BFF Bank SpA
MIL:BFF
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Good afternoon, and welcome to BFF Banking Group First Quarter 2023 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would like to turn the conference over to Massimiliano Belingheri, Group CEO; and Piergiorgio Bicci, CFO. Please go ahead.
Thank you. Welcome, everybody, for joining us for the first quarter results presentation. We are happy to report a strong first quarter in terms of adjusted net profits as our highest quarter on record. And that's an important result given that the dynamics of our balance sheet means that in rising interest rate environment, our liability rise faster than our assets.
The net interest income is being driven by factory and lending, which has shown a 22% growth year-over-year, driven in particular by the increase of the LPI statutory 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 rates 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 at 75%. And we had a net positive inflow of retail deposits in Q1 2023, EUR 200 million more than the year-end and importantly, over EUR 1 billion more than where we were a year before.
Overall, we have 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 Head to Collect bond portfolio, which is down by EUR 1.6 billion. Capital, as I mentioned, remains plentiful. We have a core equity Tier 1 ratio of 17%, total capital ratio, which is relevant for our dividend payout at 32.6%, sorry. So it means over EUR 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 EUR 0.28 per share accrued for our interim dividend, which will be paid as last year in August of this year.Â
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. -- in most likely in London. Another important news is that Italy has communicated actually yesterday, they applied for the extension of the split payment, which is a measure where the public administration in Italy paid their invoice net of VAT. In case of approval, there's no change in our 2023 guidance. And we will see if they will approve it and also for what terms that we will be approved for. On the following page, on Page 3, you can see the highlights of our P&L, where we showed the increase of 10% in our net interest income.
As I said, that'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 LPI increase gets fell through the P&L, we are actually it would increase year-over-year. We've also seen a reduction in fee and commission that was driven by the exit of [ Arkan Anima ]. The 2 clients we lost last year, which have you seen not a dramatic impact on the overall P&L of the business. We have in other expenses, the gain from the sale of part of our bond portfolio, which have booked earlier in this quarter.
And overall, we've shown a good discipline on cost with 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 of 35%, which is probably among the best in the banking area in Europe. The P&L numbers are good, as you've seen with EUR 52.7 million of net adjusted net income. The balance sheet has also been reshaped. We have continued decline in the helpline bond portfolio, particularly with the reduction of the fixed rate bond. We have reduced our deposits at the ECB. We've increased our retail deposit on we collect from retail investors significantly, particularly compared to last year with EUR 1.2 billion of increase on that line. And our overall balance sheet has shrunk from 13.3% at the year-end to 0.6% at the quarter and improving significantly. Our leverage ratio of 5.2% versus 4.6% on the end of 4.7% of last year.
On Page 5, you can see the breakdown by business units, but Giorgio will talk about them in a second. I want to highlight on Page 6. The -- what are the drivers to be considered in the outlook for our net interest income. And 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 our self-everybody, what are the dynamics that we will see in the map ahead, which are positive for our business. In synthesis, we have already been hit by the increase in interest rates and the repricing of a liabilities.
We don't have the issue that other banks have of having to refinance the long-term funding from the ECB, the TLTRO, and the like and our competitors. So our net interest income is key market net interest income. While on the interest income side, we have the refixing of almost all of the held-to-collect floater bonds that happened in April 2023. 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 and the further fixing of the IP rate, which I've mentioned before. And clearly, we have the seasonality of the net LPI of recovery, which has to be concentrated in Q4.
So overall, a lot of positive trends that should support an increase in interest rate income, net interest income for the quarter ahead. Having said that, to set the scene, I leave the floor to Giorgio to walk you through the details of our business performance.
Thank you, Mass. Now we are at Page 7, and we start on the factoring and lending business, and we have the best forever. And we confirmed a good performance as in terms of volumes that started last year. Our loan book is at EUR 5 billion is up 30% year-on-year. And the difference between the last quarter is even only by the seasonality. There was a good performance in terms of volume. We have to consider that we are carving out a strong repricing campaign, but despite that, our volumes grew by 20% year-over-year.
We have observed the double-digit growth in Portugal in Greece France and in Poland and in Italy, a single-digit growth in Spain, the loans receivable are down considered a significant injection of capital by the government. Going to the next page, Page 8, we can see the P&L of the factoring lending increased by 37% year-over-year. And we have the start of the positive impact driven by the increase of the first of all, the RPI rates, the ongoing of the pricing campaign and also the strong compared to the one of the last year, considering the seasonality PI over recovery that we have observed in the first quarter.
In the other operating income and expenses, we are at compared to the last year. And this result has been driven primarily to the recovery cost, the so-called POS. And so the expectation is to continue to go on the side. And we are we maintain a substantial also of balance -- 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 this significant funds that we are going to recover going forward.Â
And finally, the profit before tax is at EUR 39.2 million, an increase, as I 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, so 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 is a good point going forward for the rest of the year.
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. Consequently, the direct costs MD&A are down by 19% year-over-year and due to lower direct cost and also personnel expenses. It's important to realize that the redundancy one-off costs of full covered by the DEPObank budget integration budget, and we don't foresee any additional integration costs for the future. The prober tax decrease and also the first quarter 2023 deposit end of period are down following the exit RAC and also the market trend because with higher rates, the funds are going to invest to and the deposit less liquidity.Â
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 at Page 11, the result of being driven by the sale of a portion of our Head to Collect floater bond portfolio.
We anticipated some revenues that we were expected during the year. And the -- also the other income expenses grew, thanks to these positive efforts in terms of capital gain and the net interest income is nowhere compared to the first quarter year-on-year, but is stable compared to the last quarter of the year. And as I said before, we don't expect any other integration costs coming after the merger with DEPObank. Going to Page 12. We can observe a 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 the ECB funding, and this is an important point going forward and looking at the end of the year. Our LCR and SFR are strong. And thanks to the reduction of dimension of the balance sheet, our leverage ratio improved and at the end of the quarter is higher than the 5% -- we reduced our portfolio. Now we are at EUR 5.6 billion compared to the EUR 6.1 million that we have at the end of the last year. But one important thing is the strong reduction in terms of our fixed loan portfolio compared to the total tolerance.
For the asset quality has been confirmed the good asset quality and the negligible cost of risk. We -- our NPE are 92% related as seen in the table to the public sector. So is all related to the public sector. And if we take into consideration that the 70% is related to the multi parties in partnership. We know that is a question of time.
We have to wait the end of this procedure and then we can come back to collect our to collect more. 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 on Page 14, we have the capital ratio. We confirm our excess capital versus the target of the 15%. The excess capital is higher than EUR 200 million. And we have already accrued after these results as a EUR 0.28 per share that we are going to pay in the -- after the midyear results. And so it's also an important point to be highlighted, that is the confirmation of our stability, strong capitalization and the performance of the business that we had in the beginning of the 2022. So I leave again the floor to Massa to go in the rest of the presentation. Thank you.
Thank you, Giorgio. We'll leave now the floor for QA. The upcoming events, we see I think many of you face-to-face in course of the next event to our road show. And now it's time for your questions. Thank you.
[Operator Instructions] The first question is from Andrea Lisi with Equita.
Some question on my side. The first one, is if you can explain us when it comes to the decision to sell the [ govisas ]. And it was not so clear to me if you sold floaters or fixed [ govisa ] because in Slide 11, there was written floater Slide 12, a strong reduction in fixed bonds. So if you can just explain this. And if you can provide us an update on your long-term or midterm strategy on the [indiscernible] portfolio.
The second question is on your deposit base, in particular, making a comparison versus the last quarter. I saw that deposits from transaction services were down by EUR 700 million, I think the effect of was already there in the fourth quarter. So 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?
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 through the repos. The retail deposit market is marginally more attractive that it used to be. Remember the fixed rate deposits that we have to turn deposits, and so we can actually lock in a rising interest rate lower rates than the forward curve, whereas our deposit from transaction services actually price use monthly day. There's always a bit of movement on the deposit from transaction services quarter-on-quarter depending on the decision, particularly on the security services side, for fund managers to invest or divest.
So this shouldn't be any reason to have a patio concern. We haven't lost customers. We have actually continued to add 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 decisions people are taking. In terms of the decision to sell the strategy around [indiscernible], we sold the floaters, which was due to expire to member 18 months. So we are busy front-loaded most of the earnings were actually coming this year.
So it's more a timing issue, particularly this year. and that was to reduce our balance sheet, we bought other floaters, and at the same time, were fixed rate deposits -- fee rate bonds that actually expired. So that's why the message might be a bit confusing. We had a reduction of fixed rate deposits simply because they were at the end of their term. And then we sold part of floaters, and we bought other floaters with what we saw to keep still a reduction of the overall bond portfolio.Â
So overall, exiting at 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 share overall profitability going forward. We have EUR 300 million roughly of fixed bond 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 we price every 6 months. So is the interest rate environment is playing catch up and there is a stable or kind interest rate environment effect is different or liabilities can reduce or are stable in our asset yield goes up.
Next question is from Simonetta Chiriotti with Mediobanca.
Two questions from my side. The first is on the pricing process of maturity commission. If you could give us an update of how the process is proceeding, how much of your -- of your book has been already repriced. The second question on Security Services. Or 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 last -- at the end of 2022 of EUR 180 million -- EUR 190 million. And considering 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 were expecting in the coming quarters or if it is something that adds to the guidance?
Thank you, Simonetta. Look, under the pressing process we're well advanced. You actually see -- we don't see that yet because a lot of it comes at the end of the quarter. So we'll be seen clearly in the next quarters with the new purchases. We have some customers who we can't reprice. But we have, I would say, with this week concluded most of the repricing we had planned.
And so we are well advanced on that. The -- I think the other banks will be slower but at the beginning of the year, repricing. So we had to appear more aggressive than others in the market. We think actually people have realigned themselves, which is good for us. And we also have, in fact, lending over a situation where the first half of the year tends to be a bit slower in getting new customers onboard. So less people have what we plan to do factoring and 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 as the working capital with one-off transactions at year-end. So that's the usual cycle.
But we are a quite good on the opportunities we have in front of us. A number of large contracts that 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're placed to actually continue to deliver strong growth in factory and lending. We're quite pleased on factoring, we haven't added as much the performance actually the collection team, which has delivered includes in terms of correction, we will see that going forward as well.Â
On Security Services, it's a quarter which doesn't give full credit to the strength of the business. And Giorgio mentioned, we see onboarding time we have won tenders in which to see the assets coming through. So we know that it is a good baton the net revenues. And on the cost side, we have concluded the restructuring process for the exit of the employees that were servicing Arca, but people have not let yet.
A number of them are set towards the middle of the first quarter. Some will exit at the end of May, and some will exit at the end of July. So we still have -- we have taken already provisioned this quarter in terms of one-off costs, but there are salaries are still in the P&L and the 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 until the next quarters will be much better in terms of overall cost. It's a business where, as we mentioned before, we see actually have an opportunity to grow, particularly with the opening up of the capelin market where we think we're actually place to capture volumes there and that will positive impact on liquidity and also on our growth from 2020 in '24.
In terms of guidance, as I hinted before, the sale of the bond is mostly tie the earnings that those bonds were going to give us this year. So there's been anticipation there of earnings for the next quarter. So we confirm the guidance of EUR 180 million to EUR 190 million, and we'll give volume update at the end of June, depending on where we are also in the commercial development.
The next question is from Luigi Tramontana with Banca Akros.
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 I would like to 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 other elements.
Good to have you back. On M&A, well, we -- difficult to comment 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 are said now for us M&A see to have it is something we look at, but we're disciplined, and it is very easy to do a good deal on an excess spreadsheet, 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 are not right. We are -- we ended up not liking the asset for a good reason, some of some of assets 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 if you find the right person, if you end up really liking in.
[Operator Instructions]Â The next question is a follow-up from Andrea Lisi from Equita.
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 [indiscernible] portfolio just as an indication, but also considering the fact that the pricing and the fixing of the rate, is it reasonable still to expect growth in terms of NII there or maybe some stabilization just to have an indication of the tradesmen.
No, it's a fair question. And we've tried to explain it in the first bullet point, but maybe not such a clear way. What happens on the floaters, I think about how we file in nutshell. If you imagine our protest portfolio being funded by repos or by deposits from transaction services, both are either overnight or 1 month floating rate. While the asset side to the floaters are at 6 months floaters with 2 years -- twice a year reset, which means that actually in the first quarter of the year, we have 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 DCB. So we actually had a contraction of the year.
Now in April, there is an effect of the yield. So there's a step-up in the yield of the floaters portfolio, which remain fixed for the next 6 months. And then even if you're in an increasing interest rate environment, it takes a while before actually the cost of the liabilities 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 where the market does not expect the cost of a bit 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 in -- 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.
The next question is from Filippo Prini with Kepler.
Three questions, if I may. The question one regarding 2024 -- are you confident that the increase of materials commission you are negotiating be enough to grow again NII even if interest rates be lower by looking for instance to what the [indiscernible] is selling today? Second is on your Capital Market Day next June. Will you give targets into 2025 on metric volumes, loans and net profit like you did in 2021 for the 2023 target? And finally, your Annual General Meeting, also an authorization of a buyback up to 5% in 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 buyback to remunerate even shareholders or dividend will be the only way for remuneration of the shareholders.
Thank you. Let me answer. On the buyback, as we said, at a number of times, it's not a very flexible instrument, it comes a 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 requirements. So we think at the moment that the best approach.
The -- we will buy back some shares to fund the dilution of the stock options, but also with the new incentive plan that we've approved 2 years ago, there will be a bit less negate, which also means there's less dilution for shareholders. So that's not sewer -- it really depends on the market condition and the timing of the approval with regulator.
On the Capital Market Day, yes, what we'll do is a refresh of our strategy. The 2021 Capital Markets Day was very much focused on the integration of Depo. What we want to focus now even the dramatically changed, I would say, dramatically positive change in the interest rate environment for our factory lending business, the opportunities we see in the other 2 businesses have to present once again the business to the market to show the earnings potential, which we think actually a bit misunderstood by the market. In a rising interest rate environment, in fact, and that goes to your first question, we also playing a big catch-up on interest rates until they stabilize.
Remember, we have only a portion of what we collect in terms of LPI that goes through the P&L. So with the rising LPI 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 time of the business. And once the rates stabilize, actually, our earnings capacity goes up significantly because then we don't have the delay in the reset for instance, of the bonds, and we have the full effect of the NPL rate resets.
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 0. And then if you look at the forward curve in 2024, and then you see that actually the volumes have increased, as 2024, we have repriced our customers. We are going to have growth in volumes. And importantly, the LPI rate has moved from 8% to almost 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 the increasing rates by 50% of the difference between 12% and 8% NPI.
So having it quite a strong growth in NIM and on a business which is mostly fixed cost business that has quite a significant impact on our P&L. So we're actually quite bullish on the results that we should expect in 2024, all things equal because of the way the business performs. And let's not forget 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 on the recovery of so-called EUR 40 -- so in a sense, it's now a great environment for us. Maybe it doesn't show entirely in our P&L because we are deferring so much. But we should see are strong accumulation of earnings, but also the further earnings given the mechanics of our business.
The next question is a follow-up from Simonetta Chiriotti with Mediobanca.
Just a couple of questions. I'm looking at Slide 8 on factoring and lending KPIs. And we report a growth in the gross yield from -- well, from 4.9% in first quarter '22 to 6.7% in the first quarter this year. How much of this growth refers to the LPI, the pricing and how much to facility commission roughly speaking. And then another question on LPI for recovery. That is improving. It already improved material in the last quarter and also in the current quarter, in the first 2023. So if it-- rather the structure of the past one that is in charge of this overrecovery at least things changed the structurally. So can we expect this positive trend to continue going forward?
On the over recovery, I think we are seeing the effect of having made some changes in the way the department has managed was done for the adjustment in the first call of this year, by [ reaching ] some managerial responsibilities and also by giving a different leadership to the recovery process so that actually they can be also more effective. We also expect that the impact of the sentences around EUR 40 will be felt much more in our collection process that is creating.
So today there's the news of a 1/3 on Court of Justice sentence that again clarifies not only the EUR 40 are due, but also that no national law can prevent the collection of the EUR 40 or the reduction of them to be calculated in a different way, very explicitly, which is strong on support or legal clients in court. On the -- on splitting the impact on gross and average loan is complicated because what you have is the effect of the LPR recovery. You have the fact that portion of the loan book has not seen an increase in yield because you have the Polish portfolio, which actually has a flat rate.
And so the business has not grown. We have the repricing. We have clearly the step up in the LPI rate. The LPI rate covers roughly EUR 2 billion out of memory of the EUR 5 million. And so that has an impact on yield, but not on the entire portfolio. So you can see already in December as part of the effect of the repricing, which though is on the new volume been high, going higher level, but a lower base in the fourth quarter. So we still have the full effect of that to be seen.
[Operator Instructions]Â
This concludes our question-and-answer session. I would like to turn the conference back over to Massimiliano Belingheri and Piergiorgio, the CFO, for any closing remarks.
Thank you. Thank you for attending the call today. As always, excited for us also to answer your question. I think probably the main takeaway I will leave easy to look forward to but we easiest way to model the business in the way I try to answer Filippo's question. We see a huge opportunity to continue to deliver on the strong part of earnings and volume growth in many businesses we've seen in the last 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.
Your conference has now concluded. Thank you for attending today's presentation. You may now disconnect.