Earnings Call: Q4 2018

Feb 5, 2019

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for Let's turn the conference over to Mr. Alessandro Foti, CEO of Simeco Bank. Please go ahead, sir. Good afternoon, everyone, and thanks for joining our 2018 results conference call. 2013 confirmed once again a successful sir. A story of growth based on a sustainable strategy and a sound business model able to deliver solid results in every market conditions. We are very pleased to propose to the next Annual General Meeting a dividend per share of joining. €30.3 plus 6.3 percent year on year. Adjusted full year net profit exceeded joining. EUR 241 1,000,000, a double digit growth despite the more complex environment compared to last joining. And then higher contribution to the deposit guarantee scheme. We generated more than joining. 625,000,000 of revenues in the year, up 7.1% compared to 2017, With the usual strict control on cost, despite the continuous expansion in assets and clients, Thanks to a strong operating leverage and the scalability of the platform. Cost income ratio as of December 2018, down at 39%. Now please go through the following slides for analyzing more in details the dynamics of our results. On Slide 6, on the net interest income, let's start with the net interest income dynamics. And net interest income increased by 5.2% year on year, supported by strong volume growth. Both high quality lending and sticky and side deposits, even more valuable Given the current remuneration on liquidity offered by the system, volume dynamics more than offset the reduction in gross margins. As you can see at the bottom right of the slide, average gross margins on interest earning assets Lower it from 1.35 percent in 2017 to 1.30 percent in 2018. Cost of funding remains very low at 4 basis points due to the deposit in foreign currencies. Please let me remind that our cost of funding related to deposits in euro, which To represent 97% of our total deposits is 0. In the following slide, you can find the focus on our government bond portfolio, which now includes also France, Spain, Ireland, joining. U. S, Poland, Austria, Germany, Belgium and sovereignational agency In addition to Italy, our strategy to run off the uni credit bond portfolio and move Into a more diversified investment portfolio through a blend of European government bonds is progressing very well. As you can see, the GOVI's contribution to our net interest income more than doubled year on year. For 2019, we confirm a low single digit increase in net interest income Supported by lending and volume effect on valuable side deposits that more than offset the declining margins me, mainly due to the runoff of the existing bond portfolio. Let me also remind our sensitivity to a potential increase in interest rates, A parallel shift of 100 basis points would generate EUR 109,000,000 of additional net interest income. Fees and commissions increased more than 11% year on year With management fees up 12.5% year on year, thanks to a larger contribution of guided products and services, Which moved up from 63% penetration in 2017 to 67% in 2018 and to the new asset management company. The profitability on asset under management calculated as Management fees, net of taxes on assets under management, further improved by 2 basis points quarter on quarter, reaching joining. 47 basis points in the last quarter of the year. Please let me highlight that our investing fees sustainable as for the most represented by recurring fees. Entry fees only weight around 4% of investing revenues And our business model does not rely on them as not aligned with the interest of the clients, But they are just in anticipation of future profitability for the bank. Brokerage commissions rebounded in the Q4 2018 on the wave of increased market volatility recorded in the period. Trading income mainly affected by the Visa evaluation quarter on quarter. Overall, we are very satisfied about the yearly brokerage performance Despite the lower ForEx volatility and the new ESMA regulation in place in the second half of the year. Please remind that we are setting up new products and solution to offset this effect going forward. Moreover, Clients are moving more and more into multicurrency activities reported in the banking area, which recorded an increase by 18% here. Moving to Slide 9, we have a detailed overview on the cost evolution. Adjusted staff expenses were at €85,000,000 in 20.18, 7.2% more compared to 2017 mainly due to the increase in the workforce related to the business development And cost related to Fineco Asset Management not in place in 2017 and the new long term incentive plan. Other administrative expenses at €148,700,000 plus 3.6 percent year on year, Despite the enlargement of assets and clients confirming the operating leverage as a distinctive competitive advantage for our bank. In terms of future evolution, we confirm our guidance on a continuously declining cost income in the long run, Thanks to the scalability of our platform and the strong operating gearing we have. On Slide 10, commercial loans grew 47% year on year with the usual joining. Strict control on credit quality. Let's remind that our lending is offered exclusively to our Loyal customer base and our deep internal IT culture allows us to fully leverage on big data analytics. This translates into a commercial cost of risk very well under control at 24 basis points as of December 2018, Much lower compared to the system. For 2019, we expect a stabilization of our cost of risk below 30 basis points. Let's move now in analyzing our lending offer more in-depth. Moving to Slide 11, mortgages. New production in 2018 joining. At EUR 411,000,000 average loan to value on the total outstanding at 50 2% and average maturity at 19 years. Personal loans grew 24% year on year joining. And margins remain very attractive. Loan bad loans reached EUR 1,000,000,000 in December 2018 with us. And 59.5 percent in 1 year, thanks to the new credit loan pattern. We confirm our guidance for 2019 On mortgages, a new production of around €350,000,000 as we prefer not to compete against The system in red zones characterized by aggressive prices, high loan to value and longer maturities. On personal loans, New production of around EUR 2.60 million per year. On Lombard loans, we expect around EUR 500,000,000. On the capital ratio, moving to Slide 12. Kinneko confirmed a rock solid capital position on the wave of a safe balance sheet. Transition of common equity Tier 1 ratio Amounted at 21.16 percent and common equity Tier 1 ratio fully loaded Was at 21.11 percent. Total capital ratio transitional at 29.58 percent, Including the additional Tier 1 issued at the beginning of 2018. Our capital ratios benefited From the implementation of the look through approach, bringing additional 51 basis points in the Q4 on our core Tier 1 ratio, We've been a yearly benefit of 259 basis points. As anticipated, we will propose to the next Hanwhal General Meeting, a dividend distribution of $0.303 per share plus 6.3% year on year. Let me underline that dividend proposal is current with our strategy of sustainable and safe growth, Which embraces all our strategies, choices and leads to an attractive and low risk equity stories. On Slide 13, we show an overview of the total financial assets growing trend Supported by the healthy expansion in the net inflows, we gathered €29,200,000,000 net sales since 2012, Leading total financial assets above €69,000,000,000 in 2018. Guided products increased their penetration rate to 67% on total assets under management from 63% on December 20 Jumping on to Slide 16, out of €6,200,000,000 Of net sales 2018, 85% was organically generated through the existing financial planners Joao. For 2019, we expect robust net inflows driven by structural trends and by the high quality of our proposition. The recent launch on some brand new products and services such as Plus and Costarget is helping us in offsetting the higher propensity of clients in remaining in a wait and see mood in this very complex market environment. Now I would skip directly to Page 24 of the presentation. As you know, Sustainability and healthy growth have at the heart of our business model and all our choices are current with this strategy. We are strongly convinced that this currency is key to be a long term winner, especially in a challenging macro environment Characterized by pressure on margins, lower expected returns and demanding regulation. In the following slides, we summarized all the Different aspects of this strategy. 1st, safe and diversified low risk assets, Which coupled with valuable and sticky deposits. In fact, client's acquisition is exclusively driven by our best in class service model without leveraging on short term incentives. As a matter of fact, our cost of funding is close to 0. 2nd, rock solid capital position 3rd, fairness and respect joining us. To us, clients and the like in the like motive of our day by day activity as the relationship with our clients the most valuable asset we have. This translated into a sustainable fee structure and organic growth as a main joining of our development. 4th, brokerage as a countercyclical business. Moreover, joining. All the above mentioned aspects lead to high quality recurrent and predictable profitability over the cycle, joining. Let's remind that a deep Internal IT culture allows us to leverage on cutting edge technology, difficult to replicate and leaving our Operating leverage unmatched in the banking system arena. Let's now move on to Slide 33. Finica Asset Management is key to further improve operational efficiency in several aspects, joining. Meeting evolving customer needs and dealing with market challenges. Just few words sir. On 2018 main achievements and the key activities for 2019. With regards to COSIRIS, joining. Finica Asset Management actively worked on improving product efficiency and optimizing existing funds of funds. For this year, it will work to further improve operational efficiency. With regards to sub advised funds, joining. New 31 strategies equal to 78 new housing were released in 2000 We are relieved and in 2019, the offer will be enriched through partnership exclusively dedicated to Fineco clients. The transformation of underlying assets will proceed with insurance ramp up. Finally, in December 2018 In January 2019, the first 9 FiniQ Asset Management building blocks were released A new passive strategy will be available in the Q1 of 2019. Moving to Slide 35. Here we have a quick update on Finnic UK and Patent Box. In UK, we acquired over 3,000 clients with a very interesting mix, 55% is represented by non Italians, joining. Of which 40% net of British, considering the steady level of revenues constantly generated, We are now approaching the 2nd phase of this initiative with more boost on marketing and commercial activities. Aiza and multi brand funds are expected in the coming month. No news on Patent Box. As we announced during last quarter representation, the closing of the process is in the hands of the revenue agency. Let me remind you that we applied both for intellectual properties as our platforms are internally developed and also for Trademark. The fiscal benefit will cover 5 years from 20 joining. 15, 2019 intellectual properties are renewable according to the international guidelines. Finally, on the Slide 36, some update on the headquarters acquisition. Here we summarize the details on our headquarters acquisition announced last week, Which cost us EUR 62,000,000. The deal presented several advantages. In particular, it generates better results in terms of joining. Iva generation in comparison with the current building rent considering the introduction of new accounting standard on leasing As of January 2019, the acquisition is expected to generate a running cost saving of around €2,500,000 per year And the limited additional impact on Courtyard valuation in the region of 34 basis points. Thank you for your time. And now we can open the call for questions. Excuse me. This is the Chorus Call conference operator. We will now begin the question and joining The first question is from Giuseppe Mapelli with Equita. Please go ahead, sir. Yes, good afternoon. I have some Question, the first one is on your trading margins that you reported in the Q4. Even considering Visa, You experienced a trend that was quite a little bit below the historical average. You stated that ESMA regulation is joining. And I would like to understand if going forward the new products that you're going to launch will be able to offset these joining new regulation on your profits. My second question is on your past strategy that you are going to implement joining. Through Fini Cost Management, you can give us an idea of margins on that kind of business and What's the value proposition for your clients? And I have another question is regarding look through. I would like to understand what is the Look for on 2018, the target for 2019 and the potential impact on Core Tier 1 expected joining. Yes. Let me start from the trading, Sanjit. Clearly, the trading income related to the internalization activity Grille has been affected both by the volatility of the market that for a long period Last year has remained pretty low and also by the introduction of the new use by Hesma in the second half of the year. So regarding the clearly, during the Q1 of this Here, we are going to have full in place the new set a new generation of products and solutions, And we expect this is going to contribute to fill this kind of gap. 2nd, clearly, everything is in the hands of the volatility of the market because this Clearly, we cannot predict the level of volatility during the last quarter of 2018 has been pretty The volatility, for example, January, the volatility has not been particularly high. At the same time, we are observing a change In the structure of the market, because for example, during 2018, there has been a considerable reduction in the ForEx volatility And this has moving clients. For example, now clients are trading less using the ForEx derivatives, mainly represented by contract for difference and they are progressively moving in using much more the multi currency, the spot practically. So they prefer to take a joining. Longer term position buying directly the currency and this is the reason why we experienced an increase by 18% joining. On this kind of activities that for the time being is still is being reported in the banking activities, joining. Probably considering that now there is this kind of change underway in the market is going to be probably In the next few months, it's going to be recasted in the brokerage business because it's pretty clear that the clients that before they were using the ForEx derivatives now they are using the ForEx spot. Regarding the passive funds, joining. So regarding so first of all, the strategy. So we are not going to offer The passive funds on a stand alone basis to clients, but they are going to be used internally to our advisory solutions. And the main goal is to increase the efficiency in terms of total expense ratio for the clients And at the same time, retaining in the bank and a decent profitability. And we expect that this passive solution is going to generate in a margin for Finica Asset Management is in the region of 25 basis points. And regarding move through, We can say that practically, we can say that we already reached an important coverage results. Therefore, we don't expect any significant additional improvement in contribution in our joining. Clearly, what is it's very important to remind that thanks to this kind of approach, we can keep on increasing Practically limitless our activity on the Lombard loan because practically we have no constraints because I want to remind that the expected cost of risk The loan, but loans is practically very close to 0. At the same time, in terms of capital consumption, we are Again, very close to 0. Thanks to the look through approach. But clearly, we don't expect any significant further contribution to our core Tier 1 capital ratio. Thank you. The next question is from Gianluca Ferrari with Mediobanca. Please go ahead, sir. Joining. Yes, hi, good morning. Three questions. The first one is on January inflows, if you have already the headline number and the mix between asset management, brokerage and banking. The second question is on the tax rate. I think still around 32% at the end of 2018. I was wondering if you have a guidance for 2019, thanks to the full consolidation of your time. And the third is an opinion regarding the fact that some of your peers are increasing fixed joining. So regarding the January inflows, the January Flos is absolutely pretty has been absolutely a good inflows, so pretty robust. And also we had what we can say considering the overall market environment is an absolutely decent contribution joining us by the asset under management products. And so we can say that this we think that this results exactly the same story of the results we joining us. We consider these results extremely solid and robust because They've been achieved in an environment that is quite different because I want to remind that we caused the volatility of the market and the correction experience, Particularly at the end of December, we had a large part of our financial planners much more involved in managing the existing clients then involved in taking on board new clients in business. And second, clearly, the reason as we were mentioning before, we have many players that they are extremely aggressive and active in offering and high remuneration on liquidity and deposits. Nevertheless, our net inflows, they have remained pretty strong And this is boding very well looking forward because it means that the inertia cruising speed Of the bank in terms of growth is very, very robust because we have been able to keep on growing very robustly also in this joining. Regarding the tax rate, we expect our tax rate Keeping ongoing slightly lower because thanks to the contribution of the consolidation of Finian Asset Management. Clearly, as we very frequently, we explain during our meetings with investors and shareholders, You have not expected a dramatic and sudden decrease of the tax rate for a very simple reason, because I want to remind that Fineco is characterized by an Extremely broad and very wide diversified business model in which still the largest part of our revenues joining. Are generated in Italy with an Italian tax rate because net interest income is at full Italian tax rate, brokerage is the joining. So the guidance is modestly declining tax rate. Regarding the third questions, honestly speaking, I'm as you know, we are not particularly excited to make comments on what is done by the other place The only comments that I'm going to make that is clearly our position on the In terms of what's going on regarding the pressure on margins and so on is particularly We think and we the pressure on margins are materializing. We expect that more to come. So driven by joining. Lower expectations by the market, more attention by clients regarding the cost paid and putting everything together, clearly, I'm not saying that is impossible to increase the what your clients are paying, joining. It's joining. Thanks, Alessandro. The next question. It's from Alberto Vila with Intermonte. Please go ahead. Hi, good afternoon. A couple of questions that are Related to the previous one actually, but again on the margin pressure, in practical terms, I would like to ask Thank you. What are you seeing I mean, witnessing in terms of real, I mean, demand by customers to reduce the commission on Joe. Specific products or they choose a different allocation of their assets to pay less. You're showing that you are you've been able To move the assets of the clients towards the products that like the guided solutions that are more profitable for you, Probably offering obviously higher services to the client, but I was just wondering if there is really a demand for To lower the amount of euros the customer is paying on a specific product or is rather a general the margin pressure that has got to do with the increased transparency and eventually the Market performance that obviously has not helped and hasn't helped in the last part of last year. It's Charlie, please go ahead. Joining. No, no. That's the first question. And then the second one is on the tax rate. You show on Slide 40 that On the Finian Asset Management, you are paying more or less 12.5%, which is the Irish tax rate. So I was wondering if that decline in the tax rate couldn't be a little bit more faster than what You're guiding if the, let's say, the composition of the commissions coming from a Finesco Asset Management your Increase is faster in that terms. Now it's around 10% of the net commissions in 2018 coming from joining. Finnequa Asset Management, can you give us an idea what in your view could be the percentage of commissions coming from Finnequa Asset Management in 2019. Okay. So let me start on the pressure on margins. So pressure on margins is a structural trend that is expected to keep on challenging the industry joining. I think the next few years and the trend has started and This is clearly is driven by several components. One for sure is the declining expected returns And the poor returns offered by the markets, because clearly this is making clients a little bit more interested in understanding a little bit joining. And second, clearly, the increased level of volatility is making the client more cautious And so moving more in direction of more conservative solutions that by definition are less profitable. And third, clearly, there is a structural increase of attention, particularly by the rich clients Regarding what they are thinking and this is mainly driven by the fact that there is progress in Italy and generational change, Which we have the new generation starting on inheriting the wealth of their parents and considering the Macroeconomic dynamics in Italy characterized by in a hedging country with a lower level of growth. Clearly, There is a growing number of these families are they have more assets than income and so by definition they have to be more cautious on what they are paying. Joining. And so practically putting it in together is this trend is going to continue And the answer is moving direction of increasing the quality of the services, Improving the operational efficiency and so and Pinnacle Asset Management is part of this Story and increasing the productivity of what you're doing. So running a large amount of business joining. With the same financial planners. And regarding joining. The contribution of the FICC Management on the tax rate, clearly, it's difficult to give such a precise guidance because, for example, It depends on which kind of mix of products is going to be both by clients, because I'm referring to The concept that clearly we have for example, if we have difficult market conditions remaining joining. The dominant component during the year, what you can expect the clients remaining more secured in direction of your cautious products that they are commanding lower margins. So it's again, it's extremely difficult to give such a precise guidance because We are not in control of the evolution of the market and the evolution of the market clearly tends to influence joining the mix of the products that we are selling to the clients. In any case, what we recommend joining. That we you have not expected a dramatic decrease of the tax rate in driven by Finic Asset Management In any case, the contribution in terms of revenues of Unique Asset Management is going to remain clearly massively lower respect What is the overall generation of revenues of the bank, because I remind that there is large part represented by net interest income brokerage And the component of the investing revenues that they are in any case remaining in Italy. So clearly tax rate is expected to keep on going down, But we are not in the position to give you such a precise guidance regarding exactly the precise number because this is really joining. Okay. Thank you very much. Joining. Your telephone. The next question is from Filippo Grini with Kepler. Please go ahead, sir. Yes, good afternoon. I've got 2 questions. The first one is on cost operating cost 2019, you mentioned a decline of cost income ratio. Does it mean the same increase of in absolute terms around 2%, 3%. And the second one is on your net total financial advisor. I noticed that this the number, the absolute number of financial advisor has decreased The matter of the recruitment outpaced by professional debt has left the bank, The network of the bank, I would like to understand which will be the trend for next year if at some point financial adviser numbers should joining. Start picking up again or maybe structurally the bank now is by far more efficient and can deal with higher assets than with a decent number of financial advisers. Regarding the cost evolution for 2019, so for 2018 year end, we expect a growth in a range between Overall, considering all the costs, considering also the contribution in terms of cost of Fintech Asset Management, We expect the growth in the range between 4% 5% with respect to 2018 adjusted figures. And so again, we confirm our guidance of a slowly but steadily declining joining. Regarding the financial planners network, the right reading Because clearly, there is a portion more or less joining. For the financial planners that have been in which the bank decided to terminate the relationship with them and that this joining. This is related to the process of continuously increasing the quality of the network. So adjusting the numbers Based on the of these number of financial plans that have been terminated in which the relationships has been terminated by the bank, Changing our strategy is a strategy in which probably we are going to hire between 70, 80, joining. It is not more in any case, one of the financial plans over the year. And on the other side, you can expect the churn rate pretty much at the same level, and we can expect also that we continue in the process of improving the quality of the network. So all in all, you can expect roughly a stable number of financial planners in the next. Joining. Many thanks. The next question is from Elena Perini with and Kayimi. Please go ahead, madam. Yes. Good afternoon. I have only one question about joining. The impact of the IFRS 16, I was wondering whether the 34 bps joining. As you indicated in Slide 36 is referred only joining. To the building acquisition or to the overall impact of the new accounting principle, joining. I'm referring to the shops, the financial shops and so on that you have in leaving, for example. Thank you very much. I leave the floor for answering the question to Lorena, our CFO. Please Lorena. Thank you. So as you know, starting from January 1, the new IFRS 16 And IFRS 16 envisage the recognition of leasing value on the so called right of use. This if we didn't bought the headquarters in Milan, We would have led to recognize the recognition of net present value of the right use in our balance sheet among joining. With the impact on capital ratio and consequently amortizing cost of the right shoes joining. Instead of the rent cost in P and L, so the After the decision to purchase the building, the impact on capital ratio that is only 34 basis points And this is absolutely manageable. It's represented by the difference between these two options joining. So maintain the building, the rent of the building with the duration of the asset according to the new IFRS 16 or to build the building. So the difference is An impact on capital ratio of additional 34 basis points. But at the same time, with After buying the building, we have a positive impact on P and L of around EUR 2,500,000,000. €1,000,000 we have at the end less cost of €2,500,000 per year, joining. Mainly represented by the difference between the amortizing cost of the purchase and the amortizing cost of the IQOS. Okay. Just as a follow-up, do you have any additional Yes, we have additional impact Coming from the recognition of financial shops that are the financial Shops used by financial advisers and the offices in Reio Emilia. The estimated impact It should be in the range of 0.5%, 0.6% of common equity Tier 1 ratio. Okay. Thank you. And would you have any impacts on the P and L too? In the P and L, we have an impact that is more or less in line with the previous joining. Okay. Thank you very much. Very clear. Joining. Joining. Gentlemen, there are no more questions registered at this time. Thank you very much for the attention. And as usual, if you want to have any kind of follow-up, Please don't hesitate to call us and we are here for assisting you. Thank you again. Over. You may disconnect your telephone. Thank you.