BFF Bank SpA

MIL:BFF

Earnings Call Transcript 2019-Q1

[Massimiliano Belingheri, executive]

Thank you, everybody, for joining us today for the first quarter 2009 (sic) [ 2019 ] results report.

We report a strong growth in net income and profitability with adjusted net income growing at 10% year-on-year and a 36% adjusted return on tangible equity. This has been done despite a lower collection level of LPI, which has generated in turn a higher balance sheet LPI and reserve of EUR 378 million. Interest income also has grown at 5% year-on-year. And operating costs continued to improve with operating costs over loans declining to 1.87%.

Growth in loans year-on-year has been strong up 20%, and the international portfolio is at 34% before we consider the impact of the acquisition of IOS Finance in Spain. Funding base remained solid, and we ran a good liquidity position.

Capital ratios are strong with total capital at 15.6% and Core Equity Tier at 11.1%. That excludes the EUR 21.4 million of reported net income for the period, which would clearly increase otherwise the ratio and include the mark-to-market effect on the bond portfolio.

NPLs remained low at 1.5%, and as you will see later, much lower if we exclude the municipalities in default. And the cost of risk is at 0.

The new initiatives. We have changed the organizational structure of the group on the 1st of April to drive forward the growth of the business. As mentioned before, we have actually announced the acquisition of IOS Finance and signed a deal with all shareholders on April 10. We expect the closing of the transaction to happen in the third quarter of this year.

Let me look to Page 4 to go through the net income result, which, at EUR 22 million, shows almost a 10% growth compared to last year. The collection of LPI has been lower at EUR 6 million versus EUR 15 million of Q1 2018 due to different seasonality and that has created more back book value in our LPI result.

If we look at the revenue side on Page 5 on the net interest income and net banking income, both have grown at mid-single-digit at plus 5% and plus 4%. And again, that's after lower net over-recovery compared to 2018 given the lower amount of LPI collected, that's EUR 3.5 million. And so the growth, if you want to adjust for that, would be again in the double digit.

Interest income has grown as well, Page 6, up 5%. Again, if you take into account the lower net over-recovery, the growth would have been again in the double digit. And as mentioned on Page 6 at the bottom, you can see the stock of LPI, which now approaches EUR 600 million, of which EUR 378 million is not yet going through -- has not yet gone through the P&L area.

On Page 7, you see the usual chart that we show to indicate the importance of the deferral of income for our business. In the first quarter, at the bottom, we had EUR 1 million of negative net over-recovery, which means that the rescheduling, which is an ongoing effect, has been higher than the over-recovery of LPI. That's something we have seen in previous quarters, particularly the first half -- in the first quarter of the year, as you've seen in 2015 and '16. And we expect that the fact with the higher cash-in of LPI in the next quarter to be reabsorbed.

Page 8, funding costs continues to improve. We are now in the first quarter of this year at 1.57% cost of funding versus 1.95% in the first quarter of last year. Importantly, as you can see in the graph at the bottom, we continue to reduce our cost of funding quarter-on-quarter. And that's despite the stronger component of zloty funding versus our overall cost of funding, as you can see in the graph at the top where the yellow and the red components, which are zloty-denominated are a larger proportion of our overall funding costs.

We continue to maintain good access to the wholesale funding market. We don't have any funding cost linked to government bond yield. We have no ECB financing. And we still have the opportunity to continue to improve our funding cost with the opening of the Polish branch where we're still waiting for the final regulatory approval.

Page 9, we continue to invest in the business. Employees have reached 462, as you can see at the bottom of the page. And despite that, we have maintained a mid-30s cost-to-income ratio with an adjusted cost-to-loans of 1.87%. That's a 20 bps reduction compared to last year and it's seen again of the scalability of our business model. We've invested, as you know, quite a lot compared to last year in the business to grow our international expansion -- international business, but also to make our processes more efficient in Italy through the outsourcing of some activity to our Polish subsidiary in [ Walcz ].

Customer loans on Page 10 have grown 20% year-on-year throughout the group, Italy has grown at 16% and international business at a slightly faster pace so it now makes up more than 1/3 of our overall portfolio. In this, we've actually continued to reduce our exposure to the runoff SME factoring business in Poland, which now represents only EUR 2.6 million net customer loans.

On Page 11, volume has been flat year-on-year in -- across the various geographies. That has been driven by mostly seasonality and a number of deals that have moved to the next quarter. We expect growth to resume going forward.

As mentioned, Page 12, we've announced at the beginning of April a new organization to be able to continue to deliver on the growth and profitability that the business has been able to deliver, to continue to increase our presence also in new geographical markets, to execute the integration of the acquisition of IOS Finance in Spain and to successfully open the branch in Poland. Having a leaner and more integrated organization allows us to have a more agile approach to capture the growth opportunities that we see ahead.

So what have we done? First of all, we have reorganized the sales activity in Italy, we have a new Head of Sales in February and we have reorganized the commercial effort into 3 different areas that was a more effective approach to the market.

We've consolidated all the international business into the international department that gives us a stronger grip on the cross-border opportunities, and we have actually created a new Cross Border Sales unit to drive our services and our sales towards the multinational companies that comprise a large portion of our business.

We have continued to in-source activities in our credit management business -- our credit management activities from outsources in Italy to our data processing department in Poland, which will become the center of excellence for all the group back-office activities in due course. Clearly, it has cost advantage and the ability to have more efficiencies in those processes. The fact that we have moved those activities has made the processes more efficient, has also freed up resources so that our front-office collection team in Italy will increase by about 50% throughout this year without having to add any additional headcount.

Finally, we have created the position of CFO at the group level reporting for me, which will be overseeing pricing increase evaluation, finance, treasury and planning and administration.

I will leave to Carlo to continue the presentation. Thank you.

[Carlo Zanni, executive]

Okay. Thank you very much. On Page 13, we can highlight the available funding in the first quarter for around EUR 1.3 billion and then excess liquidity with an undrawn funding at EUR 0.3 billion. And the committed wholesale funding increased at a competitive rate despite the market instability.

If you look at the bottom of the page in the graph, we can see also that we have a very diversified and flexible funding base able also to support further growth, of which deposits account for 29% of the growth funding are equal to EUR 80 million -- EUR 70 million (sic) [ EUR 870 million ] at the end of the first quarter.

We have a very strong liquidity position, which you can see at the top of the page, we have the LCR at the end of March of 202%. And then we haven't funding cost linked to Italian government funding cost or rating. And we -- at the end of December, we established the EMTN program to properly benefit of potential funding opportunity in the market.

At Page 14, we can see also the structure of our balance sheet. We have a conservative assets and liability management approach, positively generated higher interest rates most in -- and particularly most of Polska assets are at variable rate and the nonrecourse factoring with the LPI is at the variable rate.

We have a flat government portfolio amount at the end of the first quarter at EUR 1.1 billion, 23% of the total assets, down from 27% at the end of the first quarter 2018, including also the negative mark-to-market HTC&S for around EUR 3.5 million at the end of the first quarter.

Going to Page 15. We can see that the level of NPL in the first quarter is EUR 51 million with an NPL ratio for 1.5%, but 87% of the NPL for EUR 44 million, as you can see in the graph the right of the page, are related to Italian municipalities in conservatorships, of which EUR 8 million already in conservatorship at the time of the purchase. And excluding the Italian municipalities, the amount of NPL are flat versus the [ last year ] 2018. And the ratio decreased at a very low level of 0.2%, as you can see and -- at the top of the page.

The total net impaired assets in the first quarter are EUR 112 million, of which EUR 50 million are represented by past due of which 77% toward Public Administration and public sector.

If you can see the bottom left of the page, the cost of risk is equal to 0 in the first quarter 2019, in line with the first quarter 2018, excluding the manufacturing business that we have runoff with the residual credit for EUR 2.6 million that here represents the net exposure at the end of the first quarter for the SME factoring coverage at 59%.

Regarding the capital position at Page 16, we can see that we maintain a very strong capital position with 15.6% of total capital ratio and 11.1% of Core Equity Tier 1, higher than our target. This is otherwise to assure with the structure of capital a further possibility to grow. And this ratio doesn't include the EUR 21 million of net income. And we highlight that both ratio, Core Equity Tier 1 and the total capital ratio, are net of HTC&S mark-to-market impact that represent around 16 basis points on both ratios.

Okay. We have available and further [opportunity] of capital. If you look at the level of our capital for 15.7% (sic) [ 15.6% ] is higher than our direct requirements and our target. We maintain a very conservative RWA calculation based on standard model and with the Italian exposure to NHS and other PA risk-weighted up to 100%. We can highlight also that one notch of Italian rating upgrade would move the risk-weighted to 50% with 3.4% positive impact on the total capital ratio and 2.4 impact on the Core Equity Tier 1.

And another important consideration is the RWA density that in the first quarter 2019 is at 64%, that at December 2018 at 69% and at the end of the first quarter 2018 was higher than 54% that we have at the end of 2000 -- the first quarter 2019.

[Massimiliano Belingheri, executive]

Thank you, Carlo. On Page 19, I have the update on the acquisition of IOS. On the 10th of April, we have signed the sale and purchase agreement for the acquisition of 100% of the share capital of the company. There was a Right of First Refusal, which has been exercised and therefore has been waived. And all the agreements have been signed to execute the transaction. We expect -- we already filed the acquisition with regulators, both Bank of Spain and Bank of Italy. Therefore, we expect the closing to take place within the third quarter 2019. We plan to announce that EFC license for IOS, in any case, to merge the 2 companies between the -- before the year-end.

With this, I conclude the presentation of our first quarter results and leave you the floor for any questions.

[Operator]

[Operator Instructions] The first question is from Simonetta Chiriotti, Mediobanca.

[Simonetta Chiriotti, analyst]

I have got a couple of questions on volumes. So if you could elaborate a bit more on the reasons behind this reduction in volumes in some markets and flat volumes in Italy? I mean, we have -- we come from a couple of years of strong volume growth. So I was wondering if this -- the drag that has been recorded in the first quarter is linked to the reorganization of the distribution order in your group. Or also the availability of capital has played any role in this trend?

And the second question in regards this new business figure with respect to loans. Loans, on the contrary, are growing 20%. So if this implies a higher DSO, so lower new business in presence of higher loans is -- points to the fact that the DSO are longer.

[Massimiliano Belingheri, executive]

Sure. Let me take the first question on the volume. If you look at our volume, I think there has been a number of factors, but no overarching reason. I give you some examples. For instance, in Portugal last year, we had a large one-off contract -- sorry, we think that it will be a contract with also one-off purchase of receivable from a large customer and that has moved clearly volume from one quarter -- made the difference in the first quarter much stronger. In Slovakia, we have still the effects of the injection of cash into the system and we expect growth to resume. And in Poland, we've seen some of the deals have been moved later on.

So we don't see any reason where we see less appetite in the market where we operate for our activities, been simply sometimes these factors, sometimes also poor execution and that's why we have rejigged the organization. And so turning to the fact that we have had 6 months from August of last year to February this year without a commercial director in Italy might have impacted the execution on that front. So we are not particularly pleased, but we don't see anything dramatic there.

On the growth of loans where clearly growth of loans compared to last year is the effect also what has happened between first quarter to today, the intervening quarter. I think what is important maybe to see if you look at the last page of the presentation, Page 31, you know that we always have a down quarter in the first quarter. This year has been less down than last year. So the total of spending of EUR 3.461 billion in the last column. At year-end, we were EUR 3.583 billion. So we are 96% -- 97% of the year-end figure. Last year, we were 95%. Is that a better indication of longer payment time? We don't think necessarily so. Yes, there had been some picking up in some geographies over a few days, notably Spain, but we don't see anything dramatic yet in the overall market. It can well be just a mix effect of what are the payment time of the debt as we purchase it.

I don't -- I didn't quite understand your reference to capital. I mean, we were not managing the business with a view of not consuming capital to grow as you want to grow.

[Operator]

[Operator Instructions] There is no question at the moment.

This concludes our question-and-answer session. I would like to turn the conference back over to Massimiliano Belingheri for any closing remarks.

[Massimiliano Belingheri, executive]

Thank you, everybody, for joining us today. Seems the lack of question is because the presentation was well done and well received. Jokes aside, I wish you a good week. Thank you. Bye.

[Carlo Zanni, executive]

Thank you.