FinecoBank Banca Fineco S.p.A. (FBK) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the FinecoBank Full Year 2022 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Alessandro Foti, CEO of Fineco. Please go ahead, sir.

Good afternoon, everyone, and thank you for joining our 2022 results conference call. As you know our new dimensional growth is further underpinned by the new structure of the interest rates. Thanks to this, adjusted net profit in 2022 reached a new record level at EUR 429 million, up by 23% year-on-year. Adjusted revenues at EUR 948 million increasing by 18% year-on-year and mainly supported by investing, thanks to the volume effect in the higher control of the value chain by Fineco Asset Management and by net financial income, which is sustained by our clients very sticky and valuable transactional liquidity and not driven by lending. Operating costs were under control at EUR 281 million, increasing by 4.6% year-on-year by excluding costs related to the growth of the business and confirming operating leverage as a key strength of the bank. Adjusted cost income ratio was equal to 29.6%. On cost, let me please remind you that the strategic decision to manage 100% internally our IT is protecting us from the inflation on IT cost. Our capital position confirmed to be strong and safe with a common equity Tier 1 ratio at 20.8%. Let me please underline that we are very pleased to propose to the next Annual General Meeting, a dividend per share of EUR 49 sales. Our commercial activity confirms to be extremely solid also in January with net sales at around EUR 750 million and a strong mix with around EUR 700 million in assets under management and around EUR 320 million in assets under custody. Let me underline that Fineco Asset Management has recorded its best month ever in terms of retail net sales with around EUR 700 million, thanks to the launch of the new capital preservation product offer. Estimated brokerage revenues in January at around EUR 16 million, more than 35% higher compared to the average revenues in the period 2017-2019. This result was achieved despite market volumes extremely low in the month and close to the historical lows, thus confirming once again that the floor of the business is now definitely higher. Looking at 2023 and going forward, we expect to continue to deliver strong growth, thanks to our very diversified business model. On the right-hand side of the slide, you can find a summary of our 2023 guidance more in detail. On net financial income, we have improved our 2023 guidance, and we now expect a growth by around 80% respected the better-than-expected 2022 results. On investing revenues, we expect for 2023 an increase high single digit compared to 2022 with a higher after-tax margin. We confirm EUR 5 billion assets under management net sales, both in 2023, 2024, with EUR 4.5 billion of retail net sales for Fineco Asset Management. We also confirm management fee margins after tax at around 55 basis points in 2024 with pretax margins at around 73 basis points. From brokerage, we confirm for 2023 expected revenues strong with a floor higher versus pre-COVID period. On operating costs, we expect a 6% growth year-on-year in 2023, not including around EUR 2 million of additional cost for Fineco Asset Management, strategic discontinuity, around EUR 3 million for U.K. operational costs and other costs for the expansion in Germany and eventually additional marketing expenses. We expect our cost of risk in a range between 5 and 9 basis points. And finally, we expect a growing CET1 and leverage ratio. Let's now move on to Slide 5. As announced, we reached a new record high adjusted net profit in 2022 at EUR 429 million, plus 23% year-on-year on a like-for-like basis in a very challenging macro scenario. Revenues at EUR 948 million, up by 18% year-on-year as we have been able to catch the strong acceleration of the structural trends in place, mainly thanks to the robustness of our net financial income and to the contribution of the investing business. Operating cost at EUR 281 million, well under control and increasing by 4.6% year-on-year, excluding cost strictly related to the growth of the business. Let's now move to Slide 6, and start to analyze more in detail the dynamics of our results. Net financial income in 2022 at EUR 392 million, increasing by 40% year-on-year with net interest income at EUR 343 million and profit from treasury management at EUR 49 million. Let me highlight that net interest income is progressively increasing, thanks to the strong gearing to interest rates we have driven by our clients valuable and sticky transactional liquidity. We are continuing to accelerate the growth of our nonfinancial income, which in 2022, reached EUR 555 million, up by 6% year-on-year, mainly thanks to the positive contribution of investing and banking. Now jumping to Slide 18. We will deep dive on the performance of the brokerage business. Overall, brokerage registered an excellent 2022 at EUR 190 million despite the persistent negative market context in terms of volumes and the market, continuing a structurally higher floor compared to pre-pandemic levels regardless of market conditions. As you can see in the chart on top of the slide, in the fourth quarter of the year, brokerage revenues reached EUR 41 million, resulting in a monthly average 22% higher compared to the monthly average revenues in the period 2017-2019. Let me remind you that the growth of the brokerage business is driven by the contribution of 3 structural components. First, the continuous process of deep reshape of our brokerage business. Second, the widening of our client base using the platform with active investors growing significantly in absolute terms and standing around 35% above the average level of 2018, 2019. And this trend has been confirmed also in the most recent quarters despite the low volumes on the market, as our target market is focused on wealthy and financially aware clients able to trade in every environment. Third, we're continuously increasing our retail market share. Let's now move on Slide 7 for a focus on investing. Fineco is positioned in the sweet spot to capture the structural trends in place in Italy. And also thanks to our initiatives, we have experienced a strong acceleration towards assets under management. On top of this, Fineco Asset Management is delivering on its discontinuity and taking more control of the value chain. As a result, investing revenues were equal to EUR 308 million in 2022, increasing by 12% year-on-year with management fees increasing by 13.5% year-on-year. Let me highlight that the strong contribution by Fineco Asset Management has been able to sustain margins and revenues. Management fees margins after tax reached 53.1 basis points in the quarter, in line with the previous one, despite the stronger negative market performance at the end of the third quarter, which has resulted in lower average assets under management in the last 3 months of 2022. Let's now move to Slide 8 for a focus on our cost. This slide confirms once again efficiency to be part of our DNA and core in our bank, representing a clear and unique competitive advantage. Operating costs in 2022 at EUR 281 million, growing by 4.6% year-on-year, excluding costs related to the growth of the business. Mainly additional EUR 5.7 million cost for Fineco Asset Management that are current with the acceleration to further expand its business and have in higher control of the value chain, additional EUR 4.3 million in marketing costs. Staff expenses at EUR 117 million in the period, increasing by 5.1% on a yearly basis, net of the cost related to the expansion of the business of Fineco Asset Management. Finally, non-HR cost at EUR 164 million, growing by 4.2% year-on-year, net of the cost related to the growth of the business. Let's now move to Slide 10 for a focus on our capital ratios. Fineco is confirming once again a rock-solid capital position on the wave of a safe balance sheet. Common equity Tier 1 ratio at 20.82%, leverage ratio at 4.03%, risk-weighted assets at EUR 4.74 billion and total capital ratio at 31.37% as of December 2022. Let's now move on Slide 16. Let's now focus on our 2023 guidance and outlook going forward. On banking revenues, we expect the net financial income in 2023 to grow by around 80% compared to the better-than-expected results in 2022. Let me remind you the assumptions behind the guidance. First of all, the guidance is updated with a forward rate call as of February 3, 2023. We confirm that we will not pay any interest on current accounts, EUR 1 billion net inflows in deposits. In terms of our investment policy, we will continue the diversification of our bond portfolio by buying European govies, and we have stopped reinvestments in Italian and Spanish govies. Finally, let me remind you that the net financial income is expected to be represented finally by net interest income as we don't expect any contribution in terms of profits from treasury management in the present interest rate environment. Going forward, we expect net interest income to keep on benefiting from the new interest rate environment. Overall, banking fees are expected to be stable compared to 2022. On investing, taking into consideration the negative market effect up to the end of January, we expect that 2023 revenues to increase by high single digit year-on-year with higher management fee margins after tax. Overall, bank's asset under management net sales are expected at around EUR 5 billion, while for Fineco Asset Management we expect the retail net sales around EUR 4.5 billion. On this, let me add that inflows in January had been very solid and promising, and we will update the guidance in case of the consolidation of the current trend. Our financial planner network is expected to increase by around 100, 120 financial advisers. In 2024, we expect around EUR 5 billion net sales per year in the overall bank's assets under management. For our Irish company, we expect to retail net sales of around EUR 4.5 billion per year. Finally, despite the challenging context, we confirm the increase of our management fee margins after tax up to around 55 basis points by 2024. Thanks to Fineco Asset Management operational efficiency, that is more than offsetting the negative market performance. Pretax margins are confirmed at around 73 basis points by 2024. Brokerage revenues are expected to remain strong with a floor in relative terms with respect to the market context that is definitely higher than in the pre-COVID period. Operating costs in 2023 are expected to grow at around 6% on year, not including around EUR 2 million of additional costs related to Fineco Asset Management strategic discontinuity around EUR 3 million for U.K. operational costs. Other costs for the expansion in Germany is eventually additional marketing expenses. Cost income, we confirm our guidance on a continuously declining cost income in the long run, thanks to the scalability of our platform and to the strong operating gearing we have. Systemic charges for 2023 are expected in the range of EUR 50/55 million. On capital ratio, we expect the growth in 2023 for both CET1 ratio and leverage ratio currently with the combination of both a strong acceleration in the growth of the bank and the distribution of generous dividends. On dividend per share going forward, we expect it constantly increasing, also thanks to the progressive delivery on our strategic discontinuities. Cost of risk was equal to 4 basis points, thanks to the quality of our lending portfolio that is offered exclusively to our loyal customer base. In 2023, we expect it in a range between 5 and 9 basis points. Finally, we expect a robust and high-quality net sales with a mix mainly skewed towards asset under management and with a lower component of deposits, thanks to holding new initiatives we are undertaking. Let's now move to Slide 17. As you know, Fineco Asset Management is progressively taking more control of the investing value chain, resulting in a higher revenues and margins for the group. The contribution of Fineco Asset management to the group assets under management net sales is further improving regardless of the macro scenario, moving from 53% in 2021 to 77% in 2022. At the end of 2022, the contribution of Fineco Asset Management assets under management, out of the total stock of assets under management of the bank moved from 27.3% in 2021 to 30.3% and in January is above 31%. Let me please underline that our Irish company has recently launched a new generation of product, perfectly in line with clients' needs in the current environment, as shown by the strength of the inflows in the last few months with January recording the best month ever in terms of retail net sales. On top of this, Fineco Asset Management continued to deliver the internalization of value chain by collecting net sales of funds underlying of wrappers. As a reminder, this process is linked to the substitution of Fineco Asset Management funds within the building block used for funds of funds or insurance wrappers, thus leading to an additional margin contribution for the bank. I will now leave the floor to Paolo Di Grazia, our Deputy General Manager for an update on our international business on Slide 21.

Good morning. Let me start with the usual update on our U.K. business. We are finalizing our talks with the local authorities on the post Brexit setup, and we have submitted the request to open a light subsidiary in the U.K. This will imply a slight increase in our U.K. cost base in the region of around EUR 3 million more. As for the results in 2022, let me underline that we are very happy for the growth of the business we experienced despite we stopped our marketing activity due to the talks pending with the local regulator. Our client base kept on increasing, thanks to the word of mouth and our revenue generation has doubled year-on-year to EUR 2.7 million. The next country we are assessing to enter is Germany in 2023, leveraging on our new platform for investments. Our intention are to develop the offer in 2 steps: the first brokerage and multicurrency; and the second, investing with no financial network, financial adviser. The offer will tailor German customers' behaviors, leveraging our stocks, ETFs, certificates and CFDs on a multicurrency platform. While the brand positioning will look to acquire sticky, high-value and financially aware clients looking for fairly priced quality service in -- as in our DNA. Finally, in the next few years, we will assess to approach different countries across Europe depending on the opportunity that may arise. Thank you for your attention, and I will hand it back to Alessandro.

Thank you for your time. We can now open the call to questions.

[Operator Instructions] The first question is from Azzurra Guelfi with Citi.

I have 2 questions. One is on the net interest income guidance and component and the other one is on the flows. When you talked about the detail of the NII guidance, you talk about no deposit remuneration. Can you give us some evidence on how this is going with customers, if there is any resistance on this or if there is any level at which the interest rate environment could create some questions about that? You also talked about EUR 1 billion of inflows of deposit, if I'm correct, for the entire 2023. And this linked to my second question on flows. The flows on FAM are confirmed as EUR 4.5 billion. And in the recent months, we have seen very strong flows in the product that have been launched. What degrees of conservatism is in this number? And when you think about deposit flows, do you think that there is a risk of outflows from deposit into higher-yielding product like, I don't know, BTPs or others?

So first of all, yes, we are confirming our guidance on -- that we don't plan to remunerate deposits, but this is perfectly in line with our history. Just as a reminder, we stopped on remunerating current accounts 10 years ago in 2012. So for us, it's not a brand-new story. So no, there is no resistance by clients because the bank is offering plenty of opportunity for the clients that they are interested in chasing rates that they can buy our brand-new solutions in the asset under management business that is mostly in direction of satisfying the fixed income appetite by clients. They can invest in term deposits offered by other banks. We launched last year the platform that is growing and they can buy also directly bonds on the platform. So yes, no -- there is no questions by clients. For our clients, it's pretty clear that one thing is the transactional liquidity that is on the current account with 0 remuneration. And another thing is the remuneration for that for the excess liquidity. So -- and yes, the EUR 1 billion deposit inflows is mostly driven by the expected continuous growth of our new base of new clients that are expected to keep on driving in our direction fresh new transactional liquidity. EUR 4.5 billion from net fees, the question is if this is conservative. I take the opportunity to spend a few years on the guidance on the asset under management. It's clear that the numbers that we -- that they are emerging or emerging over the last few months, particularly in January are really strong, very impressive and mostly driven by the, one, is our flexibility and rapidity in launching brand-new solutions, able to capture the appetite of clients. Second, clients in any case are even more aware that inflation is a problem, and so they want to invest. And so yes, we didn't change the guidance just because we are at the beginning of the year. So we don't think that to change the guidance after the first month of the year is not -- doesn't make any sense. But it's clear that we are extremely positive, constructive. And as soon as we have this trend consolidating, we think that there is room for improving the guidance. And any risk of outflows from deposits into BTPs as we explained, the definition the govies are back again. But more generally speaking, fixed income is back again as an appealing alternative for clients. But this overall is not a bad news because now we have in front of us a world that in which we have all the full range of the asset class that they are investable. So on one hand, you have to put in account of some -- a little bit more competition by the govies. But at the same time, the broadness of the -- of your offer in terms of asset under management is much bigger and much more balanced. So overall, it's a good thing. So...

The next question is from Filippo Prini with Kepler.

I got 2 questions. The first one, I've seen that your -- that your share of floating rate bond portfolio has increased a little bit in the last quarter compared to the previous quarter. Is it fair saying that your guidance of plus 80% growth in NII in 2023 still takes account an increase of the part that floating rate? And the second one is on your AT1 bond. If I remember correctly, your 1 of 2 AT1 bond, the one that is full time [ diverted ] by UniCredit is becoming callable in June. Could you already share with us your plan to roll it over with a new AT1 bond?

Now just a second because we are checking with Lorena, our CFO. So the increase of the floating rate bond portfolio. Lorena, you are…

No, I am not…

Honestly speaking, we don't see that kind of increase. But the increase of the guidance is not driven by this. So just a second. So in any case, the increase of the guidance is just related to the 2 components. One, clearly, it's further improved that there has been on the forward rate curve. And second, the consistency of the fact that our EBITDA on deposit is practically 0. So the increase of the guidance is driven by these 2 components. AT1 bonds by UniCredit, on this, if we assume that the conditions remaining as we are now, clearly, there is a high probability that is not going to be a record because it doesn't make any sense from an economic point of view. And it would be very difficult to justify also in front of the regulators.

Sorry, I think the first…

Sorry, there is Lorena that has some additional comments on the floating rate notes.

Yes. So regarding the floating rate notes with respect to the last quarter, there was a slight increase from 35% to 38% swapped. So as you know, when we buy generally fixed rate bond and then we swap them into floating rate. So this is why there is...

But in any case is...

It's a normal activity.

Yes. That is not -- it is not this behind the increase of the guidance on the net interest income.

No, no, no, absolutely not. It's only the normal activity of investment that we are doing, investing the additional liquidity we have.

The next question is from Domenico Santoro with HSBC.

I have 2 questions from my side. First of all, I appreciate that you defend the idea of deposit beta for this year. But your guidance also show a bit of confidence on the NII for the next year instead. Now given that the yield curve implies rates going down and there is a risk, of course, for the NII for the next year. I just wonder if you are contemplating some actions already in order to counter affect the impact from rates in 2024 going forward? Then on the change in the share of viable floating rates, I just wonder whether also your NII sensitivity has changed a little bit. And if yes, if you could quantify? Then I have a question on investing because your guidance, if I'm not mistaken, so implies even accounting for the market effect in January and the strong sales of EUR 5 billion, implies, if I'm not wrong, margins to improve significantly during the course of the year, maybe reaching already, if not above the 73 bps that you are targeting instead of 2024. So my understanding from the call is that you might have been a little bit also conservative in given this high single digit for investing fees. So I just wonder whether this is correct. So the 73 bps target for 2024 now is conservative and if it could do better going forward? Then if you could give us also the level of tax rate that you expect for this year, which is consistent, of course, with this -- the level of NII and fees that you give in your 2023 guidance.

Yes. So clearly, we are not giving guidance on the 2024. But in any case, the -- based on the -- yes, taking account the forward rate curve and so on. Also for 2024, net interest income is expected to keep on growing, clearly not at the same speed of the 2023, but it still keeping on going. And this, again, the main -- the main reason is that still probably is not completely fully captured by the market is that our -- is our business model that is driving to a 0 beta deposits and so on. So this is the real point of strength. And again, I'm going back to the strategy we put in place many years ago because we stopped on remunerating current accounts 10 years ago. And so we -- the clients are coming to us because they are interested in the services we are providing. And if they want to change rates, they are using completely different kind of solutions. The net interest sensitivity, honestly speaking, so the traditional interest sensitivity that is measuring the expected changes in net interest income with a parallel shift to the curve, honestly speaking, doesn't make any sense because this is the reason why we prefer to give to the market in order to make their life easy, easier for the market to give the right -- the right guidance because honestly speaking, in my personal career, never I saw a parallel shift of the curve. So this is -- absolutely it doesn't make any sense. But in any case, our gearing rate has not changed, particularly is there and so on. Regarding investing, yes, there is for sure the reason -- there has been some kind of cautiousness in what we are giving. But this is current with the fact that we are just at the beginning of the year. We know that we are moving in an extremely volatile environment. But it's clear that everything is extremely promising, both in terms of net sales of assets under management. Fineco Asset Management is doing an absolutely terrific job. So we expect that is -- it's my opinion, I would not be surprised to see them doing even better than we are expecting. So yes, there is a reasonable and decent level of cautiousness that is current with the fact that we are just at the beginning of this year. Tax rate, we expect an increase of the tax rate for 2023, but the very simple reason that the weight of the revenues generated in Italy is going to jump a lot, considering the big rise of financial income. So we expect tax rate growing, increasing by...

Range between 1.5% to...

Yes. Between 1.5% and 2%, and again, driven by the fact that now that the mix is in terms of revenues is more skewed in direction of revenues generated in Italy.

Sorry, just a follow-up question. So I'm making very simple, the question. Is your guidance on investing implying a certain increase on margins from here to handle 2023, correct?

Can you repeat?

So which is exactly your point on the...