Banca Generali Spa

Good afternoon. This is the Coruscall conference operator. Welcome and thank you for joining Banca Generali's preliminary 2022 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. Gianmaria Mossa, CEO and General Manager. Please go ahead, sir.

Good afternoon and thank you for participating to our full year results conference call. First of all, let me start by saying that the overall results were pretty strong, despite one of the most difficult years ever for the financial markets. Net inflows and total assets held up very well, I would say, where the mix got better during the fourth quarter. The net profit suffered by a very pure contribution from performance fee, while the recurring results posted a very strong increase and well above expectation, thanks to the resiliency of the margins of asset management products and the positive impact of the normalization of the yield on the net interest income. We confirm very sound balance sheet with all the capital and liquidity ratio above the requirements and we will propose a dividend yield of 1.65 per share at the next AGM. Last but not less important, we are fully on track to meet all the key financial targets for our three-year business plan and even more important, all the initiatives of our strategic pillars, the value of service, innovation and sustainability are well in place. So now moving on to page four, let's start by looking at a long series of our net profit. As you can see, and as you know very well, the bank is increasingly focused on the recurring revenues. You know we launched several projects to diversify the revenue streams. We diversified and innovated products and services. We redefined the incentive schemes, both short and long term for our financial advisors. we worked on also price optimization. And all these initiatives were finalized to increase the recurring components of our P&L. And the graph, page 4, is pretty impressive. We moved from less than 50 million euros at the end of 2012 up to 221 for 2022. And I'm very positive also for this year. In particular, if you focus just on the last five years, you can see that the recurring net profit increased by two point fold. And as I said, this year will be definitely a good year. If you move on the next page, so page five, there is the quarterly trend. And you see that there is a steady growth over the year. with a contribution of in q4 at 57.6 while where net profit were close to zero for very pure performance fee page six as usual we will go through line by line our pnl starting from net financial income net financial income jumped by 50 thanks to the acceleration of net interest income If you look at the net interest income in the fourth quarter, the result was at 57.1. This result benefits also from the repricing of the inflation-linked bonds. Overall, 6 million in the fourth quarter, 20 million for the full year. If you look at the yield, we closed the fourth quarter with an average yield at 1.42 with the number for the final day of the year was above 2%. Page 7, total gross fees. Total gross fees are stable in the year with a bottom in Q3. So we close 2022 with 940.7 and you see that the fourth quarter close at 232.7. They say that again this is the result of all the major components as we will see in a brief while as already mentioned variable fees were negligible also for the fourth quarter. So let's go through management fees. Overall, the contribution for the year was positive, plus 1%. The result of the fourth quarter declined, close at 197.6. This is basically due to the reduction of the average managed assets, and we know that average managed assets bottom out in the fourth quarter, while margins were very resilient at 1.43. That is above our target. to stay above 1.41%. If you focus also on the other recurring fees, at page 9, you can see that the overall contribution was negative, minus 8%, but it is all explained by the reduction of the more cyclical component, so minus 10.5 million in the entry fees, which is basically driven by almost zero front fee from measuring products, and the lower volumes in structural products. Focusing on the other components, here there are several positive indications. The first one is about the brokerage commission. It is slightly down, but in terms of volumes, we are in line with the previous year. The mix was more conservative. A very strong result from advisory fees. and a steady growth of other banking fees. In the fourth quarter, in general terms, we saw an acceleration of all the components. Page 10, moving on to cost side, let's start by commenting the total payout ratio to the financial advisory network. As you can see, total fee expenses and the overall payout to financial advisors were down year-on-year. The 2022 closed at $488.5 million. In terms of payout, positive news from the ordinary payout ratio at 35%. The incentive scheme, 10.9%, and this is the confirmation of a very flexible model. Payout to third parties, closed at 5.8. Here we are very efficient. I don't see room for further improvement. I remember that this includes the two main components, the sub-advisory mandate cost and brokerage to third parties. In this slide you see a new line on the payout to FAs on net interest income. Basically we pay to the FAs one a percentage of the spread between markup and markdown there is of course a cap and this amount is paid once per year um it's we always pay this kind of payout but due to the lower for longer impressive scenario let's say that we forgot these components in the past it accounts for two million in 2022 and we do expect a cost in the range of $78 million for this year. Page 11, operating costs, in line with our guidance, plus 5.9%. As usual, we focus on the core operating costs. As you can see, we include, as already said, the BG Swiss. The overall cost for BG Swiss closed at 6.1%. The depreciation was in line with 2021. The staff cost under control and you see an acceleration in the GNA for two main reasons. First of all, the acceleration of some specific project, for example, data intelligence. and cybersecurity projects. And for the back to normality, so we are launching all the commercial activity and meetings with our financial advisors. And we confirm also for this year, despite inflation pressures, the guidance of the three-year business plan closing in the range 5-6%. Page 12, we see the usual cost ratios. We focus on the red line, so the adjusted cost income close to 40%, so very good. In terms of operating costs out of total assets, of course, here there is a negative impact on lower total assets, so a slight increase at 0.31%. So, page 13, there is a sum up of the first part, and I would say very strong results. with operating results, X performance fee of 15%, driven by, again, I like to repeat, several components, net interest income, the resiliency of the margins in asset management products, and all the new revenue engine launched three years ago. If we focus on the contribution below the operating line, you see an overall positive effect here or near. It is mainly driven by a decrease of the pension provision and other contractual indemnities for financial advisors. On the negative side, there is an increase of the contribution of banking funds and some provision for risk and charges strictly linked to the string financial market conditions. You remember these results include a one-off tax charge of 35 million euro for the tax agreement to pay 45 million euro overall. And you can see the tax rate close to 25%, so slightly higher to the guidance we gave last time, that was close to 24. This is driven by higher contribution from net interest income. Moving on next chapter about balance sheet, you see asset expansion, balance sheet amount at 17.3 or 1.1 billion higher than previous year and basically due to the deposit from client where we included also the repos to financial institutions, so Euronext clearing and the interest bearing assets expanded by 0.7 billion. Next page we can focus on the yields starting from financial assets from 10.6 to 11.9. We close the fourth quarter at 1.42. Loans to clients up from 2.4 to 2.5 with the yield at 2.57 for an overall yield on interest-bearing assets at 1.6. In this slide you can see also the cost of funding, the fourth quarter closed at 0.18 with the cost of retail at 0.13 and this is the demonstration of a low elasticity to the spiking interest rate for the cost of funding. Page 17 with the deep dive on the financial assets. You know here we continue to maintain a very conservative approach and we are benefiting from the rise of interest rates also thanks to high shares of floating rate bonds above 50% and then of course for the low durations. Page 18, capital and liquidity ratio. We confirm solid capital ratio. CET1 closed at 15.6. Overall total capital ratio at 16.7 based on a dividend payout ratio at 19%. Leverage ratio well above 4% and liquidity coverage ratio and net stable funding ratio well above the SREP requirement. Next section, page 20, you see the overall total asset down 3%. And this is the result of an overall performance of the portfolio clients at minus 9, more or less, between minus 9 and minus 10, and positive inflows for 5.7. On the positive side, you see the increasing penetration of assets under advisory. We have at the highest level 8.9% of the overall total assets. So despite the market financial conditions, the asset under advisories continue to increase, both in absolute and relative terms. Focusing on the right of the page, asset under management, we see a reduction of both the managed solutions, the ones exposed to risky assets, and the traditional life policies for net outflows. Managed solutions out of total assets are below 50%. If you want to see the positive side is that in the phase of normalization, we do expect to regain at least a floor of 50%. Page 1, there is a deep dive on the left on asset management product, on the right on insurance product. Starting from asset management products, pretty impressive the resiliency of financial wrappers, so not only positive news from assets under advisory, but also positive news from financial wrappers, and I remember that these are the two investment services introduced by MIFID review, or strengthened by MIFID review, while you see a reduction in the distribution to retail of funds. The overall penetration of now solution increase now stands at 61.7%. Again, this is probably the highest level for the last five years. So again, in a difficult moment, Financial advisors, clients prefer in-house solutions with a particular focus on financial wrappers. Focusing on insurance products, you see that both components are down. So traditional life policies, this is the result of net outflows. Insurance wrappers, this is the result of positive inflows but negative performance. And here, you know, we are waiting for the release of new initiatives for both traditional life insurance as well as the insurance wrappers. So I'm positive that at the end of the first quarter, even probably more in the second quarter, we will see different inflows. About inflows, page 22. You already know these numbers, 5.7 with a contribution of assets under management products at 1.2. On the right you can see that this 1.2 is the results of 2 billion euros in wrappers and funds and outflows for 800 million euros in traditional life insurance. This of course is positive in terms of margins as a mix. Page 2.3, there is the net inflows by position channels could result from the existing sales force. On the right, you see a focus on recruitment. Recruitment, you know, lower than expected due to the financial market, but an acceleration in new financial advisors without remuneration packages. These are about mainly younger financial advisors and for the creation of new teams, so to work together with more senior financial advisors, also for the succession planning. Page 2.4, there is a deep dive on sustainability. You see a spike on the penetration of assets under management with a focus on ESG. Now they stand at 32.2%. This acceleration is due to a broader inclusion of assets following the introduction of MIFID ESG regulation. So basically at the beginning we included only the most preferred funds that we advise in our platforms. Now we include all the ESG solutions. On the right, we give evidence of the great job done in the ESG ratings. All the major rating agencies increased the rating on Banca Generali, MSCI, Standard Ratings, Moody's, and Sustainalytics. And last, we had signed the Principle for Responsible Investment. Page 2.5, a quick update on inflows for January. In terms of net inflows, positive for 100 million euros. In terms of mix, let's say it's pretty poor, but it's basically explained by the seasonality of the first month and then the closing of the 2022 year incentive scheme for the network. Net inflows in asset under advisory, positive. more than 100 million euros also in January and the recruitment started well. Here you can see that there is a different behavior from let's say financial advisors and financial advisory coming from private banks. The recruitment from FA network increased from 5 to 7. It's easy to move financial advisors thanks to this normalization of the market. For the traditional bankers it takes more time to convince them and probably they are waiting for more signs of stabilization of the market. The blue bar confirms the commitment to work on the aging issue and to foster new talented financial advisors. The last part of the presentation and the business update is all about our three-year business plan. You remember well, three clear targets. Consistent growth, so it's about net inflows. Profitable growth is about recurring net profit. And remunerative growth, it is about dividend. You remember the targets for the three years. the numbers for 2022 were pretty good and they allow us to confirm all the targets for the full period. And today we set also the targets for 2023. In particular, starting from consistent growth, we see net inflows in the range of 5.7, 6.7. So we consider the results of 2022 a floor where the mix will be between 55-60% in asset management products. About profitable growth, you remember we gave a target in the range 10-15. The results for 2022 was very impressive, up by 25%. And also for this year, we project an increase above the target in the range of 15-20%. On last but not least, remunerative growth. Also for this year, we confirm our dividend policy to distribute in the range of 70-80% the recurring net profit and from 50 to 100 for the variable net profit. And as I already mentioned, for this year, we will propose a dividend at 1.65%. or 90% of net profits. In the following slide you see all the initiatives supporting these targets. So starting from page 2.8 and 2.9 there is a focus on consistent growth. Here we have two major initiatives to support the productivity of the existing Salesforce. The first one are the first release and the first pilots on data-driven approach, very concrete initiatives for top clients, entrepreneurs, but also more in general for all the customer base. The second initiative is simply back to normal. Probably you remember that at the beginning of 2020, just before the COVID pandemic, we launched, we announced a project of a dedicated location for our training courses for sharing experiences. Now we are back to normal and finally we see this building full of financial advisors and this is very, very important to us by sharing experience and training on the new scenarios. And back to normality implies also more events and meetings on the territory. And here the proximity is again a very strategic factor for us. So for the existing Salesforce, the focus is on how to increase the productivity. On the new financial advisors, the main drivers are basically two. Increase diversification, it means by aging and by gender, and you see the results of 2022. The age average, 48 years old. Gender, 25% women. And all is driving an acceleration of the BG team project. We have now 143 teams for $12.4 billion. And of course, we will continue in attracting very talented and senior financial advisors. In terms of targets... We have a goal of 150 financial advisors, so we confirm the target of the three-year business plan and the contribution on the overall net inflows will be in the range 25-30%. Next three pages is on our second target that is about profitable growth. Here we have three very strong levers. The first one is net interest income. The second is about managed solutions and the third is about assets under custody. Let's start from net interest income, page 30. We increased our guidance for this year to stay above 200 million euros. Key assumption, average six-month arrival at 3.2. A potential cost increase of the retail funds, let's say the current accounts, at 130 basis points. That is a very, very conservative assumption. And we assume stable volumes. So in this way, we would increase our net interest margin at least of 45%. And again, this guidance is to think of a normalization of the markdowns, of the costs of the current accounts, but as we mentioned last time, we don't have any automatic mechanism and we will wait for competitors. Next page, there is the focus on asset under management. The results of the last quarter of last year were impressive. We had numbers in line with the sum of the three previous quarters and this is due basically to new initiatives. We revised all the propositions for the new scenario of yields with new financial wrapper solutions, new target fund solutions and how to offer We say asset management products in a context in which GOVI bonds provide higher yield. So, of course, here the competition of GOVI bonds has been increasing over time, but for us it could be an acceleration because it allows you to offer more diversified solutions with the same yield and to provide also, let's say, protected solutions by stripping out the GOBI bonds and completing the offering with equity funds. So bonds at 4% is not necessarily bad for asset management products and we launched several initiatives with good success in the last weeks. Page 3.2 you see assets under custody. Also in this case I'm pretty optimistic. You know in the previous three year business plan we launched the new revenue engines and the results are very good. Asset under custody almost doubled and we recorded also an acceleration in the profitability of asset under custody from 14 to 20 basis points. On the right of page 32 you see the trends. from the launch of these new initiatives and a deep dive on last year. Advanced advisory services, you know we started with providing advanced advisory services for funds and then we completed the offer with advisory also for assets under custody. Now assets under custody offered through advanced advisory amount at 2.5 billion and you see the acceleration of the last quarter. Primary and structural products. Again, here we multiply by three the volumes, so 1.2 billion euro. And the fourth quarter was pretty impressive. And again, having a different yield, of course, is easier to offer these structural solutions. And then brokerage fees. Again, also here you see that we almost doubled the volumes. The revenues were marginally lower due to a more conservative mix, but again, the fourth quarter was pretty impressive. So, also from assets under custody, I do expect more positive news. Third target is about the dividend policies. the proposal for 2022 and you see the dividend paid in the previous three years. We decided to confirm the dividend at 1.65 that is in line with 2019 and 2020. You know 2021 was pretty an exception due to a very strong performance fee. And we confirmed our approach to pay two different branches. The first one will be paid this year, 1 euro. The second will be paid next year, 0.65. This will imply a cash view for this year at 1.8 because I want to just remember that on the 20th of February we will pay the dividend for the previous year or 0.8 euro per share. So just to sum up, I'm very confident in the acceleration of business to achieve our three-year business plan. I see positive signs from the commercial activity and stabilization of the market would imply a potential acceleration. Plenty of initiatives, very concrete ones. Profitable growth. three levers, net interest income, asset under custody, and asset under management, clear in mind the targets and how to achieve it. And remunerative growth, you know, we are a capitalized company focused on growth, but also focused on value, and we love to pay back the net profits to our shareholders. And now I will leave the floor to the Q&A session. Thank you.

Thank you. This is the course 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 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 is from Elena Perini with Intesa San Paolo. Please go ahead.

Yes, good afternoon and thank you for your presentation. My first question is about the discussions that we see on the press and the comments that we already have had from your competitors regarding the potential ban of inducements. What's your position about this and how do you think that you could manage a potential change? Another question is about your assets under management inflows, which were positive for the purely managed assets in the first month of the year. It is true that January is usually Not a very exciting month, but you had a negative flow from traditional policies. So I was wondering if your reopening of the offer is bearing fruit. It seemed to... to bear them in the fourth quarter, but I would like to have any additional comments also considering your guidance of net inflows for the current year. Thank you very much.

Thank you, Elena. So let's start from the banner of inducement. Let me say that I'm not so sure of the result of the current discussion because other countries could be eaten even more than Italy and I mean Germany and France because Italy is probably the best position in terms of transparency so we already disclosed all the costs and you know that the discussion is not only on the ban yes or no but also on different level of transparency that you should achieve. So they said that I'm not sure that we will see the ban and any intermediate solution will be favorable for Italy versus other countries. This is my view. In case of ban, it would be very exciting for us because I think that we are probably the best position for at least two reasons. First of all, I mentioned several times that would benefit the review, two investment services were at the core of our strategy, that is advanced advisory services and financial wrappers. We are definitely best in class. We recorded positive influence also last year. We have positive performance with our financial wrappers and this is the solution, the answer. And more in general, all the strategy based on wrappers, so also the insurance wrappers are the right way to approach this kind of regulation. And last but not least, don't forget that we provide services with the best financial advisors in the market for portfolio average, but also for experience and capabilities. So let's say that I would see problems for other distribution channels because overall financial advisors will be better positioned. And among financial advisors, and no doubt we will be the best in class on all the investment services we can offer in this new environment. The second question is on the breakdown of the influence with a particular focus on traditional policies. Of course, the main competitor of the traditional life policies are the BTPs. And as a mitigating factor, now we launched several services under advanced advisory services. So let's say that from a revenue perspective for us, the switch is not necessarily negative. But on the other hand, I think that traditional life insurance has a great value in terms of protection, in terms of value proposition. So with the relaunch of the initiatives, let's say in March, I'm pretty confident to see also positive, to regain momentum and to see also positive inflows to, let's say, offset eventually the outflows. So I'm not so negative on traditional life insurance because, let's say, the reason why this product is not just about the yield, but it's more, let's say, sophisticated and it's about a concept of protection.

Okay, thank you very much.

As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question is from Luigi Debellis with Equita. Please go ahead.

Yes, good afternoon. I have several questions. The first one is on the recruitment. Can you elaborate on the cost of acquisition if you expect to remain stable or not and the competition on this side? The second question on the product mix and margin. So can you elaborate on the evolution of the mix of assets, net inflow mix and the management fees margin that do you expect in the coming quarters? The third question on the securitization, so can you provide us an update on the reimbursement trend and performance of these products? The first question on the expectation for 2023 of the new revenue stream engine, tax rate and cost. And the last question, if I may, can you give us also an update on the JV with Saxo Bank, BG Swiss. So if you have some targets in terms of new clients, asset under management, recruitment, and economics for 2023 for BG Swiss and Saxo. Thank you.

Thank you, Luigi. I start answering. Please interrupt me if I forget some questions because I took notes, but I'm not sure to have written all. Let's start from recruitment. Cost of acquisition is flat, we are around 2.3, depending on the mix. Last year was lower due to a more conservative asset allocation. But no news on this side. Competition is always the same. I don't see an acceleration of competition. There is a great attention on recruitment, especially from retail banks, and we have different targets if we compare our activity with Fineco and Medioland that are the most aggressive ones in this moment. Second, margins. We are confident to stay above our guidance of 1.41 for managed solutions. I'm very confident on financial wrappers and I think that the overall in-house solution gaining ground because on average performance are in relative terms better than others. In terms of securitization, no big news at the year end. We haven't received any information of further realized losses and I remember that the overall realized losses were at almost 10% of the outstanding. And we are continuing to explore and take action to protect our clients and the bank. In terms of reimbursement, we are close to 50% of their first three securitizations. In terms of revenue engine, if you understood well, first of all, advanced advisory service. Here there is a great opportunity. It takes time because it's a cultural shift. to accelerate also in the business of asset under custody with an explicit fee while I see constant growth in asset under advisory through funds. These rumors and news on the inducement could be an accelerator because I see increasing demand for a trainee for information, for communication from the network and from the client. So this could be a positive surprise for the year. Brokerage fee, Saxo Bank. Let's say that you have two different behaviors. The first one is the day trader, mainly focused on equity. We saw a small cluster of clients accelerated a lot in terms of turnover, so positive. And then we have, for the last year, a major focus on bonds. And this is, let's say, difficult to leverage the capabilities of Saxo in the bond market. So a normalization of the market should allow us to increase also the brokerage fees. Structured products and, let's say, primary market Here I'm more optimistic because this level of yields allow us to accelerate also this kind of offer and so we have all the processes that are digitalized. We are better positioned than others to gain momentum also on this kind of offering. In terms of Swiss projects, We are waiting for the approval from the regulators. We should be very close. We project the green light in the next couple of months. At worst, we should be ready to provide these services in the second half of this year. We will give more color on this project once we receive the formal authorization. And tell me if I forget something, Luigi. Thank you.

Only tax rate and cost. Thanks.

Tax rate, sorry, let's say in the range of 24, 25, probably closer to 25 and 24. And the cost in the range of 5, 6%.

Brilliant. Thank you very much.

You're welcome. Thank you, Luigi. Sorry.

Once again, if you wish to ask a question, please press star and one on your telephone.

For any further questions, you may press star and one now.

The next question is from Gianluca Ferrari with Mediobanca. Please go ahead.

Yes, hi, good afternoon. I have a question on the retail cost of funding. It seems that you raised the guidance from the 90 basis points, despite so far we are not seeing any real signs that the cost of funding is growing. So I was wondering this new guidance, what is implying in terms of remuneration, if you are expecting to give that to a specific segment or across the board, how much, and a bit of additional color to square these guidelines. Thank you.

Thank you Gianluca. Let's say that this is a very conservative projection. We start seeing some specific initiatives from commercial banks and some competitors. offering deposits and repo initiatives to higher rates, and also from very small and medium banks. We are not suffering this competition, but I start seeing several initiatives. So, just as a conservative approach, we prefer to think of a worst-case scenario. Of course, on the high net worth individual, there is a little bit more pressure. to be part of the Oribor, but the overall impact on our numbers are pretty low. I would consider 30%, 35% of the overall stocks. So unless you don't have in mind any structural initiatives from the two major banks, this projection will be probably a little bit too conservative.

Okay, thank you. You're welcome.

The next question is a follow-up from Elena Perini with Intensa San Paolo. Please go ahead.

Yes, excuse me, but I was not fully connected today, so I apologize if I ask some questions about things you have already said. I would like to have a guidance on operating costs for 2023. And we read in the press these past days that you are ready to post some additional provisions on securitizations. I was wondering if any in the fourth quarter or... Are you going to consider them and on what basis? Thank you very much.

No problem, Elena. As a guidance of operating cost, we are in the range of 5-6%. And for the provision, we don't have specific provision for securitization. but we have posted 10 million of provision in the fourth quarter to manage commercial initiatives due to the extreme negative market conditions. So just as a conservative approach, we decided to post in the fourth quarter 10 million, but it's in general terms for any commercial activities to support the relationship of the financial advisor with the client. Thank you.

Mr. Mossa, there are no more questions registered at this time.

Okay.

Thank you for attending our conference call, and bye.