Banca Generali Spa

Good afternoon. This is the course called Conference Operator. Welcome and thank you for joining the Banca Generale First Quarter 2022 Financial 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. John Mariamostra, CEO and General Manager of Banca Generale. Please go ahead, sir.

Very strong and very positive of the recurring net profit, up by 43% year-on-year and closing at 53.2 million euro. As I said, this is the result of the completion of all the repricing initiatives in the banking, insurance and asset management space. And this has compensate the negative effect of the market. In terms of variable net profit, instead you see a lower contribution compared on a year-on-year basis at 15.1, basically driven by lower performance fee. Page 6, let's start from net financial income, from this side Only positive news, the quarter stayed at 22.5 million euro of net interest income. It's the strongest quarter of the last five quarters and the trading gain stands at 4.6 million with yield on net interest income at 0.6. Of course, thanks to the new scenario of the interest rate Here we are more confident on the result of the full year. We closed last year in the range of 83 million euro and now we review our target for overall contribution of net interest income at around 100 million euro. So it means an increase of almost around 20%. Moving on next page, so page number 7. where is the focus on the total gross fees. Total gross fees are in line, of course, with the recurring net profits, so you have the recurring components very strong, double-digit growth on year-on-year, a slight reduction on quarter-on-quarter, while variable fees, as you can see, down by almost 88% on year-on-year basis. Total gross recurring fees on total assets stands at 1.17, in line with our targets of announcing the investor day. Next page, now we will enter the gross fees, so two main components, the management fees and the other fees. Management fees close to 210 million euro, again also in this case double digit growth on year on year, The average managed assets down just 1%, the average quarter on quarter. Profitability here is at 1.43 and it's again in line or even higher than the target we announced during our investor day. You remember very well we set a target above 1.41 because we had a very conservative market. projection to the market dynamic and unfortunately now the trend is even worse than what we previously expected, but thanks to all the initiatives we launched last year, we continue to stay above this target and we continue to be positive to achieve all the targets we announced. Page 9, there is a new representation of other fees. You have, as you well know, four main components. The red part of the bar is about entry fees. Entry fees has two main components. One is about structural products and certificates, and the other one is the traditional banking fees, so it's more cyclical as a component, down from 9.2 to 8.8. Second block is about brokerage fees. More resilient to the market volatility is at 11.3, so pretty constant. And then advisory fee and other banking fees. Advisory fees is confirmed the same level as last year, which is due basically thanks to new contracts, while other banking fees are almost stable over a year. The overall margins and profitability of other fees, recurring fees, is around 0.17 in line with the average of 2021. So this is about revenues. Now move on to the cost side. Page 10. This is a new representation of the total payout ratios. Let's start. from the FA's network. You know we have the two main components, the ordinary payout and the cost of growth. Ordinary payout stands at 35%, that is slightly lower than the threshold we set during our investor day, it was 36%, and you see also a lower cost of, let's say, growth, which is An example of how efficient is our model that the cost of growth is strictly connected and correlated to the quality of the net inflows. So now stands at 10.0%. So the overall payout ratio to the net is about 45%. While payout to third parties is pretty stable over time, you know, we do expect a level around 6%. Overall, here you have the two components, one is brokerage and the other one is about third party asset managers. Overall, payout ratio below 51%. Let's say that in a very challenging scenario of the market, I do not expect significant acceleration of the payout. in case of normalization of the market we are more uh we think that the range could be 52 53. moving on uh the let's say other costs so the internal cost of the bank operating costs here you can see that on the left you have the total operating cost with the breakdown of the core components and others. In the others you have the one-off as well as the sales personnel costs. Sales personnel costs are a little bit higher. This is about the relationship managers, so bankers and employees. And this is due to the incentive scheme for the great result of the last year. While the co-operating cost is up by 5.9%. also once having included the cost for growth and the BG project in Switzerland. On the right, you see the breakdown of the core operating cost and the first block is about the Swiss project, BG Swiss. And as you can see, the increase is from 0.4 to 1.5, so a part of the growth of the core costs are linked to a growth project. For the other components, as you know, it's the first quarter, we have some seasonality, but we are confident to be in line with our targets. Of course, if the market remains challenged, we will be closer to the lower band than the upper one. Page 12, the efficiencies of our machine. All the ratios are at the top level in the market. You see a slight increase in the operating cost out of total assets, just for the reduction of total assets, and then cost and income ratio that once excluded the more volatile component is even lower than in the past, 40.4. To sum up the first part of the presentation, it's pretty impressive. The healthy trend of the recurring fees, as I mentioned, is strictly driven by the extraordinary job of optimization and efficiency of the pricing scheme of several products last year. Costs are under control, and then when we move below the operating items, you see lower provisions for contractual indemnities for the network and then we have updated with an upward revision the discount rates for the pension requirements and this is of course has a positive effect last comment on the direct income taxes at 22.7 we had the target of 22 is slightly higher due to the lower unexpected contribution of the Luxembourg business strictly connected to the performance theme. Now there is a new chapter named balance sheet and capital ratios just to give you an overall picture at page 15 of our balance sheet. Our balance sheet at the end of the first quarter stayed at 17 billion euro or 800 million euro higher than the end of the last year and this is driven basically by client deposits up by 0.7 billion and you see as a consequence the interest-bearing assets increased for the same amount. Some positive aspects of our balance sheet, first of all the loan portfolio the cost of risk first quarter was zero and the ratio MPL out of total loans stayed at four basis points. For the financial assets, we have almost 60% of the portfolio that is linked to variable rate and you can see even better in the next page, page 16. If you look at on the bottom right of the page, You are pretty familiar with this slide. The duration of the portfolio is, the overall duration is stated at 1.3. So we are ready to take advantage of any acceleration of the interest rates. The last page, page 17, is about capital ratios. These capital ratios are based on the new dividend policy. applied with the new business plan. So you remember we introduced two different ranges. The first one was about the recurring net profit and it's in line with the previous range, the previous three-year business plan, so 70-80. And then we have widened the range for the performance fee in the range 50 and 100%. And of course, all the capital ratio are worked out with a very conservative approach. So considering the upper band of both ranges, total capital ratios close at 17.3 with CET1 existing 0.1. All the liquidity ratio are well above the requirement provided by the regulators. So again, a very strong balance sheet very conservative approach, ready to take advantage of any upward revision of the expectation on interest rates. And already in place part of the benefits of the recent increase of the rates. Now, let's move on to the third chapter. It's about, let's say, total assets and commercial activity. Also, in this case, you will see Some new contents. First of all, at page 19, there is a different representation of the total asset in the three traditional blocks. I'm on the left of the page. You have the asset under management, the asset under custody, so stock and bonds basically, and the current accounts of the clients. And then there is another information, extra information, is about the asset under advisory that stays at 8.5% of the total assets. On the right, you see the focus of the asset under management in two main components. The first one is managed solutions, so the part of the portfolio, say, that is exposed to the market volatility, stay at 42.5 billion euro, or let's say 1.7 less than the end of the year, and then you have more stable results in the traditional life policies staying at 16.1 where the decrease is driven by some maturities and some disinvestment. The overall contribution of assets under management on total assets stayed close to 70% and the overall contribution of managed solutions is still above 50%. Next page. two deep dives, the part of the asset management products, both in-house and third-party, and the deep dive of the insurance products. Let's start from the asset management products. You know we have two, let's call, in-house families. The first one is about in-house funds. The second is about financial wrappers. What is encouraging and positive is that during these volatile moments, the financial advisors are more propels to increased delegation. So you can see that the discretionary accounts, the financial discretionary accounts are more resilient to the crisis due to also positive inflows. And then you see the reduction of third-party funds and in-house funds is very similar. The reduction is about 800 million euros for the third parties and it's about 500 million euros for in-house funds. On the left bottom of the page, the ratios, so in-house funds out of total assets, 11.7. In this case, it could be very useful also to consider the overall in-house funds, so summing up also the financial wrappers, and you see that the result is at 22.8%. On the right, we already commented traditional life policies, so the overall exposure of the bank to insurance products stands at 32%, and especially in this moments of the market and is one element for our ability to over perform the competitors in this scenario since at 32% and the insurance wrappers are close to 11 billion euro and also in this case you see that these kind of products are less impacted by the crisis. Now the same representation of the total assets is at page 21 for the net inflows So you know very well these numbers. We already announced to the market. So first quarter in terms of net inflows are almost in line with the first quarter of last year, 1.5 compared to 1.7. But with a more conservative approach mix with the banking assets, this is twice the level of the first quarter. So 0.6 compared to 0.3. The asset management component is well diversifying the different solutions. This is another element of strength of our bank to have the opportunity to offer different solutions in a more volatile context. Page 22, positive information because the contribution coming from the existing network is in line with the past, 1.1. What is below the targets or below the results of the last year is the contribution of new recruits, but just because transferring assets in these moments is a little bit more complicated than in normal times. And outflows are in line with the historical levels. Recruitment trends, first quarter lower than the same period of the last year, 33 new colleagues, and then we will see that in April we have accelerated the recruitment activity. Page 2-3, this is a deep dive on ESG solutions. It's another point of strength of our offering. We are at 6.3 billion euro and so you see that this kind of asset class is more resilient just down by 0.2 thanks to an increasing penetration of these solutions. And this increase in penetration is also driven by constant positive net inflows, up by 200 million euro in the first part of the year. Page 24 is the breakdown, the communication of the results in April. Again, half a billion euros, very sound and solid, with 60% coming from asset management products and with a negligible contribution of banking assets. So, very good quality, these results. In terms of breakdown, well diversified. And in terms of new recruits, as you can see, in April, we insert 17 new colleagues. So, the result year-on-year is now at... 50 new private bankers. Page 25, there is a focus on our financial advisory networks. Another very strong element of Banca Generali is the constant growth of numbers of financial advisors without penalizing the quality expressed in terms of asset portfolio average. So you see we continue to increase the sales force. This is driven by recruitment, of course, but even more by very low churn rate and very high retention rate. Bottom line of the page, you see the numbers of teams. We continue to increase the number of teams. This is very important also for succession planning goals. So it stands at 13% of the total assets. with a portfolio average of teams of around 85 million euro and on the left you have the breakdown for size portfolio size of our financial advisors who are wealth managers so bankers with more than 50 million stands at 36% of the total assets so now moving on the last section that is about business update Before commenting the business update, let me say that the quality of financial advisors in this situation matters most than in normal times. So we are confident to manage, properly manage the trust with our clients. So all our financial advisors are very focused on their relationship with our clients. Even at the cost of losing some opportunities, it's really important to stay close to the clients in this moment. and being very focused on our strategy for the next three years. On page 27 you see a sum-up of what we announced during our investor day, so basically three clear pillars, starting from our vision, so increasing constant increase of the value of services, the focus on innovation and sustainability as an engine to everything we do, clear guidelines and very concrete action. As I said, we are almost ready to launch the first dedicated affluent client product and I'm at page 28. This is about a new product based on ESG approach. So it's about people, it's about our planet and there is an automatic engine to reduce the risk exposure of our clients. So it is a very well diversified portfolio with a risk engine mechanism. And this is well thought for an affluent client. So as we introduced during our investor day, the offer would be more and more targeted on specific kinds of clients. And again, sustainability is an important part of our strategy. So in this case, the product is 100%. It does not mean that it is exposed to 100% of the beat of the market because we built a product with an engine to reduce exposure to clients during higher volatility periods. And last but not least, I want to leave you before opening the Q&A session with three main messages. The first one that is to me very important is that we confirm of all the strategic and financial targets of the next three years and you see at page 29 a representation of the three first level targets we share together in february second recurring earnings growth it's it's very healthy and it's working pretty well of course the impact of the market is negative but we have been working significantly to offset at least part of this downside pressure, especially in terms of margins. And the third is that we have a very strong historical track record in managing these kind of moments, and both thanks to a more diversified portfolio, and second, it is very connected to the first one, the quality of our professionals. So now... I leave the floor for your questions. Thank you.

Thank you, sir. Excuse me. This is the chorus call conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. To remove your question, please press star and two. Please pick up the receiver when asking questions. The first question comes from Luigi de Bellis of Equitasim.

Yes, good afternoon to everybody. I have some questions. The first one on the banking and three gross fees, solid trend across all business lines. What do you expect for the other quarters and full year 2022 for the main blocks? The second question on the NII, can you provide a sensitivity to interest rate and with the current interest rate curve, a guidance also for 2023? Yes. The third question on the items below the operating line. Can you provide us a guidance for the net provision and contribution to banking funds for 2022? The first question on the net inflows. We have seen for Banca Generali and the industry a resilient performance so far despite the negative performance on financial markets. In your view, why this time is different compared to the other past corrections of the market? And this I made last one on the performance of your clients. Very tough equity and bond market in Q1. Can you elaborate on the performance of your products to customers in Q1 2022 and what kind of reaction and how are you managing the relation with your customers in this tough time? Thank you.

Thank you. I start with some answers and then I leave the floor to Tommaso. Growth piece. In terms of margins, considering the market at the end of April, I continue to be optimistic to stay above the target we announced during our investor day. The target number is about 1.41. And of course, if you have in mind a new leg of negative performance will be hit, but we have an advantage that our portfolio is very well diversified. think of the traditional life insurance, think of the discretionary financial wrappers, as well as the discretionary insurance wrappers, the significant buffering of current accounts. So, of course, we will be hit, but I think that in terms of performance, I answer also to your question, I think that we are in relative terms performing better than the average of the market. The overall performance is around minus 5, minus 6 at the end of April and it's the equivalent of the performance of 2018. So, of course, numbers are not good and of course there is also dispersion of these numbers, but comparing with, say, we run competitive analysis and we are better positioned, especially in a part of the discretionary financial wrappers and, of course, also for the insurance contributions. So, in relative terms, if you think of important clients, it's all about relative terms, not absolute terms. and so there is a plus. Let's say that we are still in the situation in which the relationship with clients is manageable because we have the threshold of many times as an average, as a critical situation, so we are pretty distant from that situation and so we continue to consider this a correction and so we can continue to dedicate time the relationship of the existing Salesforce and the existing clients and part of the time to develop a new business. Why the inflows are in relative terms stronger than the past? Because let's say we are getting more and more used to such a correction of the markets and also we are better organized to dedicate the right time to the existing clients and to commercial activities and by the way We are planning several initiatives for June and July. And it's also about the quality of the bankers. And remember that the commercial banks sold a lot of asset management insurance products with lower advisory in terms not only of transparency, but also less risk. propens to see the client, explain what's happening. So the maintenance of the portfolio is crucial in this moment. So if you can go to clients before clients call you, this makes really the difference and this is how we are approaching our clients. In terms of other fees, so the gross fees, we said measurement fees, margin should be pretty stable. Of course, the net inflows, the mix will depend mostly from what you expected by the market. But again, the mix in April was good. So let's see what will happen in the next months in terms of performance. And in terms of other fees, positive in terms of brokerage fees. positive in terms of advisory fees in the way that are a little bit more resilient than management fees, but would be hurt of course. Banking fees are of course positive. Front fees, structural productivity could be hurt in case of other mess of the markets. I'm still positive, I think that we can stay at the same level of last year, but again, it depends mostly on what you expect from the market side. For the sensitiveness to the net interest income rates and a comment of the non-operating I leave handovers to Tomas. Thank you.

So the first question was about net interest margin. As we said before, the guidance for 2022 is to increase the net interest of around, we expect, 20%, so in the range of 100 million in absolute terms. The sensitivity that we gave is around 70 million of increase in net interest margin if we test an increase, a sudden increase of 100 basis points of the curve, a parallel shift upwards. And of course, going forward in 2023, we expect to have a further benefit because our duration is very short. We have one year and three months, so this means that basically after one year, all the book is repriced. Also, the lending part is exposed to variable... variable rates, so we have an important benefit also in 2023. We don't give a specific guidance, but we expect a further important benefit also in the next year. For the net provision, well, our guidance, we expect to stay in the range of 35, 37 million by year-end. The contribution that we expect on resolution funds is around $16 million per year. This is our internal forecast. I think that that was all.

Thank you very much.

The next question is from Giovanni Razzoli of Deutsche Bank.

Good afternoon. A couple of clarifications on my side. One is on NIII. I was wondering how much of the 12 basis points increase in the asset yield that you recorded year-to-date is related to the impact of inflation-linked securities. And as we haven't seen that much of increase in short-term rates so far, going forward, if the expectation on Euribor were to materialize, this amount, these 12 basis points of increase may rise further. And the second question, back to your comments on NII, my perception is that you are very well positioned to a steepening and to a parallel shift of the yield curve. So now we have seen a steepening. In the future, we will expect a parallel shift. So I was wondering whether my understanding is correct or not. And the last question on the impact of the rising rates environments on your commercial policy. I was wondering whether the rising rate that we've seen so far, especially in the five, ten years of tenure, offers you more commercial opportunity in the future. For instance, I don't know, some products that were out of fashion last year now become more attractive, like, I don't know, class one products, multi-class certificates. and also becomes more, for clients, more interesting to switch out of deposits into asset under custody or also more especially more managed assets. So my point is, is this environment creating opportunities also in terms of fees rather than price for the potential negative impact of the NAV of fixed income funds? Thank you.

Thank you. Let me start. From the second question, when I will introduce the first one, I will hand over to Tommaso. Let's say that in a competitive landscape, we are the best position to take an advantage from an increase in the interest rate. I would say at least for three main reasons. The first one is about advisory. So when you start having positive interest rates, it's easier to provide an advisory service paid by the client. And we have, you know, we develop Robo for Advisory. We have a very, very strong competence center in the bank. So let's say that we have all the instruments, the capabilities, and the professionals to accelerate the advisory service, the advisory fee model. Second, we are based in class and certificates. And you are right, of course, if we have higher spread and higher rates, this is the place to be for the certificates. But as you know, I'm very conservative in accelerating the overall weight of certificates. I prefer to maintain a sort of constant exposure and to negotiate on the secondary and then working both on the secondary and primary markets. But again, we have a competitive center. And thirdly, Even more important, we haven't discussed yet, but if you are convinced of any permanent increase of the interest rate, traditional life policy is the place to be. And you know how difficult it was to transform our commercial approach from a traditional life policy-driven proposition just to attract clients to an advanced advisory fee model. So if you have in mind, let's say, at least a normalization of the yield, I see tremendous opportunities starting from next year for net inflows, first of all. So for all these reasons, at this level is a great opportunity. It takes time. It needs some stabilization of the markets because the first message we... we have been giving to the client, to the financial advisors to stay as close as possible to the existing clients. In terms of net interest income, you are right. There is a portion of portfolio that is about inflation link boosted by what's going on. But the real effect the strongest effect will be in the second quarter. In the first quarter, there is a tiny contribution, but for the details, Tommaso will give you more flavor.

Yes, we have, I have to say, an exposure to inflation linked around 200 million, and we had a benefit in the first quarter. of 3.5 million in terms of higher interest margin. But of course we expect that in the second quarter we will have a further improvement in terms of benefit that we can have from the inflation-linked exposure that we have. If you look at our exposure, we think that, of course, the benefits will be major in the future because the parallel shift is not what is really happening in the markets. So the short-term interests are still negative. So the benefits that we will have... uh going forward will be much higher this is our our how we structure our our our balance sheet also because we have to remember that on the liability side we have that also the current accounts are a fixed rate at zero so we don't have any automatic review of the interest rate of the clients. So the markup and markdown will increase in the next quarter. Thank you.

The next question comes from Angeliki Bairactari of Autonomous Research.

Good afternoon, thanks for taking my questions. First of all, a question on an article that came out by Bloomberg a few weeks ago with regards to some trade receivables that you have distributed to some of your customers. There was an article that alleged that customers were sitting on potential losses on those trade receivables and considering the history of last year you know, Banker Generali buying back the securitizations with underlying healthcare receivables from the same arranger, if I understand correctly. Could we see a repeat of that this year? If your customers are facing significant losses, would you consider stepping in and actually buying those trade receivable securitizations this year? That's my first question. And second question, I understand that the management fee margin declined by four basis points. You mentioned that around two basis points of that was due to a more cautious allocation out of equities and into flexible funds. Can you give us the percentage of your managed assets currently split into equities versus flexible and balanced and versus fixed income funds at the moment? And where do you expect the equity exposure to land? I remember a few quarters ago, obviously the market was very different. You were guiding for an increase in equity allocation within total managed assets. Is it fair to now assume that there could be a further decline in equity allocation in the second quarter? Thank you.

Thank you. First of all, on the securitization side, they say that based on the information of provided by CSE, the critical situation, as we can define that, seems restricted to specific exposure to Sudan and Cuba, and there is no intention in the current situation to consider any repurchase of the assets. Again, it's just two different stories, at least with the information we have today. In this moment, I'm fully committed to managing a reduction in market effect of minus 3-4 billion euros. So our attention is mainly there. So it's an asset class, the trade finance, and this can be subject to market volatility. And at the moment, CSC has confirmed that it is very limited to these two countries. In terms of asset allocation, this is a very good question because You are right. The whole industry and the whole market increased equity exposure over the last two years, both for commercial activity, but even more important for the market effect. And the equity exposure today stays at close to 27%, between 27% and 27.5%. consider that this is the overall exposure, so out of 100%, and consider that this is the number worked out at the end of April. May started very bad, so I don't know exactly the numbers of today. The flexible products, I don't know whether Tomaso has the... Because we work out the overall exposure. I think that if you... Because the discretionary accounts, for example, almost 50% are variable. We have different flexible products, both in-house and third parties. Now we are looking at the number. The alternatives, yes, we have structured alternatives and flexible and balanced. I don't have in this moment the overall exposure. We will give you the details after the call. I'm sorry, but I have in mind the overall asset allocation, but working out the equity exposure of the underlying.

Thank you. And if I may just follow up on the management fee margin near term. I hear your guidance that you don't expect this to fall below the 141 basis points target or floor that you indicated with the business plan in February. But in terms of second quarter, if we assume that the markets are at the current levels that we see them in May, which are obviously below March, is it fair to assume that there could be another leg down from the 143 basis points that we saw for the first quarter?

No, the 1.43 has been worked out with the market condition as of the end of April. So, okay, there are one week of downturn in May, but let's say that there is a pretty update in these numbers.

Also, because the first quarter, there is, I mean, there is a fact, because the quarter is... there is an effect of almost one basis point linked to the real effect in this that we have in the quarter. So there is some seasonality in the first quarter that will be recovered in the second, in the third and in the fourth. So we don't expect effectively to have a change in terms of profitability in the second quarter, at least with the present market condition.

That's very clear. Thank you very much.

Gentlemen, at this time there are no questions registered.

Thank you for participating in our conference call and I hope to see you soon. Thank you. Bye.