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

Good afternoon, and welcome to BFF Banking Group First Half 2024 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would like to turn the conference over to Massimiliano Belingheri, Group CEO; and Piergiorgio Bicci, Group CFO. Please go ahead.

Thank you. Thank you, everybody, for joining us this evening to go through our first half results. But let's kick off first with the response to Bank of Italy. We have officially filed our responses, we announced already to the market in terms of credit classification governance remuneration. And we have applied that credit classification to our first half credit portfolio. This has generated incremental past due of EUR 1.4 billion, incremental RWA of EUR 1.8 billion and incremental provisions under IFRS 9 for EUR 0.7 million, given the low credit risk of the portfolio. The step up in the recognition of LPIs and recovery cost rights has pushed the reported earnings to EUR 162 million. If you strip out that, the adjusted net profit stands at EUR 71 million, which is growing compared to last year, which -- where we had a capital gain on bond sales. The loan book has grown at 7% year-on-year. That's above the best recorded first half result. The balance sheet has remained stable following with growth on the loan book, given the decline of the bond portfolio. We maintained a high liquidity with a strong growth of online deposits year-on-year. The loan-to-deposit ratio is very prudent, 69%. The capital level, including the earnings of the period stands at very close levels, which will allow once the Bank of Italy will cancel the ban on dividends to restart paying dividends. We have, in fact, a Core Equity Tier 1 ratio of 11.9%, and total capital ratio of 14.8%. If we move to Page 4, we have stepped up the accrual rate of the recognition of late payment interest and recovery costs at 65% from 50% that has generated EUR 109 million of capital uplift in the reporting date of the 30th of June. The recognition level of 65% is still significantly above our historical average level of collection for the period 2015, 2023, leaving us, therefore, still a significant buffer of embedded profitability, which is not yet recognized in our earnings and the step-up allows us instead to align better revenues and cost recognition and representing a better representation of the bank underlying profitability. The filing we did on the 11th of July, on Bank of Italy -- to Bank of Italy covers of the 3 areas of focus of Bank of Italy is reporting on credit reclassification, where we'll go in a second on governance, where we have an action plan approved by the bank corporate bodies and our remuneration where through the change in the remuneration policy that we applied this year and a different implementation of the CEO contract that we have overcome those issues. On past due on Page 6, we have a total incremental past due of EUR 1.4 billion. The EUR 1.4 billion is generated, as you can see from the graph on Page 6 by EUR 425 million of a portfolio, we generate a contagion the front book. So the actual past due is EUR 425 million, but that's because of the rules on the treatment of exposures that generates an incremental EUR 1 billion of further past due. That's important because it means actually we should focus on that portfolio to reduce the overall past due impact through an acceleration of collection, particularly on the Italian NHS, we represent EUR 183 million of the EUR 425 million contagion portfolio and the application of the mitigants, which will be agreed with Bank of Italy and also the faster legal processes. So once we deflate that, we will be able to deflate also the incremental EUR 1 billion of portfolio subject to contagion. That's important because if you look at Page 7, that does not have an impact on how we write new business. The purchasing criteria are unchanged. This application of the meeting as we had on legal actions -- ordinary legal action means that we will start with the faster and more effective injunction process. So we should have an impact on -- a positive impact on collection. We expect, given the stricter rules, a marginal increase in RWA on the new business. But that will be compensated by the fact that on the back book and front book of the existing business, so the contaging portfolio, the back book and the portfolio subject to contagion, so the front book those portfolio will be over time deflated and therefore, that will generate a release of the capital that we are at the moment absorbing. In terms of management of that back book and front book, it means more focused on settlement agreements and on the front book, which is not yet subject to legal action again and move to the faster injunction process. Where does this leads us? This leads us that since from the new business approach is unchanged, and we expect yes to absorb margin more capital, but we've generated a capital through the step-up of LPI, we expect that the 2026 business plan targets will be maintained, clearly, in terms of adjusted net profit, earnings per share, cumulative dividends, Core Equity Tier 1 ratio and cost income. On the return on tangible equity, it would be if we exclude the impact of the accrual rate step up, we'll still be at the level we indicated of over 50%. If we include the equity generated by debt, it would be over 40%. But the overall return for the shareholders will be unchanged. So that's the important message. We have concluded the signing with Bank of Italy. We are in position now. We're almost there in terms of capital levels to restart paying dividends. The business approach is unchanged for how we manage our business going forward. And simply, we have work to do to deflate the past due increase through a disciplined collection of the back book. With this, I will leave it to Giorgio to walk you through the results of the first half.

Thank you, Mas. Now -- and good afternoon to everybody. Now we are at Page 9. We have an adjusted net income that increased by 5% year-over-year, excluding the first quarter 2023 capital gain. The total net revenues are up by 9%, and the cost increased only by 4%, also considering the investments, the inflation and the banking sector contract renewable in Italy. The total revenues are up by 20%. On the other side, the cost of funding also reflects the level of the rates. In terms of provision, we have EUR 6.3 million of provisions due to the change for the IFRS 9 and increase of the past due portfolio by EUR 0.7 million, and provision on the VAT credit in Italy and the longer collection time related to a public exposure that we have in Poland. So finally, the net income is at EUR 71 million, 5% higher than the last year. On Page 10, we have our balance sheet that is stable compared to the last year. It's important to highlight the increase in terms of retail deposits that grew by almost EUR 1 billion compared to the last year. And this improved our loan-to-deposit ratio at 69%. Also -- at the meantime, we reduced our reports that are down by EUR 1 billion. Our loan book increased by 7% year-over-year. And this is said before by Mas, the best and the higher level that we had in our history. Also, we are continuing to reduce our bond portfolio. Going now at Page 11, we start with Factoring and Lending business. We increased by 17% year-over-year in terms of revenues and also considering the increase in the accrual rate that has been partially offset by lower LPI over-recovery. Our other income expenses are at EUR 12.9 million, and this is primarily related to our recovery costs. The gross yield on average loans increased by 13% year-over-year and now is at 7.6%. It's important to highlight also the increase in the total recovery -- LPIs and recovery cost funds that is now over EUR 1.1 billion and also after the step-up in terms of accrual of LPIs and recovery rate, we have a deferred profitability with the fund of EUR 467 million. So this is a big buffer that we have also for the surplus in the next year. Going to Page 12, some highlights for the Factoring and Lending, the loan book growth at 7% year-over-year despite a low growth for Italy because we started a bit the departure of the new -- of the Commercial Director, the new 1 joined BFF at the beginning of July. So -- we think that in the next months, we can put this effort in order to let also the business in Italy grow again like we did in the past. But it's important to highlight the growth in Spain. They increase by 58% year-over-year, also in Poland and in Greece, we confirm a very positive trend. In terms of volumes, overall, there was a growth of 5% year-over-year with a double-digit growth in Poland, Spain and in Greece. At Page 13, we have a slide dedicated to the payments. And for the payments, continued a very positive dynamic in terms of number of transactions with an increase also in terms of revenues. The growth -- so the growth of the revenues is lower than the number of transactions due to the pricing mechanism that is flat fee in terms of volumes. But it's important also to provide a significant level in terms of deposits that are largely lower than the last year. Page 14, we have the Securities Services business with a strong growth in terms of asset under deposit for the depository bank, especially the global custody despite the -- excluding the low-margin client that exited in the last quarter of the last year, also we observed a growth of 13% year-over-year. In terms of revenues, the difference is related to the client and exited, but year-over-year, there is a very, very comparable amount. In terms of deposit, it's important to highlight the deposit under custody increased by 3% year-over-year. Having said that, we are now at Page 15 in terms of costs. We put in place our usual discipline despite investment and the inflation and also the renewal of the collective agreement in Italy, and we increased cost by 4%. 4% is distributed for the business unit, or in payments, we increased a bit more than 4% due to some investment in terms of ICT infrastucture. For the balance sheet that we have at Page 16, we maintain, as explained in our industrial plan, we want to maintain our balance sheet stable, despite the growth of the factoring and lending portfolio. We increased, as I said before, the deposit. Now we are over EUR 8 billion. We maintained also cost of funding that is lower than the average market reference rate. We continue to have funding to be refinanced to the ECB. And it's important to highlight also that the yield on our floater bond portfolio is now at 4.9%. In terms of reclassification, past due and NPE, we have at Page 17 slide. And despite the fact that our past due increased significantly, our cost of risk is unchanged, our risk profile is unchanged. And we maintain -- considering that 98% of our non-performing exposure towards the public administration, our credit risk is always at the same level. In the meantime, we decreased by 3%, our NPLs considering also that mainly related to municipality in conservatorship. And also we have increased EBITDA -- unlikely to pay, as said before, this is driven to a reclassification of the public exposure that we have in Poland with the prolongation of the expected collection time. So without an increase in terms of credit as we. Finally, -- we are at Page 18 in terms of capital ratios. We are well above our regulatory target also for all the capital ratio despite the increase that we had in our RWA density now is at 71%. And our CET1 ratio is at 11.9% with a total capital ratio that is closer to [ 2% ]. So we are a bit lower than the level that can lead us to pay the dividend after that Bank of Italy will leave the bank. So we can confirm our dividend policy. And I leave the floor to Mas in order to give you some final remarks and some highlights on the focus for the last quarter of the year.

It has been a busy quarter for us, but we now have to refocus on the business. So objectives over the second half of the year is to very much manage the reduction of the back book of receivables, the contaging portfolio to deflate the RWA and make the business capital efficient once again. Secondly, to rebuild our commercial drive in Factoring and Lending in Italy, particularly, which has been quite slow over the first half of the year. That has been driven also by a very soft market as our competitors have reported and where we've still been able to build our portfolio and then prepare for the peak hunting season of the Q4 in terms of LPI and recovery costs, we should drive incremental profitability. And finally, strategically, we are keeping a close eye on the development on the late payment directive, which is now the stage of the European Council and where we can have good visibility on future development by keeping a close monitoring of the revision there. With this, I conclude my remarks and Giorgio remarks and leave the floor to any questions you might have. Thank you.

[Operator Instructions] The first question is from of Manuela Meroni of Intesa Sanpaolo.

I have 4 questions. The first 1 is on the back book generating the contagion effect, this has decreased from EUR 458 million in March to EUR 425 million in June. How did you reduce it? You made collection of disposal -- and can we take this quarterly reduction as a run rate for the next quarters? You also mentioned in 1 of the slide, the potential application of mitigants to be agreed with the Bank of Italy. What are you referring to? And the second question is on Slide 7. You mentioned a marginal increase of the risk-weighted assets of the new business. This is different compared to what I understood before. So could you please clarify the reason of such an increase and quantify banking itself? And then on the results, I would like to know if you can share with us the amount of LPI accrued in the interest income in the first half and second quarter, and if you could provide some more color on the provision or risk and charges that you took in this quarter, are this provision related in some way to the portfolio reclassification or not? And do you think to be able to recover this provision going forward?

On the provision -- sorry, on -- let me go through the questions, which [indiscernible] correctly, a bit more than 4. But on provisions, as Giorgio said, one, the 2 major charges have been one on VAT, which we suffered in Italy, which is a large part of the provision we have taken this quarter. And then we have the change in timing of payment or expected collection of exposure towards the public sector hospital in Poland, where we don't expect a credit risk, but given the different CF then we need to take provisions, if you wanted reduction in earnings, those earnings we can in the future. In terms of the results, we have for the step-up in LPI in the first half, the impact is -- which has gone through the adjusted interest income, it's EUR 11 million [indiscernible]. In terms of marginal RWA increase on Page 7. Look, we expect a margin increase in RWA simply because we want to be prudent and because we don't have the same level of mitigants as before. I think there's nothing wrong in saying that we expect a bit more RWA, I don't think that changes the profile of the new business much. In terms of meeting to be agreed with Bank of Italy, we have mitigants where we have to agree how we implement them, although we're not discussing that they are valid or not. That requires some work on our side to define the exact way how they should be implemented. At the moment, they're not included in our base case, but that's something which can have a positive impact. In terms of the back book, why it has decreased quarter-on-quarter while it got decreased quarter-on-quarter because we collected. And that's part of our normal business. Remember, the portfolio actually churns, and we expect now that actually the team is focused not on counting the past due, but actually on collecting the receivable that, that back book can be deflated through more transactions and also by having a different approach to legal actions I mentioned, through injunctions on the front book and on the new business, which then push the public sector counterparty to transact more. So we haven't sold a single euro of receivables. We manage the collection ourselves. We haven't done any trade. We really focus very much on our processes and that's the reason why the back book has reflected. That's consistent also with what we always said, which -- that's a portfolio that moves over time. In terms of trajectory, I would say, look, we don't have -- we've not communicated trajectory of the decline of that back book. It's very different from what you will see in an NPL portfolio where dynamics are very different. Here is actually transacting with counterparties with whom we have a constant dialogue, particularly on the NHS in Italy, and that's a function of there -- the willingness also to enter into in transaction on the LPI and for the [indiscernible]. Remember, we always collect the capital. If history is a good indication, we have more transactions done in the last quarter of the year, so that might have an impact in the following quarters once the portfolio gets reduced on the back book in the last quarter, and then after the cure period, we also released the front book. I think I have answered all your questions because there were a few.

The next question is from Giovanni Razzoli of Deutsche Bank.

Just some clarification on the quarter numbers. First question is on Slide #25. I've seen that there has been also EUR 27 million of -- in the adjustment column of other operating income expenses with a positive impact of EUR 26 million. Is this the impact of the higher accrual rate of LPI on recovery rate -- on recovery rights? This is my first question. And the second question is on the -- something that clearly the market now ignores, but in the future should be another opportunity of growth for BFF that is the potential change in the LPI regulation. And I was wondering what could be the impact under the new LPI accrual rate of the -- this change in the regulation with 50% LPI accrual rate, you guided for an impact of EUR 48 million to EUR 52 million from the higher recovery rights and the reduction in the 30 days [indiscernible] payment. I was wondering whether with a very simple calculation as the LPI accrual rate is increased by 30% now we should see this guidance going to something in the region of EUR 64 million, EUR 65 million. Last question is on the business plan targets in 2026, which you have again, reiterated with higher accrual rate of 65%, I shall -- I read it correctly that the confirmation of the targets is due to the fact that you will have higher accural rate, but lower over recoveries. And the last question, the contagion effect is extremely clear, EUR 425 million of higher past due generate EUR 1.4 billion of risk-weighted assets because there is the contagion effect. So as you are now saying that you will be more aggressively to tackle the contagion portfolio, shall we consider the EUR 1.4 billion of additional risk-weighted assets in a reasonable time frame as a temporary increase in the risk-weighted assets and temporary decrease of your capital ratio?

Thank you, Giovanni. On the last question, to be clear, the EUR 1.4 billion is the past due, the incremental RWA is EUR 1.8 billion. But the reasoning that you made applies -- we clearly can manage now that portfolio by being more aggressive on the legal collection. We used in the past in Italy, particularly ordinary legal collection because that stopped the past due, but has the drawback of actually much more lengthen collection time through the courts. So the move to an injunction process actually should accelerate to that and make also our recoveries, not only faster, but in higher level in terms of APIs and EUR 40 getting to more frequently to centers. So there clearly is something which will deflate the past due over time. It's a function of how good we are in terms of managing that and how fast across the court process is. In terms of the business plan target to 2026, look, we have higher accruals, the over recoveries will be based on a higher accrual rate. So the definition that would be lower. And so there are a number of moving parts. But overall, we feel confident about our 2026 targets. In terms of the LPI regulation, yes, in case of a change in increase in the recovery cost and in the shortening of the maximum payment times to generate more LPIs, we can quite simply calculate what will be the impact of that. In case of the recovery costs of EUR 50, which is the original Parliament proposal, we expect additional revenues for BFF in the first full year will be between EUR 18 million and EUR 20 million. It was 13%, 15% at a 50% accrual rate, you can do the proportion for the run rate in the same way. And in case of recovery costs of an average of EUR 100, which is the -- sorry, the parliament proposal, the previous one with the commission proposal, the expected additional revenues for us would be between EUR 62 million and EUR 68 million in the first year. And again, we can proportionately put that number on the full run rate after the year 5. In terms of the line you mentioned on Page 25, that's actually the effect of the step-up on the EUR 40. That's don't go into the interest income line, but go in that line of the P&L.

The next question is from Fabrizio Bernardi of Intermonte.

I may have missed the initial part of the presentation. So my question is about the dividend policy, which was very remarkable at BFF. So what I'm asking is, why didn't you go directly to 77.5%. And you just stopped at 65% from 50% of let's say, recovery cost rights because this would give you more room for paying a better, let's say, dividend. And so the question is -- and I say again, I may have missed part of the presentation, when do you think you can recover the dividend policy?

In terms of dividend policy, as Giorgio mentioned, the dividend policy remains the same as the one we've announced. The resumption of dividends, it's a function of us reaching a 12%, 15% target for CET1 and total capital ratio respectively, and importantly, Bank of Italy lifting the back. So that's really, I would say, the gating item for us. In terms of the step-up of LPIs where we moved to 65% and not only -- not to 77-plus percent. Look, it's an estimate what we project for the future. And so although there on the IFRS, the concept of prudency in accounting has bit gone down the drain. We thought that is, in case the best approach for the company to have a prudent approach on accounting since it's forecast on collection, but we expect to be able to maintain the level of performance we've had over the last 9 years, even going forward.

So sorry, the top-up on this, let's say, matter, do you think that -- I mean, and I know you don't work for the Bank of Italy, obviously. But do you think that Bank of Italy is fine with your answer, is okay with the new methodology or maybe there can be other further discussions?

We have entertained plenty of conversations with Bank of Italy, and we believe that our answer addresses their concerns, but it's not to me to opine if that's the full address of their concerns. So we are looking forward to a positive response from the regulator, but let's hope is not certainty.

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

Two questions for me, please. The first 1 is on capital. So in 1 quarter, you basically replenished your capital base, you're only EUR 7 million short of the 12% threshold for dividend payment, and I think it was quite remarkable given the full classification on no disposals or securitization. So my question is what are the moving parts on capital going forward? Do you retain the optionality on disposing securitizing part of the past year. Do you plan to use that optionality? Or should we expect just organic volumes affecting your capital base from here? That's my first question. Secondly, really a question to do with your Slide 8 of the presentation. I see you're confirming all targets, including your 2026 net profit guidance of EUR 255 million to EUR 265 million. My question is when do you plan to update these targets given that with the LPI change, leaving aside even the elementary discussion, just changing the collection rate, you're going to be higher than that level potentially much higher. So I'd like to hear your thoughts around how we should think about that guidance in 2026?

Yes. On -- look, on targets, we confirm the target, we incur a lot of moving parts and we think that's already a positive message to the market. We will most likely revisit those once there is a clear view around the regulatory situation, particularly around the LPI regulation. And so for us at the moment, they focus very much to execute on our plan, both in terms of commercial development but also -- and that goes to the answer to your first question in terms of managing our back book. We have ruled out to sell the back book, but certainly that's not currently our base case. We believe our collection team is capable of freeing up a lot of the capital, which at the moment is trapped there. We don't want to do that sacrificing profitability. Those are receivables are money-good, it's EUR 1.8 billion of incremental past due, EUR 0.7 million of IFRS 9 provision, and that gives you a sense of what we are talking about. And so we think there is a lot of value actually in reducing the back book and inflation, the contagion effect on the front book on our own, being frankly one of the most specialized player in this sector. And we think the stricter approach of Bank of Italy may even allow us to have a better commercial development. If you think that people coming -- wanted to come into this market, probably they will see this as a complicated matter to manage. And we need to see also what happens of the rollout of this approach across the market.

The next question is from Simonetta Chiriotti of Mediobanca.

A couple of questions from my side on the Factoring and Lending business. The first is on volumes, in particular, on the Public Administration segment that continues to be very weak. So if you could give us flavor of the reason of this trend. And -- and the second question is on the margins of the factoring and lending business. The gross yield on average loans was 7.6% in the first half from 7.5% in the first quarter with different and less favorable accrual rate. So my impression was that the margins would have grown more -- can you give us an idea of the other parts of these -- the revenues for the factoring business. So how are maturity commission going over recovery and so on?

Yes, you see the net over-recovery have moved much. If you think about the step-up in LPI has probably around 8% impact on the gross interest income. So you shared if you intend to beat on the yield. So that's what explains the mix. You also have -- we also have -- because we have less of Italy proportion than the other markets, we end up having a bit less headline profitability, for instance, in Spain, but we have a higher return on risk weighted assets on that once we strip out the effect of the past due. On Public Administration, we have been hit, if you wish, in Italy, in particular, by utilities selling less receivables than in the past -- that's driven by partially they have better financial position in the first half of the year, driven by their own results and debt pressure on [ fairly ] receivable. We need to see what happens in the second half when they want to optimize the financial position at year-end.

The next question is from Andrea Lisi of Equita.

The first 1 is just if you have any update on the timings of a possible answer by the Bank of Italy if you can provide us an update on that? The second is just a follow-up to understand if I understood correctly. If the result -- if the benefit on the P&L of the step-up of LPI is EUR 11 million positive, just because I'm not so sure to have understood well. The other question is on the Security Services business, in particular, what should we expect in terms of new mandates related to the Casse, if the issues that emerged has in some way delayed in some way, the process that were in due course? The other question is on your funding strategy. And in particular, if the expectation on rate movements led you to some changes on your initial thoughts about funding. So the mix between deposits -- line deposits, repos and so on. And if the increase in risk-weighted assets due to something thoughts about also the bonds you have issued?

Let me go through on funding, we don't expect to want to change our funding strategy, which, in any case, was predicted on using online deposits more below average cost of funding because the spread actually on the deposits become more attractive for us. Remember, we basically don't collect on deposits in Italy. It's mostly in Spain and in Poland. So we have a very different exposure to other banks to the market also because we distribute in Spain and in Portugal through our own brand. So we don't pay distribution fee as other people do with third-party platforms. On repos which, by the way, have gone down by about EUR 1 billion compared to last year. That's basically a plug, right? We have a bond portfolio. So if you have more liquidity, we use less repos. If you have less liquidity, we use more repos to fund that bond portfolio. It has been always a balancing item in our balance sheet. And we said we will keep the balance sheet the same in terms of size, which means that we have more liquidity, the repos will be down and vice versa. In terms of increasing RWAs and the change in our strategy, we might depending on what we see the outlook for our past due at year-end, and overall, our funding plan, we might issue more bond for our MREL requirements, but that again will be an issue of timing in our plan compared to what we had before. In terms of Security Services, yes, there's been a delay in onboarding the Casse, that has been driven mostly by the fact that the Casse have not issued new tenders, which was good for us because in this period of uncertainty, certainly, we have not been able to win as many mandates as we wanted. And so the fact that the decree that supplies the Casse to have the postpaid bank has not been published yet. It's actually positive for us because it gives us more time to get to a resolution of Bank of Italy, the timing of which we don't know. It's in the hands of the regulator, and it's in that gift to list the restrictions. In terms of the overall impact, the EUR 109 million is for both LPIs and EUR 40. And as I mentioned in the answer before, you can see the different impacts for EUR 40 and LPI in terms of one-off in the adjustment.

Gentlemen, there are no more questions registered at this time. Back to you for any closing remarks you may have.

Thanks, everybody, for joining us tonight. I hope you will have a restful summer and I'm sure we'll talk very soon. Thank you again.