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 2022 Results Conference Call. [Operator Instructions]
At this time, I would like to turn the conference over to Mr. Frederik Geertman, CEO. Please go ahead, sir.
Thank you, and good afternoon, everybody. Welcome to Banca IFIS's first quarter results. I will present a few slides of the presentation that you can download from our side, and we will leave as we usually do more time for Q&A, then we will devote to the presentation.
I would take you to Page 4 of the presentation, starting with what we think are the key deliveries that we executed in the first quarter. We posted net income of EUR 35 million, which is 71% Q-on-Q and 74% year-on-year, confirming our track record in growing the core businesses. And we emphasize that because most of the dynamic that we've seen in this result comes from the revenues. We posted revenues of EUR 163 million, which is 19% year-on-year growth, driven by both commercial banking and the NPL business. We're very pleased to see a dynamic commercial network. All the business units deliver very nice growth, factoring turnover plus 19% year-on-year, new business underwriting for leasing, plus 16%, and the cash collection of the NPL business is up 13% year-on-year and reached EUR 91 million.
There is, over time, of course, potential further upside from the pickup in interest rates. We see in the first quarter of this year, the resilience of the asset quality. We will show you also some detail on the very low, negligible, I would say, asset quality deterioration from loans that were formally under moratoria under the COVID schemes. We have negligible direct exposure to Russia or Ukraine and in Q1 '22. So this quarter, we posted loan loss provisions of EUR 17 million. That includes EUR 8 million for certain older vintage positions and EUR 9 million of, let's say, nondiscretionary provisions. Our CET1 ratio is up by 28 basis points to a comfortable 15.72 we will pay EUR 0.95 of dividends per share on the 25th of May.
Let's take a look at some of these results in slightly more detail. Page 5, revenues. We mentioned the 19% growth. It comes both from commercial banking and from NPL growth, 13% and 20%, respectively, in the 2 divisions. Something that we'd like to underline is that the revenue growth also compensates for the PPA revenues that are down. We have always considered them noncore, if you will. This quarter, they were EUR 4 million. A year ago, they were $12 million. And so that is sort of petering out. But in the meantime, our core business is continuing to compensate and overcompensate I would say. We mentioned some scenario considerations.
There's always a lot of focus on the rate sensitivity. We confirm that our bank is positively correlated with the rate scenario in simulation of 100 basis points increase of rates across the curve. So on all durations, we would see between $30 million and $45 million of net interest income decreased. The range depends on both the speed with which on the asset side and on the liability side, the rates increase then translates into the book. Not all of it is mechanical. That constitutes between 6% and 9% of net interest income, which is what generally the analysts look at.
Of course, we're in a slightly different scenario than we were a few months ago, inflation, the geopolitical situation supply chain disruption, raw material prices, energy prices. All of this is constituting a drag. So we might have on the minus side, we might have negative impact from these items on revenue development.
Page 6. Some flavor of the commercial activity factoring turnover increasing 19% year-on-year. The market did 14%. New leasing business did 16%. The market did 15%. Of course, Q1 '21 was still a bit impacted by COVID. But within that business, if we look at automotive leasing, if is it plus 5%, the market did plus 1%. So that's where most of the dynamism was. In NPLs on the lower side of the page, we see an increase both of extrajudicial and of judicial collections. On aggregate, 13% increase of cash collections. So we have an NPL portfolio that has an accelerating performance.
One additional thing that I would mention here is that in terms of digitalization, the project is generating tangible impact. It's progressing very quickly. We have released our Ifis4business business, the digital platform, which basically is an internet banking suite that serves all the SME customer needs, both sales and after sales, we have 40% of the factoring clients onboarded, and we will onboard the remaining part in the first half of the year. So we will have real benefit from efficiency generated by digital interaction with the clients.
Page 7. Efficiency. Operating costs, plus 5%. We have to remember there is an increase -- a slight increase of personnel during the year. We have EUR 37 million HR costs. They grow in line with the business plan. I remind everybody that we expect further but limited increase in FTEs over the business plan period. Of course, we expect to brought to grow the business more. So the combined effect will be efficiency and an improvement in the cost-to-income ratio.
And then on general and administrative expenses, G&A, we are more than offsetting the potential impact of inflation and volume growth by contract renegotiation that is ongoing. There's a very significant effort with a centralized procurement function, and we are going through basically all the purchasing that the bank does in order to save money and reinvest it in growth. $21 million of the $51 million, I remind everybody our variable costs linked to NPL recovery.
Page 8. Asset quality, EUR 17 million loan loss provisions more or less in line with the previous quarters as in the previous quarters, EUR 8 million. So a part of the EUR 17 million in this quarter, it's [ EUR 8 million ] additional provisions on older vintage position, negligible asset quality deterioration of loans formerly under moratoria. We will give you a lot of detail on that bullet point on the next page. We didn't perform any write-backs of quite sizable unused provisions for COVID-19. If you want an order of magnitude of those unused provisions, it's between EUR 30 million and EUR 40 million that were basically untouched and that we -- in a conservative approach avoided writing back to P&L at this stage. Of course, the macro situation is complex. We implemented some detailed and proactive monitoring of the loan book, which we will comment on a few pages down.
On the lower part of Page 8. Asset quality ratios year-on-year, nice progression, roughly 0.5 percentage points of improvement on the asset quality ratio, so we have 6.4% growth, 3.8% net. You might remember that in Q4 '21, we classified EUR 64 million loans in past due. So you find them in the NPE ratios. These were invoices and therefore, exposures versus the Italian public health system. Historically, it's a late payer. It constitutes limited asset quality risk, but being a late payer, depending on how you interpret the new definition of default, you're going to have to classify them as past dues.
Now we classified EUR 64 million in Q4. There is an ongoing evaluation of this issue. It's highly technical, and it also involves conversations with the regulator. The reason it is technical is that in order to define whether it should be classified as a past due, you can -- you need to ascertain whether there is a commercial dispute or not. In case it's a commercial disputes, past due doesn't apply. But in order to ascertain that, you need to get into very detailed specifics about how you operationally manage those loans. And that is the reason why the definitions are not so clear cut and why we are taking this time to determine exactly how to treat it.
It may lead to an increase in asset quality ratios during the collection period of those invoices, of course, in the next quarters. It will have no or marginal P&L impact. It will have very modest CET1 impact, if it happens, but it might impact aesthetically, if you will, the asset quality ratios. We like to present these uncertainties upfront so that we avoid surprises. As soon as we have more information, we will share that with the market. But as we said, it would be a rather limited and manageable issue if it comes up.
Page 9, we mentioned the COVID situation being very encouraging in terms of the impact actually have on our credit book. What you see here is that we had EUR 572 million of loans under moratoria requested by the clients. So they basically stopped paying the installments for 6 months, 9 months or a year at the end of 2021, that terminated and therefore, there was a widespread expectation in the market that, that would lead to some serious flows towards default. We have a very, very benign situation to report at the end of the day, 3% of the loans that were under moratoria present 3 or more installments in arrears. That's EUR 20 million. It constitutes 0.5% of the loan book. And I remind you that that's not -- those are not provisions, but the total exposure of loans that have installments in arrears.
So it's almost physiological. Of those EUR 20 million, EUR 13 million have a public guarantee. So if at the end of the day, they go into default, 80% of those EUR 13 million is covered and of EUR 6 million leasing contracts, we benefit, of course, from the residual value of underlying assets. So we are able to say when all is said and done after this COVID situation, that the actual losses -- credit losses of COVID for Banca IFIS are negligible. We did not write back the provisions that we made yet.
Moving on to a slightly more forward-looking situation, which is what might be the impact of the new complexities, right, that the bank is facing, i.e., Russia, Ukraine, there is no way to know that for sure. We want to take you through how we reason about these things as a bank. So without having the ambition to be able to categorically predict what's going to happen, we will now take you for a few minutes into the engine room, and we will, together, go through the reasoning that we use when we try to define what our course of action should be.
So what IFIS did was it carried out a granular survey of 560 corporate clients that have roughly EUR 530 million exposure that operate in the most impacted sectors, they're steel, oil, automotive, luxury, energy, cement, ceramics and farming. And we asked those clients to report direct and indirect macro impacts of the situation. Direct impacts being I lose my market or being people in Russia on my money, and I'm not going to collect that money. Those would be direct impacts. Indirect impacts would be, I use energy. Energy is becoming more expensive. So on the basis of those criteria, we ask the clients and of course, they self-report.
So we should be aware that this is self-reported by clients. It's not audited, right? But we have good experience in this type of dialogue. The self-report that a very limited part on the left-hand side of the client base reports high direct impact. And our exposure to the clients who state that is roughly EUR 1 million, a bit over 8 clients. So you can see it's not something that is so impacting the current credit book, right? Medium-to-low impact, 20% where the clients say it's manageable, doesn't fundamentally change the picture.
Of course, on the right-hand side of the slide, indirect impact, it shouldn't be surprising that a larger number of clients in these priority sectors, as I remind you, states that they will have a serious impact because lots of our clients are obviously manufacturing. You can imagine energy prices or supply chain disruption or raw material prices being very relevant into the business models of these clients. So here, we have 43%, let's say, I am seriously impacted. What the bank then does, it says, okay. So given that you state that you are seriously impacted, let's see your starting position.
So we give you here a breakdown of the ratings that we attribute to those clients. And you see that rating, the best rating, rating, the worse rating before defaults rating 8, right? You see the breakdown. To give you an idea, rating 4 and 5 are roughly between 2% and 3% probability of default, right? So you see that the vast majority of these exposures are towards clients that have a very solid financial starting position. This is confirmed both by what we just saw on the moratoria, the quality of the book makes a difference when you get into these situations.
So on the basis of this, we can state we have negligible direct exposure as a bank. Our clients have a modest direct exposure on the left-hand side and where the indirect exposure is high, we are comforted by a very solid loan book to start with. If you're interested in what the picture is outside of these priority sectors, we give you the results of the same survey outside of these priority sectors on Page 21 in the appendix, where you can see that we examined another EUR 570 million with the same criteria. It's not surprising that in those surveys, the amount of clients that say I'm strongly impacted is a lot lower because obviously, outside of the priority sectors that we logically right, would assume to be more impacted, the effect is lower.
Page 11. Still on the subject of resilience of the bank. The proprietary portfolio, this has been set up for no volatility and to give a stable contribution to P&L. Let's try and put some numbers on that. Top left corner, the asset classes. 83% of the book is government bonds, 9% is financial bonds, 4% is corporate bonds. So the vast majority and the corporate bonds are, to a large extent, investment grade. So the vast majority of the book is low risk and also low duration bonds.
Bottom left corner, given this book, what is the accounting treatment, 78% is in held to collect. Therefore, as spreads vary or rates increase, no impact on P&L and no impact on capital as long as, obviously, the bonds don't default. But given the asset quality of the bonds, we don't think that is a realistic concern. 22% are on held to collect and sell meaning that we are exposed not to the P&L, but to a capital hit if rates or spreads increase. The combined effect of 100 basis points spread increase in the Italian government bonds would be 9 basis points of capital. So 100 basis points of increase in BTP-Bund spread, 9 basis points of capital for the bank starting from 15.72 CET1 ratio that's hardly going to change the picture.
Top right corner, are we exposed to rising interest rates, 28% of the bonds are floaters, 6% are inflation-linked. And in addition, we have EUR 500 million of bonds that expire in April, which we haven't yet reinvested and are about to reinvest at more attractive, obviously, spreads for the investor, right, that can be had now.
So a good part of this book is, in fact, sensitive, positively correlated to increasing interest rates. Therefore, the contribution to the P&L in the last quarters has been stable. We expect it to continue to be stable and to grow. This is our expectation for the proprietary banking book. With respect to the $8 million that we saw in the first quarter of 2022, leading to [ EUR 60 million ] in total revenues from the book in Q1 '22, those 8 were, to a good degree, the result of the disinvestment of inflation-linked bonds.
As you see, we still have quite a portfolio of those. Now obviously, the accounting treatment doesn't allow us to do trading, so we can't do this too often, but there is still a significant amount of unrealized gains in the inflation-linked bonds in the portfolio that we can access with certain limitations. Therefore, we expect back to the resilience, the proprietary book, not to give us headaches and to continue to give us a reliable P&L impact.
Page 12. Capital ratios -- we started at 15.44 CET1 ratio after the capital impact of the Scogliera transfer to Switzerland. This quarter, we added 28 basis points, of which 32 due to the reduction of the peak exposure at the end of the period of factoring loans. You're aware, of course, that on December 31 factoring piece, on March 31 it does less does it less. Therefore, [ these of bit ] is bit is seasonality of factoring. And then we have a negative 11 basis points effect due changing market of financial instruments, and those were the Italian govies obviously. We did not compute in the 15.72% CET1 ratio, the contribution of profits in the quarter that would have given us another 15 to 20 basis points depending on what you assume. So we would have gone close to 16% if we counted it.
I will skip Page 13 and 14. They contain the details that you would normally expect in terms of Q-on-Q evolution and the breakdown of the businesses. Let me just say on Page 14 that all the divisions and within the divisions, all the business units contribute positively to net profit. And I will go to the conclusions of Page 15 before allowing you to open the lines and ask all the questions that you might want.
So Page 15, conclusions. We expect the GDP environment and the risk environment to become more challenging. We wouldn't do the simulations and the surveys and everything that we discussed out of Board. So the reason we are thinking about that is that we are expecting a more challenging environment, both in terms of less growth and in terms of risk.
We see our core business still accelerating. So we have no indication today of a slowdown, neither in factoring nor in the other businesses. We might have some very weak signals, for instance, in leasing where certain capital goods have slightly longer delivery times due to supply chain issues. That's one thing we see. We might have a very modest first effect on the NPL side in terms of voluntary repayment plans by the debtors very weak signals, but at this point really to be monitored. We see the core business still accelerating. We did not write back COVID related provisions. They are all there. We actively monitor the credit book. As you saw, we confirm it is very sound. By the way, the long-term lending is mostly assisted by guarantees or has leasing assets.
So where we have long-term lending, the lending is typically protected, where we have short-term lending, obviously, we have the ability to react and also to exit certain situations where we think they are too risky in a very brief time span. It's the advantage of factoring. So we confirm that we proactively monitored the credit book and that we are convinced of its soundness. We have, as we saw a low volatility prop portfolio that we expect to generate additional revenues and recurring revenues, we have the positive correlation with rates increase.
These things together allow us to say that with currently available data, we can confirm the business plan profit targets, not to say that the macro environment isn't changed. But given the resilience of the bank, given the protection that we have on various items, we can, at this point, with the currently available data, confirm the business plan targets.
Thank you for your time and your attention until now. I would like to take your questions if you have any.
[Operator Instructions] The first question is from Manuela Meroni with Intesa Sanpaolo.
A few questions on my side. The first one is on the new definition of default. You mentioned that there are a discussion with the regulator on the application of this new definition of default. I'm wondering when we can have more clarity on the potential impact of that? And what is the reasonable impact that you might expect from the new definition of default on asset quality, common equity Tier 1 or net income, if any?
The second question is on Russia. I'm wondering if you have taken some provision against the Russian exposure or the indirect Russian exposure of your clients during this quarter.
The third question is on the common equity Tier 1. Could you please share with us the evolution that you are expecting in 2022? And if you are going to pay an interim dividend in 2022.
Then on the NPL market in the first quarter, I'm wondering what are the main trends that have you seen in terms of volume and prices.
On trading gains, you mentioned that the large trading gains achieved in the first quarter related to the divestment in inflation-linked bonds and you still have unrealized capital gains. So I'm wondering if we may expect further sizable capital gains in the remaining part of the year. That's it.
Thank you, Manuela. I'll take them. I hope I haven't missed anything. I tried to write them all down. But if I have, please remind me.
And you talked, when do we expect to have clarity, we expect clarity in Q2, latest Q3. So this year, it will be definitely completely out of the picture. By the way, you should keep in mind that there -- these are invoices, right? So it's, in any case, going to be a transitory issue because as you collect those invoices, right, or you sell them or you collect them or you manage the portfolio, the aesthetic impact will go down.
What could be the impact? Well, we -- it's too soon for us to give you definitive number. We want to avoid also rushing forward to conclusions. I will give you an order of magnitude. The impact on the NPE ratios is going to be percentage points. The impact on the -- so a couple of percentage points. The impact on the capital ratios could be a couple of tens of basis points, okay? The impact on the P&L 0, close to 0, right? Maybe single million, something like that. But -- because obviously, it's a public sector, right?
So you have to -- depending on the situation, you might have to classify it as past due, but the policies in the bank make for a very limited provision. If your debtor is the regional government, which is similar to the central government from a credit point of view. And therefore, you don't normally expect to lose the money.
And let me also state that the complexity of the operational definitions, right, of these commercial disputes is such that it's very difficult from one market participant to draw conclusions on other market participants, right? Because we've had some of these questions in the last weeks. I think everybody should really figure out what their own operating model is. And in that specific operating model, everybody will reach their own conclusions. So don't draw conclusions from IFIS on any other player. I want to underline this.
Impact of indirect Russia exposure in the clients and therefore, provisions. So as we mentioned, we have the stock of provisions from the COVID times, no write-backs were made. And we have, until now, only some indirect forward-looking statements of clients, which, as we show, they're very good ratings. So there are today no Russia-related provisions on indirect risks of clients, but there is, as I mentioned, a very sizable stock of provisions that are still there from COVID.
CET1 evolution. I want to give you a very broad feeling. We expect -- I would expect the year to end comfortably above 15%, potentially close to 16% if the risk weighting of the purchased NPLs goes to 100%, down from 150%, I remind you that somewhere in the following quarters and EVA and EBA sorry, regulation should be translated into national rules. If that -- when that happens, I shouldn't say if it happens, when that happens, then we will benefit from roughly 80 basis points of CET1 effect, positive CET1 effect. So I would say if that comes in close to 16%, if it doesn't probably go close to 15% at the end of the year as the volumes continue to grow.
Interim dividend, we are considering this. I can't give you news. We would rather -- because it's obviously also a regulatory issue. So I would rather not give indications before having completed all the EBA evaluations that we're making. But we listen to the market. We know a lot of investors would find it a friendly move, and we would be generally happy to make friendly moves. So when we will be able to tell you that it's done, we will be sure to communicate it immediately until now, I can't commit.
NPL volumes and prices. Well, the first months of the year are typically a bit slow in terms of NPL transactions, right, of sales. The -- most of these sales tend to be done towards the end of the year -- this year is no exception. So the start of the year has been quite slow in terms of new NPLs coming onto the market. But in this slow market, we made a couple of transactions also in the secondary market. And so we've bought in Q1, roughly EUR 600 million of gross book value, which is a very nice purchasing volume in the first quarter. So I feel we are ahead of the plan in terms of NPL purchases for this year.
Prices flat, I would say. No deterioration, no particular, no particular change. The prices are the ones that we are used to. We are buying in a disciplined way, and we're happy with the IRR that we project.
Trading gains from inflation in bonds, yes, I confirm, right? So part of those EUR 8 million is a good part of those EUR 8 million were connected to that.
Could there be further gains? Well, there certainly is an unrealized gain presently there. We have regulatory limits because if you keep these bonds in how to collect and sell or in how to collect, then you can't trade for, obviously, reasons. But within limits, you can make a reasonable number of transactions with a reasonable amount of stock even in those categories.
So do we expect further gains? I would say, more yes than no. we treat it as an option. We treat it as something that might be there. We don't count on it. We grow the core business and we try to make the revenue targets with factoring in the NPL and the leasing business. I think I had them all. If I miss something, Manuela.
The next question is from Christian Carrese with Intermonte.
The first question is on the sensitivity you provided on interest rates. If you can elaborate by single division and in terms of cost of funding, what do you expect for 2022?
The second question is on the factoring business. I see that the spread in the first quarter this year went up from 5.2% to [ 5.47% ] year-on-year. So there was an improvement. What do you expect for the next quarter? Do you think this trend could continue?
The third question is on the business plan. You presented the business plan just before the announcement of the war. So if I'm not mistaken, you were expecting the basic assumption was for a GDP at 4% in 2022. Maybe now the estimate, consensus estimates are more near to 2% rather than 4%. You confirm the business plan -- business plan targets around EUR 118 million, EUR 120 million net profit. I was wondering if you expect a different mix? I mean, what is the contingency planning you have in mind to reach the target the sort of sensitivity, I mean, if the GDP will be not 4, not 2, but 0, what do you expect in terms of cost of risk for example?
And finally, on financial portfolio, you said there are some capital gains. I don't know if you want to spend some figures? What are the unrealized capital gains or not?
Okay. Let me just write down your last question. Okay. So thank you, Christian, and I'll take them in order in which you asked. IRR sensitivity. What does it include? It includes all the various items. So it includes both the -- well, the prop portfolio, obviously, it includes factoring, it includes lending, long-term lending, where it's variable rate. And it was calculated, including not just those that are rate sensitive, but also, for instance, those that expire and that we will then reissue, right, we underwrite.
So it's quite a detailed analysis that contemplates all the divisions on the asset side. On the liability side, it includes the same logic, right? So all the forms of funding are considered. And basically, assuming different levels of stickiness, especially on the liability side, you get to that range, right, between 30% and 45%. I think it was roughly, okay? Most comes from financial holdings factoring and long-term lending guaranteed by the state. Breakdown by division, honestly, it's a simulation, right?
So it's a theoretical shock of 100 basis points. I haven't got the numbers here. I'll admit. And if I had them, I'm not sure we'd enter this level of details because really it's a thought experiment by itself, right? So it allows us to have a dialogue on what you can expect roughly overall for the bank. But the way exactly it will plan out, I wouldn't be able to give you the numbers now. And if I had it, I don't think I would get into this level of detail with the market just because it's, frankly, a bit uncertain, right? Factoring...
Just to understand that there is more room for a widening of the spread or customer spread in the factoring business rather than leasing -- and at the NPL, I suppose it's not so big, the sensitivity. I don't know if you...
I agree. Yes, I agree. Do we have further room for improvements on the spreads? I would say, yes, okay? So you've noticed they've increased. I was personally rather impressed and struck by the pricing discipline that is present in the bank. In previous experiences in other places, I wasn't used to this level of control on the issue. The prices in factoring increased. And in the meantime, the volumes increased year-on-year. We expect the volumes to continue increasing. We also expect the prices to continue increasing, both helped by the rates environment and helped by repricing actions.
On the leasing side, I would say, slightly less easy. I'm looking to the Chief Commercial Officer, Raffaele Zingone, and he says, yes. So slightly less easy on the leasing side. Long-term lending is always a little bit tricky in terms of the contract negotiation, right? You have a one-off situation where you define the price whereas factoring gives you a lot more wiggle room whilst you manage the relationship.
So yes, we do think -- and part of, by the way, the interest rate impact that we quantified in the sensitivity comes, right, from renegotiated contracts that expire, right? So not all of it is automatic. It should be stressed, right? It's not all just the base rate that moves. Some of these things require renegotiation of contracts at more favorable rates after they expire, okay?
Business plan GDP growth, yes. So that's looking at a lot less rosy now. We presented the plan at 4%. It's now looking like we will have 2%, and it may even be less, right? So do we confirm the business plan target, yes, of course, right? You saw it on the slide. And yes, therefore, we expect a slightly different mix.
First of all, part of the rate increase scenario that we simulate has actually already happened, right? So we've got some help from there. Then -- in my opinion, there is an advantage in being a challenger bank. The advantage is that much less than the largest commercial banks in the country. You are not like floating on the GDP, right, without the ability to do much about it. We are relatively dynamic, small. So even in a scenario in which your GDP doesn't grow that much, you have the possibility to grow share. I wouldn't say it's easy because it never is, but it is a concrete option we have. And in fact, if you look at the numbers -- and Q1 delivered results that are obviously putting us ahead of the run rate of the business plan, right?
You see that we grew more than the market. So we are gaining share. And I think we can continue to do that over the course of the year, even if the economy doesn't grow that much. But yes, in answer to your question, do we will probably deliver with a slightly different mix, right, the business plan. I would assume that in any business plan, right, reality is always different than what you imagine and what you simulate and what you write. But certainly, this environment we're in now is slightly different than the one that we presented in the planning.
Having said that, we're not underestimating the complexity of the moment, but we are -- given all the things we mentioned, right, in the compensating factors, we are with currently available data in the current situation, confidence that we can confirm. -- you -- I believe your final question was how many unrealized capital gains we have? Is that what...
It's just on this point, if I can, if I may, on GDP sensitivity, assuming no GDP growth this year, could you spend a sort of sensitivity on cost of risk? What do you expect in terms of gross NPLs formation and so on. I mean, we heard from other banks that until there will be a recession, maybe the cost of risk will not be so different from the base case. I don't know in your case, it will be so or you see something different.
I think the honest answer is we don't know.
I appreciate.
And what we know is on the slides. And I think sharing this amount of information on the risk perspective of clients is already quite a lot. We tried to share with you how we reason about those things and how we adapt to situations that arise. So I think we are adaptive. And I think we are capable to react also to a low growth or no growth environment.
I'm very comfortable about the cost of risk, and I'm not going to answer you with a specific number, which was your question because of a combination of factors. The first being that for many quarters, if you go back to our various analyst presentations, we have had a certain amount of cost of risk, fairly stable, but there were always specific extraordinary extra provisions due to COVID or due to other things. So the book is generating a modest cost of risk by itself, more modest than what you've seen in the last quarters.
The second reason that I'm comfortable is that we have this large unrealized, unused -- sorry, provisions coming from COVID that are between EUR 30 million and EUR 40 million. So a lot can go wrong, Christian, before we need to worry about cost of risk seriously impacting the numbers.
Now I'm not here to say that nothing can go wrong. So I want to sound prudent because the moment is complicated. When we say that we are confident we do it on the basis of these elements, right? I hope I still answered your question partly at least.
Yes, you were very clear. And finally, maybe on unrealized gains on the financial portfolio. I don't know if you want...
Between 5 and 10, Christian.
[Operator Instructions] The next question is from Simonetta Chiriotti with Mediobanca.
A couple of questions from my side, most have already been answered. So the first question is on the activity with in factoring with the public administration. So the purchase of receivables towards the public administration. You have commented on the impact and the potential further impact of the new DoD. In the last years, you have, I think, reduced the activity in that area. How do you see this segment going forward? There is something that is still a core business or not?
And the second question is on factoring; and in general corporate banking. I have the impression that there are new challenger banks targeting SMEs, online banks and so on? And is it something that you have perceived or do you see more competition from these actors in your core business and in your core customer base of very small corporates?
Yes. Thank you, Simonetta. Yes, this factoring business towards the public administration with the purchase of these invoices. Do we still see that as core business? I would say, yes. I would see it, though, as a business that will require some change. So we're not thinking about completely exiting, but we think we will need to manage it in a way that is consistent with the new definition of default, meaning that we will have probably shorter collection times and that we will have less revenues from penalty rates, right? Because the reason the business was rich was that the public administration paid 8% on the arrears, when they finally paid.
So you needed to wait a lot for your money. But when they paid finally, even if you had to go to court in some cases that's necessary, right, when you were then finally paid, you got your 8% per year penalty rates. I think that as a business model could be a bit challenged, right?
So I would assume that we would -- I would expect, right, that we would restructure it, that it will become less rich, but they won't disappear. To give you an idea, in the business plan, we had, I think, in last year, roughly EUR 12 million of revenue from that activity. So it's not totally irrelevant, but it's not big either.
And I would expect that we would need to grow the volumes a bit and reduce the collection times a bit, et cetera, and that we would save part of that revenue stream but manage it in a different way. So there would need to be a little bit of compensation with other businesses, right, during the business plan. I'm not expecting us to exit that at all, and I think we can find a way to manage it appropriately in the new regulatory environment.
Factoring and corporate banking challengers, right? So new banks appearing and do we feel that. I think it's one of those situations where in -- maybe in the short term, you underestimate the impact, you over estimate the impact. And in the long term, you underestimate it, right? So it could be that we are still in that initial phase because an answer to your question.
And I'm not saying it won't be so in the future. But today, we don't really feel competition from the challengers. We feel competition from the national banks and from the local banks. But it appears, if we look at growth, client satisfaction, margins, it appears that we can handle this competition. So we are growing share. And we're seeing a lot of dynamism in the network. Also, we've been doing a lot of communication, as you might have seen on TV, right? So there's quite some impact coming in now just from brand awareness from companies knowing that we are a bank specialized in SMEs.
So no impact yet. I don't mean to say that all this technology and these new entrants and all this capital also that's flowing towards these players is not going to impact us at some point, but we don't really see them now. And we feel quite confident about our ability to compete, right, and to keep growing. And in the meantime, we're investing ourselves, right?
So remember, we have a business plan with a very significant digitalization investment that's ongoing, and that's tangibly already being implemented. So it's not something that I think is going to make our business suffer in the very short term. No, of course, you need to, of course, adapt yourself too, right? Otherwise, you will at some point, your risk becoming a dinosaur, but it's not the risk that we see today.
[Operator Instructions] The next question is from Andrea Lisi with Equita.
The first one is, obviously, it's not easy to answer, but just to have kind of idea. When do we expect it is likely to see most of the effects from current crisis on Italian SMEs?
The second question is if -- do you expect some impact and if you can provide us an indication about the magnitude on the volume growth in the lending and corporate business and also in the cash recovery in the NPL business in a slowing GDP scenario.
And in particular, where do you see them in risks? Obviously, we know about the loan loss provision. But with the exception of loss provision, where do you see the risks with respect to the business plan targets?
Then the other question is on cost. If you can elaborate a bit more on how do you plan to manage cost in an environment with higher inflation?
The last question is on the NPL market. If you can provide us some indication about the pipeline and how is changing in the current environment?
Okay. Yes. So once again, I want to be -- I want to sound humble in making predictions, okay? Because -- it's -- if you look at today, you don't see any impact, right? We don't even see -- and I want to talk about Q1, I'm talking about April and the start of May, right? We're not seeing an issue in factoring, right, in the last weeks.
But the impact is most certainly going to be there because you can't imagine having a shock on energy prices and on supply chain disruption and raw material prices as big as what's happening and not have an impact on the economy, right? So I'm talking to you about expectations, but not about data because if I would go on the data, I would just limit myself to saying no impact yet.
Now expectations, and therefore, a general sense. I think Q3 will see it, Q2 not yet. Q3, Q4, I think we're definitely going to see it. But I expect us and most other banks in Q2 to commercially probably be pretty much in a continuous situation. Maybe towards the end of Q2. But if I look at what's happening now, and you ask me, are you seeing an issue in volumes of reoperational volumes, right, or factoring going on, not yet, right?
Where do we see in terms of business plan targets, the risks in the current environment. So obviously, credit and volume growth, we had a 6%, 7% CAGR of aggregates credit growth throughout the plan presented to you 2 months ago. That's challenging. If the economy contracts, that's going to be tough, right? So that's certainly something that we'll need to see whether we can do it today. We're ahead, right? But it's just 1 quarter. So that on a 3-year horizon, that's almost irrelevant.
So I expect us to be challenged on the 6%, 7% growth rate of overall credits, CAGR, right? So annual throughout the plan. Now obviously, in the meantime, you can work on spreads and you can work on your interest rate sensitivity, right? So I'm not saying that the revenues were in the end suffer. I'm just saying that if you look at top line growth that might be challenging because to do all of that out of pure market share growth is just a bit more challenging and also having a bit of support from the economy.
Another area where I think we might have a challenge on the business plan target is non-judicial cash collections in the NPL business. It's also something that we're not really seeing yet. But if you think about it, we have debtors who pay us their installments of their repayment plan on the loans we bought. You can imagine a family that needs to spend more on energy and on food, you can imagine that they're going to have less, right, to pay the installment of the voluntary repayment plan, right?
So I would expect there that we would probably need to figure out something about productivity, about compensating actions in the NPL management, right? Obviously, we have a huge book. So it's not that you can't adapt. But probably, we need to react in terms of just operational excellence, right, in order to get to a larger number of maybe smaller voluntary repayment plans, for instance, right or maybe slightly more judicial repayment plans or judicial strategies, right? Or maybe more saldi e stralci, right, as a strategy that we -- sorry, for the time, but I think it's clear for the audience, right. So cash recovery of voluntary repayment plans is the second area where I think the current environment is going to challenge us.
Costs with respect to inflation. We did a simulation a few weeks ago when the price is starting to -- started to spiral out of control. And then in fact, we might get some renegotiation. But the nice thing about doing all these contracts is that you fix the cost for a multiyear time normally.
So our cost exposed to inflation is actually very limited. Therefore, not really a headache. NPL market. In terms of pipeline, we have a pipeline of concrete situations that we're looking at, which is roughly EUR 1 billion, so it's quite healthy, EUR 1 billion growth. So we bought EUR 600 million, and we are looking at portfolios with roughly EUR 1 billion of growth. So it's looking like this year too, we will be able to buy what we need without a lot of effort or stress. Is that okay, Andrea?
Yes, very clear.
The next question is from Giuseppe Grimaldi with BNP Paribas Exane.
The first one is on the digital plan that you mentioned. I know that is not that easy as long as it involves several layers of the bank. So I just wonder if you can give us an update on the time line of the project and on the kind of efficiency that you expect? And also on the commercial side during the business plan, you mentioned some benefits from the partnership, if you can, let's say, give us an update on what you mentioned.
So those would be the distribution partnerships, right?
Correct.
Yes. Okay. And so digitalization, yes, we have something that's quite short term, which is that we want to roll out to the factoring clients, the Ifis4business platform. So we'd like to have them all on the new platform because operationally, it makes things a lot easier for us, right, uploading invoices and managing the relationship. That's going to happen in Q2. Let's assume maybe a tail in Q3.
We did 40% of the customer base in the quarter. So that can go quick. The good thing about not having a mass market business, but an SME business is that the number of counterparts you have is big, but it's not huge, right? It's not millions. So you can go fairly quick in these things.
Then there's a second. And that's the interface, if you will, between the clients and the bank. And so that will, I think, within 2022 will be definitely wrapped up and that's when we get to benefit internally, right, from a much smoother way in which to process the whole aftersales relationship.
So both the invoices and for instance, the requests for new debtors to be accepted. Everything that happens in a factoring relationship, if you want to keep it alive and if you want to keep the volumes to flow. Separately, there is slightly more long-term story. You might remember that we presented roughly 20% of the clients being acquired online last year digitally, right?
So out of a digital marketing effort. And you might remember that we promised our business plan to bring it to 40%, right to double that. And that's ongoing, right? So I think last time I checked, we were at about 25%, maybe, something like that. So it's going smoothly. It also depends a little bit on how much you invest, obviously, in the digital channel.
We are now really digging into the optimization of those funnels and putting in place all the monitoring of the conversion rates, right, from digital [ fund ] collection, right until contract activation, right? And that's a much more long-term story of really optimizing your processes internally and becoming smart about all these conversion factors, losing less clients as you move them through, right, your onboarding process. So there, I wouldn't put an end date to it. I would just say continuous improvement and hopefully reaching 40% before the third year of the business plan. I would like that, at least, right?
Then thirdly, there is the digitalization aspect that's just internally, right? So end-to-end process optimization that might not impact the client, right? But that might be just the way things are run inside the bank. That's project by project. We're now very deep into a project on the underwriting system, right? So from the collection of the loan request, right, until the contractualization of the loan, right, we're totally redoing the credit system from the ground up.
That's something that will, I think, be done mostly within 2022, but it will have tails once again in 2023, right? So long-term projects, more gradual. I will give you a flavor. I think all in all, we're on track. Probably a bit faster than on track. It's very focused. We're using outside help. So we think we have competent people helping us, I mean, advisers and system integrators.
And what we're doing is really mainstream digitalization. I mean it's not that we're inventing the wheel here or that it's a rocket science. It's just doing in a very serious and robust and industrial way stuff that's been done in other places. So I'm quite confident about also the ability both to execute it and the impact in the end.
And partnerships, yes, we are activating the first one that we mentioned. We are now through the pilot phase. We are pretty soon going to, I hope, confirm it with them and roll it out. So we have got one ongoing and we have a couple of conversations underway that I cannot comment on because it would be, I think, there are rules towards a them.
But I confirm, yes, we're going to get some commercial impacts from partnerships, and we might have some nice ones to announce over the next 12 to 18 months that would might make some difference commercially. So it's on track. It's just 1 quarter into the business plan. It's a 3-year plan. So give us a break.
Mr. Geertman, there are no more questions registered at this time.
Good. Okay. Well, thank you all for your time and attention. And I guess we'll be in touch either in one-to-one situation or in the next quarterly call. And in the meantime, thanks for your time and for your attention.