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

Good day, and thank you for standing by. Welcome to Banca Mediolanum 9 months 2022 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Alessandra Lanzone, Head of Investor Relations. Please go ahead.

Good afternoon, everyone, and welcome to the presentation of our 9 months results for 2022. Massimo Doris, our CEO, and will lead the presentation today; and Angelo Lietti, our CFO, will join us for the Q&A. As usual, please make sure that you ask your question in the language of the language line you're connected to. Either way, the answers will be in Italian with a simultaneous English translation. So let's get started. Massimo, the floor is yours.

Thank you, Alessandra, and thanks, everyone, for tuning in today. So we are here to take a look at the first 9 months of the year. I do need to point out that Q3 was another crazy quarter for the markets. With global equities down 8% and European bonds down 7%, further penalizing assets under management. As you all know, Banca Mediolanum is well established as being the most exposed to equity markets. Yet once again, the market impact was largely offset by a commercial performance that remained remarkably robust. And which, along with an elevated net interest income, was the engine behind the outstanding results that you are seeing. In fact, I think we are sharing an exciting set of numbers today. which are even more impressive if we consider the uncertain global scenario. I'll start off with the business results, whose highlights are shown in Slide #4. You immediately noticed the resilient nature of our flows against significant headwinds. And in particular, the stamina of managed assets inflows, thanks to our trademark strengths, namely the guidance our Family Bankers give the customers who they've educated over time to look beyond market drops and more and more evidently, the effectiveness of our automatic investment services strategy in a slowdown scenario. In fact, our inflows into high-quality managed assets came in at EUR 4.23 billion, entirely into equity funds down only 9% versus our record last year and in contrast with all the other banks and networks in Italy. As a matter of fact, as you can see Slide #44, using a surety criteria, the managed asset flows of our peers fell significantly in the period, down 61% compared to a 20% decline for Banca Mediolanum. Our unmatched performance of managed asset flows tempered to some degree the impact of market shocks on our assets in the first 9 months. As you can see in Slide #14, total assets dropped another EUR 0.9 billion in value in the third quarter, ending up just under EUR 100 billion at EUR 99.9 billion, with a decline of 8% since the beginning of the year. To the contrary, thanks to loans granted, which came in at EUR 2.88 billion, even surpassing the strong strides made last year. Our credit book grew 10% year-to-date to almost EUR 15.9 billion, as you see in Slide #4. The quality of our loan portfolio remains very strong with a net NPE ratio of 0.71%. And a 12-month rolling cost of risk of only 10 bps. And lastly, we managed to sustain double-digit growth in our general insurance business with a 12% increase in gross premiums. But our results are especially exciting when it comes to economic performance, as you see in Slide #5. Our net income was practically in line with last year at EUR 371.5 million, minus 1%, but with an entirely different composition, backed by an unshakable well-diversified recurring business, which is clearly reflected in the contribution margin, up 12%. At the same time, our impressive operating margin was up 25% to EUR 474.6 million, thanks to 3 all-time high quarters in a row this year, culminating in a gratifying record Q3 at over EUR 167 million, which rewards the strong work we've put in and the perseverance with respect to our strategy, resulting in a solid and efficient recurring business. Below the operating margin, however, some light items beyond our control mask our bottom line strength. Market effects reflected drastically different dynamics in the year-on-year comparison in both fair value and performance fees, although fair value turned positive in Q3 due to an increase in the NEXT's share price as well as in the mark-to-market of derivatives hedging some fixed-rate mortgages no longer in the book. But what really counts and what we can count on is a substantial revenue stream that we have strategically developed. Above all, a sound and reliable net commission income, up 6% to EUR 762 million, demonstrating a core business that performs even when faced with difficult markets. In fact, against all odds, recurring fees were up 3% reflecting increased average assets under management, still EUR 2 billion ahead of our record last year. Clearly, our recurring fees will strongly benefit over the long term from steady, high-quality flows momentum, but more significantly in today's scenario, a very robust net interest income up 28% to EUR 253 million as a result of the aggressive interest rate hikes. Please note that NII in Q3 was down from the previous quarter, which had benefited from a one-off EUR 12 million in coupons from inflation-linked bonds. As you are all very aware of, the positive impact of this hike has just started in Europe, and the big repricing will come over the next 12 months. And this is no exception for us. We have over EUR 10 billion of floaters in the banking book, essentially CCT's indexed to the rapidly growing 6-month Euribor, thus repricing twice a year, mostly in April and October. While the 3-month Euribor, which finally turned positive last summer and is increasing just as quickly opens the door to new growth in interest income from our retail credit book made up of variable-rate mortgages and loans to the tune of over EUR 12 billion. The fourth quarter of this year will already host a substantial repricing, leading us to lift our guidance on net interest income for 2022 which incorporates a growth of around 50% versus EUR 270 million last year. And since this repricing will take place several times over the course of next year, we are now guiding to an increase in NII of another 70% to 75% in 2023. But keep in mind that there are many moving parts involved here. Naturally, the strong NII growth implied by the current rate curve has some offset in the cost of funding, as we likely raise the interest rates paid on our customers' deposits. Of course, the pass-through will very much depend upon how the competitive environment shapes up further on. And in any case, it won't be done all at once but gradually taking into consideration customer clusters. Just like we are doing in terms of mortgage relief that I'll touch on later. At any rate, the benefits far outweigh the cost for sure. Going beyond just looking at the numbers in the income statement, it may be helpful to examine them through our key ratios. First and foremost, positive operating jaws pulled cost/income ratio down to 48.7%. As can be seen, our cost/income ratio target to be consistently below 50% by 2024 is being met earlier. The payout ratio to the network was fairly steady, down somewhat compared to a year ago due to lower gross flows than in 2021 and the time delay in incentives earned, which, by the way, are impacted by a materially higher threshold we implemented to qualify for the individual net inflows incentive. Please note that the recurring fees margin improved quarter-on-quarter by 1 basis point at 204 basis points. In fact, due to the market drops, there was an acceleration in the shift of money market funds into equity funds as part of the intelligent investment service stepping feature. Now let's switch gears from the income statement to the balance sheet -- balance sheet ratios in Slide #6. Our CET1 ratio at 20.7% is kept consistently solid and more than adequate to the requirements. Similarly, our leverage ratio of 5.7% is well above Basel III requirements. Now moving over to Slide #23, as is our practice and certainly our will, the Board of Directors has resolved to distribute an interim dividend of EUR 0.24, which corresponds to a payment of EUR 177 million. Finally, on Slide 7, I want to elaborate on our main growth and resilience drivers. At the top of the list, Total Bank customers increased 5% to over 1,662,000 with a notably high retention rate of 95%. And this is the result of our continued marketing efforts in customer acquisition, which gave us 125,900 new customers in the first 9 months, thanks as well to the success of the Selfy account with some 15,300 new customers. And now let's move to the network numbers. The growth momentum remains strong. In fact, the number of Family Bankers at the group level has passed the milestone of 6,000 with a total of 6,018 at the end of September, a gain of 4% since the start of the year. Lastly, I'd like to spend a few words on our automatic investment services. To get you up-to-date, at the end of September, there were EUR 3.77 billion parked in the money market funds of the intelligent investment strategy service. As we've already mentioned, the market drops produced an uptick in the automatic step-ins shifting assets into equity funds to take advantage of the bylaw opportunity, consequently reducing the level of the money market funds. Added to this, there are EUR 1.32 billion in the deposit accounts of Double Chance. And so between the two, there are over EUR 5 billion ready to be transferred to equity funds over the next few years on a monthly basis. On top of that, in the first 9 months, flows into installment plans reached a total of an additional EUR 1.6 billion annualized. Now let's take a quick look at the numbers in Spain in Slide #14. Our business in Spain has grown very successfully and has been picking up speed to the point where it is approaching a double-digit contribution to the group's bottom line. In fact, net income in the first 9 months came in at EUR 30 million, a marked increase of 17%. Total assets were down slightly at EUR 8.62 billion with net inflows into managed assets remaining strongly positive at EUR 518 million. On top of this, we saw a number of other impressive advances in Spain since the beginning of the year. The credit book rose 12% to EUR 1.2 billion. Family Bankers were up 6% to 1,598 and the number of customers approached 204,000, up 9%. So let's turn the page and take a peek at how the fourth quarter is starting out. As you can see Slide #42, our commercial initiatives are moving along superlatively into October. In fact, net inflows registered strong volumes in both Italy and Spain for a total of EUR 724 million, surpassing EUR 6.3 billion since the beginning of the year with top-notch flows into managed assets to the tune of EUR 352 million. This brought the year-to-date figure of managed assets to almost EUR 4.6 billion, 12% below last year record flows. We can still boast 100% equity component in our flows, so you can picture the high caliber quality of these numbers. Clearly, this secures a very high average margin for us. And our customers are benefiting too since they have substantially averaged down their investment this year, capitalizing on the volatility in the markets. Based on the stats, despite the deteriorating market conditions, we are on the right path toward our full year guidance of EUR 6 billion in managed asset inflows for 2022. While this is a very challenging target, we are confident that if we don't hit it, we won't be far off. And as far as 2023 is concerned, even factoring in a weaker market outlook, we believe inflows into managed assets will be in line with this year. And don't forget the commercial business of Banca Mediolanum is highly diversified. General insurance premium totaled EUR 16 million in October and EUR 149 million year-to-date, 11% higher than the same period last year while total loans granted registered EUR 320 million for the month and EUR 3.2 billion since the beginning of the year, in line with our record 2021, far different from the other asset gatherers who don't focus on this business and also different from the other banks in terms of quality of the credit book. And speaking about the lending business, we decided to do something concrete regarding mortgages to have families in dealing with this complex moment. So as you can see, Slide #56, we developed a package of solutions to mitigate the impact of the interest rate hikes, which have further aggravated the difficulties that households must face today with the level of inflation that has never been this high in the past 40 years, coupled with a very high energy prices. Please note that the structure of many of Banca Mediolanum's mortgages include the mechanism, which is unique in the market that renders loans more sustainable in the event of a significant rise in interest rates. In fact, this mechanism sets up Euribor threshold that if exceeded, allow the customer to benefit from 20 basis points automatic reduction in the spread. Now for those customers most vulnerable to the negative effect of the rate hikes. We decided to lower the spread of the mortgages by a further 25 bps for a period of 12 months. Furthermore, starting in October, all mortgage holders have the possibility of requesting an initial 6-month interest-only payment period on new mortgages, which results in lighter monthly payment. Similarly, in a couple of days, an initial 3-month interest rate only payment option will be introduced on new loans. This move will ease the situation for those customers in hardship. Thanks to our strategy, there is a very limited number of these. So there will be only a negligible impact on our P&L. These types of initiatives are nothing new for Banca Mediolanum. As you know, we have always backed our customers who are particularly hard-pressed in especially challenging times. In October 2008, after the default of Lehman Brothers, the loss suffered by those customers holding Lehman Brothers' bonds in their portfolio was compensated despite no contract obligation by the replacement with safe bonds at the personnel expense of the two majority shareholders at their own accord. The same year for a similar interest rate situation we are seeing today, we unilaterally lowered the spread of mortgages to all customers, including the back book. Moreover, we've always intervened by providing tangible aid in the form of donations in the event of natural disasters. And we do our part providing rescue loans as well, which is a way we support and to usually foundations of the Italian dioceses that assist people in serious trouble due to unmanageable excessive debt. So these new initiatives or mortgages add to the legacy of our activities that define us as the bank that stays close to its customers. Now we get a lot of questions from you regarding our project we refer to as NEXT, which essentially establishes an entirely new FA career path within Banca Mediolanum, creating a figure we call Banker Consultant. As you probably know, this project pairs high potential new graduates to work as junior assistants with senior private bankers and wealth advisers. We started this project at the beginning of 2021 with a selection process that is very carefully followed and very selective. And just to give you an update, we now have 59 active banker consultants who are already up and running, working alongside their senior private banker. Additionally, we can count 81 aspiring banker consultants who are currently training in the 6-month executive master program that we provide by our Corporate University, which also includes the preparation for the state licensing exam. We expect a group of 40 of them to be fully active in January 2023, while the other 41 will continue on with their training. At the same time, a new class of the same number of aspiring banker consultants would start off. So you may ask, is this project making a difference? The first numbers are clearly encouraging. The senior private bankers and wealth advisers who have been part of the project working with a banking consultant for more than a year, have shown an increase in their managed asset inflows by over 34%. And when you look at the comparison with our colleagues, at the same level in their area, the increase jumps to over 207%, 3x higher. And we see similar improvements looking at their lending and general insurance businesses. These results are very rewarding, and as such, we have another 160 senior private bankers in line who want to get involved. So we feel committed to supporting and actually expanding this project. We are already active in most regions of Italy and with the January class, we will also cover Sicily. Please note, we are giving a great opportunity to these young advisers. We are not just giving them an easier path paying some guaranteed minimum for a couple of years and then letting them grow it alone just as some peers do. To the contrary, we are providing an entirely new career path, which allows them to work alongside someone who is already established. In this market, it would be almost impossible to start this job on your own. Indeed, our graduate programs that support developing talent pool is actually one of the initiatives quoted among the reasons for the recent rating upgrade from Morgan Stanley MSCI ESG rating from A to AA, as you can see Slide #56. In fact, according to MSCI analysts, the upgrade is driven by our robust human capital management practices relative to those of peers along with our corporate governance practices that were found to lead those of most global market peers. We were also upgraded for our enhanced effort to integrate ESG factors into our investment portfolio. In conclusion, I trust you appreciate our first 9 months. You know, we continue to deliver results that matter, creating significant value for our current and new shareholders, regardless of what's going on around us. And I can assure you Q4 results will be in line with those of the previous strong quarters despite all we will have to contend with. Thank you, everyone, and we can now open the floor to questions.

Before handing it over to the conference call, I would like to mention a few questions that we received by Gian Luca Ferrari of Mediobanca about guidance on 2023 NII. I guess you have already answered Massimo -- correct. We said there will be a 70%, 75% increase compared to what we expect this year. So it's about EUR 700 million increase. Also another question is what are the underpinning assumptions -- the assumptions underpinning cost of funding and how are you going to remunerate deposits? Well, we have -- we expect an increase in -- we envisage an increase in the cost of funding, which is essentially tied to specific actions such as Double Chance accounts that will be paying a higher interest out to customers or probable premium that's to say when we receive fresh money invested in managed assets, we provide good interest, we pay higher interest on customers' deposits. But based on the forward Euribor curve, we have -- we envisage also higher deposit interest for our more significant customer cluster, while so called regular clusters will continue to receive 0 deposit rate. On average, the cost of funding for us is 15 basis points. And by hiking the interest on customer deposits as well as on Double Chance accounts as well as, as I was saying, the deposits held by our most significant -- our key accounts, we may go up to a cost of 50 basis points. So from EUR 15 to 50 basis points. And this would once again be based on an increase of about EUR 700 million NII in 2023. Ferrari was also asking about the guidance for 2023, assuming a certain forward curve. Well, this is exactly the one because we have assumed a forward curve and we've been extremely conservative in establishing or assuming the cost of funding, so these are the numbers I've just shared with you. Another question came in, and it's this one. Net income next year is expected to increase significantly. EUR 0.02 increase in the dividend would actually turn out to be a significant decline in the dividend payout. Is there any possibility that you decide to retain your 65% to 70% payout considering the level of net income? Well, when we had a policy -- payout policy of paying out 65% to 70%, we were criticized because the dividend would be volatile and would go up or down in terms of euro cent, so most people, not all, but most of them asked us to have a gradually increasing dividend policy year after year. So what we envisage is a growth of a couple of euro cents per year. If looking at the numbers, and if we see a growth in future income, which would enable us to grow our dividends by EUR 0.03 or EUR 0.04 instead of EUR 0.02 without backtracking the following year, we will do that. But declaring that now is really too early, saying whether next year, we are going to increase the dividend by EUR 0.02, EUR 0.03 or EUR 0.04 since we haven't paid out the dividend entirely but just the advanced dividend -- the initial dividend for 2022. And the final question is about the banking service fees for the fourth quarter. What are your expectations in terms of certificates being issued? Well, I think we'll -- that they will keep growing at the current level, considering the interest rate hikes that have occurred, the number or the volume of certificates we can sell will be, for sure, will continue being significant considering the volatility of rates, the volatility of markets. So the pay off and the coupons that can be paid via these certificates are quite hefty. That's why I expect 10% growth by year-end. Thank you very much. This is all as far as the questions that came in from the webcast. So let's turn it over to the conference call.

[Operator Instructions] First question comes from Domenico Santoro, HSBC.

I do have some questions. And thank you also for sharing all your guidance on net interest income. With respect to fees, I would like to understand your view with respect to margins. You went very well in the third quarter because they increased, but I believe this was more due to market performance. I mean the market performance in September is not the clear on margins. I would like to understand your view on the fourth quarter and what you expect also next year. With respect also of volumes, so will they still be rather sustained in terms of sales volumes? What do you expect the management fee growth to be, and banking fees, what is your guidance for next year? Recurring fees and commissions for 2023 and so on based on margins, of course. If there are performance fees in this year's fourth quarter, I guess there aren't, but I just wanted to be sure. And then I would like to have a guidance on costs for next year. Thank you.

So talking about fees, we've seen there has been a 1 basis point increase over the second quarter. What do we expect in Q3? I expect to see 204 basis points holding there. And as to next year, I don't think, especially if markets will pick up that the 204 basis points are going to decline. I don't think this is going to happen. But going forward, I believe that we are going to have downward trend, a creeping downtrend, 1 or 2 basis points. There have been extremely sharp market movements that has a sort of hit this decline, but I believe that it's going to be a slow decline in 6 or 7 or 8 years, so that at the end, we are going to get to 195 basis points. I don't believe that we are going to breach this level lower. Next year, we might even see a stability of this margin. As to performance fees, since there have been a new fund that have been launched, we might see small increase, but really, we are talking peanuts and I would really keep the EUR 7.5 million in the 9 months. So no performance fees this year. Whereas with respect to cost increase, once again, it is key to focus on cost income -- to the cost income ratio, because many of our -- in many of our accounts, whether to increase this cost or not is up to us. It's really discretionary. So the cost/income ratio should stay below 50% next year as well with the revenue or income side growing more compared to costs. So I would really stick to this cost/income ratio.

Next questions, Elena Perini from Intesa Sanpaolo.

I have 2 questions. One is a follow-up question on the -- concerning the guidance you have just given us Massimo for the next 7 or 8 years. I would like to really understand what is -- what do you think is driving margins down. I'd like to know whether you could put in place some kind of action to limit to stem this decline? The other question has to do with the tax rate. Interest income is now giving a greater contribution compared to the guidance you gave us a few months ago. So I'd like to know whether you can let us know more about the fourth quarter this year as well as the next few years? Also, taking a step back, you talked about EUR 700 million net interest income for next year with a growth comprised between 70% and 75%. So I guess this year, you're going to hit the mark of EUR 400 million, and I'd like to know whether I did my math correctly?

Yes. I'll take your last question first. And I do confirm that the interest income we expect this year is of about EUR 400 million. Year-to-date, we reported a 28% NII increase, but that is essentially generated by larger volumes rather than higher interest rates. In fact, the treasuries made a few new purchases. And also, we lent money at slightly higher interest rates towards year-end in the second half of the year, but that was essentially generated by larger volumes, EUR 12 million were generated by coupons. We cashed in because of an inflation-linked BTP that came and do. So that is the only nonrecurring item as compared to last year and that's it because both CCTs that are linked to the 6 months' Euribor and mortgages that are linked to a 3 months' Euribor were repriced in October. So in the first 9 months of the year, we cannot see the effect of this repricing. We will reflect that -- that will be reflected in the numbers effective from October this year. So in the fourth and obviously in 2023. Tax rate, we stand at 20.7 currently for the 9 months. And we expect that for the end of the year, it will remain more or less at this level. So NII is going up. And so we expect the tax rate may go up slightly next year between -- and reach 21 or 22 maximum, and I'm talking about the tax rate. As far as shrinking margins are concerned, why do we expect margins to decline? Well, for two reasons. Number one, the decision we made back in 2019 to stop distributing a certain class of funds we chose to have and still has a management fee that is higher with an almost 0 upfront fee. So why did we decide not to distribute those funds anymore? Because currently, Family Bankers, if they so wish, can give a 100 discount -- 100% discount on upfront fees. So it was no longer -- it didn't make any sense to be distributing funds that in terms of the underlying assets were identical, but one family of funds had higher fees and the one actually entailing upfront fees would not generate those upfront fees because bankers can discount 100% of them. In fact, I'm sure you have seen a steady decline in the item -- in the line item, entry fees, it's almost down to 0 because our bankers -- our Family Bankers, our sales network is really trying to capture higher and higher assets to make higher and higher management fees. So they tend to discount the entry fee, which have currently an impact of 0.41% on gross inflows. So we are no longer distributing these funds that call for higher fees. But since all new inflows are channeled towards this other family of funds, we see a generalized decline. But on a per head basis, these products are less -- these funds are less costly. But please consider also that we do gather a lot of funds via MyLife that implies -- that entails an additional fee because of the insurance wrapper. Plus we have to consider that now we are acquiring wealthier and wealthier customers, customers that are definitely more and more affluent. So probably the portion of their investments in products that are more conservative in nature, i.e., bonds may increase since we are talking about a decline of 1 to 2 basis points in our margins. We're not talking about margin crushing to the floor, not at all. So even a shift -- an increased shift to bond investing may contribute to this slight decline plus consider, please, our IIS investment systems with the monetary fund that entails a 25 basis point management fees, and this is, of course, averaging down the fees that we make. And this is just a relative picture, but what you have to do is compare us to others. Everybody is talking about declining margins and margins are actually declining, our margins, I mean, but our peers' margins are going down, too, and they were starting off a lower level. So thanks to our strategy, we can still retain margins that, by and large, not in every single situation, but by and large, are higher than our competitors. Also, let me say that this is attributable to the fact that we are not decisively more expensive than others, than our peers, even though the cost of our products is above the average cost in the market. But what really makes the difference is the asset mix. Let me give you a banal example. If to companies sell two funds. One is an equity fund and the other one is a bond fund. Let's say, that the equity fund would generate 200 basis points of management fees and the bond fund 120 basis point management fees. I, as Banca Mediolanum, would sell 80% equity fund and 20% bond fund and the peer would do exactly the opposite. So our average of fees, the one we cash in are completely different. And my management fee is a lot higher than my competitor, not because I'm more expensive, but because we sell two identical products, but with a different mix. And the different mix makes us reap more favorable, makes us reap higher fees. 55% of our customers' assets are equities -- of our customers' assets are equities. So this, of course, is generating heftier and heftier margins.

Thank you, Massimo. Thank you, Elena. Thank you for your question. We have no other questions from the Italian line. So let me switch over to the English line.

[Operator Instructions] The next question comes from the line of Hubert Lam from Bank of America.

I've got three. Firstly, on costs. I know you're guiding for a cost/income ratio for next year being [indiscernible], but anything you can say about the absolute cost growth potential for next year, considering the impact of inflation, maybe investment spend you need or any other projects that you have lined up? That's the first question. Second question is on your asset mix. Do you see any potential for flows to switch into fixed income over time -- over the next year or two just because fixed income rates are now much more attractive. And just wondering if you see any mix impact from that and any pressure on fee margin because of the mix. Last question is on performance fees. I know you're guiding for little to no performance fees for the rest of this year. How should we think about performance fees, say, into next year? I know it's very much dependent on markets. But if markets stay where they are, would you expect similarly low performance fees similar to this year? Or just how should we think about it for next year?

Talking about cost increases for next year, we expect, as we said, the same level as this year, that is 9% more or less, this is what I expect. We have few inflation-linked costs or costs tied to the inflation. So I don't expect to see a higher level than the one we saw this year. Net inflows and fixed income funds, sure. For next year, I do expect to see an increase in net inflows, and also with respect to the upcoming 2 months, I expect to record an increase of net inflows going towards fixed income. Why am I hoping -- why am I saying I'm hoping to see, even though the fixed income funds have a smaller margin than the equity funds? Because to date in the last couple of years, just as all the rest of the market, we've carried out our job without reference asset class, without one asset class. Because the fixed income asset class was for prudent conservative clients, but proposing this asset class to prudent customers would have meant to have no income whatsoever, no gain whatsoever. Now fortunately, this asset class is back. It's interesting, and so we can provide or offer an interesting proposal to our more prudent customers. Also with respect to customers, we have been offering equity funds too. According to MiFID, we cannot exceed a certain threshold, a certain percentage. So also our customers who would want to further invest in equities cannot do that because based on their risk profile and based on their asset mix, they can no longer invest in equities. So this renewed inflow towards bond is a positive aspect because this is going to be additional net inflows and that is not going to eat into equities. It's going to adapt to equity. As to performance fees, I expect to get very little there next year because in order to generate performance fees, you have to exceed an absolute high watermark, so 31st of December 2021. And then we have a hurdle rate, and really I don't expect markets to fully recover what they lost and to exceed or overcome the 2021 highs. If this happens, that's all the best for us, for our clients in terms of performance. But in my opinion, 2023 once again, will show little performance fees. This is not in our hands. However, it really depends on how markets are going to perform and behave.

Any other questions from the English line?

There are no further questions on English line. I will now hand back to the Italian call. [Operator Instructions] Next question from the line of Equita.

Two quick questions. First, -- can you please share a prediction as far -- guidance as far as entry fees for insurance products and acquisition costs are for next quarter. And also management fees. What do you expect in Q4 considering that inflows are increasing and I'd like to have a comparison between Q4 and Q3?

Well, the trend of displayed by entry fees, I expect it to remain in line with -- to display the same decline compared to last year and insurance revenues will, I believe, record the same increase. So I don't expect a major difference in Q4. Management fees in Q4 will be, we believe in line with Q3, i.e., in line with the EUR 350 million reported in Q3. Okay. Thank you, Luigi. Are there other questions?

With the fact that we might have an excess capital. So I would like to understand whether having reached a certain level of capital ratios, you might think about dividend distribution? Even though compared to the past, income was more tied to market performance, whereas now this might be more structural considering also the capital level?

Slowdown in mortgages in 2023. The combined effect between the increase in new mortgage cost and inflation may lead to less homes being purchased and therefore, lower number of mortgage applications. We have to wait and see what's going to happen. However, should we lend less compared to 2021 and 2022. By the way, 2022 is exceeding 2021, which was our record year. So should we go a little bit under that level? I don't see this as a major problem considering the fact that we exceeded 60% between loans and deposits ratio. So we are considering good ratio as being 65%. So if it should go down slightly, we don't see this as a major problem. As to dividend distribution, I said before that if we see we have a headroom to increase dividends slightly above the EUR 0.02 we were talking about; however, we don't want to retrace and have to step back the year afterwards. We're going to do this. And then with payout ratio and excess capital with our risk-weighted assets, they keep on growing. So retained earnings are used to cover these requirements. Our common equity Tier 1 ratio always hovers around 20%. We did not go up to 25%. So again, we want to remain more or less close to this figure. But once again -- let me repeat once again, I am the Chief Executive Officer, but I'm also sort of a big shareholder of this bank as well. So it's in my interest and my family's interest to receive hefty dividends, and therefore, we are very interested in dividend distributions, but I want this dividend distribution not to jeopardize the future capital solidity of the bank and of the group. I don't care boasting 30% CET1. I'd rather cash in dividends. What I'm looking for is the right balance between capital strength, and rewarding shareholders, thanks to the success this organization is achieving. But rest assured and sleep well at night, because I'm always going to submit to the Board the proposal to go to the maximum dividend distribution level; however, without impairing capital solidity. But if there is a possibility of increasing a few cents more, I'll push for that. Thank you, Alberto. Any other questions?

There is one more question from the line of Filippo Prini.

I have three quick questions about mortgages. I'd like to know whether any customers of yours has asked you to shift from variable rate, from floating rate to a fixed rate mortgage. Second question is about the credit quality for mortgages. You have explained what mitigating factors you have adopted to kind of relieve customers to alleviate the burden of customers that are settled with huge debt. But I'd like to know whether this is going to have an impact on the credit quality.

Well, we did not receive any questions of -- I'm sorry, any requests from our customers because fixed rate mortgages have gone up a lot in the past. Last year, for instance, almost all mortgages were fixed rate. But this year, I have -- I see that the demand for fixed rate mortgages is steadily declining. So we received no request for this shift from floating to fixed rate mortgages. And as far as the credit -- the quality of credit is concerned, I believe that our NPE ratio is not going to change for what we did because the quality of our customers is extremely high. And also because most of our loans, in addition, I mean, aside from mortgage loans that are, of course, backed by a collateral, by real -- a piece of real estate, we have a loan-to-value ratio that hover is around 50%. But in addition to that, most customers that took out a mortgage do invest with us, almost all of them, and these investments they have are not meant to back the mortgage loan because the mortgage loan is backed by a house, by a property. But of course, if I invest with Mediolanum and I took out a mortgage loan with Mediolanum before stopping my mortgage back to Mediolanum, I would disinvest and repay my mortgage regularly. I really think that when we grant mortgage loans, we are very conservative in our underwriting, and we are very conservative in calculating the debt income ratio for our customers, and that is why our NPEs are so low. Please remember that the gross NPE ratio has never really changed much. I think that we reported a maximum level of gross NPE equal to 1.83% and we have never ever sold or securitized loan to try and dispose of these nonperforming loans so as to improve the ratio. And we have navigated quite a few crises so far. Nonetheless, the NPE ratio really hasn't changed much over time. It was just a few basis points. So net NPE ratio is 0.71% and so -- and maybe the net ratio will go up to 1.4%, maybe, but that is not going to have a terrible impact on either the balance sheet or the income statement of the bank. Thank you, Filippo. There are no other questions. So I hand it over to Ms. Lanzone.

Thank you. Let me add a specific comment to the questions asked by Ferrari at the beginning of our conference. The EUR 700 million being the NII guidance for 2023. Well, I'd like to remind you all that the underlying assets that we have into account for the underlying assets is the 3-month Euribor rate of 2.65% is the average for the year, exactly. We have taken the forward curve, which is unfortunately extremely volatile. We decided to be more conservative and to lower it a bit. So Massimo, do you want to make any further questions in conclusion or well, yes, I'd like simply to say that I'm looking -- I am optimistic. I look at the future, but I still feel optimistic and there are problems, of course. Inflation is at 10%. We are experiencing energy-related problems. There is a war in Ukraine, that's undeniable. But governments and central banks are really trying to dampen the effect of all these negative events, and little by little, I think they will make it. Looking at Banca Mediolanum specifically, I'm sure that inflows will keep coming in steadily and abundantly. And thus, I believe we'll continue offering our shareholders good performance and also offer good advice to our customers. We'll continue being on the neediest customers' side. Unfortunately, this morning, another quake shook the Marche region. I didn't have much time to actually learn more about this earthquake. Apparently, it was a rather mild earthquake, no major problems. But should our customers experience major problems, we will step in and help them out as we've always done in the past. So it's good to report good earnings. It's good to report high and good results, but we want to be on the side of the less fortunate as well. Thank you, Massimo. We wish you all a good evening, and we'll get together again on February 8 for the year-end results. But hopefully, we'll have a chance to talk again before February. So once again, thank you all for tuning in. This concludes today's conference. Thank you for joining us. You may disconnect. [Statements in English on this transcript were spoken by an interpreter present on the live call.]