Banca IFIS SpA
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Banca IFIS SpA
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Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the Banca IFIS' 9-Month 2020 Results Conference Call. [Operator Instructions]
At this time, I would like to turn the conference over to Mr. Luciano Colombini, CEO of Banca IFIS. Please go ahead, sir.
Good morning. Welcome, everybody, to our call. Yesterday, the Board of Directors under the chairmanship of Mr. Sebastien Egon Fürstenberg approved our first 9 months 2020 results.
Before going into the results, I would like to confirm our guidance. despite the second wave of COVID-19. In 2020, we expect to achieve net income in the upper range of our guidance of EUR 50 million to EUR 65 million. Banca IFIS profitability proved to be resilient with all the 3 quarters of 2020 profitable. In third quarter 2020 and 9-month 2020, we achieved a net income of EUR 16 million and EUR 52 million, respectively. This reflects Banca IFIS' business model, which focuses on profitable market niches that are difficult to enter and not covered by large players. Banca IFIS focuses on short-term lending to SMEs with a full range of customized products, which provide some protection in terms of asset quality. The factoring has a double guarantee from the debtor and the creditors. The leasing, mainly cars, Apple products and equipment have residual values and remarketable agreements.
In the NPL sector, Banca IFIS is a market leader in unsecured mortgage with more than 20 years' experience, EUR 1.3 billion worth of cash recovery, a proprietary servicing platform, a proprietary database with 1.3 million borrowers. However, the macroeconomic scenario is still uncertain, and the level of profitability over the coming quarters will depend on the evolution of the second wave of COVID-19, which is difficult to predict at the moment. We have faith in our bank, but in order to better face the crisis, in the first 9 months of 2020, we posted EUR 47 million provisions for COVID-19, and we increased our CET1 by about 73 basis points.
Let's move to Page 5. The EUR 47 million worth of provisions for COVID-19 include EUR 11 million of potential impact of leasing moratoriums and sectors most heavily impacted by COVID-19; EUR 11 million to reflect a larger recovery time frame, slightly lower cash recoveries in the NPL portfolio; EUR 7 million fund write-offs, mainly NPL fund of former Interbanca; EUR 17 million due to a single position of ex Interbanca.
I would like to highlight that in addition to EUR 47 million provision write-offs, there are other direct and indirect impacts of COVID-19 Including this other direct and indirect effect of COVID-19, the preliminary estimate of COVID-19 impact in 9 months of 2020 is about EUR 60 million. CET1 increased by about 73 basis points in the first 9 months. At September 30, '20, CET1 came in at 11.79% calculated excluding 2019 dividend suspended in accordance with the Bank of Italy recommendation and excluding the first 9 month 2020 net income. However, in the fourth quarter 2020 we expect a negative impact on the CET1 of about 20 basis points due to the completion of the acquisition of our bank.
Please let's move to Page 6. I would like to highlight that NPL cash collection increased compared to last year. Plus 13% NPL cash collection in July, September 2020 versus July, September 2019. NPL cash collection flat in January, September 2020 versus January, September 2019. This result reflects that about 40% of order of assignments are in the face of public employees and retirees and our portfolio diversification with about 1.3 million borrowers. Since the beginning of the year until the end of October, Banca IFIS purchased 16 portfolios of NPLs for about EUR 1.7 billion, which will provide a contribution to the bank's profitability next year. We are actively participating in sales processes for a total of about to EUR 2.5 billion GBV.
I am positive about the quality of our commercial corporate banking portfolio summarized on Page 7. Our commercial and corporate banking portfolio amounted to EUR 5 billion most of them in the space of public administration, NHS and government entities. The remaining portfolio is short term and well-diversified in terms of geography, sector and company. To conclude, I would like to highlight that the financial capital position of the bank is solid and will allow us to overcome the second wave of COVID-19, this period of uncertainty, in this macroeconomic environment.
Please, Martino, go on and describe the details of our third quarter 2020 results.
Hello, good morning to everybody. I will keep this section short, just highlighting the key messages, and then we will open to Q&A.
So let's focus on Page 8 of our quarterly results. In 3 quarter '19, we achieved a net income of EUR 15.6 million. Net banking income came in at EUR 109 million and was impacted by the August seasonality in judicial and extrajudicial NPL workout and in the volumes of commercial and corporate banking. And loan loss provision came in at EUR 14.5 million, and this number includes EUR 11 million worth of provision against moratoriums in the sectors that were most impacted by COVID-19.
In the third quarter, the default rate that we observed was particularly low. And the provision we're concentrating was concentrated mainly on some provision that has some criticality before. However, we prudent post this EUR 11 million provision for the future. Operating costs came in at EUR 74 million and include EUR 5 million provision to the FTD and single evolution fund.
Let's move to the capital, and you can see that on Page 11. The CET1 came in at 11.69% and is 73 bps up year-on-year and 11 bps up quarter-on-quarter. This number, the CET1, is calculated excluding 2019 dividends, which has been suspended in accordance to the Bank of Italy recommendation. It excludes prudently the 9-month 2020 income. I think this proves the bank's ability to increase organically its CET1. I'd like also to remind that in the Q4 2020, we expect the completion of the acquisition of Farbanca, which will have a negative impact on the CET1 of about 20 bps. So I repeat the message 8.12% is the SREP level, CET1 at full year 11.69%, excluding 2019 dividends and excluding the 9-month 2020 net income. I would -- and SREP is 8.12%. So we are well above the SREP.
I would like to stress other 2 messages that you can see on Page 14 and 15. 14 is to know our factoring. The turnover was EUR 2.7 billion, net banking coming in factoring EUR 35 million, stable quarter-on-quarter. And despite also some -- the August seasonality. Also stressing leasing. The new leasing came in at EUR 113 million against EUR 86 million of the previous quarter. This -- I think this would show that the bank is able to benefit from any revamp in economic activity.
Deposits are stable. Deposit base, and you can see that if you want to have a quick look at Page 26 of the presentation. You can see that the funding is stable quarter-on-quarter up to EUR 9.2 billion. Deposit base is stable at EUR 4.9 billion. And we at 3Q, we have EUR 1.4 billion cash reserves. The average cost of funding is down from 1.45% in 2019 to 1.10% in 3 quarter 2020.
And finally, have a look at Page 28, the asset quality. Asset quality proves, let's say, good trend. Gross nonperforming exposure ratio is down from 9.3% to 8.6% in 3 quarter 2020. The net NPE ratio is down from 4.8% in first quarter 2020 to 3.8% in the third quarter 2020. Of course, this ratio is calculated only on commercial and corporate bank, so on our self-creating nonperforming.
We will now open the Q&A session, and we are at your disposal. Thank you.
[Operator Instructions] The first question is from Manuela Meroni of Intesa Sanpaolo.
I have some questions. The first one is on NII. I'm wondering if you can provide us the guidance for the fourth quarter this year and 2021. We have seen a strong recovery of the net banking income in the NPL business. So I'm wondering if we can expect a similar or improved performance also in the fourth quarter and in 2021.
The second question is on the margins on factoring business. I'm wondering if you can tell us what you are expecting in terms of margins going forward.
Third question on the cost of risk. Clearly, you are provisioning for the future. So can we expect in 2021 cost of risk in line with the cost of risk of 2020? Or we are expecting, in any case, an increase in the cost of risk in 2021?
And then on the definition of default, I'm wondering if you have some guidance on what could be the impact on your asset quality and capital base of the application of the new definition of default.
And lastly, on the bad bank, we have read that there are some projects to set up a network of national bad banks. I'm wondering if you expect that is to impact your NPL business and any thought on this would be helpful.
Let's start with the bad bank, start with the last one. The impact we expect -- we don't expect a significant impact from this bad bank network. First, it's still too early stage, it's to an early discussion to make an assessment. But we are focused -- in terms of our business, we are focused on unsecured small ticket, so below EUR 10,000. This category, you need, let's say, special skills to recover them. And I would struggle to see a bad bank acquiring this type of loans, able to price these type of loans and then able to recover and work out this type of loans of nonperforming. Probably they will stick to the gap to the, let's say, to secure medium-sized secure, which is the vast majority of nonperforming rather than ours. And -- but I repeat, it's too early stage to make an assessment in terms of the impact on a potential network of bad banks. Even GACS, let's say, our portfolio were not part. Usually, we're not included in the GACS, our type of portfolios.
Regarding the cost of -- you make a very nice question about the cost of risk and the provisioning in the future. Let's say, in 2018 and '19, we were impacted by the construction sector. We learned from that lesson, and we tried to reduce the concentration risk. Of course, in the coming months -- in the coming quarters, the cost of risk will strictly depend on the able -- on the speed of the recovery. It's difficult now to make an assessment. And that's why, that's one of the reason also we decided to, let's say, to slightly postpone the work that we are doing on the plan. It's -- let's say, we have to be -- to have more visibility on the future to make a precise assessment of the cost of risk.
The default rate remains for us at the lowest level in the 9 months, 2020. The default for the loan of provision were mainly concentrating on a few critical positions, but now one of them has been almost entirely provisioned. So let's say, probably, we will definitely not go to the level of the previous crisis, where you saw a significant increase in the cost of risk, et cetera, but it's too early to make an assessment. We make EUR 11 million provision in order to be prudent.
And then I would like also to remind one characteristic of our portfolio. We have EUR 5 billion in the commercial and corporate banking, EUR 0.8 billion to the public administration. So we come back to 8.2 -- EUR 4.2 billion. Of this EUR 4.2 billion, we have EUR 300 million guaranteed by MCC, which is a state-owned entity. So we go back to EUR 3.9 billion. Of this EUR 3.9 billion, we have EUR 100 million more or less towards the pharmacies, the chemists, and then we have EUR 500 million more or less factoring towards larger, very big Italian companies like the top 20, 30 Italian companies. So our, let's say, risk portfolio, it's much smaller in size. We are thinking around about EUR 3.5 billion, something like that. And it's very strong granularity, it's short term. Let's say, the factoring is 3, 6 months. The average duration is for the leasing is 4 years. For the leasing, we have remarketable goods, so goods that have a potential for remarketing, cars, they have a residual value. We have technology, we have medical equipment that can be, let's say, repossessed and resold.
And if I can stress at this point, I'd like to say that in the first 9 months of 2020, the default was very, very low, but I don't feel safe about that. And our view is that in the last quarter of this year, we will do as much provision as we can to protect 2021 because obviously the effect of moratorium will disappear in 2020. And we have to be ready to face the end of moratorium. So in the benefit of this year, we have to provide some more provisions to protect next year.
So that's -- Regarding the other question, on the net interest, let's say, on the net banking income revenues, I want to call it. We don't provide a guidance, let's say, for Q4, but we expect more or less in line with the previous quarter. I remind that this year has been somehow strange because for each year -- for all the year, for each quarter, we work basically 2 months instead of 3. In March, we have the lockdown. April and part of May, we were closed, so we worked only for 1.5 months. August, courts and companies took all the seasonality, so we worked for 2 months. And now we have to see the impact of this, let's say, new lockdown. Courts will remain open. I would like to stress, courts, there will not be a shutdown in courts, but of course, this will slow the activity. And this slows the court recovery, will slow the commercial activity. So you may expect also that this quarter can be in line with the previous one as soon, of course, as the, let's say, courts reopen. I would like to stress that we are -- we deliver. You can see -- sorry, from the recovery in Page 6 of our presentation, we put the cash recovery. We are cash flat year-on-year despite all the COVID. And in several months in July, in August and in September, our cash recovery are above one of the previous year. So when we just have our activity, which is -- depends on court and the commercial efforts that we can have is impacted by COVID. But we -- first, there's no full lockdown. And second, as soon as there is any recovery, we are very quick in capturing it.
And regarding margin in factoring, we were -- you can see that there were somehow with a slight -- in the first quarter, second quarter somehow stable around, you can assume, 4.8% in terms of the net banking income average loan. So we don't experience much pressure in this -- even in this environment. Our value-added is on our speed, cash of the execution on -- our ability to provide cash very quick to the companies and our tailor-made services rather than on price.
Are there questions?
The next question is from Luigi Tramontana of Banca Akros.
My question is basically on the evolution of the volumes, especially in factoring, but also in leasing, given that the turnover on new businesses are impacted by the general situation. They were weak over the first 9 months, of course. How do you see Q4, especially in factoring where seasonality is very important in the last quarter of the year? In this first month of October, have you seen any pickup compared to the previous months? Do you think that by end of the year, you're going to have a significant demand given the situation or not? So any comments will be useful to understand how we should position for the end of the year.
This is, of course, Q4 is -- for us, it is usually the strongest now. We have to consider that we have a slowdown in activity. October was strong, was strong in terms of factoring, was strong in terms of cash recovery for the nonperforming. But we are still assessing now, I repeat, the impact of this new decree. It's difficult to make an exact estimate, but it will, for sure, be much better than what we experienced in March, April, and May. First, because we are ourselves, Banca IFIS, and clients are, let's say, not getting used to, but our experience, again, experience from the previous lockdown, and it's not as strict as the one that occurred in the spring. From this, drawing conclusion is a bit too early, but probably you can assume, let's say, in terms of a pickup, for sure, in the factoring, it's due to seasonality. You can still assume that new leasing business comes below the, let's say, normality, the running rate that we experienced in 2019. It's -- you can assume revenues, net interest income more or less in line with the previous quarter. It's difficult to make an exact assessment going forward.
Anyway, we're very strong in leasing and factoring and recovery. So I think this year, we're quite sure in terms of results -- our final results.
The next question is from Simonetta Chiriotti of Mediobanca.
Well, most of my questions have been answered, but I would like if you could discuss a bit more with us the impact of this second wave of COVID-19. I would say at this point, you have already discussed asset quality on the NPL segment, so on collections and on the market in terms of liquidity, portfolio on sales, sale and so on.
And also another question on the asset quality. How would you define your provisioning at this point? Do you think that it is a conservative level? Or do you expect -- I mean you already said that you expect more provisions. If you could recap on this point?
And well, finally, on dividends, what is the outlook in terms of dividends for 2020? And well, if you will be allowed to distribute them?
Thank you for the questions. And I can say that we have learned from previous experience and the experience we had in March, April and May. On that occasion, in a few days, we were able to turnaround in not working. And so now, in a few days, we'll turn back to not working and we continue to carry out our business. Quarter over, but distancing measure means low court activity, and we made a report longer time frames and slightly lower cash recoveries in NPL portfolio. And anyway, I would like to remind that about the 40%, 45% of assignments are in the face of public employees and retirees. So it is not danger in this section of our debtors. Obviously, the slowdown in economic activity may impact the asset quality of commercial and corporate banking. Of course, it's difficult to make an assessment at this stage as said before, Martino. It will depend on the speed of the recovery. However, I'd like to stress that the factoring has a double guarantee on the debtor and the creditor. In the leasing, and we are in the sector of cars, Apple products and equipment, and we are not in the sector of real estate, have residual and remarketable values. So the quality of the asset of our leasing is very good.
About the dividend. Now in accordance with the recommendation of the regulator on dividend policy, our Board of Directors decided to follow the guidelines provided by Bank of Italy and BCE. And we postponed the distribution of dividend of 2019 until the January 1, 2021. We will proceed with time and after this date if no regulatory provisions or recommendation from the supervisory authorities are issued against this. So we want to pay the dividend if -- we will able to do it. And we hope that the pressure of all the bigger European banks on the BCE will have effect. And I think we are absolutely in the condition to pay dividend because we are profitable, our CET1 has increased from the beginning of the crisis, our liquidity position is strong. So we -- I think that we have all the -- we are observing the position to pay dividend. I don't not know if I forgotten something, Martino.
No, no, that's perfect.
Your next question is from Andrea Lisi from Equita SIM.
Several questions from my side. The first one, even if, I think, in part, you have already answered to this question. You have said that you feel pretty confident to reach in the last part of -- I mean for the full year '20, the high range of the EUR 50 million, EUR 65 million guidance. You have already achieved EUR 52 million in the third quarter. You have still to book the badwill of Farbanca, that's around EUR 15 million. You -- this means that you expect for last quarter to be more or less at breakeven? Am I right? What are the drivers? I understood that you expected the net banking income to be pretty stable and the cost of risk to increase in order to anticipate some impacts of COVID that in 2021. And consequently, I want to ask you if there are also other elements to be considered there?
The second question is on the NPLs. You said -- I want to ask you if you are seeing some -- what are -- what is the environment you're seeing in the NPL tenders you are facing? So if prices are up or down? And just to figure out, in case of rebound of the economic activity in the next year, how flexible is your cost base? So how can you leverage on operating leverage?
The very last point is just if you can explain how -- maybe this is more an accounting theme. You have a really strong cash collection in the NPLs, but still in the 9 months in terms of NPL revenues, we are significantly minus 30 -- approximately minus 30% with volumes that are up. So if you can give us a bit more clarification on that?
Okay. I will go to the question on the guidance. Of course, we gave a guidance between EUR 50 million and EUR 65 million. And we have already given this guidance of EUR 52 million. We have bargain of Farbanca, which will be recorded before if we get the authorization from the Bank of Italy. This [ 15 the month ] will drive -- should not drive to certain conclusion. For sure, what we want to do is to be prudent. And we are still assessing the potential impact of this crisis in terms of asset quality, the level of -- our level of provisioning. For sure, we prefer to go in advance. As you see, we posted EUR 11 million provision on the moratorium this quarter rather than get caught in 2021 and have to put, let's say, more provision in next quarters in the future. So basically, you are right, I think it's more a question where we put part of the impact of this crisis in which quarter, in which year, but definitely, the message is that we would like to be prudent. Then we do hope to beat, of course, the guidance that we have provided. But let's see how next weeks will develop. That's for sure.
Regarding the nonperforming, you put an interesting question that is probably many people ask for. We reported cash collection. The cash -- very strong cash collection, the cash collection and based on the nonperforming that have been already worked out, okay? So when we buy nonperforming, we work out this nonperforming, and this can take from a few months, 1 year, if it is extrajudicial activity; 2.5 years, if it is judicial activity. So we go through the court system, and then we start to cash-in. So there is a time lag between when we buy and when we start to get the cash. In the meantime, I would like to stress that the workout is when we post all the costs, okay? So all the costs because we have to pay our -- the incentive to our extrajudicial recovery networks. We have to pay all the expenses of the court system. So that's why the -- let's say -- and on the cost side. On the revenue side, the nonperforming as soon as the workout proceeds successfully, for sure, the nonperforming increases in value. So the cash collection were based on the nonperforming that's been already worked out. They keep on paying. And this has been for, I don't know, work out 1, 2, 3 years ago, our existing portfolio. For the nonperforming that are in the process -- have still to be worked out or need to be worked out or are in the process of workout experience some delay. This delay, for sure, is reflected into the P&L because the nonperforming do not increase in value, do not benefit from the workout. And that's the reason why there is discrepancy between the cash collection and the P&L. But remind it, when we arrive at the cash collection, all the costs have been already worked out. So the cost income of the nonperforming portfolio is, let's say, very high, 60%, 70% in the first years. And then it goes to, let's say, 10, 20 at -- after a few years when the portfolio has been already worked out because all the activity has been already, let's say, carried on.
Then regarding the -- you asked further 2 questions on the -- on our cost base. Our cost base, the workout of the nonperforming has some variable costs, which are linked to all the judicial and extrajudicial activity. The incentives paid to the employees, to the networks when they recover the judicial activity the court -- the expenses of the court and of the external lawyers. This can be 20%, 25% of the net income, so -- the net banking income. So if we record, a lower net banking income of 100, we may have 20, 25 lower variable recovery cost. However, this is not the savings that we'd like to pursue, of course, because we record revenues.
I would like to stress that on the personnel and G&A, the operating costs, we are disciplined. We don't expect much variable compensation in 2020 compared to 2019. And in the second quarter 2020, we posted a EUR 7 million provision to the solidarity funds for voluntary exits. So cost discipline. And let's say, we carried on part of the plan of the exit plan that we announced in the context of our industrial plan in 2020, 2022.
Finally, on the price of the nonperforming. The price of the nonperforming really depends on the competition. Current and on how the foreign player, especially the hedge funds, compete -- aggressively compete on their prices. Price of our category are relatively stable, slightly down because of the longer time frame, but let's say, maximum -- let's say, single-digit decline due to the COVID. Remember that we have 1.3 million borrowers. We have a very long -- relatively long recovery time frame of 7 years. 40% of the order of assignment in the face of public employees and retired people, which are relatively stable. Eventually, the court shutdown impacted only the time frame of the legal recovery process. Borrowers, remind it, are still bounded to their legal obligations. Other categories of nonperforming may have -- may experience higher decline in prices. You have really to go case by case. In our category, remind that we are also lucky because there are not much, let's say, maintenance cost. For us, the maintenance costs are extremely limited. If you have real estate, you have all the -- all -- you have to pay all the expense of the maintenance and the taxes on the, for example, the real estate.
I hope that I was clear, especially on the nonperforming.
[Operator Instructions]
Okay. We would like to thank you for attending our call. We are at your disposal for any call or video call that you would like to make. Due to COVID, we cannot meet in person. And thanks for attendance. I hope that you appreciate also the fact that we are slightly prudent in front of the crisis, but let's say, we remain positively optimistic. And we believe that the bank has a business model, which will allow to face this crisis in, let's say -- and to overcome this crisis. We are in the solid business model. CET1, let's say, is well above our SREP level, and profitability, of course, it was impacted, but, let's say, not so much.
Thank you very much, and good luck, everybody.
Thank you. Bye.