BFF Bank S.p.A. (BFF) Earnings Call Transcript & Summary

Thank you, everybody, for joining us today. Given the news coming out of Italy and Lombardy and Milan, in particular, we wanted to give you an update on what are the measures that we have taken to ensure business continuity for our business, and importantly, what can be the impact of this coronavirus on our business. I think it's important that we go back to our business model, which has a relatively low level of interaction, a physical interaction with our customers and our debtors, both on the factoring side, in terms of customers, but also on the retail side since we operate with an online-only distribution model. That's actually a strong point of strength at the moment because, clearly, we can operate our business remotely without having any major impact on the interaction with the various partners. And so if we look at what we have done, we had clearly planned for events of this type. We have the full infrastructure of the bank and the key processes that are able to be operated remotely. As of today, we have moved all our staff in Milan in smart working, where we've kept the physical presence active in Rome and with some people in Milan as well for some critical function. So in a sense, we have the business operating normally. Although, clearly, people are not traveling to work anymore. In Milan, the international business, which you'll always remember is 40% of our activities, remains entirely unaffected at this point in time, although we have prepared also our subsidiaries for the potential spread of coronavirus. So that is, if you want, on the business side and on our infrastructure. If we look at the market and our ability to operate, the impact, again, we think is going to be fairly mild. The only measure that seems to have a potential impact on the business is some delays in the legal processes, but that should take only lengthening a few months, and as you know, the legal process are helpful for us in terms of negotiating the debt of the collection but are not necessarily needed in order to collect the money from the debtors. What we are likely to see in an environment where the public administration has been asked as much as possible to operate in smart working as well is potentially a lowering -- sorry, lengthening of the payment time of the public sector, which as you know, is potentially beneficial for our business, both in terms of demand and overall returns for our assets, so that could be potentially positive. More importantly, clearly, there is going to be more demand for our services from customers. We expect an increase in health care expenditure. And in particular pockets where customers need to set up CapEx to actually service the public sector, we should expect more demand for our factoring product. As you know, we've always run our balance sheet and our business in order to cope with potential shocks, either on customer demand or on payment time of the public administration. And as of today, our available undrawn funding lines unpledged government bonds and cash deposited in other banks reaches an amount of EUR 935 million. To give you an idea, at the end of the year, that same amount was only EUR 600 million. So we have actually significant excess funding in order to cope to any peak of demand ahead of important months for us as they are March or the second quarter. In general, the -- if you look at our credit risk, which is, again, a concern on lenders in case a recession were to hit, we should remind ourselves that our exposure is largely to the public sector. Our private sector exposures are mostly concentrated in hospitals in Italy and in Poland. Poland is not yet affected by the coronavirus. And remember that the dilution risk, again, is kept in check by having exposure in terms of customer, mostly through large suppliers of the public administration. Again, in terms of operational impact, roughly 30% of our business is written with customers in Italy that operates in the so-called orange area, i.e., Lombardy and the provinces where the government measures have been introduced. That's roughly 15% of the total of the volumes of the group. That's because actually large concentration of our customers in Italy is around Rome, where most of the international pharma companies are based. And so even in that respect, we should be impacted only marginally, if at all. So the message we want to give to the market is, I would say, threefold. First of all, operationally, we continue to operate normally as if the virus has not struck and those measures have not been implemented, clearly, with a different way of operating for our employees, but with the ability to service our customers and collect from our debtors. Secondly, we are prepared in case there is more demand for our services from customers, or there's more demand for funding in case government payment time lengthens. And that's something we've always been focused on with, as you might remember, a very conservative asset liability management structure with ample liquidity and a strong balance sheet. And third, we keep monitoring the credit risk in our portfolio. But in general, given the nature of our customers, we feel pretty positive about where we are today. That's what we want to communicate today, but clearly, it was important to interact with you guys, and I leave the floor open to any questions you might have.

[Operator Instructions] The first question is from Antonio Reale with Morgan Stanley.

I've got a couple of questions, please, on your business. The first one, maybe just the opportunity to give us an update on your sensitivity to an interest rate cut, if you could just give us sort of your latest. And then from what I understand, just a clarification, obviously from everything that is happening, public finances in Italy will remain under stress, and I wonder what this does to your DSOs. Do you have any sensitivities that could provide -- sort of add a bit of color in terms of your DSOs going forward and the implications this has on your net interest income? And lastly, I -- it's likely the point on sort of the underlying cost of risk, given your business model, however, I wonder in the framework as part of the expected loss framework, IFRS 9, are there any sort of changes that we should keep in mind looking at sort of GDP estimates going forward?

Let me start from the last one. I mean under IFRS 9, we shouldn't be impacted. Remember, most of our exposure vis-à-vis the public sector. So we don't have a direct link with the level of economic activity in the country. So we -- in our model, that's a very marginal component. So we shouldn't see any impact in the -- if you want, in the generic provision has been taken under IFRS 9. On the interest rate cap sensitivity. If you remember, we have liabilities that are, in terms of duration, to a large extent, longer than the duration of our assets. A large portion is on fixed rate. So we will not have a significant impact in reduction on interest rate immediately on our liabilities because only the -- from -- the wholesale funding side gets repriced quickly through the LIBOR and the base rate. What is unclear to us is actually what will happen to the credit market because we think, actually, given the nervousness -- or the potential nervousness around the payment time of the public administration, there may be opportunity to price better for the incremental volumes we have. But in terms of interest rate sensitivity because our liability tends to have a longer duration of our assets, we tend to catch up over time around that, but most of them are, as I said, a fixed rate. In terms of DSOs, look, we don't have seen yet, to be honest, any impact on the payment time, but the measures are very recent. The one that has been implemented vis-à-vis the public administration. The sensitivity to our book, if you take the detail, is roughly 60% of our book, and the DSOs are around 50, 100 days. Clearly, 30-days lengthening means a 20% increase in our balance sheet on Italy, which in turn, is 60% of the group, so a 12% increase. And clearly, that's an increase, which will tend to translate almost immediately in net interest income. And because the cost base is fixed, and it should have a positive impact to the bottom line. That's in rough terms of what should happen.

The next question is from Simonetta Chiriotti with Mediobanca.

My question regard to the collection rate. Don't you think that with the Italian public finance is under pressure going forward, the collection -- also, your collection rate could be a bit under pressure? And the second question is, yes, on some data that you gave before in terms of volume in the red zone, in the orange zone, I didn't catch the number, if you could kindly repeat this data.

So of the Italian volumes, 30%, 3-0, come from customers who are headquartered in the orange -- in orange zone; 70%, 7-0, from customers who are located outside. That's for the Italian volumes, which clearly are a fraction of the volumes of the group, so roughly only 15%, 1-5, of our group volumes come from the orange regions. So that's one. On the collection rate, look, I think the collection rate is always -- the collection time, if you're on the collection rate is always 100%. The collection time, it's always a function of 2 things: the availability of funding and the efficiency of the public administration. I don't think necessarily there's going to be a constraint in the ability of the government to fund itself. The incremental cost of the resources made available, it's a few billion euros. Clearly, there will be an effect on tax receipts, which should widen the deficit, but the initial estimates are not really massive. So in that respect, we don't expect a massive gap. I think what might have more of an impact, which is the second effect, is on the efficiency of the public administration, i.e., if they start to have a lot of civil servants not showing up at work or having to work in smart working might -- that may slow down the payment performance of the various public administrations. What we have been doing actually already since a few weeks is to price in a potential delay, and we will continue to do that. And again, remember, if in case we didn't price correctly and there is a shift, yes, we have some dilution on our returns, but it's pretty marginal because most of -- a large part of our returns comes from the late payment interest, which actually gets increased by the delay.

Well, you don't see the -- even in the following months, I mean, not now, but going forward, you don't see the necessity to settle with the public administration at a lower amount, at a lower level of LPIs for the current situation?

No, absolutely not. And the point -- why I made the point around availability of funding and why we set up multiple funding sources through the deposit markets, through the institutional bond market, through our relationship with the banks is never to be put in the same situation that we felt we had in 2011 and '12 of payment time length and that we didn't have access to funding. That's basically what we've always been prepared for, and the bank is fully prepared for it. We know that in case payment time lengthens, the effects: One, clearly, we generate much more capital because asset sits on our balance sheet for longer, our costs are fixed, and therefore, it flows through the P&L. Secondly, there is more demand from our customers at better prices, to be honest, and therefore, again, it's a positive for us. So with all of this, we can actually be the marginal taker of deposits. And we've seen in the past that the increase price on the asset side is not -- is much higher than the increase in spreads on the liability side. And so we can play that opportunity in case it happens. But importantly, in order to assure continuity of our business, we've always kept, as I just said, plenty of available funding and liquidity in our balance sheet. If you look at the number I gave, EUR 925 million as of today, that's clearly a significant amount, if you consider that our balance sheet as of December, in terms of customer loans, was only EUR 4.1 billion. So we have almost 20% of our -- of incremental potential on our balance sheet. As of today, without doing anything, without launching a campaign for deposits, without launching a bond or raising other money in the wholesale market.

The next question is from Filippo Prini with Kepler.

A very brief question. I would like to ask how flexible is your structure to deal with these possible higher volumes to work on? I mean should we expect that the additional volume that you may capture in next month will go down to the bottom line? Or maybe you should increase your cost in terms of process, in terms of number of workers to deal with this potential peak.

Yes. I would answer in the 2 different increase in volumes we need to consider. The first one is, I buy the same amount of receivables. The receivable sits on my balance sheet for longer, therefore, my interest income, in absolute terms, is higher. The fixed costs are exactly the same. If an invoice sits on my balance sheet for 6 months or 9 months, still sits on my balance sheet and the amount of effort operation I need to do is exactly the same. So that actually flows through directly through the bottom line. Now on the incremental volumes, there are 2 things to consider. The first one is we have about EUR 3 billion of volumes, which are managed only, they are not sold. If those shift from managed only to sold, again, we have 0 marginal cost because, simply, we are managing those volumes anyway. The -- in case there are incremental volumes, even there, frankly, we're talking about marginal impact. And to be honest, because last year, the Italian business did not perform as we expected, that extra capacity that we had built should be able to cope with that extra demand. Remember, in Italy, we have roughly 200 customers, and we have 9 salespeople. So we're not talking about massive numbers to generate incremental volumes.

[Operator Instructions] There is no question at the moment. The next question is a follow-up from Simonetta Chiriotti with Mediobanca.

Yes. It's a bit out of the specific subject of today's call, but maybe it's related, I don't know. Just to have from you an idea what is happening on the split payment. I don't know if the current situation makes any difference in terms of renewal or not renewal of this measure.

Yes. We are trying to understand, again, in a situation where companies are going to be most stretched for cash. I think probably confirming sooner rather than later than the split payment is not going to be extended, it's going to be a positive. So we're trying to understand if and when the government will make that official. So we don't have any news, but that's clearly an area where we think it will actually be a positive for the economy, in case there would be a reintroduction of the split payment, so reintroduction of the normal VAT, the abolishment of the split.

[Operator Instructions] There is no question at the moment. This concludes our question-and-answer session. I would like to turn the conference back over to Massimiliano Belingheri for any closing remarks.

I would like to thank you for joining us today, and it's a busy time in the market, and it's a tense moment in many respects in our lives. We want to convey the message that the business has been prepared for what is happening. And we are there for our customers to be able to deliver to them the service they need in this moment. Clearly, it's probably something which we'll continue in terms of effect, and we are monitoring the impact on our business, but we are quite confident that we shouldn't have any major negative impact on our business going forward. Thank you very much for everybody for attending today. Thank you.