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 2021 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. Thank you very much, and good afternoon to all call participants. As usual, I'm here with Carlo and Ilaria. I'm referring, as usual, to the presentation that has been made available and, in particular, on the Page 2 of the presentation. But let me start by saying that I'm very pleased with the results that I'm going to describe, in particular, due to the last quarter of last year, which has been one of the best quarters ever that we have observed as a bank. Let's start with the commercial performance. The factoring turnover was up 16% on a year-on-year basis. While the overall market in Italy on factoring, based on the information provided by the Association of Factoring Company (sic) [ International Factoring Association ], was 10% increase on year-on-year. In the last quarter, we have originated more than EUR 1.1 billion of turnover, even if we consider that the tax receivable segment was below the performance that we were expecting. The CQ business reached an outstanding -- which is up on a year-on-year basis, if we exclude the sale of part of the portfolio that happened on the last quarter of last year. The pawnbroking business reached EUR 90 million in terms of outstanding, which is an increase of 16% on a year-on-year basis, which represents a constant growth on a quarter-on-quarter basis. We have continued to originate SME state-guaranteed loans that we provide only to our factoring client after the good performance of 2020. And the stock had reached, at the end of last year, EUR 160 million. In terms of key data from the P&L. The net interest income is equal to EUR 82 million, which is up 10% on a year-on-year basis. The cost of funding has been reduced to 0.4%. The total income is equal to EUR 108 million, which is up 6%. The total operating cost is equal to EUR 62.9 million. The net income equal to EUR 23.3 million, which correspond to a good return on tangible equity equal to 13.1%. The core Tier 1 ratio is at 11.6%, and the total capital ratio is at 14.6%, with a lower impact than expected from the higher past due versus what we said at the end of October when we approved the first 9 months' result. The core Tier 1 ratio, of course, already takes into account the 25% deduction from profit, which is connected to the dividend that we expect to distribute. Moving to the next slide. As you can see, the factoring outstanding is up on a quarter-on-quarter basis, thanks to the strong performance that we had on the last quarter of the year. The turnover growth was also driven by the diversification in other segments, such as Spain, for instance. While on the other hand, we, as a bank, we have been very prudent on the EcoBonds' activity. And we have only a very small portfolio of EUR 17.7 million (sic) [ EUR 17.07 million ], and we do not expect to have a huge portfolio of EcoBonds even in the future. The acceleration in payment by the public administration is expected to stabilize in the first part of the next year. In next year -- this year, sorry, thanks to the agreement with the European Investment Fund, we will be able to reduce the capital absorption from factoring to a private client. Moving to Slide #4. As you can see, the CQ turnover was stable on a year-on-year basis. I already have made comment about the fact that we have sold the portfolio. We have registered good performance on year-on-year in the direct component, which now represents 29% of the total, with a turnover that has been double if we compare to the previous year. The effect of the so-called prepayment, which is typical for this type of product, in the last quarter, although relevant in terms of outstanding, was lower than in the previous quarter in terms of impact to the P&L. The CQ division is continuing to work on strengthening the network of agent or intermediary, selective look at indirect portfolio to purchase. As you may have read, we are waiting for the authorization from Bank of Italy to purchase a portfolio from Banco BPM of EUR 150 million. Moving to the ProntoPegno or the pawnbroking business. We have continued our organic growth where we have registered 16% growth on a year-on-year basis. And as I said, this has been constant on every quarter as well as the focus has been moved more and more to technology up to the point that, for instance, auction at the end of last year have reached more than 80% being done online. Now I will leave the floor to Ilaria for more details on the P&L and balance sheet.

Thanks, Gianluca, and good afternoon to everybody. I will start, as usual, with comments on the balance sheet. So if you look on Slide 5, we can see that total assets are basically flat versus year-end 2020. And in particular, loans at amortized costs are now EUR 2.8 billion, showing a quarter-on-quarter growth, mainly thanks to the increase in factoring assets in Q4. As Gianluca has just commented, CQ loans are stable year-on-year despite the sale of 2 portfolios of credits for a total amount of EUR 70 million, and pawn loans are up quarter-on-quarter, thanks to a strong organic growth. Govies' portfolio is equal to EUR 630 million and is stable quarter-on-quarter, although down year-on-year. And the average duration is still 31 months. On the liabilities side, due to bank's year-on-year decrease, it's driven mainly by ECB funding which is stable quarter-on-quarter. Due to customer increase year-on-year and also quarter-on-quarter, it's driven by the increase in terms of deposits and current accounts with the new contracts that carry a lower cost. As commented already in the last call, year-on-year decrease in funding for debt securities is mainly driven by the maturity of a private placement in May, the repayment of Tier 2 bond that was executed simultaneously to the issuance of an AT1 for the same amount and also to the reclassification of EUR 8 million AT1 as equity instrument. Quarter-on-quarter increase in this cluster is driven by higher funding through ABS. Let me remind you that shareholders' equity have included since Q2 2021 all the AT1 bonds. We now move on to the next page to discuss P&L. Full year interest income is stable versus 2020 with higher income from pawn loans and SME loans, which had a higher contribution of EUR 2.9 million and EUR 3.7 million, respectively. The higher contribution from pawn and SME loans compensated the lower full year contribution from factoring, which has registered 3 weak quarters and a very strong fourth quarter. With EUR 60.3 million, factoring now represents 61% of total income compared to the 66% at the end of 2020. Within the factoring, there has been a good diversification effect among the different subsegments. Indeed, while the commercial and fiscal receivables have shown some weakness, LPI have registered a good performance, both in the legal action space as well as in the extrajudicial space, which has registered a tremendous contribution. Focusing, as usual, on the performance of factoring LPI from legal action, we have an overall contribution of legal LPI of EUR 21.5 million, which is stable with respect to the EUR 21.6 million in 2020. Of that, the accrual accounts were EUR 11.4 million and extra collection for EUR 10.1 million. There hasn't been any sale of LPI in the last quarter, therefore, the contribution of the sale of LPI confirms to be much lower than in 2020. We have EUR 700,000 in 2021 compared to EUR 3.1 million last year. As already indicated in our previous call, the impact of the update of the model this year has not been relevant as the positive component related to the update of the accrual rates have been completely offset by the increase in the expected collection times which is the time value. Nevertheless, the performance of the accrual component has been strong. The combined effect of the different performance among the various factoring segments is such that factoring adjusted income margin is down year-on-year. If we move to the CQ space, we see the interest income growth has been negatively impacted by the prepayment effect, as Gianluca mentioned, which caused the net income contribution to be basically flat year-on-year. However, flattish interest income has been compensated by the gain originating from the sale of the 2 loan portfolios mentioned before, which were performed in the last quarter. And therefore, while CQ income margin is stable on a year-on-year basis, it has registered a significant increase on a quarter-on-quarter basis. Pawn loans contribution has continued the positive trend registered over the past quarters, and with a very strong fourth quarter, the full year income contribution has been double what we had in 2020. The margin of the pawn loan business has been confirmed above 15%. So overall, total adjusted income margin was slightly lower year-on-year, moving from 4.5% down to 4.4%. We now look at total income before cost, total income on Slide 7. Full year total income is up 6% year-on-year, mainly driven by the increase in net interest income and other income. A significant saving in interest expenses positively contributed to the growth in net interest income. Net commissions is down year-on-year due to lower factoring commissions, only partially compensated by higher commissions from pawn loans. Other income includes EUR 1.9 million gain from the multiple sales of factoring portfolios of loans versus private investors and EUR 3.7 million gain from the sale of the CQ portfolio. The govies portfolio has registered a lower contribution with respect to last year, EUR 6.4 million compared to the EUR 10.1 million in 2020. Of the EUR 6.4 million, EUR 1.9 million refers to NII and EUR 4.6 million refers to other income. In the pie chart below, we show the breakdown of total income contribution of the 3 businesses. The diversification trend has continued over the quarters as the weight of the factoring business relative to the others is decreasing. The factoring still continues to be the biggest contributor to the revenues, but its relative weight has decreased to 68%. The pawn loan is stable around 11%, and CQ has increased to 21%. We now move on to cost on the next page. Total operating costs are up on a year-on-year basis but on a consolidating path. In particular, personnel expenses are up year-on-year, mainly due to the consolidation of the pawn loan business unit since Q3 2020. All other expenses increase year-on-year is mainly due to an increase in servicing costs, to initiatives to further develop the business and to investments for the IT infrastructure renewal. The contribution to the Single Resolution Fund was also higher for the year. We now move on to funding on the next slide, Slide 9. I'll be very brief in this section as there isn't much more to add with respect to what we have commented in the past quarters. Cost of funding is significantly lower year-on-year, moving from 0.6% to 0.4%. The split retail/wholesale funding reflects the events occurred in Q3 when we registered a significant relative increase in retail funding compared to wholesale, mainly driven by the increase in term deposits and a decrease in ECB funding. Retail funding is confirmed as 68% of total. The increase in retail funding continued also in Q4 at a lower cost. The wholesale component also slightly increased quarter-on-quarter in absolute amount, although it was stable in percentage terms. And the increase in absolute terms was due to higher ABS funding and to higher repos. ECB funding is stable. However, in Q4, we have extended the TLTRO III maturity to December 2024, with a positive impact on NSFR. We now turn to Slide 10 to discuss asset quality. The current level and composition of gross NPE is still the result of the dynamics occurred in Q1 and Q2. I'm referring to the fact that we have had an increase in past due in Q1 driven by the introduction of the new definition of default, while in Q2, the exposures versus municipalities in conservatorship have been all reclassified as bad loans from UTPs. In the last quarter, we've had an increase in gross NPE, mainly due to a past due increase. If you remember in our previous call, we mentioned that we were still assessing the impact of the interpretation of the regulations on the New DoD according to the guidelines received by the Bank of Italy the day before the earnings release. The consequent increase in past due has now been confirmed in just less than EUR 20 million compared to the estimated EUR 60 million at the time. Consequently, the amount of past due is now EUR 109 million in absolute amount. Gross NPE ratio increases, therefore, to 11.2% compared to the 9.5% at the end of 2020 and compared to the 10.9% in Q3. As for the previous quarters, the amount of loan loss provisions, which are now equal to EUR 10.6 million, has been driven mainly by the dynamics occurred in the first 2 quarters. Compared to last year, loan loss provisions are slightly down, in line with what we had envisaged. Excluding the nonrecurring provisions related to exposures versus cities in conservatorships, the ordinary loan loss provisions were lower than historical average. So 2021 cost of risk stands at 40 bps compared to 42 bps in 2020. I now hand the floor back to Gianluca.

Thank you, Ilaria. So let me comment on the regulatory capital. The regulatory capital in terms of the core CET1 ratio and total capital ratio at the end of the year is slightly down on a quarter-on-quarter basis. And this is due to various factors. We have EUR 2.4 million of reserve driven by the mark-to-market of the government bond portfolio and the held to collect and sell. And then we have another EUR 1.9 million of prudential filter coming from the calendar provisioning. One of the other drivers of the reduction of the regulatory capital is due to the RWA increase driven by factoring business and, in particular, by the exposure to corporate and, to a less extent, to the past due because, as you can see, as also Ilaria has mentioned when she commented on the previous slide, our past due has reached almost EUR 110 million. And we are now fully compliant with -- different probably from other players, we are fully compliant with the Bank of Italy interpretation on the new definition of default. Now I don't think that there is anything much to comment more, so I will leave the floor for any Q&A.

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

The first question is on the new definition of default. I heard about a constitutional court ruling on this matter. Are you aware about this ruling? And do you expect any additional impact going forward or the full year results should have shown the full impact in terms of capital risk-weighted assets? The second question is on CQ. We saw some disposal in the fourth quarter. Should we expect the recurring business this kind of disposals also for the next year? And if you could give us a guidance in terms of net interest income and commission for the next year. Or I mean, if you have any other kind of guidance, it could be very useful. And I would say mainly, these are the questions I ask.

Okay. Thank you for your question. I think that what you're referring to, the constitutional court has nothing to do with the new definition of default but is connected to the CQ business and the Lexitor situation because -- which Lexitor is this decision being taken in the case of Poland where all the upfront costs connected to the CQ business, based on what the European court states, has to be pro rata and rebated back to the client. So that was the rule of this famous Lexitor sentence. This imply that all companies that did the CQ business have to go back on the last 10 years and eventually run the risk of rebating back this amount of money to the people that have prepaid their loan. In summer last year, the government in Italy, like in Germany that have done the same, they have changed the Italian Consolidated Bank Act in order to take into account this European decision at the level of European Court. And the Court of Justice of Turin, more afterward, have put a question to the Italian Constitutional Court if this change is a change that is correct or not. So this is probably the constitution -- then there is another point of constitutional court, that maybe is what you're referring to, is relating to the health care, which is not news, already happened in the past. It has been declared that the suspension of the possibility to look after the health care system has been considered unconstitutional. But we have taken that into consideration already in our number. So these are the 2 cases of constitutional court that I'm aware of.

The second one. It was the second one.

Okay, okay. So the second one has an impact to the definition of default because, clearly, there was a suspension related to this law. This law has been considered unconstitutional. So the suspension of the past due to the health care system has been released, but this is already included in our number. So there's not any other things on that respect. In terms of CQ disposal, as mentioned also in our business plan, we will continue to make disposal mainly towards year-end because we are making important investments in the network, in enlarging the network of the CQ. And we are financing this investment by making some disposal of CQ portfolio. So this year, we did almost EUR 10 million of disposal. And in a very opportunistic way, we'll continue to do the same also in the following years. I don't know if maybe, Ilaria, you would like to add something.

No, I don't have much to add. Your feedback was absolutely complete. Maybe just a slight addition to the previous question regarding the new definition of default. As Gianluca mentioned, the impact related to the Corte Costituzionale sentence was and is already included in the actual impact related to the new definition of default. As a summary, over the year, the increase in past due related to the introduction of the New DoD is worth for us EUR 60 million more of past due. As you can see, the amount in past due increased from EUR 50 million at the end of last year to almost EUR 110 million at the end -- sorry, last year, meaning 2020, to EUR 110 million at the end of 2021, with a slight decrease by EUR 20 million in the middle of 2021, which was now then offset by the new impact following the reception of the guidance in Q4. And we expect this to be the maximum, as Gianluca mentioned, amount in relation to the new definition of default.

Just a clarification. On LPI, you didn't sell any LPI in the fourth quarter. And taking into account the positive trend seen in this quarter and your initial comments, are you confident net interest income next year to go up year-on-year? So if you can give some color on that. I don't know if you can.

Ilaria?

Yes, sure. Yes, we have a positive view on the trend in net interest income for 2022. We believe this will be driven not by an increase in margins but an increase in volumes generated. So overall, we believe that the net margins, the consolidated margins, among the 3 business lines will be stable in 2022 vis-a-vis 2021, with a potential relative difference within the single business lines. For example, we have a particularly positive outlook for CQ margins and probably a little bit more bearish outlook for factoring margins. But overall, on a consolidated basis, margins are expected to remain stable. We have a positive view on the new volume generation. So overall, as a consequence of that, we believe there is going to be a positive impact on net interest income for 2022. On the other side, costs, as we mentioned during the presentation, are expected to consolidate around the current levels, with potentially some increase due to nonrecurring one-off projects or investments. So as a result of that, in terms of net income, the outlook should be of an increase with respect to what we have seen at the end of 2021.

The next question is from Manuela Meroni of Intesa Sanpaolo.

The first question is just a clarification on an answer you gave before. So we can expect no further impact from the new definition of default in 2022 and going forward? The second question is on the kind of provisioning. I saw that you had a EUR 1.9 million negative impact from the calendar provisioning in 2021. I'm wondering what you are expecting for 2022 and for the following years. Third question is your outlook on the factoring business with the public administration. It's clear that the accelerated payment are going to remain at least for the first part of 2022. So I'm wondering when you expect the situation to change and to come back to the pre-COVID level. Then another question on the sensitivity. Can you please share with us your sensitivity of net interest income to an increase in interest rates and your sensitivity of the common equity Tier 1 to an increase in the BTP bond spread.

Okay. Maybe on the first one very quickly. As I said before, I think that at this stage, even though we don't necessarily share all the view of the regulator on the interpretation of the new definition of default, we comply, different probably from other players, to the request of the regulator. We hope that there will be a level playing field where all the players will do the same. So we do not expect to have a further increase on the past due with the application of the new definition of default. I will take maybe the third question on the outlook, and I will leave then to Ilaria to answer to the provisioning and to the sensitivity. The third question was relating to the outlook of payment. Clearly, the public administration have received extraordinary funds from the central government. As you have seen also in these days, they keep asking the government, due to the increase of the cost of electricity in particular, to have extra money because they are not able to comply with the payment. So this is something that already signed the point where the local authority probably will turn the other way around. And if they don't have enough liquidity, they may slow down the payment. It is also fair to say that after the new stance that the European central banks finally took, because it looks like that the only central banks with a view of zero inflation was the European ones, while all the other central banks already have foreseen increase of interest rate due to the impact of inflation. Also, the ECB now is changing their view, and now, we may expect to see an increase of interest rate also in the euro area. With interest rates increasing, a country like Italy that have a huge debt, they will be under further pressure on the debt, something that in the last 2 years seems to be forgiven. So the stability path and the debt has been forgiven. But now, the point of the debt will be coming on the table and back to the discussion. So we will have, in this case, an impact where government will pay more attention probably on the further increase of the debt which, in other words, means that this extra liquidity that has been provided by central government to local authority will not continue. The other impact with interest rate increase, and I will leave then to Ilaria the comment on the government bond portfolio, but I remember that Banca Sistema has 3 stages. In the first stage, when we born, the reason why corporates were keen to sell receivable was because of the Italian risk. Then in the second period, the reason why companies were selling receivable was to improve their net financial position. When interest rates end up to be close to zero, corporates with huge debt didn't see the need of improving their net financial position because the cost of their debt was zero, in some cases, even negative. If interest rates will go up, a more attitude to sell receivable from large corporates will come back as these corporates with large debt will use the sale of receivable as a way to improve their net financial position. So I do expect that this new macro environment with interest rate that will go up will allow us to even increase more the turnover on receivable coming not only from small cap or medium-sized cap but also from large corporates that need to improve their net financial position. Now I will leave to Ilaria to answer to the provisioning and to the sensitivity of the government bond portfolio.

Yes, sure. Thanks, Gianluca. Regarding the calendar, as we have indicated, we had an impact slightly less than EUR 2 million for 2021 due to the calendar. We might expect the impact for the calendar to be a bit higher for 2022, but at the same time, we are working on initiatives that might allow us to reduce the impact due potentially to asset disposals. So basically, we are working towards managing the impact of the calendar for 2022 and onwards before it takes a full effect. Regarding the other question on the sensitivity of the govies portfolio to interest rate and, therefore, the sensitivity of the core Tier 1 capital to interest rate movements, I have to say that the duration of our bond portfolio is 31 months. So it's 2.5 years. So the size is consistent, but in terms of duration, it's very limited. As we indicated, we had an impact on the valuation of reserve due to the movements in mark-to-market for a net impact of EUR 2.4 million, which has become a bit higher due to the recent sharp movement in interest rates, reaching a net maximum amount of EUR 6.3 million. So we have an additional negative delta of around EUR 4 million due to the sharp market movements. As we said, we are not too concerned about that considering the limited duration of the portfolio. In terms of our sensitivity to the BTP bond spread, I have to say that we carry these positions on an unhedged basis. So we are exposed to both interest rates as well as BTP bond portfolio, which explains the impact not only at the end of 2021 but also in the recent weeks.

Yes. Let me only add one point. With the interest rate going up, we can buy shorter-term duration bond maintaining the same level of carry because if one year ago, in order to have some carry, you have to take a 3-year maybe exposure, now you can have with half of the duration the same level of carry. And as Ilaria said, as our portfolio duration is already short, we will continue to replace position to shorter-dated bond in order to maintain the nice carry that we have also in the past.

And you do not expect your margins on factoring, CQ or bond business to be impacted by the increase in interest rates?

On the factoring side, you have to consider that the average duration of our portfolio is 11 months on what we purchase. Clearly, there are some tail with longer-dated asset, but the average duration remain within a year. That means that we are able to transfer the increased cost of funding to the client if interest rates will go up because we replaced the portfolio. So after 1 year, on average, the portfolio is completely replaced and so we are able to reprice.

The next question is from Luigi Tramontana of Banca Akros.

The first question is on the evolution of your cost base. You are investing a lot. Of course, you are prioritizing growth in volumes. My question is whether it's possible to see a reversal in the evolution of your efficiency ratio. When I look at the cost-to-income ratio, it was around 46% in 2017, '18. It has increased steadily over the last few years to 58% this year. And in parallel, the net profit has come down from EUR 27 million to EUR 23 million. So do you think to take any action to decrease the cost inflation starting from 2022? And do you still expect to reach 49% cost-to-income ratio in 2023 as indicated in your business plan? The second question is on the margin evolution in CQ. It's positive for sure that you are generating more volumes in CQ from your own distribution. If I remember well, the margins there are much higher. However, you are also selling these portfolios. So do we have to expect the margins in CQ to remain stable as we have seen in 2021 with no improvement going on? And the final question is on a missing point, which is dividend. Mr. Garbi, do we have to stick to your indication of a 25% payout ratio? Or is there anything different?

Okay. Thank you for the question. I will start with the last one because it's also part of the press release. As has been mentioned in the press release, all the core Tier 1, so the capital requirement ratio, has been already netted by the 25% profit allocated to dividend. So this means that we imply that the Board will stick to the view of continuing to distribute 25% profit as dividend. I will leave then more detailed answer to Ilaria. But on the first question, on the increase of cost, the 2 main drivers of the increase of the cost are connected to the pawnbroking business and to the increased number of headcount that we have taken with the acquisition of the Intesa Sanpaolo. And the second other driver connected to the cost is related to the legal fee from collection, which from a technical standpoint, is an operational cost. Even though it's deeply connected to the LPI that we are able to collect legally but also extrajudicially at the same time. Then maybe Ilaria can comment more. But as more of the pawnbroking business will increase its activity, the cost-to-income will decline. In terms of CQ, correct, we are buying receivable. And the same, we are buying the originating -- we're not buying, sorry, we are originating loan as well as buying loan. And part of those loans are sold to the market in order to generate this profit, which allow us to self-finance the growth of the network. So the growth of the network, which is the cost of agent, of technology as well, is financed by disposal. At the end, the margin on the CQ we expect to remain stable for the following year. Maybe there can be some positive upside because we are considering also to pass back to client the cost coming from the Lexitor situation, whereby we already embedded in our account how much is the cost of Lexitor. And that means that this additional cost has to be transferred back to the client. But maybe Ilaria can comment more in depth on the first 2 points.

Yes, sure. Regarding cost, Gianluca has just re-summarized the main drivers related to the cost increase. So really, on top of absorbing more costs related to the pawnbroking business unit, as Gianluca highlighted, we have also invested in the business. And we want to continue to invest in the business. The reduction that we have registered in the net profit over the past 2 years was not driven by a massive increase in cost but mainly to a reduction in the top line, which itself was not caused by a reduction in volumes generated, as the origination has always been solid and robust but mainly to a reduction in margins. So really, we need to still invest in the business in order to support volumes growth. And we believe we will be able to offset the slight reduction in margins or stabilization in margins with more volumes originations without increasing further the cost base. So at the end of that, we might expect to see a slight improvement in the cost-to-income margin, but a real improvement in cost-to-income margin will only take place when income margins would revert back to higher levels.

Let me only add one point on that respect. During 2021, due to the lack of clarity from regulator about the application of the new definition of default, where some of the interpretation did come to us on the last part of the year, we have also been very prudent on the asset. And we have, for instance, decided not to buy some assets that may have caused some issue on past due because the cost opportunity was not there. Now that at least that there is a bit more clarity, we know what type of contract we can offer. So we can also buy, going forward, asset that will carry more duration, which is, for us, important. Because if we could generate turnover, but the duration we buy is shorter because we don't want to run this cost opportunity risk, it means that we have to be very prudent on the asset we buy. In particular, when we look at the utility company, we decided not to buy asset with the longer duration in this situation of uncertainty because of the risk that if you have to apply an RWA of 150%, there was no point of getting a proper return. Now that the situation is at least more clear than in the past, we will be able to continue to buy assets with longer duration, which means higher margin for us, in particular, because those assets carry more LPIs. Okay. If there's not any other question, I would like to thank everybody for your attendance. And we will have the time to talk again at the next conference call. Thank you.

Thank you. Bye-bye.

Bye-bye.