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 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. Good afternoon to everybody. And as usual, I'm here with Carlo and Ilaria. Clearly, let me start by saying that since last conference call, we have now started to see the signal coming from the new monetary policy that the ECB has put in place. Starting from the commercial performance, we are pleased to say that the factoring turnover was up 22% on year-on-year basis, which is clearly better than market as a whole, but is also the record year in terms of total turnover that exceeds EUR 4.4 billion. The CQ outstanding has remained stable at EUR 933 million, in line with our plan to maintain this level. And most, if not all, is coming from the direct origination. The pawn loan reached EUR 107 million in terms of outstanding with an increase of 19% on year-on-year basis, which represents a constant growth in terms of turnover as well as contribution margin of this business. Looking at the P&L, the net interest income is equal to EUR 85.4 million, which is up 4% on year-on-year basis. Truly, we are sure we can leverage on higher net contribution from factoring, pawn loan for the next month and quarter, considering also that the factoring business will register a positive increase due to the higher level of the latest interest ratio starting from the 1st of January 2023, has now move up from 8% to 10.5% of rate as a consequence of the higher ECB rate. On the other hand, the CQ net contribution cannot be positive, in particular, due to the older portfolio of the stock, which is a fixed rate. This portfolio will expire over time and will continue to be replaced by new volume originated at a higher yield. The funding cost is stable on a year-on-year basis at 0.4%, even though in the last part of the year, clearly, there was an increase of the cost of funding that will continue on the following year. The total income is equal to EUR 105.9 million, which is minus [ 2% ], so it's not stable. And the result is influenced by lower income from the sales of the CQ portfolio and lower trading margins from government bonds, which is something that even during the last conference call, I already anticipated that we will not be in a position to sell the CQ portfolio at this new level of interest rates as well as the mark-to-market of the government portfolio will not allow any gain, but we have done always in the past. The lower cost of risk remained at 29 basis points. The total operating cost is equal to EUR 64.2 million, which is pretty much stable as the cost-to-income is also stable. The net income is equal to EUR 22 million corresponding to a [ ROCE ] of [ 13.2% ]. The wholesale funding is up on a quarter-on-quarter basis and represents 45% of the total fund. The bank was able to maintain a strong liquidity portion with the liquidity cover ratio, LCR, at the 271%, which is up on a year-on-year basis. The net stable funding ratio and the legalization are equal to 133% and 5%, respectively. The total assets equal to EUR 4.4 billion, which is up on the year-on-year as well as on a quarter-on-quarter basis. The core Tier 1 ratio is at 12.6% and the total capital ratio is at 15.9%, that is the transitional reference, which is up on a quarter-on-quarter basis. Moving to the next slide with a few more details. As you can see, the factoring stock is lower, even though the turnover was much higher, but that is due to the strong collection of a tax receivable. So this year, in particular, this segment has reduced on one hand, but very strong growth in terms of turnover, and part of the old portfolio of tax receivable as well as a part of the recently acquired tax receivable has been reimbursed by the tax authority. Moving to the Slide #4. As you can see, the CQ turnover, excluding the portfolio that we acquired from Banco BPM was substantially driven by direct origination. And we are continuing to work on the strengthening of agent and intermediary network. So our brand QuintoPuoi that we are using in the branch, which is part of our strategy, continued to grow, and our pricing is becoming more and more visible. The pawn loan business is growing on a quarter-on-quarter basis. In October 2022, we have opened a branch in Athens and we also purchased Art-Rite, an auction house, in line with our business plan, considering that the auction house [ is indeed ] common with our pawn loan business, and we expect important growth on that part. As you probably have seen, today, we also have announced that we start with the process of the IPO of Kruso Kapital, so all our [indiscernible] in the auction house business, which has been approved by approval by the Board of the company and today by Banca Sistema approved as well. We believe that there will be an important space for growth in the market, not only in Italy, but also abroad. And we expect that we will see the pursuit coming [indiscernible] minority of the company will be placed into the market to continue with acquisition of activity, in particular, outside of the country. Now let me leave the floor to Ilaria to comment on more details of the results.

Thank you, Gianluca, and good afternoon to everybody. We now move on to Slide 5, where we make some comments on the balance sheet. As you can see from the table, total assets are up 19% versus year-end 2021, mainly due to the increase in the Govies' portfolio. Indeed, the Govies' portfolio is now slightly less than EUR 1.3 billion and is up quarter-on-quarter with an average duration of 18.4 months lower than last quarter, mainly thanks to the reduced duration of the held-to-collect portfolio, where the additional EUR 400 million bonds are all floaters. The residual duration, average duration of the held-to-collect portfolio is now 1 year. The held-to-collect and sell portfolio is stable quarter-on-quarter with a lower negative mark-to-market. We will provide more details on the level of the reserve later on when we cover regulatory capital. As regards to core business, we have that loans at amortized cost stands at EUR 2.85 billion and is slightly down quarter-on-quarter, in particular, factoring assets have slightly decreased year-on-year, influenced by a sharp decrease quarter-on-quarter due to a sustained collection of tax receivable as Gianluca mentioned just before. On the other side, SME loans outstanding, which is run by the same factoring division, increased year-on-year and also quarter-on-quarter. CQ assets are stable versus year-end and pawn loans are up 19%, confirming a sustained organic growth. On the liabilities side, we have the due to banks quarter-on-quarter decrease driven by a reduction in both short-term ECB funding and interbanking. We currently sold a EUR 540 million TLTRO. This figure is unchanged. And further to the announcement by ECB of change of the [indiscernible] 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 repo related to the quarterly growth of the Govies' portfolio and the increase in current accounts. Also, in December, we have drawn a EUR 66 million credit line from [ Cassa di Risparmio di Asti ] using a portion of our portfolio of sale guaranteed loans as collateral. The credit line has an average maturity above 3 years. Debt securities quarter-on-quarter decrease is driven by lower funding through ABS. We now move on to the next page to discuss P&L. Let's start from interest income, which is up 4% year-on-year and is also up quarter-on-quarter with a higher contribution versus last year from pawn loans for EUR 1.9 million, EUR 1.9 million is the difference year-on-year. And from a significant guaranteed loans and tax credit for super bonus for an additional contribution of EUR 4.3 million even last year. Factoring accounts for EUR 56.6 million of total interest income and represents a relative share of 56%, in line with the 9 months but lower year-on-year. Lower overall year-on-year contribution by factoring is mainly due to weaker factoring [indiscernible] collection, which is now equal to the EUR 15.2 million and is down from the EUR 21.5 million in 2021. Breakdown is the following: The accrual is now worth EUR 9.1 million, while extra collection is worth EUR 6.1 million. There was a sale of LPI in Q4 worth EUR 400,000. The EUR 400,000 is the net contribution to P&L related to the sale. Lower contribution from legal LPI was partially compensated by extrajudicial collection of LPI, which has registered revenues for EUR 9.4 million, up from the already strong level of 2021. A good diversification effect was also provided by tax receivables, which have registered a good performance both in terms of origination of new credits, as Gianluca mentioned, as well as P&L contribution. To be mentioned, again, is the accelerated pace of collection in the last quarter, as already highlighted. As a result of the different performance among the various factoring segments, full year factoring, the margin stands now at 4.6%. This is up in the second half of 2022 compared to the first half, but slightly down year-on-year. Over the quarters, we've managed to adjust margins on commercial receivables, in line with the new interest rate environment, but not enough to completely offset the impact of the weak performance of LPI with respect to the past year, which mainly explains the year-on-year reduction in factoring margins to a lesser extent, a higher weight on credit portfolio of tax receivables, which typically carry a lower margin compared to commercial receivables has also contributed to a margin reduction. However, for 2023, we expect to be able to further charge higher discounts by receivables such that the overall factoring margins should increase. In addition to that, the LPI rate has increased, as Gianluca mentioned on the back of the increase in [ CD ] rate. So since the 1st of January, LPI rate is now 10.5%. So also thanks to this adjustment, the contribution of LPI to income generation should get back to levels more in line with past results. In the CQ state, the income contribution is slightly down versus last year. And the interest margin stands at 2.2% mainly impacted by what should be the final sale of the prepaying dynamics and also by pricing reduction occurred in the first half of the year. Also, 2021 margins had been positively influenced by sale of assets that have generated a significant capital gain, which was impossible to achieve this year to the same extent given the different interest rate environment. Moving on to the pawn loans. Its contribution continues to be in line with expectations and a growing trajectory. The interest income contribution for the year has been EUR 7.8 million, up from the EUR 6 million in 2021. The margins, including commissioning income for EUR 8.3 million are now 16.4%, which is up year-on-year and also quarter-on-quarter, thanks to the continued repricing of the contracts carried out quarter-by-quarter. We expect further margin increase over the next quarters, in line with the increase in market interest rates. Overall, total adjusted income margins have been positively impacted by higher interest income contribution from other assets, mainly SME state-guaranteed loans carrying from superbonus and government bonds. Specifically, interest income generated by SME loans is EUR 7.1 million compared to EUR 4.4 million in 2021. Income from superbonus was EUR 1.8 million compared to almost 0, basically during 2021. And the government bonds contribution was EUR 5.3 million. So as a result, total adjusted income margin is lower year-on-year, but stable quarter-on-quarter, expected to increase, considering what we just said about the ability to reprice the use on most asset classes. Now we turn to Slide 7 to comment on total income. 2022 total income is slightly down year-on-year due to the lower other income. Net interest income, 4% year-on-year increase is driven by the increase in interest income as described while interest expenses were flat. Net commissions are slightly up year-on-year, thanks to the higher pawn loan commissions and lower-than-expected CQ negative commissions in the third quarter due to the revised accounting treatment of fees paid to agents, which we have commented in the last call. On the other side, other income is significantly down year-on-year. This includes EUR 2.2 million gain from the sale of a factoring portfolio and EUR 1.5 million gain from the sale of the CQ portfolio. The sale of the CQ assets has contributed for EUR 3.7 million in 2021 as the sale was executed for a bigger size than in 2022. We had already anticipated in previous calls that it would have been very, very unlikely to sell any assets in the second part of the year given the higher interest rate environment and [indiscernible]. Also, the contribution of the Govies' portfolio to other income was down with respect to 2021, although the portfolio has contributed more to the NII than last year, as commented already. In the pie chart below, we show the usual breakdown of the total income contribution of the 3 core businesses. The weight of the factoring business relative to the others is slightly lower compared to a year ago. accounting now for 67% of total income with respect to 68%. Also, the CQ has seen its relative share decrease. The difference has been covered by the pawn loans [indiscernible] total income has increased from 11% to 14%. Now let's discuss costs on Page 8. Total operating costs are slightly up year-on-year, mainly due to net provision for risk. In particular, personnel expenses are stable year-on-year if adjusted by extraordinary items worth EUR 2.4 million. These items include, among others, EUR 1 million higher than expected release of the bonus pool relative to 2021 fiscal year. All other expenses are EUR 3.5 million up year-on-year, of which EUR 2.8 million is related to net provision for risk. Let's now look at funding on next slide. The wholesale retail mix has remained unchanged with respect to the last quarter with a 45-55 split. In the wholesale component, there has been an increase in repos as I already commented related to the Govies' increase and the drawdown of the new credit line from the CDP that has more than compensated a slight decrease in the year's funding and the reduction in interbanking funding. In the retail space, we have registered the minor decrease in term deposits and an increase in current accounts. Our average cost of funding is flat year-on-year at 0.4%, but constantly up quarter-by-quarter. In the first part of the year, our cost of funding reached its trough with 0.10% in June. And since then, it has taken an increasing path with the share price in Q4. Our well-diversified funding base allowed us to absorb the increase in market rates with a limited impact on our interest expenses in 2022, which, as we said, remained flat vis-a-vis the previous year. More in detail, the retail funding cost set at 0.6% at year-end, down from 0.7% the previous year despite the fact that we had to increase retail interest rates in the second part of the year. In particular, we increased the rates offered on term deposits in October and December, both in Italy and abroad and also the rates on current accounts. On the wholesale side, the increase in cost has been material from the lowest level of minus 0.6% in June to the highest over 0.10% in December. As we said, the net effect of this dynamic for 2022 was a flat cost of funding. But in terms of outlook for 2023, we expect the cost of funding to increase as many of our funding instruments will reprice. We now turn to Slide 10 to discuss the asset quality. Nothing too relevant to report in terms of asset quality. As we can observe in the graph, gross NPE is down quarter-on-quarter and also year-on-year, driven by the decrease in [indiscernible]. We highlight that the figure for bad loans include the exposure to cities in conservatorship, which is the EUR 144 million figure shown in the bottom left table. Net debt loans without cities in conservatorship amount to EUR 4.3 million. Cost of credit risk in 2022 stands at 29 basis points, down from the 40 basis points in 2021, which you remember, was impacted by the more current provisions on [indiscernible] vis-a-vis [indiscernible]. The 29 basis point is indeed more in line with our usual cost of risk. I now hand the floor back to Gianluca.

Thank you. Let me briefly comment on the capital. So the fully loaded Core Tier 1 and TC capital ratio at the end of the year, which includes EUR 24.7 million of held to collect and sale reserve from government bond portfolio is lower on a quarter-on-quarter basis. On a quarter-to-quarter basis, [indiscernible] decrease is driven by factoring leases, mainly by lower exposure to corporate and lower [indiscernible]. The capital provision is well above the regulatory requirement. And when after the 3 large process of Basel III that is taking place at the level of European parliament will approve that the Ecofin proposal to stabilize the held for collection [indiscernible], our capital position will be even better than that. Thank you, and now I'll leave the floor to the questions.

[Operator Instructions] The first question is from Manuela Meroni with Intesa Sanpaolo.

The first one is on the cost of funding. Could you please share with us what you are expecting in terms of cost of funding for 2023? And you mentioned that the cost of funds, cost of deposit is repricing quicker compared with the assets. So when do you expect that this effect to reserves? And so when do you expect the NII to increase on quarterly basis? The second question is on the TLTRO. If I understand correctly, we are not going to reimburse the TLTRO. I'm wondering if you want to prefund [indiscernible] in 2023, although you are not going to reimburse it. The third question is related to your loan portfolio. declined by 5% quarter-on-quarter, mainly on factoring business. Maybe you mentioned something during the call about [indiscernible] if you can please repeat why loans declined on a quarterly basis and what you are expecting going forward? The fourth question is on the [indiscernible] ruling. The Italian constitutional [indiscernible] took a decision that in December. I'm wondering then if you expect some impact on your [indiscernible] business? And finally, I'm wondering if you feel comfortable in giving us a guidance on the full year 2023 in terms of revenues and net profit?

Thank you for the question. I will leave some of the questions to Ilaria. Let me start to take some of that. In terms of the [indiscernible] repricing of the cost of fund quicker than the asset, this is mainly driven to the CQ because with CQ the duration that is longer for a year and not repricing the asset because it's a fixed rate. And while the other products are repricing very fast, as you can see also on the number, the average yield, sorry, the contribution margin, adjusted contribution margin in Slide #6, looking at the factoring in September where we were at 4.3% and at the end of the year, that moves up already to 4.6% and keep moving up. On the other side, on the pawn loan, you have an increase of 15.3%, then move up to 16.4%, while the CQ is the contribution is going down. And that is the reason why all the portfolio at the fixed rate and has a longer duration, so you need to reprice more. But then I leave maybe Ilaria to comment more to that. In terms of the third question about the fact that the outstanding has been reduced, as Ilaria mentioned before, the main reason is, and I also said at the beginning is because a lot of the VAT receivable that has been purchased in the past as well as purchased during the year has been paid by year-end, so that there was a faster collection of the receivable. But the other reason is because we decided in order to have a proper return on regulatory capital to reduce by selling a lot of factoring that we did in favor of private client that has 100% [indiscernible]. And so we have purchased, but at the same time, we have also sold more than in the past, and we will continue to do so. Bear in mind that most of the factoring with product clients that we do is guaranteed by insurance. And we have a selling platform with other factoring banks that buy on a regular basis. So for these 2 dynamics, we reduced our spending [indiscernible] increase. Clearly, when we sell when we receive a payment earlier than expected, the yield goes up. And at the same time, when we sell the receivable to other factoring company see the upfront, the yield by selling that, and we improve also the capital consumption. The fourth question is about Lexitor. We have taken a [ EUR 1.3 million ] provision after the constitutional court decision. Let me add at the same time that yesterday, the European Court of Justice on a case that has been put forward by [indiscernible] for mortgages has resolved that the upfront fee should not be returned back. I simplified [indiscernible] is longer and complicated, but in a nutshell, the same European Court of Justice has said that for mortgages, the upfront fee should not be given back to the client. And as the same European rule that apply to any type of loan because this is the rule in protection to individuals is now clear that we had 1 sentence Lexitor by the European Court of Justice that goes in one direction. And then now we have the same European Court of Justice for the same type of commission is taking exactly the opposite direction. That means that this will open back case that will actually put forward again at the European Court in order to understand what is actually done is one or the other. In the constitutional court, let me add in their decision, while on one hand, they said that is unconstitutional, the decision by the government that has been taken by the government, at the same time, they said that the way in which the regulator has implemented and interpreted the European directive was incorrect. And so there is a responsibility, which eventually translate in also economic obligation of returning the money to any financial intermediary that [indiscernible], there is a responsibility by the authorities that we [indiscernible] with this implementation and interpretation of the European directive. I will leave then to Ilaria better comment on the cost of funding in 2023, the TLTRO and if you like to ask something too, other point.

Regarding the cost of funding, you cover most of the question. Just in terms of numbers, as we said, our cost of funding has been on an increasing path, starting from June this year. The average cost increase quarter-by-quarter. And we believe midyear cost of funding is not a good predictor of what our cost of funding would be in 2023. If we close 2022 was 0.4% cost of average cost of funding, we believe that 2023 cost of funding would be north of 2%. But it would then stabilize during the course of 2023 around these levels. In terms of the margins, to summarize what I had already anticipated during the comments to the slides and adding to what Gianluca has said in terms of the capability to reprice the various assets purchase. And to summarize all of that, we can say that definitely the gross interest margin for factoring and pawn loans would increase in 2023, and following on from what Gianluca said, the CQ net margin would be a sort of a drag so that the consolidated net margin's outlook for 2023 should be stable, slightly increase in net margins vis-a-vis current levels. In terms of the TLTRO, we are planning to reimburse the TLTRO by the end of 2023, mainly in the last quarter of 2023. We will replace the TLTRO funding using existing social funding. When we reimburse the TLTRO, we have some collateral that will become a variable that can be utilized as a collateral for diversified funding in line to what we are already doing. I think that was pretty much all...

The next question is from Christian Carrese with Intermonte.