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 First Half 2020 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Gianluca Garbi, CEO of Banca Sistema. Please go ahead, sir.

Thank you. Good afternoon to everybody. Beside me, as usual, I have Ilaria, our CFO; and Carlo Di Pierro, our IR Director. Let me start saying that since the end of February, we have proactively implemented a set of measure to mitigate the COVID-19 impact on our employee and our customer on the 3 business division. And since the beginning of July, almost 40% of our employee are working now from the office, while on the same time, group branches for banking business and gold/jewelry-backed loans are open with ordinary hour. Despite the negative macro environment caused by the COVID-19, we have so far registered minor impact to the various business and we are pleased to say that we closed the first semester with a net income, up 9% on a year-on-year basis. Let me now go through the first slide, in Page 2. The factoring turnover is equal to EUR 1.4 billion. And if we exclude the tax receivable and receivable related to football industry, the year-on-year growth will have been up 8%, with a turnover of EUR 1.1 billion. The trend of the volume in the second quarter was influenced by our decision as a bank to wait a few months for purchasing some receivable related to the football, whose volume are down 25% on a year-on-year basis; and also lower sales of tax credit from our customer, where the volume were down 8% on a year-on-year basis. And this later effect is mainly due to the rescheduling of tax due date that has been approved by the Italian government. The CQS and CQP outstanding reached EUR 891 million, so up 19% on a year-on-year basis. It's also up on a quarter-on-quarter basis, thanks mainly to the purchase of loan from other intermediaries, representing today 88% of the volume in the first half of this year, which is equal to EUR 147 million. The direct origination with agents are, where agent represents certainly the biggest contributor, has registered a performance not far from our expectation. The gold and jewelry-backed loans outstanding is, at the end of the first half of the year, EUR 13 million, which is higher on a year-on-year basis, but also on a quarter-on-quarter basis. We have registered a good performance for the first 2 months of 2020. Then in March and April, volume were low as a consequence of the lockdown measure that has been implemented by the Italian government in order to mitigate the COVID-19 impact, while starting from mid of May, the turnover was back to the normal growth path, which is a double-digit growth. The net income end up to be at EUR 33.3 million, driven by lower collection of factoring LPI in the second quarter of this year compared to the second quarter of last year. And this is in line with the expectation and is in line with what I anticipated during the last quarter result call. Lower funding cost on a year-on-year basis, which end up to be at 0.6%, so 10 basis point lower, thanks to a well-diversified funding and good funding condition on the wholesale, in particular, on the ECB segment. The total income end up to be at EUR 45.9 million, up 4% on a year-on-year basis. The cost of risk is equal to 37 basis points, with EUR 5.1 million of loan loss provision, in line with expectation. The total operating cost had an increase, mainly due to higher contribution, as already mentioned during the last call, to the Single Resolution Fund, that was almost EUR 1 million increase; and Atlantide consolidation from the second quarter of 2019. Without these 2 components, the operating costs were flat or in some part of it lower than the same period last year. The net income, as anticipated, end up to be 9% up on a year-on-year basis, equal to EUR 12.1 million. Also this increase exist even if we consider the extraordinary gain from the sale of 25% stake in ProntoPegno that happened on the first half of this year. But in last year, we had the sale of Axactor Italy participation. So the 2 components pretty much compensate each other, which are extraordinary components. So we can confirm that the net income of plus 9% is there, regardless the extraordinary component of this year and last year. The core Tier 1 ratio ended at 13.7% and the total capital ratio at 17.3%. Clearly, these 2 ratios take into consideration the change in risk weighting of the CQ. And if we consider the acquisition of the gold/jewelry-backed loan unit from Banca Intesa, the 2 parameter end up at 11.7% and 15.2%, so still at quite decent and significant amount. Looking at the next slide. As you can see, the factoring outstanding trend show an increase on a quarter-on-quarter basis, and the growth is explained by the volume registered on the first half of the year. The tax receivable represents today 24% of the outstanding. And the CQ and gold/jewelry-backed loans have registered a good increase, as explained before. In April 2020, the branches of ProntoPegno, our subsidiary dedicated, as you know, on the gold and jewelry-backed loan business have registered a higher flow of customer and higher new volume of renewal comparing with the previous period. As I mentioned, we finalized the acquisition of Banca Intesa branch in -- at the beginning of July. Now let me give the floor to Ilaria that will take you through more in-depth of the result.

Thanks, Gianluca. Good afternoon to everybody. If we now turn to Slide 4, I'll start my presentation with some comments on the balance sheet. As shown in the table, total assets in the first half are up 5% and in particular, the govies' portfolio is now EUR 1.2 billion compared to the -- compared with the EUR 1 billion at the end of Q1, with an average duration of 21 months. Loans at amortized cost is flat versus 2019 year-end and slightly up quarter-on-quarter. And in particular, factoring receivables are down 4% versus year-end at EUR 1.6 billion, but compensated by secured loans, which are up 9%. Gold and jewelry-backed loans, although still relatively small in size, as Gianluca mentioned before, are up a good 13% versus 2019 year-end. On the liability side, due to banks has increased quarter-on-quarter due to higher ECB funding, confirming the trend started in Q1. Due to customers decrease quarter-on-quarter is mainly driven by term deposits, confirming also in this case, the trend started in Q1, where foreign deposits, in particular, have been decreasing following the reduction in interest rates offered on the online platform, which is part of our funding strategy. Current accounts, quarter-on-quarter stock increase is driven mainly by corporates. Debt securities slightly increased quarter-on-quarter due to the CQ securitizations outstanding. And finally, other liabilities include among others, the EUR 7.5 million dividend related to the 2019 financial year, which has been approved, but not yet distributed. We now move on to the next page to discuss a few P&L features. Interest income is down 3% versus the first half last year. And the decrease is mainly due to lower contribution from factoring LPI. Indeed, factoring LPI from legal action now represents 32% of the factoring interest income, and this semester report EUR 9.9 million. Of this EUR 9.9 million, EUR 3.7 million is accrual and EUR 6.3 million is extra collection. As far as margins are concerned, we can refer to the top right table, where we see that the adjusted income margin is slightly lower year-on-year. It's now 4.3% compared to the 4.7% in the first half last year. The drop is almost entirely due to the CQ business. Indeed, while the factory margins are substantially stable year-on-year, CQ margins have been reduced by more than 50 basis points since last June. This trend had started already in the last quarter 2019 and has sharpened in the first half of 2020 and can be mostly explained by the early prepayment on a portion of our portfolio of credits. On the other side, still in the CQ space, the direct origination business, where we managed to gain higher margins, has not yet reached significant size to be able to compensate the lower marginality of the portfolio. To give you an idea of the relative size of the 2 origination channels, out of the 147 million CQ loans originated in the first half, only 70 million were directly originated. The stock of LPI, bottom-left table, stands now at EUR 146 million, of which EUR 98 million is part of the accrual perimeter. This is just slightly up quarter-on-quarter. The amount of LPI currently recorded in the balance sheet is EUR 47.4 million. Finally, commenting the bottom-right table, extra collections have been robust in the quarter, amounting to EUR 7.2 million, including the portion of sold LPI. Compared to last June, as you can see in the table, the amount is a bit lower, but the EUR 9.4 million registered in 2019 included EUR 5.2 million of sold LPI, while sold LPI are now EUR 2.3 million. We now move on to comment total income performance on Slide 6. The first half total income is up 4% year-on-year, also thanks to the strong performance of other income component, specifically trading and dividends. Net interest income decrease is driven by the lower contribution of factoring LPI, as described before, not entirely compensated by lower interest expenses. I'll spend a few words on trading and dividends. In the first half, we had registered EUR 1.6 million from the sale of the portfolio of LPI where we also made a capital gain and sale of portfolio of receivables versus private debtors. The sale of private exposures represents the third tranche of an activity that started in Q4 last year, and that has now become recurrent. As said before, we look at these type of transactions with the aim of optimizing our capital. A brief comment on pawnbroking business. Its contribution to total income in the first half has been EUR 800,000, still small in absolute terms but representing a double-digit growth. We expect that in the second half of the year, the business unit we acquired from Banca Intesa will contribute to around EUR 4.5 million to total income. Finally, we had a good contribution of almost EUR 5 million from the Govies' portfolio, of which EUR 2.3 million is included in the net interest income. We now move on to costs on Page 7. Operating costs have increased on year by 6%. And most of the increase, as Gianluca has just highlighted, is due to the higher contribution to the Single Resolution Fund worth EUR 900,000 versus last year. I just know that the total contribution to the fund for 2020 is equal to EUR 2 million. In the comparison with 2019, we should also consider the impact to the cost base related to the consolidation of Atlantide, which accounts for EUR 600,000 on a quarterly basis and which has impacted the cost line for a full semester in 2020. Personnel expenses account for 44% of total cost and are higher year-on-year also due to the addition of 21 headcount from Atlantide, whose cost is already included in the EUR 600,000 that I've mentioned. As again, Gianluca highlighted, excluding the above components, operating cost would be stable year-on-year. We now move on to the next slide on funding. Funding mix continue to be well balanced between wholesale and retail and has got back to the 50-50 mix after having experienced a strong increase in the retail component in the second half of last year. Cost of funding is trending lower, and it's now reached 0.6% on average. The wholesale component increase compared to the last year is mainly due to higher ECB funding, which is now equal to EUR 691 million, confirming what was seen in the Q1. As said already, in fact, we have taken full advantage of the various funding measures that the ECB put in place to counteract the COVID emergency. The TLTRO III component accounts for EUR 491 million, which is our maximum allowance. Retail funding is down q-on-q, mainly due to the decrease in term deposits, as explained. And as mentioned a few times now, the stock originated from the growth channel has been managed down through a sharp reduction in interest rates that's been ongoing since the end of last year. We now move on to the next slide to discuss asset quality. Gross NPL is up quarter-on-quarter. The growth is totally due to the increase in past due. Past due increase is related to factoring versus PA and is entirely due to one single position that has not been paid because the municipality hasn't received the funds from the central government to compensate for lower revenues due to the continuing epidemiological emergency. Bad loans and then likely to pay and the contrary have been stable. As mentioned by Gianluca already, first half cost of risk is at 37 basis points, while it was 36% at the end of 2019, so stable vis-à-vis last year. Part of the loan loss provisions in the first half are related to the update of our forward-looking impairment model to take into account the worsening macroeconomic context caused by the ongoing health emergency. I now hand the floor back to Gianluca.

Thank you, Ilaria. So we are now on Slide #10, where there's not much comment. In a sentence, I'll really most of the content of this slide. So the regulatory CET1 ratio and total capital ratio were up due to the change of RWA on the CQ business, but also up, thanks to good net income of the second quarter and lower reserve from the government bond portfolio. As explained before, the -- post acquisition of the business unit from Intesa Sanpaolo, the 2 ratio will be 11.7% and 15.2%, which are well above the SREP minimum capital requirement. Usually, I end up here with my presentation, but due to the, let's say, extraordinary circumstance that we are living in, I have an additional slide, which is Slide #10 (sic) [ Slide #11 ] with a few comments. One, the first comment is that I would like to underline the fact that our business model is a resilient business model, despite the economic environment due to the ongoing COVID-19 situation. The factoring industry, for your reference, have been down 13.5%. And at the same time, you hear about our number. Also on the CQ, latest data from the association of consumer company show, from January to May, a decline of volume of 24.7% on the CQ space compared to -- even though it's not exactly in the same period because the data from the association end to May, while our data is -- also include June, we were up 19% versus, as I said, minus 24.7% of the market. The other element that I would like to highlight is that despite the growth of our stock price, which personally it doesn't probably reflect the true value of Banca Sistema, on a positive note, we have noticed that our stock is the second-most liquid stock in the Italian Stock Exchange STAR segment, measuring the liquidity of turnover versus capitalization. Last comment on my side is that the gold and jewelry-backed loans business starting from the next quarter, as Ilaria already anticipate, will start to be seen in the P&L result, thanks to the acquisition of the Intesa division. And just as a recap, in the next quarter, we will reach an outstanding of EUR 70 million. The branch that we had in the pawnbroking business will be doubled from 6 to 12. The colleagues that are working on the division will be tripled. And we rely, as Ilaria anticipated -- on an annual basis, we expect to have a net contribution of -- to the revenue of EUR 9 million for 6 months. This contribution could be of -- out of these amounts. We will continue to support our customer in all the business divisions that we are involved. And we continue to support our partner agent, broker, introducer agents and so on. So I will stop here. Now I'm happy with Ilaria to take any of your questions.

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

I have a few questions. The first one on net interest income, assuming, as you said, around EUR 4 million, EUR 4.5 million additional revenues coming from the pawnbroking business just bought from Intesa Sanpaolo, I assume we can assume 50% in net interest income and 50% in fees. Just if you can clarify that. And assuming also that you should maybe add some additional benefit from the lower cost of funding, beside TLTRO III full impact? And if you can elaborate also on the securitization for CQS/CQP? This is just in our securitization, are you planning to sell it on the market or not? And maybe also some additional contribution from Govies' portfolio. So assuming all these metrics, can we say that full year 2020 net interest income will be more or less similar to the level of 2019 despite the COVID-19 impact? This is the first question. The second one is on costs. If you can tell us your assumption in terms of cost from the pawnbroking business you just bought? The third one is on loan loss provisions. We saw a pickup in the quarter due to the update of the models. We saw as well some increase in past due. Can you tell us what you expect for the second half of the year in terms of past due? And if you think that some of those past due could become unlikely to pay and therefore, they will cause some additional provision for the rest of the year? And finally, on dividends, just a few days ago, ECB clarified, again, and asked banks not to pay dividend until January 2021, asked also national authorities to ask less significant banks not to pay dividends. Still, you have to call to decide on dividend, assuming that you are not going to pay a dividend this year, could you increase the dividend payout for the next year? And maybe could you introduce as well a sort of interim dividend for 2021?

Okay. So let me try with the support of Ilaria to answer to all your questions. In terms of net interest income, first of all, some clarification. No intention from our perspective to sell the securitization on CQ. Actually, thanks to the ECB decision to widening the scope of the collateral, we are buying back from the securitization the CQ back in our book because we are allowed to post the receivable, so the CQ individually, through the ECB. And this imply for us a saving on the structure of the securitization. So we don't need to use the securitization any longer. But also saving in terms of cost because we can refinance the position at minus 25 basis point compared to the cost of the securitization that is -- that the senior component only could be refinanced at the ECB at 0%. So no intention to sell the securitization, but actually, we are buying back the portfolio. In -- the question on the -- on whether we can assume that including the contribution of the pawnbroking business, we could end up to have a result in line with the previous year, is something that, yes, it could be. There are some moving parts that we already discussed during the last call, and in particular, the component related to collection of LPI. As you know, the collection -- the LPI is an important component to the P&L. And the slowdown of some public administration and the shutdown of the court could have a negative impact on the collection. As I mentioned last time, the fact that the public administration will pay more time imply an increase of accrual. But as accrual does not flow in the P&L on a full basis, but only on part of it, we can have an impact that it could be a reduction of interest from LPI for an increase of future year. This will answer also to the question about loan loss provision and past due. The position, one position that cause -- is the cause of the -- most of the past due is a city in Italy that we're supposed to pay an important amount of receivable that was expecting to receive the money from the government and did not receive the money and the entire position end up to be a past due. Now we could be positive on that front. The government decided to give to the city in Italy EUR 3.5 billion plus an additional EUR 3.5 billion. So in total, the city should receive EUR 7 billion from the central government as a way to compensate the reduction of income that the city has suffered and keep suffering in our day because if people, for a period of time did not circulate, there are less income coming from tickets, less income coming from parking that are owned by the city and so on. So because there is less traffic, there are also less income from the city. So the government decided to give, in total, EUR 7 billion. Unfortunately, from the time the government take a decision up to the time the people receive the money, there could be a lag -- a temporary lag. And that was the reason why, for instance, one of the position end up to be in the past due as the other position may end up to be in past due if they do not receive the money from central government. And I'm not talking about position that are in distress like city that enter into a default distress because in this case, it's a city that is not distress whatsoever. But simply, it's a city that sure -- end up to be short of liquidity in order to make the payment to the creditor. Before leaving maybe to Ilaria, the -- to answer to the cost of funding, the Govies' portfolio and the cost associated to pawnbroking, let me answer about the dividend. We have seen the decision of the ECB. We have seen the decision of Bank of Italy. That is not necessarily the same decision of the ECB. The Board decided -- the Board didn't take any decision in a sense that the general assembly is supposed to happen anyhow in November. Before that time, the Board will decide about the recommendation for the general assembly. In the meantime, the component related to dividend for 2020 as well as the component related to dividend for 2021 are deducted from the CET1. And therefore, the impact on the regulatory capital is 0 and will be maintained 0. So today, in our balance sheet, the component that was supposed to be paid as a dividend is included not in the net asset, but is a debt towards shareholders. And we will maintain most likely this position. So soon, we'll be allowed to pay, assuming that we are not allowed today, which is a question mark that we need to examine by the Board in due course. The component of dividend is not reserved, but it's a debt. And being a debt potentially could be paid any time in the future. And the same will apply also for 2021. So even the 25% of the net profit of the 2021 is already set aside and not take into consideration for the CET1.

So just to clarify, if we assume you are not going to pay the dividend, you would release EUR 7.5 million additional capital for...

We will keep the capital. We will keep this as a debt. So it's not going to be capital.

Okay. So it's already the..

The net asset value doesn't change. The net asset value of the bank will not change, unless somebody will oblige us, unless the regulator will oblige us to reverse this debt into the capital.

Okay, okay.

If you look at Page 4, Christian, it's included in the other liabilities, which is now EUR 149 million. That includes the EUR 7.5 million dividend not distributed yet.

Okay. And just a follow-up, if I may, on -- net interest. You said that maybe there could be a delay there's been a delay from public administration. Usually, you update your models for the accrual in the third quarter. Do you expect this quarter this year not to see similar positive impact from the update of the models? Or still, should we expect a positive impact on net interest income?

Look, we -- as you said, we'll go with the -- we're updating the model in the third quarter. Our back testing continues to perform well. So we are satisfied with the cash collections. However, we now start from gross accruals, which are already quite high in terms of absolute terms. So really, the relative improvement vis-à-vis last year is not expected to be as big as it used to be in the past when we started from much lower accrual rates. Just to remind you, the gross accrual rates are now 68% -- sorry, 69% for the health care sector and 60% for the non-health care. So as I said, pretty high.

So there will be some adjustments. Probably the impact is less than the previous year. But nothing to do with the late collection because the performance in terms of collection is when we collect, we collect more than in the past. So in terms of percentage of collection, we haven't seen any reduction. We continue to collect well close to 90%.

What we will do as well in September, we will update the time value of our outstanding. At the time, we will assess whether the closure, the temporary closure of courts might have had an impact on the expected collection time of our position. So whether we will assess whether we will have to update upwards our time value. But for the time being, our collection team has not really seen any worsening of the potential collection time. So a true assessment would be performed in September.

Okay.

Then going back to your questions. On the pawnbroking, I just wanted to clarify something that probably was misunderstood in the presentation. The contribution that we expect from the business unit we acquired from Banca Intesa is EUR 9 million on an annual basis and EUR 4.5 million on a semi-annual basis to the total income, not to the net interest income. Otherwise, the contribution to the -- if that was the case, the EUR 4.5 million contribution to the net interest income would be far too high. Do you...

No, I was saying -- is it correct to assume 50% to net interest income and 50% to fees?

Yes. Because..

Yes, yes.