Banca Generali Spa

Good afternoon. This is the Coral School conference operator. Welcome and thank you for joining the Banca Generali first half 2024 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 Banco Generali. Please go ahead, sir.

Good afternoon, and thank you for attending our first Alpha Resolve conference call. Numbers of the first half were very strong, with a new high in terms of net profit, net recurring profits, and total assets of our clients. thanks to positive financial markets, as well as very strong commercial activity. We are entering the last half of our three-year business plan, and so we decided also to do some fine-tuning, positive fine-tuning to the targets. But let's start with net profit, page four. We closed the first half with almost 240 million euros. thanks to a very solid recurring net profit, despite some one-offs, plus variable net profit were supported by performance fee. So, recurring net profit, we have the two major components. The first one is net financial income. The second one is the gross fees, starting with net financial income, page five. you can see that the contribution of trading gains in the first half is in line with the historical average with 9.1 million or 4.7 in the second quarter while the net interest income has improved year on year so 157 million thanks to a robust second quarter, 78 million. These 78 million euros of net interest income are the result of very stable net interest margin, above 2%, and stabilization of volumes. But we will see in detail our projection for the net interest income in the last part of the presentation. Page 6, let's focus on total gross fees, up by 7.5% is basically driven by all major components of revenues, while you see also the very positive contribution of variable fees at 94 million euro. This is thanks to buoyant financial market as well as very positive results of our asset management solutions. Focusing on gross recurring fees, as you can see, there is a steady growth quarter by quarter with the second quarter at 257. This is mainly driven by growth in both investment solutions as well as other fees. At page 7, you can see the investment fees. Investment fees are referred to all the assets generating ongoing fees, so two major components, the management fees and the fees generated by advanced advisory services. Both components increased in the period with a constant margin. You can see it at page 8 and 9. Page 8, you see the trend in management fees, steady growth. Second quarter, above 210 million euros. and margins at 1.42. It seems slightly lower than the previous quarter, but there is some round effect. I would say pretty stable margins. And at page 9, you can see the trend in advanced advisory fee. Again, also here, a steady growth quarter by quarter. We closed the second quarter with 12.4 million, with constant margins at 0.5%. So on the ongoing fees, very consistent and very positive for the second half. Moving on to the other fees, the comparison first half of this year with the first half of last year, the acceleration is pretty impressive. As I mentioned in the previous conference call, we saw a normalization in entry fees. also with a smaller contribution of the BTP initiatives. So the second quarter closed at 33.5 with stabilization of entry fees, 12.5. Great contribution of brokerage commission in line with the first quarter. This is due to volumes and a better mix and then stable banking fees. From this quarter, I do expect stabilization of both entry fees and brokerage fees with some seasonality in the third quarter. Total fee expense, we are to say that it's pretty boring because no news is good news. Everything is in line with expectation. You see a slight reduction in the fee expense on net interest income. You see stabilization of the ordinary payout for the financial advisors at 36.5%, stabilization in the cost for growth, and stabilization per payout to third parties. There is a small one-off that is due to link to the restructuring of the financial advisory network. It accounted for 0.5%. Second part of cost, page 12. Again, All in line with projection. Remember that in the core operating costs you have two components. One is the setup of BG Swiss. The second one is the phase-in of the national banking contract. Excluding these two components, the increase year-on-year would be of only 2.6%. So a great operating leverage. and very efficient. This strict control of costs brought the ratios of page 13 to new lows, in particular operating costs on total assets down 0.28 and the two constant income ratio to new lows if we focus on adjusted cost income 33.3. So to sum up, Very solid commercial activity, positive contribution from all the major revenues, strict control of costs, very strong operating results. Below operating lines, you see an increase of the non-operating charges, mainly for two reasons. The first one is higher contribution for the resolution on the crisis of the banks. compared to the five of last year. For the first time, we started provision also for the same fund for the insurance. It accounted for 1.2. So part of the acceleration is strictly driven to this exogenous factor. The second is about the discount rate change. for our financial advisors so you know lower rates implies higher provision so the combined effect of these two factors account for more than 10 million euros in terms of tax rate you see slightly lower compared to our guidance this is mainly driven by the positive effect of the performance fee in Luxembourg so highest level in terms of net profit, and highest level in terms of recurring net profit. As we said, these results are the result of, of course, positive markets, but also very solid commercial activity. Let's start by commenting the balance sheet and capital ratio, and then we will move on to the commercial results. Balance sheet, page 1.6, focusing on total liabilities. You see the client deposits stabilized, or with a slight increase, 11.5 billion euro. The overall reduction of the total liabilities and equity is driven by a reduction of deposits from banks for the optimization of the net interest margin. In terms of cost of funding, 1.19, where the cost of clients close at an average of 0.88. If you look at the value at the end of the period, it's close to 1. From this level, we do not expect significant further increases, so we will project a range of 1, 1.1. Asset side, so page 17, you see that the equivalent reduction of total liabilities and equity is in the financial assets. So the overall financial assets decreased from 10.6 to 10.2. Here you see stable yield, 3.44. Overall, very solid capital ratio, page 18. Total capital ratio closed at 23.7. Considering also the fact that we already accrued 1.76 euro per share, or the 86% of the net profit. So it equals to more than 4% on actual price. And we also ran an exercise to see The full effect of the new Basel IV and CRR III, and we can confirm that also with a full phase-in of the new regulation, it would stay above 20%. Leverage ratio close to 6%, and very stable and solid liquidity coverage ratio and net stable funding ratio. So, good profitability, very solid bank, And commercial activities, so moving on to page 20. Page 20, you see total assets, 99 billion euro of assets with the total asset under management about 60 billion euro. If we focus to the asset generating ongoing fees, so we look at on the right, the orange histogram, you see that the overall assets under investment, without double counting, closed above €66 billion or €3.4 billion higher compared to the end of last year. So this €3.4 billion were mainly invested in internal capabilities. Very positive effect. Stabilization of traditional life insurance, 14.5. Second, acceleration in in-house solutions. Financial wrappers up by 1.4 billion euro. In-house funds up by 1.5 billion euro. Strong interest in internal solutions. So now let's see Let's move on the inflows, so we are at page 22. Positive factors. First, net inflows, double digit growth on year-on-year comparison. Second, we more than doubled the contribution of assets under investment, 1.4, and the momentum is really positive. We are confident to confirm all the targets, in particular to exceed 40% of total net inflows in asset underinvestments. Page 2.3, the focus is on asset management products, and as I mentioned before, strong inflows in financial wrappers, strong inflows in in-house funds, the most profitable solutions for the bank. Last but not least, page 2.4, Positive news also from recruitment. As I mentioned, we start seeing acceleration in recruitment, 94 new colleagues, acceleration in new colleagues from FA's network, and acceleration in the interest of young talent, 36 new colleagues. This is crucial for managing aging issues and to foster the teams project. We exceeded 20 billion euro of assets under teams, mainly one senior partner and one junior talent. So, very confident in continuing this positive trend. So, at page 26, we decided to slightly review the target For this year and for the three-year business plan, in particular starting from the inflows, we are confident to exceed 6.5 billion euros. And as I mentioned, at least 40% will be invested in assets under investment. So it means at least 2.6 billion euros of assets under investment. We increased the guidance net interest income. Now we do expect numbers in line with last year. And we slightly increased also the margins on management fees from higher than, higher or equal to 1.41 to higher or equal to 1.42, just because now we can see the end of this business plan. And then in terms of remunerative growth, We have just moved the lower band of the range because if you add what we already approved as a general meeting and the amount already accrued for this year, we already exceed eight. So we've just moved the lower range from 70.5 to eight. So we haven't work out the projection for the full year. And so it's just because if you sum the two components, you exceed eight. Page 2728, a quick comment on net interest income and on internal capabilities. Let's start from net interest income. You see how we closed last year, the previous projection for this year, and the new projection. Basically, at the end of the day, the result will be close to the one of the last year because, first of all, the market rate, the average market rate for this year will be almost in line with last year. We project 3.6. If you look at the client deposits, we were conservative in assuming a slight reduction Now the new guidance is that we will close in the range 11, 11.5, so in line with last year. And then in terms of net interest margin, at the end of the day, the net interest margin will be almost stable, above 200 basis points. The difference is that last year the cost of funding was lower and was lower also the yield on financial assets, and both increased by almost the same amount, maintaining the net interest margin almost unchanged. So, at the end of the day, we will close in line with 2023. Page 2.8, I think that this is the most important page of the presentation, because on one hand it describes the great job done in terms of capabilities, internal capabilities on the most profitable products of the bank. You know after the MIFID review introduction, it was 2019, we closed the acquisition of Nexam and we increased the capabilities in terms of portfolio management, hiring top talented portfolio managers. And we set new rules for partnershiping with external asset managers. So we focus on quality. And then we started updating and relaunching the product offering. We started with the insurance, the financial wrappers, then the in-house fund, and the second part of this year will be all about a new kind of product in the unit link space. The total assets increased from 21 billion to 31. Pretty impressive. But what is really important is that the margins of these solutions stayed stable over time. 1.55%. And if you multiply just by two, the result of the first half, you see that the acceleration is pretty impressive. So these... is more than offsetting the temporary reduction of margins on the insurance space because you know that on the insurance space we are applying some favorable conditions to the clients, temporary favorable conditions to stabilize the inflows. So this is a great support for our profitability. And we are very focused on these kind of solutions for the second part of the year, waiting for the launch of the new Unit Link platform probably in the fourth quarter. And now I will end over for the Q&A session. Thank you.

Thank you. This is the Corvus Co-Conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touch-tone telephone. To remove yourself from the question queue, please press star and 2. Please pick up the receiver when asking questions. Anyone who has a question may press star and 1 at this time. The first question is from Giovanni Razzoli, Deutsche Bank. Please go ahead.

Good afternoon to everybody. Thank you for the presentation. I have number of questions the first one if you can share with us what is the allocation of your clients to domestic government bonds or to go on and bonds in general because after last year this up you and all your domestic peers suffer a significant competition from this after class seems to me now that the allocation to this product has now reached a quite significant amount so to have an understanding of what kind of you know effect that is possible in the future placement may have on your inflows. Second question, if you can share with us what is the year-to-date amount of inflows generated by your initiative in Switzerland. I've seen that you have reiterated the guidance of 0.5, 0.7 billion of inflows for the year. What have you achieved so far? And I think you have been pretty effective into keeping the cost base under control despite the launch of this initiative i'm wondering whether the bank is already reaching break even in there or what is the time frame for getting there and the other two very quick question i'm a little bit surprised by your comments about basel 4 because seems like you are guiding for an impact of more than 100 basis points is that is my understanding correct or not and if it is correct can you share with us What are the drivers of the impact of Puzzle 4? And finally, on net interest income, if you can share with us what would be the expectation for 2025, assuming 100 basis points of lower in your high board. Thank you.

Thank you, Giovanni.

Let's start from the allocation of our clients. In absolute level, the GOVI bonds, European GOVI bonds in Euro account for 10.4 billion at the end of the first half of this year. It means 3 billion higher than the same period of last year. So at the end of the first half of last year, they accounted for 7.4. And just to remind that a great part of this investments are on short-term duration instruments. So, they say that we are more or less at 11% of the total assets for the GOVI bonds. In terms of inflows in our Swiss project, you know we received the freedom of services license in June. So we finally started opening current accounts, Swiss current accounts with investment solution in Italy. So Swiss current accounts of deposit, asset deposited in Switzerland and investment services in Italy. We started with a pilot and the pilot is going very well. The overall assets already invested or related to Switzerland are around 150 million, more or less, between 120 and 150 thanks to this pilot and thanks to the recruitment of a financial advisor. We do expect that before the end of the year, at least half a billion. For the breakeven, it's too early to give projection for the breakeven, also because part of the profits and the revenues will stay in Italy, thanks to our BG International Advisory Model. On the cost base, let's say that just to add some color. I'm very impressed by our operating leverage. We internalized and considered the Swiss project as a core cost, and despite these investments, we are almost in line with our initial projection without considering the inflation shock we experienced altogether. This is mainly because on one hand, we have a great part of our costs related to distribution so our payout and the second because we are experiencing a digital shock so on daily basis we are innovating we are in robotizing great part of the processes we are digitalizing everything so very impressed by results in terms of net interest income it will depend on the level of the rates for the next year. At the moment, we do project a reduction in the range of 5-10%. For Basel IV, I will hand over to Tommaso.

Let's say that the most important impact of the new regulation requirement of operating risk, which is going to be differently calculated going forward. This is the major impact, which is an impact for the bank because, of course, the new calculation is based more on gross fees more than on net fees. This is why we have an important impact. But if you look at the evolution of that we had of total capital ratio. Basically, what we had was a benefit this year because we had the positive impact of the new, let's say, way of calculating the credit risk, which gave us a benefit around 2.5 percentage points. And that will be basically, let's say, balanced by the new impact that we will have in the future for the new regulation on operating risk, basically. This is the major impact that we are going to have.

So can we summarize it on an impact about 100 basis points?

Yeah. The net of the two, yes, it will be in line with this.

Thank you.

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

Yes, hi, good afternoon. Ciao Gian Maria, ciao Tommaso. Three for me. The first one is on NII, but with specific reference to Switzerland. This morning Julius Baer basically warned about a sharp increase in the deposit beta in May and June, and the stock is massively down. So I was wondering what is your expectation for the remuneration of deposits in Lugano? Do you feel this kind of big pressure in remunerating private clients? And if you can give us a bit of color, considering that it is a green field, you are starting now and you already disclosed the guidance in terms of retail cost of funding for this year. It is just a bit of color of what you see in that market. The second one is on the leverage. I don't know if you agree on the fact that probably the leverage of clients is almost over. And eventually, what would you need to have a bit of real leverage? So more Lombard and loans in general. Do we need to have a steepening of the curve again to see volumes growing? And the third and final one, again, on the maturities on Govis, if you can remind us how many BTPs are maturing in the second half and what is the attitude of your clients, how many BTPs are rolled over, and how much you can work out to redeploy in asset management solutions. Thank you.

Thank you, Gianluca.

You said that in terms of pressure on the cost of deposits, in Switzerland we are still too small to feel this pressure. In Italy, I confirm that on top clients, there is great competition. If you look at the penetration of current accounts on our customer base related to private clients, it is at the lowest level ever. So, I do see for others some potential pressure. In terms of the leverage, let's say, of course, if we start seeing a reduction of the short-term yield, short-term interest rate, we could see some inflow in current accounts and some lower activity gain. And then on the maturity on Govis, My perception is that, I don't have the precise numbers, but my perception is that we have, linked to the maturity, 30-40% are invested in other solutions. So we still have a consistent reinvestment also in Govis. I would say 30-40% in other solutions. we have at least 30-40% of the portfolio with duration lower than one. So overall, I do expect some positive effect on the overall asset underinvestment from the maturity of these billions in the next quarters. Grazie.

The next question is from Elena Perini in Tiso San Paolo. Please go ahead.

Yes, good afternoon and thank you for taking my questions. I have a question on performance fees, which were very strong in the first half, so how was the trend in July, if you can share with us. And then the second question is on the trend in net inflows in July, if you can give some indications. And finally, some guidance on tax rate considering the higher weight of performance fees. Thank you.

Thank you, Elena. Let's say that July started positively in terms of performance fee, and now the last two or three days are not so positive. Let's say that we have already accrued almost €10 million. In terms of inflows, we start seeing some seasonality. The summer period started. In terms of mix, the mix is very positive. In terms of tax rate, let's say that the medium-term target is in the range of 26, 27. Now we are below to 25, but I do expect a normalization in the second half.

Thank you.

The next question is from Alberto Villa, Inter Montesim. Please go ahead.

Good afternoon. A couple of questions from my side. One is on the recruitment outlook. There was a clear acceleration in the first half compared to last year and also to the entire 2023, which closed with around 120 new additions. Now you are already at 94. So I was wondering if This kind of trend is something that we can expect going forward and also in terms of a mix of recruitment if there will be a continuation of this trend of increasing also the young junior, let's say, new additions. And in this respect also, looking at your slide on inflows, I've seen there has been a decrease of the contribution from the existing network in the net inflows in the first half compared to last year. and the higher increase of a high contribution from recruitment looking at your target for the net inflows in 2024 now pointing to more than 6.5 billion i was wondering if you can give us an indication of what are you expecting coming from recruitment and what coming from the existing network that's my first question the second one is a general comment on We have rumors all around the place on M&A in financial sector. Are you looking at something as an opportunity to accelerate growth like, I don't know, maybe small FA networks or anything that could be interesting on your side at this point in time?

Thank you. Thank you.

So on the recruitment, I'm very positive because there is a great interest from financial advisors. So I do expect to close about 150 and especially from financial advisors. Still pretty low the recruitment from traditional banks. In terms of contribution of the recruitment on total net inflows, I do expect a normalization, so the target should be in the range of 20-25%. And the explanation of just slightly lower productivity of the existing sales force, the explanation is pretty clear. I don't want to compete on the on the on the yield on the current account so now there are some competitors private banks in particularly very aggressive so i don't want to pay if i don't see other revenues collateral to the business so we decided to let some clients a couple of institutional clients and to invest liquidity in other solutions. It's a competition that I really don't like and is useless. If you carve out a tour-free operation of this kind of nature, I'm very, very happy of the level of the productivity of the existing Salesforce because it's well-spread. And we do not have any significant liquidity event influencing the overall results. So if I have to comment, the quality of the productivity is in line of higher or higher compared year on year. On the rumors, I continue to say that we are the place to be because we are the purest player in the wealth management, the lowest balance sheet, the lowest traditional risk of the banking industry, the best financial advisors, very solid inflows, double-digit growth year on year, and we have plenty of initiatives just at the beginning of Loro's story. So we have the Switzerland, we have the data-driven bank, we have very innovative solutions in the financial wrappers, and in a few months also in the insurance space, we have a strong brand. a very strong management team. So I do believe that we are the place to be. And so it's normal that in a context in which in the next few months we start seeing lower net interest margin across the sector, we start being a new interest in asset getters. So let's see, let's see. You know I'm as much a lord of Banca Generale, so I'm very happy of his interest. Second, I don't see opportunity at the moment in the private banking in Italy. Very small target potentially in Switzerland, but it's a sort of recruitment more than acquisition. Thank you.

Okay, thank you very much.

The next question is from Marco Nicolai Jeffries. Please go ahead.

Hi, thanks for the presentation. A couple of questions on my front. First one is on advanced advisory. So thanks for sharing the guidance in terms of AUE inflows for this year and for these years. I just wanted to know if you have any ideas in the mix in terms of AUI that you expect for 2024 and in general, also for the following years, what should we expect in terms of inflows on advanced advisory products? Second question, a bit more technical. Could you share the rate on the fixed rate bonds in your portfolio that will expire between 2024 and 2026? This is just to have an idea what kind of support this can give you to your NII going forward. And last question on recruitment. I found interesting that in the first half of this year, essentially you had more recruiting from other financial advisor networks rather than traditional banks, retail and private banks. Just was wondering if we could read anything into this in terms of where you are sourcing going forward financial advisors. Thank you.

Thank you. I start with the first and the third and then I will hand over to Tommaso for the

yield of the portfolio. Asset under investments, let's say that the mix would be probable more on wrappers, financial and insurance wrappers. I do see a rotation from third-party funds to internal funds. I do see stabilization in advanced advisory services just because now this half, but also in the last weeks, we start focusing the attention of the NATO on the new launch of the new initiatives. So when you communicate new initiatives, normally the focus is there. So I do expect positive inflows but lower than the average on asset under advisory. I do see inflows in the in-house funds. I do see continuing positive and strong inflows in the financial wrappers and in the last part of this year also in the insurance wrappers. I think that the 40% in asset under investment is a floor for the foreseeable future. It's not just for this year, but it's for the next three, five years at least. Because with the normalization of the yield, I expect also normalization of the overall assets of our clients. It will take time, but now we are in a shooting. In terms of recruitment, Let's say that we are an open platform for entrepreneurs, for financial advisories, the place to be. There is a very positive word of mouth from some competitors, so I start seeing a broader interest in joining the bank. There are some players that have some difficulties due to some strange announcement. From the traditional private banking industry, it takes time. First of all, because we are still in trouble with asset management products. If you look at the inflows in asset management products, you have negative inflows for the last eight quarters probably in the traditional banking and eight quarters positive in the financial advisory business. So probably for the initiatives linked to bond portfolios, rapid in asset management solutions. Now there are some issues with clients, so it's more difficult to transfer clients in that situation. So I think that it takes time to see normalization there. I continue to think of being the place for the financial advisors willing to provide a holistic approach. aging population, succession planning, fiscal optimization are priorities for the clients and as a consequence for the financial advisors. So we know how to answer to these needs. In terms of banking book, I will end over to Maz.

Let's say that we have basically, let's say that we get to maturity around 2 billion of asset per year, 2025 and 2026, and in the next few months of 2024 around half a billion. Of this maturity, let's say that the majority, let's say around 1.9, 1.3 billion are linked to fixed rate bonds. So the majority of our maturity will be linked to fixed rate bonds. In terms of exit rate, let's say that we expect to have around 2% in terms of yield of the bonds that are going to get mature in 2025-2026, while in 2024 we'll be around... 0.5, but as we said before, the majority is only half a billion. So we have, of course, a positive impact, especially in 2025. Then at the same time, we expect to reinvest at a rate which will be, of course, a declining rate because we have an expectation of 50 basis point reduction of URIB or let's say, in the next month of 2024, and we expect to land around 2.5% in terms of Euribor at the end of 2025.

Thank you.

The next question is from Filippo Prini, Kepler. Please go ahead.

Good afternoon. A couple of questions, please. Firstly, the increase of guidance of net inflows for this year from more than $6 billion to more than $6.5 billion, does it depend upon a better outlook on Switzerland or even the Italian business is contributing mostly? And second, on restricted assets and capital, in the first six months of the year, you've reduced your restricted assets by 15% compared to the end of last year. Do we expect this trend to continue also in H2, maybe not the same pace, but still with the client-respected asset? And if even considering the negative impact from introducing Basel IV, at some point we will make some consideration about your chatbot ratio that now is more than 22%. Thank you.

Thank you.

Let's say that the increase of the guidance is related to the Italian business and is driven by this interest in the bank, so recruitment, and I do see also a good perception, a good feeling from some potential new clients. So the idea is that excluding these period that has a negative seasonality effect, October, November, December could be very strong months. Switzerland, let's see, I'm very happy with the pilot, so finally we started. The operating machine is very efficient, it's working pretty well. Let's wait for September, October, and then let's see the interest of the clients. We want to start step by step. We are not in a hurry. This is a long-term project and it will give great support for the next years. Now let's focus on Italy and let's do things in the right way in Switzerland. In terms of risk-weighted assets, I don't expect significant decrease. I expect more sort of stabilization. On the ratios, let's say a consideration of Basel IV, you know that we are very open to, say, to compensate, remunerate properly our shareholders. Let's see the second half. You see we are always very conservative in the projection. There is some uncertainty. economic and political uncertainty. Let's see the second half and then we will update in the next conference call.

Thank you.

As a reminder, if you wish to register for a question, please press star and one on your telephone. Mr. Mossa, there are no more questions registered at this time. I turn the conference back to you for any closing remarks.

Okay, thank you for the participation, and Giuliana, it is your disposal for any Q&A. Thank you.