Earnings Call: Q3 2018

Nov 6, 2018

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the Fimeco Bank 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. At this time, I would like to turn the conference over to Mr. Alessandro Foti, CEO of Fineco Bank. Please go ahead, sir. Good afternoon, everyone, and thanks for joining our Q3 2018 Results Conference Call. Adjusted net profit in the 1st 9 months 2018 at 100 and €78,800,000 plus 13.9% year on year despite a more complex environment compared to last 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 annual contribution to the deposit guarantee scheme accounted in the Q3. We generated around BRL 465,000,000 of revenues in the 1st 9 months, up 7.8% year on year, supported by investing and banking area. Adjusted operating cost at EUR182,800,000, well under control despite the continuous expansion in assets and clients. Costincome 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 1st 9 months 2018 increased by 6.6% year on year, supported by strong volume growth, both sticky side 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 Percent in 2017 to 1.31% this year. Despite the rising trend in place in The bank is system to remunerate liquidity. Our cost of funding remains very low at 4 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 0. In In the following slide, you can find the focus on our government bond portfolio, which now includes also France, 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 unithulated bonds It's progressing very well. In 2018, 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 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 EUR113,000,000 of additional net interest income. Slide 8. 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 guided products and services, which We're up 19% year on year. For the first time this quarter benefited From the contribution of the new asset management company, the profitability on asset under management Calculated as management fees, net of taxes on assets under management improved by 4 basis points Quarter on quarter, reaching 45 basis points in the 3rd quarter. Please let me highlight that our investing fees Strongly 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 clients, but they are just in 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 3rd quarter was also slightly affected by the introduction of new ESMA regulation, which impacted for a couple of 1,000,000. Please remind that we are setting up new products and solutions to offset these effects going forward. Moving to Slide 9, we have a detailed overview on cost evolution. Adjusted staff expenses were at €63,100,000 as of September 2018, 7.5 percentage more compared to the same period of 2017, mainly due to the increase in the workforce related to the business development and costs related to Fineco Asset Management not in place in 2017 and the new long term incentive plan. Other administrative expenses at 100 €12,400,000 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 that we have. On Slide 10, commercial loans grew 71% To fully leverage on big data analytics, this translates into commercial cost of risk very well under control at 23 basis As of September 2018, much lower compared the system. At the year end, we expect a stabilization of our Customer risk in a range between 23 basis points 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 800,000,000 in the 1st 9 months, almost 123 percent more year on year with almost 7 point 8,000 mortgages granted with an average loan to value of 52% and an average maturity of 19 years. For 2019, we expect a yearly new production of around 350 1,000,000 as we prefer not to compete against the system in red zones characterized by aggressive prices, High loan to value and longer maturities. 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 and margins remain very attractive. Our expectation in terms of new production is around €250,000,000 per year, which means €90,000,000 net in terms of Delta stock. In terms of yields, same uplift trend in terms of repricing is expected. Lombard loans at €910,000,000 increased by 98% compared to 1 year ago. Thanks to the introduction of the new credit lumbar. In 2019, our expectation is to grow Around EUR 500,000,000 with an average yield of around EUR 110 basis 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 percent and common equity Tier 1 ratio Fully loaded was at 20.39. Total capital ratio transitional at 28.88 percent, 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 credit lumber, 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 one 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 NeoHimfos. We gathered BRL 27,700,000,000 net sales since 2013, Leading total financial assets close to €71,000,000,000 as of September 2018. This powerful performance Fineco's potential to further consolidate its position and take advantage from structural trends 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 €71,000,000,000 8.4% more compared to September 2017 With assets under management up 9.9% year on year, guided products increased The penetration rate to 66% on total assets under management, 6 percentage points more than As announced last month, In September, we gathered €4,800,000,000 of net sales with a mix in line with a more complex market environment Compared to the previous year, for 2018 here and 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 We'll be more skewed in direction of asset 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 1st 9 months 2018, Out of EUR 4,800,000,000 of net sales, 84% was organically generated through the existing financial planners or directly by the bank, and 16% come 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 be Fineco, allowing us To better position our bank in advance when we perceive that the structural trend is coming. This is why our strategy has strongly focused on 3 main concepts: continuous improvement of the quality of products and services To be recognized by the client 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 this concept 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 cyber 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 advisers grew more than 9% year on year, of which 10% asset under management and plus 20% related to guided 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 advisers with total financial assets above €20,000,000 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 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 the breakdown of our total financial assets per cluster The brand repositioning, we are carrying on bringing 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, plus 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 5,000,000. Moving on to Slide 30. The 3rd key concepts 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 management, managers is progressing at full speed. The first 17 strategies Already implemented 14 expected by year end. This translates into better condition 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 and A activities. As expected and already The increased operational efficiency through Fineco Asset Management leads to a higher asset under management Net of taxes from 41 basis points in the 2nd quarter to 45 basis points in the 3rd quarter. Moving to Slide 31, finally, a quick update on Fineco UK and Patent Box. In UK, we acquired over 2,700 clients with a very interesting mix, 53 is represented by non Italians, of which 39% is in native British. Considering the steady level of revenues constantly generated, we are now approaching the 2nd phase 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. The first question is from Dubetta Maffeli with Equita. Please go ahead. Yes, good afternoon, 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 to the new scenario on the markets. The second question is on the penetration of guided products. You can 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%. And my last question is regarding Finneco Asset Management. I would like to understand, Let's say a little bit better, what kind of passive strategy are you starting with Finneco Asset Management? And what could be the cost of such strategies as let's say and some color on the possible cannibalization of such strategies to other kinds of products that you are already selling? Thank you. So let me start from the to Giving you some color on the month of October. So the brokerage has produced an absolutely An excellent month currently with the uptick on volatility. So no surprise, brokerage is clearly very clearly driven By the level of volatility, so 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 by with the introduction of the new regulation by Hesma. Regarding guided products, our guideline remains unchanged. So we expect Clearly to continuously improving the level of penetration of guided products, it's clearly that the more we grow in terms of penetration and the slower is the pace Clearly, and in our Hidal world, clearly our Hidal world is a world in which gathered products represents 100 Sense of the asset under management products, but clearly this is not possible. But clearly what you can expect is a continuous increase The penetration of the cadet products on the overall asset under management. On Finneco Asset Management, on the passive Strategy, we our plan is to because passive strategies, so Passive plants clearly are theoretically dangerous products For the Profila PIP, the profitability, unless you are not in the control of the value chain, because clearly, if you are proposing and you are using Passive strategies in your portfolio solutions that they are passive strategies produced by someone else Certainly, this clearly is not great. But 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. And one thing just for as example, the The fact that you are in control of the securities lending and everything that is related to the manufacturing on the front. So 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 And these are going to be used in as creating a kind of A blend in our advisory solutions, and 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. And 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 We used as a component of advisory solutions are not going to be sold on a standalone basis because this In case it's not current with the philosophy we are using in managing our clients, so they are 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 Erena Perini with Bancaeni. Please go ahead, Nara. Yes. Good afternoon. First of all, I would like to ask you about the trend of Of net inflows in the month of October. Then The second question is about your loan loss provisions. They are still very, 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. And then the third question is about Fineco Asset Management. You provided us with The Epiendal split, so also about it, if you can give us Some sort of guidance for next year because in the contribution of the 1st nine Month of the current year, we only had the Q3 basically. So these were My questions, thank you. Yes. So regarding net sales of October, so October, we are going to release The number tomorrow and unfortunately, we have not been able to give you the number on net sales of October today Because we are just finishing of elaborating all the numbers in order to have The perfect picture of net sales, we need to have one day more. In any case, net sales for tomorrow, For October, that's been absolutely has been a good month. So with robust net sales in terms of overall Dimension has been a bit that's lower respect to the same month of last year. But 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. And so we are absolutely quite satisfied by these numbers of October. Also considering that With the existing environment is extremely challenging because we have on one hand Financial planners that they are deeply involved in managing the existing clients because clearly, as you can imagine, Considering what's going on in the market, the clients, the base of clients is a little bit more nervous, respected previous month. 2nd, that there is a huge amount of banks that they are Very large amount number of banks that they are quite aggressive in offering high interest rates on deposits, not only the regional banks, But also asset gatherers and banks that they are in absolutely in a decent shape. Nevertheless, our net inflows are they are remaining extremely robust, strong, perfectly in line with Our expectation and this again because we our business model is based on the concept of taking on both clients, Thanks to the quality of service. Regarding the loan loss provision, We had to make a little bit of distinction. So regarding the expected cost of risk, We expect our cost of risk remaining pretty low. So in the range that between 23 basis points, 28 basis points And must definitely very well below the average of the industry. And 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 in definitely in a great position for evaluating the credit quality of our clients. In terms of the clearly, on the loan loss provision, there is also the impact produced by the There is some volatility that has been generated by the probability of default of Unicredit bonds, current account. Yes, current account. I did the floor to the CFO that is for sure much more precise than me on this point. So please, Lorena. Thank you. Good afternoon. So we have to say that loss loan provision are not fully comparable with 2017 They now include also exposure to banks and forward looking information following the introduction of new Accounting standard IFRS 9. So in these P and 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 1st 9 months, we had a positive impact Night amount of this year, we had a positive impact of around €1,500,000 due to this evaluation. Before finishing, just a couple of additional words on the net Sales of October, clearly, net sales, so very good in terms of net inflows and clearly the mix Is as we anticipated is skewed in direction of liquidity and asset under custody. And on Fineco Asset Management, to give you a split in terms of results between Fineco SPI, Fineco Asset Management is clearly the risk in the annex. But in terms of my our suggestions Is to use as a guidance the progression we are going to have in terms of margins after tax On our asset under management products, because clearly is there where you can have a perfect idea Of the real impact produced by Fineco Asset Management on our Asset Under Management business. Because clearly, we At the 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, I mean, 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? So just an indication of what Could be the expected growth for net interest income going into next year. The second one is a more broader question, if you want, is About the uncertainty on the markets and 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 I mean, grow the share of wallet or the market share in the asset gathering, you are Expecting maybe to happen again this time. So let me start from the net interest income. So net interest income, we confirm for 20 19 as a guidance, a growth of low single digit and this is going to be the results of A negative component that is represented by gross margins expected to keep on declining it, Because until we have not the beginning of a rise in short term interest rates, clearly, gross margins are expected to keep on declining. So We expect and saw a negative component generated by declining gross margins. But on the other hand, we expect a positive contribution Produced by the deposit volume effect because we expect to continue Together, transactional liquidity paid 0. At the same time, we expect to keep on expanding our lending book and again, maintaining our extremely conservative approach. Clearly, I want also to remind that In this guidance is embedded also the continuation of our policy that not renewing Our expiring unit credit bonds and keeping on diversifying our European Goddess So this means that we are not going to increase our exposure on Italian goddess and so progressively In terms of weight on our overall portfolio, the weight of the Italian coins are going to be further diluted in the coming months. And so this is the guidance on the net interest Regarding the environment, clearly, 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. So 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 and this clearly this can wait on the business mix of the net On the other side, the net inflows is expected to remain strong Because for example, differently from the past, clearly now the clients are less and less interested in capturing The opportunities produced by the offer of high interest rates by other banks, because our clients are more aware That when there is a bank offering in high interest rates is because there is something else On the horizon, and so clearly, there are no free lunch on the market. So we clearly, we expect brokerage Doing pretty well. And particularly considering that the bank currently with Our DNA of innovator in the brokerage industry, we are going to launch And we are launching right now brand new solutions for making our brokerage business Even more efficient and so on. So in summary, what we can expect to have We see we have discontinuation, net inflows remaining pretty strong, business mix remaining skewed more in direction of The asset under custody and brokerage keeping on doing well. At the same time, continuously we are going to continuously enjoying the additional contribution produced by Fineco Asset Management clearly is more and more up and running and is going to play and constantly growing impact on Okay. If I may follow-up just on private banking, you're putting more emphasis on Growing the, let's say, the assets into this kind of segment. What do you think You think you are okay to continue to grow? You need to invest more to change something? Or it's just a matter of time and you will The reason behind our growth is because the mindset of the so called Affluent rich people is changing because 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, some material investments in this direction, but clearly, we are going to have A much and continuously growing focus on this kind of business. So for example, we are going to launch in the next During the next few months and tailor made solutions For the Private Banking clients and as we mentioned during the presentation, and again, we are going to use the same approach We have been using over the last few years. So we are not interested in, for example, buying directly A company specialized in providing these services, but we are going to keep on leveraging on our approach of an open platform. So creating agreement with companies specialized in providing extremely sophisticated solution for these Segment clients, probably we are going to announce the first agreements in the next few weeks going towards the year end. Thank you. Mr. Conti, 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, callers 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 telephone. Thank you.