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

Good afternoon, and welcome to BFF Banking Group Full Year 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.

Hi. Welcome, everybody, to our full year results presentation. Thanks for joining us tonight. I will walk you through the presentation that has been posted online with Giorgio. On Page 3 of the presentation, we have the key highlights of today. Clearly, we report the numbers of a challenging year, but also a year that has shown in the fourth quarter the turn of a number of indicators, particularly in the growth of our factoring business in Italy. The reported net profit at EUR 215 million, adjusted net profit of EUR 143 million. Loan growth went up by 5% and 7% in Italy. And we had record volumes in Q4, which is the highest quarter in terms of volume in general, but we reported overall the highest volumes on record of new volumes. The off-balance sheet reserve has grown significantly since June despite the accrual that's driven by the fact that collection has been relatively low this year compared to historical due to the focus of team on the reclassification of the past year. Liquidity remains plentiful. We have a loan-to-deposit ratio of 69% and continue to gather deposits nicely. Capital also is at good levels, 12.2%, which is above the dividend capital target and the total capital ratio of 15.1%, both above the SREP ratio. We've increased significantly our CET1 year-on-year by over EUR 200 million driven by the reclassification of -- so the change in estimate on the LPI in EUR 40 and the retention of earnings. We are fully compliant with MREL requirements, which have been in place since the 1st of January of this year. In terms of past due, we report a significant decline of the past due portfolio as classified in June, a reduction of over EUR 80 million, 19% of the so-called contaging invoices in the second half of last year. That's important because as you remember, we redid the classification on the June numbers, but only in August. And so this is actually the performance of the business over a shorter period than the 6 months of the second half of the year. The overall level of past due is at EUR 1.7 billion, which is nearly flat due to the fact that the contagion effect on new receivable is still there that will disappear, of course, once the contaging invoices get collected. In light of all the above, we have spent as a management team, as a Board, time to review our business plan. We have an unchanged strategy and outlook for the business. But clearly, we have lost a year due to the reclassification of the focus on the past due on our growth, and we have revised our 2026 target accordingly. So we expect now an adjusted net profit of approximately EUR 240 million, an ROTE of over 40% and the cumulative dividends from 2023 to 2026 of over EUR 560 million, of which EUR 183 million we have already paid. This clearly assumes that Bank of Italy lifts its restrictions on our dividend. Other news, which are relevant. We received a green light by Bank of Italy for opening our deposit gathering franchise in Greece. We have -- we are waiting for Bank of Greece for any objections and the launch of the deposit gathering activities, therefore, expected at the end of Q1 or at the beginning of Q2. Importantly, as communicated to the market, we have had, as other banks, a favorable outcome from the European Court of Human Rights towards municipalities in conservatorship, which means that for judicial sentences also towards those, the state is ultimately responsible for paying and that's a strong underpinning of the credit quality of our book. In terms of the LPR, we have received news that the EU Council Polish President has prioritized the repayment regulation in for agenda, and we expect the revision of the guidelines of the definition of default by European Banking Authority by 2025. I'll leave the floor to Giorgio to walk you through the full year results, and then I'll take over again to walk you through instead the key strategic points for the business ahead of us.

Thank you, Max. Good evening to everybody. Now we are at Page 4 of the presentation, and we have our balance sheet that is still a strong balance sheet with very significant leverage ratio that is at 6.3%, and we have maintained our ample funding capacity. The loan book grew year-over-year by 5% and the loan-to-deposit ratio is now at 69% compared to 62% of the last year. It is important to highlight that we issued EUR 600 million of senior bond to cover the MREL requirement. Page 5, we have the P&L with a good year for the payment and also for the security services. As I said before, was a tough year for the factoring and lending, but the last quarter was an interesting quarter. So the expectation is that we have changed and we restarted our trajectory of growth. The cost of funding reflects higher interest rates year-over-year and also the bond issuance. In terms of final result, the result compared to last year is EUR 143 million compared to EUR 183 million of the 2023. But in that case, there was also around EUR 19 million of capital gain, thanks to the sale of some Italian government bonds. At Page 6, we have the factoring and lending business. So the interest income is stable, and we increased our deferred profitability with an increase of EUR 61 million in our balance sheet reserves compared to June '24. In terms of result, we suffered in terms of recovery for LPIs and also for the EUR 40. But in this case, we have also increased our funds. So the expectation is to restart again during 2025. In terms of KPIs at Page 7. As said before, the loan book grew by 5% year-over-year. In terms of outstanding, Italy grew by 7% with a very important fourth quarter of 2024. The same occurred also in terms of volumes for Poland, Spain, Greece and also France. In Spain, we suffered a bit in terms of outstanding because the government injected a significant amount of money in the last weeks of the year in order to repay. So the outstanding declined a bit. But it's very important that if we see quarter-by-quarter, they compare between 2024 and 2023, the last quarter was a positive quarter and in Italy was the highest quarter ever in terms of sales. At Page 8, we have the slide on the payments and has been confirmed the dynamic that we have seen over the year with an increase in number of transactions, very significant double-digit growth and with an increase in terms of revenues by 7% year-over-year. At Page 9, we have the Security Services with a big step-up in terms of assets under deposits and with the growth also in the deposits that grew by 8% year-over-year, thanks to the transfer of Cassa Forense’s assets that started in the last quarter of 2024. At Page 10, we have the slide related to the cost. We maintained our cost discipline and the increase are mainly related to the investments and also to the new contract, the new contract, so the contract that has been signed for the banking sector in Italy at the end of last year. At Page 11, just quick words about our building. Now we are fully all the people in Milan and Casa BFF. And we made an investment for EUR 72 million, but the value at the moment is EUR 88 million, so with EUR 60 million of overall revaluation. In the same time, we have sold our ex previous headquarter in Via Domenichino, and we made an impairment related to our offices in Rome in Via Chianesi. It's important also to highlight that the new headquarter is LEED Platinum and has been certified, and we have the coverage -- photovoltaic coverage panels that can support the 65% of energy needs of the building. In terms of balance sheet at Page 12, we have said that we are stable. We have the right liquidity level. It's important to highlight that the negative carry of our fixed bond is going to decrease and the expectation is to continue this trajectory also up to 2026. And our yield on floaters is now at 4.08%. At Page 13, we have our risk profile. It is important to highlight that obviously, the comparison between 2023 and 2024 has been inflected by the reclassification of the past due in terms of likely to pay and nonperforming loans, they are mostly towards public entities. So with no risk in terms of collection, but a delay considering the status of this debt. It is very important for the municipalities, the sentence that obliged the Italian state to pay receivable due by municipalities in consensus. Page 14, we have the capital ratios. As said by Max, a few minutes ago, they are above our targets. We are over the 12% in terms of CET1 ratio and also in terms of total capital ratio, we are above the 15%. It is important also to highlight that there was a reduction in terms of the RWA density. But on the other hand, we had an increase in terms of the operational risk requirement due to the fact that we have added the 2024 year-end result with a step-up in terms of -- with the reporting result and we have lost 2021 that was lower in terms of total result of the year. So we are in a good trajectory also on that side. Now I leave the floor again to Max for some important highlights and message about the new challenges that we have and what we have and what we have done until now. Thank you.

Thank you, Giorgio. We'll talk about the opportunities we have ahead of us. Certainly, it has been, as we said at the beginning, a complex year, but with signs of recovery in factoring lending in Italy and a number of growth enablers that should support the delivery of our revised 2026 targets. We saw already on Page 7, the recovery of Italy and the changing trends, which bodes well for 2025. But importantly, we have launched a number of initiatives to actually help us deliver on the plan ahead. First of all, on Page 16, we have reinforced our commercial team in the countries where performance has been less effective last year. So not only change in leadership, but also a strengthening of our commercial sales force. And that should support the growth as we have seen in the last few years, years where we've seen in the past moment also of reduction of our loan book and also strong acceleration depending on the dynamic from one side of our customer selling and the public sector paying. So we continue to expect the ability to grow at a 10% plus growth rate going forward. The second important point on Page 17 is that the change back to the injunction process in Italy means that we go back to the operations as we were operating in -- before 2020, where we use injunctions to proceed in the recovery of the receivable. As you may remember, we changed at the end of 2020 from injunctions to ordinary legal actions to protect our past due level. And then we also lived through a number of years, so that lengthened the judicial process. And also, we entered that period, which then was impacted by COVID when courts were closed for a period of time. There was a ban on execution on a number of jurisdictions. And clearly, last year, we were also focused very much on the portfolio reclassification. That effect has meant that our overall performance in terms of collection was not as effective as in the past. In the graph that you see, you see what is the collection level. So the LPI and EUR 40 recovered year-by-year starting from 2015, I think we lost the numbers at the bottom. We'll correct that. And you can see the blue bars, our performance pre-2020, the gray bar post 2020, you see clearly marked difference in that. And so we expect that moving back to injunctions, we should be able to go back to a level of collection over the previous year total LPI recovery cost, which is more in line with historical long-term norm or also the pre-2020 performance. So that's the second more impact on the stronger growth on the commercial side, better execution on collection, and that should drive our P&L results. And in terms of balance sheet, on Page 18, for the third important point, we expect clearly a reduction of the past due, confirming our past due strategy, as we outlined back in the summer, which is to collect the past and continue to operate normally on the new business. Why? It's actually classification is linked to mostly the back book, i.e., the so-called contaging invoices, which has generated in the past a contagion of the book, which was at the time present, what we call the front book and clearly the contagion also on new business. And so what we've seen is that our strategy of focusing collecting the contaging invoices, continue to collect the front book and continue to write new business also towards the debtors in past due demonstrate that actually we have a good turnaround -- good turnover of our portfolio and the problem over time should disappear by eliminating the contaging portfolio. How is that? On Page 19, you see the numbers. You can see that in the second half of last year, we reduced the past due invoices, which were at EUR 1.7 billion in June to EUR 790 million in total. We reduced the contaging invoices from EUR 425 million to EUR 344 million, again, a fairly narrow period of time. As I said at the beginning, we did the full reclassification only with the June numbers presented in August. So let's say, we only had September, October, November and December to execute on our new collection strategy. And that allowed us, notwithstanding that to actually more than half our original past due exposures. Then the total level of past due has been increased mostly by the new purchases on debtor in past due and then some debtors that also are routinely coming in past due. So overall, we are at a level which is fairly in line we were in June, but with a new portfolio that importantly pushes further down the line any kind of provisioning risk and shows that actually we have a pretty dynamic movement in our portfolio. And therefore, with the reduction of the contagion portfolio, and the contagion effect should disappear and we should have a significant boost to our capital position. In terms of strategy for the contagion portfolio on Page 20, we will continue to execute on the reduction of that portfolio through using the legal injunction on the remainder of the portfolio, better execution, thanks to a stronger team and more settlement agreement with the debtors, and we expect, therefore, to have a strong declining trend over time. We have potential upside that can materialize. First of all, the expected update of the EBA guidelines, which would happen in July 2025. That's according to the timetable and the approval of the last CRR. We are under discussion on new mitigants and their operational application and then the positive ruling of the European Court of Human Rights should also help to accelerate collections. So there are a number of upsides are not factored in our numbers, which should help us delivering on the release of capital. Importantly, we always have the optionality to sell this portfolio when we will be closer to the tender provisioning timing. But in the meantime, we continue to believe that it's the best course of action for us to continue to collect directly this contaging portfolio. In terms of [indiscernible], we have a strategy, and we are delivering on that strategy. Part of the growth in earnings is also expected by the reduction of the negative bond carry portfolio, which are the fixed bond portfolio we have, as mentioned by Giorgio before. And finally, supporting the plan is also a change in the organizational structure that should help driving execution. We have moved the report of group sales, group collection in factoring and lending to a direct report. We've moved group factoring operations under technology and process improvement to actually link better our ICT department with the back office. And then Giorgio will take the role on top of his CFO role of being the head of the various countries to focus the business even more on execution and commercial relaunch and the collection improvement. At the same time, we've continued to strengthen our corporate function. We have a new compliance and AML Director, who will join by March with a strong experience in a number of international banks. And Michela Della Penna will take a new role as our Corporate Secretary. So overall, we believe we have a strong team to deliver the updated plan numbers, which you see on Page 22. And you can see that actually, a lot of them are still where they were in terms of our original plan, same return on tangible equity, more equity, a cost income which we expect to be below 40% and a 12% core equity Tier 1. The targets have changed at the adjusted net profit, which we expect now to be in the region of EUR 240 million for EUR 1.27 per share of earnings and cumulative dividends of over EUR 560 million, an amount which is driven by the underperformance compared to the original plan of the business over that period. So I conclude on Page 23, the main takeaway for today. We focus on a strong recovery in factoring and lending that's driven by the strength in commercial team and a lot of focus on growth on the Italian and international markets. The move to injunctions in Italy should help us go back the collection levels of pre-2020, and so get back to a better performance on that front as well, should also help accelerating the reduction in past due together with the other initiatives to achieve that result. So overall, we have lost 1 year of growth. We still have a business which is highly profitable compared to our peers and the market with strong growth prospects and strong management teams to deliver it. Thank you.

[Operator Instructions]. The first question is from Tommaso Nieddu of Kepler Chevreaux.

Just 2 for me, please. The first one is on the loan portfolio growth. I mean I do understand you don't provide year-over-year guidance. But I just wanted maybe to get some color on its growth expected this year in the plan, I mean, we are still at 10% per annum. 2024 has been, let's say, a bit of an exceptional year, but should we expect 2025 to see every bond of something close to like, let's say, 20% and then 10%, 12% in 2026 or more growth in 2026. And then the second one is on the average payment time of the public administration. It seems like looking at some market data that the public administration is accelerating their payment time in Italy. Is it something you are seeing as well? Or if not, maybe you can tell us what makes you different than the market? Is it due to public interest rates, regulation? Any help would be highly appreciated.

Ladies gentlemen, please the conference, we'll resume shortly. Mr. Nieddu, please can you ask your question again?

Yes. Sure. So the first one was on the loan portfolio growth. And yes, I mean, I know that you don't provide year-over-year guidance but just maybe to get some color on the growth expected for 2025 because I mean, the plan, we are still at 10% per annum. 2024 has been exceptional. So just to understand 2025, where should we see the number. A rebound of something close to 20% and then 10%, 12% in 2026 or the other way around maybe more growth in 2026. And then the second question was on the average payment time because it seems that looking at some market data that the public administration is accelerating their payment time in Italy. And my question was, if it's something you are seeing as well or not? And if not, maybe you can tell us what makes you different than the market.

Yes. On payment time, always remember now the chicken of produce. If you take the average, not necessarily, you get the right distribution, and we don't buy the average, we tend to buy, clearly, the part of the distribution should not paid as well as the average, the usual example is I buy fairly little in Lombardy and buy more in Caribbean. So we don't see at the moment a huge shift in payment times. If you look at our reported data, one thing always to bear in mind for a business which moves quite a bit in terms of volume and payments, sometimes the point-in-time data does skew the picture a little bit. So as Giorgio mentioned before, for instance, if you look at our year-end results, you see a strong contraction in loans and receivables in Spain for a business which has actually has grown quite a bit over the year and has been building up the portfolio. Then in December, the Spanish government injected EUR 29 billion of cash to try to accelerate payments. Yes, that has an impact on the level of loans we have outstanding at year-end but not clearly on the average balance for the year. So those are the dynamics also worth mentioning. If you think that the EUR 100 million in Spain that we lost, simply the portfolio would have kept at the same level of last year, that's another 2 percentage points of growth. So it gives you a sense of actually that we need to look at the long-term trend targets for us who have access to them, the monthly data to actually see really where the portfolio is going. Portugal, to an extent, had the same effect. Going to loan portfolio growth, we don't provide, as you correctly pointed out, targets in terms of intermediate years and being -- having only 2 years in front of us, we clearly give you 1 year, then I give you the year-by-year target. We're clearly trying to accelerate as much as possible growth also because the performance that we'll have at year-end 2025 will drive quite a bit of the performance in 2026. We -- as indicated always, we try to buy as much as possible in terms of public sector receivable as we can from customers of high quality. So we don't set ourselves a 10% growth target. Usually, we have a higher target and then we clearly have a long-term target that we achieve or not over a period of years.

The next question is from Simonetta Chiriotti of Mediobanca.

The first question is again on volumes. Just to understand if the volumes in the last quarter of the year have a contribution from the new contract that you announced with the 9 months results. So the large contract in Italy that you have announced. And also looking at Slide 32, I've seen that there is basically this new segment in Spain in other, EUR 249 million of volumes that were not present before. And also in Italy, the other segment picked up in the last quarter of the year. These were tax receivables, if I remember well. So did you start again to buy that kind of assets?

Yes. On other, yes, it's mostly tax receivables and some private sector exposures. We usually have a peak at year-end when we talk about tax receivables mostly VAT that we buy. In terms of Spain, we have had -- we bought some tax receivables and a legal claim towards the public sector, which was, I think, partially done already in the 9 months of the year. Yes, we already had it in the 9 month. In the 9 months, we already had EUR 400 million -- amount you see here, EUR 225 million instead of EUR 249 million.

Okay. And the new contract in Italy?

The new -- apologies, yes. And yes, you see the effect of the new contract in Italy, of course.

And this is in the NHS segment, not in the public administration is correct in Italy?

Yes.

The next question is from Andrea Lisi of Equita.

The first one is on the dynamic of past due. It is clear what you said that the stabilization in some way of the past due level was mostly related to the fact that you continue to do new business and there is a contaging also on new business. So also on the basis of what are you experiencing in terms of recovery of the contagin portfolio, if you can, in some way, provide some color or give us an indication of the timing in which we should reasonably expect to observe a decrease in the stock of past due and consequently, a benefit at capital level. The second question is on just...

Ladies and gentlemen, hold the line. We lost the speaker line again. I apologize. Ladies and gentlemen, the line of the speakers has now been reconnected. Mr. Lisi, please, can you ask again your question.

Yes. I repeat my first question and then I go to the others. As regards to the first question is on the dynamic of past dues. In particular, I want to ask you if you can provide us a bit more color on regarding when should we start to observe an actual decline in the stock of past due, due to the real recovery and the end of period regarding the content portfolio and consequently, a capital benefit from reduction in risk-weighted assets. The second question is just if you can remind me on Slide 17, you have shown that you changed over time the collection strategy and you are coming back to the previous one. Just to understand if you can remind us why you have switched from one to the other, which provided worse results in terms of collection. The other question is, obviously, I don't know if you -- how much update you can provide us, but if you can provide us some update on the interactions you're having with Bank of Italy? And also just to understand if -- considering also the focus that Bank of Italy is having on challenger banks, obviously, you are really different from the others. But do you think that the 12% threshold for CET1 remains a good level to define the dividend policy? And really last one, if you can provide us a bit more color regarding the NII trend we should expect starting from this year with obviously declining rates, you have this trend of delaying that should in this moment give you benefit the NII and if this, coupled with recovery on volumes should lead to a material growth of NII that suffered during 2024.

Ladies and gentlemen, the conference will resume shortly. Ladies and gentlemen, please hold the line. The conference will resume mostly.

I think I got your questions. So maybe in the interest of time and also not to challenge the technology today too much go through the answers. First of all, on the trend for the reduction of the contaging invoice on Page 20, you can see that we have reduced by 20% that portfolio over the space of 6 months. And that's frankly, first of all, we have to identify it and then start actions on it, focus the team on it, start the injunctions on it. And we haven't seen the full effect. So in half a year or if you want, even in a quarter, September to December, there has been a reduction, which is quite substantial, and we think that trend can continue. On the other questions on -- it's good always to go back to history, Page 17. Well, we started to use ordinary legal actions because we had agreed with the regulator that was -- would stop the counting of the past due. Then new guidelines came out, which disallowed that. And therefore, we moved back to an injunction process, and that's what we are doing now. There's no point for us in having a lengthier and less effective and more expensive legal process, it actually is not protecting us from the past dues. We are better off actually suing more frequently the debtors and manage the past due in other ways. So that's the reason. In terms of Bank of Italy, we have completed, as we indicated in the press release, what was required to cover the remuneration, credit reclassification and governance points, which were raised by Bank of Italy as we are waiting for them to come back on the banks. On capital level, let's maybe go to the capital page. Let's not forget that we had on Page 14, a 12% capital target when our RWA were EUR 3 billion. And now on a loan book, which has not increased dramatically, it is EUR 5.2 billion. So the fact that we are absorbing significantly more capital for the same level of risk, which is nil because of the public sector nature of the exposures. So we don't know what the regulator will decide in terms of SREP levels. In our SREP, we had an indication that we had an add-on for the implementation of the definition of default. We clearly -- we should be fully compliant, but we don't know what will be the outcome of the SREP process when will be communicated to us. And in terms of net interest income trend is mostly driven by clearly the volumes in the business. We tend to benefit in the first period of the declining interest rate because we have a slight mismatch of duration between assets and liabilities. And remember, we have a pretty significant fixed rate bond book. If you simply take the fixed rate bond book, which is EUR 1 billion, if you have a 1% reduction in interest rate, by definition, our net income goes up by EUR 10 million without much to say. In terms of factoring a reduction in interest rate tends to have a more muted impact depends on what is the pricing, frankly, with our customers, we tend to benefit when interest rates go down because we usually buy with a fixed commission for a period of time and the reduction in LPI rate is also deferred by 6 months.

The next question is from Manuela Meroni of Intesa Sanpaolo.

A couple of questions on my side. The first one is on your 2026 guidance. I'm wondering if this includes also the benefits from the late payment direct review or not? And the second question is on the favorable outcome from the European Court of Human Rights. I'm wondering if these have had some positive impact on your P&L or you expect to have it in the future? And if you can quantify it? And then just, let's say, confirmation when you give your guidance in terms of cumulative dividends up to 2026, you kept unchanged your...

Excuse me, Ms. Meroni, we have lost the speaker line again. Please hold on. Thank you. Ms. Meroni, please, can you repeat your question?

I've answered -- I've already heard the 2 questions, so that's probably easier for me to answer. First on the impact of late payment regulation, no, there's not a single euro included in our numbers because it has not been enacted yet. On the European Court of Human Rights, we haven't booked yet the impact of that event because it was a January event. We communicated in the press release the impact of that particular sentence. What is relevant for us is more on the classification of the municipalities in conservatorship and the ultimate risk level there. It's particularly important also because it's likely to prevent those exposure to ever go in kind of provisioning because once we get a final sentence through an injunction, it means that we can then enforce against the state and not wait for the conclusion of the conservatorship process. So for us, that's a good capital impact potentially.

The next question is a follow-up from Simonetta Chiriotti of Mediobanco.

So going back to the write-down of the past due portfolio, basically, there was a reduction in the contaging invoices, so in the back book of EUR 80 million in the second half of the year. This amount can be considered a run rate. Can we consider this as a run rate or there were some, how to say, low-hanging fruit that were at the beginning of the process and in 2025, we will have like a lower month. I mean any type of comment on the evolution, I think, would be helpful.

Yes, I know it would be handful, but it depends also on our counterpart. This is not down to us as well. I think what is a fact is that we started to have those conversations mostly starting from September. You see actually an acceleration from the performance between June and September to September and December and the reduction of the contaging portfolio that on Page 20. Then the ability to collect the contaging portfolio depends on the other side as well being willing to pay. So we don't indicate the trend for that portfolio. But I think it demonstrates the validity of our strategy of actually collecting directly and selling that portfolio.

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

Thank you for attending us in our call tonight. Apologies for the technical problems. We have a busy ahead of us in terms of continuing to grow our business. We're quite confident on the targets we have given to you and look forward to the continued dialogue over the next quarters. Thank you very much.

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