Mediobanca Banca di Credito Finanziario SpA

MIL:MB

Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to Mediobanca 3 Quarter 2020 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to the CEO, Mr. Alberto Nagel. Please go ahead, sir.

[Alberto Nagel, executive]

Thank you. Good afternoon for joining the earnings call. I would start, I would say, highlighting the solid trend of the third quarter backed by strong commercial performance and IP earnings contribution. This is based on quite a [ healthy ] new loan production in consumer finance, EUR 1.89 billion, up 18% and large corporate as well, 1.7%, coupled with intense IB activity levels, in particular in M&A. And I would say, in particular, with above expectation net new money trend of EUR 2.5 billion with a total of roughly EUR 7 billion in 9 months, which is 2.5x last year. This led to TFA in the region of EUR 80 billion and EUR 700 million revenue and EUR 190 million of net profit.

So on the back of this third quarter, we can add a 9-month result with where revenue trajectory in terms of growth has been confirmed with high single-digit in the region of 9% increase revenue, a further increase in return on risk-weighted assets with 30% -- 30 bps of uptick and roughly 200 basis points of profitability. EPS up 22% and core Tier 1 at 15.3%. So this is also preparing the ground for Mediobanca in a weaker macro environment, where I think we have some very positive tool and strength to be put at work or to work against a negative environment. So like a valuable business position in terms of risk/reward.

So basically, I am deeply convinced that being exposed at the 2 extreme of the segment of the client base, so large and I met corporate on one end and house or the Italian household on the other is protecting in terms of risk and is the best risk/reward, and also the fact that we have 3 business which is basically wealth management, consumer finance, and insurance exposure, which are less exposed to cycle is, of course, positioning Mediobanca in good term. We don't have material exposure, not even material to Russia-Ukraine risk, and we enter in this situation with the strongest ever asset quality. So at the end, this coupled with very strong capital buffer and shareholder remuneration, which is confirmed even in this scenario, I think, is putting ourselves on a relative good terms compared to the sector.

Last but not least, I think we did quite an important progress in our ESG environment and target appointing a lead independent director and launching a very important diversity, equity and inclusion project, which I personally sponsored, which set important financial -- numeric target in terms of reducing the gap for gender parity.

Now looking at Slide 4, I would like to draw your attention only on -- in ALM, the projection of loans, plus 7% year-on-year. The projection of TFA, 16% year-on-year, the core, which was stable, 52 basis points, and the cost/income which was down 1 point to 45%. Another, I think, important metric is gross NPE on loans, we are at 2.7%, while the net is less than 1%.

Looking at Slide 7 and 8, we see better the commercial activity around different -- on the different quarters. So TFA, it was EUR 64 billion only in the first quarter of '21, and it reached EUR 80 billion in the third quarter -- in the last quarter, out of which March '22 was bringing EUR 1 billion. And this is an acceleration of our trend, and we will see is backed by the different market position, in particular, we are having in private banking and ability to capture many motion events.

In corporate finance -- sorry, in consumer finance, we have had an expansion of the loan book. And now we are steady producing EUR 1.9 billion, and this is back to pre-COVID level. While during the COVID, you see we were having EUR 1.5 billion of average production. And also the incidence of personal loan, which are the most important in terms of profit product is going up from 40% to 49%.

CIB quite a good trend in terms of acquisition, finance, and advisory with lending volume up to EUR 18.1 billion as opposed to EUR 16.5 billion in Q1 '21. Capital-light activities are increasing the weight, and then, of course, some fees are more volatile or linked to deals, but we have now reached a stable above EUR 200 million of capital-light revenues, up 12% compared to last year.

If we go and see the trend compared to the average trend of single quarter in terms of revenue, pre-COVID, were staying in the region of EUR 600 million to EUR 640 million. And you see that even in a quarter where we have had 1 1/2 months of weak market, we were able to reach roughly EUR 700 million or EUR 688 million, out of which clearly one difference is made by wealth management. We were producing EUR 144 million revenue per quarter. Now we are in the region of EUR 170 million, EUR 180 million. And we can say the same also for corporate finance. So basically, consumer finance because we have generated EUR 260 million before COVID, and we are back to this level.

In CIB, it's more linked to single quarter, so we need basically to make more the average of various quarters. If you see, this year, we have a plus 2% compared to last year where we have had, as you remember, some very big transaction that was booked. So this year, we had internally a budget which was lower compared to last year, but we managed to beat.

The positive news of this quarter is also NII. NII was up 3%. We guided about plus 2%. Now we are at plus 3%. So this is a trend that we are consolidating, and this is also the outcome of the new loan production of consumer. You see that NII in consumer is back exactly at the pre-COVID with EUR 237 million. And the rest, in particular, the CIB is on the high end on EUR 73 million. Fees are confirmed up 13% and here, you see the projection -- the development of, in particular, wealth management, which is now by far the largest contributor and is up 28% year-on-year on higher management fee and AUM [indiscernible] consolidation, BlackRock upfront fees. And in the third quarter, we have had a confirmation notwithstanding the NAV went down. We have had a positive trend in confirmation in management fee which are, of course, the most current.

CIB enjoyed a very strong advisory with a 23% increase year-on-year and lending, which was up 11%. Core confirmation of positive trend. Why? Because basically, we have had low default rate and a very good recovery in consumer finance. So consumer finance managed to be below EUR 150 million as opposed to EUR 133 million. But the last quarter, we sold with some capital gain that every end of the year, we sell NPEs of consumers. So there was a capital gain. So net of this would have been the same in the region EUR 140 million. And very, very, very low cost of risk in CIB notwithstanding what we have seen in terms of Ukrainian war because Mediobanca portfolio was not and is not exposed, has no direct exposure to those kind of counterparties.

So the overall cost of risk was 45 basis points this quarter and in the 9 months was aligned to our guidance of 50, 52 basis points. This is without releasing materially any material release in overlay. The overlay, they stay in the region of EUR 300 million. In consumer, they went up EUR 10 million. In CIB, they went down because we have had prepayment. So basically, we had to release them because the loan has been repaid.

We mentioned already the gross NPE and the coverage is still further up with 68% of coverage, but I have to say that the coverage is up also in Stage 2 and is stable in Stage 3. So we have overall, in particular, in consumer finance brought the [indiscernible] coverage, performing loan coverage to 3.8%, which is the highest level for Compass.

Capital ratio, we didn't have important swing. So it was early generated and cash payout deducted then the increase in the loan book of Generali, which will be reversed in the next few months with the payment of the dividend. And this so minimal RWA inflation, and so we are at 14% fully loaded. This is taking into consideration, of course, the -- also the buyback.

As I said, a very important project today. I sponsored the project personally because I wanted that this goes down the different group companies and business line. We set targets about how reduced the gender gap in particular, knowing that the gender gap is an issue for banking, and we need to solve it. We set targets at -- in different time horizons. So hand over the next business plan and hand over the other one. So raising the female members of Mediobanca and the management team incidents as well as executive in terms of hiring, in terms of advancement rate, and in terms of also of third-party rating. As you know, we have already a fairly good rating in terms of Bloomberg GEI, but we want to increase it from 80% to 85%.

Then divisional results. Every single division is posting a return above cost of equity. We have had swing in each of them, 2 positive, 1 negative, 2 positive, very positive ROAC in Wealth Management, which was up from 22% to 29%. ROC of consumer finance, which was from 28% to no 34%. In Corporate Banking -- in Corporate Investment Banking, we had on the contrary, a decrease of profitability, which is linked to expected lower write-backs because last year, you remember we had a one-off of [ Burgo ], which we clearly factor as a one-off. And the second is that the activity and also the market RWA went up EUR 1 billion. So we have added a dilution; temporary dilution, we think of this ROAC. Insurance exposure went up in terms of ROAC from 12% to 13%.

Looking at divisional results, wealth management was posting a 43% increase in profitability, and it was posting on the back of 17% increase in revenues, but which is even more important is the net new money and the ability of Mediobanca to raise in a complex situation, EUR 2.5 billion in the last quarter. As I said, this was driven by, in particular, in this quarter, the ability to capture the money motion event and the effectiveness of our network in terms of PB combined with IB, and having a very strong network of bankers on the ground is letting these results happen. And of course, it's linked also to M&A. So the more M&A is, the more we have. We enjoy both sides. So we enjoy doing more M&A on our own, and we enjoy also the market trend in terms of money motion event we are able to capture. So we have now reached 70% cost income, notwithstanding that we are quite young in this business. So we manage in the next year to go further down in cost/income ratio.

I would go to Compass now. Compass, very good results. So all-time high. This on the back of expansion of revenue, in particular, NII. NII is better than expected. So it's posting a 5% increase. This is basically driven by new personal loan and in general, new loan, but new personal loans are going back to certain percentage of the total loan, while during the COVID they were down, and we were more selling, say, purpose loan. So they are at 47%. They were at 43%. And before COVID, they were at 52%. So we still have some margin to go at 52%. This will increase the marginality or defend the marginality in the new era of interest rate hike.

We are expanding our network, and we are expanding our distribution network in a different way. So basically, opening agency, opening new point of sale in Compass Link. Again, there are agents, they are not employees, and they do basically the sort of outside branches, door-to-door selling, and this is helping us to cover situation and territory we don't cover enough with our branches and our franchise of Compass, and it's already -- it's becoming already a material project. So record profit because profit take into consideration the expansion of, on one hand, the top line and low-risk level, low cost of risk level and cost down 1% due to lower recovery made that basically, we have increased our bottom line by 32%.

If we go and see asset quality on Page 26, we still have below COVID risk level. We start to see a bit of increase, slight increase compared to the previous month. So just to give you an example, if 3, 4 months ago, we were at 30% discount or lower core compared to pre-COVID, now we are at 20%, 15%. So we thought that this normalization of cost of risk would have been faster. It's lower and is still very positive and favorable compared to -- even to the recovered. So this led a further decrease in NPL stock, you see on Page 26. This is driven by basically derisking source. Lower new NPE production and derisking through disposal of NPEs. So we have had an important decrease of the already small by 31% and also, the coverage is 80% of the NPE and 3.8% of the performing. And on top, we have -- and we have also the overlay which are still [ on touch ].

This quarter and in April, we have had quite a positive trend in IB, where important transaction, as you know, have been announced. And this has helped advisory business and, I would say, lending business and CMS to stay on the high level. So this led the group beating the all-time high IB revenue of last year and kept the cost/income low at 44%. No material exposure to risky situations, so let also confirm the good -- the excellent asset quality with gross NPL ratio at 1% in CIB.

So you see on Page 28 and 29, that in our calendar year, Mediobanca has played an important role in each of the segments. And we have recently announced the hiring of Giuseppe Baldelli as a co-head of CIB. I think Giuseppe is a great addition, which will further improve our franchise and boost also the future growth of earnings and revenue of CIB.

Insurance exposure is on Page 30, within PI. We have had the confirmation that like other banks if you think about all the most important banks in Europe, they have quite a large insurance exposure. And this proved to be across the cycle quite a positive addition. Why? Because it's the correlated risk anticyclical compared to the banking risk, enjoying a good risk weighting. So if it is true for the others is true also for Mediobanca. And in a normal period of time without, I would say, nonrecurring item like this year, you see the difference with revenue up 47% and a very good ROAC in the region of 13%.

Holding function, nothing to say. Basically, we have done quite a good activity in terms of completing the funding and also starting to prefund next year as you -- and as you have already been told last earnings call, we are smoothing the end of the TLTRO and having a part of the effect this year and part of next year.

So just to spend the last few minutes on the remaining slide. Why? It's important to stress that the business where we are and the trend that they are having in terms of wealth management being a business which is growing so can also face a moment of contraction or can face a moment of market adversity because on the other hand, we are expanding. We are hiring the bankers, we are hiring financial advisers. And you see in fact that in the last 5 years, we have almost doubled the size, a mix of organic growth and small bolt-on acquisition. And we have a very limited reliance on performance fee, only 3% of the fee.

On consumer finance, our experience in 60 years is that the correlation between new loans core and GDP is very limited. There is a graph here. And basically, we think that entering into a more modest GDP growth will make that family, we may ask for more credit rather than less credit.

CIB, I want to draw your attention on the migration of our ratings in the portfolio. 5 years ago, out of 100% of our loan book rating, 45 were investment grade. Today is 65. This is on the back of activity that we have done throughout these 5 years, which led to an improved even more solid rating of our portfolio. And also the loan book broken down by sectors is giving you the evidence that we have a limited exposure towards the sector most impacted by macro headwinds. We will be impacted. We are sector which are impacted. We will be impacted. But what we see is that our clients may have a margin squeeze, may have a period of lower profitability, but they are, on average, very strong and basically leader in each sector.

Capital generation and capital visibility even ahead is quite good because basically, you see here in 6 years, we have generated important amount of capital. We were at -- and we maintain a very strong MDA buffer because we were at 12% only 6 years ago, and we are at 15.3%. And this is basically coupled with low exposure to [indiscernible] and [indiscernible]. So our sensitivity to spread is that with an increase of 100 basis points, we have less than 10% -- 10 basis points of attrition of CTI -- of CET1. [indiscernible] represents only 45% of CET1. RWA volatility is limited by prudent ALM approach. So we think that even in the new world, we can deliver quite a sound shareholder remuneration.

So to come to visibility on the last quarter, we continue to see positive commercial trend in the business. And there are supporting factor for NII in consumer and for fees in wealth management. I would say a good chunk of our CIB pipeline is only partly dependent on market condition because it's more linked to announced M&A. We continue to hire, as I said, with the hiring of Giuseppe Baldelli. I want also to remember the hire of Marco Carreri. Marco is not only a great professional but is also a friend, which has done quite well in Anima. And before so, I think that it will bring for sure some value added in CheBanca! in its growth trajectory, which is quite interesting and positioning on to the higher end of the market.

And we see also in the last call, the confirmation of capital generation. As we said in the last quarter, we are confident to be above 14.5% core Tier 1. Thank you very much. I leave you the floor for questions now.

[Operator]

[Operator Instructions] The first question is from Antonio Reale from Morgan Stanley.

[Antonio Reale, analyst]

It's Antonio from Morgan Stanley. 3 questions for me, please. My first question is about your business plan targets. We're now 1 year away from completion. You had 3 targets if I remember right, one on revenues, one on EPS, and one on capital distribution. I may have missed it, but I haven't seen any reference in the presentation, and we've seen a number of banks with targets in light of the renewed outlook. And I wonder where do you stand on your business plan targets? If you can confirm them? And any -- so where do you see risks or why would you have flexibility? So that's my first question.

My second one is on consumer business. Your consumer division is going to end up printing a record high year in 2022, at least judging by the performance in the 9 months. Loan origination is back to pre-COVID levels and product mix has continued to improve while you haven't touched your large overlays. So my question is how sustainable are these trends in terms of new origination and cost of risk and your consumer going forward? And lastly, one question on M&A. I mean, your stance on M&A has been very clear over the years. I wonder if anything has changed in light of recent events, generally, with the board renewal behind, and how you see conditions now for a transformational deal? And more generally, if you look at your 3 businesses, you operate in: CIB, consumer and wealth, where, if any, do you see most opportunities over the projects as capital?

[Alberto Nagel, executive]

In terms of business plan target, I think that EPS and capital distribution, we are quite aligned, so we are on track on trajectory. So I would say that we expect to meet broadly the targets of our business plan. And as of today, we don't have any reason to say that the targets are not on sight, I would say, on sight. Consumer, you say how sustainable this record level of Compass? I think in terms of new loan production, it's sustainable. And we are fostering our new loan production with quite a number of new initiatives from a very important push in digital sales and digital platform, a very important push on new type of channel, distribution channels, so Compass Link and agents in the buy now pay later. You will see that we will become a leader in buy now pay later, and we have quite bold projects already ongoing, but we may be more precise, I think, in the quarters to come. So new loan origination is going to be there. I don't think that we're going to have a decrease in new loan origination.

Cost of risk, we expect to go up progressively. The question mark, how slow or how fast you can see in 2 different directions, we expected it to go up to the pre-COVID. So pre-COVID, we were in the region of EUR 180 million, EUR 200 million. Now we are below EUR 150 million. So this trend is slower than we expected. So I think we may go towards a higher level in the last quarters or last quarter of next year, but we don't see an important increase in cost of risk anytime soon. And we still have overlays. Of course, we can also, in the last years of the plan, see if those overlay are still sustainable to be kept as they are today. But for macroprudence, we have delayed any update of our forecast because of the uncertainty of the macro, and we have left this for the last year, the plan.

M&A -- you are right, if I got it well in the sense of your question. Our main or preferred route is to do bolt-on acquisitions. So the acquisition that we can manage, they have a limited risk and where we see them. We see them in the 3 business. We see them in wealth management, we see them as well in CIB, we see them also in consumer. So the consumer may be more on buy now pay later, in CIB may be more on advisory boutique, while in wealth management can be both on alternative asset management so another Bybrook or another Barclays type of transaction.

So this is basically what we are working on. The rest we see on the newspaper I commented before in the press conference. It's more a press article. One day, we are supposed to buy Anima, another day, we are supposed to do transaction with other wealth management operator. The reality is that we don't have discussion open for projects open and running on larger item and on larger target. And on the other way, we are quite happy with our insurance exposure, the results and anticyclical contribution it's given to our P&L. So we are, I would say, always vigilant to put capital at work, always active, but this cannot and should not derail our growth trajectory -- organic growth trajectory and should not generate or encompass risk we cannot manage.

[Operator]

[Operator Instructions] The next question is from Britta Schmidt from Autonomous.

[Britta Schmidt, analyst]

One clarification on Generali, please. What is the expected capital uplift that you expect from the dividend payment still to be accounted for? And then another clarification on the net interest income sensitivity. I think I saw a comment on Bloomberg that you guided to 4% of NII for 50 basis points, which seems a little bit more than you indicated last quarter. Can you just confirm that and tell us whether anything has changed there? And then lastly, can you comment a little bit on the relations with your larger shareholders? What sort of discussions have you had with them, if any, recently around the strategy, and comment a bit on to what extent the debate around Generali impacts management.

[Alberto Nagel, executive]

The first one, the answer is that the dividend payment of Generali will generate roughly 40% of -- 40 bps, sorry, 40 bps of increase of our CET1. NII, I take the opportunity to elaborate more on our NII trend. You remember that in the last call, I said, "Okay, we are confident to be in the regional 2% increase." Now our confidence is bigger, and we think that we can do at least 3%, but maybe we can do even more at the end of this year.

So our NII is already growing on top on a different scenario. So I confirm that we are progressively increasing our exposure to interest rates. So how we do it we are not covering the -- when we have maturity of our exposure, we are not covering anymore. Hence, we take a directional exposure to interest rates. So this brought our sensitivity from 3% to 4% every 50 basis points. So I confirm this.

In terms of relationship with our shareholders, we continue to promote engagement with all of them, and we continue to have a relationship with all of them. And as I said in the press conference on the Generali topic, after the outcome of the general meeting, which was, I think, an outcome we welcome both in terms of quality, independence, and ultimately, confirmation of the contribution to the P&L of Mediobanca, we think that a new period of appeasement in terms of setting aside the confrontational period and favor period where all the actors can work better for the interest of Generali is welcome, and we will sponsor it.

[Operator]

We have the next question from Domenico Santoro from HSBC.

[Domenico Santoro, analyst]

It's Domenico, HSBC. Just a couple of questions looking beyond this year, given the year is almost finished, whether you can give us a little bit of a trajectory for the NII next year in particular, specifying what's your assumption in terms of rates now that you have a little bit of more sensitivity to raising rates? And how should we see actually the TLTRO benefit, whether we should exclude the EUR 20 million or you are implementing any [indiscernible] to offset that?

And given the outlook on the economy, thanks for giving us the guidance on loan loss provision. But my understanding is that we should expect a little bit of increase for next year, even [ though ] dramatic. I'm just wondering whether these might have a little bit of impact on the pipeline in the investment banking and whether you can give us a bit of visibility of what the way that you see fees evolving in the division?

[Alberto Nagel, executive]

So we are working -- We are working now with our budget. So we can be -- we will be more precise on the next call, which is the ending call of the year and also the -- giving a bit of more guidance of the new year. We are working to have an NII in increase also next year. The pace of this increase will depend on also how fast we can be in transmitting the higher cost of funding to clients in recurring consumer. While the rest of the asset side is more variable in terms of -- so they reprice more rapidly. The asset side of Compass reprice as well, but it takes a bit more time. So there may be a lag time in this, but it's going to happen.

For core, the outlook -- as I said, for the time being, we are envisaging and experiencing very good core. So we don't see deterioration. It's difficult to see a big deterioration in one quarter. So I would expect that the core is not going to be materially different next year also take into consideration the buffer we have in overlays, which can stay for a period of time. But technically, as we know, overlays are overlays. If they are there for a period, then overlay needs to be used one way or the other. So we think that the next year will be the right moment to assess them.

Pipeline of IB, we have announced a series of transactions in the last year -- in the last quarter, sorry, that will be materialized in next year. So the pipeline in advisory is quite good, and in acquisition finance is very good. Then there is a team of execution in ECM. In ECM, we have secured a number of mandates of IPO. We were able to price a very good one, Technoprobe in February. We need to see if equity markets are there to let pricing of other big one [indiscernible]. We have secured 4 to 5 mandates of this kind, but we need to see whether there is a market for that. They are all very good companies. So I think -- and also the sector in which they are, there should be a market to do this transaction. So basically, as I said, the pipeline continues to be good and there is the more recent hire would support the pipeline. Part of this is more dependent from equity markets and [ partner ].

[Domenico Santoro, analyst]

Can I just ask a follow-up question, sorry, on your activity? I understood that it's now 4% because your balance sheet is more rate sensitive in the way that you're changing the mix. How should we look at this 4%? Is it on a 1-year base? And based on the comments that you just made on the repricing of the different parts of the balance sheet, is there any risk that repricing of liabilities, the way indeed, your asset is composed, your assets mix is composed, repricing of liability might proceed in a way repricing of assets. So this 4% is more to see like a sort of look-through benefit on the NII.

[Alberto Nagel, executive]

4% takes into consideration everything. So it's taking also into consideration the possible effect on Compass, but at the group level, is confirmed is 4%.

[Operator]

There are no further questions. I will hand back the conference over to Mr. Nagel. Thank you.

[Alberto Nagel, executive]

Thank you very much for the attendance, and we hope to have you all in the next call which will be, I think, the 1st of August. And thank you again. Bye.

[Operator]

That conclude the conference for today. Thank you for participating. You may all disconnect.