Mediobanca Banca di Credito Finanziario SpA

MIL:MB

Earnings Call Transcript 2018-Q3

[Operator]

Good day, and welcome to the Mediobanca Third Quarter 2017/2018 Results Conference Call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Alberto Nagel, CEO. Please go ahead, sir.

[Alberto Nagel, executive]

Thank you. Good morning to everybody.

I would say that this 9 months results have a clear picture that is the sustainable growth that is at the heart of our business model. This is showed by revenue trend, GOP and net profit trend, where we have achieved quite an important high digit to 2 -- high single digit to 2-digit increase; revenues up 9% with a very good diversification in income sources backed by organic growth and some selected M&A. COR stable at quite a low level led to a GOP increase after LLPs of 19%, net profit up 11% and at EUR 682 million and return on tangible equity at 10%. This quarter and in general, the 9 months showed a very important commercial results across the different business.

I will start commenting the robust franchise developing in Wealth Management, with a net new money in 9 months of over EUR 3 billion. Wealth Management is scaling up with a sustainable revenue mix on the back of important efforts to foster the distribution. Consumer recorded another excellent quarter with EUR 80 million net results and ROAC in the region of 30%. CIB cashed quite a good level of fees at the high level and with higher productivity and diversification. And we continue to improve the holding function results with assets and liability optimization and a decrease of NII loss.

These P&L results have been coupled with quite a stronger balance sheet improvement, core Tier 1 up 100 basis point to roughly 14% after AIRB validation and RAM acquisition. And asset quality further improved on the back of very good new loan production.

If we see the last 3 months trend. As I said, we have had an acceleration of quite stronger commercial results across the different business. And we will see after the results of consumer, where we have increased the new loan 7%. We will see also the results of CIB, where we're able to offset a very important single-digit transaction fee event of last year, but what I want to start with is the strong acceleration in Wealth Management: EUR 1.5 billion of net new money in this quarter, 50% coming by affluent, 50% by the product segment; and assets under management and under administration up EUR 4.7 billion in the quarter, thanks also to the acquisition of RAM, where affluent had strong organic growth with EUR 0.7 billion of net new money and important add-on of additional financial adviser. Roughly 50 financial adviser have been added this quarter, and now we have tripled in 9 months the number. And also in Private Banking and asset management, we have had a strong net new money of EUR 0.8 billion, driven by Cairn, a new CLO activity and Mediobanca Private Banking.

So this quarter show NII at highest-ever level; as well as fee as at highest-ever level; COR at lowest level; and hence net profit, by definition, at the highest level, EUR 206 million out of -- in excess of EUR 600 million. It is another record in terms of revenue of the quarter. So a marginality that is on revenue, 30%, which is more interesting is to see those results in the context of the reshape of the group. And you can see them on Page 5 and 6, where you see in the last 3 years the evolution of the group in terms of, first, revenue, CAGR of 9%; and the last one, so the last 9 months, with important increase in each item. So we have positive NII, positive fees and positive trading results, but moreover you see the trajectory of these items on the second part of the slide, on the right side of the slide. So fees and NII by quarter. You can see the comparison of the latest quarter as opposed to the quarter of 2 years ago. We are moving towards EUR 150 million, EUR 160 million of recurrent fee per quarter, as opposed to EUR 100 million, EUR 120 million, while NII is going toward EUR 350 million. And it was EUR 300 million 2 years ago.

In terms of fees, the evolution is even more remarkable. You'll see them on Page 6. Because we have basically doubled the fee component coming from Wealth Management in 2 years. It was EUR 97 million. It is roughly EUR 190 million today. It was the 26% of the overall fee, now is 39%. This is the most important evidence of the trajectory of our plan in terms of business focus and contribution. Today, the contribution of Wealth Management in terms of fees is as big as the one of CIB. It was totally different only 2 years ago.

If we move from fees to NII, we see that we are experiencing the fifth consequent years of growth in NII. As we said when we did the plan, this growth is coming mainly by 2 sources. I will say 2.5 in the sense that the big component is consumer. The second important component is Holding Functions. And then there is a third one that is the mortgage segment within the Wealth Management. So this was done in a way to maximize the return on assets. For this reason, we have guided also the NII of CIB to go down in a moment where margins and return on assets and moreover also the level of leverage in some transaction of CIB are not, I will say, the best in terms of return on adjusted risk.

In terms of asset quality, further improvement on an already good situation. So overall cost of risk in the region of 60 basis points, with quite a good trend in both consumer, slightly below 200; and still some write-backs in corporate that led to this level of minus 11. Then overall stock of deteriorated loan further diminished to 165 (sic) [ EUR 865 million ] from EUR 892 million. And coverage was up 1 point on bad loan and also on deteriorated loan to 73% and to 56%. Nothing to say about, let's say, asset quality.

GOP trend, you see it on Page 10, up 19%. Fairly all divisions contributed positively, where the biggest contributor was consumer, but the important contributor were also Principal Investing, holding function and Wealth Management.

In terms of CTI (sic) [ CET1 ], this quarter, we have had 10 bps organic growth, 140 bps in AIRB benefit. 30 bps accounted for RAM acquisition; and 10 bps absorbed by higher AG deduction because, as you know, this is the quarter in which we have the highest deduction of Generali because of the increase of the book value on the back of the results of Generali. From next quarter, we have the positive effect because the dividend is going to be paid. And hence, the cost, the book cost, of the investment is going to be deflated by the dividend. And hence we will get back as much as 20, 30 bps of [ CTI ].

GOP trend, positive in -- and/or stable, like in CIB, in -- on a good level on every single business, with I would say a return on allocated capital that exceed well 10% in each, I will say, business division: 12%, Wealth Management; 30% in consumer, 15% in CIB; and 14% in Principal Investing.

Commenting the divisional results, I would start from Wealth Management, where we are at the start to a very positive and growing period based on 2 important platform. One, that is the CheBanca! that is the real multi-channel digital and physical bank in Italy, one of the few that started digital and selected a small physical presence. This is leading a very good customer acquisition trend, over 17,000 customer acquired only through web; already a large customer base to be tapped, 800,000 customer; and a fair and stable pricing in a MiFID II environment. Having this platform and leveraging this platform through the different distribution channel is going to be the key growth element for the affluent segment. And we are seeing already, as I said, important net new money.

The second platform that is receiving a very good, I will say, back from the market and from clients is the Private Banking of Mediobanca, so the newly created division and brand, where the brand attractiveness and the potential of Mediobanca brand is such that, both in terms of organic growth and in terms of new hire of bankers, we are ahead of our plan and ahead of our expectations. So if we see the number embedded by this kind of rollout, we are gaining scale in terms of revenues, up 16%; in terms of total financial assets, at EUR 63 billion. In terms of assets under management, then it is up EUR 6.5 billion, fueled by EUR 3 billion of net new money and the RAM consolidation. Affluent segment tripled FA network and reached EUR 21 billion at total financial assets. Private Banking and asset management resumed organic growth, AUM up EUR 1.5 billion, of which EUR 0.5 billion in Q3. New product launched, CLO of Cairn's. RAM consolidation and new product or brand launched in the last few weeks. And moreover, a nice -- quite a nice and increasing deal pipeline in mid caps that is also to the profit of the CIB network.

Wealth Management division in a nutshell can be analyzed on Page 16 in terms of the number of clients, total financial assets and net new money total financial assets and loans. So we have basically 800,000 customer in affluent and 15,000 in Private Banking, in the region of EUR 21 billion in total financial assets in affluent and 52 -- or EUR 42 billion, sorry, in private and Wealth Management. Loans in the region of EUR 10 billion, out of which EUR 8 billion in mortgages and EUR 2.2 billion in lombard in Private Banking.

The actual efforts and efforts of the next quarters are going to be addressed into fostering proprietary channel and indirect channel, investing every quarter in upgrading digital platform; on robot advisory; in wealth adviser; in centralizing the institutional sales force now that we have -- we tend to have a wide product range; and of course, continue the hiring spree in the financial adviser.

Numbers of net new money show on Page 18 EUR 3 billion in the last 9 months, with an important pickup in this third quarter, EUR 1.5 billion, equally divided by affluent and private. Number of FA, that was quite robust in this quarter, another 46 additional FA. A good churn in -- also in Mediobanca Private Banking, where we have some exit and intended exit and the new intended, of course, hiring of different quality and, I will say, size and reach.

Then also, in terms of assets under management and assets under administration, the numbers showed on Page 19 show an increase of 20% up to EUR 36 billion, out of which 8% growth is coming from organic. And the rest is coming from RAM. Overall, an overall set of revenue that is scaling up with a sustainable mix. And what is even more important is 90% recurrent banking and management fee and is done at a pricing that in our reading is more than fair and compatible with a MiFID II environment.

Consumer Banking showed quite an interesting trend where Compass is enjoying its position of top player in terms of distribution, risk selection and risk price -- and risk pricing in Italy. This led to another record results with EUR 240 million of net profit, up 20% year-on-year, fostered by stable revenue growth, 4%; and the reduction in COR, cost of risk. Distribution is key to assure this kind of growth, so we have renewed several distribution -- important distribution agreement. We have also opened 10 new branches in the last 18 months. And we are ready to open another 10, so it's a pipeline that is coming to the opening date by the June of this year. So another 10. And also, the company is looking at selected M&A opportunity to have also some external growth on top of the already robust organic growth.

New loan, up 7%. You see the overall new loan was EUR 5.2 billion, as opposed to only EUR 4.5 billion of 2 years ago. And in this new loan production, personal loan and Compass branches-originated loan are making the big chunk and the big part of value, but it's also important, the other production secured by banks, post office and agent as well as those of point of sale and car loan where cost of risk is lower and the possibility to do more repeat business is higher.

Loan book growth steadily at EUR 12.3 billion; revenue, up to EUR 744 million, up 4%. And you see the steady increase in the revenue trend compared to 2 years ago. COR, at the lowest level in the -- stable compared to previous quarter, so below 200 basis point; and then yielding an increase in the net profit of 20% and 5 points of higher ROAC at the end of March. We've done quite an extensive work that is not finished to improve the profitability and the revenue trend of CIB.

Now ROAC on the back of good revenue trend, discipline in cost and in cost of risk led to a return on -- of 15%, much higher than it used to be. This is because we have improved the client coverage. We have assured an higher number of transaction to -- that we're able to cope with lesser dependence from single-ticket transaction. We have hired new banker to cover. And we are increasingly present in mid cap segment that is also, as we explained in previous quarter, a very positive segment in which we can grow also through Private Banking activity. All these efforts led to stable revenue in a moment where we don't want to grow our NII in CIB; and where the breakdown of different revenue is balanced because 50%, as you see on Page 27, is coming from financing, 40% from capital-lighter products like M&A and capital market and only 10% is coming from trading.

We have concluded very important transaction in this first quarter in ECM and in M&A, and the pipeline is quite good.

In terms of Principal Investing, this quarter, we have had increased and positive results. The NAV was up 4% at the end of March. It's up 9% at the end of April. The contribution of Generali has been better, an improvement compared to the previous quarter. And we have had a slight decrease in ROAC because of the higher capital absorption, but it's still a ROAC of 14%. And as we know, this is the capital provider for the future growth of the group in terms of acquisition we will be looking in Wealth Management.

Holding function loss significantly reduced, as we were committed to do, by 32% through a liquidity optimization, LCR down from 250% to 150% basically. Funding improved because, as you remember, we have still some tail of a past issue of bonds with higher spreads that are going to be refunded at better spread. Part of this has been done. Part can be done also in the future. And all this led to a much improved situation of holding function, where you see in particular, NII, the last quarter the negative contribution was very much diminished to only minus EUR 6 million.

So overall, quite positive set of results, quite positive trend that clearly strengthen our positioning as a specialized group, a group that is enjoying by its business presence and specialization and healthy and sustainable growth at very low risk. And this is evident from our asset quality; and also is evident by our, I will say, govies exposure. We have only 2.7 billion of Italian govies. And the duration of govies is less than 3 years. Quite a good capital generation. And that capital adequacy, that coupled with the P&L trend, is supporting a more interesting shareholder remuneration.

Thank you very much. We are now ready for your questions.

[Operator]

Operator Instructions] We will now take our first question from Azzurra Guelfi of Citi.

[Azzurra Guelfi, analyst]

This is Azzurra. I have 2 quick question, 1 on cost of risk and 1 on the Italian consolidation potential benefit for the group. When I look at the cost of risk, you continue to surprise constantly not just on the better CIB rate on write-backs but also on the consumer that is very well under control. Can you share a bit about how this is sustainable? And what has been the major changes that you have done for the future cost of risk? The second one is that the Italian banking sector has gone through a cleanup in terms of asset quality. And these, in my view, have 2 opportunity for your group in terms of NPLs but also in terms of future consolidation for your CIB field. If you could just share with us your view. And actually I have a very -- more strategic one, about your digital platform. When I look at your CheBanca! and your IP, it seems to be newest in Italy compared to the other banks and wealth manager. How does this represent an advantage in a competitive -- [ continued financial ] competitive position versus peers?

[Alberto Nagel, executive]

In terms of -- Azzurra, first of all, in terms of cost of risk, I think we have to differentiate it among the different business. Today, we see the level of 205 basis point as a normal course of cost of risk in consumer. In CIB basically we don't have new deteriorated situation, on one end. So this is positive. We don't expect major write-backs in the few coming quarters even if in our, I will say, deteriorated loan there are, as you know, some historical position that are improving in terms of ratings. So we need to understand if and when this position can go back to [indiscernible]. So there is a positive trend that we have to consolidate. So this trend is maybe not of the last quarter, where we have had a lot of write-backs, but in general the trend of the year is a trend that is, I would say, broadly sustainable. Italian consolidation may happen, as we know, only if and when cleanup in terms of asset quality is done. So for us is an important business provider, this whole preparation and then M&A, because as you know, as you have seen, we are basically present in no transaction that are related to NPLs disposal. Intrum transaction was done by Mediobanca. We are doing GACS. We -- yesterday, we have done the GACS of Montepaschi. That was quite an important transaction. We are working on the other of Banco and UBI and BPER. So there is a preparation that is capital market and advisory. And then there will be, hopefully, in 2019 M&A. So we are already participating to this. And I think we can have, hence also because of this, a good positioning in also the advisory and capital market that can happen in 2019. In terms of digital, I think we are working to make more evident to investor and to the third-party observer the beauty and the ability of CheBanca! to outperform the rest of the sector in the sense that, as it is a truly digital and human bank, we are continually improving the whole apps, the whole service in a way -- and the CRM at a pace and at a quality improvement that I think, as you mentioned, is not so easy to be matched, also because of legacy team that a bigger bank may have. So we do expect an acceleration of this client gathering of CheBanca! on the back of this continuing investment in this digital platform.

[Operator]

We'll now take our next question from Alberto Cordara of Merrill Lynch.

[Alberto Cordara, analyst]

Sorry. I just want to ask you a bit of some critical questions. The first one is on CIB wholesale. We continue to see some decline in sequential NII. So if you can please clarify when this potentially will stop. And what is the situation actually in new lending and [ in margins ]? The second question relates to the NPL business. We saw recently some of the companies active in NPL services headquartered in Italy [ losing some values ]. I think there is some concern that the entry of Intrum in Italy can deteriorate the competitive situation of these companies. I just wanted to have a bit of your comments on this space and the strategy of Mediobanca in the NPL purchasing and servicing space.

[Alberto Nagel, executive]

Thank you, Alberto. The first one, I think we do think that pressure on NII in CIB will continue throughout 2018 and may improve in 2019. Why this? Because there has been an overall repricing of the book of the old player, in particular for all the -- I will say, the counterparty but moreover for the better-rating counterparties. So there has been a margin squeeze in the overall sector. And hence, we still generate a single high digit return (sic) [ "high single digit return" ] transaction, in some cases or so 2-digit return, but we need to be selective in terms of the higher-digit return because in some cases they are, of course, associated with higher leverage. So we don't think that the credit cycle will become negative soon, but we know that, as we say, sooner or later, it will become more negative. So we want to enter in that cycle with quite an outstanding balance sheet. So we are expecting this margin pressure to last throughout 2018 and recover in 2019. On the other end, I will say that the rest of the NII of the group and in particular the one of factoring NPLs is counterbalancing part of this decline. As far as NPLs are concerned, we do think that there is a lot of capital now available in Italy. There are a lot of operators, so competition clearly has increased. This is why it's very important to stick to a positioning in the market that is selective. We wanted to become an operator mainly in personal loan defaulted. This is the niche we are operating. We want to stick mainly to this. And as you see, we haven't done purchases of new portfolio this last quarter. This is also because we were careful about pricing. So if we see that there is a pricing that is clearly remunerating [ good risk ], we go for that. Otherwise, we wait for the right moment because, as you said, the competition have increased and price went up.

[Operator]

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

[Domenico Santoro, analyst]

Sorry. I lost your commentary at the beginning, so sorry if I ask the question again, but I just want to have some more visibility in the short term on the NII, in particular in the holding function where there was an improvement, if my understanding is correct, because of reduced liquidity and some repricing also of funding. Second, well done with CIB. There is another strong performance in terms of fees. I was just wondering. What is the pipeline here? And whether this line is sort of sustainable going forward over the next quarters. And then I don't know whether you'd feel comfortable to ask -- to answer to this question, but it's more regarding one of your main shareholder and the impact that this could have on your shareholder's pact. So any comments here will be welcome.

[Alberto Nagel, executive]

Domenico, the -- your first comment is on NII of holding function. I think we can say that it's pretty stable, this improvement. So we have done, I would say, 95%, not 99%, of the optimization. So this trend can be seen as stable, positive and stable. CIB pipeline is good, and converting this pipeline into fees is always an effort. What I can tell you is that, the better coverage, we have started; the different and more effective coverage, we have started already 1.5 years ago. Plus, the different presence in mid cap is giving us more inflow of deal; more pipeline; and I think, which is nicer, less dependence from single large ticket that are always welcome and searched, but less dependence because we have definitely -- we process every year a definitely higher number of transaction, as oppose as it was in the past. And so for this reason, I tend to say that the pipeline, the fee trend there should stay on the high level because it's supported by an higher number of transaction. I didn't understand the last question in the sense that you were referring to a shareholder but you didn't mention the name. Or I didn't get it.

[Domenico Santoro, analyst]

Sorry. Can we come back for just a second to NII, please? My question was more there was an improvement in the holding function, right, and that was because of the reason that we know. And this division is quite volatile. And I was just mentioning whether this improvement or downsizing of the liquidity will continue. And repricing, of course, will continue, so maybe this line might turn into positive. The other question was one on, I mean, do we know the -- what happened with one of your shareholder in particular. And it's part of the shareholder's pact for Mediobanca, so just wondering whether there might be an evolution there. And you might won't comment. And this might probably bring to the fact that the shareholder's pact will basically be amended going forward.

[Alberto Nagel, executive]

As far as NII in holding function, we tend to say that the liquidity optimization has been done. So it's difficult that we go lower 260%, 360% of LCR, so we don't think that this level of improvement can be further...

[Unknown Executive]

[indiscernible].

[Alberto Nagel, executive]

Improved. So we tend to confirm that this trend is sustainable but is difficult to be improved further. As far as our shareholding structure, we are -- we have no evidence or no news about the intention of our main shareholder in the pact. As I have commented in the previous press conference, we are prepared to -- well prepared to every scenario in the sense that, if this pact is going to last, and we have to say that this pact has back the strategy of the bank leaving total independence and autonomy to the board and to the management of the bank in order that we could develop the bank, the way and the trajectory. On the other side, this work have brought the level of institutional investor in our share of capital to a record level that is 45%. So it doubled in the last 2.5 years, 3 years. So even in the case of, I would say, unwinding of the pact already this year, I think we have a situation of business position and trajectory expected results that are clearly explained where received by investor, so a -- and we have also a corporate governance already at standard for a company that may not have a shareholding pact. So we have, as you know, an independent board at majority. We have also a bylaw that make that the board can file the list for the renewal of the board. So we are prepared also for the scenario of the unwinding of the pact this year. Of course, we are neutral to this decision. We work and we live well in both scenario. Thank you.

[Operator]

As there are no further questions at this time, I'd like to turn the conference back to Mr. Alberto Nagel for any final remarks.

[Alberto Nagel, executive]

Thank you to everybody for the patience to attend this call. And I hope that you can join us for the last quarter call and the full year results that will be in the last day of July, for the full year results.

Thank you very much. Bye.

[Operator]

That concludes today's conference. Thank you for your participation. You may now disconnect.