Banca IFIS SpA
MIL:IF
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Banca IFIS SpA
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Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Banca IFIS First Quarter 2019 Results Conference Call. [Operator Instructions] At this time, I will like to turn the conference over to Mr. Luciano Colombini, CEO of Banca IFIS. Please go ahead, sir.
Okay. Good afternoon, everybody. I'm Luciano Colombini. I'm here with Martino Da Rio, the Head of Investor Relations; and Cristina Taormina, the CFO of the bank.
Welcome to our call on first quarter 2019 results. Today, the Board of Directors under the Chairman of Mr. Sebastien Fürstenberg approved the first quarter results. First of all, I want to take the opportunity to introduce myself as new CEO of Banca IFIS. In coming months, we will organize roadshows in Italy, London and New York, and I will be very happy to meet you in person. I'm obviously enthusiastic of joining this dynamic and profitable bank, and I will put all my efforts to grow our business, while maintaining our innovative and unique model.
The growth strategy is confirmed alongside the main business lines. The first, growing in NPL, which is a core business for us, and we will continue to invest in it. We are the #4 Italian NPL business by [ deposing ] in terms of purchasing and servicing capabilities. We're currently participating in all of the ongoing disposal process of unsecured tickets, after which have a binding [ files ] in second quarter.
We are streamlining the recovery strategy, leveraging also on capital scene which offers wage against 1/5 of the salary and FBS with strong know-how in secured and unsecured corporate NPL. The NPL market is changing, driven by consolidation, new regulation, amounts, types, vintage of the NPL to be sold. There will be greater focus on NPL recovery capabilities that will represent the key competitive advantage going forward.
In terms of recovery, we have a sound investor machine. There are several ongoing strategic initiatives, which we expect will bring some benefit when they come to fruition. We are specialized in unsecured tickets. And with FBS, we have broadened our expertise to unsecured and secured corporate NPL.
Second point. Broaden lending and services to SMEs, leveraging the unique and diversified business model of the bank. We will be selective in lending with a prudent approach towards asset quality and taking into account client and business diversification to reduce concentration risk. We will broaden our product offer to SMEs, rental in leasing, value-added credit servicing in factoring, corporate finance.
Point 3. We will be more focused on capital management and on cost saving. In first quarter, the CET1, including EUR 41 million goodwill of FBS, came in at 10.29%. The CET1 performance for the first quarter net income was 10.37%. Important to say that there is a sound buffer versus our SREP level of 8.12%.
In the future, there will be more focus on cost control after the growth and acquisition from 2015 to 2018. We will continue to -- strong investment in IT digitalization and in our NPL recovery process.
In terms of our first quarter results, we reported net income of EUR 30 million, in line -- exactly in line with our expectations. It is worth noting that in first quarter some variable items came in lower than previous quarters.
The contribution from PPA came in at EUR 17 million versus EUR 31 million in fourth quarter '18 and EUR 22 million in first quarter '18. First quarter '19 and fourth quarter '18 results include the negative effects of NPLs model update maybe in the first quarter '18 to consider longer time frame for issuance of court injunction. In Italian we say, [Foreign Language]
This effort was negative for EUR 9 million in first quarter of this year. The appendix, in order to provide greater transparency, you may find more information about the accounting of NPL business.
First quarter result include less EUR 4.7 million fair value adjustment for an equity instrument stemming from debt restructuring. Operating cost came in at EUR 74 million, including the consolidation of FBS.
As I mentioned before, there would be a greater focus in this component without impacting the investments to back our growth. We have [ zillion ] funding with about EUR 5 billion retail deposits, which represent over 60% of our funding base. In first quarter, we attracted about EUR 0.35 billion new deposit, driven by the new campaign of Rendimax term deposits, mainly focused on 2 years and 5 years maturity. We plan to renovate our Rendimax product in order to make it more attractive to depositors.
In conclusion, I would like to highlight that I have found a profitable bank with sound fundamentals, well-capitalized, active in a very attractive business segment. We will continue to focus our business on growth and innovation. The majority shareholder has communicated that will support the strategy in the growth of the bank.
Now I will leave the word to Martino to describe the details of our results.
Hello. Good morning to everybody. So let's focus on Page 4 of our Q1 presentation. I, of course, make reference to the presentation that you should have received or you can find on our website.
In terms of net banking income, they came in at EUR 130 million, and the distribution is somehow consistent with the previous quarters: 48% from nonperforming business, 30% from trade receivable, 10% from leasing and another 10% from corporate and others, and this item includes the PPA.
The operating cost came in at EUR 74 million, and is including the consolidation of FBS. The cost of risk came in at EUR 13 million. And you remind that in 2018, we experienced several one-offs on the construction sector. Of course, this cost of risk of EUR 13 million, the evolution of this cost of risk will depend also on the macroeconomic environment. If the macroeconomic remains at this level, of course, we can somehow remain about this level. If market deteriorates further or there is a significant company having issues, can increase. That -- it's too early to make an assessment. In terms of customer loans, they came in at EUR 7.3 billion. And trade receivables were flat simply because leasing was flat as well because of the strong seasonality in Q4. Regarding the nonperforming loans, they were somehow flat because there were not several transaction of nonperforming in this quarter, but there are some ongoing transactions, which we're actively participating. As the CEO was saying before, we focus on unsecured tickets because we believe that we have a very strong competitive advantage in this sector and that's what we look at.
Regarding the nonperforming business, the ERC came in at EUR 2.4 billion, and the funding benefit from the Rendimax campaign, we increased our customer deposits by about EUR 350 million and about more than EUR 300 million came out from the Rendimax campaign. And in terms of CET1, 10.29%.
I would like to focus on just 2 items. The first is some items that, as the CEO was describing, they came in, let's say, lower in this quarter compared to the previous quarter. So you can see that the fair value adjust -- I'm looking at Page 5, where we summarized this item in a table. And you see that the contribution of FBS, this contribution of EUR 8.2 million includes some, let's say, some extraordinary items linked to the business of a few millions.
The fair value adjustment that you see, it's EUR 4.7 million, is just linked to one single position in the write-off of the equity instrument stemming from debt restructuring. In Italian, we call [Foreign Language]. And it can be considered nonrecurring item. The model update that you can see 6 -- minus EUR 6 million in Q4 2018, minus EUR 9 million in first quarter 2019, we update our model on an yearly basis. And of course, we check it on a monthly basis. And this -- so the item is somehow recurrent, but the amount will vary quite a lot depending on the time frame of the courts, okay, on the execution of the time frame on the courts.
Let's focus -- let's move to Page 8, which is regarding -- regard to our -- the capital. And the CET1 came in at 10.29%, which is somehow stable quarter-on-quarter, despite the full consolidation of FBS, which had a negative impact of around 46 bps, EUR 41 million. And this is also to a combination of the realization of DTAs and lower risk-weighted assets, which increased the CET1 by 19 bps, and also due to the change in the capital conservation buffer, which reduced the excess capital and bring -- brought the capital in at -- the capital -- the CET1 up by 26 bps, basis points.
Of course, this 10.29% does not include the equity of the first quarter. We had some -- we have some items which will increase the CET1 going forward, which are, for sure, the first is retained earnings. We are a profitable bank, we expect to remain profitable in the future. There is a -- the progressive winding down of the PPA, former Interbanca, which still amounts to EUR 213 million pretax at 31 March, 2019. We have the progressive use of the DTA, the EUR 135 million of DTA still, and we expect to use them. Of course, the use of this DTA will depend on the profit, but you can assume that about 30% -- of course, the tax rate is 30%, and we'll use accordingly. So the 30% of the profit will reduce the DTA and the deduction from the CET1. And then we have the ordinary wind-down of the Interbanca business and of other items.
Then, let's move to Page 11 where you can see trade receivables. We have the turnover up 19% year-on-year, but 10% down quarter-on-quarter. And this is because the fourth quarter was significantly impacted by seasonality. The net banking income divided average customer loans came in at 4.8%. So there is a decrease in this ratio, and this is mainly due to the lower contribution from pharma and a few large clients, mainly due to seasonality. Then what I would like to stress is that our business is somehow, there are several items which can come up slightly higher or slightly lower quarter-on-quarter, so somehow it's -- and this is impacted either by the seasonality or by, for example, the nonperforming updates on financial model, but that's why this decrease.
On the leasing, the new leasing came down minus 4% year-on-year, minus 19% quarter-on-quarter. And this was, again, was impacted by seasonality. We performed better than the market in automotive leasing. We were down 15% quarter-on-quarter, while the market was down more than 45% -- 46% in the first quarter '19 due to the slowdown in the market. I would like to stress that here we have a very -- we're very disciplined in lending. We try to lend only where we have third-party contracts for remarketing of returned leasing and rentals. So this provides a clear some, let's say, buffer in terms of recovery estimates, okay?
In terms of the nonperforming business, let's move to Page 13. The EFC came -- sorry, we performed limited acquisition. So our gross book value increased mainly due to the acquisition of FBS. There are several process ongoing. We are participating in all this process. Some are coming from the -- let's say, from first and primary market, so the disposal either from consumer finance business or from banking. Others are expecting to occur or occurring in the secondary market as some operator will look for a more specialization-specific sector and will try to sell part of their portfolio. Of course, we acquire the portfolios in which we have historical evidence and capabilities. The key driver for the profit in this segment is mainly ability of recovery.
And let's move to Page 14. The ERC came up at EUR 2.4 billion. I also -- we've also provided the breakdown of ERC. You see that it's coming from the -- mainly from extraordinary judicial positions and also from the judicial part for all discount for about EUR 1.4 billion out of EUR 2.4 billion. The ERC in terms of timing, time frame, the ERC is mainly focused in the first 5 years where we expect about EUR 1.4 billion cash in the next 5 years. So this can count on average for about EUR 0.3 billion expected cash per year, per annum.
I would like also to stress that our ERC is based on experience, recovery, modeling. From -- since 2014, we have cash-in either through recovery or through disposal about EUR 0.75 billion, about EUR 750 million, okay?
In Page 15, we show the gross -- the evolution of the gross book value. As we see in terms of judicial recovery, the voluntary plans grew up steadily each quarter, and they are up 5% versus the previous quarter. In terms of judicial recoveries, you see the increase in the gross book value of the order of assignments. You can see also the increase in the secured and corporate and there is, of course, a big jump due to FBS, but you see that we're growing at about 5% to 6% in terms of gross book value.
And I would like also to point your attention to the freezed amount, which is EUR 1.8 billion. This -- these are ongoing processing. They're not yet in advanced legal process, but they will move, a part of them, we expect to move towards order or secured and corporate and be the base for future cash flows of the coming quarters.
Finally, on Page 15, I would like also to stress that there is a comparison between the model, which is the gray line, and the actual cash recovery. And you see that our actual cash recovery, which is the red line, came out -- came in slightly above our -- always slightly above our expectations.
And on Page 16, as the CEO was -- on Page 16, as the CEO was coming out -- was saying, sorry, the cash recovery is not so distant from the contribution to P&L. In Q1, was about 87%. In Q4 and Q3, 79% and about 100%. It was 60% and 73% in first quarter 2018 and second quarter 2018, simply because we updated our models. But then there is not great difference between the cash recovery and the P&L contribution. We point in the appendix -- I don't want to go in detail in the presentation, but in the appendix, you can find all the details for our accounting, and of course, for any question, we'll be at your disposal afterwards.
In terms of cost, we move to Page 17, okay? You see that the cost came up by about EUR 10 million and EUR 3 million due to the -- about EUR 2.9 million due to consolidation of FBS. Then, there are EUR 3.4 million due to the resolution fund and EUR 2.5 million due to higher legal costs, mainly due to the nonperforming business. Of course, the cost/income ratio came in at 57%. And this is a contribution of slightly higher costs, slightly higher revenues, but, as the CEO was pointing out, there will be a continuous focus on the cost base, and of course, on the revenue base.
Finally, we would like to strike on Page 20 the final messages before opening to Q&A. So we have sound growth perspective. The order of assignments are -- in terms of gross book value are up 5% quarter-on-quarter, the secured and corporate 6% quarter-on-quarter, there's another EUR 1.8 billion not yet processed, but just in the starting of this -- of the legal action. The trade receivables and leasing showing a relatively stable revenue contribution. And there's a strict monitoring of the loan loss provision. You see some stabilization of this category.
As a result, net income, EUR 30 million. Contribution of PPA pretax is EUR 17 million in the first quarter. So pretax – post tax, you should deduct 35%. CET1 13 -- 10.3%. And this is expected to grow in the coming quarters then -- due to net income generation and the reversal of the PPA. Finally, we -- I would like also to stress, when we speak about the nonperforming and the cost, that we expense, and you will see in the details in the appendix, we expense all the legal cost as the court proceeding goes on. So this allows that a large part of the recovery cost connected to the future cash-in are already expenses in our P&L items. So we'll open to the Q&A session. Thank you very much.
[Operator Instructions] The first question is from Andrea Lisi of Equita.
Several questions from my side. First of all, I want to ask you whether do you have any news on the alternative product to the reverse merger with La Scogliera that can release some 300 bps of capital? Then, I want to ask you in light of the first quarter result if you confirm the target you provided at the end of the full year 2018 of net income in the range between EUR 140 million, EUR 160 million? And also if you can provide a guidance in terms of PPA and loan loss provision? And in terms of loss provision, how do you see the quality of your NPL portfolio? Do you think you have some concentration you see in trade receivable that could create some issues in terms of further loan loss provision in the next quarters? And last one on capital and the CET1, you said you expected to see it growing in the next quarters. I want to ask you at which -- which is a level with which you will be comfortable and with which you will be happy.
Okay. Let's go on. The reverse merger with La Scogliera was considered for some potential transaction which eventually were not carried on. The bank has now a CET1 of 10.3% with a sound buffer, as I said before, the 2019 SREP of 8.12%. And I can say that the controlling shareholder has confirmed his full support to the growth of the bank. So about the second question, about the asset quality, and -- I think that there is -- based on my preliminary analysis in these first days, there is no need of any extraordinary write-offs or any cleanup in the asset quality of the bank. Obviously, there is, in this bank, a complex business that grew up very quickly in few years. And so Banca IFIS needs more cost control, streamlining of the organization with the integration of different subsidiaries, which are many at this moment.
About the result of the first quarter. As I said, they are in line with our expectation. Obviously, the ability to deliver our targets at the end of the year will depend on the macroeconomic scenario and on our ability to streamline the NPL recovery process from -- through some strategic actions that we have already planned. The time frame and the results of these new action is the key for the achievement of the guidance. About the CET1, we expect that the CET1 has bottomed in the first quarter and will start growing in the coming quarters. For the numbers, we have to wait for the business plan, and I hope that we will be ready to explain the business plan in 3, 4 months.
The next question is from Manuela Meroni of Banca IMI.
The first question is on the model update that the negative impact on your revenues in fourth quarter 2018 and first quarter '19. It's the second consecutive quarter with a negative impact. So as I understood that this is related to longer time frame for the [Foreign Language], I'm wondering if we can see a trend here and, therefore, if we can expect further negative impact from the model update in the next few quarters? And again, on this issue, it's unclear to me what is the time frame of the update? Every year? Every quarter? So if you can clarify, please.
The second question is on the NPL acquisition. Broadly nil acquisition in the first quarter this year because there are no deals on the small ticket unsecured business. So after the acquisition of FBS, I'm wondering if you are thinking about the possibility to make deals also on the secured and corporate NPL business?
The third question is on the cost of risk. I'm wondering if you can give us a guidance on the cost of risk for the entire year and if maybe we can consider the first quarter this year as a run-rate for the entire year.
Then on the PPA, it would be extremely useful if you can guide us on the reversal of the PPA that we expect at least for 2019.
And finally, you mentioned some -- that you're going to focus on the capital management and on cost in order to improve the efficiency. So I'm wondering if you can share with us some action that you have already in mind in order to strengthen your capital base and to improve your efficiency.
Okay. I will answer to these. In terms of model update, the effect is recurrent, but the amount is quite variable. This because, of course, we update our model -- and each -- basically every couple of years -- every year -- every couple of years -- every year, but this EUR 9 million is the impact of the update of the model that we did last year, okay? So this -- the effect is recurrent, the amount not. Really, it's quite variable, and you'll see it was EUR 3.2 million in the first quarter to up to minus EUR 9 million in first quarter '19, okay?
Regarding the cost of risk items, we don't provide a guidance for the cost of risk. We would like just to say that it really depends on the evolution of the macroeconomic environment, of course, depending on how this will go on in the coming quarters. Probably, if the macro remains somehow stable, you can consider this. If the market deteriorates further, is quiet -- let's say, that it's quiet, we can have some impact, okay? You can say that at normal level, we report 88 bps in this quarter. The average in the previous quarter normalized was between 90, 100 bps. So yes, we can say about this level depending on the macro.
Regarding the reversal of the PPA, we estimate EUR 50 million in the year, but of course, this is quite variable because it depends -- in terms of quarters because it depends, for example, if we decide to close some positions and -- regarding to Interbanca, in that moment we capital -- we, let's say, realize a greater amount or a lower amount of the PPA, is on average, you can assume, EUR 50 million. Remember that this is pretax, so you have tax it. And regarding the capital management, all the action, et cetera, we think about that, but probably it's better to wait to the business plan for that and to say yes, okay?
The next question is from Simonetta Chiriotti of Mediobanca.
Just a couple of questions from my side. The first is, again, on the NPL market. So if you could comment on the reasons behind the low liquidity of the secured segment in the first quarter. So this is usually quite a liquid segment. Why originators did not sell in the first quarter? And my second question is on the corporate banking segment. Looking at the revenues, if we deduct the PPA, the net banking income is slightly negative in the first quarter. So if you could clarify on this point.
Well, I will answer about NPL and Martino about the rest. And in the first 5 months, there were just EUR 0.7 billion unsecured NPLs assigned in the market, so very few transactions. Banca IFIS bought about 50% of them. About secured NPLs, it's not our business, and we are strong in unsecured NPLs, and we compete in that field. Anyway, we have recently signed a forward flow agreement for consumer NPL for the acquisition of about EUR 100 million, EUR 150 million GBV. We have actually 2 binding offers for 2 additional portfolios with gross book value of about EUR 0.4 billion. In the coming months, we expect more disposal in the secondary markets. Some operator will focus on specific segment disposing unsecured NPLs, but our specialization is on unsecured NPLs, and we will compete in that field. On corporate bank, Martino...
Regarding the corporate banking, this is mainly due to the fair value adjustment as the item that recorded EUR 4.7 million that we discussed before was included in the corporate banking. So it is a write-off of the equity instrument stemming from the debt restructuring, okay?
[Operator Instructions] The next question is from Christian Carrese of Intermonte.
Just a clarification, again, on the NPL business. Martino, you were referring on model update. I didn't get how often you are going to make this kind of update because if you have this kind of swing quarter-by-quarter, I suppose you make a sort of mark-to-market quarter-by-quarter.
And then second question on the strategy. We read the main shareholder, Scogliera, that was ready to support the bank's growth and also said maybe there could be some development in abroad. So I would like to know the new CEO thinking on this kind of policy strategy.
Okay. I will answer to the first question. The model is updated about once a year. But the effect of the model then come up. Of course, this effect are somehow create some volatility on the quarters. But -- and this is due to the fact that, for example, we had this EUR 9 million in this quarter, but even somehow some very small adjustments can bring to the significant volatility. Then if you look on an yearly basis, I think that many of these effects are much smoother than may appear. So I repeat again, the model is updated once a year on average. The effects are then -- what you see here are the effects of this updating that was done in the first and second quarter of last year. Regarding the -- of course, the model every month we have a detailed update on all the account -- on all the performance of this each single cluster of the model. So that is the point.
About strategy, I can say for the moment that obviously the NPL segment still remain strategic for the bank and, as you know, it represents about 50% of the net income of the bank. So we continue to invest in this sector, and we are looking at new portfolios and confident to be able to buy some portfolios in the next future. For the rest, you be -- you must be patient and you have to wait the business plan and the new business plan that we present in next few months.
And one point also about our foreign subsidiaries. We have been operating on the foreign activities over the last probably 20 years. This is due -- in our factoring business, just clarify. Of course, some foreign market in terms of factoring are much more profitable than the Italian market, and we can leverage on some synergies. So that's why, it's our part of the core business, and we focus on that. The margin that you realize in some CEE countries in factoring are much higher than the margin that you realize in Italy.
And we will invest on our foreign activities, and we'll dedicate our best skills to this update.
Gentlemen, there are no more questions registered at this time.
Okay. So we would like to thank everybody for joining the call. And of course, if you have any question, you can contact us directly, and we look forward to meeting you in person in the coming months. Thank you.
Thank you very much, everybody. See you soon.