Banca Sistema SpA

MIL:BST

Earnings Call Transcript

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Banca Sistema Q1 2021 Results Conference Call. [Operator Instructions]

At this time, I would like to turn the conference over to Ms. Ilaria Bennati, CFO of Banca Sistema. Please go ahead, madam.

[Ilaria Bennati, executive]

Good afternoon to everybody. It's only me and Carlo today on the call as Gianluca is not feeling well. He apologized that he is not able to attend the call. So Carlo and I will take you through the first quarter results in the call.

As usual, you can follow the presentation, using the material that has been made available before this call. We first like to with the first quarter results at a glance. From a broader macro-economic standpoint, the first quarter of the year has as continued to be affected by the ongoing COVID-19 situation and in this context, the bank's business model has continued to prove its resilience, registering a solid commercial performance in all 3 business lines.

Factoring turnover was indeed up 12% year-on-year, reaching EUR 783 million excluding tax receivable, the turnover would have registered a year-on-year increase of 20%. In the secured pace of the outstanding is higher year-on-year, thanks to the strong origination activity carried out in the last 12 months while the first quarter volumes were a bit below expectations. Pawn loans have reached EUR 80 million, in terms of outstanding, registering a 3% quarter-on-quarter increase. The growth vis-a-vis last year, as you know, is not meaningful due to a different perimeter.

Building up on the positive outcome reached in 2020 in the semi-state guaranteed loan space, we have continued this year to develop this business and the stock of loans reached the EUR 118 million at the end of Q1.

If you highlight now on the financial results, before going into more details, further down in the presentation, net income is equal to EUR 19.3 million representing a 21% increase versus last year, also supported by term loans and SME loans and by lower interest expenses. Funding cost is lower year-on-year at 0.5%, total income is equal to EUR 26 million with an 18% increase. Recurring cost of risk is equal to 37 basis point. Loan loss provisions are up year-on-year at EUR 4.1 million due to a one-off provisioning of EUR 2.4 million related to position, municipality in conservatorship.

Total operating costs year-on-year increase is mainly due to the consolidation of the pawn loan business unit acquired in Q3 last year and to a lesser extent also to higher IT expenses, servicing cost and the contribution to the single-solution farm. Net income is equal to EUR 4.5 million and I would say substantially in line with last year results. CET1 ratio sets at 12.2%.

We now move on to Slide 3. The strong performance of the factoring turnover was driven by commercial receivables, which were up by 21% versus last year. As you can see a factoring outstanding trend shows a slight decrease year-on-year, mainly due to a weaker-than-expected origination of tax receivables during 2020 and also during the first quarter. Tax receivables have a higher duration and therefore they have to be sending in one way or another. The outlook for fiscal credit origination however is much brighter for the continuation of the year and indeed, we have witnessed a trend reversal starting from March.

If we move on now to the next slide, then we make a couple of comments on 3Q and home loans. So Slide 4, in the secure space, we have registered the better performance in the last year in the direct origination channel with EUR 12 million turnover originating through assets with respect to the EUR 8 million in Q1 last year.

The India's business has performed below expectations in the quarter due to higher competition on prices, which made not appealing to buy certain portfolios. Thanks to an organic growth from [indiscernible] has generated EUR 37 million of loans including renewals, which allowed the spending to grow 3% versus year-end. In the quarter, the business line carried out 13 auctions compared to only 2 auctions in Q1 last year. The auctions activity has increased, also thanks to the consolidation of the Intesa Sanpaolo's, while the small number for 2020 was also due to the COVID restrictions prevailing at the time.

Now from Slide 5, we start to cover the financials in more details. As usual, I'll first comment the balance sheet. As shown in the table on Page 5, total assets are down 6% the quarter-on-quarter, and in particular loans at amortized cost is now EUR 2.6 billion and is down quarter-on-quarter, mainly due to factoring. CQ loans are down 2% quarter-on-quarter, while pawn loans are up 3% quarter-on-quarter.

As mentioned before, since the second quarter last year, we have assumed that the SME lending business backed by the state guarantee following the initiative of the government to support the economy and SMEs is impacted by the COVID-19. The outstanding is significantly up quarter-on-quarter as you can see from the table. Govt portfolio now equal to EUR 700 million is now on the quarter with average duration of 28 months. This amount also includes almost EUR 100 million as to collect and sell, which is up quarter-on-quarter and which has an average duration of 25 months.

On the liability side due to banks quarter-on-quarter decrease is driven by Inter-banking while ECB funding is up in the quarter. Due to customers decrease is mainly driven by the decrease in repo as a consequence of the govt portfolio reduction and to a lesser extent that the reduction in term deposits and current accounts. That securities increase is due to higher funding through ABS.

We now move on to the next page, to discuss P&L, but in introduction, the main factor driving the comparison between Q1 '21 and Q1 '20 is the contribution of the pawn loan business since the first quarter. We start analyzing interest income. Q1 interest income is up 8% due to higher contribution of pawn loans and semi schedule guarantee loan portfolio. Factoring now represents 64% of total interest income, which is slightly less than its relative contribution in the financial year 2020 but, is stable in absolute terms, year-on-year.

Higher LPI contribution has compensated lower contribution from tax receivables. Going more into details of the LPI, we've registered the stronger contribution of LPI from legal action, EUR 6.6 million compared to the EUR 3.4 million last year. LPI registered a good performance in both our core and extra collection components, in particular the latter has registered the record quarter even without any sale of LPI. A more detailed information on the LPI has now been moved to the appendix and you can refer to that for a comparison over time.

The contribution of the CQ business line has been slightly down quarter-on-quarter due to a larger-than-expected impact of early loan repayments. Lower interest income in the quarter has been reflected on adjusted income margin reduction year-on-year. Since the past quarter, we started to see a significant contribution to income generation by the pawn broking business, also thanks to the acquisition. The contribution to total interest income of the business line has indeed the EUR 1.3 million versus EUR 200,000 in Q1 last year with a higher adjusted income margin versus 2020. The margin has indeed now reached 15.2% which is by far the highest among our 3 business lines. Total adjusted income margin as you can see from the bottom table was slightly higher, quarter-on-quarter driven by factory endpoint loans.

Now we will move on to total income on Slide 7. Total income was up 18% year-on-year, driven by the increase in net interest income. Indeed, net interest income increased by 21% as a combination of an 8% increase in interest income and the 23% decrease in interest expenses, total cost of funding is now we put to 0.5% and is lower both year-on-year and versus year-end in both the retail and the wholesale component.

Net commissions are down year-on-year due to a lower factoring commissions that have not be fully compensated by higher contribution from pawn loan commissions, which indeed increase from EUR 200,000 in Q1 last year to EUR 1.2 million this year. Other income includes a EUR 2.4 million from the sale of the govt. portfolio.

Now in the pie chart, at the bottom of the slide we present in line with the presentation for the financial year 2020. In the strategic plan, the breakdown of the total income contribution of the 3 business divisions. The factoring business, as you can see from the pie chart continues to represent the lion's share, although its relative weight has decreased with respect to year end in favor of pawn loans in line with what has been envisaged in the strategic plan. The CQ contribution to total income is pretty much unchanged with respect to year end.

We now move on to Slide 8 to discuss cost. As for the top line, the main driver of the year-on-year cost increase as integration of the pawn loans business unit. Personal expenses are up year-on-year due to a higher number of FTEs following the acquisition. In addition to the pawn loans cost increase, administrative expenses are also higher due to higher IT expenses, higher severance cost and higher contribution to the Single-Resolution fund for a total amount this year of EUR 1.7 million. D&A is also up due to the rental cost of the pawn loan branches.

We now move on to the next slide to discuss funding. I'll go very quickly through the section as there isn't any relevant changes since previous quarters updates. As I mentioned before, cost of funding is lower year-on-year and also quarter-on-quarter. Funding mix keeps on being balanced between wholesale and retail, the wholesale component is now 40% and is down quarter-on-quarter due to the reduction of the repos and to the lower -- to lower contribution of inter-banking funding. ECB funding is up by EUR 50 million, thanks to the further borrowing under the free allowance which is now EUR 540 million and which is totally grown.

Still on the wholesale component, we have increased the base funding backed by CQ assets. Retail funding is down quarter-on-quarter due to the reduction of interest rates offered to customers since the beginning of the year for both term deposits and current accounts.

We now turn to Slide 10 to discuss asset quality. As you can see from the top left table, gross non-performing exposures is up quarter-on-quarter due to past due increase relating to factory driven by the introduction from 1st of January of the new definition of default. The increase of past due is in line with the indications we providing in the most recent conference calls during the year. Clearly the growth in Brazil given the nature of our factoring business which is for most part exposure towards Public Administration does not represent the sign of deterioration in terms of credit work as of the bigger, not a deterioration in the probability of recovery.

As a consequence of the increasing past due, the NPE ratio went up to 11.9% compared to the 9.5% at year-end. Now you know even of the results update, we've decided to add more granularity to the description of our factory in nonperforming exposures, which is in large part represented by exposures to municipalities in conservatorship that are classified as bad loans or UTPs.

As described in the bottom left table, such exposure amounts to EUR 125 million in total and has slightly gone up in the last 6 months. In the bar to the right, we will present the amount of LPIs related to credit exposure in conservatorship. At the end of Q1, such LPIs amount -- amounted to EUR 59 million and as we stated many times that they are of balance sheet are not eligible to be considered within their core perimeter according to our accounting policy.

Loan loss provisions in Q1 are equal to EUR 4.1 million and are up year-on-year due to EUR 2.4 million one-off provisions related to invoices that are part of the conservatorship procedure of a municipality. This provision is a consequence of the one-off decision to accept the transaction on some invoices within the conservatorship perimeter. The decision is driven by the fact that on one hand, the exposure to what is the municipality is the largest we have and therefore, it also carries a significant amount of LPIs that have already been accrued and will continue to occur in the future.

So it makes sense to anticipate part of the collection and also on the other hand, the commission entity has recognized on this exposure, our claim on the accrued LPI which will then be paid when we finalize the transaction in the following months. So as such the haircut suffered on the capital which has driven the provisions would be last part compensation stated by collection LPI, which are currently, of balance sheet. Q1 2020 cost of credit risk, considering the above-mentioned provisions as non-recurring stands at 57 basis point down from year-end.

Finally, I cover capital ratios on Slide 11. Regulatory CET1 ratio and TCR ratios are confirmed well above our minimum requirements, they stand at 12.2% and 15.6% respectively. They are slightly lower compared to 2020 year-end that due to NRW increase driven by driven by the increase in past due as a constant quest of the adoption of the new definition of default. The impact of the new DoD has been therefore confirmed within the range stated in previous calls.

As we mentioned in many occasions, capital ratio do not include the dividends of the profit related to 2019 and to 2020 that have been approved by the show that meetings, but not yet distributed. In line with the past regulatory capital as at 31st of March does not include the 25% of the profit recorded in the period.

I’m now done with the presentation. And so Carlo and myself are happy to take your questions.

[Operator]

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

[Manuela Meroni, analyst]

I have 4 questions. The first one is on the definition of default. I'm wondering if you can tell us what is main impact of the new definition of default on the capital base on one side and on the stock off non-performing exposure. I am wondering if it had also an impact on runoff condition for this quarter or not and if they have a negotiation discussion, so if there could be some changes in the future of our inflation that we may expect.

The second question is on the loan growth. Loan growing this quarter has been quite weak. While your business plan is directing a double-digit on localized in the business plan. So I'm wondering if you could give a slow start of the already expected in your business plan targets. And what we can expect in terms of loan growth of the 3 main divisions for the full year.

The third question is about despite England's the lack of shifts, I'm wondering if we can expect some of the first positive one-off on the – when the collection of LPI will start or when that we’ll see an end of the process or we are not going to see anything about that.

And the last question is on the portfolio classify that as cash cost you recognize a govt. portfolio. This is a new strategy or is adjusted net of 2 can move..

[Ilaria Bennati, executive]

I will start by taking the first question and if I'm missing out something, Carlo will tap in and cover the rest. So on the new definition of default. The impact on the capital ratio was slightly above the 70 basis point, which we had indicated there is our top end of the range. That's why we said that the impact has been in line with what previously estimated in terms of increase in A&P, the impact has been quantified in the increase of the EUR 60 million of past due. In terms of developments on the new definition of default, we do not expect this impact to go any higher if anything, there might be mitigation that we would be able to apply that could make these amount to decrease in the next future.

So on the second question regarding the decrease in the outstanding, this is pretty much due. I mean, regarding the factoring, this is pretty much due to lower origination of fiscal receivables as I was commenting during the presentation and the lower origination of fiscal receivables characterize the second part of last year and continue to characterize the first quarter of the year. And because fiscal receivables has a higher duration, they affect the outstanding in one way or another. However, as I was described – sorry, the reason for behind that over origination of task receivables due to the fact that corporates had lower originated lower to normal due today, ongoing COVID-19 situation and therefore the fiscal credits were lower than they used to be in previous years.

As I was commenting this trend as we believe it has stopped at the -- towards the end of the first quarter. Indeed, since March, we started to see a recovery, a solid recovery of the fiscal credit originations that we would be able to confirm at the end of the second quarter and still progressing. So at this point in time, we believe we are in a position to confirm the forecast we have outlined in the business plan presentation regarding pretty much everything and also in particular the amount -- the growth of their spending as you were asking.

The first question was related to Catania, the positions that we discussed earlier on during the comments the rationale behind the transaction as we mentioned is the fact that this represents our largest exposure and due to the amount of the exposure, the position also carries a significant and these interesting amount in terms of LPI accrued. So it really makes sense for us to exploit the opportunity to accept the transaction with the commercial entity also in consideration of the fact that our claim on the LPI -- on the accrued LPI has been accepted and therefore when we finalize the transaction, we will be able to collect not only the capital which is on balance sheet, but also the LPI, the portion of LPI that are currently of balance sheet. Therefore the provisions that have been accounted for in Q1, that would be in large part, almost entirely compensated by the collection of LPI, which would represent a windfall gain given to the fact that they are of balance sheet at the moment.

So the answer to your question is yes. Clearly, we cannot comment on the timing because we don't control, we don't fully control the timing bar as a compensation effect. We definitely look. Carlo, you would like to take the first question?

[Carlo Di Pierro, executive]

The strategy of govt. has not changed action of the definition of default, the consequent increase of the past few stocks has not influenced the loan loss provision in Q1.

[Operator]

Your next question is from Christian Carrese with Intermonte.

[Christian Carrese, analyst]

The first one is again on the one-off provision done in the first quarter. Can you again, maybe explain little bit better the phasing, so you posted the provision this quarter and you are going to get some LPI off balance sheet through the P&L and we don't know yet when, do we expect by the end of the year from at around the EUR 2.4 million and the decision to make this kind of set. Can you explain a little bit why you decided to do that, because the amount was too high and so can explain a little bit? Second question is on operating costs up in the quarter. If you can give us a guidance for the full year of operating cost and then margins on secured, we show it the adjusted margin at 2.3% if I'm not mistaken. The business plan, you set in margin in the area of 3.1. So if you can give us in idea when always going to be the evolution of the margins from that region.

[Ilaria Bennati, executive]

I'll start by taking the first question regarding being the one-off transaction on the exposure towards the municipality conservatorship and the rationale is quite simple. And first of all, as we said, it's a one-off decision. Our main strategy regarding the exposure towards municipality's conservatorship hasn't changed. Therefore, we are still convinced that it makes financial sense to keep the exposure some deal at the end of the conservatorship proceeding and to wait for the municipality to regain its inborn status and therefore to collect the -- both the capital and LPI as part of the annual collection activity and however this position was particularly large and it doesn't really represent a concern in terms of recovery, because of its size, but in line with what we are already doing that with the LPI.

Remember that with the LPI from time to time we perform sale of LPI simply because we are happy to smooth the collection of LPI for time and when there are the conditions which means when we see interesting off from external investors on the LPI amounts that we perform sale of LPI in order to anticipate the collection. On the same line, we decided to take this opportunity in the conservative space considering the fact that we believe the proposition or the transaction that will be put forward by the commission entity would be interesting for us as we -- it would allow us to anticipate the collection, both in terms of capital as well as LPI and also it will allow us to make it windfall gain on the NPI considering the fact that at the moment they are completely of balance sheet because exposures on the -- towards municipalities in conservatorship state tools are not an eligible to be recognized within the actual perimeter due to our accounting policy.

So for us, this was an opportunity in line with what we are already doing and had already done in the past regarding our LPI portfolio. Carlos, do you want to take the questions on CQ margin or shall I take it. Okay. On CQ, yes, the margins were low as you highlighted with respect to last year and they may reason is due to the fact that in this quarter, we suffered in a significant turn from the effect of early prepayments. As you know, in these contracts that have the right to prepay the loan when the life of the loan gets to 4 feed -- 2 feed -- sorry, of the contract life. So in the beginning -- at the end of -- sorry, starting from mid-June, second half last year. We started to see this trend to increase and we believe we are at the peak of the phenomenon. Probably the phenomenon will start to decrease towards the end of 2021.

In order to settle from 2022 onwards, we are making provisions for the fact that we'll be able to release when it will be convenient. So these are already the main reason behind the decrease in the CQ margins. Considering the comparison vis-a-vis what we have outlined in the business plan, we will be able to get there as soon as the origination -- the direct origination activity, we get to the pace we have in mind that in order for its higher margin to be able to compensate the lower margins that we see in direct business. The last question Christian was regarding operating costs. If you remember when we discuss the business plan, we had indicated that we had of line the business plan based on considerable investments, strategical investments over the life of the plan to be able to support the growth of the 3 business lines.

We also indicated the fact that the return on the investments will mainly come in the second part of the plan horizon. So the cost income is expected to increase -- slightly increase at the beginning of the 3-year plan. This is the reason why we expect a significant increase in total operating cost in 2021. So this is absolutely in line what we had in these -- within the business plan. In terms of the contribution of the pawn broking business line to the increase in operating costs, this is totally expected due to the fact that, and it makes the comparison of Q1 2021 with Q1 2020, a bit more difficult because of the difference in the perimeter. When we get to comment future quarters, we see that really the comparison, also in terms of contribution of the pawn broking business line to the consolidated financial will be easier because the perimeter, at that point, will be constant.

[Christian Carrese, analyst]

If I annualize did in the first quarter number, I would get around EUR 60 million total cost for 2021, I mean it more than that -- sorry -- it's EUR 64 million. So what do you think should be that our rate of maybe in the coming quarters, we should see. I mean for these costs.

[Ilaria Bennati, executive]

No, as I said we are planning to invest for the growth of the business. So I can't confirm your figures, but the rationale of seeing the higher cost is absolutely in line with the strategy that we have outlined. So we are not expecting to see a reduction of cost in the coming quarters just to answer your question.

[Christian Carrese, analyst]

Okay. Just to follow-up on the first question, if I may, to different side of the settlement. In terms of capital, the construction, any impact and maybe I missed the answer on when are you planning to get the LPIs, the one-off LPI, had in 2021.

[Ilaria Bennati, executive]

Yes. Okay. So first of all, the transaction hasn't been closed yet, but because we are planning to close it and to finalize it, we have decided to take provisions as early as this quarter, although the transaction might be come to conclusion in the future quarters, potentially within 2021. The collection on copyright and LPI will occur at the same time with the difference that the LPIs are currently off balance sheet and therefore they will represent in full gain which will compensate although with different phasing the provisions that we probably with that we have our heated the P&L levels in Q1.

[Operator]

The next question is from Luigi Tramontana with Banca Akros.

[Luigi Tramontana, analyst]

My question is a little bit outside the results. Recent court ruling is creating some problems to the government to inject some EUR 2.5 billion into local municipalities having some problems of liquidity. Among them, some big cities like Turin, Naples. Do you expect this ruling to impact your asset quality and your cost of risk this year? And just to clarify, you're referring to the vision of the [indiscernible] of the last week. Yes.

[Carlo Di Pierro, executive]

The decision, we are not able to understand on our specific exposure the impact, but what we know for sure is that the government has no interest to see big city with a proven in the future for the next month. So the government, now after this decision of the court is obviously the role to make a law and to adapt this consequence on the public finance of the each single, let's say municipality or typical or the one that had problem with the delay, but we, let's say building on the history of the delay. So we have no evidence by now on potential risk of the increase of number of conservative sector following the decision of the court.

[Operator]

The next question it's a follow-up from Manuela Meroni with Intesa Sanpaolo.

[Manuela Meroni, analyst]

Now the presentation and regarding Catania, you mentioned that you accept the transaction [indiscernible] consumer a lot of scope. So I'm wondering if this transaction reserve to the entire population that you have towards Catania or a single portion. And if we can have some, but in the future on this kind of position. And the second question, sorry, I didn't get your answer concerning that if you have this portfolio classified as that's not those cost you reduce the portfolio and I was asking you if reduction is Just an optimistic move or is the new strategy?

[Ilaria Bennati, executive]

Okay. Regarding the second question, probably you couldn't hear Carlo answering the questions. So I'll ask him to repeat his answer, again in a second. Regarding the first question, Manuela. yes, you're right. Your understanding was correct that we have decided to accept the negotiation only on a portion of the overall position and the amount of the portion is the result of our analysis and is what we deemed right for us to accept. For this reason, we consider this transaction for the time being to be a one-off decision.

[Carlo Di Pierro, executive]

Currently, things -- are you referring to SME's portfolio or to the govies’ portfolio classified under amortized cost.

[Manuela Meroni, analyst]

To the govies’ portfolio.

[Carlo Di Pierro, executive]

To the govies’ portfolio, we anticipated sales of that we expected to do in the first half of 2021 in the first quarter and the strategy is to have a size that is very similar to the one we have now for the rest of the year.

[Operator]

[Operator Instructions] Ms. Bennati, Mr. Di Pierro, there are no more questions registered at this time.

[Ilaria Bennati, executive]

Okay. Thank you very much to everybody and talk you again for the next quarter update. Thank you. Bye-bye.

[Operator]

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