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 9 Months 2022 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. As usual, I'm on the call with Ilaria Bennati and Carlos Di Pierro. Let me start to say that since last conference call, in addition to the new government in Italy, we start to begin to see some signal of the new monetary policy. As usual, I will follow the slides that has been made available. So moving from the Slide #2, which gives you some information about the commercial performance. Let me start to say that we had a very good commercial performance, where factoring turnover was up 26% on a year-on-year basis, which is better than the market. The CQ outstanding is stable on a year-on-year basis at EUR 958 million with a very good performance on the direct origination. The pawn loan reached EUR 104 million in terms of outstanding, which is 19% up on a year-on-year basis with constant growth on a quarter-on-quarter basis. We're moving at the P&L and some information on the P&L. The net interest income is equal to EUR 65.4 million, up 15% on a year-on-year basis. The cost of funding is still very low, which is 20 basis points. The total income is equal to EUR 80.9 million, which is up 8% on a year-on-year basis. The cost of risk remained also stable and low at 28 basis points, which is lower on a year-on-year basis. The operating cost, excluding the net position for risk is slightly up at 2% on a year-on-year basis, ending up with a net income equal to EUR 17.8 million, which is 21% above the result of the same period of last year. Looking at some information on the balance sheet before leaving the floor then to Ilaria, the wholesale funding is up on a quarter-on-quarter basis, which represent 45% of the total funds following higher government portfolio. The total assets equal to more or less EUR 4.2 billion, which is also up on a quarter-on-quarter basis. The CET1 ratio is at 12.1% and the total capital ratio is at 14.4% (sic) [15.4%]. These are numbers that are calculated based on the transitional rules, which is down on a quarter-on-quarter basis mainly due to higher negative mark-to-market on the government bond portfolio, which is represented at the reserve. But considering that decision that has been taken 3 days ago by the Ecofin to introduce a new prudential filter of 100% for the next 3 years, this reserve for government bonds will have an impact on the capital ratio that will become the same, leaving everything unchanged. So as of September this year, the core Tier 1 will become 13.3%, and the total capital ratio, 16.5%. This Ecofin decision, which basically approved the proposal which was made by the Czech Presidency, we need some further formal step. But to date, there's been found unanimous consensus by all member states and, therefore, is quite highly reasonable that this will enter into force in the next period. Moving very quickly on the next slide. As you can see, the factoring outstanding is stable on a quarter-on-quarter basis. What has changed, as you see in the pie, is our exposure to our corporate that has been reduced compared to the previous period. In Slide #4, looking at the 2 other segment of our business. As you can see, the CQ turnover, excluding the purchase of the portfolio from Banco BPM was substantially be made with the direct distribution. The division is working on strengthening of the network of agents and intermediary, and the QuintoPuoi branding of the 3 branches of agent in the different city has been introduced. So now we have the shops with our name on it. On the other business, on the pawn loan business, this is growing as usual on a quarter-on-quarter basis. And for the first time, now we have moved above EUR 100 million of outstanding. A few weeks ago, we also changed the name of the legal entity from ProntoPegno into Kruso Kapital, and ProntoPegno will remain as our commercial brand that we will use for this pawnbroking activity in the various branch. To enlarge and strengthen Kruso Kapital position, we have also purchased Art-Rite, which is an auction house, and let me say that it's the first time of an auction house being owned by a bank as far as we know. And this is a business that's much more in common with pawn loans than anybody could imagine. Now let me leave the floor to Ilaria, and then I will comment on the last slide, and then we will take all your questions. Thank you.

Thank you, Gianluca, and good afternoon to everybody. We now move on to the next slide where we make a few comments on the balance sheet. As you can see, total assets are up 12% versus year-end and also up quarter-on-quarter, mainly due to the increase of the held to collect bond portfolio. In particular, we have the loans at amortized cost is flat quarter-on-quarter and at EUR 3 billion. Specifically, factoring SME lending, which is run by the same division, has both increased year-on-year, especially factoring thanks to the robust origination of fiscal credits, as Gianluca mentioned, and both are flat quarter-on-quarter. CQ assets are stable quarter-on-quarter and are up versus year-end thanks to the stronger direct origination and the purchase of a portfolio of loans for EUR 130 million from Banco BPM that more than compensated the sale of EUR 70 million assets carried out in the second quarter. Pawn loans are up 15%. The Govies' portfolio is now equal to EUR 845 million, with an average duration of 24.5 months, and is up both year-on-year and quarter-on-quarter mainly thanks to the growth of the held to collect portfolio, which has increased over the last quarter, slightly more than EUR 200 million with a total residual average duration of 19.7 months. After the 30th of September, in the month of October, we have purchased a further EUR 100 million of Italian GTT and the average of residual duration of the held to collect portfolio has decreased down to 16.6 months. The held to collect and sell is slightly down quarter-on-quarter, and its negative mark-to-market has worsened over the quarter due to the further sell-off of market rates. We will cover this theme and it impacts more in details when we discuss the regulatory capital. Due to banks quarter-on-quarter increase is driven by short-term ECB funding. We currently hold EUR 540 million. And further to the announcement by ECB of changes to the use of the program, we have not changed our initial plan to keep it outstanding for the whole 2023. Due to customers quarter-on-quarter increase is driven by the increase in repos funding the Govies' portfolio, which has more than compensated the higher decrease in term deposits and current accounts. Finally, debt securities increase versus year-end is driven by the higher funding through ABS. Let's now turn to the next page, Slide 6, to discuss P&L. We'll start from interest income, which, as you can see, is up 70% year-on-year, especially thanks to the higher contribution from pawn loans for EUR 1.3 million and from SME loans and tax credits of EcoBonds for EUR 2.8 million overall. This proves the good diversification effect of the different products within the factoring scope. Factoring accounts for EUR 40.8 million of total interest income and represents a relative share of 55%, which is down from 60% in September last year. Lower year-on-year contribution by factoring is mainly due to lower LPI from legal action, which is now equal to EUR 11.3 million, down from EUR 16.3 million in 2021. The breakdown of the LPI contribution is the following: accrual is worth EUR 7.4 million compared to EUR 9.1 million last year; and extra collection is worth EUR 3.9 million compared to EUR 6.5 million. Lower factoring LPI contribution was partially compensated by a particularly strong contribution from tax receivables, which have registered a good performance, both in terms of P&L accretion as well as origination of new credits. As a result of the different performance among the various factoring segments, factoring income margin is down year-on-year, as we now said, at 4.3% compared to 4.8% in September last year and to 4.9% for the full 2021. In line with the first half, the main element driving the factoring margins down continue to be the weak performance of LPI from legal action with respect to the past year. To be noted that we have not executed any sale of LPI in the third quarter as well as we didn't in the first part of the year, but we expect to execute one before the end of the year, so in Q4. So the second element driving -- again, in line with what we have commented in previous calls, the second element driving the factoring -- the average factoring margins down is a higher weight of tax receivables, which typically carry a lower margin compared to commercial receivables. However, overall factoring margin is slightly up with respect to the first quarter when it was 4.2%. We expect further growth in margins going forward given the new outlook for interest rates, which, as everybody has noticed, has sharply increased compared to the beginning of the year, which will enable us to charge higher discounts when we buy receivables in the future -- in the short future. In the CQ space, income margin is flat at 2.3%, both year-on-year and quarter-on-quarter. Moving on to the pawn loans. Its contribution continues to be in line with expectations on a constant growth trajectory. The margins have been stable in 9 months versus the first half after the significant increase that we have registered in June versus a year ago. We expect further margin increase also in the pawnbroking space over the next quarters, in line with the increase in market interest rates. As a result, total adjusted income margin is lower year-on-year, but stable quarter-on-quarter. We expect the income margin, the average income margin to increase, considering what we have just said about the ability to reprice the asset purchase. We now move on to total income on Slide 7. First half total income has grown 8% year-on-year despite a decrease in other income. Net interest income has significantly grown year-on-year, mainly driven by the increase in interest income, which I just commented, and the savings in interest expenses. Indeed, our total cost of funding is still very low. It's now equal to 0.2%, as mentioned by Gianluca, compared to the 0.4% in September 2021. Net commissions are slightly up year-on-year thanks to the higher contribution from pawn loans and a lower-than-expected CQ negative commissions in the third quarter due to a revised accounting treatment for the fees paid -- to be paid to agents. As we hinted, other income is down year-on-year and includes EUR 1.7 million gain from the sale of portfolios of factoring over the 3 quarters. And it also includes EUR 1.5 million gain from the sale of a CQ loans' portfolio carried out in the second quarter. On the opposite side, we have not registered the net Govies trading revenue in 2022 compared to EUR 4.2 million registered as of September last year. However, the Govies' portfolio continues to have a positive contribution overall to the net interest income with EUR 3.8 million contribution compared to a EUR 1.5 million contribution as of September last year. In the pie chart below, we show the usual breakdown of total income contribution of the 3 businesses. The weight of the factoring business relative to the others is slightly lower compared to a year ago, accounting for 66% of total income with respect to 69% last year. The difference has been mainly covered by pawn loans. Now let's discuss cost on Page 8. Total operating costs have increased year-on-year mainly due to net provision for risk. In particular, personnel expenses is stable on a year-on-year basis despite the growth in the number of full-time equivalents thanks to a higher-than-expected release of the bonus relative to 2021, which was worth EUR 1 million in the first half. Other expenses have increased year-on-year, as we said, mainly due to EUR 2.3 million net provisions for risks. The remaining of the increase is due to administrative expenses and D&A. We now move on to the next slide where we cover funding. As mentioned already a few times now, our cost of funding is still very low at 0.2%, and it's lower year-on-year but slightly up quarter-on-quarter. The trend of the split, wholesale, retail, has inverted with respect to what we have observed in the previous quarters. As in the last quarter, we have registered the relative increase in wholesale funding compared to retail. The weight of retail funding is now 44%, down from 66%. The wholesale component increase is mainly due to higher repos funding the Govies' portfolio, the increase in ECB short-term funding and higher interbanking funding, which overall has more than compensated a minor decrease in ABS funding due to the amortization of the notes. Average wholesale funding cost is still in negative territory thanks to the significant negative cost in the first half, but is expected to become a charge in the short term, driven by the increase in market rates. Retail funding decrease over the quarter is in large part due to the decrease in funding from corporates, while the pure retail funding has remained stable. In October, we have increased the interest rates offered on retail term deposits, both in Italy and abroad, to align our offer to the new market environment. And finally, in September, we have securitized a new portfolio of EUR 400 million of CQ loans in Quinto Sistema securitization 2017. With this new transaction, the securitization has reached a size of more than EUR 500 million, and we now hold an enlarged collateral instrument, which benefits from a rating, with the exception of the mezzanine tranche that gives us further funding levels. Finally, let's turn to Slide 10 to discuss asset quality. As you can observe in the graph, gross NPE is stable quarter-on-quarter where the increase in past due have been compensated by a decrease in UTP for almost the same amount. Past due quarter-on-quarter increase is due to factoring ordinary delay in payments from the PA. And UTP quarter-on-quarter decrease is due to 2 corporate exposures that have been repaid. Nine months' cost of risk is now at 28 basis points compared to 236 basis points (sic) [36 basis points] in September last year. I now hand the floor back to Gianluca.

Thank you. Thank you, Ilaria, for the numbers. Very quickly on the regulatory capital. As I said, the core Tier 1 ratio and total capital ratio are down on a quarter-on-quarter basis. And this is mainly due to the held to collect and sell reserve from the government bond portfolio that has been higher on a quarter-on-quarter basis. On the other hand, we have an increase also on the RWA, driven by business with some increased exposure on the corporates and on the past due. As you know, with the new definition of default, we have this past due. As you remember, we have discussed also in the previous call. This is something that we have taken seriously since the beginning, and we move the business using mitigants. And now this may change a little bit on a month-to-month basis, but pretty much is all in there since the beginning. The transitional core Tier 1 ratio and total capital ratio are, respectively, 12.1% and 15.4%. As I mentioned at the beginning of this presentation, with the Ecofin decision of 3 days ago, this will move to 13.3% and 16.5% in terms of total capital ratio. And this will absorb, of course, any volatility that we may have on the government bond portfolio. Just to give you the idea, since yesterday, if we compare to what was the situation of the mark-to-market at the end of September, we have a movement where the mark-to-market has been reduced to almost 20% of the value because now the expectation on increase of interest rates has been changed a little bit, and therefore, the mark-to-market has been moved on the opposite direction. Now let me leave the floor for any question.

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

The first one is on net interest income. We read about your guidance for the fourth quarter. I was wondering, what is your capability to reprice the loan book? And if you can elaborate a little bit on the moving parts that should cause some weakness in the fourth quarter. The second question is on a new definition of default. It seems that you didn't have any particular impact from that kind of rules, let's say. But we read from a competitor that there was from Bank of Italy, some guidance at the end of September 2022 that caused a pickup in past due loans and so on. So if you can give us some color if what we saw in the previous quarter is all the impact. Or do you expect an additional impact in the coming quarters? Further the different method of classification for fees, the agents for the CQ business, not cash but accrual, any guidance for the coming quarters? And finally, in the fourth quarter, you said -- Ilaria said that you're expecting some maybe LPI disposal last year. You sold some portfolio related to salary guaranteed loans, CQ. Do you expect something similar this year? And if you can still confirm your guidance for full year net profit in 2022, that should be higher than 2021.

Okay. Let me start with some of the questions, then I will leave it to Ilaria. In terms of our capability of the pricing on the factoring side, we are -- we have 2 pieces. One is the -- what we keep buying. And so the discount that we are currently applying is higher than in the past. We are able to continue to pass on the new expected cost of funding to the client without any impact on the turnover because, as you have seen, we registered a very good performance in terms of turnover despite the fact that we have increased the discount in line with the increase of rate and, therefore, in line with what we may expect in the future to see our cost of funding going. On the portfolio, for instance, on the large pharma, on all the portfolio where we collect the LPI, these are where we buy a part, at the end of the day, we are talking about a book of floating interest. It's a variable rate because this is ECB plus 8%. While up until now, the ECB was 0, so 8%. But this will automatically become more than 10% starting from next year, and even higher if next year we will have some increase. The rule define the directive. And the rule that has been implemented in Italy is that adjustment will take place automatically. So when -- on every 6 months. So when the ECB will increase, in January, we will have a new rate, and the rate will embed the last rate available from the ECB. Putting together a bit of your first question and the last question. In the past, we have sell portfolio of CQ that generate an additional profit of about EUR 5 million. That was part of our P&L and, therefore, contributing to the net income. The current situation of the market with the current level of interest rate will not allow us to make any disposal because any disposal will not generate any profit at these changes. So we are not selling any CQ portfolio. And therefore, we will be sort of this amount that will impact the bottom line of the P&L. To say whether at the end what is going to be the result overall, it depends by other component at year-end. On the new definition of default, and thank you for the question, we have always also discussed this point in the various calls. And the new guidance that has been issued by Bank of Italy was not something that was new for all participants in the market, in particular, the one that are focused on this business with public administration. Because Bank of Italy already gave us this type of guideline, let's say, on a bilateral basis, and we decided that even though in some cases we disagree with the interpretation of the regulator that the Board of Banca Sistema decided to follow the required -- the interpretation of Bank of Italy. For this reason, over time, looking at the rules, we have built a way of generating receivable that allow us to reduce the use of the past due, using other mitigants or using a different way to buy the receivable where due to the guidance of European Banking Authority allow not to consider that as a past due. For this reason, we are fully in line with the guidance that has been published. As I said, the guidance that has been published are not new for us, are simply something that we knew and simply we applied since the beginning. So for this reason, we do not expect to have major change. We may have some past due that will likely increase, that may likely reduce over time, but this is something that is, I would say that we fully loaded all these guidelines. What was strange in the past was that out of outstanding that was similar, we had a situation where some of the participants did not have any past due while we had the past due and we are on the same market. I will leave then to Ilaria to cover the point of the fee accrual on the agent.

Yes, sure. So this observation is in relation to the variable fees, so the variable commission in the form of a bonus that we pay to agents, which is dependent on the volumes originated by each agent. Up until now, we used to account for these variable fees as one-off on the year the volumes were originated. And -- but this, as you can imagine, has a very downward effect on the income on the year of origination. And especially when you are in a growth business environment, your income can be penalized by the increasing amount of volumes that agents originate year-by-year. So we've decided to -- in order to smooth the effect, the negative effect of the fees paid to agents down and to utilize an approach which is to align costs and benefits to cost and the income related the origination of volumes. We've decided from this quarter onwards to spread these fees up until the life of the loans. In this year, you basically will not be able to observe this effect pretty much because by changing this accounting methodology, we will more or less offset the increase that you would have otherwise seen on the fees paid to agents due to the high level of volumes originated. So we were supposed to pay a considerable amount of fees, which we would be paying, in reality, to agents, but to account for a considerable amount of fees in 2022 based on the high amount of volumes originated. This will not be evident in the year because by spreading this amount up until the life of the instrument of the loans, the discharge will be significantly diminished in the specific year of origination. It's nothing more than that. Going forward, this new accounting treatment will be also -- will have the also positive effect to stabilize the costs related to the CQ origination.

So from an agent point of view...

Nothing changes because...

There is no clawback mechanism in case of a loan has not been proper explained to the customer or the customer will stop to pay or whatever. So it's just a matter of origination or there is any kind of a mechanism on the asset quality in terms of...

No, this will not have any negative impact on -- in terms of our relationship vis-a-vis the agents or vis-a-vis our capability to keep the agents linked to the firm and liable of any, say, mistake on the origination. For this year -- I mean, from that standpoint, nothing will change. So they will still receive the fees on a cash basis at the end of the year of origination. So once the volumes have been confirmed, the change will only be reflected in a different -- with a clawback mechanism, but the changes will only be reflected in a pure accounting methodology.

Just a final question on this, but this is related to the old method and the new one, just a comparison between the 2. When you pay a fee to the agent and then the loan will be reimbursed, there will be an early repayment. How does it work, let's say, you paid to the agent? There will be a...

Well, it doesn't change, Christian. It doesn't change anything because the agent fee are -- has to be paid regardless of the early redemption or not because these are agent fee. The only difference is when we buy portfolio from other intermediary where, in some cases, the early repayment is at risk of the seller. In other cases, we take the risk of the early repayment. But vis-a-vis agent, the agent execute his job with the loan being underwritten. So when we originate the loan, the agent get the fees, and that's it.

And also the fees are not spread until the contractual maturity of the loan because we know that the early prepayment phenomenon effectively reduces the average duration of the loans. So we spread it over a shorter term than the original contractual maturity.

So the accrual is not based on the contractual date of the loan, but is based on the curve of redemption of the loan, which take into account the prepayment.

Okay. So on LPI, you confirm that you should sell some LPI in the fourth quarter?

Yes, yes. If we are over with this question, yes, regarding the sale of credits, Gianluca covered the sale of CQ loans. With respect to the LPI sale, yes, we confirm there is going to be one transaction in Q4. With respect to the 2 transactions that we had forecasted, the one that we had forecasted for the first half didn't occur. So we we'll be happy with just one by year-end.

I didn't comment on 2 things. I did comment on the repricing of the factoring. I did not comment on the repricing of the CQ. So we are repricing the CQ, so the new origination embedded all the increases of ECB. So [ paritas ] with the increase of the ECB, we have increased the cost that were the interest to final client. And so this is keep going. On the pawnbroking, we are doing the same. We said that on the pawnbroking, the only limit today is that we are currently at 20 basis points below the usury rate because the usury rate is adjusted on a quarter basis and interest rates went up so steep in such a short period of time that we were able to pass on almost all the ECB change. But some of these will -- we have to wait 1st of January when we have the new 3 months usury rate level from Bank of Italy. And at that point, we will add on the additional increase. So in this case, the limit is because Bank of Italy published the usury rate only on a quarter basis. So there is some delay, but it's not driven by market. It's only -- it's driven by the formality of -- when Bank of Italy issue the usury rate level.

[Operator Instructions] The next question is from Luigi Tramontana with Banca Akros.

Sorry, I was late in it. Just a question that maybe you have already answered to regards the fact that one of your competitors commented about the recent judgment by the court of justice, the EU Court Of justice regarding the recovery of at least EUR 40 for each invoice in the PAA segment. Do you see any impact on your fundamentals, especially regarding the possible accrual of this element?

Thank you for the question. We saw that in the European Court of Justice, let me say that the EUR 40 per invoice. On one end, we are pleased to hear that potentially we could claim this amount. On the other hand, this is what from a commercial standpoint, is it represent a very aggressive move. Consider that when you have a utility company or even the pharmaceutical company, very often, you have invoice of a few hundred euro. And if you charge EUR 40 on EUR 100, you have a 40% increase, and this is for utility deal and so on. So we have never been aggressive in claiming this EUR 40 per invoice. Sometimes we use this number just to add it on to the legal action in order to create more size for discussion and then to reach an agreement where usually we waive this amount. But to look after EUR 40 per invoice, we believe, is going to cause a huge impact in the relationship with our client that sell the receivable. Because at the end of the day, the public administration is a client of our clients. And I think that there is a limit up to which you have to become aggressive. So for the -- pleased to hear the decision from the European Court of Justice. We will put it always -- but even in the past, we were used to add it on to the bill when we claim the interest to obligor. But this still represents the first amount that we are prepared to waive in order to speed up the payment from the obligor. So we will not take accrual on the EUR 40. And commercially, we don't think that looking after the EUR 40 per invoice, in particular, when we're talking about such a fragmented number of invoice -- I mean we are talking about a full utility. We have about millions of invoices with the ticket that are so little, that EUR 40 represent an excessive move -- a very aggressive move towards those type of obligor.

Mr. Garbi, there are no more questions registered at this time. I turn the conference back to you for closing remarks.

Okay. Thank you very much. I would like to thank all the participants, and we will talk for the year-end result. Thank you. Bye.

Bye-bye.