Finecobank Banca Fine Spa

Good afternoon. This is the Curriculum Conference Operator. Welcome and thank you for joining the Fineco Bank 3rd 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 vivo on their telephones. At this time, I would like to turn the conference over to Mr. Alessandro Foti, CEO of Simileco Bank. Please go ahead, sir.

Good afternoon, everyone, and thank you for joining our third quarter 2020 results conference call. Before we start going through the details of the presentation, let me please underline the key message of the quarter. 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. Adjusted gross operating profits stood at 397 million in the first nine months of the year, increasing by 31% year-on-year thanks to the growth of our very well-diversified stream of revenues. Adjusted net profit increased by 23% year-on-year, reaching $246 million in the period, despite the increased contribution to systemic charges during the third quarter of the year. Operating costs very well under control, with cost-income ratio declining by 4.8 percentage points year-on-year to 33.1%. and consuming operating leverage as a key strength of the bank. The first nine months of the year recorded that the strong acceleration in the commercial activity with net sales crawling 6.4 billion, increasing by 46% year on year. These results have been organically generated as only 6% come from recruits made over the last 24 months. 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. Also, thanks to the success of the new generation of products launched by Finneco Asset Management. Those dynamics were also confirmed in the month of October with net inflows extremely robust at $739 million and the solid asset mix despite the temporary lag in the pipeline of new products by FinEco asset management due to a slowdown in the authorization process in Highland for Brexit. In the next few months, we expect to transform the strong amount of assets recorded thanks to the launch of the new solution at the end of October and November. As for brokerage, Estimated revenues in the month of October were around 13 million, increasing by 12% year-on-year, with October 2019 being the strongest month of last year. Nevertheless, despite the volatility that has been contained, with the exception of the last few days of the month, revenues have increased by around 28% compared with the average monthly revenues in the period 2019-2019, equal to around 11 million. This is confirming once again that the floor of our business is now definitely higher. Finally, let me please highlight that at the end of October, S&P Global Ratings upgraded Howard Bank's outlook to stable Indeed, according to Standard & Poor's, Fineco is expected to be less exposed to risks related to the highly uncertain microeconomic environment in Italy than purely commercial banks. To our digitally innovative and well-diversified business model, which is only marginally focused on lending activity. Let's now move on to slide five and start commenting our nine-month results. As announced, our diversified business model allowed us to reach, once again, very strong industrial results despite the complex scenario with adjusted gross operating profit at 122.7 million in the third quarter of 2020, up by 13.8% year-on-year. In the first nine months, adjusted gross operating profit reached 397.5 million, increasing by 30.8% year-on-year. and adjusted net profit totaled 246.3 million in the nine months, up 22.7 here and here, despite the higher contribution of systemic charges. Cost income decreased to 33% despite the continuous expansion in assets and clients, thanks to our strong operating leverage and to the scalability of our platform. Let's now move to slide six. As you can see from this slide, adjusted revenues in the first nine months stood at 594.2 million, up 21.5% year on year, thanks to the contribution of whole product areas, as we have been able to capture the acceleration of the structural trends in place. Operating costs stood at 196.7 million, increasing by 3.8% year-on-year, net of 4.5 million of marketing costs in UK. Please now go through the following slides to analyze more in details all the dynamics of our results. On slide seven, Let's start with net interest income dynamics. Net interest income in the first nine months of the year remained resilient at $206.9 million. Despite the worsening of interest rates environment, it decreased only by a few million thanks to the continuous enlargement of our sticky side deposits to our quality lending book and the positive contribution from treasury activities and other initiatives on which we will deep dive later. The lower interest rates environment led to a reduction in average gross margins on interest earning assets from 1.23% in the first nine months of 2019 to 0.03% in the same period of 2020. Finally, cost of funding decreased to zero basis points in the quarter due to the lower USD LIBOR. Please let me remind you that our cost of funding related to the deposits in Euro, which represents 96% of our total deposit, is zero. Let's now move on to slide 8. to deep dive on our industrial actions to sustain a net interest income. As you know, being a public company allows us to couple our high quality balance sheet and our low-risk investment strategy with a more flexible management of liquidity. Therefore, we are able to undertake industrial actions to sustain our net interest income and to partially offset the pressure coming from the worsening interest rates environment. Among the actions we are undertaking, it is worth mentioning first a more dynamic treasury management resulting in yield enhancement strategies like collateral switch or unsecured lending in order to get an extra yield on the top quality paper in our portfolio. Second, the enlargement of the scope of our investments towards investment-grade non-European GOVIs in order to exploit opportunity also in markets with more interesting yields. We are also starting to invest in financial corporates, senior bonds, also to a lower extent. Third, we are going to take full advantage of the ECB measures designed to contain the side effects of its accommodative monitoring policy, namely tiering and tiered TRO. I want to underline, as in the results we are presenting, there is nothing coming from tiered TRO because the tiered TRO is going to start on October giving to us a contribution starting by the end, beginning of next year. Finally, we are expecting an increase in the demand of our lending products by our existing good clients due to the low interest rates environment. Please note that we are not changing our cautious and conservative approach. Let's now move on to slide nine. Finite fees and commissions stood at $307.6 million in the first nine months, growing by $26.6 million year-on-year thanks to the contribution of all product carriers. Trading income net of non-recurring items reached 78.1 million, increasing by more than 131% 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 to slide 10 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 nine months of the year, overall brokerage revenues stood at $178 million, increasing by 84% year-on-year. On the top of the slide, you can find the chart showing the monthly brokerage revenues since our listing. As you can see, brokerage revenues in the period are structurally higher. October has been another strong month, confirming that the floor of the business has increased. This is true regardless of the level of volatility, thanks to the contribution of the three structural components. The first component is the deep reshape of our brokerage business we have undertaken. Please note that this is a never-ending process since the bank is extremely efficient, fast in improving the platform, broadening the offer of products with new instruments and best-in-class solutions, expanding regions in which clients can trade. We are improving the efficiency of the internalization engine on which we can leverage thanks to the dimension and quality of our volumes and to the technology we have in place. Finally, we are in the process of vertically integrating certificates becoming issuer, market maker, and distributor throughout our platform. Considering that the leveraged certificates at a market size of around 13 billion volumes and estimated revenues of 100 million, we have a strong potential for increasing our market share through the vertical integration of the business. Just as a matter of information, at the moment the number of commissions produced by the certificates for us is just in the region of just a few millions of euros. So we are far away from our natural market share on the business. So this is absolutely an absolutely very relevant project for us. Second, 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. Third, the increase in our market share. Let's now move to slide 11. for a focus on the last two components. The graph on the left-hand side of the slide summarizes the quarterly evolution of our brokerage clients since 2018. As you can see in blue, active investors are remaining stable in terms of percentage of total clients, but in 2020, they have grown significantly in absolute numbers. standing well above the average level of 2018 and 2019. Please note that the active investors have an average of four executed orders per month. All this confirms that building up of an overlap between brokerage and investing business. as those clients are not speculative traders, but active investors realizing that the current situation makes it more compelling to directly manage their savings. In addition, let me remind you that despite Finic is a market leader, our market share keeps on growing. On the graph on the right hand side of the slide, you can find a very strong evidence of this trend. The graph represents the top 10 banks of origin of our new brokerage clients. A very interesting note is that new clients are coming from traditional banks and not from vertical brokerage peers. On top of this, the number of new clients doubled in the first nine months of 2020 compared to the same period of 2019, once again showing that we are the natural player of reference for clients looking for actively managing their savings. Let's now move to slide 11 for a focus on investing. Investing revenues amounted to $179.8 million in the first nine months of the year, increasing by 5.7% year-on-year, thanks to volume effect and strong asset under management net sales, driven by higher contribution of gathered products and services and to Finneco asset management. Investing revenues in the quarter have recovered from the levels of the previous quarter, which was impacted by the negative market performance in March. Please note that the management fees increased by 8.9% quarter-on-quarter and by 3.7% year-on-year, while management fee margins have remained flat in the quarter. Let's now move on slide 13 for a focus on our cost. Going forward, we expect our investing revenues to keep on growing as a result of the combination of stronger volumes effect and the resilient margin despite the cautious approach held by clients. As you know, Fineco is a flexible and fast-moving company, and we are undertaking many actions to further boost our long-term sustainable growth. let me let please go into the details of our actions to strengthen both the volume effect and the increase in operational efficiency by finicose finicose management the strong volume effect will be driven by combination of first robust asset under management net sales and we are in the sweet spot to capture the acceleration in structural trends second a new project aimed to offer even better quality solution to our clients with a strong focus on risk management since our irish company allows us to have a daily look through on its solutions we expect we expect a strong acceleration in direction of finico asset management third the increase in financial planners productivity thanks to our cyber advisory approach As for the increasing contribution by FinEco asset management, let me highlight that first we expect a continuous extraction of additional operational efficiency, for example, on fund administration cost. custodian cost and so on. Second, the increase in FinEco asset management volume will result in a geometrical growth of its margin contribution because institutional products can be used as underlying of investing solutions. Finally, our Irish company is developing a new product range based on advisory services by third parties. This is going to make Finnecoset management even more flexible and the value chain even more efficient. Let's now move to slide 13. The slide once again confirms efficiency to be part of our DNA and core in our bank representing a clear and unique competitive advantage. Operating costs stood at the 196.7 million in the first nine months of the year, growing by 3.8% year on year, excluding 4.5 million of marketing expenses in UK. Staff expenses stood at 73.5 million in the period, plus 10.4% on a 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 Unicredit Group. Non-HR costs stood at 123.1 million flat year-on-year, excluding UK marketing expenses. Let's now move to slide 15. In this slide, we summarize the breakdown of the bottom line in the third quarter. Within the provision for risk and charges, we accounted our contribution to the systemic charges for $28 million, of which $21 million related to the usual contribution to deposit guarantee scheme, increasing year on year according to the market share on guaranteed deposits. and 7 million related to our first yearly contribution for Banca Popolare di Bari. Let me remind you that these contributions are estimates and adjustments could be made in December when we will receive the official communication. On top of this, we also counted 2.3 million of provisions due to the repricing on current accounts As a reminder, the authority has to delay to the end of the year the application of smart repricing for 2020 to a cluster of clients that opened the current account in the past years under an online commercial initiative. Although we are fully convinced that our decision was correct, we maintain our usual prudential approach not to challenge the regulators. Let me remind you that in the fourth quarter we are going to refund to that cluster of clients the banking fees paid during the year and therefore we will have a release of provisions for the same amount. Finally, let me confirm that the full effect of the smart repricing on the whole customer base will be in place starting from January 2021. Let's now move to slide 16. As you can see on the left-hand side of this slide, commercial loans grew by 29.3% year-on-year. This was with the usual strict control on credit quality. Let me remind you that our lending is offered exclusively to our loyal customer base and Internal IT culture allows us to fully leverage on big data. This translates into commercial cost of risk very well under control, decreasing at 11 basis points as of September 2020, in line with our guidance of the 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 slide 17. we confirm our guidance on mortgages, yearly new production in the range between 600 and 700 millions with 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 the big data analytics and to the quality of our lending book. To this regard, let me please highlight that after 45 months, from the launch of our mortgage offer, only three clients are accounted in the NPRs. On personal loans, we confirm our guidance on 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 confirm our annual growth in a range between 300 and 350 million. We've expected a yield between 75 and 85 basis points. With regard to 2021, we are not going to change our cautious and conservative approach for lending. but low interest rates environment should increase the appetite for lending solution by our good clients. Therefore, we expect a rebound in lending activities with production being higher than in the past. Let's now move on slide 18 for a focus on our capital ratios. Finico 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 28th, we will refrain from paying dividends until January the 1st, 2021. In any case, our intention is to give back our excess capital to our shareholders at the first window of opportunity. Common equity tier 1 ratio stood at 23.28% as for September 2020. Please note that the indicator has been negatively impacted by a one-off effect. In fact, in the quarter, we had an impact of 18 basis points minus 18 basis points coming from the deferred tax assets on the contribution to the deposit guarantee scheme that will be recovered in the fourth quarter. In addition, in order to have a more stable level of capital ratio during the year and to give a more conservative representation, we have started to deduct the AT1 coupon from the core TR1 capital on an accrual basis and not on a cash basis, with an impact in the quarter of minus 19 basis points. On top of this, the main reasons behind the quarterly decrease in the common equity TR1 has been the process of building up the dynamic management of our treasury. Total capital ratio stood at 37.41% as of September 2020. Now I would skip directly to slide 26. In this slide, we summarized our guidance for 2020, please note that it does not include the revenues and costs related to the UK business development. Net interest income is expected to remain resilient, only slightly decreasing by just 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 the more dynamic management of our treasury. Please note that in 2020 we had no contribution from TLTRO. Investing fees are expected to increase mid single digit here on here with a stabilization of margins. 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 deeper continuous reshape of our product offer. Second, the strong growth of new customers 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 levels registered in the past years. Banking commissions related to smart repricing are expected to be around 11 million this year. And we are confirming our guidance on operating costs to a yearly growth of around 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 to have to 7.5 million and we are increasing them thanks to the good feedback reached so far. We expect the Q1 ratio to stay comfortably above 70%, a level that we deem appropriate and massively above industry average. The leverage ratio stood at 4.35% in September 2020, and this is expected to remain above 3.5% thanks to all the initiatives that the bank is undertaking. Let's now move on slide 27 for a focus on 2021 guidance. Net interest income is expected to remain solid and resilient following the worsening interest rates environment. We are now estimating decline in the region of 13 15 millions in comparison to 2020 so this is just an fractional we are seeing respect that the most recent indication we get to the market that was in the region of more or less 12 millions of euros let me please underline that we are containing the effects of decreasing interest rates thanks to the smooth runoff of our bond portfolio the positive effect from volumes and lending, the benefits from ECB tiering and TLTRO, and more dynamic treasury management through the yield enhancement strategies and the enlargement of the scope of our investments to non-European GOVIs. On top of this, we expect a contribution of structural revenues from the regular activity and maintenance of our investment portfolio in the present context of decreasing interest rates. Let me please underline that although this contribution is accounted in the trading profit line, this activity is not driven by market timing, but only by the continuous process on maintenance to have an efficient portfolio. For investing revenues, we expect a double-digit increase with respect to 2020 with resilient margins. Brokerage revenues are expected to remain pretty strong with a floor that is definitely much higher than in the past. Banking commissions related to the smart food pricing are expected in the region of 20, 23 million. Costs are expected to grow. in the region of 4.5%, mainly due to the increase in the workforce. Going forward, we confirm our guidance of a continuous decline in cost income in the long run, thanks to the scalability of our platform and to the strong operating gearing we have. We expect our core T&1 ratio to remain above our floor of 17%. Leverage ratio is expected to remain above 3.5%. Cost of risk is confirmed in a range between 10 and 15 basis points, even decent environment, thanks to our high-quality landing book. Finally, we expect a robust and high-quality net sales, reflecting the acceleration of the structural trends in place. Let's now move to slide 29. Our key priority going forward remains to structurally improve the quality of our net sales and client base in order to increase better quality and recurring revenues and keep the growth of our balance sheet under control. Our focus on improving the asset mix is clearly the revenue delivering and this year we are recording a strong acceleration in our net sales dynamics. That is the results of our industrial measures. And we have not undertaken any aggressive and short-term commercial offer in the period and have not leveraged on the overpaying recruiting. As you can see from the graph in the slide, the first nine months of 2020 asset under management net sales have increased more than 35% year-on-year, and the same has happened to the productivity of our network, with net sales per financial advisor increasing by around 45% on a yearly basis. Let's now move to slide 30 to analyze more in-depth FinEQ asset management. FinEco asset management is confirmed to be key in our move to accelerate the conversion of deposits into asset under management and to sustain margins thanks to its strong operating leverage. Our latest NETSIS results confirm once again that FinEco asset management is gaining commercial momentum, giving a strong contribution to FinEco inflows also in complex environments 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 offer to meet evolving customers' needs. The penetration of Finneco asset management retail class total assets reached 23% of the Finneco Bank's total assets under management, and we expect heat to grow even farther. The penetration of asset under management, excluding insurance, reached 33% in September 2020, increasing by six percentage points in one year. Finally, let me please underline that Finnecos Ad Management is going through a further evolution of its business model and is catching a trend coming from the U.S. where asset managers are starting to give advisory in portfolio management. Starting from 2021, our asset management company will head to the present sub-advisory mandates, a new product range based on advisory services by third parties, giving us even more flexibility in making the value chain even more efficient. Let's now move to slide 31 for an update on the development of our UK business. Our one-stop solution often in the UK is proving to be very well welcomed and our marketing campaign is providing a strong boost to quality client acquisition. As you can see from the graph on the top of the slide, since we have started our marketing campaign, the number of active current accounts has strongly increased, up by more than 60% year on year. In particular, active current accounts on trading have increased by more than three times. higher year on year. Please note that the strong feedback we are receiving from our first marketing campaign is driving us to increase our marketing expenses for 2020 up to $7.5 million. As you can see from graph on the bottom of the slide, the cross-selling through our one-stop solution is translating into an improved and better quality revenue mix since our very first marketing campaign at the end of the first quarter of 2020. OTC and listed products confirmed to be the lion's share of revenues in the third quarter of 2020, despite seasonality and lower volatility. Coupled with our huge operating leverage, this is allowing us to be at operating break-even, excluding market expenses, within the first half of 2021. As for our next steps, we are progressively enlarging our fund offer, and ISAs are now in the test and ready to be delivered, while SIPs are confirmed for next year. You can find the detailed timetable on slide 32. Thank you for your time, and now we can open the call to questions.

Excuse me, this is the COVID call conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and 1 at this time. The first question is from Domenico Santoro with HSBC. Please go ahead, sir.