Finecobank Banca Fine Spa

Good afternoon. This is the College Call Conference operator. Welcome and thank you for joining the Fineco Bank third 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 third quarter 2023 results conference call. Adjusted net profits in the first nine months of 2023 was equal to $454.2 million, halved by 50.1% year-on-year, and by 68.4% excluding first nine-month 2022 profits from treasury management. Adjusted revenues at $916.7 million, increasing by 34% 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 $215.8 million, increasing by 4.8% year-on-year, by excluding costs related to the growth of the business. Adjusted cost-income ratio was at 23.5%, decreasing year-on-year and confirming operating leverage as a key strength of the bank. In the first nine months of the year, Finicol 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 22% year-on-year. This is particularly healthy and remarkable growth considering that we have not changed our client acquisition strategy and that the competitive environment is crowded with short-term aggressive commercial offers rates. Let me also underline that October recorded the best number in terms of new clients acquisition since March 2021 with around 12,000 new clients. Second, our net sales confirmed to be very solid 6.8 billion inflows in the first nine months of the year. The trend is confirmed also in October with net sales at around 500 million, which deposits at minus 900 million and influenced by one-offs due to the subscription for 620 million of BTP Valore in the recent auction. where we had a 3.5% market share, and by liquidity being temporarily used by short-term traders buying on the dips, both equity and Govis, given the market correction in the month. As a consequence, brokerage recorded a very strong month, the second this year, with estimated revenues at 17 million, more than 50% higher compared to the average revenue in the period 2017-2019, and more than 25% higher versus October 2022. Asset under management at around 10 million, due to around 220 million half-loss from the low-margin insurance business, and asset under custody at around 1.4 billion. 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 fintech DNA. Our capital position confirmed to be strong and safe with a common equity-to-run ratio at 24.7% and the leverage ratio at 4.96%. On the right-hand side of the slide, you can find a summary of our 2023 and 2024 guidance. More in detail. On net financial income, we expect it to increase in 2023 by at least 70% versus 2022. For 2024, we expect a potential slight decline here and here with a progressive stabilization of deposits. On investing revenues, we confirm our 2023 revenue guidance expected to increase high single digit compared to 2022 with higher after-tax margin. For 2024, we expect revenues increasing high single digit here and here with a neutral market assumption. 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. For 2024, we expect a growth around 6% year-on-year, not including additional costs for both Finic asset management and marketing expenses. We expect our cost of risk in a range between five and nine basis points in 2023. And finally, we expect in 2023 a growing CT1 and leverage ratio year on year. Let's now move on slide five. As announced, adjusted net profit in the first nine months of the year at 454.2 million in a very challenging macro scenario, increasing by 50.1% year-on-year and by 68.4% excluding profits from treasury management, realized in the first nine months of last year. Revenues at 916.7 million, up by 34% year-on-year, as we have been able to catch the strong acceleration of the structural trends in place. The strong growth of our net financial income, increasing by 95.1% year-on-year, supported by our high-quality and capital line net interest income, growing by 140.6% year-on-year, and with a low contribution by lending. Net commissions increased by 4.5% year-on-year, mainly thanks to the contribution of investing and banking. As for the trading profit, let me remind you that in this line, there are accounted 4.8 million related to the ineffectiveness of hedging derivatives in accordance with the accounting standards IFRS 9, compared to plus 14.6 million in the 9-month 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 in the trading profit is mainly related to the lower brokerage activity due to the level of market volumes. Operating costs at 215.8 million were under control and increasing by 4.8% year-on-year, excluding costs quickly related to the growth of the business, mainly additional cost for Finic Asset Management to further expand its business and have a higher control of the value chain, additional marketing cost 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 240.6 million in the first nine months, increasing by 5.6% 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, with only 1% contribution from placement fees and no performance fees at all. In the first nine months of the year, management fees margins after tax at 53.6 basis points, increasing year on year thanks to the strong contribution by Finneco Asset Management. Let me please underline that this set of results is particularly remarkable given the more challenging marketing environment for the asset management industry. Also, let me underline that the bank has already started to deeply reshape its product and services offer to better fit with the new context. This will give more fuel to our growth engine in the month ahead and will allow us to keep on adding new market shares. Let's now move on to slide seven for a focus on our asset management company. As you know, Finneco Asset Management is progressively taking more control of the investing value chain, resulting in higher revenues and margins for the group. The contribution of Finneco Asset Management to the group asset under management net sale is further improving regardless of the macro scenario, moving from 75% in the first nine months of 2022 to 117% in the first nine months of 2023. At the end of September, the contribution of FAM out of the total stock of assets under management of the bank moved to 33.5% from 29.1% in the third quarter of 2022. The commercial performance by Finnecos 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 our suggestion in retail net sales as of September. As you can see, our Irish company delivered the second-best net sales compared to the most relevant asset managers operating in Italy. This remarkable result, despite the very challenging environment, is due to Fineco Asset Management's effectiveness in quickly developing the right set of products to catch what clients are currently looking for. Let's now move on to slide 8 for a focus on brokerage. Brokerage, as usual, registered an excellent first nine months at $140 million, resulting in a monthly average more than 35% 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. As a reminder, October has proven to be a very strong month, thanks to our short-term traders buying, which both on the dips, both equity and Govis, given the market correction in the month. This resulted in the second best month this year, with revenues at around 17 million of revenues, more than 50% higher versus the average in the period 2017-2019, and more than 25% higher compared to October 2022. 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 and 2019. we are continuously increasing our retail market share. As you can see on slide nine, all this is translating in a very resilient revenues generation regardless of market context, delivering a far better performance compared to peers. Let's now move on to slide 11 for a focus on our capital ratio. Finneco confirmed once again its capital position well above requirements, on the wave of a safe balance sheet. Common equity tier one ratio at 24.73% and the leverage ratio at 4.96%. While risk weighted assets at 4.48 billion and total capital ratio at 35.9% as of September, 2023. As for the liquidity ratios, liquidity coverage ratio is at 800 and net stable funding ratio at 389%, while the ratio of high-quality liquid assets on deposits is at 66%, well above the average of the industry, and positioning Finneco as the best positive outlier, as you can see on slide 12. Let's now move to slide 14 for a focus on the acceleration of our commercial dynamics. Let me spend a few words on the strong acceleration in our new client acquisition, which is even more remarkable considering the context. As you can see from the graph on the top of the slide, new clients in the first 10 months were 22.7% higher year on year. These results have been achieved keeping our marketing strategy unchanged when it comes to the new client acquisitions and translating a quality and sticky client base key to grow and healthy business in a long-term horizon. Let me also underline the very positive further acceleration in October, recording the strongest month since March 2021 in terms of new clients, thanks to the new marketing initiatives undertaken by the bank. In particular, the figure benefited by the Fineco Days, a very innovative marketing campaign combining both advertising and physical events. As a reminder, let me also underline that we have recently increased the efficiency of our marketing engine, thanks to our brand new onboarding process. This optimization has significantly improved our conversion rate while also lowering acquisition costs, as you can see down in the slide. Let me also quickly comment on slide 18 as another key driver of 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 assets under management has been by far the best one within the sector. Let's now move on to slide 19. The granularity and thickness of our deposit base is confirmed quarter by quarter, with the transaction liquidity slightly above 90% of our client deposits. As you can see from the slide, private banking clients have further reduced their excess liquidity, while our deposits continue to be extremely granular, with an average ticket of around €18,000 and a median ticket of €4,500. On top of this, differently from other players, mostly focused on brokerage and investing, our sub-solution relies on a fully-fledged banking platform with 50% of our clients crediting salary and pension with us. Let's now move on slide 20 to deep dive on net sales of our deposits during the first nine months of this year. In the graph on the top of the slide, we show the trend seen this year at the index level on the side deposits. The most recent figures are related to August, and as you may see, Finneco Bank deposit base has been holding up much better compared to the system, which in order to stabilize deposit base has been very aggressive in offering time deposits. Our relative performance is explained by the very different nature of our deposits, which for the vast majority are represented by a very sticky transactional liquidity. Down in the slide, we show our usual breakdown of deposits net sales, where we once again saw an increase in the net new liquidity before investments. As you can see, in the first nine months of the year, the bank collected $14.5 billion of liquidity coming from salary and pensions and $9.3 billion from bank transfers. After expenses in cash, bills, and taxes, deposits were at $5.6 billion, increasing compared to September. Once taking into account investments in assets under management and assets under custody, The final result is minus 3.8 billion deposits net sales. As in October, investments have been quite high due to the one-off of the BTP Valore auction and to the brokerage clients buying the dips both on equity and bonds. On the graph down on the right, we confirmed the trend in terms of liquidity flows per cluster of clients. Clients with total financial assets below $100,000 euros increased amounts of liquidity in the bank, and this is mainly transactional. On the other hand, the cash sorting process has been 100% driven by wealthier clients, which in the past accumulated excessively waiting to be invested. For private banking clients, the liquidity as a percentage of total financial assets is at 11% as of October, 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 slide 22 for a focus on our guidance. Let's now focus on our 2023 guidance and 2024 outlook. On banking revenues, we expect net financial income in 2023 to grow by at least 70% here and here. For 2024, we expect a potential slight decline here or near, with a progressive stabilization of deposits as wealthier customers leading the cash sorting process have already used a lot of their excess liquidity. Overall, banking fees are expected stable compared to 2022, and the same holds for 2024 compared to 2023. On investing, Taking into consideration the market effect up to the end of October, we confirmed 2023 expected revenues to increase high single-digit year-on-year with higher management fee margins after tax. For 2023, we expect Finneco asset management retail net sales at around 3 billion and Finneco overall asset under management net sales at around 3 billion. For 2024, we expect revenues to increase high single-digit year-on-year with a neutral market assumption. 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 Finneco asset management, strategic discontinuity, at at least 3 million of additional marketing expenses. For 2024, operating costs are expected to grow at around 6% year-on-year, not including additional costs for both financial asset management and marketing expenses. Cost income, we expect to hit below 30% in 2024, thanks to the scalability of our platform and from the strong operating gearing we have. Systemic charges for the year are expected at around 50 million, On capital ratios for 2023, we expect a growing CT1 ratio and the leverage ratio, here and here, 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, in full year 2024, we expect a hit increasing, also thanks to the progressive delivery on our strategic discontinuities. 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 a range between five and nine basis points. The one-off windfall tax will be allocated as non-distributable reserve. Finally, we expect a robust and high-quality net sales keeping our priority in direction of asset under management. Thank you for your time. We can now open the call to questions.

Excuse me, this is the call call conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone with a question may press star and one at this time. The first question is from Zurra Guelfi of Citigroup.