Bff Bk Spa

Good afternoon and welcome to BFS Banking Group First Quarter 2023 Earnings Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be the opportunity to ask questions. To ask a question, you may press star then one on a touch-tone telephone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would like to turn the conference over to Massimiliano Beningheri, Group CEO, and Piergiorgio Bicci, CFO. Please go ahead.

Thank you. Welcome, everybody, for joining us for the first quarter result presentation. We are happy to report a strong first quarter in terms of adjusting the profits, actually our highest quarter on record. And this is an important result given that the dynamics of our balance sheet means that in a rising interest rate environment, our liability rate rises faster than our asset. The net interest income is being driven by factoring and lending, which has shown a 22% growth year over year, driven in particular by the increase of the LPI stats to the rate, which was 8% until December, and from the 1st of January has moved to 10.5%. Given the increase in the ECB reference rate, that will increase already. today's rate from the 1st of July at 11.75%. So another step up will happen in the second half of the year. The balance sheet remains solid, both in terms of quality of assets, but also in terms of funding. We have maintained a good loan-to-deposit ratio of 75%, and we have a net positive inflow of retail deposits in Q1 2023, $200 million. we were a year before. Overall, we've managed the balance sheet, so to decrease the level of total assets while increasing our loan books and therefore improving our leverage ratio and reducing significantly compared to a year ago our health collect bond portfolio, which is down by $1.6 billion. Capital, as I mentioned, remains plentiful. We have a core equity ratio, 70% total capital ratio, which is relevant for our dividend payout of 22.6. Sorry, so it means over 200 million of excess capital versus our 15% total capital ratio target. Given that we are above the 15% total capital ratio target, it means that the earnings of the quarter accrue to our interim dividend, so we have already 0.28 euros per share accrued for our interim dividend, which will be paid in August of this year. As we mentioned in the previous earnings call, we will have a capital market day on the 29th of June to present our new medium-term target, and most likely will be in London. Another important news is that Italy has communicated, actually yesterday, that it has applied for the extension of the split payment, which is a measure where the public administrations in Italy pay their invoice net of VAT. In case of approval, there's no change in our 2023 guidance, and we will see if the EU will approve it and also for what terms it will be approved for. On the following page, on page three, you can see the highlights of our P&L, where we show the increase of 10% in our net interest income. As I said, it's important because despite the faster repricing of our liabilities, while the repricing of our assets with the negotiation with our customers happens, and the increase gets sent through the P&L, we actually have a good increase year-over-year. We've also seen a reduction in commission that was driven by the exit of ARCA and ANIMA, two clients we lost last year, which have, as you've seen, not dramatic impact on the overall P&L of the business. We have in other income and other expenses the gain from the sale of part of our bond portfolio, which I've booked earlier in this quarter. And overall, we've shown a good discipline on cost. We've cost marginally up compared to last year, despite inflation, and significantly down compared to the fourth quarter of 2022. That drives our cost-income ratio at 35%. in the banking area in Europe. Retail numbers are good, as you've seen, with 52.7 million of adjusted net income. The balance sheet has also been reshaped. We have continued the decline in the health-to-collect bond portfolio, particularly with the reduction of the fixed-rate bonds. We've reduced our deposits at the ECB. We've increased our retail deposit, the one we collect from retail investors significantly, particularly compared to last year with 1.2 billion of increase on that line. And our overall balance sheet has shrunk from 13.3 at the year end to 11.6 at the quarter end. 4.7 of last year. On page five, you can see the breakdown by business units, but Giorgio will talk about them in a second. I want to highlight on page six what are the drivers to be considered in the outlook for our net interest income. This is important because the balance sheet of our banks behave differently from the balance sheet of other banks, and I think it's helpful probably to reiterate to ourselves and to everybody, what are the dynamics that we will see in the months ahead, which are positive for our business. In synthesis, we've already been hit by the increasing interest rates and the repricing of our liabilities. We don't have the issue that other banks have of having to refinance the long-term funding from the ECB, the TLTRO, PLTRO, and the like. We don't have that, so Our net interest income is the market net interest income. While on the interest income side, we have the re-fixing of almost all of the head-to-collect floater bonds that happened in April 2003. So that will increase the earnings in the second quarter, but particularly in the third quarter, clearly. We have the ongoing repricing of the maturity commission. The further fixing of the API rate, which I've mentioned before, including we have the seasonality of the net LPI over recovery, which tends to be concentrated in Q4. So overall, a lot of positive trends that should support an increasing interest rate income, net interest rate income for the quarter ahead. Having said that, to set the scene, I need the floor to George to walk you through the details of our business's performance.

Thank you, Max. Now we are at page seven, and we start on the factoring and lending business. And we have the best from Q ever, and we confirmed a good performance in terms of volumes that started last year. Our loan book is at $5 billion, is up 30% year-on-year, and the difference between the last quarter is really not only by the seasonality. There was a good performance in terms of volume. We have to consider that we are carrying out a strong pricing campaign, but despite that, our volume grew by 20% year over year. We have observed a double-digit growth in Portugal, in Greece, in France, and in Poland, and in Italy, a single-digit growth. The loans receivable are down, considered a significant injection of capital done by the government. Going to the next page, page 8, we can observe that the P&L of the factory lending increased by 37% year over year. We have the start of the positive impact driven by the increase of the, first of all, the LPI rate, the ongoing of the repricing campaign, and also the strong compared to the one of last year considering the seasonality LPI over recovery that we have observed in the first quarter. In the other operating income and expenses, we are at a crop compared to the last year. And this result has been driven primarily to the recovery cost, the so-called 40 euros. And so the expectation is to continue to go on that side. We maintain a substantial also of balance sheet, LPI, recovery cost fund. That is the portion that we don't book on time by time, but that has been driven by the collection. So we have these significant funds that we are going to recover going forward. The profit before tax is at $39.2 million and increased, as said before, by 37% year over year. Going to the security services, page 9, we are carrying out an important onboarding campaign of new clients. We have to consider that after signing this contract, the start in the inflow of the deposit is delayed due to technical point and the starting of the activity of the funds, but it's a good point going forward for the rest of the The net revenues are down due to the lower net interest income and also the fee and commission has been impacted by the exit of ASCA and that occurred at the end of the last year. and due to lower direct costs and also personal expenses. It's important to realize that the redundancy, one-off costs are full covered by the Depo Bank budget, the integration budget, and we don't foresee any additional integration costs for the future. The quality before tax decrease, and also the source for 2023 deposits end-of-period up-down following the exit of the RAC and also the market trend because with a higher rate, the funds are going to invest and they deposit less liquidity. Going to page 10 for the payments business, we have to consider the seasonality also of this business. But at the end, the total net revenues are up by 7% year over year, down compared to the last quarter of 2022. And it's important to highlight the important contribution that we have from the payment business in terms of liquidity. liquidity increase is stable compared to the end of the year, but increased by 42% year over year. Going forward to the corporate center, the result, page 11, the result has been driven by the sale of a portion of our head to collector floater bond portfolio. We anticipated some revenues that were expected during the year, and also the other income expenses grew thanks to these positive efforts in terms of capital gain, and the net interest income is lower compared to the first quarter year-on-year, but stable compared to the last quarter of the year. And as said before, we don't expect any other liquidation costs coming after the merger with Depo Bank. Going to page 12, we can observe a very diversified and stable funding base. As said by our CEO, we increased compared to last year the portion of retail deposit. We don't have any issue related to ECB funding and this is an important point going forward and looking at the end of the year. Our LCR and SFR are stronger and thanks to the reduction of the dimension of the balance sheet, our leverage ratio improved and at the end of the quarter is higher than the 5%. We reduced our bond portfolio. Now we are at 5.6 billion of euros compared to the 6.1 that we had at the end of the last year. But one important thing is the strong reduction in terms of fixed bond portfolio compared to the total bond portfolio. So the asset quality has been confirmed, the good asset quality and the negligible cost of risk. Our MP are 92% related as seen in the table to the public sector, so it's a good asset to the public sector and taking consideration that the 70% is related to the municipalities in conservatorship. We know that is a question of time. We have to wait until the end of this procedure and then we can come back to collect money. The cost of risk is at 4.7 bps and is lower than the one that we had at the end of last year. So in page 14, we have the capital ratios. We confirm our excess capital versus the target of the 15%. The excess capital is higher than 200 million euros. And we have already accrued, after these results, 0.28 euros per share that we are going to pay after the mid-year results. So it's also an important point to be highlighted that is a confirmation of our stability, strong capitalization, and the performance of the business that we had in the beginning of the 2023. So I leave again the floor to Max to go with the rest of the presentation. Thank you.

Thank you. Thank you, Giorgio. We leave now the floor for NQA. We invite you. Thank you.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone telephone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. The first question is from Andrea Lisi with Equita. Please go ahead.

Hi, thank you for the presentation. Some questions on my side. The first one, if you can explain us where it comes to the decision to sell the GOVIs. And it was not so clear to me if you sold floaters or fixed GOVIs because in slide 11 there was written floater. In slide 12, restaurant conduction fixed GOVIs. So if you can just explain this. And if you can provide us an update on your long-term or mid-term strategy on the Govis portfolio. The second question is on your deposit space. In particular, making a comparison versus the last quarter, I saw that the deposits from transaction services were down by 700 million. I think that the effect of ARCA was already there in the fourth quarter. If you just can provide us some color on this, if there is some seasonality, or in general, if you can explain on this point and what you expect. And the last question is, how do you see the composition of your funding mix going on? Thank you.

Thanks for the questions.

Look, in terms of composition of the funding mix, we expect to continue with not the similar mix that we have today, if it's for the repos. The retail deposit market is marginally more attractive than it used to be. we have a structure on deposits, and so we can actually lock in in a rising interest rate, lower rates than the forward curve, whereas our deposit from transaction services actually price usually the one month delay. There's always a bit of movement on the deposit from transaction services, both on quarter depending on decision. side for fund managers to invest or divest. So this shouldn't be frankly any reason to have any particular concern. We haven't lost customers. We haven't actually continued to have customers. If anything, we are waiting for customers to migrate to us and so to have more inflows. And so that's simply an issue of timing of decision people are taking. In terms of the decision to sell, the strategy around Govis, we sold floaters, which was due to expire, I remember, in 18 months. So we're busy front-loading most of the earnings we actually can this year. So it's more a timing issue, particularly this year. And that was to reduce our balance sheets. We bought other floaters. At the same time, there were fixed rate deposits, fixed rate bonds that actually expired. So that's why the message might be a bit confusing. We actually had a reduction of fixed rate deposits simply because they were at the end of their term. And then we sold... part of the floaters and we bought other floaters with what we saw to keep the reduction of the overall bond portfolio. So overall, if you think it's our bond portfolio, the strategy is to continue to reduce the portfolio, particularly the fixed rate bond, which has at the moment a negative carry. And so that should improve actually our overall profitability going forward. We have 300 million roughly of fixed bonds reduction already locked in in the second quarter of this year. So that part will go down. Importantly, as I mentioned at the beginning of the presentation, the floaters reprice every six months. So in rising interest rate environments, we're still playing catch-up. When there is a stable or declining interest rate environment, are stable and our asset yield goes up.

Thank you.

The next question is from Simonetta Chiriotti with Mediobanca. Please go ahead.

Hi. Good afternoon. Two questions from my side. The first is on the repricing process of maturity permission. If you could give us an update of how the process is proceeding, how much of your book has been already repriced. The second question on security services. How do you see the coming quarters? Where do you see the profitability of this business in the coming quarters and overall in 2023? And finally, looking at the guidance that you gave us at the end of 2022 of 190 million and considering uh the the large capital gain that you have made in the first quarter how should we see this capital gain is it just like an anticipation of the revenues that you are expecting in the coming quarters or it is something that adds to the guidance thank you thank you simonetta look under the pricing process we're well advanced you actually see

You don't see that yet because a lot of it comes at the end of the quarter, so we'll be seeing clearly in the next quarters with the new purchases. We have some customers with whom we can't reprice, but we have, I would say, with this week concluded most of the repricing we had planned. And so we're well adapt on that. I think the other banks have been a bit slower, particularly at the beginning of the year, in repricing, so we have to appear more aggressive than others in the market. We think actually that people have realigned themselves, which is good for us. And we also have, in fact, a lending situation where the first half of the year, tends to be slower in getting new customers on board. So unless people have already planned to do factoring, then they don't necessarily do it right away because they can simply concentrate the cost of doing that in the second half of the year and manage the working capital with one-off transaction at the end. So that's the usual cycle. But we are, I would say, quite bullish on the opportunities that we have in front of us. A number of large contests are coming up for renewal that are in the hands of our competitors in the second half of the year. We have a number of interesting conversations with large corporates, and we think we are well-placed to actually continue to deliver at least on growth in factory and lending. We're quite pleased, again, on factory and lending. We haven't adapted as much, but the performance actually, the collection team, which has delivered a good result in terms of our collection, we see that going forward as well. On security services, it's a quarter which doesn't give full credit to the strength of the business. As Giorgio mentioned, we are still on board in transit, and we have one tender in which to see the assets coming through. So we know that this is a good time for the net revenues. And on the cost side, we have concluded the destruction process for the exit process. of the employees that were servicing ARCA, but people have not left yet. A number of them have left towards the middle of the first quarter. will exit at the end of May, and some will exit at the end of July. So we still have, we have taken over the provision this quarter in terms of one-off costs, but their salaries are still in the P&L and the . still roughly at the end of this quarter, 20 people that need to leave. There were some people who were in the cost base in the quarter as well, so in the next quarters will be much, much better in terms of overall cost. It's a business where, as we mentioned before, we see actually a lot of opportunity to grow, particularly with the opening up of the where we think we're actually quite well-placed to capture volumes there, and that will have a positive impact on liquidity and also on our growth from 2020 and 2024. In terms of guidance, as I hinted before, the sale of the bond is mostly going to give us this year. So there's been an anticipation there of earnings for the next quarter. So we confirm the guidance of 180 to 190, and we'll give an update at the end of June, depending on where we are also in the commercial development.

Thank you.

The next question is from Luigi Tramontana with Banca Acros. Please go ahead.

Yes, good afternoon. Thanks for taking my question. Actually, one left regarding the environment for M&A. Given that you have excess capital and excess liquidity, you are scouting the market, but it seems that it's difficult to find a suitable target. So let's understand. what you are seeing around, if it's just a matter of pricing or if there are some problems in the targets in terms of funding or in other elements. Thank you.

Hi, Luigi. Good to have you back. On M&A, it's difficult to comment on without commenting on specific targets. I think the fact we haven't executed acquisition is a testament to our strong discipline in looking at opportunities. We always said, you know, for us M&A, it's a nice to have. It's something we look at, but we discipline. It's very easy to not to do a good deal on an Excel spreadsheet, but they need to execute them. So we continue with the same discipline. In the past, we've looked at opportunities that we didn't execute upon either because the terms were not right or we ended up not liking the asset for good reason. Some of us have been mentioned in regards of what happened to them can testify. And so there are various reasons. You never know. It's a bit of a dating game. It depends on if you find the right person, if you end up really liking him or her.

As a reminder, if you have a question, please press star, then 1. The next question is a follow-up from Andrea Lisi from Equita. Please go ahead.

Hi. Just a follow-up as regards especially the corporate center contribution in terms of NII for the next quarters. Considering that you have sold a portion of the Govis portfolio, just as an indication, But also considering the fact that there is the pricing and the fixing of the rate, is it reasonable still to expect growth in terms of RNI either or maybe some stabilization just to have an indication of the trend is better? Thank you.

Now, it's a fair question, and we've tried to explain it in the first bullet point, but maybe in not such a clear way. What happens on the floaters? Think about how we fund, in a nutshell. If you imagine our floaters portfolio being funded by repos or by deposits from transaction services, both are either overnight or one month floating rate, while the asset side, so the floaters are at six months floaters with twice a year reset, which means that actually in the first quarter of the year, we've had the yield on the floaters, which was fixed because it's been fixed in October of last year, The cost of the liability went up because of the increase in the expectation for market increase for the ECB. So we actually had a contraction of the yield. Now, in April, there is a reset of the yield. So there is a step up in the yield of the floaters portfolio, which then remains fixed for the next six months. And then even if you're in an increasing interest rate environment, it takes a while before actually the cost of the diabetes goes up. When then we will have the next reset, if you look at the forward curve, we have a step up, and then we don't expect the cost, we don't expect, well, the market does not expect the cost of the diabetes to go up further, and so we'll have a benefit, particularly in the fourth quarter of this year. So that's the mechanics. So it's a long, winded answer to your question, but yes, we certainly expect the corporate center to continue to deliver growth for our business.

Thank you.

The next question is from Filippo Perini with Kepler. Please go ahead.

Good afternoon. Three questions for me. The first one, regarding 2024, are you confident that the the increase of maturity commission, you are negotiating, be enough to grow again in AI even if interest rates will be lower by looking for what the three-month arrival forward is telling today. Second is on your capital market day next June, will you give targets into 2025 on a matrix, volumes, loans, and profit alike? you did in 2021 for the 2023 target. And finally, your annual general meeting last April approved also an authorization of a buyback up to 5% of the capital. I believe that most of that could be used for the remuneration of managers and so on, but would you ever consider part of the way back to remunerate even shareholders or dividend will be the only way for remuneration of the shareholders. Thank you.

Thank you. Let me answer in reverse order. On the buyback, as we said a number of times, it's not a very flexible instrument. You can't take time when you want to do it. And we think It's easier also with the regulator to distribute the earnings as they arise and then optimize our capital level by growing the business. Remember also we have a number of other constraints, which are, for instance, leverage, the environment requirements. So we think at the moment that the best approach, we will... buy back some shares to fund the dilution of the stock options, but also with a new incentive plan that was approved two years ago, there would be a bit less need of that, which also means there is less dilution for the shareholders. So that's in that shed where we're at. So it really depends on the market condition and the timing of the approval with regulators. On the Capital Market Day, yes, what we'll do is a refresh of our strategy. The 2021 Capital Market Day was very much focused on the integration of data. What we want to focus now, even the dramatically change, I would say dramatically positive change of interest rate environment for our factory and lending business, the opportunities we see in the other two businesses, actually to present once again the business to the market to show the earnings potential, which we think are actually a bit misunderstood by the market. In a rising interest rate environment, in fact, and that goes to your first question, we always play a big catch-up on interest rates until they stabilize. Remember, we have only a portion of what we collect in terms of API that goes through APNL, with a rising API rate, we will actually see a significant improvement of balance sheet reserves, a large portion of which then gets captured, but in due course. So in a sense, we are enhancing our embedded side of the business. once rates stabilize, actually, our earnings capacity goes up significantly because then we don't have the delay in the reset of, for instance, of the bonds, and we have the full effect of the LPI rate reset. So going to your question, and sorry for the long introduction, 2024 is actually easier to model than 2023. The reason is if you take 2021, when rates were flat at zero. And then if you look at the forward curve in 2024, and then you see that actually the volumes have increased. By 2024, we have reprived our customers. We are gonna have growth in volumes. And importantly, the LPI rate has moved from 8% to most likely 12%, which means that actually the running yield on the portfolio will increase if we just repriced the receivable simply to transfer to the customers increasing rates by 2%, 50% of the difference between 12 and 8% API. We have inherently quite a strong growth in NIM and on a business which is a mostly fixed-cost business that has quite a significant impact on our P&L. So we're actually quite bullish on the result that we should expect in 2024, all things equal, because of the way the business performs. And let's not forget that that the fact that the LPI rate has increased, it means that actually we are deferring more income in the future through the fact that we are actually very prudent in our accrual both of the LPI rate and of the recovery cost, so-called 40 euros. So, in a sense, it's now a great environment for us. Maybe it doesn't show in part in our P&L because we are deferring so much, but we should see a pretty strong accumulation of earnings, but also of the third earnings, given the mechanics of our business.

Thank you for confirming.

The next question is a follow-up from Simonetta Chiriotti with Mediobanca. Please go ahead.

Yeah, thank you. Just another couple of questions. I'm looking at slide 8 on factoring and lending of KPIs. And you report a growth in the growth yield from 4.9 in first quarter 22 to 6.7. in the first quarter of this year. How much of this growth refers to the LPI, the pricing, and how much to the Maturity Commission, roughly speaking? And then another question on SPI for recovery. That is improving. It already improved the material in the last quarter and also in the current quarter, so in the first quarter of 2023. So is it the structure of the department that is in charge of these over recovery if the ARPANETs changed structurally, so can we expect this positive trend to continue going forward?

Thank you. On the over recovery, I think we are seeing the effect of having made some changes in the way the department has been managed. We've also done further adjustments in the first quarter of this year by Reaching some managerial responsibilities and also by giving different leadership to the legal recovery process so that actually that can be also more effective. We also expect that the impact of the sentences around the 40 euros will be felt much more in our collection process. Today there's the news of a third European Court of Justice sentence that again clarifies not only the 40 euros are due, but also that no no national law can prevent the collection of the 40 euros or the reduction of the 40 euros of them to be calculated in a different way, very explicitly, which is strong support of our legal claims in court. On the, on splitting the impact on gross yield and average loan, it's complicated because what you have is the effect of the LPA recovery, you have In fact, the portion of the loan book has not seen an increase in yield because you have the Polish portfolio, which actually has flat rates, and so the base rate has not grown. We have the repricing. We have clearly the step-up in the LPI rate. The LPI rate covers... roughly two billion out of memory of the five, and so it has an impact on the gross yield but not on the entire portfolio. So you can see already in these numbers that part of the effect of the repricing, which though, is on the new volumes, and it's been high, so it's been high as level, but the full effect of that could be seen from now on.

Thank you.

For any further questions, please press star and 1 on your telephone. This concludes our question and answer session. I would like to turn the conference back over to Massimiliano Beningheri and Piergiorgio Bicci for any closing remarks.

Thank you. Thank you for attending the call today. As always, it's helpful for us also to answer your question. I think probably the main takeaway I would leave is to look forward to 2024. That's probably the easiest way to model the business in the way I try to answer Philippa's question. We will see a huge opportunity to continue to deliver on the strong path of earnings and volume growth in many businesses we've seen in the last decade. There are a few quarters, and we look forward to review the performance of the business in the next quarter, and ahead of that clearly to present you our business plan for the medium term. Thank you.

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