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

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the Banca IFIS Update Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Frederik Geertman, Chief Executive Officer of Banca IFIS. Please go ahead, sir.

Thank you, Madam, and good morning, everybody. Thanks for your participation on such short notice and on this early hour. We have a few updates that we want to communicate to the market. We are not using any slides, but there's a press release for your reference in Italian and in English. I will make a few remarks, and then I will take your questions. I'm joined this morning by Roberto Ferrari, our CFO; and Martino Da Rio, our Investor Relations Executive, and I will briefly get into the subject. So as you know, we are reshaping our business model into a well-rounded SME banking specialist, ensuring closer alignment with the regulatory environment and the group's risk profile. This refers to the NPL business, of course. We believe we have identified the right strategy and the measures to design the future of the bank, and we have completed a few milestones in that direction with the acquisition of illimity and the creation of the Furstenberg division in this long-term transformation that we focus on sustainable value creation. So this reshaping of Banca IFIS is progressing smoothly. We initiated, as we said, with the acquisition and derisking of illimity, but we've moved on this year, as you saw, with the orderly disposal of a number of subsidiaries of illimity, Hype, 50% stake was sold. Abilio, ARECneprix, we also restructured illimity's IT contracts, both with Engineering, with Apax. And we took the decision yesterday in the Board to deconsolidate the NPL business. So the Board has decided to move from an evaluation phase into a deconsolidation phase and the competitive bidding process has been started. Recent developments required us to review also our profitability outlook with the decision to update our 2026 guidance, which is now between EUR 100 million and EUR 110 million net profit for the year, down from EUR 170 million, EUR 190 million, which was the previous range. Our Q2 performance reflects a more challenging environment compared to what the initial expectations were. We want to provide a timely and clear, hopefully, explanation of the impact on our profitability. So the difference in profitability with the new guidance towards our previous expectations is mainly driven by one-off items related to actions we proactively carried out pending the Bank of Italy report. After the authority concluded an on-site inspection. And we also have updated provisions on illimity's noncore assets. These are the 2 main items. So as mentioned, we are -- we went through a Bank of Italy inspection that started half January. We are awaiting for the final report after the completion of the on-site inspection that finished a few weeks ago. It was conducted as part of its standard supervisory processes. We haven't had a general inspection for a number of years. The consequent preliminary actions we proactively resolved to take include a more conservative stance on certain large lending exposures so reinforcing the commitment to the highest standards of risk management and transparency. So we reassessed the risk profile of the selected exposures, and we recorded additional provisions. While awaiting for the final report, we have, therefore, proactively resolved further voluntary adjustments of approximately EUR 30 million before tax. So that's the size of the impact. To give you an idea, that's 0.2% of the credit exposures that were -- that are on the book. So I would say, fairly modest amount. We also took further provisions on the illimity's noncore assets. That's in the context of a review that happens every 6 months of the recovery plans for the underlying NPL portfolios. So the process incorporates updated data that arrives from the servicers, it typically provided on a 6-month cycle. And also, we have a 6-month cycle of an audit that we need to do on those assets with the internal audit function as a consequence of the commitments taken by illimity on their inspection by Bank of Italy that happened in 2024. So we have these 2 6-month cycles. And as a consequence of that, we incorporate latest collection trend, recovery expectations and the overall portfolio performance. And here, as a result, provisioning came out at approximately EUR 40 million, also before tax, as said, primarily concentrated in the securitization vehicles and intended to reflect the revised recovery expectations. So those are the 2 big items. So in response, we acted decisively to try to contain the financial impact. So we activated in the whole group targeted cost control measures, including tighter spending and efficiency initiatives. And these actions help -- will help to partially offset the pressure on profitability, although obviously, they are not sufficient to compensate for the effects that I just described. More broadly, I'd say it reflects our ability to react in a changing environment and focusing on efficiency and cost discipline without compromising long-term growth initiatives. The updated guidance, I wish to underline, does not reflect any impact from the deconsolidation of the IFIS NPL business. At this stage, it is too early to quantify the precise effect as the deconsolidation process will depend on the final structure that's adopted. For instance, the percentage that we will sell hasn't been decided yet. So there could be a partial maintenance or a partial retention of profitability in the business. And we are working on this, and we will provide updates to the market once the key decisions are finalized. As was mentioned in the press release, we have a competitive process ongoing with significant interest. We continue to move forward on our path, committed to the direction we've set, so creating an SME specialist and a fully-rounded bank. We are aware of these recent events have had an impact on our short-term results. We view them mostly as nonrecurring in nature. and we take the actions in a proactive way, right? So our traditional strengths, including capital positioning, risk discipline, integration capacity, derisking, they remain tangible and intact, and they will continue to support our long-term ambitions. I would also stress that the synergies that we have quantified on illimity are fully confirmed, and we will benefit from them in 2027. So there's absolutely no discussion on that. That said, we remain focused on executing our strategy with discipline and protecting our shareholders' interest, positioning the group to capture the full value of the strategy. And we will obviously, as there are some -- still some moving parts, we will update the market as soon as any further news is available as we've done today, where we have anticipated communication to the market with -- in the most timely manner that was possible. Thanks for your attention until now, and I will gladly take your questions.

[Operator Instructions] First question is from Irene Rossetto, Banca Akros.

Two questions from my side. What impact do you expect in terms of group earnings and common equity Tier 1 ratio from the deconsolidation of your NPL business? Then what is the size of the remaining pharma business? And finally, will you exercise the call of illimity Tier 2?

Okay, Irene, thank you. So on your first question, the impact of the deconsolidation. We are moving early in our initiative to optimize capital allocation and also in our initiative to share this with the market. So we -- but we are maintaining some strategic flexibility, and we want to execute the most value-accretive solution that will come out. This decision will be driven also by the discussion with the potential partner. So it's not entirely in our hands, Irene, okay? Also considering the evolution of the regulatory environment. What is clear is that the Board yesterday decided to deconsolidate, right? So we're transitioning to a more capital-efficient partnership-based model for sure. It might be a full sale. It might be a deconsolidating partial sale. What I would say, maybe this can help is that the risk-weighted assets that are allocated to that business amount to EUR 1.8 billion, right? So you can work out yourself what the EUR 1.8 billion -- . EUR 1.9 billion, actually, sorry, I correct myself, EUR 1.9 billion. So you can work out the number for yourself in terms of what it would mean in terms of CET1. With respect to the Tier 2 call, yes, there are 2. The call of the Tier 2 bond is subject to a prior authorization from the Bank of Italy. Now in line with standard supervisory practice, that may be granted after the phase of the inspection is completed. I mentioned we are in an inspection. The inspection is formally ongoing. We haven't had the final report yet. So we will proceed with the call once the approval is obtained. And that doesn't fully depend on us. So I can't give you a more precise date, except that it would be the intention of the bank, obviously, to call the Tier 2, given that we issued EUR 400 million in January. Is that okay, Irene?

Yes. Maybe the question on the size of the remaining pharma business.

The size of the remaining pharma business. So I'm sorry, yes, I missed that one. I can be very precise. The remaining pharma portfolio is roughly EUR 100 million. And it's currently in orderly runoff, okay? So you may remember that in 2022, we had EUR 560 million, right? So that was basically a runoff in the last years, an example of anticipating as much as we can a regulatory environment as we're doing now on the NPL business. Here, too, regulatory expectations have evolved over the last few months, have become -- the interpretations have become even more strict. We are fully aligned with these. We consider it noncore. So we will continue to evaluate partial disposals or an accelerated runoff, if you will, whilst maintaining compliance with -- obviously, with the new definition of default, right? Which is clearly the issue there. But it's, I would say, gradually becoming nonmaterial in our balance sheet.

Next question is from Manuela Meroni, Intesa Sanpaolo.

I have a few. The first one is on the guidance. Can you provide all the moving parts between your previous guidance of EUR 170 million, EUR 190 million and the updated guidance of EUR 100 million, EUR 110 million. The extra provision you announced do not explain in full the gap between the 2. So I would like to understand what is the remaining part. The second question is on the Bank of Italy inspection. Shall we expect further one-off items from this inspection? -- or from the noncore portfolio of illimity or from the consolidation -- the deconsolidation of the NPL portfolio? The third question is on DTA. Is EUR 70 million the amount of DTA write-up that you included in your 2026 update guidance? And can you pay dividends on those DTA? The fourth question is on the dividend policy, how we should look at your dividend policy for 2026? Do you have in mind some specific payout ratio or do you plan to distribute reserves? And maybe is the dividend per share of the last year a level that you want to keep? So -- any indication on the shareholders' remuneration would be welcome. And finally, a clarification on the perimeter of the disposal of the NPL business. Does it include also the NPL business of illimity and the securitizations of illimity? And if not, what do you plan to do with the NPL and the securitization of illimity if it is excluded from this disposal process? And I would like also to understand if the disposal process includes the entire structure of the NPL unit, so including the cost and the allocated capital.

Yes, Manuela. So that's quite a bunch. I'll take the -- if I missed something, you will remind me. I'll start with the first one. So the difference between the previous and the current guidance of EUR 100 million to EUR 110 million. So first element, as we mentioned, roughly EUR 30 million of provisions on credit exposures in the context of the Bank of Italy inspection. Second element, EUR 40 million roughly provisions on illimity's noncore assets. So that's basically the NPL world, which is mostly securitized or present in the form of funds, okay? There are both -- technicalities are present in the balance sheet. The rest is lower profitability of the business in general in a mix of slightly higher provisions, some delay in the commercial relaunch of illimity, where we've had contraction of the loan volumes for a significant part of the year. In the meantime, we have filled up the pipeline and things are moving along very nicely, but they will take time to add up to volumes and then translate into interest margin. And finally, as you saw in Q1, slightly lower performance of the NPL business. So it's a mix of those things. And that's the remainder that gets you to EUR 100 million to EUR 110 million. Bank of Italy, can we expect or rule out any further adjustments? We cannot rule out further adjustments. The final report hasn't been received. So once the final report is there, we will know the final result. And we can't obviously speak for the regulator before we have that report. We took the EUR 30 million as a proactive stance, and we will need to wait until the report comes. Any further provisions in illimity, some further provisions, but they are in the guidance. So expect something to arrive in Q3. That's just technicalities of when certain things will arrive. Also, we expect to sell certain portfolios, and we have an indication that they may lead to some balance sheet adjustments. So keep -- assume that they are in the guidance for the end of the year. And finally, you had 2 questions on -- you had a question on the impact of the deconsolidation, right? Well, the RWA that will be deconsolidated are EUR 1.9 billion. The P&L impact depends on the price. That's hard to say, but let us say that we are not assuming at all that there would be a negative effect on the P&L given the quality of the platform. And so I would assume for now, I wouldn't assume any impact. Then you had 2 questions on dividends and DTAs. The DTAs of EUR 70 million, right? I can give the word to Roberto, who can elaborate on that, and then I'll take the dividend part.

Thank you, Fred. Hi, Manuela. DTA will add up to CET1 ratio in the future, not in 2026. We recognize we will have a positive contribution on our ratio from 2029 onwards from DTAs.

And back to me on dividends. So dividends have been and will continue to be a key component of our equity story. So we obviously are committed to remaining profitable and to remunerating the shareholders. We -- the dividend policy adopted by the Board some time ago hasn't been changed. So there is a policy that the Board has adopted that has not been changed formally. But on dividends this year, we will decide at the end of the year once we have clarity on all the moving parts. So we are taking no position on dividends, and we will come back on that once we have clarity on everything that happens in the balance sheet from here until the end of the year, both in terms of inspection and in terms of profits and in terms of deconsolidation, okay? There are just too many moving parts now to make any statements on it. I hope this answers your questions, Manuela.

Yes. Just to clarify if you can pay dividends on the DTA write-up. And what you want to do with the NPL of illimity, if they are not included in the portfolio or the business that you are currently in the process of disposal?

Yes, you're right. So on illimity, no, these -- their NPL exposures, the NPL exposures of illimity are not included in this competitive process we have ongoing now. The strategy on illimity's NPL exposures is an orderly runoff with tactical opportunistic sales as opportunities become available, right? So we'll be taking our time there. And... We don't think it is in the interest of capital preservation to accelerate the sale of these portfolios. But we will do something tactical if attractive opportunities arise. So it's an accelerated runoff, if you will, right? I would describe it as that. On the DTAs, I will pass to Roberto.

On DTA, actually, they don't contribute to capital in 2026. As we said that they will in the future. We are from 2029 onwards. And so dividend will depend on the several moving parts that actually we described. And mainly what we said is recurring profitability and the impact of the disposal of the NPL business in terms of [capital release].

Next question is from Simonetta Chiriotti, Mediobanca.

The first question is on 2027 outlook. During the first quarter, you expressed comfort with the consensus that was EUR 190 million or EUR 200 million roughly. Could you comment on this point. And second question on the timing of the Bank of Italy report. If it is possible to have an indication if you have any? And also on the timing of the disposal of the NPL, you expect to close the disposal already during the year? And third question, meanwhile, will you represent the NPL business separately in your account having decided the sale.