- the commercial performance in Wealth Management, notably in affluent and in ultra-high network -- net worth individuals, so Private Banking.

CheBanca!, as you have seen already from the press release, has achieved a very interesting growth in terms of size, quantity but moreover in quality. So EUR 500 million of managed asset, good quality, good profitability, not only consolidates previous quarter of NNM but also give you the sense of the trajectory because a year -- just 1 year ago, it was half of that. And it had also a performance that compared to the industry was remarkable. This trend is possible thanks to distribution empowerment. FA went up 9% in the quarter, 30 new financial adviser. And as well, we have reinforced the proprietary distribution network. Now we have roughly 900 salespeople in the bank. This led to this increase of revenue of 7% and an important increase in profit of 35%.

I would say as well as we have had very good performance in net new money generation in Private Banking. This is mainly Italy also. Because, in Monaco, as you know, we just have a new very strong management team that is in place, so we expect also Compagnie Monégasque for the next few quarters to contribute. But taking into consideration only Italy, EUR 600 million of net new money in managed asset is quite interesting results.

The same we can say for Compass. Compass has delivered another 5% increase in NII. This is quite interesting because it is the 6th year of growth of Compass and is based on continued new production. Loan went up 7% year-on-year and 1% Q-on-Q; revenue, 4%, where NII were 5% and less in terms of fees; asset quality, a small notch of increase quarter-on-quarter, 4 bps, as we said already, as we guided you in the last call, with very limited impact from the growth of NPE due to the new definition of default.

We continue to reinforce the distribution with opening of 5 new agencies in the quarter. Good progress in the client activity of CIB, where M&A leverage on the new add-on of Messier Maris presence in France. And capital market solution was pretty active. This gave us the opportunity to stabilize the NII and to increase Q-on-Q the fee compared to the last quarter despite, as we know, capital markets environment, in particular in equity, that was still soft. Asset quality confirmed stronger with further write-backs in the quarter. PI enjoyed a one-off, so this EUR 45 million of extraordinary gain from the disposal of Generali while Holding Function enjoyed a stable trajectory that was not an obvious result given the steady decrease of interest rates.

So Page 6, to go a bit to the point. Basically steady loan book growth in the 3 years and in the last year-end as well. Steady TFA growth led and is leading the revenue growth. That is the one that you see on Page 6, EUR 684 million, comparably to EUR 530 million, so over 3 years gives the sense of a CAGR of 9% in 3 years.

With an NII, as we said, that is now even more pushed by Compass, that is leading the NII to EUR 360 million, up more than 4% -- 3% quarter-on-quarter and 5% year-on-year. And this is also the sense of the outcome of a diversified and growing loan book where consumer and mortgage did the most important part. The second element was managing with attention cost of funding, basically refinancing at the same spread all the bonds but also with hope to lower at least this part of cost of funding for the remaining expiring bond whose cost is higher compared to the market one -- today market one.

If on NII, the engine, as we know, is -- has been and continue to be the growth from -- played by Compass, in consumer, the 2 big drivers are Wealth Management and CIB. And here, again, basically the fact that we are diversified in CIB mean that we can cope with a capital market environment that wasn't great, but we have add more advisers, and we have also add more capital market solution while in Wealth Management, we expect to improve the trend. Also taking into consideration that part of this increase is limited by the passive fees we have to pay when we recruit more. And you see that in this quarter it was EUR 8 million. But overall, quite a good trend in the sense that we are stable with a tendency to have in Wealth Management a good trajectory.

TFA up 5% with CheBanca! As we said, CheBanca! has recorded this kind of track record in the quarter where compared to most of the competitors, they stand out quite well. Only one competitor did better in managed asset in the quarter. So it's important that -- not the comparison with the other, but the steadiness of the quarter of Compass that has recorded in every quarter basically in the region of EUR 0.5 billion of net new money. The positive element is the qualification of this net new money that, compared to the past, is not really deposits but is managed asset with good profitability.

Asset quality remains very -- pretty stable and very good in the sense that overall cost of risk went up 2 bps. This is the effect of 4 bps in consumer, so not really having any impact. One very important change of definition of default that we have applied for the first year, so this led to this increase that is of EUR 120 million from stage 2 to stage 3. We think that with the trend of asset quality over the rest of the group, we can be able to come back to 4% gross NPE on loans by the end of this fiscal year.

Solid capital generation in the sense that the banks continue to generate capital, and this is also driven by the continuous optimization in RWA. So from June, we have had another notch of improvement, so from 59% to 56%. This is an ongoing trajectory. As you know, we will rely less and less from new validation in the future because they will be neutral to less positive. It will be more reliant from our management -- I would say internal management of this kind of aspect.

As a closing remark, as also we are approaching the day of the presentation of our new 3 years plan that will be released on the 12th of November, basically, it is fair to say that the banks entering in a new 3 years plan, much stronger in terms of revenue pool, earnings and dividend trajectory. And this is led through the efforts that we have done in growing each business in the way that it grew with then combined an important increase in profitability and generation of capital that has been of up to 200 basis points in the 3 years -- in the last 3 years.

Of course, this kind of development in terms of business profile -- stronger business profile, stronger earning generation and dividend distribution reverted into a clear outperformance of Mediobanca compared to many peers. If you compare -- if we compare the last 3 years through June '19, we were up 34% compared to other Italian banks that are pretty flat or negative trend of European banks, but which is more important that if you take into consideration also the dividend distribution, we have delivered, I think, quite interesting total shareholder returns of 54%.

Basically, this element that we can summarize in sustainability, distinctiveness of Mediobanca accretive value cycle are confirmed, as you have seen also by this quarter. And these are the basis for us to build on for the next 3 years plan.

Thank you very much. I am now available for your questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Azzurra Guelfi of Citigroup.

[Azzurra Guelfi, analyst]

A couple of questions on the consumer credit and on the Wealth Management. The consumer credit NII showed a very strong progression, not just with loans but also with the margin. Can you explain us what has been the main driver of the margin expansion and if this is sustainable? Because if this is the case, Mediobanca could show rising NII even in the year [ it had profitability ].

The second one is on the FA network and the expansion of the distribution channel in the Wealth Management. Can you give us indication on how this is progressing and what is the cost associated with that? And lastly, I have a question which I'm happy to wait for the plan to be answered, so it doesn't need to be now if you can't because I understand it. But when I look at the recent development that has been in the shareholder base, I just wanted to know if you think that there is anything in the group governance or in the strategy that can be reviewed. Because when I look at many of the things that has happened in the 5 years -- in the last -- past 5 years, many things have changed and have significantly improved the positioning of Mediobanca within peers and also in terms of profitability and capital, as you mentioned.

[Alberto Nagel, executive]

Thank you, Azzurra. In consumer NII, the factor that drove the expansion of margin or the resilience of margin, better be prudent, are that we managed down the cost of funding, that the proportion of personal loan is a touch higher so we produce more personal loan. Because -- as you know, produced, also distributed by the own branches of Compass, that -- there has been a large -- they produce much more value because we don't give fee and cost away. And the fact also, as I said, that the distribution network is bigger compared to a year ago because, basically, we have enlarged it.

In Wealth Management, plans are the ones that you have seen in the sense that every quarter, we -- I mean, on average, we tend to hire in the region of 150 -- 150-ish wealth advisers in terms of financial advisers, and we plan to hire as well much less because these are more employee -- wealth adviser for both CheBanca! and also Compagnie Monégasque and Mediobanca private. So our idea is to continue this kind of growth. Of course then, every quarter you can have a swinging factor like a group of people coming in one quarter or the other, but the idea is to grow at, at least the same level of last year in terms of new person coming and bringing AUM. We have to say that the more CheBanca! is affirmed, the more it improves its visibility is -- after repositioning, the more it's -- they are able to attract new kind of wealth manager and financial advisers. So the more we grow, the more we can grow. It's linked. It's a positive cycle because it is more visible that -- as you have seen also in the quarter, net new money, that is an important operator.

Plan, you will see the plan. We want to stick to, of course, the today strategy because we think that this strategy brought good results. Of course, this strategy and -- like any strategy can always be improved. It is true that it's fair to say it can get even worse. But of course, we're thinking positive, and we think that we can improve the actual results. We can continue to growth and -- to grow, and this will be the aim of the plan. And in doing this, we are open to every suggestion. So every suggestion that for us is in the best interest of the bank would be very carefully considered and valued by the Board.

[Operator]

Your next question comes from the line of Antonio Reale of Morgan Stanley.

[Antonio Reale, analyst]

One -- 2 questions for me, please, one on really loan growth. Because looking at the Q-on-Q, volume growth was quite steady despite the sort of challenging demand, particularly consumer and mortgages. I'm interested in hearing your thoughts. Could you perhaps comment on -- with respect to what you're seeing from competition or spreads you're charging and really your strategy in terms of margin versus loan growth going forward? And the second question is with respect to the contribution from CIB, which has been flat quarter-on-quarter. I was just wondering how you're seeing the pattern going forward here.

[Alberto Nagel, executive]

Yes. Antonio, you pointed out, in fact, that the nicest part of loan growth is coming from Consumer Wealth Management, where I think because of Compass expansion in proprietary network with light branches is defending very well the margins. So we need to think about Compass in the future that is bigger in terms of light, direct presence and relying less on third-party distribution agreement because this is the best way to preserve the margins. Because, of course, competition is out there in these very low interest rates, like it happened even in the past. So when you add scarcity of revenue, you see that players that were not looking at consumer finance, all of a sudden, they put a lot of efforts to be there. So this is bringing down a bit the marginality.

The way to defend it is originated through proprietary distribution channels. So this is why we have a plan, and we are doing -- executing a plan of reinforcement of profit redistribution. Taking also into consideration that, as you know, a lot of branch -- a bank's branch network are going to be or are going -- are shut down. So today, the possibility to operate in the territory is bigger because, compared to only some years ago, a bank's presence tends to be less effective. As we have a network of 200 branches, for us, adding 10%, 15% capacity can become very important, and this doesn't change anything at the territory level.

CIB, we see a good -- as I said, good pipeline in M&A -- and both on large and mid and on capital markets solution. So these are going to be there even in the coming quarters. What is -- where we have less visibility as we -- as I think you shared, is equity capital market, where, I mean, signs of recovery were there but then the market was not so open for IPO. So IPO discussion is bigger compared to a year ago, but IPO execution is not that bigger for the time being. But if we think about this very low level of interest rates, we should assume that equity will stay as an important asset class in the future as well as we need to see a bit more of acquisition finance. So acquisition finance in the last few -- couple of quarters in Europe was a bit more muted, and hence, we have, I would say, 2 positive and 2 negative. For this reason, I think we are working to have anyhow a good revenue trend, but leveraging on diversification.

[Operator]

[Operator Instructions] Your next question comes from the line of Giovanni Razzoli of Equita.

[Giovanni Razzoli, analyst]

Two questions from my side. The first one is on the competitive environment in Italy overall in terms of lending. Because it seems to me that after a couple of quarters of normalization, now the competition on pricing is back to very high levels, probably also in light of the terms of the new TLTRO 3. So I would like to -- you to share your views on the competitive landscape for corporate lending in the coming quarters. And the second question, if you can provide us an update, if any, on the M&A activity in Indonesia, whether there are any updates on the closing of the transaction.

[Alberto Nagel, executive]

Yes. Thank you very much, Giovanni. Yes, you are right in the sense that the new version of TLTRO made the -- as it has been extended in terms of duration, made the situation more competitive for the pricing of loans in corporate. That's why we tend to be more deal driven and/or for a part of the portfolio, relationship-driven rather than wanting to increase, by definition, our loan book in corporate. So it depends more if we find a good opportunity in terms of ROAC rather than that we have to do it, and this is lucky enough because we can grow in the other business. So we can select where to grow in terms of -- depending on return.

Now if you see our -- or if you see -- maybe you cannot see, because it's not a public data, but our spread -- average spread of new production indeed was better in this quarter. It was more the volume that was -- we have some early repayments. So we did some good production, but we had also some early repayments. So at the end, outstanding amount was a touch lower. But the spread for the time being, we did well and was okay.

M&A in BFI. Now we have had one positive new element that -- in the controversy that is one of the element that is a precondition for us to do the closing. The counterparty did the agreement with us and signed agreement with us, won to Supreme Court in Jakarta, the latest round. So one element of -- to go to the closing has been today achieved. We need to work on the rest. So today, should I tell you -- "Do you have, Alberto, less or more hope to close this deal?" I would say today, we have more hope to close it.

[Operator]

Your next question comes from the line of Domenico Santoro of HSBC.

[Domenico Santoro, analyst]

Just a couple of questions from my side. First of all, coming back to the NII, in particular in the Consumer Banking. I got all your comments about cost of funding, margins and loan growth, that they are quite positive and supportive for the NII going forward. On absolute terms, I mean there is more volatility now in all the line. Also the Holding Functions had turned more negative in the quarter because of the cost of liquidity. Just wonder whether this number, especially the Consumer Banking one, is a clean base for the next quarter or there might be some volatility that you might mention.

And then the second question is on the new definition of NPE or defaulted loans, this EUR 120 million. Can you please comment what was the coverage before the reclassification and whether you expect this to turn into performing again before the end of the year, given your comments on the NPE ratio of 4% that you expect for the end of the year? And related to this, should we expect more volatility or an increase in the loan loss provision going forward for the next quarter, given that there might be more NPE entries?

And then your comment which would be very nice to have about M&A in Italy among Italian banks. We see more press reports on this. And from my experience, this is another coincidental when we start to read articles. So I'm just wondering whether there is some substance there. I know that you are -- it's an important business for you. And what is the regulatory attitude on capital toward this kind of deals?

[Alberto Nagel, executive]

Thank you, Domenico. Very, very interesting question. Let's go ahead one by one. Consumer, stable, sustainable, yes. We see this as a basis also for the next quarter.

New definition of default, basically, what happened is that we have reached a level where -- of coverage that is EUR 160 million gross. This was EUR 160 million, a portfolio of loans that with the old definition were stage 2. With the new definition -- you know that the new definition is much more stringent than the old one, so easily a part of the portfolio that was stage 2 becomes stage 3. Now it was EUR 160 million gross, and it goes to EUR 120 million net, with so -- hence with the coverage of 25.

We don't see increasing cost of risk, so -- above what we have guided to the market. So we said to the market that this year compared to last year, there should have been a touch of increase in consumer loan provisioning because, last year, it was all-time low, and we did also some capital gain in selling nonperforming. We don't see a structural increase in cost of risk. We see only the continuation of a little inflation that is linked by the new standard. To give you an example, today, as you know, IFRS 9 impose you to set aside 3% the very first day -- or in the region of 3% the very first day you do the loan, the bonds. So basically, if you grow like we grow -- and we continue to grow. The more you grow, as you know, the more you have to set aside. So there is, I would say, a low but statistical inflation within the guidance that we have given of consumer provision that is not today a consequence, an outcome of industrial higher cost of risk but linked to the new standards, the new accounting standards.

M&A. Well, of course, we have discussed at length about M&A. For sure the latest events that are the important decrease in the structure of interest rates and the length of this, we should remember that interest rates will stay negative in the -- at least in Europe for the next 3.5 years or 3 years will make -- or will put such a big pressure on banks, in particular tier 2, that M&A discussion is going to be more likely. Then likely doesn't mean that it comes into this, it turns into this. But it is, I think, more likely because it's very difficult to present, as you know better than me, plan by banks that are decent and realistic because we have to put together 2 words, decent and realistic return on tangible in 2, 3 years' time.

Now one way to cope with this is trying to do an M&A that is complex for many reasons. You know and we know that given the approach of SSM -- the approach of SSM is that if you build a bigger bank, it has to be safer. The standard of a new bank coming out of a merger should be higher than -- in terms of quality, in terms of stress requirements just to be specific, it has to be, I would say, a better standard. Now -- so this means that these are possible. I think after what happened in the trajectory of the interest rates, to me, it seems that they are more likely than before.

[Operator]

There are no further question at this time. I will hand the conference back to Mr. Nagel for his final remarks.

[Alberto Nagel, executive]

Thank you very much for your patient attention. And we hope to have you all at the new call we will have on the 12th of November for the plan. Thank you very much. Bye.

[Operator]

This does conclude our conference for today. Thank you for participating, you may all disconnect.