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

Good afternoon, and welcome to BFF Banking Group First Half 2026 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would like to turn the conference over to Caterina Della Mora, Head of Investor Relations, Giuseppe Sica, Group CEO; and [indiscernible], Group CFO. Please go ahead.

Good evening, and good afternoon to those joining us from other time zones. We will start with a presentation by our CEO, Giuseppe Sica; and our new CFO, [indiscernible] followed by Q&A. Let me hand over now to [indiscernible].

Thank you, Caterina. Let's start on Slide 2 with the key highlights, which reflect our focus on execution and the strategic deleveraging, which will have to continue in coming quarters. His focus on execution and the resilience of the bank has enabled us to grow adjusted net profit by 8% versus first half 2025, even in what remains and will continue to be a challenging environment. Our Payments and Security Services business continued to perform well, as you will see in a moment. In line with our strategic deleveraging, we are managing the factoring and lending business in a very disciplined manner. We must start decisively on calendar provisioning and have started to do so. Notwithstanding the anticipation of calendar provisioning from 3Q to 2Q, we have maintained our pro forma capital ratios above regulatory requirements, as we said we would do. Finally, while we are pleased with our execution to date, we know that we have to address the effects of future calendar provisioning and are working to do just that. Meanwhile we have a number of strategic options under review, which includes, but are not limited to possible securitization. A fundamental reviewing the business model is under consideration. And of course, this has to be in the interest of all shareholders. Moving to key financial metrics on Slide 3. [indiscernible] continues to be profitable with ROE for the first half well above 20%, close to 30%. The business continues to perform in line with expectations across the board. Net revenues are up 9% year-on-year in what has been a complex first half for shareholders and employees alike. Adjusted net income is up 8%. Factoring loans are down 5% compared to year-end 2025. This is fully in line with our strategic deleveraging and focus on profitability. Deposits are down by a similar percentage, allowing for a constant loan-to-deposit ratio, which remains strong. It is not on the slides as we are simplifying messages, but overall deposits grew versus Q1 2026. And finally, our pro forma CET1 ratio stands at 11.1%. This is up versus year-end, even if we had faced the impact of the Bank of Retail report for almost EUR 30 million and close to EUR 90 million impact from the anticipation of calendar provisioning. Let's look at net profit in more detail on Slide 4. BFF underlying business performance is resilient and drove an 8% increase in adjusted net profits. This is thanks to robust performance of transaction services, which was up year-on-year and continues to invest for growth and is collecting successes. Disciplined management of factoring and lending, as already mentioned, and lower volumes will continue over time as we address calendar provisioning. Collection focus remains high and we've also strengthened our collection team. And finally, effective cost control. I would also like to point out that our reported net profit would have been up 3% year-on-year if we exclude the impact of the Bank of [indiscernible] inspection report. Following slide. Group profit before tax is up 7%, demonstrating our ability to maintain profitability in the context of our focus on strategic deleveraging. A bit more detail on the various divisions. PBT for security services and payments rose 15% year-on-year to EUR 27 million. It would have reached EUR 63 million if liquidity has been invested in Italian government bonds. This will generate over EUR 120 million is annualized. Factoring lending performance was mainly affected by portfolio derisking. The derisking will be apparent as we talk about our net exposure to negative court ruling, which has gone down from EUR 240 million at 2025 year-end to EUR 100 million. Corporate Center has benefited from improved funding rates, focus on cost and the HTC portfolio. I'm now going to hand over to [indiscernible] for more detail on the numbers as well as the business performance.

Thank you, Giuseppe. Good evening, everyone. Firstly, I am delighted to have joined BFF and of having the pleasure of speaking to you today for the first time about our results. If we move to Slide 6, you can see the benefit of BFF's diversified mix of revenues, which I would like to draw your attention to. In H1, 64% of net revenues were generated by activities outside our factoring and lending business, and this compares to 58% a year ago. This diversified mix allowed us to continue growing net revenues year-on-year despite a decrease in factoring and lending as a result of portfolio derisking, which also resulted in significantly lower exposure to negative court ruling. As we already mentioned, the corporate center benefits from lower funding costs and larger [indiscernible]. In Payments and Securities Services, we benefited from higher commission income. Let's now move to Slide 7, where we show you the net interest income, which was stable compared to the first half of 2025. This primarily benefited from an improved spread, which was up -- is up 21 basis points compared to a year ago and offset the effect of a smaller loan book. This is a trend that was already observed in the first quarter of this year. The improved spread reflects our increased focus on internal rate of return even excluding LPI, as well as on quick collections, which has resulted in lower reschedulings. On Slide 8, we look at fees and commissions. We continue to grow fees and commissions in transaction services with securities services achieving a 15% increase year-on-year, thanks to commercial activity, including the onboarding of 15 new funds. On the payment side, the 4% growth was driven by a good performance of net commission -- net commission income, and we have a solid future pipeline. We would like to highlight today that among our new relationships, we have also partnered with Revolut, and we have started rolling out specialized services for them. This partnership is supported by a strong pipeline of additional services to be launched over time, and that highlights our ability to attract and support leading neobank and fintech players with tailored capabilities for the Italian market. In factoring and lending fees and commissions related to the servicing of third-party portfolios were broadly stable year-on-year, underscoring our expertise in this area. On Slide 9, you can see our disciplined approach to cost management, which has allowed us to reduce our cost/income ratio to 46%, even after inflation and accommodating for our continued investment in transaction services focusing on system upgrades. In factoring & Lending, you see an increase in cost, which was related to the review of processes. And now I give the word back to Mr. Sica.

Thank you, [indiscernible]. Let's look at our commercial performance on Slide 10. In Security Services, both assets under depository and assets under Cassidy grew in the first half of the year. The overall reduction in deposits is linked to the rebalancing of the group liquidity mix. In payments, commercial activity is picking up and with a significant improvement in deposits in Q2, which was up 18%. Finally, in factoring and lending, we've been pursuing a selective approach to loan origination, focus on quality, profitability and derisking actions. Business remains highly profitable on an underlying basis, but we will continue to increase focus on profitability versus volumes and improve operational effectiveness, which is key given the EBA definition of default. New ways to operate in the business will be needed in order to address the calendar provisioning. Moving to our help to collect Italian government bonds. We announced a repositioning of our portfolio on 28th of July. This included the sale and investment of around [ EUR 30.1 billion ] of HTC bonds. [indiscernible] fully in line with the option set out in our capital conservation plan and only has a marginal impact on recurring profitability. The impact was not conservatively included in the previous capital conservation plan. Government bonds represent circa 40% of our total assets. And this is also to protect the interest of all of our clients in the Transaction Services division. Liquidity remained strong and stable, actually improving versus Q1. This also reflected in stronger liquidity ratios. In particular, improved [indiscernible] reflects lower due. Online deposits growth already observed in Q1 continued in Q2, making up for a slight decrease, EUR 72 million in the transaction services deposits. Cost of funding decreased significantly year-on-year, while spread was broadly stable. Looking at the customer loan portfolio on Slide 13. We already mentioned diversification is an important contributor to our resilience. This is also true for our customer loan portfolio, driven by our selective approach in origination as well as improved collections, the factory loan book has decreased by 11%. Our factoring exposure accounted for less than half of the total loan book in the first half of 2026. It also benefits from geographical diversification with Italian factoring representing just below 1/3 of the loan book. Now let me move to Slide 14 on asset quality. Net impaired loans have decreased 6% in the first 6 months of this year. The drivers of these results are probably more important. We made significant progress on our net exposure to negative cost rulings in this period, which decreased by 60% and stands now at EUR 100 million versus EUR 243 million 6 months ago. Net NPLs, let me remind you, mainly represent [indiscernible] conservator ships are down by 25%. UTP increased due to the impact of Bank of Italy report on the classification of Polish public hospitals. The cost of risk at 12 basis points is more than double compared to 1H and reflects a more conservative approach to provisioning still 12 basis points. This follows the significant cleanup affected at year-end. Slide 15 shows the quality of our origination, which has allowed us to collect 95% of the 2025 volumes and already 70% of the first half volumes. In terms of passive collection, we have collected more than EUR 2 billion in the first half, which corresponds to around EUR 300 million of common equity Tier 1. As I already done in Q1, let me give you the details of our calendar provisioning impact on the next slide. As you know, we anticipated the impact of calendar provisioning from 3Q to 2Q in light of the new EBA QNA. We now have an impact of close to EUR 150 million from calendar provisioning. It's a big number. But as of June 2024, the impact would have been around EUR 400 million. We are, therefore, efficient introducing the portfolio affected by the calendar and will continue to be so. The new reclassification from Bank of Italy which we effected at year-end adds additional burden, of course. As now also LPI are included in the contagion portfolio and tend to stay on our balance sheet for almost 7 years. So would be fully deducted from capital. That is why we are also exploring portfolio transactions, which, of course, will only happen is done at the right terms. Additionally, in the absence of external activities, Poland drives 35% of the estimated Q4 2027 calendar provisioning. That is why we have put in runoff a small factoring portfolio in the country, which contains the rest and much larger of our profitable lending book in the country, and we should just be able to significantly reduce the impact on calendar provisioning. On Slide 17, we provide more detail on our common equity Tier 1 ratio. As you can see, these improved both on stated and on a pro forma basis. Importantly, our organic capital generation remains very strong at nearly 2 percentage points in 6 months. The combined impact of calendar provisioning and Bank of Italy report is lower than our organic capital generation. We affected the sale of HTC bonds at the end of July, which has allowed to respect all capital ratios on a pro forma basis, which was not the case at year-end. The sale was not included, as I already said, in our baseline projections on which our going concern status was based at year-end. A few additional points from Slide 18. RWAs are down EUR 500 million since year-end. [ RWE NCD ] has also gone down. Capital is up compared to year-end. We expect all capital ratios on a pro forma basis, including [ MREL ]. Before we start the Q&A, I would like to summarize the key takeaways from the set of results on Slide 19. BFF continues to achieve adjusted net profit growth, thanks to its focus on execution. The transaction services business is performing well. In line with the derisking program, the factoring and lending business is managed in a disciplined manner. The pro forma capital ratios remain above regulatory requirements. And finally, the review of strategic options is ongoing. Thanks for your attention. We will now start the Q&A. To ensure that we can take everyone's questions, we kindly ask you to limit yourself to 3 questions.

[Operator Instructions] The first question comes from [indiscernible] with Kepler Cheuvreux.

The first one is on the calendar provisioning. You have described indeed, the calendar provisioning H1 impact as a phasing shift from Q3 into H1. And -- so since calendar provisioning is a mechanical function of vintage aging, I was hoping if you can quantify what you expect from the same vintage in 2027. What guidance can you give today on the size and timing of those steps? I understand from the press release that it should still allow you to be compliant to requirements, but more info would be very helpful. The second question is on the securitization. There has been no update on the timing. So would you still expect it to close for Q3 2026? And is investor engagement on the junior [indiscernible] tranche is still active. The third question is on the press speculating on a potential split of the group. Separately, today, you have disclosed that the Board has received a preliminary nonbinding expansions of interest from domestic and international parties. So can you clarify whether or partial breakup of them is one of the structure under active consideration or whether the expression of interest received related to the group as a whole?

Thank you, Tomas, I'll try to answer to the best of what I can say today. In terms of calendar provisioning, we don't provide the explicit projections, but we say that we expect all capital ratios in 2027. The number we have today I expect to go down in the next couple of quarters as we collect [indiscernible] was reclassified in June 2024. And let me remind you, in the first half of the year, can you hear me? I will not repeat, but if I skip any other points, let me know. So what I was saying is we have already offset the first wave of calendar provisioning impact and the impact of EUR 30 million from [ Banco Italy ] inspection report with our first half earnings and deleveraging. So this as much as I would say, again, there should be an improvement over the next couple of quarters because of the collections we are making. As you've seen, we've gone from EUR 400 million to EUR 140 million in 6 quarters. On the securitization, of course, once there are updates to be given to the market, we will give updates to the market, we are working along the lines, which I've said on previous calls. There is no point for me to add -- to add to that, the securitization needs to be done at terms which are fair and create capital for the bank. The Board is not working on the split of the group. And so we will like to analyze the various options that the bank has its disposal.

The next question comes from Giovanni Razzoli with Deutsche Bank.

I have a couple of questions. One is a clarification on Slide #16. So the EUR 141 million of calendar provisioning impact is the one in the second quarter of 2026. Is it the one that is embedded in your CET1 ratio as of now, following the anticipation of the decision of Bank of Italy to bring forward in second quarter, the impact of the calendar provision. So that is my first question. And the second question is, if this EUR 141 million is the one that is embedded in your CET1 ratio. And as we know that the calendar provision mechanically increases the coverage from 35% to 100% after another 1 year of vintage, is it fair to assume that the second quarter of 2027 is another relevant cutoff for another potential significant impact of the calendar provision all else being equal. So assuming that there are no collection or other managerial actions. So just to have an understanding of, on a static basis, what would be the impact on your CET1 ratio? And another question, can you explain -- can you provide more details about the downsizing of Polish factoring product. So you mentioned that you are selling a small portfolio, which is providing a significant impact in terms of [indiscernible] is my understanding correct.

Yes, the EUR 141 million is what is already deducted from our capital as of June 2026. However, as you know, we already had around EUR 50 million of calendar provisioning in the past. So it's not all from the reclassification. I think the one from the reclassification, which we quoted in the previous press release was around EUR 85 million and there could be numbers, so you can work out what the 65% would be However, as already said [indiscernible], we offset the [ EUR 85 million ] and the impact of Bank of Italy inspection report with 1 semester of earnings. And to do the initial numbers or the mathematical numbers, I would assume no collections, but we are collecting and that's why we show what was the impact as of June 2024. What is the actual impact Okay. . So I would say you can run the numbers, you should certainly account for a reduction of the overall impact because of collections and other measures that we are taking. On the -- on Poland, I was not very clear. So we have a small book. It's around EUR 100 million of factoring like products. And this factoring is often beyond 180 days. And because of the letter which we received in March from Bank of Italy, it was classified as past due, which was not the case before because it was a not notification factoring. So by running off or deleveraging, I didn't talk about disposal by deleveraging and reducing this EUR 100 million, the level of contagion on the lending book of Poland would reduce dramatically. And so we would expect a significant number of our lending book in Poland to go back from past due to performing, which makes sense because our hospitals continue to pay us regularly other than for this small factoring portfolio.

Basically to make it clear, you are doing what, I guess, you are not in the condition to do now in Italy because the amount of contingent exposure also is much higher when compared to the [indiscernible] exposure.

Yes. In Italy, there are -- in Poland, we collect this factoring on average in 2 years. So we can run it down quickly. and above all, the component of LPI is very small. In Italy, the impact of the LPI after the reclassification of March is much more important. And so we cannot collect discontinuing exposure live in Italy that quickly.

And just a very, very quick follow-up clarification. Again, back on that slide, I would assume that the decrease from EUR 400 million to EUR 141 million does this impact reflect also this effect of Poland? Or is this something that we will see in the future?

No, it will be seen in the future. This was a decision that was taken, in fact, after the 30 of June.

The next question comes from [ Manuel Meroni with Intesa Sao Paulo ].

The first one is on the calendar provisioning. You said to expect to respect the capital ratios about 2027? Do you have some updated expectation on 2028? The second question is on the strategic options that you mentioned on top of the secularizations. I'm wondering if you can please elaborate a little bit more on what you are working on. And the third question is on the impact of the disposal of the government bond portfolio you made in the second quarter of this year. What will be the contribution of the government bond portfolio in the second half of 2026. And more in general, if you can confirm your guidance in terms of net income for 2026.

On the impact, as I go backwards, on the impact of the bond portfolio on the overall profitability, I don't think I can give you a number, but it's less than handful of million on a running rate basis. As you know, we have around [ EUR 1 billion ] of bonds, which yield 0.6% fixed, which are going to expire in 2027. So we will largely more than offset the impact of the slightly lower net income. We have not updated our estimate for the year. You have seen how much we have delivered in the first half of the year. On the securitization, I'm afraid I can't give you much more detail than what I've said before. But I'd like to talk about things once I've done them have indicated what is the timing we are currently working towards. The calendar provisioning, yes, we said we expect the ratios in 2026. We said with respect to ratios in 2027. In the context of the annual report, we said we had a small bridge in 2028. Now because of the anticipation of the calendar provisioning, one may have thought that we would have breached in 2027. We don't -- and we don't because we have started to take actions. And these actions are precisely the sale of the HTC bond portfolio, which was not there. The deleveraging that I discussed a few moments ago, [indiscernible] on Poland, and because the bank remains profitable. On 2028, we have a potential small capital bridge. That is on the assumption that we don't do any of the actions which are in our capital contribution plan. There is some disclosure in the press release what these actions have -- and I think we have many options that we can evaluate. We don't need to do all of them. So I'm not too concerned about our capital ratios in 2028. What is important for me to stress and I take your question as an excuse to that, that we all have to understand that, yes, we can manage the calendar. We can address the capital ratios, but we have to rethink the way we do the factoring part of the business to be able to generate more capital in the future.

The next question comes from Michael [indiscernible] Capital.

One question for me. Can we rule out a capital raise, an equity raise at this stage. I mean, you've managed to protect your capital Tier 1 ratio despite a number of headwinds, and it looks like it's going to -- on an upward trajectory from here. So is it fair to say that a capital raise is not an option at this stage?