Italy's FinecoBank, majority owned by UniCredit, the country's largest lender, is seeking to seize opportunities in the Italian retail and private wealth management market – a sector its chief executive officer Alessandro Foti expects to grow in the future.
Italy is a country with a historically high savings rate. Households were saving more than 20% of gross disposable income in the early 1990s, according to data from EU statistical office Eurostat, the highest such levels in Europe at the time. The recession brought a reduction in these levels, but its saving rates remained in excess of 11% and above the EU average of 11.03% in 2013 and 10.45% in 2014.
Yet with interest rates still hovering at record low levels – the European Central Bank’s base rate is at 0.05% at the time of writing – Italy’s savers are in need of alternatives offering higher returns.
According to research from financial services company Kepler Cheuvreux, Italian asset gatherers such as Fineco have seen net inflows of €67bn in 2015 up until mid-June – a surge of 85% year on year – underlining that many Italian households’ preference for saving has shifted to managed assets. This trend also applies to Fineco: the bank saw its assets under management grow by 50% in the same period.
“Italian families, thanks to the crisis, have realised that managing their assets is a complex [matter],” says Mr Foti. “This created a huge boom in the demand for [financial] advising, with traditional banks not always prepared, skilled or trained to provide these kinds of services to their clients. This is creating a huge opportunity for a company such as Fineco.”
Getting physical
FinecoBank was set up at the end of 1999, initially as an online broker, before adding direct banking to its armoury in 2000. “But the really relevant step in terms of the evolution of our business model was between 2002 and 2003, when we realised that without any kind of physical [relationship] with our clients, it was not possible to enter the most sophisticated and most profitable part [of banking], which is investing,” says Mr Foti.
This led to Fineco developing its unique strategy of combining its direct banking model with a physical presence, offering financial advisory services to its clients.
“The distinctive point for our business model is that we are the only player in Italy and also in Europe that is combining successfully very powerful digital banking and brokerage platforms with a physical touch, through a very effective network of financial planners,” says Mr Foti.
As of the end of March 2015, the bank had 2571 personal financial advisors and 328 Fineco Centers – about 100 advisors and 4% more centres than at the same time in 2014. But a business model of direct banking plus a physical presence clearly is more expensive than a plain-vanilla direct bank. Financial analysts at Kepler Cheuvreux expect Fineco to face €25m to €30m of upfront costs over the next five years, related to an expansion of the financial advisor network by between 100 and 140 additional staff.
Still, Fineco says that its strategy is working well. As of June 2015, Fineco had some €26.1bn of assets managed through its financial advisors.
Asset management
Fineco sells about 5500 mutual funds from 67 providers on a fund-of-funds basis. This includes funds from the currently UniCredit-owned Pioneer, which, after its agreement with Santander Asset Management, will be 33.3% owned by UniCredit, Santander and a combination of private equity fund managers Warburg Pincus and General Atlantic.
At the end of 2014, about 26% of Fineco’s revenues were related to net commissions from its investing activity, a figure that is expected to grow to 30% by 2019, according to Kepler Cheuvreux.
“Every time there is liquidity looking for an investment solution, we are driving our clients in the direction of asset management products, which in our opinion are a much better solution than deposits,” says Mr Foti. “In any case, Italy is by far the best market at the moment in Europe for asset management products. The Italians are emerging as being extremely interested in these kinds of solutions.”
In terms of asset allocation of Fineco’s clients’ portfolio, 65% are represented by bonds and money market funds and 35% are represented by equities and equity products, according to Mr Foti. Investments are usually made in investment grade-rated funds.
Banking as usual
Fineco also operates in traditional banking areas such as cards and deposit taking, and most of its revenues are still originated by net interest income – some 51% in 2014.
“Fineco decided several years ago that we were not interested in chasing deposits through offering high interest rates,” says Mr Foti. “The largest part of our deposits is represented by sight deposits – transactional liquidity, as we call it – so the typical liquidity that is remaining on the current account [comes as a result of our] clients using our transactional banking platform.”
Mr Foti adds that in direct banks, the majority of deposits is typically represented by term deposits and only a small percentage are sight deposits. “In our case, more than €13bn is represented by sight deposits and only a very small part by term deposits,” he says.
Credits, meanwhile, form a very small part of the bank's business as Fineco does not offer mortgages, and most of its cards are debit rather than credit cards. “We have total assets of slightly more than €53bn, of which only about €800m is represented by loans,” says Mr Foti. “The reason why our loan portfolio is so small is because our customer base is represented by clients who in large part are in a net positive financial position and so they are not particularly interested in loans.”
Fineco’s target clientele is the affluent market, with about 37% of Fineco’s total financial assets of €53bn related to clients with more than €50,000 of assets – the threshold dividing retail banking clients from private banking clients in Italy.
An Italian future
To make the bank more visible, both inside and outside Italy, Fineco took the step of going public on the Italian Stock Exchange in mid-2014.
“The rationale of UniCredit has been to give up a slice of the pie in order to make the pie grow larger,” says Mr Foti. “The outcome of the initial public offering [IPO] has gone exactly in the direction we were expecting, because it has made the bank much more visible, and we are becoming more and more successful in penetrating the upper end of clients, because Fineco is [increasingly] becoming the bank of reference for wealthy clients.”
Fineco priced its IPO at €3.70 per share, giving it a market capitalisation of €2.24bn and started trading on July 2, 2014. So far, the international market exposure has worked for Fineco, which saw its share price peak at €7.17 on April 13, and consistently stay above €6.00 thereafter.
On top of that, internationally Fineco is widely known for its brokerage business, where it is the largest online trader by executed orders in Europe. In 2013, it executed 24 million orders – ahead of second placed Comdirect of Germany with 19 million orders – despite the fact that Fineco only operates in Italy. This strong position raises questions over the scope for Fineco's regional expansion.
For a while, Mr Foti was also running the operations of Munich-based Direktanlagebank (DAB). “We talked about the possibility to create synergies between Fineco and DAB but unfortunately Europe is not like the US – we have different languages, different fiscal systems, different ways of reporting to Central Banks and so it is almost impossible to [operate in] different regions and countries using one single platform,” he says.
Instead of integrating DAB into Fineco, UniCredit, which is also the majority shareholder in DAB, decided to sell it to France’s largest bank by assets, BNP Paribas. With this decision also came a realisation. “We are not planning any expansion abroad because the opportunity we have in Italy is so huge that we think that we don’t want to make the mistake to divert scarce resources from a market in which expected returns are huge for entering a market in which returns are going to be much more questionable,” says Mr Foti.
Fineco has a 1.34% market share of the total financial assets of Italian families. Considering the structural shift towards managed assets and the expected migration of clients after the potential consolidation of Italy’s regional 'populari' banks, Mr Foti says that Fineco’s opportunities in Italy are huge.
“We prefer to remain concentrated on Italy, as even the most sophisticated investor and most active trader needs a bank account to receive their salary, their pension, pay the utility bills, use their credit card,” he says. “We can offer a one-stop solution to fulfil all the financial needs of our clients.”
