illimity Bank SpA

MIL:ILTY

Earnings Call Transcript 2024-Q3

[Operator]

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the illimity 9 Months 2024 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Corrado Passera, Chief Executive Officer of illimity. Please go ahead, sir.

[Corrado Passera, executive]

Thank you, and good morning. Welcome to illimity's 9-months results presentation. Let's start from Slide 3. We are at a pivotal moment at illimity. Our strategic shift is setting the stage for greater resilience and long-term growth. Historically, as you certainly remember, our focus was on the one side on SME lending performing and reperforming as well as on the other side as NPE portfolio investments, the latter contributing significantly to our results.

However, due to regulatory changes and market conditions, we exited direct NPE investments last year, simplifying operations and aligning with our long-term goals. Now as a streamlined SME bank, we are concentrating on performing and reperforming lending, huge markets where we have unique strengths. While short-term profitability faces challenges, our strategy focuses on SME lending growth, cost reductions and unlocking value from noncore assets.

In line with this, our strategy of executing major annual transactions continues. And today, we are pleased to announce our latest initiative that further leverages our technology assets. Let's move on Slide 4 for a closer look. We just announced a partnership with APAX Partners to advance our asset valorization strategy, unlocking the value of past tech investments and enhancing our competitive edge. The partnership will form a new company focusing on digital products, tech consulting and banking services.

We will hold a 48% stake of the new company. We will outsource our IT systems to this entity for 10 years, ensuring IT cost savings while maintaining top-tier digital client services. Moving to Slide 5. We are expecting significant financial gains, adding approximately EUR 54 million to our profit once completed, expected by December 31, '24 or early '25. The transaction will also boost our capital by around 70 basis points, providing a stronger base for future growth.

Outsourcing IT to the new company will lead to long-term cost savings while ensuring high-quality digital services for our clients. Our ongoing stake in the new company also ensures additional revenue from its tech-driven activities. Such future revenues will add to the royalties we expect from our successful partnership with Engineering. Let's now move to Slide 6 with key highlights of the results. The 9-month net profit stands at EUR 31 million with a resilient underlying operating profitability.

Corporate and Investment Banking profitability increased with pretax profit up 9% year-on-year. Business origination and specialized credit is steadily growing year-to-date. Capital and liquidity positions remain strong. Core Tier 1 ratio is at 14.4% with a liquidity buffer of EUR 1.1 billion. Asset quality remains under control with the gross NPE ratio, excluding public guarantees, confirmed at 0.6% and the cost of risk at 69 basis points, down from the previous quarter. Tech ventures, Hype and b-ilty have confirmed their positive trends. Moving to Slide 7. Despite exiting from direct NPE portfolio investments, our underlying operating profitability remains largely in line with last year.

Operating profit came in at EUR 68 million from EUR 71 million, excluding extraordinary revenue from the IT partnership. Operating income reached EUR 222 million from EUR 228 million, underpinned by fee growth and SME lending business. Costs have started decreasing compared to the same period of last year with further reductions expected to accelerate in the fourth quarter. We anticipate stronger cost reductions ahead, in particular, in 2025, driven by savings on due diligence and servicing costs for NPE portfolios.

Slide 8. We confirm a solid capital and liquidity position. The Core Tier 1 ratio stands at 14.4%. As indicated by the regulator with regard to the prudential treatment of a specific senior-note securitization, which positively impacted the Q4 2023 P&L, we sterilized its effect on capital, resulting in a 40 basis point reduction. This impact may reduce over time due to collections and disposals. This reduction has been largely offset by the removal of reserves on government bond holdings effective since July under CRR regulation. Furthermore, we agreed with the regulator to complete an additional analysis of specific asset classes represented by senior notes and fund units by year-end.

On the liquidity front, our buffer remains strong at EUR 1.1 billion with regulatory ratios well above the minimum requirements. Slide 9. Our Corporate and Investment Banking business reported continual growth in profitability. SME lending origination rose by 15% year-on-year, reflecting high demand for structured lending in the corporate sector. Pretax profit increased by 9% year-on-year. Cost income at 21%, demonstrates excellent operating leverage.

Slide 10. Asset quality remains under control. 57% of total loans are backed by public guarantees or credit insurance. The organic NPE ratio, excluding state guaranteed positions, continues to stay very low at 0.6%. The total organic NPE ratio, including public guarantees, is at 5.4%, almost entirely represented not by NPL positions, but by UTP positions under restructuring. The annualized cost of risk is down from the previous quarter at 69 basis points.

Let's move to Slide 11. This year, our specialized credit division is completing its transition. New business origination has been steadily growing since the beginning of the year and is up 37% quarter-on-quarter. We expect core revenues to benefit over time from volume growth. Cost down 14% year-on-year with savings that will become more visible in the next quarters following the business mix change.

Moving to Slide 12. ARECneprix, our asset management company specializing in large real estate UTP positions posted a remarkable profitability progression. EBITDA posted a strong increase to EUR 11.2 million, significantly up from EUR 4.7 million last year, driven by third-party mandates, structuring and advisory fees. Slide 13. Our SGR posted a significant increase in profitability. Pretax profit increased by 62% year-on-year, driven by assets under management growth with new funds in preparation. Now let's move from core businesses to other activities.

Slide 14. Technology has consistently driven our success. The partnership we announced today with APAX, along with the partnership with Engineering will contribute to our future profitability. On top of that, we can rely on our tech ventures to generate additional capital for future growth. Starting with Hype on Slide 15. Hype, one of Italy's leading retail fintech platforms, showed strong improvement year-on-year. 9-month net profit is at EUR 1.3 million, a significant turnaround from EUR 5 million loss in the same period last year.

Both accounts and transactions continue to grow steadily. Moving to b-ilty on Slide 16, b-ilty, our lendtech for small corporate, posted another strong quarter in business origination. Net customer loans steady progressed, all backed by public guarantees. Profitability improved further. Slide 17, Quimmo. Quimmo, our PropTech has consolidated its leading position in the judicial market by increasing its market share and is progressing in its development in the nonjudicial market. Results are still impacted by the reduction in national bankruptcy figures over the last 2 years, but this trend started reversing recently with expected benefits on future profitability along with ongoing cost reduction. Silvia, our CFO, will now provide a comprehensive review of our Q3 2024 results.

[Silvia Benzi, executive]

Thank you, Corrado, and good morning, everyone. Let's move straight ahead to the balance sheet figures on Slide 19. Net customer loans grew by 12% in the quarter, driven by robust growth in SME lending, which increased by 3% quarter-on-quarter. This growth was strongly supported by contribution from Structured Finance, Special Situation desks and b-ilty, which altogether posted a notable 6% growth on a quarterly basis. Additionally, it reflects the shift of the Specialized Credit division towards asset-based components. Our excess liquidity remains robust and is invested largely in government bonds with less than a 3-year duration and about 3% average yield. All in all, total assets stood at EUR 8.3 billion, up 3% quarter-on-quarter and 22% on a yearly basis. Our funding also increased this quarter, driven by the wholesale component. We will provide more details shortly.

Moving to profit and loss on Slide 20. Profitability on a 9-month basis remains broadly stable if compared to the same period last year. If we exclude the IT platform revenue booked in 2023, what is down on a quarterly basis is affected by the seasonality of some of our businesses. Point number one, net interest income was down 3% quarter-on-quarter. This dynamic reflects the high cost of funding related to the bond issued in May, whilst interest income was up in the quarter, supported by corporate banking activity.

Year-on-year trend is affected by higher cost of funding and reduction in direct distressed credit investments. Point number two, net fees in Q3 are affected by the unfavorable seasonality in August for credit servicing and real estate brokerage businesses and also reflected lower business origination in corporate banking compared to Q2. Year-on-year trend shows a 21% growth, driven by business origination advance, an increase in investment banking activity and new third-party mandates in the servicing business.

Point number three, other income reported a soft performance quarter-on-quarter, owing to limited trading, quiet activity of placing derivatives to corporate clients and little contribution from revenue arising from assets at fair value. The comparison on a yearly basis was affected by the profit recorded on the partnership on our IT platform booked in the first half of last year and by the shift in our distressed credit business, which used to generate significant profit from closed positions.

Point number four, operating costs have started declining both on a quarterly and on a yearly basis. We have implemented cost-cutting measures following the shift in distressed credit strategy. Reduction in operating costs is set to continue in the next quarter. Point number five, loan loss provision charges are down quarter-on-quarter and stabilizing at 69 basis points. Now let's move to Slide 21. Our capital base is solid with a Common Equity Tier 1 ratio at 14.4% and a total capital ratio at 18.4%. This quarter was characterized by some moving parts that you can see highlighted in the slide.

As indicated by the authority about the prudential treatment of a specific senior-note securitization transactions that led to a positive impact on P&L in Q4 of around EUR 28 million net. We sterilized its effect on capital. This impact amounted to a negative 40 basis points is largely offset by the benefit coming from the removal of reserves on government bonds according to the CRR regulation and is expected to reduce over time as a result of collections and/or disposals. Risk-weighted assets remained stable despite volume growth, thanks to the implementation of optimization measures.

Finally, let's move to our funding on Slide 22. Funding was slightly up in the quarter, while keeping a well-diversified mix. Retail funding from our retail platform, illimitybank.com remained largely flat, while we tactically reduced our funding from the rising platform. Wholesale funding was up quarter-on-quarter due to some collateralized interbank funding transactions. Our blended cost of funding stood at 4% in September, in line with expectations, and we expect a gradual decline from 2025. I now hand back to Corrado for final remarks.

[Corrado Passera, executive]

Thank you, Silvia. Our current profitability certainly does not yet reflect illimity's true potential. The temporary impact of our strategic decision to exit NPE direct investments, along with the peak funding costs has affected the short-term results as planned. However, our potential will be clearly demonstrated in the new business plan, which will be -- which will leverage on 3 important points: the growth opportunities in our SME lending activities, significant cost reduction initiatives to enhance efficiency, further strategic valorization of our noncore assets.

With regard to the timing of the new business plan presentation, in order to incorporate the effect of the recent transaction on tech assets and other potential valorizations into limited growth estimates, we deemed it appropriate to postpone the presentation of the new business plan to 2025. Thank you for your attention. We now look forward to addressing your questions.

[Operator]

[Operator Instructions] The first question is from Manuela Meroni, Intesa Sanpaolo.

[Manuela Meroni, analyst]

The first one is on the APAX transaction. The positive impact on the capital base is huge and clear 90 basis points. Could you share with us the recurring impact on the P&L in its different components? So I'm thinking to the annual fees, the expected income from the stake in the NewCo, the earn-out and the cost savings you mentioned EUR 13 million in 4 years and other elements that we should consider.

Again, on APAX transaction, in the press release, you stated that the full outsourcing achieved provides a greater flexibility for the future growth opportunities in your business. Could you please elaborate on those opportunities? What are you seeing and what is the evolution of the business that you are considering also taking into consideration the presentation of the business plan in 2025?

Third question is on -- if you can share your thoughts on the potential evolution of your partnership with Azimut. We have read some press article that were not very clear to me. So where we are now with Azimut and what could be the potential evolution of such a partnership, if any? Then in the press release, you mentioned the review of a selected asset class foresee in the first quarter of the year. Could you please elaborate on that? And what is the magnitude of the impact that we may expect? And last question is on your NII, so the sensitivity of your NII to rates decline.

[Corrado Passera, executive]

I will leave a number of details to Silvia as far as the APAX transaction is concerned. It's an important one. The combination of what we got through the partnership with Engineering last year that is developing successfully and what we are getting from the APAX transaction this year makes in the round of EUR 100 million. That means that we have recovered practically 100% of our investments in technology.

And we will benefit from now on not only from the capital implication in capital effects that you mentioned, but also from a number of economic effects, royalties from both companies, profits from our 48% share in the company we are creating with the APAX Group. Silvia, maybe you can add some more color...

[Silvia Benzi, executive]

Yes. And, in terms of the, let's say, running savings, we commented in the press release that we expect the annual saving to be in the region of 6% of what is today our running costs for the IT platform, which is EUR 3 million, EUR 4 million per year in terms of cost savings. And then we are also expecting a nice contribution in terms of profits from equity shareholdings into the NewCo. So those are the 2 main positive of the transactions on top of the ability to reinvest the capital generation into investments in our core business, clearly.

[Corrado Passera, executive]

Exactly. In terms of opportunity -- growth opportunities, the business plan will develop on this point, but we will be more and more centered on our main and core business that is SME lending. SME lending means performing growth credit, acquisition credit, structured finance and reperforming credit. That means special situation, restructuring kind of financing, where we clearly and objectively developed a quite a distinctive position on the market.

Asset-based financing is growing in its importance. But again, is one way we can support SMEs where asset-based opportunities are available. Partnership with Azimut. You said that what came out on the press is not clear. I agree. It's not clear to us either because we know what we have done with Azimut. We are long-term partners with them. We developed -- and we are providing their current accounts with a number of banking services, and that's certainly something we are proud of and that will develop. Nothing else today is on the table in terms of further collaborations. But certainly, we have been close to Azimut, and we are proud of that. The fourth question I missed maybe Silvia...

[Silvia Benzi, executive]

Maybe first, I'd like to comment on the questions regarding what we mean when we say that we do have flexibility on the contract?

[Corrado Passera, executive]

Yes.

[Silvia Benzi, executive]

So basically, the agreement provides for the full outsourcing of our information system to the NewCo with a 10-year contract. So we signed a service agreement. We have agreed upon paying a certain level of service fee, but we clearly bid on flexibility around the annual amount, which means that upon certain conditions, the annual service fee can be lower.

So we believe that in that way, we can manage the growth of our business, and we have a clear operating leverage built within the service fee. And at the same time, we can manage other strategic options. That's why we say we built a flexibility within the contract, but at the same time, we are making sure that we remain on top of the technology evolution.

[Corrado Passera, executive]

You can keep going on the net interest income sensitivity.

[Silvia Benzi, executive]

Net interest income sensitivity is mid-single digit -- low to mid-single digit. Andrea?

[Andrea Clamer, executive]

As you mentioned, we took the commitment to complete by year-end an analysis aimed at verifying the valuation classification of our senior note transaction funds unit contribution. And we don't see any relevant impact, also considering the benefit coming from the valorization of our tech assets. And please take into account that the performance so far of these vehicles are above or in line with our initial expectations. Okay.

[Corrado Passera, executive]

Any other questions?

[Operator]

The next question is from Davide Giuliano, Equita.

[Davide Giuliano, analyst]

I have some. The first one is how much revenues do you deconsolidate with the NewCo? And are there some perimeter overlaps with the Engineering royalties for the future? The second one on the capital gain, you have always indicated that you want to use it to finance growth of the SME business or increase shareholder remuneration. So I was wondering with this 90 bps of additional capital, what do you intend to do?

Are you considering an additional dividend at least in part? And the third one on the specialized credit division, net interest margin, it continues to be particularly subdued compared to the NPL business despite the gradual ramp-up. How does this fit into the goal of profitability in line with the previous profitability of the NPL business? Is it only a matter on cost of funding or there is something more? And just a fourth one, if I may, can we consider 45 bps as a reasonable organic core for the next few years?

[Corrado Passera, executive]

Okay. As far as the revenues and the overlapping of the 2 partnerships, we have designed this partnership in a way that does not create any overlap between the 2. The partnership with Engineering that we signed last year and that is developing successfully is the commercial partnership to market a number of applications that illimity developed in the first years of our life. And they are clearly interesting for a number of potential buyers.

The focus on the partnership with APAX is more on software products that illimity developed in the area of artificial intelligence of cloud management and of ESG reporting. The way we will use the equity that we are freeing will be more clear in the business plan. As you said, the 2 main directions are growth. Probably, we can say it is the priority for us in order to reach that critical size that will optimize our profitability. But at the same time, we cannot exclude that revenues coming from noncore assets disposal might also be used in the future for increasing shareholders' remuneration. All these issues will be clearly explained in the business plan. I will leave the specialized credit issues to Andrea and then to Silvia.

[Andrea Clamer, executive]

It's not an issue. It's an opportunity, I say, in relation to the ABF, we have a profitability that is in the range of 11%, 13% taking into account that now we have a book that is EUR 130 million, that is very low compared to our previous book. Taking into consideration that transformed book with securitization, with funds quotes accounts for more than EUR 1 billion, and this book has an IRR of -- in the range of 5%. Then what we have to do is to decrease this back book, to increase the new book we have that has an IRR that is in line with our previous IRR.

[Silvia Benzi, executive]

And last was -- I guess, was the question on the organic cost of risk that we might foresee for the future. We posted 45 basis points in Q3. In the 9 months, the number is in the region of 70 basis points. Probably, we could be between 70 and 80 basis points for the full year 2024.

[Operator]

[Operator Instructions] The next question is from Violeta Baraboi, SocGen .

[Violeta Baraboi, analyst]

Actually, I might have missed because unfortunately, I had to join a little bit later. My question relates -- and maybe it was asked, but my question relates to the capital structure. And I'm trying to understand a bit...

[Corrado Passera, executive]

Sorry, what is your question, relates to what?

[Violeta Baraboi, analyst]

To the capital structure.

[Andrea Clamer, executive]

Yes, capital structure.

[Violeta Baraboi, analyst]

So yes. I was trying to understand a little bit in terms of funding, if there is any appetite for limited to issue an additional Tier 1. And so that's the first question. And also understanding a little bit if -- how do you see think of funding in terms of Tier 2 and senior potentially into next year?

[Silvia Benzi, executive]

So I mean, the -- we are always looking at opportunity to optimize our capital stack. We are very aware that there is a market there for the AT1, but we are open to consider every form of optimization of the capital stack. I mean our capital base today is very solid per se, but...

[Corrado Passera, executive]

Certainly, one area that will support the further strengthening of our capital structure is the area of the disposal or the valorization of our nonstrategic assets. As you know, we announced, I mean, that we have in mind to have at least one main transaction every year. We started last year with the partnership on our IT platform. We continue this year with the APAX partnership, but we will try to keep this pace and prove with this kind of deals, the value we created in the last years in our tech ventures.

[Violeta Baraboi, analyst]

Understood. So the focus would be more on disposing and then kind of building CET1 ratio rather than optimizing, would that -- is that a correct understanding? And then a second question, sorry, I might have missed it, but there were headlines on Azimut being interested in buying some of your assets. Maybe you've mentioned something during the call and I missed it. Can you comment on that?

[Corrado Passera, executive]

I will elaborate a bit on the first question and your comments. Nonstrategic asset disposal is one of the way we will use to accelerate the creation of capital and equity to finance our growth. Obviously, the main source will remain the profits coming from our activities. And another area of source of equity is the optimization that we are trying to apply to any of our activities to reduce the equity component.

So these are the 3 main levers we will use to accelerate creation of equity and availability of equity for both growth on the one side and shareholders' remuneration on the other side. As far as Azimut is concerned, what we said before you joined is that we have a useful, interesting collaboration with Azimut. We have powered, if I can use this word, their current accounts, and we are providing their customers a number of banking services. This partnership -- this collaboration has increased during the years, and we cannot exclude that other collaboration can arrive. But as of today, there is nothing else on the table.

[Operator]

[Operator Instructions] Mr. Passera, there are no more questions registered at this time.

[Corrado Passera, executive]

If there are no other questions, I thank all the people that attended our call. As I said, we are going through a very important shift -- strategic shift. And we are becoming more and more an SME banks that use all these assets to grow and increase its profitability. So thank you very much to everybody.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.