U.S. Markets open in 6 hrs 51 mins

Edited Transcript of MB.MI earnings conference call or presentation 6-Feb-20 1:00pm GMT

Q2 2020 Mediobanca Banca di Credito Finanziario SpA Earnings Call

Milan Feb 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Mediobanca Banca di Credito Finanziario SpA earnings conference call or presentation Thursday, February 6, 2020 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Alberto Nicola Nagel

Mediobanca Banca di Credito Finanziario S.p.A. - CEO & Director

================================================================================

Conference Call Participants

================================================================================

* Alberto Vittorio Luigi Cordara

BofA Merrill Lynch, Research Division - Research Analyst

* Antonio Reale

Morgan Stanley, Research Division - Equity Analyst

* Azzurra Guelfi

Citigroup Inc, Research Division - VP

* Christian Carrese

Intermonte SIM S.p.A., Research Division - Research Analyst

* Domenico Santoro

HSBC, Research Division - Analyst

* Giovanni Razzoli

Equita SIM S.p.A., Research Division - Financial Analyst

* Hugo Moniz Marques Da Cruz

Keefe, Bruyette & Woods Limited, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by, and welcome to the Mediobanca Half-Year 2019-2020 Results Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, Thursday, the 6th of February 2020.

And I would now like to hand the conference over to your speaker today, Mr. Alberto Nagel, CEO. Please go ahead, sir.

--------------------------------------------------------------------------------

Alberto Nicola Nagel, Mediobanca Banca di Credito Finanziario S.p.A. - CEO & Director [2]

--------------------------------------------------------------------------------

Thank you very much. Good afternoon for joining the call. In commenting this first 6 months' results, I mean the most important element was the very strong business activity that reverted into very strong commercial results. In a nutshell, we have registered a net new money for EUR 2 billion in managed assets in the last 6 months, and we have established a record for the group of having EUR 1.6 billion in the last Q.

New loans totaled EUR 5 billion in the last 6 months in Mortgages and Consumer with a record of EUR 2.8 billion in the last quarter. On the back of this very strong commercial activity and the highest level of TFA and total loan -- so TFA were up 10% year-on-year, 2% Q-on-Q and with a totally different mix. So the managed component was up at 66% of TFA. And this was well divided between affluent and private segment, while loan reached EUR 46 billion, up 8% and up 3% Q-on-Q.

On the back of this higher TFA and bigger loan stock, we have delivered a 4% growth in revenue. And this was spread among the 2 main driver of revenue: NII, which was up 3% year-on-year and was up 1% Q-on-Q. And this was led by the loan growth and the cost of funding under control. And we have experienced a rebound -- strong rebounding fee that were up 5% but more importantly, 12% Q-on-Q.

This, coupled with discipline in cost, quite a good cost of risk, ended up being 4% growth in net profit with -- which is even more important that now, every single division of Mediobanca in terms of ROAC is above 15%, with notably a ROAC of Wealth Management that had a big spike from 16% to 23%.

Group ROTE was above 10%, and CET1 was confirmed above 14%. So COR was excellent because it was lower than 50 basis points, and we went back to a gross NPE on loans ratio of below 4%.

So on Page 4, the key quarter takeaways were, as I said, this new record level of activity, notably in Wealth Management and in Consumer. The NII driver is the Consumer, which was up 2% Q-on-Q, while the driver of fees was more the capital-light business where the 2 main contributors were Wealth Management, up 27% Q-on-Q; and CIB, up 14% Q-on-Q. Now Wealth Management produced 50% of total fee income and has a very strong recurring profile.

Asset quality NPE down 7%, coverage ratio to 40 -- to 54%, group COR below 40 basis point. This is also due to a single UTP reclassification in bonds that is the position of Sorgenia.

So as I said, the performance which was the most important in terms of progression was Wealth Management and, in particular, also bottom line because bottom line was EUR 29 million. It was 46% up Q-on-Q. And as I said, this gave an important progression to the ROAC that reached 23%.

Steady loan book growth, where the main driver are twofold: Consumer. Consumer is steadily above what we had demand in terms of stock, both in terms of -- because of more robust new production. And I would say, also more stickiness of the stock made that -- at the end of December, we have reached nearly EUR 14 billion, so higher than what we had expected as well as the mortgage book and the Private Banking segment has had quite an important production across the last 2 quarters, and they reached barely EUR 13 billion. So now the -- I would say, the loan book is very well diversified because you have -- I shouldn't say 1/3 but a bit more in CIB. And then I would have a very good chunk in Consumer and in Mortgage and Private Banking.

The TFA dynamic is particularly interesting because while you see only 2%, so it's still a very good number, 2% increase in TFA, but when you go into details and you -- and we look at the component that is managed, so the one on which we have sticked our attention and our commercial efforts in the last few quarters, you see that the progression has been 5%. And then in 2 years, from roughly EUR 36 billion, we are at roughly EUR 42 billion. So a 13% progression of the managed part of AUM. Then the impact on revenue is that -- I mean the big driver have been Compass and Wealth Management, one in NII and the second in fees.

NII trajectory, still to -- having an upward trend, upward trend that is supported by Compass and Wealth Management. This is also based on EUR 1.3 billion of new loan business in Mortgages, so plus 58% year-on-year and plus 11% of growth in Consumer. And also this has been also coupled with certain defense of margin. There was not a given -- given the fact that this abundant liquidity situation is putting more pressure on margins.

The fee trend is on Page 7. I would say, in absolute, 5% is quite a good level of growth. But then when we see in details, it's more interesting because now the composition and contribution of fees from different sources is reshaping a bit the group in the sense that roughly 50% of the fee is now generated by Wealth Management. It was 40%, 42% only 2 years ago. And given our progression in terms of rollout of our distribution network, our aim is to have always a growing fee path with less volatility driven by single ticket or single business that may generate, I would say, more fluctuation in the trend of fees. The more Wealth Management grow, the better we'll be because they will be steadier and on the rise trend.

The component are equally splitted -- or now a bigger Wealth Management with EUR 87 million. Here, we give you some qualitative details about our recurring (inaudible). Today, we have roughly EUR 19 million of fee that are more recurring, EUR 11 million that is still a modest component of performance fee. And of course, we have more passive fee because the more we accrue it, the more we have to pay in terms of passive fee. This stands as compared to the EUR 65 million that we have generated in CIB, well, quite a good number with an important chunk of advisory, EUR 34 million, that is becoming by far the largest contributor in CIB and also resilience of capital market compared to the first quarter in the region of EUR 10 million.

The breakdown of AUM and the activity in asset management is that in the last 3 months, we have generated EUR 1.6 billion, as I said. And this is coming equally splitted between Affluent and Private. And they kept a very strong pace in terms of progression and qualitative-wise is also I would say, more recurrent than in the past.

On the asset management, our activity has been to have a bigger proportion of homemade manufactured product or selected product distributed within our own network, and this is paying off. And we have offset outflows that were anticipated, either because we are exiting from low-margin institutional mandate or because systemic strategy is not really having a market push today, rather the other way around, with some important gain on the illiquid one in the credit that offset part of the outlook.

Asset quality, very good, even above our expectation in the sense that this quarter, we have had 39 bps. This is linked to the fact that industrial cost of risk of Consumer went down to 185 and we have had a very good trend in CIB with one important reclassification to bonds. This is something that we have anticipated to you. We still have some position in -- that are formally classified as UTP still in our book in CIB but whose trend is quite good. And as anticipated, by the time, some of them will become bonds.

So this led to -- basically, going back to the situation we had 6 months ago. So we were below 4% of NPE ratio. Then as you know, we are one of the banks that have adopted -- one of the first banks to adopt a new definition of default. This has generated EUR 170 million of additional NPE. But then with the trend of the recent quarter, we went down back again from 4.3% to 3.9% in terms of NPE ratio.

So the asset quality is broken down on Page 10 where, basically, bad loans, real bad loans of Mediobanca net are a tiny amount, EUR 76 million, out of which we have still a tail in leasing that is going down and is more proportion in Wealth Management, in Mortgage where we have sold the portfolio, legacy portfolio of Micos last year. So basically, we have all positive trend in asset management, both in terms of stock, in terms of coverage.

Group GOP was up 3%. And the 2 main contributors have been Wealth Management, plus 32%, so the most important; plus 9%, that was the contribution of Generali. The rest has been stable with a small increase in the negative contribution of holding function linked to the fact that, of course, the contribution of NII to holding function with this interest rate environment was lower than a year ago.

Group ROTE in excess of 10%. Here, what I want to see and to restate is that we have had a big improvement in Wealth Management with -- basically from 14% to 23% ROAC improvement, while all the rest are above, I would say, banking business are above 16%. And Generali went down from 17% to 13% because of increase in available-for-sale with a tightening of the spread. We have had an effect of inflation of available-for-sale reserve hence the book value was bigger.

The strong Mediobanca capital profile has been more than confirmed with the recent data published by ECB. It was evident that Mediobanca stands out very well compared to the rest of the pack. We are among the best bank in terms of SREP, I would say, based requirement and with the P2R requirement stable at 1.25%. So we are above 14%. So we have more -- the 550 basis points of excess compared to SREP.

Divisional result. We go to -- first to Wealth Management. Here, as I have anticipated, even in the last calls, but in particular, in the plan, our trajectory is a trajectory of distribution enhancement in the recruitment. So we have now reached 1,000 people that are in the sales activity. So I would say that the most important progression, of course, is in Affluent where we recruit the most. And we have had, compared to a year ago, 20% increase of distribution sales force. This led to the increase in net new money that we have already commented. So I won't spend too much time on this slide because it's coherent with what I have already explained, in particular, the increase of AUM where the managed assets are, so EUR 42 billion as opposed to EUR 37 billion of a year ago.

Now clearly, this progression of TFA is impacting the revenue side. The revenue side is going at a 2-digit increase where we have a 10% increase year-on-year, out of which 12% is fees, but it's -- already we have to take into consideration a very nice 8% increase in NII. So this means that Wealth Management is not only a big source of fee but is becoming also a stable and increasing source of NII.

Now if we go to breaking down the different business, we see that the different components are in Affluent where we have 9% of increase in terms of fee or revenue and 16% in Private. The big bounce in revenue and in net profitability made that we were able also to improve our efficiency ratio. So from 79%, we are going to 75%. Of course, it's a long trajectory, but we are on track.

Page 18 was to be commented because it gives you the sense of the potential and the -- of effectiveness of our Affluent activity. Now you see the AUM trend, net new money trend in every quarter. And you can see that there's been quite an important acceleration in the last quarter. So we went from an average of EUR 0.5 billion to EUR 0.8 billion of net new money in the last quarter. This is evenly split between relationship manager and financial adviser, which is more interesting. What is more interesting is seeing CheBanca! compared to more established players.

This is the -- in the center of the slide. You see only 3 very well affirmed and listed asset manager, wealth manager. We're able to have a higher net new money in managed assets or not in liquidity in the last 6 months. With EUR 1.4 billion, CheBanca! was able to rank #4 in the market and well ahead -- much bigger comparable and much more affirmed. This gives you the sense that we are really at the start of a very interesting growth period, and we have to keep on investing in order to catch up all this value and potential that is ahead of us.

So this trend is totally in line with our strategy. So in terms of -- sales force increased by 20% to 850 people. In the last 6 months, we have recruited 60 financial advisers and 8 relationship management. We are working on conversion of deposits into AUM. So you see on one hand, liquidity deposits or deposits slightly going down because we have put a lot of attention and focus on converting the liquidity into managed assets. And we are working much better with our product company in terms of manufacturing and starting solution that are tailor-made for our customer and for our distribution network.

Positive news are coming also from Private Banking where we have had back again EUR 0.9 billion of new money -- net new money in the last 6 months. And we have reached EUR 18.5 billion of total AUM. This activity was also mixed with a greater attention in terms of marginality and margins in general. So we have, I would say, resegmented our customer base, offer different product and solution and different pricing. We have also favored here the switch from deposits into AUM. And we have also put a bit more emphasis, as you may have seen, in a number of initiatives that are more related to alternative illiquid. So this is the Mediobanca Private Markets. Second placement is the Mediobanca Trophy assets in real estate, and also which is even more important is the great integration that we have -- greater integration that we have with corporate finance in the mid-corporate space.

In Consumer, we are investing more on our network, convinced that the value of a loan generated by our own network is much more interesting than value generated through third-party distribution where, of course, economics have to be left onto the table. So from this standpoint, given this impressive new production, because for the first time in the life of Compass, we have reached -- we are above EUR 2 billion of new production in a quarter. You can see the trend in Slide 21. It is -- last year, we have had in second -- in Q2, EUR 1.8 billion, then we have reached in Q4 roughly EUR 2 billion. But this is the first time we go above EUR 2 billion. And it's quite a positive outcome that is based on the fact that in the meantime, we have reinforced our distribution network, opening in [Bagnara] 14 additional agencies that are distributing product of Compass.

Which is even more important is the kind of production that we have had on Page 22. You see we have double digits increase in every product. Basically, we have had plus 20% in a car sector, plus 21% in point of sale. These are very important numbers because they give us a wider client base on which we can do repeat business for personal loans. So being strong as -- I think Compass is either #1 or #2 in these 2 segment in Italy is very important because it secures you the possibility to print more personal loan, adding access to additional client, which we do, by the way, because personal loan in this quarter was 10% higher than a year ago. And clearly, this is supported mainly by our branches because our branches went up 10%, while the rest of the production being more stable.

The new stock, the new loan production, the defense of margins, so the discipline in printing new loan only if they meet our requirement in terms of profitability meant that we were able to increase by 4% our revenue. And that this coupled with a very good, I would say, cost of risk trend because we have forecasted this year to go in the region of EUR 200 million. Actually, what we experience is that industrial cost of risk is way below this and this in the region of EUR 190 million.

The small increase in cost of risk and one exceptional item of a fine, we have a provision of EUR 5 million made that we have had a slight -- a smaller decrease in net profitability, so minus 4%. But ROAC stayed in the region of 30%.

Corporate & Investment Banking positive news because here, as I said, we are working at the remix of a more diversified revenue stream where advisory, capital market, in general, capital-light products are becoming more important. So today, we have less than 50% of revenue that are related to financing, 45% that are related to investment banking, more capital-light business, and only 5% in trading.

The importance here is what we state on Page 26, where the source of business is changing within Mediobanca. And we see an increasing presence of the work with financial sponsor and mid-corporate transaction. And this is also led by organizational changes that we did some quarters ago where we have created a joint team that is dealing with mid-corporate and financial sponsor and that is working very closely with the private banking network.

Another element is that also geographically, the breakdown and the source of the different revenue is becoming different -- is different because of the bigger contribution that is from the non-Italian component, thanks to Messier Maris consolidation.

Numbers are quite stable and on the high level of profitability. So why we kept the book under certain control and discipline. This is also based on the fact that the repricing and the margin compression in large corporate has been much more evident than in other segment. Having put a lot of discipline in cost and in cost of risk, this led us or allowed us to maintain a quite high profitability in the region of 16% of return on allocated capital.

Principal investing, good news because notwithstanding the last quarter of Generali where the capital management and the capital -- the ILM management activity made that they have anticipated or registered some loss. The sum of Q1 and Q2 made that we have had a 9% increase. So at the end, a positive contribution. That is also a campaign with a bigger loan book because of loan book -- book value, sorry, because of the available-for-sale reserve that was bigger, thanks to the tightening of the spread.

Holding function. Nothing to be, I would say, commented. New -- we have maintained and controlled the cost of funding, taking profit of the good window of market that were in the last 6 months open. So we have placed bonds. And hence, our bond stock went up, thanks to different kind of placement, with a cost of funding that was lower compared to the expiry one. So we had EUR 110 billion, and now we have recorded EUR 90 billion. We are ahead in the next few quarters. Other average cost that should be beaten in positive, of course, with the new placement, so EUR 130 billion, EUR 160 billion. But today, we have barely finished our funding of 2020. So we are quite ahead of our budget.

LCR was optimized to the level of below 170%. It was higher before. In terms of MREL requirements, even here, we have had quite positive confirmation from the regulator where we have been asked -- or given MREL requirement that is among the best in Europe. And we are totally comfortable with what we have already done and the level to be achieved in the coming years.

As a closing remark, I would say, we have had quite an intense and somehow record level of business activity that reverted into bigger asset content, more robust revenue pickup and more robust than expected net profit. We have, in December, approved our LTI plan, and you have all the details of this LTI with the scorecard to which it is basically linked. So I think in the next 6 months, we have 2 priorities. One is leverage the current momentum we are experiencing and accelerating the implementation in our business plan in all business segments and also work on improvement of our governance framework.

The 2 main activity will be seeing the Board concentrating on proposing bylaw modification in order to take into consideration the evolution of our shareholding structure and the fact that we have the possibility to modify the bylaw and make it more market standard as well as the Board will be involved and working on the renewal of the Board following the normal, I would say, procedure that the Board has to do when this comes to the due date. And so with the help of external adviser, the Board will present a new list of Board of Directors that will be, I would say, representing an improvement in terms of quality, in terms of, I would say, independence compared to the existing one.

Thank you very much. I've been a bit long. But it's now time for your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from the line of Antonio Reale from Morgan Stanley.

--------------------------------------------------------------------------------

Antonio Reale, Morgan Stanley, Research Division - Equity Analyst [2]

--------------------------------------------------------------------------------

I have 3 questions, actually. Thanks for the governance points. Three questions really on the operating side. The first one is on the fees. So net new money -- particularly in Wealth Management, so net new money in the quarter was very strong, EUR 1.6 billion, which on your stock of AUM is a very large number to analyze. You're basically growing at the same pace of some of the most aggressive peers in Italy. So my question is how much of this number you're buying in the form of new private bankers being hired? I basically want to know if there is a lag in the cost of hiring new sales force or if this is sustainable going forward. That's question one.

The second question is on the cost of funding, which continues to come down. I think it dropped another 10 basis points in the quarter. We are 6 months in the year, and you already have basically prefunded the bank for the year. Can you help us sort of quantify the benefit from lower funding costs that you expect going forward? I'm looking really at Slide 32 here, if it helps.

And the last question is on Monte dei Paschi because there's talks about a possible positive outcome for the bank with respect to a potentially large NPL transfer, which could clean up its balance sheet and remove one of the obstacles to M&A. Now a further change in the ownership for Monte dei Paschi is a problem for you as it distributes about EUR 800 million new loans a year for Compass in your consumer finance business. And I mean that's large. How should we think about it? I know you've talked about it in the plan, but I just wanted to get your thoughts on this, please.

--------------------------------------------------------------------------------

Alberto Nicola Nagel, Mediobanca Banca di Credito Finanziario S.p.A. - CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Antonio, for your question. Question #1, net new money. Out of EUR 1.6 billion, we have to break it up in 2 bucket. One is of same size, as I said, is CheBanca! and the rest is Private Banking. So out of EUR 800 million, it's fair to note that half of this is coming from the existing bankers network of CheBanca!, which didn't have a great -- I would say, hire. On the contrary has had very few hires. So the rest is net new money by financial advisers.

So I would say that the performance of CheBanca! is linked to the very great efficiency and productivity of its first own network, both in terms of bankers that are more and more -- it takes time to form them and to focus them on AUM, but then after 3 years, we are there. So the network -- first of all, the banker, the wealth adviser of CheBanca! are very, very productive. On top, we have a growing financial consultant chain that we are building. So our growth is well spread and is not linked to the fact that we do a massive hiring. So we do hiring, it is important hiring. So we do, on average, 100, 120 financial adviser. But we pay the market standard. So we don't pay them something that is different from other competitor, and they are important source of net new money but not the only part.

So I think this trend is sustainable. I'm not saying that every quarter, we will do EUR 1.6 billion because as I said and as you know, this is also linked to the very positive trend that the market had in the last quarter. So it's not repeatable. Which is interesting is that we are raising every quarter the firepower, the possibility to cash net new money at a higher level.

Cost of funding. We are -- we think that this situation of cost of funding today is going to be stable. So we may have some small improvement, but it's -- the large part of this optimization has been done.

And for the last question, we hope that Montepaschi will continue to produce with us because being associated with Compass give you a totally different perspective in terms of new loan production and fees. But as you know, we have also forecasted in our plan, was embedded in our plan that in the last -- in the next 3 years, we will have substituted important part of third-party production with branch-led -- own branch-led one. So we are already prepared for such an event, and it's already embedded in our 3 years plan.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

Your next question comes from the line of Azzurra Guelfi from Citi.

--------------------------------------------------------------------------------

Azzurra Guelfi, Citigroup Inc, Research Division - VP [5]

--------------------------------------------------------------------------------

So very solid operating and fundamental trends. I have a couple of questions on that. One is on the NIM and the volume growth, and the other one is on governance. So when I look at the NIM, it's slightly down quarter-on-quarter. And I assume it's mostly because there is a switch in the mix and you have an increase in the Wealth Management that have lower margin than consumer credit. And can you confirm that despite the very strong volume growth, you are still very focused in the overall profitability of the position and not just for the NII growth?

And the second one, unfortunately, is another one on the governance because it seems that this is the main problem for the share price in the last few months since that has been the new shareholders coming in. And I know that this is not really in your hands, but is there anything more that Mediobanca can say to reassure the investors at what is going on? It's somehow under control because it seems that we're slightly going back to the future when Mediobanca had industrial shareholder in the government.

--------------------------------------------------------------------------------

Alberto Nicola Nagel, Mediobanca Banca di Credito Finanziario S.p.A. - CEO & Director [6]

--------------------------------------------------------------------------------

Thank you, Azzurra, for your comments. On NIM, I think you are right. We stick to our, I would say, belief that we need to print the loans if they have the right margin. Of course, then you can have one quarter where the production of one segment is bigger compared to what we would have expected and can EBIT dilute the overall margin. But the big driver of NII is consumer. So consumer, the way I see it is that as we are ahead of our plan in terms of stock, we have entered in 2020 with a bigger loan book at work. So naturally, in fact, we have seen a 5% increase in NII of Compass. And I think that this will -- if we are able to print the same volume, this trend will continue.

Of course, we have other elements that can support NII like, I would say, in particular, mortgage, in particular, linked to the volume. On the other hand, we have holding function and other element, part of, in particular, of CIB, where we see more a negative contribution in terms of growth as opposed to the 2 previous ones. But I think you have the right analysis. But we stick to the marginality, not on the volume.

On governance, I think I repeat what I just said in the call with the press. We have had this statement of Mediolanum and this statement contains comments that are aligned with, as you know, some, if not most of our institutional investors are telling us. So that Mediobanca should stay with an ownership structure and the governance that is not dissimilar or far from what you see in the market for peers. And so for this, I think, I have -- I would say, a reassuring message that is based on one hand, to a good sense and knowledge of the counterparty. And I have a second element that is based more on the activity of our Board.

The first one is that Delfin was able to create a huge value in industrial sector, affirming a champion in the frame business and through a listed company. So he has a long story of working with other investors. And they are pretty knowledgeable and aware that in order to create value and to continue the growth and to deliver results, Mediobanca needs to have a shareholding structure and the governance that is not different or comparable to the other listed banks that are doing the same job. And hence, I don't think that it's in the mind of any investor, in particular, of Delfin to work against this kind of practice. So I am knowing -- based on a good sense judgment, I don't think that someone invest in Mediobanca then to have -- to see the stock value or the performance of the bank are going down.

The second is more based on what we can do, we are doing. As I said, Mediobanca Board will work hard in the next 6 months on 2 topics. The first one is that we have the opportunity to align our bylaw to take into consideration the recent evolution of our shareholding structure. So as you all know, one important shareholder of Mediobanca sold the shares on a creditor, and this gives us the possibility to reinstate a provision of bylaws that we have had always for all our life before Unicredito did the merger of -- with Capitalia and was required by antitrust to have some, I would say, limitation. Now the situation is over, and we can go back to what we had in the past.

The second element that is back again, a reassuring one is that the Board will work to present a new slate up for election in the month of October. And we will do it following the standard that is requested to a Board for a listed bank. So we'll have a selection of candidates that will try to increase the quality of the Board, the independence of the Board. This will be a proposal for shareholder. And I think the shareholder will see the outcome of this in a positive way.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

Your next question comes from the line of Alberto Cordara of Bank of America.

--------------------------------------------------------------------------------

Alberto Vittorio Luigi Cordara, BofA Merrill Lynch, Research Division - Research Analyst [8]

--------------------------------------------------------------------------------

My question is on the cost of risk. Traditionally, you've always been quite prudent in how you look at the evolution of cost of risk. But I can see that in the quarter, the print was, again, a very good one, partly because of this recovery position that you had is unlikely to pay, if I understood it correctly. But partly also due to the fact that when I look at consumer finance, I don't see any pickup in cost of risk. So my question is, how much more recoveries we can expect out of the -- you're left with circa EUR 500 million as UTP in CIB. And also what is your outlook for consumer finance because, again, I don't see any pickup in credit losses. Then on a different topic, if you can give us an update on BFI.

--------------------------------------------------------------------------------

Alberto Nicola Nagel, Mediobanca Banca di Credito Finanziario S.p.A. - CEO & Director [9]

--------------------------------------------------------------------------------

In cost of risk, you -- thank you, Alberto, for your question. Cost of risk, you are right. We have been prudent, and then it reverted to be a bit better. It's fair to say that we have 2 elements here, one is more one-off and one is more structural. The one-off is linked to Sorgenia. It's true that we still have some UTP, and it's true that I think at least a couple of them may revert to bonds. But the timing of this is uncertain. So we cannot predict that in Q3 or Q4 or Q1, they will go. It will much depend on seeing their industrial trend. I have a confirmation that they are online, on track and then go to.

The second, which is even more interesting, is that you are right, the industrial cost of risk is better than expected. So in particular, in consumer, but not only consumer, we are adding confirmation even recently that the cost of risk is very good. So we have guided the market to have 60 basis points of cost of risk this year as a target, maybe we can stay more at 55. So 5 bps of improvement may be there. But on the other hand, as you know, it's fair to say that the situation of big write-backs are some sort of one-off in the sense that we have some quarter, we should expect that other quarters will not benefit from this.

On BFI, we have done some progress in the sense that some of the legal issues that were there against the closing have been cleared. We need to restart with our authorization process. And I hope that in the next, I would say, between 3 and 6 months, we will able to arrive to a conclusion that 1 way or the other. But I mean today, at least 1 element that was there against the closing like this legal controversy between some shareholder of BFI has been sold. They have been done. They have reached a settlement that is covering every risk. So today, BFI is not only a very interesting asset, but also clean from any possible lawsuits that we knew in the past.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

Your next question comes from the line of Christian Carrese from Intermonte.

--------------------------------------------------------------------------------

Christian Carrese, Intermonte SIM S.p.A., Research Division - Research Analyst [11]

--------------------------------------------------------------------------------

The first question is on corporate and investment banking. As you said, the consumer banking is the main driver for net interest income. Maybe the corporate and investment banking is showing some weakness in terms of net interest income but as well some important write-backs in terms of cost of risk. You said that for the full year, maybe the guidance could be changed to 55 basis points in terms of cost of risk at the group level. I was wondering, do you expect on the corporate investment banking still some write-backs in the second half, maybe lower than the second quarter? And in terms of net interest income, what should be the trend for the following 2 quarters?

The second question is on consumer banking. We saw some weakness in terms of fees. If you can elaborate a little bit on that. And finally, on capital, you showed the most important buffer in terms of MDA among Italian banks. Today, you only create say the 300 basis points and increase the payout. You have more than 550 basis points MDA buffer. I was wondering if there is any change in your view in terms of paying higher dividends or maybe increase buyback program.

--------------------------------------------------------------------------------

Alberto Nicola Nagel, Mediobanca Banca di Credito Finanziario S.p.A. - CEO & Director [12]

--------------------------------------------------------------------------------

On CIB, we do expect that NII is not going to recover massively in the next 2 quarters simply because repricing of the loan book is still there. Everybody is affected by this repricing. And we don't want to compromise on asset quality in the sense that today, as you may know, the leverage on -- the average leverage on the transaction, in particularly, of leverage finance, is back again to the highest level of 2007 with a very covenant-light structure. So we prefer to abstain also because we enjoy an NII growth that is linked or led by the other 2 segments, so Wealth Management and Consumer. So we don't need to print loans that we are not comfortable with in CIB.

We don't expect in the next 2 quarters at least pretty soon, but we'll see material -- further material write-backs while we see an interesting trend of fees because fees are still -- I mean CIB, as you know, is the second largest contributor of fee after Wealth Management. And this renewed activity in advisory is giving a very good support to the fee level.

In consumer banking, the fee was weaker compared to previous quarter because we have placed less insurance product. So it's linked on the production of insurance. So we'll see if the market or the situation is better in the coming quarters. Capital, to come to your point, as you know, we have approved the plan only, I would say, 2 months ago. So of course, we stick to the level of dividend that we have stated. But as you know, and you have already anticipated, we have always the possibility to look at the buybacks as possible adjustment of our capital management. So what we will do is, at the end of this fiscal year for Mediobanca, so at the end of June, with -- in the month of July when we will have a full evidence of capital ratio, we will propose the level of buybacks that have to be approved with the general meeting of October. And this will be the adjustment in terms of capital return, we may envisage in order to cope with this capital generation.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

Your next question comes from the line Giovanni Razzoli from Equita.

--------------------------------------------------------------------------------

Giovanni Razzoli, Equita SIM S.p.A., Research Division - Financial Analyst [14]

--------------------------------------------------------------------------------

A couple of questions on my side. Back to the outlook for CIB revenues. In the last couple of conference calls, you mentioned that the attitude of your counterpart was quite interesting in terms of attitude towards closing M&A transactions, also not only in the mid corporate, but also on the larger tickets. I was wondering whether you can confirm this outlook that may support the CIB fees going forward over the next couple of quarters.

And the second question is a more broader one. I remember that a couple of years ago, you were probably the first one mentioning the magic number of the 5% NPE ratio as a medium-term target for the banks to achieve. And no one paid much attention to this, and now we really know the end of the story. Now there is a second element that could be part of the banking union, that is the convergence towards a more harmonized exposure to domestic government bonds. You are not part of the story. You have a quite diversified, limited exposure to domestic office. I would like to know your view about this topic in the sense that do you think that the harmonization of this asset class in Europe is the precondition to implement or to complete the banking union?

--------------------------------------------------------------------------------

Alberto Nicola Nagel, Mediobanca Banca di Credito Finanziario S.p.A. - CEO & Director [15]

--------------------------------------------------------------------------------

Thank you, Giovanni, for your question. In terms of pipeline, I confirm that the pipeline, in particular, in M&A is interesting because it's more diversified compared to only 2 years ago in terms of different cluster of client segment. So we have a good pipeline on large to medium transaction from corporates as well as a good pipeline from mid-corporate and financial sponsor as well from a known Italian customer, thanks to Messier Maris. So today, the franchise is stronger and is more diversified. So it can also stabilize as we have shown revenue line in the wake or in the absence of equity capital market activity because the equity capital markets, as you know, has been quite poor in Europe in the last 2 years because we can offset this with higher M&A fee and with a good capital market solution activity.

I do think that all the elements of banking -- coming to your second question, I do strongly believe the banking union is -- means going ahead with all the pieces. The problem that we have had, honestly, in the last proposal of Mr. Schultz, that was appreciable because he basically made a new proposal at the end of last year. And this means that even Germany wants to go to the next level in banking union is that you see a lot of emphasis on derisking. And in derisking, they put also the, I would say, the risk weight of govies, while on the EDIS it was very timid in the proposal of the EDIS that is essential to the banking union. So we have to go ahead with all the different components. So derisking as well of mutualization of risk in terms of EDIS. The EDIS proposal was very much watered down in terms of a number of conditions that have to be met before it kicks in. So it's worth talking and also making some progress on govies if on the other hand, EDIS is going at the same pace. If it is the last proposal, it means that the priorities on derisking rather than on adding a true banking union.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

Your next question comes from the line of Domenico Santoro from HSBC.

--------------------------------------------------------------------------------

Domenico Santoro, HSBC, Research Division - Analyst [17]

--------------------------------------------------------------------------------

It's Domenico, HSBC. A couple of questions, again, on your commission in the Wealth Management. When I look at the quarterly evolution, the assets were 5% up quarter-on-quarter. But the Commission, there are more than 10%, 15% almost up quarter-on-quarter. So I know that you have book here also upfront. But can you give us some color on the fee side, whether that was in the quarter, apart from strong sales, as you commented? Some improvement in margin? Or there was also some contribution from upfront?

Then on your payout structure to financial advisers, I mean the payout fees are more or less 12% of the total fees. I know that basically, those fees are also generated by other parts of the bank. But I just want to understand what is the structure at this point, or wonder whether we might see more payout to financial adviser going forward. Just to understand a little bit the sustainability of these numbers because of course, they are getting quite irrelevant for your group.

Then another point on the NII, just to liaison with a colleague's question. When I look at the speeding cruise in the CIB and the consumer banking is kind of slowing down for the reason that you mentioned. So I'm just wondering whether the holding function, it might reduce the contribution -- negative contribution going forward since the new bonds, the new issuance, they might be issued at a much lower spread compared to the back book, so -- and also your treasury portfolio is actually going down. So just to understand how the contribution from holding functions, it might go ahead. And then on cost, whether you can give us some guidance for end of the year. I know that you give more an indication in terms of cost income. But since your revenues is, of course, here getting momentum, I remember from the plan, you have some investments. Just wonder whether you can upfront part of this investment.

--------------------------------------------------------------------------------

Alberto Nicola Nagel, Mediobanca Banca di Credito Finanziario S.p.A. - CEO & Director [18]

--------------------------------------------------------------------------------

Thank you, Domenico. On margins in Wealth Management, basically, this rebound is having different explanation. We have 2 bps of improvement in CheBanca!. We have had, in terms of marginality, we have had repricing of Private Banking. In Private Banking, we have said clearly in the plan. In our Wealth Management, because of the history -- this is the summary of the possible answer. In our Wealth Management, because of history, we have different clusters of clients that were served somehow in the past with similar offer and similar pricing. What we are doing since already some month is differentiating offer and differentiating pricing. This is going to be valid across the different channels but started with Private Banking. And over time, will be also more present in CheBanca!.

Then we have had EUR 11 million of performance fees. And this is basically most of the explanation of the difference in terms of profitability and rebound in terms of profitability on Wealth Management, payout of financial adviser. And we are, today, in line with the market. We are also planning over time. The more -- the project of CheBanca!, as it is now on its way, is well received, and it becomes a clear proposal that basically is considered and accepted by most of our competitor becomes even more important. It will be improved because basically, today, we plan to improve this payout or basically to lower it because we want to link this more to some product house. While today, the proportion of house product is still very low because CheBanca! started as a pure open architecture historically. And basically -- so today is already in line, but what we want to do is to put more emphasis on to in-house product to be rewarded and distributed by our financial advisers.

Holding function, I would like to reduce this. But honestly, it's difficult because we have worked -- we have been working to reduce the cost of funding. We have been working to reduce the buffer of liquidity. So the vast, the vast part of our efforts are already there. So we need to maintain a certain ratio of liquidity and answer the simpler math, applying to the size of our portfolio with the lower NII, lower interest rates make the contribution of holding function is not going to improve in the second quarter.

Then in terms of guidance. In terms of guidance, what we see? We see a second half debt being equal to the rest. So if the situation, the macro situation market, stability of Italy, stability of Italian spread stays where we have seen it up until today, I think will be another very good quarter, where I think, compared to this one, we will have -- we can put a bit more emphasis on fees as opposed to NII. NII will much depend on the volume. Volume have been a record level in this alpha quarter, we need to see if we are able to print the same level of volume in the second half. So I would say I would put slightly more emphasis on fee as opposed to NII. Cost income will stay same, so in the region of 45%, 46%.

And basically, we do expect good cost of risk. In the -- no particular, I would say, extraordinary item like systemic cost in these next 2 quarters, why we have had in the [first quarter.] So basically, it would do like a trend -- of a similar trend of revenue growth, so 4% with -- maybe with a different mix between NII and fees and the rest aligned. So basically, another second half that is another good second half.

--------------------------------------------------------------------------------

Domenico Santoro, HSBC, Research Division - Analyst [19]

--------------------------------------------------------------------------------

Can I ask a follow-up question, sorry, on the asset management, given that you are now a relevant player as well. I mean when I speak with investors, there is a large narrative that in this segment, there would be heavy margin compression because of the transparency that MiFID is more transparency that MiFID is triggering. So I'm just wondering whether this view is a bit exaggerated. And I mean these operators, they will stay the size they are currently or differently? You will see some sort of -- you might think about some consolidation in the sector. Actually, you just mentioned that your margin then might potentially improve given that you are going to internalize some margin, distributing more in-house products?

--------------------------------------------------------------------------------

Alberto Nicola Nagel, Mediobanca Banca di Credito Finanziario S.p.A. - CEO & Director [20]

--------------------------------------------------------------------------------

I don't -- Antonio, I don't think -- Domenico, sorry. I don't think that we should expect a massive margin compression. If we think about in the medium term, something like between 20, 30 bps, maybe. But the evidence as of today is that, in particular, in networks that are quite entrepreneurial, that they have a dedicated sales force. So they are very much able to cope with even, I would say, regulatory bad news or news, thanks to the service they provide with the client, the ability to interact with the client. Their attitude to face also this kind of issue and sort them out. So the reality is that we have seen no compression as of today.

Some operator even increased their margin. So fact-based and being in the market, I see this as a very positive because this gives us even more confidence on the fact that investing into this dedicated sales force. Now basically, we have done all our life this because if you think about consumer, and also investment banking, we've been working on 2 very, I would say, vertical dedicated sales team in each business. So we saw that what we are doing, what the other are doing with more experience than us is that you create value in having this kind of network. Then you may face some volatility. Our model is not skewed on performance fee, has very low loading fee.

We may improve our margin because we are on the low end of them, and the proportion of equity in our client portfolio is still very modest. So we have room to improve. But I don't think that the market will have a big margin pressure. So I think that M&A, for the time being, will not be led, if any, by this margin compression, but will be led by either intention to sell of the fact that you can create a bigger group with also bigger possibility to grow. But not because of problems, rather because of opportunity or valuation.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

You next question comes from the line of Hugo Cruz from KBW.

--------------------------------------------------------------------------------

Hugo Moniz Marques Da Cruz, Keefe, Bruyette & Woods Limited, Research Division - Analyst [22]

--------------------------------------------------------------------------------

I'm not sure if it's been answered already, but can you talk a bit about the opportunity to optimize your capital in CIB? This quarter, there's been a bit of growth in the density. It's been the first quarter in a while where RWAs will be tighter than I expected. So I was just wondering if there's something you can do in the next few quarters.

--------------------------------------------------------------------------------

Alberto Nicola Nagel, Mediobanca Banca di Credito Finanziario S.p.A. - CEO & Director [23]

--------------------------------------------------------------------------------

Yes, we are working on this. We are working in the sense that we do expect some improvement, in particular, in the market and in the, I would say, the non-lending activity. And on top, as you know, we have planned, and we have presented clearly also when we presented our plan that we will do 2 synthetic securitization in the coming years. So we'll have one in 2020 and one in 2021. So we think that with what we can do now in terms of, as I say, market improvement and, I would say, reducing RWA plus the fact that we'll do sizable ABS in the next 2 years, we'll make that the average intensity or density of our CIB will go down. This is important because -- so to see how relevant this is, is also linked to the fact that we want to maintain a ROAC that is above 15%. And this is linked to the -- given the fact that the write-backs are not going to stay for the next 4 years, we need and we want to improve the density of the CIB book.

--------------------------------------------------------------------------------

Hugo Moniz Marques Da Cruz, Keefe, Bruyette & Woods Limited, Research Division - Analyst [24]

--------------------------------------------------------------------------------

Okay. Can you quantify the potential impact of the securitizations?

--------------------------------------------------------------------------------

Alberto Nicola Nagel, Mediobanca Banca di Credito Finanziario S.p.A. - CEO & Director [25]

--------------------------------------------------------------------------------

The securitization will be between EUR 1 billion and EUR 2 billion. And in terms of capital absorption is important, the impact, because if I remember well, it is going to be like possibility to have 200 basis points of improvement in return on allocated capital in the division.

Thank you, Hugo. Thank you. I don't know if there are further questions. If not, thank you to everybody. I know that today was quite an intense day because many banks reported, so you have to switch from one call to the other and write a lot of comments. So I do appreciate your attention and your time a lot. Thank you very much. We stay in touch for the next analyst call. Bye.