Mediobanca Banca di Credito Finanziario SpA

MIL:MB

Earnings Call Transcript 2022-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Mediobanca First Quarter 2021-2022 Results Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today. [Operator Instructions]

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

[Alberto Nagel, executive]

Thank you to everybody for joining the call.

I should say that we have started quite well this new fiscal year, with all business segment trends ahead of expectation. This was particularly true on Wealth Management, thanks to large distribution scale and the improved offering. The Private and Investment Banking model is increasingly effective and is taking more market share. The Investment Banking revenues in general were particularly robust, but the news is that also Consumer Banking ahead of the schedule is bouncing back in terms of new loan production, coupled with excellent asset quality.

We have had also a steady improvement in our ESG profile. And the results are such that revenue were up 13%, net profit up 31%. With all-time high fees, we have had more than EUR 200 million fees in the quarter, which is all-time high, driven by Wealth Management with EUR 96 million, which is a quite strong contribution and robust CIB client business.

Another important element was NII back to growth. We have been always a bank whose main feature has been, among others, the NII growth. You remember that this was altered by COVID and now is back to the previous trajectory of growth.

Strong asset quality, default rates at minimum, gross NPE on loans at 3.1% with highest coverage. So this then led to an increase of 30% in GOP, G-O-P, and net profit, which is the best ever quarterly banking performance. So if we strip out the component of PI, this quarter is the best of our history in terms of GOP and net profitability, which translate into a ROTE of 11% on capital ratio which stay in the region of 16.1%, fully loaded and 15 -- sorry, 16.1% phase-in and 15% at fully loaded.

As said, ROAC of each business, every single business improved the metrics and the trajectory quarter-on-quarters and -- which is, I think, even more impressive if the increase of contribution in the ROAC of Wealth Management. We were at 20% ROAC last year. Now we are at 27%. We have increased 77%, and we have also basically reduced also the cost/income.

ROAC of Consumer Banking, it's very, very high, 34%, and is the result of NII growth and cost of risk. ROAC of CIB is 15%. It's quite good and is the -- I would say, the consequence of a robust revenue trend, coupled with efficiency in capital allocation.

So I want to comment with you Slide #7 because it's giving the sense of what we are doing. We say here that the group today has a totally different revenue generation capability and it is much bigger than the pre-COVID. We have compared here the last quarter revenue, EUR 706 million, with the pre-COVID, which was on average EUR 642 million. So we are 10% above of the pre-COVID. So a bank that has a materially higher revenue capability and a positive to come, which is Consumer because if you see the breakdown in this increased capability in terms of revenue, the biggest contributor is Wealth Management because we have EUR 172 million as opposed to EUR 142 million, so 21% increase above the pre-COVID. We have a good increase also in CIB with 15%, but we are still stalling compared to -- in Consumer Banking. And this is the nice news in the sense that with the recent new loan production, we do expect this to happen also in the coming quarters.

The business model, which is based as you know, on a specialized banking approach with a focus on value-added product and service, is increasingly effective because it translates into a superior capability to generate net new money compared to our size in Wealth Management. It is able to rebound in terms of new loan production in Consumer, thanks to very strong, I would say, distribution proprietary system in Compass and as a reinforced market position in CIB, thanks to the model of Private and Investment Banking.

Now NII back to growth. We had a 6% increase of Consumer Banking NII, which was not expected in terms of size. It is a mix of both new loan and lower prepayment. And this translates to a plus 4%, but we are still having room to be catch up because the NII of the pre-COVID in Consumer, as I said, was EUR 235 million and now it's EUR 226 million. And the loan book was 13.7% and now it's only 13.1%. So room for further improvement is visible. And the different component of this uplift in NII is mainly Consumer, but also CIB and Wealth Management, as well as ALM optimization because we continue to manage down our cost of funding.

Fees. As I said, more than EUR 200 million, first time in our life positive, but even more positive the breakdown. Why? Because a big component is coming from Wealth Management. Now Wealth Management is definitely the biggest contributor of fees in the group. And if you see then, the quality of these fees is as good as it comes because it's EUR 75 million are management fee, so are to be considered more sustainable, more stable over time, depending on the NAV, of course, but recurrent as opposed to performance or to upfront.

CIB, another very good quarter where we managed to substitute certain big ticket of last year with an equally strong advisory contribution, EUR 39 million as opposed to EUR 41 million, and a good contribution coming also from other business in CIB.

Asset quality. Further improvement here. We have been managing down the outstanding moratoria to less than 1% to EUR 500 million. Consumer totally out of this issue, mortgages and leasing having a very low amount, less than EUR 200 million the first, less than EUR 300 million second. Every single moratoria has been classified either in stage 2 and stage 3. And so we have done already some provisioning, but we do expect that some positive news may come after the December '21 because there will be an expiring date for both mortgages and leasing, and the information we have from clients are such that we think that an important part of this, if not the biggest part of this, may come back to [ Bonis ] already at the end of the next quarter.

Prudent staging. You see them on Page 12. Here, 3.1% as opposed to 3.2%, a notch down, and net NPEs at 1.1% and -- which is even more important, I would say, the performing loans coverage is going up to 3.70%. So we have created good overlays and buffer for the future.

Now cost of risk reduced to 51 bps with no overlays reverse and record coverage ratio. So here is a mix of a very low-cost of risk depending on excellent trend of Consumer 160 bps. And I would say, CIB with very low cost of risk, enjoying some small write-backs linked to repayment and the rest of Wealth Management is at 12%. So very low cost of risk, but as a reflection of very solid underlying trend.

Positive asset quality trend in all division on Page 14, I won't spend much time on this.

And on CET1, the dynamic of CET1 was basically starting to use more capital to RWA growth. And doing the buyout, the acquisition of Bybrook, so 20 basis point. There is a transitional impact of the higher book value of Generali, which will be reversed in this quarter because they paid the dividend. The news that we know is that we're going to have another buyback depending on authorization by our general meeting and by ECB up to 3%, which will have an impact estimated in 65 basis point on CET1.

Now very important achievement in ESG, where Mediobanca has been mentioned among the top 40 companies ranked in the new MIB ESG index. And even more important, we have had a double upgrade in Morgan Stanley index from BB to A. We have done a step ahead also in our disclosure on last year in consolidated non-financial statement enhanced with alignment on SASB and TSFD (sic) [ TCFD ] request. We have also made important step ahead on calculating our economic value generated and distributed to all stakeholder, and we have also made a further improvement in our -- disclosure in our group's tax strategy.

Environmentally, we are supporting heavily our clients targeting climate change with important new loan production in green credit product. In asset management product, where now we have 39% of our qualified fund are ESG rated. And DCM, we have gained quite an important position in becoming a leader, a clear leader in placing ESG bonds, ESG-linked bonds or green bonds in the market.

We continue to support with more conviction even after the COVID. So it was possible more activity in -- with our community, Mediobanca Sport Camp, new rugby pitch inaugurated as part of the TOGETHER/INSIEME social inclusion project. And we have been also working with our colleagues to improve the environment planting 2,000 trees in the Milan area.

In governance, both in remuneration and in governance, we have done some step ahead. Part of them are subject to general meeting, which is going to be tomorrow.

Divisional results. Here in Wealth Management business, we are getting to a larger scale. Now this is a mix of important push in distribution. So we have had another 20 such people added to our total number of 1,100. We have been working also in a product upgrade. We have done a major new project with Blackrock, Mediobanca/Blackrock co-investment, which has achieved a very important size of EUR 1.4 billion, much higher than the original target. So this is an evidence of the ability of Mediobanca to structure tailor-made product that suits well with demand of sophisticated clients.

We have launched also other funds, MB Target Maturity, new thematic/customized investment lines for Mediobanca Private and CheBanca! We have concluded the acquisition of Bybrook. Hence, we see the progression in net new money, which was EUR 1.8 billion in Premier and in Private, and equally divided between AUM and deposits. Deposits are growing a lot because we are -- we are getting -- we are managing the vast majority of the closing of investment banking transaction, mostly generated by Mediobanca, but also third-party. And hence we have an edge in getting to a nice position towards clients that have to manage liquid assets and convert them into managed assets.

We have had -- it was forecasted that the last tranche of the optimization of some institutional mandate in exit, which was EUR 400 million. So TFA up 17% year-on-year and 5% Q-on-Q to EUR 75 billion, driven by an important growth in AUM and assets under administration. And hence, this reverted into a steady -- an important increase in net profit, so 48% increase year-on-year and 24% Q-on-Q.

We want to also highlight that this trajectory of TFA has had an important contribution from organic growth, but as well as the selected acquisition that we have done in the last 5 years also have contributed heavily to these results. You see it on Page 19, where this CAGR of 18% is part of EUR 27 billion of organic growth and EUR 22 billion of external growth. So basically, in 5 years, we have tripled our TFA, and this is the outcome of internal growth and external growth.

Premier and Private segment are contributing nicely with important trend in net new money and also an improvement in marginality because we are also -- we have also improved the marginality of this business. And we continue to enhance the distribution and the offering. We told already about the increase of relationship manager and financial adviser. We have also registered -- we continue to register very good productivity. CheBanca! ranks second in the market in terms of the best productivity in terms of AUM, net new money per capita. And hence, this is important because the growth that we are doing and the future growth is associated with a good marginality and productivity as well as, as I said, it's very important to continue to reinforce the wide Private markets platform. We have already developed in this year. So this year, we will have new products that alongside, for instance, the tech and real estate activity and private equity activity with Blackrock can be replicated even in different asset class.

Consumer. Page 22, ongoing distribution enhancement. So we are now having 233 branches. Some are proprietary, the vast majority; 54 run by agents and 49 are Compass Quinto, so the salary guaranteed. Solid rental digital distribution, so now we reach 26% of direct personal loans, so personal loans that are generated through the web. And we have launched Compass Link. Compass Link is a new distribution tool that we have developed in order to sell not only personal loan, but also other product associated with personal loan, also in a different situation compared to the branches. So outside of the branches and in -- also in retailers.

New loans, EUR 1.8 billion, close to the pre-COVID, it was EUR 1.9 billion, an important increase, which is also notable. What is also notable is the fact that the mix is different because personal loan are now 47% of the total new loans. They were 42% in the previous quarter, and they were 52% pre-COVID. So we have still some room to improve this incidence of personal loan, but we are on the right track.

Q1, one, in terms of net profit, one of the highest of the history of Compass, EUR 90 million, up 43%. Revenue, quite stalling because we had to catch up, as I said, the NII, but we are there and loan loss provision, which are going down to 160 bps. We with more than EUR 200 million overlays already set aside in previous quarter, and we continue to slight beef up this number to cope with the situation after the COVID.

Asset quality is at best ever level. NPEs on loans down to 1.6%. We continue to de-evaluate our non-performing to provision them to a very low level of book value. Hence we are also this year continuing to sell NPEs. So we plan to do another sale of NPE out of Compass from here to the end of the year.

As I said, we are devoting more and more emphasis, capital and commitment to the digital upgrade, where, of course, digital upgrade is important, but it's important to give a smooth customer experience. For this reason, we are investing in upgrade from transactional to relational tool, integration of different channels, simplifying and enriching payment methods. So credit card, web or shop by dedicated barcode.

Compass investment in this field have one specific goal, which is minimizing time to yes and give a superior service and product to the customer. For this reason, you can see here on Slide

[Audio Gap]

in this quarter, we have processed 80% of loan application in 1 day and 40% in 1 hour. So we continue to improve this. We have given us a very demanding target to arrive to the end of the plan with most of the request process in 1 hour and limiting the dropout, which are linked to process rather than credit merit reason.

We have now launched in 2021 in this quarter, the Pagolight. So it's -- Pagolight is a buy now, pay later Compass solution. We have now more than 2,000 point of sale served, and we are rolling out this initiative, which we have been working on with [ NUSA ] as a partner already since 2 years ago.

Asset quality at its best-ever level. So you see not only the CoR, but the ongoing asset trend in early risk indicator, which are very low. Further decrease in net NPL stock. So we have another drop of 12% of NPEs from EUR 235 million to EUR 206 million and coverage ratio, which are going up to 78% and 3.70% in terms of performing.

CIB, as I said, very positive news from the industrial different footprint of our CIB, which is basically already 90% a client business, but today is more diversified than before. It's more diversified because we have had another important market like France. And we have had another important customer segment, which is mid-corporate in Italy and in future, not only in Italy. So this created the opportunity to generate EUR 40 million fees in advisory, quite a good activity in acquisition finance and in DCM. Good contribution in Capital Market solution on the back of a quite interesting volatility in equity market. ECM is going to have a more robust quarter in the coming months because of calendar of IPOs.

CoR at 8% -- 8 basis points, the only difference compared to last year was that last year, we had a one-off of writebacks of Burgo, net of which the results are pretty equal to the very high first quarter of last year.

We have retained or improved an important position in the markets in IB. In M&A, you have seen that we are managing quite an high volume of transactions since January '21. We are managing more than EUR 27 billion of transaction, and this is true also in ECM and also in DCM.

Principal investing a positive contribution because of ordinary trend of Assicurazioni Generali as opposed to last year when we had a negative extraordinary. And also a positive contribution from [ holding ] function because we have reduced the loss, thanks to higher contribution from Treasury and cost control. Funding stock up 3% Q-on-Q because we have issued -- we have found a good window of opportunity to place senior non-preferred. We have managed to have another chunk of TLTRO, and we have had an increase in deposits of Wealth Management because of liquidity event that I mentioned before. So CoF is in the region of 60 basis points, flat Q-on-Q and 5 bps below average '21. All indicator of liquidity are pretty good.

Now as a closing remark, I would say that this quarter shows the ability of the group to have an increased capacity of generating revenue. And 3 businesses that are contributing in a positive way also in the quarters to come, where we do expect, assuming that we have a normalized scenario. So we don't have a restart of the COVID restriction and/or a major correction of the financial market, we assume that the growth in profitable asset will last in terms of both of TFAs and new loan, driven by Consumer Banking and Wealth Management. The growth in revenue will continue with NII, which has already bottomed out and now going to a better trajectory. Fees that will benefit from intense activity in Wealth Management and CIB. And I would say, we'll take the opportunity to continue to invest and to speed up the digitization of the group. So flat cost/income and CoR that should continue to enjoy a positive industrial trend as in the first quarter.

Now we -- the news is that we will -- as you know, we -- if authorized, we will do the new buyback in basically when we are authorized, so we will start ideally from November. And hence, this will bring down a bit our capital ratio for 65 basis point.

Thank you very much. I have been a bit long, but I leave now the room for you for questions.

[Operator]

[Operator Instructions] And we will now take our first question from the line of Antonio Reale at Morgan Stanley.

[Antonio Reale, analyst]

I have 3 questions, please. One on Generali and one each on NII and fees respectively. So the first one, if I look back since 2003, under your mandate, Mediobanca has significantly reduced the exposure to listed stakes. You've improved the free float after dismantling some of the historical shareholders pack. And I think the progress has been clear, the direction of travel similarly. So how should the market read the increase in borrowing in your Generali stake ahead of the Board renewal? That's my first question.

Also do you anticipate any changes to your capital treatment of financial investments from the Basel III proposal? It's just been published. I don't know if you had a chance to look at it, and you can comment. My second question is on NII. As you mentioned, a number of good news. It was interesting for me to see particularly that you've been able to deliver a margin expansion despite the very benign cost of risk, which, I mean, on risk-adjusted metrics, your origination is implying a very nice profitability.

And my question for you is, do you think this is sustainable or competition will eat into that margin going forward in your view? We've seen a number of banks flagging their intention to gain market share back in Consumer. And it feels that, unlike the past cycle, asset quality is no longer a competitive advantage for you. So what would you expect overall you can deliver in terms of NII growth this year?

And lastly, on fees, the agreement you signed with Blackrock on private markets I think has gone a little bit under the radar screen. You mentioned the positive contribution. And I've seen, especially on upfront fees this quarter, visibly the numbers. How much of this do you think is recurring? And what growth shall we expect from group fees overall this year in light of your comments on CIB and Wealth Management?

[Alberto Nagel, executive]

Thank you, Antonio. First question on the security lending about Generali, it doesn't change at all our strategy. Our strategy is that the contribution of actual Generali stake is important to our -- in order to meet our financial target at the end of 2023 and in general every single year. So what we did is only meant to remove or to reduce the execution risk in terms of delivering the financial targets, which are embedded in our plan.

Sustainable NII and NII growth. So we were -- I have to say, we were a bit surprised this quarter of the magnitude of the rebound. To give you more color why it happened and what's behind this? Basically I would say that all contributed positive, but of course, Consumer did more. Why it did more? Because of 2 elements: new loan production, good level in terms of size and marginality. And the second, it's lower prepayment. So the stock was higher compared to what we have forecasted.

Now is it sustainable? I think we have visibility for the next quarter. It is sustainable in the sense that new loan production is doing -- is going well also in October. Of course, at the end of December, we need to see the prepayment, which is the other element of the equation. But I would say that in general if Compass goes this way, we can revise our guidance on NII from flat to positive. Of course, then the entity of this positive is still to be assessed because, basically, it will be a plus. But then if it is going to be something like this quarter or something more, we need to look at with more clarity and more, I would say, precision in the -- at the end of the first half of -- so at the end of the first quarter, the next quarter. But I think the NII trajectory is sustainable and will lead to a growth at the end of the year and not a flattish trend.

Fees. Blackrock has contributed here -- has contributed. And you see in the upfront, so the upfront was a touch higher compared to last year. But what is more important is the management fees component. It's very important, the growth that we have had in one year. So we have grown the management fee in a very steady way. And this is happening again because basically, even this month, we are having quite a good net new money, not only from Premier but also from Private. So I do expect even in fees that we can stay higher than last year. We need to see also, as I said, for Investment Banking and Wealth Management, equity market trend is very important. So we need to see not the major changes in the tone of the equity market. But definitely also in fees, we can deliver better trend than last year.

[Operator]

We will now take our next question from the line of Azzurra Guelfi at Citi.

[Azzurra Guelfi, analyst]

A couple of questions from me. One is on your plan and profitability. You're really running at around the level of 2023 target in all your divisional at group level. So as I was hearing your comment about the consumer credit and the trends in some of the division, could there be some upside to this target already?

The second one is on capital. Capital remained strong. You have a general dividend policy. And I just wanted to clarify a little bit your position relative to [indiscernible] because if I understand well, asset quality and sustainability are going to be 2 big topics coming forward, and you probably are better placed compared to peers. And if you can elaborate a little bit on, I don't know, impact of calendar provisioning, ESG climate impact, if you can?

And the last one is on revenue opportunity. You have mentioned opportunities from climate ESG as well as buy now, pay later. And I guess they're still small at this stage, but probably they are an indicator that you are still trying to identify opportunities that come from all the possible spectrum of revenue like that.

[Alberto Nagel, executive]

So Azzurra, I tried to answer because the line was not so clear. So the voice was not so easy to listen to. So plan -- in terms of plan is, true what you're saying in the sense that in some segment, we are definitely doing better than the plan. This is coming from a smaller revenue line compared to what we have forecasted 2 or 3 years -- 2 years ago. In terms of, I would say, a bit NII and a bit also profit from trading, which is always very difficult to forecast. But at the end, the cost impact and the cost of risk is such that at the end, we are having better overall results. We need to see whether in terms of revenue, in particular on NII, we can close a bit the gap compared -- knowing that we lost one year in NII, which is the COVID year. And we need to see how fast we can rebuild the NII of Compass this year and next year in order to meet those targets, which are thanks to lower cost already partly met.

Capital -- yes, capital strong. I totally share your point. In the new environment also with the activity of ECB and SSM is very important not only to have strong capital buffer, but also to have strong asset quality and level of provisioning which are adequate. This -- the combination of these 2, I think, will put the bank in a better position to distribute back to shareholders. And I think Mediobanca is very well positioned because asset quality continue to improve. And the fact that we sell every year the non-performing warehouse in Compass keeps the balance sheet of Mediobanca in Consumer completely clean. Today, basically we don't have non-performing in Compass because once they go to stage 3, we sell them and before we start to provision. So I think it's sustainable and it's for Mediobanca, this trend, and coupled with healthy capital ratio, will make the case of our distribution policy, I think, easier and more likely to happen.

If I got it well, the third question was related on M&A to support revenue. And I think we continue to look at opportunity to beef up our Wealth Management in terms of distribution capacity and product enhancement with transaction that may be also small or midsize. But as I showed in the slide before, they clearly contributes to the TFA and to the progression of revenue. As well as, as you mentioned, if we find a platform or enabler to speed up our buy now, pay later solution, we call it Pagolight, we will go for that because we think that it's going to be an important evolution of the market as customer will ask more and more delay in payment and also getting their profile in terms of repeat business for personal loan is going to be very important.

So it's what we do normally, Compass is very strong. It's #1 or #2 in the market in finalized. And why we want to develop this because normally, you get an important database of clients on which you can do repeat business with personal loans. So you can then pitch them after they have repaid the first loan, which is linked to the purchase of a certain good, and you can offer them personal loan for the future. So buy now, pay later, in particular, if you get contact, in contact, we'd find a client it can be an important application so for the personal loan.

So with our capital ratio, as you know, we have forecasted every year to do some M&A. So we will continue to do this along our plan.

[Operator]

We will now take our next question from the line of Giovanni Razzoli at Deutsche Bank.

[Giovanni Razzoli, analyst]

The first one is on the business. I've seen that the Compass, one of the good news of this quarter is the cost of risk. I was wondering whether you can update us with what is the run rate through the cycle and the cost of risk that in the past should have been in the region of 180 basis points. Would you now be ready to decrease it to a lower level, given the change in the mix and the better production?

And secondly, on the CIB, I've seen that there are still a lot of landmark transactions still in pipeline. So if they were to close, I was wondering what kind of contribution shall we expect on the fee in the coming quarters.

And then another question regarding your strategy. I've seen that you've been a relatively big investor into NPL recently. So I was wondering whether this is an area that you can be interesting into scaling up of developed further on the NPL investment.

And the last question. I was wondering whether as a main shareholder of Generali, how would you see an involvement of Generali as an anchor investor in the recapitalization of Montepaschi as some newspaper seems to suggest today.

[Alberto Nagel, executive]

Thank you, Giovanni, for your question. So the run rate through the cycle CoR of Compass, it's a very difficult question to answer because basically it's true that we are every year upgrading the technical skill of Compass with an improved scoring system, more tools and, which is also as important as the first one, capability of different capability and system to collect. So I may think that the run rate which was clearly above 200 basis points, so between 200 and 300 basis points, my sense is that as we see today is more on the region of 200 basis points rather than 300 basis points. But this is honestly a perception we have, given the fact that the trend is pretty positive. And the marginality of Compass is such that, of course, we can have less profit or more profit. But even with a swing of cost of risk, the profitability will stay very, very high.

CIB, I do think that the contribution of next quarter will be as good as this one. Then, of course, we may have -- it's still -- it's a business that is having its own volatility. We do expect good fees from acquisition finance because we have closed a number of very nice deal, which will go to termination to execution in the second quarter. We are doing a lot of M&A. And normally, at the end of the year, you have some closure of M&A, both in large and mid-cap. So we do expect another solid quarter.

NPL. We would be a more convinced buyer of NPL in Mediobanca Credit Solution should the rules of calendar provisioning change because we consider applying the calendar provisioning to an activity, which has not generated defaulted loan, which has bought a discount defaulted loan totally out of any sense. So -- and I know that my position is shared by the other operator in the market that have the same situation of Mediobanca Credit Solution. So we did some tactical acquisition of portfolio, but we need to have more clarity on the CRR and calendar provisioning on this activity in order to do more.

And I have no clue about what you -- your fourth question because I don't know anything about Montepaschi and Generali.

[Giovanni Razzoli, analyst]

Okay. We have no clue as well. I've just read them on the newspaper today. So that's why I was asking.

[Operator]

We will now take our next question from the line of Domenico Santoro at HSBC.

[Domenico Santoro, analyst]

Thanks for the presentation. Also a number of follow-ups on the business in particular. First of all, can you quantify the amount of COVID-related provision or overlays that were due to models? And I was wondering if there is any plan in the near future to revise the model and maybe to release a little bit of this provision going forward?

The second question is on the asset management. You already mentioned why the upfront fees they were up quarter-on-quarter, but also the management fees and the margins were significantly up. So I was wondering whether there is also a little bit of contribution from the target products that you potentially have distributed in the quarter and how much they are revenues attached to this. In absolute terms, instead, your margins in AUM, I mean, remain pretty much below the other Italian wealth managers that we know very well. So I know that everything in Wealth Management is conditional upon any acquisition that you might do in the sector. But I'm just wondering whether there is some project to internalize more of the production in Mediobanca in order to boost a bit margins that remain below the other peers.

And on fees, I mean, I'm quite surprised about the amount of fees that you are booking quarter-on-quarter even without the large contribution from big deals and large tickets. So I'm just wondering whether this is also due to the diversification and all the projects that you have in the SME segment in terms of ECM and DCM. So my question is, if next year we will see the large tickets instead coming back in the banking sector. If your fee level should be much, much stronger than what we have in our model is, of course, the activity with the SMEs remains there?

[Alberto Nagel, executive]

Thank you, Domenico. COVID-related provision overlay. In a nutshell, we are having something like EUR 300 million plus, EUR 310 million, EUR 300 million. Vast majority is on Compass. The rest is divided with the [ all ]. So basically, as we said, EUR 200 million in Compass and the rest split. Now understanding -- we will have to do at the end of the year, solar year and fiscal year, exercise about IFRS 9 basically scenario. And then we have to see the overlays. I think we need to fine tune this with what I said before. I think that we need to see the post COVID entrants in the new normal, so phasing out of state support. And how fast are they and if they are going to impact the ability of our clients to repay?

So we need to do this in parallel with the overlay reassessment. And we need also, as I said, to be considered a bank that has done all the homework and is still a prudent buffer because I do think that this will favor banks in terms of capital repatriation or distribution. So as we are having already quite a good trend in terms of cost of risk and very good profitability, I think we will have to decide on overlays in the coming quarters, but with no urgency.

I definitely think that you are right in the sense that we have had quite an important management fee uplift, but this was not linked to distributing one specific product. It is part of a long-dated exercise where we have repositioned and we are repositioning CheBanca! in the Premier segment, which is -- which means that we are exiting mass market exposure and we are improving product, differentiating prices in terms of service. And all this is generating an increase in marginality. We are also working on what you said, internalizing more.

But here again is a process which takes time because it's true that we were a year ago at one of the lowest level of equity into portfolio and one of the lowest level in terms of penetration of products. But we need to do this with attention and with the maximum respect for me, [ even ] for clients. So it's something that we're going to see in the next 2, 3 years as long as our capacity and the ability to build new product for customer base is going to be completed and reached. And also, clients are more keen to take equity product or more sophisticated product as opposed to simple products.

So I see that this is something that, in terms of management fee, is not having one-off in upfront. By definition, you have some one-off of different kind, but not in management fee. And I think it's very -- the second part of your question about fees for CIB, it's very difficult to answer in the sense that, of course, we can have -- we can have also the scenario that we are mentioning, where big transactions are coming back, in particular in Italian market. And I think at that moment, we are very well positioned to take part of this. But of course, it's very difficult to predict them.

[Operator]

We will now take our next question from the line of Britta Schmidt of Autonomous Research.

[Britta Schmidt, analyst]

I've got 3 questions, please. The first one is on the fee outlook. The press release says that you expect to flow of fees in line with the performance recorded in Q1, so pointing to a run rate. Shall we presume that this will include Bybrook? And can you maybe update us on the contribution of Bybrook that you expect for this year?

The second question is on -- just coming back to capital. Do you see any regulatory impacts on capital to come? And do you have any update on Basel IV impact potentially?

And the third one would be on Pagolight. Is there any way that you can help us size the potential opportunity of the buy now, pay later scheme itself as well as the associated cross-selling?

[Alberto Nagel, executive]

Sorry, Britta, thank you for your question. Unfortunately, the third one was not -- the line was not good. So I will ask you to repeat the third question, please.

[Britta Schmidt, analyst]

Sure. Apologies. Can you hear me better now?

[Alberto Nagel, executive]

Yes. Yes, I think you should speak not too much close to the microphone. Otherwise -- try again.

[Britta Schmidt, analyst]

All right. The question was on Pagolight, whether you can help us size the opportunity for the buy now, pay later business itself as well as any associated cross-selling that you expect over the next 1 to 2 years?

[Alberto Nagel, executive]

Yes. Bybrook. Bybrook, as you said, we are not seeing the contribution in this quarter because we started to consolidate only 2 months -- 1 month, sorry. So it's a company that will definitely improve the number of [ care ] because it's having a different marginality. To give you the sense, the marginality of Bybrook is in the region of 100, 110 basis points. Low cost/income. So it's quite complementary to what we have because will lead to important uplift in terms of contribution of the combined entity.

Basel IV, we don't have anything to add because we have also given a fast review on the recent publication. So if I am right, it was published today at 1:00 p.m. We reviewed it before this call. And we came to conclusion that nothing is happening to us because the impact is going to be quasi 0 because we will have, as I mentioned, maybe another call or through our IR department, some inflation or WA in equity, but some deflation in operational risk RWA. So net is going to be a non-event for us.

The potential of buy now, pay later is still -- we think it's going to be something over time important. But honestly, we are not ready to give guidance, which are fact-based because today still in the Italian market -- in the Italian market is, I would say, not material. But what I can tell is that all these new products are important also to increase the ability of our distribution network. I give you one example which was mentioned today in our Board, the fact that more than a year ago, we started Compass Rent. Compass Rent is another project, which is meant to the new consumption.

As you know, cars are not bought anymore; if any, are leased and hence or rented. And hence, we have started the Compass Rent more than a year ago. And what you see is that our dealers in terms of the car sector, knowing that we have this project of Compass Rent, they start to give us more business because we have a product that today is very much in demand. So this buy now, pay later Compass Rent, new kind of product are not only important because they open new avenues, but because they reinforce the actual business with additional business from existing client.

[Operator]

We will now take our next question from the line of Hugo Cruz at KBW.

[Hugo Cruz, analyst]

Just 2 quick questions. One, I noticed that net equity fell quite a bit Q-on-Q. I couldn't understand the reason, if you could clarify that. And then on the Consumer side, can you tell us how much of -- what percentage of new lending is coming from the third-party banking channels?

[Alberto Nagel, executive]

I start with the second. The banking channel in Mediobanca in Compass today compared to some years ago has been reducing a lot, in the sense that today we have the Montepaschi agreement, which we forecast going down than already in the plan and we have plan to substitute this with new opening. So to give you the sense, in terms of volume is something like EUR 500 million, EUR 600 million, all the third-party distribution network, but it's not proportional in terms of profitability because Montepaschi itself is EUR 400 million, then we have Poste, we have others, but I think those are more stable in terms of agreement.

But in terms of profitability, as I said, we have less than half in terms of profitability compared to the loan which are distributed by Compass branches. So we have basically the Compass, the Montepaschi agreement is something that contributes in the region of EUR 20 million every year. And it's going to have a phase out of 3 to 4 years. So it's not going to be one day 0, but it's going to go down if and when it's terminated. And in the meantime, we can, as we have already envisaged in our plan, plan to substitute this with new loan production than internally in Compass new branches.

The difference in the net equity is all related to the dividend distribution. So it's EUR 500-plus million of the dividend distribution, which is going to be paid in some weeks.

Thank you, Hugo. I need also to answer one question by Cordara, which -- is sent his through an email because he cannot be in touch. But he is asking whether we have still pressure on margins. We have enjoyed today quite a stable situation in terms of marginality. So margin tend to be stabilized at a good level, both in Consumer, thanks to personal loan and also into CIB.

[Operator]

We will now take our next question from the line of Luigi De Bellis of Equita SIM.

[Luigi De Bellis, analyst]

2 quick questions for me. The first one is a general question. Do you expect that the full restart of the calendar provisioning may represent a treat on the cost of risk for the banking sector in general and for you, in particular, compared to your current good run rate, especially considering some potential increase in default rate due to the expiry of moratoria? And can you remind us which initiatives did you put in place to address this risk?

And the second question on the Wealth Management, can you elaborate on your strategy and target for new recruitments of new bankers and financial adviser for this year and the cost of recruitment now on the market, if you are seeing an increase of competition or not?

[Alberto Nagel, executive]

Well, I have to say that I'm still convinced that calendar provisioning can generate some impact overall in the system, not only in the Italian banking system. On top, taking into consideration that there can be a sort of hardening in the application of the current provisioning, it’s not only the current provisioning, it’s also the way it can be applied, in particular, for the loan generated before the calendar provision introduction and the possibility to have the comply or explain. If we assume, for instance, that there can be only comply and not explain, hence we will see a greater impact in the years to come.

Honestly, I think that some automatism are not helping the recovery of the economy because it's clear that if we have to continue to add clients, which are going to -- which are in classify, for instance, in stage 3, unlikely to pay. And we think that those clients may go back to Bonis. But if we have to give additional credit and this credit automatically is going to be then a provision or third for the next 3 years. The incentive for banks to lend more money to this situation will be lower. So basically, I don't think that is helping the -- this automatism and the way it can be applied is not helping the recovery of the economy.

Wealth management, Luigi, we have, I think, a unique position today in the market. Why? Because we are, I think, the only institution which offer to a wealth management bunker and even to investment banker, the possibility to have this 2 business very strong under a very important brand, working very well together. So why is it important? And it's going to be very important in the future because, as you know, in order to get access to net new money in money motion event, you are totally in a different position if you dominate those kind of events, either because you are managing them in terms of IPOs, M&A or because you have a brand which is a synonym of solidity. Now we are now having a huge amount of money motion event under our -management. And this is happening because we have either strong investment banking franchise, or we have wealth manager and private banker, which are connected with our IB.

So how we recruit? First of all, we offer an experience and an environment which is unique. Then, of course, we need to pay also market price. But having such an important selling proposition, our recruitment is and is going to be even more easy in the future.

[Operator]

We will now take our next question from the line of Fabrizio Bernardi at Bestinver.

[Fabrizio Bernardi, analyst]

As you may imagine, many investors are asking about the consolidation process in Italy, M&A, Monte dei Paschi and so on. I know maybe this is not a comfortable question, and probably I understood the answer you gave to Giovanni before. But maybe there is any color, any flavor that you may be willing to share with us about Montepaschi and what can happen in the next, let's say, next year or about anything about consolidation that may involve Montepaschi and the role of the Ministry of Finance?

[Alberto Nagel, executive]

Well, I do think that the government is doing a lot to favor the consolidation because thinking only to the DTA and the flexibility show to find a good solution. I think it's -- I think it's a very important step change compared to the past. And what -- it seems that DTA may be prolonged also next year, this is going to be another strong technical supporting factor to further consolidation.

And in particular, in Tier 2, I'm still convinced that one way or the other, it should materialize in 2021, 2022, more likely. And it's needed because basically, if you are in a universal bank model, you can easily come up easily. You can't really not easily come up with a plan saying, okay, I cut 30% of my branches, and I do a lot of layoff. But then if you have someone which is paying for that with DTA, it is totally different. In order to do this, you need to do M&A, which is another element of saying, okay, we have a good exercise to review the cost base, to review the branches, to review the IT, we can support bigger investment in digitalization. So there are a lot of good, I would say, reason to do consolidation. And we shouldn't be afraid that one attempt has failed, and this is the end of the game. I think it's only the start of the game.

[Fabrizio Bernardi, analyst]

Are you happy with the physical franchise of Mediobanca? Or is there any reason why we should believe you may want it bigger?

[Alberto Nagel, executive]

No, I'm very happy. Fabrizio, I'm very happy with that. And I see a lot of potential in the group. I see the potential of having a truly omni-channel distribution with a right touch of small, high end physical branches with an important digital tools in selling with agents. So I see a lot of potential in the group, and I don't think that those potential should be armored with taking on a large and differentiated distribution network, all type of banking. So I clearly am a fan of a specialized banking model.

If I can add in a period of interest rates negative and negative interest rates and digitization in selling basic product. Of course, if you sell sophisticated product, if you sell private markets, selling them through the web is difficult. And for this reason, you may need or you need private bankers coming from Mediobanca or from other important brand, which give you the sense of professionality, trust, confidentiality. So we need to stay -- if I can, I can do a comparison. In banking, you need to decide whether you want to be Zara or you want to be Hermes. There is no doubt that we don't want to be a Zara.

[Operator]

As there are no further questions, I would now like to hand the call over to the CEO, Alberto Nagel. Please go ahead.

[Alberto Nagel, executive]

Thank you very much for your kind participation, and we hope to have you all in February when we will have our second quarter results. And sorry, it's very important also that you may attend at our ESG roundtable, which will be on the November 16, and we'll have a representative of institutional investor setting the scene of the engagement also with the corporates. Thank you very much. Bye.

[Operator]

This concludes today's conference call. Thank you for participating. You may all disconnect.