Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the FinecoBank second 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 Fineco. Please go ahead, sir.
Good afternoon, everyone, thanks for joining our first half 2018 results conference call. Net profit in the first half exceeded EUR 125 million, plus 20.1% year-on-year. Gross operating profit reached EUR 187 million, almost 16% more compared to the first half 2017. These results confirm, once again, the soundness of our business model, able to deliver industrial growth in every market condition without significant volatility among the different quarters. We generated over EUR 311 million of revenues in six months, all recurring, up 10.3% year-on-year, with all product areas positively contributing. Operating cost at EUR 124.6 million, well under control despite the continuous expansion in assets and clients. Cost-income ratio down three percentage points year-on-year at 40%, thanks to our strong operating leverage and the scalability of the platform. Please now go through the following slides to analyze more in details all the dynamics of our results.
Slide six on net interest income. First half 2018, net interest income increased more than 8% compared one year ago, supported by double-digit growth in volumes, both sticky sight deposits and lending. Volume dynamics more than offset the yearly reduction in gross margins. As you can see at the bottom right of the slide, average gross margins on interest-earning assets lowered from 1.34% in the first half 2017 to 1.32%. Cost of funding remain very low at four basis points. In the following slide, you can find the progression of our government bond portfolio. As anticipated during our full-year results conference call, we confirm our intention to enhance the diversification of our investment portfolio through the non-renewal of expiring UniCredit bonds and the increase of European government bonds, in addition to the already announced focus on lending activity.
Let me remind you that our strategy is always aimed at generating industrial and high-quality results. Therefore, we don't use our portfolio for gaining short-term revenues. This is the reason why, in the past, we booked the majority of our government bond portfolio at amortized cost without any volatility on capital ratio and P&L. In 2018, we confirm our low single-digit increase in net interest income, supported by lending and volume effect on variable site deposits that more than offset the decline in 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 115 million of additional net interest income. Moving to commissions and trading income. Fees and commissions strongly up year-on-year. A double-digit growth supported by whole product areas, in particular, by investing.
Management fees grew 12.2% year-on-year, thanks to the better asset mix, as assets under management increased 11% year-on-year with a strong contribution of guided products and services, grew by plus 21% year-on-year. Also, brokerage performed very well thanks to the higher volatility compared to the first half 2017 and to the enlargement of the product offer. Core revenues in the first half 2018 ranked as the second-best semester. We will deep dive on this later on. Moving to slide nine, we have a detailed overview on cost evolution. Efficiency is part of our DNA and core in our bank. Moreover, the relentless improvement in IT and the operational internal know-how made in our 20 years journey represents a unique competitive advantage for us. Staff expenses were at EUR 41.5 million in the first half 2018.
EUR 6.6 million more compared to the same period of 2017, mainly due to the increase in the workforce related to the business development and the setup of Fineco Asset Management. Other administrative expenses at EUR 78.3 million, plus 1.2% 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. Looking at 2018 year-end dynamics, we are forecasting an increase of total operating cost by around 5% year-on-year, plus EUR 5 million related to Fineco Asset Management. This increase mainly includes expenses for business growth with clear returns.
For example, cost for look-through implementation, which brought significant benefit to the Common Equity Tier 1, as we will see in the following slide. Moving to slide 10, Fineco confirmed a solid and stable capital position on the wave of a safe balance sheet. Transitional Common Equity Tier 1 ratio amounted to 20.7%, and Common Equity Tier 1 ratio fully loaded was at 20.6%. Total Capital Ratio transitional at 29.3%, including the Additional Tier 1 issued at the beginning of 2018. As announced last quarter, we are very pleased to inform you that we implemented the look-through approach, leveraging on our best-in-class internal operational skills. This approach allows us to drill down the underlying assets provided by clients as collateral to Credit Lombard, reducing therefore the risk-weighted assets absorption according with the real underlying asset.
The look-through covers around 57% of the collateral, leading to a significant improvement of core Tier 1 ratio by 194 basis points. On slide 11, we're showing overview of the total financial assets growing trend, supported by the healthy expansion in new inflows. We gathered EUR 26.6 billion net sales in the last five and a half years, leading total financial assets close to EUR 70 billion as of June 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 1.63% as of March 2018. Moving to slide 12, we summarize the breakdown of total financial assets. As you know, we are strongly focused on the quality and the sustainability of assets gathered.
In currency with the ongoing initiatives to improve the productivity of the network, the asset mix is constantly moving in the right direction with a better mix. As of June 2018, total financial assets were at almost EUR 70 billion, 10% more compared to June 2017. Assets under management amounted to EUR 34.5 billion, 49% of total financial assets. Guided products increased their penetration rate to 64% on total assets under management, 5 percentage points more than one year ago. On the right side of the slide, assets under management grew EUR 10.6 billion since the end of 2014. Leveraging on our cyborg advisory approach, the lion's share in this growth was represented by guided products and services, which increased by EUR 13.7 billion in the period.
On slide 13, we can see that we are very satisfied about the solid commercial data released in the first semester, despite the more difficult environment compared to last year. We gathered EUR 3.6 billion of net sales, an increase of more than 24% compared to the first half 2017. The recent launch of some brand-new products and services, such as Plus and Core Target, helped in offsetting the higher propensity of clients to remain in a wait-and-see mood. The strong increase of the inflows gathered confirms the continuous improvement in the quality of clients, and therefore the effectiveness of the brand repositioning of the bank. More than EUR 3.2 billion of net sales were gathered through our financial advisors, +22% year-on-year. They are strongly committed in moving clients into added value solutions, helping clients in managing their wealth with a long-term approach, bearing in mind the client's investment targets.
Moving to slide 14. As you know, our growth strongly leverage on the organic component, thanks to the unmatched quality of our services. In the first half 2018, out of EUR 3 billion of net sales, 85% was organically generated through the existing financial planners or directly by the bank, and 15% came from recruits made in the last 24 months. As you know, in our view, this growing strategy is strongly sustainable in the long run, also from a future cost sustainability perspective, positioning the bank in a sweet spot to cope with future pressure on margins and potential challenges. For us, recruitment is exclusively aimed to improve the quality of the network through selected new recruits. Now, I would skip directly to page 18 of the presentation, of the next section, before moving to the last part of the presentation. It is worth spending a few words on brokerage.
Confirmed as a strong contributor to our revenue generation. As you can see in the chart at the bottom, current revenues in the first half 2018 ranked at the second best half since 2013, but the best one with this level of volatility, thanks to the continuous enlargement of the client base and market share, combined with a broader product offer. The strong potential of this business is also being recently confirmed by the jump in the market share of equity traded volumes in Italy, increased at 24%, according with the Assogestioni ranking, +4.4 percentage points compared to December 2017. Let's now move on to slide 24. Commercial loans grew 90% 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, as you can see on the right side. In the first half 2018, it's not fully comparable with the previous periods due to the introduction of new accounting standards. However, for 2018, we're expecting stabilization at the June 2018 level. Let's move now in analyzing lending initiatives more in depth. As you can see in slide 25, lending offer is very well welcomed by our clients. Mortgages reached EUR 723 million in the first half, almost 40% more compared to December 2017, with almost 6.9 thousand mortgages granted, with an average loan-to-value of 52% and an average maturity of 19 years.
For 2018, we expect an yearly new production of around EUR 400 million, as we prefer not to take part of increased competition in the market without entering into red zones characterized by aggressive pricing, high loan-to-value, and longer maturities. Expectations in terms of yields stand at around 80-85 basis points, slightly lower compared to our previous indication, given the increased hedging cost due to worsening of market conditions. Personal loans grew more than 31% year-on-year, and margins remain very attractive. Our expectation in terms of new production is around EUR 200 million per year, which means EUR 100 million net in terms of delta stock, with an expected yield in the range of 400-450 basis points. Lombard loans at EUR 845 million increased by 140% compared to one year ago, thanks to the introduction of new Credit Lombard.
In 2018, our expectation is to grow around EUR 500 million, with an average yield of around 110-120 basis points. Moving onto slide 27, just a few words on the new asset management company. As announced, Fineco Asset Management is fully operational since July 2nd, 2018. This initiative represents a big step forward to further improve efficiency in our asset under management business. Improving at the same time the quality of the services provided to clients. Let me underline the main stream of revenues of this new company. First of all, Fineco Asset Management already managed EUR 6.7 billion of Core Series, of which EUR 6.55 billion retail and EUR 0.14 billion institutional, and already actively working on the improvement of efficiencies and portfolio rationalization. The first 31 sub-advised funds are already under approval by the Central Bank of Ireland.
This week is expected that the formal approval of the new Irish collective asset management vehicle to make the process of new sub-advised funds more efficient, simpler and faster. This will allow Fineco Asset Management to release the first wave of sub-advised funds this week, and the second wave of release is expected in October. Finally, new funds of funds, complementary to the existing Core Series, are under implementation. The first nine are expected to be released by year-end. This initiative represents a clear win-win solution. Improving efficiency will allow us to reduce total expense ratio for clients, producing at the same time higher margins on asset under management. As already anticipated, we confirm you that relevant and recurring improvement in our profitability is expected. Leveraging on the clear advantages these solutions has, we have a very positive expectation in terms of future volumes managed by Fineco Asset Management.
Thanks to some initiatives, the bank we will put in place to channel a relevant portion of asset under management in Fineco Asset Management. For example, all innovative new solutions will be manufactured in Ireland. At the bottom of the slide, we summarize the main interaction between Ireland and Italy. Let me just highlight that the cost structure of the new company is expected to be extremely lean, and we are budgeting around EUR 6 million-EUR 7 million of cost per year. This, combined with expected revenue growth, leads to a very attractive single-digit cost income. Finally, on slide 29, a few words on Fineco U.K. and Patent Box. In U.K., we acquired over 2,100 clients with a very interesting mix. 52% is represented by non-Italians, of which 37% are represented by native British.
The most recent clients acquired show that our proposition is more and more welcomed, not only by Italian expatriates, but also by non-Italians, in particular British native. As you know, in our estimates, we do not include neither revenues nor cost. This project represents a concept card for the future evolution of our bank, as we now have a perfect blueprint that could be redeployed in other European countries. As you know, we applied for the Patent Box in December 2015, both for the intellectual properties as our platform are internally developed, and also for the trademark. Talks with the Italian Fiscal Authority have entered in the final phase. We are very confident about the possible outcome. The closing of the process is now in the hands of the revenue agency. Fiscal benefit will cover five years from 2015 to 2019.
Intellectual properties are renewable according to the international guidelines. Thanks for your time. Now we can open the call to questions.
Excuse me. This is the Chorus Call Conference operator. We'll 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 comes from Gian Luca Ferrari with Mediobanca. Please go ahead.
Yes. Hi, good afternoon. I have four questions. The first one is related to page 18 on brokerage. Basically, I was looking for your help to reconcile the fact that in Q2, executed orders were down 3%, the trading income was down something around 14%, I just wanted to understand why this drop Q2 versus Q1 in trading income. The second question is on guided products. It seems that the second derivative is flattening out a bit, so it now represents 64% of your total assets under management. Do you have any target or guidance for full year 2018? Do you think guided products will remain in the region of 64, 65, or you are much more ambitious than that and we'll see more to come in the coming quarters?
The third question is related to page nine, it is about your very strong cost control. In particular, G&A related to development went down from EUR 23.6 million in Q1 to EUR 20 million in Q2. Can you help us in reading a bit better this number? Did you anticipate some costs in Q1, those costs were not present in Q2, we should see this normalizing in the next quarters? Last question, I think you already answered. You reduced the guidance in terms of mortgages from EUR 500 million to EUR 400 million. Is this due to the fact that hedging costs are getting higher, you want to be a bit more prudent with this respect? Thank you.
First of all, let me start from the brokerage. On the brokerage, the decrease quarter-over-quarter, the second quarter versus the first quarter, is related mainly to seasonal effect, because the first quarter has been, for sure, to some extent, more volatile. In the second quarter, we had a lower number of open days, the example of Easter, in any case, for example, the month of June has been characterized by more of a wait-and-see mood by the clients, driven by the political uncertainties. In any case, I want to remind that the second quarter 2018 has been the best second quarter ever after the listing.
My word of caution when you are analyzing the results of brokerage, making comparison quarter-over-quarter, you have to be extremely prudent, because again, the brokerage is the least predictable part of our business, because it's clearly driven by the level of volatility of the market. The risk is to compare periods. What is, in our opinion, is very important on the brokerage, that it is a very clear trend that the bank is keeping on enlarging the market share, the client base, and the business. Clearly, the short-term volatility can affect temporary results. Clearly, we are extremely positive on the long-run development of brokerage, and this has been, in any case, confirmed by the quite big jump we had in terms of market share in the volumes exchange and on the Italian stock exchange.
We have to remind that Fineco has a market share on retail brokerage that we are estimating is definitely above 50%. To keep on growing in terms of market share is something quite outstanding. Moving on, guided products. The guided products are going to remain the main driver of the growth of our asset under management products. It's clear that the point is that the bank, at the same time, is keeping on growing robustly, and to move the percentage is more and more difficult. But I can confirm that we don't expect to remain sit on this 64%-65%. This percentage is expected to grow in the coming months.
The decrease of cost in quarter-on-quarter is related to the usual seasonality in the first quarter, which include higher financial planner Social Security contributions, such as ENASARCO Association and FIRR Termination Compensation Fund. The yield increase is mainly linked to a higher expense related to PFA, mainly loyalty. Again, FIRR, ENASARCO, and costs related to the new management company. On mortgages, clearly, we confirm that the change in the guidance, because we lowered slightly the guidance from EUR 500 million to EUR 400 million, is because, as we explained during the presentation, we are not interested in taking part to a market that is starting on becoming a little bit overrated.
We are not interested, for example, in becoming aggressive in terms of loan-to-value and too long maturity, and as well, we are not interested in providing pricing if we are not current with a decent and acceptable profitability. This is the reason why we reduced by EUR 100 million the guidance.
Okay, thank you very much.
The next question comes from Elena Biffi with Banca IMI. Please go ahead.
Yes, good afternoon. I've got some questions. The first one is on the outlook for your net inflows and their mix for the second half of this year. Can we expect a similar level of the first half, both in terms of absolute value and mix. The second question is about loan loss provisions. I understood that there were some impacts from the new IFRS 9 accounting principles. If you can elaborate a bit more and also on the run rate we can expect for the full year and for the coming quarters. About the recruiting costs. Are you willing to exploit the benefits offered by IFRS 15 in terms of longer amortization period? You will stay like now, as you are now? If you can provide us with the sensitivity of your Common Equity Tier 1 to the BTP Bund spread.
Finally, I don't know if you have already talked about it because I had to disconnect for a few minutes, about the Patent Box, when do you think that you will obtain the response from the Italian Fiscal Authority? Thank you.
Starting from the guidance on net inflows. As usual, we are not giving any precise guidance on net inflows because we are not obsessed by gathering a few hundreds of millions, more or less, because we are concentrated on the prevailing structural trends. We confirm that we expect the bank remaining on the fast lane of growth in terms of net inflows, because again the net inflows we are gathering are driven by structural trends. That they are the change of habits by the Italian families in managing their wealth, digitalization, and clearly, the headwinds against the small and medium regional banks. These trends are structural, are going to stay, and Fineco is exactly at the crossroad. We expect the bank keeping on growing robustly, we don't give any really such precise guidance.
In terms of mix, clearly, the main goal of the bank is to move as much as we can in the direction of asset under management products and clearly, mainly guided products. Clearly, we cannot be 100% assured to achieve the perfect asset mix, the business mix and asset mix, because clearly this can be temporarily affected by the market conditions. For example, if we enter in a much more volatile situation characterized by corrections on the market, clearly you can expect net inflows remaining pretty strong. With a temporary change in the mix, moving more in direction of liquidity and asset under custody. Again, this is not fully in our hands.
What I can confirm you that we expect to keep on growing very robustly in terms of net inflows and the whole efforts and activity by the bank is in direction of moving as much as we can in direction of asset under management products. For the loan loss provision, I leave the floor to Lorena Pelliciari, the CFO. Please, Lorena.
Yes. Loss loan provision are equal to EUR 0.2 million in the second quarter. Let's underline that loss loan provision are not fully comparable with previous periods, as they now include also the impairment related to the IFRS 9, due to exposure to bank and also forward-looking information following the introduction of the new accounting standard. In the second quarter, we had minus EUR 2.2 million of loss on provision related to loans to customers, following the increase in lending exposure. We had a positive impact of EUR 2.4 million on loans to banks, mainly on current account with UniCredit, due to the model recalibration, and in particular to the improvement of UniCredit risk profile, the probability of default.
Now, I leave the floor again to the CFO for the questions related to the IFRS 15 recruiting cost and so on. Please, Lorena.
Yes. Regarding IFRS 15, we didn't have any impact. With reference to recruitment cost, upfront fees are amortized in five, six years, accordingly with the locking period indicated in each mandate.
Finally, on the Patent Box, clearly as we explained, everything has been finished. Has been finalized with the Italian Fiscal Authority. Again, we are quite positive regarding the outcome, so there is no doubt that we are going to get an fiscal break. That clearly now, in terms of time horizon, is completely in the hands of the Italian Fiscal Authority, because we received some indication by them, but as you know, sometimes it's not so precise. Clearly, what in our opinion it's important, that for sure Fineco is going to benefit from this fiscal break. Another very important point to be concentrated, that the largest part is going to be represented by the intellectual properties.
That is making Fineco a unique case in the banking industry, because this is thanks to the fact that we are running by ourselves with our platforms. Even more importantly, this component is going to be recurrent. Differently from the trademark, that is the component for which all the banks are applying, that is a pure one-off. We are not in a rush because we know that these are money that are going to come to us. We are patiently waiting for the final and official green light by the Italian Fiscal Authorities. In terms of sensitivity on the volatility on the BTP-Bund spread, every 100 basis points of widening or tightening of the spread, we expect an impact between 40 and 45 basis points on our Common Equity Tier 1 ratio.
Okay, thank you very much. Basically, in line as far as your last answer with the 45 basis points I see on page 10 on the HTCS reserves.
Yes.
Okay. Thank you very much.
The next question comes from Giuseppe Mapelli with Equita. Please go ahead.
Yes, good afternoon. I have only one question. It's related to your core Tier 1 ratio. I would like to understand if you can give us an idea on what kind of projection we should assume in terms of capital absorption related to personal loans and mortgages going forward.
Regarding this point, clearly we don't expect any significant impact on our core Tier 1 ratio by the new production of lending products. The reason is this. First of all, we have still some room in improving further the effectiveness of the look-through approach. Because clearly at the moment, we have 57% of the total assets used as a collateral by clients, that they are under this. This is generating a 44% absorption in terms of risk-weighted assets. What we expect in the following month to increase even more the coverage. Moving up from 57% and reaching, I don't know, probably I'm looking to, what do you think, Lorena? Which kind of level we can reach?
Our expectation is to reach around 80%.
Our idea is to be able to cover 80% of the assets that they are used by the clients as a collateral. This means that we have a room for adding quite an interesting amount of Core Tier 1 ratio more. Every 10% increase on look-through brings a positive contribution on Core Tier 1 ratio by 50 basis points. Clearly, as you can imagine, this is much more that we can expect to consume on the mortgage side and the personal side. What we expect that our Core Tier 1 ratio is going to remain pretty strong. Also considering that our growth in terms of lending business remaining on the same direction, perfectly current with the guidance we gave to the market.
Okay, thank you. Just a follow-up. Can you share with us what is the breakdown of 125 basis point increase, or rather impact on Core Tier 1 related to risk-weighted asset increase?
Yes.
125 basis points means EUR 160 million of risk-weighted assets. This is the question.
Yes. Let's say, is it possible to understand what are the assets underlying this increase? Mortgages, personal loans, whatsoever.
Yes. Are mortgages, personal loans and partially Credit Lombard.
Yes. The portion that is not still covered by the look-through.
Okay. Thank you.
As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question comes from Anna Damo with Autonomous Research. Please go ahead.
Hi, thank you for taking my questions. I have two questions, actually. One on the Fineco U.K. business. Now that the business is up and running, could you perhaps share with us what you expect in terms of profit contribution from the business in the next couple of years? Related to this point, are you planning to launch any of the ISA and pension products, which are very popular in the U.K. market? The second question is related to the EUR 5.4 million gain on investments related to UniCredit. How often are you planning to update the PD assumptions, and should we expect these gains to be recurring on an annual basis? Thank you.
Let me start from the U.K. business first. On U.K. business, as we said, it is still too early to give some kind of guidance in terms of the future potential of the business, because we are still in the stage in which, what is our opinion, it is quite rewarding that despite the fact that we are considering this phase as a kind of starting phase, the welcome that we are receiving is pretty nice. Without doing any kind of significant marketing, we are keeping systematically on acquiring new clients, and we are doing business. It is still too early to give such a precise guidance in terms of future contribution by this business. We still need at least some months to have the business definitely. For example, I take the opportunity to answer also to the other part of the questions.
In the next following month, I can confirm that we are going to have as well the ISA products and investing products, because clearly we're perfectly aware that this is a very important component of the business. Probably at that point of time when the proposal is going to be 100% up and running, we are going to be in the position to give a more precise guidance in terms of future revenues generation. Regarding the profits on investments and the evolution of the PD and so on, I leave again the floor to Lorena. Please, Lorena.
Yes. Also profit on investment are affected by the introduction of the new accounting standards, IFRS 9. This is why the figures are not fully comparable with previous periods. The impact of EUR 5.2 million in the first half is mainly linked to the impairment on UniCredit bond portfolio, accounted as held to collect, due to model recalibration for institutional counterparties, and in particular for the improvement of UniCredit risk profile. Following the introduction of the new standard, IFRS 9, we have to evaluate all our assets that are not evaluated at fair value through profit and loss. Each six months, they are subject to impairment. We don't know if the risk profile of UniCredit will improve or not in the next month. We have to evaluate every six months, all our assets.
The main reason of the improvement of the risk profile of the parent company is clearly, as you can imagine, is being driven by the fact that these models are usually put in place in the way in which a certain set of data that is coming from the past. Clearly now it's like the moving averages. Now the old data related to the period in which UniCredit was just before the capital increase, this kind of data has been eliminated by the model. Now we have the new UniCredit with fully capitalized. Clearly, unless we have some absolutely unexpected events, disruptive and so on, we can expect a certain kind of stabilization of the risk profile of UniCredit.
This change has been produced by the fact that now the model is fully incorporating the new situation of UniCredit after the capital increase.
Very clear. Thank you.
Once again, if you wish to ask a question, please press star and one on your telephone. For any further questions, please press star and one on your telephone. Mr. Foti, there are no more questions registered at this time.
Thank you again for attending our conference, and talk to you soon.
Thank you.