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

Good afternoon, and welcome to BFF Banking Group First Half 2025 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 Giuseppe Sica, Group CFO. Please go ahead.

Thank you. Thank you, everybody, for joining us today for the reporting of our first half results. Let me, first of all, say that we don't have any direct update on our discussion with Bank of Italy, and we'll clearly give an update as soon as we have disclosable information. So let's focus first on our financial and commercial performance. In the first half of the year, we continue improving our financial and commercial performance on the trajectory we set already in Q1. The adjusted net profit stands at EUR 75 million, up 6% year-on-year. Equally importantly, the second quarter profit is also up 6% sequentially and 37% year-on-year, a good trajectory for the business. Factoring & Lending has continued also its positive path. It's PBT -- PBT of the division is up 21% year-on-year and the loan book in volumes are the highest first half ever for the group and are just marginally shy from the record balance sheet of year-end. Not only reported profitability is up, but importantly, also the future one continues to build up. In fact, our off-balance sheet reserves has grown EUR 93 million year-on-year, faster than our loan book growth. We continue to deliver on growth while keeping a substantial liquidity. Our loan-to-deposit ratio stands at 77% and the highly stable transaction services deposits are also growing 31% year-on-year. The rate spread environment continues to support the mark-to-market of our held-to-collect portfolio. Now the positive mark-to-market is close to EUR 50 million, an improvement of over EUR 100 million year-on-year, and this will also support our future profitability. Moving to capital. Our CET1 ratio stands today at 14.3%, which is well above the level that we registered pre-credit reclassification at the time the capital was 17.5%. We've generated over 200 bps of capital in the first half of this year alone. We have EUR 114 million of excess capital versus the 12% CET1 target, EUR 75 million of which are related to our first half adjusted net income. Furthermore, if you look at our SREP level, we have EUR 226 million of excess capital, so a substantial buffer also towards that. As we have repeated in the past, our dividend policy remains unchanged. We are waiting the removal of the banks of Bank of Italy, as we mentioned before. Looking at past due, we are pleased on our progress on the past due to date. Our past due shifted towards government and public sector down 10% in the last 6 months. If we consider only the portfolio we had at year-end that has seen a reduction of 40%. And that gives a sense of how much we're actually reducing the portfolio -- the growth of the portfolio of the past due has been driven instead by further purchases of debtors already past due and a marginal increase in the past due portfolio. Also, what we call the Contaging invoices progress continues. We have done close to 30% in a year. We continue to take action to reduce that portfolio. A few points outside of our numbers. First of all, we have renewed our ICT contract with Nexi, which as you know, underpins part of our transaction service activities that has been renewed until 2032, and it has given us some strategic flexibility into intellectual property ownership on the infrastructure. Second and importantly, we obtained further European Court of Human Rights rulings on the municipalities in conservatorship, which proves again the state needs to pay those public exposures. In the meantime, we have filed appeals to the European Court of Human rights for additional EUR 40 million of capital on municipal conservatorship, that's roughly 40% of our NPL portfolio and another EUR 25 million on past due exposures. Third, following receivable, the regulatory authorization and the support of our partners. We have launched our deposit gathering platform in Greece. This is another step in our funding diversification, and we'll launch a massive campaign in the last part of the year to increase that activity. And finally, you might have seen the logo, we have the presentation we celebrated on the 22nd of July, our 40th birthday. That's an important step in our history and a history which has seen so many successes, and we wish all of us and allow our shareholders many successes to come. If we look at Page 4 on the balance sheet. I would highlight a few things. First of all, the loan book stands at EUR 5.9 billion. And as I said before, it's up 5% year-on-year. The loan book size is actually the main driver of our interest income together with other recoveries of LPI. Our held-to-collect portfolio is down 7% on year-on-year, we are managing down particularly on the fixed rate side. The mark-to-market, as I mentioned, is now positive and is increased by EUR 134 million year-on-year. That means that actual future profitability is better as the cost of carry becomes a positive carry over time on the fixed bond portfolio. And importantly, we continue to have positive spread on our variable rate portfolio. On the liability side, as mentioned before, transaction service deposits are up 31% year-on-year. Those are stable, driven mostly by decision of our clients on their asset allocation. But importantly, by the volumes of our activity with them. We have a strong growth, for instance, in our depository bank activities at 20% year-on-year growth. Given that liquidity, we've actually reduced our deposits, which was down 39% year-on-year and the online deposits and repos, which are down 13% year-on-year. Leverage remains strong to 6.1%. Our loan-to-deposit ratio is at 67%, which is an improvement in -- over last year, which confirms ample liquidity in the group. And we talked already about our CET1 ratio, again, are a very high capital ratios with 14.3% CET1 and plenty of buffer versus our 12% target in our [ SREP ]. If we move on the P&L on Slide 5. Our adjusted net income is at EUR 75 million, up 6% year-on-year and 37% versus the second quarter of 2024. Let me speak in more detailed data about the drivers of our performance. And it's important to stress that profit before tax of our factory lending division is actually up double digit, plus 21% year-on-year, which underpins the future growth of the business. Also, security services is significantly up 43% year-on-year. Payments on slightly down by ahead of budget, and we see plenty of opportunity to deliver further growth and profitability in that business. Having said that, I leave now the floor to Giuseppe to walk you through the details of the numbers. Thank you.

Thank you, Max. Let me give you some more details on our Factoring & Lending business on Slide 6. The gross yield has not only resilient, spread versus ECB rate has, in fact, improved. And let me remind you, ECB rate is the key driver of our cost of funding. So MRO rate is down 135 bps versus gross yield down 74 bps. Spread resilience explains, together with volumes, I will talk about in a moment, the 21% increase in the PBT of the division. And schedulings are normalizing and improving quarter-on-quarter, EUR 6.2 million in the second quarter versus EUR 12.7 million in the first. Other income is mainly driven by continued collection of recovery fees. Looking not only at the past, but also at the future profitability, our off-balance sheet funds have increased EUR 94 million in 12 months. Moving to the commercial performance of the business on Slide 7. Loan book stands at EUR 5.9 billion, the best first half for loans and the key driver of net interest margin. Our loan book in Italy continues to grow and is up 5% compared to last year. Spain, on the other hand, is down, reflecting lower volumes after planned depart at the end of last year. France loan book continues to grow. Reflecting on commercial performance. Volumes are up 10% year-on-year at EUR 4.2 billion. Volumes in Italy are up 17% year-on-year and up 41% in Poland, albeit with a different business mix. Portugal, which was down 6% in the first quarter is up 9% year-on-year. And finally, France even before the future opening of a branch in the country, in only 12 months after launch of meaningful business is already at the same level of risk, which in itself growing. Let me move now to Slide 8 on payments. Both revenues and number of transactions are up 1% year-on-year, proving the resilience of the business. The division provides circa EUR 2.8 billion of deposits to BFS, which are also up 2% year-on-year. Continuing to invest in the business, we have extended ICT contract with Nexi to 2032. We have signed agreement with Nexi and equensWorldline for domestic intermediation with intellectual property ownership for critical IT applications remains with us. And we have become exclusive provider of domestic settlement cut service for the equensWorldline. Next slide on Securities Services. As Max said, the division has recorded very strong performance during the year. Assets under deposits are up 20% compared to 1 year ago and very meaningfully for the business, they are back to pre-Arca as we continue to be a provider of choice of several alternatives, specialized funds and pension funds. Revenues as a consequence are up 13% versus 1 year ago. Liquidity provided by the division has now reached EUR 4.4 billion, which is up 62% year-on-year and is allowing an efficient management of our liquidity profile for instance, as Max said, by reducing our online deposits. Slide 10 on group costs. We maintain our cost discipline while investing in growth. In fact, OpEx and D&A are up 4% year-on-year with lower personnel costs and higher G&A mainly due to meaningful IT expenses. At the regional level, Securities Services, OpEx and D&A are up 6% year-on-year in relation to ICT systems upgrade. Factoring & Lending at EUR 24.3 million, up 3% year-on-year. And for payments, OpEx and D&A are only slightly up year-on-year. As in the first quarter, any variable remuneration for the year would only be assigned after the removal of Bank of Italy banks. Now let us move to our balance sheet and its strong profile on Slide 11. We are pleased with the composition of our balance sheet and continue to work on marginal improvements. The loan-to-deposit ratio remains very strong at 67% showing ample liquidity and is further reduced compared to 1 year ago when it was 69%. NSFR is 143% compared to 134% one year ago. And LCR is also up from 209% 1 year ago to 249%. In essence, we feel liquidity sources remain abundant and diversified, and we continue to diversify with the launch of our deposit platform in Greece. Moving to the asset side, our HTC portfolio continues to be managed down and is down almost 10% year-on-year. And importantly, mark-to-market is positive and increased by EUR 124 million year-on-year, which bodes well for future profitability. Slide 12 on asset quality, showing our low risk profile is confirmed. Our cost of risk in the first half stands at 4.6 basis points, broadly in line with historical averages. Our NPE stock affected by June '24 reclassification is down 10% year-on-year. And I will expand on the underlying dynamics in a moment. Let me stress once again that NPE exposure is almost entirely towards public administration, 96%, which is, by definition, low risk. Looking at the details of our NPLs. Also these are largely towards public administration and in particular towards municipalities. We are pleased to have received the new ruling confirming Italian State liability receivables due by three municipalities in conservatorship and in the quarter, we have appealed to the European Court of Human rights for circa EUR 40 million receivables towards municipalities in conservatorship, which represents 40% of our NPL portfolio. EUR 40 million by the way, is already capital with significant upside from collection of LPIs. As mentioned, let me now give you some more detail on the evolution of our past due portfolio on Slide 13. First, excluding net new exposure, which we have bought in the year, past due has gone down by 40% in 6 months. This is important as it shows the high churn of our portfolio and our collections. Second, contaging invoices are down by another EUR 41 million in the first half, and we expect more as new injunctions take effect. Third, new past due is mostly due to contaging effect EUR 419 million. New past due generation is limited to EUR 96 million in the 6 months. I promised a few more details on our legal activity supporting transactions or traditional collection. By the end of July 25, we have filed in Italy around 840 injunctions towards public debtors, and this represents around 82% of Italian past-due exposure and around 64% of the total past due exposure. We have appealed for EUR 25 million more involved in past receivables to the European Court of Human Rights in addition to the appeal on conservatorships. This should and will support further past due reduction. Last, but not least on capital -- Slide 14. CET1 ratio stands at 14.3% versus 11.9% in the first half of 2024. And in the first half of the year alone, we have generated 207 basis points of common equity Tier 1. This is supported both by past due and RWA density reduction and by the profitability of our business. We, therefore, had EUR 114 million of excess capital versus 12% common equity Tier 1 target and 226 million versus SREP requirement. Total capital ratio stands at 17.4%, while MRL requirements are covered with ample buffer, thanks to organic capital generation and the 2 bonds that we have issued last year. As said by Max, the dividend policy remains unchanged, subject to the listing of the dividend down by Bank of Italy. Let me now hand over back to Max for the key takeaways on our business in the first half of 2025.

Thank you, Giuseppe, for the deeper presentation. Look, if you leave for [ set of ] details, what we are seeing today is a confirmed positive momentum for the group with double-digit growth year-on-year, both factoring & lending securities services and good strategic positioning of our payment business. We have reached the highest first-ever volumes and group loans for the Factoring & Lending business. Secondly, the reduction of past due is underway with total past due portfolio down 10% versus year-end 2024 despite us continuing to buy new receivable towards entities already in past due. We are accelerating legal actions, so we should see an acceleration of the reduction of the overall stock in the contaging portfolio in the quarters to come. And finally, we are in a pretty strong position in terms of capital because despite the still high level of past due, which is far away from where we should be in a normalized situation. Our CET1 ratio is at 14.3%. We have EUR 114 million of excess capital versus our CET1 target for dividend. And so we think we are in a strong position to continue to grow the business, generate further capital and in due course, reward shareholders. Thank you for listening to our presentation. I will leave the floor to any questions you might have.

[Operator Instructions] The first question came from Tommaso Nieddu from Kepler Cheuvreux.

I would have two for now. The first one is on full year estimates. It seems that consensus is sitting between EUR 175 million, EUR 180 million on adjusted net profit. So I would be appreciated some colors on that? And do you feel comfortable with these numbers? And the second one is on the contaging portfolio collection. Clearly, the past due exposure is going down. But in the second quarter, your collection of contaging portfolio has been only EUR 16 million. So should we consider it the new run rate? And now that the back book is getting smaller. Is it more difficult to collect or -- yes, that's it.

Yes. On the Contaging portfolio, look, there are quarter -- slower quarter, it depends really on where we are with the discussion with the counterparties, where we are with legal action. So one cannot pinpoint to a specific number that we target. We target to reduce that portfolio, which actually will mean an acceleration also going forward. You should bear in mind that we are only a year -- not even a year away from the reclassification later last year, and we started to change our approach on legal actions at the end of 2024. And as we said, we were expecting an acceleration in the second half of this year of the collection of the past due portfolio. In terms of full year estimates, as you know, we don't give targets for 2025. You should remember that we always have a stronger fourth quarter, which accounts for more than a usual quarter, and we are trending towards level that we think is consistent with our business plan target.

The next question is Simonetta Chiriotti of Mediobanca.

My question is on volumes. The second quarter is really brilliant in terms of volumes in most geographies. So is it possible to have a bit more color. I've seen that the PA segment improved a lot in the second quarter and also Spain was better than in Q1. So could you just elaborate a bit on this?

On volume, we are working hard to improve our commercial performance on many fronts. As you know, we also have a lumpiness in the decision of customers to sell their receivables. We are overall pleased with the performance of Poland. We think Italy, although showing decent growth in volumes and still a lot of potential to be expressed. Spain, which is down year-on-year. So it's down year-on-year about 20% still is impacted by the injection of cash we have seen by the government in Q1 and Q2 has been less relevant clearly because it's an effect that impacted mostly Q1. And those, I would say, are the main driver. We think Portugal has more to go as well. So it has grown year-on-year, but we see more potential. And interestingly, on the smaller markets, you can see France, as Giuseppe pointed out, that has shown very strong growth from a small base, but now in terms of portfolio, it's already at half the size of Slovakia. And this space, it will reach the size of the smaller market pretty soon. So we see that as an opportunity, which is driven by the reconsideration people have on the financial conditions of the country as well as potential risk on the political stability of the country itself. Slovakia as well, it's a tiny market, we need to see what happens in the following quarters, but pattern seems pretty good. And we know that that's a market where the budget deficit is quite high, so they should help focusing the customers' attention on it.

If I may complete the question. We have, in the first 6 months, a 10% growth in volumes and the 5% growth in loans, should we -- can you give us an indication of how the DSO is evolving in the largest market?

We're not seeing strong trends one way or the other. Remember, we buy what our customer give us and depending also on when we buy in the quarter, we have a different outstanding at the quarter end. So for instance, in the second quarter, we did more purchases in proportionally than usual in April and May and less in June. And so that actually skews the 2 effects. And you have markets also where we buy portfolios, which are not necessarily representative of the overall market. If I take France for instance, we buy portfolios that we paid later than normal DSO. So you can't really -- we are not seeing any individual performance of counterparties with significant improvement or worsening of payment times. I don't agree, we're not making changes to our pricing mechanisms to take into account either shortening of lengthening of payment times.

The next question is from Davide Giuliano of Equita.

I have three. The first one on NII. Overall, interest rate environment was, let's say, good in first half as Euribor decreased while LPI rate was fixed at the beginning of January. Now that the LPI rates are fixed in July and the ECB is expecting to cut 25 bps by year-end, which dynamics do you expect on NII in the second half? The second one on the Casse di Previdenza. When do you expect the tenders to start? And what margin can we expect on these mandates for the Security Services division? And the third one on capital allocation. I know that dividend is the priority, but there has been some movement in the Specialty Finance segment and also some things are going on. My question, I was wondering if the excess capital you have accumulating during the dividend ban, if do you see opportunities for organic growth initiatives?

Organic or inorganic?

Inorganic.

Okay. Got it. Okay. Look, we look at M&A as stated in our strategy all the time. And it depends on the opportunity, the right price, the right moment, the right target. So it's not really an issue. We have capital, so we buy. Capital is there, but it's actually our shareholders' capital. So it has an opportunity cost that we need to be mindful of. As we always stated for us, I mean, it's an avenue mostly for diversification, and we continue to monitor the market in Italy and also abroad. In terms of the Casse di Previdenza, the [ decree ] has been actually has been actually ready. We know that the under Secretary of the [indiscernible] stated in June that we should expect the publication shortly. We think there's still a bit of a delay. For us, actually, it's a positive because it means that when it will be issued, hopefully, we will get in a position where we don't have the restrictions imposed on us by Bank of Italy, and that would take away some concern that client might have on us as a trustee of their assets. So at the moment, a delay is actually for us positive. We expect something to happen in the fall. In related to NII, Look, I think the movement in interest rates of that magnitude are not really -- don't change dramatically our P&L. Frankly, what will drive the NII in the second half is going to be the growth of our loan book and also our ability to collect late payment interest and the recovery fees. And I think one item, which gets overlooked a little bit in our presentation at times is actually how big and how much it grows our off-balance sheet reserve. And if you look where we are today compared to last year, that off-balance sheet reserve has increased by EUR 93 million to EUR 561 million. Now EUR 93 million, if you want a portion of it, what will come from 65% to our average collection rate, which is just shy in the long term of 80%. So let's take 1/3 of that amount, slightly more, is actually if you want normalized earnings that we have, we are simply deferring. And so when you look at our results, you need to take into account that actually, we are still deferring a lot of income and continue to accumulate profit reserve that will show up in our accounts going forward. And our ability where we collect the past due is also to negotiate a transaction with our debtors where we collect those LPIs and EUR 40 and also when it's allowed interest on interest like it.

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

It's Antonio from Bank of America. Apologies if you've answered this question already. I've been in between calls, and so I missed the first part of your presentation. My question is really around the past due and the Contaging invoices, which are down again, I think, by some EUR 41 million or so in the first half. And the progression has been quite good on the organic side. And so my question, I know you've been open to both organic as well as inorganic initiatives for the bank. So what would be the pros and cons of you to explore a disposal of a securitization of a big chunk of your contaging invoices. Just because looking at from the outside, and I'm conscious that we don't have the full details, but it looks extremely appealing as a way to really put to bed this issue. So any thoughts you can share around just the sort of the qualitative pros and cons of pursuing this option would be super helpful.

Antonio, look, the -- when we look at our contaging portfolio, we have, at the end of the day, a number of levers where we can collect organically and clearly selling that portfolio even in a securitization where we will probably sell the junior notes to achieve the consolidation, therefore, have a pretty strong capital impact, as you point out, still leaves some money on the table. And also, we want to be in a position where our collection processes are fine-tuned so that a purchaser of that portfolio will clearly be even more comfortable about those invoices being collected in due course with clearly interest as well. And so the -- we are working on that. We're working also on preparing for a potential disposal, which also means thinking what portfolio we might want to dispose of because of that contaging portfolio, a portion is -- has a high multiplier, if you want. So if we sell that, we actually get rid of proportionately larger share of the infected portfolio, so to speak. There are other portion of that portfolio where that effect is not as strong. So probably doesn't make as much sense to sell. So it's that consideration. The business continues to generate a lot of capital. And we think at the moment, we don't really need to put pressure on that. At the same time, we don't want to be in a position where we need to take provision on that portfolio. So we want to be ready ahead of that to potentially dispose of those assets. I think if you look at Page 13, we take a lot of comfort by the fact that this is a very dynamic portfolio. And the fact that we have reduced in 6 months, 40% of what we had at year-end, which by the way, a portion of which was after that we purchased after the reclassification, if we were to look at, actually the previous portfolio would be gone down even further, gives a sense of how dynamic the portfolio is. And we think we have with the acceleration in legal activity that Giuseppe mentioned before, quite a lot of levers to deliver a reduction in the overall portfolio. But we keep the option of also selling or securitizing, which is probably the most likely outcome that portfolio as one of our tools. And also all the support from a regulatory point of view that makes securitization effective easier. It's also welcome because it means actually we can execute on a shorter time frame than it was normally expected in the past.

[Operator Instructions] The next question is a follow-up of Simonetta Chiriotti of Mediobanca.

So a question on LPI over recovery and the impact of rescheduling. So the negative impact improved. So it's lower in the second quarter but remains negative and relatively high. Do you expect an improvement on this metric?

We have seen already an improvement by definition -- as you said, the second quarter is better than the first. Let's also remember that the rescheduling is what we account at the moment of rescheduling, which means that actually that yield does then translate into interest income in the following period. Now we certainly want to -- we certainly aim to improve substantially our LPI over recovery. That's not where we should be by any mean. I think the team has a decent pipeline. And overall, our level of over recoveries in terms of recovery rate has been exactly in line with what we expected and what we have seen historically. So yes, we expect to do more. Yes, we expect to do more in the second half of the year, and we are aiming to get a pretty good result in Q4. Now that depends not only on us, but the fact that we have moved from ordinary legal action to injunction should accelerate those results because we have counterparties that are less -- will have less time to actually wait before they have to pay.

This concludes our...

Sorry, in a sense to add to it, Simonetta, it's a bit what I said before on the increase on the off-balance sheet fund. So the fact that we actually had a low net over recovery, but we increased our off-balance sheet fund by EUR 93 million of which a portion of EUR 15 million over EUR 35 million, it's roughly 40% is what will be our standard over recovery means actually we have created that value that we don't see in that accounts yet but will be actually recovered over time. And that's something which is helpful to focus on, partly because now the comparison year-on-year, you see the same level of LPI recognition. And so that's an important data point, which I think has overlooked as mentioned before.

This concludes our question-and-answer session. I would like to turn the conference back over to Massimiliano Belingheri and Giuseppe Sica for any closing remarks.

Thank you, everybody, for joining us today, later in the day, and I'm sure later also in your plans for holidays. We wish you a good break for the ones of you who are having one, and I'm sure we'll have plenty of opportunity to speak with you and meet you in other investor meetings and calls over the next few months ahead of our Q3 results. Thank you.