Banca Mediolanum S.p.A. (BMED) Earnings Call Transcript & Summary

Thank you for standing by. Welcome to the Banca Mediolanum first half 2021 results call. [Operator Instructions] Please be advised that today's conference is being recorded on Thursday, the 29th of July 2021. I would now like to hand the conference over to your speaker for today, Ms. Alessandra Lanzone, Head of IR. Please go ahead.

Good afternoon, ladies and gentlemen, and welcome to this meeting today dedicated to our half year results. The presentation will be led by our CEO, Massimo Doris; and our CFO, Angelo Lietti, who will join in during the Q&A session. Please make sure to ask your questions in the language of the language line you're connected to. In any event, answers will be in Italian with an English translation. And in the interest of giving all of you the chance to ask your questions during the Q&A, please limit them to a maximum of 2, and we promise we'll give you the chance to ask further questions at the end of the session. And now I'd like to hand this over to Massimo. Thank you.

Thank you, Alessandra, and welcome, everybody, and thanks for taking the time to join us. I know it's been a very busy week for all of you. But I promise you won't be disappointed since the past quarter was our best quarter ever in terms of top line growth and a true confirmation of our focus on strengthening and expanding our revenue streams. This head out significantly to a half year where both the contribution and operating margin confirmed reliable growth over the previous periods. In fact, on top of generating powerful net inflows, which finally also got some good health from the markets, we were able to significantly decrease our cost income ratio, and we are more than on track to reaching our target for this year. As you can see in Slide #5. Our net income reached EUR 268.7 million for the half year, clearly beating consensus and overtaking H1 last year by a wide margin, an increase of 79%. The entire income statement came in strong. Sure, we had a nice benefit coming from the SIA shareholding fair value write up. However, what stay in power is the remarkable contribution margin of nearly EUR 600 million on one hand, and on the other, the 27% increase in the operating margin, which came in at over EUR 245 million, confirming that quarter-after-quarter, our growth continues to be solid. Gross commission income was up 17% to nearly EUR 856 million. Entry fees increased 13% on the back of the massive level of gross inflows gather into mutual funds, which more than compensated for the decline of this fee component, which, as you know, is dropping gradually over time. Our most healthy ingredient of the top line, management fees, were up 19%, reaching EUR 605 million, an impressive EUR 95 million more than in H1 last year, thanks to greater assets overall and without any impact on margins. In fact, in Slide #7, please note that the commission income from recurring fees of nearly EUR 700 million in H1, corresponding to 206 basis points on average assets, no change from Q1 this year and down 1 basis point since the end of 2020 due to the prevalence of intelligent investment strategy in the mix of incoming assets. Indeed, investments through this service have been very strong in the past few years. And we now have some EUR 3.8 billion sitting in low-margin money market funds waiting to be shifted into equity in the next 4 years on average. So let's go on with gross commission income, looking at net insurance revenues. The healthy increase of 34% is largely thanks to general insurance protection policies, which showed a 29% increase in gross premiums with standalone policies jumping 37%. But also the growth of unit-linked policies in Spain made a contribution. Banking service fees, on the other hand, were down 6%, mainly due to a different pricing structure of our loans with lower upfront fees in favor of net interest income over time and also, to some extent, to a promo reduction in the origination fees of mortgages. Moving down the income statement, let's address acquisition costs, which were up 18%, totally in line with the higher-margin fee income as well as insurance revenues. Bear in mind that incentives on net inflows are higher too as a result of the higher managed asset components of our flows. Net interest income totaled almost EUR 130 million, up 15%, an impressive increase in an environment where many are struggling with their NII. This continues to be, thanks to a lower retail cost of funding versus last year as well as a higher interest income coming from our expanding lending activities in Italy and Spain, together, counterbalancing lower volumes and yield on treasury activities. Net income on other investments were less negative by nearly EUR 3 million than in H1 last year, with impairments on loans largely flat at EUR 13.9 million despite the 19% growth year-on-year in our credit book. In fact, as you can see in Slide #13, our NPL ratio at the group level continued to be very low at 0.62% net or 1.21% growth, demonstrating our strong commitment to credit quality with a cost of risk that we estimate to be around 20 bps for year-end. And since we are on the subject, please note that the amount of loans currently under moratorium is very limited, in the ballpark of EUR 180 million. Going back to our P&L, you're seeing the strength of our contribution margin, which went up 16% versus last year, totaling almost EUR 600 million. But no doubt, you appreciate even more the stamina behind our operating margin result, we jumped 27%, thanks to an ever stronger operating jaws. Our revenues increased at much higher rate than our costs. In fact, the cost-to-income ratio normalized by excluding market effects from the calculation, went down from 54.5% for -- of the full year of 2020 to 51% for the half year. Remember, we set the goal of reaching 52.5% for the full year 2021. Now let's move down and take a look at market effects. Specifically, in line item net income on investment at fair value, I would like to point out the revaluation of our shareholding in SIA in the run-up to the merger with Nexi. In H1, the CFR value came out to be EUR 72 million gross. We also had a positive mark-to-market benefit on the treasury portfolio. This, of course, had an impact on the income tax rate in H1, 23%, being a domestic revenue and taxed at a full Italian rate just like NII. However, our guidance for a full year run rate of around 21% going forward for our income tax doesn't change. To finish off with the P&L analysis, I would like to say a word on extraordinary items. Just so you know, the EUR 2.3 million represent our latest share of the 4 bad banks fund. So let's move to Slide #9, illustrating assets under administration and management. Now I know you've already heard the news, but I don't mind repeating it. In June, we surpassed the milestone of EUR 100 billion, hitting EUR 102.2 billion, gaining 9% since the start of the year. And this motivates us to look forward to reaching new challenging milestones. This increase was certainly in part due to the positive market performance. And this is proof of the strong role our equity gear in place in our investment strategy and the capacity of our family bankers to carry it out and be aware that the equity component of our mutual funds now stand at 55%. But this substantial growth in assets under administration is equally thanks to our brilliant performance in net inflows as you already know, and can go back and see in Slide #11. The EUR 4.7 billion in total flows we achieved in the first 6 months were genuine success, especially since over 70% went into extremely high-quality and high-margin managed assets, bringing managed inflows to an incredibly satisfying EUR 3.3 billion. But the true value in this number is that half of the fund flows so far this year are committed to equity investments directly or indirectly through intelligent investment strategy, where there are, as already mentioned, EUR 3.8 billion sitting in money market funds waiting to be shifted into equity in the next 4 years. And since we are on the subject, be aware that our other automatic investment services continued to feed EUR 280 million into equity every month through both installment plans and double channels. And in addition to this, our lending business accelerated in the first half, bringing total loans granted to customers to over EUR 1.9 billion, surging 40% over last year. Meanwhile, inflows into general insurance premiums grew 29%, approaching EUR 77 million, of which EUR 44 million into new business of standalone policies, up 37%. Now changing gears completely. Let's look at our capital ratios for the banking group in Slide #16. The common equity Tier 1 ratio at the end of June was up to 21.3%, indeed, a robust capital position. And while we are on the subject, please note that based on the ECB and Bank of Italy's press releases regarding the lifting of the ban on the distribution of dividends set for September 30. We intend to proceed with our dividend policies and distribute the 2019 balance and the remainder of the 2020 dividend for a total of EUR 0.753 per share or EUR 553.7 million. We've already initiated communication with Bank of Italy in order to go forward with payment on October 18 as planned. Now let me quickly address a few points regarding our network in Italy. I'm pleased to share with you that we reached a total head count of 4,200 family bankers, adding 160 in the first 6 months as a result of our recently enhanced and targeted recruiting approach. Our family banker's average portfolio is approaching EUR 22 million at the end of June. But what matters more is that the segment of our advisers with more than EUR 20 million in their portfolio has increased by 5 percentage points in 6 months, reaching 43%. And just to put this into context, 10 years ago, this segment stood at 6%. The numbers are really backing up the work we've done in terms of quality and productivity over the past several years. We believe we can close the year with a net increase in the head count of around 150, which will allow us to reach 4,250 family bankers in Italy. Moving over to Spain. Slide 34. I can definitely state that there has been a clear shift upwards in the pace of growth, as you have all noted. 2020 was already an excellent year. And 2021 is taking on even more momentum. Overall, we are getting a meaningful contribution with a net income coming in at EUR 15.4 million, 57% ahead of H1 last year, as you can see in this slide. Spain made progress in each business indicator. Total assets reached nearly EUR 8.3 billion, a solid gain of 15% since the start of the year with managed assets getting close to EUR 6 billion. Net inflows had impressive numbers exactly as in Italy, reaching EUR 736 million for the half year, nearly EUR 500 million of which in managed assets, up 46%. The lending business also did extraordinarily well, bringing the credit book to EUR 902 million, an increase of 21% since the start of the year. The network saw a strong move up of 7% in head count since the beginning of the year, reaching 1,404 family bankers and continues to remain the #1 position in the FA networks in Spain. Of special interest is also the number of customers in Spain, which increased by 10% since the beginning of the year, reaching 172,700. And since we are talking about customers, let me share the latest numbers with you regarding customer acquisition, which we consider to be very rewarding in the first half of this year, especially since this was managed without any special promotional backup. By the end of June this year, we were able to add 90,000 new bank customers at the group level, an increase of 28% versus the 70,000 in H1 last year. Of course, this number does not include Flowe nor salary-backed loan customers. Certainly, the launch of the Selfy account last January played its part in the aforementioned number of customers acquired. In fact, our totally digital offer of banking services, addressing a digitally oriented target of young adults, but also those who are traditional, yet migrating to digital. A trend we see happening in post-pandemic is extremely timely and well received. Thanks to Selfy, there were over 8,000 new customers acquired in Italy via digital onboarding. Although this number is still very small, in the great scheme of things, the increase was 30% year-on-year. But where I'd like to focus my and your attention right now is on the development of customer acquisition and assets of another segment of customers, the so-called private and wealth segment, meaning those who have assets higher than EUR 500,000. Although they represent a small percentage in our domestic customer base, 2%, they increased by 14% in the first 6 months, and their assets grew even more, up 15%. In fact, the private and wealth segment of our customers was responsible for 40% of the H1 net flows. Needless to say, the private and wealth segment has been our focus for the past several years. This is why we've decided to expand and strengthen the private and wealth network of family bankers. And in this regard, we've developed a series of services dedicated to their top level customers, including our fiduciary company services and more recently, investment banking. And despite the hardness presented by the pandemic in finalizing investment banking operations, our private bankers and wealth advisers have been engaged more and more in client content, introductions, meetings and so on in support of our investment banking team. As you know, the enhancement and the upgrade of the relationship between our private bankers and their customers was precisely the objective of this synergetic strategy, which is also paying off in terms of positive spillover effect. Indeed, the increase of net inflows. This is also the reason why we designed the recruiting project we call next, which bears a high potential new graduate with a senior private banker wealth adviser to assist them as a junior banker consultant to expand productivity while solving the issue of generational renewal. We are pleased to say that the first 13 banking consultants of the pilot phase in Lombardia completed their training stage and passed the FA license exam. So they will be incorporated into our network starting in September. And the new group of 16 from Toscana are currently in classes at our Mediolanum Corporate University. Before we move on to the Q&A, I'd like to close with a quick comment on our 2 most recent ventures, namely Flowe and EuroCQS. Flowe has just celebrated its first year birthday as a full participant of the innovation and sustainability world. Let me give you a couple of numbers. Flowe has captured approximately 700,000 users in 12 months. Average age 29 years. Developing an ecosystem of 36 partners to provide content to have the young generation build their future, develop their potential and take care of the planet. The green mindset is shared with and encouraged by all users. Doses of green activities have also been launched that are aimed at raising awareness and that have a concrete impact on the environment, including plastic garbage cleanup base, 35,000 trees have been planted in the better region of Guatemala and a total of 1,700 tons of CO2 have been compensated. Flowe also has a strong focus on education for young people. Course is a license-based on not just financial matters, but also on the development of digital skills and soft skills, are the most recent addition to the app. At this point, customer acquisition has stabilized. And our objective is now to encourage these customers to become more active in terms of transactions, payments and general engagement and to upgrade their status from free to the paying profile. In this regard, we have introduced an intermediate level to the paying profile. As a confirmation that it is truly a unique app in the national and international banking landscape, Flowe has received several awards in the field of tech innovation, even in its first year, namely the iF Design award in the service design category, the IBS Intelligence Global FinTech Innovation Award 2020 for the best original and adoptable concept, innovative API Open Banking and the FStech Award 2021 in the cloud computing innovation of the year category. Changing gears, you are probably aware that a couple of weeks ago, we did a rebranding of our subsidiary, EuroCQS where CQS in Italian stands for Cessione del quinto dello Stipendio, meaning salary-backed loans. We changed the name to Prexta, realizing that the previous name was no longer representative enough for the business we envision for the future. In fact, we decided to extend the business to strengthen our presence in the consumer credit market and add unsecured personal loans to Prexta offer. You know credit is gaining importance due to the pandemic, and this kind of personal loans will certainly help manage the recovery. We don't want to give away the opportunity to provide this customer segment the same type of loans our competitors in this field are offering. Prexta enters this market with the usual approach of all Mediolanum new projects, step-by-step. We intend to build a small and profitable book of unsecured loans, maintaining the focus on credit worthiness and preserving the group's undisputed low-cost of risk that you all appreciate. Keep in mind that the weight of these loans on the group's book will remain low at any rate. And so we launched 3 new categories of fixed rate loans covering amounts from EUR 3,000 to EUR 75,000 as well as a consolidation loan called [ compact ] to consolidate all other loans a customer may have. Well, I think I've covered just about everything. So let's move on to the Q&A section. Thank you.

[Foreign Language] Giovanni Razzoli, Deutsche Bank

A couple of questions on my side. I think that the banking fees has increased quite significantly on a quarter-on-quarter basis. You mentioned last --

I'm sorry, Giovanni, would you mind asking the question in Italian?

Yes. Sure. Sorry, apologize. Yes. [Foreign Language]

[Foreign Language]

[Operator Instructions] Our first question is from Hubert Lam from Bank of America.

I've got 2 questions. Firstly, on the cost income ratio. I know Massimo, you're targeting 52.5% for this year. But you actually see 1% in the first half and Q3 is also, I think, a seasonally weaker quarter on -- lower quarter on costs. So does it mean you can possibly maintain the 51% cost income for the year? That's the first question. The second question is on insurance revenues. Insurance revenues went up to EUR 20 million in the second quarter, and it feels like it is probably one of the better -- best quarters you've had in insurance revenues. Is this number sustainable? Or can we expect this number to grow from here just given the emphasis you've been placing on insurance?

Okay. [Foreign Language]

Thank you, Hubert. Next question, please.

Our next question for today is from Angeliki Bairaktari from Autonomous Research.

First of all, the Italian press has reported that Deutsche Bank's [indiscernible] network is currently up for sale. And some of your competitors are set to be bidding in that process. Do you see further consolidation between financial adviser networks in Italy? And would you have any interest to participate in that consolidation in the future? And second, a more broad question. I mean, we've obviously seen that net flows have kept increasing in mutual funds. In the second quarter, they were higher than the first quarter. And you also mentioned earlier that July flows are quite good. What do you see for the second half of the year? And what do you hear from the customers on the ground? Is there an element of sort of people spending more in the real economy now and saving less? Or do you expect the net flows to continue at the very strong levels that we have seen in the first half of this year.

[Foreign Language]

There are no further questions waiting. I will now hand back to my colleague Sara on the Italian line.

[Foreign Language]

Dividend, can you elaborate on our future dividend policy, for example, interim dividend and future payout?

Okay. [Foreign Language]