illimity Bank SpA

MIL:ILTY

Q1-2025 Earnings Call

[Operator]

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the Illimity First Quarter 2025 Results Presentation.

[Operator Instructions]

At this time, I would like to turn the conference over to Mr. Corrado Passera, Chief Executive Officer of Illimity Bank.

[Corrado Passera, executive]

Thank you. Good morning, everyone. Welcome to Illimity's first quarter results presentation.

I will frame today's results in the context of the 2026-2028 strategic guidelines that we published recently.

Let us start from Slide 3. Illimity has consistently grown despite several unexpected challenges. Our commitment to growth has never wavered, as we will see once again in this quarter.

Total assets have steadily increased, just surpassing EUR 8 billion at the end of 2024 and are expected to reach approximately EUR 11 billion by 2028, partly by providing roughly EUR 6 billion more loans to SMEs.

Slide 4, capital. Our capital position has consistently been very solid, and this quarter is no exception. Core Tier 1 ratio increased to 14.7%, representing a substantial buffer above the regulatory requirement.

The strategic guidance we have provided foresees that this solid capital position will be maintained going forward, with a projected Core Tier 1 ratio for the period between 13% and 14%. Our risk profile will also benefit from the decision to stop investing in NPE portfolios.

Slide 5, profitability trends. The 2021-2025 plan was built on the underlying assumption of low market rates and the primary NPE portfolio market in '24 and '25, consistent with previous years. As we all know, things turned out differently.

The sharp and unexpected rise in market interest rates, unforeseen by any econometric model, has turned into a real windfall for traditional banks, while for banks like Illimity, the negative impact on margins was inevitable.

The effect on NPE business became particularly severe, leading us to decide to stop investing in NPE portfolios in late 2023.

This impacted our 2024 results in three main areas: lower net interest income due to reduced volumes and margins, and much lower profits from closed positions than expected, extraordinary write-downs in relation to the updating of the workout plans for our NPE portfolios and impairment of goodwill for equity holdings linked to the NPE business unit.

On top of that, there is also the slowdown in reaching Illimity's target critical mass, on which we had based the operating leverage for '24-'25.

The 2026-2028 strategic guidance aims to rebuild strong organic profitability, targeting net income of EUR 80 million in 2028 and the cost/income ratio of 54%.

The new organizational structure we have given Illimity focuses on growing rapidly in the core business of lending and investment banking services for SMEs, streamlining the cost base and improving operational efficiency, separating and gradually running off non-core assets, unlocking the value of non-strategic assets and equity investments.

Slide 6. Let's look at the core business. Today, Illimity's core business is concentrated in the SME world, where we have built up a distinctive position in the space of just a few years.

We have focused on segments with significant and growing potential, structured finance, factoring, turnaround and special opportunities, asset-based financing, and investment banking.

In Q1, Total exposures reached EUR 3 billion, with business origination up by 50%, driven especially by the Investment Banking and turnaround segments.

Profitability proves resilient with Q1 pretax profit of EUR 31 million, in line with the same period last year, despite the negative impact of the drop in interest rates.

The cost/income ratio of 21% confirms the excellent operating leverage and suggests performance across the group going forward. This is what Illimity will look like from now on, more and more.

Slide 7. Our SME lending portfolio remains healthy and well-managed. 60% of Illimity's total loans are backed by government guarantees or credit insurance. The percentage of organic NPEs net of position backed by government guarantees or insured remains at a contained level of 2%.

The total percentage of organic NPEs, including those with government guarantees, is 7.9%, almost entirely represented by UTP positions under restructuring.

The cost of risk stands at 41 basis points attributable to the core business, which increases to 137 basis points with b-ilty and non-core assets. As we have set out in the strategic guidance, this figure is expected to improve, thanks to the gradual rebalancing of assets toward performing loans.

Let's look at the non-core side. As part of the process of exiting direct investments in NPEs, most portfolios were converted into senior securities and units of specialized investment funds.

These assets, along with the residual portion of NPEs that we still hold directly, have been allocated to a dedicated business unit that is managing the runoff process.

The stock of non-core assets now amounts to about EUR 1.2 billion, which is 6% down on the previous quarter, about 15% down year-on-year, and is expected to continue to reduce during this year, also following potential disposals on the market.

The gradual reduction of this stock will free up capital that can be allocated to the growth of the core business.

Let us now turn to the total results of the first quarter on Slide 9. Revenue was EUR 68 million. They were affected by both the cuts in market interest rates and the substantial reduction in NPE business contribution.

The negative impact on net interest income was particularly concentrated in this quarter, as over EUR 2.4 billion of our loan book was repriced in January 2025.

Net interest income is expected to stabilize as early as next quarter, also benefiting from the decline in the cost of funding. NPE business contribution will be progressively substituted by the SMEs lending volume growth.

Costs decreased by 3%, excluding nonrecurring expenses, which are mainly related to the public tender and exchange offer. Going forward, the decrease is set to continue.

The strategic guidance forecasts total cost reductions of around EUR 50 million in the planned period. Net income of Q1 is EUR 300,000.

Slide 10. The liquidity position remains very robust with a buffer of EUR 1.3 billion, and regulatory ratios easily exceed the minimum requirements.

Let's now move to Slide 11 about our holdings and joint ventures. Over time, Illimity has developed ventures and initiatives that represent a potential source for substantial value creation.

In 2023, we launched a process of progressively unlocking such value, and over EUR 100 million worth of capital gains were realized in '23 and '24.

We plan to continue pursuing this by fully or partially divesting of some of these assets. We forecast that these will generate at least 200 basis points of additional capital by 2026 that can be used for core business growth.

Here are some of the main examples of our ventures. Hype, our joint venture with Cella, is one of Italy's top retail fintech platforms with nearly 2 million accounts and constantly growing transaction volumes.

Its growth potential is significant, both in terms of revenue and efficiency. Matrix with over EUR 9 billion in assets under management has strengthened its competitive position as a total asset manager, specializing in large UTP positions with underlying real estate assets and in the management of Stage 2 exposures.

Ilimity SGR now has EUR 630 million in assets under management. It has launched 4 specialized funds in the last 4 years, demonstrating strong execution capabilities.

Altermind, a joint venture we have with Apax, is already fully operational and positioned as a highly innovative player in the artificial intelligence-based digital solution market.

Pay launched last year is a new proximity payment network, leveraging the 800,000 vending machines operating in Italy. It can become a very efficient channel for accessing the world of payments and services, offering strong growth potential.

Slide 12, the last one, is about 2025. 2025 will be a pivotal year of transition and realignment as we lay the groundwork for the future growth of our core business.

Our profitability this year will reflect several nonrecurring items, linked to the reduction of noncore assets, one-off costs related to the public tender and exchange offer, restructuring costs, if necessary, to accelerate structural cost savings, and potential nonstrategic equity disposals.

Some of these disposal projects initially commenced in 2024 and have been delayed partly as a result of the public tender offer.

As outlined in the strategic guidance, Illimity's potential for future profitability growth is significant and can leverage major growth opportunities in our core business.

These are expected to drive total assets to around EUR 11 billion, significant cost reduction of about EUR 50 million that we are putting in place, and freeing up at least 200 basis points from disposing of non-core assets, activities, and nonstrategic equity investments.

I will now hand over to Silvia, who will take you through the financial and economic results in greater detail.

[Silvia Benzi, executive]

Thank you, Corrado. Good morning, everyone. Let's move straight ahead to Slide 14.

There are 2 noteworthy trends that indicate the bank has already embarked, as of this quarter, on the trajectory outlined in the strategic guidelines. Corrado has already covered the first trend, which concerns the reduction of noncore assets.

The second trend that you see depicted in this slide highlights the performance trajectory of our core business segments. The business origination, you can see, is advancing well, both on a yearly and quarterly basis.

Also, Q1 was less affected by early repayments. And as a result, the stock of core customer loans is substantially flat year-on-year. Now, the quarterly comparison is less significant as it's affected by the typical dynamics of the factoring business that tends to have a seasonal peak in the month of December.

Moving to the profit and loss on Slide 15. Profitability during the first quarter was subdued, affected by the anticipated dynamics of interest rates and by the performance of the noncore business.

However, there are constructive signs in the trends of recurring costs. Note that the comparison on a quarterly basis is not that meaningful as it was affected by many extraordinary items booked in Q4 and a bit of different seasonality in the quarter. So let's go through.

Point number one, net interest income decreased year-on-year, primarily driven by 2 factors. The first factor is the strategic shift away from direct NPE investments that we completed last year, which reduces the gross return on a portion of our assets and increases the balance in variable-rate loans.

And the second driver is the decline in market rates in a context where, for us, assets are repriced lower than liabilities.

The decline in market rates had a notable impact on the quarterly dynamics, as more than half of our total customer loans repriced downwards in Q1. This is also because a portion of our interest-earning assets reprice only every 6 months. So, they repriced in January.

Interest expenses remained stable year-over-year despite a double-digit growth in interest-bearing liabilities, and that is thanks to a gradual reduction in the cost of funding.

Now, NII is expected to stabilize over the next quarters, supported by the ongoing improvement in funding costs and volume growth.

Point number two, net fees. Net fees decreased year-on-year, mainly reflecting lower contribution from our mid servicing activities, which in 2024 had a remarkable first quarter linked to a few very specific transactions.

The quarter-on-quarter comparison reflects lower business origination and a bit of reduced capital market activity.

Point number three, other income is up year-on-year, supported by gains booked on fair value assets, especially related to the turnaround business.

We also accelerated efforts to enhance the profitability of the securities portfolio.

Point number four, costs. So, the headline number shows a stable cost base. However, this item includes nonrecurring expenses related to advisory services, mostly linked to the ongoing tender offer process and to some organizational streamlining initiatives. So, the recurring cost base is down 3%.

Point number 5. Loan loss provision charges amounted to EUR 13.9 million in the quarter. But out of these, around EUR 11 million relates to non-core assets, and to this date. So, provisions for the core business stood at about EUR 2.5 million, which corresponds to a cost of risk of 41 basis points.

So, in summary, the first quarter of 2025 closed with a profit before tax of EUR 1.4 million. This date includes a negative contribution attributable to Hype for EUR 1.9 million, and the quarter closes with a net result of EUR 0.3 million.

Now let's move to Slide 16. So, our capital position remains robust and even showed an increase in Q1, with the common equity Tier 1 ratio standing at almost 14.7%.

The increase is the result of a 7% reduction in risk-weighted assets, including the effect of the first-time adoption of the Basel IV regulatory framework and the implementation of effective capital optimization measures.

Our common equity Tier 1 capital declined slightly in the quarter, mainly owing to the termination of the IFRS 9 filter phasing period, and this amount does not include any dividends at all.

Finally, let's have a look at funding on the next slide, Slide 17. So, our retail deposits amount to EUR 4 billion, up 6% quarter-on-quarter, thanks to the successful growth of our domestic platform and of rising.

Wholesale funding, to the contrary, was slightly down quarter-on-quarter due to lower repos and interbank funding.

Our blended average cost of funding fell to 3.7% from the peak of 4% recorded in 2024 and is set to decline further in upcoming quarters. I think we're done. Thank you for your attention. We now look forward to addressing your questions.

[Operator]

[Operator Instructions]

The first question comes from Davide Giuliano of Equita.

[Davide Giuliano, analyst]

I have 3. The first one is on CET1. It was a good surprise in the quarter and better than the upper range of stand-alone strategic guidelines.

Could you guide us on capital impacts you expect in the coming quarters, if any? And do you see room for further RWA optimization? And what are your expectations in terms of capital evolution in 2026 and 2027, also in light of the strategic guidelines?

The second one. In the quarter, you recorded additional adjustments, particularly on BLT. If I recall correctly, 100% of a new generation of BLT was backed by public guarantees and therefore has limited impact on loan loss provision.

Could you please comment on the reasons behind these adjustments? And were there any issues with the guarantees in particular?

The third one is on your strategic guidelines. Your core loans are down minus 3% year-on-year, so already discounting seasonality. What dynamics are you seeing in terms of credit demand from corporates? And what gives you confidence in the strong core loan growth you have outlined in your strategic guidelines?

[Corrado Passera, executive]

Thank you, Davide. Yes, the core Tier 1 figures are very satisfactory, and I will ask Silvia to comment on possible evolutions.

[Silvia Benzi, executive]

The possible evolution, we have already taken optimization measures. We started already at the end of last year, particularly, for example, all of the work we've done on market risk has proved to be very successful.

Our outlook is to improve the business origination to keep investing further and further. There is a good demand for loans, maybe then Enrico can comment on that.

So what we expect is our CET1 ratio to remain very robust, but probably to go towards the 14%, which is 13% to 14%, depending on what we are going to do with the other portion of our capital, but we expect to keep investing and keep growing. So, we're going to remain very robust while keep growing the business.

[Enrico Maria Luigi Marzocchi, executive]

As far as the additional adjustment we decided to take on the BLT portfolios, you said that all of those positions are linked or covered by state guarantees. But as you know, there is a percentage of it that is not.

We decided to be prudent also on that component, and decided to cover also the non-guaranteed portion of the portfolio. It's an area of activity where expectations were higher in terms of profitability and risk profile. So, we decided to take the most prudent attitude.

As far as core loans evolution, as you know, in the last 5 years, we kept growing in lending to SMEs, while the system as a whole has consistently gone down in terms of lending to this part, a very important component of the Italian economy.

The demand for the kind of business we provide is very high. We have to select very cautiously, but the demand for factoring, for structured finance, for turnaround finance, for asset-based financing keeps being very high. And we don't expect any decrease given what is happening around the world.

[Operator]

[Operator Instructions]

The next question comes from Michele Baldelli of BNP Paribas.

[Michele Baldelli, analyst]

Just a quick question on the public offer from Banca IFIS. Can you remind us now the timing of your answer to this prospective of Banca IFIS, if this could be shared with us?

[Giovanni Lombardi, executive]

I'm Giovanni Lombardi, General Counsel of the bank. In terms of timeline, we are waiting to see the offer document to be published by Banca IFIS, which is expected, I think, today or tomorrow.

And then our Board will be convened to resolve upon the Comunicado, the issuer notice in which they will be provided the evaluation of the offer from our perspective, and this will occur by the end of next week.

[Operator]

[Operator Instructions]

Mr. Passera, there are no more questions registered at this time, sir.

[Corrado Passera, executive]

Thank you, and thanks to all the people who attended our presentation. Now, we have the Q1 results that are in line with the strategic guidance we provided a few weeks ago. And I mean, the rest is coming. Thank you very much to everybody.

[Operator]

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