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.

Hello. Hi. Good afternoon. Thanks for the presentation and all the details. A very well done presentation. Thank you. I do have a couple of questions. First of all, on the dividend, assuming that the regulator removes the dividend ban at the beginning of the next year. Now, this seems also more likely given what is happening today, the vaccine, and let's see what happens. But I mean, my question is, how shall we look at your dividend policy for next year? It's true that you are sitting on a huge pile of capital but it's also true that you might want to have more appetite for lending next year, given the way rates are behaving and also your leverage in my benefit. So my understanding here is that there is a trade-off, of course, between capital and the dividend. Shall we think that you, as other operators in the market, are going to pay also the 2019 dividend? Shall we assume... like how they are doing, you will increase the payout for next year. So any thoughts on this will be welcome at this point. The second question is on investing, your guidance for this year, 2020. If my calculation is correct, your Q4 in investing in terms of revenues will be a bit lighter than the third quarter. So I'm just wondering whether there is any increase the payout ratio to financial advisors had it happened last year or there is something more to say in terms of margin or whatever you might want to comment. The other question is on investing for next year instead for the guidance for 2021. My understanding was that the migration to FAM was going to be margin announcing why your guidance points out a stabilization of margin. So I mean, double digit in my means, a lot of things. So can you give us more indication about margin sales so we can extrapolate a bit more precise guidance in your generic double digit. And then I understand that the comment that you made on the 81 coupon, the DTAs, but there is also quite an increase of risk credit assets in the quarter. Can you comment if there is any change in mix that is more penalizing for risk credit assets or any other reason why risk credit are up 4.3%? Thank you.

Thank you for your questions. Let me start from the dividend. So first of all, on dividend, we prefer to maintain a cautious wording because what we can expect by the regulators is still unclear. So it's not clear if banks are going to be allowed to pay the dividends and if this is the case, in which dimension. and which kind of rationals they're going to use for making eventually a distinction among the different banks. So we think that it's much more serious to remain extremely prudent and so on. We are confirming that we are going to give back to the market the excess of capital we are building up. The business model of the bank remains extremely capital light, so we can put together our strong growth with a very generous dividend policy. And so this is more or less the kind of comment we can make on dividends. So before being more precise, exactly what we need to have is a much clearer picture by the regulators. Because for the time being, we have just rumors. But there is nothing that has come from the regulators on the official side. So our position is that clearly we are not interested in retaining excess capital, so we are going to give back to our shareholders. The business model of the bank is extremely very well-balanced, extremely capitalized. And so we are going to perfectly in the position to keep on paying very generous dividends and sustaining our growth. Regarding the 2020 investing and the guidance of 2020 investing and also 2021, in the last quarter, there is clearly the final payments for financial planners and so clearly there is some kind of, it depends on the dimension of the net sales that they are going to achieve. in the last part of the year. Last year, as probably you are reminded, we had an incredibly robust final of the year, much above our expectations, and this has proven a higher cost for financial planners. So in the case of investing, the net sales are going to be pretty much in line with our expectations. We don't expect any significant change in in what we are paying to the financial planners. Clearly, if there is a higher than expected acceleration, that in any case is extremely very well welcome because it's going to create an even better base for 2021. In this case, there is the possibility to have a small increase in what we have to pay to them. Regarding the guidance on 2021, clearly it's impossible to give more precise guidance because clearly there are components of what we can expect to happen next year that are not perfectly under our control. So I want to just For example, there is the market effect. We don't know. The timeline of the net sales, because clearly the fastest are the net sales made on asset under management and the batteries. And this is exactly the contrary in the case your net sales on asset under management is coming later on. But clearly, as you can imagine, this is not completely in our hands because, for example, the example has been 2020 in which there has been a totally unexpected impact caused by the month of March. And this clearly has... has generated and clearly has been a drug for the revenue generation of investing. So we are extremely confident on this double digit growth. Regarding your point on if Finico asset management is clearly continuously contributing in increasing margins, why we are giving a picture of stable margins. because we know that clearly we have some, for sure, Finicosted Maze is going to keep on contributing in increasing, in making our HOFR more efficient in sustaining the margins. On the other end, there is clearly, we expect the continuation of the headwinds represented by clients remaining in any case cautious and conservative. So if you put everything on the table, we think that a serious and conservative guidance is to expect margins remaining relatively stable going through the 2021. Clearly, if we are more successful in driving the client's appetite, there is room for higher margins. But at the moment, we prefer to be cautious and giving us a guidance, something that we think that is extremely robust and solid. On risk-weighted assets, if you don't mind, I leave the floor to the CFO that can give you a more detailed description of what's going on with risk-weighted assets. Please, Lorena, if you want to.

Thank you. Thank you, Alessandro. Good afternoon to everybody. Regarding to risk-weighted assets, in the third quarter, we can see an increase of about 150 million of euros driven for 40 million euros of euros by extraordinary impact. As already said by Alessandro, 27 million due a one-off effect related to the DTA on the contribution to the deposit guarantee scheme. Consider that this impact will be recovered in the fourth quarter once the contribution to the deposit guarantee scheme will be paid. And then we had also another one-off effect for 13 million on other assets. It's a technical misalignment that has created an exposure immediately recovered the day after the end of September. The recurrent, but not the recurrent, so what happened regarding commercial loans and treasury investment is a value of 114 million euros of risk-weighted asset increase, of which 19 million related to treasury activity. Unsecured lending and investment in non-European government bonds. Both of these activities have a risk-weighted asset absorption of 20%. And then we had the usual increase in our commercial loans and Finic asset management exposure. So this is the impact on the third quarter.

In any case, this is not clearly the impact caused by the building up of the yield enhancement strategies clearly is bigger at the beginning of the process. then when we are going to reach the the the the target level this is going clearly is going to accelerate decelerate quite considerably so you you have not to keep this uh run rate in the increasing respected assets as a these as a run rate for the future so clearly this is the has been higher because the process of building up is the moment in which clearly the impact on respected assets is higher and then progressively tends to keep on going down.

All right.

Very clear. Thank you very much. The next question is from .

Please go ahead, Madam.

Hi. Good afternoon. A couple of questions for me. One is on the NII outlook. I see that you've given a resilient outlook. I don't know if you can quantify it a little bit, and also if you can give us some color on the tiered TRO strategy and what is your sensitivity to the tiering potential changes. The other one is on the net sales. Octobers were very strong, but mostly driven by deposit. Do you expect if market normalized that the switch from deposit into AUM to accelerate very soon, or it will still take a bit of time? And the last one is on your digital angle. Clearly, you are very different from most of your peers in your IT platform. It's a key differentiating factor. We always talk about it in terms of efficiency and scalability of your business. But what do you think are the other main advantages? Is it revenue generation and risk management? If you can give us some color on that. Thank you.

So on the net interest outlook, So for 2020, clearly we don't expect any significant change in the process, because clearly there is such a short period of time still, so there is no impact. So it's much more interesting to make comments on 2021. So what we are trying to do on giving an indication to the market is to try to give to the market a precise number. So during the last few months, clearly in which there has been a continuous deterioration of the interest rates environment. we moved in the direction of expecting for next year a decline of net interest income in the region of 12 million of euros. Now, considering that the interest rates kept on going down, our outlook has become slightly worse, and so now we are giving as indication a range between a decline between 13 and 15 million of euros, so not a big change, but clearly What we prefer, considering that the net interest income dynamics is extremely complex, we are trying to give to the markets the highest possible visibility in what's going on on the market. Regarding TLTRO sensitivity and regarding the tiering potential changes, I don't know Lorena if you want to make some comments on this point.

Yes, so regarding TLTRO for the first time on December our intention is to join TLTRO and ask to borrow the maximum available amount that is in the region of 1 billion. So we expect a positive contribution to net interest income. And if we relate this to tiering, we can say that on an annual basis, each 100 million of euros of TLTRO, we can have 1 million of euros of positive effect on net interest income if we can count on tiering, so if we can invest this money on tiering. The tiering is possible for us for six times the reserve, the regulatory reserve, and this is the situation. Sorry, Alessandro, I interrupted you.

No, I'm not sure that if we got correctly the question raised by Azur. So if we answered correctly to your questions on TLTRO and tiering potential.

On TLTRO, yes. On tiering, I wanted to know, like, if, for example, the multiplier gets increased, what's the sensitivity of the NII, if you can?

So your point is if there is an increase in the... Yes. In the multiple, so... At the moment, which is the total amount?

The multiple is six times our mandatory deposit.

At the moment, the mandatory deposit is equal to?

It's 262 million at the end of September.

Okay. And clearly... At zero rate. Yes.

So 206 million of Euros, the variation on net interest income on an annual basis is 1.3 million of Euros.

This is the sensitivity.

Now a comment on the net sales. So the month of October has been... has been incredibly robust because we are continuously building up and so now the net sales has been 91 percent higher than the past year and again without any kind of commercial initiatives so the bank has kept on doing business as usual nevertheless and so this is confirming that there is a massive contribution by the reinforcing structural changes. The reason why there has been such a large component represented by deposits is because the month of October has been a combination of several negative elements regarding asset under management. The first one is the delay in the pipeline of the approval process by the Irish Central Bank of the new products and this has been driven by the combination of the traffic jam caused by Brexit And also the fact that Ireland has been the first country entering in a very strict lockdown. But we expect that to recover in the next few weeks because the new pipeline of projects now is underway. And so this is going to for sure is going to bring in a positive contribution in this direction. And second, Clearly, the increase of the assets we gathered has been definitely above our expectations, and so it's clear that we have such a sharp acceleration with respect to the trend. It's normal that at the beginning you have an accumulation of liquidity. on the asset, but this is boding extremely well for the future because it's the base on which we can start to work. And for sure also the expectations by the incoming U.S. elections and so on has made financial planning clients a little bit in a wait and see mood, but this is confirmed also by what's going on in the market and so on. we are extremely confident to resume very shortly and an excellent pace on the asset under management dynamics and in any case we are extremely pleased by the huge increase that we are experiencing in net sales because it's confirming that the bank is definitely in a great position for capturing the structural trends. So the internal IT Which are the advantages? So the advantages of an internal IT are so numerous that it would require probably a dedicated presentation for this. But I'm just concentrating on the most evidence. So the first one, obvious, that clearly we are doing things much better and spending much less for a very simple reason, because when you are leveraging on externalized services or external system integrators, by definition you rely on someone that has to make a margin on what is provided to you. And so clearly, if you are directly managing everything by yourself, it's much less expensive. But more importantly, it's making you much more reactive, agile, and faster because every time you need it, you can change the course of what you're doing. Third is making your internal culture much better because you tend to retain internally the skills, the knowledge, the experience in what does it mean to run an IT infrastructure if you are leveraging on externalized solutions. the knowledge, the skills are in the hands of someone else and so clearly you are not the owner of your future because this is put in the hands of someone else. and and also you can be in a very comfortable position to be in what is the the best position for a bank to be to to be in a smart and fast follower so we can you can we can observe everything what's going on in the market then deciding when something makes sense to be used and when this makes sense to jump into an and a certain technology avoiding to make extremely expensive and costly mistakes. But there are many other elements so probably we are considering probably to arrange a dedicated presentation to the market on what is our IT infrastructures and what does it mean for us and which kind of strength represents for the bank.

The next question is from Angeliki Bairactari with Autonomous Research.

Please go ahead, Madame.

Good afternoon. Thanks for taking my question. Just one on my side. You mentioned in your presentation that Fineco Asset Management will add to sub-advisory mandates a new product range based on an advisory service. And so I was just, I'm not sure I fully understand exactly what this means. So will you be using third-party products from third-party asset managers as part of your offering to your clients, or is it the opposite? So you will be using Finneco asset management products as part of an offering of third-party players. If you could just give us a little bit more detail on that and sort of what could be the potential contribution in terms of revenues from this initiative. Thank you.

So regarding this point, and so just to be more precise on the point, at the moment, FinEco asset management is remaining consistent with an approach that is leveraging on third parties' contribution. And this is made throughout a scheme in which there is a FinEco fund and then the reason we are giving to a third party and sub advisory mandate for running the fund and we are paying a fee for this. The new generation of products particularly on extremely the products that are related to extremely efficient markets, so simple markets and so on. The scheme is going to be instead of giving to the third parties and sub-advisory mandate, we are going to get by them an advisory service. so which is the difference in terms of a structured portfolio is not such as great because clearly we are going to put in place practically what is suggested to be done by the third party but clearly the reason is much less expensive for us because in sub advisory mandate can cost to you up to 50 40 50 business points and an advisory service is usually in the region between five, six, seven basis points. So it's a massive reduction of what you are paying to the third parties for running the business. Clearly, this is not going to make a substantial difference because it's going to remain a fund in which the decision where you want to invest, what you want to do is going to remain in the hands is going to be driven by a third party but is a schema that is much more is much more efficient and is making for us possible to extract and a much higher amount of value so in few words becoming more efficient on the value chain thank you and so the the basis point difference that you mentioned is obviously quite big but i presume

You mentioned over a few years, so I guess it's going to take, at the moment, this will only be applicable to a small part of your Finneco Asset Management product offering. Is that correct? Meaning we will not see a big spike in margins in 2021 or 2022 from this initiative. Is that correct?

No, it's going to be a progressive building up. So clearly we are going to start and progressively this is going to build up. It's going to become a quite relevant way we are working. So you have to look to this. as something that is going to keep on building up over the months and the years. But clearly, probably during the next year, can be probably throughout 2021, probably to think to have And a few billions of assets that are going to be managed in this way can make sense. So clearly it's not going to make a dramatic difference just immediately, but it's going to make a quite large, quite important difference going forward, yes.

Thank you. The next question is from Federico Braga with UBS.

Please go ahead, sir.

yes good afternoon everyone and thanks for taking my question uh sorry just one clarification first so the um 13 to 15 million decline to nai includes uh also the benefits from tltro and dcb tiering etc uh correct the second question is uh still on nai actually on tltro i mean in q2 you said that uh you had no interest in participating to tltro so just trying to understand What has changed if it's just because of the environment or there is something else and also, if you can please tell us what could you be to expect the, what can we be to expect the net impact to your leverage ratio of please. And the last question is on the tax rate, the 20% tax rate that you reported in. Q3 there was some one-off or we could expect the tax rate to go back closer to 30% in the coming quarters. Thank you very much.

The guidance on net interest income 2021 are clearly including the benefits from TLTRO and tiering. why we changed our mind on TLTRO because clearly the situation has changed so the interest rates environment has become much more challenging when respect the past and so clearly we think that considering that there is a gift left on the table and why we have not to take this gift. So this is very transparently this is the reason why we changed our mind. the net impact on the leverage duration on the TLTRO. Lorena, if you can give more details on this point.

Yes, the impact is estimated in about 1414 basis points.

And if you want to elaborate also on the tax rate, please.

Yes, regarding tax rate, So in the third quarter, what happened was that Finicobank standalone profit before taxes decreased compared to the second one, mainly due to two effects. One is the contribution to the systemic charges for 28 million, and we have also lower brokerage revenues for around 14 million of euros quarter on quarter. In the same period, so in the third quarter, Finneco asset management profit before taxes remained quite stable, slightly increased quarter on quarter, and this increasing its contribution to the consolidated pre-tax profit of Finneco Group. And as a consequence, the consolidated tax rate decreased from 30% to 28% because in the quarter, the weight of the Finneco Asset Management profits that are subject to the Irish tax rate of 12.5% increased, while the weight of Finneco Bank standalone profits subject to the Italian nominal tax rate of 33% decreased. And for 2020, we expect a tax rate to flattish and we don't expect also going forward significant reductions in our consolidated tax rate as the majority of the consolidated income will continue to be represented by revenues generated by Fineco. which are growing more due to the outstanding performance of brokerage business.

Thank you very much.

The next question is from Filippo Prini with Kepler.

Please go ahead, sir.

Yes, two brief questions for me. The first one is on Ukraine. Last quarter, you gave an indication of active clients at €140 per year. If you can give an update on this metric. The last one is on your natural financial advisor. You increased a lot of inflows, but numbers basically haven't changed yet. in the last, let me say, three. So you made a lot of comment on the possibility of financial advisors to increase their profitability, but at some point, your asset will grow at a depth that you should need to increase the number of financial advisors. Thank you.

So, let me start from the financial planners' inflows and then I will leave to Paolo di Grazia the answers on the UK. Regarding the financial planning, Finneco is in terms of productivity by financial planners is by far the most productive organizations in the industry because if you make the right calculations, so not considering the impact caused by recruiting, clearly Fineco is by far the most productive organization. So your point is, are you close? Are you close to the level at which the productivity cannot be increased even furthermore or not? Or in order to keep on sustaining what you're doing, you need to have more financial planners. The fact that we are much more productive than the industry, this doesn't mean that the industry is really productive because the level of productivity of the industry in the financial planning industry is extremely low in comparison to what is the opportunity on the market. And so we are absolutely fine in saying that the room for increasing even more the productivity of our financial planners is still huge. Because just to give you an extremely easy, simple number, at the moment Finneco has 1.3 million clients, of which 500,000 are clients most interested in transactional banking, so we are not of interest for financial planners. The remaining 800,000 clients, the number of them that are actively managed by the financial planners at the moment, they are probably between 200,000 and 250,000. And so the remaining part is still awaiting for being directly managed. And clearly, the point is, if you think to do this with the normal approach, I'm totally with you that the productivity, there is no room for being increased. But if you are using technology, clearly the possibility to increase the productivity of financial planners is still really huge. So this is the first point. So we expect the productivity of our financial planners keeping on growing according with everything we are doing on the technological side. we are observing and growing natural interest by the markets in direction of what we are providing and so we expect that the number of financial planners is going to increase net of net by the year end for a very simple reason because now financial planners that they are interested in changing the organization in which they are working They are starting realizing that there is not just the upfront premium you're receiving as the main driver, but it's becoming incredibly important that the business model, the service model, the technological platform, because this is what is going to make you. The combination of these two components is leaving us extremely relaxed on the capability of the bank on keeping on increasing the business with a very small impact on the operational side because the productivity of financial planners has still a lot of room for growing. In any case, we are observing that our capability to take on board new financial planners is definitely growing, and we are not clearly changing our approach, so we are not interested in overpaying them for recruiting the new financial planners. Paolo, if you want to give an update on UK, please.

Yes, good afternoon. About the ARPU you asked about, the ARPU decreased, still strong, but decreased at around 500 euros. The reason why it decreased is because of the seasonality and the lower volatility we had in the third quarter. Please note that the previous quarter was very strong, related to the strong volatility It was a perfect quarter for the brokerage. If you compare the third quarter with the first quarter, there is a big jump, there is an increase. The reason why is because we started investing with the right target, basically acquiring the right clients. and we're still working on the on the cross-selling activities which is giving us some results right now and we will start you know we will continue to invest and try to acquire the best clients we can in the uk in the next months many thanks the next question is managing the balance with equity please go ahead sir

Yes, good afternoon. Just one question on the certificates. Could you elaborate on these new opportunities and quantify the potential impact in terms of additional revenues for Fineco? Thank you.

Yes, this is a very large and huge opportunity for Fineco because clearly, and this is just for giving another evidence of how it is important to be perfectly integrated from an IT and operational point of view. The certificates market is a huge market here in Italy that is a listed market and as we are saying is a market that represents more or less 100 millions of euros of revenues. Fineco has a market share on retail brokerage that is above 50%. And at the moment, we're capturing on this market probably just a few millions of euros. So clearly, we are capturing. incredibly far away from our natural market share and the reason of this because until now we we declare we were we were concentrated in doing something else but clearly now it's a it's a market that is is emerging as a very interesting particularly also looking forward for the our also to rate potential expansion in other countries in europe in which certificates are driving the lion's share of the business like germany and france clearly has become evident that was important for us to start to look to this market and so probably what we're going to do we are going to start on integrating the the chain so becoming a issuer market maker and distributor so we are going to bring to to the clients and so progressively instead of having our clients buying and selling products provided by someone else progressively we are going to bring to them our products And clearly, this is a very relevant innovation that we are going to introduce, and we are extremely confident this can represent an absolutely very interesting additional upgrade in the revenues generated by brokerage.

Thank you very much.

Mr. Foti, there are no more questions registered at this time.

Thank you very much. As usual, if there are any other questions and so on, please feel free to contact us anytime for having a follow-up. Thank you.