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 Full Year 2020 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Luciano Colombini, Chief Executive Officer of Banca IFIS. Please go ahead sir.

Good evening. Welcome, everybody, and thanks for this call on our 2020 results. This afternoon, the Board of Directors under the chairmanship of Mr. Sebastien Fürstenberg approved the preliminary 2020 results. I would like to highlight that our bank faced very well the 2020 COVID-19 crisis, and is ready to face the possible economic troubles of the next quarters and is able to capture the growth opportunities of the economic recovery expected in the second half of this year and in 2022. In 2020, profitability and NPL cash collection proved to be resilient. The asset quality and capital requirements have improved. I would like to highlight 4 points. First of all, in terms of profitability, we achieved the 2020 net income of EUR 69 million, above our EUR 50 million to EUR 65 million guidance, with all 2020 quarters profitable. As you can see on Page 5, net income of EUR 69 million included additional provisions and adjustment of EUR 76 million mainly to face asset quality deterioration in commercial banking and longer timeframes, slightly lower cash recovery in NPL business due obviously to the COVID-19. In fourth quarter 2020, we booked about EUR 29 million additional provisions, of which EUR 20 million for asset quality deterioration in commercial banking and the remaining for lower cash recoveries in NPL business. Second, NPL cash collection proved to be resilient. On Page 6, you can see that in 2020, NPL cash collection were stable versus 2019 at EUR 259 million despite COVID-19 and lockdown, due to several management activities including the strengthening of operation. This also reflects about 40% of order of assignments in the face of public employees and retirees and portfolio diversification of about of 1.4 million borrowers. Third, in terms of asset quality, we have accelerated NPL deleveraging, achieving our NPL disposal target in advance. We see that in fourth quarter '20, we disposed about EUR 120 million GBV NPL mainly originated by former Interbanca with no significant P&L impact. The NPL disposal had a high vintage, about 8 years, were highly provisioned and already worked out by Banca IFIS. Following these disposals, the gross NPL ratio came in at 6.4% in December '20, and the net NPL ratio came in at 3.2% in the center point. Four, CET1 came at 11.29% net of dividend. 2019 dividend of EUR 59 million were booked as debt to shareholders and 2020 dividend of EUR 25 million will be proposed to our general meeting called on April of this year. Finally, I would like to highlight the bank's ability to benefit from any ramp in economic activity. In the fourth quarter '20, the net loss in factoring were plus 8.6% quarter-over-quarter. And the new leasing was plus 27% quarter-over-quarter. Before going into these results, I would like to thank the clients, the employees, the shareholders and the analysts for their support in the last 2 years. As you know, I will step down as CEO next April. I'm confident the Banca IFIS is profitable and in a very strong position in terms of capital and liquidity despite 2020 very challenging because of the macroeconomic environment. Thanks, and I will now hand over to Martino who will describe the details of our balance sheet.

Hello. Good morning to everybody. I will keep the call short, just highlighting the key messages, and then we will open to Q&A. So let's focus on Page 8 of the presentation. I do apologize for this time that we came a bit late with sending the presentation. We'll try to be faster next time. So in Q4 2020 net income came in at EUR 16.5 million. Net banking income came in at EUR 146 million driven by the positive performance in nonperforming and the commercial business, and EUR 30 million PPA impacted by customer loan and NPL disposals and prepayments. Then loan loss provision came in at EUR 43.5 million, and this includes EUR 20.4 million worth of additional provision in factoring and structured finance against asset quality -- potential asset quality deterioration due to COVID-19. I would like to highlight that Banca IFIS is focused on short-term lending to SMEs with client, product diversification, which provides some protection in terms of asset quality. Factoring has a double guarantee, from the debtor and the creditor. The leasing, mainly cars, Apple products and equipment, have residual values and remarketing agreements. This should put Banca IFIS in good position. However, the macroeconomic scenario is still challenging. Banca IFIS for sure, like all the other businesses, will have an impact. And therefore, we put aside some provisions. Let's move to operating costs. Operating costs came in at EUR 79 million. Cost of personnel was up EUR 5 million quarter-on-quarter. And then other administrative expenses and other income include several one-offs. In terms of income, there were about EUR 17 million of Farbanca bargain purchase, plus EUR 12 million mainly related to NPL portfolio indemnities from sellers. In terms of costs, there were EUR 15 million of higher recovery expenses, EUR 7 million of provisions on contractual guarantees and EUR 3 million higher IT costs. As you see, there are several one-offs, mainly offsetting each other. Then I would like to highlight that customer loans in Q4 2020 amounted to EUR 9.1 billion, which is up EUR 1.2 billion or 14.8% quarter-on-quarter. However, this included EUR 600 million in Corporate Banking due to the acquisition of Farbanca and the positive effect from seasonality and some pickup in macroeconomic environment, especially in factoring and leasing. So the bank is quick and fast to benefit on any improvement in macroeconomic environment. In Q4, we made EUR 0.7 billion of additional factoring turnover compared to Q3 2020. And in Q4, leasing came in at EUR 142 million, new leasing, which is up 26% quarter-on-quarter. In 2020, we also launched successfully our new products, which are loans guaranteed by state, MCC, Mediocredito Centrale. And this product grew EUR 100 million just in Q4. This product is very efficient to SMEs because it's efficient in terms of asset quality and capital absorption. I would like also to highlight that the short-term nature of factoring, we have an average maturity of about 4 months, coupled with the know-how of the bank, allows us a great flexibility. So Banca IFIS can quickly increase/decrease volumes and margins depending on the macroeconomic conditions, on the performance of corporate sector and on the level of liquidity and risk targeted by the bank. Finally, nonperforming. Nonperforming loans business was up [ EUR 80 million ] quarter-on-quarter as Banca IFIS purchased EUR 1.3 billion, and this EUR 1.3 billion will provide a solid contribution to the bank's profitability next year. Funding reached EUR 9.9 billion versus EUR 9.2 billion in 3Q 2020. And this increase is mainly due to Farbanca, EUR 360 million (sic) [ EUR 365 million ]; an increase in corporate deposits, EUR 110 million; and German deposits, about EUR 50 million. So this as we are pursuing our fund diversification. I want to thank you all. And we'll now open to Q&A, and we are at your disposal.

[Operator Instructions] The first question comes from Manuela Meroni of Intesa Sanpaolo.

Thanks for the presentation, and thanks to Mr. Colombini for the job done in Banca IFIS and for all the interesting discussions that we had in the last couple of years as well. I wish you all the best.

Gracias.

I have a few questions from my side. The first one is on dividend. I'm wondering if you are going to pay a dividend this year. The second question is on asset quality deterioration. So what do you see in terms of asset quality deterioration now? Third question is on NPL disposal. I'm wondering if you can provide more color on the EUR 120 million NPL disposal originated by the former Interbanca. Again on nonperforming business, I'm wondering if the NPL prices has gone down during 2020 and what you're expecting for 2021. Then on the disposal of NPL business that you've made in here before fourth quarter of 2020, I am wondering if you can provide more color on this EUR 37 million of gross book value disposal. On the cost, cost grew quite a lot in the fourth quarter. Can you please provide more details on that? And finally, on the impacts of regulatory changes and headwinds in 2021, what we can expect? I'm referring both to the positive, so the potential review of the Article 127 of CRR; and on the negative, so on the new definition of the [indiscernible] or if there are any other potential impact of [indiscernible] regulation?

Thank you. I will say something about dividend. And as I said before, the Board of Directors of Banca IFIS decided to act following the guidelines provided by the authorities. And so 2019 dividends of about EUR 59 million were booked as debt to shareholders, and they remain a debt to shareholders. Dividends, 2020 dividends of about EUR 25 million will be proposed to the -- our general meeting on April. So the 2019 dividends are freezed. And we wait for the decision of the authorities in September. And dividend of 2020 we will propose in our general meeting in April.

I will run through the other questions and what you see in terms of asset quality deterioration. The slowdown in economic activity is going to impact the asset quality of Commercial & Corporate Banking. Our specific model for sure allows some protection as factoring has a double guarantee from the debtors and the creditors, and the leasing has residual value and remarketing agreement. However, in 2020, defaults were very low, mainly relative to a few position that we have already experienced and critical issues. I'm referring mainly about 2 or 3 positions that were already in the unlikely-to-pay category. However, it is very difficult to make an assessment at this stage as the default rates will depend on the speed of the recovery. We will have more visibility at the end of moratoriums. But for sure, we will have to review situation by situation, company by company, file by file. We cannot make a generalization just by sector. Certain sectors would be more impacted. What we can do instead for sure, we put some additional provision in 2020. Regarding the EUR 120 million nonperforming disposal originated by former Interbanca, I would like to start in Q4. Banca IFIS disposed EUR 120 million of gross book value of nonperforming, which is about EUR 60 million of net book value, through several transactions. And this was done to decrease NPL ratios to better face the impact of COVID-19. The nonperforming loans of former Interbanca that were disposed had a high vintage. We are speaking about an average for longer than 8 years default date. They were highly provisioned and were already worked out by Banca IFIS. I would like to stress that the nonperforming loan disposal has no significant impact on the P&L, which is eventually a good feedback on our credit policy and our coverage. Furthermore, the nonperforming loan disposal triggered the Article 55 of the Cura Italia Decree allowing the transformation of EUR 27 million DTA. The EUR 27 million DTAs were 100% deducted by CET1 into tax credit. So in this case, no CET1 deduction. So we had also a positive impact in terms of CET1, positive impact in terms of reduction of the asset quality ratios and positive impact in terms of CET1 and no significant impact in P&L. Then in terms of the disposal to be the EUR 37 million in the nonperforming business in Q4. It's true in Q4 2020 we disposed EUR 37 million gross book value of payment plans. And this were already worked out by Banca IFIS, and the disposal price will be in line with book value. The reason -- there is really a strategic reason behind it. The monitoring of this voluntary payment plan requires to hire new FTEs. It's very human intensive. So in order not to hire too much and expand too much our cost base, we have disposed these plans from which Banca IFIS has already extracted the recovery value. So the value from their workout. In addition, it's also, let's say, a [ small edge ] in recovery. Because if the macroeconomic deteriorates further, this voluntary plan may experience faster decay. However, I would like to stress, so the disposal price was in line with book value and this also provides some confidence in our -- in the book value of our nonperforming portfolio. Regarding, again, the nonperforming portfolio, the prices, again, there are many different types of nonperforming loans. We focus on secure. We saw in 2020, last month of 2020, a slight decline but less than 10%. Now we see -- currently, we see some strong competition, especially by Italian players. And so in our category, we can say that the price is relatively stable, maximum minus 10%. But -- and this is -- this reflects our portfolio. We have a strong diversification in terms of borrowers. We have 1.4 million borrowers. And we have a relatively longer average time frame of recovery, about 7, 8 years. And 40% of our order of assignments are in the face of public employees and retired people. So this provides a relative stability on our portfolio. Despite that, I would like to say that, to remind you, that we put EUR 22 million -- EUR 23 million provision -- prudent product provisioning in 2020 against potential COVID-19. Finally, cost. It's right, they grew in Q4 2020. There are EUR 5 million in terms -- we have EUR 5 million in terms of personnel expenses. And then there are several one-off nonrecurrent items in other administrative expenses and other income. The bargain of Farbanca, which is EUR 17 million, plus EUR 12 million of [ operating income ] to portfolio indemnities. Then on the negative side, we have EUR 15 million of higher NPL recovery expenses and EUR 77 million of additional provisions. You mentioned also the regulation.

Excuse me, I would like to comment about costs. The meaning is that we did not slow our CapEx, our investment in 2020 because we want to be absolutely ready to capture any growth opportunities in the economic recovery in next month. So we did not lower investment. Also, we were in presence of a slowdown of the revenues, obviously. But I think that we are ready to capture, as I said, the growth opportunities in the economy. That's why the cost [ grew ].

We haven't factored any impact in terms of this -- the potential changes mentioned in the CRR. Of course, if the weight of nonperforming decreases, that would be beneficial. But up to now, we haven't factored that. It's very simple. We have -- in our balance sheet, we had EUR 1.4 billion nonperforming weighted at, on average, slightly less than 150%. It's normal that if this decreases to 100%, we have a positive impact there with -- in terms of CET1. Up to now, we haven't factored anything of that. But we monitor the situation carefully. It's normal. The regulation is not defined. There are many, let's say, attempts to change and many suggestions. We monitor and we will, of course, supply when this is clearly defined. I hope that I answered to all the points, and I open myself to further questions.

The next question is from Andrea Lisi of Equita.

I wish you, sir, to Mr. Colombini for good job done in Banca IFIS. Several questions on my side. The first one is on the cash collection NPL. It's quite good results in a tough environment like the current one to have achieved a cash collection like the previous year. My question is on the strategy further to achieve such a result, if there was some change, maybe some more disposals on NPL and so on, also to optimize the trend of the cash flow and cost of recovery? My second question is on cost of risk. You have -- I think you have anticipated several impacts of -- in 2020 of potential deterioration of the asset quality for 2021. Just wondering if you can provide already some guidance in terms of cost of risk, at least a range, or if it is still too early to assess it? And the very last point is on what you said before on the DTA and the EUR 27 million of transformation, if and when we will see impact on the P&L, in next year, next quarter 1?

First of all, thanks. I'll start with the question of the nonperforming cash collection. Cash collection was stable year-on-year. This is also due to this, let's say, the characteristic of our portfolio. We have, once again, 1.4 million debtors, a strong debt capital diversification and 40-plus percent against public employees or retired persons. That's the first thing. The second is that, of course, we implemented some management actions in order to offset the fact that we couldn't -- let's say that due to COVID-19 we couldn't work as in 2019. And this was mainly to move to phone collection, to online collection, okay? Strong use of, let's say, web [indiscernible] And this -- I would like to say that this number that you saw, EUR 259 million, do not include tax disposals, they are just tax collection. Disposals were slightly less than previous year. So there is no change. There is no advance and the, let's say, use of disposal to achieve cash absolutely. The number that you see are just collection. In terms of cost of risk, we don't give guidance yet considering also that management are considering also that we want to monitor very carefully our position, our -- let's say, our customers. Up to now, we don't see many sign of deterioration, but you never know. 2021 is real full of [indiscernible]. Regarding the -- so no guidance for now, additional provisions and in order to reflect the impact that we are likely to have due to COVID-19 like any other business. Finally, in terms of DTA. This, I can stress you Page 11 of the presentation. In Page 11 of the presentation, you see that the impact of this -- the DTA that were deducted from CET1 of EUR 27 million were included in the CET1, so none was deducted. And you can see, in fact, that there were already in Q4, a positive impact of 23 basis points. So it's already -- everything is already in our number, and we don't have P&L impact because this DTA transformation doesn't flow into P&L. It flows -- it remains a balance sheet item. So it's no more a CET1 deduction, it's a simple tax credit. So we were efficient and used this regulation, which, by the way, expired last year.

The next question is from Luigi Tramontana of Banca Akros.

Many thanks to Mr. Colombini, especially for the enhanced visibility of your results, thanks to the full digitalization of the figures. I think that this will be a long-lasting result of your tenure and that Martino and all will continue to take care of it. So thanks again. Moving to questions. Most have already been answered. Just a clarification, again, on capital and the DTAs. If I understood well, this transformation from DTAs into tax credit was due to the disposal of NPL. So that's a one-off.

I'm sorry?

Is there another one-off in Q4 related to the softer treatment and what would be the impact on capital?

No, no, no. No. Sorry, 1 second. The transformation of DTA had 23 bps of positive impact, done. Then we had the impact of Farbanca. So another, let's say, one-off, which is EUR 400 million of [indiscernible]. Then Manuela Meroni was mentioned a potential change in the treatment of our nonperforming loans portfolio, which may change, but up to now is just one of the various suggestions we hear into the market. That may change from 150% to 100%. So back to -- from 150% to 100%. Of course, in this case, if this is approved and go through, we will have a positive impact. But up to now, this is just one of the potential changes which have been rumored by the authorities. And we haven't factored anything.

The next question is from Simonetta Chiriotti of Mediobanca.

Let me join the colleagues in greeting Mr. Colombini. Most of my question actually has been already answered. Maybe just a very general commentary from you, if possible, on factoring volumes. So how was this type of products during 2020? And how do you see 2021? Do you think that there will be interest for this type of financing? It will be higher or lower with respect to 2019 and '20?

Thanks for everything. For sure, we expect interest. Remember one thing, we are so tiny, so small into the market that for us growing, it is not a problem, okay? We have a strong demand in the factoring business. It's a flexible product. It's a flexible product that allows financing to several companies that may not get financing through the traditional banking network, and because -- let's say, because of our know-how, our ability of selection and of course our ability to take some risks. So absolutely, we expect to continue growing. The demand is in there. The factoring product is flexible, so we can adjust in terms of volumes, we can adjust in terms of margins, we can adjust in terms of the ways to do one thing.. So yes, we expect a good demand. And as you see, margins were not impacted by the lower interest rates simply because the value is more in our know-how, in the time to cash and in the ability to select the companies rather than in 0.2 or 0.3x or more [ mark ] Yes. So we expect to continue to see demand in this [ business ]. And let's say that for us, it's also a good way to finance some small SMEs, which may not attract funding from other banks in short-term because remember we provide financing on average for 4 months. So these are our short products -- short-term products. I don't know if there are any further questions.

Sir, the next question is from Nicholas Binda of Intermonte.

First all, many thanks to you, Mr. Colombini, and good luck for the future from all of us. Just a follow-up, sir, on factoring. So we saw turnover came in both in line with pre-COVID level. I was wondering if net banking income of this quarter, EUR 42 million, could we consider it as a run rate for the future?

No. We had a positive, let's say, in the factoring business. There is a traditional factoring versus the -- we can do it in many forms, okay? There is factoring to SMEs, okay? Then there is a factoring in terms of acquisition of credits, too, in the face of the national health system. There is the factoring to chemists. In this case, in the Q4, we had EUR 4 million of positive performance in the pharma. And pharma is the loans exposure to public administration, NHS. So probably you could say part of this at least is one-off. But remember there is always some volatility because the sum of this business is a business impacted by seasonality. It will be stronger especially in Q4 and in the second quarter while the third quarter is lower because of [ holidays ] where many businesses are shut down.

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

Okay. I would like to thank you all for the call, and we -- I remain at your disposal for any question you may have. Thank you.

Thank you very much, everybody. Thank you.

Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your lines.