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

Hi, good afternoon, everybody. Thank you for joining the call for full-year 2023 results of Banca Sistema. I'm here with Gianluca Garbi, CEO of Banca Sistema; and Ilaria Bennati, CFO of Banca Sistema. I'm Christian Carrese. Before starting the call, I wanted to remind you that all the documents related to the results can be found on the bank's website www.bancasistema.it. Now I leave the floor to Gianluca. Please go ahead.

Thank you, Christian, and good afternoon to everybody. We are happy to announce a positive set of results, which allow us to register a profit in 2023 equal to EUR 16.5 million, which is better than the guidance that we provided on the first half result, which was embedding a full year net profit equal to about EUR 15 million. Despite the difficult interest rate environment for funding, the bank has been able to outperform peers in terms of new production supporting the growth in different business line and in particular, factoring and pawn broking business. The factoring, as you can see also in the Slide #2, the factoring turnover has grown 26% versus a market that declined -- that is less than 1% growth. On the other hand, the salary and pension guaranteed loan went down year-on-year due to the disposal and -- of some of these receivables, but also due to the first half weak performance in production due to our decision to reprice this product in order to cover the higher cost of funding. This trend has been reversed in the second half of 2023 as also the competition started to reprice this product, is also worth to highlight the positive trend of the SME and the state-guaranteed loan, which grew by 45% on a year-on-year basis. The growth in loan is even more important when it's compared to the increase in the cost of funding, which went up from 0.4% in 2022 to 2.8% at the end of '23 and negatively impacted the net interest income evolution. On this point, I would like also to stress the fact that we have reinforced our liquidity position. Our LCR moved from 271% to 547% which also not only the [ leverage cover ] ratio, but also we improve our funding mix in favor of retail and increase the retail funding duration from 12 months to 15 months. We have to pay a bill, but we are now in a much better position to take advantage of the future business opportunity. The disposal of part of the financial portfolio as we also announced in the previous months had a negative impact in terms of net interest income but was supported by trading income helping the bank to limit the overall revenue decrease to just 2.3%. The portfolio of government bond [ half ] in 2023 versus 2022. I would like also to highlight that the net interest income in the last part of the year, so in the -- in the fourth quarter of the year was the highest on the 3 quarter. Therefore, we start to see the first sign of a rebound. Let me also like the fact that the net interest income in factoring have reached the record ever for the bank. The asset quality is also excellent trend. We don't see sign of deterioration. And the cost of risk in 2023 was at 17 basis points versus 29 basis points of the previous year. Finally, in terms of capital position, this is also a very solid one with an improve of 40 basis points on a year-on-year basis and 75 basis points on a quarter-on-quarter basis, thanks to the RWA optimization, better earning and positive trend in held to collect and sell reserve. This level has also been seen as an excellent starting point for next business plan, which, as we already mentioned, will be presented by the end of the first half of this year and was supportive for the Board of Directors, which today decide not only to approve the numbers for 2023, but also to approve the proposal for a payment of dividend per share, the same level of last year, which means EUR 0.065 per share. Moving to the Slide #3, we show the breakdown of loan outstanding for factoring division, which marked a growth in the non-recourse loan, up 40%, a positive trend more pronounced in the first quarter -- in the last quarter of last -- big ticket, which, as you know, is typical in our business where big ticket tend to come towards the end of the year and a strong commercial effort. The tax receivable went up 43%, while the recourse loan slowed down the trend registered in the first 9 months at minus 7%. In terms of Obligor, as you can see also in the pie, there was a decrease in local health care organization and corporate vis-a-vis an increase in state/central administration. And the exposure overall towards public administration account for 82% of the total loan. If we move to the next Slide #4, the CQ outstanding went down by 14.4% as we were more cautioned in terms of the new production, which is dropped by 9.6% on a year-on-year basis. In details, in the first half of last year, we were very disciplined in terms of pricing, while we saw some of the competitor in this field that continue with a very aggressive price. The situation has reserved as I anticipated before, in the second part of the year with a positive sign in terms of new volume, which have increased of 9%. As for the pawn broking business, this, of course, is keep recording -- record in terms of both turnover and return and where the turnover grew by 13.7% on a year-on-year basis. And more and more transactions are now finalized to the digital app. We remind the business as also a very low capital absorption, consider that the collateral is for more than 90% represented by gold and almost 0 risk. At the beginning of January, we completed the listing of the Kruso Kapital, our subsidiary that include the pawn broking also but the auction house, which is now listed on the Euronext growth market. With Banca Sistema that's still keeping 17.5% of the total stake as we didn't sell any shares in the market and the dilution has been deriving only from the primary offer, which has been placed as what we consider very interesting price also for us. Furthermore, Kruso Kapital also announced at the end of last year, the acquisition of the pawn business in Portugal, which will be completed by the first half of this year and will help Kruso to grow faster and diversify the business from a geographical standpoint. Now I'll leave the floor to Ilaria to describe in detail the balance sheet and the P&L evolution. Thank you.

Thank you, Gianluca. Good afternoon to everybody. Let's now turn to Slide 5 where we comment the balance sheet. Looking at the table, total assets have increased compared to year-end '22 and to Q3 '23, despite the sharp reduction in the Govies' portfolio, indeed, around 620 million bonds classified in held to collect have been sold, of which 450 sold in Q4. The size of the Govies' portfolio booked in held to collect is now only EUR 61 million with an average duration of 43 months. The size of the held to collect and sell portfolio is pretty much unchanged and it's a residual average duration in 13 months. Its mark-to-market is still in negative territory but it has continued to improve over the months therefore, reducing the negative impact on the reserve on capital. The reduction in govies has been more than compensated by the growth of core business assets. Indeed, the factoring receivables have registered a big increase in Q4, exceeding EUR 2 billion at year end due to the seasonality of the business and as Gianluca mentioned to a few big transactions closed just before year end. The decreasing trend in CQ assets continued also on the back of asset disposal while pawn loans have increased, confirming a sustained and constant organic growth. On the liability side, due to banks has increased quarter on quarter driven by interbanking funding and is pretty much stable versus year end. Due to customers is stable compared to Q3, but it's the result of 2 opposite dynamics. On one side, funding through term deposit has continued its sustained growth, adding another EUR 300 million of stock. The increase in current accounts in Q4 has also had a positive impact on due to customers, but on the other side, the positioning of repo fund in the bond portfolio has been reduced to zero, which explain why the net result is a stable figure for due to customers. Debt securities has increased quarter on quarter due to higher utilization of structured funding. Both CQ, ABS and fiscal credit ABS. We'll add further color on funding later on in the presentation. Before that, we move on to discuss P&L on the next slide. Confirming the positive trend, on the previous quarters, interest income has registered a solid growth also in Q4 and as a result is 75% up year on year. The factoring business generated almost EUR 96 million interest income with a year-on-year increase of 69%. The fourth quarter has confirmed the outstanding performance of LPI from legal action. Legal LPI accounts for EUR 36.5 million in total compared to EUR 15.2 million in 2022. The breakdown is now the following. Accrual is worth 30 million compared to EUR 9.1 million in '22. Extra collection is worth EUR 6.5 million, while it was 5.7 million in 2022. We highlight a few components that have positively impacted the accrual figure in the financial year, EUR 6.4 million is the result of the change of the LPI rate which has been reset to 12.5% through a series of updates over the quarters with the last one done in Q4. EUR 3.7 million is the accrual of the EUR 40 per invoice compensation claim. This amount represents around 47% of the value of the credit that we have claimed so far and EUR 1.2 million is the result of the update of the accrual model which we have done in Q3. Still in the factoring space, also commercial receivables have continued to register a solid performance as new credits were further repriced upwards. Indeed, the gross yield of new commercial credits, excluding pharmaceutical in Q4 was 7.9%, which compares with 7.4% in Q3 and with 5.4% in Q4 '22. The repricing action is still ongoing and we expect to continue to see the effects in the coming months. VAT credits have improved both in terms of contribution to P&L and price yield. Overall, factoring margins on the outstanding stock increased therefore from Q3 and set at 7.1% for the whole 2023, which represents accumulated increase of 250 basis points from last year. In the CQ space, the interest income has slightly increased compared to last year and also the adjusted income margin is higher. Also thanks to a few sales of assets. The yield of new credits originated in Q4 was 5.3% compared to 3.5% in Q4 '22. However, it's still the case that the vast majority of CQ assets in the portfolio were originated before 2022 and therefore the average yield of the stock is much lower than the current market rates. Thanks to the new origination. However, the CQ margin on the outstanding stock has increased to 2.8% from 2.2% in 2022. Of the 3 businesses, pawn loans confirmed to be the best position to reprice assets. Indeed, its margin is now 19.6% compared to 16.4% last year. As a result of the [indiscernible] dynamics, consolidated gross margins of the 3 businesses have increased by 200 basis points since 2022, moving from 4.2% to the current 6.2%. As a final note, the contribution to the interest income of lines of businesses different from core business has constantly increased over the quarters, reaching EUR 49.5 million in total. This figure includes, among others, EUR 24 million from the Govies' portfolio compared to EUR 5.3 million in '22 and EUR 15.7 million from SME loans, which compares to EUR 7.1 million in 2022. We now move on to total income on Slide 7. Despite the strong performance of interest income, total income is still slightly down year on year due to lower net interest margin. However, if we look at the quarterly dynamics, both NII and total income seem to have bottomed in Q3. NII has increased in Q4, although the cost of funding was slightly higher than in Q3. If NII was only marginally up quarter-on-quarter, total income has registered a significant boost in Q4, mainly driven by a strong performance of government bonds and trading from ecobonus credits. The capital gain from the bond sale is worth a bit more than EUR 6 million, while the capital gain from ecobonus trading is worth EUR 3 million. This last one is now to be considered as a recurrent component of the revenues. Net commissions also play the role in the increase in total income. The 2 main offsetting drivers of the commission's evolutions are a significant increase in pawn loan commission and with an opposite effect, the increase of banking commissions linked to the growth of funding from term deposits abroad. Overall, net commissions are 18% up year on year. From the bottom pie charts, we can see that the relative contribution to total income of the 3 businesses is pretty stable quarter on quarter, but much different from last year. The factoring contribution to total income is 81% while pawn loans contribution is now 19%. We now turn to Page 8 to discuss cost. If we look at the cost evolution year on year, we registered an increase of 14%. The quarter-on-quarter increase is much higher than the trends seen over the first 3 quarters and this is due to the fact that in Q4, we have registered the few costs that are either no recurrent or accounted for on a cash basis. Specifically as regards to personal expenses, in Q4, we have set aside a provision for the whole bonus pool related to the financial year. Also in Q4, we had the heat of the contribution to deposit guarantee scheme which was worth EUR 4 million this year compared to EUR 1.6 million last year. In addition to that, in the last quarter, we had the impact of no recurring costs related to the IPO of Kruso Kapital and the acquisition made by Kruso Kapital of the pawn business in Portugal. All these items have caused operational costs to sharply increase in Q4 versus Q3. The overall year-on-year increase in the cost base was, however, also impacted by an increase in all other expenses spread throughout the year, driven by higher IT expenses, higher marketing costs and higher cost of legal collection. Also, personnel expenses increased year on year due to the higher number of FTE and the renewal of the labor contract. In addition to that, the 2022 figure was positively impacted by the release of variable compensation components which were in total worth EUR 2.2 million. Let's now move on to Slide 9 to discuss funding. Over the last quarter, we have continued to favor retail cost of funding which are currently cheaper than wholesale ones. The retail component has now reached 78% of total funding, up from 66% in September. As evidenced in the bottom right table, the amount of retail funding has reached EUR 3.1 billion, of which EUR 2.4 billion as term deposits and EUR 700 million as current accounts. The growth of term deposits in 2023 is remarkable with EUR 1 billion increase in the stock. 75% of the stock are foreign deposits while 25% are domestic ones. As indicated already in past calls and by Gianluca, we have switched most of our funding from corporates to individuals as the latter is by far more stable. The residual maturity of the total outstanding stock is now 15 months. As regards to wholesale funding, there are no changes to highlight. We still have the TLTRO in place and we are planning to reimburse it in different installments over 2024. As regards to cost of funding, the average cost of funding set to 2.8% for the whole 2023 which is 10 basis point lower than our expectations compared to market rates, we are still raising funds at a negative spread versus Euribor. The 2023 average funding cost was indeed 100 basis point lower than 12-month Euribor. With respect to the trend in future funding cost, the Q4 figure has only marginally increased versus Q3 and seems to have peaked. We expect the average funding cost for 2024 to be higher than the 2023 average cost, just as a consequence of the higher weight of funding raised in 2023, which was more expensive on the total stock, but otherwise the marginal cost of new funding in 2024 is expected to go down. I now hand the floor back to Gianluca to comment the quarterly results evolution.

Thank you, Ilaria. We added this Slide# 10 that was usually part of the appendix in our presentation simply because we would like to show the quarterly result evolution which confirm the negative trend in net interest income is slowing down and in the fourth quarter, we saw even an increase in net interest income quarter on quarter. We still expect some pressure in this item, but we start to see the stabilization. The positive contribution of fee and trading income boosted the total revenue to EUR 32 million in the quarter, helping to deliver the best quarter of the last 2 year and reducing the decline of the full-year 2023 revenue to just 2.3% which was partially compensated by the drag on net interest income due to the higher cost of funding and more difficult repricing on the CQ business. As I mentioned already before, in the first part of this presentation, the factoring recorded the highest net interest income margin since the creation of the bank. So at the end, the net profit of 2023 was equal to EUR16.5 million vis-a-vis the EUR 22 million in 2022, mainly to this decrease of net interest margin. If I move now to the Slide 11, the cost of risk as anticipated before was excellent in 2023 with 17 basis points versus 23 basis points registered in 2022 and we did not see major sign of asset quality deterioration. We further increased the coverage of municipality in conservatorship to 93.1% versus the 88% in 2022. If you move to the last slide which is the Slide# 12, the core Tier 1 and the total capital ratio improved on a quarter-on-quarter basis from 12.25% to 13% and from 15.4% to 16.2% respectively. The very positive result has been driven by earning of the 20 basis point positive trend in held to collect reserve of about 50 basis point and RWA reduction in factoring towards corporate of about 40 basis point which more than offset the increase on other factoring RWA, minus 15 basis points and trading in ecobonus was 15 basis point. We remind that the package of reforms to Basel III regulation will allow the neutralization of all or part of the held to collect reserve on government bond security. As soon as this will change -- this change will come into effect, there will be a positive effect on capital ratio which is about -- represents for us about 80 basis point on the core Tier 1 ratio. As highlighted in the press release, we are working as I said in the new business plan, which will be presented by the end of this first half quarter. Now I will ask if there is any question, so please go ahead if you have any question.

[Operator Instructions] The first question is from Fabrizio Bernardi of Intermonte.

Hello everybody, I have a few questions. One is, let's say pending the business plan presentation, there is a clear [ u-turn ] in NII. There are many moving parts. So repricing on one side, volumes on the other, and the cost of funding, that is, let's say growing but decelerating quarter on quarter. So I would like to ask if you can give us a guidance on this moving parts in terms of NII trend going forward? So what we can expect, I repeat, pending the business plan. I know that it may be too early to ask, but maybe you can give us some color? Then, as you pointed out, there are some one-off items in the cost base related to Kruso and more in general the pawn lending plus variable compensation. So even from this 10 point of view, maybe you can give us some items to understand how the OpEx can move. Last question is on the dividend policy. The payout is up, given that the dividend is the same, can we argue that the payout may remain at this level, you are planning maybe a dividend growing from time to time, even if stable. I know that there is not an official guidance on dividends, but this was, let's say, a nice surprise to see a flattish dividend in presence of a decreasing bottom line? Probably then obviously Kruso Kapital, there was the IPO. And so I was wondering, given that external growth is, let's say, the bias for growing this business, I would like to understand that if on top of the Portuguese acquisition, there is, let's say, something in the pipeline for 2024.

I will try to answer to all of them. So in term of NII, repricing will continue in all the business line. Also, because on the factoring, we start to see the effect of the repricing of the business that started since a while and this will continue over time. I would say that the ongoing business is fully repriced and there is no issue. What was -- as you know, while the average duration of the total factoring is around 10 months, we still have some tail that are related, for instance, of a city that are in a distress situation, which they do not bring any positive contribution on accrual basis to the NII. So in other words, when a city is in distress, we are not allowed to take accrual on LPI, even if LPI will continue to accrue. And this is by regulation, and we have to associate the cost of funding without any interest on the positive side. Some of the city come out from the distress during the last period and we expect that going forward, the number of distress has been -- of city in distress has been reduced compared also to the previous years. So we expect that this component of asset will also generate positive results. So the repricing will continue. And this repricing did not affect the volume, because one of the questions, remember, in the past has always been that if you increase the price, don't you see the drawback of a declining volume? Actually, we see that this is not the case. On the CQ, which is probably the most difficult part. As you saw in the presentation, we were able, thanks to the new production, to have a gross yield, a net yield on the CQ on average at 2.8%, which is equal to the cost of funding. But the reason is because the new production, while is made at positive pricing, is not able to compensate the back book, because the back book is the majority of the total outstanding. So while this repricing continue, it will take time to see a more positive contribution. So next year we may start to see a positive contribution, I would say on income margin, but not enough to cover the cost yet. Then, of course, this pretty much depends on where interest rate will go. The cost of funding, I would say that, as you saw, our [ NCR ] ratio is very high. We continue to raise money through retail, I would say in quite a lot, and we already have reduced twice our offer in the market. So we may be able, depending also on the decision of the ECB, to see more under control, further control of the cost of funding. The one-off cost pawn broking was basically 2, the IPO and Portugal, the acquisition of Portugal. About the variable compensation that hit the last quarter of the year is because we have a variable compensation with some gate, and gate -- one of the gate is driven also by the parameter of gross profit. Based on our forecast, after the second half of the year, we did not expect to reach the level of revenue that we -- that allowed to pay variable bonds. So what we have done was in the second -- from the third quarter to reverse all the variable component of the salary. And while what happened is that actually in particular in the last quarter of the year, thanks to the good result, the gate was passed. So what we have to do was to put back the variable component in the cost of a salary. So this had a negative impact, because rather than spreading this number in the full year, we have done the accrual on the first quarter, we had done the reversal on the following quarter because we did not expect to reach the target. And then we reached the target. And so we add on the cost, which I think that is also important to notice, because despite this variable cost of salary, despite the fact that we have to take the one-off, increase cost of salary, due to the renegotiation at the national level of the banking contract, we were able anyhow to close in term of net profit higher than what we had forecasted, okay. In term of dividend policy, in also the previous, I would say since the beginning of -- since the bank was listed, we have always said that we don't have a dividend policy. We always have paid 25% of the amount, but we don't have a dividend policy. In case there is a spare capital, certainly we will not be shy to adjust the dividend at the level. So what we have seen is that we have considered the fact that we had a regulatory capital that increased above our expectation. We have seen the last quarter of the year that outperform, which is a good starting point for 2024. And for this reason the board decided to pay the same amount of previous year to the shareholder, which implied that even in the future, if there is a space, we will be able to adjust the dividend in line with our need. This, we also took in consideration the acquisition of Portugal, the cost of acquisition of Portugal, and that's the reason why, despite the dividend payout, we are at the level that easily cover the capital required for the acquisition of -- in Portugal of Kruso Kapital. You asked last question, what next after the acquisition of Portugal? We keep scouting the opportunity. One of the things to mention is that we also acquired also another portfolio of pawn in Naples. So it's not only outside, but also in Italy, where we have done a press release last week, where we had done also another small acquisition also in Italy. We continue to scout the market at the national, at the international level. Portugal is a big acquisition, similar probably to the one that we have done in Italy within [ Teza ] Sao Paulo division. But there are potential other opportunity also in other part of the world.

[Operator Instructions] The next question is from Davide Rimini of Intesa Sanpaolo.

I would have just a few follow-up questions on the questions that have just been posed. One is on CQ business. You mentioned also during the presentation, if I'm not mistaken, sort of the competitive environment. And I was just wondering if you could add a few words on the level of competitions that you would expect and the pricing over the course of this year. And since you were talking about, we noticed that 2.8% is into the adjusted margin, the business is not yet covering its cost of funding. I was just wondering whether sort of during the course of the year, at which point, obviously, depending on interest rates, you would expect the book to be absorbed in a way in terms of profitability. And the second part of the follow-up questions is regarding the pawn business. And more specifically, when you talk about further opportunities, could you just -- you mean sort of in Portugal, aside of sort of what you mentioned earlier, sort of in Italy. So if you could add few words on the market in Portugal that you address now with this Portuguese acquisition.

Now in the CQ business in terms of competitive environment, basically what we have seen on the first part of the year is that the Bank of Italy average yield on the CQ business that is produced was not increasing at the same speed of the increased average cost of funding. This implied that in particular, some of large retail bank had continued to benefit from the low cost of funding because they did not adjust the reward to their client and they did not reprice the CQ product. We decided not to -- that we did not want to compete in that situation. So what we did, we start repricing in order to make sure that for us, the new production was in line with the cost of funding. And this caused a slowdown of turnover because you had in the market a lot of other players, in particular the one that are linked to a traditional bank that to cover some of the market share. What happened on the second part of the year is that, the liquidity and somehow probably also the cost of funding has been adjusted also on these other banks. And therefore the average that is published by Bank of Italy in term of overall yield on the product has increased. And in that environment we were able to increase our turnover. So there was, I would say, some delay in repricing coming from competitor, which, based on Bank of Italy data on the average yield, now seems to be -- not to be there any longer. In terms of -- the other question is about the fact that due to all the portfolio, the average interest income on the cost of funding, the cost of funding of the CQ is today, I would say covering this cost, but not creating margin. So we are flat on that level. And whether this will change in 2024. In 2024, we will continue the dynamic of the increase of the yield, but more importantly, the new production will wait more compare the old production at lower rate, and this will have a positive impact. On the other end, we expect the cost of funding in 2024 to be higher than the cost of funding of 2023. And how much higher? This pretty much also depend by the decision at the ECB. So we can have a turning point, a certain point this year where the margin will become positive to say when it depends on how much the new production will in relative term be higher than the old production and when -- where the cost of funding is going to end up in 2024. Based on the decision of the ECB, that, as you know, there is still a big gap from the -- what the ECB official member keeps saying and what the market think. Based on the ECB official position, we may not expect a decrease of interest rate before the first part of this year while the market is already pricing a cut on the second quarter of this year. And clearly we are depending on that level. So I'm not able to give you the answer when we will be able to move from a flat contribution to a positive contribution. In terms of the acquisition in Portugal, in Portugal I go by art and I'm sorry if I don't necessarily have all the full number in front of me. But I think that overall we are acquiring 13 branches with 60 employee and 3 million of net profit of the division. We are buying this business from another bank, where this other bank is specialized mainly in private banking. So the pawn broking for them didn't fit with their core of their client. So we are buying from another bank. We got -- they got the authorization from Bank of Portugal and now that they got the authorization from Bank of Portugal, we are able to ask the authorization. We are able to notify Bank of Italy on our side. So this is a significant acquisition. We are going to pay EUR 11 million in term of goodwill for this acquisition with a contribution that is quite positive. And now looking at the level where Kruso Kapital has been, IPO is going to be an accretive transaction for Kruso Kapital. In term of other market, we are looking both the acquisition of portfolio wherever in Europe. Clearly [ Iberic ] Peninsula could be more interesting. We are looking also some potential portfolio acquisition also in Italy. Then, as it happened for Portugal, we continue to scout opportunity in all the jurisdiction. Because in all the country, the pawn broking work exactly in the same way, where 90% is represented by gold and is exactly the same dynamics that we have in Italy. The difference between buying a branch or a business line or buying a portfolio, it depends pretty much by the size. Clearly, if we have a business with 60 employee, 13 branches, we buy an activity. If we have, like we have done recently, Naples was a smaller portfolio. What we did, we transferred the portfolio in our branch without necessity to buy another branch or a corporate.

Yes, thank you. The next question is a follow-up from Fabrizio Bernardi of Intermonte.

Hi again. 2 more questions, if I can. One is on the cost of risk, which is going well, better than expected. So maybe you can give us some color about this? Most of the banks are guiding on an improving cost of risk with default rates that are not deteriorating, at least now. And secondly, if you can give us, you mentioned before, Ilaria mentioned before that there is a part of the govies/portfolio disposals that may become, let's say, more recurring. So I was wondering, I know that it's not easy to assess trading gains and so on, but maybe you can give us the magnitude of this kind of activity.

Well, in term of cost of risk, I would say majority, as you see, of our exposure is toward public administration. So despite potential risk due to recession and so on, we have the Obligor that -- cannot default by law, which is the public administration. And for this reason when we take some provision, always these provisions are not driven by -- mainly by the deterioration of the Obligor, that cannot default. But they may happen that some of the receivable has been dispute. And because there's been a dispute on the receivable and the Obligor was right and the seller was wrong, then the seller was a corporate and the corporate was not able to pay us back. And so we have to take a provision from there. So our cost of risk is driven by that, or may also driven by some specific situation. But overall we don't see a deterioration, of course of the quality of the Obligor. And as I said before, even the cities that are in conservatorship, we observe that there's been a drop in numbers of a city in conservatorship during the last year. I don't know if this is a trend or not, but certainly reduce also this issue. In term of the size of the portfolio of government bond, we have always been opportunistic on government bonds and we've always seen the portfolio of government bonds helpful in our treasury activity, because we run a business where we may have a big portfolio to buy in a matter of few days, as I mentioned, the big ticket at the end of the year and so on. So using the buffer of a very active portfolio of government bonds, it can help our position and the possibility to have access to liquidity when we need it. Now we did not see -- we reduced our portfolio. We may increase the portfolio in the future if we see also opportunity, if we see that when there will be probably a better clear trend on when ECB is going to cut the rate and there will be some, maybe for external reason, some widening of the spread, which allow us to take the opportunity. We are always keen to jump in, how much in the past our portfolio easily reach more than EUR 1 billion. And I don't see why it's not going to be the same also in the future. I don't know if Ilaria would like to add something on that, just to complete the answer.

Yes. Thank you, Gianluca. In terms of how recurrent the revenues could be, when I made the comment that this part of income is from now on to be considered recurring, I was mainly referring to the capital gain we recorded from trading on ecobonus credits. It's absolutely what Gianluca mentioned about our trading activity on government bonds is absolutely confirmed. So we'll try to be opportunistic, but this is not going to become a line of business. While the trading activity in ecobonus credits is going to be for the future an important source of revenues. We only booked EUR 3 million in 2023 because we only started the trading activity in the last part of the year. But we intend to be more active in this space, and therefore the EUR 3 million will be -- would become a much bigger figure for 2024 income.

Okay, one last curiosity, if I can. Now in the CQ division, you have the back book that is barely profitable, let's say, to be easy, while the new business is under repricing and is more profitable. And now we are in a situation where rates are still high. So my curiosity is, if this kind of activity progress and the new, say, business becomes more, let's say, give a better contribution to the back book. And when rates go down, should we expect that the CQ portfolio may become extremely profitable? I mean, the other way around now is not the back book, maybe in the future, with very low or decreasing interest rate, this would become very productive.

I would say, yes. Your statement is correct, because we didn't lock the interest. And so it depends how fast the decrease of interest rate will arrive. Because if we have a fast decrease of interest rate, we will benefit. Because also the old portfolio will -- may move from not positive margin contribution into immediately a positive margin contribution, because there are all a fixed rate on top of the new portfolio. If the decline is going to be slow, then you still have the cost of funding that is higher compared to the revenue on the old portfolio, okay. And the old portfolio that has a yield that is in the area of 2% will go on at least for another couple of years. So of course, reducing over every month by month is reducing, but still -- we still have a component that has a negative contribution. Now if interest rate will drop more than expected, yes, of course, the business is fixed and so the increase of margin will be there for sure.

[Operator Instructions] The next question is a follow-up from Davide Rimini of Intesa Sanpaolo.

Just a couple of questions, follow-up questions, very much sort of top down. One was on the factoring volumes [indiscernible] and you despite sort of the strong performance versus the market accelerated in Q4 due to big ticket items. What we should expect, sort of this divergence? Should we expect versus the market, should we expect to continue during course of this year? And the second question is instead sort of on the pawn margin, which has been gradually sort of expanding. If you could give a sense of whether sort of the Portuguese business is different versus sort of your own business and whether sort of we should expect sort of that to be sort of enhancing within the margins of the division?

Well, on the first question, we have some big ticket at the end of last year on factoring. If we assume that this big ticket will not come in 2024, we expect in term of turnover to remain flat compared to 2023, which is EUR 5.5 billion of turnover. Clearly, the big ticket is always unpredictable because it's something that may come up at the last minute and depends by factor that are external to us. Today, we believe that the EUR 5.5 billion of turnover which bring us probably of the top ranking on being the largest bank or factoring company active in public administration in Italy, because as far as I know, nobody did the EUR 5.5 billion of turnover. So being conservative, I would assume that 2024 we do as much as 2023 to be on a conservative basis. In term of Portugal, I ask help from Ilaria because the EUR 3 million is what I do remember being the profitability, the net profit of the division of Portugal. The yield in Portugal is higher than the yield in Italy. So it's further higher than our 19.4%. And the average outstanding is the data that I don't remember that I ask if, Ilaria, you have in front of you, how much is the average outstanding of the asset we are buying in Portugal? Because with the average outstanding and EUR 3 million profit, you can immediately figure out how much profitable is the business in Portugal. Do you have that Ilaria in front of you, how much is this?

I don't have the precise outstanding in front of me. It's in the region of EUR 13 million, probably a bit more than that, EUR 13 million to 15 million. But just on clarification, in terms of net income contribution, we are estimating an yearly contribution, at least at the beginning of EUR 1 million net income. So clearly, the contribution to 2024 will depend on the timing of the closing of the acquisition. But overall, our estimate for the entire full year profits of the business is around EUR 1 million net profit. It's absolutely true that yields are higher, because really, EUR 1 million comes from an outstanding which is much smaller on a relative basis than our outstanding. And also from an operational standpoint, there is probably a lower cost base in Portugal than what we have here.

There's EUR 1 million net profit versus EUR 15 million outstanding.

So shall I assume, since you were mentioned, sort of a lower cost base? So the business is very much similar in cross countries, but there are sort of benchmarking analysis that can be made that can sort of derive a justification of a much higher yield in Portugal, right.

I think that the yield is slightly higher than in Italy. What is different from Italy is that the salary and the cost of premises is much lower in Portugal. The average cost per employee in Portugal is much less than our cost in Italy in general. In mean, if you ever go even for vacation in Portugal, in Lisbon, you take a taxi and you immediately figure out how cheaper is the life in Portugal compared to Italy.

And cost base is much lighter to run the business there rather than Italy?

Yes, correct. While interest rates are same, there is some bit more yield on the product. But what makes the business more interesting is the fact that this is a very labor intensive business. There are 60 employee in Portugal and the cost per employee is much lower than the cost per employee in Italy, including the office and the cost per branch in Portugal compared to Italy. So bottom line, you end up with higher bottom line compared to the outstanding. Because we have 120,000,000 outstanding nowadays in our pawn broking business and generate at the end of last year, if you take out all the extraordinary activity and so on, let's assume that the target today is about EUR 5 million. This is a part of the business plan that we also present for the IPO. So under EUR 20 million generate EUR 5 million net profit with some investment and so on. Portugal standalone is a EUR 15 million asset and EUR 1 million of net profit. Sorry about my EUR 3 million. I remember something different. The EUR 3 million was…

Theoretically, it's much sort of better to run sort of the business within the EU, right? Sort of in the low cost countries.

Yes, that's the reason why we are also in Greece.

[Operator Instructions] There are no more questions registered at this time.

Okay, thank you. Thank you everybody, and have a nice weekend. We'll talk at the next quarterly result. Thank you.

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