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 2023 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Christian Carrese, Head of IR of Banca Sistema. Please go ahead, sir.

Good afternoon, everybody, and thank you for joining the Banca Sistema 9 month results conference call. I'm Christian Carrese, Head of IR, and I'm here with Banca Sistema CEO, Gianluca Garbi; and Banca Sistema CFO, Ilaria Bennati. Before leaving the floor to the CEO, I would like to remind you that you can find the press release, the presentation and all the key figures on the website, www.bancasistema.it. Please, Gianluca, go ahead.

Thank you. Thank you, Christian, and good afternoon to everybody. We are happy to announce the first 9 months results, which are in line with the guidance that we gave in the previous quarter which foresaw second half profitability in line with the first half of this year. I think that is worth to highlight that we have reached this result straightening fund the balance sheet where we have an increase of 40 basis points in the core Tier 1 ratio and 100 basis points in the NPE coverage ratio and strengthening also the liquidity position, which is well above the minimum regulatory requiring ratio. In terms of commercial performance, looking at the same Slide #2, the performance of the factoring has continued to grow on a double digit in the first 9 months, which is up 13%. The pawn loans outstanding has also increased 13% on a year-over-year basis, while the CQ outstanding decreased by 13%, also on a year-on-year basis due to disposal, due to natural redemption of the loans and more selective approach in terms of origination. From a P&L perspective, the net interest income was weaker due to the higher cost of funding linked to the higher rate and larger liquidity buffer. This higher cost of funding has been transferring full only to the factoring and the bond broking activity. On the other hand, the cost grew in the third quarter at a lower pace than the previous one, and cost of risk was absolutely under control, refer to 18 basis points, thanks also to the lower NPEs. The total assets were pretty stable on a year-to-date. There was a positive miss effect on funding in favor of more sticky technical instrument, in particular, term deposit for individual mainly outside of Italy, while the wholesale funding now represents 34% of the total funds, in the previous quarter was 43%. As for the government portfolio, we have produced the size by 150 million in the quarter. Moving to the next slide, we showed the breakdown of loans outstanding for factoring division, which market growth in Non Recourse loan up 15%, while a light reduction in tax receivable and recourse loan. In terms of Obligor, there was an increase in local healthcare organization and corporate vis-a-vis a decrease in State Central Administration. Exposure to public administration account now for 75% of the total loan. Moving to Slide #4. The CQ outstanding went down by 13%, as I said before, and we were more -- as we were more disciplined in the new production, which dropped half on a year-on-year basis. So since the beginning of the year, we have originated EUR 131 million, while for the same period last year, we originated EUR 273 million. As the fourth export pawn broking business, the turnover grew by 13% more and more transactions are now also finalized through digital application. We remind that pawn broking is also a business at a very low capital absorption or almost there as the collateral is 90% represented by gold. Now I leave the floor to Ilaria to describe more in detail the balance sheet and the P&L evolution. Thank you.

Thank you, Gianluca, and good afternoon to everybody. Let's turn to Slide 5, where we start with comments on the balance sheet. Looking at the table, total assets are stable compared to year-end 2022 and lower compared to Q2 '23, mainly driven by decrease in factoring assets and in government bonds and to a lesser extent in secure assets. Govies' portfolio booked in Held to Collect has been reduced by EUR 150 million, and its duration is now at 10.9 months. The size of the Held to Collect and Sell portfolio is pretty much unchanged and its residual average duration is now 18 months. It's mark-to-market is still in negative territory, but has improved since the end of Q2, therefore, reducing the negative impact on the -- of the reserve of capital as Gianluca will better show later. As regards to the core business assets, they stand at almost EUR 3 billion, slightly down Q-on-Q. Factoring assets at EUR 1.73 billion has slightly decreased quarter-on-quarter but still higher versus year-end. Secured loans are slightly down Q-on-Q and EUR 100 million lower than year-end due to a more selective approach in origination and also due to the sale of a portfolio of credit for EUR 54 million in total executed in Q2 and Q3. Pawn loans have increased to EUR 170 million, confirming as mentioned already, a sustained organic growth. On the liability side, due to banks is down Q-on-Q due to a combined effect of a decrease in interbanking funding and the decrease in repos executed with institutional counterparts. Due to customer quarter-on-quarter increase is driven by the sustained growth of term deposits who's stock has increased by EUR 300 million or 17% since the end of Q2, confirming the positive trend started at the beginning of 2023. The growth of deposits since year-end has been almost EUR 700 million or 48% Debt securities Q-on-Q decrease is driven by lower structured funding, both for CQ ABS and ABS [ Siva ]. We'll add further color on funding in the dedicated section of the presentation. Before that, we move on to discuss P&L on the next slide. Confirming the positive trend of the previous quarters, interest income has registered a solid growth also in Q3 and on a 9-month basis is up 73% year-on-year. The factoring business generated almost EUR 16 million interest income, which represents 52% of interest income of the period. The third quarter has confirmed the outstanding performance of LPI from legal action already registered in the 2 previous quarter. Nine months legal LPI in total accounts for EUR 26.7 million compared to the EUR 11.3 million in September '22. The breakdown is the following: Accrual is worth EUR 21.8 million and extra collection is worth EUR 4.9 million. Three components have positively impacted the accrual figure in the 9 months. EUR 4.2 million is resulting from the update of the reference rate of the LPI, [ distribute ] rate which has been reset to 10.5% in Q1 and to 12% in Q2, as already indicated. This figure is unchanged with respect to Q2 results and the remaining ECB rate hikes would be reflected in the LPI income in the fourth quarter. EUR 1.9 million is the accrual of the EUR 40 per invoice compensation claim. As already indicated, this amount represents 53% of the value of the credit which we have claimed so far. And also this figure is unchanged with respect to Q2 results. Finally, EUR 1.2 million is resulting from the update of the accrual rates and time value that we regularly do in the third quarter on the basis of the outcome of the big testing process. The strong performance of LPI was coupled with a higher contribution of new commercial credits originating, carrying much higher yield than in the past. Indeed, new commercial credits, excluding pharmaceutical receivables in Q3 have been originated with a price gross yield of 7.4%, which compares with a price gross yield of 4.5% in Q3 '22, although with a short-term funding period than in the past. The repricing of new credits will carry on over the next quarter. VAT credits have improved, both in terms of contribution to P&L and price yield, and they have improved also vis-a-vis last quarter, although they continue to have a dilutive effect on the margins. Overall, factoring margins set at 6.3% in the first 9 months which is up from 5.9% in the first half and of course, also up from the 4.6% at year-end. Margins, factoring margins are expected to increase further over the next quarter, thanks to the new origination activity. Also in Q4, we'll start -- we'll see further increasing in the margins. In the secure space, the interest income contribution in absolute terms is slightly up versus last year. And also the adjusted income margin is higher, also thanks to the sale of the portfolio, which, as we said, we performed in Q2 and Q3. However, although new credits are originated at a higher yield than in the past as the vast majority of secure assets in the portfolio, which carry fixed rate were originally originated before 2022, the average yield of the stock is much lower than the dedicated funding costs. The future trajectory of the CQ average margins will depend on the relative weight of the new loans on the stock outstanding, which will be a combination of both the pace of the new origination activity as well as the amortization of the old portfolio. Moving on to pawn loans. Its contribution continues to be robust and on a growing trajectory. Also thanks to the quick repricing of the yield of the loans outstanding quarter-by-quarter due to the short original duration and to the fact that at each renewal, the contractual rate gets reset. Indeed, pawn broking margins have added another 20 basis points since June, reaching the current 19.2% compared what it was 15.9% in September last year. As a result of the described dynamics, consolidated gross margins of the 3 businesses stand at 5.7%, which is up from 5.4% in June and, of course, significantly up compared to last year. To complete the total income picture, Quickly going back to the top chart on interest income, the item, Other, which is now worth EUR 37 million, include among others, 20.4 million from Govies’ portfolio, which was EUR 2 million last year and EUR 10.8 million from the SME loans, which was less than EUR 5 million against last year. We now move on to the total income on Slide 7. Despite the remarkable increase in interest income, total income is down 10% year-on-year due to lower net interest margin. Net interest margin decrease is driven by higher interest expenses, which have grown by EUR 17 million year-on-year following a sharp increase of the funding cost. Funding cost that was equal to 2.7% for the 9 months. compared to 2.4% in the first half of 2023 and to 0.2% in the 9 months 2022. The cost of funding has continued to increase over the next quarters, but we believe it's not far from reaching its peak in 2024. Net commissions are up 24% year-on-year, mainly thanks to higher pawn loans commissions. Other income is up year-on-year, thanks to better trading results on the Govies' portfolio equal to EUR 2.8 million, while gains from the sale of Factoring and CQ assets are stable and with a combined value equal to EUR 3 million. From the bottom pie chart, you see that the relative contribution to total income of the 3 businesses is pretty stable quarter-on-quarter as a significant change occurred as we have widely commented in the past months. The Factoring contribution to total income is now 81% compared to 66% last year. Pawn loans contribution has slightly increased to 20% from 18% in June and from 13% last year. On the other side, the relative weight of CQ to total income contribution has become negligible due to the already discussed suboptimal yields of its assets. We now turn on to comment costs quickly on Page 8. Total costs are up year-on-year by 5%, mainly due to all other expenses having increased by EUR 3 million year-on-year driven by higher IT expenses, higher marketing costs and higher costs related to the legal collection. Cost increase is also due to the consolidation of the subsidiaries Art-Rite and Pronto Pegno Greece within the Crusoe capital universe. Personnel expenses on the other side have decreased year-on-year as a consequence of lower provisions for variable compensation. Let's now move on to Slide 9. In the third quarter, the sustained increase of retail funding has continued with retail -- with the retail component reaching 66% of total funding, up from 57% in June. It's interesting to commend the evolution of retail funding since year-end '22. With respect to that, not only the amount of retail funding has increased in size from, as you can see, EUR 2.07 billion to EUR 2.53 billion, but also its composition has significantly changed. Indeed, while in December, out of the, say, EUR 2 billion fund from physical individuals was EUR 1 billion. As of the end of Q3, the funding from individuals is EUR 2.2 billion with a total net inflow over the period of EUR 1.2 billion. As indicated already, we have switched most of our funding from corporates to individuals as the latter is by far more stable than the first. Retail funding is composed in large majority by term deposits, EUR 2.12 billion in total of which the foreign component accounts now for EUR 1.7 billion, which is equivalent to 76% of total. Also in the fourth quarter, the bulk of net inflows occurred for online platforms abroad. And the average take on rate was higher than what we had witnessed in the first part of the year. Indeed, the average taken rate on deposits in Q3 has been 4.5% compared to 4% in Q2 and to 3.2% in Q1. As far as the duration is concerned, the average taken duration was 17 months, which is slightly less than 21 months registered in Q2. Overall, the residual maturity of the total of standing stock is now 14 months. On the back of higher taken rates and following a higher weight of new deposits raised in 2023 out of the total stock. The retail funding cost is expected to increase further by year-end and to peak in 2024. Wholesale funding cost has increased as well, in line with the rise of market interest rate, but is expected to remain stable over the next months in line with the revised expectations of ECB hiking campaign in the end. So overall, as mentioned before, the average cost of funding has increased to 2.7% for the 9 months. We confirm our expectation for the average cost of funding for the year to reach 2.9%, in line with our previous forecast. Compared to market rates, we're still raising funds at a negative spread. For the 9 months, the spread over [indiscernible] has been minus 110 basis points. We now turn on to Slide 10 to discuss asset quality. As highlighted by Gianluca, gross NPE has moved down quarter-on-quarter, driven by a decrease in Past-due and UTP although coupled with a minor increase in bad loans. The UTP decrease is related to a single exposure to the same factor in counterpart, which had determined the increase in UTP in Q2. Gross NPE ratio is down year-on-year and stable Q-on-Q at 9.5%, while net NPE ratio has decreased also quarter-on-quarter from 7.7% to 7.5%, also thanks to a higher NPE coverage ratio. Cost of credit risk is confirmed lower than in 2022, now at 18 basis points compared to 20 basis points in the 9 months last year. I now hand the floor back to Gianluca for the final remarks.

Thank you. And I'm now in Slide #11. The core Tier 1 ratio and the total capital ratio has improved on a quarter-on-quarter basis, as I mentioned before, at 11.9% to 12.3% and from 15% to 15.4%, respectively. It is worth to highlight on this front, the positive action that has been undertaken us to keep the RWA pretty stable, actually slightly down and the positive impact of earnings and lower and to collect in sales reserve, we passed in the quarter from minus EUR 31.8 million to EUR 28.5 million. This reserve has further improved on quarter-to-date to EUR 24.5 million. And taking into account the short duration of the portfolio, where actually most of the portfolio will expire in August next year, where the overall duration is the 16 months, we expect regardless the movement in interest rate that there will be a further recovery in the coming months. We also like to remind that the package of reform of the Basel III regulation that will most likely be published at the beginning of next year, if not even before will allow the neutralization of all or part of the Held to Collect and Sell reserve on government security. So as soon as this will change. This change will enter into effect, there will be a positive -- an immediate positive impact on the capital ratio. If we assume, a full neutralization of Held to Collect and Sell reserve as of the September the capital ratio would stand as follows with the core Tier 1 ratio at 13.6% and total capital ratio at 16.7%. In the last part of the year, we expect a similar trend as we registered in the last few quarters with the Factoring the Pawn loan division to compensate the still weak revenue from the Security division. We don't exclude that in the last part of the year, we may complete other disposal of factoring our CQ portfolio and also potential upside that will come from the government portfolio with the further reduction. As also we highlighted in the press release that has been issued today. We also started the process to build the new 3-year business plan, we should be able to present to the market on the first half of next year. Let me thank you, everybody, for your attention. Now we can switch to Q&A session. Thank you.

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

Yes. Thanks for the presentation. First question on my side is regarding your capital position. If we assume the neutralization of the Govies' reserve, you're going to have a pretty strong capital position. You never enjoyed that historically. Given this new capital position, what are your thoughts regarding the use of this capital? Would you rather think to better remunerate your shareholders to accelerate your organic growth? Or may you consider some acquisitions and if so, in which businesses? And also on capital, do you have any update on the possible listing of Crusoe capital? Second question is on the guidance. Thank you for the update you gave us on the funding cost. My question is rather on the operating costs, do you have any estimate of the impact of the new labor contract in the sector for next year? And do you think you have any levers you can move to compensate this increase given that your cost income ratio is rather high.

Thank you. So about the capital position, correct, we will have a stronger capital acquisition considered high return that we are able to generate. For me, the priority will be to growth and to make acquisition in particular on the pawn broking area, where there are possibility not only in Italy, but in particular outside the country. This is something that we continue to explore. And with the -- with also the digitalization, we launch, and I think that is important, very important. Last week, the first service and domicile. So basically -- and this is -- you're going to see in the Italian generalistic television of Fininvest Group the advertisement in the -- coming from -- starting next week. People will be able to do the [ program ] from home. So we are going to collect directly the asset from their house, which is going to enlarge the use of this product. This is something that we will be able to launch also in other jurisdiction, and that's the reason why our priority is to try to expand as much as we can this product and to make it more a normal product rather on the -- on niche product. Clearly, there will be at the end of any process spare capital remuneration to shareholders, of course, is no rollout. We will continue to maintain this is our priority. But as I said, in terms of process. First, we try to use the spare capital for acquisition. And if we don't find anything, of course, we have to return the money to our shareholder. In terms of listing, we started the pilot fishing. The expectation is still that the cruise of capital will be listed by year-end. I'm positive based on the first contact that we have so far also with the potential anchor investor due to the size that we are placing to the market is not substantial, and the pickup of the -- this product is significant. But Clearly, we are at the early stage of the process in terms of pilot vision, but everything is going ahead. In terms of guidance, as I said in the last part of the year, everything will be in line with the first part of the year. As Ilaria mentioned before, the operating cost has been partially improved also to the variable component that we have decreased because while the company continued to produce profit. The profits are below the previous year and the employee will be rewarded based on the reward also the shareholders. So the variable compensation will go down. In the impact of the labor contract clearly, the new labor contract has not been finalized yet. So probably next week, it will be the time. Based on the first information we have, our impact in the next 2 years will be about EUR 700,000. So EUR 350,000 per year. So it's not a huge impact because most of our employees will absorb in the current salary, the increases. So this is the impact. But let's see -- let's wait and see what is going to be the final outcome of the new contract and then we will be able to be more precise. Now these estimates are simply driven by information available, which are probably not the full package.

[Operator Instructions] Mr. Carrese, there are no more questions registered at this time.

Okay. I don't know if anybody else. Okay. So if there are no more questions. Thank you very much all for joining the call. We are available for any questions you should have. You have all the contacts at the end of the presentation press release. So feel free to call us. Thank you, and have a nice weekend.

Thank you. Bye.

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.