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 Bank First Half 2024 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Corrado Passera, CEO of illimity Bank. Please go ahead, sir.

Thank you. Good morning, everyone. Welcome to the presentation of illimity's second quarter 2024 results. Let's start from Slide 3. First half net profit, EUR 23 million, up 43% year-on-year, excluding last year's extraordinary revenue. Q2 net profit, EUR 12.2 million, up 13% quarter-on-quarter. Without the anticipated payment of the deposit guaranteed scheme contribution, our net profit would have been EUR 16.8 million, a 56% increase. Corporate & Investment Banking pretax profit up 26% quarter-on-quarter and 35% year-on-year. Specialized Credit business origination, up 79% from the previous quarter. Capital and liquidity, strong figures. Core Tier 1 ratio is at 14.6%. Liquidity buffer at EUR 900 million. Assets quality under control with gross NPE ratio, excluding public guarantees, more than holding at 0.6%. Tech ventures. Hype and b-ilty confirmed a further profitability improvement. We are pleased with these results, particularly because this is our first semester after exiting the NPE direct investment business. Q2 profitability improved despite EUR 7 million deposit guaranteed scheme contribution that was paid in Q2 instead of Q3 as it was last year. No extraordinary transactions occurred this half, but we expect asset valorization to continue. Moving to Slide 4. Looking at operating performance in the first semester. Operating profit is up 22% year-on-year. Costs have started decreasing compared to same period last year. We expect further reductions in the second half of the year, especially from savings on due diligence and servicing costs of NPE portfolios. Slide 5. Looking at operating performance in Q2. Operating income is up 12% quarter-on-quarter. Net interest income only slightly down despite exit from traditional NPE portfolio business. Net commission rose by 56%, driven by a doubling in business origination across all divisions and the strong performance of ARECneprix. Moving to Slide 6. We sustained a robust capital and liquidity position with a core Tier 1 ratio at the 14.6%, a liquidity buffer of EUR 900 million with regulatory ratios well above minimum requirements. Slide 7. Our Corporate & Investment Banking business confirmed its growth in profitability and volumes. Pretax profit increased by 26% quarter-on-quarter and 35% year-on-year. Excellent cost/income further improved to 19%. Net customer loans up year-on-year, driven by strong business origination despite early repayments. Slide 8. Asset quality remains under control. 57% of total loans are backed by public guarantees or credit insurance. The organic NPE ratio, excluding state guarantees position are significantly down this quarter from 1.7% to 0.6%. The total organic NPE ratio, including public guarantees is down quarter-on-quarter to 4.5%, mainly represented by UTP positions and the restructuring. In this quarter, our cost of risk stands at 83 basis points, mainly related to the disposal of two non-state-guaranteed positions and to the strengthening coverage of some other positions under restructuring. We expect the cost of risk to normalize to a lower level in the following quarters. Let's move to Slide 9. As already stated, the Specialised Credit division is completing its strategic shift out of NPE portfolio direct investments, now at only 7% of the division assets and 1.6% of the total group assets. The division is accelerating asset-based financing with business origination up 79% from the previous quarter. Profitability is expected to gradually rise due to revenue growth and cost savings from lower servicing fees and due diligence costs. Moving to Slide 10. ARECneprix, our asset manager company specializing in large UTP positions, posted a remarkable profitability progression. EBITDA reached EUR 9.7 million, significantly up from EUR 3 million in the first half of last year. Slide 11. Our SGR posted a significant increase in profitability. Pretax profit increased by 67% year-on-year, driven by assets under management surpassing EUR 500 million, up 20% year-on-year with new funds in preparation. Now let's move from core businesses to other activities. Slide 12. Technology has always been a key success factor for us, and we have also transformed it into a profit center as demonstrated by last year's technology partnerships. Other initiatives will follow. Our tech ventures, the ones on the right-hand side of the slide, are not part of our core business, but leverage our skills and technology to generate additional capital for future growth and increase shareholders' return. In Q2, these ventures confirm the profitability progress seen in the previous quarter. Starting with Hype on Slide 13. Hype, Italy's leading retail fintech platform, continues its improvement. Q2 net profit increased to EUR 1.1 million, bringing the first half result to EUR 1.5 million, a significant rise from the EUR 4 million loss in the first half of last year. The number of clients and transactions are steadily increasing. Moving to b-ilty on Slide 14. B-ilty, our lend tech for small corporates, posted another strong quarter in business origination. Net customer loans, all backed by public guarantees, surged to EUR 547 million, more than 3x the amount in Q2 last year. Profitability improved, further consolidating our breakeven position. Slide 15, Quimmo. Quimmo is Italy's leading proptech, offering a one-stop shop digital platform for the sale and purchase of real estate assets. Quimmo has consolidated its leading position in the judicial market by increasing its market share and is progressing in the non-judicial market. Profitability is moving in the right direction, but it's still impacted by the reduction in national bankruptcy figures. However, this trend started reversing this year with expected positive impact on future profitability. Silvia will now provide a comprehensive review of our Q2 [ 2024 results ].

Thank you, Corrado, and good morning, everyone. Let's move straight ahead to the balance sheet figures on Slide 17. As Corrado mentioned, in this quarter, we substantially completed our strategic shift aimed at reducing NPE direct investments that now accounts just for a negligible proportion of total assets. As a result, our loan book mix is increasingly shifting towards SME lending. Net [ capital loans ] were negligible proportion of total assets. As a result, our loan book mix is increasingly shifting towards SME lending. Net customer loans grew by 13% in the quarter, driven by robust growth in SME lending, which increased by 5% quarter-on-quarter. This growth was strongly supported by contributions from b-ilty, Structured Finance and Special Situation desks. Additionally, it reflects the shift of the Specialised Credit division towards asset-based components, including the reclassification of transactions completed this quarter from other assets. We continue to invest our excess liquidity in high-quality liquid assets, and this largely explains the increase in our securities portfolio, mostly in government bonds. All in all, total assets stood at EUR 8.1 billion, up 7% quarter-on-quarter and 21% on a yearly basis. Our funding also increased this quarter by 9%, driven by a wholesale component. We will provide more details shortly. Moving to profit and loss on Slide 18. Profitability improved both on a quarterly basis despite the early payment of the deposit guaranteed scheme and on an annual basis, if we exclude the IT platform revenue last year. Point one, net interest income was likely down quarter-on-quarter. The dynamics reflect the reduction of our direct distressed credit investments and the increase in the cost of funding, in particular, owing to institutional sources. Point two, net fees rose 56% quarter-on-quarter, driven by business origination growth and increased in Investment Banking activity and new third-party mandates in the servicing business. On an annual basis, the trend is up 44%, driven by contribution from all business divisions. Other income was substantially flat quarter-on-quarter with revenue from trading and assets at fair value, offsetting lower profits from close position as expected. The dynamics on a yearly basis were affected by the IT platform revenue booked in the first half of last year. Point four, operating costs in the first half of this year have started declining as anticipated, thanks to cost cutting measures. Reduction in operating costs is set to accelerate over the next quarters. Point five, loan loss provision charges are affected by the increase in coverage on some selected positions on the restructuring and to a few new nonperforming positions assisted by public guarantees. Finally, please note that this quarter, we booked a full annual contribution to the banking schemes. Now let's move to Slide 19. Our capital base is solid with common equity Tier 1 ratio at 14.6% and total capital ratio at 18.6%. The decrease in the quarter was mainly due to the increase in risk-weighted assets following the growth across our business in spite of the positive contribution from net results. Finally, let's move to our funding on Slide 20. Funding was up 9% in the quarter while keeping a well-diversified mix. Retail funding was slightly down. We decided here to reduce our funding from the rising platform whilst keeping our retail platform in illimitybank.com largely flat. Wholesale funding was up quarter-on-quarter, driven by the issuance of a EUR 300 million EMTN bond finalized in May. Our blended cost of funding stood at 4.1% in June, broadly in line with expectations. I now hand back to Corrado for final remarks.

Thank you, Silvia. As we move into the Q&A session, let me summarize our strategic response to recent changes and outline our path forward. Our '21, '25 business plan was based on two widely accepted assumptions, persistently low interest rates and the thriving NPE market. However, as we are all aware, the financial landscape has shifted differently. Interest rates have risen beyond expectation, the NPE market has largely disappeared. The recent regulatory evolution in favor of specialized players made this business less attractive for a bank like illimity. Despite these unexpected challenges, we have always delivered uninterrupted profit growth. We have adapted our strategy by exiting from NPE direct investments and shifting portfolios to indirect positions, and we are focused on performing and reperforming credit, structured finance turnaround opportunities, asset-based financing and factoring. We acknowledge that in the short term, there may be a dip in structural profitability. However, we have robust measures to counteract this, exploiting the significant growth potential in our core credit areas, which are largely anti-cyclical, improving our operating leverage, which is, for us, a top priority, accelerating the valorization of our noncore assets that might also contribute to an increase in shareholders' remuneration. Thank you for your attention. We now look forward to addressing your questions.

[Operator Instructions] The first question is from Manuela Meroni, Intesa Sanpaolo.

The first one is on your strategic shift from NPL investment to asset-based financing. I'm wondering if you could drive us to understand the different profitability of the two businesses. And if you can tell us what is the contribution of the two activities in the second quarter of 2024. The second question is on cost. You guided for lower cost in the second part of the year, thanks also to the new focus on the asset-based financing. Can you help us understanding how cost, let's say, what is the cost there -- the trend of the cost there? How the cost works with the new business model? And how many costs were related to the due diligence business and the servicing business of the investment in NPL in the past? The third question is on your partnership with Engineering after 1 year. Can you tell us how it's going? And if you are cashing in some royalties, what is the contribution of this partnership to your revenues in the first half of this year? Then a detailed question on the tax rate. It was very low in this quarter. So could you explain why? And finally, I'm wondering if you feel comfortable in providing guidance for the full year '24?

I'll ask Andrea to elaborate a little bit on the very important shift -- strategic shift from NPE portfolio investments to asset-based financing and related restructuring of his division.

Yes, very shortly, we decided to move from direct investment to this asset-based financing product. The key of this new investment, of this new finance is not very different compared to the previous one. You have to know is that the ROE of this new product is around 20%. The IRR is around 10%, 12%, then quite close to the previous one. In terms of dimension, we plan to book almost EUR 350 million, EUR 400 million in this year of this new product. And this will permit us to have, in 3 years, a book of this new product of almost EUR 1 million. That's the...

As far as costs are related, I mean, the new structure of your cost, the kind of due diligence costs and servicing costs we are about to have.

Definitely, we are reducing the cost base. Take into consideration that considering just the cost of the division -- of the part of the division that is the bank, that is investing in this kind of assets, we halved the cost that we had in 2023 in 2025. Then definitely in providing new financing, you do not have to have the very costly due diligence that you have to add in acquiring portfolios of NPEs. Then, for sure, this part will permit us to reduce our cost base importantly.

As far as the partnership with Engineering, in the second quarter of this year, the flow of royalties will start. We know because we have been part of some negotiations that important projects have been signed. And as planned, as I said, in the second half of this year, royalties will start to be poured into our accounts. Tax rate and forecast to Silvia.

Yes. On the tax rate this quarter, EUR 2.2 million, patent box. So that explains why we have a bit of a lower tax rate this quarter. And in terms of the guidance, we aim at giving more visibility on our profitability evolution during the presentation of our business plan that will be approved by the end of this year. As you already noticed, in the results, our top priority is clearly are the efficiency improvement that will also come from, as we sign the strategic shift from the Specialised Credit division. We will focus on our core business areas, performing and reperforming. So we will give -- we'll be able to give you more visibility in a few months.

Could you please provide us what was the cost of due diligence and servicing of the investment in NPL in 2023?

We can consider that the cost of the due diligence is around 2% of the net book value that we are going to book. Then that's the average cost that we had in our previous history.

The next question is from Luigi Tramontana, Banca Akros.

And very good results in terms of fee generation, really very strong. Only one question left on my side regarding the cost of risk, which in the semester was pretty higher than expected. Can you please give us more details? Because I don't really understand how it is possible that your gross NPE ratio is going down, even significantly. And at the same time, you are doing all these loan impairments, not only in CIB, but also in Specialised Credit. There were an additional EUR 7 million in the first half. So what do we have to expect for the second half of the year?

I will leave the answer to Enrico. The cost of risk is strictly connected with our decision to dispose two positions that were not state guaranteed and that enables us to have a very low NPE ratio, Enrico?

Yes, we -- in this quarter, we decided to dispose of two relevant position -- NPE position. And before serving them, we had to increase the provision of them to match the price that we obtained for the sale of these two positions. That explain the majority of the increase of -- in cost of risk and also the statement that we made regarding the view that we have -- or the guidance that we have for the evolution of the cost of risk in the next half of the year. Regarding Specialised Credit provision, I will have to -- Andrea to answer.

Yes, we had some very normal provision that we had on our story book. We have this provision. We had also some positive elements that historically going to compensate each other.

The next question is from Davide Giuliano, Equita.

I have just three. The first one is on NII sensitivity and the curve experienced a significant reduction in rates in 2025, 2026. Can you remind us your sensitivity? What impacts do we expect in terms of NII on 2025? The second one on capital. What do you expect by year-end? Is it reasonable to expect compression by increased RWA due to the new generation of asset-based financing? And if I'm not mistaken, there has been an increase in RWA density in the Specialised Credit business. Can you comment on this aspect? And the third one on the potential valorization of your initiatives. Are there any updates on this? Could you consider valorization of other parts of your business outside of tech initiatives, including maybe some industrial joint ventures?

I will leave the first two questions to Silvia, then I will elaborate on the last one.

So in terms of NII sensitivity, we are running at a low single-digit level. And the impact is flat in NII in 2025, we believe, will be limited first because of the limited sensitivity and second, because we will put in place some hedging of the -- of some of the areas of the assets and liabilities. In terms of capital expectations, we are aiming to remain in terms of CET1 ratio towards 14%. So the increase in business origination, and so the volume growth we are expecting between now and the end of the year, with kind of consumer bit of the CET1 ratio from the current level that this is pretty much in line with what we -- our expectations. And in terms of risk-weighted asset density, I don't recall to have a major difference in terms of the density.

We do not have major density in the new business. We think that we will have more or less the same RWA density that we had in the past. As far as asset valorization, this is an important point because as we said since the very beginning, we decided to invest part of our profits in the past to create technology and ventures that might contribute to our results and the equity creation in the next years. We started with asset valorization last year, and this process will continue. We are doing our best to have extraordinary revenues every year. It's not a commitment, but it's certainly an effort we will do year after year. And that will allow us to grow more than structural profit would allow and maybe will put us in the position to increase shareholders' remuneration.

[Operator Instructions] Gentlemen, Mr. Passera, there are no more questions registered at this time.

Thank you very much and thank you to everybody who participated in this call. We have tried to give you a very transparent picture of our company and especially of the process we are going through in the shift of our strategy. And the instruments we are using to go through this process, through this change are very clear. And the potential for growth, both in terms of volumes and results is very material. So thank you very much to everybody.

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