Good afternoon. This is the conference call conference operator. Welcome, and thank you for joining the FinecoBank fourth quarter 2018 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. Alessandro Foti, CEO of FinecoBank. Please go ahead, sir.
Good afternoon, everyone, thanks for joining our 2018 results conference call. 2018 confirmed once again a successful 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 EUR 0.303, +6.3% year-on-year. Adjusted full year net profit exceeded EUR 241 million, a double-digit growth despite the more complex environment compared to last year, and higher contribution to the deposit guarantee scheme. We generated more than EUR 625 million 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%.
Please go through the following slide for analyzing more in details the dynamics of our results. On slide six, on the net interest income. Let's start with the net interest income dynamics. Net interest income increased by 5.2% year-on-year, supported by strong volume growth, both high quality lending and sticky and sight 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 lowered from 1.35% in 2017 to 1.30% in 2018. Cost of funding remains very low at four basis points due to the deposit in foreign currencies. Please let me remind that our cost of funding related to deposits in EUR, which represents 97% of our total deposit, is zero.
In the following slide, you can find a focus on our government bond portfolio, which now includes also France, Spain, Ireland, U.S., Poland, Austria, Germany, Belgium, and Sovereign, Supranational, and Agency, in addition to Italy. Our strategy to run off the UniCredit 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 gov'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 declining margins, mainly due to the run-off 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 million 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 assets under management, calculated as management fees, net of taxes on assets under management, further improved by 2 basis points quarter-on-quarter, reaching 47 basis points in the last quarter of the year. Please let me highlight that our investing fees are strongly sustainable as for the most represented by recurring fees. Entry fees only weigh around 4% of investing revenues, and our business model does not rely on them as not aligned with the interest of the clients. They are just an anticipation of future profitability for the bank.
Brokerage commissions rebounded in the fourth quarter 2018 on the wave of increased market volatility recorded in the period. Trading income mainly affected by the Visa valuation 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 solutions 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% year-on-year. Moving to slide nine, we have a detailed overview on the cost evolution.
Adjusted staff expenses were at EUR 85 million in 2018, 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 EUR 148.7 million, +3.6% 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 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 stood at EUR 411 million. Average loan-to-value on the total standing at 52%, and average maturity at 19 years. Personal loans grew 24% year-on-year and margins remain very attractive. Lombard loans reached EUR 1 billion in December 2018 with a 59.5% in one year, thanks to the new Credit Lombard.
We confirm our guidance for 2019 on mortgages, a new production of around EUR 350 million, 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 250 million per year. On Lombard loans, we expect around EUR 500 million. On the capital ratio, moving to slide 12. Fineco confirmed the rock-solid capital position on the wave of a safe balance sheet. Transitional Common Equity Tier 1 ratio amounted at 21.16%, and Common Equity Tier 1 ratio fully loaded was at 21.11%. Total Capital Ratio transitional at 29.58%, 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 fourth quarter on our Core Tier 1 ratio, with an yearly benefit of 259 basis points.
As anticipated, we will propose to the next annual general meeting a dividend distribution of EUR 0.303 per shares, plus 6.3% year-on-year. Let me underline that the dividend proposal is current with our strategy of sustainable and safe growth, which embraces all our strategy 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 EUR 29.2 billion net sales since 2012, leading total financial assets above EUR 69 billion in 2018. Gathered products increased their penetration rate to 67% on total assets under management from 63% on December 2017.
Jumping on to slide 16, out of EUR 6.2 billion of net sales 2018, 85% was organically generated through the existing financial planners or directly by the bank, and 50% came from recruits made in the last 24 months. For 2019, we expect a robust net inflows driven by structural trends and by the high quality of our proposition. The recent launch on some brand-new product and services, such as Plus and Core Target, is helping us in offsetting the higher propensity of clients in remaining in a wait-and-see mode in this very complex market environment. Now I would skip directly to page 24 of the presentation. As you know, sustainability and healthy growth are at the heart of our business model, and all our choices are current with this strategy.
We are strongly convinced that this currencies 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. First, safe and diversified low-risk assets, which coupled with valuable and sticky deposits. In fact, client 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 zero. Second, rock solid capital position. Third, fairness and respect towards clients in the leitmotif of our day-by-day activity, as the relationship with our clients is the most valuable asset we have. This translating into a sustainable fee structure and organic growth as a main engine of our development. Fourth, brokerage as a counter-cyclical business.
All the above-mentioned aspects, lead to high quality recurrent and predictable profitability over the cycle, characterized by diversified and sustainable revenue growth in all market conditions. Let us 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 us now move on to slide 33. Fineco Asset Management is key to further improve operational efficiency in several aspects, meeting evolving customer needs and dealing with market challenges. Just a few words on 2018 main achievements and the key activities for 2019. With regards to CORE Series, Fineco 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, new 31 strategies equal to 78 new ISINs were released. In 2019, the offer will be enriched through partnership exclusively dedicated to Fineco clients. The transformation of underlying assets will proceed with insurance wrappers. In December 2018 and January 2019, the first nine Fineco Asset Management building blocks were released. A new passive strategy will be available in the first quarter of 2019. Moving to slide 35. Here we have a quick update on Fineco U.K. and Patent Box. In U.K., we acquired over 3,000 clients with a very interesting mix. 55% is represented by non-Italians, of which 40% is native British. Considering the steady level of revenues constantly generated, we are now approaching the phase 2 of this initiative with more boost on marketing and commercial activities. ISA and multi-brand funds are expected in the coming months. 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 us remind you that we applied both for intellectual properties, as our platforms are internally developed, and also for trademark. The fiscal benefit will cover five years from 2015 to 2019. Intellectual properties are renewable according to the international guidelines. On 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 million. The deal presented several advantages. In particular, it generates better results in terms of EVA 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 EUR 2.5 million per year and a limited additional impact on cost-to-income ratio in the region of 34 basis points. Thank you for your time. Now we can open the call for questions.
Excuse me. This is the Chorus Call conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press Star and One on their touch-tone telephone. To remove yourself from the question queue, please press Star and Two. Please pick up the receiver when asking questions. Anyone who has a question may press Star and One at this time. The first question is from Giuseppe Mapelli with Equita. Please go ahead, sir.
Yes. Good afternoon. I have some questions. The first one is on your trading margins that you reported in the fourth quarter. Even considering Visa, you experienced a trend that was quite a little bit below the historical average. You stated that ESMA regulation is impacting. I would like to understand if, going forward, the new products that you're going to launch will be able to offset this new regulation on your profits. My second question is on your passive strategy that you're going to implement through Fineco Asset Management. You can give us an idea of margins on that kind of business and what's the value proposition for your clients? I have another question is regarding look-through. I would like to understand what is the presentation of look-through on 2018, the target for 2019, and the potential impact on Core Tier 1 expected on that period.
Thank you.
Yes. Let me start from the trading assumptions. Clearly, the trading income related to the internalization activity clearly has been affected both by the volatility of the market, that for a long period of last year has remained pretty low, and also by the introduction of the new rules by ESMA in the second half of the year. Regarding, clearly, during the first quarter of this year, we are going to have full in place a new generation of products and solutions, and we expect this is going to contribute to fill this kind of gap. Second, 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 decent, 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. This has moving clients. For example, now clients are trading less using the Forex derivatives, mainly represented by Contract for Difference, they are progressively moving in using much more the multi-currency, the spot, practically. They prefer to take a longer term position buying directly the currency. This is the reason why we experienced an increase by 18% on these kind of activities that for the time being still is being reported in the banking activities.
Probably considering that now there is this kind of change and the way in the market is going to be probably, in the next few months, is 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. First of all, the strategy. We are not going to offer the passive funds on a standalone basis to clients, but they're going to be used internally to our advisory solutions. 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. We expect that this passive solution is going to generate a margin for Fineco Asset Management in the region of 25 basis points.
Regarding look-through, we can say that practically we already reached an important coverage results. Therefore, we don't expect any significant additional improvement and contribution in our Core Tier 1. Clearly, what is 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 expected cost of risk of the Lombard loans is practically very close to zero. At the same time, in terms of capital consumption, we are again very close to zero thanks to the look-through approach. Clearly we don't expect any significant further contribution to our Core Tier 1 capital ratio.
Thank you.
The next question is from Gian Luca Ferrari with Mediobanca. Please go ahead, sir.
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 it is still around 32% at the end of 2018. I was wondering if you have a guidance for 2019, thanks to the full consolidation of FAM. The third is an opinion regarding the fact that some of your peers are increasing fixed fees. What do you think about this? Thank you.
Regarding the January inflows, the January inflows has been absolutely a good inflows, so pretty robust. Also, we had then, what we can say, considering the overall market environment, is an absolutely decent contribution by the asset under management products. We can say that we think that these results are exactly the same story of the results we experienced in December. We consider these results extremely solid and robust because they have been achieved in an environment that is quite different. 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 than involved in taking on board new clients and business.
Second, clearly, the reason, as we were mentioning before, we have many players that are extremely aggressive and active in offering high remuneration on liquidity and deposits. Nevertheless, our net inflows have remained pretty strong, and this is boding very well looking forward because it means that the inertial cruising speed of the bank in terms of growth is very robust. We have been able to keep on growing very robustly, also in this environment characterized by some noise and disturbance. Regarding the tax rate, we expect our tax rate keeping on going slightly lower because thanks to the contribution of the consolidation of Fineco Asset Management.
As very frequently we explain during our meetings with investors and shareholders, we do not expect 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 well-diversified business model, in which still the largest part of our revenues are generated in Italy with an Italian tax rate, because net interest income is at full Italian tax rate. Brokerage, the same story. Clearly, the guidance is a modestly declining tax rate. Regarding the third question, honestly speaking, as you know, we are not particularly excited to make comments on what is done by the other players on the market.
The only comments that I am going to make that is clearly our position in terms of what's going on regarding the pressure on margins and so on is pretty clear. We think, the pressure on margins are materializing. We expect that more to come, so driven by lower expected returns by the market, more attention by clients regarding the cost paid. Putting everything together, clearly, I'm not saying that it's impossible to increase what your clients are paying, but it's like to swim against a current that is continuously reinforcing. It's not impossible, but it's extremely tiring.
Thank you, Alessandro.
The next question is from Alberto Villa with Intermonte. Please go ahead.
Yeah. Hi, good afternoon. A couple of questions that are related to the previous one, actually. Again, on the margin pressure. In practical terms, I would like to ask you, what are you witnessing in terms of real demand by customers to reduce the commission on specific products, or they choose a different allocation of their assets to pay less? You're showing that you've been able to move the assets of the clients towards products like the guided solutions that are more profitable for you, probably offering, obviously, higher services to the client.
I was just wondering if there is really a demand to lower the amount of EUR the customer is paying on a specific product, or is it rather a general margin pressure that has got to do with the increased transparency and eventually the market performance that obviously hasn't helped in the last part of last year?
Sorry, please go ahead.
That's the first question.
Okay.
The second one is on the tax rate. You show on slide 40 that on the Fineco Asset Management, you are paying more or less 12.5%, which is the Irish tax rate. I was wondering if that decline in the tax rate couldn't be a little bit more faster than what you're guiding if, let's say, the composition of the commissions coming from Fineco Asset Management increases faster. In those terms, now it's around 10% of the net commissions in 2018 coming from Fineco Asset Management. Can you give us an idea what, in your view, could be the percentage of commissions coming from Fineco Asset Management in 2019?
Okay. Let me start on the pressure on margins. Pressure on margins is a structural trend that is expected to keep on challenging the industry for, I think, the next few years. The trend has started, and this clearly is driven by several components. One for sure is the declining set of returns and the poor returns offered by the market, because clearly this is making clients a little bit more interested in understanding a little bit what they're paying. Second, clearly, the increased level of volatility is making the client more cautious, moving more in the direction of more conservative solutions that by definition are less profitable. Third, clearly, there is a structural increase of attention, particularly by the rich clients, regarding what they are paying.
This is mainly driven by the fact that there is a progress in Italy in generational change, in which we have the new generation starting on inheriting the wealth of their parents. Considering the macroeconomic dynamics in Italy, characterized by an aging country with a lower level of growth, clearly there is a growing number of these families, they have more assets than income, by definition, they have to be more cautious on what they're paying. Practically, putting everything together, this trend is going to continue, the answer is moving in the direction of increasing the quality of the services, improving the operational efficiency, Fineco Asset Management is part of this story, increasing the productivity of what you're doing. Running a larger amount of business with the same financial planners.
Regarding the contribution of the Fineco Asset 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 bought by clients, because I'm referring to the concept that clearly we have, for example, if we have difficult market conditions remaining the dominant component during the year, what you can expect, the clients remaining more skewed in the direction of cautious products that they are commanding lower margins. Again, it's extremely difficult to give such a precise guidance because we are not in control of the evolution of the market, the evolution of the market clearly tends to influence the mix of the products that we are selling to the clients.
In any case, what we recommend that you are not to expect any dramatic decrease of the tax rate driven by Fineco Asset Management, because in any case, the contribution in terms of revenues of Fineco Asset Management is going to remain clearly massively lower in respect of 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. Clearly, tax rate is expected to keep on going down, but we are not in the position to give such a precise guidance regarding exactly the precise number, because this clearly can be affected by the market evolution.
Okay. Thank you very much.
As a reminder, if you wish to register for a question, please press * and 1 on your telephone. The next question is from Filippo Pini with Kepler. Please go ahead, sir.
Yes, good afternoon. I've got two questions. The first one is on operating costs for 2019. You mentioned a decline of cost-income ratio. Does it mean the same increase in absolute terms around 2%, 3%? The second one is on your net new financial advisor. I've noticed that the absolute number of financial advisor has decreased. Is a matter of the recruitment outpaced by professionals that have 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 advisor numbers should start being up again or maybe the structure of the bank now is by far more efficient and can deal with higher assets with a reduced number of financial advisors. Thank you.
Regarding the cost evolution for 2019. For 2018 year-end, we expect a growth in the range between overall, considering all the cost, considering also the contribution in terms of cost of Asset Management, we expect a growth in the range between 4% and 5% with respect to 2018 adjusted figures. Again, we confirm our guidance of a slowly but steadily declining cost-income ratio. Regarding the financial planners network, the right reading, because clearly there is a portion more or less 40 financial planners that the bank decided to terminate the relationship with them, and that this is related to the process of continuously increasing the quality of the network. Adjusting the numbers based on this number of financial planners that have been terminated, in which the relationship has been terminated by the bank, the churn rate remains in the region of 3%, so remains pretty low.
In terms of future guidance, we are not changing our strategy. It's a strategy in which probably we are going to hire between 70, 80, not more in any case, 100 financial planners over the year. On the other side, you can expect the churn rate remains pretty much at the same level, and we can expect also that we continue in the process of improving the quality of the network. All in all, you can expect a roughly stable number of financial planners in the network.
Many thanks.
The next question is from Elena Perini with Banca IMI. Please go ahead, madam.
Yes. Good afternoon. I have only one question about the impact of the IFRS 16. I'm wondering whether the 34 basis points you indicated in slide number 36 is referred only to the building acquisition or to the overall impact of the new accounting principle. I'm referring to the financial shops and so on that you have in leasing, for example. Thank you very much.
I leave the floor for answering the question to Lorena, our CFO. Please, Lorena.
Thank you. As you know, starting from January 1st, the new IFRS 16 will be effective. IFRS 16 envisage the recognition of leasing value on the so-called right of use. If we didn't bought the headquarters in Milan, we would have led to the recognition of net present value of the right of use in our balance sheets among assets, with impact on capital ratio. Consequently, amortizing cost of the right of use instead of the rent cost in P&L. After the decision to purchase the building, the impact on capital ratio, that is only 34 basis points, and is absolutely manageable, is represented by the difference between these two options. Maintain the building, the rent of the building, with the registration of the asset according to the new IFRS 16, or to build the building.
The difference is an impact on capital ratio of additional 34 basis points. At the same time, after buying the building, we have a positive impact on P&L of around EUR 2.5 million. We have, at the end, less cost of EUR 2.5 million per year, mainly represented by the difference between the amortizing cost of the purchase and the amortizing cost of the right of use.
Okay. Just as a follow-up, do you have any additional impacts from IFRS 16 note?
Yes.
Okay.
We have additional impact coming from the recognition of financial shops, that are the financial shops used by financial advisors and the offices in Reggio Emilia. The estimated impact should be in the range of 0.5%-0.6% of Common Equity Tier 1 ratio.
Okay. Thank you. Would you have any impact on the P&L too?
In the P&L, we have an impact that is more or less in line with the previous cost of leasing.
Okay. Thank you very much. Very clear.
Once again, if you wish to ask a question, please press star and one on your telephone. For any further questions, please press star followed by one. 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.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.