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

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LPI collection for EUR 2.6 million and also more prudent provisioning, which has had an impact of almost EUR 2 million in the first half of the year compared to last year. The lower collection results in a higher pool of balance sheet LPI, which are over EUR 400 million, EUR 414 million, which are recognized and, as you know, represent a big reserve of future income for our business. Importantly, given our capital position and given the fact that before the earnings of the period, our total capital is above 15%. The entire amount of earnings generated in the first half of the year can actually be earmarked for dividend, that's EUR 37.5 million. So if you add the EUR 37.5 million with the EUR 70.9 million of 2019 dividend, which are not accounting in capital, we have almost EUR 110 million of available dividend capacity in the business. The business has grown nicely over the first half of the year, with customer loans up 10% year-over-year, that despite the huge cash injections that have happened in a number of markets, not only Spain and Portugal, and the effort actually governments have put to try to keep payment times of the public administration at decent levels. The growth has been marked outside Italy, particularly, and almost 40% of our loan book is currently outside of our home country. Volumes grew healthier, 29% year-on-year, driven mostly by Spain and Poland. And overall, we have a good pipeline for the key few last 2 quarters of the year, which, as you know, are critical for us in terms of generating growth in the business and earnings. Capital and -- sorry, funding remains strong. We have increased significantly our funding. In particular, we have increased significantly our undrawn credit lines. That is a healthy buffer to allow us to absorb higher loans growth, but also to withstand any shocks that may come in the funding market in the months ahead. We have pushed the growth in our online deposits, which are up 77% year-on-year and represents now almost half of our funding. This high funding position results then in an LCR of over 500%, net stable funding ratio of 108%. And if you include the calculation of the new methodology that will come in mid of next year, we're almost 140%. As I mentioned before, capital remains plentiful. We haven't allocated any of the earnings of the period or of the 2019 dividend capacity to capital. That would generate an additional 460 basis points of capital on top of what is reported in the presentation. We have reduced further the net NPLs, excluding the Italian municipalities and conservatory, and our net NPL over loans is down to 0.1%, confirming our low-risk profile. Cost of risk has been higher, given our prudent provisioning and our coverage ratio on NPLs has gone up 21%. Let me move on Page 4 to touch upon the topic of dividend. As you know, when the recommendation for the payments of dividend -- 2019 dividend was issued at the end of March, we decided to follow 1 of the 2 options, which allowed to maintain the flexibility of paying dividends but not account the earnings earmarked for dividends as capital. We have, therefore, kept the dividend out of our capital base. The regulators recently, last week, had issued a new recommendation, which de facto moves the deadline for the potential payment of dividends from the 1st of October to the 1st of January. And today, the Board has decided to continue to maintain the so-called Option 1, and therefore, maintaining the full flexibility of paying dividends, if and when, the regulator would allow. Going through the topic of COVID on Page 5 and 6. We've tried to summarize the major items of the government decisions across the many markets where we operate regarding the economy, the fiscal position of the countries, the injection of capital, aimed the transfer of money from the center to the periphery and our measures to help the economy. In general, I would say that the shock that the economy has suffered through the COVID-19 crisis has had a marginal impact on payment time by the public administration. Certainly, the fiscal position of the countries where we operate has deteriorated, but the government have had full access to the funding market, and therefore, have been able to contain the negative effect of that worsening fiscal position on the payment time of the public administration. At the same time, the demand from customer has been good, but at the same time, have been supported by a lot of liquidity in the market. And therefore, we have seen a growth, which has been significant, but not similar to the one we have seen in case the government did not intervene. Governments have injected cash to keep DSOs stable. That allows, we think, to have better recoveries of LPIs in the second half of the year, and we have a pretty good pipeline, I would say, around the many markets where we operate, including Portugal and Spain. In order to contain risk, we've taken a decision in March to stop the business of direct lending to doctors that we do in Poland. And therefore, we have kept the exposure to that more risky part of our business at the same level as before the COVID crisis. If you move to Page 7, before I give the floor to Giorgio. Again, if you look at our net income, it's flat year-over-year. But that's after the fact that we have EUR 3.7 million lower net NPIs. And if you see at the bottom of the Page 7, EUR 2.6 million lower over recoveries. If you adjust for that, if you adjust for the more prudent provisioning we have taken in this quarter for another EUR 1.9 million at the underlying business trend has been pretty, pretty strong. But we leave to Giorgio to actually walk you through the components of the P&L and the balance sheet before coming back on depo.

Thank you. Thank you, Massimiliano. Good afternoon. Going to Page 8, where the growing of the interest income and the LPI stock. Compared to last year -- for the same period of the last year, we have an interest income that grew about 7% -- by 7%. And this considering also the lower net LPI over-recovery that affected us for EUR 2.6 million. The collection of the LPI was also lower than for EUR 3.7 million as compared to the same period of the last year. But this -- in our balance sheet maintains also the adjusted interest income compared to the RWA, around 9.85%. So we were able, also to go in interest despite the situation described in collection, the overrecovery of the LPI. If you go to Page 9, we have the cost of funding that stands at 1.6% -- 1.60%. As described before, this -- the choice that we made during this period is to growth in our stable funding. And so the online deposits grew across this period. And also we have to consider in the cost of the funding that we issued a bond last October with a cost of 1.75% fixed rate and this affect also the cost of the -- in general of the funding. And also we have to consider that the growth in Poland have also as a higher base rate as a cost. And so in general, we were able also to maintain a lower cost of funding considering also the general situation. If we go to Page 10, we can see that also the adjusted net interest income and adjusted net banking income both grew about 5% compared the same period of last year. And this is also a good signal from our side that we can maintain also a return on RWA stable at 7.6%. Going to Page 11. We maintain a good operating efficiency, also considering that we made some investments in personnel because the cost of the personnel increased by 16% because the employee base grew. And also, we sustained some cost operating expenses related to the opening of the branch in Greece and also for the platform, for the digital platform, that we set up in partnership in Spain, and this approximately cost for an 80% more than the same period of the last year. So we are at 42% of the adjusted cost income ratio and is mostly in line with the same period of the last year. Going to the Page 12, we grew in a significant way if we consider the COVID situation, also in the customer loans. Mostly, in Spain, where if we consider also the IOS acquisition, we grew about 100%. And in Poland, where the growth is 9%. But if you consider a constant exchange rate, this is 14%. It's really important also to highlight that in Spain, there is a government plan for the liquidity and injection of liquidity to repay public administration debt. And despite this, we were able also to give you in this very strong, and we can say in triple-digit way. Going over, also this is confirmed also on Page 13, this is the as dedicated to the new business production and the important message is the same that we have seen in like before. So the strong growth that we have also in the countries outside Italy. And in this moment, the loans is about -- the loan term, the 40% outside Italy, and this is for us a good signal that the business is very strong, not only here where we established the bank a lot of years ago, but we are very able also to grow also in the other countries. Slide 14, we have a strong liquidity situation. We didn't ask for the ECB financing, no TLTRO and Moody's confirmed also the ratings of Banca Farmafactoring. And as highlighted before, the liquidity, the funding and liquidity position is strong. The LCR is very high, higher than 500%. Also the NSFR has been maintained at the usual level and we know that when the new regulator will come in force mid of the next year, we will have also another boost of around more than 20% on this ratio. One important thing is the available funding that we have. This is a protection for us for -- to react quickly in some shock that we can have, at this moment, we don't know about in the next month. And also, as highlighted before by Massimiliano, also the online deposit has grown in a significant way compared to the last -- to the same situation in the last year. Going to Page 15. We maintain our total balance sheet. We have a higher level of government bond portfolio. But this is also related to the DEPObank acquisition. And we don't have any particular point on this. But in this moment, we are not going to increase in the net matters of our bond portfolio, but we are going to the natural taking this situation under control. If we go to Page 16, we have our position in credit risk. Credit risk in this -- for Banca Farmafactoring is a good point because we have a very low level of NPL. What we have done also with the COVID that we have changed our macroeconomic scenario that give us an increase in the provisioning for the performing and also the nonperforming position and the coverage that we have in this moment. So the NPL arise from 75% up to 81%. So we can consider also with this increase in the cost of risk, also our results very, very, very strong in the business. And this situation give us Page 17. You can see in Page 17, a very strong capital position. Our capital ratio are over 15%. So as highlighted before, we are able to pay potentially a dividend up to EUR 108 million. And this is the mix between the dividend that is on bank coming from the results of the last year and the EUR 37.5 million that are the results of the first 6 months of the year. In this case, if we consider all this amount as capital, so if we put this amount in the capital ratio, our total capital ratio can grow up to the 20%.

Thank you, Giorgio. Let's move then to Page 18 and subsequent to the DEPO acquisition. On Page 19, you can see the time line of the deal. We received the approval of the merger by the Board of Directors of both banks, the clearance of the Antitrust and of the Golden Power by the Italian government. We expect to receive the regulatory clearance in the fourth quarter of 2020 and the foreclosing to the GSM to be called towards the end of this year and then closing to happen at the back end of this year or in February 2021. So we're progressing as planned with a good cooperation from the DEPO management on the integration, and we see plenty of upside in integrating the 2 businesses. Wanting to point out on Page 20 is what happened to the mechanism of risk-sharing on the bond portfolio of DEPO, given the change in the market value of the bond portfolio. Actually, the transaction would result as of today in an uplift of our capital position of EUR 10 million compared to what we've shown in the numbers in the presentation of the acquisition. And that's something clearly, it can change over time, but it's important in an environment where the perception of the creditors of the Italian government is lower, we actually have additional capital buffer there. So overall, as I said, we're progressing as expected with the closing according to the time line you've seen. DEPO is an important step for us. It's one of the many things that we have put in place in the last 12 months since we announced our 2023 business plan. And we are quite pleased actually if you look at Page 22 and subsequent of what we've been able to realize in this first year against the vision that we set ourselves against in becoming a leader in specialty finance niches in Europe, which was really what we expected to achieve and what we expect to achieve in the medium term. In terms of things that we have achieved more in the short-term across the 3 group of strategic growth that we've announced. On Page 23, you can see a summary of the main one. The first objective for us was to continue to develop our core business and improve our operating efficiency. What we have done, we've actually launched the entry in the French market. We've expanded our credit management business in Spain. We're very close to sign our first deal in trade management also in Portugal. We have received the authorization to open a branch in Greece, which we expect to be fully operational in September. And also, as you've seen probably in the press, we have launched a digital platform in Spain, in cooperation with one of the largest provider of electronic invoicing to actually access the smaller customers that are otherwise difficult for us to reach in terms of distribution of our product. Secondly, we looked at optimizing our funding and capital. Let's say we had a number of initiatives in launching further deposit platform, which have paid off, if you see the growth that we have had in our deposit franchise. We got our first pay rating it should be Moody's in October 2019, which was then confirmed recently even after the acquisition of DEPO. And finally, I third objective was to consolidate our existing business or expand it into other areas that are underserved by traditional banks. Not only we have completed the acquisition of IOS Finance, which has shown great results for our Spanish business but also announced the acquisition of DEPO, which we think will further strengthen our vision and our ability to deliver against our plan. In all of that, the ownership of our business has changed, as you can see on Page 24. We are now one of the few Italian public companies with almost a 90% free float. And even with the merger of DEPO, the free float of the business will be almost over 80%. The Board of Directors is committed to present its own slate for the Board of Director elections of next year. And therefore, we're in the path of becoming a true public company. So with that, I will finish the presentation. Thank you for your attention and leave the floor to any questions you may have. Thank you.

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

I have quite a few questions, actually, apologies for that. Hopefully, if the -- most of them will be quick clarifications. The first one is on dividend. If I understand your comments correctly, it seems you are willing to continue with your policy, i.e. pay an excess above total capital of 15% plus whatever was due from last year, even if this was to imply a payout above 100% on your 2020 fiscal year. Is that correct? That's my first question. The second one, I saw that you've cleared the harbor of the Golden Power, which is great to hear. Can I also clarify that there was no conditions imposed by the Italian government here. I'm wondering, in particular, if there were any conditions, for instance, on DEPObank's sovereign bond portfolio, which could delay or lower the funding synergies from the asset transformation out of the low-yielding bonds adding to the core factoring business, which has a much higher yield. That's the second point. The third question was on -- it was interesting, and to some extent surprising, to see how the government measures in Italy, specifically on the CDP scheme resulted in such a low usage, which I guess reinforces the strength of your business model. It looks like, however, this could be extended to September. And I was interested in hearing your take first on why such a low tick up? And secondly, to what extent this has played a part in sort of customer behavior? I guess, if there is an expansion, could that mean that volume growth in Italy remains modest also into Q3? And what are you seeing from corporate customers here? And the last question is on cash collection of LPI. So the backlog of cases in Italian court has historically been quite large. And I wonder to what extent the disruption caused by the lockdown could slow down the process of collection beyond the short term. I've heard your comments, so suggesting that there is an improvement already that will be visible in the second half. But to what extent you think there could be a more structural component related to that? And if that's the case, can you remind us how much of your collection is out-of-court versus in court?

Let me go in reverse order so that I capture with my memory what you ask if it keeps somewhat specific, to ask again. Look, on cash collection of LPI, we need -- and the impact of the court holidays, if you want. The -- we need to remember that a court case in Italy last usually 4, 5 years, if not longer, particularly in certain regions. So a few months of delay doesn't really impact the collection rate. We tend to transact on most of the collection we have. We might have core cases close to the end, and therefore, that makes it more sensible for the public administration to actually transact before we get to the end, and that allows us actually to transact on things which are not getting court cases or that are at earlier stages. So certainly, the fact that there is a holiday -- there was a holiday in the court did not help in the collection in the first half because you have less if you want leverage on that front. We always have had a disproportionate amount of LPI collected in the second half of the year. That's also because of the way the public administration manages its budget. What we are seeing now, and this, I think, positive. We're seeing a bit more collection also in the smaller market, which allows us to be less exposed to the risk only on the Italian market. What is important for us is to keep a consistent approach on collection. And so we did not offer steeper discounts on LPI with the objective of collecting more because actually detrimental to, we think, the long-term strategy. It's better to be consistent on what you ask so that actually the public administration know that they have to pay at a certain level. On the CDP scheme in general, the market in Italy, look, I think it's interesting if you see Italy and Spain. Spain injected EUR 11 billion of cash into the system immediately in June. Italy had a convoluted system built around CDP for anticipation for the public administration and application process, and that has resulted, frankly in a low take up. We actually advertised ourselves, the instrument because for some of the worst payers, it's actually better for us that they get the cash, they crystallize the debt, and we get paid. It also makes it easier to collect the LPI. So we will continue to do that. It's likely that the measure will be extended. Again, I think it's down to how effective is the public administration to manage those things. And unfortunately, they don't tend to be very reactive. One of the issues also they tend to crystallize them in long-term debt, short-term liabilities, which probably takes away some room of maneuver for the politicians. So that's -- yes, I think part of the reason for the low take up. On the volumes in Italy, first of all, we're pleased, actually, that the volumes in Italy recovered in terms of positive growth because we had a decline in the first quarter of the year. We shouldn't forget that in Italy the market is more penetrated on one side. On the other, the disruption of COVID was more marked than in other countries, and that affected also the private sector where people were really struggling to understand where their business was going, necessarily whether working capital was going. I think we are quite hopeful that we can see faster growth in the second half of the year. We've been disappointed by the fact that the government extended the VAT split payment. We take as a good sign that Europe did not extend into the full amount in terms of time, but 6 months shorter. So hopefully, in 2023 that will disappear as well or maybe even earlier. But as I said, I think in Italy, we have a team which has invested a lot of time in building strong relationship with large customers, and they should come through in the second half of the year. In the other markets, let's remember that for, to a large extent, we start from a very low base. So the incremental volumes can be quite lumpy quite significant. I think we have good visibility on Spain, where we expect to continue to grow at a healthy click. The same in Portugal, Greece, it think it's a small market. And I think in Poland, which is a market where the economy has been less hardly hit. We think that there will be higher demand, particularly for the shorter-term products, where margins are higher compared to the loans product, and we have a pretty good pipeline. The market where we have a bit more question mark is Slovakia because the government has announced a EUR 600 million cash injection. I think for the first time the part of that is to pay LPI. We are the largest creditor in that market. So that would mean probably we have positive news coming more for the LPI on the back book. while we may get repaid on the existing book, which is fine. On the golden power, look, as we announced in March, we have no material conditions. The approval has put just a request of information if we were to change the -- had to collect portfolio and would have to notify the government of that is had to collect portfolio. So we remain held to collect. So we don't see that as a major impact. And that does not have any effect on the synergies we can get from the DEPO deal. I think it's worth flagging that the DEPO portfolio of bonds is actually unencumbered, so it's not report. So in any case, it can be generated also by that in case. So we don't see that as a material recommendation. Dividend. Dividend, we -- what we've said always is that we pay out our net income of the year that is not required to remain at 15%. And at the moment, we are at 15.7% pre-earnings so far. So we can clearly grow our balance sheet and our RWA still by a bit without having to use the capital we have generated or will be generating in the next 2 quarters. Now we expect volume of the portfolio to pick up and to continue. So we will consume some capital. But we have, at this point in time, certainly, the dividend of 2019 to be paid, the EUR 71 million we mentioned and then in, what has been generated in the first 2 quarters of the year has not been set aside as capital. So it's fully distributable.

The next question is from Simonetta Chiriotti with Mediobanca.

A couple of questions from my side. The first one on NPLs. You have described the trend in net NPLs. So in the decision that you've taken on -- of increasing the coverage. So if it's possible to elaborate a bit more on the trend in gross NPLs and so this measure is moving? And second question on volumes, in particular, on Italy, looking at decline the first on the second quarter, it seems -- I don't know if my calculations are right, but there is a slowdown in the second quarter with respect to the first quarter in Italy, which is a bit surprising given the scenario. Could you elaborate a bit more on this?

On -- because the growth on the volumes in Italy, I mean, the growth has been pretty much single between the first and second quarter. Is that a growth we are super happy with, not really. I think there is more to do in the Italian market. And we would expect our Italian business to perform at a faster pace. We think this business will be, for reasons we've discussed before, less attractive to the large banks. But we still see the Italian market, a market where banks tend to be very aggressive on pricing. And for us, remember, growth means growth at a return on capital. Not growth at any cost. And I think what is important is highlighted also in the presentation is that we actually kept a strong pricing discipline. Throughout the last few years, including recently. So for us, it's important we maintain that, and we think the growth will resume at a higher rate in Italy as well. On NPLs, look, if you look at Page 16, those are the net numbers. If you look at Page 35, you also have the growth numbers. If you see the net nonperforming, they've increased by roughly EUR 5 million between end of the year. And now, provisions have increased by EUR 1 million, EUR 1.1 million actually, in terms of net NPLs, whereas on Page 16, the increase of NPLs from municipalities grew by 3.7%. So actually, the overall growth in NPLs outside obviously part has been fairly low and more than covered by the provision we've taken. That's why the coverage has gone up. And then if that was clear.

The next question is Filippo Prini with Kepler.

Three questions, if I may. The first 1 is the network recovery in the second quarter compared to second quarter last year. The negative delta is just for the effectively lower collection of the LPI or there's also some selling effect. The second is on operating cost. Operating cost this quarter has been quite tight. There is especially the cost of M&A, EUR 3.5 million. I would like to know if this EUR 3.5 million cover the all the possible cost for adviser and so on of the bank acquisition. And the last one is a possible clarification on the shareholders after the deal with DEPObank. I remember that Equinova has got a lockup on the new shares that we receive of 1 year as long as is not the main shareholders. If, by chance, Centerbridge before the closing of the deal will reduce further stake. Does this lock up start or it will never do not even start?

Not even. Thank you, Filippo. It will not even start. So that's the conditions only not to be the largest shareholder. And the view we took at the time, as frankly, if you stay centric were to sell, you have then a bank with a 90% plus free float. And frankly, a 7% shareholder is not here nor there in terms of overhang. So that's the reason. In terms of the M&A costs, we have announced EUR 25 million of overall transaction cost. That means restructuring costs, cost for advisers and so on. And so that's what we will be expanding over the period until the transactions then invested and all the things we need to do are done. So basically more cost for that. We think that's quite an ample number for what we need to do. But as we've already expensed almost EUR 4 million for that. In terms of over recovery, I couldn't quite get your question because you broke out midway through. So if you could repeat, that would be helpful.

Yes, yes, sorry. Just wondering if the lower recovery, network recovery versus same quarter last year is just a matter of effectively lower collection of LPI for the reason of shutdown of Court, difficulty to find agreement with public administration official or there is also some scheduling effects. So the fact that you have explained that the expected maturity of mature expected time to collect credit and passing a negative impact to profit and loss.

No. The rescheduling is pretty much constant. If you see the net overrecovery has been a EUR 2.6 million lower, but we collected also EUR 3.7 million lower LPIs. So the collection rate has been pretty much stable. So the real effect has been win in the collected land.

Okay. And if I may, very briefly, if I can get back for a second to the EUR 25 million of restructuring costs that you mentioned. Assuming that the large part will be restructuring, not just to pay advise or legal and so on. Should we expect the effective expense of this restructuring after the completion of the deal. So as long as there's no closing, so basically for third quarter this year is unlikely that should see another bump of cost related to operation of DEPObank?

Yes and no. I sense there are certain costs that are on closing. For instance, M&A advisers, there are certain costs which are linked to integration, where we are already working. And so some of the costs will be expensed between now and the closing date. And there are certain costs which are actually after the closing there because, for instance, we need to implement new core banking and part of those costs will be actually expensed by DEPO and will be to -- not including those numbers and to the account of the selling shareholders. Part of those will be actually for our own account going forward. So it's really a mix of that. Again, we take it -- we see it as an overall cost of the transaction. We don't see any reason why the transaction shouldn't go ahead. So we think the risk of having larger board costs, it's pretty clean.

[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 Max Belingheri for any closing remarks.

Thank you for joining us today. I hope you all have a chance to have a break and recharge the energies for a very interesting [indiscernible]. So thank you very much for today.

The conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.