Finecobank Banca Fine Spa

Good afternoon. This is the Coral School conference operator. Welcome and thank you for joining the FinEco Bank full year 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 and General Manager of Fineco. Please go ahead, sir.

Good afternoon, everyone, and thank you for joining our 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. Adjusted net profit increased by 19% year-on-year, reaching $325 million in the year, despite the increased contribution to systemic charges. Adjusted revenues stood at $776 million in 2020, increasing by 18% year-on-year, mainly supported by brokerage and investing. Operating costs were under control and confirming operating leverage as a key strength of the bank, with cost-income ratio at 34.7%, declining by 3.2 percentage points year-on-year, also thanks to the extraordinary performance of brokerage. As announced, 2020 also recorded a strong acceleration in the commercial activity, with net sales hitting $9.3 billion, increasing by 59% year-on-year, and with a strong contribution by asset under management, reaching a new record level at $4.3 billion. Thanks to the increased productivity of our network of financial advisors, and to the success of the new generation of products launched by Finneco Asset Management. Let me remind you that these results have been organically generated and reached with no aggressive commercial welfare and despite the introduction of the repricing on current accounts. Those dynamics were also confirmed in January with net inflows extremely robust at $891 million and a solid asset mix with asset under management equal to $470 million. As for brokerage, estimated revenues in the month of January were around $19 million, increasing by 30% year-on-year. This confirms once again that the floor of our business is now definitely higher. Let's now move on to slide 5 and start commenting on our 2020 results. As announced, in 2020 we reached very strong industrial results thanks to our diversified business model. We've adjusted net profit standing at $324.5 million, plus 19.2% year-on-year, despite the higher contribution of systemic charges and the complex scenario. Adjusted revenues In the period, it stood at $775.8 million, up 17.9% year-on-year, mainly thanks to the contribution of brokerage and investing, as we have been able to capture the acceleration of the structural trends in place. On the banking side, our initiative on the smart repricing on current account allowed us to offset the impact coming from the lower interest rate environment. Please note that in December, after the final communication by the Authority, we refunded the banking fees related to the smart repricing to a cluster of clients. Let me remind you that the effect on the net profit is equal to zero as this refund was already accounted in the previous quarters under the line provisions for risk and charges. Excluding the contribution generated by banking fees for the smart repricing, Revenues in the fourth quarter would increase by 1.7% quarter-on-quarter. Operating costs stood at $269.6 million, increasing by 4.4% year-on-year. Net of marketing costs in the UK additional marketing costs in Italy to catch the positive momentum for growth, and additional staff expenses related to the unexpected lockdown in December. The quarterly distribution is characterized by the usual seasonality. We will deep dive on cost later on. Cost income decreased to 35% despite the continuous expansion in assets and clients, thanks to our operational leverage and the scalability of our platform. Let's now move on to slide 6 and start to analyze more in detail the dynamics of our results. Net interest income in 2020 remained resilient at $270.7 million. decreasing by 3.8% year-on-year despite the worsening of the interest rate environment. Thanks to the positive contribution by more than 7 million from our treasury activities, namely yielding aspect strategies like unsecured lending and collateral switch and tiering, and to our quality lending book, Let me please highlight that the negative impact generated by the low interest rate scenario has been offset by the positive contribution coming from the introduction of the smart repricing in 2020, which produced almost 12%. million of banking fees in the year therefore overall banking revenues remain flat here on here in the fourth quarter net interest income stood at 63.9 million declining by seven percent quarter on quarter as the lower interest rates environment affected both financial investments and lending. Please note that in the fourth quarter there has been a further deterioration in rates. As an example, five years EUR moved from 39 basis points in the third quarter 2020 to minus 46 basis points in fourth quarter 2020, and the year-reward one month from minus 52 basis points to minus 55 basis points in the quarter. The lower interest rates environment led to a reduction in average gross margins on interest earning assets from 0.98% in the third quarter to 0.88% in the fourth quarter. Finally, cost of funding decreased by three basis points here on here to one basis point due to the lower USD LIBOR. Please let me remind you that our cost of funding related to deposits in Euro, which represents 96% of our total deposit, is zero. Later in the presentation, we will deep dive on the new commercial initiatives we are undertaking to sustain our banking revenues. and further reacted to the decrease in interest rates. Let's now move on slide 7 to deep dive on our non-interest income. Fees and commissions stood at $404.3 million in 2020, growing by 24.3% year-on-year, thanks to the positive contribution of all product areas. Please let me know that the net commissions in the fourth quarter would increase by 8% quarter-on-quarter, excluding the contribution generated by the banking fees on the smart repricing. Trading income net of non-recurring items reached $97.2 million in 2020, more than doubling year-on-year thanks to the strong brokerage performance. We will deep dive more in depth in the following slides. Let's jump now on slide 26 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 past. In 2020, overall brokerage revenues stood at 229 million, increasing by 73% year-on-year. On the top of the slide, you can find our usual chart showing the monthly brokerage revenue since our listing. As you can see, they are structurally higher since 2020. January 2021 has been another strong month, confirming that the flow of the business has increased. This is true regardless of the level of volatility, thanks to the contribution of three structural components. First, the deep reshape of our brokerage business. Let me remind you that we have recently launched a new US option platform and that we are in the process of vertically integrating certificates, becoming issuer, market maker, and distributor throughout our platform. We will deep dive later on this project. Second, the client base using our platform is widening with active investors that have grown significantly in absolute terms in 2020, standing well above the average level of 2018 and 2019. Please note that our active investor have an average of four as executed orders per month are wealthy people in their 50s with assets above 200 000 euros on average and the vast majority of them has a relationship with our financial advisors for the long-term planning of their financial wealth third the increase in our market share. For example, our market share in Italy on equity traded volumes has increased to 27.8% in December 2020, as recently confirmed by ASSOSIM. As announced, brokerage revenues were strong also in January, reaching around 19 million. Please let me note that in January, for the first time, executed orders were higher on foreign markets than on the Italian one. And this is very positive news for our international expansion plans. Let's now move on slide eight for a focus on investing. Investing revenues amounted to $245.3 million in 2020, increasing by 7.1% year-on-year, thanks to volume effect and strong asset under management net sales, driven by a higher contribution by Finneco Asset Management. The strong investing dynamics were confirmed also in the fourth quarter, with revenues increasing by 5.6% quarter-on-quarter and by 11.3% year-on-year. Please note that management fees in the year increased by 4.6% compared to 2019. The quarterly increase was 5.2%, with management fee margins stable. Let's now move on slide 9 for a focus on our costs. This 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 $269.6 million in 2020 with the usual seasonality among the quarters. Let me please highlight that in the last part of the year, we decided to spend additional 1.3 million of marketing costs in Italy, given the extremely favorable conditions. On top of this, we recorded the highest staff expenses, as in December some employees cancelled their annual leaves given the unexpected lockdown in Italy. Excluding this one-off cost and 7.2 million of marketing costs in UK, operating costs grew only by 4.4% year-on-year. On marketing costs in UK, let me please remind you that given the positive feedback reached so far in the acceleration of the business, we decided to spend more compared to the initial guidance. Going into the details, 2020 non-HR costs. stood at 170 million, excluding UK marketing expenses and the additional marketing costs in Italy in the fourth quarter that we decided to spend to catch up growth opportunities. They only grew by 1.3% year-on-year, confirming our strong operating leverage. Finally, staff expenses stood at $99.5 million in the period, increasing by 9.9% on a yearly basis, excluding a half-million cost for the annual leaves canceled in December due to the lockdown. The increase is mainly due to the growth in the workforce related to the business development and to the internalization of some services after the exit from Unicredit Group. Let's now move on slide 10. In this slide, we summarize the breakdown of the bottom line in the fourth quarter. Within the provision for risk and charges, we released $2.9 million related to a positive adjustment on systemic charges, thanks to a lower than expected growth of deposits compared to the system. This, once again, proves the effectiveness of our initiatives to absorb our clients' liquidity. On top of this, after having refunded our clients for banking fees for the smart repricing, we also released 6.3 million of provisions that were set aside in the previous quarters under the line provisions for risk and charges. Let me confirm that the full effect of the smart repricing on the whole customer base is now in place starting from January 2021. Finally, we recorded 2.3 million of higher provisions or related to our sovereign exposures. This was not driven by the underlying quality of our bond portfolio, but by the accounting process according to the IFRS 9, under which we had to update the macroeconomic scenario after COVID-19 outbreak. Let's now move to slide 11. As you can see on the left hand side of the slide, commercial loans grew by almost 23% here on here 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 culture allows us to fully leverage on big data analytics. This translates into a commercial cost of risk very well under control, decreasing at 10 basis points as of December 2020. in line with our guidance of the cost of risk between 10 and 15 basis points, which is confirmed also for 2021, even 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 letter, we granted only less than 300 requests for mortgages moratorium. Let's now move on slide 13 for a focus on our capital ratios. Finaco confirmed once again a rock-solid capital position on the wave of the safe balance sheet let me remind you the strong recommendation by ecb and bank of italy in december 2021 2020 that provides to refrain from paying dividends or to limit the dividend payment until september 2021 Dividends are recommended to remain below the minimum amount between 15% of cumulated 2020 profits and 20 basis points of 2020 Q1 ratio. For Fineco, the more stringent condition is the second one, corresponding to 7.6 million. Therefore, we decided to refrain from distributing dividends until next indications from the regulators. In any case, our intention is to give back our excess capital to our shareholders at the first window of opportunity. Please note that the 2020 capital ratios consider the allocation of 100% of the 2020 profits to reserves. Common Equity Tier 1 ratio stood at 28.56% as of December 2020. Risk-weighted assets stood at 3.812 million. Let me please highlight that increased risk-weighted assets is partially related to our treasury activity. But this should not be considered as a run rate going forward, as we are very confident to deliver on the new industrial initiatives we are introducing to reduce customers' liquidity, and they are completely in our hands. Total capital ratio stood at 41.68% as of December 2020.

On slide 15, as you know,