illimity Bank SpA

MIL:ILTY

Earnings Call Transcript 2022-Q4

[Operator]

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the illimity Bank Fourth Quarter and Full Year 2022 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 Bank. Please go ahead, sir.

[Corrado Passera, executive]

Thank you very much. Good morning. Thank you for joining us to all of you. This presentation marks our fourth year of operation. 4 years ago, there was practically no illimity. Then, we started lending and investing, so we broke even, then we grew to a team of 900 people into a pretax profit of more than EUR 100 million. We achieved all of these in just 4 years and under circumstances, not always easy. We are proud of what we have done in 4 short years.

We have tangibly proven that we are highly capable of continuing high growth together with high profitability, while continuing at the same time investing for the future.

Let's go now to the presentation. First, I will focus on the main trends and key highlights as well as the outlook we see in front of us. Then Silvia, our CFO, will provide more detail on Q4 and the fiscal year 2022. In the appendix, you will find the usual further information on each business division. This information will be used during the Q&A section, also by the division leaders who are here with me.

Moving straight to the results on Slide 2. As planned, we confirm a very nice acceleration trend in the second part of the year, both in volumes and profitability. New business originations more than doubled quarter-on-quarter to over EUR 660 million, making this quarter the strongest quarter of the year. Operating income advanced 22% on the previous quarter, driven by an increase in net interest income and net fees, which grew 40% quarter-on-quarter and is expected to further increase in 2023. Net profit went up 29% Q-on-Q to almost EUR 25 million, confirming the typical seasonality pattern of illimity's earnings stream, highest quarterly net profit ever.

Slide 3. Overall, 2022 was yet another year of steadily improving results from any point of view. The guidance was met reporting a profit before tax slightly above EUR 100 million, up 25% year-on-year and EUR 75.3 million net profit, up 15% year-on-year with a return on equity of approximately 9%. Loans and investments grew significantly, up 37% year-on-year, reaching EUR 3.8 billion.

The risk profile remained very low with a gross organic NPE ratio of the business generated by limiting at 1.8%, among the best-in-class. Core Tier 1 ratio came in at 15.8%. With a buffer of more than 660 basis points on top of our SREP requirements. Liquidity buffer that will support growth sits at approximately EUR 600 million.

Slide 4. Our trends since inception, despite the challenges, demonstrate a remarkable combination of growth and profit. On top of all of this, we also managed to keep investing for the future. We launched three tech initiatives that will further add to the value of our group.

In 2022, we completed the development of our unique new generation IT system, and we completed the building of our central and control functions that are now ready to ramp up the group. Growth profit and strategic investments altogether is a combination of strength, not often found in the new world of financial services.

Moving now to our main ESG achievements on Slide 5. At illimity, we follow them up on make profit and be useful. Sustainability has always been at the forefront of all our strategies. ESG values and targets are embedded in our processes and governance rules. The evidence of our results is visible in the huge number of rating improvements we received this year.

On this slide, you can see only a few of our achievements. We are already carbon neutral in Scope 1 and Scope 2. We are gender equality certified and Best Workplace in Europe. And in addition, we launched the illimity Foundation supporting urban regeneration projects. Our targets for the coming years in all ESG areas are very ambitious. These targets will keep us at the forefront.

Moving now to our core businesses and starting with the excellent results of our SME businesses. SME business results come from both our Growth Credit division and our Investment Banking division. I want to highlight here that also the Investment Banking division, which started its activity during 2021 is already a well-recognized player in the SME market.

Overall, we reported exceptional growth in both volumes and profitability. Net customer loans increased by more than 50% to EUR 2.2 billion year-on-year, underpinned by strong business origination in all areas of activity, gross financing, acquisition financing, turnaround financing and factoring. Operating leverage gains are very visible with the cost income further improved to 27%.

Pretax profit is up by 79% to EUR 61 million year-on-year, driven by significant acceleration in both divisions. There is no doubt that the SME market has huge potential with more than EUR 750 billion stock of performing loans at system level, and it offers a number of very attractive segments open to exploit for a specialized bank, like us.

Moving to Slide 7. Our prudent and disciplined approach, one as outstanding asset quality, despite a more difficult environment than affected. The gross organic NPE ratio of the originated business since inception is still very low at 1.8% -- actually is 0.5%, if we exclude the loans with public guarantees. The role of industry experts, the tutors here is very crucial.

About 55% of the stock to SMEs is backed by public guarantees or it is insured. Stage 2 loans represent only 3% of the outstanding loan book. In addition, our loan book is highly diversified across more than 30 economic sectors, none of them with a concentration higher than 10% of the total Growth Credit book.

Slide 8. Now looking at our distressed credit division that includes three different businesses, all enjoying relevant synergies but with very different economics, cost income ratios and equity consumption. The investment business here on this slide, the servicing business, we incorporated in ARECneprix and the real estate brokerage business, we incorporated in Quimmo.

On this slide, we can see the very solid result of the investment business. Business origination was very strong, up 61% on 2021 and totaling EUR 562 million. Profit before tax was a huge EUR 123 million proves continue high profitability, which does not include any revaluation based on models. Operations remain very lean with cost/income ratio of 29%.

Accumulated cash flow amounted to EUR 156 million, demonstrating a continuous overperformance on our initial business plans. The distressed credit investment business has a strong growth potential also given the large amount of Stage 2 loans at system level that are expected to follow at least partially the worsening climate.

Slide 9. We are often asked about the impact of the new scenario on our distressed credit investment portfolio. And we always respond confidently, thanks to our asset mix and our very prudent pricing models. We expect to maintain our position. 79% of our total investment is secured with high real estate collateral type diversification. Our net book value of EUR 700 million is backed by a judicial value of our real estate collaterals of almost EUR 1 billion and EUR 1.5 billion of open market value. Meaning, we have a buffer of more than double the net book value against the possible further deterioration of macroeconomic environment.

And on top of this, the average duration of our distressed credit portfolio is about 2 years, meaning that even if we were a short-term real estate market correction, the bulk of our portfolio would have the necessary time to be properly valorized.

Let's look now at our servicing business and at the newly merged ARECneprix on Slide 10. During 2022, we significantly strengthened our position in the servicing business through the acquisition of AREC. This decision has made us the third largest player in Italy in the corporate UTP management industry. In terms of figures, we report a total asset under management equal to approximately EUR 10 billion. Pro forma revenue amounts to EUR 34.7 million with an EBITDA margin of 33%. And the pretax profit of EUR 11.4 million.

This strategic maneuvers has given us a very valuable scalable model with significant economies of scale, expected and more specialized approach to large ticket real estate asset management.

I'd like to go ahead now, and highlight the strategy behind our three tech initiatives, starting on Slide 11. In addition to gaining very satisfactory results from our 2 core businesses, we launched three innovative tech initiatives that will all create substantial value for our shareholders b-ilty, Quimmo and Hype. Over the last 2 years, we invested a fraction of our profit, pretax profit impact of close to EUR 20 million in 2022 to these initiatives. In order to exploit even further, the opportunities of the ongoing digital transformation in the banking industry. These initiatives are now fully operational. We expect them to reduce their negative contribution to P&L significantly already in 2023 and to become increasingly profitable from 2024.

They will accelerate the new equity creation for the illimity Group also through strategic partnerships. As we all know, the true value of this kind of assets is only partially based on the short-term bottomline.

Slide 12. Starting with b-ilty. We invested in b-ility to capitalize on the untapped small corporate market and on our skills in SME lending and data technologies. Nowadays, many traditional banks have forgotten about this market. in Italy alone, there are 1 million underserved small corporates, and we see no other competitor inside, taking a similar approach. B-ility, a first in Italy and certainly among the first in Europe, is a fully fledged digital bank, designed specifically for small corporates.

The deliberate delay launching this initiative, ensured we refined the artificial intelligence credit machine to the perfect level of effectiveness. The digital services beauty offers are already more comprehensive than any other competitor, but will get progressively broader and broader. Not only are all products available 24/7, but every customer enjoys personalized care, direct from their own personal account manager. These innovative initiatives joins much needed digital innovation on the one side with available expert human interaction and support.

Now into Quimmo on Slide 13. Quimmo, our proptech is another worthy investment and is already the leader in the real estate digital brokerage for the judicial market. Assets under management are equal to EUR 2.2 billion with approximately 90% from non-captive business. Growth potential can be seen not only in the judicial market, but also on the larger free market. Quimmo, unlike most of our competitors has been profitable since before 2022. Despite investing this year's margins to enter the free market, we still closed fiscal year 2022 to close to breakeven. Quimmo will grow independently, and we will continue to look for innovative ways to accelerate growth. Partnerships will be an effective way to do so.

Slide 14. Hype is already the fintech market leader in Italy for retail clients and one of the biggest in Europe for numbers. We jointly own it with the seller group. And over the last 2 years, we invested primarily in structure and technology. Hype records the following results: a customer base of EUR 1.7 million up 11% year-on-year, with 22% sales subscriptions. Transaction numbers increased to EUR 103 million by 36% year-on-year.

A positive contribution margin since Q4 '21, a breakeven expectation date of 2024. Less than a month ago, we proudly welcomed the Hype's new CEO, [indiscernible] one of the most highly regarded top managers in the payment world. His objective now is to accelerate and enrich types ambitious development projects.

Turning back now to illimity as a group. It is only through innovative technologies entrepreneurial spirit that the bank can continually come up with capturing market opportunities and turning them into profitability and solid growth. These two elements are our distinctive strength and we think of them as competitive advantages.

Let me explain more on Slide 15. We know technology will reshape the banking industry and machine learning with artificial intelligence technologies opportunities are potentially enormous. Considering this, we strategically developed an innovative, unique legacy-free new generation IT architecture. When we say new generation IT architecture, we mean fully digital centered on data, fully modular, reducing integration costs by orders of magnitude, the opposite of mainframe-based system, which needs and less in cost intervention.

Cloud native with elaboration power and the level of cybersecurity that traditionally only megabanks can enjoy with the fraction of traditional systems, CapEx and OpEx. The significant investment is well behind us. And we are now starting to reap the rewards of such innovation in operational efficiency, and effective decision-making processes.

Moving on to entrepreneurship. I'm talking about us, the illimiters. illimity was founded and is now led by a group of entrepreneurial to managers with very relevant experiences. They almost 900 team members bring to illimity an incredibly high level of diversity. More than 20 industry and even more nationalities. They survived the pandemic award and serious inflation, and they always found new opportunities. We will keep devoting a lot of effort to attract and retain top talent. And to develop each illimiters potential because we know that the quality of the -- and the motivation of people will become even more crucial in the foreseeable future.

And now, what we expect for '23 and beyond our outlook.

Slide 17. Our strategy is reconfirmed, and we will continue to focus on the most attractive segments of both SME and corporate distressed markets. We will work dynamically by optimizing the use of capital and of funding, also through the best use of our SGR, which is developing rapidly. The two present funds will become at least four by the end of 2023. We will take our three tech initiatives to full deployment. We will defend our technological edge by applying the best data and the AI technologies to all our activities. We will keep investing in the illimiters, and we will distinguish ourselves even further in terms of our ESG responsibility.

Lastly, as we've always done, we will keep the right balance between short and midterm targets. Moving to my last slide, Slide 18. You are certainly going to ask me, if we are reconfirming not only our strategic trajectory, but also the business plan targets we set almost 2 years ago in spring 2021. Most assumptions have been profoundly affected by the enormous disruptions the world has faced. Geopolitical and macroeconomic uncertainties are probably there to stay, at least for the short term.

Therefore, the guidance we can provide today must necessarily be very prudent. Even so, we feel confident to deliver a good net profit of EUR 100 million in 2023 and EUR 200 million in 2025. To reflect our commitment to going beyond the guidance I just gave you, for 2023. Our top management rewarding scheme, kicks in only above EUR 100 million net profit.

Now Silvia will go into more detail on our full year 2022 results. Silvia?

[Silvia Benzi, executive]

Thank you, Corrado, and good morning, everyone. Our Q4 results were solid, driven by accelerating business origination in the last part of the year, which is a common characteristic of our business.

Let's move straight ahead to the balance sheet figures on Slide 20. In the last part of 2022, our balance sheet continued to grow, driven by the interest-earning asset components. While maintaining a strong liquidity position of around EUR 600 million. Net customer loans increased further in Q4 by 14%, bringing the annual growth to a strong 37%. The advance in volumes was mainly driven by the Growth Credit division with all business lines contributing to the trend.

Distress credit loans and investment grew by a solid 18% over the year, as business origination outpaced repayments collections and disposals. On top of this, the Investment Banking division also posted significant volume growth. Our financial portfolio gradually increase over the year, driven by investments in the hold-to-collect strategy to take advantage of the rates environment. Switching to liabilities. Financing sources also expanded in the last quarter, driven by both retail and wholesale funding that's keeping a good diversification.

Moving to profit and loss on Slide 21. Net interest income progressed by a strong 22% year-on-year and 10% quarter-on-quarter, benefiting from core business volume growth that more than compensated for the slight increase recorded in cost of funding in the last part of the quarter, following a hike in interest rates.

Commissions significantly up 73% year-on-year and 40% quarter-on-quarter, driven by strong business origination in our core businesses, acceleration in third-party servicing mandates. Further progression of the Investment Banking division and increasing activity at illimity SGR.

Profit from close positions rebounded in Q4 following a seasonally soft Q3 and confirming to be a significant contributor to illimity's revenue. Operating costs increased by 21% year-on-year due to sizable new hiring, investments to complete operational structure and launch of new businesses. The increase in Q4 was related to both the seasonality of low Q3 and business growth in the last part of the year. Loan loss provisions include generic provisions on the loans originated and some analytical impairments.

Finally, in the quarter, we booked a EUR 6.4 million value adjustments on the distressed credit portfolio. This is the result of periodical business and reviews on existing positions, and reflects a prudent approach in view of the expected macroeconomic slowdown. As a note, the net result of EUR 24.7 million in Q4 includes high [indiscernible] results of EUR 7.3 million.

Let's now have a look at segment reporting on Slide 22. From this quarter, our segment reporting will change, in order to give more visibility to b-ilty and to the CIO division, that includes our IT and digital operations, along with the open banking platform illimitybank.com.

Let me go through our divisional trends. Distressed credit remains the largest profit contributor. Revenue of EUR 210 million is up 6% year-on-year and account for approximately 65% of the group's total. Operations remain very lean with a pretax profit at EUR 119 million, up 4% year-on-year. Growth Credit revenue from the Growth Credit division represents today 23% of the total for the group. And it accelerated significantly in 2022, up 50% year-on-year, showing visible operating leverage gains. The pretax profit stood at EUR 54 million, up 61%.

Investment Banking recorded a EUR 7.8 million pretax profit, a very satisfactory result. Profitability is already excellent here with a cost income ratio of 38% for the year. Altogether, the SME business made up of Growth Credit and Investment Banking generated a combined pretax profit of EUR 61.4 million, up 79% year-on-year.

B-ilty, as you know, b-ilty is one of the illimity's most important projects. 2022 was the salary year of this initiative and posted a EUR 10.4 million negative pretax results. Our asset management company has posted some profit in 2022 -- thanks to the additional closing of the UTP fund and the real estate fund launched in Q3. We are working on two new funds, which we plan to present in the next few months.

The CIO division shows a limited negative pretax result of nearly EUR 13 million in 2022. Despite investments and running costs related to our unique IT system, our digital retail banking platform illimitybank.com.

And finally, corporate center came in with a negative pretax result of EUR 56.7 million, of which EUR 42.7 million of operating cost, EUR 7.3 million related to the prorata and the loss of Hype and EUR 6.7 million related to system charges paid in 2022. The headquarter set up in control function are now largely completed, and from 2023, these costs will be highly scalable.

Let's now have a look at our KPIs on Slide 23. First, cost income. In 2022, it was affected by establishing our new tech initiatives, in particular, b-ilty and Quimmo. It was written out, our cost-income ratio for the year would be around 52%. Second, KPI asset quality. As Corrado already showed that it's very solid. In 2022, we experienced very limited deterioration of our loan book. The gross organic NPE ratio of the portfolio originated by illimity at the end of 2022 is 1.4% or 2.6%, including Banca Interprovinciale legacy portfolio.

A resilient book coupled with a high proportion of guaranteed or insured loans supported a low cost of risk that in 2022 stood at 30 basis points. And thirdly, capital ratios that are very solid, looking at them in more detail on Slide 24.

Mainly as a result of strong business origination, risk-weighted assets increased by 18% in Q4, while the density remained stable at just below 70%. High risk-weighted assets drove our common equity tier 1 ratio to 15.8% on a phase-in basis and 15.3% fully loaded, more than 660 basis point buffer on that requirement.

Common equity tier 1 capital printed a 3% growth in the fourth quarter, mostly driven by internal capital generation. Total capital ratio was 20.4% phased in and 19.9% fully loaded. Our common equity tier 1 ratio at 2022 includes dividend accrual at a 20% payout ratio. As in 2022, we will start paying the dividend according to our plan.

Let's move to our funding on Slide 25. Total funding increased by 23% quarter-on-quarter in support of the strong business momentum and also to fund in advance some of 2023's funding needs in anticipation of a higher rate environment. We use also to the funding to keep a well-diversified mix. The retail component amounted to EUR 2.5 billion, a little less than 50% of total funding. The stock grew by 9% in Q4, driven by a successful campaign on a illimitybank.com platform that focus specifically on long-term maturity.

The wholesale funding component also increased, posted 61% growth in Q3, thanks to the issuance of 3-year senior bonds for EUR 300 million in December. Following the interest rate hike in the last part of the year, which affected, in particular, the wholesale funding component, our cost of funding edged up to 2.1% in the month of December, bringing the blended average cost of funding for the full year to 1.7%.

And finally, the outlook for 2023 on Slide 26. As for the 2023 guidance, taking into account the uncertainties related to the macroeconomic environment, we believe illimity is well positioned to seize new opportunities, thanks to existing business model. Volume progression will be a key profit driver in 2023. We expect revenue will continue growing at a sustained pace. We approached a double-digit net interest income progression more than compensating for the expected increase in cost of funding, combined with continued expansion in net fees and solid other income streams.

Operating costs are expecting to grow at a decelerating pace compared to the growth posted in 2022. The big of investments in digitalization is largely completed, and our operational and technology platforms are regionally optimal sizing and from 2023, we become highly scalable. We, therefore, expect operating leverage at group level to become clearly visible in 2023.

These dynamics are also set to benefit from the evolution of the economic performance of the three tech initiatives; b-ilty, Quimmo, and Hype, which a contribution to the group's pretax result is expected to improve significantly from 2023.

Given the perspective macroeconomic slowdown, there will also be some challenges. We expect cost of risk to increase in 2023 albeit remained well below the level initially projected in our strategic plan, also thanks to the conservative mix of SMEs lending with a high proportion of loans guaranteed or insured.

All in all, we consider EUR 100 million a reasonable assumption of our results in 2023 in light of the difficult scenario and without assuming any new initiatives or inorganic strategies. Finally, we expect results in 2023 to follow the same pattern seen in 2022 with profit generation in the second half, much stronger than in the first half, driven by seasonality in business origination.

And I'll hand back to Corrado, so we can start the Q&A.

[Corrado Passera, executive]

Yes. Thank you, Silvia. Beyond Silvia and Fabio Pelati, who is in charge of Investor Relations and Sustainability. I have here with me Andrea Clamer, Head of the Distressed Credit Division; Enrico Fagioli, Head of the Growth Credit Division; Fabio Leonard, the Head of the Investment Banking division, Carlo Panella, Head of b-ilty; and Filipe Teixeira, Head of the CIO division. We are now all available for your questions.

[Operator]

[Operator Instructions] The first question comes from Andrea Lisi of Equita.

[Andrea Lisi, analyst]

The first one is on the guidance. I see that you expect operating leverage to boost in 2023. Just to understand better, what is the trajectory of cost do you expect in 2023 with respect to the level we saw in 2022? The second question is still on guidance, in particular, with the level of NII. Have you assumed that in the guidance, which is the sensitivity to rising rates given the current level of rates? And which is the deposit beta assumed? In particular, how do you think the cost of funding will impact on your NII growth trajectory? And in general, where is the upside and the downside risk on the EUR 100 million guidance you provided for 2023?

Then if you can provide a bit more color on the tech initiatives, how will they contribute in 2023 and going on? Also in this case, where is the potential and where are the main risks? And looking at that one, we see that at the fully loaded level, it is 15.3%. Just asking you if you can consider to go below the 15% target of the EUR 200 million you envisaged in the plan.

[Corrado Passera, executive]

Okay. I will ask Silvia to answer the first question, then I will see how to elaborate on the second and the third. Maybe, Silvia, you can also address the core Tier 1 ratio issue.

[Silvia Benzi, executive]

Okay. So I'll start from the question regarding the operating leverage gains and the trajectory of cost. In 2022, we had several investments in our new tech initiatives, but also to complete the investment in technology and the operational structure of the bank. So the growth rate in cost was double digit. What we would expect for 2023 is still a growth because we have also a portion of costs that are variable and they are linked to the new business origination that we expect to be growing versus 2022, but the pace of growth of costs in 2023 would be a big deceleration versus what we have seen in 2022.

So we can talk about like high single-digit cost progression. So we will still grow costs, but at a much less pace versus what we have seen in 2022. And at the same time, the cost progression will be much lower than revenue progression that we continue to see and to expect to be very strong versus 2022.

Maybe, Corrado, I can also discuss on the guidance for sensitivity on rising rates and the deposits beta. So the sensitivity to rising rates for illimity is, let's say, low to mid-single digits because we know we have a portion of our loan book that is fixed rate, and that relates to the distressed credit portfolio and into the turnaround. Having that said, we still have a positive sensitivity. And the way we look at our projection for 2023, what we assume is that for the current level of Euribor, that is in the region of 2.5%, we expect our NII to grow by EUR 40 million to EUR 50 million in 2023 as a combination clearly of the rate environment but much more of what we project to be volume growth. That is the main engine of growth in our NII there.

The deposit beta for us is in the region of 80%. The reason being that, as you know, we have a little component of [ site ] deposits where the beta is around 40%. But then we have a larger proportion of term deposits where we have to pass through interest rate hike and a bit of a hard proportion to our retail customers. So more or less, this is our deposit beta.

Cost of funding guidance, what we have as a plan is cost of spending to increase by nearly 100 basis points for the whole 2023 as a blended average cost of funding. So from the 1.7% we have seen in 2022, we position -- we say we will position around 2.7%.

Maybe I'll hand over to Corrado for the upside and downside risk on the guidance.

[Corrado Passera, executive]

Yes. Let me give some colors on the 3 tech initiatives. They are midsized investments. All of them together certainly had potential value higher than the present market value of limit as a whole. We decided in all the 3 cases to invest more and longer than we had foreseen at the beginning.

Take b-ilty. We realized that the right time for exercising the credit machine needed more time. And we devoted time and people, our tutors, our account managers. And we exercised this model. Now it's perfectly functioning for longer than initially expected.

We also decided to complete or to enrich the offer because what makes -- one of the reasons that makes b-ilty a real different animal from most fintechs providing services to small corporate is the completeness of our offer. Most of our competitors are monoliners. They provide 1 or 2 products. And so they are product seller. We want to create a bank, a digital bank designed for this huge segment of the market, but a real alternative bank to all the present players. It took more time than expected. And -- but we are happy we devoted these efforts before launching commercially b-ilty.

Even if we look around in Europe, it's hard to find something similar. So it's now much more than a bet because now we know that it works. For sure, it's something completely new, and we expect in 2023 to have the evidence of the rightness of our choice.

Quimmo. Quimmo is [ prop tech ]. It's already a successful one in a very defined segment of market, the judicial one. There, we are by far the leading player. But we decided that the experience that Quimmo had accumulated in that very specific segment could be used also for the free market.

It's a different market. We have to invest. And we will do a number of that. We have a number of steps to be taken in the next months to make Quimmo really capable to work also on the free market. But let's not forget that Quimmo is already the largest digital brokerage organization in the country, 2,200 deals a year is already something nobody else can put on the table. So we bet more than that. We confirm that Quimmo will be profitable already in 2023. And the room for smart partnerships is certainly an important one.

Hype is, again, a leading player in a very clear segment. It's the leading fintech organization in the retail market. We invested -- we decided to invest more than initially expected in structures, in technology. And we believe that here again, we can provide a full-fledged offer to retail customers. We started with a number of products trading, all related -- most of them related to payments and trading, but we know and we are already working for providing a full-fledged offer of saving products, insurance products, lending products to a customer base that hopefully will go beyond 2 million already this year.

This is a company that developed an astonishing capability to collecting customers. On average, we have new customers in the round of 1,000 every single day. And we know there is nothing else similar on the market. For sure, all of them are investment. We devoted, as I said before, part of our profits to developing these medium-term projects. But the kind of value we expect from the development and the valorization of these 3 assets is really significant, especially in the light of the present market value of illimity.

Andrea, did we answer all your questions?

[Andrea Lisi, analyst]

The last one was about, that's a 200...

[Silvia Benzi, executive]

Yes, I'll take that.

[Corrado Passera, executive]

Please, Silvia. Go ahead.

[Silvia Benzi, executive]

So 15%, as you know, is our long-term target, and we plan to close 2023 around that level. Clearly, it's a prudent target that includes a buffer flexibility, but we have built our guidance around that level. And in terms of what we to be the investment capacity for 2023 between internal capital generation and some risk-weighted asset optimization measure we are already working on, we believe that we will be more than enough to push our volume growth up in a very strong double-digit pace.

[Operator]

The next question is from Walter Guagnano of Aurelia.

[Walter Guagnano, analyst]

My questions are, again, a follow-up on the guidance of the company on 2023. As I understand, I was wondering what was behind the downgrade of the guidance in 2023 versus the initial plan that you presented to the market in 2021 of EUR 120 million net income for 2023? And that was some way, let's say, confirmed in the last 9 months results that we had a few months ago. And especially on this, I was looking at the guidance for 2023 that now you're giving as building blocks. That seems to me very, very prudent, even in a very low-growth environment because if you pledged with us the fact that you wanted to bringing the new initiative to a breakeven level in 2023.

Now if I look into your balance sheet and your P&L, you have EUR 30 million of cost there. This should go -- pretax obviously. This should go to 0 in 2023 in order to breakeven. Therefore, this should uplift your net income level of around EUR 20 million net income. And then there is all the effects that the CFO has just outlined on the NII sensitivity. So I wouldn't end up much higher than EUR 100 million net income in 2023. So I was wondering where the company is actually losing money versus the initial expectation.

[Corrado Passera, executive]

I will start this answer and, for sure, certainly Silvia will complete it. In order to make the answer easy, we reduced the target -- not the target, but our expectations, our estimate for 2023 vis-a-vis the targets we set 2 years ago for 2 main reasons. The delay we decided to apply to the launch of the 3 tech initiatives by itself reduces our 2023 results, about EUR 30 million, EUR 31 million. And this is a postponement. It's a delay. It's not a structural reduction. So given the decisions we have taken in 2022, the almost automatic effect on 2023 results coming from the 3 tech initiatives by itself brings a reduction of about EUR 30 million before tax.

The second effect, that is quantitative. We had to make a reserve evaluation in the round of EUR 50 million that reduced at the end of 2022 the amount of equity and then the amount of assets we can develop during 2023. So again, this might become a simple postponement. But given the so strong uncertainties, we prefer to stay on the prudent side. So the beginning of the answer to your question is the difference. We absorbed all the other effects. And despite all the changes in the market, we confirm the targets of 2 years ago with these 2 very clear delay effects: the results, the contribution of the 3 tech initiatives that are 1 year late; and the reduction of equity and asset available given the evaluation reserve.

Silvia, maybe you can add something.

[Silvia Benzi, executive]

No, I think, Corrado, you touched the main drivers. So the tech initiatives and the fact that we had less investment capacity because of the negative mark-to-market on the securities portfolio classified as hold to collect and sell. And those are the 2 main drivers.

[Corrado Passera, executive]

The reason why we organized today's presentation in the way we presented it is exactly because we wanted to convey a number of very clear messages. The 2 core businesses are performing very well, even better than expected. We have 3 investments that will be valuable contribution in terms of market cap at the end that we postponed 1 year in their launch on the market. This created a step-down. And the other one is the valuation reserve that I mentioned before.

[Walter Guagnano, analyst]

Can I have a follow-up on these?

[Corrado Passera, executive]

Please.

[Walter Guagnano, analyst]

I just was wondering how you think how this should cope with the fact that -- basically 1 year ago, we were in a similar situation where the management decided to increase the costs and actually on the new initiative and actually affected illimity income. And 1 year ago, you pledged with us the fact that you wanted to contain costs and to continue to confirm the midterm guidance. So I was wondering, it comes out from all these postponements that continues to come in ways that our ability to believe in the company guidance is actually dented because everyone or every year, there's a pledge to reduce costs.

And every year, at the end of it all, there was some higher costs that comes out because you want to grow more. But at the end of it all, the results were actually lower. So can't we, in the future, try to be more consistent with the guidance? So actually, if you want to invest more, just tell us in order to factor in the target in order to set the expectations. Because at the end of it all, every time coming out with a reduction versus the expectation. It was actually lower because in the third quarter, there was another profit warning. It's actually disappointing on an investor point of view.

[Corrado Passera, executive]

When the issue is trust, it's really in the hands of -- it's not in our hands, and you can decide whatever you want. I believe that there are not many cases in Europe of new banks providing the level of growth, the level of profitability and the long-term investment strategy that we provide. And I use the word proudness at the beginning because I strongly believe that there are very few cases, if any, that are providing their shareholders the mix of growth, profitability and investments we are providing. First point.

Second point. We believe in long-term management, and we believe that we should not only optimize short-term results, but only -- but also medium-term value and profitability. And that's why we keep investing in new initiatives. We chose 3 initiatives that are ambitious, but that are very wise in our opinion. And I believe you should not underestimate the amount of changes and uncertainty that in the last year arrived on the market. Being more prudent, delaying some decisions, investing more to make sure that the new initiatives are fully equipped for the new environment, in my opinion, are an evidence of good management, given that -- again, we are providing overall results that probably no other new banks are providing after 4 years anywhere else in Europe.

Being very transparent today in terms of expectations is a way for us to build trust. Please do not forget that this start-up that 4 years ago did not exist had to face 3 black swans that would have killed a number of companies, because don't forget the COVID, don't forget the inflation, don't forget the war. So this is our answer. And it's up to you to decide whether our behavior is -- builds trust or does not build trust.

[Operator]

Next question is from Manuela Meroni of Intesa Sanpaolo.

[Manuela Meroni, analyst]

The first one is on the cost of funding. Thanks for having provided the evolution of the cost of funding expected in 2023. I'm wondering if you can also elaborate on the timing of these increases. So if based on the maturity of your time deposits, you are expecting a progressive increase in the cost of funding or, let's say, a big gap in the cost of funding at the beginning or at the end of the year.

Second question is on...

[Corrado Passera, executive]

Sorry, sorry, sorry, go ahead.

[Manuela Meroni, analyst]

The second question is on the Common Equity Tier 1. In the last quarter, we saw a strong increase in risk-weighted assets. So I'm wondering what drove this strong increase and if it is just a seasonal effect or is something that will remain stable also in 2023. Then considering that you are closer to the 15% long-term target, I'm wondering if you feel comfortable in going below the 15% in the next year or this year. And if you have in mind some capital management actions to support your capital base.

The third question is on your NPE. Now the gross NPE ratio is still very low at 1.4%, but the gross organic NPE doubled in the last quarter. So I'm wondering if this is just the start of the deterioration of the asset quality or you had some single-digit or one-off impacting the stock of NPE.

Fourth question on the tech initiatives. You said that you expect a lower negative contribution from the tech initiative in 2023. I'm wondering if you can quantify what is the contribution of these initiatives that you have in mind for this year.

Last with another -- last question is on the business plan. I'm wondering considering the very different market scenario, the delay in the tech initiatives, if you expect to update the plan sooner or later. And the very last question is just retail. You have got some tax benefits in the last quarter of the year, I'm wondering what they are about.

[Corrado Passera, executive]

Silvia, if you take the first 3 and then from capital management actions. Tech '23 and business plan, I will try to answer.

[Silvia Benzi, executive]

Sure. So let's start with the cost of funding. Cost of funding you've seen that in the month of December, it adds up a bit to 2.1%. So let's say, from that level, you might see a gradual slight increase all over the year. We have maturity of term fundings kind of spread across the whole year. Every quarter, we have something. So it's kind of well-balanced. But from 2.1%, that is the month of December, we expect to go and to end 2023 with a blended of 2.7%. But actually, you have had already a little step-up at the end of this -- of the month of December.

In terms of the increase in risk-weighted assets, the bulk of it comes from the business origination, both on and off balance sheet. We do have also the calculation of the operating risk-weighted assets that we do once a year at the end of the year. So every year, you have a kind of a seasonal component in the risk-weighted assets evolution quarter-on-quarter because you just have that one-off, like once a year. And the rest is a bit of [ DTs ], a bit of [ DTA ], a bit of software, a bit of other assets. But the bulk of it is the little set-up from the operating risk-weighted assets and the credit risk-weighted assets connected with the new business origination.

Then the question on the capital, would you feel comfortable to go below 15%? Well, 15% is kind of a long-term commitment. It's an area where we feel comfortable. We believe it's really a prudent area because, as you know, it's 660 basis points above this SREP requirement. Eventually -- occasionally, if there are transactions that will be a big booster to our profitability, we might consider. But we prefer to set ourselves a prudent target and try to stick to it across the year.

And as we said, there are risk-weighted asset actions, optimization actions that we are planning to do. We already did the significant risk transfer on factoring. We will do a larger one in 2023, and a few other things are already under evaluation. So we will clearly support our growth also through optimizing as much as we can, the risk-weighted assets.

And maybe I'll take also the tax benefit in Q4 so that I complete the [ sale ] financial area. So the tax benefit is nearly EUR 10 million, that's related to 2 those things. The first one is the AREC acquisition's goodwill tax deductible that accounts for something like EUR 6 million. And then also we benefited from the patent box. I don't know if you are familiar with that. It's basically -- it's a kind of a benefit that is given to innovative companies for the investments they do into digitalization or these type of things. And that also is something where illimity has invested quite a lot. And that accounts for EUR 3.3 million.

[Corrado Passera, executive]

Okay. The last 3 issues are capital management actions. I can certainly say that we expect a contribution to our equity from the 3 tech initiatives. I think that the development of these 3 ventures and the possibility to have them developing on their own will provide, sooner or later, but probably at the right time, new equity for the group.

Tech initiatives in 2023. We should not go that much into detail, but if you are asking our guidance in terms of the total contribution of the 3 tech initiatives to our bottom line in -- to our before tax next year, the EUR 20 million of 2022 might get to something between EUR 6 million and EUR 7 million.

The last point is about our business plan. Given the amount of uncertainty on practically everything, inflation, or you name it, we have applied the new scenario to our business plan. And by applying what we have today, the new budget came out and the new estimate for 2025 of EUR 200 million net profit came out. This is not formally a new business plan. That is the outcome coming from the application of the present world and the application of the inputs of the budget inertially to the following 2 years.

As soon as we all decide together that the world has reached a new normal, probably a new 3 and 5 years plan will have to be properly designed. But the kind of exercise we have done to reach the EUR 200 million net profit estimate for 2025 is the best exercise based on what we have today.

[Manuela Meroni, analyst]

And on the organic NPE?

[Corrado Passera, executive]

It is 30%. The organic NPE maybe I will ask Enrico to elaborate on it.

[Enrico Fagioli Marzocchi, executive]

Yes. We have a worsening in the fourth course of the year. And this relates -- and the question is if it relates to a single figure to our general deterioration of our assets. It relates to very positions moving to UTP. And all of them are covered by public guarantees. And this is why we were saying before that if we consider only the amount of loans effectively at risk, not covered by the state guarantee, the ratio would be reduced to 0.5%.

NPE ratio will increase also because the b-ilty business will have structurally a bit higher NPE ratio than the growth credit division structurally has. And this is the other reason why we have prudentially included a higher figure for 2023.

[Corrado Passera, executive]

Next question?

[Operator]

Mr. Passera, there are no questions registered at this time, sir.

[Corrado Passera, executive]

Okay. Let me close this meeting by thanking the participants and by addressing 2 points I already made during our discussion. We believe in the combination of gross profitability and investments. And we believe this combination will create, in the medium term, the best outcome for our shareholders.

Second, in looking at illimity, look at a bank that has probably some of the best characteristics of traditional banking, but is a bit more than that. And the investments we have accumulated in the last 4 years in terms of technology, augmented artificial intelligence will start paying from now on because it takes time to exercise your engines, your systems. So in that respect, the best is yet to come.

Last point, look at this bank as a bank capable to go through the cycle. Maybe we are not enjoying the short-term effect of the yield increases that other commercial banks are benefiting from, but the growth we will provide, the quality of our portfolios and our capability to exploit both expansionary phases of the market but also recessionary ones, makes illimity an interesting investment case.

Thank you very much for joining us today. And obviously, we remain at your disposal.