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 2024 Results Conference Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. [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.

Thank you, operator. I'm here with Banca Sistema CEO, Gianluca Garbi; and Banca Sistema CFO, Ilaria Bennati. Before we start the call, I would like to remind you that you can find a press release, presentation and the results database on our website, www.bancasistema.it under Investors Results and Presentation section. Finally, I would like to remind you also the safety day for the presentation of the new 3-year strategic plan, which we will present on May 20. Now I leave the floor to Gianluca Garbi, CEO of Banca Sistema.

Thank you, Christian, and good afternoon to everybody. I'm using the presentation that Christian just described where you can find it. I'm happy to comment starting from Slide line #2. I'm happy to comment a positive set of results, with the total income growing by about 6% on a year-on-year basis despite the increased cost of funding on a year-on-year basis. That achievement has been possible thanks to a positive commercial effort in all the business division to increase turnover and also spending. As a result, the factoring turnover grew in the quarter by 28% on a year-on-year basis, the Pawn loan by 12% on a year-on-year basis, the SME sales guarantee financing loan by 40% on a year-on-year basis. As far as for the CQ loan, despite the decrease of the outstanding by 11%, it's worth to realize that the positive commercial performance with new volume that was equal to €60 million in the quarter or up 50% compared to the same quarter of last year with an easy comparison linked to the fact that last year, the first half, we have done a sharp repricing of the new production losing some of the market share. In terms of the P&L, we provided, for the first time, the adjusted net interest income items, which is the sum of net interest income and trading from ecobonus, and Ilaria will describe more in details later on. We like you to look at this item from now on to have a more correct picture of revenue trend as the trading from ecobonus as cost in terms of interest expenses than recover in terms of the trading income. So the 2 components need to be seen together in terms of net interest income. So the adjusted net interest income decreased over 21% with higher cost of funding equal to 3.6% in the quarter versus 2% of the same period of last year, but also due to the fact that the quarter -- in the quarter, the bank has sold more product with IFP component. As a result, looking at the key component, we have an increase that has more than offset the decline of interest fees of 88%, which we don't think is the same nature, which is -- we don't think this is going to be the future run rate. But as I said before, we had for the period and more product that are fee driven rather than interest driven. The cost of risk was still prefigured at 17 basis points, we do not see any major asset quality deterioration. Our gross NPE stock improved in the quarter. The operating costs were flat on year-on-year. The pretax profit grew by 19% and at €7 million, and we closed the quarter with a net profit of €4.1 million. In terms of capital and liquidity, we confirm liquidity ratio well above the minimum requirement. We ended up with a core Tier 1 ratio at 12.7%, which would be equal to 13.4% once the new CRR directive on the neutralization of held-to-collect and sale portfolio reserve will be in place, which has been now approved by the parliament and needs only to be publicized on the European official gazette. We confirm also the funding mix that we registered at the end of last year with retail funding represent 76% of the total funding. Moving to the Slide #3 to go more in details of the factoring division. We showed the usual breakdown of the loan outstanding for factoring, which marked growth in recourse loan of 48%, but also in the nonrecourse component, which is 15%, more stable at the tax receivable. In terms of obligor, the public administration represents 71% of the total outstanding and loan for Ecobonus, about 9% of the total amount, which is equal to €183 million. On this point, I think it's worth to spend a few words as a newspaper as a member of the parliament, Italian Parliament and government started to talk about the possibility to increase the period according to which the tax credit can be used up to 10 years. Well, first of all, it seems based on the latest view that the -- this change is not going to be retroactive and therefore will not have any impact on the credit, and we start only from 2024. But second and more important, I would say that all the contracts that we have signed have the clause -- a specific clause of the change of law. Therefore, if any new law will intervene even retroactively, that can reduce the IRR, we will be entitled to ask to our counterparties to get back their credit, and we can offer an alternative, the possibility of buying back those credit, maintaining the IRR unchanged. So we don't see any major risk from our side, if any law will be in place, either it would be retroactive or not retroactive. The counterparty from whom we bought this receivable more than 50% are other banks and therefore, we will have this adjustment towards other banks or companies that are -- that have a good credit [Indiscernible]. In terms of profitability, those loans have an interesting IRR, and we expect that the first quarter of -- that there will be an increase in the contribution to the P&L in the coming quarters. Moving on to Slide #4. You can appreciate the double-digit growth of the pawn [ broking ] business, the -- our control entity, Kruso Kapital already announced the result. We just concluded the IPO in January last year, and we are in the process of completing the acquisition in Portugal that we already announced, that is going to happen on the second half of this year. As far as the CQ business, we already touched this point. I already mentioned something before. So the new volume were okay in terms of the quarter, the stock was flat. Profitability continues to be negative not to -- due to the new portfolio, but due to the old legacy portfolio that has a low fix rate, which reduces the yield of the entire portfolio and is not adequate to the remuneration to remunerate the cost of funding. Now I leave the floor to Ilaria to describe more in detail the balance sheet and the P&L evolution.

Thank you, Gianluca and good afternoon to everybody. Let's turn to comment on the balance sheet on Slide #5. Looking at the table, total assets has slightly decreased compared to year-end 2023, mainly driven by a reduction in factoring credits due to big big transactions originated towards the end of last year, carrying a very short duration, which have already been collected for the most part. The size of the Govies' portfolio has increased versus year-end as we started to rebuild the portfolio after the sale of the majority of the held to collect book in Q4 last year. The new floating rate bonds have been classified in the held-to-collect and sell book, which has now an average duration of 9 months, while the held-to-collect portfolio has an average duration of 4 months. It's negative mark-to-market -- its mark-to-market is negative for EUR 5.4 million. CQ and pawn loan assets are stable versus year-end and other assets include EUR 290 million Superbonus credits that we hold in the balance sheet, mostly for trading purposes. On the liability side, due to banks has decreased quarter-on-quarter as both ECB exposure and inter-banking funding decreased due to customers increase compared to Q4, driven by the increase in term deposits and increasing report, which more than offset the decrease in current accounts. Debt securities has decreased quarter-on-quarter due to lower utilization of structural funding will add further color on funding later on in the presentation. Before that, we move on to discuss P&L on the next slide. We have slightly changed the top end graph, which now shows a breakdown of total gross revenues, including interest income, commission income, gain for asset disposals related to the 3 core businesses and SME loans. The factoring figures from now on will include revenues from Superbonus. And consistently, also the factoring income margin includes revenues from Superbonus. Confirming the positive trend of the previous quarter, total gross income has continued its solid growth also in Q1, and as a result, is 51% up year-on-year. The factoring business has generated almost EUR 42 million income, marking a 62% year-on-year increase. Commercial receivables have positively contributed to the period income generation and LPI from legal action has confirmed the brilliant performance of the past quarter. Legal PI account for EUR 13.4 million in total compared to EUR 11.1 million in Q1 '23. The breakdown of the LPI is now the following: Accrual is worth EUR 10 million compared to EUR 9.1 million in Q1 '23, and extra collection is worth EUR 3.3 million, while it was EUR 2 million in Q1 '23. The accrual figure was boosted by the inclusion in the accrual perimeter of new credits with a significant backlog of LPI. On the other side, the contribution of the accrual of the EUR 40 stream per invoice compensation claim was negligible this quarter. As mentioned, a big focus of the origination activity of the factoring division was on the Superbonus product, which generated significant revenues. The contribution in the quarter was EUR 4.9 million, of which EUR 4.4 million generated by Superbonus assets held for trading. This amount, as commented by Gianluca, has been included in the adjusted NII, and it is going to be a recurring component of our revenues. The yield of new credits has continued to grow both for commercial receivables as well as fiscal credits. Indeed, the gross yield of the new commercial credits, excluding Pharmaceutical, in Q1 was 8.4%, which compares with 7.9% in Q4 and with 5.8% in Q1 '23, showing that the repricing action is still well ongoing. Overall, factoring margins on the outstanding stock stabilized in Q1 with respect to the whole 2023 and set at 7%, which, however, represents an increase of 150 basis points from Q1 last year. The 7% factoring margin also includes revenues from Superbonus, which have a 10 basis point accretion effect on the margins. In the CQ, the interest income has slightly decreased compared to last year as the effect of prepayment in the quarter was particularly severe. Also, the adjusted income margin is lower than the whole 2023, which had benefited from a few sales of assets. The CQ margin is flattish versus Q1 '23, although new credits continue to be originated at increasing yields. We have 5.4% compared to 4.6% in Q1 last year. However, the weight of the CQ assets originated before 2022 is still predominant in the portfolio. And therefore, the average yield of the stock is still much lower than current market rates. Of the 3 businesses, pawn loans confirm its outstanding ability to reprice assets. Indeed, its margin is now at 21.6% compared to 18.6% only a year ago. As a result of the described dynamics, consolidated gross margins of the 3 businesses have increased by 150 basis points since Q1 '23, moving from 5% to the current 6.5%. As a final note, the contribution to the P&L of the SME loans, although we all know it's not a core business for the bank. However, it has continued to increase, doubling from a year ago, reaching the current EUR 5.6 million. We now move on to total income on Slide 7. Q1 total income has increased 6% year-on-year, thanks to a positive contribution from factoring and pawn loans despite higher cost of funding and despite lower contribution from the CQ business. Adjusted NII, which as we said, is NII plus the result of trading Superbonus has decreased versus Q1 last year due to a higher cost of funding and a different portfolio mix. As Gianluca mentioned, in 2024, we have originated a bigger portion of factoring commission-based products whose revenues are not included in NII. Indeed, net commissions played a big role in the increase of total income as they are up 88% year-on-year even, as we said, by factoring commissions, which have registered a EUR 4 million increase versus last year. As mentioned already by Gianluca, this is not going to be recurrent, and it's pretty much related to a particularly strong origination of credits with a very short duration. Also, pawn loans commissions have had a solid growth year-on-year. Other income has grown as well year-on-year, thanks to a good performance of the Govies' portfolio, which is worth EUR 1.1 million as well as capital gain from factoring asset disposal, which is worth EUR 0.9 million. In line with previous calls, in the bottom pie chart, we represent the relative contribution to total income of the 3 business lines. The contribution of the factoring in pawn loans keeps growing, while the CQ total income has turned negative due to the negative net interest income on the legacy portfolio. We now move to Page 8 to discuss costs. Total operating costs are flat year-on-year as the increase in personnel expenses and administrative expenses have been compensated by the cancellation of the contribution to the Single Resolution Fund, which is no longer due. In Q1 2023 such a contribution was worth EUR 1.9 million. Personnel expenses are higher than Q1 last year due to higher number of FTEs and the impact of the renewal of the national labor contract, while administrative expenses have increased due to higher business-related costs such as, for example, factoring collection fees. Let's now move on to Slide 9 to discuss funding. In the first quarter, we have continued to favor retail forms of funding, which continue to be cheaper than wholesale ones. The retail component, as I said, is now 76% of total funding pretty much unchanged with respect to year-end. The amount of retail funding has slightly decreased in absolute terms, but just on the back of a large drop in current accounts from corporate. Actually, the spike in the current account figure as of year-end '23 was more an outlier in the trend of a deliberate reduction of funding from this source. On the contrary, term deposits have increased from EUR 2.4 billion to EUR 2.7 billion, all driven by the foreign component, while the domestic funding is stable. The relative percentage of foreign deposits on the total stock has increased to 80% and the residual maturity of the total of [ semi ] stock is unchanged at 15 months. As regard to wholesale funding, there are just a couple of comments to highlight. As regards to TLTRO, we have reimbursed EUR 193 million of the total borrowed amount in Q1 ahead of the maturity date in December. On the REPOs, they have increased with respect to year-end also driven by a larger size of the Govies' portfolio. And finally, over Q1, we have reimbursed the funding through [ BCVA ], which I remind you is the securitization backed by fiscal receivables. Before we finish, as regards to cost of funding, the average cost of funding set at 3.6% for Q1, higher than the whole 2023, but in line with our expectations. Compared to market rates, we're still raising funds at a negative spread versus [ Euribor ]. With respect to the trend in funding costs, the Q1 figure has marginally increased versus Q4 '23, which was at 3.3% and seems to have reached the plateau. We expect the average funding cost for 2024 indeed to be at current levels, which is 3.6% higher than the 2023 average cost. However, the marginal quarterly funding cost might slightly increase up to June. We are actually talking no more than 10 basis points and then should start to slowly trend downwards. As said, the average cost for the year is expected to be around the current levels, which is 3.6%. I now hand the floor back to Gianluca to comment asset quality and capital ratios.

Thank you, Ilaria. Now I'm in Slide #10. So the asset quality show a slight improvement on a quarter-to-quarter basis and to decrease in unlikely to pay and past due category. On a yearly basis, there was an increase mainly for some of the unlikely-to-pay position. As you can see from this slide, there is no pickup in the past due loan in the last 5 quarters. But even if you go back further, you will not see any real spike as we always apply the new definition of default in line with the guidelines provided by the regulator. I can be more precise if there is any question about the new definition of default during the Q&A session. In terms of the cost of risk, the cost of risk on the quarter confirmed the previous trend of 17 basis points. The Slide #11, you can see the capital ratio. So the core Tier 1 and the total capital ratio were slightly down to the increase of RWA to the factoring where we had more exposure to private corporate. The capital ratio, so more than 300 basis points vis-a-vis the RET requirement, which is 17.7% versus 9.4% of the Core Tier 1 ratio level. As I mentioned also before, the European apartment has approved finally, the CRR prudential filter confirming the sterilization of the held to collect and sell reserve on government bond. Therefore, on a pro forma basis, the core Tier 1 ratio would be equal to 13.4% and the total capital ratio will be equal to 16.5%. Let me conclude by mentioning again what Christian just said before that on the next 10th of May, we will present our new 3-year strategic plan, and we look forward to see you in this occasion as well. Now let me thank all of you for your attention, and we can move to the Q&A section.

Thank you. This is the Chorus Call conference operator. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Fabrizio Bernardi of Intermonte.

A few questions. We have seen a bank with certain problems during the last 2 days. I'm sure you don't want to comment on another player. But the question is if -- how confident you are on your RWAs. So to the question in very general terms, so you can give us the, let's say, the flavor of the color you want. Then another question about the stock of loans I got from Page 3 to Page 4. And I see that the outstanding loans in factoring are down. I remember you had a fantastic last quarter in 2023, while the CQ is going up slightly. And upon broking is going up as well. So maybe you can give us some color about which kind of trends we should expect going forward. We show that the asset quality is not deteriorating. So maybe you can give an update comment on the macro. And I mean, other banks have said that they don't see a deterioration. So your impression is -- would be great. And then on the Superbonus, I understand that you were some situation in which you could, let's say, offset the problem of moving the, let's say, maturity duration from 4 to 10 months. The question I'll ask you is different is -- what do you think about this kind of legal changes because it's not the first time that we see the government doing some, let's say, what I call banal mistakes about changing regulation onwards. So there is a loan. It was approved years ago and how they change. So I don't know, maybe you can tell us if we could expect something else because every time, it's a little bit of a mess for us on the brokering side, let's say. And then if I understood well, we are now at the peak at the plateau, let's say, as Ilaria said, about the cost of funding. So we may expect the NII line to go slightly better going forward. I know that there is a business plan in the pipeline. So I don't want you to anticipate something you don't want to say, but maybe some color would be good considering the situation. So considering the fact that you have a free business unit, of which one is a little bit struggling on the cost of funding.

Okay. Thank you for the question. I will leave the second question about the stock of loan at Page 3 and 4 and the pickup of cost of funding to Ilaria, I will comment to the other one. So vis-a-vis the confidence of WA or more broadly speaking, the application of the [Indiscernible]. Let me say that we had this -- we have discussed the impact in the introduction of the new definition of default in many of the previous call since the introduction of the new definition of default. And during this call, I remember that in several occasions, I was asked why our past due was higher than the one of other players. And my answer is, has always been that we apply the regulation coming from European Banking Authority and Bank of Italy, I think that may be conservative or I don't know, but certainly in what we believe that's the correct way. And we didn't know how it could have been that other player had such a low part due doing pretty much the same business. So based on this assumption, since the beginning, what we have done was to carefully consider the application of the new definition of default, and we did mainly 3 things. One, we reduce or even stop to buy receivable that could have a negative impact in the definition of default. Second, we apply all the possible remedies that the regulation, the guidelines of the European Banking Authority Bank of Italy allow us to use to suspend the calculation of the part due. Third, we have reached an agreement with an international fund that buy our receivable before they become overdue. And this is a revolving facility that we use every quarter. Thanks to all these actions, we ended up to be compliant with the regulation and be able to limit the overdue and limiting the overdue will mean also limiting the calendar provisioning. So this is the only thing that I would say about the new definition of default. And as I said, I will not comment about other players. But the difference that -- and as I said before, looking also the previous balance sheet since the start of the new definition of default, that's been -- there was always a gap, even though the assets were the same, the size the same, there was a gap on the past due and meaning probably the interpretation of some of the rules of the guidelines of the regulator. Clearly, if there is this issue and if you had a past due at that time, this -- after a period of time, they will become calendar provisioning. In terms of macro decoration, at the end, we are exposed towards mainly the public administration. But even when I look at the smaller -- because it's not a big portfolio of SME financing, so far, we didn't see any deterioration. So in terms of asset quality, I would say that even though we are a small player in this scheme, we didn't see any deterioration of the credit. In terms of the Superbonus, well, I start with the assumption that I don't trust the government and you correctly said that we already have seen in the past some change in the Superbonus in the regulation retroactively. And I refer in particular to the change that happened on the renewable energy incentive where at that time, the government decided to retroactively change those incentives. And as a result, there were several litigation and everything ended up to the Supreme Court constitutional court and the constitutional court defined that this change was legal because when there is a superior interest, which is protecting the government balance sheet, this prevail towards the individual interest. For this reason, not only for a few of the Superbonus but for the entire portfolio of Superbonus, we have included in the contract, this change of law clause. I don't think that there are many players that did it, probably nobody, I don't know, but we know that we have to turn down several transactions because some of the counterparty did not affect to introduce this change of law. So we are protected. As I said, I don't think that tonight, the government will introduce something retroactively. But there are other 4 years going forward. So maybe next year, a new government in 3 years time, they will see an issue on the deficit, and they will change the attractive. If I'm not mistaken, I think that the Superbonus law has been changed at 27x. So I'm not concerned because of the -- on one hand, our contractual construction. I'm not concerned because the control part that we have are all people that can afford it. I will also say that in the -- we have several contracts that has been done in 2 installments, which I'll make an example. I can say I buy the receivable for EUR 80, but I will give you only EUR 60 today. if the law doesn't change, I will pay you the difference at the time when I use this credit or I will sell it the credit. If the law change, this difference will become the indemnity that I will maintain as an adjustment of the price, making sure that my IRR will remain unchanged. So that is the situation. So I cannot -- I don't think that today there will be a change that was retroactive. I'm not 100% sure that in the next 4 years, there will not be a change that will be retroactive, of course. Clearly, more time will pass, less of an issue will be but never know what a government -- in our business, where we buy credit towards public administration, we learn that we cannot trust necessary public administration. So we need to work in an environment that we are able to protect ourselves towards also the risk of a change of law. Now I'll leave to Ilaria to answer to the other 2 points of the stock of loans outstanding and the cost of funding going forward.

Yes, sure. Thank you Gianluca. So regarding the outstanding, let's start from the factoring. The factoring of sending has decreased versus year-end, but that was mainly actually -- not mainly but only due to the fact that the year-end figure for factoring was boosted at the time by the origination of a few big transactions that, as I said, boosted the outstanding at year-end, but not the average outstanding for the year. And these assets had particularly a short duration. Most of them have already been collected, which is the reason why compared to the year-end figure, the factoring outstanding seems to have decreased. But that's the only reason as the origination, as we said, was particularly robust in the first quarter. This is going to be the case if we look at 2024 year-end figure for the factoring outstanding and we compare it to 2023 year-end figure. So the year-end outstanding for factory, we expect to be slightly lower than last year, but just for this reason. In terms of overall outstanding for the factoring division, which includes also the Superbonus assets. If we look at the 2 figures combined, the overall outstanding is going to be in line if not marginally higher for 2024 than for 2023. That's for the factoring. In terms of CQ, we expect the CQ outstanding to be around EUR 100 million lower at the year-end 2024. We expect to year-end 2023. This is due to the fact that as we discussed that we are going to be more selective in the origination of -- we have already been and we are still going to be more selective in the origination of CQ credits, which is going to be reflected in the fact that the outstanding is going to be lower than in the past. We finish with the pawn loans, the outstanding for pawn loans is expected to increase at a steady rate we compared to the past. We believe the year-end figure is going to be just slightly less than 30% higher than last year. This figure will include also around 14 million credits that will be acquired for the acquisition of the Portuguese business.

Sorry, if I can top up one more question. You introduced the adjusted net income, which is the more or less a sum of NII and Superbonus trading. Maybe you can give us a trend for the whole figure. And then you can split the 2 items in order to tell how they may be going?

Yes, yes. I was going to do that in picking up your second question. So we commented together the funding cost and the trend for adjusted NII. So if we start from the funding cost, we said that this is going to be more or less stable at around these levels, which means that interest expenses for the following quarters are expected to be stable at around current levels, if not marginally higher. So imagine they are stable. On the interest income, we expect to have an increase, but without including the income from Superbonus, the nonadjusted net interest income is not going to be -- to increase compared to last year figure because as Gianluca mentioned and as we mentioned again in commenting the P&L, the Superbonus credits are going to be funded through interest expense. So we absolutely -- we need to include the revenues from Superbonus. That's why going forward, we look at the adjusted net interest income. This figure is going to increase steadily over the quarters and to reach year-end level, which is higher -- double digits higher with respect to 2023. The same is, of course, valid going to be valid for the total income figure. But because you mentioned the adjusted NII, the answer is that, yes, 2024 year-end NII is going to be higher than 2023 year-end NII. Regarding the contribution of the Superbonus trading, we mentioned it to be just a trading component, EUR 4.4 million. This is going to increase over the quarters, reaching an amount which could be perhaps almost for the last quarter, double the current level.

The next question is from Luigi Tramontana of Banca Akros.

Regarding the adjusted income margin, you changed a little bit your methodology. As far as I remember, on the CQ, the adjusted income margin was 2.8% at the end of last year. Is it due to the portfolios that you sold last year, which explains this drop in Q1? And do you plan to sell additional portfolios this year on this business given that it is loss-making. And then a question on your your costs, if there were any nonrecurring costs in Q1 due to listing of Kruso Kapital? And finally, on the cost of risk, if you have any indication for the full year?

Well, quickly, I would say, on the CQ, I think that the drop is mainly driven by the prepayment and not by the sale of assets, even though going forward, we are going to sell assets, but I will let eventually Ilaria to comment more. Second point, yes, there are some one-off costs in the first quarter of the year, which is the IPO of Kruso Kapital and part of the cost of the acquisition of Portugal activity for Kruso Kapital. In terms of cost of risk, I think our target is always to remain below the 30 basis points but I will leave maybe to Ilaria to comment more.

Yes, sure. Relating the question on CQ margins, it's correct. The Q1 margins have been affected by a more severe prepayment effect than expected. It's also true that if we compare CQ margins not with Q1 2023, but with the average 2023 margins, the comparison is not even because over 2023, we had some asset sales that have boosted the margins. Yes, we are still going to carry out asset sales in the CQ space this year. In terms of contribution to P&L, we are not expecting the effect to be massive. So we expect something which is pretty much in line with what we had last year. Yes, I confirm what Gianluca said regarding the noncurrent costs in Q1. These were the 2 sources of nonrecurring costs. So it's all related to the pawn loan business. However, in terms of -- in absolute terms, these were not going -- these are not massive. So they didn't really play a significant role in the cost base for Q1. Overall, for 2024, we can expect the cost line to go up because we are investing in the business.