Banca IFIS S.p.A. (IF) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Banca IFIS First Half 2020 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Luciano Colombini, CEO of Banca IFIS. Please go ahead, sir.

Good afternoon, and welcome to our call on first half 2020 results of Banca IFIS. Today, the Board of Directors under the chairmanship of Mr. Ernesto Fürstenberg approved the first half results and the updated guidance for 2020. In the first 6 months of 2020, during the COVID-19 pandemic, one of the worst crises in recent decades, Banca IFIS was profitable and reported a significant increase of its CET1. Net income came in at EUR 37 million, having recorded a EUR 36 million pretax provisions and write-offs due to the COVID-19. In addition to EUR 36 million provisions and write-offs, there are other direct and indirect impact of COVID-19, mainly due to the slowdown of judicial and extrajudicial NPL work out. Including an estimate of these other direct -- indirect effects, the preliminary estimate of impact of COVID-19 in first half is about EUR 50 million pretax, CET1 of 11.58%, plus 62 bps in half '20. CET1 is calculated excluding 2019 dividend suspended in accordance with the Bank of Italy recommendation and excluding the first half net income for prudent reasons. And also, we have to underline that we have stable deposits and funding needs. In first half, we have accelerated our investment in technology and digitization. We acquired Farbanca, which will be integrated into Credifarma, creating the market leader in Italian and in Europe chemists sector. We continue to invest in NPLs. Since the beginning of the year, we have purchased about EUR 1.3 billion NPLs in terms of GBV, which will provide a solid contribution to the bank's profitability in the next year. The macroeconomic scenario will depend, obviously, on the evolution of COVID-19 and on the speed of the recovery of the production activities. The bank's economic and financial result will be closely linked to the evolution of economic context. If we assume the progressive stabilization of the economic scenario, the support of government and central banks to the economy, the absence of further lockdown period and for September, courts operating at full capacity, we can estimate a 2020 net income between EUR 50 million and EUR 65 million, including the accounting of the badwill of Farbanca. Net banking income between EUR 420 million and EUR 440 million, cost of credit between EUR 85 million and EUR 100 million. Under this scenario, in second half '20, we expect [indiscernible]. There is already a visible ongoing recovery in NPL business. In July, cash recovery came in at EUR 25 million, well above monthly average of second quarter. It was about EUR 17 million. In the third quarter, in Commercial and Corporate Banking, we expect a slightly declining net banking income due to lower volumes and margins. We expect a pickup in the fourth quarter as the macro environment stabilize. In fourth quarter, we may record a potential first-quality deregulation in commercial, corporate and noncore due to the expiring of the moratorium provided for Decree 18/2020, so-called the Decreto Cura Italia. I am optimistic about the quality of other commercial corporate banking portfolio, summarized on Page 8. The portfolio is short term, well diversified in terms of geography, sector and company. This is making it positive about the future, obviously, if the economy stabilize. Now I will hand over to Martino, who will describe the details of our second quarter 2020 results. Martino, please.

I will keep it very short, just a key message, and then we'll go straight to Q&A. So in the second quarter 2020, we recorded a net income of EUR 10 million; net banking income, EUR 107 million so we are almost flat quarter-on-quarter. I would like to stress that the net interest income includes EUR 11 million provision on our nonperforming portfolio. This is just to reflect -- prudently reflect the longer time frame for especially the judicial workout and slightly lower cash recovery for 2020 in extrajudicial. It's a prudent, let's say, provision that we want to include. Then the trading income came in at EUR 10 million, and this is a positive result achieved mainly in the trading of Italian government bonds short term, so with a duration between 2 and 2.5 years, so with a very low risk associated. In terms of loan operation came in at EUR 14.8 million. But just for accounting reason, we put EUR 4.3 million in other net income expenses. That is a provision for a guarantee of former Interbanca. And we also -- expenses in the second quarter result EUR 7 million for the voluntary exit fund. So we promised this in the business plan, and we are going to deliver despite COVID-19. And I think that one positive message that we want to pass is that also, in the second quarter, net income of EUR 10.3 million despite EUR 21 million provision pretax for the COVID-19. It's true that we -- this includes PPA of EUR 11 million, but it's also true that the provision accrued on former Interbanca loans account between EUR 18 million and EUR 20 million, so above the PPA. Finally, message CET1, 11.8 -- 11.58, 46 bps up quarter-on-quarter. And as the CEO was saying, this does not include 2019 dividends and the first half 2020 net income. I would like to stress also that if you move to Page 12, with detail here, the results -- for the provision and the potential impact of COVID-19 in the first half 2020. So there are EUR 11 million provision that are included in lower net banking income due to COVID-19. That's for prudent reason. Then there was a write-off of funds ex Interbanca that we recorded in the first quarter results of EUR 7 million. Then there are about EUR 18 million, EUR 17 million, EUR 18 million provision, single Interbanca position, a total EUR 36 million. However, this is just -- all this provision that we took in the first half 2020 related to COVID. Then there are other impacts, which are very difficult to estimate and assess. We try to make an assessment internally, and just to provide you an indication. And this came out at -- let's say, the COVID-19 has an impact in the first half 2020 of at least EUR 20 million -- EUR 50 million, so EUR 36 million direct, plus EUR 15 million plus impact on the revenues due to the lower commercial activity. So we go about -- or above EUR 50 million impact from COVID-19. Finally, I would like to pass the message, and you can see that on Page 15, again slide, the CET1, 11.58%, which is well above the SREP, which stays at -- which stands at 8.12%. And so if you look at that, even during the hardship of COVID-19, we were able to increase the CET1 by 62 bps in just the first half 2020.

Yes. Thank you, Martino. I'd like to say that we are already working on the new business plan that we will present to the market as soon as market conditions stabilize, hopefully, in the end of November or beginning of December. Now if you want, we will open the Q&A section. Leanore?

[Operator Instructions] The first question is from Irene Rossetto with MainFirst.

Yes. The first question is on dividend, 2019 dividend. Some companies in the financial sector said that they will pay this dividend in 2021 in the form of an extraordinary dividend. Is it something that you can consider? Then if you can give us an idea of what you expect in terms of NPLs to gross collection in the end of this year, and in 2021. And finally, if you can disclose the amount of Farbanca badwill included in your guidance for this year.

I answer about the dividend. And in accordance with Bank of Italy recommendation on dividend policy because of the COVID-19 pandemic, our Board of Directors decided to act by following the guidance provided by supervisory authorities and therefore, proposed that distribution of dividends for the 2019 financial year be postponed until 1st January 2021. So at that time, we will proceed to the payment after the date if reverse provision or recommendation from the supervisory authorities will be issued against us. So we -- I think we will be able to pay the dividend at the beginning of next year, considering the strong position of our CET1 and the result of this year.

Yes. And in terms of Farbanca badwill, we are speaking about EUR 15 million, 1-5 million euros. This is not taxable. It's EUR 15 million net, just to be clear.

And in terms of NPLs, gross collection expectation, do you have some guidance? Or is it still very uncertain?

In terms of the -- let's say, if I understand correctly, in terms of the NPL business, we expect a recovery in the Q4. Let's say, in the first 2 quarters of the year, we experienced a slowdown in recovery due to the lockdown, okay? In the third quarter, so we remind that there is August. There is the summer break. So courts are closed for more than 1 month. So in the fourth quarter, if everything goes according to plan, normally, we'll have 1 quarter or full potential. What I would like to stress is that in Q -- in the second quarter, let's say, the average cash-in from NPL was about EUR 17 million, 1-7, 1-7 and 1-9. And then -- 17, 17 and 19. And then in the -- in July, cash collection came in at 20 -- EUR 25 million. So it's quite positive in terms of, let's say, cash collection for the NPL business. That's what we can say. Of course, if everything goes fine, the revenues for the nonperforming business will be higher in the second half than in the first half. But we don't want to provide any guidance because there are too many moving parts. That's why we provide a range.

The next question is from Manuela Meroni with Intesa Sanpaolo.

Yes. Some questions from my side. The first one is on the NPL business. I'm wondering if you are perceiving a different level of competition in the NPL area, if our moving prices, and if you can confirm your EUR 2.7 billion restructure [indiscernible] for new loans this year. The second question is on cost. I'm wondering if you are ready to provide us or share with us your thoughts on the potential synergies with Farbanca and the potential cost savings coming from the voluntary exit plan that you have just announced. And then lastly, on the tax. You got some tax benefit in the second quarter. So wondering if you can provide us with the guidance for full year 2020.

Okay. In terms of NPL purchases, let's say that we are acquisitive. We keep on buying and investing in this sector, which is core for us. We have done EUR 1.3 billion since acquisition, since the beginning of the year, and we will continue doing that.

Yes. Martino, this amount is about the 70% of unsecured portfolios on the market in first half 2020. So we maintain our leadership in purchasing from NPL unsecured portfolios. Sorry, Martino.

Yes. Let's say that there is -- of course, we apply a little discount due to COVID-19. But the price in our segment, which is the unsecured, proved to be resilient. And then of course, it depends on the type of the unsecured but proved to be relatively resilient. There is competition, mainly from the Italian players. And so sometimes, it happens that we use some leads, but that's normal. In terms of Farbanca synergies, there are some synergies. We have not -- they are not yet public. We will disclose them in the business plan. However, the conclusion of Farbanca will be in this -- in December, probably, let's say, the final part of the year. So this year, the [indiscernible] will not be impacted by the synergies of Farbanca yet, at least materially. And I would like to stress that this -- the second quarter includes a EUR 7 million provision on the voluntary exits and also the synergies that we can achieve from this will be in the business plan that we presented. But you've made an assessment based on our average cost of person. In terms of tax rate, the tax rate came in quite low simply because we have some tax benefits, these tax benefits due to [indiscernible] and due to accelerated depreciation. If the income is very, very low, this tax benefit has a significant impact. If, let's say, this tax benefit is valued a few million euros. If the product profit is low, the tax rate came in very low. Of course, if you achieve a significant net income, the tax benefit in terms of euro will remain the same but in terms of percentage will be very low. So we can assume that if we report -- until we report, let's say, net income about this amount, you can see a low tax rate. Of course, as soon as you see the net income increasing, the tax rate will pick up again.

Next question is from Luigi Tramontana with Banca Akros.

Luigi.

Again, on taxes, I understand that the tax benefit you booked in Q2, I would like to understand first if you can quantify this amount of benefit is in a one-off booked in Q2, and that's it. Or do we have to expect additional tax breaks in the coming quarters? So this is the first question on taxes. The second one on capital. You had a one-off benefit on -- coming from the SME supporting factor in the quarter for about 30 bps. Do we have to expect additional benefits in the coming quarters? Especially related to the realization of DTAs, you had 10 bps this quarter. What can we expect from additional DTAs in -- by year-end? The third question is on the restructuring costs. You booked EUR 7 million in Q2. However, if I remember well, the total restructuring costs you had in your business plan were around EUR 27 million. So do we have to expect additional provisions in the coming quarters on that front? And I think that's it.

Okay. The first on the restructuring costs. Yes, it's true. We had, in the business plan, slightly higher, I think twice as much. So instead of EUR 8 million, I think, EUR 15 million for the voluntary exit. For now, considering all for the extraordinary year, we proceeded with, let's say, part of that. And that we post EUR 8 million -- sorry, EUR 7 million for this voluntary exit. We didn't want to -- strange year, complex year, so we didn't want to have also a lot people go in this time frame. Regarding the tax rate, I would like to stress this. It is not one-off. It is just a recurrent benefit that we have due to accelerated depreciation and [indiscernible]. I don't know. It's worth a few million, EUR 2 million, EUR 3 million, EUR 4 million, I don't know, something like that. And as long as our pretax income remains low, this will lower the tax rate. Then you can have probably a tax rate in the range of 20, but it really depends on the amount of net pretax profit that we will do. It is a benefit that we have is that the value of this limit to a few million euros is recurrent. As long as it remains low -- as the pretax income remain low, it absorbs all the taxes.

Okay. So if I understand well, it's between EUR 2 million and EUR 4 million per quarter.

Yes, more or less EUR 3 million, something like that. It's more -- let's say, it's not material. Then I give you the exact number, but it's not material. It's just something that is visible as long as the net income -- pretax income remains low, then, of course, is much less visible. Yes.

And regarding capital, you...

Just to give you an idea. Yes, I -- my colleague [indiscernible] it's about EUR 2.5 million per quarter, EUR 5 million in the first half, just to give you an idea, confirming the number.

Okay. So on capital evolution, the benefits of SME supporting factor, something additional in the coming quarters and the DTA benefits.

Depends -- this will depend on our ability to create -- to report net income, and I hope that we can realize that. But it really depends on our net income generation. Not material, probably will not be so material in the second half. But of course, we'll have a few million euros. But definitely, Luigi, I think that with a CET1 of 11.7 -- 11.6%, excluding any impact in terms -- excluding 2019 dividends, excluding the first half 2020 net income, probably we are on the safety side.

Yes. I mean that's fine, and the trajectory is satisfying. Just to understand how much it can be improved further coming from those, I mean, nonoperational elements, let's say.

Not so material, but a few -- between EUR 0 and EUR 10 million, something like that.

The next question is from Andrea Lisi with Equita.

Several questions from my side. The first one, if you can provide us more detail on your prudent provision you made on the NPL portfolio. I want to understand why do you have made them, if -- which were the condition that under which you put that provision? And what can we expect for the coming quarters? And the second question is on what you expect in terms of asset quality in the second half. Obviously, I think that a crucial moment will be when moratorium will expire. So if you can provide more color on that. And the last point is on the evidence you have on cash collection in this quarter -- in this month after the lockdown. And so which are your expectation, cash collection of NPL, obviously, for the second part of the year?

Okay. Thank you for your question. In terms of cash collection, cash collection, if you look at, came in -- you have this on Page 23, came in at EUR 52 million in the second quarter. This -- the gap is mainly in the gap in cash -- the decrease in cash collection is mainly on the secured and corporate segment. Why? Because of the court shutdown. So it's normal, then the security has to go to an auction. Courts were shut down, and let's say, auction were suspended. So we recorded a lower cash-in. I would like to stress that the average EUR 52 million in the second quarter 2020, EUR 25 million just in the month of July. So as soon as the courts restart and the activity progress more towards a sustainable level, we move back to normality also in cash collection. The second question is really a question mark and to which the CEO is very cautious and very focused on is the asset quality. You're right. Let's say, it's a question that we have discussed quite at length. You can see that on our presentation, we put, let's say, some guidance on Page 7. We expect a pickup in the loan loss provision, the default once the moratorium ends, which I don't know if it is 30th of September or will be postponed. And so we wanted to be transparent, and we provided a breakdown of our portfolio, of our commercial and corporate banking. And you can see that on Page 8. Portfolio amounted to EUR 5.2 billion, of which EUR 0.8 billion is towards the public administration. Then that added EUR 0.2 billion of loans to SMEs, which are 80% guaranteed by the state. And then there is a EUR 0.1 million (sic) [ EUR 0.1 billion ] factored in towards chemists. And there is EUR 0.6 billion to which the debtors are either large or top Italian corporation so with revenues above EUR 500 million. We -- let's say, we can be relatively safe. For the other, which is the factoring, we have EUR 1.4 billion, but the duration is very short, between 3 and 6 months. It's very diversified. We have 7,200 customers with an average ticket of EUR 200,000. So let's say that we can be relatively safe. Also, in the leasing, the average duration is, on average, 4 years. It's very diversified in terms of number of customers, and we have a remarketing agreement for the reprocessed assets.

Sorry, Martino. Anyway, if the end of moratoria [indiscernible] at the beginning of next year. For this year, we don't expect so dramatical raise of the cost of risk. It's very linked to the end of moratorium. We expect at the end of moratorium, obviously, we see some more default to them.

And finally, on your question on EUR 11 million. It's a prudent adjustment we did on the net interest income/net banking income. It's just assuming slightly longer time frame for the recovery in terms of judicial workout and slightly lower cash recovery in 2020 in extrajudicial recovery and especially in secured and corporate. It's a prudent adjustment. We saw that also some other competitors did like Hoist and Intrum. It's a prudent adjustment that is -- let's say, seems to be, let's say, spread among other European players. So we want to be conservative.

Just a follow-up on the loan loss provision. We -- I remember that in the previous quarters, you often booked a significant loan loss provision on specific positions, large-size positions, mainly referred to Interbanca, if I'm not wrong. Can you tell us which is the amount of -- or the number of big tickets, big positions you have referred to Interbanca that do you see more at risk?

I can see this. We cannot -- let's say, the portfolio of Interbanca is large ticket. So it's not that we can say that we are at risk. There are some positions which are more at risk or less at risk. Like I -- otherwise, we have to do provision. What I would like to stress is that in last year, there are EUR 30 million provision of, yes, Interbanca. And this -- in the first half, there are about EUR 80 million position on former Interbanca. And I think the CEO, and then you can -- is very focused on that and is very focused on decreasing the, let's say, the concentration risk.

Next question is from Simonetta Chiriotti with Mediobanca.

Yes. Well, most of my questions have been answered, but I would like, if you're -- to take -- if you could take a bit more time on July 5 that is very interesting. So my question is on loan-loss provisions. The range that you give, I understood that assumes the end of the moratoria in September. So this is the first question, if I understood correctly. And my second question is what -- does -- do this level of provisions cover the whole -- the total amount expected? I mean do you expect, in 2021, further heavy provisions or which is you're feeling on this point? And finally, last point of the slide, the impact of Farbanca badwill in P&L. So if you could be more clear. Before, you said EUR 15 million after tax. So the range of net income includes EUR 15 million after tax of benefit from Farbanca. Is that correct?

Yes, it's correct. This includes the badwill of Farbanca. And talking about provisions strictly related to the end of moratoria. So moratoria, and at the end of September, we expect more provisions. Otherwise, if moratoria will end at the end of January of next year, we expect a raise of cost of risk in 2021. I think the moratoria is something like a cover over some NPL, which are not clear at the moment. But this is something not predictable at the moment.

So you would expect 2021 to be like a [indiscernible]?

[indiscernible] 2020, worse than 2020.

The next question is from Nicolas Binda with Intermonte.

I have 2 questions. The first one is on operating income. I was wondering if you have some other unrealized gain embedded in your government portfolio. And the second one is related to Farbanca. Do you confirm the negative impact on situation of around 20 basis points?

Yes, we confirm that. But I have to say that in ongoing of Farbanca in this year is better than expected. We are talking about something like EUR 0.5 million more than we expected. So we are very confident that this acquisition is a good acquisition and at the moment, that the bank is in good sector. The chemist sector is obviously settled, which doesn't suffer so much from pandemic and COVID-19. So this [indiscernible]. And any other question?

The other question is on the trading gain. No, let's say, we don't have embedded capital gain on our portfolio. But you can see our property portfolio -- proprietary portfolio on Page 31 of the presentation. It's government bonds, let's say, more than 90% government bonds, it's short term, so you have 2.4 years, low risk and we make the profit on that. That's preferably with relatively low risk, we report a good profit that helped us this year, this -- in the past 2 quarters. Low risk and short term. You can see on Page 31 of the maturity, et cetera.

[Operator Instructions] Gentlemen, there are no more questions registered at this time.

So thank you very much, everybody, and see you at the presentation of the new business plan maybe. Okay. Bye-bye.

Thank you.

Ladies and gentleman, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.