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 2023 First Half 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 very much. Good afternoon to everybody, And as usual, on the call with Ilaria Bennati and Carlo Di Pierro. As usual, I will make reference to the slides that has been made available to the participants. Starting from the Slide #2. Let me start by saying that in this environment, we have registered a very good commercial performance. The Factoring turnover was up 18% on a year-on-year basis, almost EUR 2.5 billion, with growing gross margin on a month-by-month basis. The CQ outstanding is down on a quarter-on-quarter and year-on-year basis with the negative net interest margins once we deducted the cost of funding relative to the business division. Then on this point Ilaria will comment further later on this point. The Pawn loans reached EUR 113 million in terms of outstanding with an increase of 15% on a year-on-year basis with constant growth on a quarter-on-quarter basis. Looking at the P&L, The net interest income is equal to EUR 35.8 million, which is down due to the higher cost of interest expenses, which is more than compensating the year-on-year increase in interest income which is 65% on a year-on-year basis. The cost of funding has reached 2.4%, which is higher on a quarter-on-quarter. As you may recall, last year, the average cost of funding was 0.4%. The total income is equal to EUR 49.4 million so up at 10%. The cost of risk is 19 basis points. The total operating cost, EUR 35 million and the net income is equal to EUR 7.5 million. The wholesale funding component is down at 43% in terms of total funds, mainly due to the lower income banking activity while the retail component is up in absolute terms due to the higher stock of term deposits, mainly collected outside of Italy. The total asset has reached EUR 4.6 billion and up on a quarter-on-quarter basis. As additional information, during the Board on the 21st of July, the bank has decided to approve the sale up to the total outstanding of all the government bonds as in the Held to Collect portfolio that had a nominal value of EUR 666 million at closing of 27th of July, of which EUR 541 million so almost the total amount as an annualized profit of EUR 13.5 million. While the remaining portion, which is about EUR 110 million has an unrealized loss of EUR 3.1 million. So resulting overall in a net profit of EUR 5.4 million. This transaction will be carried out by the end of the year depending on the market condition and most likely in different currencies during the course of the remaining part of the year. The disposal of the portfolio will allow the bank to reach a higher liquidity buffer as a proportion of assets and, at the same time, generating also positive results based on the current market condition. The CET1 ratio is at 11.9% and the total capital ratio is at 15%. If we exclude the reserve on the Held to Collect and Sell portfolio, the ratio will become 13.3% and 16.5%. And I will comment later on. But these are mentioned simply because we expect neutralization will take place by year-end based on what has been approved at the level of European [indiscernible] discussion. Moving to the Slide #3. As you can see, the Factoring stock so not only the turnover, but also the stock has been increased on a quarter-on-quarter basis with -- as I said, due to this higher volume, in particular in May and June, with the majority of this turnover generated in the business without the course. The Factoring division, as you may recall, is also offering for our Factoring clients only financing granted by the government, which has increased on year-on-year of 73%, where we basically originated in the first half of this year, EUR 72 million. Although we have originated a good tax receivable volume in the first half of 2023, looking at the pie by product comparing to last year. The outstanding has been reduced simply because several tax receivables that we have purchased has been repaid, and therefore, the outstanding has been decreased despite the growth of the turnover. Moving to the Slide #4 commenting on the other products. The CQ stock is down on a year-on-year basis. And the main driver is also the sale of a portfolio of EUR 35 million that happened in the second quarter of this year. And as you remember, we are focusing today in direct channels where we originate directly, we don't buy portfolio unless it's a very small portion. The Pawn loan business keeps growing on a year-on-year and a quarter-on-quarter basis and increase the turnover and as well as the outstanding. Now I'll leave the floor to Ilaria for more comments on the results there.

Thank you, Gianluca, and good afternoon to everybody. Let's turn now to Slide 5, where we comment the balance sheet. Looking at the table, total assets have increased compared to year-end 2022 and also compared to Q1 '23, mainly driven by Factoring assets. Govies' portfolio is largely down quarter-on-quarter and the average duration is also down. Indeed, the residual average duration of the Held to Collect and Sell portfolio is now 19.8 months and Held to Collect portfolio has a duration of 11.6 months, and its mark-to-market at quarter end was positive by EUR 1.9 million. As regard to core business, we have that loans at amortized costs stand at EUR 3.07 billion and is slightly up quarter-on-quarter. In particular, Factoring receivables, which stands at EUR 1.8 billion, have increased by 20% versus year-end and also quarter-on-quarter. Secured loans are down quarter-on-quarter due to the sale of a portfolio of credits in June for an amount of EUR 35 million. And Pawn loans are up confirming the sustained organic growth. On the liability side, we had Due to banks stable quarter-on-quarter. As a combined effect of an increase in interbanking and an increase in Repos executed with institutional counterparts. Due to customer quarter-on-quarter increase is driven by the massive growth of term deposits from individuals. Whole stock has increased by EUR 375 million since the end of Q1. Debt securities quarter-on-quarter increase is driven by higher structured funding, both secured DS and [indiscernible]. As usual, we'll provide more comments on funding later on in the presentation. We now move on to the next page to discuss P&L. First half interest income is up 65% year-on-year and is also up quarter-on-quarter, with the highest contribution from Factoring, which generated almost EUR 45 million interest income. Factoring now represents 54% of total interest income. Higher year-on-year contribution by Factoring is largely driven by a sustained increase of LPI from legal action, which is now equal to EUR 20 million compared to EUR 6.8 million in June '22. The breakdown of LPI is the following: accrual is worth EUR 16.4 million and extra collection is worth EUR 3.6 million. I'll give you a few more details on the EUR 16.4 million accrual. Two components have positively impacted the figure, in particular, EUR 4.2 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 January 2023 and to 12% since the 1st of July 2023. EUR 1.7 million is the accrual of the EUR 40 per invoice compensation claim, which we have started to account for in this quarter. And this amount, the EUR 1.7 million represents 53% of the value of the credit, which we started to fix so far, which is worth EUR 3.2 million. Further increase of LPI rates following ECB rate hikes would be reflected in future quarter figures. A strong performance of LPI was coupled with a higher contribution of new commercial credits originated in the quarter, carrying much higher yields than in the past. Indeed, new commercial credits, excluding pharmaceutical receivables in Q2 have been originated with a price gross yield of around 7%. With respect to a price gross yield of 3.3% in Q2 2022, although we have a shorter funding period than in the past. The repricing of new credits will continue in the second part of the year 2. On the other side, VAT credits, confirming what has already been observed in Q1, had a lower contribution to P&L and continue to have a dilutive effect on margins. Overall, factoring margins set at 5.9% in the first 6 months, up from 5.4% in Q1 and of course, also up from 4.6% at year-end. As I said, margins -- the Factoring margins are expected to increase further over the next quarter. In the CQ space, the interest income contribution in absolute terms is slightly down versus last year, but the adjusted income margin is higher, also thanks to the sale of the portfolio carried out in the second quarter. Although the new credits are originated at a higher yield than in the past, for example, new CQ loans originated in Q2 had a gross yield of 5.2% compared to 2.6% a year ago. However, as the debt majority of the CQ assets carried a fixed yield that was set before the ECB start in the hiking campaign, the average yield of the stock is lower, much lower than the dedicated funding cost. The future outlook of the CQ margins will depend on the relative weight of the new loans on the stock outstanding at the end of the next 2 quarters. Moving on to Pawn loans. Its contribution continues to be in line with expectations on a growing trajectory. Indeed, the margin is down 19% compared to 15.9% in the first half of last year and compared to 16.4% at year-end. This business has, by far, the strongest ability of repricing the contract quarter-by-quarter, also thanks to the shorter regional duration and to the fact that -- thanks to the fact that [indiscernible] [ we cannot expect ] reset. As a result of the described dynamics, consolidated gross margins among the 3 business lines stand at 5.4%, significantly up compared to last year. We now move on to total income on the next slide. First half total income is down year-on-year due to lower net interest margin. The net interest income decrease is driven by higher interest expenses, which registered an increase in absolute terms of almost EUR 42 million year-on-year, following a sharp increase of the funding cost, which was equal to as Gianluca mentioned, 2.4% compared to 0.1% in the first half 2022. The cost of funding is definitely on a growing trajectory and does not reach its peak yet. At year-end, it was -- to give you an idea of the trajectory, at year-end, it was 0.4% and at the end of Q1, was 2%. Net commissions are 45% up, thanks to higher Pawn loan commissions and also due to the different accounting of CQ commissions, as already described in previous calls. Other income is slightly up year-on-year and includes EUR 0.9 million gain from the sale of Factoring portfolio and EUR 1.1 million gain from the sale of the CQ portfolio. In addition to that, it includes better trading result on the Govies' portfolio equal to EUR 1.3 million. From the bottom pie chart, you see that the relative contribution to total income of the 3 business lines has changed significantly versus a year ago. The weight of Factoring is now much higher, contributing for 81% of total income compared to 66%. Pawn loans contribution has also increased to 18%. While on the other side, the relative weight of the CQ is much smaller than in the past as its gross margin has been heavily penalized by the stock outstanding, as we said, yielding much lower rates than current market rates. Given the longer duration of the CQ asset, the repricing process of these assets taking it far more time than for the Factoring and the Pawn loans. Let's look at the cost on the next page. Total costs are up by 12% year-on-year, mainly due to all other expenses having increased by EUR 3.3 million year-on-year in absolute terms, driven by higher net provisions for risks, higher expenses, higher marketing costs related to the advertising of our Funding campaign in Italy both for the current accounts and the term deposits. The cost increase is due to the consolidation of the subsidiaries of Kruso Kapital and in Art-Rite and ProntoPegno in Greece. Personnel expenses are only marginally up year-on-year, mainly as a consequence of the fact that there was higher-than-expected release in the first half last year of the bonus related to 2021. Let's now move on to Slide 9 on funding. As you can see from the top chart, the wholesale retail mix has changed and the retail funding has reached 57% of total funding up from the 50% at the end of Q1. As discussed already during the last earnings call, the reduction of retail funding in Q1 was only temporary and was part of a strategy to reduce the funding from corporate accounts, both in the form of current accounts and term deposits and to replace it with more stable funding from individuals. On the deposit side, the reduction of corporate deposits have been entirely replaced by March by deposits from individuals in our majority through the foreign channel. While on the current account side, the reduction of the corporate current accounts had been temporarily replaced by interbanking funding with the aim to retain interbanking gradually as the stock of term deposit would increase. This has been achieved indeed in Q2. The stock of deposits has increased from EUR 1.44 billion to EUR 1.82 billion, just over a quarter, leveraging on higher rates offered and on a dedicated marketing campaign. And that has allowed us to remove interbanking funding and also other forms of wholesale sources lying convenient from a cost standpoint. The bulk of new deposits were taken on through online platforms abroad. And one aspect to highlight is that the taken duration was much higher than in the past. Indeed, the average taken duration was up from 14 months to 21 months. Through increasing the residual maturity of the outstanding stock from what was 12 months to the current 15 months, in line with our funding strategy. As regards to the cost of funding, the increase in the cost of all instrument wholesale and retail has continued, as we mentioned over the second quarter. The retail funding cost has been slower to adjust at the end of last year. But over Q1, it has started to rise sharply and increases continue in Q2. The new taken rate to give you an example, the new taken rate on deposits in Q2 has been 3.7% compared to 3% in Q1. On the back of the recent adjustment to interest rates, both on deposits and current accounts, and following a higher rate on the overall stock of new deposit rate raised in 2023, the retail funding cost is expected to increase further over the year. On the other side, also the wholesale funding cost is expected to rise in line with the growth of market interest rates but at a lower space than the ones seen in recent past. So as mentioned before, the total cost of funding has increased to 2.4% for the first half, and we expect the average funding cost for the entire year to reach 2.9%, in line with our previous forecast. However, despite the increase, we are still raising funds at a negative spread over Euribor with respect to the average 12 months Euribor, our funding cost in the semester has been with a spread of minus 130 basis points. We now turn to Slide 10 to discuss asset quality. Gross NP has moved up quarter-on-quarter driven by significant increase in Unlikely to pay, which has not been entirely compensated by the decrease in past-dues. The UTP increase is due to a single position related to a factor in counterpart with the majority of the exposure guaranteed by [indiscernible] . The cost of credit risk is down at 19 basis points compared to 29 basis points in the first half last year. I now hand the floor back to Gianluca.

Thank you. And I move to the Slide #11. The Core Tier 1 and total capital ratio, respectively equal to 11.9% and 15%, which was slightly down versus the increase of outstanding. And this includes EUR 21 million of Held to Collect and Sell reserve of the portfolio of government bond. As you know and anticipated before, among the various changes that are part of the package of the Basel II regulation, there will be the neutralization of the Held to Collect and Sell portfolio reserve on government bond security, which has been approved by the European Trilogue meeting. This change will come into effect with the publication of the official directive, which is predictably going to happen by the end of the year. As Ilaria mentioned before, the duration of our portfolio is 19.8 months, while the neutralization will cover a period of 3 years. So we will cover the full period of the duration of our portfolio. For this reason, if we consider this neutralization with the data of the June data, the Core Tier 1 ratio, we will move it from 11.9% to 13.5%, and the total capital ratio from 15% to 16.5%, which are 150 basis points. In the second half of the year, so basically for the full year, the overall result will be affected by the ability of our Factoring division in Kruso Kapital for the Pawn loan to make up for the CQ contribution, which at the total income level is virtually [indiscernible]. And the cost of funding is exceeding the return on the portfolio, which has been originated before the item of interest rates, as Ilaria mentioned before. So the net result could be positively affected also by the possible sale up to the total amount, as I mentioned before, of the government bond portfolio that has an unrealized gain of overall more than EUR 5 million. And if we all consider the majority of the portfolio, EUR 550 million out of EUR 666 million gain that could be up to EUR 13.5 million. I will finish here. So I will leave the floor for questions.

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

My first question is on revenues. Could you provide us the outlook for the second half of the year? And how should we look at the different moving parts of the revenues? I mean, as far as I understand, there could be some capital gain on the financial portfolio on the Govies portfolio. But on the net interest income, what do you expect? I think that in terms of cost of funding, we should still see some quarter with a higher cost of funding. But on the asset side, what do you expect, in particular, on Factoring if you will be able to increase the rates on that item? And the second question is on capital. I presume you will free some capital by next year, thanks to also regulation and the disposal of some Govies. How -- which area do you think is the -- where you want focus to invest the additional capital to grow revenues? And finally, on costs, if you can provide us a guidance for the full year 2023?