Earnings Call: Q1 2018

May 8, 2018

afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the Finnacle Bank First Quarter 2018 Results Conference Call. To ask questions. Star and 0 under telephone. At this time, I would like to turn the conference over to Mr. Alessandro for Mr. Alessandro Forti, CEO of Fineco. Please go ahead, sir. Good afternoon, everyone, and thanks For joining our Q1 2018 results conference call. Net profit in the Q1 reached 59,000,000 A remarkable plus 41.1 percent year on year and $155,100,000 of revenues, plus 9.5% more compared to the previous year with all Product areas positively contributing. Operating expenses were €69,000,000 in Q1 2018 well under control despite the continuous expansion in assets and clients. Cost income ratio down at 41% minus 1.8 percentage points year on year, Thanks to our strong operating leverage and the scalability of the platform. As usual, the 1st month of the year We're affected by some seasonality such as financial planners, social security contribution. So Not particularly relevant in commenting the operating performance. Please now go through the following slides to analyze more in details on the dynamics of our results. On Slide 6, Now we have on the net interest income. In the Q1 2018, net interest income was Up more than 9% compared to 1 year ago, supported by double digit growth in volumes, both Sticky side deposits and lending. I would like I would highlight once again our strong commitment in building A very high quality lending portfolio, thanks to a strategy focused on offering this product exclusively to our loyal and very well known base of clients. Finally, let me highlight that net interest income quarterly Comparison was affected by restructuring of an uni credit bond in arrears, the IFRS 9 first time adoption and the following restructuring of the bond to produce Two combined effects. The valuation of the fair value of these bonds generated a positive impact on our balance sheet of around EUR 9,000,000 while the restructuring of this bond, which has a residual maturity of around EUR 1 year, Generated a negative effect of EUR 1,800,000 in our Q1 2017 net interest income. Net of this discontinuity, net interest income would be up by 1% quarter on quarter and 2.4% year on year. In In the following slide, you can find that the development of our government bond portfolio. As anticipated during our full year results conference call. Our intention is to further diversify our investment portfolio through the non renewal of expiring during credit bonds and the increase of European government bonds in addition to the already announced focus on lending activity. Let me also remind our sensitivity to a potential increase in interest rates. A parallel shift of 100 basis points would generate EUR 119,000,000 of additional net interest income. On Slide 8, fees and commissions, strongly half year on year, A double digit growth mainly boosted by investing fees. In particular, management fees grew 10.7% year on year, Thanks to the improvement in the asset mix as asset under management increased 11.2% year on year We have a strong contribution of guided products and services, which recorded growth by 22.6 percent year on year. The quarterly comparison was slightly affected by negative market performance and by around Minus EUR 800,000 related to the new long term incentive plan to financial planners accounted in this line starting from 2018. Also brokerage performed very well Thanks to higher volatility compared to 2017 and to the enlargement of the product offer. Core revenues in Q1 2018 ranked as the 3rd best period, But we will deep dive on this later on. Moving to Slide 9, we have a detailed overview on Cost evolution and as you know, the focus on efficiency is core in our bank. Staff expenses were At $90,500,000 in Q1 of 2018, 6.9% More compared to the same period of 2017 due to the increase in the workforce related to the business growth. Other administrative expenses at $40,800,000 As anticipated, the Q1 was affected by the usual seasonality related to higher personal financial planner social security contribution such as Enozarco Association and fear termination compensation fund as the payments are subject to an yearly cap. Moving to Slide 10. Finneco confirmed its strong capital position with a transitional common equity Tier 1 ratio At 20.15 percent and the common equity Tier 1 ratio fully loaded at 20.08%. Total capital ratio transitional at 28.49 percent, including the additional Tier 1 issued at the beginning of 2018. Let me highlight that the bank is working on the look through implementation to drill down the underlying assets provided by clients as collateral to credit bond. This will allow and lower risk weighted assets absorption according with the real underlying assets. On Slide 11, we show an overview of the total financial assets growing trend supported by the healthy expansion in euros 24,600,000,000 net sales since the end of 2012 Let total financial asset to EUR 68,100,000,000 as of March 2018, Confirming Fineco's potential to consolidate its position and take advantage from structural trends in place in Italy, The increasing demand for advanced advisory services and growing digitalization. This is also confirmed by our market share On total financial assets, still increasing increasing at 1.61% as of December 2017. 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 our 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 definitely better mix. As of April 2018, financial assets totaled at EUR 69,300,000,000 Plus 10% year on year, of which EUR 33,600,000,000 represented by asset under management. Guided products increased their penetration rate to 65% on total assets under management. On the right side of the slide, Asset under management grew EUR 9,500,000,000 from the end of 2014. Leveraging on our cyber advisory approach, The growth skewed towards guided products and services increased by EUR 12,900,000,000 in the period With a stronger acceleration in 2017. Net sales breakdown. We released today very solid commercial data also for April. We gathered EUR 2,240,000,000 of net sales in the 1st 4 months, an increase of 13% compared with the same period of last year. The monthly mix was characterized by higher liquidity component and by a temporary slowdown in guided products as Both clients and personal financial advisers were in a wait and see mood for the launch of some brand new products and services at the end of April. We'll provide you a deep dive on our new plus and core target multi rammer solutions later on in the presentation. Let me just underline that they will be particularly suitable in periods with high market volatility and very effective in overcoming emotional reaction by clients during phases of market turmoil. Net sales gathered through our financial advisers were at EUR 2,050,000,000 as of April, at plus 50% year on year. They are strongly committed in moving clients into harder value solutions, helping clients in managing their Wealth with a long term approach, bearing in mind the client's investment target. As you know, moving to Slide 14, our growth strongly leveraged on the organic component, Thanks to the unmatched quality of our services. In the Q1 2018, out of €1,700,000,000 of net sales, 83% was organically generated through the existing financial planners or directly by the bank and 17% 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 and cost sustainability perspective, positioning the bank in the 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. As of March 2018, the stock of recruitment cost To be amortized in our future P and L amounted to $24,000,000 stable compared to 1 year ago Confirming the future cost sustainability. Now I would skip directly to Page 18 to the next section before moving the last part of the presentation. And brokerage. It is worth spending few words on brokerage, confirmed as a strong contributor to our revenue generation. As you can see in the chart at the bottom, core revenues in the Q1 2018 ranked The 3rd best quarter since 2013, but the best quarter with this level of volatility, Thanks to the continuous enlargement of the client base and market share combined with a broader Product offer allowing clients to find volatility also when there is none on the market. Let's now move to the last part of the presentation on Slide 23. As you know, since the beginning, our strategic decision has been to manage internally IT and operations. This is part of our DNA and the relentless process of no improvements made in the last 20 years represent a unique competitive advantage for us. This successful choice translates into high level of efficiency and huge platform scalability, resulting in a strong competitive advantage. Thanks to our proprietary back end, internal development and automotive processes, We can benefit from a lean and efficient cost structure and time to market in delivering what our clients need. As you can see in the graph at the bottom of the slide, this strategy allows us to benefit from a strong operating gearing as there is a strong correlation between growth in total financial assets, clients and profits. Cost income ratio is the only KPI that is constantly decreasing despite the continuous expansion of our business. Slide 24, commercial loans grew 117% 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 cost of risk very well under control, as you can see in the right side. In Q1 2018 is not fully comparable with the previous periods due to the introduction of new accounting standards. However, for 2018, we expect Stabilization of the customer risk at the full year 2017 levels. Let's move now in analyzing lending and more in-depth. As you can see in Slide 20 Lending offer is very well welcomed by our clients. Mortgages reached a production of EUR 621,000,000 In the Q1, more than 20% up compared to the previous quarter. This is a very good result with almost 5,800 Mortgages Granted with an average loan to value of 52% and an average maturity of 19 years. For 2018, we expect a yearly new production of around $500,000,000 as we prefer to maintain a cautious approach without entering into Red zones characterized by aggressive prices, high loan to value and longer maturities. We expect also a normalization of yields in 20 18 on around nineteenninety 5 basis points. Personal loans grew more than 35% 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, we even expected a yield in the range of 4 50 basis points. Lombard loans at EUR 728,000,000 more than doubled compared to 1 year ago, with accelerating growth of the new credit loan bundle. In 2018, our expectation is to grow around Additional $500,000,000 with an average yield of around 110, 120 basis points. Moving on Slide 27, just few words on the new asset management company. The project entered its final phase and the company is expected to run at full steam ahead of schedule. All the formal steps have been done. We are just waiting to receive the formal approval by Central Bank of Ireland. Slide 28, new products and services. As previously announced, at the end of April, we launched Plus, an evolution of our cyber advisory model. This brand new integrated advisory platform, very flexible, offers very high customization in building clients' portfolio, Maintaining a digital and paperless approach. Plasse is holistic multi asset and multipurpose. Financial advisers can include all the products available, not only asset under management but also Asset under custody and the hidden liquidity. As the platform is fully developed in house, it's 0 cost for the bank and perfectly integrated with clients' current account. Moreover, it can be used as a financial education tool to drive clients in a process of financial awareness. With a fee on top in a range between 20 basis points and 100 basis points, we have differentiated pricing for assets under management, Asset under custody, ETFs. These products will help us making asset under custody profitable and we speed up the transformation into asset under management. We also recently launched core Multiramotarget, a new multiline policy, which combines Safety from traditional insurance policy with the investment opportunity coming from market volatility. This solution is particularly suitable in periods with high market volatility and is very effective in overcoming emotional reactions by clients during phases of market to Moel. Slide 30, further opportunities. Finally, we recap new interesting opportunities on Slide 30. As you know, we started to offer our banking and brokerage service in the UK And the first outcomes are, as expected, very encouraging. We reached over 1800 clients with a very interesting mix as 51% is represented by Italian UK residents and 49% non Italians, of which 36% are native British. As you know, in our estimates, we do not include neither revenues or cost, But this project represents a concept car for the future evolution of our bank as We know as we now have a perfect blueprint that could be redeployed in other European countries. We applied for Patent Box in December 2015, both for intellectual properties As our platforms internally developed and also for trademark, talks with the Italian fiscal authority are handled in the final phase, and we are very confident about the possible outcome. This process is expected to be closed In the coming months and fiscal benefits will cover 5 years from 2018 to 2019. Intellectual properties are renewable according to international guidelines. Thanks 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. Please pick up the receivable and asking questions. The first question comes from Gianluca Ferrari, Mediobanca. Please go ahead. I have a couple of questions. First one is the launch of this new Multirammo life insurance product. I was wondering if you Had the chance your legal department had the chance to read into the ruling of the Italian Supreme Court related to the fact that unit linked policies and potentially also the Multiram or the hybrid products could be defined as financial products And not insurance products. So if you can comment a bit on this. 2nd and last question is a bit more color if you can On the RWA reduction coming from the look through of the collaterals, any sense of how This could impact your RWA. Thank you. So regarding the recent Pronouncement by Italian Castasione that is regarding this point, first of all, I want to redirect you to the recent to the just recent Sent statement by Anya that is the Association of the Insurance Companies that has taken very clear position explaining that this pronouncement is related to one specific topic and is not involving the overall generally speaking the industry. In any case, regarding coming to our product, In this case, the main rationale behind in terms of the selling rationale behind this These studies are presented by the fact that there is a component that is the geste uni separata that Is not affected clearly because this company is a capital guarantee product. And so clearly, in many cases, not involved in any kind of this situation. And second, clearly, because This product is giving to the clients the possibility to decumulate from a capital guarantee product with a very high return Progressively into the equity market. And so is the second reason why our clients are extremely interested in this product because they have the opportunity to And so progressively in the market that taking advantage from volatility. So this what's going on that side for combined Together, these two components is absolutely relevant for the future development of this product. Regarding the impact of the look through on risk weighted assets, I want to be sure that there is not a misunderstanding because the implementation of the look through is going clearly is going to decrease the consumption of risk weighted assets. And we expect because clearly cautiously, we expect that we are that our hypothesis implemented to look through approach more or less on 50% of credit loan by collateral. And so this is expected to generate And a lower reduction of core Tier 1, so positive impact of between 150 basis points and 180 basis points on the core Tier 1 ratio. Thank you. The next question comes from Elena Tartini with Bancaise. Please go ahead. Hello. Good afternoon. I have only one question about your Irish company, your Irish project. And I would like to ask you if you are worried about what you have a cooperative compliance team with the revenue agency. So you should not have any particular worries. But If you have some kind of concern about the fact that recently Banca Mediolanum Received a notification from the Italian tax police regarding also Some fiscal years where an agreement was already reached with the Italian Revenue Agency. So if you are confident that your agreement could be a definitive one with no potential risks in the future. Thank you. Yes. Many thanks for your questions. This is the reason why during presenting our Irish project, We have been so accurate in describing our the fact that the bank has been admitted to the corporate compliance team. Because the corporate compliance I want to remind that at the moment that we have only 5 companies in Italy that have been admitted to corporate compliance scheme. One is UniCredit, our parent company. Then there is Pinnacle. Then we have Leonardo and Ferrero And Prada and other are waiting to be admitted. This new approach is clearly is expected to shelter us completely by this kind of situation. Because for example, if you are under this kind of scheme, there is no possibility for the fiscal Police to prosecute the company because the only interaction is Going to be with the fiscal with the Italian fiscal authority. And so there is no and second, again, I want to Repeat that the main advantage is that you can sit at the table in advance with the fiscal authority, discussing everything. And when everything is completely agreed, there is no possibility to receive any future possible claims. You were mentioning Mediolanum. Mediolanum is not part of this corporate compliance scheme. And this is the reason why They are now under this kind of issue on the statement. Okay. Thank you very much for your clarification. The next question comes from Giuseppe Mapelli with Equita. Please go ahead. Yes. Good afternoon. I have two questions. The first one is on your Finneco Plus platform. Can you share with us what is the reaction of the clients? I know that You just launched these new products, but the first reaction could be useful for us to understand what could be the reaction on this product. And then my second question is on Finacle Asset Management. If you can give us some color and elaborate a little bit more About the process that is going on at which stages we are currently. Thank you. Regarding Plasse, The reaction of clients, considering that we are talking about just 10 days, has been absolutely Very well above our expectations. So it's pretty clear that we this is the perfect product, Both for clients and financial planners, because again, it's extremely flexible, because you can approach the clients from every Different angle view is absolutely great in terms of the customer experience. And so the reaction is absolutely outstanding. And for this reason, we have Even greater expectations for the looking forward. On the fund processes, practically, Now the situation that everything has been finalized and we are just waiting for the final signature by the Irish Central Bank that is expected to come very soon. So I think all the process regarding the different filings and has been finished, No problems merged. And so now there is exclusively on the table of the Ally Central Bank for the final and last segment. And so we confirm that we are confident that we are going to be up and running ahead of schedule. Thank you. The next question comes from Filippo Priini with Kepler. Please go ahead. Yes. Good afternoon. Two questions. The first one is on cost. If you can confirm your guidance on cost for the full year, excluding the €5,000,000 additional coming from new product factory in Ireland. And the second one is on the Patent Boxes. I see that you're still waiting For the final answer from the tax authority by the end of the year, but if you can assume that this will be something As an impact quite material on your earnings generation. Thank you. So regarding cost, the answer is yes. We are So clearly, we expect in terms of cost, so considering that It's a growth in the range of between 3% 4% year on year. And we've been on top of that, the 5,000,000 related to the Finacle Asset Management in Ireland. And so again, we are confirming continuously declining costincome ratio. Regarding what's going on, on the patent box with the most recent developments we had in conversation with the fiscal authority. I will give To Lorena Policari, our CFO, for the update. Thanks, Lorena. Yes. In We started the discussion with the revenue agency with the focus on software and brand in October 2017. The feedback we received was positive. The evaluation method was shared. And in the following weeks, The agency will focus on the functional analysis for the attribution of extra revenue for the What we expect regarding the intellectual properties is could be material, but we don't Have now the possibility to give you a precise guidance on that because we need to close the process with the agency. Yes. So everything is more or less has been the most part has been agreed. I confirm that what Lorena, She's saying that the impact when it's penalized is going to be material on the P and L of the bank. And also very important to consider that in the key Continue that the most part is going to be represented by intellectual properties related to software. This is not exclusively related to the 5 years period, but it's going to be on a run rate basis according with the international standard rules. And so this is the reason why it's so important. And this is the reason why is because Finacle is in a unique position because again, thanks to our approach base of internalization of IT and operation infrastructures, Finacle is one of the few probably banks that is in the position to capture this kind of opportunity. Okay. Many thanks. Mr. Foti, there are no more questions registered at this time. Thank you very much for attending our conference call and talk to you later. Bye.