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Edited Transcript of BMED.MI earnings conference call or presentation 7-Nov-19 3:30pm GMT

Q3 2019 Banca Mediolanum SpA Earnings Call

Milano Nov 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Banca Mediolanum SpA earnings conference call or presentation Thursday, November 7, 2019 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alessandra Lanzone

Banca Mediolanum S.p.A. - Head of IR

* Ennio Doris

Banca Mediolanum S.p.A. - Chairman of the Board

* Massimo Antonio Doris

Banca Mediolanum S.p.A. - CEO & Director

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Conference Call Participants

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* Alberto Villa

Intermonte SIM S.p.A., Research Division - Head of Analysts Team

* Andrew John Crean

Autonomous Research LLP - Managing Partner, Insurance

* Federico Braga

UBS Investment Bank, Research Division - Equity Research Analyst

* Gian Luca Ferrari

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Equity Analyst

* Hubert Lam

BofA Merrill Lynch, Research Division - VP

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Banca Mediolanum 9 Months 2019 Results Conference Call. (Operator Instructions) I must advise you, this conference is being recorded today, Thursday, the 7th of November 2019.

And I would now like to hand the conference over to your speaker today, Alessandra Lanzone, Head of Investor Relations. Thank you, and please go ahead.

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Alessandra Lanzone, Banca Mediolanum S.p.A. - Head of IR [2]

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Good afternoon, ladies and gentlemen, and welcome to our conference call for the presentation of the first 9 months results. Our CFO -- sorry, our CEO, Massimo Doris will lead the presentation today; and our President, Ennio Doris; and our CFO, Angelo Lietti, will join the Q&A session.

So let's get started immediately. And now over to you, Massimo. Thank you.

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Massimo Antonio Doris, Banca Mediolanum S.p.A. - CEO & Director [3]

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Thank you, Alessandra. Good afternoon, everybody. The set of results that we are presenting today for the first 9 months of the year are incredibly solid once again and are built on the strategic actions we've undertaken to render our revenue streams more sustainable in an increasingly demanding environment. Specifically, the third quarter, as you've noticed, was notably strong at EUR 113.4 million and was remarkably straightforward. As a result, net income for the first 9 months came in at EUR 284.8 million, 5% above the same period last year. As a matter of fact, we managed to increase the operating margin by an impressive 49%, surpassing EUR 328 million or EUR 107 million over last year, even with more than EUR 39 million less in net income on other investments that we'll address in a moment.

The key growth driver of our operating margin, namely net commission income, was up 26% for the 9 months at EUR 612 million. In fact, apart from entry fees, all of the contributors were on the increase, with much of the credit going to the recurring components, specifically, the management and investment management fees. Management fees totaled over EUR 760 million, up 1% year-on-year, hitting their highest mark again this quarter with almost EUR 261 million. Here, the lower price effect influenced by the mix was entirely compensated by the volume effect. On the other hand, the investment management fees contributed EUR 113.5 million in the first 9 months. And remember, these have no impact on acquisition costs.

Summing up these 2 fees, as you can see Slide #7, commission income from recurring fees reached EUR 874 million for the period, corresponding to 210 basis points on average assets, a couple of points down just as we've expected. This is due to the inflow mix impacted by the success of intelligent investment strategy, since the initial invested amount is parked in a money market fund, and also by the increased sales of a lower margin unit-linked policy. It looks like we can now cut on some EUR 300 million of recurring fees per quarter with a very healthy margin.

Going back to total commission income. Banking service fees exceeded EUR 105 million and continued to benefit from the fees on certificates. At the same time, net interest income registered a total of EUR 176 million, increasing 29% year-on-year as a result of the ongoing expansion of our credit book, but also the front-loading of EUR 3 billion in govies we carried out in February and March.

As you can see, Slide #8, in Q3, net interest income continued totaling over EUR 64 million, but please note that since the EUR 3 billion in govies we previously had in our portfolio matured in October as well as November, we should see a lower contribution in Q4. We can confirm the guidance for 2019 NII that we had already adjusted upwards to some 20% over 2018. For 2020, we are looking at a slight increase over 2019.

Going back to Slide #5, I'd like to provide a bit more color to net income on other investments. I think a more detailed look with a few reminders would be helpful. About half of the negative EUR 40 million difference year-on-year was due to capital gains generated last year on the sales of some bonds prior to their maturities in a far better interest rate environment. Moreover, we took a write-down to the tune of EUR 15 million this year for a rental property we own in Rome that has recently been vacated. And lastly, we registered impairments on loans for some EUR 5 million higher year-on-year, largely due to the worsening of Italian GDP, which triggered the application of a higher risk coefficient for the industry. Additionally, in Q2, we took an impairment on a couple of significant loans. Anyway, please note that there was no impact on the NPL ratios. In fact, there was even a slight decrease.

Now moving down the P&L. G&A expenses totaled about EUR 396.5 million for the 9 months, up 1% versus the same period last year. At this point, we can adjust our previous guidance of a 4% increase to somewhere in the range of 2% to 3% for year-end. General overall efficiencies were largely responsible for this improvement despite our ongoing commitment to supporting growth. Provisions for risks and charges were simply impacted by the decrease in the discount rate applied to the provisions for the networks retirement package, following the drop in interest rates. Therefore, I think it's important to stress again the strength of our underlying business, our operating margin is on a convincingly sustainable trend, up 49%, thanks to a solid performance of our key growth drivers and our tight focus on cost control.

Focusing now on the market effects line items. Remember that performance fees only account for fees generated by capital gains of those customers who took advantage of profit taking during the period. As far as fair value is concerned, please note that this line of item is a mixture of a few positive and negative values. The negative shift of some 1% in the yield curve impacted the derivatives in our portfolio, hedging fixed-rate mortgages that no longer are in our book. On the other hand, the value of our shareholding in SIA had to be adjusted upwards in Q2 to reflect current market valuations. So this brings us to a profit before tax, which is largely in line with the same period last year.

Now moving on to Slide #10. Assets under administration and management totaled EUR 81.9 billion at the end of September, actually increasing 11%. As you can see Slide #32, we generated nearly EUR 2.6 billion in total net inflows in the first 9 months of this year, with around 85% in managed assets. And at the end of October, we nearly reached EUR 3 billion of high-quality inflows. Aside from any significant macro events, we believe, we'll be in the same range at last year's total net inflows. This year has set our network of family bankers apart. Our ability to keep a high-quality inflows mix continues to be stronger, not only than the industry as a whole, but also than the other networks.

As you can see Slide #39, our mutual fund unit-linked inflows ranked firmly at the top of the networks even without the support of the PIR funds. However, beyond EUR 3 billion in net inflows, our family bankers in Italy are also focusing their work on other areas that further broaden our revenue streams and should be considered on equal footing than the net inflows, and their efforts are paying off.

In fact, as you can see Slide #24, we were also able to generate EUR 1.79 billion in the lending business, which, indeed, is becoming a significant source of revenue. In fact, mortgages and loans registered a strong increase to the tune of 23% year-on-year, in contrast to a poor performance of the industry as a whole, which was down 14% in the first 9 months as far as mortgages are concerned.

So our credit book now stands at EUR 9.4 billion, as shown in Slide #25, EUR 1.3 billion more of net loans granted year-on-year. In fact, the credit book contributed some EUR 120 million to the net interest income for the 9 months, thanks to an average rate of the entire book of 1.81%. Mortgages continue to represent the bulk of the book, reaching almost EUR 6.9 billion, up 9% since the beginning of the year. Moreover, salary-backed loans are steadily on the rise, up 80% year-to-date with EUR 591 million in the book, right in line with our plan.

As you know, the other area our family bankers are concentrating their efforts on is the general insurance business. We believe there is a great opportunity here. Just as a reminder, our objective is to fill the void in our customers' coverage in terms of P&C, health and disability as well as term policies so that our customers' assets are protected in case of serious unfortunate events. In fact, these products have a very low penetration rate. At the beginning of the year, only about 9% of our customers had at least one policy of this kind, but only 2% had 2 policies, which we consider to be the bare minimum number. So we partly had the entire customer base that we can develop, and we set a goal to increase new business stand-alone policies tenfold in 5 years.

In the first part of this year, we tested the efficacy of pairing up general insurance experts with family bankers for assistance in making and closing the sale with encouraging results. We registered an increase in new business premiums of 77% in the first 9 months, though on a very small numbers, but nonetheless, promising. We now have some 100 Family Bankers, called family protection specialists, who are experts in general insurance and work alongside assisting their colleagues. And we are also adding general insurance professionals from the outside to help grow the business even faster.

Switching gears, slide #13, you can see our updated capital ratios. The common equity Tier 1 ratio at the end of September was 18.8%.

Finally, I'm pleased to announce that the Board of Directors have resolved to distribute an interim dividend of $0.21, which corresponds to a payment of EUR 154.1 million, an increase in the interim dividend paid last year of 5%. If the potential performance fees remain at the current elevated level until the end of the year, as previously indicated, we would take into consideration the distribution of an extraordinary dividend.

Let me make a quick comment now on the foreign markets. Our business in Spain continues to deliver. On Slide #33, you can see net income came in at EUR 17.6 million for the first 9 months, an increase of 39% year-on-year, and is influenced by the same dynamics as in Italy, namely higher recurring fees and no material performance fees accounted as yet. Assets increased 15% since year-end, totaling EUR 5.6 billion, with managed assets at EUR 4 billion. The sales network saw healthy growth year-on-year with an additional 45 individuals, which allowed us to reach 1,013 Family Bankers.

And now as far as Germany is concerned, we are currently waiting for feedback from the discussions between buffing and the interested party, and so we should be able to provide an update on this process sometimes early next year.

In closing, there are a few points I would like to stress. We are growing, and our P&L is strong. Our recurring fees are on the rise, compensating for any kind of margin pressure we are all facing with higher volumes. We have delivered what we say we would. Cost control and diversification of our revenue streams are realities, with the lending activities that are growing at a fast pace ensuring a strong NII for the future. Furthermore, our strong commitment to the general insurance business is allowing us to reinforce our revenue base, setting the stage for a substantial contribution to the P&L in the near future. As a matter of fact, real diversification and owning the value chain is what distinguishes us from our peers in 2 ways. Not only is our managed asset mix more diversified than our peers and of a much higher quality, but our revenues in general are also more diversified, allowing us to increase the profitability per customer, whether we are talking about our credit book or our own general insurance business.

With that, I will now open to the lines of questions. Thank you.

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Alessandra Lanzone, Banca Mediolanum S.p.A. - Head of IR [4]

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Thank you. We can now open the Italian line for question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question from Federico Braga's line.

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Federico Braga, UBS Investment Bank, Research Division - Equity Research Analyst [2]

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Good afternoon. So 3 questions. First one, about the dividend, a 5% increase in the interim dividend. Could this be assumed the rate at which the dividend will grow in the next few years on a recurring basis? The second question, NII. In terms of tiering, what are the benefits that your NII will receive from tiering in 2020? Final question, certificates. Could you please tell us how much of the third quarter banking fees were generated by certificates and how much by October inflows -- so how much of the October inflows were actually generated by certificates -- assets and certificates?

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Massimo Antonio Doris, Banca Mediolanum S.p.A. - CEO & Director [3]

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Dividend, you said plus 5%. Well, more or less. This could be the target growth rate looking forward, especially if our business continues faring so well, where we have solid growth in asset management. If we fare well in the lending business as well as in the insurance business, then I really think that these solid sound foundations will allow us to keep going in this direction.

Tiering, well, we have room for about EUR 1 billion worth of tiering with a margin at the current rate of about 40 basis points. So this is what we expect to do next year. We will do that next year.

Certificates, was your other question. The quarter's fees generated by certificates are equal to EUR 11.5 million. As far as net -- October net inflows generated by certificates, that is 150 -- I'm sorry, EUR 115 million, one hundred and one five million, so net inflows, EUR 115 million. We sold more than that, more certificates than that worth, but net is EUR 115 million.

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Operator [4]

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Next question, Gian Luca Ferrari.

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Gian Luca Ferrari, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Equity Analyst [5]

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I have 4 questions. The first, once again, we talk about the plus 20% NII guidance, EUR 192 million last year. I would like to see whether this is actually EUR 54 million, which is minus EUR 10 million compared to Q3? And some UTPs have come due. I want to understand whether this might be the guidance for the fourth quarter? Second question, we have a low rate by 11% -- 11.9%. Are we going to reach the 20 percentage in Q4? The performance fee level, unrealized, ways to understand what is the potential in terms of performance fees? And then the last question, Banca Mediolanum reported a very strong 3 quarters, EUR 8.4 million compared to the EUR 4 million to EUR 5 million track record per quarter. I would like to understand whether this EUR 8.4 million posted by Banca Mediolanum shows some one-off items?

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Massimo Antonio Doris, Banca Mediolanum S.p.A. - CEO & Director [6]

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As to unrealized performance fees, we are talking about more than EUR 340 million. This is the latest figure. Among the unrealized performance fees of Mediolanum International Fund and, of course, also Mediolanum Gestione Fondi. So it's the sum of both these entities. With respect to Banco Mediolanum, an important contribution came from the sale of index-linked products, where we have an immediate inflow of commissions. And this is one of the reasons why we were able to report such as good quarter.

And the NII and the tax rate. In 2018, intercompany dividend-based taxes were reported in September, whereas this year they will fall in October, and this is why they do not fall under the third quarter, but rather you will see them in the fourth quarter, and we're back to the estimated levels. And the NII, there was a question on NII itself. We could have a 20%, 22%. It's not going to drop that much. We believe EUR 59 million to EUR 60 million will be what we are going to have in the fourth quarter. So we will be back to 20%, 22%.

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Operator [7]

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Next question from Alberto Villa's line.

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Alberto Villa, Intermonte SIM S.p.A., Research Division - Head of Analysts Team [8]

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Well, good afternoon. I have some connection problems. So I may ask questions that have already been asked, and I apologize for that. Any benefits, and if any, did you quantify those benefits in terms of ECB tiering and positive impact on NII in 2020? If benefits are there, could you please quantify them? Also, expectations as far as the new regulations for PIRs, new regulation compared to 2019? Should we go back to the situation prior to the amendments? Do you think this could lay the groundwork for you to have positive impact? Commercially speaking, do you think the market is still interested in this type of product? We've seen that the new PIR product practically never made it off the ground. Also, statements or rumors about a likely merger with the Mediobanca, could you clarify the context or the situation in which such a merger could be useful and create value for Banca Mediolanum?

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Massimo Antonio Doris, Banca Mediolanum S.p.A. - CEO & Director [9]

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Okay, let me take the tiering question first. We could make EUR 1 billion there. And as soon as possible, we would do that. At the current rates, that means a margin of about 40 basis points. As far as PIRs are concerned, you know that the government is working hard. They are talking to the various players and counterparties (inaudible) and the others to amend the regulation. I don't think they will go back to the previous regulation. They will probably pass some kind of amendments. But I believe that the final proposal will be more viable -- a more viable product.

What kind of repercussion would this have on inflows? Well, I think that, that will get the market started once again, but I don't think that these products will take off as fast as they used to do back in 2018 because after all, for one year, we have done without these products. We have not offered these products to the market. So it will take a while. There will be a kind of a lag before these products can really go back to a more -- to a faster growth rate. But for sure, if this is the case, if the amended regulation is okay, we will have our network sell these products. Again, the network will push for these products to be sold actively because we still believe these are excellent products for our client base. But like I said, it will take a few months, there will be kind of a lag before these products go back to selling as fast as they used to do before the change in the regulation.

As far as the hypothesis you mentioned, that could be an interesting thing, but it's just a study that was carried out not by us. It wasn't even solicited by us. At present, we are not interested in this type of merger, our business is really plowing forward, is as strong as ever, it's growing well and fast. So this is what we are focused on.

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Alberto Villa, Intermonte SIM S.p.A., Research Division - Head of Analysts Team [10]

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I just wanted to hear your point view about the possible merger. I was interested in understanding Banca Mediolanum's take on the value creation that this kind of merger would generate?

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Massimo Antonio Doris, Banca Mediolanum S.p.A. - CEO & Director [11]

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Well, that would have sense, because there is little overlap between the 2 banks. So more comprehensive toys, if you pass me the word, would emerge from the merger. But let me say that the current toy, the current bank is really working perfectly well. So we are already creating a lot of value as is.

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Ennio Doris, Banca Mediolanum S.p.A. - Chairman of the Board [12]

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Well, let me add something, says Mr. Ennio Doris. The Doris family owns 40-something percent of Banca Mediolanum, which allowed us to impart on Mediolanum a unique vision and strategy, something unparalleled in the market. Not even the best competitors share our strategies and view. Let me underscore a few aspects here. Take a look at managed assets. We are the only company in Italy at list with 49% of its assets invested in equity funds, an additional 9% invested in balanced funds, an additional 26% invested in high-yield bonds. So with interesting or attractive commission being generated. Then we have, out of this 14%, 7% invested in money market products. And in these funds, we have money that is temporarily parked in this money market products because this is all part of our intelligent investment strategy. For some time, money has got to be parked there, but then it will be reinvested in more attractive products from the point of view of returns.

If you compare us to the rest of the market, they only have 20% to 22% exposure to the equity market. It's true that those leaves of the market that those markets are riskier, but I'm sure that in the short to medium term, fixed income will not generate satisfactory returns for customer, quite the opposite for the equity market. Also a decline in the performance of the equity market is more easily understood by investors, by retail investors. While it is very difficult for retail investors to understand how they can lose money if they invest in a fixed income instrument, which should, by definition, pay a fixed return. So like I said, we are uniquely positioned against the Italian scenario. Take a look at lending, we have granted EUR 2.4 billion worth of loans this year. So when we lent money, considering the margin we enjoy is 1.5% for retail customers, for instance, is as if we were selling EUR 1 billion worth of fixed income products or funds that have a margin of 1.5%, which are absolutely protected from market jitters. So that means that we can generate and protect a source of steady income.

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Massimo Antonio Doris, Banca Mediolanum S.p.A. - CEO & Director [13]

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And also, Massimo is adding, we have a much lower rebate to the network.

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Ennio Doris, Banca Mediolanum S.p.A. - Chairman of the Board [14]

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Correct, Massimo, which means that the net income is higher than what we have seen so far. And also take insurance, for instance, we are growing very fast in P&C policies. For instance, in the P&C business, we have more modest margins there, but we are growing fast. So the stand-alone products can -- are generating growing steady -- steadily growing returns that are not affected by market situations. This is something that really sets us aside -- sets us apart from the competition. So before we mingle with somebody else, even the great Mediobanca, we would think it over very carefully. We are fully persuaded that we will continue outgrowing all competitors, we'll be outperforming all competitors, plus we have a mix of revenues, mix of revenue sources that is totally unknown to our competitors. So before we decide to go to bed with some other competitor, we would think very, very carefully.

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Alberto Villa, Intermonte SIM S.p.A., Research Division - Head of Analysts Team [15]

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But Massimo, I have one more comment. During your presentation, you talked about margins that are under pressure but compensated for by volumes. Could you say something more about margins? Something -- has something changed in the last few months? How are things faring on the margins front?

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Massimo Antonio Doris, Banca Mediolanum S.p.A. - CEO & Director [16]

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Well, everything is perfectly in line with what we expected. Let me remind you that, that decline is attributable to 2 factors, which I mentioned during my presentation, that's, to say, the IIS product that's all money market funds, but little by little, all of these funds will be channeled to the actual managed assets sector. Plus, we have to consider that customers are steadily asking for coupons. So how can you pay your customers' coupon? Either you offer closed-end unit link that would rely on high-yield bonds and you can, thus, generate distributions in the area of 2%. So you can pay out a rather attractive coupon, but still retain a little buffer in case of defaulting of some of the -- in case some of the underlying bonds default. Then we also have to consider management fee of 1.25%. So the other thing is certificates, but certificates are not included or are not visible in those 210 basis points because those are accounted for under banking services fees.

In addition to this, let me remind you that we are no longer selling S funds, which have a management fee that is 25 basis points higher than the others. All the old contracts are still up and running, but all the new funds are channeled to L funds with lower fees. So if you put together all of these factors, this boils down to a decline in the margin, which is compensated for by higher volume, higher volumes in terms of net inflows into managed assets, where we achieved EUR 290 million worth of recurring fees in one quarter, when in 2009, we reported EUR 278 million, so EUR 20 million less as an amount for the full year. So this is the kind of offsetting effect, the kind of counterbalancing effect.

So plus, in a competition, the important thing is that you run faster than your competition, when you are running uphill, maybe you slow down a bit. But if you still run faster than your competitors, you still lead the pack. So if you lead your competitors, you continue snatching market shares and you continue winning, and you don't do that by selling more expensive products, but rather by having a well-diversified mix of products, very well diversified, like I said, equities, bonds and everything. And something that is not just the classical European bond exposure.

Let me round off what I said earlier, our -- the culture of our sales network and our company's culture allow us to set targets for ourselves that are completely out of reach for our competitors, both in terms of quantity and/or pace and quality of growth. If they asked me to merge with a company in the same business as ours that is maybe worth 30% or 40% more than us, I wouldn't do that because I'm sure that over time, we would grow faster than them.

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Alessandra Lanzone, Banca Mediolanum S.p.A. - Head of IR [17]

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Thank you, Alberto. If you have no further questions, we would move on to the next question.

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Operator [18]

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(Operator Instructions) There are no further questions from the Italian line. Let us switch over to the English conference call. (Operator Instructions) Your first question comes from the line of Hubert Lam of Bank of America.

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Hubert Lam, BofA Merrill Lynch, Research Division - VP [19]

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I've got 3 questions. Firstly, on your NII guidance for 2020, you said that you expect a slight increase on 2019. Just wondering what are your assumptions for that increase in terms of loan book growth, in terms of margin, in terms of rolling over the government bond portfolio. Just wondering what your assumptions are behind the expected growth in 2020. Second question is on cost growth. So you've reduced your G&A cost growth from 4% down to 2% to 3% for this year. Just wondering if we should think about going forward beyond 2019, if the 2% to 3% is the likely run rate for future periods as well. The last question is on the provisions for risk and charges. You said that increased in the quarter, mainly due to a lower discount rate for retirement plans. Is that just a one-off for the quarter to $14.5 million? Or is that a recurring number going forward as well?

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Massimo Antonio Doris, Banca Mediolanum S.p.A. - CEO & Director [20]

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With respect to the first question, (foreign language) Sorry. For 2020, what are the assumptions we have developed for 2020? In 2020, we'll have EUR 2.4 billion less due to government bonds that are presently in our portfolio, but they are now coming due by the end of the year. So this is the average number of bonds we have less in portfolio. However, we are going to resort to tiering EUR 1 billion, and then we are going to have EUR 2 billion less in terms of loan book. So we are going to have EUR 2.4 million less in terms of bonds that are going to come due and 3 that are going to be added, and they have a better margin. This is why we believe that we are going to see a slight increase compared to 2019.

Then as far as costs are concerned, for 2020, we expect to report a 2% to 3% growth. This is the guidance, the assumption we can hold true for 2020.

Q4 provisions. With respect to Q4 provisions, it will depend on the interest rate curve by the end of the year. And therefore, at that point, we will be able to see the present value. We have to wait for the interest rate curve. If they decline, we are going to have more costs. Otherwise, it's going to be the reverse, present value will change accordingly. If they stay the same, we are not going to see major changes. We are still going to have constant allowance to the provisions for risks and charges, but this is the same as last year. It really depends on where rates are going to be by the end of the year. This is what is going to determine the volatility.

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Operator [21]

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Your next question comes from the line of Andrew Crean of Autonomous.

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Andrew John Crean, Autonomous Research LLP - Managing Partner, Insurance [22]

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Two questions, if I might. Firstly, you talked about potentially a special dividend at the end of the year if the performance fees remain where they are now. How will you judge or how should we judge the size of that special dividend? Will you some pro rata it to a level where you have a CET1 ratio of 20%? What is the guidance around that? Secondly, could you talk a little bit about the rotation of cash deposits into mutual funds? It appears that from what I can see that people are holding in cash a lot longer than they used to and not moving money over into mutual funds. Is that a fair statement? And what do you think is needed to change that?

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Massimo Antonio Doris, Banca Mediolanum S.p.A. - CEO & Director [23]

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Well, as far as the special dividend is concerned, what we have in mind is actually raising a bit CET1 from 18.8%, a little -- make it a little higher. So we will use a portion to distribute a special dividend and a portion will be actually used to bolster our CET1, going up to 19% or 20%, we haven't decided yet. But anyway, some money will be used to strengthen our capital ratios. We have retail loans that are performing very well. The lending business is growing. The insurance business is faring well and growing. So faced with the potential of very attractive and strong profits, we think it is wise, it is smart to set aside a portion of this, none -- of this profits.

As far as the fact that customers tend to stay in cash, well -- or to retain their cash deposits for a longer period of time, well, people think that equity markets valuations are rather stretched. They fear a looming crash or bear market plus the fixed income market is really -- is not really paying off because rates are very low. So customers are perplexed and are asking themselves lots of questions. So what can they do? And we think that the only way out is this. We have to stick to our guns because if we split customer needs between short, medium and long term and, thus, diversifying their investments, we believe, is the only viable way forward. And most customers are actually saving for the long term. That is why the intelligent investment strategy is really the optimal solution for them. If we think markets will actually go into a crisis in the short term, well, if you are actually investing with intelligent investment strategy, you should really hope for a crisis because you will -- your purchases will be staggered over 4 to 5 years. So if a market crisis hits at the very beginning of your investment period, that makes you a very lucky investor. So believe me, we are really betting on lending as well as on general insurance to keep bolstering and nurturing our business, and these are elements that are not really tied to market performance and allow us to have a very steady growth of the business.

Let me get back to the extraordinary dividend. The very first metric, based on which we'll calculate the dividend, will be profit. Second thing, the capital ratios will not just be calculated on fiscal year 2019, rather we'll concentrate on the multiyear business plan and will try and stick to the solid -- to the strong balance sheet of Mediolanum. So we'll also have to keep an eye on the actual development of lending. You mentioned CET1 20%. Well, on average, that would be the target level but over the 3-year period. This year could have been or could be kind of a one-off or an extraordinary year. So we have to look forward to the next 3 years. Speaking also about the rotation out of the money market or our cash deposits, okay, it's out of cash deposits.

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Alessandra Lanzone, Banca Mediolanum S.p.A. - Head of IR [24]

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Okay. So if there are no further questions from you, Andrew we'll take the next question.

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Andrew John Crean, Autonomous Research LLP - Managing Partner, Insurance [25]

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Could I just take one follow-up, sorry? It's just how much capital do you think you will need to fund the growth in your lending business next year?

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Massimo Antonio Doris, Banca Mediolanum S.p.A. - CEO & Director [26]

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We don't have multi-annual plans yet. We haven't prepared them or defined them. It takes a little more time to understand the scope. But if we grow at the same growth rate we saw in the past years, then we are going to absorb the same amount of capital we did these couple of years. I don't have exactly the figure in terms of capital absorption, but we can let you know later on.

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Operator [27]

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(Operator Instructions) There no further question on the English call. I now hand over to the Italian call.

(Operator Instructions) Federico Braga has one more question.

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Federico Braga, UBS Investment Bank, Research Division - Equity Research Analyst [28]

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Yes. I have a follow-up question. On the EUR 2.4 billion you mentioned, these are bonds that are going to come due by the end of the year. What is the average yield they generated this year?

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Massimo Antonio Doris, Banca Mediolanum S.p.A. - CEO & Director [29]

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The yield of these bonds, considering also the debt, it's 70 to 80 basis points.

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Operator [30]

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There are no other questions. So I'll hand it over to Ms. Alessandra Lanzone.

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Alessandra Lanzone, Banca Mediolanum S.p.A. - Head of IR [31]

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Well, let us thank you all for participating and lending so much attention to our conference. We'll be back on February 11, 2020, for the 2019 annual results. Thank you, and have a nice evening.

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Operator [32]

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This is the end of the conference. We are going now to disconnect. Thank you for participating.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]