Earnings Call: Q2 2018

Jul 31, 2018

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the Finnacle Bank 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. Today, I would like to turn the conference over to Mr. Alessandro Forti, CEO of Fineco. Please go ahead, sir. Good afternoon, everyone, and thanks for joining our first half 2018 results conference call. Net profit in the first half exceeded 125,000,000 Plus 20.1 percent year on year and gross operating profit reached 187,000,000 Almost 16% more compared to the first half twenty seventeen. These results confirm once again the soundness of our business model, able to deliver industrial growth in every market condition without significant volatility among of the different quarters. We generated over EUR 311,000,000 of revenues in 6 months, all recurring, up 10.3% year on year with all product areas positively contributing. Operating costs at 124,600,000 well under control despite the continuous expansion in assets and clients. Cost income ratio down 3 percentage points year on year, up 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. On Slide 6, On net interest income, the first half twenty eighteen net interest income increased more than 8 segment compared 1 year ago, supported by double digit growth in volumes, both sticky side deposit and Lendingen. 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 Cost of funding remain very low at 4 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 unit credit 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 This is the reason why in the past, we booked the majority of our government bond portfolio Without any volatility on capital ratio and P and L. In 2018, we firm our low single digit increase in net interest income supported by lending and volume effect on valuable side deposits that more than offset the declining margins, 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 We generated EUR 115,000,000 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 and in particular by investing. Management fees 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 twenty seventeen and to the enlargement of the product offer. Core revenues In the first half twenty eighteen ranked as the 2nd best semester, But we will deep dive on this later on. Moving to Slide 9, 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 meet in our 20 years journey represents a unique competitive advantage for us. Staff expenses were at $41,500,000 in the first half twenty eighteen, dollars 6,600,000 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 $78,300,000 plus 1.2 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 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, This increase mainly includes expenses for business growth with clear returns. For example, cost for look through implementation, which broke significant benefit to the common equity Tier 1, as we will see in the following slides. Moving to Slide 10, Fineco confirmed a solid and stable capital position on the wave of 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 Lombard. Reducing therefore the risk weighted asset absorption according with the real underlying assets. The look through covers around 57% of the collateral, leading to a Significant improvement of core Tier one ratio by 194 basis points. On Slide 11, we show an overview of the total financial assets growing trend supported by the healthy expansion in New Hymplos. We gathered EUR 26,600,000,000 net sales In the last 5.5 years, leading total financial assets close to €70,000,000,000 as of June 2018. This powerful performance confirms Fineco's potential to further consolidate its position and take advantage from structural clients 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 Tata Financial Asset. As you know, we are strongly focused on the quality and the sustainability of assets gathering. 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 €70,000,000,000 10% more Compared to June 2017, assets under management amounted to €34,500,000,000 49% of total financial assets. Guided products increased their penetration rate to 64% on total assets under management, 5 percentage points more than 1 year ago. On the right side of the slide, assets under management grew 10,600,000,000 since the end of 2014. Leveraging on our cyber advisory approach, The lion's share in this growth was represented by guided products and services, which increased by BRL13.7 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 BRL3.6 billion of net sales, an increase of more than 24% compared to the first half twenty seventeen. The recent launch of some brand new products and services such as Plus and CoreTarget helped in offsetting the Higher propensity of clients to remain in a wait and see mood. The strong increase of the inflows Gederate confirms the continuous improvement in the quality of clients and therefore the effectiveness of the brand repositioning of the bank. More than EUR 3,200,000,000 of net sales were gathered through our financial advisers, plus 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 Moving to Slide 14. As you know, Our growth strongly leveraged on the organic component, thanks to the unmatched quality of our services. In the first half twenty eighteen, out of EUR 3,000,000,000 of net sales, 85% was organically generated through the existing financial planners or directly by the bank. And 15% come 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 few words on brokerage. Procurement has a strong contributor to our revenue generation. As you can see in the chart at the bottom, Revenues in the first half twenty eighteen ranked the 2nd best half since 20 13, but the best one with this level of volatility. Thanks to the continuous enlargement of the client's base and market share combined with a broader product offer. The strong potential of this business is also been recently confirmed But the jump in the market share of equity traded volumes in Italy increased at 24% according with the team ranking, plus 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 translate Bank into commercial cost of risk very well under control. As you can see on the right side, in the first half twenty eighteen. 2018 is not fully comparable with the previous periods due to introduction of new accounting standards. However, for 2019, we expect and 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 BRL 723,000,000 in the first half, almost 40% more compared to December 2017 with almost 6,900 mortgages granted We have an average loan to value of 52% and an average maturity of 19 years. For 20 2018, we expect a yearly new production of around 400,000,000 as we prefer not to take part High loan to value and longer maturities. Expectations in terms of yields stand at around 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 200,000,000 per year, which means 100,000,000 net in terms of Delta stock with an expected yield in the range of 400 basis points, 4.50 basis points. Lombard loans at 8.40 €5,000,000 increased by 140% compared to 1 year ago, thanks to the introduction of new credit lumbar. In 2018, our expectation is to grow around €500,000,000 with an average yield of around 110120 basis points. Moving into Slide 27, just few words on the new asset management company. As announced, Fineco Asset Management is fully operational since July 2, 2018. This initiative represents a big step forward to further improve efficiency in our asset under management business and 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, Finneco Asset Management already managed 6,700,000,000 of core series, of which 6,550,000,000 retail and EUR 0.14 billion institutional and already actively working on the improvement of efficiencies and portfolio rationalization. Then 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 1st wave of sabotage funds this week and the second wave of release is expected in October. Finally, New funds of funds complementary to the existing cost series are under implementation. The first nine are expected to 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 the same time higher margins on asset under mine. As already anticipated, We confirm you that relevant and recurring improvement in our profitability is expected. Leveraging on the clear advantages This solution has we have a very positive expectation in terms of future volumes managed by Finneco Asset Management. Also thanks to some initiatives. The bank will put in place to channel a relevant portion of asset Standard Management, Infineco 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 I like that the cost structure of the new company is expected to be extremely lean, and we are budgeting around EUR 6,000,000, EUR 7,000,000 of cost per year. This combined with expected revenue growth lead to a very attractive single digit cost income. Finally, on Slide 29, A few words on Fineco UK and Patent Box. In UK, we acquired over 2,100 clients with a very interesting mix, 52% is represented by non Italians, of which 37% represented by Native British. The most recent clients acquired show that Our proposition is more and more welcome not only by Italian expatriates, but also by non Italians, In particular, British NetEase. As you know, in our estimates, we do not include neither revenues Norcos, but 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 and we are very confident about the possible outcome. The closing of the process It's now in the hands of the revenue agency and fiscal benefit will cover 5 years from 2015 to 2019. Intellectual properties are renewable according to the international guidelines. Conference operator. We will now begin the question and answer session. The first question comes from Gianluca Ferrari with Mediobanca. Please go ahead. Yes. Hi, good afternoon. I have four questions. The first one is related to Page 18 on brokerage. And basically, I was looking for your help to reconcile the fact that in Q2 executed orders were down 3%, But then the trailing income was down something around 14%. So 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 We'll see more to come in the coming quarters. The third question is related to Page 9 and it is about your very strong cost Control. And in particular, G and A related to development went down from $23,600,000 in Q1 to $20,000,000 in Q2. Can you help us in reading a bit better this number? Did you anticipate some costs in Q1 and those costs were not present in Q2, But we should see this normalizing in the next quarters. And last question, I think you already answered. You reduced the guidance in terms of mortgages from $500,000,000 to $400,000,000 Is this due to the fact that hedging costs are getting higher, So you want to be a bit more prudent with this respect? Thank you. So first of all, let me start Bank. From the brokerage. So on the brokerage, The decrease quarter on quarter, so the 2nd quarter versus the 1st quarter is related mainly The seasonal effect because it is so the Q1 has been for sure to some extent more volatile. In the Q2, we have we had a lower number of open days, The example of Easter and any increase presented in the month of June as being characterized by more and wait and see Moved by the comments and driven by the political uncertainties. In any case, I want to remind that The Q2 2018 has been the best second quarter of ever after the listing. So by word of caution when you are analyzing the results of brokerage making comparison quarter with quarter, We 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 market. So the risk is to compare periods. So what is in our opinion is very important On the brokers that it is a very clear trend that the bank is keeping on enlarging the market share, The client base and the business. Then clearly, the short term volatility can affect Temporarily, but 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 is we are estimating is definitely above 50%. And so to keep on growing in terms The market share is something quite outstanding. So Moving on guided products. So the guided products is we are expecting to the guided products are going to remain The main driver of the growth of our asset under management products. It's clear that we have The point is that the bank at the same time in keeping on growing robustly. And so to move the percentage is Sorry, it's more and more difficult, but I can confirm that we don't expect to remain sit on this 64%, 65%. So this percentage is expected to grow in the coming months. And So The decrease of cost in quarter on quarter is related to the usual seasonality in the Q1, which include higher personal financial planner social security contributions such as an Azarco Association and Field Termination Compensation Fund. So the yield increase is mainly linked to higher expenses to related to TSA, mainly loyalty, Again, fair and as Arkan cost related to the new management company. And finally, on mortgages, clearly, we confirm that The change in the guidance because we lowered slightly the guidance from €500,000,000 to €400,000,000 is because as we explained during the presentation. We are not interested in taking part to a market that is starting on Coming a little bit overrated. So we are not interested, for example, in becoming aggressive in terms of loan to value and to long maturity. And as well, we are not interested in providing pricing. We are not Current, we've had a decent and acceptable profitability. And so this is the reason why we reduced by 100,000,000 Okay. Thank you very much. The next question comes from Elena Perini with Banca Yimi. 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. Then the second question is about loan loss provisions. I understood that there were some impacts from the new IFRS 9 accounting in principle. So 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. Then about the The recruiting costs, are you willing to exploit the benefits offered by IFRS 15 in terms of longer amortization period or you will stay like now as you are now. And then if You can provide us with the sensitivity of your common equity Tier 1 to the BTP debund spread. And finally, I don't know if you have already talked about it because I had to disconnect for a few minutes. But about the Patent Box, when do you think that you will obtain response from the Italian Fiscal Authority. Thank you. So 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 100 of 1,000,000 more or less, Because we are concentrated on the prevailing structural trends. So we confirm that we expect Bank. 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 Bank. That they are the change of habits by the Italian families in managing their wealth, utilization and clearly and the headwinds against the small and medium regional banks. And these trends are structural, are going to stay Fineco is exactly at the crossroad. So we don't expect so we expect the bank keeping on growing rapidly, but we don't give any such a precise In terms of mix, clearly, the main goal of the bank is to move as much as we can in the range of Asset under management products and really mainly guided products. Clearly, we cannot give you the We cannot be 100% sure to achieve the perfect asset mix because the business mix and asset mix Because clearly, this can be temporarily affected by the market conditions. So 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, But with a temporary change in the mix moving more in direction of liquidity But again, this is not fully in our hands. So what I can confirm you that we expect to keep on growing very robustly in terms of net inflows and all the efforts Bank 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 Pelichard, the CFO. Please Lorena? Yes. So loss loan provision are equal to EUR 200,000 in the 2nd quarter. Let's underline that The loss loan provision are not fully comparable with previous periods as they now include also the impairment related of IFRS 9 due to exposure to bank and also forward looking information following the introduction of the new accounting standard. In the Q2, we had minus EUR 2,200,000 of lost loan provision related to loans to customers following the increase in lending exposure. And we had a positive impact of €2,400,000 on loans to banks, mainly on current account with UniCredit due to the modern recalibration and in particular to the improvement of UniCredit risk profile and probability of the fall. Now there There is again, I leave the floor again to the CFO for the questions related to the IFRS 15 recruiting costs and so on. So please Lorena. Yes. Regarding IFRS As 15, we didn't have any impact. We drew reference to recruitment costs, upfront fees. Upfront fees are amortized in 5, 6 years accordingly with the locking period indicated each mandate. And finally on the patent box, clearly as we explained, Everything has been is finished. So it has been finalized with the Italian Fiscal Authority. And again, we are quite positive regarding the outcome. So there is no doubt that we are going to get a fiscal break. And that clearly now in terms of time horizon is completely in the hands of the Italian fiscal authority Because we have received some indication by them, but as you know, we prefer not to be because sometimes It's not so precise. So 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 unique case in the banking industry because this is thanks to the fact that we are running by ourselves with our platforms. And even more importantly, this component is going to be recurrent And differently from the trademark that is the company for which all the banks are applying That is a pure one off. So we are quite we are not absolutely we are not in a rush because we know that these are I need that they are going to come to us. So we are patiently waiting For the vinyl and official green light by the Italian Piscalatoides. In terms of sensitivity On the volatility on the BTP bond spread, our every 100 So the widening or tightening of the spread, we expect an impact between 14 basis points, 45 basis Okay. Thank you very much. So basically, in line as far as Your last answer with the 45 bps I see on Page 10 on the ATCS reserves. Okay. Thank you very much. The next question comes from Giuseppe Mattelli with Equita. Please go ahead. Yes. Good 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 loan bond loans and mortgages going forward. Regarding this point, clearly, is we don't expect Any significant impact on our core Tier one ratio by the new production of lending products For the reason is I assume, first of all, we have still some room for In improving further the effectiveness of the look through approach. Because clearly at the moment, we have 50 57% of the total assets used as a collateral by clients that they are under this. And this is generating 44% absorption in terms of risk weighted assets. And what we expect In the following month to increase even more the coverage, so 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 80%, around 80%. So our idea is to be able to cover 80% of the assets under that are used by the clients as a collateral. So this means that we have a room for adding quite an interesting amount of core Tier one ratio more. So and this is going to Definitely, definitely. So every So there is every 10% increase or look through means and it Brings a positive contribution on core Tier one ratio by 50 basis points. So clearly, as you can imagine, this is much more that we can expect to consume on the mortgage side and the personal side. So what we expect That our core to own ratio is going to remain pretty strong. Also considering that our growth in terms of lending business remaining On the same direction, we perfectly current with the guidance we get to the market. Okay. Thank you. Just a follow-up. Can you share with us what The breakdown of 125 basis point increase or rather impact on Core Tier 1 relative to risk weighted asset increase. Yes, there is One other thing. Thank you for this point. EUR 160,000,000 of But let's say, is it possible to understand what are the assets underlying It is in Greece. So mortgages, personal loans, what's over? Yes. Our mortgages, personal loans and partially credit lumber. Yes. The portion that is not Still covered by the look through. Okay. Thank you. The next question comes from Ana Damo with Autonomous Research. Please go ahead. Hi, thank you for taking my questions. I have two questions actually. 1 on the Finnacle UK business. And 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. And related to this point, are you planning to launch any of the Aiza and pension products, which are very popular in the U. K. Market. And the second question is related to the €5,400,000 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. So let me start from the U. Business. So on UK business, as we said, it's still too early to give I'll give you some kind of guidance in terms of the potential future potential of the business because we are still In the stage in which what is our opinion is quite rewarding that despite the fact that we are considering this Bank. As a kind of starting phase, the welcome that we are receiving is pretty nice because Without doing any kind of significant marketing, we are keeping systematically on acquiring new clients And we are doing business. And but it's still too early to give such a precise guidance in terms of future contribution On the by this business, we still need at least And Sam, to have the business definitely. So for example, and I take the opportunity To answer also to the last part the other part of the questions, clearly in the next following month, I can confirm that we are going to have as well The highest 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 And regarding The profits on investments and the evolution of the PD So profit on investment are affected by the introduction of the new Accounting Standards, IFRS 9. This is why the figure has not fully comparable with previous periods. And the impact of EUR 5,200,000 in the first half It's mainly linked to the impairment on UniCredit bond portfolio accounting as L2Collect due to model a model of recalibration for institutional counterparties and in particular for the improvement of unique credit risk profile. So 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. And each 6 months, They are subject to impairment. So we don't know if the risk profile of UniCredit will improve or not Bank in the next month, but we have to evaluate each every 6 months and all our assets. The main reason of the improvement of the risk profile of the parent company is clearly, as you Can imagine it's been driven by the fact that these models are usually put in place in the way in which you have And a certain set of data that is coming from the past. And so clearly now there is we has been It's like the moving averages. And so now the old data related to the period in which Uniquator was Just before the capital increase, so this kind of data has been eliminated by the model. And now we have The new unit credit that we've fully capitalized. And so clearly, we unless we had some Absolutely unexpected events disrupted and so on. We can expect a certain kind of stabilization of the risk profile of UniCredit. So that this change has been produced by The fact that now the model is fully incorporating the new situation of Uniqlo after the capital risk. Very clear. Thank you. Conference. Mr. Foti, there are no more questions registered at this time. Thank you again for attending our conference and talk to you soon.