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.