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 9 Months 2024 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Frederik Geertman, Chief Executive Officer. Please go ahead, sir.

Thank you, Madam, and good afternoon, everybody. Welcome to our 9 months 2024 conference call. I would, as always, take you through the presentation and leave some time for questions at the end. So if that's all right with you, I'll take you straight to Page 4 where we give the synthesis of our 3 quarters' results. The third quarter saw net income of EUR 33 million, which is flat year-on-year. 9 months '24 net income is at EUR 127 million, which is a progression of 2% year-on-year. Revenues reflecting the typical summer seasonality and the expected, I should say, increase in cost of funding. To mitigate sensitivity to declining interest rates in the coming months and years, we have strategically extended the duration of our government bond portfolio and we try where possible to make new business at fixed rates, especially in the leasing area. So we try in this way to enhance the stability of the interest income. In Q3, we saw some limited signs of asset quality deterioration with the classification of specific exposures in certain sectors. So very limited, I would say, and very focused on specific issues, nothing widespread. But we want to signal it. And finally, we can confidently confirm our 2024 guidance at EUR 160 million of net income. Financial position of the bank is very, very robust. We have EUR 2.1 billion in available cash and cash equivalents. Notably, we have completed the TLTRO repayment. The last amount was EUR 0.4 billion. It was repaid in 2024. So there's nothing left now. And we report a CET1 ratio of 16.43% at 30th September. That's including the net income after deducting the dividends that were accrued in the first 9 months. The dividends that we have deliberated in the Board are EUR 1.2 per share to be paid on the 20th of November for EUR 63 million total. The ex-dividend date is the 18th. The record date is the 19th. Taking you to Page 5, revenue focus. The revenues in Q3 were EUR 157 million, minus 4% year-on-year due to the cost of funding increase. Over 9 months, we are at EUR 531.8 million, therefore plus 3.8% year-on-year. Breaking it down, Commercial Banking revenues at EUR 93 million, which were EUR 87 million in the second quarter and EUR 84 million in third quarter '23 based on commercial performance and pricing discipline that we will talk about later, largely offsetting the cost of funding increase. NPL revenues at EUR 55 million, which were EUR 86 million in the second quarter and EUR 66 million in the third quarter of '23 due to a fairly marked seasonality in judicial and extrajudicial workout. Non-core and G&S at EUR 9 million, which was EUR 16 million in the second quarter of '24 and EUR 14 million in the third quarter of '23. The proprietary book confirmed itself as a recurrent and stable contribution to revenues, as you've seen, I believe, in the last quarters. On Page 6, we give a little bit of information on how we're dealing with the rate scenario. We -- as we mentioned, the cost of funding has peaked in the bank. It's now stabilized. We expect it to decrease hence forward. And to manage, if you will, the overall sensitivity of the bank to a decrease in interest rates, we've simulated a 50 basis points decrease. That simulation in March yielded EUR 11 million to EUR 13 million of impact negative. In September, that's EUR 8 million to EUR 10 million, and we will continue to strategically work to reduce the sensitivity to scenario, which is expected, right, where in the following quarters, the reference rates will be reduced. How do we do that? We increased the duration of the proprietary bond portfolio. We're at 3.3 years now. We increased the origination of fixed rate leasing and enjoy a fixed rate lending where possible. That's increased from 29% in the first 9 months of '23 to 80% this year. And we decreased deposits in Bank of Italy, which are remunerated less, of course, from EUR 0.9 billion to EUR 0.4 billion. Now cash position remains very, very large and more significant than that, obviously, due to the assets that we can pledge that count as liquidity. Page 7, commercial activity. Factoring turnover stable year-on-year with a market that does minus 4%. Quite a performance, I would say, considering the spreads. The average spreads are at 3.98%. That's on top of the base rate. Consider what the base rates did, right, in the -- during the peak of the interest rates increase by the central banks that we think that's very solid. On leasing, we're seeing that the tax incentives that are being made available are providing some acceleration for the leasing market in Q4. The equipment leasing is very much exposed to these types of measures being in place or not being in place. The implementation decrease for the Industry 5.0 tax incentives were approved actually only in July. And thus far, we haven't seen any significant impact due to their complexity. So on equipment and technology leasing, we see that the SMEs have delayed some CapEx decisions. We have a -- on the first 9 months, right, we report a slowdown of 11%, which is less severe than the market decline of 16% in the quarter, which you see in the bars. We do minus 12%. The market does minus 1%. As said, it's a little bit -- goes a little bit up and down, and it's quite exposed to these tax incentives. We can talk about it maybe later a little bit. Automotive leasing is outperforming the market. We remain focused on, as you know, on premium segments. We remain focused on pricing, and we make sure that we have remarketing agreements in place as we do not want to have a significant exposure to the value of certain brands. So the spreads on the basis of this policy are quite high at 3.97%, up 6 basis points year-on-year. So that's an increase even. NPL portfolio, Page 8. Mind you that the bars do not include the Revalea acquisition, right? So we have in third quarter quarterly cash collection excluding Revalea of EUR 83 million, including of EUR 97 million. This is -- that's down, obviously, because of seasonality versus the second quarter. If we look at revenues, we have excluding Revalea, EUR 53 million, including Revalea, EUR 62 million. It should be noted in that respect that starting early 2024, we concentrated on the Revalea purchase and integration, limiting significant other portfolio acquisitions given that we had acquired EUR 6.8 billion gross over EUR 250 million net of NPLs. In this quarter, Revalea contributed, as you saw, right, EUR 8 million to the revenues and EUR 14 million to the cash collections. You see it from the numbers that are written on above the bar charts. We saw some slightly longer time frames in the secured corporate segment. We don't have very much of those loans, but they are present. It's a small sub portfolio that's managed [indiscernible]. What I would add is that we see quite marked seasonality, a little bit more marked than previous years. October appears to be a normal October. So we do not appear to be in the presence of a lasting trend in terms of collections or revenues. And of course, we started purchasing portfolios again in Q3. Page 9, inflation impact countered by efficiency is the standard title we put on that chart. Operating costs are EUR 94 million. Other operating costs are down EUR 6 million Q-on-Q, lower IT, NPL onboarding operations and marketing expenses, right? This includes some IT and project expenses that are substantially stable as we execute our projects, right, that are in our 3-year plan. Those projects are mostly on time, which means that we're gradually winding them up and finishing them. And we're confident that as we finish the 3-year plan, the whole of the digitalization agenda, cybersecurity agenda, credit process agenda, et cetera, has all been completely executed. Cost directly linked to NPL recovery decreased Q-on-Q. As you would expect, they are seasonal as the revenues are. If you compare with '23, you should note that this in '24, it includes EUR 4 million NPL recovery costs of Revalea. Going to Page 10, loan loss provisions. We have EUR 13 million of loan loss provisions in the quarter. We see that the coverage ratio, all in all, increases from 45% to 46%, slightly different mix. Some past dues of the pharma business, you will remember that we have this portfolio in runoff where we purchased invoices from the National Health Service or to the National Health Service, I should say. And that's gradually disappearing, which is good news. The remaining past dues are normal in nature, so they tend to be slightly more reserved. On the lower side of the chart, the NPE ratio, you see a slight increase from 5.4% to 5.7% gross and from 3.0% to 3.2% net. This increase is mainly due to the lower stocks of the performing loans, and that's connected to the factor of seasonality. If you look at the actual amount, they're stable Q-on-Q. So there's no significant increase, even though we have, as I mentioned, classified a number of single exposures in specific segments, i.e., steel and automotive mostly in this quarter. The application of the new definition of default, as you know, leads to the reclassification to past due of this stock of loans. I've already mentioned it. You can see that that stock is nicely decreasing from 1% to 0.6% gross and from 1% to 0.5% net. So that's going exactly as planned. Are there any signs, on Page 11, of a widespread risk issue? It appears not. We try to share with the market here always the most, how should I say, predictive indicators that we have, right? Let's take a look at them. Payment days in factoring, they're stable. They're actually roughly 15 days lower than they were in 2022. So no tension appears to be present at all in the capability of the corporates to pay their bills. Remind you, these are not past dues. This is the actual payment which they pay, right? So it would be perfectly legitimate for them to pay in 89 days. Top right corner, stage 1 and stage 2 loans, actually a small decrease in stage 2 loans from 10% to 9% in this quarter. So there too, no sign of widespread issues in the Italian corporates. Rating migrations fairly stable. The upgrades roughly balance the downgrades. It's slightly variable Q-on-Q, but I wouldn't give too much importance to it. The probability of default of the book remains roughly stable, as you can see on the bottom right graph, right? We're at 2.9% in the third quarter. So we don't appear to have in the economy or in our book any widespread issues. Quarter results, I'll comment on them a little bit this time. Page 12. So you can see net interest income over 9 months in 2024 is at EUR 404 million. Last year it was EUR 409 million. As you know, the bank prudently maintained approximately EUR 0.7 billion, I would say, in excess cash to make sure that we would be really comfortable to repay the TLTRO and to meet loan demand if it would arrive. This conservative approach leads to an increase in costs of about EUR 10 million. That's, if you will, the price of the insurance of wanting to be absolutely sure that the TLTRO repayment would not give us any sign of tension. That's projected to be EUR 13 million for the full year. And that, as I mentioned, is the price of the insurance that we created by issuing a bond at the beginning of the year and by attracting EUR 600 million, EUR 700 million of additional retail funding at quite high prices in the months of January, February, March of this year. There's also, as I mentioned, some marked seasonality in this year in NPL workouts. I also mentioned already, we expect normal results in Q4. And part of it, I think, is slightly exacerbated by the fact that in the first 9 months of this year, we concentrated on the acquisition and integration of Revalea. So there wasn't a lot of new portfolios coming in and being released onto the servicing operations. We have resumed purchasing NPL portfolios in Q3. We have made a few transactions. Some of them are reasonable in size. Then income from the proprietary portfolio is EUR 28 million. That is partly driven by the sales of some government bonds that were executed both in June and in September. We had a favorable interest rate situation. So as part of normal trading activities, we made some profits there. And at the same time, we've increased the portfolio duration of the remaining bonds to enhance the yield. And finally, capital gains. That's quite a recurring form of revenue for us. We have EUR 13 million capital gains from our private equity investments. You know that we have a portfolio of very fragmented and selective minority investments in companies that are bought by private equity players that we partner with. We also had around EUR 10 million from the disposal of NPL portfolio sales. As a matter of good housekeeping, when the portfolio has been worked, we try to pass it on to players who are specialized in these sales and not to keep them on our books. It makes it easier to monitor the situation. It makes the business more transparent. We are able to sell those portfolios at a small profit. So that's also a form of capital gain that you should consider fairly recurring, certainly on an annual basis; may not be there every quarter, but on an annual basis, those are quite recurring facts. So that's the way that the revenues over the 9 months have been built up. Going to Page 13, capital ratios. That's looking very, very solid. We go from 15.32% to 16.43%. Part of that is the seasonality in risk-weighted assets. Part of it is that we have lower risk-weighted assets due to the introduction of the Fitch rating -- the ECAI Fitch rating that also contributed, and that's a benefit that's here to stay. Finally, we have the 24 basis points increase in the OCI reserve and the reintroduction of prudential transitional filters on the government bonds, adding up to a 1.11% increase in the quarter, putting us at the end of our business plan if things stay similar, right, in Q4 in an extremely favorable capital position and also relative to the business plan targets. You may recall that we had a business plan target of staying above 14%. It looks like we will close the business plan with the same amount of capital, maybe even slightly more that we had when we started the business plan. Page 14, concluding remarks. We confirm the guidance of EUR 160 million, 1 quarter to go, and that would -- that is the last quarter of our 3-year plan. What are we seeing now in the second half of 2024, right? And you may, with your mind, also maybe think about the next quarters. Quite moderate loan demand. Corporates are streamlining their funding, and there was a lot of liquidity injected, as you know, post-COVID, mostly in the form of long-term loans, very often with government guarantees attached. The economy is obviously slightly slowing down. It's -- we don't have a very significant growth in Europe or in Italy. Italy doing slightly better than some other European countries. We see some competition in lending to the highest rating corporates. Banks are liquid. They have capital, and it seems that they are looking for business. We focus on profitability, and we successfully increased the average spreads compared to previous year. That's a very important point in terms of discipline and also in terms of not being interested in building -- in aggressively building long-term loan books just because there are government guarantees. You will know that we will -- that we have created a book of roughly EUR 800 million, but in a very, very stable and progressive growth path. Second item, obviously, in the second half of the year is the ECB. It has already reduced interest rates by 75% (sic) [ 0.75% ] since June. Starting from Q1, we have decreased our sensitivity to this. So obviously, we've reacted. Asset quality, what are we seeing? As I mentioned, in Q3, we had some defaults. It hadn't really happened with sizable companies for a couple of years. They were all concentrated or all but one concentrated in either automotive or steel. So we have no indication at all of a wider issue, but we had some loans going to non-performing in the quarter. Obviously, our business model is quite favorable. We have a strong portfolio diversification across sectors and borrowers. We have fragmented loans. We do mostly short-term lending, and we have a very robust collateral management, not only in the form of government guarantees, but also in the leasing segment. The risk outlook appears still benign. Personal opinion, over the next couple of years, I would expect a normalization of the cost of risk. As I've said on previous occasions, the very, very low risk observed in the Italian banking sector is a function certainly of the quality of the corporates because the cleanups that were made in those balance sheets were huge, but also, I think, a consequence of the enormous amount of liquidity that was injected. And that's something that I think is in its nature is transitory. So it will -- at some point, it will ease out. So in the midterm, I would expect a normalization of cost of risk. But all the indicators we have, as I mentioned, still point to a very, very benign scenario. Finally, the NPL business. We had achieved our NPL purchase targets significantly in advance ahead of schedule. So we were a bit more selective in 2024. We started buying again in Q3. In the medium term, I would expect -- well, first of all, in our house, we will partner with co-investors and share some profitability and risk of the NPL business with certain structures that may help us alleviate the impact of calendar provisioning. And I think what you should expect is over the years, right? So it's not something that is relevant on a quarter-by-quarter basis. But over the years, given the way this sector is maturing, the weight of the NPL business is probably going to gradually decrease a bit in our overall balance sheet in our overall income statement, but we will compensate with the additional businesses that we have, right? I would pause here and open the floor for any questions that you may have, and I wait for those questions. Thank you for your attention this far.

[Operator Instructions] The first question is from Fabrizio Bernardi of Intermonte.

The first question would be about any color you may want to share with us about the bottom line in 2025. We know you, Banca, is very precise about the guidance. So any sentiment, any color or any flavor you may want to share with us would be very appreciated. Then the second question is that I think you mentioned that you are waiting for another cut in 2025 in terms of available rates. So the question is how can you, let's say, deal with this? And last but not least, curiosity about the fact that you are introducing the double voting rights scheme. So I'm wondering, given the shareholder base there, which is the rationale behind it.

Can I just ask you to repeat the third question, please, Fabrizio? I didn't get that. We didn't hear you that well. Thank you.

You are introducing the double voting rights scheme. So I think it's like something like if you are shareholders for more than 2 years, we have a double voting right. So I was wondering about the rationale behind the scheme.

Thank you, Fabrizio. It's very clear. Okay. So bottom line in 2025, let me be a bit generic. We don't have a business plan for 2025, 2027. We're actually starting the work on that. I expect that we will present it before the summer, right, of 2025. So I cannot comment too specifically. Besides telling you that the way we see the bank performing, the way the business is structured and the scenario around us, we are quite confident that we will continue to be a bank that provides attractive returns and equally attractive dividend payments, right? Remember that even if we were to assume, right, the normalization of the cost of risk scenario, the bank has put aside significant overlays and we expect to release these in the coming 18 months, right? So either way, we release them because risks appear and we use them against those risks or we will release them as they flow towards the P&L as you can't keep those indefinitely, right? So let me give you a constructive feeling for 2025 without giving any numbers. On the macro scenario, until now, it's been quite supportive, right? The rates are a bit higher than we were actually expecting at the start of the year. You remember there was a huge overshooting, I think, of the expectations on rate reduction. We don't have signals of a recession. We have maybe slow growth in Europe, right, but nothing much worse. I won't get into really, really macro geopolitics as I guess everybody can have their own ideas. So I think we are in a reasonably positive scenario still for the banking sector, right, even though it was not -- it may not be the total blue sky scenario, right, that we saw in '23 and '24 that generated the huge profits that you saw in the European banking sector. On rates, how to deal with rates and with the cost of funding? Yes, we mentioned it in the Q2 results call. We had reached 3.9%, and we saw it stabilizing. I can confirm that now it's actually going down slightly. So we expect an average cost of funding for 2024 to be below 4% and that trend is ongoing. Now in 2025, it will depend, of course, on rates, right? If I can give you -- and this assumes, right, a certain rate scenario. So there's a little bit of speculation in this. But if you're looking for a number, I don't want to duck the questions. We would like to remain below 3.5% cost of funding based on the current forward curves, right? But that's a little bit speculative, right? So yes, expect us to be able to reduce the cost of funding significantly. It's already peaked. It's going down. Of course, what we will need to manage, and we're very focused on that, is what happens on the asset side of the balance sheet, right, because the sum of these 2 effects will give you the net interest margin. Finally, double voting rights. Yes, it is exactly as you said. We -- obviously, the shareholders' meeting has to deliberate this, but the objective is to give shares that have a long-term commitment to the bank, double voting rights. It's legally allowed in Italy. Of course, there's been a specific law that made this possible. The objective being, which is also our objective to pro stability in the shareholder base of the listed companies, also supporting maybe projects that take some time to develop, thereby, hopefully, we'll see also reducing, in general I'm saying, not just on us, right, stock volatility, right, attracting stable investors. It can help to minimize swings, right? Now as you know, we have an equity story, if you will, that is based on a long-term view. The controlling shareholder is always taking a long-term view, and you can see that in our risk profile. You can see it also in specific decisions that the bank took, i.e., not doing very opportunistic things in terms of lending, not doing very opportunistic things in terms of now businesses that suddenly popped up, like, for instance, super bonus type of asset purchases, right? So long-term perspective and the bank likes to have shareholders that share -- all shareholders, not just the controlling shareholders, that share a long-term perspective and that are interested in our long-term plans and are interested in our long-term commitment to buying -- to giving stable and generous dividends, okay? So that's the rationale behind the double voting right. I hope I answered your question.

Yes, for sure. One last thing. There has been a very strong spike in terms of capital ratios between the second and the third quarter. Most of it is related to RWA decrease. I know that there are some initial transitional filters and the OCI reserves and so on. My question is, is there any, let's say, not a commitment, but is there any fear about net new money in your business? So we can assume that maybe a kind of RWA decrease may diminish across time or is there any, let's say, embedded strategy by the bank about the net new money saw increase in the stock of new loans? Because to be honest, I never seen such a huge RWA increase. So what I think is, is there any view about the fact that the group may be scared about the evolution of the asset quality? You mentioned before that there were some positions that were in trouble. Or is it just a temporary decrease?

I'm having a really hard time understanding. I'm sorry, Fabrizio. So I'm sorry if I didn't get your question right. You were asking about the evolution of cost of risk from Q3 on…

Can you hear me a little bit better now?

Yes. Yes. Thank you.

Okay. Sorry, it was headphones that was not working well. So what I'm asking is on Page 13, there is a clear scheme about the evolution of the common equity, which is going up to levels that are very, very high and most of this is related to the RWA decrease. So I guess that it's a problem of stock of, let's say, loans in general terms. So is this a temporary situation? Or is this, let's say, an issue about what you think about the evolution of the cost of risk? So you are, let's say, very, very, let's say, focused on group positions that are safe and you don't want to, let's say, take more risk about asset quality?

Okay. Thanks. Yes. That was better.

Sorry, my fault.

No, no, that's fine. That's fine. No problem. So yes, we had this 87% -- 87 basis points that is attributed to risk-weighted assets decrease. Now this is a little bit of a simplification because obviously, risk-weighted assets have one dynamic and loans have another dynamic. Now part of that is loan decrease. I would consider that seasonality. So we haven't had a massive slowdown in new lending or a massive slowdown in new clients in factoring. I think the loan decrease in this quarter, you can fully ascribe to seasonality and we don't have any particularly harsh credit policy that's generating less assets because we don't -- really don't see the reason to execute a thing like that, right? So besides the normal risk policies and a very, very disciplined focus on margins, there's nothing else. The other parts of the RWA decrease that are not connected to a decrease in credit, right, is, as I mentioned, things that reduce the risk density of the book, right? And those are just benefits. They materialize in this quarter. You may actually see some other benefits appearing in Q4. So actually, if you would ask me to make a prediction of how this will develop, probably it will stay roughly where we are based on an increase in risk-weighted assets due to the seasonality, right, which in Q4, we expect, as always, to go back up and some other benefits in terms of risk density that we are putting in place. So roughly expect this to be where we are now at the end of the year. And in terms of risk policies or credit policies, really nothing new to report. I confirm that we had a couple of defaults on mid-corporate historical clients in the sectors that I mentioned. We've been looking very carefully at our exposure in those segments and also the other ones. And we don't think there's anything that in the short term would merit attention. So no change in risk policies. And to answer your question, given this level of capital, if we will have opportunities to grow the asset base with the current approach to risk and with a reasonable pricing, we'd be very happy to take it. In our opinion, the bank is currently balanced between its discipline and the opportunities that are out there. If we could do more, so distribute more effectively, we would be happy to do it. Hope I answered.

The next question is from Giuseppe Grimaldi of BNP Paribas.

First of all, let me, let's say, congratulate for your second appointment, Mr. Geertman. I wish you all the best for the second Q.

Thank you. You're welcome.

And on my side, I have actually a couple of questions. The first one relates to the NPL business. We saw this quarter a pretty chunky, let me say, seasonality. Do you expect some recovery into Q4 to recover part of the ground lost? And on the other side of the spectrum, the performance of the portfolio was remarkable. So should we expect this to continue in the coming quarters? And the second question relates to the overlays. Are they all impacting in your balance sheet in absolute figure? Or have you used it in Q3? That's all.

Sorry, I was replying to your question, but I had the mic switched off. Sorry, Giuseppe. In your first question, you mentioned that there was a portfolio that was performing very well. You were referring to the financial portfolio. You were asking us if that would continue to perform like this?

Yes, exactly, exactly.

Okay. Thank you. So on the NPL business, yes, we -- first of all, we -- the seasonality was a bit more marked than we thought, right, than we would have expected. But we analyzed it and we think it is what it is. It is a quarter that was a bit slower. And that's probably been exacerbated a little bit by this phenomenon that I mentioned, i.e., that since the end of '23, we were really quite selective, right? So Revalea gave us -- obviously gave us a contribution this quarter, right, EUR 8 million in revenues and EUR 14 million in cash collections. And we've restarted purchasing. So we would assume that this is, in Q3, is not a trend. Also on the basis of what we saw in October, we don't think this is a trend. Now more in the medium term, you can see it in our report. We have a very detailed report that came out in September; it's for e NPL watch. I think if you look at this industry, it is quite obvious that the industry is maturing. It's quite obvious that the banks are producing less NPLs and it's quite obvious that most of the risk has been translated from banks to investors already. So the early years of this business were very, very rich and very, very profitable. In the meantime, obviously, players have matured have become more specialized and especially Banca IFIS has become very specialized in small tickets unsecured. So in this segment, we will continue to remain present, but in a context in which in the medium term, probably the opportunities are going to be a bit less rich. So over the next quarters, no concerns about the health of the NPL business itself. In the long, long term, obviously one needs to take into account that the profitability that was built up in the early years won't probably be present in this market as it was back then, right, as it matures. On the financial portfolio, can we assume that this continues. There is a non-recurring element in it in the sense that we made some sales, right? So there were some government bonds that were sold in June and in September. So we had some profit-taking there. On the other hand, we've increased the yield of the portfolio by making the duration longer. And I can assume -- but it's probably not every quarter. I can assume that these opportunities will arise again. So I wouldn't consider them completely one-off, right? And I would -- if you look at the evolution quarter-by-quarter in the last, I would say, 2 years, right, I think what you will appreciate is that the proprietary portfolio has been actually a stable contributor. And I would say the same for the equity investments. We make very selective small fragmented equity investments together with our private equity partners that we finance in the structured finance business. We only make them when we really like the asset. We don't have a budget that needs to be somehow invested. So we can afford to be really opportunistic, positively opportunistic. And the portfolio of these investments has performed really, really well. So we will continue doing this. Now of course, you don't every quarter have exits. You don't every quarter see EBITDA development so positive that you can increase the value of the participation. But I would consider it -- I wouldn't consider it one-off. So I would be supportive of a positive view on the proprietary finance and on the investment part also in the future, right? And then Q-on-Q, it may vary a little bit. But I think if we take a yearly view on this, what I said will hold over time, no doubt. You asked about the overlays. They're not fully intact, meaning that we used some. As these assets or these loans that I mentioned turned non-performing, we used some overlays to -- against those. So we allocated some. The majority of these overlays are still present. So we use them only partly and very partly, I would say. And as a time frame I would give you for substantial elimination of these overlays, right, is roughly 18 months. I don't think we could justify keeping them for much longer. I hope this answers your question, Giuseppe.

The next question is from Davide Giuliano of Equita.

First, I'll join my colleague in congratulating on the renewal of your mandate, Frederik, and good luck to all the management team for the new business plan. But moving to the question, I have 3, if I may. The first one on factoring. NII performance is very strong in the quarter and growing sequentially despite the unfavorable seasonality and lower rates. Can you elaborate on this a bit more? And the second one, a follow-up on overlays. Is the decline in stage 2 coverage due to that? And if you can give us the exact number. I -- probably I missed it before. And the third one on leasing, there have been some newspaper articles in recent days about possible changes in the application of VAT and also a reduction in the risk weight of these exposures. Have you made any consideration internally about the impact of the changing on the timing of VAT on the leasing demand for the future?

Yes, I'll take the first 2 and not having really an answer, I will confess on the third one. I will pass it to Martino Da Rio, who's volunteered. So -- but I will confess that I wouldn't be able to answer. It's probably a bit early. But maybe Martino has thought about it, and I'll pass the microphone to him. So factoring performance. Well, factoring performance relative to the market, I think, is very solid. And if you compare it on a slightly longer time frame, actually I think it is remarkable. In Italy over the last probably 5 years, but maybe even longer, short-term lending has become less prevalent because banks have allowed, if you pass the term, companies to finance themselves with long-term lending to a much more significant degree even when there are no specific investment plans present. So we've sort of accepted the view that if a company is healthy, it can finance itself with long-term lending regardless of the use of those funds. And that was obviously possible given that there was a rates environment, which allows for very cheap long-term lending, and it was made even more attractive given that they were government guarantees. So in this context, if you look at the way the bank's loan books are built up, I'm talking about 5 years roughly, right, maybe more. I remember from previous experience that we had serious trouble keeping the short-term lending up because it's more expensive and because it's more work. The fact that this bank has gradually grown its factoring book and even in the last quarters, right, has outperformed the market is actually a testament to its ability to have client relations to justify its pricing with exceptional platforms, very user-friendly digital interaction with the clients, which, as you know, in factoring is continuous, and that's very different from a long-term loan. And so the fact that spreads have actually even increased over this time, whilst the stocks have moderately grown, I think, is a remarkable testament of the quality of the relationships and of the platforms that the bank has. We don't talk about it that much in analyst calls because it tends to become boring. But we've spent a lot of time and energy in becoming the most performing factoring platform in terms of user experience, in terms of usability, in terms of speed of answering of the country. And I think if we are keeping this business as it is, then it's probably the consequence of those types of investments. So yes, I would say it's really good and we consider it core, core business. It's the essence of where the bank comes from, and it's definitely a very attractive business also in terms of duration of the loans, risk fragmentation and the capability that you have to react when companies go into trouble. If you give a long-term loan, it's given you can't do a thing. In a factoring relationship, most of the time, you will actually recover your money even if problems appear. And doing all this with a spread of 4%, that's not easy, 4% on top of the base rate. The part probably of the explanation is also that we have costs associated with it because I remind you that we have own distribution. So we have 26 branches all over the country with hundreds of colleagues who are specialists. And this is not the type of business that you can do with third-party distribution, with agents or that type of stuff, right? So it involves a cost. But as you've seen, it's highly remunerative. Overlays, we haven't given a specific number. And as I mentioned, it's -- the majority of them are still in place. We will communicate like this as we will, how should I say, use them over the next 18 months. I don't want to enter a cycle where we update every quarter on a single million euro number, the amount of overlays. I think it is more opportune in the credit committee than in an analyst call. So we've mentioned the number when we had built it up. We're giving the time frame when we are -- when we expect to use it. Most of it is still there, I confirm. So we used some of it and expect it to be gone in 12 to 18 months. On the leasing and VAT and change in regulation, I will pass to Martino, who volunteered. Thank you.

Hello. I will be very brief. It's too early, as the CEO was saying, it's too early to give a precise opinion. Bear in mind that this is discussed at the sector level and with Assilea, which is the association of the leasing business. Of course, if approved in these terms, it will be positive in terms of risk-weighted assets, lower capital absorption. It is difficult yet to make an estimate from the change of VAT on how the clients will react to that. It can be potentially negative, but really at the present time, it's very difficult to make an assessment. We monitor this very carefully.

The next question is from Simonetta Chiriotti, Mediobanca.

Congratulations also from my side. I have 3 questions, a couple of NPLs and one on M&A. So on the NPLs, my question is, when do you expect to have an impact on the segment of calendar provisioning and consequently to have to adopt with the new way of purchasing assets in the segment, so through partnership and joint ventures? And second question on this segment, you said that medium-term prospects are less exciting than in the past. Will you have to adjust the cost structure to the new market prospects? And the third question on M&A. So you said before that you would be happy to expand distribution at the right conditions. So what should we expect? So you have already several segments. Do you want to grow where you already are present? Do you want to add new segments? What -- or distribution channels, what would be the right target?

Yes. Yes. Okay. So on NPLs, first of all, let me say that it's not a black or white situation, right? So even today, we have -- in the portfolios we bought, we have quite some loans with calendar provisioning. They are generating a deduction from our CET1 ratio. We don't mention it, but it's there. And so as we purchase, we have purchased loans with calendar provision. And given the capital levels at which we are now, we could actually have quite a tolerance for purchasing them. And we have and I think we will over the next quarters do that. Now of course, in terms of ROE, right, it tends to depress the attractiveness a little bit. So it becomes more attractive to do it with structures that allow you to deconsolidate, that allow you to maintain hopefully significant, we think a significant part of the profits that are created. Thus slightly less revenues, but much less capital absorption. Therefore, in terms of revenues, slightly negative development. In terms of ROE, a very positive development and expect that to be rather gradual. So we've been, I think, rigorous and thoughtful about setting up the structures. If you were to ask me when roughly they could start to operate, I would suggest Q1, Q2 2025 is a totally reasonable time frame. But even if it weren't Q1 '25, keep in mind that we can comfortably purchase calendar provisioning NPLs. We have them today. And we -- and if we see good portfolios, given where we are with 16.4% CET1 level, we can really afford to go on for quite some time and just take the extra weight. It's not efficient in the long term. So we'd like to morph, if you will, over the next business plan to an asset management model, right, which is very, very attractive in terms of ROE, but it will mean sharing some revenues and some profits with the third-party investors. Now it is a core business for us, and we will stay in it, right? We think that the position that we have, given our specializations and our market share in the non-performing small tickets unsecured area is unparalleled. So when you say adjust cost structure, actually what we are seeing is that until now, and we think we have further ways to go, the use of technology and the use of becoming smart in the way you interact with the debtors, the frequency with which you interact with the debtors, the digital channels that you can activate to interact with your debtors actually are very, very remunerative projects. We have this stock of EUR 1.5 million -- 1.5 million debtors. There is a gross book value that is north of EUR 25 billion. And there's an enormous amount of value that can be extracted from it by reasonable, socially responsible, but technology-driven recovery. So those are the projects that are ongoing, and you can hear from those terms that I'm using how much we are committed to the business. I will, however, also in an analyst call, make sure that you know that we know that over the midterm, the profitability of this business will require attention. So either we improve in the way we are explaining and we find models like the one I described to deal with calendar provisioning or it will become a less attractive business. So don't -- in those words, in those elements of attention that I put forward, don't assume that the commitment of the bank is in any way less focused on this business. We think we are -- we have an unparalleled capability, both in terms of pricing and in terms of recovery. And we are quite sure that over the next years, we can generate a lot of value from it still in an environment that's changing and that we need to react to. That's the bottom line. M&A. Yes, I can imagine the question also comes from the CET1 position, right, because it's -- obviously it gives us space. We don't have any deal on the table now that is sizable enough for me to mention it. We always look at opportunities. We've never stopped looking at them. Then when Revalea came up, it was -- obviously, it was already a business we were in. So it wasn't really considered a big news. But in any case, we considered it M&A because the type of negotiation, the type of transaction was definitely M&A. We like businesses where we have 2 elements. One, clear synergies with what we already do. So our capabilities are somehow good to develop that business and to add value on it. Second, and then maybe third, I would say; second, businesses which have a size that do not impair our capital position or our funding position. So we want to be able to comfortably digest, if you will, the acquisition. And third, anything that would be conducive to having more attractive funding would also be looked at with interest, right? These are the criteria and also in M&A, taking a long-term view. I hope, Simonetta, this was an adequate response.

[Operator Instructions] Mr. Geertman and gentlemen, there are no more questions registered at this time.

Okay. Then let me thank everybody. We hope to have you all on the call when we do the full year results. And that will also be the call in which we do the final business plan results. And well, we'll see how it goes. There's one quarter missing, but hopefully we can celebrate a good conclusion of our last -- of our latest 3-year business plan as we work on the new one. You will have read that we've started working in earnest on it and we will probably present it before the summer, so late Q2, if I would have to guess now, but we'll see how it goes and the exact date. Thank you very much for your attention and I hope to have you soon.

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