Financial statements for three months to 30 September 2008 approved
Price sensitive
At a meeting held today with Renato PAGLIARO in the chair, the Management Board of Mediobanca approved the Group’s financial statements for the three months ended 30 September 2008, as illustrated by Chief Executive Officer Alberto NAGEL.
Consolidated results
The Mediobanca Group’s results for the three months ended 30 September 2008 reflect the worsening of the financial crisis in the final weeks of the quarter, which saw several major banks collapse and a liquidity crisis without precedent. The volatility in this phase has led to extraordinary shifts in stock market prices, a further rise in interest rates and a subsequent slowdown in corporate activities.
The Mediobanca Group’s results for the three months ended 30 September 2008 reflect the worsening of the financial crisis in the final weeks of the quarter, which saw several major banks collapse and a liquidity crisis without precedent. The volatility in this phase has led to extraordinary shifts in stock market prices, a further rise in interest rates and a subsequent slowdown in corporate activities.
Against this backdrop, the Mediobanca Group has maintained appreciable profitability, ending the quarter with a net profit of € 309.9m (30/9/07: € 389.7m, pro-forma). This result, which includes the profits earned by the Linea group for the first time following its acquisition on 27 June 2008, was boosted by higher net interest income and gains on disposals of AFS securities, but also reflects a much reduced contribution from trading and the Group’s equity-accounted companies, plus lower net fee and commission income and higher costs due to the new ventures launched last year.
In particular:
- net interest income rose by 7%, from € 208.1m to € 222.7m, driven by growth in average volumes, which offset the rise in the cost of funding;
- net trading income, despite falling 12.2% from € 186.6m to € 163.8m, reflects break even on trading operations (with dealing profits of € 0.9m, compared to € 72.8m last year), plus gains on disposals for the quarter amounting to € 162.9m (€ 113.8m);
- net fee and commission income declined by 7.1%, from € 119.5m to € 111m, reflecting the slowdown in corporate and investment banking referred to above;
- income from principal investing also showed a reduction, from € 171m to € 96.2m, following the slowdown in profitability by Assicurazioni Generali (down 47%) and RCS MediaGroup in the second quarter;
- costs grew by 25.4%, from € 127m to € 159.3m, reflecting the Group’s domestic and international expansion programmes plus the costs incurred in connection with CheBanca! (€ 19m for the quarter), net of which the increase would be 10.5%.
Bad debt writeoffs rose from € 62.3m to € 75.9m, € 2.2m of which refer to corporate banking, € 3.8m (€ 2.3m) to leasing, and € 69.9m (€ 60m) to retail operations. The 21.8% increase in this item reflects the higher volumes deriving from the consolidation of Linea and the general worsening of the risk profile.
With the launch of the new three-year business plan, the Group’s areas of operation have been segmented differently to form three new divisions: Corporate and Investment Banking (CIB), consisting of wholesale banking and leasing activities; Principal Investing (PI), which brings together the Group’s investments in Assicurazioni Generali, RCS MediaGroup and those taken as part of merchant banking and private equity activities; and Retail and Private Banking, which includes consumer credit, CheBanca! and private banking (with the pro-rata contribution of Banca Esperia as is customary).
Looking at the results by business area, all the main divisions held up well, despite the adverse market conditions and the increase in costs due to the new initiatives. Net profit from CIB was virtually unchanged, at € 200.2m; total income posted a modest decrease, from € 343.2m to € 319.7m, while operating costs rose from € 56.5m to € 71.5m, driven by staff costs as a result of the Group’s new non-Italian ventures. Retail and private banking showed a 7% rise in total income, from € 185.4m to € 198.3m, due to consumer credit operations and despite the 12.1% reduction in net fee and commission income from private banking, which was down from € 21.4m to € 18.8m. The increase in operating costs, from € 77.1m to € 93.5m including the € 19m attributable to CheBanca! referred to above, plus the rise in bad debt writeoffs, from € 60m to € 69.9m, brought net profit down from € 29.2m to € 24.7m. The contribution from principal investing, down from € 159.9m to € 86.1m, reflects the reduction in profits earned by Assicurazioni Generali and RCS MediaGroup mentioned previously.
On the balance-sheet side, there was growth of 3.2% in loans and advances to customers, from € 34.6bn to € 35.7bn, of 3.8% in funding, from € 45.6bn to € 47.3bn, and a rise in treasury funds from € 10.2bn to € 10.8bn, while AFS securities declined from € 3.8bn to € 3.3bn. These trends demonstrate the objective of safeguarding a comfortable liquidity position for the Group despite an scenario which is unfavourable to new issuance of funding products.
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Significant events that have taken place during the three months include:
- further trimming of the AFS equity portfolio, with net divestments of approx. € 150m generating gains on disposal of € 158.2m;
- reallocation of holdings in debt securities from the trading book and AFS portfolio to loans and receivables, owing the lack of a reliable fair value for these investments at the reporting date due to the illiquid market. This reallocation, which was made possible by the recent amendment to IAS 39, also reflects the changed time horizon of the investments.
The transfer was made at book/fair value as at 1 July 2008, and involved bonds carried at € 542.5m, € 209.6m which from the trading book and € 332.9m from the AFS portfolio; these are chiefly ABS securities or bonds subscribed for via private placements. Without this reallocation, based on market prices at the reporting date which are meaningless, a writedown of € 23.8m would have been charged, € 7m of which would have been taken to profit and loss account;
- the closure of all outstanding positions versus Lehman Brothers, largely derivative contracts hedging bonds issued by the Bank, and their renegotiation with other counterparties. All these positions involved Mediobanca as debitor; one of these was backed by collateral worth approx. € 11m more than the contract at the closing date, in part as the result of the extraordinary volatility. This generated a creditor position for Mediobanca which was covered in full by gains realized on the other closures. However, full closure of our operations with the US banking group will obviously depend on procedural timescales;
- approval of the internal capital adequacy assessment process (ICAAP) required under Basel II regulations.
- further trimming of the AFS equity portfolio, with net divestments of approx. € 150m generating gains on disposal of € 158.2m;
- reallocation of holdings in debt securities from the trading book and AFS portfolio to loans and receivables, owing the lack of a reliable fair value for these investments at the reporting date due to the illiquid market. This reallocation, which was made possible by the recent amendment to IAS 39, also reflects the changed time horizon of the investments.
The transfer was made at book/fair value as at 1 July 2008, and involved bonds carried at € 542.5m, € 209.6m which from the trading book and € 332.9m from the AFS portfolio; these are chiefly ABS securities or bonds subscribed for via private placements. Without this reallocation, based on market prices at the reporting date which are meaningless, a writedown of € 23.8m would have been charged, € 7m of which would have been taken to profit and loss account;
- the closure of all outstanding positions versus Lehman Brothers, largely derivative contracts hedging bonds issued by the Bank, and their renegotiation with other counterparties. All these positions involved Mediobanca as debitor; one of these was backed by collateral worth approx. € 11m more than the contract at the closing date, in part as the result of the extraordinary volatility. This generated a creditor position for Mediobanca which was covered in full by gains realized on the other closures. However, full closure of our operations with the US banking group will obviously depend on procedural timescales;
- approval of the internal capital adequacy assessment process (ICAAP) required under Basel II regulations.
Divisional results
Corporate and Investment Banking (CIB)
- Loans and advances to customers up 4% since June 08, at € 23.6bn2
- Positive trend in funding during the quarter, up from € 36.2bn to € 37.9bn, with a subsequent increase in treasury funds, from € 9bn to € 9.4bn
- Total income down 7%, to € 320m: growth in net interest income (up 13%, to € 94m) and in gains on disposals (up from € 104m to € 158m) offset net trading income being virtually wiped out and a 29% decrease in net fee and commission income from investment banking
- Costs up 27%, to € 72m, due to international development initiatives
- Net profit stable at € 200m (versus € 201m)
The net profit earned by the corporate and investment banking division division was virtually unchanged at € 200.2m (30/9/07: € 200.5m), boosted by € 162.7m in gains on disposals of AFS securities. Total income was down from € 343.2m to € 319.7m: the 13.4% rise in net interest income, from € 82.8m to € 93.9m, and the increase in the share of profits earned by equity-accounted companies, from € 0.2m to € 7.6m - reflecting the good results posted by Burgo (due to non-recurring items) - were offset by dealing profits being virtually wiped out (compared with € 68.4m last year), and net fee and commission declining from € 78.2m to € 55.5m due to the widespread slowdown in investment banking activity. Operating costs were impacted by the Group’s international ventures coming fully onstream, with a 26.5% increase, from € 56.5m to € 71.5m, compared with the same quarter last year which was only impacted in part by this development; indeed, compared to the quarter-by-quarter average for the last financial year, the increase in costs was just 5%. Bad debt writeoffs totalled € 6m, € 3.8m of which in connection with leasing and € 2.2m in respect of the corporate loan book (due to the increase in volumes and the associated risk profile).
Balance-sheet aggregates in the three months reflect growth in loans and advances to customers, from € 26.9bn to € 28.2bn, funding, from € 36.2bn to € 37.9bn, and treasury funds, from € 9bn to € 9.4bn, while the AFS securities portfolio continued to decline, from € 2.8bn to € 2.2bn.
Corporate and Investment Banking (CIB)
- Loans and advances to customers up 4% since June 08, at € 23.6bn2
- Positive trend in funding during the quarter, up from € 36.2bn to € 37.9bn, with a subsequent increase in treasury funds, from € 9bn to € 9.4bn
- Total income down 7%, to € 320m: growth in net interest income (up 13%, to € 94m) and in gains on disposals (up from € 104m to € 158m) offset net trading income being virtually wiped out and a 29% decrease in net fee and commission income from investment banking
- Costs up 27%, to € 72m, due to international development initiatives
- Net profit stable at € 200m (versus € 201m)
The net profit earned by the corporate and investment banking division division was virtually unchanged at € 200.2m (30/9/07: € 200.5m), boosted by € 162.7m in gains on disposals of AFS securities. Total income was down from € 343.2m to € 319.7m: the 13.4% rise in net interest income, from € 82.8m to € 93.9m, and the increase in the share of profits earned by equity-accounted companies, from € 0.2m to € 7.6m - reflecting the good results posted by Burgo (due to non-recurring items) - were offset by dealing profits being virtually wiped out (compared with € 68.4m last year), and net fee and commission declining from € 78.2m to € 55.5m due to the widespread slowdown in investment banking activity. Operating costs were impacted by the Group’s international ventures coming fully onstream, with a 26.5% increase, from € 56.5m to € 71.5m, compared with the same quarter last year which was only impacted in part by this development; indeed, compared to the quarter-by-quarter average for the last financial year, the increase in costs was just 5%. Bad debt writeoffs totalled € 6m, € 3.8m of which in connection with leasing and € 2.2m in respect of the corporate loan book (due to the increase in volumes and the associated risk profile).
Balance-sheet aggregates in the three months reflect growth in loans and advances to customers, from € 26.9bn to € 28.2bn, funding, from € 36.2bn to € 37.9bn, and treasury funds, from € 9bn to € 9.4bn, while the AFS securities portfolio continued to decline, from € 2.8bn to € 2.2bn.
Principal Investing (PI)
- Income halved, to € 88m
- NAV: € 4.8bn, down 4% since end-June 2008
The share in earnings attributable to Mediobanca for the period declined by 47.9%, from € 169m to € 88m, € 80.6m (€ 151.3m) of which was attributable to Assicurazioni Generali and € 8m (€ 17.8m) to RCS MediaGroup.
- Income halved, to € 88m
- NAV: € 4.8bn, down 4% since end-June 2008
The share in earnings attributable to Mediobanca for the period declined by 47.9%, from € 169m to € 88m, € 80.6m (€ 151.3m) of which was attributable to Assicurazioni Generali and € 8m (€ 17.8m) to RCS MediaGroup.
Retail and Private Banking (“RPB”)
- Segment has self-financed strengthening of distribution platform, with net profit of € 25m (30/9/07: € 29m) more than paying for the € 19m in costs due to the start-up of CheBanca!
- Total income up 7%, to € 198m, with all product segments contributing positively: revenues from consumer credit up 5% to € 149m, from retail banking up 23% to € 14m, and from private banking up 9% to € 36m
- Segment has self-financed strengthening of distribution platform, with net profit of € 25m (30/9/07: € 29m) more than paying for the € 19m in costs due to the start-up of CheBanca!
- Total income up 7%, to € 198m, with all product segments contributing positively: revenues from consumer credit up 5% to € 149m, from retail banking up 23% to € 14m, and from private banking up 9% to € 36m
- Consumer credit:
• Merger of Linea into Compass completed
• Loan book worth € 8,413.1m (up 1% vs end-June 2008)
• Cost of risk under control (adjustments/loans: 3.1%), despite households’ financial profile deteriorating
- Private banking:
• AUM stable at € 13.4bn (vs € 13.5bn three months previously)
• Profitability preserved, with net profit up from € 14m to € 18m, due to CMB’s traditional banking activity
• Merger of Linea into Compass completed
• Loan book worth € 8,413.1m (up 1% vs end-June 2008)
• Cost of risk under control (adjustments/loans: 3.1%), despite households’ financial profile deteriorating
- Private banking:
• AUM stable at € 13.4bn (vs € 13.5bn three months previously)
• Profitability preserved, with net profit up from € 14m to € 18m, due to CMB’s traditional banking activity
This division’s results for the three months show a 7% increase in total income, from € 185.4m to € 198.3m, driven by a positive contribution from all segments, i.e. consumer credit, retail finance and private banking. Given largely stable net interest income, up just 3.1%, from € 128.8m to € 132.8m as a result of the increased cost of funding, the most noteworthy item is the growing contribution from fee and other income from consumer credit. This income growth, however, was swallowed up by the operating costs incurred in connection with the CheBanca! initiative, totalling € 19m for the period, and the widespread rise in the cost of risk, with bad debt writeoffs up 16.5%, from € 60m to € 69.9m, partly due to growth in the loan book. For these reasons net profit for the period declined from € 29.2m to € 24.7m. Turning to the individual business segments, consumer credit showed an increase in profits, from € 14.7m to € 18m, on the back of the higher fee income; retail banking activity posted a 22.5% rise in total income, and higher costs, up from € 8m to € 23.6m, due to the start-up of operations by CheBanca!; lastly, the contribution from private banking operations improved from € 13.9m to € 17.6m, on the back of higher net interest income linked to Compagnie Monégasque de Banque’s commercial activities. Assets under management on a discretionary/non-discretionary basis were stable overall during the three months, at € 13.4bn compared with € 13.5bn at the balance-sheet date. AUM attributable to CMB were up slightly, from € 8,208m to € 8,220m, while the pro-rata share from Banca Esperia attributable to Mediobanca fell from € 5,325.3m to € 5,204.5m, reflecting the reduction in valuations of assets under management.
