Finecobank Banca Fine Spa

Good afternoon. This is the Chorus Call Conference Operator. Welcome and thank you for joining the Fineco Bank First Quarter 2023 Results Conference Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Alessandro Foti, CEO of FinEco Bank. Please go ahead, sir.

Good afternoon, everyone, and thank you for joining our first quarter 2023 results conference call. As you know, our new dimension of growth is further underpinned by the new structure of interest rates. Thanks to this adjusted net profit in the first quarter of 2023, was equal to $147 million, up by 19% year-on-year, and plus 61% excluding first quarter 2022 profits from treasury management. Adjusted revenues at $294 million, increasing by 15% year-on-year, and mainly supported by net financial income, with net interest income increasing by 165% year-on-year, which is sustained by our clients' very sticking, valuable transactional liquidity. The growth of revenues has been also supported by investing, thanks to the volume effect and the higher control of the value chain by Fineco Asset Management. Operating costs were under control at 73 million, increasing by 4.6% year-on-year, by excluding costs related to the growth of the business. Adjusted cost-income ratios was equal to 25%, decreasing year-on-year and confirming operating leverage as a key strength of the bank. On cost, let me please remind you that the strategic decision to manage 100% internally our IT is protecting us from the inflation on IT costs. Our capital position confirmed to be strong and safe with a common equity TR1 ratio at 21.8%. Our commercial activity confirmed to be extremely solid also in April with net sales at around 800 million and a strong mix with around 270 million in asset management and another strong performance by Finneco Asset Management. with retail net sales at around 340 million. Assets under custody recorded around 755 million inflows and deposits at around minus 190 million. Estimated brokerage revenues in April were solid at around 12 million, more than 10% higher compared to the average revenue of the same month on the period 2017-2019. Please note that April is characterized by some seasonality as there are lower trading days and lower market volumes. These results do confirm once again that the floor of the business is now definitely higher. Looking at 2023 and going forward, we expect to continue to deliver a strong growth thanks to our very diversified business model, despite the recent complex environment for the banking industry. On the right-hand side of the slide, you can find a summary of our 2023 guidance. More in detail. Our net financial income, we expect an increase of around 70% in 2023 versus 2022. On investing, we confirm our 2023 revenues guidance expected to increase high single digit compared to 2022 with higher after-tax margins. For 2024, we confirm our net sales and management fees margins expectations. On brokerage, we confirm for 2023 expected revenues to remain stronger with a floor higher versus pre-COVID period. Operating costs, we expect 6% growth year-on-year in 2023, not including around 2 million of additional costs for Finneco Asset Management and around 3 million for UK operational costs and eventually additional marketing expenses. We expect our cost of risk in a range of 5 and 9 basis points, And finally, we expect a growing CT1 and leverage ratio. Let's now move to slide five. As announced, adjusted net profit in the first quarter of the year stood at $147 million in a very challenging macro scenario, increasing by 19% year-on-year and by 61% on a like-for-like basis. excluding profits from treasury management realized in the first quarter of last year. Revenues at 294 million, up by 15% year-on-year, and by 41.5% by excluding profits from treasury management realized in 2022, as we have been able to catch the strong acceleration of the structural trends in place, mainly thanks to the robustness of our net interest income and to the contribution of the investing business. Operating costs are at 73 million, while under control and increasing by 4.6% year-on-year, excluding costs strictly related to the growth of the business. Let's now move on to slide six and start to analyze more in detail the dynamics of our results. Net financial income in the first quarter of the year at 157 million, increasing by 46.5% year-on-year, with net interest income increasing by 165% year-on-year, thanks to the strong gearing to interest rates we have, driven by our clients' valuable and sticky transactional liquidity. Please note that this figure is extremely positive considering that, first, we don't remunerate clients' deposits. Second, we are one of the few banks not offering aggressively termed deposits to clients, but we offer third-party termed deposits to our clients through our platform. Third, we have the best-in-class platform for trading bonds, very efficient and convenient. Non-financial income in the quarter reached $136 million, mainly thanks to the positive contribution of net commissions. Please note that in the trading profit line, there are accounted minus $4.3 million related to the ineffectiveness of hedging derivatives in accordance to the accounting standards IFRS 9 compared to the plus 5.1 million in the first quarter of 2022. The value is influenced both by the spread between the ESTR and the EU REBOR and by the amount of the fair value of the derivatives. Excluding this effect, the non-financial income is decreasing by only 1.5% year-on-year that is mainly related to a lower brokerage activity. Let's move on the slide seven to deep dive on the performance of the investment business. Fineco is positioned in the sweet spot to capture the structural trends in place in Italy, and also thanks to our initiatives, we have experienced a strong acceleration towards asset under management. On top of this, Fineco asset management is delivering on its strategy to take more control of the value chain. As a result, investing revenues were equal to $75 million in the quarter, increasing by 2% year-on-year, despite the negative market performance experienced during 2022. Please note that the quarterly comparison is characterized by the usual seasonality on financial planners' costs related to the SEER and the NASARCO. that are higher at the beginning of the year and to 4.6 million of other commissions in the fourth quarter of 2022 related to the operating efficiency reached throughout the year in the value chain on the institutional classes by FinEco asset management, which are booked each year in the fourth quarter. Management fees margins after tax reached 53.4 basis points in the quarter, increasing both year-on-year and quarter-on-quarter, thanks to the strong contribution by FinEco Asset Management. Let's now move on to slide 8 for a focus on our asset standard management company. As you know, FinEco Asset Management is progressively taking more control of the investing value chain, resulting in a higher revenue and margins for the group. The contribution of Finneco asset management to the group asset under management and net sales is further improving regardless of the macro scenario, moving from 86% in the first quarter of 2022 to 133% in the first three months of 2023. The contribution of Finneco asset management Asset management, asset under management, out of the total stock of asset under management of the bank, moved from 28.4% in the first quarter of 2022 to 32.2% in the first quarter of 2023. And in April, it is 32.7%. As shown by the most recent next stage numbers, FinEco asset management has been extremely effective in quickly developing the right set of products to catch what clients are currently looking for through the offer of the new generation of capital-protected investment solutions. Let me please underline that our Harish company is now launching a new product innovation with the global defense multi-strategy, a fully now developed solution allowing clients to build a protected exposure towards equity. Let's now move on to slide 9 for a focus on brokerage. Brokerage, as usual, is emerging as a perfect counter-cyclical business. It registered an excellent quarter at $53 million, resulting in a monthly average 58% higher compared to the monthly average revenues in the period 2017-2019, thus confirming a structurally higher floor compared to the pre-pandemic levels regardless of market conditions. Let me remind you that the growth of the brokerage business is driven by the contribution of three structural components. First, the continuous process of deep reshape of our brokerage business. Second, the widening of our client base using the platform with active investors growing significantly in absolute terms and standing around the 35% above the average level of 2018-2019. Third, we are continuously increasing our retail market share. Let's now move to the slide 10 for a focus on cost. This slide confirms, once again, efficiency to be part of our DNA and core in our bank, representing a clear and unique competitive advantage. Operating cost in the quarter at 73 million, going by 6.4% year-on-year, and by 4.6% year-on-year, excluding costs related to the growth of the business. Mainly, additional minus 4.9 million cost for Finneas Cost of Management, that they are current with acceleration to further expand its business and have a bigger control of the value chain. additional 0.4 million in marketing costs. Staff expenses at 30 million in the period, increasing by 4.3% on a yearly basis, net of the costs related to the expansion of the business of financial management. Finally, non-HR costs at 44 million, going by 4.7% year-on-year, net of the costs related to the growth of the business. Let's now move on to slide 12 for a focus on our capital ratio. Finneco confirmed a rock-solid capital position on the wave of a safe balance sheet. Common equity TR1 ratio at 21.8%, leverage ratio at 4.21%, risk-weighted assets at 4.7 billion, and total capital ratio at 32.4%. 41% as of March 2023. From slide 16 to slide 18, we made a focus on our liquidity position. Let's now move on to slide 16. First of all, let me start from the composition of our deposit base to underline its granularity and thickness, which is resulting in a transactional liquidity equal to around 89% of our clients' deposits. As you can see from the slide, 97% of our deposits is represented by retail clients. Second, our deposits are extremely granular, with an average ticket of around 19,000 euros, of which 140,000 euros related to private banking clients, and with a median ticket of... 4,800 euros, of which slightly more than 47,000 related to private banking clients. Third, 75% of our deposits is under the protection of the deposit guarantee scheme. On top of this, differently from other players, mostly focused on brokerage and investing, our one-stop solutions relies on a fully-fledged banking platform. Our clients are not just using our bank for brokerage or investing purposes, but all our quality banking proposition for their daily life. Indeed, we have 50% of clients crediting salary with us. On this point, let me underline that just through the salary credit last year, we gathered 15 billions of euros of fresh new liquidity, a number which has more than doubled over the last 10 years. All of this is the result of a clear strategy we have taken more than 10 years ago when we stopped remunerating liquidity and focused on our client acquisition 100% on the quality of our one-stop solution. We confirm that we are not going to change this approach, which is the cornerstone of our client's very sticky granular and valuable transactional liquidity. Finally, on the bottom of the slide, you can see the relentless histories of growth of our deposits throughout the years, also going through some very relevant crises like the financial and sovereign ones. Let's move on the next slide to deep dive on the net sales of our deposits during the first part of the year. On the left-hand side of the slide, you can find the evolution of net sales this year. As you can see, inflows of assets and clients continue to be very robust as the bank continues to benefit from the long-term structural trends underpinning the growth. We have observed a strong improvement in the clients' acquisition. Indeed, in the quarter, the monthly trend has increased by 25% compared to the average period 2020-2022. Let's now focus on the breakdown of the next phase, with deposits being negative to their investment into asset under custody and asset under management of the excess liquidity of our clients. Moving on the right side of the slide, on the top there is an interesting graph where you can see how the balance of the bank transfers has firmly remained on the positive territory. Also, in the first four months of the year, this confirmed that the bank is keeping on acquiring new liquidity from both new clients and existing clients, and that there are no liquidity outflows going in the direction of other banks. For example, the ones remunerating liquidity. Then, on the graph below, we gave a detail on deposit net sales split by cluster of clients. As you can see, clients with total financial assets below €100,000 increased the amount of liquidity in the bank, and this is mainly transactional. On the other hand, the cash sorting process has been 100% driven by welfare clients, which in the past accumulated excess liquidity waiting to be invested, and rising rates are making this process accelerating. Let me also add that that looking at private banking clients, the liquidity as a percentage of total financial assets is now at 14%. That is the lowest level since 2015, suggesting that they are approaching the floor. Finally, please note that new clients acquired in the year also brought positive liquidity. To sum up, Client behaviors are confirming what our internal models were predicting, with transactional liquidity remaining sticking to the bank and excess liquidity being reinvested into asset under management or asset under custody. The main result is that transactional liquidity has increased at 89% of total deposits compared to the 85% as of December. Let's now move on to slide 18 for a focus on our liquidity ratios. Going to details of our liquidity ratios, net stable funding ratio at the end of March was 377%. This indicator measures the stability of the funding base. Considering the structure of our deposits, the business model, the retail driven nature, the high percentage of deposits under the protection of the deposit guarantee scheme, Finic is one of the banks in Europe with the highest ratio meaning that the probability of the bank losing in big way based on deposits is the lowest among European banks. Moving on the asset side, the balance sheet as shown in the graph at the bottom of the slide, you can see the high-quality liquid assets on total deposits reaching 63% at the end of March with $19.4 billion of high-quality liquid assets. Also here, Finip is emerging among the banks with the highest deposits covered by high-quality liquid assets, thus leading to a liquidity coverage ratio at 803%, once again, far above the average level of European banks. Let's now move on to slide 20 for a focus on our guidance. Let's now focus on our 2023 guidance and outlook going forward. On banking revenues, we expect net financial income in 2023 to grow by around 70% with a peak in the last quarter of the year. Let me remind you the assumptions behind the guidance. First of all, the guidance is updated with the forward rate curve as of May 8, 2023. which has improved compared to the last guidance. We confirm that we will not pay any interest rates on current accounts, minus 2 billion net inflows in deposits compared to the 1 billion of the last guidance. In terms of our investment policy, we will continue the specification of our bond portfolio, progressively reducing the exposure towards Italy and Spain in line with our strategies. Going forward, we expect net interest income to keep on benefiting from the new interest rate environment. Overall banking fees are expected remaining stable compared to 2022. On investing, taking into consideration the market has set up to the end of April, we confirm 2023 expected revenues to increase high single digits year-on-year with higher management fee margins after tax, but with different assumptions and a better mix. We are improving our expectations for FinEco asset management retail net sales up to around $5 billion, and it is able to catch the outflows coming from the insurance wrappers in the new interest rate environment. As a result, we expect overall banks' asset under management net sales at around $4 billion. Our network of financial planners is expected to increase by around 100-120 financial advisors. In 2024, we confirmed around $5 billion expected net sales in the overall bank's asset under management. For our large company, we confirmed retail sales at around $4.5 billion. Finally, despite the challenging context, we also confirmed the increase of our management fees margins after tax up around 55 basis points by 2024, thanks to the Finicol asset management operational efficiency. Pre-tax margins are confirmed at around 73 basis points by 2024. Brokerage revenues are expected to remain strong with a floor in relative terms with respect to the market contest that is definitely higher than during the COVID period. Operating costs in 2033 are expected to grow at around 6% year-on-year, not including around 2 million of additional costs related to FinEQ asset management, around 3 million for UK operational costs and eventually additional marketing expenses. Cost income, we confirm our guidance on a continuously declining cost income in the long run, thanks to the scalability of our platform. and to the strong operating gearing we have. Systemic charges for 2033 are expected at around 50 million. On capital ratio, we expect a growth in 2033 for both CT1 ratio and leverage ratio, currently with the combination of both a strong acceleration in the growth of the bank and the distribution of generous dividends. On dividend per share, going forward, we expect the heat constant to increase also thanks to the progressive delivery of our strategic discontinuities. Customer risk was equal to four basis points thanks to the quality of our lending portfolio that is offered exclusively to our loyal customer base. In 2023, we expect a hit in the range between five and nine basis points. Finally, we expect robust and high-quality net sales with a mix mainly skewed towards asset under management and we will lower component of deposits thanks to all the new initiatives we are undertaking. Let's now move to slide 23 for an update on our international business. Let me share the usual update on our UK business. We are very happy for the growth of the business we experienced despite we stopped our marketing activity due to the talks still pending with the local regulator. Our client base kept on increasing thanks to the word of mouth, and our revenue generation has increased by more than 86% here on here, reaching 1.3 million in the world. The next country we are assessing to enter is Germany, but before, we are focused on finding the right setup for the UK business. Thank you for your time, and we can now open the call to questions.

This is the Coruscall conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touchtone telephone. To remove yourself from the question queue, please press star and 2. We kindly ask you to use the handset when asking questions. Anyone who has a question may press star and 1 at this time. The first question is from Azura Guelfi from City. Please go ahead.

Hi, good afternoon. A couple of questions for me. The focus is clearly on the NII guidance. You have lowered the guidance from growth of roughly 80% versus 2022 to roughly 70%. What has driven this change in guidance? Is it different deposit trend you give us, the indication of the outflows that you assume for the year in your guidance? Because just looking at rates, that would not square. The second one is on the guidance for flows for FAM. You have improved 2023, but you have kept 2024 unchanged and down versus the new guidance. So I'm just trying to understand what is the moving part in that. That would be very helpful.

Thank you. Regarding the net interest guidance, the main driver is represented by the fact that we lowered our expectations on the deposits, moving from an expectation of a plus one billion, by a growth of one billion of deposits, down to minus two billions. So this is the main reason, is the main rationale behind. Regarding the farm flows, clearly during the start of 23, We increased the guidance on financial asset management because this is related to the higher than expected hot flows by the insurance wrapper and clearly financial asset management is playing the lion's share in capturing what is outflowing by the insurance wrapper. For 2024, we expect a stabilization in the insurance business and so we are back again to the normal guidance for financial management. But in any case, also, the fact that there is a combination of lower expectation in terms of insurance wrapper, and this is the only reason behind the lowering of the guidance on the next stage of asset under management for But what is important to underline that this has not caused any change in the expected revenues and margins generated by the asset under management, the investing business, because lower volumes by a better mix, because the insurance buffer, as you probably know, are characterized by the lowest margins for us. So at the end of the story, what is important The revenues and margins are remaining absolutely aligned with the previous guidance.

Sorry, if I can follow up on the deposit. Basically, you have a swing of roughly $3 billion of deposit that has resulted in roughly 10% reduction of the NII. Is this the kind of sensitivity we should use? Do you expect further deposit decrease in 2024 and wouldn't you consider if these deposit outflows continue, especially for the private banking client, which seems to be the one more active in moving deposit to have some form of remuneration?

As we explained during the, so going into the details of our liquidity position, the composition of the deposits, What we expect is that progressively, as much as we have rates reaching the top and stabilizing, this cash sorting is going to progressively go down. We have the first evidence of this process in place. Second, the Practically, the total amount of this investment in direction of Govis, for example, has been driven by the wealth clients that they are reinvesting their liquidity. And these clients are now sit on the historical floor in terms of percentage of liquidity on their assets. And also this is bringing us to the conclusion that that the process is expected to keep starting on cooling down. And finally, the results is, and this is comforted by the fact that the percentage of transactional liquidity has increased because the transactional liquidity has not been touched by this process. And so this is making the, so we are very confident, we are very positive on the evolution of the liquidity position of the bank.

The next question is from Giovanni Razzoli from Deutsche Bank. Please go ahead.

Good afternoon and thank you for taking my questions. I have a few. You mentioned it during the presentation, if I'm not mistaken, but can you confirm that you have no intention to resume the issue on term deposit or your own deposits in the short term and also in the medium term? There has been a lot of press coverage about the distribution of insurance policies with Eurovita. Can you share with us, once and for all, so that we are on the same page, what is the amount of the policies that you have distributed and the number of clients, please? target for the commercial flows at the end. You had 1.2 billion of net inflows year to date and 1.7 for FAM and you are guiding respectively 4 and 5 billion for the full year even if there is a couple of months where we should have negative seasonality. So it seems to me that you are incorporating quite significant acceleration in the coming months in terms of inflows Do you share these views and what are your assumptions for the rest of the year?

Thank you. Let me start by the first question. Yes, we can see that we have no intention to pay interest rates on deposits and we are not planning to launch any time deposits offered to our clients. We are going to keep on giving to our clients the possibility to invest on time deposits of other banks. The reason behind this is different than many other banks. We don't have a liquidity problem. And so there is no reason that we gather liquidity that is expensive and worthless because it's absolutely... not sticking because the stickiness of this liquidity is just related to the maturity of this deposit. So we don't need to do that. So as we explained, the most part of our liquidity is transactional liquidity that is there because the clients are using the platform. And so on this, we are not going to pay anything. And the result and what's going on is extremely comforting because the percentage of transactional liquidity is increasing with respect to the overall base of the parts of the bank because what is flowing out is the so-called hot money. And for this reason, so considering also that the balance is probably the most liquid balance sheet among the European banks, there is no reason that we are going to to embark the bank in raising liquidity, paying skyrocketing rates. On the insurance policies with Eurovita, the overall amount of these Eurovita policies, they represent more or less 13% of the overall insurance business. And the most part is represented by unit link, not by the so-called gestione separata. And the overall number of clients involved in this is less than 1% of the total client base. Pitting everything together means that whatever is going to be the outcome of this Eurovita situation, the final impact for the bank are going to be not significant both by the P&L and the balance sheet point of view and also it's going to be not material also in terms of reputational risk for the bank considering the very small amount or number of clients involved. Clearly we are not happy. It's a painful situation but If we look to the possible negative part of the bank, these are extremely limited and not material. Target for commercial flows at the year end, because we have 1.4 billion asset under management and 1.7 billion of financial asset management. Yes, we are... What we are observing is that the commercial fraction of the network is extremely strong. The first part of this quarter has been clearly penalized in terms of inflows by the quite big amount of these investments on the insurance wrapper. Now this process is cooling down because the most part of clients that are that have been attracted by these causes, mostly by the rates that have left, that have disinvested. And so we expect a progressive normalization of the situation, and considering that the commercial traction of the network has remained absolutely very strong throughout the month, because of what I would like to underline, that our nexus of assets under mentioned have remained firmly positive also considering the negative half-loss about the insurance buffer. And so this performance has been absolutely quite amazing and is comforting us in looking forward for the following part of the year.

Thank you. The next question is from Enrico Bolzoni from J.P. Morgan. Please go ahead.

Hi, good morning. Thanks for taking my questions. The first question is, you are revising up the guidance for flows in FAM, which clearly is margin-enhancing, but you're not changing your guidance on the exit margin rates that you expect from investment products. Can you just give us some color? Why so? Are you being particularly conservative? Should we expect in 2024 or beyond an additional acceleration in the margin of the investment products? So this is my first question. The second question is related to actually the advisor population, so you're hiring new advisors. Can you just remind us what happens when a senior advisor decides to retire and eventually pass over? is book of clients to someone new? Do you have any policies or practices to make these transitions smoother? And the final question is on your leverage ratio clearly has improved. Can you just remind us if Ceteris Paribus, without taking into consideration other factors, does the reduction in deposits actually improve your leverage position? And at what point would you consider additional capital distribution to your shareholders? Thank you.

Regarding the rising up guidance for FAM, but without changing the guidance on margins, is because clearly on one hand we have this improved development on FAM. At the same time, overall on the asset under management, we have lower volumes driven by this investment by the issuance wrappers. So, putting together the two components, the impact on revenues and margins is relatively neutral. And on the 2024, we prefer to keep the guidance unchanged because without embedding any additional acceleration in margins and so on, we are very close now to the 2024, and so with the guidance we gave some years ago, and so we think that that's okay. When a senior advisor is leaving, we have different options on the table. So there is one, there is a structured process that is making possible for the senior advisors to sell to another colleague, to another younger colleague, the portfolio. And so we've very well in advance the retiring moment, giving plenty of time for making the new colleague familiar with the client base. And there is another option that is gaining momentum that is a kind of a generational change. because it's more and more frequent having these senior financial planners retiring and leaving the floor to their sons, daughters, and sons. So there is absolutely a very interesting trend there. The possibility for our financial planners to work as a team, putting in common clients and portfolio is clearly quite helpful in this transition process. Leverage ratio, yes, leverage ratio because the market is completely fully focused just on the reduction of deposits, on the possible negative impact, but for example, I don't want to be perceived as insane, but what's going on with the liquidity right now on a little bit longer-term perspective, in our opinion, is extremely positive because it's helping us in getting rid of the so-called hot money. So the hot money is now moving more quickly in the direction to be invested in. or in asset under management or in asset under custody, clearly we would be more pleased to have a higher percentage of asset under management. But in any case, the fact that we are experiencing a quite fast reduction of the hot money overall, it's good news for the bank looking forward because this is going to make our leverage ratio even more robust. Going forward, and as you have correctly underlined, leverage ratio is the only one possible constraint we have on the table in direction of becoming even more generous in regarding what we are giving back to the market. So this, and so overall it... this reduction of this kind of liquidity is positive, also because it's completely not material in terms of the, regarding the liquidity position of the bank, because as you can see, the bank has the most liquid balance sheet among the European banks, so clearly losing a few billions of deposits doesn't make any difference from that point of view.

Thank you. I'm sorry, just following up, is there any specific threshold you would consider, the question beyond which you would consider additional distributions?

At the moment, we are not. This is not on the table, but again, I'm on the point that the only theoretical constraints we have on the table regarding the high distribution of of profit to the market, of dividends to the market, is the leverage ratio. And so when the leverage ratio is comfortable at the level that we think that it's absolutely and incredibly rock solid and so on, clearly this is an option that by definition we have to consider because clearly we cannot keep on making our C to 1 ratio growing and continuously or relentlessly. In any case, just my colleagues are giving me the sensitivity, every one billion of liquidity worth 11 basis points of leverage ratio.

The next question is from Domenico Santoro from HSBC. Please go ahead.

Hello, hi, good afternoon. A few questions from my side. First of all, can we come back a bit to the NII, in particular on your guidance for this year, vis-à-vis the previous guidance? I'm just wondering whether you can break down the 40 million difference, how much is due to a different yield for this year, given the way they moved and how much is that is due to the different assumption in deposit outflows. The other question is whether you can give us the exit level for NII in absolute terms, if you have at the end of 2023, And given the different scenario rates, and I know that you mentioned before that the positive outflows are sort of normalizing. I'm just wondering whether you're still confident that NII in 2024 can increase from 2023 level, or at this point, this looks a bit ambitious. The other question that I have is on banking fees. I mean, you are reporting better numbers year on year. The sequence is positive. But you stick to the guidance that fees in banking are going to be stable this year. So I'm just wondering whether there is a link with deposit outflows or closing accounts that makes you a bit more bearish on the evolution of of this revenue stream during the course of the year or you're just conservative. And the other question is on the hedging derivatives that if my understanding was correct, the CFO explained in the past has hedging on the mortgage book. I understand the rationale behind the loss I just wonder whether this is one that we will see only in the first quarter of the year, or as rates go up during the year, there might be some more trading losses. Thank you.

So let me start by the first question. So how much is due to the different yields and how much on the different assumptions on outflows? So the most part is driven by the difference in deposits, yes. So this is the main reason behind the change in the guidance. So we took into account the evolution of the deposits. And second thing, the previous guides were based on the expectation of $1 billion of growth, now the new expectation is for a reduction of a couple of billions. But yes, the most part of this is related to the decline in the deposit base. So the exit level on net interest income at absolute level, I think that it's a relatively easy calculation because if you apply and a 70% increase on the financial income. So on respect to 2022. So it's... How much? 666 billion. 666.

Yeah, sorry. It was more than level in Q4, to be very honest, if you can give us.

So, excuse me.

It was more the exit level in the fourth quarter rather than the year.

Yes.

Yes, because as we say during the presentation, the peak of the net interest income is expected to be achieved during the first quarter of 2024.

So this means that the first quarter of 2024 is going to be higher than the last quarter of 2023. Are you lost or I've been... No, no, no.

Well, you say that the peak is in Q4 2023, if my understanding is correct. Can you tell us what's the number that you have in mind in the fourth quarter of this year?

I leave the floor to the... No, I leave the floor to the CFO because... All right, thank you.

We'll return to you later on.

Excuse me. Excuse us.

Okay. And so the positive outlook normalizing and recovering the net interest in 2004 can increase our ambitious... Yes, still we expect a slight rise of the net interest income throughout 2024, also advancing this change in the guidance.

So in the fourth quarter, we have a net interest that is 13% higher than the first quarter 2023, in the first quarter 2023.

So the first quarter of 2024. 2023.

In the fourth quarter of 2023, we have an interest income that is 13% higher than the first quarter of 2023.

Yes, but what he's asking, he's looking for, what is in comparison with the first quarter of 2024? Domenico, you had to be patient.

No, no, that's fine. That's fine. Let's make it very simple. That's basically the information that I was looking for. So 2024, you said NII is still expected to go up. But of course, the assumption that is implied in your guidance is that deposit will stop basically reducing. Correct?

Yes. Okay.

Then we have banking fees. Now, banking fees is not related to deposit atlus because it's just related to the fact that we gave back to clients a certain percentage of the cost We charged them during the period of negative rates. So, according with the model solution made by Bank of Italy, we agreed and we communicated to the market, to the clients. When we have communicated to the market? March. On March, we communicated to the market that we are going to give back to them part of the additional commissions we charge on the current accounts because we use at that time the negative rates as a rationale behind the increase of cost for clients. And now with the interest rates returning positive, we are giving back to clients this And on the other hand, clearly we have the bank is continuously acquiring new clients and so putting everything together, this is driving to stable banking fees. And on the hedging derivatives, this I'm leaving the floor to the CFO for giving you a little bit more details.

As we already said, the ineffectiveness of derivatives is due to the fact that the derivatives are evaluated taking into consideration a risk-free rate for the derivatives, coherently with the fact that thanks to the collateralization on daily basis, there is no counterparty risk. While the edged assets that are not only mortgages but also bond portfolios are evaluated using Euribor. This is why the value of the ineffectiveness is influenced by the spread between the two rates. and is also influenced by the amount of the derivative. Going forward, in the long run, the value of the ineffectiveness of each derivative will go back to zero due to the progressive expiry of the derivative.

But it is not driven by the rising rates. Yes, but Domenico made the point that the rising rates are making this... No, it's the difference between the two rates.

And it's quite unpredictable to know or to forecast what you could be in the near future. We only know that in the long run, the value of the ineffectiveness of each derivative will go back to zero.

But in simple terms, this one-off, regardless whether it's positive or negative, is something that we will see only in Q1, or is it a chance that other trading losses will generate during the year?

No, the question is if there is the possibility to have this.

Yes, it depends on the difference between the two.

It is relatively unpredictable because we don't know exactly how in relative terms two rates are going to move. So because the problem is that we have the reason and a kind of the reason we are using different kind of rates for the, but this is for accounting reasons, so it's not a And so it is a little bit random and unpredictable. But it's not related to market conditions, the level of rates, and so on.

Perfect. Thank you very much. Thanks for the patience.

And we confirm that the peak of the net interest is in the fourth quarter 2023. And it is 13% higher than the first quarter 2023. I guess in the first question or the second question that you asked.

Very clear. Thank you.

You're welcome.

The next question is from Marco Nicolai from Jefferies. Please go ahead.

Hi. Thanks for taking my questions. The first one is on the retail investment strategy. I think there is a recent draft document out I just wanted to know if you have any updated views on how this will impact your business, if it will impact it. And second one on the outflows of deposits that reduced in April versus March. Can you just give us a bit more color on the improvement month on month? Is it due to higher number of clients acquired bringing in new deposits or is it also linked to, let's say, lower appetite towards fixed income products? Yeah, if you can give me more color on this. Thank you.

On the first question, so the recent EU documents You are referring to everything related to the inducement, something like that. So please, if you can... Yes, exactly that. Yes, so first of all, the first point on this has been that the European Commission is slowing down regarding the initial project to introduce a ban on inducement, but they are moving more in direction of making a little bit more restrictive than what is the intermediaries are doing in terms of getting a retrospection by the asset managers. So regarding this point, whatever is going to be the final outcome, Finico is by far the best position player in the market for very simple reasons. First of all, we have been by far the first mover in introducing advisory services on which clients are paying an advisory fee. At the moment, we have nearly 50, which is the total amount of putting together the services on which clients are paying an advisory fee. 37, 38 billion? Yes. We have more or less 27 billions of euros out of the 50 billions of euros we have on which clients are paying an advisory fee. In any case, it's going to remain a focus on favoring services in which clients are paying advisory fees, Fineco is by far the most advanced players because our clients, financial planners, and so on, they are very well accustomed to this. Second, we clearly, there is also the possibility to have a little bit more restrictions in the retro section, but Fineco has made a very important strategic move five years ago, launching Finneco Asset Management, and this is going to make a possible impact on them extremely manageable. So overall, we see all the possible developments attached to these documents as positive for us because the final outcome is going to increase the level of transparency on the industry. and transparency is the base on which we built our business. The improvements on April has been driven by the confirmation of the very strong inflows related to the transactional liquidity because everything is remaining absolutely strong in terms of net new liquidity entering in the bank driven by new clients. and clients are moving, increasing the share of wallets with the bank and keeping on gaining traction on crediting on salary and so on. And together we have a progressive declining interest and appetite by clients for investing in Godis. But this is current with the evidence we have in which our where the clients are approaching the historical floor in terms of percentage of liquidity on their total financial assets.

One quick follow-up. Do you have an updated split between transactional liquidity and hot money? I'm thinking about your deposit base. Shall we still keep in mind the 85% of the total deposit as transactional?

Now it has moved up. We moved from 85% to 89% for a very simple reason, because practically 100% of the liquidity that has moved out in the direction of investment is related to hot money. So this clearly... And this is very important because it is confirming that the base of our deposits is really rock solid because mostly represented by transactional liquidity. In any case, this is captured by the net stable funding ratio. The main reason why Finneco has such a high net stable funding ratio, definitely the highest among the European banks, is most related to the fact that the kind of deposit we have is mostly related to transactional liquidity deposits.

Thanks a lot.

The next question is from Alberto Villa from Intermonte. Please go ahead.

Good afternoon and thanks for the presentation. Just a few questions and thanks for the answer to the Many previous questions. Alessandro, I wanted just to go back to the dynamics in terms of inflows, deposits, and also assets under management. I'm referring to the fact that the Italian Treasury is launching a series of government bonds that are trying to attract retail investors, and the aim seems to be... to get significant inflows into these products from Italian retail. We'll have the next issuance at the beginning of June. I understand that the liquidity is currently mostly related to transactional, so I agree with you that you are pretty safe on that front. But do you see any risk maybe for you and for the rest of the industry that some clients may, let's say, dismantle some of their investments and move into this kind of products, which are pretty attractive in terms of yields right now. And this could be, let's say, a potential risk going forward for inflows, being the situation for yields quite high. competitive compared to the return we have had on assets under management in the last 18 months. And the second question is on the rumors about the Italian government considering a taxation of extra profits made by the banks on a huge increase in net interest income. So far it doesn't seem to go through in the immediate future but Do you see any risk of this kind of levy being introduced on the Italian banks? And the final one, very quick one, is on the rest of EU expansion. Do you have a priority list of countries you are looking at for the future? Thank you.

Regarding the expected new launch of bonds, dedicated to retail clients. First of all, this is not a brand new story because it is several years that the Italian government has started on approaching directly the retail clients. In our expectation in terms of evolution of deposits, we are clearly embedding the expectations of additional proposal by the government directly to the retail clients. This is not going to change structurally the situation of the bank because it's going to keep on capturing the so-called hot money. So now we have 89% of liquidity that is transactional liquidity and the remaining 11% is hot money. So this means that we have a little bit more than still three billions of euros that is related to hot money. So it's possible that these offers are going to keep on capturing this kind of liquidity. Consider also that the typical pattern we are observing, consider that Sinequa is by far the platform of choice for not just trading stocks, but also bonds, because we are characterized by we are not charging any fee for the custodian of bonds. and the clients are not paying practically nothing. It's true that this is something in which there are no commissions in case, but usually when you have this kind of situation, we have clients bringing additional money into the bank. So no, this is not good. It's something that we had from the beginning on our radar screens, and so we this is not going to change any significantly. The only, regarding your points of which kind of, if this can represent a challenge for the industry, my opinion, the biggest challenge is by considering the kind of observation point we have is much more in direction of making even more difficult for For example, banks that they are specialized in lending in gathering liquidity because, for example, what we are observing on our platform offering time deposits, the appetite by clients for this time deposit is pretty low. But this is exactly driven by the competition represented by the the government bonds. And on the other side, we are observing a continuously growing number of banks that they are starting on massively overpaying temp deposits because we have banks that now are paying definitely above the one-year yield of the government. So in my opinion, the biggest risk is the government becomes a little bit too aggressive in that direction is really to create problems for banks that they are in the necessity of gathering liquidity for sustaining their lending business. Regarding the rumors about the Italian government's continued taxation, the only calculation we made has been we made very basic assumptions. We made assumptions that to have a the introduced in italy exactly the same the same approach used by spain that has been extremely penalizing for banks and in the case uh italy is going to introduce something that is exactly the copycat of spain for us the impact would be 60 million from 50 to 60 yes it would be between 50 and 60 million pre-tax so this would be the impact on the On speaking, we are not making any consideration and we are not making any comments on that because our approach is we are not commenting the possible intervention by regulators or governments. We are here for adapting our business according with the changing rules. At the moment, regarding the last questions, we are completely focused and concentrated on finalizing the talks with the UK regulators thereafter. We will put our eyes on the possible expansion in other European countries.

Thank you.

The next question is a follow-up from Enrico Bolzoni from JP Morgan. Please go ahead.

Yes, hi. Thanks for taking the additional question. Can you just remind us what proportion of your monthly or quarterly flows come from existing clients versus new clients? And the second question is the proportion of deposits that, on average, the new clients bring to the platform. If you can give us a figure, and if you saw also a change there. So if, for example, you see more new clients coming directly invested rather than with a certain proportion in liquidity. Any color of statistics you can give us there would be very helpful. Thanks.

The percentage is more or less higher. 60% is represented by new clients bringing in new assets, and 40% the increase of the share of wallet of the existing clients. And clearly, in the last few months, we had the very evident effect of clients bringing, for example, there is bringing new liquidity and mostly for investing this liquidity. Because they, for example, because starting by the beginning of the year, we had our clients buying, which is a total amount of bonds they bought. So nearly four billions, that is huge. But at the same time, we had positive net inflows for now considering also the number of April for us, three points. So this means that we had clients not just buying bonds but bringing additional liquidity for buying bonds and so on. So at the moment there is clearly the largest part of the liquidity that is entering into the bank is moving in direction to be invested. But this clearly is driven by, in the past, there was a little bit more temporal lag between the moment in which clients were transferring their liquidity in the bank and the moment in which they were investing. Now, with these much higher rates, this process is very accelerated, so it's immediate. So because clearly the clients, they know that they want to invest, clearly the opportunity cost is higher on leaving the liquidity on the current account. And so they are faster in reinvesting the liquidity immediately into the market.

The next question is from Panos Elinas from Morgan Stanley. Please go ahead.

Hi. Thanks for taking my questions. Just on the farm net sales, can you give us some color which products you see most demand and then what's also incorporated within your net sales guidance for farm and also UK market, maybe an update on Q1 flows and what do you expect or what you had in April as well? So that's all for me.

So Farmnet says at the moment are mostly focused in the direction of fixed income solutions. And now as we explained during the presentation, now we are launching a brand new generation of products that they are combining together the extremely popular fixed income solutions with a very innovative approach that is giving the possibility to clients to get 100% exposure to the equity markets, but with a protection, so without risking the principle. And so we think that progressively this is going to be quite popular on there. on updates on Q1 flows in April. So what do you mean exactly with these questions?

Because... Can you give us a bit of clarity? You have seen demand for ISAP products, for example, or something in particular for the UK?

On the UK? No, on the UK, the most part of the activity of the client is completely 100% in direction of brokerage activities.

And then in Italy for the advisors, have you seen sort of different dynamics or productivity from advisors you recruited over the past 12 months compared to the new ones? I think looking from the slide, 97% is from the organic, but can you maybe comment a bit there, just what you have seen so far?

In terms of activity by financial planners, no, we are not observing any significant change. There is clearly a continuation of this higher propensity in direction of fixed income solutions. We are keeping on enjoying quite a brisk interest by banks' employees in our directions, and And that's also, we are not observing any significant change in the structure of the market.

Thank you.

The next question is from Luigi Debellis from Equita. Please go ahead.

Yes, good afternoon. Just a quick follow-up on the net inflow guidance and the acceleration of net new sales. In your guidance, do you expect this acceleration already in May and June due to the cooling off of outflows insurance wrappers or mostly in the second part of the year? And can you give us more colors on the new products to keep this acceleration? You mentioned it global defense multi-strategy. Can you elaborate on this?

Thank you. Yes, if this acceleration in the investments of the insurance wrap is continuing, yes, we expect both in May and June an acceleration in the asset under management production. And the new product, as I was explaining, is our... a product that they are combining together. One piece is going to be represented by our defense strategy that is representing the lion's share of our message over the last few months. But it's going to be given to clients in a bundle with these new solutions that is giving to clients and the possibility to get 100% exposure, for example, to the Morgan Stanley World Index, but with the capital protection. So it's practically, and this is good, because it's in direction of starting on making clients moving again in direction of the equity products. Thank you.

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

Thank you very much for attending our conference and for the very interesting questions. As usual, you are available then for answering to any requests for deep diving in the numbers, concepts, evolutions, and so on. So thank you again.