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 2024-2026 Business Plan Conference Call. [Operator Instructions]. At this time, I would like to turn the conference over to Mr. Gianluca Garbi, CEO of Banca Sistema. Please go ahead, sir.

Thank you for joining 2024-2026 Banca Sistema Strategic Plan Presentation. I am Gianluca Garbi, CEO of Banca Sistema. I'm here with Ilaria Bennati, CFO of the Group; and Christian Carrese, Head of IR Team. Before we start, I remind you that the presentation is on our website, bancasistema.it. On Page 2, today's agenda, which includes a brief overview of our growth path since the group was born. What were the main achievements of the last 2021-2023 plan, the background to the new 2024-2026 plan, the strategic levers on which the plan is based and finally, the financial 2024, 2026 KPIs. Let's start with Slide 4. In this slide, we wanted to give a brief summary of what the bank has done since its inception in 2011. The core business is and remains Factoring. But over the years, the bank has evolved. First, by launching online retail funding, which now accounts for 72% of total funding with a high component coming from foreign channels than by entering the tax receivables business. And in 2014, the salary and pension-backed loans business. In 2015, the IPO, the growth in the salary-backed loans business through acquisition and the first wholesale bond issuance. In 2016, we started the Pawn Broking business, which brought to the creation of our subsidiary, Kruso Kapital, which in January 2024 has been listed to the EGM segment. The [ Field Rules ] that has characterized Banca Sistema over the years as specialty finance has always been the attempt to attack market niches, having high returns and low risk. Moving to Slide 5, we can see how the bank has always shown the ability to grow and outperform the market in the business segments in which it operates. The Factoring division, for example, recorded a turnover CAGR growth over the period 2011, 2023 of 39% with 2023 being the record year in both volumes and profitability. Kruso Kapital Pawn Loans division also did very well. Born from scratch generated strong volume growth and confirmed double-digits growth in 2023 as well. The company has begun a process of internationalization that has led it to open operations in Greece and will soon consolidate the acquisition already announced in Portugal. Finally, the CQ division has grown both internally and externally through the expansion of the agent network and acquisitions. It was born from the need to diversify business lines outstanding since its inception has grown at a CAGR of 58%. In the last 3 years, it has experienced a decline in loans due to our more selective approach in terms of origination. This was done in light of the changed interest rate environment and more portfolio disposals. In the next Slide 6. As we said, the focus of Banca Sistema is to develop business niches that have low credit risk such as Factoring to PA or salary and pension guaranteed loans, which are guaranteed by insurance policy and 1/5 of the salary or finally, the Pawn Broking business, which has gold as collateral with virtually 0 default rates. All this has been expressed in a low cost of risk, 35 basis points on average over the period 2015, 2023 in Aurora that has always been double digit. And even in the last 3 years of the previous plan has grown if we exclude the negative contribution from the salary-guaranteed loans business. This has allowed in the last 9 years since listing to maintain a solid capital and always distribute to shareholders a dividend that, on average, has guaranteed a yield of 4% through the cycle. Let's analyze the results of the previous 2021, 2023 plan on Slide 8. In the 2021, 2023 period, the sudden rise in rates inevitably impacted our cost of funding, but we managed to offset it with solid loan growth, plus 4.6% CAGR, 21-23 dynamic treasury management, effective repricing of Factoring and Pawn Loans. Revenues declined slightly due mainly to salary guaranteed loans and in particular, to its back book at fixed rates, whose yield was not adequate to the changed market rate conditions. In the following Slide 9, you can see how the adjusted income margin calculated as gross revenues on average loans, net of treasury increased in the previous plan to 6.2%. The cost income increased to 61%, while the Rorac decreased to 8%. These indicators were negatively impacted by the lower margin of salary and pension guaranteed loans, which had an adjusted income margin of 2.8% and an operating loss at the end of 2023. Group Rorac, net of the salary and pension guaranteed loans division would have been increasing over the plan period from 11% in 2021 to 17% in 2023. On the balance sheet side, the NPE ratio fell to 7%, CET1 ratio rose to almost 13%, and the cost of risk confirmed the quality of our loans, which have a moderate credit risk profile. Slide 10 shows the commercial performance and profitability of the 3 businesses. Factoring grew both in terms of turnover and profitability, recording record profits of EUR 26 million in 2023. The CQ division, on the other hand, due to the legacy portfolio recorded a sharp decrease in revenues and the loss in 2023 equal to EUR 11 million. Pawn Broking, which, although still has a limited size in terms of lending is showing steady growth in profits. It is clear from this slide that without the negative impact of the CQ back book, the bank is alive and kicking. Looking at the composition of the loan book in Slide 11, about 70% is represented by Factoring receivables, about 25% by CQ receivables and the remaining by the Pawn Broking business. Factoring presents high predictability being turnover composed of 25% revolving contracts and 30% recurring customers. It also exhibits high asset turnover and has high standing counterparties, such as public administration or as in the case of corporates, there is insurance to back the credit. Kruso Kapital operates against collateral, mainly gold that represents 90% of the total. Finally, the CQ division has a historically low risk profile but has been impacted by rising rates and needs greater scale to be profitable. As anticipated, the group Rorac of 8% in 2023. Net of the CQ component would have been 17%, and we expect the gradual recovery of CQ to give a boost to group profitability. Let us turn them to the context of the new business plan from Slide 13, where you can see our strategic goals for the next 3 years, we want to do better what we do well, which is to continue to focus on our niches, consolidating leadership in the Factoring and Pawn Broking segments to bring out the economic value, which is currently off balance. We want to enable the evolution of the CQ business unit into a retail business unit, offering a full suite of services through the distribution of other retail products through Banca Sistema's commercial platform with no consumptions of capital. We will work to make the operating machine more efficient. And finally, we will take actions to put in place the conditions to create a managerial buffer through the enhancement of existing collateral. The underlying basic assumptions of the plan on Slide 14 are a gradual GDP recovery below 1% in 2026, a gradual decrease in inflation rate, 1.6% by 2026 and a decrease in average 3 months Euribor, which is expected to be at 2.2% by 2026. Looking at Slide 15, we see how in the previous plan, we had a drop in profitability due to CQ division. But on the other hand, it's worth to highlight, we had strengthened the balance sheet and liquidity ratios. In the next 3 years, we are convinced to recover our previous profitability path, doubling net profit, thanks to CQ recovery and further improvement in Factoring and Pawn Loans businesses. I said we are convinced to deliver such a result as you can appreciate from Slide 16 of the nearly EUR 600 million in gross revenues, not including treasury, about 70%, 75% comes from initiatives already addressed with low execution risk and the remaining 25%, 30% cumulated revenues from initiatives under implementation. It's worth again to highlight how a big part of our business is recurring and some revenues are already in-house, for instance, late payment interests. Let's go to our ambitions and guidelines in Slide 18. The key operational objectives of the 2024, 2026 plan are to consolidate our position in the Factoring business as market leader to continue the fast-paced growth of the Pawn Broking business and to recover profitability in CQ business through the amortization of the back-book and increase of adjusted margin through new production at higher yields. The turnaround of the CQ division will also pass through refocusing the business unit into a wider focused retail business. We will realize our objectives with an ESG approach and utilizing the support of AI to simplify processes and improve origination. Let's move to Slide 19. One of the bank's watch words has been diversification. This has also been the case with Factoring. We started with only health care receivables, then PA trade receivables, then tax receivables, including the Superbonus and finally, private debtors and the entertainment world, a mix of public administration, private and football always trying to combine volumes, profitability and efficient capital employment. We added also third-party servicing and securitization vehicles servicing. In the beginning, revenues were derived almost exclusively from the originator. And today, there is also an important component paid by the borrower. Over the next 3 years, we want to continue with the provision of state guaranteed financing only to our Factoring clients, Superbonus-related credits, third-party account receivables, Intercept credits arising from the PRR counteract the effect of the likely decline in rates with repricing activity, maintain a high share of PA receivables and acquired turnover, develop activity on entertainment receivables, strengthened distribution agreements with third parties continued growth abroad, in particular, Spain and Portugal, grow further in the collection of late payments, interest and indemnity. Finally, starting in 2025, reduced loans disposals through insurance policies to optimize capital absorption. Turnover then in business plan horizon, despite a 2023 baseline inflated by some big ticket items is expected to grow at 1.5% CAGR with margins pretty stable. Moving to Slide 20. The CQ division is called to recover profitability that will go through acceleration of CQ back-book amortization and repricing of new production. We are targeting the evolution of CQ business unit into a retail business unit, which will distribute third-party retail products through agreements with major players. You will see more in the next slide, CQ through our own platform. We will make more efficient the division through cost optimization and repricing. All these actions will be completed without allocating more capital to the division. Today, the division already distributes third-party products, as you can see in Slide 21, through agreements in personal loans, mortgages, lifetime loans. We want to develop agreements with third parties also to distribute long-term rent and leasing products, PMI loans according to an originate to distribute model. According to our projections, the average CQ loans should decrease in the next 3 years by 7.2%, while the adjusted income margin should increase by almost 2 percentage points. At the same time, we will consider any initiative that prompts to a consolidation of this business. Moving now to Slide 22. Kruso Kapital is expected to continue the fast-paced growth registered in the last few years through organic growth and completing the integration of the acquisition recently announced in Portugal, likely to be done in the second half of 2024. We believe the Pawn Broking business can be exploited also abroad. We have already opened a branch in Greece, and we look at the Iberian Peninsula with interest but also any other countries that accelerate our internationalization. We also believe that the digitalization of the process can increase the Pawn Loans reference market. And we have already completed investments to be ready to catch this opportunity. In the plan, we have assumed gold price to be flat. Any increase of the commodity would be positive in terms of loans growth. Kruso Kapital is listed on the EGM segment. And in case of M&A, we have one more option to our bow that is listed paper that can be used. Today, Banca Sistema holds 70% of Kruso Kapital. In the planned horizon, we expect growth in average loans of 14.2% or 10.5% on a pro forma basis, including the acquisition in Portugal. In terms of adjusted income margin, we expect an increase in the yield by approximately 150 basis points by 2026. Let's now talk about capital in Slide 23. This is one of the pillars of the plan as we want to further optimize capital position through targeted actions on existing assets in our balance sheet to reduce capital absorption. The capital managerial buffer we expect by the end of the plan amounts to approximately 150, 200 basis points compared to the target TCR threshold, including the countercyclical reserve expected between 2024 and 2025 and equivalent to EUR 25 million, EUR 30 million. How to use it? It can be used to invest in short-term assets, for example, Factoring to private sector, which have short durations or to make accretive acquisitions, for example, in Pawn Loans business. The buffer will give us also the possibility to invest in digital transformation, for example, Generative AI, digitalization of the processes and/or give more flexibility on shareholders' remuneration. Moving to next slide. It's worth to highlight the ESG activities. We assigned the coordination of ESG activities to risk and sustainability department. As far as the credit sustainability, we will support the green transition of companies by assigning ratings produced by third parties. We will also take actions to increase diversity and continuously monitoring the gender pay gap. As for artificial intelligence, we will make investments to support Board of Directors, IR and marketing activities with a multi-language approach. We will improve data analysis to support lead origination. We will optimize pricing process. And finally, we see positive outcome to improve recruitment and evaluation processes. We also see positive implications for compliance and risk management functions as through AI, we can make remote KYC and improve fraud prevention. We can do data analysis on clients and debtors behavior to reduce default risk. Finally, we see room to improve back office activities, simplifying and accelerating the processes. We are now moving to the final part of our presentation. In Slide 26, you can see the financial targets and KPIs. Average net customer loans and Super bonus to 2026 are expected to grow at the CAGR 23, 26 equal to 4%, thanks to the positive trend in Factoring and Pawn Loan business. Total gross income, which do not include the contribution from treasury, are expected to grow by a CAGR 23, 26 equal to 9% in thanks to margin recovery, positive contribution from the CQ division due to back book amortization effect. In terms of marginality, adjusted income margin is expected to grow by about 1 percentage point. In Slide 27, we show our expectations in terms of funding mix with a rebalance between retail and wholesale funding with the latter expected to represent 31% of the total. As for cost of funding at the end of the plan, we expect to be pretty in line with 2023 level. We would like to remind you that in the first quarter 2024 results just presented, we showed a cost of funding of 3.6%. So we expect that it may slightly decrease at the end of the plan. In Slide 28, we show the contributions of the different divisions that will allow us to grow total income from EUR 103 million to EUR 149 million and net income from EUR 16.5 million to EUR 33.8 million. All divisions will make a positive contribution compared to 2023. It should be noted that the CQ division will also contribute EUR 7 million to the profit growth compared to 2023 when it made a loss of EUR 11 million. We expect Factoring to exceed the record profits of 2023 as well as Pawn Loans to continue to grow, thanks in part to the acquisition we are making in Portugal and which in 2023, generated profits of about EUR 1 million. Group Rorac then is expected to rise from 8% in 2023 to 16% in 2024. It should be noted that Rorac is calculated on the basis of a TCR capital benchmark of 15% from a capital perspective. Moving to Slide 29. We estimate that profits generated in the planned horizon can more than offset RWA growth. Capital relief actions should, according to our projections, free up 150, 200 basis points of capital, which will give us more financial flexibility for our core business and investments. In our planned projections, we have assumed a dividend payout at 25%. In Slide 30, we have the group's financial KPIs, which predict CAGR 23, 26% growth in total income of almost 13%. Adjusted income margin improvement of 1 percentage point, cost-income ratio expected to fall from 61% to 57% against CAGR 23, 26% growth in operating costs of almost 7%. These dynamics will increase profit from EUR 16.5 million to EUR 33.8 million, with a CAGR 26% growth of 27%. Rorac then is expected to rise from 8% to 16% road from 9% to 15%. And Cost of risk on Slide 31 is expected to slightly increase from 17 to 19 basis points at the end of the plan due to the actions we will take aimed at mitigating credit risk. Total capital ratio and CET1 ratio are expected to be 18.5% and 15.3%, respectively. Regarding the remuneration policy, we expect to be able to distribute EUR 18 million cumulative dividends over the plan period, which compares with the EUR 16 million distributed over the previous plan period. We, therefore, are planning to increase dividend payout by plus 10%. But at the same time, we expect to be able to increase capital by almost 250 basis points vis-a-vis 2023 level, which means that by the end of the plan, we will have higher managerial buffers, which will give us higher financial flexibility. Thank you all for your attention. And now I leave the floor to my principal, Gianluca. Please go ahead. Well, let me thank to my avatar, which has been created with the use of artificial intelligence. And now let's turn to the Q&A session.

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

Some questions to reconcile the different moving parts of your plan. Starting from the assumptions, I see that you expect a reduction of the average 3 months Euribor of about 140 bps in the planned horizon, while your funding costs compared to Q1 this year should be down on the 85 bps, why is that? Why do you think that your funding costs will be higher than the average Euribor at the end of the plan? You said that you are remixing your funding sources. Is it due to a longer duration or are there other elements? Second question is on your evolution of the Secure division into a full retail division where you are planning a very significant boost in terms of gross margin, so 170 bps of higher income margin. Can you please give us some details, given that the competition level in the retail arena is pretty higher than the niche markets where you've been concentrated up to now? How do you plan to activate the different agreements there? And how will the distribution be realized, given that you don't have a branch network? Do you do plan distribution mainly digitally based? And how do you think to develop in this direction? Then on the Factoring business, which will remain your core activity, you expect a reduction in the gross margin of about 30 bps in the plan horizon, so much less than the evolution of the official rates. Once again, do you have any details that you can share with us regarding this element? And finally, regarding your capital optimization which are the actions that you are going to take there. You said that you are going to increase the collateralization of your lending book. Can you please give us some details?

Let me start to answer some of the questions and then I leave the floor to Ilaria. I will start with the second question about the CQ business. The driver for the increase of the yield actually is not because of the more third-party product. But it's simply because currently, 80% of our asset, our outstanding is related to the back book portfolio, 20% is the new portfolio. At the end of the plan, it will be the other way around. So we'll have only 20% of the old portfolio, while the 80% is represented by the new portfolio. And the new portfolio is coming in with the yield that is above 5%. And that's the reason why this change of mix between back book and new portfolio will increase the overall yield. While the other product, which, by the way, are going to be distributed to our existing network of agent and already started to be distributed. So already last year, we really had several million of personal loan that has been secured through our network of agents. We already started with the mortgages. The reverse mortgages are starting in these days and leasing our long-term rental product that our network agents are able to distribute. This is something that is going to contribute less than EUR 1 million over the period. So it's not going to be the main driver of the change of yield. So the main driver is fact that the old portfolio is going to mature and decrease with a small tail at the end of the third year and the new coming in portfolio has a much higher yield and these 2 components make the different mix. In terms of the Factoring business, the small decline of 20 basis points, taking consideration one big part that is part of the LPI. As you can appreciate from the Slide #16, from 70% to 75% of our revenue has been already addressed. Part of this revenue are coming from LPI that we already have accumulated over the period. So EUR 159 million is the amount of LPI being cumulated, and we expect that EUR 22 million will come through the P&L from those municipalities that a few years ago, went to conservative ship. And one after the other are coming out from conservative ship and these LPI, which has not been going through our P&L are coming through the P&L and will positively contribute to the cumulative revenue of the Factoring. So despite the target there will be some decreasing of the yield in line with the market interest, there is this safe box that we have accumulated over the period of the years that are all these municipality and conservative ship that little by little, are coming out from this situation, and they are going to pay the LPI. And this is only done when they come out from the conservative ship. I would say that this is a prudent assumption because we assume that only a small portion of the municipality will exit even though based on the aging, probably there will be more. But we have assumed only EUR 22 million coming from that. In terms of capital relief, we are working in different direction; insurance that can be used for some of the products starting from the secure that can be reassured and release further the capital consumption. So reducing from the current 35% to a lower RWA, thanks to that as well as Factoring where, thanks to the credit insurance can have a lower consumption of capital. The cost of funding, which was your first question, actually, I will leave to Ilaria but in a nutshell, it's because we have assumed that the reduction of interest rate will start from the half of this year. But our term deposit that have an average duration of 15 months has been in our book. And therefore, before our average cost of the deposit will start to go down, it will take some time. And that's the reason one we have assumed prudent reduction of the cost of funding. Then, of course, will depend also on the ECB assortment. So if there will be a much sharper reduction or faster reduction compared to what is the situation today, probably our cost of funding can become even lower. But just to be on the safe side, we have remained with the assumption to be conservative and to maintain pretty much the same cost of funding. But I will leave Ilaria to further comment on all these 4 questions.

I'll add a couple of details what Gianluca has mentioned regarding the cost of funding. First of all, in terms of basic assumptions, if we look at Page 14, where we highlight a few assumptions underlying our projections, it's true that you're right, 3 months Euribor is expected to decrease over the plan horizon, definitely in terms of Euribor point in time, which means at each year-end. But if we look at the average Euribor for each financial year, we can see that, for example, in 2024, the average 3 months Euribor is expected to be higher than the average 3 months Euribor in 2023 because the which the rates cut are expected to occur is different from the pace at which rates have increased during 2023. So in a way, just looking at these figures, it's natural that also from, say, a wholesale component average funding cost for 2024 is higher than average funding cost for 2023, which is exactly the case, as Gianluca mentioned during the core presentation, we have already announced that in Q1 '24, average funding cost was at 3.6% compared to the 2.8% prevailing in 2023. In general, site a couple of other leases we can say, finish in terms of funding and cost of funding. As you can see from the presentation, our funding structure will continue to be well balanced between retail and wholesale sources. The retail funding, however, will remain the predominant source of funding the plan horizon, although the wholesale component will slightly increase from the lowest level that we have seen at the end of 2023. So our average funding cost will basically be driven by the evolution of the retail funding costs. Within each component or retail and wholesale, we do not expect any significant changes in terms of specific funding sources. And as you know already, we will reimburse the full TL TRO during 2024 ahead of its final expiry in December. In terms of cost of funding, if we compare 2023 and 2026, the average cost is about flat, so 0.8% and we end up at 2.8% again in 2023. However, in the trajectory up to 2026, we will have an increase in the first part of the plan horizon and then a decrease. So the funding cost will peak at 3.6% in 2024. And then slowly start to decrease down to 2.8%. In terms of reason why the retail funding cost will lower adjust to the evolution market rates, the reason is exactly what Gianluca mentioned that we have got some bulk of retail funding stock that has an average funding cost take on rate higher than even current market rates and that will have an impact up to 2026.

Just a brief follow-up on the LPIs that you booked in 2023 to understand how this compares to the EUR 22 million you named just some minutes ago.

The EUR 22 million that Gianluca mentioned is just a portion of the LPI component that will be recorded in the P&L over the plan horizon. This is just an abstract of the EUR 159 million of LPI, which have been already accrued, but have not been recorded in the P&L yet. This 159 stock is composed on one side by LPI accrued on positions that are related municipalities in conservatorship, which by our accounting policy are not eligible to be accrued in P&L. And another portion that contribute to the EUR 159 million stock is the component of LPI accrued already so far in terms of accessory rights that have been already accrued on the positions. We have in the balance sheet that have not been recorded in P&L because our accounting model allows only for a limited portion of crude LPI to be recorded in P&L. You know that more or less, we account for a little bit more than 50% of accrued LPI in P&L. So the remaining part will go to P&L either on a cash basis or on an accrual basis, if there is going to be any change to the model. So the EUR 22 million that Gianluca mentioned is a portion of this EUR 159 million stock that will be recorded in P&L, which are related to LPI accrued on positions related to municipalities in conservatorship, which, as of 31 December 2023, so end of 2023, amounted to EUR 105 million and which at the end of the first quarter 2024 amounted to EUR 88 million.

Give you another information is that the city that entered into conservatorship there was a peak that from 2016 to 2020. And since 2020, there is a continuous reduction in terms of number of cities that enter into conservative ship. So looking at the future because this peak from 2016, 2020, this is the period that usually is a 5-year period will get to the end. And therefore, when they exit the conservative ship, this will be treated like all the other cities, and this will start to pay the LPI. We already had experience from that. And so I would say, it's natural to see this LPI to come through to the P&L.

The next question is from Davide Rimini of Intesa Sanpaolo.

I have a few questions, if I may. The first is on the Slide 19. And more specifically on the compounded growth that you have assumed in terms of turnover in the Factoring, whether you might this 1.5%, whether you might ask you work the historical performance, if I'm not mistaken, has been stronger than that. The second question is regarding so far as I understand that over the last few quarters, a stronger component in terms of activity has come from the Ecobonus trading activities. And I just wonder whether you would be extrapolating out of the financial target, how much it will come from that activities. The third question would be instead if you could highlight whether sort out of this EUR 34 million net income target, if is any contribution in terms of treasury activities? And lastly, a bit of a follow-up on the cost of risk assumption over the plan.

Let me start, and then I'll leave to Ilaria to further elaborate. In terms of the turnover, the base where we start 2023, we said that this has been inflated by some big ticket that happened at the end of the year. So this EUR 5.6 million is not the average outstanding of 2023, but is end of the year standing 2023, and therefore, there was a big ticket that took place actually at the last few days of the year, which by the way we have already collected the full amount. For this reason the number may look conservative at 1.5%. But on average, we see a trend slightly less than in the past, but not much less than in the past. So it's simply because we look at the end of the year data and at the end of 2023, we have this big ticket. The Ecobonus, as I mentioned in the slide in the Slide 16, almost all the Ecobonus has been already acquired. So these are assets that are already in our book, and they will be paid in the next remaining 3 years. And then I will leave to Ilaria to quantify what is the contribution coming from the next 3 years. I will also leave to Ilaria to comment how much of the treasury activity and cost of risk.

So we start from a Superbonus. The back of contribution to revenues for the Superbonus will occur in 2021 because in 2024, we'll have the peak in terms of exposure to these credits. And then over the plan horizon year-by-year, we'll sell down our exposure until we will have 0 exposure remaining in 2027. Overall, in terms of accumulated contribution, gross revenues from this product will be around EUR 50 million over the 3-year plan horizon. Then in terms of contribution to the treasury activity, can you just please repeat the question because I missed the first part of it.