Good afternoon, and welcome to BFF Banking Group Full Year 2023 Earnings Call. All participants should 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 touchtone phone. 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, CFO. Please go ahead.
Thank you for the introduction, and welcome everybody to our full year results call. We are happy to report our record year in terms of adjusted net profit, with a good commercial development, a strong growth in our loan gathering capacity, particularly on retail deposits and an improvement, significant one on our off-balance sheet reserve, which have reached over EUR 600 million. The fact that we have an environment with higher rates will underpin the growth going forward, given our LPI rate now sits at 12.5% from the 1st of January.
It has been a profitable year, but also a year where we have continued to generate free capital, and therefore, we will provide a dividend, including our interim dividend, equal to our adjusted net profit of EUR 183 million, with the payment to be done at the end of April. This leaves us still with a good capital position, with a CET1 ratio of over 14%, and almost EUR 17 million of excess capital versus our 12% CET1 target. If you take the dividend distribution that we have already declared, this brings us, in terms of total distribution since the IPO, basically the value of the company at IPO. So we paid back our shareholder the entire value of the business back then.
In terms of development, we won in January our first tender, actually the first tender, in the Cassa di Previdenza, with Cassa Forense, who has EUR 13 billion of AUM. That's an important step in the growth of our security services business, and in rebuilding good position as the leading player in the long-term savings in Italy. Also, there are further discussion on the review of the Late Payment Directive, which will now be a late payment regulation. The proposal of the European Parliament are actually even more beneficial to us than what has been put forward by the European Commission, and so we see a very positive trajectory for our business from the regulatory environment.
In terms of the new Board of Directors, this is actually the last call of the existing Board of Director. A new one will be appointed with the AGM of April, and the slate will be published on the 8th of March. That leads us to page four, to recap of actually what we have delivered to the shareholders over the last three years of the board, and also since the IPO. The company has been able to deliver strong returns. We have delivered return, total shareholder returns since IPO of over 285%, and we have tripled the value of the stock since including the dividends since the end of 2020.
So a pretty good run, and not only driven by the strong growth in the bank's stock over the last few months, but the consistent growth that the business has been able to generate for a number of years, as you can see on the chart on the left-hand side of page four. So that's history, which has been quite profitable for our shareholders. But if you look ahead on page five, at our financial targets to 2026, 2023 is the first important step to reach those targets, and we are in the right direction to hit them, both in terms of net profit, earnings per share, cumulative dividends, return on capital, and cost income.
We expect 2024 to continue to deliver on that trajectory. When we look at the opportunity ahead of us on page six, we see a good net interest income momentum as rates peak and are set to fall. You might remember, differently from other banks, our liability reprice faster than our assets, and so we have a lag effect then when rates fall. So we have a lag effect when rates stabilize in catching up with the rates, and when rates fall, then we have the benefit that rate falls on our liability faster than they fall on our assets. And so with 94% of short-term floating liabilities, we are well positioned to the expected reduction in interest rate going forward. We should boost instead of contract our earnings.
Secondly, the fact that we will live in a higher interest rate environment than the zero interest rate environment we've gone through in the last few years means that we continue to add to the fair profit on our book and that compounding effect is particularly visible in 2023, where despite the fact that rates have only stepped up gradually throughout the years, let's remember, we started the year with the LPI rate at 10.5%, and now it's at 12.5%, we've actually grown our off-balance sheet reserve by EUR 76 million. And that's important because it's a source of inertia profit growth on top of the normal earning growth through the over-recovery mechanism of our accounting.
And third, to which where I will spend a bit more time, we have a likely strong upside from the review of the Late Payment Directive. We discussed before the proposal of the European Commission, as you can see on page seven, which is driving for a move from a directive to a regulation, which is directly enforceable in every European jurisdiction. A shortening of payment time to 30 days for debtors, including the NHS, and the Recovery Cost moving from EUR 40 - EUR 50.
The European Parliament, which is a second constituency, which is involved in the drafting and then approval of the legislation, has basically taken on board the European Commission proposal, but has also expanded further the Recovery Cost, which is in the draft proposal at on average of EUR 100 per invoice. That's actually quite an important potential boost to our earnings. We already announced in the November call, one on the Q3 results of 2023, that the European Commission proposal would have boosted the full year earnings in the first, the first year of implementation by EUR 12 million- EUR 15 million, with a run rate of EUR 25 million.
If the recovery costs were to be brought at EUR 100 million per invoice, then the first full year boost will move to a range of between EUR 48 million and EUR 52 million, based on current volumes. Clearly, volumes, as we expect, will grow, that will grow even more. And on the run rate, we'll have a similar boost. Where we are in terms of of the discussion, the Parliament committee, who is reviewing the draft report, will vote for the amendment and therefore, get to a final position on the 22nd of February. And we expect the European Parliament to vote before the European election on April 24th for their position, and then we will have to wait for the position of the European Council.
But if the European Commission has a position, and the European Parliament has a position very similar to the European Commission, then we expect the direction of travel is pretty much set for where we are headed. So overall, a pretty good context outside, but I leave it, I leave the floor now to Piergiorgio Bicci, our CFO, to go through the numbers and the additional reporting before reconvening for questions at the end of the call.
Thank you, Max. Good afternoon to everybody. We are now at page eight with our P&L results. First of all, the adjusted net income hit EUR 183.2 million, increasing by 25% year-on-year. This happened thanks to the increase in total revenues that has been driven primarily by the results of the factoring and lending business, and also the revenues coming from the hold to collect government bonds. We had a higher cost of funding due to the increase of the rates, and also we have an increase of 15% in the total net revenues. For the cost, we maintain our good discipline, with a reduction of 1.1 percentage points, and we hit 31% in terms of cost income ratio.
We hit our historical best in terms of net revenues, and we have, as explained before by Max, also a good vision in terms of what will happen in 2024, and on the trajectory of our industrial plan. At page nine, we have our balance sheet. We, as said before, we have a smaller bond portfolio that decreased for more than EUR 1 billion year-on-year, and the loan book grew by 3%, reflecting the different mix in our loans. We increased significantly our retail deposit compared to the last year, and on the other side, we reduced our repos. Also, our leverage ratio increased, and we are now at 4.88%. In terms of business, we are at page 10.
We have a strong increase in terms of revenues coming from the factoring and lending. The increase was at 66% year-on-year, with a significant increase in terms of gross interest rate, thanks to the increase in terms of rate, but also the other income increase, primarily following the increase in the recovery cost that we book, and also that we collect during the year. As said before, the total LPI and recovery cost fund is higher than EUR 1 billion, and we have enough balance sheet reserve that can permit us to have a deferred profitability for the years for the following years. In terms of KPIs of the factoring and lending, we are at page 11.
We hit our historical high in terms of loan book, following some different directions, because in Italy, we have a different mix in terms of loan book. In Greece and Poland, we confirm a good and positive trend in terms of volumes and loan book. Spain and Portugal have been impacted by some government cash injection. In terms of volumes, we grow by 10% year-over-year. In the next page, we have the payment business, and the transition to the digital payment in Italy driving an interesting result that we had last year.
The number of transactions increased, and the total revenues, considering also that the fees are flat, for the mechanism of pricing of this business, increase following the increase of the transaction. At the end of the year, we also increased the liquidity coming from this activity, and at the end of 2023, we are at EUR 3.5 billion of liquidity. For the security services, at page 13, as said before, we won the first tender for the Cassa di Previdenza, concluded in January 2024. So going forward, is a good outlook also for the future.
We have our depository asset and deposit that increased year-over-year by 19%, with a positive net inflow of EUR 8.3 billion during the financial year 2023. We have a decline in terms of global custody following the exit of a low margin client that decided to leave. But in terms of revenues, excluding the effect of Arca, we are at 3% higher. We are at 3% higher than the previous year. In terms of deposit, we are down following compared to last year, the exit to Arca, but we have a positive outlook also for 2024.
In terms of cost, we maintain our good discipline, and we are at page 14. Our OpEx and D&A for the factoring increased, due to the increase of legal, political cost. On payments, the costs are related to the volumes, so the increase of the volumes drives the increase in terms of cost. For the security services, we are down by 16%, following the reduction coming from the exit of Arca, and the reduction on some direct cost. Speaking about Arca exit, the cost saving is at a high rate level, starting from last August. For the other OpEx and D&A, we increased 16% year-over-year, primarily due to two different aspects.
The first one is the contribution for the resolution fund, and the second one are the investments that we are doing for the IRB model, internal model for the credit risk and some ICT investment in order of the renewal of our banking system. At page 15, we have a slide explaining our balance sheet with the ample deposit funding. In terms of deposit, we are over EUR 9 billion. The cost of funding is lower than the reference rate, and, as shown during the presentation of the industrial plan, we are forecasting the issuing of a bond in the second half of 2024 from MREL requirement.
We confirm that we don't have any ECB funding to be to refinance, and importantly, the yield on floaters hit 5.16%. For the asset quality, we maintain our asset quality, and the 90% of our net impairment loans are towards public sector. We are at page 16, and the coverage of our NPL is excluding the consolidated municipality and conservatorship is at 75%, with a cost risk that is EUR 9.4 billion. Going to the page 17. In terms of dividend, as said before, we are going to pay at the end of the year, EUR 108.3 million of dividends, split in two.
The first part has been paid after the results of the first semester, and the second one with 0.541 EUR per share will be paid in April 2024. On the capital ratios, we confirm our strong capital ratio. We are at CET1 at 14.2%, with almost we are maintaining also our RWA density around 42%-43% for 2020. Finally, slide 18, we have a highlight on our ESG strategy. We are continuing our path on the three pillars of ESG, environment, social, and governance, and governance. About the governance has been explained by our CEO, where we are in terms of the late process for the board.
For social, we have published our, during the year, our social bond framework. We create internally an inclusion board, and we increase the percentage of our female managers in all the countries. For the environment, it's important that we are still working on the inclusion and integration of the climate and environment risk in our risk framework. Also, we are continuing our trajectory in order to have our employees in LEED certified offices. We put a lot of energy in the net zero strategy and following the path that we have drawn for our industrial plan. Now, I leave the floor again to our CEO in order to give you some takeaways, and to have the possibility to answer to eventually your questions. Thank you.
Thank you, Giorgio. I think it's important again to reset where we are. We are in the second year of our industrial plan for the trajectory we set ourselves for 2026. We're optimistic about the outlook. Because rate environment first thing to support our net interest income momentum. Second, we will continue to add to our deferred profitability and this year we have increased our deferred profitability by EUR 76 million, which will be future profit that we get at a later date.
Then the Late Payment Directive is for us not only the confirmation, as we always stated, that the regulatory framework would not be against us in terms of the Late Payment Directive, but more importantly, that is going to have a positive impact in our accounts beyond what we have indicated in our plan, in our plan targets. With this, I close the presentation. You see on page 20, our appointments over the next couple of months, both in terms of investor engagement, but also importantly, on the renewal of the board, starting from the publication of the Board of Directors slate, and then the other slate at the beginning of March, and then the AGM on the 18th of April, with the payment of the dividend on the 24th of April. 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 phone. 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 Antonio Reale of Bank of America. Please go ahead.
Hi, good afternoon, it's Antonio from Bank of America. I have three questions and one clarification, if I may please. The first one is on asset repricing, secondly, on costs, and lastly, just on the outlook for profitability. The first one, obviously, you've a strong momentum. Growth is back. Your repricing seems to be bearing fruits, gross yields on average, loans and factoring has increased to 7.6% from 5.6% a year ago. That's on your asset side, while it's quite clear that your funding has moved up, upfront, given that, as you say, you have 94% of your liabilities on floating rates. So my question here is: How much more is there to go on the repricing of the asset side on the loans?
Maybe anecdotally, how across your key geographies, have your clients behaved when presented with the sort of repricing? I mean, loans and volumes have been quite healthy, so but if you can share any more color, that would be helpful. My second question is on cost. Now, you of course you have a banking license, but you have very different dynamics from the traditional banks. You're in growth mode, you're expanding your franchise in a number of relatively new geographies, and hence, your cost base will inevitably include some investment components related to the growth, funds, financing. So could you share perhaps how much is roughly that in your cost base? So how much that relates to investments?
I think that would be important for sort of your multiple expansion to clarify that. And lastly, slide seven. You know, these proposals, I understand they're drafts, and there are a few hurdles that we need to overcome, including European elections in June, but the potential upside here is quite meaningful. Now, you've obviously been following these discussions with the Commission and the European Parliament quite closely, so...
How likely do you think are these additional revenues to come through? Any color you can sort of share with respect to the things for us to look out for. And actually, one clarification, if I may, on your depository. So on the depository business, you've won an important mandate of about EUR 13 billion AUMs. How is that going to affect your P&L? Is it mainly, liquidity tool, or does it have an impact on your fee margins as well? Thank you.
Thank you, Antonio. Overall, I agree with your comment on how to read the numbers. And I go through question by question on what you said. If I missed some of the details, please come back with more questions. On the depository business, look, it's more the impact is more around the liquidity. Clearly, it has commissions attached as well. For us, it was also important because in a market which is worth actually EUR 120 billion, getting as a first customer, a EUR 13 billion customer, clearly means that we're very well positioned also on the other tenders.
There's one around EUR 8 billion open, and a couple of smaller ones of around EUR 1.5 billion, EUR 2 billion each. So we think actually, if we're able to get good momentum on the tenders, that should drive our position in that market to a very healthy market share, which will give us more liquidity and more flexibility on our funding. It's important also to restate our position as really the domestic player in the security services space in Italy. On the asset repricing, we clearly are working with our customers to try to reprice as much as possible. Importantly, we have repriced more faster than the other banks, which means that now the banks will have less deposit spread, and they are likely to have to reprice.
Then, we should be, in a sense, have already front-loaded the pain with our customers, are probably in a better position compared to others that is still left to do that. Importantly, also, when you look at our margin, let's not forget that as I mentioned before in the call, we started the year with an LPI rate at 10.5%, that went up in July to 12%. And so the effect on the spread and on the yield of a higher rate of interest is not yet seen in our numbers. First of all, because the accrual has only been on a higher rate started recently.
Second, the deferral component shows up much later in our plan, so five years down the line. On the cost base, we will continue to invest, as we indicated in the business plan. We are talking about mostly CapEx and OpEx, because mostly one-off is the investment done around the ARB, which is also an OpEx component. It has, it's the investment on the new factoring system. We were talking, frankly, pretty marginal numbers in the overall context of our business. When we think new initiatives like opening the branch in France, we're talking at maximum EUR 2 million of OpEx, which don't require much volumes of receivable to actually cover, more than cover those.
So the fact that the choice we've made always to have a simple business as much as possible and not diversify too much is paying off in terms of our return. And so, the more we grow, the more we become efficient, which is not the same for a traditional bank. One point that you mentioned, which is clearly our international presence, is also helpful in terms of hedging the cost dynamics of our business compared to other players.
The fact that we operate in lower cost geographies in terms of HR costs, like Poland, or in geographies where the flexibility around the labor is higher, like Spain, means that actually we can serve these functions for the group in a more efficient way than Italian banks, which are subject to one of the more strict, from the employer perspective, labor contracts around Europe. And so we think that's actually another source of competitive advantage, which will play out in our favor in the years to come. On the Late Payment Directive, to give, which is clearly important, so I left it at the end. We are, as I said, very close to see what is gonna be the position of the European Parliament. It's a very transparent process.
You can go online and see all the 400 amendments that have been tabled. Overall, the discussion is around if to apply the maximum 30 days to the private sector as well as the public sector. There's no discussion of making it easier for the public sector to pay late. The increase in the fee is not really debated. So the EUR 50 proposal, the European Commission would say probably it's a floor. Most likely, we are going to go in the direction of the European Parliament proposal, but that will come down to the trigger with the trilogue with the Council of Ministers. So we think direction of travel is pretty good.
The debate is only around, really the private sector, the private sector payment times, which affects actually, if you want, the factoring companies who deal with the private sector, so not as that much. And so we see as fairly likely the upside that we've indicated, certainly the first one on the commission, but also the level we've indicated for the parliament proposal. Then it's a legislative process, as Bismarck said; it's like a sausage factory. You like the result, you don't know exactly how you get there, but we are quite hopeful of the outlook.
That's great. Thank you very much.
The next question is from Manuela Meroni of Intesa Sanpaolo. Please go ahead.
Yes, hello, thank you for taking my questions. The first one is on the factoring and lending business. You said that Spain and Portugal has been impacted by some government cash injections. I'm wondering what we can expect going forward, if there is any change in the trend that we can expect for 2024. And again, on the factoring and lending business, I'm also wondering if you are seeing any material changes in the payment behavior of the public sector in any of the country where you are operating. The second question is on the security services business. In Global Custody, there has been a stronger decline in assets under custody. You mentioned some loss of low margins clients.
I would like to understand if you can elaborate a little bit more explaining this trend, and if we can anticipate a further loss in 2024. On the other hand, again, in securities services, the assets under deposits increased significantly, as Cassa Forense will be on board in 2024. I'm wondering, what has produced this kind of a change? And the last question is on the loss provision, because the risk is for sure very low, thanks to your business model. But there has been an increase in loss provision in the last quarter, so I would like to understand if there is something to flag on that. Thank you.
Thank you. Look, on cost of provision, there's been some methodological changes in the IFRS 9 computation for the government bond portfolio, which accounts for EUR 1 million. So when we look at provision, we need to take into account not only specific provision, but simply also the impact of IFRS 9. This has been the main driver. At the end, I think we'll say most of the growth we've seen. On Global Custody, the kind of loss was the parent of Arca, so it was not an unexpected outcome.
And, as I said, was a fairly low margin business for us, was more an impact in terms, in terms of the headline assets under custody, which we think we can recover with growth and with the tender of the Cassa di Previdenza. You correctly point out that the numbers you see on the page do not include the Cassa Forense yet. So the good growth we have seen last year from EUR 49 billion - EUR 59 billion, basically, of the depository bank assets under depository has been driven by our commercial activity. And that's a demonstration, actually, of our ongoing commitment to the market and our ability to attract assets, particularly in the pension funds and in the alternative asset management arena.
On factoring and lending, when you look at loans, you always need to bear in mind as we make money, not on the money we have in a single day in the month, which is what you see on the 31st of December, but on how much the assets remain in our portfolio. So the injection of cash from the Portuguese and Spanish government, which is a way for them to, if you want, do a bit of window dressing, at year-end, and use spare cash in the accounts to accelerate payments. We don't know how much they will do that going forward. I think it will be more and more pressure on the public finances.
From what we see, this year, we've seen actually an increase in DSOs in our portfolio across most of the countries. Look, the only one where we have seen a decline has been actually Croatia, and marginal decline of three days in France. But Greece, Spain and Italy have actually seen a growth in DSOs. Portugal has actually seen a decline driven by two cash injections that we had this year compared to last year, but we expect them to... positive, and if you want a lengthening of payment times.
Anecdotally, what you are hearing from both the customers through their association, take, for instance, in Spain, which is the Medical Device Association, and some of the health authorities, is they don't expect that they will be able to keep up the level of payment times they've had the last few years. Now, those anecdotal evidence, we have a few data that are seeing a certain trend for us, with payment time lengthen, you have a double effect. One, our balance sheet expands, but our cost base remains the same, so we make more money on the same volumes, and usually there's more demand from customers to their receivables.
Thank you.
The next question is from Andrea Lisi of Equita. Please go ahead.
Hi, thank you for taking my, my question. The first one is on the NII trend, in particular, if you can somehow guide us on a reasonable level that you have to expect for 2024, given the current level of rates and expectations regarding a cut in rates by the central bank. And always, also related to NII, I wanted to understand, I wish to understand, if you can provide us a bit more color on the trend of over-recoveries, which had showed a great increase in the fourth quarter compared to last year. So, just understand here what's happening.
As regards the loans, coming back to the previous question of Manuela, just to understand a bit better the trend in Italy, where in the third quarter we saw a double-digit increase in loans, while in the fourth quarter a +2% year-on-year. So if you can provide us a bit more color on what's happening here. The other question is on the average duration of online deposit that you have increased in the last six months. So just understand the level of rates and for how long you have locked in that rate. The very last question is on the timeframe, a reasonable timeframe, if any, for which you can obtain the authorization for IRB model. I know that is a really long process, but if you can provide us a bit more color on that. Thank you.
Yeah, the last one, I'll answer with a joke. We should ask Bank of Italy. So we have just started the process, but it takes a while. The good thing is, for a number of public sector entities, we have already working model we've implemented over a number of years, so starting from 2014. So it's really expanding the model to other low risk, low default counterparties. On the NII trend, we expect to continue a good momentum. It's composed by two things. One is the bond portfolio, which is easier to measure. We have actually our credit spread, this spread over Euribor indicated in the presentation, for the floaters and the yield on the fixed.
So that's actually quite easy to model if interest rates were to go down. On the factoring business, we expect to be able to continue to price with a positive spread over Euribor to our customers. And plus, we have now the effect, the delayed effect, of the late payment interest that kicks in from the beginning of this year. And even if rates were to decline, clearly on a year-to-year basis, we'd still be in a pretty good, pretty good position. Also, then we have the over-recoveries on that front. Our liabilities are, as you've seen, mostly floaters. The deposits on transaction services and on payments are floating. The deposits have an average duration that my team is calculating.
At inception, we are always on average around 9-12 months. So if you take then the passage of time, we are actually around 6-12 months. So we've locked in those rates going forward. Remember also, we are collecting most of our deposits in Poland and in Spain, and not through third-party platforms. So it's not only that we have a better access to a better deposit market compared to Italy, but also we don't pay a distribution fee to third-party platforms, as other specialty finance businesses do. Another recovery, I'm pleased you noted that, we have actually increased our performance this year. We've been working on our team, and we are seeing the first fruits of that effort.
We are still not there in terms of where we want to be, in terms of over-recoveries. And, if you look at, the further accumulation of balance sheet reserves, net of what we put through the P&L, therefore, now the fact that we have increased another EUR 76 million, if you want, means taking the math of that, that our embedded profit has grown, this year by another EUR 35 million. And so if you want the, the normalized profitability is higher than the EUR 183 million that we've been. And so that's where we are gonna go. In terms of loans, as I said, that the loan book is seen at year-end on a single point in time. This has already the impact of Spain and Portugal in Italy.
We've had a different mix compared to the past, and so we have not gotten a certain portion of loans which were actually not yielding late payment interest, so were actually marginally profitable for us. And therefore, we expect that to have a positive impact also on our mean yield of the portfolio going forward.
Many thanks.
The next question is from Simonetta Chiriotti of Mediobanca. Please go ahead.
Hello, good afternoon. A couple of questions from my side. So the first is on slide seven. So on the impact of the proposal on recovery rise, you gave an indication of EUR 48 million-EUR 52 million. This number, so the question is, this number compares with the EUR 12 million-EUR 15 million that was given for the first increase, so from EUR 40 - EUR 50. So this is my first question. And the second question is, I was looking at slide five that, well, graphically, you give a projection of earnings that is very constant. So I was wondering if you see 2024 actually on a constant growth path to reach the target of 2026, the implied growth rate that the year should be above 10%. Is it something that we can assume for 2024? Thank you.
Thank you. Well, page five is a graphic representation where dots are, as you can see, equally aligned to the trend. So I would not take it, not take it as an indication of where we expect the results to be year, year by year. So that's not a hidden way to give you yearly targets we're not providing the market. On page seven, the short answer is yes. So the 50... the EUR 48 million-EUR 52 million on the second box are the equivalent of the EUR 12.5 million of the first box. And therefore, we haven't provided you here the run rate for the impact of these potential proposals. The run rate includes also the Over-Recovery at year five and six.
Yeah. Okay, thank you.
The next question is from Luigi Tramontana of Banca Akros. Please go ahead.
Good afternoon, thanks for the presentation. Two questions on slide 15 and then one on 13. Slide 15, you are indicating that your funding cost for full year 2023 was 3.22%. How does it compare with full year 2022? And what are your expectations for full year 2024, where I imagine you are expecting the peak in terms of funding cost? The second question on page 15 is related to the residual EUR 1 billion fixed rate bonds, which have a very low yield. Are there any maturities planned for this year on this portfolio? Just to understand if we can expect a replacing with a better yield.
And then on page 13, regarding Cassa Forense, for sure, it's positive news, and in terms of AUM, it's quite big. But given the tender system, my question is on the fee attached to it. Is the fee structure in line, lower, or higher than the traditional fees that you get from the traditional SGR? If you can provide some details there. Thank you.
Yeah. In terms of the yield is similar to what we get, so the commission on the customer is similar to what we get on a pension fund. So it's less than what we get on a mutual fund manager. Remember also the revenues we have both the custody and the bank revenues in what you see on page 23, so you can automatically derive the impact on fees. It's a public tender, so one-... As soon as I publish, you actually see officially how much we have offered. In terms of page 15, you see the yield on the fixed rate bonds, which is 0.68%. The duration is 41 months.
So, we have this year expected reduction of that portfolio only by about EUR 100 million, which we don't plan to actually substitute. So the effect will be actually a smaller negative carry on that bond portfolio. The fact that rates are going down means also that that bond portfolio has a lower negative carry overall, because the gap between the from the repo cost and the yield on that portfolio shrinks compared to the peak of last year. In terms of cost of funding, yes, we expect the fourth quarter would have peaked. Here is the annual cost, so it's worth looking at more the fourth quarter cost of the peak, and that will go down over the year.
We have the need to issue bonds for requirements, so that will increase the cost of funding. But that will have an impact on the second half of 2024. To increase cost of funding says that issuing a bond is more expensive than collecting retail deposits, but it fulfills the substitution to our the need to retain, to retain more capital. Have I answered all the questions?
Yes, thanks.
The next question is from Giovanni Razzoli of Deutsche Bank. Please go ahead.
Good afternoon. Three questions. The first one is on the impact on the potential review of the Late Payment Directive. I was wondering whether, as a very good note, that the guidance of EUR 12 million as a run rate of EUR 25 million, say EUR 50 million, is based on the volumes of the business plan. But it's clear that if there is going to be a reduction in the 30 days in the payment terms for the NHS, there would be immediate impact on the volumes. So I was wondering whether you can -- my, first of all, my understanding is correct. And secondly, if you were to apply this to this term of the payment on the 2023 volumes, what would have been the marginal impact on your business?
The second question is on the appetite for M&A. I was wondering whether compared with the last couple of years, where, you know, probably conditions were not really met, if you do see a more favorable ground for, for M&A on your side and on, also on the, on the potential, sellers of, of assets. And the third question, there has been several changes in the operating environment, as you have mentioned, the recovery, recovery rights, the LPD directive since the presentation of the business plan. Last year, I was wondering whether you may consider to review the business plan in the second half of this year. Thank you.
The answer is no, not at the moment. We don't know what is the timing of the approval of the directive, which will be really the major, major change in the operating environment. So at the moment, we don't have the plan to update it. If there is the need to really change the targets, well, we have a duty to the market to do so. So we'll consider only in that case. In terms of M&A, okay, always said, you can't plan deals. They come when they come. They're attractive when they are attractive, and the price is driven by, you know, having a willing seller. So we keep looking for opportunities.
We are, as you've seen, very disciplined in doing and also not doing M&A. So that's certainly an area of activity for us and attention. Certainly when you have a correction in the market, you have more situations that become available, particularly on the low end of the late payment regulation, the effects that we've indicated were on the volumes of the plan. The factor on the run rate includes also the over recovery. We have assumed constant payment behavior by the NHS. Let's not forget that payment behavior in the public sector is not driven by, to a large extent, the targeted payment time.
That might impact the people who already pay on time to a certain extent, but correcting from 60 days - 30 days for people who are paying at 60 days, it's a pretty big change. It means that you need to have an increase in cash, which is roughly equal to 8% more cash compared to your overall expenditures. Now, cash doesn't grow on trees, so then it will mean that the government will have to put 8% more expenditure into the system to keep the delay time the same.
So we don't expect that it will happen. If anything, we are in an environment where there's more pressure, and the tendency should be on lengthening payment times. So, we clearly in our numbers expected constant payment behavior, so we're not capturing the lengthening, although we are seeing it in the market a little bit now. We're not capturing a change in behavior from the debtors.
So basically, the guidance that you gave is, you know, at a static assumption of volumes, but given your comment, which I share, the impact could be significant because 60-30 is a big increase in the, is a big reduction in the terms of the payment for NHS.
Exactly. But what we are, what we have indicated on page seven is, if the NHS pays at the same time, and therefore NPI kick in instead of 60 or 30 days, then you have more NPI, so you have the positive effect, and that's already capturing the estimate. You see that effect more in the first column because that effect that you see is moving from 60 days to 30 in the NHS and to from EUR 40 -EUR 50 per invoice, in the whole spectrum of public sector debtors. The jump of the second box is simply the move, the move from EUR 50 - EUR 100 per invoice. And that's massive because, you're not adding only EUR 10 per invoice, you're adding EUR 60 per invoice. And therefore, you have that much bigger effect driven by that.
The next question is from Michele Baldelli of BNP Paribas. Please go ahead.
Good afternoon to everybody. I have just a question in relation to the loan book of the Italian market. Can you explain why seasonality is not that much visible in the last quarter, please? Thank you.
Hi, Michele. It's driven by what I said before, which, given a different change in mix, we haven't done a certain amount of loans, which have a very low yield with no LPI, so we're urgent in terms of our return. That explains the change in the last quarter.
Okay, thank you.
For any further questions, please press star then one on your telephone keypad. 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, everybody, for being with us today. Also on behalf of Giorgio, and we look forward to having another call in May. Bye-bye.