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

Good day, and thank you for standing by. Welcome to the Banca Mediolanum 9 Months 2023 Results Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Alessandra Lanzone, Head of Investor Relations. Please go ahead, madam.

Good afternoon, everyone, and it's great to be with you all again. Before we get started, please remember to ask your question in the language of the language line you're calling in on, either way, the answers will be in Italian with an English translation. And so without further ado, I'll hand it over to our CEO, Massimo Doris, who will lead us through the presentation today, alongside our CFO, Angelo Lietti. Massimo, the floor is yours. Thank you.

Thank you, Alessandra, and hello, everyone. I appreciate you joining us today. It makes me happy to share a set of results that I think are outstanding, given the context we are all in. A scenario made up of headwinds such as the competition from BTPs as well as unhelpful markets and also of tailwinds, namely rising interest rates. I truly believe we navigated both extremely well. Before we launch into the details of the 9 months, I'd like to convey a key message right from the start. Adopting a higher broader perspective enable us to see just how our business model positions our company for superior growth in the years ahead. The BMED results of this year are not a one-off phenomenon but could be looked at as a launching pad for where we are headed. In fact, the spike in NII is not just a happy accident. Happy for sure, but an accident, not for us. It's the fallout of our diversification strategy we've been working on for the past decade, as well as of our decision to opt for variable rate products in terms of both mortgages and treasury activities. And it's the positive catalyst for the acceleration in our business growth, and not just for next year but for the years to come. Allow me to be more specific. First of all, our customer base is constantly expanding due to the rapid pace of acquisition. And since the majority of our customers are primary customers, their deposits are stickier and their share of wallet is increasing. Also thanks to the well-known relationship management capabilities of our Family Bankers. Furthermore, primary customers also constitute the base of our lending business. And since their numbers are growing, our credit book is projected to grow as well. Additionally, we are locking in the current high rates in our banking book by prioritizing fixed income over floating rates and by replacing the bonds that expire with some that have longer maturities. Consequently, the evolution of NII will provide a more decisive contribution to the top line that it had before, resulting in an earnings generation that will structurally remain very attractive. On top of this, also consider that when interest rates start to decline, asset management products will go back to being the #1 option -- investment option. We are demonstrating right now in this high-rate environment to be able to generate positive and high-quality managed asset inflows. Just imagine what we can accomplish when rates start to normalize. And so in addition to an elevated NII, we'll also see a greater and a durable increase in our commission income. As such, the upside earnings potential embedded in our top line will indeed be very significant. In any case, at the 9-month point this year, we already delivered a strong operating performance with the results that are clearly well underway. As you can see Slide #4, we exceeded last year's restated earnings by 52% as net income reached EUR 572.2 million. Our positive gearing to the rising rate environment is paying off. In fact, our net interest income more than doubled to over EUR 541 million. Thanks to those powerful tailwinds on our EUR 24.6 billion of assets that are sensitive to interest rates in the credit book and treasury portfolio. As we have already discussed, our NII hasn't reached the peak yet. In fact, on top of the quarterly repricing of the mortgage book, Q4 would also include the benefit from the October repricing of our floaters. And keep in mind that all of the growth obtained over the course of 2023 will be consolidated in 2024. Thus, we stick to our NII guidance of EUR 750 million for 2023. And for 2024, we foresee an increase of some 10%. There is no question that NII is currently propelling the P&L. However, our net commission income is a constant strength even in this challenging context, increasing 4% to nearly EUR 770 million. And this is despite the fact that Q3 was weak for equity markets, with global equities down 3.5% and also tough for flows due to the uncertainties presented by the macroeconomic situation, coupled with ongoing restrictive monetary policy and the competition presented by Govies. Steady managed asset inflows and slightly higher average AUM supporting our core revenue generators, namely our recurring fees. In fact, management and investment management fees together totaled EUR 986 million, surpassing last year's figure by well over 7% and with a higher quality asset mix, resulting in higher margins. In fact, on a pre-IFRS 17 like-for-like basis, the recurring fees on average assets would be 213 basis points. Again, this was attributable to the accelerated asset shift from money market to equity due to the drop in the market last year. Don't forget that our advisory model drives our customers to invest into equity products on a regular basis through our automatic investment services. And while we are on the subject, it's essential to point out that the equity component of our customers' managed assets has now reached an unparalleled 62% as you can see in Slide #15. Going back to the P&L, I would like to draw attention to another record-breaking result. Our operating margin reached EUR 731.3 million, increasing a substantial 51%, a sign that the ongoing difficult operating environment is not weighing on our core profitability growth path. As a matter of fact, we expect a similar trajectory in the operating margin for the full year. And as operating leverage increases, the cost/income ratio continues to drive down, ending up at 39.8% from a restated 46.5% of the same period last year. Now I'd like to comment on the business results, whose highlights for the 9 months, you've already seen and are illustrated in Slide #5. As you all know, our leadership in the banking industry is unwavering. In terms of our capacity to generate healthy flows, whatever the conditions with consistent high-quality commercial performance that continues to single out Banca Mediolanum. We registered positive total net inflows of EUR 5.6 billion in the first 9 months, with the managed asset component worth EUR 2.84 billion. Although indicating a more broader strength than originally expected, flows into managed assets are remarkably resilient. This resiliency is mainly a consequence of our strategy, which has always been based on instalment plans, further enriched by automatic investment services such as Double Chance and Intelligent Investment Strategy. Therefore, despite the challenging market environment, rendered even more challenging by the retail issues of BTP Valore in June and October, we believe we are ideally positioned to continue to outperform the industry in terms of managed assets inflows, also thanks to the gradual conversion of some of the 4% time deposit offered at the beginning of the year, which by now have reached maturity. Furthermore, the high-diversification investment strategy we apply and the strong franchise we have with our customers, explain why our net flows are less impacted than our peers by the competition coming from Govies. As a matter of fact, as illustrated in Slide #38, our Family Bankers take the current high-rate environment as an opportunity to open the discussion with our customers to explain the value of fixed-income investments for the medium term and propose alternative mutual funds options with attractive yields. In fact, we have provided them with dedicated tools to show the intrinsic value of mutual funds compared to BTP. As a general rule, we firmly believe Govies are an incomplete solution unless part of a sound and diversified asset allocation with equity, of course, as the best option for the long term. In the final analysis, solid net inflows and sticky deposits helped us to maintain our total assets at a more than respectable level of EUR 112.3 billion, up 8% since the start of the year despite no help from the markets in Q3. On the other side, our credit book progressed 4% year-to-date, indeed passing the EUR 17 billion mark even though mortgages granted were down 16% year-on-year in the wake of the slowdown in the real estate market. Moreover, our wealthier customer base demonstrated a little appetite for personal loans in such a rate environment compared to traditional banks. Our loan portfolio remains of top-notch quality with a net NPE ratio of 0.79% and a 12-month rolling cost of risk of 18 basis points, in line with the expectation we shared with you of some 20 bps. And lastly, general insurance policies came in at nearly EUR 132 million, in line with last year, supporting the safeguarding of our customers assets. Finally, on Slide #6, you can see that our growth drivers are heading in a good direction. We continue to be extremely successful in expanding our customer base, building on higher-than-ever acquisition retention rates. Bank customers totaled 1,773,400, up 5% in the first 9 months. In fact, the acquisition of new bank customers made significant strides with 139,200 new customers at the end of September, up 11% year-on-year, exclusively due to solid organic growth, propelled by our marketing activities aimed at acquiring qualified customers. In fact, as most of you are aware of and in line with our long-term strategic approach, we opted to pass on part of the benefit of the high-interest rates to new customers who commit to direct deposit their salary or to existing customers who bring in new money. This has proven to be a winning strategy to increase the acquisition rate as well as share of wallet. On the other side, the development of the network continues on as we recruit and train professionals coming from other sectors, while banker consultants gradually join the franchise. The number of Family Bankers at the group level has reached a total of 6,222 at the end of September, an increase in the head count of 3% since the start of the year. All in all, we feel comfortable with the expectation of reaching a total of somewhere around 6,300 Family Bankers by the end of 2023. The project known as NEXT is making an important contribution to the network in Italy. As shown in Slide #39, by the end of October, 199 banker consultants were already working as licensed FAs alongside their senior private banker or with Advisor. Adding on to this, there are 134 banker consultants in training, working on their executive master. So our objective to reach 200 banker consultants by the end of the year has obviously been met. The success of the project has been so evident and the benefits are so tangible that out of the 317 senior bankers participating in the project so far, 11 of them have already 2 banking consultants. One of them has 3, and there is even one who has 4. To give you an idea of the benefits generated, the 100 or so senior bankers who have been working with a banking consultant for more than 9 months have gone from outperforming their peer group by 8% in terms of total net inflows to 51%, and the acquisition of new customers has greatly accelerated more than doubling versus their peer group. Finally, I'd like to spend a minute on our automatic investment services, another key driver supporting our growth. At the end of September, there was a healthy reservoir of over EUR 3.2 billion, parked in the money market funds of intelligent investment strategy service and in the deposit accounts of Double Chance. All assets that are ready to be transferred automatically to equity funds on a monthly basis over the next few years, opening the door to future flows and margins. As far as our instalment plans are concerned, please take into account that there are almost EUR 1.6 billion that automatically go into mutual funds on an annualized basis. Now I'd like to switch the topic and move to the balance sheet ratios in Slide #7. Our well-capitalized business is a consequence of our dedication to a prudent approach and best-in-class organic capital generation. Our CET1 ratio moved up to 22.1%, more than enough to meet the requirements. The same is true for our leverage ratio at 6.3%. As a consequence of our solid capital position and the sustainability of our business health, the Board of Directors this morning agreed to distribute an interim dividend of EUR 0.28 to be paid November 22, 17% higher compared to last year, corresponding to a total of EUR 207 million. The Board of Directors also decided using the option provided by the relevant law to propose to the shareholder meeting, the establishment in the future of a non-distributable reserve of EUR 67.4 million, equal to 2.5x the so-called windfall tax on banks of EUR 26.9 million. Through this reserve, which fully qualifies for the calculation of common equity Tier 1 and with no impact on the income statement. The bank intends to continue to support the needs of its customers in full compliance with our commitments towards all stakeholders. All right. Now I'd like to quickly review our business in Spain, going over to Slide #32. Spain results of the first 9 months fall in line with those of the group business. The operating margin jumped an impressive 121% while net income more than doubled versus the same period last year, registering EUR 49.3 million. Total assets increased 12% since the start of the year to EUR 9.9 billion, of which EUR 6.8 million are in managed assets, up 12% as well. Net inflows ran to a total of EUR 630 million, with net inflows into managed assets, adding up to a positive EUR 403 million. In addition to that, we made substantial headway in other areas since the beginning of the year. The credit book progressed materially, up 14% to over EUR 1.33 billion, particularly thanks to higher volumes of mortgages granted in contrast to the market. Family Bankers grew a further 3% to EUR 1,663 million and the number of customers surpassed 226,400, an increase of 8%. Changing gears and closing up with a look at flows, October fared well with a respectable performance relatively speaking. Total net inflows registered EUR 5.8 billion year-to-date October with managed assets reaching EUR 3 billion. The month of October with EUR 139 million in managed assets reflects the general framework we've been managing over the course of the year. Maybe this number seems weak, and it's surely lower than what we are used to. But I say it's exceptional, particularly with respect to our peers. Keep in mind that we anticipate a bit of an acceleration in the last 2 months of the year. So in terms of guidance for 2023, we now expect inflows into managed assets to reach EUR 3.5 billion. And we do have an even more positive outlook for 2024. We certainly maintain a firm stance that the core revenue momentum remains strong. Before we leave you today, I want to repeat again just how outstanding our 9-month results are and emphasize that everything we've seen up until now highlights the good shape of our business as we head into full year results. For 2024, I want to reiterate that we are better equipped in both absolute and relative terms compared to our competitors to cope with a high for longer interest rate environment. Thanks for your attention. We are now ready to take questions.

The first question comes from the line of Azzurra Guelfi, Citi.

Good afternoon. Guidance for next year's flows. You talk about EUR 3.5 billion. Could you please provide some color as to how much is coming from the switching of deposits you gather during Q1, Q2 and so on? And then the second question is about costs. You are -- costs are really well under control. So I'd like to know what are the reasons why your cost structure is always well under control.

Well, depending on how the market fares next year, and I am referring to interest rates and equity markets, et cetera. But I think that if this year, we'll report EUR 3.5 billion in terms of net inflows into managed assets, well, I expect a little more for next year. Why? Because I think that our Family Bankers and network in the meantime, has got used to this high level of interest rates. So the theoretical competition by BTPs, it's something they must have got used to in the meantime. Why do I talking about a theoretical competition? Because the 4% yield is quite appealing. Currently, our customer base has invested EUR 2.5 billion into government bonds and an additional EUR 200 million were invested by Spanish customers into Spanish government bonds. But based on our information, when a BTP pays 4%, it means and it's not just BTPs yielding 4%. It's finally the entire fixed-income segment that is really yielding significantly. And if we consider the kind of fixed-income funds that we are offering our customers. I have to say that some of the funds that we have sold to our customers have already locked in interest even higher than BTPs. So I expect that more investment will stream into fixed-income funds because maybe customers need to cash in steadily their coupons or because they are conservative to customers, and so they tend to favor fixed income over equities. But once again, let me get back to talking about BTPs. So I think that if you consider the information we are providing our Family Bankers with and based on reality, I really think that increased inflows will be reported by this type of funds. Also because, like I said, people and Family Bankers will get used to higher interest rates. So we expect at least EUR 3.5 billion flowing into managed assets next year. As to our cost to income ratio is concerned, I expect it will remain more or less at this level. Costs will inevitably go up next year as well because we continue growing and acquiring more and more new customers, more and more new Family Bankers. But as I reminded you in my speech, our assets under management will increase alongside and commissions and fees will go up as well as NII will go up as well. That is why I expect that the cost/income ratio will hover over this level next year as well.

Next question comes from the line of Giovanni Razzoli with Deutsche Bank.

Good afternoon to all of you. The first question is about deposit accounts. And you said that somehow they have reached the maturity, no longer apply the promotion you started at the beginning of the year, but how many are they and how many will flow into managed assets? You have about EUR 1.6 billion worth of other assets in your Intelligent Investment Strategy. And so there's quite a hefty pipeline there. And the second question I have is on capital, your leverage that is constantly improving. And of course, the profit will accelerate and will go up. Your leverage ratio went up 60 basis points, if I'm not mistaken, in Q3 2023 versus Q3 2022. And so I'm almost thinking that whether this level could pose problems -- well, it's probably as many would like to have, so to say. And so you can fine-tune your capital allocation as your business model entails very low risk as such. I almost know the answer, but I'm still asking the question. It's about your business model, this potential negative impact driven by the retail service regulation, and whereby the insurance policies will have to comply with the MiFID regulations. Sorry for asking so many questions, and thank you very much for taking them.

Well, with the time deposit, 4% time deposit, we gathered about EUR 1.9 billion. And historically, we expect a shift with of about 70% of as flows to managed assets within 18 months. I should say that I expect to get to 70% in a slightly longer time. And it's -- the reason of the BTPs, as I explained before, BTPs are very attractive. And therefore, a part of those maturities will be allocated to BTPs. And year-to-date, among the different maturities, but about 14%, well, flew into managed assets, 20% was outflows and 53% was between current banking accounts and deposit accounts paying 2% interest or BTPs. So it's still managed assets, assets under management, so to say. And for administration, sorry, I apologize, assets under administration, and out of 53%, 37% is liquidity. So with paying 0 rates, and I expect that money to be invested little by little by our clients, thanks to the work our Family Bankers will do. But it will take a couple of years according to me for this to somehow for this 1.9 billion, 70% of EUR 1.9 billion, about EUR 1.4 billion will flow into managed assets because of the impact BTPs are having now. But let me remind you that as far as assets under management are concerned or managed assets are concerned we're still #1 in the environment. And 22.1% is a very high level, indeed a CET ratio, meaning and the leverage ratio as well is excellent, as you can see. But capital levels that are so high made us somehow feel very confident through difficult market backdrops. And we don't want this 22% to grow. We don't want to grow it. We can afford somehow to see decline slightly going forward. And my idea, however, is to hover around 20%, roughly. Under this type of regulations, this is my idea, but there's room for this. And then the limitations of the Single Resolution Board, we have a limitation of 20.8% for capital and a leverage of 5.2% as a constraint. So this big room for maneuvering if you also take into account the other regulation is even narrower. And the leverage will stabilize through the growth, thanks to the growth we plan and envisage coming from our customer side. So it will stabilize and for capital with a constrained cap at 20.8%. We still have to be very careful in managing it. But that somehow has to do with MREL while CET1 could be slightly lower still. But that can be sold through fixed income or bond issuances as we did with the EUR 300 million issuance. But going below 20% could cost us because issuances, bond issuances are costly, are expensive. And as to MiFID, the MiFID issue you raised, honestly speaking, there was a comment outside the mic. And as far as insurance products are concerned that have to comply with MiFID, we didn't have any specific issuance problems caused by them.

We're waiting for the next question. Which comes from the line of Elena Perini, Intesa Sanpaolo.

Thank you, and good evening, good afternoon, everyone. I got a couple of questions. Number one, NII. I heard the Massimo referring to growth expected for next year as well. Maybe you have already covered it and I did not catch it. But I'd like to know what kind of order of magnitude you were referring to percentage-wise. And also in terms of dividends with an interim dividend at EUR 0.28. It means you are reading heading for a level for the full year of about EUR 0.56. So could you share some guidance as to next years, next few years? Are you planning on raising distributions considering your very robust capital position?

Well, Elena, as far as interest income is concerned, in 2024, we expect it to go up by 10% over 2023 NII. As to dividend per share, we plan to pay out at least EUR 0.56. Our objective is indeed that of paying a dividend higher than the year before. This year, net profit will take a jump forward. But the jump is not due to performance fees that may be there a year and may not be there the next. It is rather attributable to rising net interest income, but NII is not going to disappear or to decline vertically in 2024 or in 2025, while it's still rising in 2023. We expect NII to keep rising in 2024 and 2025. So at the very least, we expect it not to go down because it's a matter of the yield curve and the interest rate curve that we expect to materialize. And also, the treasury is buying longer-maturity, longer-dated instruments. So as to lock in a good interest for the years to come as well. And also on the other side, we expect growing volumes on the asset side. So we will have a robust NII and we'll have managed assets that will keep expanding. When interest rates peak, we believe that this acceleration will become even more crucial. So the level of profit we attained this year will be attainable in the future as well, and it will be possible, I believe, for this level to keep going up in the future as well. That is why we expect a jump in dividend per share compared to the usual EUR 0.02 to EUR 0.03 per share. That is why I think we will hit the EUR 0.56 mark.

This question comes from the line of Alberto Villa with Intermonte.

Good afternoon to all of you. Congratulations for your performance. I have a few questions on my side as well, and a few clarification on what you were saying on the NII and the 10% growth in 2024 versus 2023 and we hear other operators who talked about a peak this year. You're probably work in a different way. Could you elaborate on your cost of funding that you expect going forward? Did you include any other sales initiatives in your guidance? Did you factor them in or maybe on-time deposits or other forms of remuneration, customer or promotions, if you wish to see how deposits will fare going forward, will move going forward? Have you modeled your growth in that respect? And the question number two is on costs. Could you give us some guidance on 2024, the organic growth in costs that you expect for next year? And then acquisition costs as well that are somehow tied in with volumes and the correlation this year was slightly weaker for the reasons you have explained during the presentation. So we expect an improvement in 2024, also for inflows. Can we expect -- can we therefore expect an increase in acquisition costs?

Well, as far as NII is concerned, for 2024 that we expect to be 10% higher, we definitely expect or foresee a number of promotions, even stronger promotions than we had or that we have unfolded in 2023. And probably, this is the reason why 2023 for us is not a peak year whilst it is for other peers because in 2023, we spent money. We invested money. And our retail cost of funding was not unchanged in 2023 versus 2022, it went up sizably because we have the 4% promotion on already and then Double Chance, the [indiscernible] 5% on Double Chance, 2.5% on time deposits with no constraint requesting fresh money on new customers. So we've already spent and invested this year. And actually, well, new 10% will imply we will spend even more. We will spend more as we move forward into the next year. And if cost of funding goes up, revenues go up as well. And treasury on the one hand, is extending maturities of the instruments we buy at fixed rates. On the other hand, instead, if we look at the retail assets. Right now, the average rates we expect to have next year will be higher because we will start from a higher Euribor base versus the Euribor base we started in January this year. So despite that, we managed to cut spread several times to reduce the weight somehow the burden of these strong rate increases, the Euribor increases. And we started in 2023 on some revenues that we were supposed to -- that we could have cashed in. And we gave them up, and we used that to cut spreads. And despite that, next year, on average, -- well, we're cash in interest income. So it's going to be higher than what we expected to be higher than the 2023 one. So in addition to volume increase, we expect 2024 with a plus 10% in NII. On January 1, the ECB tax rates to 1%, that of course will change our outlook on the NII. But I think it's going to be quite difficult for that to happen. As far as costs are concerned, I talked about a cost income that should stay flat, and we are still working on next year's costs. So it's hard to say now it's going to be plus 9%, plus 10 or plus 11%. It's very hard to say, I cannot say that now. As to acquisition costs, as our payout model to the network has not changed, and therefore, the cost trend depends almost exclusively apart from a few extra contest, we may have at one time or another, it almost entirely depends on how the inflows will go, will perform. So I hope that next year, acquisition costs will really boom because that will mean that inflows into managed assets will have exploded 2 will have boomed as well.

Which comes from the line of Filippo Prini, Kepler.

Good afternoon. Two questions. Could you please share a few more details on how your investment policy will change in the next 2 years? I'm referring to the percentage of fixed rate after the total investment portfolios, duration currently at 1 year, at what level could it go? And also the mix of government bonds in your portfolio? Do you think that Italy's bonds may yield ground to other government issuances? And also, I'd like to know if you have some info you can share as to the number and amount of BTPs bought in October by your clients.

I'll take your second question first. BTP Valore EUR 223 million, but in October, our customers bought in total EUR 300 million worth of BTPs because they didn't buy BTP Valore only, but other BTPs as well. As far as the treasury policy is concerned, I have to say we are gradually replacing CCT's new purchases are, in fact, focusing on a fixed rate type of purchase, but not a 10-year bond rather shorter term, shorter maturity. So this is not going to change the mix of the treasury investment, which will more or less remain at the same level for a year. As far as government bonds issued by other countries upon -- as requested by the ECB, in new purchases, we are including also government bonds issued by other EU countries with the objective of reaching a level of 20% of non-Italian government bonds in our portfolio over the next year approximately. Currently, we have about EUR 15 billion worth of bonds next year 3.5 billion will mature in 2025, about 6 billion worth of bonds will expire, will mature. But considering the portfolio mix in considering the deadlines, the maturities, we don't think we are going to change the makeup or the mix significantly in 2024. Maybe in 2025, when a higher volume of bonds will when a higher amount of bond expires will replace more of them. But what we are doing now is replacing CCTs because back when we bought them, it was a huge opportunity, but currently, it's more advantageous to buy fixed rate bonds plus EU countries issued just fixed rate bonds. So if you want to increase the diversification of our portfolio, we are going to increase the fixed rate portion of our portfolio as well. And in terms of duration, please consider that CCTs have a shorter duration, while BTPs have a slightly longer duration, but we don't think we'll go above 3% to -- above 3 or 4-year duration. Government bonds currently are 85% issued by Italy and the remainder issued by other European countries. Thank you, Filippo. Any other questions coming from the Italian line?

Sure. We have other questions. The next question comes from the line of Marco Nicolai with Jefferies.

Good afternoon. I would like to ask you of you as far as margins are concerned, management fees, what are your expectations for the next quarter and the next years? And then cost of risk. This quarter, it was particularly good. Is there anything special you would like to highlight as a driver for that? Or is everything business as usual, so to say? And then can you give us a breakdown of assets under administration in October? Did you have any deposit outflows in the month of October? And then one last question on BTP Valore. Maybe you don't have an answer, but I'd like to ask the same. What's your policy when it comes the government policy as to BTP Valore? We've had tuitions in a short time frame, do you think the Ministry of Finance will go on at this pace? Or do you think things will be different?

So from management fees. Management fees went up. This year, they went up versus 2022, and that was driven by a specific reason. Last year, with the collapse of markets, the abrupt collapse of markets, our instrument, our Intelligent Investment Strategy, this tool we use, where you have a switch from the money market fund to planned fixed income funds and then equities. You see when there's a collapse in equity markets. And so the switches quicker in that case when the market goes down very rapidly, the switch are doubled or tripled, quadrupled or you name it. And last year, that happened quite often. So the switch was very strong, a couple of billion worth from money market funds that have a recurring fee commission that is about 25 basis points. The switch was equity funds that have a commission of 250 bps. So it was 10x higher, and that had a big impact on average commissions that went on fees, on management fees. That went up to 213 basis points without considering IFRS 17 and not including that. What do I see going forward? What do I expect it to decline again because the increase in the average management fee is due to our product mix? But in our forecast and over time, they should go back to declining. The fee should go back down a bit because in the previous years, we had declines of 1 or 2 basis points per year in the management fee, the average management fee due to, of course, the different type of products that we launch in the market. Sometimes these products are not so loaded, if you wish. And this trend according to me will be seen again. It will be seen again going forward, but I think it's difficult considering that our clients at Banca Mediolanum have always had a very strong equity component, and therefore, funds, which higher management fees than the fixed income funds. So I don't see the average recurring management fee. I can't see it go below 195 basis points. Of course, in the very long run, we'll see what happens. But in any way, I don't think, as far as I know, whenever you have an assay, I don't think a client pays less than 200 basis points as total fees between overall cost. Product cost and advisory cost for us, it's 0 because it's embedded in the product as we use the rebate system. So even if we were to go in a different direction with a paid advisory or consult advisory or consultancy fee, this won't change a lot. The management fee won't change sizably, won't change much. And cost of risk, we have seen we foreseen at the beginning of the year about 20 basis points. We are now at 18 and our forecast have been made for 2 main reasons. On the one hand, with rate hikes, there were going to be higher risks entailed and therefore, a slight increase in NPLs or NPEs. And on the other hand, there would have been a slowdown of new loans that still affects the calculation. So we hover around 18 basis points, and we should land around 20 at year-end as forecasted at the beginning of the year. And in the last 10 months, we did not have deposit outflows. So the net inflows in the first 10 months is equal to 0 with different performance in the different months. But if you consider the full 10 months, the value and the current banking accounts and deposit is unvaried, unchanged. Of course, the securities went up. BTB Valore, what will the government do? We have to ask the Ministry of Finance. So we don't know. And for sure, they have a clear target. They are trying to shift the government debt to Italian consumers or sales rather than foreign ones to stabilize that to stabilize public debt. And this is happening. This is what is actually many Italian savers are holding these BTP value, the BTP Valore. We don't know how many issuances they're going to make from now -- well, going forward. It's not possible to know that.

Gian Luca Ferrari, Mediobanca has the next question.

Hello, good afternoon, everyone. I have 2 questions. The first one is about CSM Vita. In the first quarter, there's been an impact in terms of cash flow, significant positive impact. Second question, you are a bank with almost EUR 80 billion worth of assets. So are you working on digital euros? What cost -- what price tag made this imply for the bank? What kind of implications in general, we are about 40 billion assets bank, not an 80 billion asset bank, but we'll work hard to get to 80. Anyway, euro digital euro will participate in this initiative?

In terms of costs, I really don't know, I have really no idea I wouldn't know how to answer your question, actually. And as far as the other question to Mr. Lietti, yes, I think that over the 3 quarters, the insurance arm of the business has had a rather steady performance. With the introduction of the new accounting principle, we expected no significant changes, and we also expected to have a rather steady navigation, so to speak, across the 3 quarters. But maybe I did not catch your observation. I know that the unwinding was pretty constant, but the new business, CSM, I think it really showed some changes, some variations. You talked about cash flow update, which was EUR 58 million, and EUR 129 million in the 3 quarters, respectively. On Page 81, you talk about an update on reserves for value and risk and yield curve and other. So I was wondering what kind of update led you to have such a positive impact on the third quarter number. Well, first of all, I'd like to really spotlight the CSM growth shown by the table. It's always been in positive territory. But as you know, CSM has always been affected by the trend displayed by the yield curve, which in turn affects the quarter's performance. If you wish we can have kind of a follow-up call one-on-one and dig deeper into these issues.

There are no further questions coming from the Italian conferences. So we switch over to the English conference. [Operator Instructions] We are now going to proceed with our first question. The questions come from the line of Isobel Hettrick from Autonomous.

Good afternoon, thank you for taking my question. So I have 2, please, and then a clarification question as well. So I'll start with the clarification question. So it's on your retail cost of funding. So you mentioned earlier that you expect it to go up in 2024 as you continue to launch promotional campaigns. So I was just wondering if you could give any color on the quantum. So if we look at where your cost of funding is now compared to at the end of 2022, it's gone up just over 60 basis points. So should we expect a similar-sized increase, smaller or larger? And then my first question is on the 4% deposit promotion you launched in the third quarter similar to the first quarter. So could you just provide some information about how many deposits you've been able to pull in through that -- and then again, how you expect to convert these into managed assets in the time frame to do so? My second question is on performance fees. So we saw a number of your Italian funds switch on with performance fees. So could you just provide some detail on hurdle rates and high watermarks for your funds as we head into the fourth quarter and how we should think about these versus market levels thinking about performance fees?

Well, this is the retail cost of funding for Q3, EUR 0.85. Next year, it's expected to be at about 1%. Performance fees, we are at about minus 13% -- 13% below the high watermark -- to make up performance fees. I mean, for certain funds, we might be closer or further away from that level of minus 13%, but that's the average level. And then I'm trying to remember they are helping me -- they are reminding me of the third question. Well, the retail cost of funding on average in 2023 was 0.7%. So we think that thanks to commercial promotions in 2024, we think that it will go up to 1%. But these forecasts are already embedded into the plus 10% NII, we expect for next year. Also, can you give me please the cost of the last promotion cost. The one we launched in September or October. Massimo is asking for the number to be retrieved. And if they cannot retrieve it quickly, we'll move on to the next question and get back to this one. Hold on just a sec for September and October. Currently, we have EUR 320 million for the new 4% promotion, which is still ongoing. As I said earlier, we expect it will take about a couple of years for this for 70% of this money to be converted into managed assets. It may start earlier. And anyway, it will be gradual. How much actually will be converted is a factor that will be influenced by the trend displayed by interest rates. The faster they decline, the faster the switch to managed assets.

The questions come from the line of Hubert Lam from Bank of America.

Hi, good afternoon. I guess got 2 quick ones. Firstly, on management fees in the quarter, they actually jumped quite a bit quarter-on-quarter by EUR 12 million or so. Just wondering what drove that. Was there any -- is it just due to fee margin being better? Or any one-offs in that number is pretty big increase for the quarter? That's the first question. Second question is on performance fees again. Again, it was $8 million in the quarter, but better than what we expected. Any particular funds driving that? Just it seems better than expected despite what you said about how far you guys are off the high watermark.

Management fees went up surely due to the conversion, as I said, from money market funds to equities -- equity funds, thanks to our Intelligent Investment Strategy. That was also due to an increase in average assets that we reported in the third quarter. So quarter-on-quarter, we reported an increase in average assets. Also performance fees, it is mainly Futuro Italia, an Italian equity fund that is really pumping those performance fees. It's like I said, Futuro Italia, an Italian equity fund. The vast majority of performance fees were generated by that fund.

We have no further questions at this time on both calls. I will now hand back to Alessandra Lanzone for closing remarks.

Let me just wrap it up by saying I am very sanguine, I'm very positive, not only as far as the end of the year is concerned. But next year to makes me feel optimistic because I believe the sales network will get increasingly used to this level -- this high level of interest rates. Equities performance will also help us convert or switch liquidity deposited in bank account into managed assets. Also, we are really making an effort with our Family Bankers for them to learn how to explain the value embedded into equity funds. We want to really spotlight the intrinsic value of these equity products. I think this is going to really slam on the accelerator of managed their assets. It will take a while to go back to the over $6 billion worth of managed assets. But like I said, I'm very, very positive. In addition, we have to consider that interest margin is going to be an extremely important element bolstering our results not only in 2024 results that we expect steadily in a steady increase, but also in the years to come. So I'm really very positive as far as the future is concerned. Despite what is going on in the macro environment in the Middle East and in Ukraine. So thank you, Massimo, and thank you all. Let's meet again in February next year for the full year results. Thank you, and have a nice evening, everyone. This is the end of the conference. Thank you for your -- thank you for taking part in the conference call. You may now disconnect. Thank you.