Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the FinecoBank third 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, and thanks for joining our third quarter 2018 results conference call. Adjusted net profit in the first nine months 2018 at EUR 178.8 million, plus 13.9% year-on-year, despite a more complex environment compared to last year. Once again, this set of results confirms the soundness of our business model, able to deliver sustainable and industrial growth in every market condition. The comparison with the previous quarter is not meaningful given the onward contribution to the deposit guarantee scheme accounted in the third quarter. We generated around EUR 465 million of revenues in the first nine months, up 7.8% year-on-year, supported by investing and banking area. Adjusted operating cost at EUR 182.8 million, well under control despite the continuous expansion in assets and clients. Cost-income ratio as of September 2018 at 39%, down 1.2 percentage points year-on-year, thanks to our strong operating leverage and the scalability of the platform.
Now, please go through the following slides to analyze more in details all the dynamics of our results. Net interest income. Net interest income in the first nine months 2018 increased by 6.6% year-on-year, supported by strong volume growth, both sticky sight deposits and high quality lending. Volume dynamics more than offset the expected 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 1.31% this year. Despite the rising trend in place in the banking system to remunerate liquidity, our cost of funding remains very low at four basis points due to deposits in foreign currencies. Please let me remind that our cost of funding related to deposits in euro, which represents 96% 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, Ireland, U.S., Poland, Austria, Germany, and supranational agency. In addition to Italy and Spain, our strategy to move into a more diversified investments portfolio through a blend of European government bonds and the non-renewal of expiring inflation-linked bonds is progressing very well. In 2018, we confirm a low single-digit increase in net interest income, supported by lending and volume effect on valuable sight 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 113 million of additional net interest income. Slide eight.
Fees and commissions increased almost 10% year-on-year, with management fees up 12.6% year-on-year, thanks to a better asset mix as assets under management grew 10% year-on-year with a strong contribution of gathered products and services, which were up 19% year-on-year. For the first time, this quarter benefited from the contribution of the new asset management company. The profitability on assets under management, calculated as management fees net of taxes on assets under management, improved by four basis points quarter-on-quarter, reaching 45 basis points in the third quarter. Please let me highlight that our investing fees are strongly sustainable as for the most represented by recurring fees. Entry fees only weight around 4% of investing revenues. Our business model does not rely on them as not aligned with the interest of clients. They are just an anticipation of future profitability for the bank.
Brokerage performance was in line with the very low market volatility recorded in the period. As expected, the third quarter was also slightly affected by the introduction of new ESMA regulation, which impacted for a couple of EUR million. Please remind that we are setting up new products and solutions to offset these effects going forward. Moving to slide nine, we have a detailed overview on our cost evolution. Adjusted staff expenses were at EUR 63.1 million as of September 2018. 7.5% more compared to the same period 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 112.4 million, plus 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 that we have. On slide 10, commercial loans grew 71% 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. Our deep internal IT culture allows us to fully leverage on big data analytics. This translating to commercial cost of risk very well under control at 23 basis points as of September 2018, much lower compare the system. At the year-end, we expect then stabilization of our cost of risk in a range between 23 and 28 basis points. Let's move now in analyzing our lending offer more in depth.
As you can see in slide 11, mortgages reached almost EUR 800 million in the first nine months. Almost 123% plus more year-on-year, with almost 7,800 mortgages granted with an average loan-to-value of 52% and an average maturity of 19 years. For 2019, we expect an yearly 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. As regard pricing, we think current market conditions will lead to increasing rates on new production. Personal loans grew more than 27% year-on-year. Margins remain very attractive. Our expectation in terms of new production is around EUR 250 million per year, which means EUR 90 million net in terms of delta stock. In terms of yields, same uplift trend in terms of repricing is expected.
Lombard loans at EUR 910 million increased by 98% compared to one year ago, thanks to the introduction of the new Lombard credit. In 2019, our expectation is to grow around EUR 500 million with an average yield of around 110 basis points. Moving to slide 12, Fineco confirmed a solid and stable capital position. On the wave of the safe balance sheet, transitional Common Equity Tier 1 ratio amounted at 20.46%, and Common Equity Tier 1 ratio fully loaded was at 20.39%. Total capital ratio transitional at 28.88%, including the Additional Tier 1 issued at the beginning of 2018. The implementation of the look-through approach is progressing, leveraging on our best-in-class internal operational skills. Let's remind that this approach allows us to drill down the underlying assets provided by clients as collateral to Lombard credit, reducing therefore, the risk-weighted assets absorption according with the real underlying asset.
The look-through covers now around 67% of the collateral, with an additional benefit on our Core Tier 1 ratio by 14 basis points in the quarter, leading to 208 basis points since the implementation. For year-end, we expect an additional positive contribution by look-through. On slide 13, we show an overview of the total financial assets growing trend, supported by the healthy expansion in new inflows. We generated EUR 27.7 billion net sales since 2013, leading total financial assets close to EUR 71 billion as of September 2018. This powerful performance confirms Fineco's potential to further consolidate its position and take advantage from structural trends in place in Italy, the increasing demand for advanced advisory services, and growing digitalization. Our market share on total financial assets increased at 1.67% as of June 2018 from 1.61% as of December 2017. Moving to slide 14, we summarize the breakdown of total financial assets.
In accordance with the ongoing initiatives to improve the productivity of the network, the asset mix moved in the right direction with a better mix. As of September 2018, total financial assets were at almost EUR 71 billion, 8.4% more compared to September 2017, with assets under management up 9.9% year-on-year. Gathered products increased their penetration rate to 66% on total assets under management, six percentage points more than one year ago. As announced last month, in September we gathered EUR 4.8 billion of net sales with a mix in line with a more complex market environment compared to the previous year. For 2018 year-end, we confirm our expectation of a robust net inflows growth driven by structural trends and the high quality of our proposition. Clearly, the expected mix will be more skewed in direction of assets under custody and deposits.
The recent launch of some brand-new products and services, such as Plus and CoRe Target, is helping us in offsetting the higher propensity of clients to remain in a wait-and-see mood. Slide 16. As you know, our growth strongly leveraged on the organic component, thanks to the unmatched quality of our services. In the first nine months of 2018, out of EUR 4.8 billion of net sales, 84% was organically generated through the existing financial planners or directly by the bank, and 16% came from recruits made in the last 24 months. Now I would skip directly to Page 26. Innovation is one of the pillars of which would give Fineco, allowing us to better position our bank in advance when we perceive that a structural trend is coming. This is why our strategy has strongly focused on three main concepts.
Continuous improvement of the quality of products and services to be recognized by the clients as a premium brand, allowing us to retain a premium price. Strong increase in the productivity of the network. Further increase of our operational efficiency through the establishment of the new asset management company in Ireland. Let's now deep dive in these concepts in the following slides. Since the beginning, quality of services and innovation have been distinctive selling points on our business model, leading to an outstanding customer satisfaction. Improved quality of services never stops, and every day we're hardly working to offer to our clients better products and an improved unique customer experience. On slide 27, you can find, for example, what we are internally developing to enhance usability and front-end efficiency. Slide 28. Leveraging on our cyborg advisory approach, productivity of the network continuously increased.
As you can see in the left-hand side of slide 28, total financial assets per personal financial advisors grew more than 9% year-on-year, of which 10% assets under management, and +20% related to gathered products and services. In addition, the quality of our network is constantly improving. As you can see on the right-hand side of the slide, despite the stable number of financial planners, personal financial advisors with total financial assets above EUR 20 million, which represent 44% of the network, increased by 12% year-on-year and hold 73% of the total financial assets. Let's now move on to slide 29. To deal with existing clients more effectively is an additional evidence of success of the strategy.
As you can see in the graph on the top left of the slide, the percentage of net sales from existing clients more than doubled in the last couple of years. On the right side, you can find a breakdown of our total financial assets per cluster of clients. The brand repositioning we are carrying on, brings around 80% of our assets in the hands of affluent and private banking clients. As you know, the segment in which we are growing the most is the private banking, +9.7% total financial assets year-on-year. On the right-hand side, you can find more details on our private banking clients, for the most represented by clients with assets below EUR 5 million.
Moving on to slide 13, the third key concept on which we are focusing to deal with pressure on margins is to further increase the operational efficiency of the bank through our new asset management company. As you know, Fineco Asset Management is hardly working in fully implementing its strategy. With regard to CORE Series, Fineco Asset Management is already actively working on the improvement of efficiencies and portfolio rationalization. The process of sub-advised funds with the best global investment managers is progressing at full speed. The first 17 strategies were already implemented, 14 expected by year-end. This translates into better conditions for clients, full visibility of underlying assets, and an improved risk monitoring. New building blocks will be released by year-end to our network and our clients.
In addition, to better deal with the continuous evolution of the market environment, Fineco Asset Management is working to create its own generation of new passive strategies, fully developed in-house, and so with attractive margins and lower prices for clients. Finally, through ad hoc agreements with external partners, Fineco Asset Management will offer very performant products such as individual portfolio solutions without any need for external M&A activities. As expected and already highlighted in the first part of the presentation, the increased operational efficiency through Fineco Asset Management leads to an higher assets under management profitability net of taxes from 41 basis points in the second quarter to 45 basis points in the third quarter. Moving to slide 31. Finally, a quick update on Fineco UK and Patent Box. In U.K., we acquired over 2,700 clients with a very interesting mix.
53 is represented by non-Italians, of which 39% are native British. Considering the steady level of revenues constantly generated, we are now approaching the second phase of this initiative with more boost on marketing and commercial activities. No news yet on Patent Box. The closing of the process is in the hands of the revenue agency, which is now focusing on trademark for all the banking sector. Let me remind you that we applied both for intellectual properties as our platforms are internally developed, and also for the trademark. The fiscal benefit will cover 5 years from 2018 to 2019. Intellectual properties are renewable according to international guidelines. Thank you for your time, and now we can open the call to 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.
Yes. Good afternoon, everybody. I have some questions. The first one is on October, if you can give us some color on what was the scenario for the brokerage division accordingly into the new scenario on the markets. The second question is on the penetration of gathered products. If you can give us an idea of your targets on that penetration, because we are seeing a sort of stabilization of this increase in penetration towards 65%-67%. My last question is regarding Fineco Asset Management. I would like to understand, let's say. Some color on the possible cannibalization of such strategies to other kind of product that you are already selling. Thank you.
Let me start from giving you some color on the month of October. The brokerage has produced an absolutely excellent month, currently with the uptick in volatility. No surprise. Brokerage is very clearly driven by the level of volatility. October has been absolutely an excellent month. In the meanwhile, we are working for being able, in the next few months, to deliver brand-new solutions and products for fully offset the small impact produced with introduction of the new regulation by ESMA. Regarding gathered products, our guideline remains unchanged. We expect clearly to continue seeing improving the level of penetration of gathered products. It's clearly that the more we grow in terms of penetration and the slower is the pace, because clearly. In our ideal world, clearly our ideal world is a world in which gathered products represents 100% of the assets under management products.
Clearly this is not possible. Clearly what you can expect is a continuous increase of the penetration of the gathered products on the overall assets under management. On Fineco Asset Management, on the passive strategy, our plan is to. Because passive strategies, so passive plans clearly are theoretically dangerous products for the profitability, unless you are not in the control of the value chain. Because clearly, if you are proposing and if you are using passive strategies in your portfolio solutions, that they are passive strategies produced by someone else externally, this clearly is not great. As you probably know very well, in a passive strategies, if you are in control of the value chain, there is a lot of value.
One, just as example, the fact that you are in control of the securities lending and everything that is related to the manufacturing on the fund. This means then these are products that they are able to produce an absolutely decent profitability for the bank. Again, assuming that you are in full control of the value chain, and these are going to be used as creating a kind of a blend in our advisory solutions. We think that are going to help us a lot in lowering overall the total expense ratio for the clients, but without sacrificing the profitability of the bank. Again, the key element is the operational efficiency generated by our asset management company in Ireland.
Regarding the cannibalization with other products, these products are going to be used as a component of advisory solutions, are not going to be sold on a standalone basis because this in case is not current with the philosophy we are using in managing our clients. They're going to represent an additional component in our advisory solutions and again, helping us in becoming more efficient. That means to reduce the total expense ratio for the clients, but maintaining untouched the profitability for the bank.
Thank you.
The next question is from Elena Biffi with Banca IMI. Please go ahead, Elena.
Yes. Good afternoon. First of all, I would like to ask you about the trend of net inflows in the month of October. The second question is about your loan loss provisions. They are still very low, so I was wondering if you can provide us with an outlook about next year, also considering the guidance that you have given on lending. The third question is about Fineco Asset Management. You provided us with a P&L split. Also about it, if you can give us some sort of guidance for next year, because, in the contribution of the first nine months of the current year, we only had the third quarter basically. These were my questions. Thank you.
Regarding net sales of October, so October, we are going to release the number tomorrow. Unfortunately, we have not been able to give you the number on net sales of October today because we are just finishing off elaborating all the numbers in order to have the perfect picture of net sales. We need to have one day more. In any case, the net sales for tomorrow, for October, it's been a good month, so with robust net sales. In terms of overall dimension, it's been a touch lower respect at the same month of last year. Again, as we say, that we are not too much concerned to have a few tens of millions of more of net sales. The trend remains pretty strong, We are absolutely quite satisfied by these numbers of October.
Considering that the existing environment is extremely challenging because we are, on one end, financial planners that are deeply involved in managing the existing clients, because clearly, as you can imagine, considering what's going on in the market, the base of clients is a little bit more nervous than previous month. There is a large amount and number of banks that are quite aggressive in offering high interest rates on deposits. Not only the regional banks, but also asset gatherers and banks that are in absolutely decent shape. Nevertheless, our net inflows are remaining extremely robust, strong, perfectly in line with our expectation. This, again, because our business model is based on the concept of taking on board clients thanks to the quality of services. Regarding the loan loss provision, we had to make a little bit of a distinction.
Regarding the expected cost of risk, we expect our cost of risk remaining pretty low, in the range between 23 and 28 basis points, and definitely very well below the average of the industry. Again, the secret is because we are absolutely concentrated just on our existing very well-known clients, and also because the bank is leveraging massively on the big data analytics capabilities. Our data warehousing capabilities are clearly putting us definitely in a great position for evaluating the credit quality of our clients. Clearly, on the loan loss provision, there is also the impact produced by some volatility that has been generated by the probability of default of UniCredit bonds.
Current account.
Current account.
Yes, current account.
I leave the floor to the CFO that is, for sure, much more precise than me on this point. Please, Lorena.
Thank you. Good afternoon. We have to say that loss loan provision are not fully comparable with 2017, as they now include also exposure to banks and forward-looking information following the introduction of new accounting standard, IFRS 9. In these P&L items, we now have to account also provision related to loans to banks, related to the impairment IFRS 9 on UniCredit current account. In the first nine months of this year, we had a positive impact of around EUR 1.5 million due to this evaluation.
Before finishing, just a couple of additional words on the net sales of October. Clearly, net sales are very good in terms of net inflows, and clearly the mix is as we anticipated, is skewed in the direction of liquidity and assets under custody. On Fineco Asset Management, to give you a split in terms of results between FinecoBank S.p.A. and Fineco Asset Management, it's clearly there is in the annex. In terms of our suggestions, is to use as a guidance the progression we are going to have in terms of margins after tax on our assets under management products. Clearly, it's there where you can have a perfect idea of the real impact produced by Fineco Asset Management on our assets under management business. At a consolidated level, clearly.
Okay, thank you very much.
The next question is from Alberto Villa with Intermonte. Please go ahead, sir.
Good afternoon. Three questions from my side. The first one is on net interest income. How do you see the net interest income developing in 2019, according to your plans of growing into the lending that you guided us today and your assumptions on margins? Do you expect margins to decline further, or you think these levels are sustainable? Just an indication of what could be the expected growth for net interest income going into next year. The second one is a broader question, if you want.
It is about the uncertainty on the markets. I wanted to ask you, in your experience, you were not listed at that time, but when there has been a sort of volatility of markets in past periods, what are the main drivers in Fineco, like customer behaviors or asset mix, or opportunities for you eventually to grow the share of wallet or the market share in the asset gathering you are expecting maybe to happen again this time?
Let me start from the net interest income. Net interest income, we confirm for 2019 as a guidance, a growth of low single digit. This is going to be the results of a negative component that is represented by gross margins expected to keep on declining, because until we have not then the beginning of a rise in short-term interest rates, clearly gross margins are expected to keep on declining. A negative component generated by declining gross margins, on the other end, we expect a positive contribution produced by the positive volume effect, because we expect to continue to gather transactional liquidity paid zero. At the same time, we expect to keep on expanding our lending book, again, maintaining our extremely conservative approach.
I want also to remind that in this guidance is embedded also the continuation of our policy not renewing our expiring UniCredit bonds, keeping on diversifying our European govies exposure. This means that we are not going to increase our exposure on Italian govies. Progressively, in terms of weight on our overall portfolio, the weight of the Italian govies are going to be further diluted in the coming months. This is the guidance on the net interest income. Regarding the environment, the environment we are experiencing right now is not fully comparable with the past, because in the meanwhile, we had some structural changes in the market. For example, in the past, usually, in any case, if the market remains difficult in terms of uncertainty, correction, and volatility, what you can expect, clients remaining in a wait-and-see mode.
This can weigh on the business mix of the net inflows. On the other side, the net inflows is expected to remain strong because, for example, differently from the past, now the clients are less and less interested in capturing the opportunities produced by the offer of high interest rates by other banks. Because now clients are more aware that when there is a bank offering high interest rates, it's because there is something else on the horizon. There are no free lunch on the market. We expect brokerage doing pretty well, particularly considering that the bank currently with our DNA of innovator in the brokerage industry, we are launching right now, brand new solutions for making our brokerage business even more efficient and so on.
In summary, what we can expect to have is we have this continuation, net inflows remaining pretty strong, business mix remaining skewed more in direction of liquidity assets under custody, brokerage keeping on doing well. At the same time, we are going to continuously enjoying the additional contribution produced by Fineco Asset Management. Is more and more up and running and is going to play in constantly growing impact on our results.
Okay. If I may follow up just on private banking. You are putting more emphasis on growing the, let's say, the assets into this kind of segment. What do you think? You think you're okay to continue to grow? You need to invest more to change something, or it's just a matter of time and you will continue to keep on growing?
The reason behind our growth is because the mindset of the so-called affluent and rich people is changing. Now the affluent rich people are looking for value for money, and Fineco is a great place for getting this kind of solution. At the same time, we don't expect significant investments, material investments in this direction. Clearly, we are going to have a continuously growing focus on this kind of business. For example, we are going to launch during the next few months, tailor-made solutions for the private banking clients, as we mentioned during the presentation. Again, we are going to use the same approach we have been using over the last few years. We are not interested in, for example, buying directly companies specialized in providing these services. We are going to keep on leveraging on our approach of an open platform.
Creating agreement with companies specialized in providing extremely sophisticated solution for this segment clients. Probably, we are going to announce the first agreements in the next few weeks, going towards the year-end.
Thank you.
As a reminder, if you wish to register for a question, please press Star and one on your telephone. Once again, if you wish to ask a question, please press Star followed by one. Mr. Foti, there are no more questions registered at this time.
Thank you very much for your question. As usual, then, if you are interested in having a follow-up in getting a little bit more details, colors, and numbers, please don't hesitate to contact us. Our team is, as usual, fully available for giving you all the assistance you need for better modeling our numbers and figures. Thank you very much.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.