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

Good afternoon, and welcome to BFF Banking Group First 9 Months 2023 Earnings Call. [Operator Instructions] Please note, this event is being recorded. Now I would like to turn the conference over to Massimiliano Belingheri, Group CEO; and Piergiorgio Bicci Group CFO. Please go ahead.

Thank you, and welcome today for our 9-months 2023 results presentation. We are pleased to report our highest ever 9-months result with a growth of 16% year-on-year of our net income at EUR 122.5 million. Importantly, the outlook going forward is quite positive for our business, underpinned by the dynamic in interest rates where we will see the late payment interest to increase from the current 12% to 12.5% from the first of January, which will boost both our running yield, but importantly, also deferred profitability. The dynamic on the commercial side on factory and lending is good. The loan book has grown 12% year-on-year with double-digit growth in several countries. Importantly, we still have to benefit from the upside on net interest income. As you remember, our liabilities reprice quite quickly, while the assets reprice with a certain time lag. And we are undergoing some important renegotiations with our customers, which will boost our earnings going forward. In an environment which we see as positive for the business, we have boosted our liquidity and increased our retail deposits, which have grown 4x year-over-year and has brought our loan-to-deposit ratio at 71%, with a good level of liquidity and the ability to fund the for the growth in the business, particularly ahead of our peak hunting season at year-end. Importantly, driven by the growth in the LPI rate, our off-balance sheet reserves have grown to EUR 605 million, which is a significant buffer of future profitability, which we carry outside of our accounts. We have a very solid capital ratio. Our CET1 is at 15.5 million. We have over EUR 100 million of excess capital compared to our target of 12%, and that's despite having paid already the interim dividend for this year. The earnings of the quarter, which are EUR 40.5 million have been set aside for dividend distribution, together with the fourth quarter earnings for the payment after the AGM. We have decided as many banks have done to set aside the 2.5x the windfall tax amount in reserves, which will not have any impact on dividends on our payout ratio throughout the business plan horizon. Importantly, the European Commission has published the new proposal for the late payment directive. We should be transforming to regulation. And if approved, as it is today, we further boost our earnings driving up the recovery cost and the LPI accrual time for our portfolio. In the quarter, we have acquired with EUR 7 million, a 7% stake in General Finance as a financial investment. And we are proceeding with the process to appoint the new Board of Directors, where we've published our quantitative assessment for the target board composition, which is made available to the shareholders. If we look at what we have done, we have clearly announced at the end of June, our new business plan, and we're already setting motion a number of initiatives, which will help drive the business going forward. We filed the application, first of all, to open a new branch in France which we expect to be operational in the first half of 2024. We have signed a partnership with Team Systems, the leading Italian ERP provider for SMEs where we are the exclusive provider of factoring services for the public sector receivables that the Team System clients have in their platform and they can provide a boost and access to smaller customers than we usually target. Third, we are about to file the application for the opening of our service in terms of deposit gathering in Greece. We expect to open that again in the first half of 2024. Greece is an attractive market for deposit because it has one of the lowest the deposit cost in Europe, and so I can provide further liquidity, but importantly, further repeated a cheaper cost than what we currently get mostly from the Spanish market. And finally, again, on funding and on our ESG strategy, we've launched our first social bond framework, which will allow us to issue re-eligible securities on one side and strengthen the link between sustainability and financial targets. If we look at our balance sheet on Page 4, we have continued in our stated strategy of containing the size of our overall assets with a remix between the loan book, which has grown 12% year-on-year and a decline in our bond portfolio, which has gone down year-on-year by EUR 1.5 billion. On the funding side, we've increased our retail deposits by EUR 1.6 billion, which has driven a better loan-to-deposit ratio of 71%. The fact that we have actually contracted the overall sales managed has improved our leverage ratio by almost 1 percentage point year-on-year. I'll leave it now to Giorgio to -- sorry, on -- you're right, Giorgio, on the adjusted net income, I skip the page on Page 5. Revenues have increased 75% year-on-year with a strong growth on factory lending driven by the growth in interest rate repricing and the growth in the loan book, an increase in the yield of the held-to-collect bond portfolio, although that is not fully repriced because there is a reset of rates that has happened actually at the end of October. And the cost has actually gone up as well significantly. You may remember, our liabilities reprice faster than our assets. So the fact that our net revenues have gone up by 9% year-over-year. It's actually a pretty good result, particularly if you take into consideration that we have the first 9 months of this year without Arka, whereas last year, we had in our client portfolio, and that has impacted the revenues from security services. Net of that, the security service is growing at high single digits in terms of revenue. Costs have been kept under control with a margin growth year-over-year despite the fact that we still haven't seen in the 9 months the full effect of the cost take out in the Security Services division. The cost income has remained stable at 44%, resulting therefore, with a fairly good provision level in net income of EUR 132.5 million. So having done now, I pass to Giorgio for the details on the media businesses.

Thank you, Mas. Good afternoon. And now we can go deep in the single business line, starting from Page 6 with factoring and lending. As delighted before, there was a growth year-on-year in terms of revenues of 16, 17% year-on-year, and split with an increase of 4% in terms of gross interest income, thanks to higher interest rates, higher loan book and also the net LPI over recovery. We have also an increase in other income about that is EUR 21 million and the this is related to the increase in the recovery cost rights that are EUR 17 million compared to the less than EUR 5 million in the 9 months of 2020 '22. The result of this increase led the gross yield on average loans go up to 7%, with plus 35% year-on-year. And also, we have to take in consideration that increase in terms of LPI rates, led the recovery cost and PI funds grow up to EUR 1 billion with a non-in-balance reserve of profitability that is higher than EUR 600 million. And this is a profitability that can be booked and moved forward with activity on collection of LPI. Going to the next page, Page 7, with some KPIs of factoring lending, the loan book grew 12% year-over-year with -- especially Italy, Greece, Spain and Portugal with a growth that is higher than 10%. Poland confirmed the positive growth. And in other countries, France remained stable with a small decrease in Asia and Czech Republic. And there is also a great performance in terms of volumes with a 7% year-on-year with EUR 5.6 billion with also in the same country to decrease Portugal and Slovakia, and double-digit growth. In the next page, we have a deep dive in terms of the new LPI -- the late payment regulation, I leave the floor to Massimiliano to go deeper on this point.

Yes. We discussed with many of you in the past, the regulatory framework that underpins our business, and we always indicated that we thought the direction of travel of any change in regulation would have been favorable to our position in the market. And the European Commission has actually published a proposal for the review of this directly, which should become a regulation, which means it directly enforceable in every jurisdiction, which actually goes along that direction of travel. It shortens the maximum payment times for the public sector. It increases the recovery cost from EUR 40 or EUR 50 per invoice, which is quite beneficial for us. And in general, aims to make easier to enforce our claims towards the debt. We are still waiting for the EU Parliament new council proposals around this regulation, we think the direction of travel there, it's in what we expected, and we don't see any backing down from the framework that has underpinned our business for so many years.

We are now at Page 9. We start with payments business with a strong increase in terms of revenues. And also it's important to highlight the successful acquisition of new clients for this business with a positive impact going forward. We observed an increase in number of transactions that are higher 11% year-on-year. That has been partially offset by the decrease and the decline in checks are receivable, but we are confirming the positive trend on the electronic payment business. So after that, the revenues grew by 14% year-on-year, reflecting the positive trend in volumes observed in terms of number of settlement and transactions. For the liquidity coming from the payment business, we are now over EUR 3 billion, and it is higher of more than 50% year-on-year, thanks to the different balance and operational accounts that we put in place with our clients. For the security services that we have at Page 10 and also for this business, it's important to all the onboarding of new clients from alternative funds and also the pension funds is ongoing the activity in terms of Casse di Previdenza. There are a lot of tenders open, and we are working also on that side. In terms of assets under deposits, excluding Arka, there was growth of 40% compared to the last year with positive net inflows of around EUR 4 billion in the 9 months of 2020 and '23. Excluding Arka, the revenues grew around 8% in terms of deposit, considering the different situation, environment situation in terms of asset allocation, depending also on the interest rate environment was the amount of deposits down by EUR 1 billion at the end of September, but we have observed a substantial increase in October. So at the end of October, we are at EUR 2.7 billion of deposit. About the cost that we have in 11, we continue to maintain a stable cost-income ratio at 4%, including our investments despite the inflation going a bit deeper in the single businesses. We have an increased sales of OpEx in D&A in the factoring that are linked to the increase in the collection cost. Payments had an increase, but it's related to the increase of the volumes. And for the security services, we have a decrease of 19% year-on-year OpEx and D&A, thanks to lower direct cost and also the peso expenses. It's important to take in consideration that the Arka savings are on a rate basis starting from August 2020 and ‘23. In terms of the other corporate center, the other business unit, there was an increase in terms of OpEx and D&A, but half of this increase is linked to the contribution to the resolution fund that is double at EUR 6.4 million is double compared to the contribution of the last year. Going to the next page, Page 12, we have the balance sheet, that is as highlighted by our CEO before he is declining the total amount of the balance sheet compared to the previous year, but we increased our loans and receivable portfolio and decline the bond portfolio, the constant funding lower than the average market reference rate. We continue, but we don’t have ECB funding that have to be refinanced. And it's important to realize that the healthy net portfolio yield is impacted by the fixed bonds that now are at 20% of the total held to collect bond portfolio. And the impact on the floating rate is that we will have in October, we had an increase in terms of yield that is now at 5.14% compared to 4.5% at the end of September. So this is also an increase on profitability going forward. In terms of asset quality, we maintain our excellent asset quality. We are paid [indiscernible]. It is slight increase in terms of [indiscernible] that is lower than the growth of our portfolio. And this has been driven by some past due for public administration and also for the growth of municipalities in conservative. Despite that, our nonperforming exposure are at the 91% toward the public administration. The cost of risk declined to 6.3 bps, and is also related to the fact that it's mostly towards public administration. And excluding the public sector, the NPL coverage rate is at 76%. In the next page, we have [indiscernible] in terms of the Italian import as like before, the board decided to allocate part of the 2023 net interest -- net income to reserve. And this decision will not have any impact in terms of dividend payout ratio. And this thanks to our strong capital static, capital position and the amount that we are going to allocate to a server will be around EUR 24.4 million. Going to the next page, I've mentioned that our dividend policy has been confirmed. And in terms of capital ratio, we have a CET1 that is above our target of 12%. It is at 15.5% and we don't include the result of the first 9 months of the year. And in terms of RWA density, this is flat compared to the last year. In terms of dividend, it's important to highlight that we are going to apply a share buyback. This has been made to support our remuneration policy. The expectation in terms of amount is for a maximum amount of EUR 8.5 million with an impact in terms of capital ratio at 30 bps. I leave the floor again to Massimiliano in order to go forward with the presentation.

Thank you, Giorgio. Before summing up the presentation. I remember we have started the appointment process for the board, which is due with GSM of April, the board has decided to have its own slate, but as part of the process, as also published the target for -- after the self-assessment in October has published its target for the qualitative and quantitative composition of the Board, which can be found on our website, presented the size of the Board, which recommends we kept at 9, the level of independence, the tank commitment, the diversity and the professional charters of the people, of the directors. In this context, our Chairman has decided not to stand for re-election since he is considered in the code of corporate governance not independent anymore. And so he has decided not to ask for an extension of his mandate. The process will follow with the selection process that will be conducted by the board in February and the proposed board late will be submitted to the shareholders in March for a target appointment of the board for April. If you sum up where we are today on Page 17, we continue to look at a favorable macro environment. The low liquidity that we are seeing, the high inflation and high public spending, the pressure that we are seeing in increasing DSOs are all favorable to the type of businesses we conduct. What we see in terms of economics, our funding has already been repriced. We are still repricing our assets, some of them contractually like the bonds, some of them through negotiation with customers and importantly, also through the lag time and the details for the NPA rate to actually step up. So we have, as we discussed at the beginning, 50 bps, which will kick in, in the 1st of January. That's quite different from a traditional bank. Our deposit bets basically 100%. And therefore, we still playing catch up on the asset side of our balance sheet. The higher level of interest rate, the absolute higher level of interest rates will underpin our future profitability. The fact that we have a sizable off-balance sheet fund in terms of late payment less than EUR 40, and that fund will actually continue to accrue at a much faster rate than in the past, given that interest rate on LPI now at a much higher level, is clearly an important driver for our future profitability, but importantly, our future profitability well beyond the plan horizon. And finally, I remember the importance of the proposal of the European Commission on the NPI directive, which will other be probably for a decade or more the way we will conduct this business. Thank you very much for listening to Giorgio and myself, and then we leave the floor for any questions you might have.

[Operator Instructions]. The first question is from Antonio Reale with Bank of America.

I have three questions, please. The first one is on the full year guidance. Secondly, I'd like to talk about any FPI transactions into year-end. And lastly, on the -- just generally on the deferred component of your P&L. So starting with the first one. I mean, obviously, we know your business is highly seasonal. We've just entered sort of the last 2 months of the year, which are particularly important. And we've seen it over the years, if I remember right, historically, you've tended to deliver quarter-on-quarter growth in net profit of between 65% and 67% in Q4 versus Q3, which will put you on EUR 180 million net profit, which is at the sort of lower end of your range guidance, EUR 180 million, EUR 190 million net profit for the year. Is that what we should expect for the year sort of for you to be in that sort of range? Just a confirmation, -- any color you can share there would be appreciated. My second question is related again to the previous one with the sort of -- with the Q4 profit in focus, wondering whether you have any LPI transactions in the pipeline, you tend to frequently settle some client position into year-end. I don't know if there's anything you can share with respect to what you see there in the pattern as you approach your end? And lastly, particularly important for you, I think, obviously, we've seen a number of banks report this quarter, and a lot of them are looking for ways to lock the high levels of interest rates, while you, on the other hand, have a natural lockup with a significant portion of your P&L being deferred. In fact, I see you have reached off balance sheet LPI of in excess of EUR 600 million. Looking at Slide 6 and a total between LTI and recovery costs of EUR 1.1 billion, which is a large 65% of your market cap. So my question is, can you remind us of the benefits that you get sort of that are yet to be untapped here? And when I look at recovery costs, I think you were first to report your invoice, I wanted to confirm that. And what would that number look like if we were to include an increase in the invoice value from EUR 40 to EUR 50 instead?

Look, on seasonality, yes, the fourth quarter is always an important quarter for us because we have a lot of transactions with debtors that can move the needle. That's why we have a range in terms of targets. We are quite confident to remain in that range, given what we see currently. We have a number of discussions with some large debtors that can underpin actually a pretty good result in the fourth quarter. But that’s something which is not driven only by us, but also the debtor decision to transact. We have, in the past, particularly 2020 started a lot of rig elections, so they are coming to fruition, and that drives a bit more focus on the debtors in terms of non-transaction amount. So that's what will underpin the fourth quarter results. Bear in mind as in terms of comparison, last year, fourth quarter, we still had a month of Arka. We have still the cost part of the employee base, which was still there. We don't have it this year. So we have a bit less revenue, less cost in terms of like-for-like comparison. In terms of the LPI fund. I think it's confined to point out that number on Page 6 of the presentation. If you look at the table, we are basically at guess EUR 1.1 billion of total funds of balance sheet funds. It's almost EUR 150 million more than the previous year. That will continue to accelerate because that fund has been built up with an 8% CAGR, if you want, which was the rate we had on the LPI. Now that is 12%. So if you want the speed of accumulation at the same level of volumes is 50% higher, and that will build up that fund quite fast over I would say, the foreseeable future compared to what we have seen in the past. Importantly also, because of the dynamic on collection, what we haven't accounted for in the P&L, it's as you see at the bottom of the table at EUR 605 million, and that includes also the EUR 40, which is almost what we had in 2021. But at the time, we had the entire EUR 40 of balance sheet. So that give you a sense of how much value we are actually deferring and I don't have here with me the quarter-on-quarter figures, but it's also probably a good reference point to see how fast we are starting to accumulate accumulated LPIs and EUR 40. What it means? It means that actually because we account for only 50% of our rights, both on leak payment interest and EUR 40, and we collect roughly in 6 years, the balance that will underpin our profitability for the years beyond the business plan. If you were to stop today growing, then we will have 6 years of growth in net income without doing much, not doing much – we’re still working on collecting the LTI. And I think that's something which is not necessarily appreciated. And it's something which is actually more important now, the trades are higher, and that value will accumulate going forward. In terms of the impact of the shift from EUR 40 million to EUR 50 for the recovery rights. Look, I think the short answer is that's a 25% increase in the value of those recovery per invoice between what we accrued and we collected in the 9 months to September. They were on Page 6, second bullet point, EUR 17.1 million. Now if you increase that by 25%. That's the increase and then you can annualize and then we have the growth in the business. So it's actually material and because we book only 50% upfront and we booked the deferral on the EUR 40, we are still catching up, if you want, even if you start to ask them only 4 years ago, that's quite an important drive of future profitability right now. It will not be implemented today. It's a proposal. We think it will take a few months before it becomes a regulation and then probably there would be a year of delay before the implementation, but over the plan horizon, we should see in 2026, the benefit of this new regulation. And so I would say it's positive. I flagged also that the fact that the maximum payment times shortened in healthcare, which comprise a large portion of our portfolio from 60 days to 30 days, it's also quite beneficial because it means that the -- if payment times remain stable, interest rate will accrue -- late payment interest will start to accrue earlier and the invoice that now is paid at 58 days and doesn't generate EUR 40, we still paid 58 days generated EUR 4 recovery cost. So that's another boost that could happen. So we see overall the economics of our business improving, but importantly, also a full stability on the regulatory framework for [indiscernible].

The next question is from Giovanni Razzoli with Deutsche Bank.

2 questions. One on the potential reform of the LPI directly into regulation, you just asked at this point about the shortening of the terms of the payment, which as far as I understand, it's also based on your comments, you have a multiple impact on your profitability because it's increased the DSO. It increased the accrual period at a stable balance sheet and could also generate incremental recovery rights. As I struggle to believe that public administration entities would be in the condition to half the time of payment. So I was wondering why you can share with us a rough idea of what could be the -- all else being equal, if you were to apply this regulation in the 9 months, what would be the impact on your top line, all else being equal? And the second question, I think that you mentioned that in October, there has been a quite significant increase in the deposits from the security service business from EUR 2.3 billion to EUR 2.7 billion, if not is taken. I was wondering whether this increase comes out of new clients that you have added or to existing clients, which are changing their asset allocation and locate more assets to cash.

On the second question, mostly customers allocating more assets to cash, it was actually a minimum at the end of October -- at the end of September, that's why we flagged that we went back to a bit more normal situation at the end of October. In Security Services, we are actually quite bullish on the outlook for that business, given the tendering processes around the Casse di Previdenza and where we are positioned there and that should drive further liquidity coming into that business. In terms of the fleet payment regulation, look, as you said, we don't believe that the public sector will change behavior. The public sector pays late not because there are LPI, which only applied actually on a small portion of the overall receivables. But as for cash or timing is matched in the public sector transfers or administrative efficiencies. And so assuming that the public sector will pay with the same time. If you take simply the effect of the increase in rates -- sorry, decreasing in the recovery cost EUR 40 to EUR 50 and the shorting of payment time on the health care side, all other things being equal on the first full year of implementation of the reform which might be 2025 or more likely in the full year 2026. It will have now between EUR 12 million and EUR 60 million of impact. That's what we estimate. That clearly does not take into account the thorough component of that, which will have a further boost at least 6 years later. So in your model from 2032, and there we should be more around the EUR 25 million mark, clearly profit before tax. The pure profit is 0 incremental cost to us. So it's clearly a positive. If not in our target numbers because we can control what is the regulatory outcome. As I said, the regulatory direction of travel is fully positive for us.

The next question is from Andrea Lisi with Equita.

The first one is just a confirmation that you reiterate your guidance for the full year '23 between EUR 180 and EUR 190 is an acceleration in the last quarter. The second question is on net LCA recovery, which were EUR 4.9 million in the first half. Now it is EUR 4 million. So which trend should we expect their hands or what are you observing? The second and the third question is on volumes are growing well, 7%. But in the plan, if I'm not wrong, the CAGR was 10%. So just to understand if this is consistent with your expectation when designing the plan? And where you can find further room to optimize your cost structure and in which business units? And if you can anticipate some of the impact that you expect from the renewal of the banking contract.

So the renewal of the...

Banking contractor.

We don't have an estimate yet. I think what we see in the renewal of the national banking contract is the tendency for banks for the first time in a few years where they're making any money to actually increase their cost base, which I don't think is necessarily very sensible long term. I think the good thing for us is that we have a multinational platform. So actually, we can decide where to hire people, depending also on the different local contract conditions. And so an effort we have started, frankly, also to make use of the talent we have across many countries is to centralize group activities also side Italy. So take advantage of the talent we have and the more flexibility we have, which I think actually our competitors can do as effectively as us. So a more rigid contract potentially as a bad effect that strengthen our competitive position given our footprint. In terms of volumes, look, we indicated the long-term growth of 10% plus in loans and receivables and on volumes. What we care about is actually the growth in loans and receivables because that's what we see in a sense, in terms of earnings. On volumes were actually quite bullish overall, even around that. If you look at the underperformance comes from Poland, where volumes there are actually new loans. So we don't need actually to have necessarily a large growth because they have a longer duration than the existing portfolio. So we can keep accumulating even if growth is not there. In fact, you see 7% in volume, plus 7% in loans. And then Spain, you have the effect also of the injection of the cash from the central government, which sometimes takes out what is included in the portfolio of our clients before we buy those receivables. So as I said, I think the major focus should be on loans and the receivables. Overall, we are quite positive on the 10% growth plus for our business going forward.

I missed the answer to the first question. The first question that was made by Antonio. So if you can reiterate the guidance of EUR 180 million, EUR 190 million for net income in 2023. And the trend in net LPI over-recovery given that I saw a decline between 9 months and the first half? And so which trend do you expect here?

Yes, the guidance we confirmed it. As I said, we always give a range because at the end of the year, we have a number of discussions around that. In terms of NPL recovery, let's say, “Look, it's a function of how much we negotiate with the debt” So it's a function of closing the discussion. We don't transact at a lower recovery rate than historically we have done. So it's a matter of what we conclude with the debtor. If we don't transact it simply, we pile up the late payment fund that we have of balance sheet.

The next question is from Simonetta Chiriotti with Mediobanca.

Just a couple of questions from me. Well, the first is again on volumes. Looking at the third quarter, there are some changes, in particular the peer segment in Italy looks a bit light in the quarter, while if I'm not wrong, you have started to buy again on Eco-bonus. So if you could elaborate a bit on these trends? And the second, just if you could say again the potential impact of the change in the directive. I didn't catch the number, I'm sorry.

Look, on Eco-bonus, in terms of volumes as we have most on capacity. So business transactions in this quarter, but not actually massive in terms of amount. In terms of overall growth, when we provide the split health care and public administration, bear in mind that the view towards the debtor is not the view towards the client. So the split is not a function of what we do necessarily, but what our clients sell to and what are the portfolio they are providing us to buy? So certainly, in public administration, a huge amount of market is still unaddressed, and that's an area where we need to push in Italy. Historically, we had a much stronger position in HS, which shows also in our results, but that's not going to always bear in mind that effect in terms of depending on what the portfolio has submitted to us and not a conscious choice one way or the other. In terms of the numbers, as I said, in -- in terms of what we expect of the form is for the first year of full implementation of reform would be between EUR 12 million and EUR 50 million of PBT. And for the run rate, assuming the same recovery, over-recovery rate on EUR 40 NPIs, around EUR 25 million.

[Operator Instructions] The next question is from Michele Baldelli with BNP Paribas.

I have just asked a question about the new regulation. If you were to do a sensitivity with the current conditions with the quarter days to pay currently of how much could be the impact to your business if it will be approved with the detail that you just disclosed. Can you give us a sort of some color about it?

Michele, those are exactly numbers I mentioned before. So if we assume that payment behavior of the public sector does not change. If then the LPI kicks in at 30 days, not 60 for health care, which is the first change, and therefore, we also get the EUR 40 at the first day since the invoice is issued. And EUR 40 becomes EUR 50, then the effect is between EUR 12 million to EUR 15 million in the first full year and around EUR 25 million when we get to the run rate in terms of over recovery. So first year plus 6 years. I know that means that we are pushing you to have a DCF that ends at least at the sixth year, but that's a good exercise to book.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Massimiliano Belingheri and Piergiorgio Bicci for any closing remarks.

Thank you for joining us today and for your thoughtful questions. As usual, we now turn to running the business for the busiest season for us, and we will speak again in 3 months' time. Thank you very much.

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