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

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the illimity 9 Months 2023 Results Conference Call. [Operator Instructions]. At this time, I would like to turn the conference over to Mr. Corrado Passera, Chief Executive Officer of illimity. Please go ahead, sir.

Thank you. Good morning, and welcome to the presentation of illimity's 9 months results. Let's start with the highlights, Slide 2. In Q3, core profitability saw a robust increase with a net profit of EUR 22.8 million. This takes our 9-month total to EUR 75 million, a 48% rise year-on-year. Capital position remained solid with a core Tier 1 ratio at 14.75%, well above our SREP requirement. Liquidity remains robust, enhanced by a rise in retail deposits, which show a EUR 755 million increase in the first 9 months of this year. SMB business continues to show robust earnings, marking its most successful quarter yet. Profitability of distressed credit business picked up with a pretax profit of EUR 32 million, a 47% increase quarter-on-quarter. Finally, asset quality remained under control with cost of risk decreasing to 34 basis points. Let's move to Slide 3. Q3 shows a marked improvement in underlying profitability. Pretax profit more than doubled from EUR 13.7 million in Q2 to EUR 34.3 million in Q3. Core revenue, net interest income and net commissions, up 3% Q-on-Q despite early repayments. Costs down by 9%. Loan impairments down by 47% Q-on-Q, reflecting the resilient asset quality in both our SME and distressed credit loan book. Slide 4. The 9 months results are in line with our expectations with EUR 75 million net profit, up 48% year-on-year. Operating income increased to EUR 282 million, up 21%, driven by both net interest income and net commissions as well as revenue from the new IT partnership. Staff and administrative costs increased only 5%, excluding perimeter changes in one-off items, and this is mainly due to staffing additions in the last part of 2022. The D&A increase was mainly due to investment in technology. Operating profit is at EUR 125 million, up 35%, driven by revenue growth. Loan loss provisions at EUR 7.6 million, reflecting a contained cost of risk at 34 basis points. Slide 5. Our capital position remains very solid. Core Tier 1 ratio stands at 14.75%, exceeding SREP targets by over 560 basis points. Also going forward, we expect it to remain well above SREP requirements. Total capital ratio is also strong, standing at 19%. The unrealized losses on the hold-to-collect portfolio are negligible, amounting to EUR 14 million. Slide 6. We have upheld a strong liquidity profile marked by a blend of diverse funding sources and the balanced duration between assets and liabilities. Retail deposits representing almost 60% of total funding, continue to grow. In the first 9 months, they increased by EUR 755 million. 8% of total retail funding is represented by term deposits. We also have a strong liquidity buffer of approximately EUR 900 million in cash and government bonds. LCR is very high at 235%, and NSFR at 114% is well above the minimum threshold. Slide 7. SME business confirmed its impressive earning trajectory, marking its most profitable quarter ever, driven by both the growth credit and investment banking divisions. Net customer loans surged by 37% year-on-year. The Investment Banking division accelerated in Q3, with business origination up 82% Q-on-Q. The overall operating leverage remains very low at 22%. For Q3, the combined pretax profit amounted to EUR 29 million. This takes our 9-month total to EUR 68 million, reflecting a 78% year-on-year growth. Slide 8. illimity has become a well-known and trusted specialist partner for Italian SMEs. Our accomplishments speak volumes. Over the last 2 years, our customer loans have doubled in value. This is not by chance, but by design. Our dedicated approach to business originations across all sectors is evident. There is no concentration of risks. Moreover, our robust pipeline suggests significant potential ahead. Slide 9. Our asset quality remains strong. For the first 9 months, our annualized cost of risk stood at 34 basis points, down from 42 basis points at the end of Q2. 53% of our loans are backed by public guarantees or credit insurance. Stage 2 loans represent only 1.4% of our portfolio. The organic NPE ratio, excluding state guaranteed positions remains low at 1.3%. The total organic NPE ratio, including those with public guarantees, is equal to 4.8%, consistent with previous quarter figures. Most of our organic NPEs are UTPs in active restructuring with very few positions classified as bad loans. Let's now move to our distressed credit and asset-based financing business. Slide 10. While 2023 began on a quiet note, the third quarter marked a strong rebound with a significant uptick in profitability for this business area. Pretax profit rose by 47% Q-on-Q. Business origination, mainly in UTP portfolios and asset-based financing reached EUR 232 million, increasing 3-fold Q-on-Q. The division's book stands at EUR 1.7 billion with an asset mix that is clearly evolving. Asset-based financing and UTPs are growing, investments in NPL portfolios are decreasing in weight and size and will continue decreasing. Slide 11. Our portfolio of purchased NPEs consistently demonstrates solid asset quality. 80% of our investment is backed by solid real estate values. The open market value of such collateral is 2.8 times more than our book value, further growing Q-on-Q. We review the business plans for all our NPE positions at least quarterly and align them with current market conditions. Cumulated cash flows year after year, consistently surpassed our initial projections. Slide 12. ARECneprix ranks as Italy's third largest corporate UTP asset manager with EUR 11 billion assets. 34% of these assets are non-captive. Serving as the sole asset manager and credit servicer for the recently established Olympus fund, one of Italy's largest with an initial gross book value of approximately EUR 2 billion. ARECneprix's stature in the UTP management sector has been further enhanced. In Q4, we expect to more than double the first 9 months pretax profit. Slide 13. Our SGR posted a pretax profit of EUR 1.3 million, marking a further notable increase from the breakeven point achieved in 2022. The profitability increase was driven by asset under management growth with stock exceeding EUR 450 million, a 60% increase year-on-year. In Q2, we introduced our third fund, limited selective credit, targeting single name performing businesses. We expect to launch new funds in the near future. Having looked at core businesses, let's now turn our attention to the other activities. Slide 14. Let me use this slide to highlight the important role our tech ventures in our strategy. On the left-hand side, we can see our core businesses that consistently drive our growth. Over-time, we have progressively changed our focus, reducing the importance of NPL investment. In the center, we can see limited technology, the new partnerships with engineering repaid a large part of our IT investments and transformed our digital banking platform into a new revenue source. On the right-hand side, we can see our tech ventures. They are not strategic diversifications from our core businesses, but promising investments to foster our future growth. Moving forward, we expect them to amplify our equity and fortify our core operations. Let's start with HYPE on Slide 15. HYPE is Italy's leading retail fintech with 1.8 million customers. Transactions grew by 31% to EUR 96 million in the first 9 months. Contribution margin increased significantly to EUR 12.3 million from EUR 1.5 million last year. It is worth noting that the loss in 2023 will be around half of what it was in 2022. And consequently, our share would be between EUR 3 million and EUR 4 million. We expect this positive trend to continue into next year. Moving to b-ilty on Slide 16. b-ilty is the first complete digital bank for small corporates on the Italian market. Net customer loans increased to EUR 217 million, up 41% Q-on-Q and all of them are backed by public guarantees. Profitability is on an upward trajectory. The net loss for the first 9 months has reduced by nearly half compared with the same period in 2022. Breaking even is a plausible outcome as early as 2023. Slide 17, Quimmo. Quimmo, Italy's leading proptech innovator offers an unparalleled end-to-end digital solutions for real estate brokerage. Managing assets worth EUR 2.2 billion, Quimmo dominates the judicial market, where its market share grew to 17%. Quimmo is entering the open market, strengthened by a recent partnership with luxury giant COIMA, which brings a pipeline of more than EUR 1 billion in luxury residential properties. This year's profit were impacted by a continued drop in bankruptcies nationwide. As this trend starts to change and open market activities develop, we anticipate Quimmo breaking even in 2023. Slide 18. It's important to recognize the significant progress made by illimity technology as part of our growth journey. illimity technology serves as our technological powerhouse, having created the first comprehensive bank IT architecture and systems, free from legacy constraints, these systems are modular and built natively for the cloud. Numerous artificial intelligence applications are currently in development. illimity technology is not just a strategic asset that enhances our efficiency and effectiveness, but it is also a new source of profit through our collaboration with engineering. Slide 19. Our very essence is rooted in ESG principles. We consistently strive to incorporate sustainability into our goals, operations and governance structures. We have already achieved important results. And in Q3, we saw a different improvements in our ratings. MSCI upgraded our ESG rating to AA moving us from average to leader. On top of that, Standard Ethics also recognized our progress, revising our outlook from stable to positive. We have proudly maintained our position in Europe's Best Workplaces 2023, standing as the sole bank [indiscernible]. Slide 20, the last one. Reflecting on our journey from 2019 to now, the evolution of our total assets and net earnings tells a compelling story of growth and resilience. By just looking at the first 9 months of 2023, we have already matched the net earnings of the entire 2022 period. Not only we have grown in profitability and volumes, but we have also successfully maintained a low risk profile. At the same time, we continue to invest in technology and the new promising ventures, positioning ourselves for sustained growth also in the coming years. Silvia will now provide a comprehensive review of our 9 months results for 2023. Silvia?

Thank you, Corrado, and good morning, everyone. Let's move straight ahead to the balance sheet figures on Slide 22. Total assets at the end of September slightly increased to EUR 6.8 billion. Liquidity remains robust, with buffers holding steady at approximately EUR 900 million. Net customer loans stabilized at EUR 4.2 billion, representing a strong 27% year-on-year growth. Our SME business experienced another robust quarter, driven by strong business origination, reaching nearly EUR 300 million. The distressed credit deviation continued its positive trends, particularly supported by the Structured Finance Desk despite early repayment and in the quarter amounted to over EUR 40 million. Notable growth this quarter came also from b-ilty and the investment banking desk, achieving a remarkable 40% and 24% quarterly growth, respectively. The distressed credit division partnered with a leading Italian bank to create y Olympus funds, one of the biggest funds in Italy focused on larger CP portfolio secured by real estate collateral. illimity allocated a portion of its current distressed credit investments to this fund and in return acquired shares accounted for as other assets. This transaction unlocks value from transfer loans. It will also benefit our ARECneprix business that will act as the sole asset manager and servicer of the newly created fund. During the quarter, our securities portfolio experienced growth, we've maintained a highly cautious approach with the vast majority of the portfolio invested in short-term government bonds. Lastly, our funding increased marginally by 1% this quarter, primarily driven by retail. We will provide more details shortly. Moving to profit and loss on slide 23. Net interest income held up well in the quarter, primarily driven by the performing loans business segment, which benefited from volume growth and additional repricing based on rate reset dates. This balance offset the additional rise in funding costs. Net interest income demonstrated a robust 27% surge over the 9 months compared to the previous year. Net sales showed a solid 9% quarter-on-quarter advancement, leading to a 22% yearly progression with positive contributions from all our businesses. Other income was influenced positively by the partnership on our unique IT platform, which was accounted for in the previous quarter, results for the third quarter have returned to a more normalized level. Operating costs decreased by 9% quarter-on-quarter. The comparison of staff costs reflects the positive seasonal effect typically seen in the third quarter, while other cost dynamics demonstrate effective cost control. Loss provision charges on our organic loan book decreased this quarter to EUR 1.7 million. This improvement was supported by the expansion of credit insurance in our factoring book and solid asset quality trends overall. The annualized cost of risk for the first 9 months declined to 34 basis points, supported by a substantial portion of public guaranteed loans. Lastly, we recorded positive value adjustments in our distressed credit position process based on binding offers received from third parties on some of our portfolios. This confirms the soundness of our book. We have chosen not to pay the bank windfall tax by opting to allocate profits to reserves. Now let's move to Slide 24. This slide illustrates how various business units have contributed to the group's performance over the first 9 months of the year. Corrado has already highlighted the key trends of the main businesses, so I will not reiterate them. The message I want to emphasize here is that we have substantial market potential, and we persistently channel capital into the most promising segments. Despite a sluggish market for NPE transactions, the bank sustained its upward growth trajectory. This resilience is due to the robust momentum in us thriving SME business and the strategic valorization of our tech advantages. Our tech ventures are progressing as planned and are expected to significantly reduce their negative contribution to the group's results. For instance, b-ilty had successfully halved its quarterly loss in Q3. The overall operating structure is now complete and tail is scalable moving forward. Let's now move to our capital trends on Slide 25. Our capital base remains solid with common equity Tier 1 ratio in the region of 14.75% and per capital ratio at 19%. Capital increased driven by the profit generated in the quarter. Risk-weighted assets rose following the strong business origination totaling over EUR 500 million in the quarter and the effect of the Olympus Fund transaction, our capital ratios remain well above our regulatory ratio. And finally, let's move to our funding on Slide 26. Dynamics in the quarter were largely driven by retail funding with term deposits growing over time,-representing the main store. In September, we revamped our deposit offerings with a specific focus on term deposits, aiming to maintain a balanced duration profile between assets and liabilities. Our retail funding platform in illimitybank.com successfully collected over EUR 200 million in the [indiscernible] during the third quarter, combined with rising overall retail funding increased by 10%. On the other side, other funding sources experienced a 9% decline. We reduced our reliance on ECB and interbank sources and facilitated the repayment of certain corporate deposits. Our blended average cost of funding stood at 3.1% for the 9 months ending September 2023. And now back to Corrado, so we can begin the Q&A.

Yes, Silvia. Let me conclude by saying that in the first 9 months, we increased our core profitability and strategically strengthened the bank with a new IT partnership. SME business continued to grow both in profitability and volumes, recording the best quarter ever. The distressed credit division also contributed significantly. Its business origination moving forward will be increasingly focused on UTP loans and asset-based financing. All tech ventures are advancing according to plans and will generate tangible value for illimity and its shareholders. Let's now move to the Q&A. Thank you to all of you.

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

Your results have been positively impacted by the strong adjustment on the tax credit. So a few questions on that. Considering that these adjustment comes from banking offers received, I think that they have the same nature of the income from close position. Is that reading correct? And how many loans you will disclose and what is the expected impact on your common equity Tier 1. I guess that the disposal represents a large portion of your distressed credit portfolio. So maybe…

Manuela, can you speak a little bit lower and louder because the line is not perfect.

So I will repeat the first question. The first question is on your value adjustments on distressed credit. So how many loans you will dispose. What is the impact of the deconsolidation of these loans on your common equity Tier 1? And if we can consider this move as a change in your strategy going forward, I mean, are you becoming more active on the disposal of your NPL portfolio going forward in order to free-up the capital? Are you planning a similar deal in the next quarters? And finally, I ask if we can consider these kind of adjustments of the same measure of income from close positions. The second question is on capital. You are running below your 15% target that you also agreed with the regulator when illimity was born. Can you continue to grow loans going below that level? There are any issues with the regulator? And what is the level of common equity Tier 1 that you feel comfortable with. The third question is on the cost of funding. Can you please give us your expectations in terms of cost of funding in the fourth quarter range in 2024? Fourth question on ARECneprix. You said you expect a pretax profit in the fourth quarter to be twice was reported in the 9 months. Can you take the fourth quarter level of pretax profit as a run rate for the following quarters? And finally, on your guidance in the press release, you mentioned that you confirmed your guidance just to be sure that you also confirm your net income guidance of EUR 100 million for 2023?

Okay. I will share the answers with my colleagues. Let me start with the last one, the guidance on fiscal year '23. We can say that on the basis of the pipeline of transactions we are dealing with it at the moment, we believe our guidance is still within reach. So that's what we wrote also on the press release. I will leave the first set of questions to Andrea.

Yes. In relation to the Olympus Fund, in relation to your first question, how this transaction has been impacted. It will impact effectively our book. We contributed an amount of EUR 350 million of net book value on this transaction. The overall amount of the P&L contribution of this transaction is EUR 23 million. In relation to the question, if this move is a change in our approach, we can say that we confirm our intention to decrease the volume of NPL on our book, and then we continue in this direction. In relation to your full question about the topic, is this adjustment the same of an effective disposal, Yes, it is because we see it binding-off and then we effectively sold this portfolio to the [indiscernible]

Silvia, if you can address the point of capital and cost of funding.

Sure. So let's start from the cost of funding. We were saying that our cost of funding for the full year was expected to be in the region of 3% or something higher. We project to be at 3.2% for the full year 2023. That means in Q4, we will still see a bit of an upward trajectory in our cost of funding and for 2024, based on what consensus is in terms of the level of interest rate, which is more or less in line with where we are today because of the maturing funding, we would expect the overall cost of funding for the year to be in the region of 4%. So we will have to reprice upwards, basically, the retail funding that is going to mature during the year. In terms of capital, well, we make capital one of the, let's say, of the key milestones of our investment case, we really like to continue to have a solid and robust capital base. Going forward, what we can do in terms of growth, we will have other, let's say, capital management initiatives, you've seen this year, the positive impact of significant returns, for example, on the factoring be, we would do more than that. In 2024, growth will also be fueled in areas where risk-related asset and then today is structurally lower and referring, for example, to the alternative that as within our investment banking business or BLT. So we believe we can still post a significant growth with the capital we have and remaining in the region of where we are today.

There is another question. If the Q4 results of ARECneprix can be used as a benchmark also for the future.

Yes. We can say that our plan is to close P&L of ARECneprix in the region of EUR 10 million in 2023. This will mean that the fourth quarter will be stronger, but we have to say that we have a seasonality on the P&L of ARECneprix and then we will always have a full quarter stronger than the other quarters.

2 digits is the new rule of the game also in the future at the annual level, I believe.

The next question comes from Andrea Lisi of Equita.

The first one is on the guidance. I see that you confirm the guidance for 2023. Just if you can provide us also from a qualitative standpoint, if you not have a quantitative some indication for the next year. So what are your expectations in terms of the evolution of volumes given potentially macro [indiscernible] if you feel any pressure in terms of deposit in terms of cost of funding and evolution of cost consequently on the bottom line. In particular, as regard costs, the other question is, if you have already quantified the potential impact from the renewal of the banking contract.

Okay. As far as the guidance for 2024, we cannot comment yet on 2024 guidance because we will update our business plan during the course of 2024. Now the question about deposit cost and cost of trade union agreements.

Yes, it is in the region of EUR 2 million [indiscernible].

And it's already discounted in our guidance for the year. In terms of -- you made also a question about the deposit and the cost of funding, but Silvia has already answered the previous question.

Yes. Just to add a bit of color. I think, Andrea, you were asking the expected evolution of volumes next year, I would say still in the double-digit region because we do have enough profitable and a lot of opportunities where to deploy it. And in terms of the cost of funding, we said, yes, we will expect a little increase in the overall cost of funds for 2024 in the region of around 4%. Clearly, the growth is going to be much less pronounced than the growth we experienced during 2023 versus 2022 because the bulk of the movement when the market rent is hopefully down.

[Operator Instructions]

Okay. Thanks to everybody. We are happy about our Q3 and very confident about the Q4. Goodbye to everybody.

Ladies and joining. The conference is now over, and you may disconnect your telephones.