Mediobanca Banca di Credito Finanziario SpA

MIL:MB

Earnings Call Transcript 2019-Q3

[Operator]

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Mediobanca Third Quarter 2018 to 2019 Results Conference Call. [Operator Instructions] I must advise you that the conference is being recorded today on Thursday the 9th of May, 2019.

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

[Alberto Nagel, executive]

Good afternoon and thank you for joining the call. This 9 month results shown top revenues, all time revenues -- all time high revenues, GOP and return on tangible. And those results were driven by strong commercial activity that reverted into a growth in total financial assets of 8% with EUR 5.1 billion of net new money, growth in loans by 8% coupled with the same increase in funding of 8% and a net stable funding ratio at 107%. The growth in revenue has been 5% with NII up 3%, client trading activity or CMS activity up 21%. Resilient fees that reverted into a GOP adjusted, risk adjusted up 7%. So net profit total above EUR 600 million and as said return on tangible 10%. Like other banks, we had to look at a scenario in the last quarter that was driven by conflicting factors. So while we have had some rebound in equity markets, on the other end, some weakness in the environment persisted like a low level of capital market activity and household risk adverse tendency. This led to a marginal slowdown in revenue limited to 5% where we have substituted the main reason of the drop in particular in fees that was related to equity, capital market activity with other source of income.

Cost of funding, cost of risk and efficiency were preserved or even improved, as well as the capital generation CET1 was up 40 basis point to 14.3%. And this was also a product of the quarter in particular likewise, the increase of loans 1% and the increase of TFA was also a very positive, net positive of the quarter. As well as the improvement, further improvement in asset quality with gross NP ratio on loans -- on gross loans down to 4% and a very positive require -- MREL requirement for Mediobanca in the region of 21.4% MREL target. On top, this quarter we were able to close a very interesting deal in capital light activity, notably in the mid-cap segment M&A so the partnership that we have established with Messier Maris. As said, this 9 month results were fueled by a very important growth in loans that reverted also in increasing NII. So loan book 8% up, broken down with 9% up in mortgages, 5% up in new loans in consumer as well as 9% up in wholesale banking. Funding matched this kind of increase, so we have profited from more normal market situation, refinancing most of our liabilities. So basically we have ended our funding -- the funding of the current year and we have started to prefund next year. So the cost of funding was kept under control, and it is down to 80 basis points, below the full year, past -- last year of 90 basis points.

As said, total financial assets were up 5% to roughly EUR 70 billion, with EUR 1.7 billion of net new money in the quarter evenly split between basically affluent and private and asset management. We said already about improvement in capital and low risk profile, as said this kind of progress were possible, thanks to heavy investment in distribution that we will continue to do. Basically, it happens that if you compare today with management platform only to 2 years ago, the numbers are pretty different in the sense that financial advisor more than tripled in the last 2 years. Proprietary franchise has been further strengthened, so now we have roughly 800 people selling asset management in the affluent segment. And contamination, the positive cross-selling between investment banking and private banking mix that we were after as much as 70% of all money motion events in Italy happen in the 9 months.

A very important news was also the new hiring of the CEO of CMB. It was part of a well prepared succession plan by CMB. And at the end, we have reached an agreement to have Francesco Grosoli, former CEO of Barclays and with long standing experiencing in Monaco as new CEO as this will be also another catalyst of growth and increase in net new money in this segment. Also in consumer banking, we have been heavily investing in distribution, so we have had an increase of 12% of branches, 21 in particular, out of which 18 run by agents and the rest is proprietary branches. We are heavily distributed in digital channels that now represent more than 10% of the new directly distributed personal loan.

Corporate and Investment banking, we said about Messier Maris, we will have a section on this partnership and we kept on developing nicely in specialty finance where now we have a bulk of revenue and net profit that is equaling 20% of the CIB segment. Also the contribution from stake was very positive, up from last year both in terms of P&L contribution, but also in terms of NAV. So if we break down the different component to the GOP on Slide 6, we see that we have had positive contribution coming from every source of revenue; NII, fee, treasury income, that is, as I said, not prop but is CMS, Generali contribution, cost -- net of cost and net of decrease in loan loss provision, this revert into a 7% increase in GOP. And this is important because basically we are catching up as much as a big part of the capital gain contribution of last year. So we are now in a territory where most part of the contribution of capital gain of last year has been, I'll say, recouped and I think this is an important run-rate.

Every division, but slightly CIB contributed positive to this increase in GOP, so wealth management plus 22%, consumers 7%, principal investing 7% and also an improvement in holding function. These overall results broken down into the different division led to the important results that Group 10% ROTE is I would say, pursued with CET1 that is up 40 basis points year-on-year. So of course making 10% ROTE with an uptick or 40 basis points in capital is I think an important achievement. Every [ rev ] every division contributed nicely to this ROTE. And in particular if we see the ROAC, we see we have kept improving steadily wealth management from 13% to 18%, slightly improving the amazing already achieved 30% of consumer. And notwithstanding the weak capital market contribution, we managed to have basically equal revenues and better use of capital. Hence still 15% return on allocated capital for CIB, slight increase in principal investing went up from 14% to 15%.

NII continued to grow up 3% and this growth is coming basically from consumer, marginally from wealth management and even marginally from CIB, the component that is growing in CIB is specialty finance while as we know the component that is not growing is going down because of margin pressure is the CIB book. Broken into different division is an important growth 9% as you see wholesale banking, 22% in speciality finance, 9% in mortgages and 5% in consumer banking. In CIB we preferred to stick to a better rating profile and a type of quality production that in terms of NII is penalizing us, but in terms of return on allocated capital, given also the higher rating, it's a net positive. Funding completed, funding plan completed and the cost of funding under control. So, as I said we took advantage from the quarter where we made some issuance in particular, if you see on the bottom right of the slide, we have refinanced EUR 3.1 billion of newly issued bond with 145 basis points of cost as opposed to EUR 2.6 billion that were due at 200 basis points. So net-net was a positive. Then we have also last year done a number of refinancing with collateral -- collateralized with different assets, so mortgages, consumer finance, and loans in corporate in order to constrain the cost of funding that compared to a year ago in terms of spread of the market clearly a spike.

So at the end, this approach paid off because we kept reducing from last year, the average cost of funding at 10 basis points from 90 basis points to 80 basis points. As said, we have had quite an important quarter in terms of net new money. You see the progression on Page 11, only 2 years ago we were in the region of less than EUR 60 million and EUR 30 billion of AUM. Now we are in the region -- we're in the region of EUR 40 billion of AUM, EUR 22 billion of deposits. So this means that even young in this business, young in terms of distribution, still under capacity of what we can do, the possibility to raise net new money is anyhow important. And as you can see it's evenly split between private and affluent and premier banking. So EUR 2.3 billion in affluent CheBanca! and EUR 2.8 billion in private and asset management. And the split is that given as I said, the customer approach is more liquidity but is also an important chunk of AUM, real AUM and as you know, the liquidity is the starting point then to obtain some managed assets. So in terms of new clients, in terms of commercial effort is clearly paying off.

Fee has had the trajectory that is described on Page 3 -- on Page 13. So the possibility to increase the fee were related to the fact that we have substituted fees that were not possible in the market. You see the comparison of capital market trend this year or last year. Last year we had a very good ECM and DCM. This year ECM was not available, hence we worked hard to substitute this kind of contribution with an important contribution uptick in advisory, that increased by 50%. And with a very important contribution in fee from wealth management that went up a third from EUR 175 million to EUR 225 million.

And in this of course we should take into consideration first that, now with EUR 210 million net fees coming from wealth management is the main contributor of Group fees 44%. And that as we keep on pressing on new hiring we have the element of negative passive fee to be paid when we acquire the FA. So, as long as we continue, and we should continue to grow this way, we will have these two component, one positive and one negative that show better the real trend of development. Consumer banking had a very solid trend in fees similar to what we have seen in the previous quarter. As I said asset quality further improved. So we are down 8% in NPLs or NPE. Bad loans that were already very small in our Group are down 20%. Coverage is up to 78% as a whole and you see improvement basically in every segment. And this is reverting into also a low cost of risk. You see on Page 15 we have -- we are now floating on to a level of 50 basis points. This is the contribution of 180 basis point -- between 180 basis point, 185 basis point of consumer and writebacks even in this quarter of CIB. We wanted to maintain also the performing loan coverage quite high, and so we are in the region of 1.2%.

Positive news from capital generation. Notwithstanding the fact that we have also planned to do a buyback that as you know has been up-fronted. And hence we have had 70 basis points of retained earnings, net of 40 basis points of buyback. 40 basis points same amount of improvement of -- thanks to AIRB mortgages validation and 60 basis points of different effect, hence we arrive to 14.3%. So, improving by 10 basis points after buybacks, after adding the buybacks of 40 basis points. The validation, the second validation led to 59% of AIRB mortgages of intensity of risk weighted assets on assets. So still far from average EU of 32% -- average EU that is moving also thanks to different measure like [ trim ] as we all know.

Buybacks as you know, has been restarted in the sense that, we have used part of the shares to pay -- to do the transaction on Messier Maris. And so, we have stated that we have -- we want to restart with a new basket up to 3% until 2020 to continue our buyback and hence remaining 1.7% is still there. Positive also from MREL. MREL as you can see benchmarking Mediobanca with some peers. It seems that we have been very well placed compared to others in terms of MREL requirements where the average is 26.1%, we are in the region of 21.4%. So, having a lot of headroom and no subordination, not to be in a position to issue more expensive bonds to cope with further requests. So I think we are in quite a comfortable position and this is also confirmed by Fitch and Moody's rating that has found Mediobanca having high depositor protection.

Messier Maris was the new of the quarter. We have reached an agreement under which we have bought 66% of this boutique of M&A. That is a remarkable presence in France. And that is a market that in particular for M&A and fee pool, related to M&A is quite interesting in terms of size, is quite interesting in terms of number of transaction and size of the transaction. So in particular mid-sized transaction. So we think that, it aligns exactly with the strategy of the Group that is becoming stronger in advisory in particularly in the mid-sized transaction at I would say, south European level, so Italy, Spain, Iberia and France.

So this will -- this is coupled with, I would say, a very important affinity between them and us in terms of core values, type of approach with clients. So a kind of old type M&A franchise in terms of approach, in terms of coverage, seniority to clients. So we found a lot of affinity and we found that the type of business in which they are, so basically doing more than 20, 25 transaction per year distributed among private equity, corporates and debt advisory with an average ticket that is making very much fragmented kind of production is very interesting because is a typical acquisition that as we see in on Page 21 is going to further enhance our accretive value cycle. So having a stronger positioning in advisory will let us adding a top up in fee of the Group, 8%, will have an important increase in capital light IB product fee up 30%. No material impact on capital because we paid with Mediobanca share and accretive in terms of EPS. So this will foster our value cycle that is based on reinforcing some very vertical and specialized businesses in order that each business is above 10% closer to 15% return on allocated capital.

And a good business diversification to cope also with situation like the one which we are where you may have quarter or business that are less buoyant because of market trend. But you can easily substitute them either in terms of revenue source or through NII or through other kind of income source or among different source of fees in order to maintain the growth of the Group. So we think that Messier Maris will further enhance this position of Mediobanca into the European banking landscape.

Thank you very much. It's now time for questions.

[Operator]

Thank you. [Operator Instructions] And your first question comes from Azzurra Guelfi from Citi.

[Azzurra Guelfi, analyst]

Hi good morning. Couple of question on the revenue and one on capital. When I look at the NII, I see that NII is for the first time in a long time not progressing quarter-on-quarter on the consumer credit. Can you give us some color on that? And on the CIB fees, I understand that it's mainly due to the -- if you want a weaker volume and operation on the Italian market, but if the situation in Italy remain a bit volatile given everything that is going on on the macro side, what are your expectation for fees in the coming quarter now just like the last one of the year for you. And one more question on the fees in the -- revenue in the wealth management. The growth of the asset is mainly coming from deposit. Can you give us an idea of the funding cost of this growth of deposits that you have experienced in the quarter? And sorry, last one is on capital quite quickly. Is it fair to assume that you don't have any capital headwind with the exclusion of the buyback and the closure of the acquisition that you have announced in terms of regulatory headwind or anything coming up, and so you will still have a quite sizable budget available for further acquisition. Thank you. [Foreign Language]

[Alberto Nagel, executive]

Thank you, Azzurra. CIB -- sorry, NII in consumer is stable progressing depending on, I would say the market situation, if as you know Compass Ce value in terms of gross margin, net margin produce more if they see that the situation in terms of easy money, abundant liquidity is making the gross spread less interesting, is pressing less to produce. So we have had throughout the year I think 15 basis point of compression in gross margin that is more than acceptable. This is the trend, I think we will see in the future. So if there are -- if there is compression on margins, Compass will produce less. If on the contrary we have margin that are less under pressure, they would produce more. On top of -- net-net of this, there is the new opening of the branches. So we will and as we are doing reinforce the distribution in order to have overall and increased production year-on-year. So the NII will be function of margins in the new loan production. Fees, as we expected, at least in this quarter, the absence of equity capital market fees are such that we need to substitute then with other components. So our expectation is at least for the full year to have stable fees year-on-year because we are substituting absence of equity capital market and a small chunk of performance fee we had last year with, I would say, different source of fees or better quality fees. In terms of capital -- sorry, there was a question related to the growth in wealth management and deposits. We are remunerating some deposit -- not all of them between 20 basis points and 30 basis points with a timeline. So basically we have -- is like a term deposit that a certain -- after a certain date it's of course is not renewed, so it's statical I would say. Capital as you know, as you said, but I don't know if I got it well, basically we don't see material headwinds in our CET1. On the contrary, we are seeing good generation of capital. And so, for the time being we continue with the strategy of redeploying the capital between dividend buybacks and selected mid-type acquisition. So nothing new and if any, all positive on capital.

[Azzurra Guelfi, analyst]

Thank you.

[Operator]

Thank you. Your next question comes from Alberto Cordara from Bank of America.

[Alberto Cordara, analyst]

Hi, good afternoon. My first question is on NII, now I might have missed some part of the call, but if so please forgive me. But can you please explain to us why was such a jump up in NII in the previous quarter and then a decline to a normalized level in this quarter. In the press release, you are mentioning some seasonal factor. So can you please elaborate on that and if it is a seasonal factor, should we expect the same trend of spike in Q2 next year or not? The other issue is, I was looking at your material on the MREL, and you're mentioning that, you -- not only you have a relatively comparable low level of risk-weighted asset to comply with versus peers, but also you have not been subjected to any subordination requirement which I find very [indiscernible], so in theory, if my understanding is correct, but please tell me if I'm right or wrong. In theory you could fill in the entire MREL with senior unsecured, obviously you have some equity, quite a lot of it, but in theory you don't need anything more than senior secured. And if that is so, do you expect the situation to change in the future? Will in future years be subject to some subordination requirement or not, what is your view about that? And finally my very last point. If you can tell us when the -- reasonably the deal on BFI Finance is going to close. And what we should expect when this is done as a contribution to the bottom line from this deal as well as from the investment banking boutique that you bought in France? Thank you.

[Alberto Nagel, executive]

Thank you Alberto. NII, if you go to the presentation Slide #9, you see the different trajectory of the NII. Indeed the EUR 346 million has to be compared of course with, mainly the same quarter NII, also because of number of days as we know this quarter is a lower number of days. And basically they are in the region of EUR 342 million to EUR 346 million. So there was a spike, in Q2, this spike was linked also to some, I would say, component of the CIB book that are related to certain bond, inflation link, we have cashed in terms of yield. So was -- basically it was more a normal the Q2 I would say than this one. In this one if we want to see an impact is the fact that, we did sort of prefunding. So, becoming and staying very liquid also because we wanted to safeguard the possibility to be liquid in a contest of market is not clear, of course we pay a bit of this price. So basically is I would say, 3 component, I would add also a squeeze as we say in CIB -- in CIB repricing in the sense that, as we said also in previous call, higher cost of funding for Italian banks that are banking with good level or good rating counterparty, means squeeze of margin, slight squeeze of margin. So the 3 component are this one. So, the treasury then the CIB book in I would say negative. In positive, specialty finance went up, mortgage went up and consumer went up. MREL is exactly what you figured out. So as we are considered today, as of today in the bucket of the least risky bank in Europe, we have not been given any subordination. Now, if tomorrow we become a risky bank for a reason that I don't understand or I cannot anticipate this may change, but is not really something that is reasonable. So we have plenty of bonds and possibility that we can use to fill this basket. BFI is difficult for us to make a provision of the close why? Because the closing of BFI is linked to some administrative activity or procedure to be ended up in Indonesia. So we are patiently waiting for that. So we are not in a hurry. In the meantime, the Company is doing pretty well. Last year they closed with $100 million of net profit. So if being equal of the rest if we -- if and when in the sense that, we can't say when we do it, we closed the deal. We will have being equal of the rest $20 million -- in the region of $20 million, so convert into euro of contribution into our revenue and net profit. So it will be consolidated like Generali. So we will have in the future, so we don't know in which quarter, but it will be overall for 12 months being equal of the rest, a contribution of roughly $20 million revenue and net profit. While our base case with Messier Maris is having a contribution throughout 12 years between EUR 40 million and EUR 50 million of revenue.

[Alberto Cordara, analyst]

Okay. Thank you very much.

[Operator]

Thank you. Your next question comes from Christian Carrese from Intermonte.

[Christian Carrese, analyst]

Hi, good afternoon. The first question is on the strategy on wealth management and corporate and investment banking, you just bow to the French boutique increasing your exposure to corporate and investment banking let's say. We know that there are some talks about Kairos. So I would like to understand what have you got in mind, also look at next business plan presentation in terms of business mix. I know very low capital absorption business, they are both, the capital absorption is quite low. But just to understand what could be the mix going forward in terms of fees. Second question is on the cost of risk, still quite good the trend in the quarter. But there was some pickup, a slight pickup in the consumer banking, if you can give us an idea of what you are seeing in terms of asset quality take into account the GDP slowdown in Italy. And finally look at, Brexit, if you have in mind any specific action on your U.K. activities or if you can share with us your thoughts on that? Thank you.

[Alberto Nagel, executive]

Thank you very much for your questions. Basically and as you know, we want to reinforce each division of our Group and make it bigger in terms of revenue potential, growth potential and ultimately net contribution to the bottom line. So all the activity that are coherent with our business model that in CIB it's the old type of CIB, so it's basically no trading prop is 5% 10% prop and all the rest is client business. Notably if it is client business that encompass or target capital light product and fee generating, we are clearly interested in looking at seeing whether it fits with our culture DNA, MMA, Messier Maris & Associes is clearly a good fit as I said before because it's reinforced by materially our M&A franchise advisory. And it reinforce in a segment that is a segment that we can target. So a segment of, as I said, mid-sized transaction, very much dispersed, fragmented, so that we don't have any dependents from big deals or big ticket. And is in geography with a cross-border activity that is quite interesting because as you know Italy and France are very much linked from several reason. So our intention is to progressively become bigger in mid-sized transaction in Southern Europe. Kairos is totally different segment and as well interesting because it's a [ qualitative ] play. They have interesting presence in asset management in particular in some sort of alternative and in private banking. So I said already for us, it will be crucial to understand whether we can build a strong industrial project with the management team of Kairos. So this will be the main driver for us to go to the end to a possible discussion. So, now we are in the middle of that. Cost of risk, you see cost of risk is going to be flat. So like between 50 basis points and 55 basis points. Of course, we are starting from a very low level. The comparison with last quarter is -- has to be made in this sense, last quarter we had a disposal of some non-performing, you know that Compass every semester sells its non-performing. And usually when it sells, they have also some sort of writebacks. So the industrial cost is the same of last quarter, but last quarter we have had some small writebacks for the sale of a small portfolio. So for the time being we see the same cost of risk that is for sure very small. For the next year it's too soon to say, next year, on one end we will continue to have some write-backs, on the other hand, we need to understand if anything can change in terms of cost of risk from an industrial standpoint that today we don't have a sense of because today, as of today our cost of risk, industrial cost of risk is still very low. Brexit, we have an action plan ready if and when Brexit really materialize, that will be like many banks moving bankers from London to Europe in order to cover directly some European clients, but we will stick to London office for the rest. Are there any further questions?

[Operator]

Yes, we have one more question from Christian Carrese of Intermonte. He still needs to finish the question, one moment.

[Christian Carrese, analyst]

We didn't hear your answer on the Kairos and...

[Alberto Nagel, executive]

Yeah, Christian sorry, but I can conclude. So saying that Kairos, as said, I mean, Kairos for different reason fits -- can fit well in our strategy in the sense of expanding wealth management activity. This can be conceived or I would say seen positively from us only if it is based on to a very strong industrial project agreed with the management team of Kairos because the company like just like MMA and other that we have been dealing with, it's a people business company. So this is for us the main condition. Cost of risk, you said, a small uptick in cost of risk. How do you see cost of risk in the future? Basically we see that in the future, the same cost of risk, so pretty low in the region of 50-ish basis point, 51 basis point, 53 basis points. The uptick that we have seen is not related to the industrial cost of risk, that remains the same as of last quarter. But because last quarter Compass sold the non-performing, you know, the Compass sells every 2 semester twice in a year the non-performing and sometimes, they sell it with some write-backs. So net of these the cost of risk of -- industrial cost or risk in this quarter of Compass is the same. So we'd have no reason to change our guidance on cost of risk. Brexit, we have an action plan ready like every bank whereby if and when it happens, we will have to move part of the staff that is in London into the regional office in Europe to cover the client directly from their office. But we stick to our office in London. It will remain and it will continue to do a sizeable part of the activity that today is done.

[Christian Carrese, analyst]

Okay. Thank you very much.

[Alberto Nagel, executive]

Thank you Christian.

[Operator]

Thank you. We have one further question from Anna Adamo from Autonomous Research.

[Anna Adamo, analyst]

Hi. I have 2 questions please. On Slide 16 you showed that Mediobanca risk density of 60% is much more conservative versus the European average of 32%. With this in mind, do you see more room for RWA optimization in CIB going forward? And how much impact do you expect on capital from this? Then the second question is on the cost of deposits of 60 basis points, do you see a structural decline going forward as more deposits are sold through financial advisors rather than the online banking channel? Thank you.

[Alberto Nagel, executive]

Sorry, I got the first question, not really the second. But I -- in the meantime I answer the first. Well, this is more a hope than a reality what you said for us. It's a hope that when I benchmark Mediobanca CIB portfolio in terms of quality and in terms of cost of risk to the others, of course, as we struggle to understand why the other is waiting is so lower compared to us. It is true that, in many cases, those validation are very much, I would say back in the history of validation. So now there is trim. So to have a better idea we need to understand the full effect of trim on the others before expressing our self on possible gap between us and them. And on top of this, I have to say that, as we have a low default, large corporate low default book, as you know, the statistic to be made in order to validate the internal model on a low default is by definition more complicated because is low default. And you have a history and statistic that sometimes is not really I would say enough [ robust ] for the validation. So you pay a bit of a price of having a low default and few benchmark when you validate. So it's a work on process. I have to say, we don't guide the market to say that we will have further in enhancement of this intensity, but we offer that. We work for that and we offer that. But honestly we need to see the trim impact on the other first.

[Anna Adamo, analyst]

Okay. The second question was on the cost of deposits.

[Alberto Nagel, executive]

Yeah.

[Anna Adamo, analyst]

60 basis point. I was asking whether you expect a decline from the current level and as deposits are sold through the financial advisors network rather than the banking channel. So I suspect that the declines are less sensitive to rate.

[Alberto Nagel, executive]

Yeah, it's a fair point in the sense, it should be. But normally the mix is today still much skewed on to the, I would say, remunerated deposits. So the balance is that, out of I would say 15 billion, we have I would say 12 that are remunerated and 13 that are remunerated only to that are -- they're coming from financial advisor. But going through, so along the line what you say may really happen in the sense that the deposits coming from financial advisor should be less expensive.

[Anna Adamo, analyst]

Okay. Thank you.

[Alberto Nagel, executive]

Thank you very much.

[Operator]

Thank you. There are no further questions at this time. [Operator Instructions]

[Alberto Nagel, executive]

So, thank you very much for your patience and we hope to have you all at our next earnings call that will be I think last days of July. Thank you very much. Bye.

[Operator]

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect. Speakers, please stand by.