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

Good afternoon, and welcome to BFF Banking Group First Semester 2023 Earnings Call. [Operator Instructions] After today's presentation, there will be the opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would like to turn the conference over to Massimiliano Belingheri, Group CEO; Piergiorgio Bicci, Vice President, CFO; and Caterina Della Mora, Director, Investor Relations, Strategy and M&A. Please go ahead.

Good afternoon, everybody. Thanks for joining us for the first half results of BFF. We are pleased to report our record first half net profit, both on a reported and adjusted basis, with almost EUR 82 million of net profit and EUR 82 million of dividends that we will pay to shareholders at the beginning of September. Revenue has been strong, up 72% year-on-year, driven mostly by a factoring and lending by our government bond portfolio, which is mostly on floaters. And the results have been achieved despite the increase in interest rate, which, as you all know, have entire repricing of our liabilities faster than our assets. The good thing is that the increase in interest rate has reset the level of late payment interest rate at a much higher level, 12% compared to 10.5% that we had from the 1st of January. The 12% rate kicks in from the 1st of July. And given the recent move of the ECB, this rate will go up to 12.25%, starting from the 1st of January. Freight remained the same. And clearly, we go higher if rates continue to increase. The loan book has continued to grow year-on-year. You remember that we have a seasonality in the business, so we make a comparison compared to the previous year. And we have continued to have a good discipline on the size of the balance sheet with a smaller balance sheet, given the decrease in the held-to-collect bond portfolio. We've increased our retail deposits in the last year. Our loan-to-deposit ratio has improved further to 71%, which is a good level of buffer to enter into the second half of the year, where we see the possibility to continue to grow our business in factoring and lending particularly strongly. In terms of capital and dividends, we will distribute, as I said, EUR 81.9 million of dividend equal to EUR 0.438 per share. That's an increase of 18% year-on-year, and that will be paid on the 13th of September after the General Shareholder Meeting that we have called on the 7th to approve the release of part of that dividend. Despite the payment of the dividend, the correct Tier 1 ratio stands at 15.6%. That leaves us excess capital versus our core equity Tier 1 target of over EUR 106 million. As many of you know, we have presented in the last quarter also our new strategy of date and the financial targets for 2026. We received a new credit rating from DBRS, which has given us an investment grade on long-term deposits. And we've start the process of the Board of Directors to present the new slate for the Board for next year. That's in summary the results for the first half, which we are pleased. If we look in the details of the balance sheet and the P&L on Page 3 and 4 of the presentation, that will highlight a few things. The first one is that the loan book has continued to grow at double digit year-on-year. It's the highest level we have ever achieved in the first half of the year, with the double-digit long-term growth rate that we've indicated. The balance sheet has actually declined given the decrease in the held-to-collect bond portfolio. So it's within the EUR 13 billion area that we've indicated we will keep is the long-term target in our strategy. Retail deposits have continued to grow at a good clip, or collect -- almost all collected outside of Italy. And that has driven the improvement in the loan-to-deposit ratio and in the leverage ratio. In terms of P&L on Page 4, this has been impacted by the lag of the repricing of the assets compared to the pricing of liabilities. But despite that, we have grown our net income by 20% year-over-year at EUR 81.9 million, which has resulted in good cost discipline, good cost/income ratio at 44%, trending down to the 40% target we have given to 2026. The cost of funding has gone up in absolute terms, given the increase in interest rate. And revenues are also being driven by the repricing of the portfolio. The reset of the yield in the government bonds and the revenues that have grown in the business, driven by higher loan book on factoring and lending, better revenues on payments and a good performance on security services if we take out the impact of the exit of a client last year. That's the overview of the balance sheet and the P&L, but we'll leave it to Giorgio to present the details and to Caterina to talk about the corporate governance.

Thank you, Max. At Page 5 and Page 6, we have a deep dive in the factoring and lending business. It's important to highlight the strong increase in terms of revenues. That has been driven by higher loan book and the increase in the interest rates. The gross interest income is up by 69%. The pricing of the maturity commission is still ongoing. So it's not an exercise that has been completed, but will drive us to all the -- we have higher year-on-year loan book. And also, it's important to highlight the net LPI over-recovery, which increased around EUR 6 million compared to the same period of the last year. Also, other important item is related to the other income, where we have the recovery costs with a strong impact, a significant impact. Only recovery costs are around EUR 11.4 million compared to the same period of the last year. As I said before, the gross yield on average loans increased around 34% year-on-year. And thanks also to the increase highlighted by Massimiliano in terms of LPI rate. And also, we expect a further increase starting from the 1st of July 2023. It's important also to remind that the total LPI and recovery cost fund is over EUR 1 billion and the 50% of this amount is off balance. So it's a big buffer in terms of revenue that we are postponing over the years. At Page 6, we have some information about the structuring and lending loan book and also the volumes. We had a strong growth with double digit in all the countries, et cetera. Slovakia in particular, saw an increase in Greece and in Portugal, and this, in terms of loan book, but also in terms of volumes. If we look about Italy, we have an increase, excluding the Ecobonus. That was something that we made strongly in the last year. The increase in terms of volumes is about 16% year-over-year. Going to the next page, Page 7. We have a deep dive of the payment business with also, in that case, a strong increase in terms of revenues that are around the 10%. And also an important increase in terms of deposits that reached the EUR 3 billion and very, very significant increase compared to the last year. The increase in terms of revenues has been driven by the intermediation volumes and also the settlement operation that we have registered during the first half of the year. And so also, the revenues has been driven by these positive trends in terms of volumes. For the security services that we have at Page 8, with a significant and positive performance for the global custody. And we have to consider for depository bank the impact of ASCA. Excluding that impact also, the inflows during the year were positive. And if we exclude also the impact of the revenues coming from ASCA that we don't have starting from the end of November 2022, revenues are up around 8% year over year. In terms of cost, we maintain a stable cost/income ratio, it's around 44%, despite the investment and inflation, where we have a specifical slide on Page 9. It's important to highlight that for restructuring and lending, we had an increase in terms of costs linked to the legal collection costs for the payments. There are some costs that are related to the volumes. So the increase is current with the increase of the business. And we have some savings around 20% for the business of security services, driven by lower direct costs and also the personnel expenses. We have an increase in terms of OpEx and D&A, and this increase has been driven by some investments in terms of innovation in our business and in order to improve our efficiency in the business. Both the business, the transaction services, but also the factoring and lending business, we are still investing but maintaining a constant cost/income range. In terms of funding, Page 10, we are maintaining our funding capacity without any ECB borrowing. So the liquidity ratios are well above the requirements. We have -- we maintain a cost of funding with a markdown compared to the reference rates in all the geographies. And we start to view and to have a positive impact in terms of the strategy that we started to apply last year in terms of our held-to-collect portfolio, changing the mix between fixed and floater both. Going to the next slide, Page 11, we have the asset quality. We are maintaining our excellent asset quality with 91% of our net income loans towards public administration. And we have to consider also that the NPL are mainly related to the municipalities in conservatorship. And finally, the cost of risk decreased to 7.3 bps and is lower than the one that we had in the previous -- in the same period of the last year. Page 12, as highlighted by Max before, we are going to pay EUR 0.438 per share after the AGM that has been called for the 7th of September, the payment will be on 15th of September, an increase of 18% year-over-year. And we are maintaining our strong capital ratio. Our CET1 is above the 15%, well above our target that has been set at 12%. And in terms of RWA density, we have to consider that we have a slight increase, but has been related to some transitory accounts that have been closed in July. So the expectation is to maintain our usual RWA density going forward through the year. Now I leave the stage to Caterina in order to present the [ slate ] for the Board of Directors. Thank you.

Thank you, Giorgio. We are at Slide 13. For those who are not aware yet, the current Board of Directors' term of office is coming to maturity in 2024 in -- with the AGM approving also the financial statements. And therefore, the current Board of Directors of BFF have started the process to present its own slate following a very rigorous process aligned to the best market practice. As a matter of fact, the Board is supported by 2 independent lead advisors. The wholly quantitative target composition criteria will be published 6 months ahead of the Annual General Meeting, and there is full flexibility to renew or not renew the current CEO without any exit payment. This is possible, thanks to an agreement which has been reached after the closure of the 6 months with the CEO related to the elimination of Golden Parachute trigger, which was based on the case of not renewal. It is important also to set forth on that the agreement is subject to all the provisions of the variable remuneration of the group remuneration policy. So 40% is paid upfront, 60% is deferred in 5 years, and 51% will be paid in financial instruments. As to the Board of statutory auditors later, the slate will be presented just by the shareholders. On the right-hand side of the slide, you can see the main milestones of the process. I would mention the last 3 dots which is -- which are the dates of February 2024 when the selection process will be completed, thanks also to the support of our top-tier independent adviser. And early March 2024 when the list of proposed candidates and our proposed Chairman will be published. The appointment will take place, as I mentioned before, in the AGM, which is usually held in April 2024. I would give back the ground to Max Belingheri now for the final remarks.

Thank you, Caterina. We closed the first report after the launch of the new strategic plan, in line with our expectations. We see ahead of us a good market environment, and we are quite confident in ties even to the market. And we'll give the floor to any questions you might have. Thank you.

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Giovanni Razzoli from Deutsche Bank.

Three questions on my side. One on NII and the target for the second one on the operating environment, the third one on the governance. The first question is on the guidance. In terms of the net income for the full year, EUR 180 million, EUR 190 million. I wonder whether you can confirm this guidance. In the first half, you had reached EUR 81 million of profit. So we need a quite significant improvement in the second half to generate around EUR 100 million of profit. So do you feel confident to reach these levels? And clearly, there will be support from the LPI refix, 1.5% since July 1, which means that you will record an LPI accrual rate that is 1% higher in the second half. So is it correct to say that out of the EUR 5 billion of stock of loans with higher LPI accrual rate will generate EUR 25 million of NII without doing nothing in the second half or around EUR 10 million of higher NII per quarter. Is that a fair assumption? And within that context, can you share with us what your view on the repricing of the maturity commission ongoing? So that's my first question. The second one is on the operating environment. I've seen that the government has postponed the project to force the public administration to pay within the 30, 60 days as a part of NextGenEU plan by 15 months. Is this a threat for your business if this regulation were to be implemented? And if so, what would be the impact on the DSO? And in that case, is it fair to look at the sensitivity of your NII or bottom line to different assumptions in terms of DSO? That's my second question. And the last one, sorry, this is a little bit old or embarrassing question. Given this late process renewal that has been achieved and announced for loans, I was wondering whether are you available to run the bank for another term?

Thank you, Giovanni. Let's start from the first question on the targets. We -- as I said, actually, in my presentation, we confirm the target for year-end. You know that we have a bumper last quarter usually for the transaction of LPI. And also, we have the step-up of the payment interest, which will kick in from the 1st of July. In terms of the way to calculate, roughly half of what is outstanding is overdue. So that tends to generate the LPI. So the EUR 5 billion, 2.5% generates the LPI, 1% will be on a yearly basis, EUR 25 million. That's in reality EUR 12.5 million of accrual. So it's important that given that we have the recognition of the EUR 40 when we have the receivable overdue, that actually tends to have a positive impact also on when we get more volumes purchased because we buy also a number of overdue receivables. So the peak of purchases at year-end should also drive part of that recognition. So confident on the year-end numbers, as I said. We are on budget in the first half of the year. So we should trend towards the indication we have given to the market. In terms of the operating environment, I think, overall, the operating environment is quite good. We are seeing customers and large customers that we indicated in the presentation, also the strategic plan, that we are considering doing revolving deals of large scale that we didn't see for a very long time. Also, the shift in the cost of funding, which has impacted all the banks, is putting more pressure, as we indicated, again, in the presentation to the market on some of our competitors. And we need to see how that plays out overall. I understand the reference you make to the next-generation EU commitment of the government to pay suppliers in 30 and 60 days. This year is the -- is a celebration of Alessandro Manzoni's birth or death, if I remember. And you remember, in high school, we all learn about the grida. You can put all the laws you want. But then if you don't have the tool and the instruments the operational instruments to actually deliver, those are simply statements of intent that are not frankly translate into action. If you think about also the NextGenerationEU funds, you will see that has been in the press that the [Foreign Language] will allow the local authorities to get some drawdowns of the payments related to those in part of what needs to be paid. So again, that should actually -- if it's only partial, it should drive further payment delay. So we don't expect a change. If anything, it means that actually the commitment of the government gets diluted. And we don't think that actually putting things in law make things happen necessarily. Remember, there is a commitment by the state to pay in 30 and 60 days, back then, it was 60, 90 days since 2002, and we are around. In terms of governance, look, this call actually has to be as frank and upfront as you want in asking questions. Such as a good way to have a dialogue with the investors directly. And in terms of my willingness to serve another term, I can confirm that there is. Simply in terms of corporate governance, the Board has preferred to have full flexibility for the Board slate and for the shareholders not to have, if you want, an exit fee, in case the shareholders or the Board were to decide that my service is not more needed for the good of the company.

The next question is from Antonio Reale from Bank of America.

It's Antonio from Bank of America. Three questions, please. The first one on cost, one on the repricing effort, and just lastly, on a clarification on one of the adjustments, which has been picked up by some of the investors. I think you've just commented on it. Starting with the question on costs. Your cost/income ratio was broadly stable at 44%, and that's despite inflation and the front-loading of some of the investments. I guess other one-offs related to the CMD were included. Can you help us quantify this so that we get a sense of the recurring cost base going forward? And any other initiatives that you might have, both as headwinds or tailwinds to your cost base that we should keep in mind? My second question on volumes. It was another strong quarter for volumes to the extent that sort of the first half can max given the nature of your business, which is, of course, highly seasonal and skewed to Q4. But can you talk a bit more through what you're seeing as the repricing continues and how your customers are taking the repricing effort? Just anecdotally, I think that would be a helpful color. And lastly, I think this relates to sort of the last point you've made answering the first question from my colleague. A few investors have raised to me questions around the settlement agreement that you've reached with the bank, which, I think, might have been partly misunderstood. Can you maybe just shed some light on this? I thought this to be market friendly, but maybe it's worth you spending a word or two explaining -- to explain this.

Yes. So in order, in terms of cost, the cost/income, yes, it's trending down. This despite inflation and the -- and also the investment we are putting through. The cost/income is also a measure which is driven by income. And so by nature, given that we will have a higher income in the second half than the first half, the cost/income of the business will continue to trend down. We are putting through a number of initiatives that we've indicated in the Capital Markets Day, which has not been all expensed and which will drive the reduction of cost and more efficiency overall going forward. We have some costs that have yet to come out. We have, in the first half of the year, still the cost related to some of the people who we have to let go, given the exit of ASCA last year. Some of them have exited in April, and some of them will exit in July. So there's going to be a reduction there. And we think there are other efficiency we can make. So overall, we think the inflationary pressure is relatively under control, and we feel pretty good about our ability to continue to grow and keep the cost in check. Also, it's worth bearing in mind that the resolution fund this year cost us around EUR 6 billion. Last year it was EUR 3.5 million, and that's actually quite an important impact on this year. In terms of the repricing effort, look, we continue to have a good drive in terms of volumes. The first half, as we indicated, has been -- where our commercial effort was also driven on repricing of them, almost all of it. But the -- some customers who we have longer-term contracts. We are seeing customers being confronted with the steep increase of the absolute amount of cost, and some of them are choosing to have 22 deals where they minimize the cost for them, the nominal cash outlay, which means usually less funding needs for us. So we fund actually for the same portfolio a smaller amount, which actually, for us, paradoxically generates a higher return on capital. And we are seeing more of that going forward. So overall, we see quite a lot of thinking around companies, and it's important. It's happening now because it's within their planning process, which will then drive decision for the year-end and also for the first half of next year. In terms of the settlement agreement, look, the Board of Directors' decision was driven by consideration of corporate governance and having maximum flexibility in, as I said before, renewing or not my position. My contract had, since 2013, a Golden Parachute, which worked also in case of nonrenewal, not only in case of termination. And the Board felt that, that protection should go to, as I said, give maximum flexibility to the Board itself and to the shareholders to decide what to do with the position of the Executive Director of the company. And the settlement we reached, in summary, has been a payment -- a one-off payment, which is half of basically what it was old in case of the decision would be carried out, which, we think, is a fair compromise in taking away, frankly, key protection for my contract in exchange for maximum flexibility in the part of the Board.

The next question is from Andrea Lisi from Equita.

Just a follow-up on the dynamic of the NII. In particular, if I look on a quarterly basis in the second quarter, NII was quite stable as in the first quarter. I understand that there is obviously the benefit from new and from the repricing of the bond portfolio, plus starting from July, the new level of an LPI rate. But I think that surprised me a bit was related to the factoring business, where the interest -- gross interest income divided by customer loans, the rate was lower in the second quarter versus in the first one. So just to understand, considering the various moving parts and the evolution of rates. If do you think that, considering in this division, is it reasonable to expect net of the LPI recovery to mean in a recovery of these rates? So an increase in the NII or the factoring and lending over the next few quarters. Because in the -- between the second and the first one, there was a decrease there. So just to -- if you can elaborate on this.

Yes. Bear in mind, when you look at the quarter-by-quarter, and you look only at the quarter end, you're going to get a skewed picture on the averages because you're looking at 2 peaks. And so when you do the averages of factoring and lending, you get some skewed results. Because we have the peak of usage of capital at the end of March, then the loans go down. They go up again in June. And so if you take the averages in December, you have a peak in December, then the assets go down to March, but you're starting from a higher rate. So you get those SKUs resolved because of where you are in terms of seasonality. So that's one. Second, overall, in terms of interest -- net interest income, you shouldn't forget that we -- as we said in previous calls, when we have a rising interest rate environment, we're always playing catch up, not only on the LPI rate, which is one, but also on our bond portfolio. So if you go to Page 10, for instance, our bond yield in the first half of 2023, the full first half is 279, okay? If you look at our floaters, the current yield is 451, which is the reverse 6 months plus the spread of 89 bps which has been quite different. And then we have the fixed rate bonds at 0.7%, which feels quite different if you take the average of the mix from the 279 you see in the first half because of the reset of the rate also on the floaters happens only every 6 months. So you need to bear that in mind. And because if you think expectation beyond the year was a stabilization of the rates, midway through this year and where rates are still increasing, we're still playing catch-up on it. And actually, we are quite pleased with the results given the dynamic in rate, which is slightly different than what we had forecasted.

The next question is from Simonetta Chiriotti from Mediobanca.

The first is on volumes. So you have a long-term target of growing volumes by 10%. And my question is if you think that this inflection could be reached already this year? Second question is on DSOs. How they are evolving in your main markets? And the final one is on risk weighting, if you can give us a bit more color on the increase that you have seen in the second quarter and the normalization going forward?

Can you repeat the last question, please?

Yes. On the risk weighting, that has increased in the first half. It was said that you expect a reduction -- so the density -- WA density, if you can elaborate on this point.

Yes. And Giorgio mentioned, there has been a particularly adjunct unsettled account, which was not closed at [ months ], and we generated EUR 100 million more of risk-weighted assets, and that will not happen in the next few quarters. So that's driven quite a bit of the increase in the density. In terms of volumes, yes, we expect to continue to deliver 10%-plus growth, as we've indicated in the business plan. When we present the business plan, we pretty much knew where were the volumes of the first half of the year. So it's not that we had different numbers in mind. The growth compared to last year, if you look at Page 7, it's plus 7% but we shouldn't forget in the first quarter of last year, we had the tax credit, which were actually quite important in the first quarter and because we have used our tax capacity. They are not -- they didn't come back this year. So if you strip that out, they're actually a plus 14% year-on-year growth, plus 16% in Italy, as shown in that table. In terms of DSOs, we will publish in our half year report the numbers. We are seeing in our portfolio a growth in Italy from 114 to 144 , but that's also a mix component. Spain is down 1 day. Portugal is down 55 days to 140. Greece is down 2 days. Croatia is not very relevant given the small size of the portfolio. France is down 7 days. Slovakia is down 1 day from 786 to 785. So again, overall, we see -- if you look at the overall portfolio, it's fairly stable. It changes from country to country. We were not seeing 1 direction -- any big pressure on 1 direction or the other.

The next question is from Filippo Prini from Kepler.

Two questions. The first one, if you can please give an indication if within the gross interest income of the first half, so EUR 271 million, is there already something of the new maturity commission or most of that is yet to be included into your numbers? And the second is again on corporate governance, but it's related to the discussion about the new draft law on the capital market when there is also a provision regarding the vote for the list presented by the Board of Director. If approved under the terms discussion, will it change something for the presentation with the list of the Board of next year?

On maturity commission, well, there is part of the effect. But remember, when we tend to enter into a multi-quarter agreement with customers, so if we reprice, say, March, then we've seen the impact on 1 quarter, not on the full quarter. So the impact -- and the maturity commission is then spread out across the expected life of the loan. So we haven't seen the full effect yet of the increase in maturity commission in that respect. On the -- whereas now, the increase in interest rate, given that our liabilities reprice with the exception of the retail deposit reprice of roughly Euribor, 1 month that gets repriced immediately. On the draft law on capital markets and the impact on the Board of Directors' slate, well, it depends how the law is then approved. There are various -- some flavors that are advertised on what can be the final approval. There are also the issues in that capital market law regarding multiple votes, which we need to see how it plays out. We prefer to remain for the public company without different classes of voters. And -- but on the Board itself, the idea for the Board is to continue the process of presenting the Board slate. And in case there is a law that changes the process, then we will adjust to that process. I think the major, if you want, item that were in discussion out of memory was, one, on timing of the presentation of the Board slate. And I think we will be in time to present the Board slate even in the new setup. And second, the possibility to offer the shareholders, as it happens in other jurisdiction, a vote Director by Director also will be fine for us, too. I think in a sense, the Board takes a view that in a company with almost entire free float is the responsibility of the Board to present the list of directors and not to have shareholders who have a marginal presence in the shareholding to take responsibility of identifying the structure of the Board.

[Operator Instructions] The next question is from Michele Baldelli from BNPPE.

Just a question just to understand the strategy. If I do the math on the LPI, you were pricing at the start of the year, there should be a 125 basis points higher asset sales due to this. And the total increase of that is 170 basis points. So basically the difference is around 45, 50 basis points. And this should offset the increase of interest rates from the funding cost. So I was wondering, is it just because of the lag or you are repricing the core interest rates without LPI at a much lower, let's say, level than the increase of interest rate? Just to understand the strategy.

Yes. Now let me clarify. First of all, when we start the year, we have a loan book, which has been bought previously. And so that has a certain yield. On what is late, then we have the step-up of an LPI irrespective of what or where that loan book has been priced at. And the new volumes, which, by the way, proportionately they are less in the first half of the year than in the second half of the year, gets repriced at a higher rate. We don't -- we tend not to take into account the step-up in LPI to reprice. While we simply transfer the benefit to the customers, we look at the yield and implied spread on the base rate that we charge to the customer and then to keep that as a reference point for our pricing, and that's the effect. You need to bear in mind, part of our portfolio is in zloty. And actually, the zloty rate has gone down, slightly, but it's gone down. So that has an impact of roughly 20% of our loan book and so has that effect as well.

This concludes our question-and-answer session. I would like to turn the conference back over to Massimiliano Belingheri, Piergiorgio Bicci and Caterina Della Mora for any closing remarks.

Thank you again for joining us today and for the questions, also the most direct ones. We are, as I said, quite pleased actually of the results of the first half. Given the changing external environment, we trend in line with our expectation. And we look forward to meeting you in the investor's meeting and in the next earnings call in 3 months' time. Thank you very much, and have a nice summer.