Banca Generali Spa

Good afternoon. This is the Corusco conference operator. Welcome and thank you for joining the Banca Generali 9-month 2023 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. Gian Maria Mossa, CEO and General Manager of Banca Generali. Please go ahead, sir.

Good afternoon and welcome to our third quarter result conference call. The first nine months were pretty strong with the total client assets at new highs, 88.8 billion euros. driven by very solid net inflows by the existing sales force. In terms of underlying investment service, continuing to build size, we are at 18.7, well supported by consistent inflows, while from a financial perspective, the recurring profit achieved new record high at almost 250 million. Also on the capital and liquidity perspective, we continue to confirm the level or higher level compared to the previous conference call. And in terms of business update, we are accelerating on new strategies, very close to launch our Swiss project, acceleration in the data-driven bank. and we announced also a new way of offering advisor with the sustainable advisor. Today, we will deep dive on our Swiss project. Page four, let's start from net profit. Fourth quarter, third quarter closed above 80 million, of which 83.8 of recurring net profit. and as you will see a strong contribution from net interest income and solid regarding fees, so management fees and other fees. Page 5, we can start with the net financial income. The third quarter closed at 80 million. The net interest income closed at 76.6. If you carve out the inflation-linked bond component, you see that we have achieved the highest level, almost 76 million, and from here we do expect a stabilization or a slight reduction. In terms of margin, instead, we are in line with the previous quarter at 2.13. Page 6, total gross fees. Here you can see as usual in the third quarter some seasonality. We have 240 million euro of which 238 coming from gross recurring fees. Here you will see a gradual recovery of the management fees and some seasonality in the banking and front fee. Starting from management fees, page 7. you see that the quarter closed at almost 204 with a stable margin, 1.43, and a gradual recovery of the average managed assets at 56.8. On the gross banking and entry fees, instead, here if you focus on the first nine months, The acceleration is pretty impressive, plus 21%. Quarter-on-quarter, so this quarter compared to the same quarter of last year, plus 25%. So the contribution is growing, steadily growing. Quarter-on-quarter, you have some seasonality, while the advanced advisory fees continue to grow. The third quarter closed at 10.6%. On the expense side, also here there are some seasonality effects, but we can say that the payout to FA, the ordinary payout, is coherent with our projection. Here is a little bit lower due to the reduction of the front fees, in which we have a higher payout. Structurally, you see a lower cost of growth, and this is basically driven by the the numbers of recruitment that are lower than expected. For the payout to third parties, you see a small increase and this is linked basically to an increase of cost in banking services activities, basically credit cards. The other part of costs, the operating costs, here are no news, good news. We confirm our guidance in the range of 5-6. You see on the bottom left that co-operating costs close at 6%. And just to remind that here we are including all the costs and investment for BG Swiss and also all the inflationary pressure. In terms of efficiency, page 11. The operating cost on total assets is very close to the best level, we are 0.29, while cost income ratio now is below 33%. Page 12, we have our user representation of the P&L. If we focus on non-operating lines, the non-operating charges had a higher impact due to a normalization of the discount rate for the provision for our financial advisors. So still positive, 5.3 million, but definitely lower than last year, 18.9. So the difference of this positive contribution explained almost all the higher impact of non-operating charge. On taxes, 26.9. This is in line with the guidance we communicated during the previous conference call. And then for the windfall tax, we decided to allocate the tax to a non-distributable CET1 eligible equity reserve. And the total amount stands at 26.6 million. So I would say very strong financial result. Now let's move on balance sheet. Page 14, here you see a new format in which we represent the quarter, the quarter one year ago, the number of last year result, and then the current numbers. So overall balance sheet closed at 15.5, or 200 million lower than the previous quarter. If you focus on interest-bearing assets, you see that we are at 14 billion euro, due to a reduction of the financial assets of 300 million euro. In terms of yield on interest-bearing assets, you see a further acceleration, 2.8, and this is driven by all the major components, so loans to banks, loans to clients, and financial assets. On the other side, on the liabilities, page 15, you see that the total deposits stood flat, quarter on quarter, almost flat, with stable client deposits at 11.1. In terms of cost of funding, you see a slight increase, 0.79, and with an almost stable cost of client deposits from 0.31 to 0.38. For this reason, page 16, we further increased the projection of the net interest income for Vizia up to around 300 million from the previous projection that was in the range 270-280. For next year, instead, we confirm the target we announced in the previous conference call that it was in the range 270-280. Page 17, capital and liquidity ratios. All good news. Stronger CET1 and total capital ratio. Leverage ratio, net stamp of foundation liquidity coverage ratio will be above the FRAP requirement. Just focusing on capital ratio, the 18.5% of total capital ratio include a distribution and accrual of dividend for 1.75 euro. And as you know, our commitment is to pay as much as we can in terms of dividend. Next page, page 19, let's focus on total assets. Here are plenty of good news. First of all, the highest total client assets ever achieved, 88.8%. The highest level of advanced advisory services, 8.9 billion or more than 10% of total assets. Fee generating assets continue to increase in absolute terms, 60.7 billion euros. In relative terms, you see that we are still below 70%. We are at 68%. But here, you know, I'm a very positive view because in the normalization phase, I do expect to resume standard levels that are in the range 70-75%. Page 20, you see the deep dive of asset management and insurance products. starting from asset management products, highest level ever in financial wrappers, above 10 billion euro. It's a pretty strong result considering financial market conditions. And for the funds, you see the relative strength of in-house funds compared to the third-party funds. On the insurance products, three good news. The first one, stable recovery of the insurance wrappers. The second, we do see a slowdown in the relative outflows of the traditional life insurance. The third one, we have just released the new offer, both traditional as well as insurance wrappers, and in the recent data, we see a positive impact. For the net inflows, I go directly to page just because there is an update with numbers in October. October closed above 300 million euros, so the total net inflows for the first 10 months is higher on a year-on-year basis. Managed solutions amounted to 0.6 here today, and that you have to add to the asset under advisory, so almost 1.3 billion euro overall, of which 1.5 on total asset under custody. So the overall result of fee-based net inflows is above 2 billion euro. New recruits, here you see two different behaviors, two different trends. We closed the gap in terms of recruitment from financial advisors compared to last year, while there is a gap in terms of recruitment from the traditional banking system, which is due to the fact that employees during difficult times have more difficulties to transfer and to move. the project instead of a phase without remuneration package in June continues to go in the right direction and we are now above the number of last year. So overall, we start seeing some normalization path in the client behaviors. If you look at the cash deposits of our clients in the last two months, The result is positive, excluding the BTP valore, so the one-off issue of GOBI bonds. So on the cash side, I start being a little bit more positive for the future, even if there is a very aggressive commercial offering from all the major commercial banks and also from asset getters. because you know liquidity is shrinking in the system. We move faster and before others. So I see we are least exposed to the risk of a further contraction in liquidity than the market. But I do see an acceleration in the cost of deposits, not for the bank, but for the system. Another consideration, as I mentioned, insurance. is getting better and better thanks to the new offering and we are very close to launch new and new products in the asset management industry so i do expect also stabilization and positive contribution from say financial wrappers and funds in the next weeks the last part of the presentation is focus on our BG Swiss private bank initiative. Finally, we received the green light for the banking license. You know, we will be different from the traditional players. First of all, because the financial advisors or private banker will be at the core of the relation between clients and bank. Second, it will be a very smart bank. with a very light cost structure, but with also a very senior management team. So we are pretty confident to have a significant competitive advantage on this field. Page 26, you see that we will start with two different offering, alternatives and complementary. The first one will be a new engine of growth, the Swiss market, so Swiss clients with Swiss offering. The second will be an extension of the services for Italian clients, so we leverage the Swiss license for banking services while we continue to offer the Italian investment services. Let's deep dive on the two different models. Page 27, Switzerland. First of all, first target the south of Switzerland, so Ticino, and then we're going to extend penetration also in the rest of Switzerland. We will be a challenge bank just because we'll be more digital, a new one, and it's really important in traditional industry, bias for a sustainable offering and also innovation. offering focusing on investment by women, so also with some specific characteristics to attract new clients. As I said, this will be 100% in Switzerland, so the bank will provide banking services as well as investment services, also leveraging the capabilities of Valeur. the distribution will be driven by Swiss private bankers. Next page, page 28, instead we are in the other segment of the business, the cross-border, very clear and transparent framework in which we're going to provide the Italian client with two different services. The banking services from Switzerland and investment services from Italy. And this will allow us to leverage all the competencies and capabilities developed in Italy, the digital one included. So the client will be an Italian client. The financial advisor will be an Italian financial advisor. We're going to provide the financial wrappers and advanced advisory services from Italy and managed in Italy. And the value proposition will be very disruptive. To enhance also multi-booking center and to repatriate money in Switzerland because you can continue to diversify the deposit, but you can get it. the investment services within with just one entry point that is our financial advisors and the positive impact is immediate. You can see page 29 for example because you will see an integrated position, integrated monitoring on all the positions. Just as a reminder in Switzerland there is projection of 100 and 150 billion Euro of assets there are of Italian investors and today I can say that we are first mover with this model and we have been working for almost two years to be ready and to be first. So I do see a significant advantage. Page 3.0 you see the implication and the timeline. Timeline, we have just received the green light from FIRMA. We are setting up the procedure and we're going to be ready to onboard the first client before the end of November, beginning of December. Second step. After having received the formal approval from Bank of Italy for the freedom of service, LPS, we will deliver also this kind of service to Italian clients and we expected to be ready for the first family and friends pilot at the end of March, beginning of April and fully speed in the second half of next year. Impact. This is a new engine growth. We do expect to have up to 1 billion euro for each year. So starting from 1.1 in three years time we will target 3.6, 4.1 billion of assets as overall contribution. And as I said before, this is a very important initiative from a strategic perspective for the bank. We can increase cross-selling, get new clients from Italy, launching a new revenue engine in Switzerland, but it's not the only project we are delivering. Very close to speed up in the data-driven bank and to increase the productivity of our financial advisors. And then there are several other projects and we will take time to explain and to focus on the impact of this new project in the next conference call. And now I will hand over for the Q&A session.

Thank you. This is the Coral School conference operator who will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touchtone 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 taking my questions. I've got two questions. Essentially, the first one is on the data-driven bank. If you can elaborate a bit more on it and how would you expect it to contribute to enhance your offering for your clients. And then looking at the guidance you provided for the NII for the current year, so around $300 million, and looking at the trend in the third quarter, it seems that the net interest income has already increased. already peaked. What are your expectations for next year? I don't know if you have already mentioned it as I was disconnected for a few minutes or so. If you have already mentioned, I apologize for asking it again. Thank you very much.

Thank you. First of all, Data Driven Bank, we shared our view during our investor day. We are almost ready to provide our financial advisor with the potential of the client. You know the bank is sort of a treasury in terms of data. We work out with machine learning the potential of each client and we create a matrix in which you see the assets of the client with us and the expected amount of assets overall. And then we compare this gap with the quality and with the ranking of the financial advisors. Of course, you're going to see some opportunities and we are redefining the organization of the network to support, say, less productive financial advisors to explore the potentiality of the client. And we will show you some numbers. It's pretty impressive, the potentiality of the initiative. On the guidance, you are right. I do believe that the third quarter, if you carve out the inflation-linked bond, is a sort of peak. I do not expect significant reduction. I do expect a sort of stable net interest income on a quarterly basis and we say that for next year we do expect to stay above €270 million despite a more aggressive competition on the liquidity side from all the players, both commercial banks and asset-gatherers. a target of cost of funding from clients in the range of 70-80 basis points.

It is almost twice the current one.

Okay, thank you very much.

The next question is from Alberto Villa with Intermonte. Please go ahead.

Good afternoon. I wanted to a little bit deep dive on the net inflows outlook. Thank you for your comments you mentioned about what have been the recent trends in terms of cash deposits and traditional and insurance wrappers. I wanted to understand If you are seeing some different behavior by clients in looking at their investment decision due to the swift change in the interest rates environment, so if we can expect this trend of increasing their, let's say, direct investments into fixed income investments to continue, going forward or if you expect when some of their clients investments get to maturity you will be able to capture these flows in some ways and maybe if you can comment on which kind of products are you considering to offer to the clients and if the margin perspective margins are in line with the current offering or we do have to expect some sort of erosion in the margins going forward. Then going back to the NIA guidance for 2024, just if you can share with us the basic assumptions on this guidance would be helpful and that's it. Thank you.

Thank you. First of all, on net inflows output, I do see a smaller take and I try to explain what I mean. The pressure from inflation, reduction of saving rate, less liquidity events are impacting overall in the last months on the overall amount of money in the system. So I see very aggressive initiatives to get a part of this cake, smaller cake. We haven't launched yet significant initiatives in this direction and we are very focused to maintain the cost of funding under control. So this is the first point. I do see some slowdown in the overall inflows in the system for the inflation and all the reasons that I already mentioned. In this context, I start seeing some normalization in the behaviors of the clients and I try to explain what I mean by normalization. Slowdown in the reduction of cash deposit. The trend we will continue. For example, we do expect for the 2024 another 1 billion of reduction on the current account with a cost of funding for clients in the range of 0.7, 0.8. So the numbers of the projection of next year are basically a small, another reduction of the balance sheet, so 1 billion euro of net inflows. and sort of twice for the cost of funding on the client deposit. In terms of mix, you are right. I think that in this moment, the asset under custody is the lion's share, but it's also invested mainly in short maturities, And I do see the opportunity to transform these short maturities in new solutions. Basically, I do expect inflows in the financial wrappers and in the insurance wrappers. The margin should be in line with the existing one. Any acceleration on traditional life insurance or target funds would imply lower margins. And since I believe that in the medium term insurance will be again part of the story, in the medium term we could see again the share of the traditional life insurance gaining momentum. If we successfully convert some assets under custody and some funds in wrappers, insurance and financial wrappers, we will maintain the existing margin. So I'm confident to confirm for next year the target to stay above 1.41. That is the target for our strategic plan. By the way, if you look at the fiscal reforms for the financial products, financial and insurance products, we could see a positive effect for asset management and insurance. So I do not exclude that if and when we're going to see the implementation of the fiscal reform, we could see some positive effect for our industry. And again, last question was a turning point for asset under custody. You know, the asset getters are faster in adapting to a new context. So while in the traditional banking system, I continue to see a relative strength of asset under custody in the asset gatherer business I do expect in the next two or three months a stabilization. Probably the first quarter of next year will be the moment in which we could see some inversion.

Thank you very much. If I can just a quick follow up on the recruitment side, if you can Give us an indication of what was the contribution year to date on the inflow side and if you have an outlook on what could be the contribution next year.

Yes, the contribution for this year was pretty low, was below 20% so far. also in the recruitment we do expect a normalization so we are confident to receive higher numbers next year also thanks to the Swiss project because I do expect a sort of reinsuring of some bankers who now work in Switzerland just to stay close to the Italian clients thanks to the new model ok thank you

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

Yes, hi. Ciao, Gianmaria. For me, the first one is on product strategy and asset management. I was wondering if you are working like many other networks to some target maturities, starting with BTPs and then switching into equities, or rather you see more interest in private markets? or you keep focusing on liquid, even though liquid products in Europe doesn't seem to have a great momentum right now. The second is on life insurance. If you can remind me what was the profitability of all the G&A savings, I think it was 150 basis, if I recall properly. Then you lowered that to allow clients to have a better performance. I think we are mentioning new solutions together with Generali. If you can elaborate a bit more which are those kind of solutions and which margins they have attached. The third and final one is on loans. I think there is a delay averaging across the board in the upper affluent private segment. I was wondering if you are evaluating any solution for to improve this trend of deleveraging if there are some chances to have clients increasing leverage in certificates, for example, or any other measure you might be evaluating. Thank you.

Thank you, Gianluca. On the product strategy, let's say that we are very conservative in the private markets. very conservative in this moment because we see a risk of a bubble, especially in private equity and private debt. Let's say for the target maturity fund, we are using them just tactically, just a small amount. I know some competitors just to switch assets in asset manager are providing very very cheap solutions we are working more on financial wrappers with high diversification uh going through all the capital structure and working on a very say all the um say the credit structure so just to give a sort of yield in line or higher than the BTPs but with a higher diversification and lower by definition concentration. We see great interest from especially high net worth individuals to see such a kind of solution where you can invest also in institutional bonds through your asset manager. So it's more an idea to see the coupon but in a very efficient way. You know you can optimize also the tax impact of distribution using one product compared to another one. But I don't think that in the medium term the solution is to lower margins. It doesn't work, it hasn't worked and it won't work in the future. So it's just to sort of window dressing of numbers but I do prefer to give hard numbers and show that the strategy is committed to delivery profitability and remuneration. Clients are not asking for a discount. Clients are asking for diversification, yield, and more in general, how to reduce the volatility. In the insurance space, you are right. In the segregated accounts, we launched several initiatives in which in the first two years the clients pay lower fees. So we target a yield and the management fees are complementary to the return of the segregated accounts and the target yield that we communicate. Basically, we do expect to stay in the range of 30 basis points, 50 basis points for the first two years and then there is a normalization at 120, 130, so slightly lower than the 150. Consider that if you look at our back book, so let's say almost 15 billion euro, the overall margin is closer to 120, 130 than 150 because the first insurance were with a very strong front fee and then the recurring was very low. So let's say that in two or three years' time, the profitability should be almost in line with the existing position. In the ramp-up moment, a momentary situation, so in the first 12, 24 months, you will see lower margin on such kind of initiatives. The new wrapper we launched is an insurance wrapper where you can start with a very high percentage of segregated accounts and then smoothly you can invest in equity. This is very efficient from a tax perspective and you can mitigate the volatility of the underlying. These kind of insurance wrappers for the unit link part as the traditional profitability so I do not see impact overall impact on our margin but is more flexible solution where you can switch from unit link and segregate accounts more easily and frequently. In terms of loans again in this moment I do prefer to maintain a very conservative approach to the balance sheet and to the loan as well. I'm not so optimistic on the Italian economy for next year and for European economy. Italy is just part of the European story. So we are not stimulating or incentivating the use of leverage neither for certificate nor for asset measurement products. So if you look at numbers, you see that the overall portfolio of loans is shrinking, but just because we do not want to, again, penalize margin or push leverage in the portfolios just now.

Thank you very much. You're welcome.

As a reminder, if you wish to register for a question, please press star and one on your telephone. Once again, if you wish to ask a question, please press star and one on your telephone. The next question is from Marco Nicolai with Jefferies. Please go ahead.

Hi. One question from me. What's the mix you expect on the net inflows that will come from BC Swiss in 2024? So I'm referring to the 500, 700 million net inflows you expect, and then to the 1 billion you expect from, I guess, the following year. What's the mix you see from those inflows? Thank you.

Thank you for the question. I do expect a very positive mix. mainly financial wrappers and advanced advisory services. I would say 50-50. So in this case, you will provide either financial wrappers with the profitability in line with the existing products in Italy or advanced advisory services, again, with the profitability in line with the Italian offering. So the case of asset under custody without advanced advisory fees will be marginal. So overall could be 80-90% in such an advanced investment services.

Excluding the cash, of course.

The next question is from Luigi Dabellis with Equitasim.

Please go ahead.

Good morning. Just one question for me on the capital position. So very high level at the end of Q3 of Chet 1, but stable quarter on quarter. Can you elaborate on the reasons and on capital allocation strategy? How do you plan to allocate the excess capital in the coming years between dividend by backend or M&A? Thank you.

Thank you. The strategy on capital allocation has not changed. Priority number one, dividends. Priority number two, very solid bank. So it's also a way to market the bank. So it's a marketing tool. So as you know, in our three-year strategic plan, remuneration, So dividend is one of the pillars, one of the main goals, and I hope to exceed the expectation on that front.

Thank you.

On the stable quarter-on-quarter strength of capital, there is any particular reason to access the accrual of dividend?

I think that the main part of the growth is linked to the net income of the period. Then we bought also shares of Banca Generale to serve the federalization program that we have. Of course, we have in this quarter accrued the dividend at the maximum level that we can, because for regulatory reasons, having in our policy range, we estimate the capital ratio, assuming that we pay the maximum dividend possible. Those are the two main explanations. Then there is also a little increase in terms of risk-weighted assets linked to the financial portfolio, which is investing also. It's mainly invested in government bonds, but in this quarter we also differentiated, diversified the investments, looking at the financial and corporate investments too. So that's why we have this evolution. But the main point, of course, is the net income of the period. Thank you.

The next question is from Giovanni Razzoli with Deutsche Bank. Please go ahead.

Good afternoon. Two clarifications on my side. You mentioned that for the sector as a whole, you expected that the fiscal reform may have a positive effect on the industry and also on your business. I may have missed something, but you can elaborate a bit more on this. Second question, there is an increasing noise on the possible impact that a retail investor package may have on the product pricing in Italy. There is a usual argument, the fact that the insurance policy with financial concern may be covered by the MIFID umbrella is probably seen as a concern by foreign investors. Can you share with us your thoughts on this? And the final point, if you can share with us what was the subscriptions of the BTP Valore both in October and in June to have an understanding of the appetite of the clients for this asset class.

Thank you. Yes, let's say that the fiscal reform that is just a proposal is to create a sort of normalized taxation with the compensation of all the plus and the minus of all the products. So you know, for example, that as of today, depending on the products, you can have the opportunity, the possibility to compensate profit and loss. So in some cases, the insurance wrappers in case of minus or asset management products are limited because from a fiscal perspective, at least because you cannot optimize So the new strategic view is to introduce more efficient solutions from a tax perspective where whatever the vehicle with which you invest plus and minus will be offset. So this is positive especially for asset management and for the insurance because so far in case of negative performance in the insurance, you could not compensate with any other performance, positive performance of the client. And for the insurance, you are right. The intention, in my opinion, is to unify the regulation of the insurance policies to the MIFID and to the asset management products. consider that we implemented the MIFID for all the assets of our clients. So for us, no impact, zero impact, because we run the suitability test, the product governance test, and so forth. So for the paid agent, probably for pure insurance distribution channels, you could have some impact just for transparency, for example, of the overall cost, but for the asset-gatherers, almost all the competitors as well as ourselves, we already implemented the stricter regulation of MIFID. For BTPs, they say that in October the overall result was as lower than the one recorded in June to give you some percentage. You know that our market share is between 2 and 2.5%. In March, we had 1.94%. In June, 1.95%. In October, 1.83. So we are, compared to our market share, has a slower impact. And October was better than June. In absolute terms, it was about 314 million euros compared to the 354 million euros in June.

Mr. Mosser, there are no more questions registered at this time. I turn the conference back to you for the closing remarks.

Okay. Thank you for participating to our conference call, and good afternoon.