Finecobank Banca Fine Spa

Good afternoon, this is the Curse Call Conference Operator. Welcome and thank you for joining the Fineco Bank Second Quarter 2020 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. Alessandro Foti, CEO of Fineco Bank. Please go ahead, sir.

Good afternoon, everyone, and thank you for joining our second quarter 2020 results conference call. Before we start going through the details of the presentation, let me please underline the key messages. This set of results confirms once again the soundness of our business model able to deliver sustainable and industrial growth in every market condition and to accelerate growth in the current complex situation. Gross operating profits stood at $275 million in the first half of the year, plus 40% year-on-year. Adjusted net profits stood at $181 million in the first half of the year, plus 30% year-on-year thanks to the growth of our very well diversified stream of revenues. Operating costs well under control with cost-income ratio declining by 6.9 percentage points year-on-year to 32.5% and confirming operating leverage as a key strength of the bank. The first half of the year recorded a strong acceleration in commercial activity with net sales equaling 4.7 billion plus 42% year-on-year. Let me please remind you that this result has been reached with no aggressive commercial offer and with a strong contribution from asset under management and also thanks to the success of the new generation of products launched by finico asset management our net sales have been generated organically as in the first half of the year and all and only seven percent come from recruits made over the last 24 months those dynamics were confirmed also in the month of july with net inflows extremely robust and this and the steedy solid asset mix as Asset under management flows are estimated above 600 million. Let me also add that brokerage recorded a strong performance with expected revenues in the month of July increasing by more than 50% year on year. Let's now move on slide five and start commenting our first half results. As announced, our diversified business model has allowed us to reach, once again, very strong industrial results, despite the complex scenario. Adjusted gross operating profit reached 275 million in the first half of the year, increasing by 40% year-on-year, and adjusted net profit totaled 181 million, up 30.1% year-on-year. Adjusted revenues stood at 407 million, up 25.8% year-on-year, supported by all business areas. Operating costs stood at 132.2 million, plus 3.7% year-on-year. Cost income decreased to 32.5% despite the continuous expansion in assets and clients thanks to our strong operating leverage into the scalability of our platform. Please now go through the following slides to analyze more in details all the dynamics of our results. Slide six, let's start. In the second quarter, net interest income stood at 70.1 million, increasing by 2.8% quarter on quarter, thanks to the first positive contribution coming from a more active management of our treasury, on which we will deep dive later, and to a lower cost of funding due to the decrease of the US dollar LIBOR. Net interest income in the first half of the year remained resilient at 138.2 million despite the lower interest rate environment. It decreased only by 3.5 million due to the continuous enlargement of our sticky side deposits to the quality lending book and to deposit contribution from treasury activities. The lower interest rate environment led to a reduction in average gross margins on interest earning assets from 1.26% in the first half of 2019 to 1.06% in the first half of 2020. As an example, five-year euros moved from plus four basis points a year ago to minus 27 basis points in the first half of 2020. Finally, cost of funding decreased to one basis point in the quarter due to the lower U.S. dollar LIBOR. Please let me remind you that our cost of funding related to the deposit in euro, which represents 96%. of our total deposits is zero. Let's now move on to slide seven to deep dive on our treasury management. As you know, one of the positive outcomes from being a public company is that we can couple our low risk investment strategy with a more flexible management of treasury. Thanks to our high quality balance sheet, we are able to undertake yield enhancement strategies which help us in sustaining our net interest income in an industrial way. Before deep diving into these strategies, let me first remind you that our investment strategy remains unchanged. Our goal is to run off the unit credit bond portfolio and move into a more diversified and low-risk investment portfolio through a blend of European government bonds, sovereign national agencies, and covered bonds. In this regard, we decided to further diversify our bond portfolio in the direction of investment-grade non-European GOVIs and financial corporate senior bonds. We also confirmed our conservative decision to account as how to collect almost 100% of our financial investments, thus neutralizing any effect on the P&L and balance sheet due to the widening of sovereign spreads. The yield enhancement strategies we are undertaking are possible thanks to our strong liquidity position, which leverages on a quality balance sheet and on valuable and sticky deposits, allowing us to have a quality investment portfolio. Leveraging on this, we can set up operations like collateral switch or unsecured lending in order to get an extra yield the top quality paper in our portfolio. As usual, we are managing these transactions with our strict and low-risk approach, and we are choosing very solid primary counterparties. Let's now move on to slide eight to deep dive on our non-interest income. Fees and commissions grew by 32.2% year-on-year, driven by whole product areas, as we have been able to capture the acceleration in the structural trends in place. Trading income, net of no recurring heightens, increased by more than 155% year-on-year, driven by the strong brokerage performance in the period. We will deep dive more in depth in the following slides. Let's move on slide nine for a focus on brokerage. Brokerage acted once again as the perfect counter cyclical business, and it is producing structurally higher revenues compared to the recent past. In the first half of the year, overall brokerage revenues stood at 127.9 million, increasing by 107% year-on-year. Please note that July has been another robust month, with revenues increasing by more than 50% year-on-year. On the top of the slide, you can find a chart showing the monthly brokerage revenues since our listing. As you can see, brokerage revenues in the period are structurally higher, and this is true regardless of the level of volatility, thanks to the contribution of three structural components. First, the client base using our platform is widening because the structure of the market is changing after the recent events, and there is an increasing interest into financial markets by clients. In addition, a big jump into a much more digitalized society is in place. As you can see from the graph, At the bottom of the slide, both new clients and sleeping clients are becoming active on our platform faster than in the past. Let me highlight that more than 85% of the new active clients are investing on plain, vanilla instruments, meaning that they are not speculative traders, but common people realizing that the current situation makes it more compelling to actively manage their savings. This is a very interesting trend and we are observing an overlap between investing and brokerage clients, more active investors rather than active traders. The second reason is the increase in our market share. For example, our market share in Italy on equity traded volumes has increased to 28% in June 2020 compared to 26.6% in June 2019, as recently confirmed by ASOSIM. The third and final reason is the deep reshape of our brokerage offer we have undertaken in the recent months. Please note that this is a never-ending process and that in the coming months we will continue to provide our clients with new instruments and best-in-class features. Let's now move on to slide 10 for focus on investing. Investing revenues amounted to $117.8 million in the first half of the year, increasing by 5.4% year-on-year thanks to the volume effect driven by the higher contribution of guided products and services and to Finneco Asset Management. Please note that in the second quarter of the year, investing revenues decreased by 4 million quarter-on-quarter only for a technical reason, as management fees were impacted by the negative market performance at the end of March, reducing average assets under management of the quarter and the equity component. Coupled with the increased penetration of conservative solution among our offer of gathered products explains the slight decrease by 0.5 basis points of management fee margins in the quarter, standing at 62 basis points. Let me please highlight that the underlying trend of investing is very solid, and we expect the revenues to grow again starting from the next quarter and to be higher than the first quarter of 2020. This has the results of the combination of a strong volume effect driven by the solid acceleration in asset under management net sales and the progressive increase of our network productivity. Let's now move on to slide 11. As you can see from the slide 11, Our results once again confirm efficiency to be part of our DNA and core in our bank, representing a clear and unique competitive advantage. In the first half of the year, staff expenses stood at 48.9 million plus 10.9% on yearly basis, mainly due to the increase in the workforce related to the business development and to the internalization of some services after the exit from the Unicredit Group. Non-HR costs stood at 83.3 million flat year on year. Let's now move on slide 12. In this slide, we summarize the breakdown of the bottom line in the second quarter. We have been recently contacted by the Guarantor for Competition and the Market Authority, asking us to delay to the end of the year the application of the smart repricing for 2020 to a cluster of clients that opened their current account in the past years under an online commercial initiative. Although we are fully convinced that our decisions were correct, we maintained our usual prudential approach not to challenge the regulators. This led to a $4 million of provision for risk and charges in the second quarter due to the refund of past banking fees charged from February to June 2020. And we expect them not to charge around the five millions of fees in the second half due to the delay of the application. Let me please confirm that the full effect of the smart repricing on the whole customer base will be in place starting from January 2021. In the second quarter, we also recorded that 4.7 million of higher provisions, which were not driven by the underlying quality of our lending and bond portfolio, but by the accounting process related to the IFRS 9, under which we had to update the macroeconomic scenario after the COVID-19 outbreak. Please note that provisions on commercial loans only reached 0.3 million, confirming once again the quality of our lending book. The remaining 4.4 million of higher provisions refer to our sovereign and institutional exposure. Let's now move on to slide 13. As you can see on the left-hand side of this slide, commercial loans grew by 30.4% year-on-year, with the usual strict control on credit quality. Let me remind you that our lending is offered exclusively to our loyal customer base, and our deep internal IT culture allows us to fully leverage on big data analytics. This translates into commercial cost of risk very well under control, stable at 14 basis points as of June 2020, in line with our guidance of a cost of risk between 10 and 15 basis points, which is confirmed also considering the present context of COVID-19 outbreak. Expected losses for mortgages and personal loans remain very low, thanks to the quality of our lending portfolio. As a confirmation of the quality of our lending book, we granted only less than 300 requests for mortgages moratorium. We will deep dive more in depth in analyzing our lending offer on the next slide. Let's now move on to slide 14. In the wake of the recent events, our cautious approach has become even more conservative. Therefore, we slightly reviewed our 2020 guidance on mortgages. We further increase our guidance on new production in the range between 600 and 700 million due to a backlog in requests from 2019 as clients were choosing mortgages in a period characterized by very low fixed interest rates. We confirm our expected yield in a range between 55 and 70 basis points. Our expected credit loss on this product is very low at around 19 basis points. thanks to the strength of our big data analytics and to the quality of our lending book. At this regard, let me please highlight that after 42 months from the launch of our mortgage offer, only four clients are accounted in NPRs. On personal loans, we confirm our guidance of a new production in a range between 150 and 200 million per year, with a net growth in a range between minus 20 and minus 60 million, with average yield confirmed between 380 and 410 basis points. The expected credit loss is very low, also on personal loans, at around 55 basis points. On Credit Lombard, we confirmed an annual growth in a range between 300 and 350 million, with expected yield between 75 and 85 basis points. Please keep in mind that for expected yields, in the case the market environment changes, we would have to move accordingly. Let's now move on slide 15 for a focus on our capital ratios. Finneco confirmed once again a rock solid capital position on the wave of a safe balance sheet. Let me remind you that following the extension of the recommendation by ECB and Bank of Italy on July 28, we will refrain from paying dividends until January 1, 2021. In any case, our intention is to give back our excess capital to our shareholders at the first window of opportunity. For this reason, we will comment pro forma figures, which include the dividend payment. Common equity tier 1 ratio performance stood at 18.36% and total capital ratio performance stood at 33.11% as of June 2020. Now I will skip directly to slide 23. In this slide, we summarized our guidance for 2020. Please note that this does not include the revenues and costs related to the UK business development. Net interest income is expected to remain solid and resilient or slightly decreasing by a few millions on the back of volume effect and the benefits coming from ECB tiering. Let me remind you that this assumption incorporates no change in our investment policy, no increase in our risk profile, and a more dynamic management of our treasury. Deposits are expected to increase in the region of 2.5 billion per year, and new production on lending is expected to be in a range of 1.2 billion per year, equal to 0.7, 0.9 billion net growth. For investing fees, we give a sensitivity for every 1 billion change of asset under management which generates around 2.5 million of revenues starting from July the 1st until year-end. Brokerage revenues are expected to remain strong with a floor that is definitely higher than in the past for three main reasons. First of all, the deep reshape of our product offer. Second, the strong growth of the new customer driven both by the enlargement of the market and by the increase of our market share. Third, the levels of volatility, which will probably be higher than the extremely low level registered in the past years. Banking commissions related to the smart repricing are expected to be around 11 million this year and around 20-22 million starting from 2021. We confirm our guidance on operating costs to a yearly growth in the region of 4%, thanks to our strong operating leverage. Let me please highlight that this guidance does not include marketing expenses related to UK, which are expected up to 6.5 million. In terms of future evolution, we confirm our guidance on a continuously declining cost income in the long run, thanks to the scalability of our platform and the strong operating gearing we have. We confirm our floor of a quartier one ratio equal to 17%, a level that we deem appropriate and massively above the industry average. But we expect to stay in the region of 18% for 2020. Leverage ratio stood at 3.76% in June 2020 and is expected to remain above 3.5% thanks to all the initiatives the bank is undertaking. We are extremely relaxed about our leverage ratio, considering our organic capital generation after dividend distribution and payment of an 81 coupon. Also, in the case of an extremely adverse scenario and assuming 5 billion of deposit growth, our leverage ratio would remain around 3.5%. Cost of risk is confirmed in a range between 10 and 15 basis points, even in this environment, thanks to our high-quality lending book. Finally, we expect robust and high-quality met sales, reflecting the acceleration of the structural trends in place. Let's now move to slide 24 to deep dive in how the current situation is impacting our business. Current situation is creating the conditions to further enlarging our growing opportunities. As we are seeing a strong acceleration in disaster trench which were already in place. First, increasing demand for financial advice as Italians are even more aware of the need to get a better management of their wealth. This is building up an interesting bridge between investing and brokerage. as we are observing an increase in participation in financial markets by Italians, making it easier in the future to explain the advantages of a professional wealth management. Second, digitalization, which is confirming to be a way of no return, as Italians have been forced to discover the huge advantages of a digital world. Disruption in traditional banks, which are not ready for the new paradigm and are suffering from a flight to quality. The situation is generating a gigantic opportunity to increase the speed at which we are going. Being born already digital and with a strong business model based on innovation, quality and efficiency and the network of financial advisory already used to work in a digital world. Fineco is already positioned in the sweet spot for capturing the acceleration of these gigantic trends. This is leading us in a world characterized by robust net sales with a good asset mix, brokerage revenues structurally higher, and acceleration in the acquisition of high-end clients looking for sound players with quality offer and declining cost income. Let's now move to slide 25. Our key priority going forward remains to structurally improve the quality of our net sales and client base in order to increase better quality of recurring revenues and keep growth and our balance sheet under control. Our focus on improving the asset mix is clearly delivering since the second part of 2019 But in the first six months of 2020, we have recorded a strong acceleration in our net sales dynamics and quality mix. The first evidence you can observe from the two graphs on the top of this slide is the accelerating net sales in the first half of the year, together with a robust and steady contribution from asset under management, with the only exception of March, given the exceptional volatility in the month. Let me please remind you that our net sales have been extremely positive also in July with asset under management above 600 million. The second evidence is the strong acceleration in the productivity of our network. As you can see from the graph on the bottom of the slide, the net sales for financial advisors in the first half of 2020 have increased by more than 40% here on here. Let me add that this acceleration in underlying net sales dynamics is the results of our industrial measures as we have not undertaken any aggressive and short-term commercial offer in the period and have not leveraged on overpaying recruiting. Let's now move to slide 26 to analyze more in-depth FinEcoset management. FinEco asset management is confirmed to be the key in our move to accelerate the conversion of deposits into asset under management. Our latest net sales results confirm once again that FinEco asset management is gaining commercial momentum, giving a strong contribution to FinEco inflows also in a complex environment like the present one. This is possible thanks to its ability to create modern and innovative multi-manager solutions reinforcing our guided open architecture platform, and enhancing our time to market in developing our hoofer to meet evolving customer needs. Finally, I would like to highlight that the penetration of Finneco asset management retail class total assets reached 22% on Finneco total asset under management, and we expect it to grow even farther. The penetration on asset under management, excluding insurance, reached 32% in June 2020, increasing by six percentage points in one year. Let's now move on slide 27. And at this point, I leave the floor to Paolo Di Grazia, Deputy General Manager of the bank, to deep dive into the development of our UK business. Please, Paolo.

Thank you, Alessandro, and good afternoon, everybody. Our business in UK is proceeding very well, and our one-stop solution is boosting our cross-selling activity, providing to be a strong driver for our growth. In the left-hand side of the slide, you can see the improvement of the breakdown of active clients in the quarter. Clients active on the OTC were 8% out of total active clients. 83% of them came from cross-selling. mainly from listed products. Here, the target market is relatively small, but with an extremely high level of revenues per client. On the listed products, the addressable target market is wide, and revenues per client are very interesting. Active clients in the segment increased to 68% in the second quarter, thanks to both direct acquisition and the powerful cross-selling from lower profitable multi-currencies, bringing 53% of new active clients in the segment. Finally, the multi-currency is our powerful entry gate and is the engine of our cross-selling. Its target market is extremely wide and we can leverage on our very competitive offers. In the second quarter 2020, 24% of our active current accounts were acquired through this segment. The strengthening of cross-selling thanks to our marketing activity translates into increasing and better quality revenue generation. As you can see from the graph at the bottom of the slide, listed products and OTC are now taking the lion's share of our UK revenues. Please note that we are profitable on all segments, thanks to our operating efficiency and economy of scale that allow us to be sustainable even with a very competitive pricing. On top of this, we have room to improve cross-selling from listed products to LPC, and this will help us increase our revenues per active current account, which at the moment are around 740 euros. Let me remind you that we are still missing one very important part of the story, I mean the investing, with the ISA and SIP coming soon, and you can find the detailed timetable on the slide number 29. Let's now move on to slide 28. In this slide, we did dive on our first marketing campaign, which showed a very positive feedback with only $1.4 million of pure advertising costs. The graph on the left-hand side on top of the slide shows the acceleration of the customer acquisition following the start of the marketing campaign, recording a growth of about three times higher in the quarter. Our marketing campaign is delivering also in terms of the quality of our client base Active client, active current accounts in the period between March and June increased by 56% year-on-year. Let me underline that active clients on trading services increased even more, with a growth of three times higher year-on-year. Current accounts grew by 21%, quarter-on-quarter, reaching 7,600 new total accounts at the end of June. Please remind that our first target is to achieve in two years' time horizon 30,000-35,000 good clients in order to have a sustainable acquisition through the award amount. Finally, let me remind you that our new customers came from traditional banks looking for quality services and pricing as shown by the graph on the bottom of the slide. I can now leave the floor to Alessandro for the final comments. Thank you very much.