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

Good day, and welcome to BFF Banking Group Conference Call about 2020 Full Year Results. [Operator Instructions] Please note, this event is being recorded. I would like to turn the conference over to Max Belingheri, Group CEO; and Piergiorgio Bicci, Group CFO. Please go ahead.

Thank you, and welcome, everybody, to the full year results presentation. What a year has been. We have reported today some pretty solid results. And given the COVID environment, it is proved once again that the company is strong and stable under many circumstance. And the financial results, as you can see on Page 3, are in line with the previous quarter's trend, with the 2020 adjusted net income flat year-over-year of 7% increase, if we exclude the LPI over-recoveries, which has suffered from the lower ability of the public sector to transact. The new business volumes have grown at almost 10% year-over-year when we had a flat customer loan portfolio due to the faster collection that we have experienced, both in Italy and also in the foreign market. We have a strong outperformance versus the Italian factoring market as, in fact, today this amount of loan advances have actually gone down 8% year-over-year. And therefore, we have been able to perform ahead of that. The growth of the international portfolio has been marginally stronger, and the composition of our loan portfolio is now 67% domestic and 33% outside of Italy. Because of the lower collection, the stock of unrecognized off-balance sheet LPIs, our reserve value from the collection of LPI has increased at over EUR 400 million. Funding has been plentiful partially because also we didn't buy as many receivables as we expected at year-end. That gives us pretty good comfort in the months to come ahead of the closing of the acquisition. In the past credit environment, we have maintained a low-risk profile. Our net NPLs have gone down by 1/3 year-over-year. Cost of risk will remain subdued, and we have increased coverage of 84% on the NPL side. Credit holidays are marginal in our portfolio, EUR 3 million overall, 0.07% of the customer loans at the year-end. Importantly, we have EUR 170 million -- EUR 169 million, sorry, of accrued dividends, which are not included in the capital ratio and ready to be paid as soon as the regulator will allow. The capital position has been boosted by the introduction of the new definition of default. We now have a core equity Tier 1 of 15.5%, with EUR 107 million of excess capital above our 15% total capital ratio. If we include the dividend, which have not been paid out yet for 2019 and '20, our pro forma capital and common equity Tier 1 ratio is 26%. So where we were in this year, if we turn to Page 4. I think it has been a mixed year. Certain things have gone well. Profitability has hold up, sustained also by high level of collection of principals. We have been able to continue to strengthen our relationship with customers. Credit has quality remained strong. Cost discipline has remained strong, despite our investments in growth. And importantly, we have implemented successfully, as you'll see later, the new definition of the fault, with the result of having reduced significantly our past due on one side and boosted our capital ratios on the other, aligning our approach to the one that our competitors had, had for a period of time. Not everything has gone to plan in a difficult year like 2020 for our economy. The public sector is injecting more cash, which has resulted in accelerated payments and reduced interest from our customers in selling receivables, which we expect to be temporary, but certainly has impacted us. So high collection as an offset to the volumes and the loan growth has not grown as much as we wanted it to be. And in general, the Public Administration working remotely, as we mentioned in the other quarters, that the late payment collections being weaker than last year, particularly from the Italian NHS. Now having said that, and given the results of 2021, where are we looking at 2021 -- 2020 -- where are we looking at 2021 on Page 5. First of all, as I mentioned, the new definition of default has come online. Our net past due on January 1 are EUR 2 million, a significant decrease from last year, and we have had a positive impact on the common equity Tier 1 and total capital of 4.5% and 6.6%, respectively, after the realignment with the risk weighting. On dividends, we had EUR 169 million available to be paid. We're not improving both in the capital ratios, and we're waiting for Bank of Italy to clarify the approach and how much of that will be able to be paid immediately, if not all, or how much we have to be postponed in October. On the DEPO acquisition, we are progressing as expected. The shareholders have approved the meeting at the end of January, and we expect closing to happen within the first quarter of 2021. And after that, we will present a new business plan and the new entity to the financial community with a Capital Markets Day. Transaction integration cost has been partially expensed, EUR 10 million already in 2020, and we've locked in contractually over 90% of the cost synergies to kick in at closing date, giving us good visibility on the returns of this acquisition. Finally, we present today, in preparation to the release of our second nonfinancial disclosure, our main point on the ESG. That's an area where we want to be a leader. We were one of the few companies that have established an entirely non-financial disclosure, and we have tracked a major number of milestones to achieve our objective of sustainability. Importantly, we are aspiring to be a leader in corporate governance and with the renewal of the Board this year, we'll be a fully public company and the reports later will be published in the next couple of weeks. So let me move first to the financial results on Page 6. Here, you have the dividend available for distribution this year, 97.6%. 84.9% would be the dividends, which is the capital -- the free capital, which has been generated in the year and 12.7% and what is the excess capital that is available from the change in RWA, which is equal to the adjusted net income. If you look at it, we have generated, therefore, a 29% increase in free cash flow for the shareholders and a 38% in the dividend pool year-over-year. That has been driven, first of all, on Page 7, by net income -- an adjusted net income. If you take out the extraordinary item, mostly the M&A cost, which has been flat at EUR 97.6 million. Importantly, if we take out, like, our recovery, we think it can be increased from 86% to 92%. That's an important metrics because the LPI over-recoveries, that can be at times volatile. Collection of LPI has been lower than last year, overall, with EUR 78 million compared to EUR 88 million, but with a good recovery rate. The net income has also been impacted by a higher provision than last year, which an increase, as I mentioned before, coverage on the NPL portfolio from 75% to 84%. Return on tangible equity has remained high at 38%. So these are the highlights from a financial point of view, but let me give the floor to Giorgio to walk you through the details before I talk about DEPO and sustainability again.

Thank you, Max. Going to the next page, Page 8, we have growing interest income net of LPI collection, as alluded by Max, and also the LPI stock grown during last year. We have to consider that the -- we have EUR 10.4 million of lower LPIs cashed in, in 2020, if we compare this with regards to the previous years. But importantly, the stock of recognized off-balance sheet increased by EUR 10 million year-over-year, and this is a good base in order to continue the collection in the future in the next months. Going to the next page, we explain our cost of funding. The interest expenses have slightly decreased to EUR 47 million. The reduction has been mainly driven by the cost of Zloty funding, but this has been partially offset by the increase of the average drawing fund and the incidence of more expenses and less flexible lines, like online deposits and bonds. At least, our cost of fundings for 2020 is 1.52% and is lower than the previous year. Going to the next page, we have maintained a stable net interest income and net banking income. They remained almost flat. But it's important to highlight that the recovery of the credit collection cost that are accounted on a cash basis increased from EUR 7.2 million in 2019 up to EUR 10.4 million in the last year. Regarding the efficiency and the operating cost, we continue to manage this kind of -- the cost. The operating costs are up by the 2%, but this has been driven by the higher employee base, the setup of the branch increased and the setup of the digital platform in Spain. Also we sustained a higher ordinary solution fund and fitted the contribution and that was EUR 1 million more than previous year. The next page, Page 12, we have the explanation of the customer loans that are stable. Also in a context of liquidity, important thing is that our performance has been better than the performance of the market -- of the factoring market, and we have slightly decrease in Italy due to the collection -- the high level of the collection that we have seen in the last year. In Poland, we grew if we consider a constant exchange rate. Also Spain, we have slightly decreased the customer loans at the end of year also for the same reason that we had -- we have to consider that Portugal and Greece have both gone up to more than 50%. But in Page 13, we have the growth in new business volume. New business volumes grew by 9% around the group, with Spain plus 18% year-on-year if we could include IOS Finance. There was a double-digit growth in Poland and in Portugal. And Italy, we made about EUR 3 billion, almost flat, but we have also to consider the negative performance of the factoring market in Italy. We have a strong liquidity without any ECB financing at 114%. Our liquidity position is very strong with a high level of LCR. This is mainly due also to the collection that we had in the last weeks of the year. We didn't recourse to add ECB TLTRO or any other emergency liquidity measures. And at the beginning of the year, in January, Moody's confirmed again all BFF ratings. Going to the next page, we maintained our fortress balance sheet. We have EUR 38 million of recognized mark-to-market gains in our hard to collect portfolio. We maintained our conservative asset and liability management, and the natural currency hedging with the funding that we have in our core market where we don't have the euro. Going to the next slide, Page 16, as enacted by Max, we have -- we continue to have prudent provisioning with a negligible credit risk and excellent asset quality. The net NPLs are down to EUR 2.8 million, but we increased the average coverage that with around 84%, and important that we collected 100% of closed -- the principal in the closed conservatorship. This is a good result for our a strategy because if we consider the -- raising the box in the right, we have EUR 64 million at the end of the last year of NPLs that are municipalities in conservatorship, but we can collect the 100% at the end of the costs. Going to the next slide, it's an important line because it's related to the new DoD application. We have finished the transaction at the end of the year. And considering the application of new DoD at the beginning -- the 1st of January, our net past due is EUR 2 million compared to the EUR 42 million of the previous year. The BFF approach with the new DoD has been shared with Bank of Italy in the context of the DEPObank acquisition and after the clarification given by Bank of Italy on how to apply the due date of the invoices. We applied the rules in order to set up the due date to the original invoice due date, and the result of this is that the public exposure are lower than 90 days. And this positively affected the capital absorption because applying this year with the loans lower than 90 days versus public entities, the RWA is 20% and not the 100%, for example, in Italy with longer duration. And this gave us a very big boost for the capital absorption. But now our methodology is aligned also with the methodology of our peers. So the result of this is on Page 18, that we maintained a very strong capital position with EUR 169 million of accrued dividends, and we have an additional buffer of more than EUR 100 million of the excess capital. The total capital ratio now is at 21.6%. The CET1 ratio is 15.5%, 11.9% if we apply the old RWA approach. So at the end, we maintained an ample buffer versus the present requirements, and we continue in our prudent approach also on this side. For the next page, I leave it to Max to explain the time line of the path for the DEPObank transaction. Thank you.

Thank you, Giorgio. On Page 19, we have the time line of the DEPO acquisition. We're almost there. We are aiming to close the transaction at the end of this quarter, with the closing and the subsequent merger of DEPObank into BFF and the GSM of both banks and approved the merger at the end of January. And we have been working quite hard in the last few months to make sure that we are ready for the full integration. And o Page 20, you can see the target that we have given to the market when we announced the deal, which we are still valid and where we think there is a potential upside, both on the funding and SG&A synergies, particularly on this front. We've already locked in 90% of these cost savings contractually, and so we expect those to flow through our P&L shortly after the closing of the acquisition. Importantly, also, we have already expensed in the P&L of 2020 EUR 10 million out of the EUR 25 million of transaction cost. And therefore, they have already been offset in our capital position. So all well on that front. From Page 21 onwards, you see our first disclosure in the presentation to the market of our ESG efforts. We are, we think, a strong and sustainable business, long term, committed to our community, to our people,and with the aim of being a leader also in the governments is one of the few public companies in the Italian market. On Page 22, on the environmental side, clearly, we are now an investor company, but we are aiming to minimize our environmental footprint. We have done that by managing proactively our real estate presence, with Poland and Spain already being in gold class buildings and Italy moving into a similar situation from 2023, at the latest. We have reduced in the last year significantly our paper consumption, our travel. That's certainly due also with the effect of COVID, but that has prompted us to rethink some of our processes and the way we interact within the group. So we expect a large amount of those savings in environmental impact to be continued over time. If you look at Page 23, at our social approach and our focus on the well-being of the community where we live and the employees, we have supported our community in 2020 in a difficult time with COVID. We have managed to keep our employees safe in being proactive in managing the shutdown more than actually was required by the government at any point in time. We have continued to train and increase the training of our people remotely, with significant improvement compared to the previous year, both at the employee level and the management level. And we have also changed our performance management programs to add some sustainability criteria, so to line the long-term well-being of the company, with a long-term well-being of the community around us. Finally, our increased diversity, not only at our Board but also in the management team in the last 2 years, and we have implemented a responsible product offering policy, which protects the customers from the risk of potential new selling and misalignment of incentives. Finally, on governance, as I said, as 1 of the few Italian true public companies, we aim to set the gold standard on public governance in the Italian market compliance with a self-regulation code. And we have a Board of Directors committed to have more than half of its members in the new Board slate being independent. Already now, we have 3 quarters of those. As independents, we have a large component of female represented. Actually, the majority of the statutory Board Members being female, so we have a minority of men in that a large contingent with international experience of foreign nationals. So we say we are real forefront of that. In that respect, the Board has worked quite extensively, on Page 25, in the last few months to prepare for the renewal of the Board and also the -- clearly the expansion of the business of BFF. We established on the 19th of January the target for the qualitative and quantitative composition of the Board. And in the next 2 weeks, we will publish the Board Director slate, which will be then submitted for the approval of the AGM on the 25th of March. We think this has been a very helpful process for us to rejuvenate the Board and make fit-for-purpose for the enlarged BFF. And where does it leave us? On Page 26, it's actually quite positive on the outlook and sustainability of our business. BFF today is solid in terms of capital with a high profitability and good cost income. I would say, a leader in those aspects in the banking world. And we have in front of us great opportunities. On one side, the change in the risk weighting of our portfolio, the freeing up of a lot of capital allow us to look positively to the organic growth of the business, and the elimination of competitiveness is a huge advantage we have in terms of risk absorption in our pricing. And secondly, with the acquisition of DEPO, we diversify and capitalized the business, which is return accretive for our shareholders and gives us ample liquidity and low cost of funding for our core business. And so at the end of this year, we expect BFF to be even stronger, with higher capital generation for the reasons I've mentioned, with a cheaper and ample funding base and, therefore, in a position to entrench even more our strong competitive advantage. Thank you for listening to us. We are open to any questions.

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

I had 2, please, from my side, the first one on the risk-weighted asset change and the second one on capital deployment. So the first question is, I mean, you've historically been very conservatively run a business. And I'm wondering how does the sort of new definition of default and the implied significantly lower RWA density affect your business outlook, your pricing and, more broadly, your approach to risk taking? And the second question is, of course, your subject as part of your sort of banking license to the restrictions from the Bank of Italy when it comes to distributing dividends. So my question is leaving aside sort of the guidance, what kind of alternatives with the projects as capital would you foresee short term and medium term? So I'm wondering around whether it changes your appetite for further M&A.and, down the line, once post September, if it makes sense, given where valuation is also to consider share buybacks rather than just cash dividends.

Thank you. Let me reply first to this point in reverse order on share buy back. Look, yes, it may make sense. The issue with share buybacks is, actually, you need to go through an approval process with the regulator. And so paradox is actually in a world where the regulators put illustration on dividends, even for institution like ours. Going from approval process on a buyback will be actually more complicated than simply paying a dividend. So I think we will have to see that. But certainly, we have ample capital. As you've seen, EUR 169 million of dividends accrued, plus another EUR 100 million of excess capital above our 15% total capital level. And so we plan to distribute that to the shareholders as soon as possible for a little under EUR 169 million, paying for the excess capital to continue with our historical policy, which is to continue to grow the business and deploy as much capital as possible in our business, which clearly will absorb less capital and then pay out the earnings we generate from the business with the shareholders if they are above our capital level. We have been active in M&A in the last few years, but we don't want to be driven by the fact that we have capital available to do M&A to deploy capital for that reason. We think it would be risky to have that approach and simply potentially value destroying for the shareholders who want to remain disciplined on that front. There's certainly an idea of opportunities there, and I think we have demonstrated in the past that when they arise, we are able to execute them and execute them well. On the RAW change, look, it's a bit like the cheaper funding of DEPO. We need to be disciplined in not transferring the value of absorbing less capital to our customers as well as not transferring the value of our funding -- cheaper funding to our customers. So we want to maintain the same price discipline we have had. Certainly from a competitive point of view, we can withstand more on some of the aggressive behavior we've seen in the last few years, and we are not at the disadvantage anymore in terms of capital absorption, as we have been in the last few years. And certainly, we have -- we will a full competitive advantage on the cost of funding. But we want to remain focused on that front. And I mean, the objective is to continue to grow the business, taking on large customers, which can provide us with continuity over time. Certainly, we want to grow. We have the headwind of a good payment behavior by the public sector. We'll see where it will go next year. There is more cash coming through the European Union certainly. But at the same time, we think the fiscal gap will increase. So to be -- it's interesting to see what are the dynamics there. We also recognize that we operate in a lot of markets where we are just scratching the surface in terms of development.

The next question is from Simonetta Chiriotti with Mediobanca.

I would like a bit more color on the last point that you mentioned, and in particular to the good payment behavior by the public administration. So it would be interesting to know from you if this is due only to the high liquidity that is currently available or if you -- if there is a structural change or if structural changes could come with -- in the coming years also, considering the recovery side and so on.

I mean, we don't have a crystal ball. I think the public sector has made a big effort across many geography to pay well, particularly the new invoices in different ways. If you look at the dynamic of our portfolio, I think it's interesting. You see in a lot of market, we've actually grown volumes nicely, but Italy. And then the growth of the portfolio has been actually more similar wide because, actually, what has happened in Italy is that the -- particularly the [indiscernible] side paid quite well quickly in the existing portfolio, whereas abroad, particular in Spain, we have seen the government injecting -- or Portugal injecting discretely, I mean discretely is the wrong word in English, in chunks cash at certain point in time in the year. So what we ended up was we bought more and we grew the volumes, but then saddling the portfolio actually flat because of the prepayment. Now how is it going to be this year? It's difficult to say. Spain has injected some cash in the system already in January, particularly in Catalonia, that's ahead of the Catalonia elections. Maybe it's linked to that, but that's -- or simply a coincidence. So we need to see how things play out. I mean what we can do is simply go out, contact more customers, get more volumes through the door and counter any potential increase in liquidity in the public sector by having more services to offer to our customers and having a better commercial team and a stronger commercial team to go after that. But we don't know where we are headed frankly in terms of DSO. Certainly, from the projection we are seeing, expansion, particularly in pharma is due to go up, but partly, it will be COVID. We think it's from the European countries. So the question will be more how long it takes actually to get the money, disburse them and that's for how much of a working capital in balance there is in the way the public sector operates.

And a second question, if I may. Looking at the LPI over recovery in the last quarter, with the performance was good, roughly in line with the last quarter of 2019, is it possible also on this side to have a bit more color?

Yes. We've had -- I mean, if you look at the performance year-over-year, we have had, I would say, a good performance in the public administration. We have been with a larger number of debtors. And so the team has been pretty successful there. I think in the last quarter, compared to the first 2, we didn't have the same impact of COVID. Now you can imagine the shock for the Italian public administration in particular in getting itself organized with working remotely. We are still seeing certain difficulties in -- on the NHS side. And I would say the entire shortfall has been driven by lower transaction done on the Italian NHS last year.

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

I have a question on the dividends in the sense that there is this kind of mountain of dividends accumulating for this year. The point to me is more on...

Sorry, Michele. You're breaking out, so I cannot really hear you.

Okay. Is it any better?

Much better. Thank you.

Okay. Perfect. So the point was on dividend because there is a mountain piling up for you that should be paid as soon as regulators allows you. Then looking to the next year, what I was also thinking is also that you will have also there net income synergies of DEPObank and the new regulation on the DoD and the increase of the capital ratios and also some kind of bad will to be recognized on the acquisition. So on 2021, probably, also the dividend policy should not be that bad. Is it something that you can share with us certain qualitative at least thinking because I can imagine that on quantitative, it is not possible, but because it can be summing all of these was coming up, that could be also 1/3 or 30% of the market cap.

Yes. I mean, even today, I don't know what the market cap is at the moment. That EUR 169 million of say EUR 800 million, EUR 850 million is [indiscernible] 20% of the market cap. So if we have another year with -- and plus having DEPO certainly, that will be added. But we are quite hopeful -- we are hopeful that the regulator will allow us to pay rapidly this dividend and remunerate our shareholders. Now I think if you look at our position compared to, I would say, any other bank, you could think -- we are not really exposed to the credit cycle. I mean, if our shareholder in a normal universal bank and my dividends are trapped, I don't know if those dividends that we have to fund in essence the losses that are piling up in the bank balance sheet. So we don't really have that issue. But certainly, we don't need that capital. If they are sitting idle, then we would like to pay it out to the shareholders as much as possible, as early as possible. On -- so one question, you mentioned, I think, it's important. I mean, yes, we will generate bad will with the acquisition of DEPO. We will consider that an adjustment to the -- to our net earnings, so we don't expect to pay out the bad will, and that will certainly will not be well received by the regulator, and we'll reabsorb the excess capital. Sorry, in the bad will, the bad will and new [indiscernible] should cover the 15% total capital, so we are within the 15% total capital. So that will be reabsorbed. And so I think the effect of the new DoD will certainly that we have plenty of capacity to pay out a large amount of our earnings, if not all to our shareholders also this year.

[Operator Instructions] The next question is a followup from Simonetta Chiriotti with Mediobanca.

Then on dividends, just to understand, which is -- I mean, you have submitted some questions to the Bank of Italy, if I understood well, and you are waiting for an answer from them. When the answer could be is expected from you?

Yes. Well, we submitted the question in December. And you remember, we had in the agenda of our GSM at the end of January, a distribution of dividend and we did that as we've announced at the time. If you read our press release, it lays out the reasons why we think it will be subject to the regulatory limitations for the payment of dividend. To simplify, mainly for 2 reason, first of all, it applies to the top of the CRR group, and BFF is now at the top of the CRR group. Secondly, the regulation define dividend can be restricted payment in cash that reduce the capital of the bank, and because we haven't allocated our dividend to capital, then, by definition, if you pay them in cash and we don't reduce our capital, we think this will be able to be paid. We are watching what the other Italian banks are doing because I think there are potential interesting cases that just the tax should be applied exactly with the same reason. We are in contact with our regulatory team, and we expect an answer shortly. But we are not in total control of what they do.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Well, thank you, everybody, for being close to us in this complicated year, and we look forward to you attending also our Capital Market Day in [ the coming months ] after we close the DEPO transaction. Thank you. Have a great day.

Thank you for attending today's presentation. You may now disconnect.