Good afternoon and welcome to BFF Banking Group Q1 2023 earnings call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be the opportunity to ask questions. To ask a question, you may press star then one on a touch-tone telephone. To withdraw your question, please press star then two. Please note this event is being recorded. I would like to turn the conference over to Massimiliano Belingheri, Group CEO, and Piergiorgio Bicci, the CFO. Please go ahead.
Thank you. Welcome everybody for joining us for the Q1 results presentation. We are happy to report a strong Q1 in terms of adjusting net profits, actually our highest quarter on record. That's an important result given that the dynamics of our balance sheet means that in a rising interest rate environment, our liability price faster than our assets. The net interest income is being driven by factoring and lending, which has shown a 22% growth year-over-year, driven in particular by the increase of the LPI statutory rate, which was 8% until December, and from the 1st of January has moved to 10.5%. Given the increase in the ECB reference rate, that will increase already as of today's rate from the 1st of July at 11.75%.
Another step up will happen in the H2 of the year. The balance sheet remains solid, both in terms of quality of assets, but also in terms of funding. We have maintained a good loan-to-deposit ratio of 75%, and we have a net positive inflow of retail deposits in Q1 2023, EUR 200 million more than the year-end, and importantly over EUR 1 billion more than where we were a year before. Overall, we have managed the balance sheet, so to decrease the level of total assets, while increasing our loan books and therefore improving our leverage ratio, and reducing significantly compared to a year ago, our held to collect bond portfolio, which is down by EUR 1.6 billion. Capital, as I mentioned, remains plentiful.
We have a current CET1 ratio of 70%, total capital ratio, which is relevant for our dividend payout of 22.6, sorry. It means over EUR 200 million of excess capital versus our 15% total capital ratio target. Given that we are above the 15% total capital ratio target, it means that the earnings of the quarter accrue to our interim dividend. We have already EUR 0.28 per share accrued for our interim dividend, which will be paid as last year in August of this year. As we mentioned in the previous earnings call, we will have a capital market day on the 29th of June to present our new medium-term targets, in it'll most likely be in London.
Another important news is that Italy has communicated, actually yesterday, that it has applied for the extension of the split payment, which is a measure where the public administrations in Italy pay their invoice smack of VAT. In case of approval, there's no change in our 2023 guidance, and we will see if the EU will approve it, and also for what terms it will be approved for. On the following page, on page three, you can see the highlights of our P&L, where we show the increase of 10% in our net interest income.
As I said, that's important because, despite the faster repricing of our liabilities while the repricing of our assets with the negotiation of, with our customers happens and the API increase get fed through the P&L, we actually have a good increase year-over-year. We've also seen a reduction in fee and commission that was driven by the exit of Arca in Anima. We took actually loss last year, which have, as you've seen, not dramatic impact on the overall P&L of the business. We have in other income and other expenses, the gain from the sale of part of our bond portfolio, which was booked earlier in this quarter.
Overall, we've shown a good discipline on cost with cost margin up compared to last year, despite inflation is significantly down compared to the fourth quarter of 2022. That drives our cost income ratio at 35%, which is probably among the best in the banking area in Europe. The P&L numbers are good, as you've seen, with EUR 52.7 million of net adjusted net income. The balance sheet has also been reshaped. We have continued the decline in the held to collect bond portfolio, particularly with the reduction of the fixed rate bond. We've reduced our deposits at the ECB.
We've increased our retail deposit, the one we collect from retail investors significantly, particularly compared to last year, with EUR 1.2 billion of increase on debt, on decline. Our overall balance sheet has shrunk from 13.3 at the year-end to 11.6 at the quarter end, improving significantly our leverage ratio of 5.2% versus the 4.6 of the year-ends, or 4.7 of last year. On page five, you can see the breakdown by business unit, but Giorgio will talk about them in a second. I want to highlight on page six, the what are the drivers to be considered in the outlook for our net interest income.
This important because the balance sheet of our banks behave differently from the balance sheet of other banks, I think it's helpful probably to reiterate to ourselves and to everybody, what are the dynamics that we see in the months ahead, which are positive for our business. In synthesis, we have already been hit by the increase in interest rates and the repricing of our liabilities. We don't have the issue that other banks have of having to refinance the long-term funding from the ECB, the TLTRO, PELTROs, and the like. We don't have that; our net interest income is the market net interest income. While on the interest income side, we have the refixing of almost all of the held to collect floater bonds that happened in April 2023.
That will increase the earnings in the Q2, but particularly in the Q3, clearly. We have the ongoing repricing of the maturity commission and the further refixing of the LPI rate, which I've mentioned before. Clearly, we have the seasonality of the net LPI over recovery, which tends to be concentrated in Q4. Overall, a lot of positive trends that should support an increase in interest rate income, net interest rate income for the quarter ahead. Having said that, to set the scene, I leave the floor to Giorgio to walk you through the details of our business's performance.
Thank you, Max. Now we are at page seven, we start on the factoring and lending business. We have the best first Q2 ever, we confirmed a good performance in terms of volumes that started last year. Our loan book is at EUR 5 billion, is up 30% year-on-year, the difference between the last quarter is driven only by the seasonality. There was a good performance in terms of volume. We have to consider that we are carrying out a strong repricing campaign. Despite that, our volumes grew by 20% year-over-year. We have observed a double-digit growth in Portugal, in Greece, in France, and in Poland, in Italy, a single digit growth.
In Spain, the loans receivable are down, considering the significant injection of capital done by the government. Going to the next page eight, we can observe that the PNL of the factoring and lending increased by 37% year-over-year. We have the start of the positive impact driven by the increase of the, first of all, the LPI rate, the ongoing of the repricing campaign, and also the strong compared to the one of the last year, considering the seasonality LPI over recovery that we have observed in the Q1. In the other operating income and expenses, we are at a cost compared to the last year.
This result has been driven primarily to the recovery costs, the so-called EUR 40. The expectation is to continue to go on that on that side. We maintain a substantial also off-balance sheet LPI recovery cost fund. That is the portion that we don't book on time by time, but that has been driven by the collection. We have this significant fund that we are going to recover going forward. Finally, the profit before tax is at EUR 39.2 million and increased, as said before, by 37% year-over-year. Going to the security services at page nine, we are carrying out an important onboarding campaign with clients.
We have to consider that after signing this contract. The start in the inflow of the deposit is delayed due to technical point and the starting of the activity of the funds. I think is a good point going forward for the rest of the year. The net revenues are down due to the lower net interest income and also the fee and commission has been impacted by the exit of Arca and that occurred at the end of the last year. Consequently, the direct operating income are down by 19% year-over-year and due to lower direct costs and also personal expenses.
It's important to realize that the redundancy, one-off costs are fully covered by the bank budget, integration budget, and we don't foresee any additional integration costs for the future. Decrease and also the Q1 2023 deposits, end of period are down following the exit of Arca and also the market trend, because with higher rates, the funds are going to invest and they deposit less liquidity. Going to page 10 for the payments business, we have to consider the seasonality also of this business. At the end, total net revenues are up by 7% year-over-year, down compared to the last quarter of 2022.
It's important to highlight the important contribution that we have from the payments business in terms of liquidity. Liquidity increase is stable compared to the end of the year but increase by 42% year-over-year. Going forward to the corporate center, the result at page 11. The result has been driven by the sale of a portion of our held to collect floater bond portfolio. We anticipated some revenues that were expected during the year. Also, the other income expenses grew thanks to these positive aspects in terms of capital gain. The net interest income is lower compared to the Q1 year-on-year but is stable compared to the last quarter of the year.
As said before, we don't expect any other integration cost coming after the merger with DEPObank. Going to page 12, we can observe a very diversified and stable funding base. As said by our CEO, we increased compared to last year, the portion of retail, the retail deposit. We don't have any issue related to ECB funding, and this is an important point going forward, and looking at the end of the year. Our LCR and NSFR are strong. Thanks to the reduction of dimension of the balance sheet, our leverage ratio improved and, at the end of the quarter is higher than the 5%. We reduced our portfolio. Now we are at EUR 5.6 billion compared to the 6.1 that we had at the.
At the end of the last year. One important thing is the strong reduction in terms of fixed bond portfolio compared to the total bond portfolio. The asset quality has been confirmed, the good asset quality and the negligible cost of risk. We, our NPE are 92% related, as seen in the table, to the public sector. It's all related to the public, to the public sector. If you take in consideration that the 70% is related to the municipalities in conservatorship, we know that is a question of time. We have to wait at the end of this procedure, and then we can come back to collect, to collect our, to collect the money.
The cost of risk is at 4.7 bps and is lower than the one that we had at the end of last year. At page 14, we have the capital ratios. We confirm our excess capital versus the target of the 15%. The excess capital is higher than EUR 200 million. We have already accrued after these results, EUR 0.28 per share that we are going to pay in the after the mid-year results. Is also an important point to be highlighted. That is a confirmation of our stability, strong capitalization, and the performance of the business that we had in the beginning of 2023.
I leave again the floor to Max to go with the rest of the presentation. Thank you.
Thank you. Thank you, Giorgio. We leave now the floor for any QA we might have. This is the page, final page is the upcoming events, so we'll see many of you face-to-face in course of the next events of our roadshow. Now it's the time for your questions. Thank you.
We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch tone telephone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. The first question is from Andrea Lisi with Equita. Please go ahead.
Hi. Thank you for the presentation. Some question on my side. The first one, if you can explain us when it comes to the decision to sell the Govs. It was not so clear to me if you sold floaters or fixed bonds. In slide 11 there was written floater. In slide 12, restaurant reduction fixed bonds. If you can just explain this. If you can provide us an update on your long-term or mid-term strategy on the BTPs portfolio. The second question is on your deposit base, in particular, making a comparison versus the last quarter. I saw that deposits from transaction services were down by EUR 700 million. I think the effect of Arca was already there in the fourth quarter.
If you just can provide us some color on this, if there's some seasonality or, in general, if you can explain on this point and what you expect. The last question is, how do you see the composition of your funding mix going on? Thank you.
Hi, Andrea. Thanks for the questions. Look, in terms of composition of the funding mix, we expect to continue with not the similar mix than we have today, if it's for the repos. The retail deposit market is marginally more attractive than it used to be. You know, those are fixed rate deposits. We have short-term deposits, and so we can actually lock in a rising interest rate, lower rates than the forward curve. Whereas our deposit from transaction services actually price usually the one-month delay. There's always a bit of movement on the deposit from transactional services, quarter-on-quarter, depending on the decision, particularly on the security services side for fund managers to invest or divest.
This shouldn't be frankly, any reason to have any particular concern. We haven't lost customers. We haven't actually continued to add customers. If anything, we are waiting for customers to migrate to us, so to have more inflows. That's simply an issue of timing of decision people are taking. In terms of the decision to sell the strategy around BTPs. We sold floaters, which was due to expire from every 18 months. We've been front loading most of the earnings we actually can in this year. It's more a timing issue, particularly this year. That was to reduce our balance sheet. We bought other floaters at the same time there were fixed rate deposits.
Fixed rate bonds that actually expired. That's why the message might be a bit confusing. We actually had a reduction of fixed rate deposits simply because they were at the end of their term. We sold part of the floaters and we bought other floaters with what we sold to keep still a reduction of the overall bond portfolio. Overall, if you think it's our bond portfolio, the strategy is to continue to reduce the portfolio, particularly the fixed rate bond, which has, at the moment, a negative carry. That should improve actually our overall profitability going forward. We have EUR 300 million roughly of fixed bonds reduction already locked in the Q2 of this year.
That path will go down. Importantly, as I mentioned at the beginning of the presentation, the floaters reprice every six months. In a rising interest rate environment, we're still playing catch up. When there is a stable or declining interest rate environment, actually the effect is different on liabilities and reduce or are stable and our asset yield goes up.
Thank you.
The next question is from Simonetta Chiriotti with Mediobanca. Please go ahead.
Hi, good afternoon. Two questions from my side. The first is on the repricing process of maturity commission. If you could give us an update of how the process is proceeding. How much of your book has been already repriced. The second question on security services. How do you see the coming quarters? Where do you see basically the profitability of this business in the coming quarters and overall in 2023?
Finally, looking at the guidance that you gave last, at the end of 2022 of EUR 180 million-EUR 190 million, considering the large capital gain that you have made in the Q1, how should we see this capital gain? Is it just like an anticipation of revenues that you are expecting in the coming quarters? Or it is something that adds to the guidance? Thank you.
Thank you, Simonetta. Look, on the repricing process, we're well advanced. You actually see, you don't see that yet because a lot of it comes at the end of the quarter, so will be seen clearly in the next quarters with the new purchases. We have some customers with whom we can't reprice. But we have, this week concluded most of the repricing we had planned. We are well advanced on that. I think the other banks have been a bit slower, particularly at the beginning of the year in repricing, so we had to appear more aggressive than others in the market. We think actually that people have realigned themselves, which is good for us.
We also have, in fact, in lending over a situation where the H1 of the year tends to be slower in getting new customers on board, because unless people have already planned to do factoring, then they don't necessarily do it right away because they can simply concentrate the cost of doing that in the H2 of the year and as a working capital with one-off transaction at the end. That's the usual cycle. We are, I would say, quite bullish on the opportunities we have in front of us. The number of large contracts that are coming up for renewal that are in the hands of our competitors in the H2 of the year. We have a number of interesting conversation with large corporates.
We think we are well placed to actually continue to deliver a strong growth in factoring and lending. We're quite pleased on, again, on factoring and lending. We haven't added as much by the performance actually of the collection team, which has delivered a good results in terms of overall collection. We will see that going forward as well. On security services, it's a quarter which doesn't give full credit to the strength of the business. As Giorgio mentioned, we have seen onboarding clients with whom we have won tenders in which to see the assets coming through. We know that there's a good time from the net revenues.
On the cost side, we have concluded the extraction process for the exit of the employees that were servicing Arca, but people have not left yet. A number of them have left towards the middle of the Q1, exit at the end of May, and some will exit at the end of July. We still have the provision. We have taken already a provision this quarter in terms of one-off costs, but their salaries are still in the P&L. The 15 that are still roughly at the end of this quarter, 20 people that need to leave. There were some people who were in the cost base in the quarter as well. In the next quarters will be much, much better in terms of overall cost.
It's a business where, as we mentioned before, we see actually a lot of opportunities to grow, particularly with the Casse di Previdenza market, where we think we're actually quite well placed to capture volumes there. That will have a positive impact on liquidity and also on our growth from 2020 in 2024. In terms of guidance, as I hinted before, the sale of the bond is mostly anticipated. The earnings that those bonds were going to give us this year. There is a bit of anticipation there of earnings for the next quarter.
We confirm the guidance of 180-190, and we'll give probably an update at the end of June, depending on where we are also in the commercial development.
Thank you.
The next question is from Luigi Tramontana with Banca Akros. Please go ahead.
Yes, good afternoon. Thanks for taking my question. Actually one last, regarding the environment for M&A, given that you have excess capital and excess liquidity, you are scouting the market, but it seems that it's difficult to find a suitable target. Would like to understand what you are seeing around, if it's just a matter of pricing or if there are some problems in the targets in terms of funding or in other elements. Thank you.
Hi, Luigi, good to have you back. On, on M&A, well, Difficult to comment without commenting on specific targets. I think the fact we haven't executed acquisition is a testament to our strong discipline in looking at opportunities. We've always said, you know, for us, M&A is a nice to have. It's something we look at, but with discipline. It's very easy to not to do a good deals on an Excel spreadsheet, but then you need to execute them. We continue with the same discipline. In the past, we've looked at opportunities that we didn't execute upon, either because the terms are not right or we ended up not liking the asset for good reason.
Some of you know, some of assets we've been mentioned in regards of what's happened to them can testify. There are various reasons. You never know. It's a bit of a dating game. It depends if to find the right person, if you end up really liking him or her.
As a reminder, if you have a question, please press star then one. The next question is a follow-up from Andrea Lisi from Equita. Please go ahead.
Hi, just a follow-up as regards especially the corporate center contribution in terms of NII for the next quarters. Considering that you have sold a portion of the Goldies portfolio, just as an indication, in fact, also considering the fact that there is the repricing and the fixing of the rate. Is it reasonable still to expect growth in terms of NII there or maybe some stabilization? Just to have an indication of the trend you expect there. Thank you.
Yeah, no, it's a fair question, and we've tried to explain it in the 1st bullet point, but maybe in not such a clear way. What happens on the floaters, think about how you, how we in nutshell, if you imagine our floaters portfolio being funded by repos or by deposits from transaction services, both are either overnight or one-month floating rate. While the asset side to the floaters are at six months floaters with twice a year reset. Which means that actually, in the Q1 of the year, we've had the yield on the floaters, which was fixed, because it had been fixed in October of last year.
The cost of the liability went up because of the increase in the expectation for market increase for ECB. We actually had a contraction of the year. Now, in April, there is a reset of the year, there is a step up in the yield of the floaters portfolio, which then remain fixed for the next six months. Even if you're in an increasing interest rate environment, takes a while before actually the cost of the liabilities goes up. When then we will have the next reset, if you look at the forward curve, we have a step up, then we don't expect the cost, we don't expect.
The market does not expect the cost of the liability to go up further, we'll have a benefit, particularly in the fourth quarter of this year. That's the mechanics. It's a long-winded answer to your question, but yes, we certainly expect the corporate center to continue to deliver growth for our business.
Thank you. Thank you.
The next question is from Filippo Prini with Kepler. Please go ahead.
Good afternoon. Three questions from me. The first one, regarding 2024, are you confident that the increase of materials commission you are negotiating, be enough to grow again NII even if interest rates will be lower by looking for instance at what the three-month euro forward is telling today? Second is on your capital market day next June. Will you give targets into 2025 on the metrics, volumes, loans, net profit, like you did in 2021 for the 2023 target? Finally, your annual general meeting last April approved also an authorization of a buyback up to 5% of the capital. I believe that most of that could be used for the remuneration of managers and so on.
Would you ever consider part of the buyback to remunerate even shareholders or dividend will be the only way for remuneration of the shareholders? Thank you.
Thank you. Let me answer in reverse order. On the buyback, as we said a number of times, is not a very flexible instrument. You can't really time when you want to do it, and, we think, it's easier also with the regulator to distribute the earnings as they arise and then optimize our capital level by growing the business. Remember also we have a number of other constraints, which are, for instance, leverage, the environment. We think at the moment that the best approach.
We will buy back some shares to fund the dilution of the stock options, but also with the new incentive plan that we approved two years ago, there will be a bit less need of that, which also means there's less dilution for the shareholders. That's in a nutshell where we are. It really depends on the market condition and the timing of the approval with the regulator. On the capital market day, yes. What we'll do is a refresh of our strategy. The 2021 capital market day was very much focused on the integration of data.
What we want to focus now, even the dramatically change, I would say dramatically positive change of the interest rate environment for our factor lending business, the opportunities we see in the other two businesses actually to present once again the business to the market to show the earnings potential. Which I think are actually a bit misunderstood by the market. In a rising interest rate environment, in fact, and that goes to your first question, we always playing a bit catch up. On interest rates until they stabilize. Remember, we have only a portion of what we collect in terms of API that goes through PNL. With the rising API rate, we will actually see a significant improvement of balance sheet reserves, a large portion of which then gets captured, but in due course.
In a sense, we are enhancing the embedded value of the business. Once the rates stabilize, actually, our earnings capacity goes up significantly because we don't have the delay in the reset of, for instance, of the bonds, and we have the full effect of the API rate reset. Going to your question, and sorry for the long introduction, 2024 is actually easier to model than 2023. The reason is if you take 2021, when rates were flat at 0, if you look at the forward curve in 2024, you see that actually the volumes have increased. By 2024, we have repriced our customers.
We are gonna have growth in volumes. Importantly, the API rate has moved from 8% to most likely 12%, which means that actually the running yield on the portfolio will increase if we just reprice the receivable simply to transfer to the customers the increasing rates by 2%. 50% of the difference between 12% and 8% API. We have inherently a quite a strong growth in NIM, and, on a business which is mostly fixed cost business, that has quite a significant impact on our PNL. We're actually quite bullish on the results that we should expect in 2024, all things equal, because of the way the business performs.
Let's not forget, that the fact that the API rate is increasing, it means that actually we are deferring more income in the future, through, the fact that we are actually very prudent, in our accrual, both of the API rate and of the recovery cost, so-called EUR 40. In a sense, it's now a great environment for us. Maybe it doesn't show in tab in our P&L because we are deferring so much. We should see a pretty strong accumulation, of earnings, but also of deferred earnings, given the mechanics of our business.
Thank you for confirming.
The next question is a follow-up from Simonetta Chiriotti with Mediobanca. Please go ahead.
Yeah, thank you. Just another couple of questions. I'm looking at slide eight on factoring and lending KPIs. You report growth in the gross yield from five, well, from 4.9 in Q1 2022 to 6.7 in Q1 this year. How much of this growth refers to the API repricing and how much to maturity commission, roughly speaking? Another question on APIs of recovery that is improving. It has already improved materially in the last quarter and also in the current quarter, so in the Q1 in 2023. Is it the...
Was the structure of the department that is in charge of these over-recovery, if have things changed structurally, so can we expect this positive trend to continue going forward? Thank you.
On the over-recovery, I think we are seeing the effect of having made some changes in the way the department has been managed. We've also done further adjustments in the Q1 of this year by rejigging some managerial responsibilities and also by giving a different leadership to the legal to the legal recovery process so that actually they can be also more effective. We also expect that the impact of the sentences around the forty euros will be felt much more in our collection process.
There is, actually reading the Il Sole 24 Ore today, there's the news of a third Court of Justice of the European Union sentence that again clarifies, not only the 40 EUR are due, but also that no national law can prevent the collection of the 40 EUR or the reduction of the 40 EUR, or them to be calculated in a different way, very explicitly, which is strong support of our legal claims in court. On the on splitting the impact on gross yields and average loanings. It's complicated because what you have is the effect of the LPI recovery. You have the fact that proportion of the loan book has not seen any increase in yield because you have the Polish portfolio, which actually has flat rate.
The base rate has not, has not grown. We have the repricing. We have clearly the step up in the LPI rate. The LPI rate covers roughly EUR 2 billion, out of memory, of the EUR 5 billion. It has an impact on gross yield, but not on the entire portfolio. You can see already in these numbers a part of the effect of the repricing, which though is on the new volumes. Remember, volumes have been high, so it's been highest level, but they're lower with the fourth quarter, so we still have the full effect of that to be seen.
Thank you. For any further question, please press star one on your telephone. This concludes our question-and-answer session. I would like to turn the conference back over to Massimiliano Belingheri and Piergiorgio Bicci for any closing remarks.
Thank you. Thank you for attending the call today. As always, helpful for us also to answer your question. I think probably the main takeaway I would leave is it to look forward to 2024. That's probably the easiest way to model the business in the way I try to answer Filippo's question. We see a huge opportunity to continue to deliver on the strong path of earnings and volume growth in many businesses we've seen in the last few quarters. We look forward to review the performance of the business in the next quarter, and ahead of that, clearly, to present you our business plan for the medium term. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.