illimity Bank SpA

MIL:ILTY

Earnings Call Analysis

Strong 2023 Performance and Positive Outlook

The company realized robust results in 2023, with a 40% annual profit increase to EUR 104 million, in line with guidance. Revenues surged almost 30%, and Net customer loans grew 24% year-on-year. Record performances in Corporate & Investment Banking fueled growth, while anticipating lower costs in the upcoming year. Asset quality stayed resilient; the cost of risk was just 43 basis points with a low NPE ratio of 1.3%. The firm strategically shifts from Distressed Credit to asset-based financing, expecting this to yield higher returns in a challenging market. With a stable capital position of 14.7% Common Equity Tier 1 ratio, and the anticipation of an evolving strategic plan, the company looks forward to 2024 with confidence.

Strong Overall Performance with Notable Profit Gains

In 2023, the company achieved a significant milestone with a net profit increase of 40% year-on-year, totaling EUR 104 million. This growth was powered by a comprehensive 30% rise in revenues, a robust 24% surge in net customer loans from the Corporate & Investment Banking divisions, and a 60% reduction in losses from its leading retail FinTech venture, Hype.

Record Success in Corporate & Investment Banking

The Corporate & Investment Banking business reached a pinnacle with record profits and volumes, contributing enormously to the company's strong performance, bolstering its capital position markedly beyond regulatory requirements.

Revamping the Distressed Credit Division

The company executed a significant strategic pivot by transforming its Distressed Credit division into the Specialised Credit division, focusing on asset-based financing. This shift is expected to enhance the division's size and profitability, contributing to a healthier capital position and a resilient asset quality with a low organic Non-Performing Exposure (NPE) ratio.

Technological Ventures and Partnerships Driving Forward

Technological partnerships have been fortified, which showed immediate positive impacts. The company's tech ventures, including its leading FinTech brand and dedicated Lendtech for small corporates, achieved substantial financial and strategic progress, with breakeven forecasted in 2024.

Solid Capital and Liquidity

The firm maintained a very solid capital position, with a Common Equity Tier 1 (CET1) ratio comfortably above the regulatory requirement, and a liquidity coverage ratio (LCR) almost triple the standard, reflecting a prudent and conservative approach to liquidity management.

Strides in ESG and Sustainable Growth

The company's commitment to Environmental, Social, and Governance (ESG) principles has been recognized with upgraded ratings by MSCI, further integrating sustainability into its operational ethos.

Future Outlook: A Transition Toward Increased Profitability

As it steps into 2024, the company expects an uptick in profitability, particularly in the proptech sector with Quimmo, its digital real estate brokerage platform, positioned to capitalize on an improving market scenario.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the illimity Bank Fourth Quarter 2023 and Full Year 2023 Results Conference Call. [Operator Instructions]At this time, I would like to turn the conference over to Mr. Corrado Passera, CEO of illimity Bank. Please go ahead, sir.

[Corrado Passera, executive]

Thank you, and good morning to everybody. Welcome to the presentation of illimity's 2023 Full Year Results.Let's start from Slide 3. illimity's journey is a story of continuous growth. Over our 5 years of existence, we have encountered the several unexpected challenges, but our commitment to growth has never wavered.Our asset size grew from virtually nothing at the start of 2019 to EUR 7.3 billion now. Profitability was reached almost immediately in 2019, exceeding EUR 100 million by 2023. During the whole period, our balance sheet has always been very strong, and we have never stopped our commitment to investing in technology.Moving to our full year results on Slide 4. 2023 shows very good results from every angle. Q4 posted a net profit of EUR 29 million, up 30% quarter-on-quarter, taking our full year results to EUR 104 million. This is a 40% growth year-on-year, in line with our guidance.The Corporate & Investment Banking business hit record profits and volumes. The Distressed Credit business also performed very well amid the challenging scenario. Capital position remained solid with a [ Common Equity Tier 1 ] ratio at 14.7%, well above our SREP 2024 requirement.Asset quality remained under control with a gross organic NPE ratio at 1.3% and cost of risk at just 43 basis points. Our tech ventures made significant profitability progress with breakeven projected in 2024.In addition to these results, 2023 saw 3 crucial strategic developments, as we can see in Slide 4 -- actually in Slide 5. We partnered with engineering, leveraging our technology with a positive impact already in '23 and setting the stage for future sustainable revenue.In the challenging NPE market, we decided to accelerate portfolio value creation to capitalize on opportunities and strategically shifted the main focus of our Distressed Credit division to asset-based financing. Consequently, we decided to rename the division from Distressed Credit to Specialised Credit.Finally, our proptech, Quimmo, accelerated its entry strategy into the non-judicial real estate brokerage market through a partnership with COIMA.Moving to Slide 6. As just mentioned, net profit of the year reached EUR 104 million, up almost 40% from the previous year. Our revenues rose by nearly 30%, driven by higher net interest income, net commission, NPE related gains and the new IT partnership.Staff and administrative costs increased by 10%, excluding scope changes and one-offs. The increase is mainly due to 2022 hirings, national labor contract renewals, nonrecurring marketing expenses and MBO. We anticipate lower total cost next year. Loan loss provisions came in at EUR 14 million, reflecting a cost of risk at 43 basis points.Slide 7. Our capital position remains very solid, and we expect it to remain firm at a high level. [indiscernible] [ Tier 1 ] ratio stands at 14.7%, exceeding 2023 SREP targets by over 510 basis points. Total capital ratio is also strong, standing at 18.7%. The unrealized losses on the [ Hold ] to Collect portfolio are minimal, amounting to just EUR 1.8 million.Slide 8. We maintained a sound liquidity profile with well-matched asset and liability maturities. We have a liquidity buffer of approximately EUR 1.1 billion. LCR is very high at almost 300%. NSFR at 120% is also well above the minimum threshold.Slide 9. Corporate & Investment Banking divisions achieved their best-ever year with the combined full year pre-tax profit of EUR 90 million, marking a remarkable 47% year-on-year growth. Net customer loans surged by 24% year-on-year, driven by SME lending. Investment Banking more than doubled its volume, thanks to strong business origination, in particular, in structuring and capital market activities. The overall operating leverage was very low at 24%.Slide 10. illimity has become a well-known and trusted specialist partner for Italian SMEs. Since 2019, volumes have been steadily growing across all desks. From the start, we have effectively maintained a low concentration of risks, and our robust pipeline still suggests significant potential ahead.Slide 11. Our asset quality remained resilient with the cost of risk at 43 basis points. 54% of our loans are backed by public guarantees or credit insurance. Stage 2 loans represent just 3.8% of our portfolio. The organic NPE ratio, excluding state guaranteed position, remains low at 1.3%. Total organic NPE ratio, including those with public guarantees, is equal to 5%.It is important to underline that most of our organic NPEs are UTPs in active restructuring with very few positions classified as bad loans.Let's move to Slide 12. Our Distressed Credit division is undergoing a strategic shift, as we have been discussing in recent presentations, and from today, will be named Specialised Credit division.The division has always played a crucial role in our group, booking more than EUR 430 million in profit before tax over the last 4 years. During the past 6 months, we've accelerated our shift to a new mix of activities in response to an increasingly challenging NPE market outlook. Higher funding costs, reduced NPE inflows and potential regulatory changes have made NPL investments less attractive.Given those challenges, we have chosen to maximize returns from our existing portfolios. In contrast, asset-based financing has become even more attractive due to its size and profitability, making it our preferred choice as a specialized banking operator.Moving to Slide 13. Looking ahead, this division will maintain a key role in our future, just with a new focus. We have already reduced NPE portfolios investments to just 4% of our total assets. With concentrate on asset-based financing, leverage on strong in-house expertise and shift from gone concerns to going concerns. While we expect lower revenue from portfolio disposals in 2024, it will be compensated by higher revenue from asset-based financing in the following years.Slide 14. In Q4, EBITDA reached EUR 11 million, [ fivefold ] from the previous quarter. This led to a full year result of EUR 16 million, marking a 38% year-on-year growth despite market challenges. In 2023, ARECneprix further consolidated its position as Italy's third largest corporate UTP asset manager. Total assets now [Technical Difficulty] [ captive ].Toward the end of the year, ARECneprix became the sole asset manager and credit servicer for the newly formed Olympus fund, one of Italy's largest with an initial gross book value of approximately EUR 2 billion.Slide 15. Our SGR recorded significant improvements in both profitability and volumes of assets under management. Pre-tax profit came in at EUR 1.7 million, marking a notable increase from the breakeven point achieved in 2022. Profitability growth was driven by assets under management growth, reaching EUR 520 million, up 52% year-on-year.Moving to our technology, Slide 16. From the very beginning, we have been developing an innovative and industry-recognized IT architecture, state-of-the-art fully cloud-based modular system, free from legacy. This architecture supports illimity Technology, our digital division, in continuously improving our banking IT system through artificial intelligence and open banking principles. illimity technology not only enhances our efficiency, but generated a onetime revenue of EUR 54 million in 2023 and sets the stage for continuous revenue growth starting in 2024.Now let's move from our core businesses to our other activities, our tech ventures. Slide 17. On the left-hand side, you will see our core business activities. In the center, you will see our Digital division, illimity Tech, that we just looked at. To the right, we have our main tech ventures. In 2023, all our tech ventures made financial and strategic advancements. We expect some of them will generate capital in the very next years to support our growth.Starting with Hype on Slide 18. Hype is Italy's leading retail FinTech with 1.8 million accounts and on the rise. Transactions grew by 29% to EUR 132 million on an annual basis. Contribution margin increased significantly to EUR 19.8 million from EUR 4.7 million last year. Profitability is improving with a 60% lower losses in 2023 compared to 2022. In 2023, our share of the loss is EUR 3 million, and we target to at least breakeven in 2024.Moving to b-ilty on Slide 19. b-ilty is our dedicated Lendtech for small corporates. Since the beginning of 2023, it has been fully operational, offering a unique digital solution for transactions and lending, setting it apart from other providers of credit with more corporates.Profitability is on an upward trajectory. In 2023, our net loss nearly [ halved ] compared to 2022, with Q4 showing a positive trend toward breakeven. Net customer loans reached EUR 309 million, with a steady quarterly increase in both loan value and the number of accounts. Just remember, all of these loans are backed by public guarantees.Slide 20, Quimmo. Quimmo is Italy's leading proptech innovator, offers a very competitive end-to-end digital solutions for real estate brokerage. It's already the leader in the judicial market, managing EUR 2.2 billion asset with growing market share year after year. Through the partnership with COIMA, Quimmo accelerated its entry into the non-judicial market, bringing a pipeline of more than EUR 1 billion in luxury residential properties.In 2023, our profits were affected by historically low national bankruptcy figures and high interest rates. However, as the year came to an end, we noticed a reversal in the bankruptcy trend and it is likely that interest rates have reached their peak. As we step into 2024, we expect increased profitability ahead.Moving to my last slide and our ESG achievements, Slide 21. We are committed to incorporating sustainability across our goals, our operations and our governance. In 2023, we successfully achieved additional ESG targets, leading to further improvements in our rating. MSCI upgraded our ESG rating to AA, promoting us from Average to Leader.Standard Ethics also recognized our progress, upgrading our outlook from stable to positive. We proudly maintained our position in Europe's Best Workplaces 2023, standing as the sole bank among Europe's Elite.Silvia will now provide a comprehensive review of our fiscal year 2023 results.

[Silvia Benzi, executive]

Thank you, Corrado, and good morning, everyone. Let's move straight ahead to the balance sheet figures on Slide 23. We continued our growth into the last part of the year. Total assets reached EUR 7.3 billion, up 6% quarter-on-quarter and 14% on a yearly basis.As Corrado already explained, we accelerated our strategy to divest from Distressed Credit direct investment, a process that will continue into 2024. In 2023, we executed this strategy through a few large transactions that are now reshaping our balance sheet.Point number one, the net customer loans. We are shifting our focus towards asset-based financing and SME lending. Distressed Credit direct investments are down 39% in the quarter and 46% year-over-year. Excluding [ these ] components, net customer loans would have increased by 6% quarter-on-quarter and by 27% year-on-year. This number is even more impressive if you consider that we had nearly EUR 300 million early repayment this year. All our SME lending [ thus ] contributed to this growth, with notable performance in factoring b-ilty and Investment Banking.Point two, financial assets at fair value increased substantially this quarter. Here, we account for the NPL portfolio that we contributed to the Olympus fund, a transaction signed in the third quarter and executed in October.Point three, our funding also increased this quarter by 8% driven by the retail component. We will provide more details shortly.Moving to profit and loss on Slide 24. Our strategy in Distressed Credit investment is also reflected in our P&L dynamics. Point one, net interest income was down quarter-on-quarter due to the shrinking book of direct Distressed Credit investments and the expected increase in the cost of funding. On an annual basis, NII showed a 19% progression, benefiting from higher business volumes and repricing of our SME performing loans.Point two, net fees show a robust 38% growth quarter-over-quarter, driven by an increase in the Investment Banking activity and new third-party mandates received in the servicing business. Daily progression stands at 25% with positive contributions from all our businesses.Point three, other income in the fourth [ quarter ] [ includes ] the revenue generated by the partnership of our IT platform accounted for in the second quarter.Point four, operating cost uptick in Q4 reflects mostly seasonality and some nonrecurring components. In detail, staff costs compared with the seasonally low Q3 includes the increase in national labor contract and the [ yield ] incentive scheme.Other operating expenses include nearly EUR 4 million in costs related to very specific initiatives such as the retail banking marketing campaign, which will not be repeated. On an annual basis, the cost dynamic was affected by the completion of staff hiring, IT investments and changes in the group's [Technical Difficulty]. Operating costs are [ started ] to decline in 2024.Point five, loan loss provision charges on the organic loan book increased in the quarter, leading to a cost of risk of 43 basis points for the full year. This increase was affected by the reinforcement of our generic provisions and few analytical impairments.Lastly, point six. In the last quarter, we recorded additional positive value adjustments related to transactions on our [ existing ] NPE portfolios.Now let's move to Slide 25. This slide illustrates the contribution of the different business units to the group's performance. Corrado has already covered the main business trends, so I'll focus on a few key points.The SME business continued to grow strongly across all segments with further progress for the operating leverage. The Distressed Credit division posted a record year, driven by our ability to create value from the existing NPE book and has already started to reinvest in asset-based financing. Our tech ventures are progressing as planned and have reduced the negative contribution to this year's results. The overall operating structure is completed and highly scalable.Let's now move to our capital trends on Slide 26. Our capital base is robust with Common Equity Tier 1 ratio at 14.7% and total capital ratio at nearly 19%. The increase in the last quarter came from the profit generated and by risk-weighted assets optimization initiatives. Our capital ratios remain well above our regulatory threshold.Finally, let's move to our funding on Slide 27. Funding dynamics in the last part of the year were driven by retail. As a reminder, in September, we revamped our current account deposit offering with a specific focus on term deposits aiming for [ advanced ] duration profile between assets and liabilities.Our campaign was successful despite the unstable and highly competitive market. We gather around EUR 500 million net new funding on illimitybank.com, bringing the overall stock to above EUR 2.8 billion. In addition, the strategy supported the acquisition of more affluent customers, and this will support the funding plan for 2024, combined with a rise in overall retail [ funding ] increased by 18% in the quarter.Other funding experienced a 9% decline following the repayment of the [ senior ] bonds and a reduced reliance on ECB and interbank sources. Our blended average cost of funding stood at 3.2% for the full year 2023.I'll now hand back to Corrado, so we can begin the Q&A.

[Corrado Passera, executive]

Let me close by saying that in 2023, we delivered very good results, driven by increased profitability in our core businesses and the revenue generated by our unique technology. We are very well positioned to adapt to the changing landscape, and we will review our strategic plan over the course of this year. Thank you for your attention, and let's now move to Q&A.

[Operator]

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

[Manuela Meroni, analyst]

So you clearly changed your strategy on the NPL business by exiting the NPL investment and evolving into asset-based financing. So I will start from here. I'm wondering if you are going to dispose your remaining investment portfolio? And if you see additional capital gain that could be generated by exiting this portfolio? Then I would like to understand, if you can help us understanding what is the profitability of an asset-based financing activity compared with the direct investments in NPL? I'm also wondering if ARECneprix will continue in the servicing activity for the portfolio that has been disposed?And finally, I would like to understand if we may expect some impact on risk-weighted assets? So some kind of capital enhancement from your shift in your strategy in the NPL business or, let's say, the risk-weighted asset will remain high as they are?The second question is on factoring. I would like to know if you can comment on the potential impact of the new late payment interest directive that could reduce the DSO? So if you have any comments here?Third question on the cost of funding of 2024. You expect to peak in 2024. So could you please guide us on the level that you are expecting?And finally, on cost, they increased a lot in the last quarter. Could you please elaborate on the main drivers? And what is the recurring run rate for 2024 that we should consider?

[Corrado Passera, executive]

I will ask Andrea to address the main points about our strategic shift from direct investment in NPL portfolios to asset-based financing.

[Andrea Clamer, executive]

Yes. Thanks, Corrado. The first question was the amount of the portfolio that will remain after the transaction. It would be EUR 500 million of net book value for EUR 3.4 billion of gross book value.The second question was, if we see a potential amount of additional value that we can create with the further disposals. At the moment, we cannot say that. A prudent view could be that we will dispose in line with our banking book. In relation to the future yield of our asset-based financing business, we think that more or less would be in line with the NPE investment that we had so far.And in relation to ARECneprix, for sure, ARECneprix, we will continue to serve this portfolio. And as you have seen, we reached a distribution in terms of amount managed by ARECneprix in terms of third-party that reached 70%. And we think that we'll continue to have more external customers than internal.

[Corrado Passera, executive]

Enrico Fagioli will address the factoring point.

[Enrico Marzocchi, executive]

Yes. So there are 2 main comments about the implementation of these new rules. First of all, in the -- there will be some exemption for segment and sector regarding the strict deadline of 30 days for the payment to dissolve. And so we will see what will happen in this specific sector and segment. And second, this will improve the reverse factoring activities. In particular, there's a kind of activity where you also -- you have a maturity financing for the debtors. And this -- we are very strong in the reverse factoring. And I think that this will finally help the financing of the -- some specific sector or segment where there are a kind of, let's say, help coming from the final big [ actor ] vis-a-vis their supplier. So all in all, we expect that this will improve the factoring business.

[Corrado Passera, executive]

On funding and cost, Silvia will give you the details.

[Silvia Benzi, executive]

So in terms of the projection for the cost of funding, we [indiscernible] the blended average cost of funding for 2024 to be in the region of 4% with a little increase versus the beginning of this year. And in terms of the driver…

[Manuela Meroni, analyst]

Sorry, I didn't get…

[Silvia Benzi, executive]

4%. The blended average cost of funding would be for the funding that we have at the stock in 2024. So in terms of the cost driver for Q4, in terms of the staff cost, we had something like EUR 1 million of expenses for the renewal of the banking labor contract and [ grant ] [ with ] -- related to the incentive scheme that we tend to accrue in a very little proportion throughout the year, and then we kind of measure the performance and then we did the top-up in the Q4 that is very typical and seasonal in terms of the way we operate in that field.In terms of the other operating expenses, as I said in Q4, Q4 is seasonally the highest quarter in terms of operating expenses because of a lot of reasons also connected to the seasonality of our business. Specifically, this quarter, we did have EUR 4 million, EUR 4.5 million of costs that were related to very specific initiatives, which we are not expecting to repeat next year or at least not to the same extent.So what we would expect combining via, let's say, the change in our business model with regard to the Distressed Credit investments, that will provide some savings and also a much stronger effort in terms of cost optimization initiatives. We expect the overall cost for the full year 2024 to be down, let's say, mid-single-digit versus this year.

[Operator]

The next question is from Andrea Lisi, Equita.

[Andrea Lisi, analyst]

The first one is on the transaction evolution of cost of risk that you see for the next year. We saw some increase in the last quarter maybe, I think related to some willingness to [indiscernible] the balance sheet. But just to understand which level of defaults are you experiencing, just have a bit more color on that, if you can provide us an indication on the cost of risk you expect for next year?A second question is on the fees. I want to ask you if the growth -- given that there was a strong growth in fees in the last quarter, how much of this is related to seasonality, specific mandates and how much by recurring components? So how much should it be considered as a starting point for the next quarter?And the last one is just an update on your tech initiatives. You already stated that in case you are ready to valorize them, I want to ask you if this could happen already in 2024, if there is the chance, or if you have something different in mind?

[Corrado Passera, executive]

Silvia will address the first 2 points, and then I will answer the third question.

[Silvia Benzi, executive]

So let's start with the cost of risk. We've had a little bit of an uptick in our cost of risk in the last part of the year. This is also due to the -- when you review the model for the collective provisioning, and that affected [ specifically ] some of our -- area of our book. But if you look at the underlying trend in asset quality, naming -- for example, the gross organic NPE ratio has been pretty stable throughout the year, has also been reducing quite significantly, for example, in a [ desk ] like b-ilty. So our overall asset quality is very much under control.Therefore, we're conservative to -- for the full year 2024, something in the region of 50, 55 basis points, which is a bit of a higher expectation versus what we had this year. I think there's more provisions, but nothing dramatic because as we said, the asset quality is very stable, and we do not anticipate for the moment any major change there.In terms of the fee growth, while our business we cannot define it [ seasonal ], but at the same time, it tends to have some quarters where some businesses can perform better. For example, in Q4, we had a very strong recovery in some of our desks within the Investment Banking activity. We performed an IPO, we closed to alternative [indiscernible] operations.So in a certain extent, it's not a seasonality, so you cannot really point which quarter, but actually, it can be very strong. We had a very, very strong also quarter in Q4 for ARECneprix because of the fee related to one of the transactions. So we will expect commissions on a yearly basis and in 2024 to continue to grow at a very robust pace. So that doesn't mean the Q1 will see the [ salient ] improvement versus Q4.

[Corrado Passera, executive]

On the third point you raised, I think we can say that our decision to invest in technology and in tech ventures is proving to be a smart one. We devoted part of our profits to a number of initiatives that actually have already started providing value for our group. In 2023, we saw it at least partially in the technology area, but that's an area that will continue to provide revenues in addition to the core businesses.As far as the other tech ventures, they are all moving in the right direction, and we expect to already have some effect from their, maybe partial valorization already in 2024. In any case, all these activities will contribute to the creation of further capital that will foster the growth of the whole group.

[Operator]

[Operator Instructions] The next question is a follow-up from Andrea Lisi from Equita.

[Andrea Lisi, analyst]

Just a quick indication. I see in Slide 20, but maybe it's something that I have missed in the press release and the presentation. Is that [indiscernible] in the trajectory of the CET1? You still have indicated 20% payout, but I cannot find the dividend in the presentation or in the press release. Is there the dividend or not, just to be sure?

[Corrado Passera, executive]

The decision will be taken by the Board at the beginning of March. We have assumed in our calculation projections to keep the present policy and to continue with the same dividend percentage of 2023 that was 20%.

[Operator]

[Operator Instructions] Mr. Passera, there are no more questions registered at this time. I turn the conference back to you for the closing remarks.

[Corrado Passera, executive]

I hope that no further questions means that we have given a complete picture of our results and we helped our audience to imagine what will be our 2024. Actually, and I want to stress it, we feel that at this point, with the combination of core businesses, T echnology and the Tech Ventures, we are very well positioned to continuously adapt to a landscape that is continuously changing, but we have chosen the right segments to be in and the business model we have chosen are proving to be the right [indiscernible]. So as soon as this landscape becomes a little bit more clear during the year, we will discuss together our next strategic plan.Thank you very much for your attention.

[Operator]

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