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

Good afternoon, and welcome to BFF Banking Group First 9 Months 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.

Hi, everybody, and welcome today to our 9 months 2024 conference. We have had a slight delay because we know that somebody has had a problem to access our Investor Relations website, but we have the presentation uploaded on there. So it's accessible through that system in case you have problem accessing our Investor Relations website. We report today progress on our activities following the Bank of Italy inspection where we spent the last few months repositioning the business for factoring volume growth and past due reduction, clearly early days, but we are reporting a strengthening of the factoring and lending organization, a new credit management and legal strategy to accelerate the past due reduction and some progress that's already showing, including a large contract won in Italy and over 500 injunctions filed on that representing roughly 1/3 of our past due exposure. The performance to September reflects the same trends we have seen in the first half of the year. The reported results have been positively impacted by the change in accrual accounting and the net profit has been relatively flat year-on-year also because we had booked in the 9 months the contribution to the Italian Deposit Guarantee Fund. The loan book is at EUR 5.4 billion, a marginal growth compared to last year with strong growth in Spain, Greece and Poland and still a challenging performance of our Italian business. Importantly, we continue to accumulate off-balance sheet reserves and deferred profit even despite the change in accounting with a growth of EUR 37 million compared to June when the change in accrual accounting happened. Capital has been at a good level. It's at 12.3% in terms of CET1, which is above our 12% target and significantly above the minimum regulatory capital targets. We've also completed the last leg of our capital management program by issuing a EUR 300 million bond that will cover our MREL requirements that kick in at the beginning of 2025, and importantly, has been issued with a relatively short tenure to be correlated to our expected reduction in the past due back book. In terms of other items, there are no significant updates on the Late Payment Directive and on the Past Due Regulation Review, whichever is mandated under the CRR. And we have no impact on the Italian Budget Law. For us, the deferral of the DTAs and the stock option expense deductibility as simply means that we have some deferral of the cash payments -- sorry, earlier cash payments, and therefore, it's a marginal impact for us. But if we go to Page 4 and look at the main messages on the effort we have done to reposition the business to continue growth. We have invested, as I mentioned before, in the commercial driver, factoring and lending. And we're happy to report a big win already in October, which will play out for the next 12 months and over since it's a multi-year contract. We have spent a lot of time to launch a number of initiatives to accelerate the reduction of the past due, which will clearly play out in the next few quarters with an acceleration going forward. And we have completed our capital management plan, you can see on Page 4, the impact on our levels compared to the MREL requirement. On Page 5, you can see what we have done on the commercial activity. We have moved to a full matrix structure and where we have put the head of country as responsible for the overall business, but have a strong group reporting line in sales, which has been moving in the same structure as collection and back office. We have hired a new Group Sales Director, which is a new figure in our business. And we have also inserted new Commercial Directors in Italy, Spain and Portugal. In Spain from January of this year, in Italy from July and in Portugal from October of this year. We have also strengthened and we continue to plan to strengthen our commercial team in Italy and in the other countries. In terms of past due on Page 5, we have put through a number of steps to accelerate the past due collection. We can see already -- and if you think about that we did the reclassification in August and the quarter has finished in September, clearly, the fact that we have reduced already the contingent portfolio is a good initial sign. So we are now down to roughly EUR 400 million. And we've also put in period EUR 134 million of past due. Past due exposure has gone up also because the portfolio clearly adds new receivable to debtors which are already in past due. And importantly, here you can see that roughly 1/3 of the existing portfolio in past due is towards debtors where we filed injunctions to have legal -- different legal action, more efficient legal actions towards the same debtors with different exposure, which will help in collecting the containing portfolio as well. And on Page 7, on MREL. First of all, we received from Bank of Italy the new MREL requirements, which are substantially in line with the previous ones. Those are effective for the 1st of January 2025. And with the EUR 300 million bond issuance, we are substantially above the target that the regulator has given to us. So we have a, for instance, on the RRE, a target of 5.4%. We are -- we will be pro forma for the 9 months of 2024 at 11.3%. And on the [ TRA ] from a target of 22.6%, we have a pro forma 27.1%. Importantly, as I mentioned before, we have a short maturity for this debt is a 3.5 year maturity, non-core 2.5%, which is equivalent with our expected past due reduction and RWA deflation, which will improve our MREL ratio for that. Those are the major moving parts of our business, particularly looking forward, I'll leave the floor to Giorgio to take you through the performance of the business in the first 9 months of the year.

Good evening, everybody. Thank you, Max. Now we are at Page 8 with the results in terms of P&L with an increase in the total revenues considering -- and excluding the capital gain that we had in the first quarter of 2023, the growth is around 12%. If you take in account the capital gain, the growth is around 8%. The cost of funding follows -- reflects the higher interest rates and the total net revenues grew by 4%, excluding the capital gain. In terms of cost, it's important to highlight that we paid the contribution charge for the FITD, so deposit -- for the deposits. That has been booked in the third quarter this year compared to the last year that was booked in the fourth quarter. In terms of provision, no main changes compared to the last quarter, but we booked at the end of June an increase in terms of provision. This is the difference compared to the last year. And in terms of the net income, we reached EUR 103 million, that is a small deflection compared to the last year, but mainly driven by the increase -- the payment of the contribution to the fund. At Page 9, we have the balance sheet. We increased our equity. So we are continuing to be resilient in terms of funding and we decreased our asset under [ deposit ] So the loan book is almost flat compared to the last year. We have reduced, as forecasted, our bond portfolio. And the transaction services deposits are stable, but we increased our retail deposit. Also, thanks to the higher equity, we increased the leverage ratio that now is at 6.4% compared to 4.8% of the last year. Going to the businesses, we are at Page 10. We have the factoring and lending. And we booked a growth in terms of revenues around 10%, also considering a lower net LPIs recovery year-on-year. The gross interest income has increased and the other income and expenses are flat despite the lower collection in terms of recovery rate. We increased our gross yield on average loans. And also, the total NPIs and recovery funds increased compared to the last year and also compared to the last quarter. This is also a significant buffer in terms of future profitability. Going to the KPIs of the factoring and lending at Page 11. The loan book is almost stable. We have a decrease in terms of loan book in Italy, reflecting the reduction in terms of volume that we have in Italy, but has been -- this factor has been compensated by the growth that we had in Spain, particularly, but also in Poland and Greece. In Spain, the outstanding growth around 50% year-over-year and this is the third quarter of continuous growth. In terms of volumes, we are up about 2% with double-digit growth in Poland, Spain, Greece and we start the positive trajectory for Portugal. But in Italy, we are down also considering all the activities that has been put in place in order to answer to the request come from Bank of Italy and to reassess all the organization that we have in factoring and lending also in order to put a big effort to reduce the past due going forward. For the payments, at Page 12, we have seen a very positive dynamic in terms of number of transactions, also positive dynamic in terms of revenues. Revenues grew lower than the transaction due to the fee structure. And also in terms of deposit, we have seen a decline considering a lower technical balance sheet -- balance of our clients and a lower check settlements that have been seen during the quarter. But on the other side, for the security services, there was a plus 26% growth in assets under deposit. And with a growth that can compensate the decrease that we had in terms of payment. So at the end of the quarter, the deposits are at EUR 2.9 billion compared to EUR 2.3 billion that we had in the same period of the last year. In terms of costs, we are continuing to maintain our strong discipline despite the investment, the reductions and also the renewal of the collective agreement that we had in Italy. And so the increase in general of each business is related to the personnel expenses and for payments and security services. In particular, there was also an increase regarding the investments made in the ICT system in order to upgrade the system and to give to our clients a better services. It's important to highlight that in the last -- the other, there is an increase in terms of cost that is also related to the payment of the contribution to the fund that I have mentioned before. The balance sheet is stable. We have our deposit at EUR 8.8 billion with an increase of 7% compared to the last year. The cost of funding is lower than the average market reference rate. We have issued over the end of the quarter a bond of EUR 300 million in order to cover all the gap in terms of MREL requirement that will be in place starting from the 1st of January of the next year. And we have also a yield on floaters that is at 4.9% with improvement in terms of mark-to-market that was minus EUR 76 million pre-tax as for last year and now is minus EUR 15 million. In terms of risk profile, obviously, at Page 16, we have an increase in terms of past due, due to the reclassification. So if we -- it's very difficult to compare the reclassification in terms of past due with the last year, but we are correct with what we have done at the end of June. Our NPLs are mainly due to the municipality in conservatorship. And we have increased some likely to pay due to a reclassification of some public hospitals in Poland without any impact in terms of increase of provision. We have now at the end of this quarter the cost of risk that is 11.7 bps. In terms of capital, at Page 17, we are now above the target of the 12%. And also, we are above the 15%. We have a significant buffer compared to the SREP requirements. And we have received from Bank of Italy the confirmation of our MREL requirement and was -- and after the issuance of the bond, we can say that we covered and we have also a buffer for this requirement for the next year. And on the other side, we have in terms of RWA, considering the increase in terms of [indiscernible] RWA density that is 72%. And that's it. And now I can leave the floor again to Max Belingheri in order to conclude his speech. Thank you.

Thank you, Giorgio. We conclude with what is the focus now in the last quarter of the year. As you know, it is an important quarter for us because it's a quarter where we collect what we have planted on the year with the peak of over-recoveries and collection of NPI and EUR 40. And at the same time, we plan the seed for next year. So the focus is really around 3 areas. First is to restart the growth of factoring and lending with particular focus on Italy. We indicated already some good signs with this big win in a contract in the Italian market. We are focusing the collection team back to the execution of transaction, but at the same time, also to roll over our new approach in terms of credit management to deflate our past due book. And third, continuing to work with the legal team on launching another set of injunction to cover the entire of the debtor universe in Italy to strengthen then our activities and accelerate the past due reduction in 2025. So thank you for being here with us today. Again, apologies for the technical glitch at the beginning. The website now should all be running. But in any case, the presentation is over. I'll leave the floor to any questions you might have.

[Operator Instructions] First question comes from Giovanni Razzoli, Deutsche Bank.

3 questions. The first one, if you can share with us what is the stock of loans which were [ contaged ] by the EUR 124 million of past due, which are under provision period? I'm asking this to understand what could be the effect in terms of reduction on the overall past due once this provision period is lapsed. This is the first question. The second question, if you can share with us now that you have sent the injunction to debtors, what is the normal course of the event? So how many days are the counterpart to reply to your injunction? What is the outcome in case of no action? And what is the historical evidence that you can provide us? And the final question, again, on the past due, this time on the overall past due portfolio. You have mentioned some reason for the, if I'm not mistaken, EUR 80 million of increase in the headline number in the Q3 vis-a-vis with the second quarter. So if you can share with us -- I think they went up to EUR 1.77 billion from EUR 1.69 billion. So if you can share with us what is the rationale for this?

On the first data you asked, we have not here the data available, but we'll see if we can provide it before the end of the call. On the injunctions, the process is the following. You file an injunction, so that's what we've done. Then the judge needs to issue the decree. If the decree is unopposed, it becomes a title, so you can execute on the title. Otherwise, it gets opposed and then start a faster legal process than an ordinary legal action, but that takes clearly a bit of time. In terms of historical data, let's not forget that until end of 2020, we only used injunctions. So in a sense, our business and our performance historically have been linked to that instrument. It was only at the end of 2020, we used the ordinary legal action because we thought that will stop the counting on the past due. So in a sense, our past performance is our track record on injunction. On the past due portfolio, what you have is you have an issue of mix because we have purchased mostly from healthcare -- towards health care institutions, a large number of healthcare institutions in Italy are in past due, then you had the top-up for the contagion effect on the past due effect.

Okay. So it was basically a byproduct of the compliance funding of Bank of Italy. So you are basically dealing with the same client, which generated the contagion that's the...

Exactly. So for instance, let's say, I have a hospital where I had EUR 5 million of contagion, I have reduced the contagion portfolio of EUR 5 million. I might have reduced it by EUR 2 million. So I have left with EUR 3 million. If I still have -- they used to have, I don't know, EUR 50 million exposure, which now because they bought EUR 10 million has gone up to EUR 60 million, it's still above the 1%. So the entire EUR 60 million exposure is in past due. So that's the dynamic. At the same time, I also collect the portfolio, which has been contaged by the contagion portfolio, and therefore, I reduce that. So it's a mix of purchases and collection towards those debtors. That's why when we indicated also in previous conversations, the trajectory on the reduction of past due that will not be linear by definition, because once we solve the back book issue, we need to solve it in its entirety to have the front book positive effect.

The next question is from Manuela Meroni, Intesa Sanpaolo.

The first one is on the NII. Could you please elaborate a little bit more on the decline of the NII in the third quarter? Is that just a reason of volumes or maybe there is something else that you want to highlight there? The second question is on the outlook of revenues for the fourth quarter. Usually, the fourth quarter is the strongest of the year, but I think that this year, there will be lower extra collection. So it could be useful if you can provide us with some guidance on the evolution of revenues in the current quarter? Again, on revenues, you mentioned a new contract worth EUR 700 million. I'm wondering when this contract will start generating revenues? And what is the profitability of this portfolio? Is it in line with the usual profitability or bit higher or lower and so on? And finally, I'm wondering if you have any update on the potential removal of the dividend ban? At which point we are in the process? And when you expect some news on that?

On the process, we have no major news to report. As you know, we filed our response in July. And so we are waiting for the regulator to take their decision. On the guidance, we don't provide year-on-year guidance, as you know, because we don't have targets for the year. We expect the fourth quarter to still be a rich quarter in terms of over-recoveries. Let's bear in mind that the collection of the late payment interest, the EUR 40, generates over-recovery anyway because we are booking at 65%, our recovery rate is closer to 80%. And importantly, in a number of transactions, we also have interest on interest, which we collect and we book on a cash basis, which generates also a boost there. So there are a number of levers that had a positive impact in the last quarter. But those are dependent on other parties transacting with us. So we don't give guidance on that because it's not entirely in our hands. In terms of the contract we won, actually we don't disclose the profitability of a single contract particularly because that will mean disclosing the profitability of the contract to our client, which is not necessarily something we want necessarily to do. It has been priced in line with a similar contract of similar size. Important for us, it's actually a multi-national client with whom we work in one geography and there are clearly other geographies where we are having discussions with the same customers. So it's an important win and play on our Pan European platform. In terms of the net interest income, the decline quarter-on-quarter, I think you're still making reference. I think we had less transactions with debtors. And so that has an impact both because we have some rescheduling of the timing of collection, which impacted the income. At the same time, we have less over-recoveries on the other side. You can see it quite clearly also on the factoring and lending pages where we gave disclosure of the net over-recoveries. And also, you can see the contribution of the EUR 40, which is also down year-on-year on Page 10. I think importantly, if I may conclude there, it's actually that despite the low growth in the loan book and the profitability impact that we mentioned, we continue to accumulate the late payment interest fund, which is not recognized in our balance sheet and P&L, which again, is a source of future profitability.

The next question is from Simonetta Chiriotti, Mediobanca.

A question on volumes. So if we look at Italy, in the third quarter, we see basically an acceleration of the reduction of the NHS and still a strong decline in the PA segment. So a part of this is related to the -- well, to the sales force. So you are improving there with the new hirings and so on. But in terms of demand, so is the appetite for your services declining in the context of declining interest rates?

I think if you've just won a EUR 700 million contract, probably the interest for our services is not necessarily decline in the context of a low interest rate. At the same time, are we happy about our -- and we don't see any of those numbers there. Going back actually to the question that was made before, we'll see the impact there starting from October and playing out clearly only for 2 months of the year this year. So is there demand for our services? Yes. Is the performance of the team where it should be? No. Do we have in place a strong team that can deliver? Yes. But we need to get them to deliver in Italy. And we've put in place a number of initiatives to strengthen their performance. Clearly, look, as long as we remain also in the middle of the fourth -- with the regulator, it was a bit more difficult to engage with the client, but we're pushing our sales force to do that. In terms of volumes, we should also look at the good performance of volumes of the other 2 businesses actually because we were a bit overlooked. And in that front, we've had a pretty decent performance. But clearly, factoring remains the bedrock of our profitability. And we're very focused on getting that business in Italy because the other businesses are performing much better place back to where it should be.

Yes. Actually, on the positive side, the performance in Poland has been very strong. So there, is it something that has to do with products or -- so can you comment on that?

Look, there's been a bit of -- in the first half of the year, there was a bit less demand, which has then jumped in the third quarter. We have a slightly different business mix with more lending. We had good success also on the short-term products in Poland and we continue to add to our portfolio. We're now close to EUR 1 billion there. And you can see also recovering volumes in Portugal, which was down previously. The stock is a bit down marginally year-on-year, driven also by the payment dynamics and overall the other businesses continue to perform. And we have a good opportunity to think also in other countries, including France. So it's clearly Italy, the area where we should focus, and it's the most important market where we operate. But I think the performance of our international business demonstrates the wisdom, if you want, of having diversified across many markets, and that can counter to an extent the performance of Italy.

The next question is from Andrea Lisi, Equita.

The first one is again on the dynamic of volumes. If you think that already from the following year is it reasonable to come back to the level that is more consistent with the CAGR that you have indicated in the plan also in light of the new contracts that you have just announced? So if that 10% plus level is a level that you expect to achieve for next year, considering the contract and the actions put in place in Italy? And if you can comment on the direction of NII we should expect for the next year, considering on the one hand, the volume trend that you expect, but on the other, also the fact that I think that the level of rates by next year will be lower than we would have expected last summer and just at the beginning of the year? So if you can elaborate a bit more on how do you expect this trend -- this dynamic of volumes and rate should offset each other and which should prevail into the direction you expect going on? And the last question is on the NII contribution, increasing NII contribution deriving from the fact that you have increased the accrual rate from 50% to 65%. It was EUR 11 million additional contribution in the second quarter, if I was not wrong. If you can provide the indication also for the 9 months?

Yes. On the growth target in volumes, but more important in customer loans, because remember, we eat yield on loans not volumes that we issue on factoring. We still believe the 10% plus growth for the business is the reasonable target. And if you look at Page 28, you have our long history of performance. And we've seen in time periods where there's been different variation depending on customer decisions, want to sell more, sell less, which we can't control. But overall, the trend still remains strong. As you can see, a contract of EUR 700 million, it's basically 40% of the volumes of the normal quarter in Italy -- sorry, a normal quarter in the Group. So it's quite an important contract, but importantly, it shows that there are still a lot of large customers that can be conquered with our services. In terms of direction of NII, Look, I think the important point always to remember is that our liability is on floaters to a large extent. And so what happens is that the reduction in interest rates tend to accelerate income for us is actually when there's no reduction in interest rate or where interest rate change compared to when we price the purchase of the portfolio where we end up in a positive position. In terms of trajectory interest rate, we price according to where markets are. I think it will be interesting to see what markets will price in terms of the inflation and monetary policy going forward post the election in the U.S. In terms of the increased NII the impact is around EUR 4 million gross of tax, which is offset by the lower collection of principal of LPIs -- of foreclose and LPIs. So it's around that level. Let's not forget that when we collect less capital, we also have the rescheduling. So that's clearly an impact worth bearing in mind. At the same time, we carry forward a yield, which has been raised in a higher interest rate environment in the past.

The next question is from Michele Baldelli, BNP Paribas.

I have a question on the trend of the past dues on the slide that you presented. In the sense that if the contagion portfolio is decreasing by EUR 24 million, but the past due -- total past due exposure increases by almost EUR 80 million, does it mean that basically there are more past due exposures related to single entities that basically do not produce contagion and that are, let's say, increasing because the new business generated is generating this kind of past due exposure?

Let me re-explain maybe the logic before. The contagion portfolio is the exposure that I had at the time with the debtor, which generates then the past due also in the rest of the portfolio. So if I have -- let's assume I only have one debtor, for argument's sake, and I had EUR 425,000 towards that debtor and debt on the contagion portfolio, and that debtor, I collected EUR 25,000 on that debtor. So my exposure goes down to EUR 401. Now if I purchase incremental receivable towards that debtor and I get to EUR 1.7 million -- maybe EUR 1.7 billion, then the debt is not in past due and I have more exposure towards that debtor. I might have collected a bit also on what has been contaged, but I purchased more. So that's the dynamic that we have. So what is important on the contagion portfolio is certainly the reduction. It's also important that we have entities that exit completely from the past due. And that's why for us, it's actually important what you see here in this graph, the portion of the portfolio, which is in Q period because it means that actually that is a portfolio where we have eliminated the contagion portfolio towards those debtors. And in 90 days, if the counterparty does not go back in past due, hopefully it doesn't, then they will come out of the past due. So you have that lag effect that you have. So those are the 2 considerations to be had. I don't know if I was clear.

Yes. But let's say, to me, it remains that the past due are increasing anyway, even if you are decreasing, let's say, the contagion portfolio. But anyway, I will make other thoughts about it and then we'll come back to you through e-mails.

But since we are on a public call, that's an important point. I think, as I said, remember where we are now, right? So we classified -- we reclassified the portfolio in August for the June portfolio. We started the operational change middle of August. The operational change is to actually implement all the collection in 45 days that you see here the report. So to me actually, the fact that we have already reduced the contagion portfolio, we have already EUR 134 million of the past due in Q period. It's actually a pretty good result because we continue to actually buy receivable towards the same debtors. We haven't stopped buying receivables towards the same debtor. We said that we will not change the way we purchase receivables on the front book, because frankly, now we have the tools to reduce the contagion portfolio and get the entire exposure towards those debtors out of the past due. And so frankly, for the first 45 days of implementation of our activities, I think we are in the right direction. That's also what linked to what I meant before that it is not a linear decline because we need to get the entities out of the past due, not only the reduction of the contagion portfolio, and that has a multiplier effect on the reduction on the front book if you want past due portfolio.

The next question is from Fabrizio Bernardi, Intermonte.

I may have missed a part of this presentation. I have a question of -- on costs. I've seen, let's say, an increase of administrative and personnel expenses in the third quarter. So I would like you to give me some color about it. But maybe you have already given, so I can talk to Caterina and Marie in case. The second question is something more, let's say, a qualitative question. I don't understand why the Bank of Italy is taking so much time to, let's say, give you an answer about the RWA increase on past due accounting. Is this a matter of time only or because they are, let's say, lazy or because they -- I don't want to say sort of punishment for other reasons. But I'm wondering why they cannot decide so early. There is not a time frame about this decision as far as I have understood. So I was willing to get your, let's say, focus on -- I don't want you to give us a date or a day when they can decide, but I would like to understand why they are so, let's say, they are not ready about taking a decision about the new accounting of the past due in terms of RWA formation?

On the cost, as Giorgio mentioned before, you should bear in mind that in the third quarter of this year, we booked the contribution to [ Fondo Interbancario di Tutela dei Depositi ], the Italian Deposit Guarantee Fund, which usually gets booked in the fourth quarter, but we received the call for money earlier than usual. So we booked it in this quarter. So that has an impact. If you look at the third quarter of last year, our direct OpEx were EUR 40.2 million. This year, they are EUR 46.1 million. You take out the EUR 3 million, we're actually up 5% roughly quarter-on-quarter. On Bank of Italy, I commented already before. We're waiting for the answer. We continue to engage constructively with the regulator on multiple fronts. But it's in their regulatory powers to decide the timing of when come back to us with an answer and make a decision. I will not further comment on that.

The next question is a follow-up from Giovanni Razzoli, Deutsche Bank.

I think that in the interest of everyone, if you can provide -- if you have available the data about the contagion portfolio that is attached to the EUR 134 million past due that are in the provision period that could probably help us to understand better the potential reduction in the past due? So I don't know if you have managed to find it?

Yes, it's around EUR 20 million.

Okay. So it's EUR 150 million plus of reduction in the past due, which is quite a reasonable amount because it's around 10% of the total in a couple of months' time if the probation gets there. So it's already significant.

[Operator Instructions] Gentlemen, there are no more questions registered at this time. This concludes our Q&A session. And I would like to turn the conference back over to Massimiliano Belingheri and Piergiorgio Bicci for any closing remarks.

Thank you, everybody, for joining us late in the day, and we will continue the dialogue with many of you on our business. Thank you very much.

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