Good afternoon. This is the Chorus Call Conference operator. Welcome, thank you for joining the Banca Generali nine months 2019 results conference call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Gian Maria Mossa, CEO and General Manager of Banca Generali. Please go ahead, sir.
Thank you. Good morning, and welcome to our third quarter results conference call. Let me start saying that the bank is really in good shape. Reported net profit achieved EUR 196 million, of which EUR 103 of core net profit. These numbers have been driven mainly by market expansion, great results from all the new revenue streams, and asset expansion. At the end of September, total assets reached almost EUR 66.1 billion. Once increased also for acquisition of Valeur, we have just signed the closing in October, we reached EUR 67.2 billion. This implies an asset expansion of almost EUR 10 billion. I think that the best result is in terms of inflows. The quality, more than 74%, comes from the existing sales force, and the quality of our financial advisors continue to increase, with a portfolio average above EUR 32 million. The numbers are pretty impressive.
What impressed me more, and I'm very proud of that, is the quality for the engine that we launched in the last 12, 18 months to accelerate the revenues are working very well and are beyond our expectation. Black team, in particular, with the distribution to the retail structural product, advisory fee, and retail brokerage fee. As usual, at page number four, you see the detail of the P&L, starting from the operating profit up 34.1%, where the main contributors were the net interest margin and the net fees. Net fees climbed thanks to, of course, performance fee as well as a higher contribution of other revenues and lower cost for growth. Total operating cost up 8.6%, of which an important part driven by M&A and one-off, while all the lines below the operating results are a positive contribution for the year.
Tax rate little bit higher than the same period last year at 17.4% compared to 16.4% for the first nine months. Sorry, 17.4% compared to 19%. It's falling. Page five, you see the build-up of the net profit with the split between variable profits and recurring profits. Variable profits jumped thanks to an increase in the performance fee that more than offset the lower contribution of the trading gains, while as you can see, the main contributors to the recurring profit comes from almost EUR 10 million, with increase in Net Interest Income and EUR 20 million coming from asset expansion, new revenue engines, and a lower cost for growth. From page seven, we go through every single line, starting from net financial income comparing the first nine months of the year to the first nine months of last year.
You see that the net result is a little bit lower, but the mix is much more important. Net interest income up to EUR 56.5 million and trading income at EUR 69.3. Focusing on the quarterly trends, the third quarter was very strong, with Net interest income at EUR 20.3 million. Once included the impact of IFRS 16, and we are confident to be around this number also for the last part of the year, while the trading income confirms the projection at three, four million EUR per quarter and totally above EUR 10 million. Why this impressive acceleration of Net interest income? Two main reasons. The first one, thanks to the maturity of part of the portfolio reinvest at higher rate, and second, the asset expansion. Asset expansion, total balance sheet exceeded EUR 11.8 billion, of which EUR 7.9 of financial assets.
In terms of net interest margin, we accelerate from 0.77% to 0.85%. To say that for the fourth quarter, we are positive despite the reduction of the yield because we have several maturities, and we reinvested part of the previous maturity at the higher yield. Moving on, page eight. We start with gross fees. Main component, management fees. Best quarter ever for the bank, EUR 163.2. In terms of total contribution for the first nine months, the total contribution is slightly lower compared to the last year. Also in this case, we are very confident to close the year definitely higher than the last year. In terms of margin, you can see a gradual recovery from 1.4% to 1.41%. You see it for life because from this quarter we start including also Nextam results.
Also in case of management fees, most part of the increase comes from an acceleration of the asset expansion, in particular on our Luxembourg platform. Page nine. Probably the best news of the day comes from other fees. If you look at the first nine months, we are almost at EUR 60 million compared to the EUR 51.4 of the full year 2018, with a raising contribution of both banking fees and entry fees. Focusing on the last quarter, and due to some seasonal effect, comparing it with the third quarter of the last year, you see an impressive acceleration of both entry fees from EUR 3.6-EUR 5.2 and banking fees from EUR 11.6-EUR 13.7. In terms of margins, if you compare the first nine months 2019 with the first nine months 2018, you see an improvement, in particular is more impressive on a quarterly basis.
At the beginning, third quarter 2018, we are at 10 basis points. Third quarter 2019, 13 basis points. Year numbers are very impressive, and focusing on October, we see a further acceleration. Last part of gross fees, focus on performance fees. EUR 96.3 million, with the contribution for the third quarter at EUR 25.5 million. In absolute terms, it is very impressive. It's important contribution. In terms of percentage on total AUM, the margin are at 0.28, that is far below the average over the last five years. Also performance fee are linked to the assets under management. Almost 60% of this performance fee comes from the new routine offer. On the key expense side, page 11, you can see that the total key expense moved down, mainly thanks to a lower cost of growth, so EUR 288 million compared to the EUR 301 million.
You can actually back down, starting from the payout to the network. Overall down, slightly higher organized payout and definitely lower cost of growth. Again, this is linked mainly to the quality of the inflows, most of which coming from the existing sales force. Second part is the payout to third parties. You know we had a target to go below 4% in terms of asset management, and you see we are at 3.8%. Again, almost 10% reduction, thanks to the negotiation continuing and the focus on fewer players with higher assets. Next page, you can go through the operating cost. We changed slightly the representation on the left of the slide. You see overall cost reach EUR 165.7. We highlighted two contributions, one coming from the one-off items, mainly, as we already said, BG SAXO and Valeur.
The other side, Nextam, because we start including Nextam for two months, August and September. Focusing on core operating costs, the overall increase is at 5.3%, and again, mostly linked to the acceleration in key strategic projects and the hiring process focused on quality people, quality manager to accelerate our realization of the new projects. Overall, for this year, I think that this is the most important message on the cost side. We confirm our guidance of core cost in the range 3%-5%. Slide 13, focus on the efficiency, our operating leverage. All the ratios are at the lowest level. Operating cost out of total assets reached 0.31%. Cost income ratio, both reported and adjusted, down to 39% and 32.9% respectively. Last part of the first chapter, page 14, capital position.
CET1 and total capital ratio, well above the SREP requirement, respectively 16.5 and 17.8, slightly lower to the same period over the last year, driven by the full application IFRS 16. In the first-time consolidation of Nextam. Of course, these numbers consider also the new dividend payout policy we communicated during our investor day, that I confirm will be also for this year in the range of 70%-80% of the net profit. Before moving on to the next section, just to sum up this first part, we see solid growth in almost all the revenue streams and a very efficient operating leverage. Everything is working very well, we are confident to see further improvements for the fourth quarter. From page 16, we start with asset inflows and recruitment. Total assets, as I was just saying, up to EUR 66.1 billion. Net inflows up EUR 3.8 billion.
The contribution of the performance of the client portfolios is pretty impressive, EUR 3.7 billion, that implies a yield performance for the client on the total assets of 6.4%. If we focus only on the asset management product, it will increase 7.5%, so more than offsetting the negative performance of the last year. Slide 17, you can see the breakdown of total assets. Again, here, the most important thing is to see how we continue to diversify. All the main contributors of total assets increased in the first nine months. Managed solutions up EUR 4.1 billion, traditional life policies up EUR 1 billion, banking products up EUR 3.5 billion. On the right of the page, you see that also breaking down the managed solutions, all the contributors increase. Insurance wrappers and financial wrappers exceeded EUR 15.5 billion, while total funds exceeded at EUR 15.9 billion with the rising contribution of the in-house product.
Banking assets, well balanced, EUR 9.1 deposits and EUR 9.2 current account. Of course, in case of a stabilization of the yield, we could see some extra revenues from this kind of investment. Page 18, there is a focus on our Luxembourg platform. We achieved EUR 16 billion, highest level ever, through positive contribution. The first one, the institutional fund classes continue to increase, EUR 4 billion in four years, EUR 9.3 billion. Very positive, you can see the acceleration in the retail fund classes. As we said last year, the focus now is also on the retail distribution. In just nine months, we exceeded the highest level reached in 2015. We closed the first nine months with EUR 6.7 billion. On the right of the slide, you see the assets under advisory.
Again, impressive results, EUR 4.4 billion with positive contribution of all the different approaches, so securitization, family office, and pure financial. Page 19. Let's move on to net inflows. For the first nine months, EUR 3.8 billion, slightly lower than the total inflows of the last year, EUR 4.1 billion. Again, in the last three months, including October, inflows are for each month higher than the same month of the last year. August higher, September higher, and October higher, with an estimation projection of the net inflows for October about EUR 300 million. In terms of asset expansion of asset under advisory, you see the numbers of contracts. In the first nine months of 2019, more than 6,600 new contracts. If you compare in relative terms with last year, the increase is about 50%, with an average asset per contract almost in line with the last year, between EUR 500,000 and EUR 600,000.
In these first nine months, the average was at EUR 650,000. The last page, a focus on recruitment trends. September, 59 new colleagues. In October, we had other 10 new colleagues. It's very important, as you know, to be very cautious in this activity during the phasing of MiFID review. We start seeing normalization. As we already announced, next year, we start again recruiting in line with our historical average. On the right, you see total net inflows by acquisition channel. In particular, impressive number of the contribution of existing network at 74%. Just to sum up, I think the numbers are very good. Assets quality impressive, well balanced. Where the concept is to be well diversified in terms of assets, in terms of our investing solution, in terms of products, in terms of inflows. We achieved, I think, the highest level of diversification.
This is, I think, the thing that guarantees the sustainability of our growth. The last section is about the business update. First of all, we increased the target for this year in terms of total net inflows coming from the ordinary business from EUR 3.7-EUR 4.3. It was the range, the target announced during the investor days, up to EUR 4.55 billion. A potential, an explanation of this acceleration of the inflows in particular over the existing sales force, in my opinion, comes from the introduction of a new organization in the network last year. Now it's up and running, there is more focus for different targets of financial advisors. This is very important. The second is about brand awareness and brand recognition.
In the last publication of Magstat, where you have the ranking of the private banking companies in Italy, we reached for the first time the podium at the third place. This means positive noise, positive reputation, and particularly if you compare this positioning with the ranking 2015, that we were eight, and 2013, we were 15. It's impressive how fast has been the acceleration of the assets of our clients, and we continue to see this positive trend. One important explanation, that we have a dedicated division with wealth managers. Page 23, you see that this impressive growth comes from all the class of clients, from affluent, upper affluent, private, and ultra-net-worth individuals. Of course, the contribution in terms of assets is more relevant for private clients and ultra-net-worth individual. In terms of new clients is more distributed.
This is thanks to more and more focus on differentiating the product offerings for our clients. On one end, we have very, very high personalization, private insurance, related products, on the other one, very innovative saving products. We continue to be focused on all our customer base, and we see multiple opportunities, in particular in the segment of affluent clients. In the last 2 pages, no, next, last 3 pages, you see a focus on our main initiatives. The first is about Lux IM. I would say mission accomplished. We were very focused on launching a new sustainable offering in Luxembourg with the aim at providing a well-diversified solution also for retail investors and direct investment. If you look at page 24 on the right, you see the impressive acceleration in retail fund classes.
From EUR 1 billion at the end of the first half of last year, up to EUR 3 billion. We tripled the assets in 15 months. We are very focused and optimistic on the future. For example, in October, again, we exceeded EUR 150 million of net inflows in the Lux IM retail distribution. Page 25, other three main initiatives. The first is about certificate and structured product. We exceeded the targets set for 2021 in terms of notional new issues, EUR 317 million, compared with the target of EUR 300 million. We are very close to overachieve also the target in terms of new revenues. This is thanks to the partnership with BNP Paribas, the extension of the offering, and a very high focus of managers in the bank. The second project is about robo-advisory.
Also, in this case, we are well above linear projection to achieve the target of 2021. In particular, in the first nine months, we are close to EUR 12 million. Again, just linearly projecting these numbers for the fourth quarter, you would see that we will exceed EUR 16 million. Volumes continue to grow, so we are very confident to reach well in advance the target of 2021. Last but not least, we start seeing also positive effect of BG SAXO, even if we are just at the beginning of the story. We launched the new platform between June and July. We start by piloting this platform, and we're starting expanding the platform in time.
We are very close to launch a new initiatives, a simplified version of the current platform, and the possibility for our financial advisors to insert on behalf of our clients of the orders, the so-called B2B2C platform. If you look at numbers, in the first nine months, we almost achieved the total brokerage fee for retail for the last year. Again, also in this, I can see starting positive results. If you sum up these three new revenue streams, first nine months of the year, EUR 32 million. Again, just the linear projection show you how far we are and the quality, and we meet the expectation, the linear projection to reach the target EUR 50 million-EUR 60 million before 2021. We can say that we go to page 26.
In considering the three main ambitions we announced during our investor day, empowering a phase, we are well on track. All the initiatives are up and running. There is room to accelerate in all the initiatives, retail distribution of in-house products, structured products, advisory fee, and brokerage fee, with a solid core business in the wrapper solutions as well as more in general in asset expansion. In the second mission was about the client first choice, in terms of digital footprint. Again, also here we are just at the beginning. In the last six months, we launched the new mobile app. We start opening up the new Saxo platform. We are very focused on marketing, direct marketing, also marketing clients. I see also on this ambition, a positive upside. Last but not least, we have just signed the closing of Valeur, confirming our international expansion.
The value is going ahead of expectation in terms of assets. We focus on our priorities in Switzerland in the next conference call. We are not in a hurry. We want to be very focused on reputational risk and providing the best solution for the professional to gain momentum for Swiss clients, as well as Italian clients willing to diversify the banking center. Considering the acceleration of all initiatives, I can say that all the management team is very committed and confident to overachieve the targets set for the end of 2021 in terms of inflows, total assets, and at the end of the day, net profit. Thank you. Now I will hand over to Q&A.
Excuse me. This is the Chorus Call Conference operator. We will now begin the question and answer session. Anyone wishing to ask a question may press star 1 on their touch-tone telephone. To remove yourself from the question queue, please press star 2. Please pick up the receiver when asking questions. Anyone who has a question may press star 1 at this time. The first question is from Gian Luca Ferrari with Mediobanca. Please go ahead.
Yes. Hi, good afternoon. I have three questions. The first one is on the NII. You gave us a gut feeling about the full-year result in terms of net interest margin. I guess we are speaking about something in the region of EUR 73 million-EUR 74 million. I was wondering if you can provide an indication for 2020, 2021. Which kind of growth rate, if any, should we attach on top of year-end 2019? Linked to this, I think you mentioned during the speech that there are many reasons behind this very robust NII in Q3. You mentioned reinvestment, looking at page 29, I think you even managed to reduce the duration of your bonds in the nine months 2019. You're remaining fairly short, 1.6 years duration, and you managed to have a 0.83 percentage points of yield on financial assets.
I was wondering, where did you invest in the nine months and in Q3? I guess Italian BTPs probably are not there. Second question is on the performance in October, if you can give us a sense of performance fees, given that the month is ending today. Also flows, apart from the EUR 150 million you mentioned for the Lux IM. Overall, which kind of flows you achieved in October? The third question is on your strategy in illiquid. Without entering too much into some of your competitors speaking a lot about illiquid, I was wondering if you are remaining on the current strategy with certificates, with some securitization, or you're planning to go more into this kind of product. Thank you.
Thank you, Gian Luca. Starting from Net Interest Income, I can say that we still expect a one-digit growth for the full year of next year. In terms of performance in October, very poor, a few million. Total interest for October, about EUR 300 million, with a total contribution of asset management product above the average of the year. In terms of illiquid, I confirm our very conservative approach. Now we start with securitization, we'll target initiatives for professional. Probably in the first half of next year, we will enter distribution also for retail clients. For us, retail clients means upper upper and private. Launching dedicated vehicles where the key drivers is diversification and the coupon. Nothing disruptive. It's a way to continue to go in the direction of increasing diversification for our clients, and start introducing illiquid assets also for upper upper and upper clients, not necessarily professional.
For the quality of the reinvestment in the banking book, I hand over to you, Tommaso. Thank you, Gian Maria. Let me say that we are managing the net interest margin because, thanks to the re-fee that we applied last year to the banking portfolio, we were investing a very short duration and maturity bonds. We had a lot of bonds which were expiring by the end of the current year and the next year, which have a yield which is near to zero. We are investing at a higher rate because of that. We are still diversifying the portfolio, as we said in our investor day. Looking also at other European government bonds.
Especially you see that in our banking books, there are a part of the shorter banking investments, which is investing in also other European, not Italian, short government bonds, like Spanish and Portugal. It is something which is in our strategy. Overall, as you have seen, the maturity and the duration of the banking book is still pretty short, so we're still very conservative. But the main driver for the growth of our net interest margin is basically linked to the expansion of the assets that you can see looking at our balance sheet. A part of the net inflows, which has been collecting the last year, has been also collecting deposits. We have higher volumes in the asset side. Part of the story is a better management of cash and semi-cash as well. The cost of cash is declining over time.
Okay, thank you.
The next question is from Alberto Villa with Intermonte. Please go ahead.
Good afternoon. A few questions from my side as well. The first one is on the assets under custody, assets under advisory, sorry, that you've been able to continue to increase, and this remains a quite impressive move to me. We discussed last call about a profitability in the region of 46 basis points. Is that something that you can confirm? How we can expect this margin to evolve? Meaning, if there is one of the three classes that grows more than the other, can it change or it's kind of, let's say, balanced, we can expect these statistics to remain pretty stable in the future. The second one is on the factor you mentioned before, the recruitment you think it will increase next year.
Can you give us some color about maybe what kind of professionals you are looking for from competition, from banks, you performed these two acquisitions, one in Italy, one in Switzerland, which seem to work pretty well. Have you any, let's say, hope or expectations to have other opportunities in the coming months to do other acquisitions of this kind? If you are still focused mostly on Italy and Switzerland, or you're looking to do something else? Finally, this year is a good year for performance of assets, and so your net profit and expectations are pointing to EUR 200. If we consider the payout ratio will be 70%-80%, it could easily exceed the floor of EUR 1.25. Can we expect if the EPS will be higher in this range to have a higher dividend than the floor you have set at EUR 1.25 per share?
Thank you.
Thank you, Alberto. In terms of profitability of asset under advisory, during our investor day, we announced a range of 40-45. Now we are a little bit above. We're confirming this number at 46. Let's say that our projections are in the average of the range of 40-45. We continue to see strong inflows, also October has been in line with the previous months. In terms of recruitment, let's say that it is a well-balanced activity among financial advisory networks, commercial banks, and private banks. I'm pretty confident to a little bit accelerate in the last part of this year, staying around above 80, and for next year, around 100. It is the range that we have in mind.
There's great increasing interest, in particular for the asset under advisory, for the advisory services. There is a greater attention on our holistic approach also to maintain a good drivers and good payout, introducing new services, new ancillary services to the clients. Because to perform next year will be probably more complicated than performing this year, you have to increase the quality of ancillary services for your clients. In this sense, we are considered the best in the market. We are first in class for the platform for our financial advisors, where we can provide risk assessment for the whole wealth, and we have several partnerships to create value also on other sort of wealth, for entrepreneurs and real estate and so forth. In terms of acquisition, we are pretty confident with the organic growth.
We are scouting, of course, the market, and if we see opportunity, we are ready. In this moment, we don't have any this year on the table. We are very focused in considering expansion in Switzerland, and we are focused on self-financing any other acquisitions. This lead me to the DPS. We are confident to provide DPS higher than EUR 1.25. We say we exceed the floor, but we will maintain, as a guidance, the range 70%-80%. Thank you.
The next question is from Elena Perini with Banca IMI. Please go ahead.
Yes, good afternoon. I have two questions. The first one is about the split of the EUR 1.1 billion of assets belonging to Valeur. I was wondering if you can provide us with the split between non-managed and managed assets. Second question is about the possibility of a new voluntary disclosure, which appeared in the press in the past weeks about the Draft Budget Law. I was wondering, what are your thoughts about it, and if you think that there could be a huge amount of money still to be repatriated. Thank you.
Thank you, Elena. Starting from Valeur, we consider Valeur as a sort of external asset manager. Either in investing solution or in advisory services, all the assets are under a recurring fee. It's 100% under recurring fees, either for the investing solution or for the advisory services. In terms of let's call voluntary disclosure, of course, we read about it. If you look at the previous edition, it wasn't really a success. Also this time, we do not expect higher inflows, even if I think that if it is the case, we are better positioned than others because now compared to the past, we have both the solution in Switzerland and in Italy. In case of success, we'll be probably the first to take an advantage. In this moment, the details are not known.
prudentially, we do not project an extra contribution from this initiative.
Okay, thank you. Just a follow-up on your first answer because my line was disturbed. Have I understood correctly that the 100% of Valeur assets are non-managed because are advisory assets?
No. Sorry.
Okay.
It means that part are managed with investing solution and part are under advisory. 100% of the total assets are paying recurring fees.
Okay.
It should be around 50/50.
Okay. Thank you very much.
You're welcome.
The next question is from Anna Adamo with Autonomous Research. Please go ahead.
Good afternoon. Thanks for the presentation. The first question is to gather your high-level thoughts on the current interest rate environment. If I look at the shared deposits in the financial portfolio of Italian families, this has basically reached almost 30%. What's your view on the possibility to introduce negative interest rates on client deposits above a certain threshold in order to offset the interest rate headwinds? My second question is on ESG. Can you talk a little bit more about Banca Generali approach towards ESG, and how this is incorporated in your investment process? Lastly, can you share with us your latest feedback from clients following the publications of the MiFID reports? Thank you very much.
Thank you, Anna. Starting from the possibility to implement negative yields on current account, in the moment is out of scope. We are thinking of several initiatives to offer alternatives, thanks to structured products, and we save some very well-diversified solutions in the liquidity space with a maturity of three years. I don't think that there is a real opportunity to apply a negative yield, if not applied by all the banking system. In terms of ESG, we are a first mover on the field. We launched a new commercial approach where, first of all, you can quantify the real impact in terms of sustainability of the funds.
Second, we translate all the single investment solutions in the 17 SDG goals, and we provide a digital platform to clients where they can personalize their personal preferences in terms of the 17 SDG goals, so that you optimize the total investment both in terms of risk-reward as well as the personal preference versus the SDG goals. If you look at the inflows in ESG solutions since the launch of this new digital platform, that was in March of this year, we are very, very impressed. If you think of that new inflows on ESG solutions exceeded EUR 600 million in six months, basically. It's great part of the inflows in asset management products for this year in the same period. We are very confident to have also this sort of distinctive approach to offer alternative solutions to clients.
In terms of MiFID, if I look at complaints or litigation for cost reporting are negligible. There's two or three. It means that our financial advisors did a very good job in communicating and in anticipating the reporting to clients. I'm not sure that all industries are exactly in the same good shape because, as you know, a great part of the statements were sent during the summer, and most of them sent through the mobile app. To see the full effect, in particular in traditional banking system, we probably will need to wait other few quarters. In the next three, six months, we will see the full impact. Also because I think that the Nextam, the statement should be sent before during March. Let's see.
I'm very confident that if there is an impact for us, will be positive because while we approach the topic well in advance and we train all our financial advisors, I don't have the same expectation for the market in general terms. Thank you.
Okay. Thank you.
The next question is from Filippo Prini with Kepler. Please go ahead.
Yes, good afternoon. Two questions. The first one, does your guidance on single-digit growth in AGI for 2020 include also the small positive effect from tiering? If so, could you confirm that should be something in the region of EUR 2 million? The second on the performance fee. You indicated no limited performance fee for October, is that assumed for the next two months of the year, the higher contribution because most of the new Lux IM SICAVs that you have launched are still pending listing or it's a wrong point? Thank you.
Thank you, Filippo. You are right, the tiering contribute for EUR 2 million-EUR 3 million next year and are included in our projection. In terms of performance fee, again, you are right. Almost 80% of our assets are close or at the high water mark level. Of course, in case of further increase of markets, we will be very, very positively impacted both in November, December as well as the beginning of next year.
Okay, many thanks.
Welcome.
As a reminder, if you wish to register for a question, please press star and one on your telephone. For any further questions, please press star and one. Mr. Mossa, there are no more questions registered at this time.
Okay. Thank you all for the participation and goodbye.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.