Finecobank Banca Fine Spa

Good afternoon. This is the Coruscall Conference Operator. Welcome and thank you for joining the Fineco Bank Second 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 half 2023 results conference call. Adjusted net profit in the first half of 2023 was equal to $309 million, up by 39% year-on-year, and by 63% excluding first half 2022 profits from treasury management. Adjusted revenues at 601 million, increasing by 29% year-on-year, and mainly supported by net financial income, which is sustained by our clients' very sticky and valuable transactional liquidity. And 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 $144.5 million, increasing by 5% year-on-year by excluding costs related to the growth of the business. Adjusted cost-income ratio was equal to 24.1% decreasing year-on-year and confirming operating leverage as a key strength of the bank. In the first half of the year, Finaco recorded an outstanding commercial performance thanks to our organic growth strategy. First of all, we recorded a further acceleration in our new client acquisition, increasing by around 25% year-on-year. This is a particularly healthy and remarkable growth considering that we have not changed our client's acquisition strategy and that the competitive environment is crowded with short-term aggressive commercial offers on rates. Second, our net sales confirm to be very solid with 5.2 billion inflows in the first half of the year. This trend is confirmed also in July, with estimated net sales at around 500 million, of which deposits at plus 200 million, despite the 260 million of higher taxes here and here paid by clients in the month, driven by the decision by the government to anticipate in July taxes that last year were paid in August. Asset under management at around $40 million due to around minus $160 million of outflows from the low-margin institutional business and asset under custody at around $250 million. July brokerage estimate revenues are equal to $14 million, more than 35% higher compared to the average July revenues in the period 2017-2019. Third, our network of personal financial advisors confirmed to be once again the leader in terms of productivity within the asset-gatherer space, thanks to our powerful organic growth engine and the FinTech DNA. Our capital positions confirmed to be strong and safe with a common equity TR1 ratio at 23.2%, and the leverage ratio at 4.68%. Looking at 2023 and going forward, we expect to continue to deliver a strong growth thanks to our very diversified business model and our organic growth strategy. On the right-hand side of the slide, you can find a summary of our 2023 guidance, which are all confirmed More in detail, our net financial income, we confirmed hit to increase in 2023 by around 70% versus 2022. On investing revenues, 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 strong with a floor higher versus pre-COVID period. On operating costs, we expect a 6% growth year-on-year in 2023, not including around 2 million of additional costs for FinEco asset management. strategic discontinuity, and at least around $3 million of additional marketing expenses. We expect our cost to risk in a range between five and nine basis points. And finally, we expect a growing CT1 ratio and leverage ratio. Let's now move on to slide five. As announced, adjusted net profit in the first half of the year stood at 309 million in a very challenging macro scenario, increasing by 39% here and here, and by 63% excluding profits from treasury management realized in the first half of last year. Revenues at 600.7 million, up by 29.4% here and here, as we have been able to catch the strong acceleration in the structural trends in place. The strong growth of our net financial income, increasing by 86% year-on-year, is supported by our high-quality and capital line net interest income, growing by 158.5% year-on-year and with a very low contribution by lending. Net commissions increased by 4.1% year-on-year thanks to the contribution of investing and banking. As for the trading profit, let me remind you that in this line there are accounted minus $5.1 million related to the ineffectiveness of hedging derivatives in accordance with the accounting standard IFRS 9 compared to the plus $11.7 million in the first half of 2022. The value is influenced both by the spread between the euro short-term rate and the euro rebar and by the amount of the fair value of the derivatives. Excluding these effects, the decline of the trading profit is mainly related to the lower brokerage activity due to the level of market volumes. Operating costs at 144.5 million, while under control and increasing by 5%, year-on-year, excluding costs strictly related to the growth of the business. Mainly, additional costs for FinEco asset management to further expand its business and have a higher control of the value chain. Additional marketing costs to catch the strong momentum of the business. Let's now move on to slide six for a deep dive on the performance of the investing business. Investing revenues were equal to 156.2 million in the first half, increasing by 4.8% year-on-year. Let me please remind you the quality of our investing revenues, mirroring our transparent and fair approach towards clients. As a result, our revenues are exclusively driven by recurring management fees, only 1% contribution from placement fees and no performance fees at all. In the second quarter, management fees margin after tax increased to 53.8 basis points, up both on year and quarter on quarter, thanks to the strong contribution by Finneco Asset Management. Let's now move to slide seven for a focus on our asset management company. As you know, FinEco Asset Management is progressively taking more control of the investing value chain, resulting in higher revenues and margins for the group. The contribution of FinEco Asset Management to the group asset under management, NetSede, is further improving regardless of the macro scenario, moving from 81% in the first half of 2022 to 122% in the first half At the end of June, the contribution of FinEcoset management out of the total stock of assets under management of the bank moved from 28.8% in the second quarter of 2022 to 33.4%. The commercial performance by FinEcoset management this year has been outstanding, not only in absolute but also in relative terms. Down in the slide, we are showing a benchmarking based on Associstioni Retail Net Sales as of June. As you can see, our Irish company delivered the highest net sales compared to the most relevant asset managers operating in Italy. This remarkable result is due to some effectiveness in quickly developing the right set of products to catch what clients are currently looking for. Our Irish company has recently developed a new generation of capital-protected investment solutions, which is now further widening to allow clients to build a protected exposure towards equity. Let's now move on to slide eight for a focus on brokerage. Brokerage, as usual, registered an excellent first half at 96.1 million, resulting in a monthly average 43% higher compared to the monthly average revenues in the period 2017-2019, confirming a structurally higher floor compared to pre-pandemic levels regardless of the 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 35% above the average level of 2018-19. Third, we are continuously increasing our retail market share. As you can see on slide nine, all of this is translating in a very resilient revenues generation regardless of the market context. delivering a far better performance compared to peers. Let's now move on slide 11 for a focus on our capital ratios. Sineco confirmed once again a capital position well above requirements and expected to grow on the wave of a safe balance sheet. Common equity TR1 ratio at 23.2% and leverage ratio at 4.68%. and wild or risk-weighted assets at $4.6 billion, and total capital ratio at 34.04 as of June 2023. As for the liquidity ratio, liquidity coverage ratio is at 785%, and net stable funding ratio at 384%. Before moving to the next slide, let me underline that our rock-solid capital position has been confirmed by the results of the stress test by European Banking Authority and the European Central Bank. Finneco emerged among the top three Italian banks and among the best European banks, and even in an adverse scenario, we reported an improvement in our CT1 ratio. Let's now move to slide 14 for a focus on acceleration of our commercial dynamics. Let me spend a few words on the strong acceleration of our new clients acquisition, which is even more remarkable considering the context. As you can see from the graph on top of the slide, new clients in the first half were 25% higher here on here. These results have been achieved keeping our marketing strategy unchanged. This is clearly shown by our most recent marketing campaign, which was only focused on Finneco positioning and not relying on any short-term aggressive offers on rates. Our clear aim is to build up a reputable brand that generates a positive word of mouth. This translates in the acquisition of a high-quality and sticky client base, key to grow an healthy business in a long-term horizon. Let me also add that we have recently increased the efficiency of our marketing engine thanks to our brand-new onboarding process. First of all, we introduced responsive onboarding and the app accessibility, making it easier for customers to open accounts from any device. Secondly, we streamlined the entire onboarding journey by simplifying each step. This optimization has significantly improved our conversion rate while also lowering acquisition cost, as you can see down in the slide. Let me also quickly comment on slide 18 as another key driver for our organic growth is the best-in-class productivity of our personal financial planners. helped by our FinTech DNA. As you can see in the slide, the productivity of our network in terms of asset under management has been by far the best one within the sector. Let's now move on to slide 19. Deep dive on our transactional liquidity. The granularity and stickiness of our deposit base is confirmed quarter by quarter with a transactional liquidity around 90% of our client deposits. 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. As you can see from the slide, 98% of our deposits is represented by retail clients. Second, our deposits are extremely granular, with an average ticket of around 19,000 euros and the median ticket at 4,700 euros. Third, 76% of our deposits is under the protection of the deposit guarantee scheme. On top of this, different from other players, mostly focused on brokerage and investing, our one-stop solution relies on a fully-fledged banking platform. our clients are not just using our bank for brokerage or investing purposes, but all of our quality banking proposition for their daily life. Indeed, we have 50% of the clients crediting salary with us. Let's now move on slide 20 to deep dive on the next phase of our deposit during the first half of this year. On the left-hand side of the slide, you can find The evolution of net sales this year, 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. Let's now focus on the breakdown of the net sales. With deposits being negative due to the reinvestment into assets under custody and assets under management of the excess liquidity of our clients. To give you the sense of the strong underlying drivers of our transactional liquidity. In the box down on the left of the slide, you can see that in the first half of the year, the bank collected plus 8.4 billion of liquidity coming from salary and pensions and plus 6 billion from bank transfers. After the expenses in cards, bills, taxes, deposits were still up by 4 billion. And taking into account also the investments in asset under management and asset under custody, the final result is minus 2.1 billion of deposits net sales. Moving on the right side of the slide, we share our usual graph on the daily balance of the bank transfers. As you can see, it has firmly remained on deposited territory, meaning that FINEC is keeping on acquiring new liquidity from the banking system. also from institutions that they are remunerating liquidity. Then on the graph below, we can see the trend in terms of liquidity flows per cluster of clients. Clients with total financial assets below 100,000 euros increase the amount of liquidity in the bank. This is mainly transactional. On the other end, the cash sorting process has been 100% driven by wealthier clients. which in the past accumulated excess liquidity waiting to be invested. Let me also add that looking at private banking clients, the liquidity as a percentage of total financial assets is now at 13%, the lowest level since 2015, suggesting that they are approaching the floor. Finally, please note that the new clients acquired in the year also brought positive liquidity. Let's now move on to slide 22 to focus on our guidance. On banking revenues, we expect net financial income in 2023 to grow by around 70%. Going forward, we expect the net interest income to keep on benefiting from the interest rates environment and the stabilization of deposits. Overall, banking fees are expected to be stable compared to 2022. On investing, taking into consideration the market effect up to the end of July, we confirm our 2023 expected revenues to increase by a single digit year-on-year, with higher management team margins after tax, and with new cost management retail net sales up to around $5 billion, as it is able to catch the outflows coming from insurance rafters in the new interest rate environment. and overall banks' asset under management net sales at around 4 billion. In 2024, we confirmed around 5 billion spent net sales in the overall banks' asset under management. For our Irish company, we confirmed return net sales at around 4.5 billion. Finally, despite the challenging context, we also confirmed the increase of our management fees margins after tax up to around 55 basis points by 2024, thanks to the Finneco Asset Management Operational Efficiency. Pre-tax margins are confirmed to up around 73 basis points by 2024. Brokerage revenues are expected to remain strong, with a floor in relative terms with respect to the market context. That is definitely higher than in the pre-COVID period. Operating costs in 2023 are expected to grow at around 6% year-on-year, not including around 2 million of additional costs related to FinEco asset management, strategic risk continuity, and at least 3 million of 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 the year are expected at around $50 million. On capital ratios for the year, we expect a growing 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 shares, going forward, we expect heat constantly increasing, also thanks to the aggressive delivery on our strategic discontinuity. Cost of risk was equal to five 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 range between five and nine basis points. Finally, we expect robust and high quality net sales, keeping our priority in direction of asset under management. Let's now move to slide 25. Let me share the usual update on our UK business. We are still dialoguing with the local regulators to find the right setup post-Brexit. We will continue to develop our UK business only if we will be allowed to remain with the branch and a very capitalized business model leveraging on the Italian infrastructure. Business-wise, the performance has been quite strong, considering that we stopped our marketing activity. Our client base kept on increasing, thanks to the word of mouth, and our revenue generation has increased by more than 58% here on here, reaching 1.5 million in the first half. Once we will finalize our discussion with the UK regulators, we will focus on the rest of the European Union. Thank you for your time. We can now open the call to questions.

This is the Chorus 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 the touchtone telephone. To remove yourself from the question queue, please press star and two. We kindly ask you to use the handset when asking questions. Anyone who has a question may press star and one at this time. We will pause for a moment as participants are joining the queue. The first question is from Azura Guelfi from Citi. Please go ahead.