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.

Thank you, Paolo. Jumping into slide 31, let me please spend a few words on sustainability, which is at the heart of our business model. Built to remain on the market with a long-term horizon and aiming to generate a positive impact for all our stakeholders and the overall society in the long run. Our sustainability strategy is set on two different levels, a macro and a micro level. The macro level is related to our business model, which, as you know, is built on three pillars, transparency and fairness, efficiency and innovation. This has allowed us to be, from the very beginning, perfectly in line with an ESG trajectory based on a sustainable long-term view on our revenues generation. Then we have a micro level which refers to the single details which are key to differentiate an organization in an ESG world ranging from a market-friendly corporate governor to ESG product offer and strong focus on cyber security and other ESG risk. You can find more details on the slide 32. Thank you for your time and now we can open the call to questions.

Excuse me, this is the Chorus Call Conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their 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 Domenico Santoro of HSBC. Please go ahead.

Hello, good afternoon to everybody. Hi, it's Domenico from HSBC. A couple of questions from my side. First of all, on the brokerage side, you are giving us a very simple narrative that people are, you know, using the brokerage more and more to look after their their savings rather than just doing trading online because they are locked down in their flats. I see the qualitative guidance that brokerage is going to be very strong. I would really appreciate if you could give us a sort of floor in terms of monthly revenues in the brokerage business because this is getting more important and, of course, I don't want you to take it provocatively, but there are also sort of investors that they think this is a sort of a one-off sort of revenue stream. So more visibility on this sort of, you know, numbers for year-end, but also beyond 2020, it will be very useful. Then on the NII, I see your total bond portfolio being flattish here. sorry, the contribution from the financial bonds to be flat to share more or less quarter on quarter, but of course there's a change in the mix because of the runoff of unicredit bonds. So I'm just wondering in which kind of assets you are investing in order to keep the contribution stable quarter on quarter. Can you give us more detail about the duration, about the country? uh in which you are investing or corporate uh and then uh looking forward uh uh how much was the 303 that you took and what is the the margin uh attached to that um if you are given back to dcb part of this liquidity and then also this repo transaction can you give us a bit more details about the notional the yield just to give us to get a sense then on the dividend i understood that you want to distribute The excess capital next year, presumably, if the ban on dividend is lifted. What formula that we should consider? Are you going to increase the payout compared to the level that we have seen over the last couple of years? You might be more generous or you might want to keep part of the capital to keep your leverage ratio high. And then a sort of curiosity on the charge that you take on this Govis portfolio, the $3 million. Can you give us more details? Is it under IRB because I didn't get the sanction of the charge on the government portfolio because of the IRS? Thank you.

So let me start from the brokerage end. I understand that the ideal world is a world in which we can give you an extremely detailed level. But on brokerage, unfortunately, it's not possible because clearly it's a business in which clearly what we are presenting is that we are extremely confident that going forward, the floor is also assuming the return of the market in a much lower volatile environment, the floor of the business is going to be definitely higher. In order to have an idea of this, this is the reason why in the presentation we presented the history of our revenue generation starting from the listing And as you can see, there is a very clear, you can have a very clear idea of what can be considered as a kind of floor for the business. So it's not difficult to get a reference number for this. Clearly, we think that we cannot give an unofficial precise guidance because clearly it's a market, it's a business in which the volatility is playing a role. But I think if you look to the graph we think that it's extremely easy to draw a line, understanding where is more less the floor and understanding what you can expect looking forward. For us, it's very important to explain to the market because on brokerage, recently there has been a lot of noise because we are continuously receiving, for example, questions by some investors that they are... looking to players like Robinhood, something like that. We are talking a completely different kind of business. Because in our case, it's a business, as we explained, in which the most part of the clients is related to absolutely normal clients that we prefer to nickname them as active investors more than active traders. The portion of clients represented by very highly speculative clients is just in the region of a few thousands of them out of several hundreds of thousands of clients that are using the brokerage platform. to understand this point because we are explaining the key element for understanding what's going on is the message in which we are explaining that there is in place a structural change in the market. But it's something that has happened, for example, in the U.S., in which now investors are starting on becoming more active in dealing directly with markets. And clearly, Fineco is by far in the best possible position for observing and taking advantage by these trends. But in any case, if you look to the graph that we presented, I think that you can very easily see to try to have an idea of where is the floor of the business. On net interest income, I can just repeat what we explained during the guidance. So we know that the net interest income has been, by the beginning, the most controversial part of our equity story because there is someone that is a little bit skeptical regarding the possibility to maintain the net interest income resilient. But again, we have a combination of, first of all, and an extremely high quality base of deposits and this is very important because it's the base that is allowing to us for example to build up an extremely sticky and high quality portfolio second there is an organic growth that is extremely sound because it is a remunerated zero And third, there is all the components we were referring in terms of healed enhancement. And in any case, if you are interested, we can give you a little bit more of Colos, but I think that as a matter of time, it would be a little bit time-consuming to enter in describing perfectly in the single details every single component. transactions. In terms of countries, as we're saying that we are concentrated on the European Govis. At the moment we are starting on enlarging the scope of our investments. because we are targeting also high-rated countries outside of Europe with ratings that in many cases are above the rating of the European countries. of European countries. So, for example, recently we take part to an auction investing some in Israel that is in a high-rated country. And these countries, for example, the higher his rating is the lower is the impact on risk-weighted assets. For example, we have several countries that have an impact on respected assets that is close to zero. And in any case, the more we are diversifying the portfolio and the better is also in terms of sustainability of the Pillar 2 requirements. And the duration is more or less stable, is in the region of five years, and there is going to stay. And so based on these ratios, we are confirming the guidance on a resilient, at worst, net interest income declining by a few millions of euros. Regarding the TLTRO, we didn't participate to TLTRO 3 for a very simple reason. First of all, we don't need to do that. And second, it's just a strategy based on a concept of a carry trade. As we explained, we are here for delivering trade. industrial results and TLTRO is not something that is an industrial result, it's just a financial transaction and so we don't think that this is going to give a great contribution in creating shareholder values. We are here for delivering sustainable, industrially driven revenues and this is the reason why we We have no interest for TLTRO3. Repo transactions, more details on notional and yields. The yields of this repo transaction can range between 10 up to 30 basis points, accordingly with the kind of paper that is involved in the transaction. and so this is the so this one regarding dividend we the guy with the indication we gave has been clearly perfectly current with the strong recommendation received by the regulators and clearly we kept an extremely cautious wording regarding the future distribution but just for a very simple reason because another component of the of the moral suasion of the strong recommendation made by the regulators is to avoid to take any kind of binding commitment in the dividend distributions. And so we think that regarding dividends, it's pretty clear that the ball is in the cart of the regulators. We want to make very clear that as soon as possible, we are going to give back to our shareholders the maximum amount of excess capital we have. So our goal is to remain on an extremely narrow hedge trend. of remaining in a high-speed growing company, at the same time keeping on distributing a very generous dividend. So this is our goal. We are absolutely perfect in the position to keep on doing that. But clearly, we think that considering the extremely, continuously, extremely volatile position of the regulators, it's better to be cautious in the wording, and this is the reason why we are using this kind of wording. Regarding the charging goal, I'm totally with you, it's not related to any specific market-related items is just a technical accounting reason because according with the IFRS 9 accounting principle, we have to incorporate in our results the change in the forward-looking information. And the forward-looking information clearly indicates they have a kind of a temporal lag because at the moment they are incorporating the deterioration of the macro scenario. At the same time, probably they are not incorporating yet the recent intervention made by the central banks and so on that has, for example, driven down the spread on italian gobies but this is based on the is uh we have to be we have to comply with the counting rules and so this is the duration so there isn't anything else behind okay thank you very much the next question is from john luca ferrari of media banca please go ahead

Yes, hi, good afternoon. Ciao, Alessandro. Ciao, Paolo. The first question is on the 4 million provisions for clients. Actually, I didn't really understand why Agicom asked you to delay the repricing to those clients. What is the reason? Was it improper communication of the repricing or what is underlying this? And also, I saw that you are supposed to report another 5 million in the second half. Is this going to be booked again in the provisions, or is it going to be in terms of lower commissions, the accounting of these $5 million? The second question is on the strategy on the banking book. I understood in the speech that you want to increase the $100 million corporate bonds portfolio and the financial bonds. Why only financials and not utilities and infra or other kinds of asset classes? and where the 900 million in your mind should go over the next 12, 18 months. The third question is on page 28, Fineco UK. If I get it right on the chart, basically with the campaign, you got some 1.7 thousand new current accounts, but on the right hand side, it seems that the 400 accounts were closed. the past three months so analyzing that number there is a pretty high churn of people shutting down the accounts was this guided by you making some portfolio pruning and closing some accounts or it is just physiologic so people also opening but also closing accounts there the fourth and final question is related to the initiative of one of your competitors that recently launched a challenger bank for youngest customer base and for new generation. Even that you are native digital and you should be the guys launching this kind of initiatives. I was wondering what you think, Alessandro, about this kind of initiatives. Do you think they are successful in the long term or simply a waste of time? Thank you.

Let me start from the first questions. The reason why, in the past years, we had some marketing campaigns that were marketing a zero-cost current account for clients, mainly through online campaigns. And so the IGCom has come to the conclusion that, in their opinion, it was fair to give to these clients that have been addressed directly by this marketing campaign and a longer period of time for taking the decision if closing or not closing the account. And in the meanwhile, they are pointed at it. It's fair that we don't charge to them the new price. So this is their position. For us, we are absolutely convinced that we have been right. charging these clients, but clearly, as we explained, this clearly is part of the DNA of the bank. We never make a challenge to the regulators, so we prefer considering that it's just a small delay in revenues. It's not a structural change in our revenues because starting by the beginning of 2021, the full contribution of the repricing is going to be full in place. And so we thought that it was a good position to comply with this proposal by the regulator and not making them a challenge. And in the second half, the five millions are going to be booked in terms of lower commissions. Yes. Banking book, corporate bond portfolio. Why only financials and... and not utilities. I'm not the biggest expert for answering to these questions, but I assume that what is driving our decision of investing in a certain kind of bonds or another is driven by we are extremely for us what is extremely important is the consumption of respected assets. And so clearly for us what is important is to have an And investments that are combining together the consumption of risk-added assets and the return we are getting, we can get at least a modest, but in any case, a positive EVA generation. So this is what is driving. And so we are continuously, for example, the decision to invest in... in some extra outside of Europe GOBIs, because, for example, there are some countries that they are characterized by very high ratings, and that for this, for example, with an impact on risk-weighted assets, it is close to zero, but offering a pickup respect what you can get with the same consumption risk-weighted assets by European GOBIs. just for a very simple reason, because the European GOVIs are stretched by the intervention of ECB, and so this is leaving the possibility to make some extremely efficient investments with maintaining an extremely strict discipline regarding the consumption of risky weighted assets. On the UK clients, I give you an answer then, but I'm inviting Paolo to add some more if I'm not getting perfectly the point. I think that the main reason is that clearly the number of clients we are closing are still clients... that the clients acquired in the very initial phase of our activity in UK, in which the proposition was not still what is at the moment.

But, Paolo, if you want... Yeah, I think the churn rate in reality is very low. So the point is that on the chart on the left side, it's taking account four months, and the chart on the right side is three months. That's why you see the difference. There are different time frames.

Okay, thank you.

Excuse me, there is a last remaining. So as usual, we are extremely embarrassed in commenting what is done by by other other players then the only comment we have to make is clearly that this kind this initiative is not a brand new one because it's a it's a long period of time that we have initiative like like those in the market. For example, there has been a similar initiative launched also by our previous parent company, Buddy Bank. Or if we want to look outside, there is, for example, we have Revoluto, something placed like this. So the point is that clearly we are talking about a business that is, first of all, is a vertical business. so in which you are offering just one single product characterized by practically non-existing margins. And also we think that if the goal is to build up a profitable business, we don't think that this is the right direction. Secondly, if the idea is to capture the young generation of In order to make this your future clients, we have to remind that the clients are, by definition, are becoming very, very volatile. So the fact that you are capturing a client right now with an extremely opportunistic offer, extremely not rewarding terms, is not giving for granted that this client is going to remain with you also in the future. So we think that our strategy remains to keep on offering an horizontal offer to clients, so the broad range of services in order to make all the clients we are acquiring extremely sticky and resilient in staying with us. And we prefer to compete against these high flyer in continuously enhancing our banking offer. For example, the banking offer of Fineco is accelerating dramatically. Now we are progressively introducing solutions that are cutting edge in terms of client experience with what is offered by these vertical specialized places. So we prefer to keep on doing in this direction.

Thank you so much.

The next question is from Filippo Prini of Kepler. Please go ahead. Mr. Prini, your line is open.

Yes, can you hear me now? Yes. Okay, sorry. I've got two questions. The first is on the brokerage revenues for July. You mentioned plus 50% in your growth. Could you share with us also the absolute value in EuroMillion just to compare the run rate with the previous month?

Yes.

And the second, if I may, is on your new commercial offer of brokerage in UK. Could you share with us if any of the established competitors there reacted somehow after a few months that you launched the new offer with EuroMillion? by far lower prices than what they are charging their client. Thank you.

On brokerage revenues, if I remember correctly, because clearly the numbers are not, the reason why we gave an indication of plus 50% is because clearly the month is not finished yet, so we have not the final number but correct me if I'm wrong Paolo we expect the revenues in the region of 16 17 17 millions of euros so clearly so this is going to be the results last year in the same period of the year the number was Paolo Do you remember? 11, no.

Almost 10.

Almost 10, yes. So clearly this is more or less the numbers that you had to compare. Okay, thank you. Regarding your competitors, Paolo, if you want to make a comment on this point.

Yeah, sure. No, we didn't see any reaction, also because it's quite difficult to react to our stock broken pricing. We are taking advantage of our alternative leverage, but for now there is no reaction yet.

We think that our proposal is so aggressive that for the established players to react immediately would be absolutely necessary. incredibly damaging from their PNL. So we think that until our numbers are not becoming really big, they are not going to put in place any reaction. Honestly speaking, I would be extremely happy to see a reaction by them, because this would mean that our numbers are becoming really big. But at the moment, this is not the case.

Just a follow-up on this point. So... So basically, as long as you reach a critical mass, the 35,000 clients that you are used to indicate, it's fair to assume that no strong reaction from the competitors can be... No, it's a different point.

So the 35,000 clients is what we consider a kind of critical number. Because UK, in terms of population, is not too different from Italy. And based on the experience we made in Italy, because when you reach, when you are able to put together that number of good, extremely satisfied clients, then the word of mouth starts working pretty well. But this is not directly related to the – because, for example, if you put together of these 30,000, 35,000 clients, you have 20,000 that are really active on brokerage. This is going to start on making and generating some – raising some attention and reaction by competitors because the two numbers are not related.

Thank you.

The next question is from Luigi Debellis of Equitasim. Please go ahead.

Yes, good morning. Four questions for me. The first one on the capital, can you explain the reason for the increase in risk-credit asset quarter-on-quarter, particularly credit risk-credit asset, if I'm not wrong, and what do you expect going forward? The second question on the new clients, what do you expect in terms of new clients in the coming months? And could you elaborate on the quality of the new clients acquired year-to-date? And do you think that the trend of increase of network productivity will continue at the current pace in the coming months? The first question on the NII, can you provide an update also looking in 2021 with the current interest rates curve? And the last question on investing, Can you elaborate on the management fees margin evolution in the coming quarters? Thank you.

On the increase of risk-weighted assets, before leaving the floor to our CFO that is going to give you the details of the increase of risk-weighted assets. regarding what we expect going forward. What we expect going forward is exactly embedded in the guidance we are giving on the evolution of our courtyard ratio. So that is going to stay in the region of 18%. So we don't expect any kind of significant pressure on our capital ratios by the increase of risk-weighted assets. But regarding the detailed components of the increase of risk-weighted assets, please, Lorena, if you want to give a some more details.

Yes, thank you Alessandro. Good morning to everybody. Regarding the increase of the credit and counterparty risk-weighted assets in the second quarter, we had an increase of $179 million. This is mainly driven by higher mortgages because we had a new production in this period of around $270 million of new mortgages that are mainly related to the backlog in requests that we have from December 2019. Then we have an enormous increase in credit card Lombard loans, and for the first time we had also an impact, quite low, but a low impact on unsecured lending, a new activity that we have started recently. inside our treasury.

Regarding mortgages, we expect and progressively our production going down because as Lorena was correctly representing, it's been driven mostly by the backlog of the pipeline accumulated in the past. So clearly, as we said, at the moment we are becoming more and more cautious on the market so we expect that the speed at which our initial mortgages are growing is going to moderate going forward yes on the on the new clients in coming months we what we can say we expect and and respect last year as a continuation of the existing trend so we've been a slightly lower number of clients but definitely of a much better quality. So I don't know, Paolo, what we expect in terms of client acquisition. We expect a decline in terms of just number by how much, not in terms of percentage, by how much.

This year, you mean?

Yes, but the new clients in the coming months.

New clients at the end of the year We expect 90,000 clients. We expect 5,000 next clients, basically.

No, but the new clients, in comparison, respect last year. So on a monthly basis, we have a decline.

Probably a decrease of 20-25%. Exactly.

So what you can expect in terms of absolute number is The new clients are expected to grow by 20, 25% lower respect last year, but of a much better quality. But this is exactly what we were looking for. So the rationale behind the repricing is this. And in any case, what is emerging is very clearly that Fineco is gaining momentum in taking on board high quality clients. So practically we are progressively exiting from the mass market segment and more and more the clients we are getting on board are represented by mass affluent, affluent, upper affluent and private banking clients. And this trend is accelerating and it is another outcome driven by the recent events because now the clients are starting on seriously looking to the quality of services by receiving by their banks. So this is what you can expect. And this clearly in any case is emerging pretty clearly by the dynamics of our net inflows. We are growing on average by more than 40%. year on year in terms of net inflows with a lower number of clients acquired because definitely we are taking on more and better quality clients. The productivity of the network is expected to, is going to remain very high. Clearly you have to consider a word of cautiousness because sometimes that clearly regarding the, we have to take in account some seasonality. So by definition, now we have 100 in the third quarter. That is, by definition, from a seasonal point of view, in terms of net inflows, is by far the weakest of the year. July has been pretty strong, so now we have just two months remaining. But I want to remind that August, and particularly September, are among, September particularly is by far from a seasonal point of view, the weakest month of the year. But excluding this seasonal effect, we definitely expected the productivity of the network is going to keep on going up because this is current with the continuous improvement of our platform solutions and there is still plenty of room for increasing their productivity because as I was always saying our financial planners are by far the most productive in the industry but they are still characterized by low level of productivity and the room for increasing productivity still remains huge. Net interest income next year, given considering the existing situation, we expect a continuation of what we experienced in 2020. So a net interest income remaining resilient and just declining by a few millions of euros, thanks to the combination of all the components. Investing management fees, the evolution, as we said in the presentation, the third quarter, we expect a third quarter that is going to be characterized by revenues higher. We expect the revenues we generated in the first quarter because the technical... impact generated by the March correction is going to be completely fully digested and so we expect the journey of in terms of growth of revenues resuming going forward so the third quarter unless we have some huge massively disruption in the market but assuming decently normal market condition We expect that the investing management fees in the third quarter are going to be higher. We expect that the management fees will be higher in the first quarter, not in the second, but in the first.

Thank you very much. Very clear.

The next question is from Angeliki Baraktari of Autonomous Research. Please go ahead.

Hi, thanks for taking my questions. Just three left on my side, please. First of all, looking at your CD1 capital, this has only increased by $6 million quarter on quarter. So I was wondering if you could remind me whether you have a clue for the 2020 dividend and if yes, at what payout level? And is the net income of the quarter included or has there been any other sort of fair value to OCI reserve move, et cetera, that could explain the small increase? Then second question, you mentioned with regards to the UK, you mentioned revenues for active accounts, €740, and then you have 7,600 accounts. Is it correct math to just say you've got 5 million of revenues in the UK on sort of annual run rate? Or is the number of active accounts actually smaller than the 7,600? And then last question on the mortgages. You mentioned that there is a backlog which you're now processing. And I was just wondering, was that not processed in the beginning of the year because of the virus? Or have you changed anything with regards to sort of how many mortgages you want to give sort of the attractiveness of those mortgage customers to you? Thank you very much.

On the journey on the quarter one ratio, I don't know. Lorena, do you want to... To give the detail of the... Yes.

Yes. So related to the retained earnings, we had an estimation of 14 million of euros. And in addition of that, you have to consider that in this quarter, we had the impact related to the 81 coupons paid in June for around 10 million of euros. And then the other impact is related to the higher risk weighted asset that we have already discussed before related to the higher lending activity that characterized this quarter.

Lorraine, another point is Another question was which kind of payout is embedded in this?

It is quite high because it's 75%. This is the 14 million that generates 14 million of retained earnings.

Regarding UK, I don't know, Paolo, if you want. Clearly, the 5 million revenues is not the right rate because the number of active clients is... Because the clients are coming right now are extremely... is the process of accumulating, accelerating, acquiring clients is just at the beginning. And so clearly the active clients are expected to progressively building up. So the 5 million euros of revenues is not the existing run rate. I don't know, Paolo, if you want to give some more color on the point.

Yeah, no, no, that's right. 5 million of revenues as a run rate is not the correct one for the moment. And of course, we have to work on everything we said, cross-selling, keep on acquiring, keep on investing to let Finneco know in the UK, you know, we just started and nobody knows Finneco. So we will get there, but that's not the right number right now.

Yes, because the point is just because all the process is just at the beginning, so clearly, and so the The process of activation of clients is clearly gaining momentum and is building up. So we can expect clearly a progressive acceleration of the run rate of revenues going forward. On the backlog of mortgages, the reason of the backlog is just an operational run. Because we had during the fall of 2019 a big jump in request of mortgages by our clients. And at least five times more than usually we were getting, despite the fact that our offer was absolutely... not the best one on the markets, but clearly there is something that is, in many cases, the clients are driven by the concept of one-stop solutions, so they are not crazy in order to get the lowest possible, the best possible condition. And so during the fall of 2019, there has been, if you remember, there has been a big drop in interest rates on the fixed rates and so the clients jumped in in order to take advantage by the incredibly low level of fixed rates and this has caused a massive increase of the backlog and requesting us to make an upgrade in the operational machine taking care of mortgages because we were not ready for managing such a huge amount of Now the situation clearly is normalizing, and we expect to return to the normal pace in the next few months.

Thank you. The next question is from Federico Braga of QBS. Please go ahead.

Yes, hello, good afternoon, everyone. Three questions, please. Two follow-ups on the NAI. The first one is, in the last 18 months, if I'm not wrong, the percentage of GOVIs with the floating rate increased from zero to 30%, roughly. So 30% of your GOVIs now are floating rate. Just wanted to understand what was the rationale of increasing the contribution from floating rate bonds in the last 18 months and going forward what we should expect on this point. The second question on AI is if you can please tell us what was the average yield of the purchases that you made in Q1 and in Q2, please, if possible. And then the last question, if I'm not wrong, in Q2 you had $6 million of trading income, which was not related to brokerage. If you could please give us some color on the six millions if it was capital gains on your Govis or what else and what we should expect going forward with regards to trading income, which is not related to brokerage. Thank you very much.

Yes. So let me start by the net interest income. So the reason of the increase of the floating is just because it's just related to the runoff of the Unicated Bonds portfolio because the Unicated bonds portfolio are floating rate not so clearly. And the more we are running off, because clearly we have to maintain a balance between fixed and floating in order to keep on running in a very well-balanced asset liabilities management position. And the reason of the increase of floating is just driven by the fact that the more you have unicredit bonds expiring, and clearly these are going to be substituted by something else. I don't know, Lorena, do you want to add some more on this point?

I think that is completely your answer. I don't know if... Yes.

The average yield of mortgages in... Q1 and Q2 has been, again, Lorena, if you can give me... On the go, not on the mortgages.

On the purchases of bonds, thank you.

On the purchases of bonds. So the recently purchased bonds, which has been the average yield,

We are in the region of 30, 40 business points because the average yield of the stock at the end of June, including Govis, the pro-national agency, is 0.74%. And the new investment, the average yield of new investment that we made in the quarter was 0.30 business points.

Yes, clearly a very important part to consider, and this is a very interesting component, because when you are buying high-quality bonds, the downside, the yield is pretty low. On the other side, clearly the positive component that you can use for entering in yield enhancement strategies. So when we are considering what we are doing, we are considering the overall yield So, for example, you can buy a bond that is yielding practically close to zero, but if it's a very high quality, you can use these bonds for entering in a yield enhancement strategy. And so, at the end, the yield... But in any case, the recent purchases of bonds, the average yield is what Lorena was... was referring to in the region between 30 and 40 basis points. And the 5 million trading profits is related to the portfolio Govis because we are clearly, there is activity. This is related also to the activity of making the maintenance of the portfolio, so restructuring the portfolio because there are some bonds that they are becoming eligible to be sold, that they are, for example, becoming less liquid and so on. And so in this process, clearly, the portfolio is so huge that clearly this process of continuously rebalancing the portfolio tends to generate modest trading profits in a structural way. But this is not driven by any kind of market timing and so on. is just related to the continuous process of making the fine-tuning for keeping on having an efficient portfolio. Thank you very much. And what about going forward? Yes, probably it's going to be that this is going to remain because these activities related to making the fine-tuning of the portfolio is going to clearly be continuing also in the future. So it's going to stay.

So 5 million per quarter more or less from capital gains on GALIS?

It can make sense, yes.

Okay, thank you.

As a reminder, if you wish to register for a question, please press star and 1 on your telephone. Once again, if you wish to ask a question, please press star and 1 on your telephone. Mr. Foggi, there are two more questions registered at this time.

Thank you very much to everybody. And as usual, everyone that needs to make some more deep dive, clearly we are available anytime. So thank you again.