U.S. Markets closed

Edited Transcript of MB.MI earnings conference call or presentation 31-Jul-19 12:00pm GMT

Q4 2019 Mediobanca Banca di Credito Finanziario SpA Earnings Call

Milan Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Mediobanca Banca di Credito Finanziario SpA earnings conference call or presentation Wednesday, July 31, 2019 at 12:00:00pm 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

* 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

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

Presentation

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

Operator [1]

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

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Mediobanca 2018 to 2019 Full Year Results Conference Call. (Operator Instructions). I must advise you that this conference is being recorded today, Wednesday, the 31st of July, 2019.

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

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

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

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

Thank you for joining this full year call. It's fair to say that at the start of last year, the one that we are commenting, all the macro environment, in which banks are operating, severely deteriorated for Italy for govies spread, deteriorated for uncertainty of macro, lower expectation or revised downward expectation of GDP growth. And at the end, a steep decrease in interest rates. All this was -- is still very negative for banks, but not that much negative to prevent Mediobanca to record all-time high revenue, GOP, return on tangible equity and CET1.

Growth in revenue has been 4% to EUR 2.5 billion, and this has been driven by very strong commercial targets achieved, both in terms of new lending and in terms of net new money. Growth in NII was 3% to EUR 1.4 billion on the back of 8% growth in loan book and with a cost of funds -- cost of funding managed to be under certain reduction to 80 bps. Fee has had a slowdown, but limited to 2% and is only temporary, not fully reflecting the important investment that we have done in distribution in terms of Wealth Management that have then brought important net new money in the region of EUR 5 billion, but mainly liquidity. And also in CIB division where the partnership with Messier Maris was reached only in May.

GOP risk-adjusted was up 8% to over EUR 1.1 billion, and net profit adjusted was 8% up, stated was less than 5% lower, and this was due to lower positive one-off. You remember that last year, we saw that Atlantia stake cashing in barely EUR 90 million of capital gain. ROTE, we said, and also we said already CET1 flat at 14.1%. All the business segment improved profitability and improved also the return on allocated capital, 16% in Wealth Management with size, brand awareness and distribution empowered.

Consumer Banking maintained a very high level of ROAC of 30%, thanks to value-driven new loan and also improvement in distribution. CIB, better capital use and capital-light business model more developed [is the] ROAC of 15%. We have approved and put in place buybacks up to 3% this year. And we have coupled this with a payout of 50% with an EPS of EUR 0.47 like last year.

This is also the final year of our 3 years plan, and it's also the right moment to make a summary, make, I would say, results -- final results out of these 3 years of plan. That's so Mediobanca materially reshape and stronger coming out of these 3 years' plan. Leveraging on our distribution and asset growth organically and through M&A, we have empowered distribution of Wealth Management, attracting forces to more than 900 salespeople. Consumer branch were up 20% to 200. Corporate Finance accounts were up 30% to 140. This resulted into an increase in AUM of 31%, loans up 9% as a CAGR in 3 years, funding up 3% to EUR 51 billion.

We have kept gearing low and capitalization strong. Cost to income 46%, NPE growth on loans was, for the first time, below 4% and CET1 was up 200 basis points to 14%. This delivered -- this kind of reshaped and investment in organic empowerment of distribution and some M&A delivered some important numbers in terms of CAGR of revenues 7%, profit adjusted 13% and profitability 300 basis points from 7% to 10%. Dividends up, EPS 20%.

It's not only the size, but it's also the source and the quality that matter. In particular, if you see now, Mediobanca after 3 years, 60% of the group revenues are -- and own loans and funding are now originated by 2 newly affirmed business, one already existing, but coming out much stronger out of the 3 years. Consumer, and a new one, Wealth Management that is now visible and is already a big contributor. And this is focused on capital-light businesses. So fees enlarged by 11% and now 60% driven by advisory M&A and Wealth Management. Now we have Wealth Management and CIB each contributing roughly the same level, 40%, to group fee income.

So basically, we think that the job we have done not only has improved the results but has reinforced and differentiated our business model, in particular, in an environment of low growth and low yield. And this has reverted effectively in some market outperformance.

Going throughout our strategic road map on Page 5 across the different business segment, I would highlight only that Wealth Management, as I said, now is the biggest contributor into the fee income group, 44%. Thanks to the validation of the internal model, we have managed to bring the ROAC from single-digit to 16, still, I would say, I shouldn't say start-up, our Wealth Management is very young. So we should fish and we will fish for a better ROAC along the new initiative that we will put in place in terms of distribution and empowerment.

Consumer. We doubled basically the ROAC across the -- during the plan from 17% to 30%. And now Compass represents 40% of group revenue and GOP.

CIB, very stable, low risk, very efficient in terms of cost to income. We managed to have better return on allocated capital, hence to improve the capital allocation through AIRB validation, but also putting more emphasis on to managing the capital to CIB. This related to an important increase in profitability from 10% to 15%.

PI, through Generali, gave a steady and increasing contribution. And this was coupled with a more comprehensive ESG approach, starting from our governance, from our governance of our shareholders that now with a light shareholder impact is no more consider as -- being taken out from the free float. Basically, all the capital is now free float, and this has improved our weight in the index.

Governance has been improved with the last revision of our Board, where we have increased -- we have reduced the number, increased the independence and increased the number of directors appointed from the minority list, increased the international expertise. New board will be -- list will be submitted by the outgoing board. Even this has been an important rule introduction. We are working at activating an LTI plan, and we have been working heavily in CSR, and now we are setting also new targets among the sustainable development goals that are part of our target.

Going to Page 7, you see the impact of the work in delivering the plan. It has been an important -- it has been reverted in an important increase of revenue, all sources. So a plus 7% CAGR, 3 years' growth, spread across the different sources. So plus 5% in NII, plus 11% in fees, 14% in trading income that now is, by large majority, client-driven trading and not prop trading and 8% from stakes. Spread among the different business segment, you see that we have recorded an important increase in Wealth Management and in Consumer, while we have kept stable the contribution of CIB.

Fee pool went up from 450 to 600, so basically, 1/3; and this has been a growth that if you see it back in 6 years has been a 7% CAGR. So it's not only basically the efforts and the results of this 3 years' plan, but is starting from previously. And fee income by segment, you see also that this fee income has a totally different contribution. So it was mainly CIB in the more capital added at the start. It has been now 44%, so a majority Wealth Management and steady contribution from Consumer.

NII-wise. These 3 years, it tells us that we have had a steady growth of 5%. And this growth was the same if you see it in 6 years. We have expanded the loan book from EUR 33 billion that was in '13 to EUR 44.4 billion. So a very important increase in new loans that were qualitative because it was done at not only the margins we wanted but also at the risk we wanted. So this led to a mix of NII, where we have 2 engine of growth that are in Consumer and Wealth Management. And while the trend in CIB has been reflexive in the sense that we have had one component going up, that is Specialty Finance offsetting the negative trend of spreads and margin in CIB lending book.

GOP reached EUR 1.1 billion. So with a CAGR of 16%, every business contributed positively. Of course, Consumer and Wealth Management did the most important part but also CIB and Principal Investing had a positive contribution. It was one of the main targets of our plan was to reduce the RWA intensity. We have put ourselves the target of 64%, starting from 77%. We reached 59%. We have had 2 validation basically of large Corporate and Wealth Management CheBanca!. For the rest of the validation, we don't expect major changes in RWA.

A very important achievement, I would say, in capital generation, well above our expectation. It's an interesting slide, the one on Page 12, where you see that started from 12.1% of CET1, we have generated roughly 800 basis points of capital between earnings and RWA optimization. Then we have had a business growth of 200 basis points, organic and through M&A; shareholder remuneration in the region of 300 basis points, slightly less. And then there were other regulation changes that led to 14.1%. So basically, 200 basis points ahead of the starting point. And we will see even more if we compare to what we had in mind when we started the target.

And so we could improve shareholder remuneration. So we went up 10% on average EPS, 13% adjusted, DPS 20%. And this was, as I said, also couple with a buyback.

Comparing our -- today's number with the strategic goal set at the start of the plan, basically GOP exceeded target. It was meant to be EUR 1 billion, it is EUR 1.1 billion compared to EUR 0.7 billion at the start. Cost of risk has played positively. Banking ROAC has doubled from 7% to 15%. Loan growth has been in line with target. Density has been, as I said, better. As I said, capital has been much better. You see here that beneath all the rest, it's likely if we have achieved 15.3% because in the meantime compared to the plan, we did M&A and we did a buyback that were not contemplated in the target figure of the plan. So it's likely that today, 14.1% would have reverted into 15.3%.

I would say that we are happy with all the trajectory. We have, of course, some small delay in delivering numbers of Wealth Management. This is led by -- justified or explained by the fact that, as you remember, we have started basically a year after the plan because -- in Wealth Management, because we had to cope with 2 integrations, one Banca Esperia and the second Barclays that clearly took our time in -- more in the integration rather than in development. So we are basically, I would say, 1.5 years behind the -- 1, 1.5 years behind our initial budget or target, we're anyhow very demanding. For the rest, we are much better than the plan.

This picture shows that in terms of comparison, revenue growth, NII and fee, we stand out pretty well in comparison with some peers in Europe. As well, we can say the same in terms of ROTE, CET1 and dividend yield, all combined. This has reverted into a positive trend of the Mediobanca stock if you compare 3 years' performance from the start of the plan, last year performance compared to Italian banks, European banks and, in general, other industries.

Going back to this year results. Basically, we have had another growth in GOP of -- compared to last year of 8%. GOP was led -- growth was led by Wealth Management, Consumer Banking and Principal Investment. Corporate investment banking was stable. And basically, this was another improvement, thanks to strong revenue growth compared to the market standard and lower-than-expected loan loss provision.

Long-term growth in terms of NII has been confirmed with an increase of 3%. 3% was driven by solid volume growth in terms of new loan, up 8%. And this has been fueled by all the divisions. So we have seen 11% increase in Wholesale Banking, 6% in Consumer, 8% in Specialty Finance and 11% in mortgages.

Cost of funding was a clear theme this year in a moment where Italian banks had to cope with widening of the spreads of the republic and also of the financial. So we managed to go into the market in the right windows in the -- to do a variety of funding -- using a variety of funding mix and sources. So having part of our funding given or achieved through collateralized loan and/or issues.

So -- and we also placed into the market basically EUR 3.1 billion last -- up to June at an average cost of 145 that compares with 200 of historical costs. And also the newly issued one that were issued basically in the first -- at the end of last year, beginning of this year; so between June and July, we have issued another EUR 1.3 billion. So we have done already a good part of the funding of the year at an average spread of 97 as opposed to 125. So we contained the cost of funding to a level of 80 basis points on average.

As I said, this year, we have had an environment where wide advisory, Specialty Finance and management fee were on the rise on a good level. We couldn't say the same for Capital Markets. So from EUR 91 million, we went down to EUR 48 million for lack of transaction. Then also the fact that we didn't have any performance fee, even if our dependence or our -- the contribution of performance fee to our overall fee is negligible, but this year, we didn't have any.

On top, there is one element that is linked to the growth. The more we grow, the more we grow in terms of gross fee, but also the more we grow in a passive fee that we have to pay; and we pay like everybody to recruit people. So growth is positive on one end because we increase size and we increase net new money as a cost, and this is the passive fee.

So we have had important commercial results, not only, as I said, in new loans, but also in net new money. Mediobanca Group is a young presence in Wealth Management, but notwithstanding that, for the second year, we have collected more than EUR 4.5 billion of net new money, EUR 4.7 million last year, EUR 5 million this year. With the attention that this year, the mix was more in liquidity because client aversion preferred to stay liquid. But this liquidity is going to be interesting in this year because it's going to be at least partly converted into fees and is already happening.

So basically, this kind of net new money was possible because of important investment in Wealth Management. And you can see here the rollout. So we have, today, as I said, 900 salespeople where relationship manager, from the start, increased by more than 2x. There were 260, and they are more than 500, 550. Financial advisor, we have reached 335. Branches have been fine-tuned. This has been the effort with the consolidation of Barclays; while financial advisory shop from 0, we went to 70. So we are building a serious presence here. And so we are sure that this kind of investment will revert into higher fees in the quarter to come.

Costs were under control in the sense that cost to income was stable at 46%. Cost inflation in the group of Mediobanca is linked to this -- all this kind of new empowerment of distribution and/or what is related. So IT regulation, compliance, hiring of people. So every single voice went up linked to the development of the group.

Sound asset quality; even improved. We have achieved an all-time high -- pardon, all-time low cost of risk, 52 basis point starting from 62. Not only this, we have, during the exercise, sold 2 small or medium-sized NPL legacy books, both of them in CheBanca!. So this year, for the first time, we have reached less than 4% gross NPE on loans that I think it's quite an interesting achievement.

Coverage broadly unchanged here. We have had a decrease of net new -- net NPLs by 4% with a more important decrease in net bad loans. The vast majority has been, as I said, in Wealth Management. So CheBanca! -- then we have had a small increase in -- are likely to pay in Consumer Banking and in Corporate Investment Banking.

CET1 above 14% with a dynamic of the one that has been mentioned on Page 29. So 180 basis point of net earnings, AIRB related to CheBanca!. Then M&A, 15 basis points. Dividend in this year, we have introduced a buyback. Buyback: here, you see 4.3% because basically what happened is that we are allowed to buy only 3% but then we have released a part of these 3% to do -- to pay the transaction of Messier Maris. So we have restated the possibility to continue the buyback up to 3%. So at the end, we would have bought 4.3%. And according to rules, this 4.3% is basically already upfronted in the ratio.

Going to divisional results. All division with double-digit ROAC, a good improvement in PBT of, I would say, basically GOP, as I said, 8%; but divided throughout Wealth Management plus 9%; Consumer plus 5%; Principal Investing plus 15%; CIB stable. In terms of ROAC improvement in Wealth Management and in CIB, stable Consumer and Principal Investing.

If we stick to Wealth Management on Page 32, we see that it became already an important source of revenue. We have now EUR 550 million of revenue coming from this business that are well diversified between both in terms of segment, 50% Affluent, 50% Private with an important CAGR throughout this 3 years' plan; but also in terms of sources because 50% is fees and -- a bit more than 50% is fee, and the rest is NII. It is important also for stability of revenue. While ROAC, as we said, has increased and even they are splitted between Affluent and Private, 50-50.

The effort has been to create really only omnichannel wealth managers. So it's what we are doing, basically favored by the fact that we didn't have legacy when we started this activity. So we could invest in new type of channel. Notably, the light channel like digital, CRM and robot advisory or robot for advisory, but also couple this with a variable cost distribution network like the financial advisor.

Clearly, every year is better in the sense that the perception of Mediobanca and CheBanca! in the business, the specialization of Mediobanca Private with a link with Mediobanca Investment Banking. And the technological touch and also the soundness of the group makes CheBanca!, likewise Mediobanca Private banking, more and more active in the hiring.

So we have seen an acceleration of hiring and acceleration of net new money in the last quarters because the project is taking off and is seen as more credible and more visible by the observer and by the market participant. This reverted into, as I said, an important net new money, both in Affluent and in Private. The element is that, as I said, this has been mainly liquidity and, hence, is not contributing to fees. But the conversion is already happening.

The breakdown is -- of the 2 segments is on Page 35. So TFA up to EUR 25 billion, more than EUR 25 billion, 11 -- 12% increase year-on-year on CheBanca! with EUR 10.3 billion in AUM and EUR 15 billion in deposit. In Private banking, it was up 12% as well with deposit up 50% to EUR 7 billion. We have had like in part -- intended in part, not intended some outflow in asset management, partly because the institutional asset management in SGR we wanted to exit from some legacy mandates at very, very few bps of remuneration. So a business in which we don't plan to be massive in the future.

On the other, RAM asset management like mainly systematic in the liquid segment has had some outflow, and this is the reason of -- part of the performance of the Q4, while the Affluent segment was very positive and added EUR 400 million of [interesting] AUM.

Consumer reached all-time high results on the back of a longer-plan trajectory, a plan of increasing distribution, managing a new loan-only with a value approach. So only if we are convinced about the margins that we can get, so abstaining from a pure market share approach. So at the end, 6% increase in 3 years' CAGR with cost to income that is at 29% and efficiency ratio that are all-time high. With a very good asset quality control and core that reached 185 basis point, this led to all-time high net profit of EUR 336 million.

The loan book trend has seen an increase of 6% year-on-year. So from EUR 12.5 billion to EUR 13.2 billion. We have grown this year in the last 6 months like the market, while in the previous 2 years, we were more carefully in growing at, as I said, the marginality we liked and this led to this positioning into the market.

That was also helped by the fact that we have increased direct distribution. So we wanted to retain more margins, selling more personal loan through a wider distribution network. So we decided to increase by 10% our branches and mainly done through agents. And also we have powered up our digital platform in acquisition of new customers. And in the last 12 months, we have had basically 10% of personal new loan originated by direct distribution coming from digital platform.

Going to CIB. CIB, as I said, has had an important news in the last few years. CIB was complemented by Specialty Finance in factoring in MPS bank. This has well played the role to amortize some decrease in revenue that were expected, in particular, in NII, where margins have tightened. We have, hence, maintained flat on the high level in the revenue line.

And in the meantime, we have been working on capital allocation and cost income, so that we maintain the group CIB at [interesting] ROAC, 15%, not too volatile; because basically you see that is steady in terms of return and at a cost of income that is well below 50%. So the CIB revenue today has a different composition compared to just a year ago. It will be -- this would be also more evident if we compare to 3 years ago. Lending revenue went down, Specialty Finance revenue went up and advisory revenue went up as well. Prop trading is limited to 1%.

Specialty Finance, in particular, has had an interesting dynamic. You see it on Page 45. So with a loan book trend that has been growing 38% in the last 3 years and notably 8% last year. This is based on basically factoring that went up to 1.9 -- roughly EUR 2 billion in warehouse of acquired NPLs that have reached EUR 370 million.

Principal Investing, nothing to say, nothing to worry that the positive contribution -- recurring contribution given by Generali.

Holding function here, we have continued RWA deleveraging, where -- this is related to leasing. Leasing is a business that we want to rightsize to the target segment in which we are. So large corporate and mid-corporate. This is the reason of the reduction of the loan book.

Cost trend, basically nothing to notice. We managed to keep this cost at certain level, given the fact that, as I said, we need to invest also in central function and in regulation project. So the net loss trend was kept under 20% -- 19% of the group net adjusted profit. So coming down from the starting point of 32%.

Funding, basically, I said you very comfortable situation, a good part of the new funding plan already done. And so at least a quarter.

MREL, we commented in other call, Mediobanca is well positioned because we have been assigned 21.4% of RWA as a requirement, one of the lowest in -- among those disclosed by European banks. As we have enough eligible liabilities, basically no subordination, we don't have to need to do -- we don't have the need to issue any expensive new bonds for the time being.

So basically, as a closing remarks, I would stick to the fact that this has been the best year of the 3 years' plan in terms of revenue, GOP, CET1, ROTE and payout. On the back, a very important reshape of the group. In the -- so at the end, it's a bigger group, but we would say it's a better group in terms of source of revenues, quality of revenues and profitability. And I think that's a very good basis to work at our new 3 years' business plan that will be presented at 12 November, 2019.

Thank you very much, and I'm now available for your questions.

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

Questions and Answers

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

Operator [1]

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

(Operator Instructions) Your first question comes from the line of Christian Carrese from Intermonte.

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

Christian Carrese, Intermonte SIM S.p.A., Research Division - Research Analyst [2]

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

I have just 2 quick questions. The first one -- can you hear me?

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

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

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

Yes. I can hear you, sorry.

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

Christian Carrese, Intermonte SIM S.p.A., Research Division - Research Analyst [4]

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

The first one on fees. Slide 23, we see that the fourth quarter was rather weak. Pretty stable, the Consumer Bank while Corporate Investment Banking was weaker than last year. And we have to take into account that in this quarter, there was already the contribution of the recent acquisition of the French boutique. So I was wondering, what do you see for the future or what will be the main driver, more Wealth Management or Corporate Investment banking on this line?

The second question is on the cost of risk. If you look at Slide 27, we are starting to see a slight pickup in the cost of risk in the last 3 quarters from Consumer Banking. For sure, it has been an excellent year for the Consumer Banking. I was wondering, what are you seeing in terms of asset quality evolution? Maybe there could be some deterioration due to the GDP slowdown, so if you can give us some color on that.

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

Alberto Nicola Nagel, Mediobanca Banca di Credito Finanziario S.p.A. - CEO & Director [5]

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

Thank you for your questions. So fees, in terms of fees, basically the reason of the soft performance this year is the absence of any serious ECM activity that was basically sustaining last year. And in Wealth Management, I would say that the quality is much better because it's only management fee. While last year, we had some performance fee and not recurrent.

Looking ahead, I think that in terms of fees, we see an interesting year where we see an important improvement in the actual line that is led by rollout of the plan of distribution and, hence, net new management -- net new money of Wealth Management. The fact that we have empowered our advisory activity throughout Messier Maris. So if markets are stable, so we -- if we don't have another year of lackluster or absence of any capital market transaction, I think we can confirm that we are positive on the trend of fees for the coming year.

Cost of risk. Cost of risk, we have guided the market last year to have basically higher cost of risk. So more than 52. So this basically up in the -- more in the last part of the year rather than the first part of the year. This is not related to deterioration; it's related to a number of small or concurring factor. I would try to mention a more important one. The more important one related to the new standard. This new standard makes that basically, as you know, IFRS 9 is a system where from the day -- the day 1 of a new credit, you have to set aside. Why? Before, it was not like that. So the more you grow, the more you have to, of course, set aside in terms of provision, even on the bonds.

The second element is going to be the new definition of default. Before it was 3 installments were needed, 3 missed installment were needed to create a deteriorated loan. Now -- or in the watch list -- now it's enough one. And of course, the -- also the mix, because the mix is such that we want to -- also for profitability reason, generate more personal loan throughout our branches that is 2x the one of third-party distribution network. But of course, the relative cost of risk is a bit higher.

So what does it mean is, it means that we think that next year, we should have an increase of cost of risk going back to the bps of the previous year. So in the region of 60, 62.

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

Operator [6]

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

Your next question comes from the line of Alberto Cordara.

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

Alberto Vittorio Luigi Cordara, BofA Merrill Lynch, Research Division - Research Analyst [7]

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

So first of all, congratulations because it doesn't happen too often that I think the bank is making the target of the plan. So this is, I think, is a great achievement. And then starting from that, I know maybe it's complicated to say, but do you think that the new plan would be consistent with what we have done up to date or we should expect some major departing lines?

And then more to the -- in terms of the operational business. I think the last quarter was a challenging quarter in terms of IB fees. Going forward, can you give us an idea if there is -- what will be your pipeline in Investment Banking? Because my impression is that if capital is becoming a gain, the rollout a gain for Italian banks, you may be well positioned to do more deals.

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

Alberto Nicola Nagel, Mediobanca Banca di Credito Finanziario S.p.A. - CEO & Director [8]

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

Thank you, Alberto. New plan, I think it will be consistent with this one. Basically, we think adjusted margin, what we are trying to do and we have done in Wealth Management. Wealth Management, it's fair to say is a project of 10 years. It's not a project of 3 years. It's a project whereby consistently working out through distribution, digital and physical and upgrading our system, our tool, we need to build something that is sizable in -- more in 10-year horizon plan span of time rather than in 3 or 6 years. So definitely, it will be a continuation of the existing path.

In terms of IB fees, we see a very good dialogue in M&A. M&A is, I would say, very well supported by an M&A dialogue that goes from mid-corporate to large corporate, from small transaction to big transaction. This is based on a number of elements: very low interest rates, lack of organic growth, disruption, a lot of also is driven by disruption that is pushing to do more M&A.

We have seen also a good dialogue in IPOs back again. So we are working at several possible IPOs. So we need to have a market that is receptive for this. But -- so overall, I'm not pessimistic on IB fees.

Also including what you sharply said about the fact that some sectors, notably the banking sector, may look for consolidation. And debt consolidation usually triggers some capital market who may trigger, fortunately or unfortunately, depending where you see some capital market call.

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

Operator [9]

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

Your next question comes from the line of Giovanni Razzoli.

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

Giovanni Razzoli, Equita SIM S.p.A., Research Division - Financial Analyst [10]

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

I have 2 questions. The first one is on your NII, which proved very resilient in this quarter. You were extremely effective into managing, throughout the year, the cost of funding. If I look to the Slide #22 of the presentation, you still are on a supportive path in terms of substituting the expiring bonds. So the cost of funding should represent for you a tailwind in terms of NII.

So my question is, do you see the competitive environment deteriorating to a level such that the NII may -- we can compare with -- with the run rate of this quarter? And if so, are you ready to increase a little bit to your risk appetite as you have may already mentioned in the consumer credit, so to support this revenue line going forward. This is my first question.

The second question relates to your M&A strategy. You've been very clear and very effective and vocal in terms of small-medium transactions. We've seen a couple of them in the next -- in the last few years. You do have something in pipeline probably in the next couple of months. I just like to know what is your approach in terms of possible transformational deals? Are you scouting for these or you do adopt a more passive approach on it? What's your approach there? Also in light of what you are saying regarding your 3% stake in Generali.

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

Alberto Nicola Nagel, Mediobanca Banca di Credito Finanziario S.p.A. - CEO & Director [11]

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

Thank you for your questions. NII. NII, we are working at a budget of this year where we do see still not only a resilience of the NII, but also we can hope to have another increase of NII. It would be mid single-digit would be low single digit. But -- and it will much depend if also interest rates are going further down. With the rate as of today, we are confident to have the sixth year in a row of growth of NII without compromising or risk. So this has to be said.

On the contrary, one element that, to me, the market is not fully discounting is this new accounting standard and provisioning system linked on the fact that basically, at the end, the UTP are going to be treated the same way of bad loans. This is very negative for banks, not only in Italy. I know that many banks complained because of this, I would say, not logical treatment.

So basically, it happens that if you enter in UTP, the new UTP today, as you know, you have to cover it because in many cases they are noncollateralized in 3 years. So at the end, the risk appetite for launch will become less evident because also of the heat you can have in terms of provisioning. There can be some element of treasury NII because today, we have a very short-term position in terms of govies that -- and absolute very low level of govies. So we are, I think, well below EUR 3 billion now of Italian govies.

So maybe that if there is a widening of the spread on very liquid and not big duration, we can position ourselves a bit better because today, we are honestly -- within the guidance that I gave you, we have also incorporated the fact that we are very liquid and very short in terms of, I would say, our treasury activity department.

In M&A, honestly, we don't have anything serious on the table, serious means sizable. When it comes to sizable, I think my first reaction would be no CIB, no consumer sizable; would be more in Wealth Management; and it would be more in segments where, I mean the value is more attached to a more durable, more, I would say, persistent, no? So I would say more distributor rather than producer, but distributor that have, I would say, an enduring and lasting value. That is something that, as we all know, still have to be seen throughout the MiFID II digital transparency exercise.

So we are not -- we are reviewing all possible candidate for that theoretically, but nothing is available or on our table. And then of course, we are happy to discuss with everybody. But today, our center scenario that we go and grow organically and with transactions that are in the region of well within EUR 500 million, well within that. So I would say more EUR 300 million rather than 500 million, but we don't exclude bigger deal. The only element is that today, they are either not available or not actionable or not ready to.

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

Operator [12]

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

Your next question comes from the line of Antonio Reale from Morgan Stanley.

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

Antonio Reale, Morgan Stanley, Research Division - Equity Analyst [13]

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

I've got 2 very quick questions. One is a follow-up on NII and the second question on Indonesia, I'm afraid.

On the NII, clearly, where you flagging that cost of funding, are the holding function stabilizing? When we look forward in a more negative rate environment, it feels NII growth is going to be a lot more reliant on volumes going forward. What's the outlook for loan growth across CIB retail and Consumer Finance for next year? And perhaps, can you just give us what you're budgeting for group NII into 2020?

And the second question is on Indonesia. BFI financed the integration, which unfortunately has been delayed. How do you see this affecting the day-to-day business? I understand there was a large shift in know-how between Compass and BFI Finance required. When do you expect the deal to be closed?

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

Alberto Nicola Nagel, Mediobanca Banca di Credito Finanziario S.p.A. - CEO & Director [14]

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

Thank you very much for your questions. First, NII. Basically, as I said, NII budget expectation is such that we should have with the actual EURIBOR level, 3 months EURIBOR, and given still a very, I would say, conservative position at treasury level. So short-term position of our liquidity, we should have the sixth year of increase in NII. So we -- of course, you won't be plus 5%, it will be less than that. It would be low single digit. But we still fish for that with a new loan production that can be even lower than last year. So we don't think that we're going to have another 9% new loan. We're going to be less than that, but not -- and we will have, of course, also a less important growth in NII. But this is doable.

And I think it will much depend if there is a further deterioration of rates. But we have done also our sensitivity. A further deterioration of rates is not only negative for us, as you know, because you sharply pointed out in your research. Compass is clearly benefiting from this, while CheBanca! is a bit suffering. But basically, net-net, we don't have a big difference.

Indonesia. Indonesia, I tell you, where are we. Basically, on one hand, no impact on Compass because Compass is totally, fully devoted to Italy, always in touch with people and trends of BFI that have had a very good year. And also the new election, the reelection of the President of Indonesia, I think it's a very good news also for the stability of the macro and the outlook of Indonesia.

Where -- why we are stuck, but we are -- we hope, if not confident, to unlock this problem is that basically, there is some procedural pending controversy between the seller and a previous shareholder that makes that the formal authorization process cannot start. Now we have set ourselves a period of time that will basically coincide with our Capital Market Day to understand whether this kind of procedural impediment can be solved as we wish and we hope, in order that we can then find the authorization.

So basically, we see if by that date it's possible or not. In the meantime, what I can tell you is that the company is doing very nicely in Indonesia, and we keep having a very good relation with them. This is not having any distraction of Compass management vis-à-vis its daily duty in Italy.

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

Operator [15]

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

(Operator Instructions) Your next question comes from the line of Menico Santoro.

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

Domenico Santoro, HSBC, Research Division - Analyst [16]

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

It's Domenico, HSBC. You kind of answered to this question already on NII. I just want to be clear. You said that you expect a slight growth in terms of NII with the level of risk they are at right now and potentially also a lower level ratio, the net new effect significantly results next year.

Now I mean the world is changing. And if we look at the forward curve, of course, end of the year, there's going to be a 20 bps cut. Potentially, there's going to be QE. I understand there is part of the balance sheet that is not really very sensitive. You might even balance it, but of course, we are here in a scenario of lower negative waves for longer.

So just wondering about the worst case, what could be in terms of NII? Because, clearly, the cost of equity that is implied in the valuation of Italian banks means basically that investors, they are not paying for the earnings at this point.

And then to be instead more positive, I understand there's a mix effect on your loan loss provision. So that's the reason why you expect an increase. But lower rates, does it mean that provision, they are going to probably improve from this level? And then given that the remuneration of capital from [Generali] is going to be lower for the bank. So I was just wondering whether you might have a little bit of more M&A appetite and probably move beyond the EUR 500 million size in terms of deal that you have mentioned before.

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

Alberto Nicola Nagel, Mediobanca Banca di Credito Finanziario S.p.A. - CEO & Director [17]

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

In the NII, now let's elaborate a bit more in the sense that, as you know, Mediobanca can never benefit of a lower interest rate environment because, basically, 75% of NII is generated out of Compass. Compass is a kind of machine, like every other consumer, that is definitely benefited net-net when you have a lower cost of funding. Should you have -- should we have negative interest rates, should Compass finance itself throughout Mediobanca at lower interest rates, basically, on average, it will cash in the difference as a better margin. So there is a bit of a good resiliency of our NII, given the weight of Compass to this scenario, no? That's why we have still forecasted the growth in NII. So I do see this confirming even if interest rates can go even further down. There can be -- if we can elaborate with you, there can be a negative flip side in asset spread with very important abundant QE and TLTRO, not the one that have been introduced because the one that -- the new TLTRO is not something that is supporting really the new loans to corporates because it's only 2 years. So it's only a substitution. So there can be with a QE general asset tightening spreads.

Spread asset tightening, we can suffer a bit more in other, I would say, segments like CID or mortgages. But given the weight of Compass, I think stability, resiliency of NII is there at least. No, I don't -- I would not say that lower interest rates are that much linked in our case to loan loss provisioning. Loan loss provisioning for us is a matter of, I would say, not much deterioration of the environment, but as I said at the beginning of the call, more by technical elements. First, by the fact that we are all-time low and, hence, by definition, this is a record level of low loan provision. Second, because new criteria are inflating a bit technically the loan loss provision because you have a new definition of default and you have the new IFRS 9, that mix that you have to set aside, that they won the first day of new loan and not when the loan is deteriorating. And then the mix because as we do more personal loan, personal loan have the biggest spread but also commence bigger cost of risks. That's why I think seeing our cost of risk back to last year level, 60, 62 basis points is the actual guidance.

M&A. Yes, M&A, basically, you're right in the sense that if we see -- if our stock maintains super rating and the cost of equity that you mentioned, we may be more prone to do M&A. On the front theory to practice, I think, is not easy because at the end, available interesting targets that can be integrated and can contribute to our equity story, in general, are not so basically abundant. So basically, now, we are in discussion with one possible transaction. We will see other, but we don't see a very important pipeline today of existing target available. So it's also a matter of availability of target. That can be theoretically in a situation where if the situation is deteriorating more, normally, Mediobanca stands out much better. And hence, there can be a counterparty that like what happened for us with Barclays, they are forced seller. Today, we don't have still forced seller. We may come to a point where there are forced seller. At that point, I think we can do more.

Thank you very much for your patience and also quality of questions. We will have our first Q call at the end of October. And then so basically, it would be 24 October. And then we will have, as you know, the Capital Market Day or the business plan presentation day, the way we would call it, on the 12 November. Thank you very much for your patience.

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

Operator [18]

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

That does conclude our conference for today. Thank you for participating. You may all disconnect.