Banca Sistema S.p.A. (BST) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Banca Sistema Full Year 2019 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Gianluca Garbi, CEO of Banca Sistema. Please go ahead, sir.

Thank you, and good afternoon to everybody. I'm here with the CFO, Ilaria; and our Investor Relator, Carlo Di Pierro. As you can see from the presentation and also the statement that has been issued, we have registered good asset growth last year. We have registered quarter with the growth in profitability and also further balance sheet strengthening. I'm also happy to announce the acquisition of the jewelry-backed loans unit of Intesa Sanpaolo that is subject to the authorization of Bank of Italy, that will also increase the weight of this business in terms of profitability of the group. A business. This last one, that the double-digit in terms of total income margin and very low capital absorption and 0 NPL. Going to the Slide #2, that gives you the snapshot of the results for last year. As you can read from here, the factoring turnover has increased 27% on a year-on-year basis, which is equal to EUR 3.1 billion. The CQ business outstanding has reached EUR 817 million, with an increase of 25% on a year-on-year basis. The gold/jewelry-backed loans outstanding in the EUR 12 million, with more than 9,000 underlying individual contract and pro forma in -- if we will include the Intesa Sanpaolo business this year, it will reach EUR 70 million. The interest income is equal to EUR 80.7 million, with an increase of 8%. Slightly lower funding costs on a year-on-year basis, that has been reduced from 0.9% to 0.8%. The total income equal to EUR 100.9 million with an increase of 11% on a year-on-year basis, driven by higher core business growth. The cost of risk is equal to 36 basis points, with the EUR 9.1 million of loan loss provisions. The total operating cost is up on a year-on-year basis, following the cost coming from Atlantide acquisition. The net income has increased at 9% and is equal to EUR 29.7 million. The return on average equity is at 18%, which is among the highest in the European Financial Services industry. Total assets are up 19% at EUR 3.7 billion. The term deposit has a strong growth since the third quarter of 2018, in particular, from the foreign component. And wholesale funding represents 39% of total funding. The TLTRO III is equal to EUR 108 million with an increase of EUR 98 million on a quarter-on-quarter basis. Just as a reminder, the allowance that we will have confirmed the ECB is for EUR 295 million that you can use in the next period. The core Tier 1 ratio, as you can see, we report the pro forma as well as the -- in the footnote we report also the non pro forma, the regulatory one. So pro forma, including with the reduction that we've seen from the 28th of June 2021 on the CQ business of the core Tier 1 is 13.9% and total capital ratio is at 17.8%, with both higher on a year-on-year basis as well on the quarter-on-quarter basis. The proposed dividend per share that the Board will submit to the general assembly is at EUR 0.093 per share, and it was EUR 0.087 last year. So with a dividend yield, if we look at the closing of the stock yesterday at 5.1% and with an increase of dividend in absolute term of 7%. Moving up the next slide to give you a bit more details, very quickly. The -- as you can see, the factoring, the CQ as well as the gold and jewelry-backed loans have registered a strong increase on a year-on-year basis. As of the end of the year, the tax receivable business represent on the factoring component, 27% of the total outstanding, and we expect further growth also in the course of this year. I have already mentioned the performance of the CQ. And following the merger of Atlantide, we will expect in 2020 a good growth also in the direct origination of the CQ product. Now let me give you the floor for the comment of the next slide to Ilaria that will give you more analysis of our numbers.

Good afternoon to everybody. As usual, I'll focus my comments on the main earnings figures and KPIs. I'll cover briefly at Slide 4, where we make some comments on the balance sheet. As shown in the table, total assets now stand at EUR 3.7 billion, only marginally higher quarter-on-quarter, but up 19% versus 2018 year-end. In particular, Govies' portfolio is now EUR 985 million and is up year-on-year, with an average duration of 17.6 months. Loans at amortized cost at almost EUR 2.7 billion, a rapid good 14% year-on-year, while just slightly up quarter-on-quarter. And in particular, we have the factoring receivables, are up 9% year-on-year and reached EUR 1.7 billion. They are slightly lower quarter-on-quarter, and this is due to some anticipated collections. CQ loans are up 25% year-on-year and reached EUR 817 million. Gold and jewelry-backed loans, as Gianluca mentioned, stand at EUR 12 million, and they'll be higher in 2020 following the just mentioned acquisition of the Intesa Sanpaolo business, which should bring as an additional EUR 60 million of loans. On the liability side, due to bank's quarter-on-quarter increase is mainly driven by higher ECB funding, which is now EUR 385 million. We will cover the ECB funding in more details when we discuss funding in general. Due to customers, increase year-on-year is mainly driven by the increase in term deposits, which are indeed down quarter-on-quarter following the reduction in the rates of the broad. Debt securities are up quarter-on-quarter, thanks to the financing of the new securitization, the CQ Quinto Sistema '19 that was launched in September and which has now reached the size of EUR 165 million. We now move on to discuss the P&L dynamics in the next slide. The -- for the full P&L table, as you know, you can refer to the appendix. If you look at the table, the first table, interest income is up 11% year-on-year, where the growth is driven by higher income contribution from the 2 main business lines, factoring in CQ. There has also been a solid contribution from the Govies portfolio. If we look at the top left table, we see that total interest income is EUR 110 million and with EUR 81 million factoring represents 74% of it. The year-on-year increase of the factoring income was driven over the quarter by different components. In the second quarter, for example, the one component that has registered the strongest increase year-on-year was extra collections. In the first quarter, there has been a strong contribution from the accrual and in the last quarter, the best performer were physical receivables. In the physical space, in particular, not only we have purchased a lot of credit in the last quarter, but also we benefit from significant collections on outstanding position. As usual, we focus our attention on LPI. LPI for legal action was just slightly higher year-on-year. Indeed, it's now equal to EUR 29 million compared to the EUR 28.4 million in 2018. Of the EUR 29 million, EUR 5.1 million is related to the update of the accrual rates and time value that we applied in the third quarter, and EUR 11.9 million is related to extra collection. In terms of cash collection, the 2019 has been the strongest year ever, with EUR 21.5 million of overall collection. As a result of the dynamic I just described, adjusted income margin is higher quarter-on-quarter, driven mainly by factoring margin. As shown in the top right table, the margin, the consolidated margin now set at 5.2%, and it's been on a positive trajectory since the first quarter. This quarter's margin's improvement has been mainly influenced by the performance of physical receivables. We still experienced a reduction versus last year, mainly explained by factoring margin's compression and the higher weight of CQ on total customer loans as already described in previous calls. Finally, the stock of LPIs, bottom left table, stands at EUR 142 million, of which EUR 107 million is part of the accrual perimeter. This is after quarter-on-quarter following start of new legal actions in the quarter that has not compensated the sale of LPI. The amount of LPI that are recorded in the balance sheet is now EUR 49.9 million, so almost EUR 50 million. We now move on to the next slide to comment total income. We closed the financial year with a total income of EUR 100.9 million, which is up 11% year-on-year. The growth is driven mainly by higher net interest income and higher net commissions. The interest income increase was described as more than compensated higher interest expenses. And indeed, the interest expense increase is only driven by higher stock of funding, while the cost of funding remains at 0.8%, which is lower, slightly lower year-on-year. Net commissions increase is due to the higher commission income, driven by factoring turnover, while higher commission expenses are due to the strong growth of the foreign funding raised through the online platforms. Trading and dividends component this year includes the EUR 1.1 million gain from the sale of factoring positions versus private companies that we executed in the fourth quarter. We have had a strong contribution of the Govies portfolio as well with a total EUR 6.3 million contribution to the income, of which EUR 3.5 million is included in the net interest income. We now move on to costs on Page 7. Operating costs have increased year-on-year by 20%, and most of increase is due to the dynamics that occurred in Q2. Personnel expenses account now for 46% of total costs and a higher year-on-year, also due to the addition of the 21 headcount from Atlantide. Today, our total headcount base has reached 215 units. Other costs are also higher year-on-year for a few reasons. We have registered the one-off integration costs related to the Atlantide emerging -- merger that has been quantified in EUR 600,000. We have also had slightly higher admin expenses due, amongst other reasons, to the contribution to the National Resolution fund and the deposit guarantee scheme, which together account for EUR 1 million increase compared to last year. Also, the consolidation of the Atlantide cost base accounts for EUR 1.9 million additional cost over a 9-month period. Finally, as we mentioned also in previous calls, we have had higher net provision for risk and charge related to tax receivables and risk for ongoing litigation, which overall account for another EUR 1.6 million increase compared to last year. On this basis, cost-to-income stands at 50%. But if we exclude the cost related to Atlantide, the ratio would be 48%. We now move on to the next slide, what we call the funding. Funding mix continues to be balanced between wholesale and retail. Now retail component is 61%, and wholesale is 39%, driven as described already many times by the strong increase in term deposits. The cost of funding at 0.8% is slightly lower year-on-year and basically stable on the quarter. Wholesale component has slightly increased quarter-on-quarter, driven mainly by higher ECB funding, which is now equal to, as already mentioned, EUR 358 million. Of that, as Mr. Garbi mentioned, the TLTRO III accounts for EUR 108 million, while the TLTRO II will be fully reimbursed in Q4. The remaining ECB funding comes from the participation to ECB auctions. As far as term deposits are concerned, as commented already, the stock has registered a stronger increase year-on-year, driven by the growth in the foreign component, which at year-end, accounts for 61% of total term deposits. The trend has inverted in the last quarter following the reduction we have applied between the interest rates offered in an effort to mitigate the massive funding inflow that we've seen in the first 3 quarters of the year. Current accounts, stock is basically stable year-on-year. Finally, we now -- we move on to the next slide to discuss the asset quality. Gross nonperforming exposures have been basically stable in the last quarters. Net bad loans represent now 1.2% of total loans and is lower versus year-end. Bad loans have decreased quarter-on-quarter and are basically stable year-on-year, unlikely to pay increase is due to factoring. And specifically, it's related to exposures versus municipalities that have entered the conservative status. We don't have any specific comments to make related to the prior year. In terms of cost of credit, the ratio is now 36 basis points, slightly higher compared to year-end 2018 on the back of higher provisions that we discussed over the year. I now hand the floor back to Gianluca to cover the last slide.

Thank you. Thank you for your explanation. And last slide is very quickly. I already have anticipated most of the numbers that are here in the upper left of the slide. The core Tier 1 ratio on a regulatory basis moved from 11.4% to 11.7%. If we take in consideration the change coming up from the change of the CQS and WA, this will be under 13.9%. So it's worth 220 basis points. In terms of total capital ratio, last year was at 14.6%, and is -- this year has moved up to 15%. From a regulatory basis, if we take the pro forma, including the change of CQ and WA, it will increase 280 basis points. Just as a reminder, the -- as we already announced the acquisition of the jewelry and the gold-backed loans from Intesa, will have an impact from 170, 180 basis points on our core Tier 1 ratio. As a final remark, as I already have mentioned, we can continue to distribute the dividend as we did in the past. So the increase compared to the past would be 7%. And based on the closing of yesterday's stock price, we represent a dividend yield of 5.1%. Now we are happy to take any of your questions.

[Operator Instructions] The first question is from Christian Carrese with Intermonte.

I have three questions. The first one on net interest income. I see that the spread continues to improve also in this quarter. So could you elaborate a little bit on the reason why the spread is improving? Still on net interest income, the contribution of the financial portfolio, I saw an increase quarter-on-quarter of the assets. The overall impact of TLTRO III in financial portfolio. And going forward, what should we expect as an additional margin contribution in 2020 from ECB move? And this is for net interest income. The second question is on incentives of European Court of Justice on delay from public administration, Italian Public Administration. Of course, saying that it's too long, it takes too long to pay enterprises. So if you can give us -- if there is any letter of thinking on your business? And finally, the positive one-off -- tax one-off coming from Atlantide in the fourth quarter. Could you guide us on 2020? There could be some additional positive contribution from losses coming from Atlantide -- past losses of Atlantide.

Okay, thank you. I will leave the first and the third question to be answered by Ilaria, and I will take the second one.

Okay. So on the income margin, as you rightly pointed out, margins have increased and they've been on a positive trend over the quarters. As explained, the increase is mainly driven by the factoring component, while the CQ margins have been more or less stable, if not, slightly decreasing. In terms of the software, there hasn't been a single driver of the good performance. Indeed, we have had the contribution for -- from different components over the quarters. For example, in the first quarter -- and the first and second quarter, cash collections have driven the margins. In the third quarter, the accrual has been a good contributor to the margin increase. And finally, in the fourth quarter, the best performer has been fiscal receivables. In fact, in the quarter, and not only in terms of origination, we have purchased a good amount of credit, we will -- which will contribute to the income generation in 2020, but also, we have received anticipated collections in terms of fiscal payment on positions that were outstanding already and which were expected to occur later next year. In terms of outlook for the margins, if that was the second part of your question, Christian, we can see stable margin -- stable margins for the factoring. We potentially -- some spikes related to fiscal credits for the reasons that I mentioned that we bought a good quantity of credits, which will potentially impact -- positively impact the P&L next year. On the commercial side, really, we see stable margins throughout the next year. In terms of CQ, margins on the CQ will probably trend a bit lower in the short to medium-term because the portfolios we buy have lower yields for various reasons. On one side, we have a lower interest rate environment, also some competitive pressure. So we are not purchasing the assets anymore at the 3.5% yield, but the yields have been compressed by 20 to 30 basis points. The contribution of the direct origination will clearly positively affect the overall margin of the CQ because the yields of the director origination are higher than the portfolio we buy. But the performance -- but the activity on the director of origination is taking a bit longer in terms of -- a bit longer time to come to effect. And so the contribution to P&L will come later in the year. Christian, I'm not sure I fully understood your questions related to the financial portfolio. Can you just please verify that?

Yes. Sure. On slide -- let me check on the balance sheet. We see an increase in financial assets fair value of around EUR 200 million quarter-on-quarter and stable the held to collect category. Then you get some different mix in terms of TLTRO III compared to the TLTRO II, and I don't know if you can enjoy some benefit from the tiering. So I was wondering if there is any positive impact from all these moving parts in the fourth quarter? And if there is any additional contribution, positive contribution in 2020?

Okay. So on the Govies portfolio, yes, we've had a strong performance of the portfolio over the year, which can be quantified in EUR 6.3 million as explained. There is a bit more to come in the sense that the current fair value of the positions are positive. As you know, we are not -- we don't pursue a trading activity on the portfolio. We keep it as efficient tool to optimize our funding and our need to keep liquidity on the balance sheet. If there is any specific opportunity, we might sell the portfolio. Otherwise, we'll benefit from the carry until the bonds expire. So overall, yes, positive contribution might come up.

Could you quantify the positive contribution net interest income from the financial portfolio?

For 2019?

Yes.

Yes. EUR 3.5 million was the contribution to the net interest income. The difference today, EUR 6.3 million was coming from the sale of some positions from the trading activity. And for -- just for -- on the TLTRO, there isn't any benefit in terms of different tiering. The rate we were paying on the previous program was 0% as well as the ones we are paying on the current one. The only benefit we have is in terms of duration. You have -- the duration of the new program is longer, 1 year longer. So because of that, we can defer potentially for the refinancing of the bond that will expire in October in 2020.

And on tax rate?

On the tax rate, we are not expecting to see any more benefit next year. As you know, the favorable tax rate was mainly driven by the utilization of fiscal -- of past losses incurred by Atlantide, which was a one-off compensation for the year.

I think that the tax rate need to -- or the one-off of Atlantide need to be read together with an increase of cost, operational cost and the 2 components of CET, so that is one of the points. The only probably tax things that will remain, which we have benefit this year and if government will not change in the so-called [indiscernible] that will add a positive impact, I think, of EUR 600,000.

Yes. EUR 600,000.