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

Thank you, everybody, for joining us today. We are very pleased to announce the acquisition and subsequent merger with DEPObank, the leading player in the securities services and payment sector in Italy. It's a milestone in the development of BFF Banking Group, which will allow both companies to thrive in the future, given their respective strengths. This transaction confirms the commitment we had to our strategic plans as it fits squarely in the directives we have given to the market in terms of our development through M&A. If you look at the key benefits of the transaction on Page 2 of the presentation, which has been made available, we are adding to our business a fee-based business, which will contribute roughly 30% of the combined entity revenues through commissions and without interest income. With access to a significant funding base with low cost, with roughly EUR 7.5 billion of deposits currently invested in assets with low or negative yield and therefore gives us the opportunity to substitute part of our funding and increase the return on our business. The structure of the transaction makes the deal capital-accretive with a positive impact of roughly 100 basis points on the Tier 1 ratio of the combined group. It provides significant funding and SG&A cost synergies in the range of EUR 25 million, EUR 35 million on a pretax basis on pretty conservative assumptions, does not change the credit risk profile of the business since DEPObank's assets are composed mainly of Italian government bonds and deposits in the ECB. And overall, it's an attractive deal for the BFF shareholders with acquisition price equal to 3.2x P/E adjusted 2019 earnings pre synergies and 0.5 price-to-tangible book value, excluding the excess capital of the business. We think, on Page 3, that the transaction will create significant value for the stakeholder of both businesses. For BFF and its clients, it strengthens our competitive position as leader in the Italian specialty finance sector, it allows us to diversify our business model and structurally to access cheaper financing. It increases, therefore, our ability to serve and support our customers in this current market environment, where, as you've seen already in our earnings results, we see plenty of opportunity for growth in the many markets where we operate. For DEPObank and its clients, we think there will be the benefit of being part of a listed, solid and profitable group, which has a high standard of operating efficiency, is leader in niche sectors. It does not compete head-to-head with the banks who are clients of DEPObank and has a very low-risk profile. Also, the balance sheet of the depositary bank will continue to be invested in low-risk assets. I would say even lower risk since our balance sheet is invested in commercial receivables towards the public sector. Both businesses will continue to be developed along the strategic direction that has been highlighted in the respective business plan. In this context, we've also signed an agreement with Nexi to continue the commercial partnership, aimed to complement and extend the supply of ICT services and other services for the combined group. When we look at the acquisition of DEPObank on Page 4, we see that it fits neatly on the strategic direction that we've indicated in terms of M&A opportunity that the group will push through in the BFF 2023 Plan. We indicated then 3 pillars of our strategy to expand in adjacent sectors, and that's a testimony by the acquisition of Magellan; to buy businesses that are equal to us and operate in our markets, and that's what we have done 6 months ago with the completion of the acquisition of IOS; and finally, to look at opportunities to diversify our business entering in new niche markets, where traditional banks don't operate in countries where we already operate as BFF and where there are important funding and diversification synergies. And as you can see on Page 5, DEPObank actually fits in all of those characteristics that were highlighted as key in making acquisitions through -- for diversification in our business plan. DEPObank, in fact, operates in niche businesses that are not covered by traditional banks, is the national champion in the securities services business, is the leader in the payment sector with a significant focus on intermediation services for other banks, so a niche that other banks don't covers since it's a provider of services for other banks. It operates in Italy, and it has a leading position in its reference markets. And the benefit it brings to the combination is plenty of funding synergies, as we mentioned before, and the addition of a commission income stream, which complements our strong net interest income earnings component. So strategically, we confirm exactly what we indicated to the market in our plan. On the next section, we will see what are the value levers for this combination and where we think it would be a strong benefit to the shareholders of both businesses. First of all, it increases diversification and the scale of the businesses with no additional credit risk, it gives us access to large and low-cost funding base, it's capital neutral, and it's immediately accretive to our shareholders. In terms of the combination, on Page 8, you can see the relative weight of the 2 businesses on key metrics for us. We increase significantly the scale. We improve our funding profile with our customer loans remaining at the level of BFF but the loan-to-deposit ratio improving significantly for over 300% today to 47% on a pro forma basis. Revenues will be contributed more by BFF. The component of commission from DEPO will be significant. The diversification gives us access, as I mentioned before, to a leading position into markets, as you can see on Page 9. Combined with our 3 businesses, where we are the leader in Europe or in the countries where we are present, it gives us a unique position to actually operate across many niche segments in the financial system with low risk and a defensive position vis-à-vis the larger banks. In particular, the DEPO business is the leader in Italy in securities services, where it provides depositary bank services, fund accounting, global custody and transfer agent services; and in payments, where it provides intermediation to other banks and other customers, corporate payments and check and receivables. On Page 10, we can see the liquidity position of DEPO. DEPO has a float, which is driven by the depositary bank activities for EUR 6.1 billion at the end of 2019 and from payment and fund services for EUR 1.4 billion. A large portion of that is invested in Italian government bonds with a duration within, on average, 4 years, which yields 0.6%. Another large chunk is invested in ECB deposits at EUR 2.3 billion, which yields a negative 0.4%. And that clearly compares favorably to the BFF cost of funding in 2019 of 1.58%, leaving, therefore, a large opportunity to optimize our cost of funding and providing us with an additional source of financing for our business. We will continue though to use the current instruments of funding for our own business because we really believe it's important to maintain a high diversification, particularly in an environment where funding may become tighter and the opportunity to grow will continue to be there. On Page 11, we show the capital impact of the transaction. There is no impact on BFF's total capital ratio. Both the shares to be issued in the context of the merger and the badwill generated by the transaction will cover the capital absorption at the 15% total capital ratio target. Since DEPO does not have any subordinated capital, we would buy a business, as you can see on the left-hand side, by paying out to the shareholders, the existing shareholders of DEPO, the excess capital above the 15% core equity Tier 1 level. And we would issue shares in the context of the merger for a business we will then have a net EUR 140 million of capital and would issue those shares roughly half the tangible equity of that business. So in terms of overall capital impact, if you look at the capital stack on the right-hand side of Page 11, you see that starting from the capital position pro forma at year-end last year of our business with 15% total capital, of which 10.9% of CET1 and Tier 1, we will have the absorption of the RWA of DEPO, the absorption of the intangibles and other elements of -- that absorb capital in the transaction, which will be counterbalanced by the capital increase, which will give a 7.6% stake to the current shareholders of DEPObank and the badwill of the transaction. That would leave us with a 12% CET1 and Tier 1 ratio and a total capital gain of 15% with, therefore, a stronger capital structure than today. In terms of the financial benefits of the deal, you can see on Page 12, our estimates of the funding synergies, of the SG&A cost savings and of the transaction and integration cost. I think it's worth pointing out that we see those as conservative in terms of amount that can be achieved and importantly will allow the business to continue to grow with a relatively good cost base. So in terms of funding, we've mentioned the opportunity. The synergies estimated here are equivalent to 20, 30 bps over the total DEPObank liquidity. The SG&A cost savings are 5% of the operating cost base. And those will come from the integration of the corporate bodies, the integration of the IT system, the optimization of the other SG&A cost, the disposal of the non-core operations before closing. And we think again a level that should be achievable. The transaction and integration costs mostly relates to the integration of the IT platforms, the advisers fee and the planning for the integration process. With those numbers, on Page 13, the deal is immediately accretive for shareholders. We would issue 14 million of new BFF shares, which had a value, before the leak in the press last week of our interest in DEPO, our banking offer, of EUR 63 million, which represented then a price-to-tangible book value of 0.5x. This is for a business again with marginal credit risk, low capital absorption and strong synergy potential. On a P/E basis, you can see that the multiples are 3.2 pre synergies and 1.5 with the full impact of the run rate synergies highlighted in the previous page. We have the possibility and the commitment that we have taken with the shareholders to pay a dividend by October, depending on the timing of the closing. It's highly likely that the dividend will accrue only to the existing BFF shareholders. And that will reduce further the earnings multiple paid for the business through the issuance of the BFF shares. In total, we think that the EPS and DPS accretion will be more than 10% from 2021 with significant upside. So this is the part of the presentation on the value creation opportunities, which we think is very strong. In terms of the details of the transaction, which has complex structures, we will see, I'll explain to you. We have signed a binding agreement with Equinova and DEPObank with -- where Equinova will acquire the outstanding shares held by the minority shareholders in DEPO or will drag those shareholders. We will acquire 10.7 million of DEPObank shares, which is equal to roughly 3/4 of its share capital for a cash consideration, which is the excess capital above 15% core equity Tier 1 for DEPObank at closing. DEPObank will then will merge almost immediately with BFF. And Equinova, which before the merger has 100% of DEPObank, will have a 7.6% stake in the combined entity. As we mentioned, we have signed an agreement to extend the relationship with Nexi, which for us was important for the stability and development of the part of the business. The transaction structure in more details comprise the cash consideration as described above. That's again the excess capital of DEPO above 15% at closing. That's capped to a maximum of EUR 198 million and has a number of adjustments included in the contract. We will pay out also the net income accrued to the business until closing. The closure -- cost of closing and disposal of some non-core operations of DEPObank would be expensed before closing. And then there are two streams of earn-out payments for the shareholders of DEPO: one linked to the potential release of some provisions in the DEPObank balance sheet for EUR 11 million, which is no impact, therefore, to the capital position or the cost of transaction for the group; and EUR 10 million linked to potential savings in some IT contracts that can happen after closing. The shares issued through the merger will be subject to a 1-year lockup. The 1-year lockup will expire in case Equinova will become the largest shareholder of BFF. The condition precedents are customary for this type of transaction. And among those conditions, we have cleared approval of the EGM of BFF, the authorization of the supervisory authorities and the government golden power and the antitrust clearance. Part of the transaction structure on Page 16 has been made so to take into account that DEPObank has a large government bond portfolio. And therefore, in the mechanics of an acquisition, we will have to take the mark-to-market value of that portfolio at closing. In order to reduce the impact of the mark-to-market potential negative effect in case the spreads on the government bonds were to widen, we've put together a structure where we bought this morning a portion of that portfolio, which will be kept on our HTC portfolio at current market value that was EUR 742 million, will be funded with repos in the market, has a yield as of today of 1.6% and a residual duration of 5 years that will remain with us if the deal closes or not. At closing, there will be the application of risk-sharing mechanism, where the mark-to-market impact will be allocated between us and the sellers with a potential issuance also of an AT1 instrument, an AT1 instrument, which will have a maximum nominal amount of EUR 70 million, and a fixed interest rate equal to 7% per annum, which given current market condition, we think, is very attractive. What this mechanism will allow us to do is to give certainty on closing since it can absorb substantial movement in the mark-to-market value of the bond portfolio. It has a maximum risk in terms of incremental capital absorbed for BFF of 21 -- EUR 29 million at closing. The effect of reaching that level means that we are buying -- we will be buying a portfolio that on a mark-to-market basis will generate significantly more income until its runoff. And that would generate roughly 4x return at that level of maximum capital absorption for that capital deployment. If we were to take today the impact of that mark-to-market mechanism, we would issue EUR 24 million of AT1. BFF will have an incremental capital absorption of EUR 10 million and we will get over the next 4 years, additional EUR 24 million of net profit through the increased yield compared to the book value of the yield of that portfolio today, so making the fact of 2.8x money that incremental EUR 10 million over a 4-year period. Leaving aside the details of the transaction, where does it leave us, on Page 17, in terms of shareholding structure and governance? We'll remain a company with a significant majority of free float; the transaction will dilute our larger shareholder marginally; and the management team, free float will remain at 68.3%. And as we said, the Equinova stake will carry a lockup for 1 year with that condition until they are not the largest shareholder. On a governance basis, the Board of BFF has committed to the sellers of DEPO to co-opt in the 12 months following the closing if there is the opportunity or if the Board submits a list of candidates for the renewal of the Board to appoint in that list a person designated by Equinova, which will qualify as an independent director. Again, this best effort will cease to be in case Equinova's stake in BFF's share capital becomes lower than what it is at the closing of the transaction. If we look at timing of the transaction, today, we have signed the -- on Page 18, today, we signed the agreement for the acquisition of DEPObank. We expect to we have, by June, the approval of the merger plan by the Board of Directors; to receive by the supervisory authorities the authorization to proceed with the transaction by September; therefore, approve the merger at the EGM of BFF in October; and close at the end of the year and therefore, completing the year with the acquisition and the merger of the 2 entities together. So to close this presentation, on Page 20, we're quite excited of the opportunity to partner with the colleagues of DEPO in this step of their history and our history. We think there are plenty of opportunities to create value for all the stakeholders involved. This acquisition and merger increases the scale and diversification in terms of products and services for our businesses, improve the revenue mix of both and maintains a low credit risk profile, which is always what we seek in our acquisition. We get the ability to combine the ample and stable low-cost liquidity comes from DEPO with the low-risk and high-growth opportunities that come from our business of buying government receivables throughout Europe. The transaction has a positive impact in the group Tier 1 ratio and its liquidity ratio. So we see it again strengthening also in terms of regulatory capital ratios of our group. We have the opportunity to create significant value, both in terms of earnings per share and dividend per share as early as after -- right after the closing of the transaction. And we think we have attractive financial terms for the BFF shareholders and it will also be shared with Equinova -- with the DEPO shareholders through their participation in our shareholding base. With this, I thank you for listening to me, and I'm open for any questions you might have. Thank you.

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

And first of all, well done to you and your team for the deal. I have two questions, please. The first one, I hear your comments on EPS accretion above 10% from 2021 already. Slide 12 of the presentation provides very useful color on the synergies, particularly on the run rate. I was wondering if you could give us a bit more color on the phasing of those synergies. I'm thinking in terms of what the funding synergies that you provide, also the costs. And if you could give us a bit more color also between NII and fees. And the second question is on the funding. Because, of course, with the deal, you take up quite a big chunk of deposits, EUR 7.5 billion. That's a very large number for your balance sheet. And I've got two questions here. So how should we think about the optimization of that funding versus the liability structure? But also on the asset side, how does this change your asset side, if any at all? I'm thinking about the short-term maturity profile of your loan book. Is there any more activities you could be incentivized to undertake to utilize that funding?

Yes. Let me answer the first question. There is a large amount of funding -- the second question, there's a large amount of funding. It's a funding that can move over time. We think there is a very strong, stable base of that. And we'll use a portion of that for our business, particularly to grow it and also to substitute some of our most expensive funding. The opportunity that we are showing here is again based on reducing our funding cost. We are not showing here any impact of actually having more funding and cheaper funding to actually expand our business faster, which we think actually in the current environment is the real opportunity ahead of us. The advantage we think also for DEPO of combining our business with their deposit flows is that our business is also shorter. So combining the two, we actually put ourselves in an year-end position where both businesses have a lower risk profile even in terms of liquidity. We would expect over time to run off the government bond portfolio, which has a duration roughly of 3 years. So it will take time to absorb that. If our business were to grow faster, then we'll clearly absorb that faster. But we've been always prudent in the way we manage our business and we continue to do so, keeping a good ALM policy. In terms of funding synergies, look, we have a structure of our liabilities which is longer than our assets. We have, therefore, in that structure, because again we want to be prudent on our ALM. And so after closing, we will gradually substitute part of our funding with the funding comes from the DEPO business. That will happen by, on one side, by not rolling over some of the bonds that we have. But also, remember, we have a portion of our funding lines that are also in the wholesale market. And those can be simply not drawn down and that immediately reduce our funding costs. So we think actually we can get quite a lot of benefits early on in the life of the deal. And the SG&A, again a number of them will be executed fast because related to duplication, for instance, in the corporate bodies that will cease to exist, by definition, at the closing of the transaction. That's why we've indicated that actual synergy potential is not only conservatively assessed but can be executed quite quickly.

The next question is from Simonetta Chiriotti with Mediobanca.

So I would like to -- if you could give us some more color on DEPObank business in terms of, okay, we have seen the leading position in the 2 segments. But if you can go through the prospects of the 2 businesses, if there are different expected revenues growth. And in particular, in the depositary business that is seen as a very global and competitive market, which are your considerations on this point?

Yes. We have on Page 22 and following an overview of the DEPObank business. And it can walk you through not only what it does but also our view on the various opportunities. I didn't probably stress it enough during the presentation, but one of the attractiveness of buying and partnering with DEPO is actually for us to get exposure to -- indirect exposure to 2 segments of financial services activities, which have a secular loan growth trend. The first one is asset management through the securities services business. The second is the payment infrastructure, which is attractive. And the move from cash to electronic will clearly benefit the business. What DEPO does in those 2 segments? On securities services, it's a depositary bank, provides global custody, fund accounting, transfer agents and other administrative services to funds, mostly mid-sized and small Italian asset managers. There is a niche and that's seen across many markets in Europe, where there are local players that can actually compete effectively in that market. Because it's true that you have large global custodians that dominate the global custody market. And that's what's happening in general across the world. But it's happening across -- following a trend of bifurcation in asset management, where you have, on one side, gigantic asset managers with a process of concentration and a long tail of specialists, which often acquire more tail of services and less industrialized than what the large custodians can provide. And I think the strength of DEPObank, which has been shown also in terms of retention of customers and in terms of the ability to add new customers to its roster is actually to service the domestic Italian asset management community with this need, which require a number of services, which are more dedicated and where some of the global custodians don't necessarily offer. Not all of them, for instance, have a very strong presence in Italy. Some of them do, some of them don't. We think for that -- in certain areas, particularly around domestic mutual funds, in areas like domestic pension funds, domestic alternative asset managers, the position of DEPO is actually quite strong. And if anything, there is the opportunity to actually make that business stronger with some further investment and with leveraging the opportunity to develop that business alongside what I've described. So that's one side. Secondly, in terms of payments, DEPO is the result of a demerger of the banking activities of Nexi Payments, therefore, has a very strong relationship with what is the market leader in payments in Italy, provide also services for banks through its intermediation to all the ACH and then the Central Bank and a number of other services in the payment space, which require a high level of knowledge and high level of scale and where again the local presence is quite important. And I think DEPO will benefit from the fact that the scale of efficiency to be efficient in the payment side will probably increase and so for the mid-sized banks to make more and more sense to use an interface like DEPO for those activities. And importantly, in any case, the partnership with Nexi is beneficial to both parties. Nexi needs a banking partner. We think having a banking partner that does not compete with Nexi's customers is a positive for Nexi and for Nexi's customers. And on the other hand, DEPO benefits from the fact that the strong growth and the strength of the Nexi business then translate into more revenues opportunities for DEPO as a whole. So we actually quite like the fact that we're clearly not buying State Street, but we are buying a specialist in niches in Italy, where it's probably inefficient for the State Street of this world to operate. And we are buying into one of the, frankly, 2 or 3 players that can offer in Italy this intermediation service and the only one that actually offers it not to a category, a single category of bank. So that's when we look at the positioning of DEPO, we're actually quite positive on the strength of their existing business.

[Operator Instructions] The next question is from Filippo Prini with Kepler.

Three basic questions, if I may. The first one is on the part of revenues of DEPObank from fees, especially the part of payment. I was wondering if there is any possible connection in the future with your credit management business. And maybe if you can assume that this business basically of the fee could grow according basically to number of transactions, regardless of the value payment, and increase of asset in custodian and depositary bank. The second is on the integration of DEPObank. You presented a slide when DEPObank has got 363 employees. Basically, that is a irrelevant number compared to the current size of your headcount. You indicated integration cost. But if you can have some lower-than-expected integration because of this workforce. And the second is just a clarification. If I may, you indicated the benefit from the badwill on your capital. Do you -- considering the tangible book value of DEPObank also to calculate the badwill, of course, also the net profit that they are generating until the closing?

Yes. Let me answer the last question first. We will measure at closing the -- the components are separated in the contract. So that's why they are represented that way. But to simplify, we'll take the capital position of closing of DEPO. There will be a payment made for 76% of the shares, which is the excess capital above 15% based on that point in time, therefore, including also the earnings of the period. And then the rest would be -- would merge into BFF. And therefore, you will get -- BFF shareholders will get the 7.6% of the combined entity. So the mechanics -- and so the shareholders of DEPO will get the interim net profit. Bear in mind that we are actually getting part of the earnings stream by having both the CCT at signing. And that's actually to our account, not to the shareholders of DEPO and with EUR 750 million roughly at 1.6%. So it's an important income stream that we got to simplify the closing mechanism, but it's for our own account. In terms of integration, we've seen again, we've been quite explicit, we make reference only to SG&A. Those are the costs where we will be working. We have plenty of opportunity to grow in our business and absorb some of the overlap that we have. That's not a key consideration in the transaction. The -- in terms of revenues, there is no real overlap between the 2 businesses. If you look at Page 9, those are very distinct. The commission base that we get from the credit management are related to a service that is not really provided by DEPO. The securities services business has fees that are linked to AUM. Some of them are also linked to a number of accounts. So it's a mix between complexity and AUM. It's roughly more towards AUM. In payments, it's flow transactions, even if you have some value numbers, that's mostly -- it's mostly around number of transactions. That's why we think with more accumulation of assets, and that's important, particularly if you think about the profile of the industry in Italy around pension funds, which are still in the accumulation phase in our country. That's -- it's a secular long-term trend of people putting more of the TFR in them, for instance. And in payments, you have the shift from cash into card and into electronic payments, which is the trend underpinning again the Nexi business and, in general, the transformation around payment system, which will benefit DEPO, both in terms of relationship with Nexi but also relationship with all the other banks for which provides those layer of -- in the payment infrastructure.

The next question is a follow-up from Simonetta Chiriotti with Mediobanca.

I don't know if you can give us a bit of color on the major customer -- major clients in DEPObank business, in particular, a general comment on the concentration of these customers, so Nexi, in particular, in the payment and if there are major customers in the other businesses.

Yes. We can't provide this information to you because confidential information on -- from DEPO. The relationship with Nexi is important, but it's 2 ways. So Nexi is basically distributor of DEPO's product because certain products can be only served by DEPO by having a banking license and provide some IT services to DEPO as well. So the 2 companies are actually quite linked to each other. I would say one needs the other, as I described before. But a portion of the earnings around the payment business comes from relationships that DEPO has autonomously with other banks. For instance, we are a client of DEPO for certain aspects. And we don't use Nexi because we don't actually use payments. But we need to interface with other part of the payment system, which is not provided by Nexi. So it's an important partner, but not the only partner. And that's why we think it's actually a pretty solid business if we've got good relationship that actually can offer things that actually Nexi will never be allowed to because it's not a regulated entity and services that, therefore, banks need anyway or other corporate payment service provider they're calling in PSD2. In terms of asset management, the portfolio is fairly concentrated. I think top 8 customers representing a majority of the assets. We have some contractual protection, the transfer of those assets over. We think, frankly, this is a service where for the asset management company, it's the complexity of moving depositary bank, global custodian services, does not really counterbalance the potential marginal savings in having a different provider. And so these contracts tend to be quite sticky. And if DEPO provides good services, I don't see a reason why people should move away from getting the services of DEPO.

The next question is from Michele Baldelli with Exane BNP Paribas.

I've got a further question on the Nexi agreement, just to understand if there is a time frame like, is it lasting for x number of years? How long is it lasting? And on the P&L of the DEPObank, how much does it represent Nexi?

For the whole -- again, I can't disclose the number on the second one. What I can -- if you look at the overall revenues of DEPO, you have that -- the payment side represents, Page 24, EUR 46 million. And check and receivables are not related to Nexi, corporate payments, no, intermediation, only a portion of that. So we're talking about a portion of that EUR 46 million, which is, in turn, a portion of the overall business. The -- yes, the other question was, sorry?

On the length of the contract with Nexi, is it a 5-year agreement or longer? And is there any noncompetition agreement such that you will be linked to them?

Yes. We can't disclose those terms again because it's a confidential information. What we've announced is actually by signing those banking terms with Nexi, we have expanded those contracts, which is one of the key considerations to expand that partnership.

Okay. And I am sorry, just last question about the cost of funding of the acquired company. Did you already say how much is it?

The cost of funding for DEPO? DEPO charges normally spread over the ECB base rate. So it's a cost of funding which is not far away from the market funding. So the fund, a depositor gets a bit more than what you were getting against -- by getting your [ LIBOR ]. It's a negative rate. If you think about the other way around, the 60 bps of the government bond portfolio and the negative bps of the ECB funding minus the negative yield on the -- on what DEPO pays to the depositor gives you the treasury income that you see on Page 9.

There is no other question booked at the moment. This concludes our question-and-answer session. I would like to turn the conference back over to Max Belingheri for any closing remarks.

Well, thank you very much for joining us today at a short notice. As I mentioned at the beginning, for us, it's an exciting time. We are really pleased to reach this agreement with the shareholders of DEPO and with DEPO to consider this partnership and create what we think will be an incredible strong business in the specialty finance area in our country and in Europe. Thank you very much.