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 Quarter 2023 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. I'm in the call, as usual, with Carlo and Ilaria. We continue to see a signal of the change in monetary policy. But despite the environment, we have registered a very good commercial performance with a factoring turnover that was up 9% on a year-on-year basis. The CQ outstanding is almost stable. So being able to replace redeem receivable with new receivables. The pawn loan had increased 19% and keep growing on a constant basis. At the P&L level, the net interest income is equal to EUR 20.6 million, which is stable on year-on-year, but it's important to note is that the interest income have increased 70% compared to the previous year and similar increases also the interest expenses. The higher funding cost on year-on-year is at 2%, although we were able to manage a very good level of diversification that Ilaria will cover afterwards. The total income is equal to EUR 25.3 million. So it's up 3%, thanks to a better performance of the pawn loan net of commission. We have a low cost of risk at 15 basis points, which is almost half of the same information from the last year. The operating cost is equal to EUR 18.4 million, which is up on a year-on-year basis. And the net income in equal EUR 3.7 million, which is EUR 0.7 million less than last year. The wholesale funding component represents 50% of the total fund. As a group, we have maintained a strong liquidity position with the liquidity cover ratio that is almost 300%. And the net stable funding ratio, the leverage ratio that were equal 223% and 4.9%, respectively. The total assets are at EUR 4.4 billion, stable compared to the previous period. The core Tier 1 ratio is at 12% and the total capital ratio at 15.3% fully loaded. So as you remember, with the end of last year, the negative mark-to-market that we did not account in the calculation as now going -- went back to the calculation because of the end of the period, and most likely the new CRR will put back the parameters to neutralize the negative mark-to-market from September based on the information that we have. Moving to the Slide #3. As you can see, the factoring stock is up on a year-on-year basis based on strong volume, in particular, in the last month of March with a little bit less turnover in the tax receivable. Very recently, yesterday, the Prime Minister of Finance confirmed that the split payment rules has been postponed that was due to expire in June is going to be postponed to 2026. And that will, of course, will contribute to the sale of tax receivable, VAT receivable going forward. In the Slide #4, as you can see, the security turnover is nowadays 100% just direct. So we didn't buy any portfolio like last year, where we have EUR 4 million of indirect. The new turnover is running as definitely higher fixed rate compared to the past. Even though the new component of the new loans is a small portion of the total outstanding. The pawn loan business is growing on a quarter-on-quarter basis. And at this stage, I don't have anything to add. I will leave the floor to Ilaria, and then I will come back for the last part and the Q&A. Thank you.

Thank you, Gianluca, and good afternoon to everybody. Let's now look at the balance sheet on Slide 5. As you can see, total assets are stable versus year-end 2022. The govies portfolio is just less than EUR 1.25 billion, and this is slightly up quarter-on-quarter with an average duration of 15.3 months versus the 18.4 months at year-end. The residual average duration of the held-to-collect and sell portfolio is now 22.7 months while the held-to-collect portfolio has a duration of 9 months and the mark-to-market at quarter end, positive by EUR 1.65 million. As regards to the core business, we have that loans at amortized costs stand at EUR 2.9 billion and is slightly up quarter-on-quarter. In particular, factoring assets has slightly increased quarter-on-quarter influenced by strong origination, especially in the month of March. CQ assets are down versus year-end 2022, and pawn loans are up, confirming a sustained organic growth. On the liability side, we had that due to banks – the due to bank's quarter-on-quarter increase is driven by inter-banking growth. We continue to hold EUR 540 million, which is stable quarter-on-quarter. Due to customers quarter-on-quarter decrease is driven by the decrease in funding from corporates, both from current accounts and term deposits, partially compensated by higher term deposits from individuals, mainly for the foreign channels and also by higher reports related to the Govies portfolio. Debt securities quarter-on-quarter decrease is driven by lower funding through ABS instruments, in particular, the one collateralized by fiscal credits. We now move on to the next page, Slide 6, to discuss the P&L development. As you can see, Q1 interest income is up 70% year-on-year, and it also up quarter-on-quarter with a higher contribution from factoring for EUR 8.7 million. Factoring now represents 57% of total interest income. Higher year-on-year factoring contribution was mainly due to higher factoring LPI from legal action, which is now equal to EUR 11.1 million compared to EUR 4.1 million in Q1 2022. The breakdown is as follows. Accrual is worth of EUR 9.1 million compared to EUR 1.9 million in '22, while extra collection accounts for EUR 2 million in line with EUR 2.2 million in 2022. Looking at accruals more in detail, the EUR 9.1 million income includes EUR 3.8 million resulting from the update of the reference rate for the LPI, which has been reset to 10.5%, up from 8% since the 1st of January 2023, following the multi-policy rate increases occurred before December 31. Over the next quarter, the RPI rate will further increase to reflect the additional rate hikes that the ECB will have carried out by the end of June. The next adjustment will occur from the 1st of July, so will effect on Q3 results. Strong performance of LPI was coupled with a higher profitability of the new commercial credits originated in the quarter, while VAT credits continue to have a dilutive effect on margins. Overall, factoring margins sat at 5.4% in the quarter, up from the 4.4% in Q1 last year and also up from 4.6% at year-end. In the CQ space, the income contribution is slightly up versus last year, and interest margin stands at 2.3%, stable versus Q1 '22 and also stable versus year-end. And this is due to the fact that the vast majority of CQ assets carry a fixed yield that was set before the ECB started the hiking campaign. Moving on to the point loans, its contribution continues to be in line with expectations on a growing trajectory. Indeed, the margin is now 18.6% compared to 16.1% in Q1 last year and to 16.4% at year-end. The impressive growth testifies the effect of the continuous repricing of the contracts carry out quarter-by-quarter. As a result of the described dynamics, consolidated gross margins stand at 5%, which is up from 3.9% in Q1 and also up from 4.2% at year-end. In total margins, we also include the income from super bonds and [ semi ] loans with the latter registering a strong increase versus last year. We now move on to discuss total income on the next slide. Q1 total income is slightly up year-on-year due to higher net commissions. Net interest income is flat year-on-year and is the result of the strong increase of interest income just described and an equally high increase of interest expenses. The cost of funding reached 2% in the quarter, while it was 0.2% in Q1 2022 and 0.4% for the whole 2022. We will add more comments on funding costs and its outlook in the section dedicated to funding. Net commission are slightly up year-on-year, thanks to the higher pawn loans commissions driven by higher credits outstanding as well as by the repricing. Other income is slightly down year-on-year, and it includes EUR 0.2 million gain from the sale of a factoring portfolio and the flattish contribution of the Govies portfolio. From the bottom pie chart, you see that the relative contribution to total income of the 3 businesses has changed considerably versus a year ago. The weight of factoring on loans relative to CQ is much higher now compared to a year ago because the gross margins of these 2 products have increased, while the gross margin of CQ has been heavily penalized by the stock outstanding, yielding much lower rates than current ones. Given the longer duration, the repricing process of these assets taking need far more time than factoring and pawn loans. We now turn to Page 8 to discuss costs. Total operating costs are up year-on-year, mainly due to net provisions for risk, higher IT expenses for Kruso Kapital and the consolidation of the auction house Art-Rite and the subsidiary of Kruso Kapital in Greece. Personnel expenses are up year-on-year as a consequence of higher-than-expected release of the bonus pool relative to 2021, which had occurred in Q1 2022. We now move on to the next slide on funding. As you can see from the main chart, the wholesale retail mix changed slightly, reaching now a 50-50 mix, while at the end of last year, the retail funding was prevailing with 55% share. The wholesale component quarter-on-quarter increase was mainly due to higher interbanking and repos and more than compensated the decrease of the collateralized funding due to the reduction of tax receivables, ABS. I think it's important to share more details about the reduction of retail funding over the quarter. This reduction is part of a strategy to reduce the funding from corporate accounts and to replace it with more stable funding. Indeed, in an increasing interest rate environment, corporates are more likely to adopt an opportunistic approach to cash investment, perhaps switching from one deposit to another according to the rates offer, therefore, jeopardizing the stability of funds. With that in mind, we decided to manage a reduction in funding from corporates, both in the form of current accounts and for deposits, with the aim to replace it with funding from individuals. On the deposit side, the reduction of corporate deposits has been entirely placed with an increase in deposits from individuals in large majority through the foreign channel. On the current accounts, the reduction of corporate current accounts has been temporarily replaced by inter-banking funding, but the strategy is to further increase term deposits abroad and in Italy, leveraging on higher rates offered and on dedicated marketing campaigns. As regards to cost of funding, we've managed to -- we've registered an increase in [ all ] instruments, wholesale and retail. The retail funding cost has been lower to adjust at the end of last year, but over Q1 has started to rise sharply. The new taken rate on deposits in Q1 has been 3.2% compared to the 2.6% in Q4 2022. On the back of recent adjustment rates both on deposits and current accounts, the retail funding cost is expected to increase from this quarter. Also, wholesale funding cost is expected to rise in line with the growth of market interest rates, but at a much lower pace than the one seen in the recent past. We now turn to Slide 10 to discuss asset quality. In terms of asset quality, this quarter has confirmed the positive trend starting in 2022, decreasing gross NPE driven by a further decrease in past dues. The cost of risk for the quarter was 15 basis points. I now hand the floor back to Gianluca.

Thank you. So in the last Slide 11. So the fully loaded core Tier 1 and total capital ratio as at the end of the quarter are respectively equal to 12% and 15.3% that are up on a quarter-on-quarter basis. And these include EUR 21.4 million of negative mark-to-market in the portfolio of held-to-collect and sell reserve. On the other hand, our held to collect portfolio of government bonds as a positive mark-to-market. The capital acquisition, as I said also before, is well above our regulatory requirement. And when after the trialogue process of the Basel III change, the European Parliament will prove most likely this Ecofin proposal that tree this part of the held-to-collect and sell reserve. And in this case, our capital acquisition will further improve. That's all. So now I leave the floor for Q&A.

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

Some questions from my side. The first one is on deposits and cost of funding. You reduced the order corporate funding and you are saying that you want to increase your time deposits in the retail segment by increasing the interest rate offer. So I'm wondering what is the cost of funding that you are expecting for 2023. And what is the cost of funding of retail deposits that you are expecting? The second question is on 2023 results. In the press release, you mentioned that the result is going to be influenced by some transactions. Could you please elaborate a little bit more on what transaction you are referring to? The other question is on Krus Kapital and I’d like to think is one of the transactions we are preparing. I'm wondering if the process is still ongoing and if you are expecting to cash in a capital gain from the IPO. And finally, on the split payment, is it fair to say that the [ streaming ] postponing is broadly, let's say, new drug review as you have more opportunity to buy tax receivables, while the invoices of factoring, is lower than the situation without this repayment?

Okay. Thank you for your question. Maybe I go in reverse, and I will start with the last one and on reverse and then leaving the floor to Ilaria. About the split payment, yes, it's pretty much neutral because on one hand, if the split payment will have been stopped. We will have an increase of turnover of receivable business that will have an RWA on average of 30%, 35%, depending on which obligor. While with the split payment still ongoing, we will have more VAT receivable with an RWA at 0%. So while the yield is less in VAT receivable, the return on regulatory capital is higher on the VAT receivable because the capital consumption is 0 compared to the other receivable and we already made some hypothesis also during the last call in case of the [indiscernible] will have been stopped, and I reconfirm that we are pretty much neutral on the split payment. Maybe the timing will be different because the collection of VAT receivable, it happened when people claim the VAT credit. And this happened once a year plus a quarter-on-quarter basis. While when you buy receivable, you buy maybe on a monthly basis. So this component come in on a monthly basis. But all in all, I think that for us that we do both type -- we buy both type of receivable VAT and commercial receivable is pretty much neutral. I confirm that we are on track on the IPO of Kruso Kapital. This will not generate a capital -- this would not generate an additional profit because the idea is to do the transaction through a capital increase. So we will not sell -- we don't have any intention to sell any shares, but the intention is to raise capital in order to make investment. And on the second question about transactions, certainly in the pipeline, in particular, on the CQ space, we had in the pipe in the sale of part of the CQ portfolio. And this will happen partially by mid of this year and the other part by the end of the year. So this will have a positive effect in terms of revenue when the sale of the portfolio will happen. So it's cannot be accounted on an ongoing basis. So that is one of the transactions that we have in mind. But I may leave also the floor to Ilaria to further expand on this point as well on your question about the cost of funding.

Yes. Thank you, Gianluca. Yes, I don't have much to add to this point regarding future transactions, apart the fact that in addition to transactions foreseen in the CQ space, we might have transactions in the factoring space as well, in line with what we have already done in the past by selling LPI stock in an opportunistic way. So only when it makes sense from an income standpoint. So these are the 2 key elements that might drive the net income up in the second part of the year. Regarding the first question on funding cost, we expect the funding cost to trend higher in the second quarter and in the second half of the year in general. The average funding cost for the quarter, as we said, was 2%. We might see it higher between 2.5% and 3% on average for the whole year. In the retail space, as I said, the take-on rates on deposit is going up. It moved from 2.6% in December to 3.2% in Q1 as an average second rate. At the moment, we are currently offering rates at a higher level than these ones. For example, we have a 24 months offer at around 4%, which will raise the average deposit cost for the year for sure. But on the other side, as I said, we are also envisaging to increase the funding on current accounts, where the rate is much lower. So on average, there will be an increase as an increase in funding costs, but not with the same proportion and pace that we have registered between last year and the first quarter this year.

Let me only add one point that for the time being, we were able to raise a very well term deposit with the German citizen, using the 2 platform where we were pioneer in doing that, and we continue to do it. And clearly, is not only a question of being able to have a well-diversified term deposit from individual, but it's also the point that we're also able to get duration, which is today, price at a level that is well below what would be a price of issuing a bond for the same duration. On the other hand, the strategy is also to have the corporate to represent less and less the funding for us as a corporate may be more volatile in the future. We believe that with interest rate that's going up, maybe more corporate will use the money to reduce their debt and therefore, they have to withdraw the money from accounts. So we don't want to be dependent. So the amount of corporate that we have nowadays is irrelevant or not so significant for our funding for our business.

The next question is from Christian Carrese from Intermonte.

Back on funding. If I'm not mistaken, in the previous call, you guided for a funding cost in 2023 at 2% compared to 0.4% of something like that in 2022. I see that in the first quarter, you already reached a 2% funding cost. So there is any update for the full year? Maybe I missed your point on this. And still on funding, do you -- would you take into consideration an issue of a bond maybe today is too costly, but I don't know if you are planning to do so in the coming quarters. The second question is on a more strategic one on the CQ business. I see in the first quarter, the contribution was very low. Fixed-rate, margin squeeze currently. But going forward, you see that CQ creating value for the bank or you could do something different on this segment.