Good afternoon, and welcome to BFF Banking Group first half 2024 earnings call. All participants will be in a 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 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, Group CFO. Please go ahead.
Thank you. Thank you, everybody, for joining us this evening to go through our first half results. But let's kick off first with the response to Bank of Italy. We have officially filed our response, as we announced already to the market, in terms of credit classification, governance, and remuneration. And we have applied that credit classification to our first half credit portfolio detail. This has generated incremental past due of EUR 1.4 billion, incremental RWA of EUR 1.8 billion, and incremental provisions under IFRS 9 for EUR 0.7 million, given the low credit risk of the portfolio. The step up in the recognition of LPIs and recovery cost rights has pushed the reported earnings to EUR 162 million.
If you strip out that, the adjusted net profit stands at EUR 71 million, which is growing compared to last year, which we had a capital gain on a bond sale. The loan book has grown at 7% year-on-year. That's above the ever-the-best recorded first half result. The balance sheet has remained stable following this growth on the loan book, given a decline of the bond portfolio. We maintain a high liquidity with a strong growth of online deposits year-on-year. The loan-to-deposit ratio is very prudent, 69%.
The capital level, including the earnings of the period, stands at very close levels, which will allow, once Bank of Italy will cancel the ban on dividends, to restart paying dividends. We have, in fact, a core equity tier one ratio of 11.9%, and a total capital ratio of 14.8. If we move to page four, we've stepped up the accrual rate of the recognition of late payment interest and recovery cost at 65% from 50%. That has generated EUR 109 million capital uplift in the reporting date of the June 30th. The recognition level at 65% is still significantly above our historical average level of collection for the period 2015-2023.
Leaving us, therefore, still a significant buffer of embedded profitability, which is not yet recognized in our earnings, and the step-up allows us instead to align better revenues and cost recognition and representing a better representation of the bank underlying profitability. The filing we did on the 11th of July to Bank of Italy covers all the three areas of focus of Bank of Italy's reporting on credit reclassification, where we will go in a second, on governance, where we have an action plan approved by the bank corporate bodies, and our remuneration, where through the change in the remuneration policy that we applied this year and different implementation of the CEO contract, we have overcome those issues.
On past due, on page six, we have a total incremental past due of EUR 1.4 billion. The EUR 1.4 billion is generated, as you can see from the graph on page six, by EUR 425 million of a portfolio, which generate a contagion on the front book. So the actual past due is four hundred and twenty-five, but that's because of the rules on the treatment of exposures that generates an incremental EUR 1 billion of further past due.
That's important because it means actually we should focus on that portfolio to reduce the overall past due impact through an acceleration of collection, particularly on the Italian NHS, which represents EUR 183 million of the EUR 425 million contagion portfolio, and the application of other mitigants, which will be agreed with Bank of Italy, and also the faster legal processes. So once we deflate that, we will be able to deflate also the incremental EUR 1 billion of portfolio subject to contagion. That's important, because if you look at page seven, that does not have an impact on how we write new business. The purchasing criteria are unchanged.
This application of the meetings we had on legal actions, on ordinary legal action, means that we will start with the faster and more effective injunction process. So we should have a impact on, a positive impact on collection. We expect, given the stricter rules, a marginal increase in RWA on the new business, but that will be compensated by the fact that on the back book and front book of the existing business, so the contagion portfolio, the back book, and the portfolio subject to contagion, so the Front Book, those portfolio will be over time deflated, and therefore, they will generate, they will generate a release of the capital that we are at the moment absorbing.
In terms of management of that back book and front book, it means more focus on settlement agreements, and on the front book, which is not yet subject to legal action, again, a move to the faster injunction process. Where does this leave us? This leaves us that since from the new business approach is unchanged, and we expect, yes, to absorb marginally more capital, but we've generated a capital through the step up of LPI. We expect that the 2026 business plan targets will be maintained, clearly in terms of adjusting net profit, earnings per share, cumulative dividends, Core Equity Tier 1 ratio, and cost income.
On the return on tangible equity, it would be, if you exclude the impact of the actual rate step up, we should be at the level we indicated of over 50%. If we include the equity generated by that, it would be over 40%, but the overall return for the shareholders will be unchanged. So that's the important message. We have concluded the filing with Bank of Italy. We are in position now, we're almost there in terms of capital level to restart paying dividends. The business approach is unchanged for how we manage our business going forward, and simply we have work to do to deflate the past due increase through a disciplined collection of the back book.
With this, I will leave it to Piergiorgio to walk you through the results of the first half.
Thank you, Max. Now, good afternoon to everybody. Now we are at page nine. We have an adjusted net income that increased by 5%, year-over-year, excluding the first quarter 2023 capital gain. The total net revenues are up by 9%, and the cost increased only by 4%. Also, considering the investments, the inflation, and the banking sector contract renewal in Italy. The total revenues are up by 20%. On the other side, the cost of funding also reflects the level of the rates.
In terms of provision, we have EUR 6.3 million of provision due to the change for the IFRS 9 and increase of the past due portfolio by EUR 0.7 million, and a provision on the VAT credit in Italy, and the longer collection time related to a public exposure that we have in Poland. So finally, the net income is at EUR 71 million, 5% higher than the last year. At page 10, we have our balance sheet that is stable compared to the last year. It's important to highlight the increase in terms of retail deposit, that grew by almost EUR 1 billion euros compared to the last year.
This improved our loan-to-deposit ratio at 69%. Also, in the meantime, we reduced our repos that are down by EUR 1 billion. Our loan book increased by 7% year-over-year, and this is, as said before by Max, the best and the highest level that we had in our history. Also, we are continuing to reduce our bond portfolio. Going now at page 11, we start with Factoring and Lending business. We increase by 17% year-over-year in terms of revenues, and also considering the increase in the accrual rate that have been partially offset by a lower LPI over recovery. Our other income expenses are at EUR 12.9 million, and this is primarily related to our recovery cost.
The gross yield on average loan increased by 13% year-over-year, and now is at 7.6%. It's important to highlight also the increase in the total recovery LPI, the recovery cost funds, that is now over EUR 1.1 billion. Also after the step up in terms of accrual of LPIs and recovery rate, we have a deferred profitability with a fund of EUR 467 million. So this is a big buffer that we have also for the surplus in the next year. Going to page 12, we have some highlights for the Factoring and Lending.
The loan book growth at 7% year-over-year, despite a low growth for Italy, because we suffered a bit the departure of the new commercial director. The new one joined BFF at the beginning of July, so we think that in the next months he can put his effort in order to let also the business in Italy grow again, like we did in the past. But it's important to highlight the growth in Spain. They increased by 58% year-over-year, also in Poland and in Greece, and we confirm a very positive trend. In terms of volumes, the overall there was a growth of 5% year-over-year, with a double-digit growth in Poland, Spain, and in Greece.
At page 13, we have a slide dedicated to the Payments. For the Payments, continue the very positive dynamic in terms of the number of transactions, with an increase also in terms of revenues. So the growth of the revenues is lower than the number of transactions due to the pricing mechanism that has is flat fee in terms of volumes. But it's important also to highlight a significant level in terms of deposits that are slightly lower than last year.
At page 14, we have the Security Services business with a strong growth in terms of assets under deposit for the de pository bank, especially for the global custody, despite, and excluding, the low-margin client that exited in the last quarter of the last year, also we observed a growth of 13% year-over-year. In terms of revenues, the difference is related to the client that exited, but year-over-year, there is a very, very comparable amount. In terms of deposit, it's important to highlight that the deposit under custody increased by 3% year-over-year. Having said that, we are now at page 15.
In terms of cost, we put in place our usual discipline, despite investment, and inflation, and also the renewal of the collective agreement for in Italy, and we increased cost by 4%. 4% is distributed for the business unit. Only in payments, we increased a bit more than 4%, due to some investment in terms of ICT infrastructure. For the balance sheet that we have at page 16, we maintain, as explained in our industrial plan, we want to maintain our balance sheet stable, despite the growth of the factoring and lending portfolio. We increased, as said before, the deposit. Now we are over EUR 1 billion.
We maintained also cost of funding that is lower than the average market reference rate. We continue to have funding to be refinancing to the ECB, and it's important to highlight also that the yield on our floaters bond portfolio is now at 4.9%. In terms of reclassification, past due and NPE, we have at page 17 a slide. And despite the fact that our past due increased significantly, our cost of risk is unchanged, our risk profile is unchanged, and we maintain, considering that 98% of our non-performing exposure towards the public administration, our credit risk is always at the same level. In the meantime, we decreased by 3% our NPEs, considering also that are mainly related to municipality in conservatorship.
Also we have increased a bit our unlikely to pay. As said before, this is driven to a reclassification of the public exposure that we have in Poland with the prolongation of the expected collection time, so without any increase in terms of credit risk. Finally, we are at page 18. In terms of capital ratios, we are well above our regulatory target, also for all the capital ratios, despite the increase that we had in our RWA density, that now is at 71%, and our CET1 ratio is at 11.9%, with a total capital ratio that is closer to 20%, so we are a bit lower than the level that can lead us to pay the dividend. After that, Bank of Italy will leave the bank.
So we can confirm our dividend policy, and I leave the floor to Max in order to give you some final remarks and some highlights on the focus for the last quarters of the year.
It has been a busy quarter for us, but we now have to refocus on the business. So the objectives over the second half of the year is to very much manage the redemption of the back book of receivable, the contagion portfolio, to deflate the RWA, and make the business capital efficient, efficient once again. Secondly, to rebuild our commercial drive in Factoring and Lending in Italy, particularly, where which has been quite slow over the first half of the year. That has been driven also by a very soft market, as our competitors have reported, and where we've still been able to build our portfolio.
And then prepare for the big hunting season of the Q4 in terms of LPI and recovery costs, which should drive incremental profitability. And finally, strategically, we're keeping a close eye on the development on the Late Payment Directive, which is now the stage of the European Council, and where we can have good visibility on future development by keeping a close monitoring of the revision there. With this, I conclude my remarks and Giorgio's remarks, and leave the floor to any questions you might have. Thank you.
Thank you. We will now begin the question and answer session. To ask a question, you may press Star, then One on your touchtone 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 Manuela Meroni of Intesa Sanpaolo. Please go ahead.
Hi, good evening. Thank you for taking my questions. I have four questions. The first one is on the back book generating the contagion effect. This has decreased from EUR 458 million in March to EUR 425 million in June. How did you reduce it? You made collection of disposal, and can we take this quarterly reduction as a run rate for the next quarters? You also mentioned in one of the slide, the potential application of mitigants to be agreed with the Bank of Italy. What are you referring to? And the second question is on slide seven. You mentioned a marginal increase of the risk-weighted assets of the new business. This is different compared to what I understood before. So could you please clarify the reason of such an increase and quantify the increase itself?
And then on the results, I would like to know if you can share with us the amount of LPI accrued in the interest income in the first half and second quarter. If you could provide some more color on the provision or risk and charges that you took in this quarter. Are these provision related in some way to the portfolio reclassification or not? Do you think to be able to recover this provision going forward? Thank you.
Okay. On the provisions—sorry, on, let me go through the questions, if Mario corrected a bit more than four. But on provisions, as Giorgio said, one, the two major charges have been, one, a fraud on VAT, which we suffered in Italy, which is a large part of the provision we've taken this quarter. And then we have the change in timing of payment of expected collection of exposure towards the public sector hospital in Poland, where we don't expect a credit risk, but given the different DCF, then we need to take provisions, if you want. It's a reduction in earnings. Those earnings will come in the future.
In terms of the result, we have for the step-up in LPI. In the first half, the impact, which has gone through the adjusted interest income, it's EUR 11 million post that. In terms of marginal RWA increase on page 7, look, we expect a marginal increase in RWA simply because we want to be prudent and because we don't have the same level of mitigant as before. I think there's nothing wrong in saying that we expect a bit more RWA, something that changes the profile of the business of the new business match.
In terms of mitigants to be agreed with Bank of Italy, we have mitigants where we have to agree how we implement them, although we're not discussing that they are valid or not, that requires some work on our side to define the exact way how they should be implemented. At the moment, they're not included in our base case, but that's something which can have a positive impact. In terms of the back book, why it has decreased quarter-over-quarter? Well, it got decreased quarter-over-quarter because we collected, and that's part of our normal business.
Remember, the portfolio actually churns, and we expect now that actually the team is focused, not on counting the past due, but actually on collecting the receivable, that back book can be deflated through more transactions and also by having a different approach to legal actions. I mentioned through injunctions on the front book and on the new business, which then push the public sector counterparty to transact more. So, we haven't sold a single euro of receivables. We manage the collection ourselves. We haven't done any trade. We really focus very much on our processes, and that's the reason why the back book has deflated. That's consistent also with what you always said, which that's a portfolio that moves over time.
In terms of trajectory, I would say, look, we don't have and we not communicate a trajectory of the decline of that back book. Is very different from what you would see in an NPL portfolio, where the dynamic are very different. Here is actually transacting with counterparties with whom we have a constant dialogue, particularly on the NHS in Italy, and that's a function of their willingness also to enter into transaction on the LPIs and EUR 40. Remember, we always collect the capital.
If history is a good indication, so we have more transactions done in the last quarter of the year, so that might have an impact in the following quarters, once the portfolio gets reduced on the back book in the last quarter, and then, after the cure period, we also release the front book. I don't know if I've answered all your questions because there were a few.
Thank you very much.
The next question is from Giovanni Razzoli of Deutsche Bank. Please go ahead.
Good afternoon to everybody, and just some clarification on the quarter numbers. First question is on slide number 25. I've seen that there has been also EUR 27 million of, in the adjustment column of other operating income expenses with a positive impact of EUR 26 million. Is this the impact of the higher accrual rate of LPI on recovery rate, on recovery rate? This is my first question. And the second question is on the something that clearly the market now ignores, but in the future should be another opportunity of growth for BFF, that is the potential change in the LPI regulation. And I was wondering what could be the impact under the new LPI accrual rate of the this change in the regulation.
With the 50% LPI accrual rate, you guided for an impact of EUR 48 million-EUR 52 million from the higher recovery rates and the reduction in the 30 days of mandatory attachment payment. I was wondering whether, you know, with a very simple calculation, as the LPI accrual rate is increased by 30% now, we should see this guidance going to something in the region of EUR 64 million-EUR 65 million. Last questions is on the business plan targets in 2026, which you have again reiterated with the higher accrual rate of 65%. I shall I read it correctly, that the confirmation of the targets is due to the fact that you will have higher accrual rate, but lower over recoveries?
The last question, the contagion effect is extremely clear, EUR 425 million of higher past due generate EUR 1.4 billion of risk-weighted assets, because there is the contagion effect. So as you are now saying that you will be more, you know, aggressive in to tackle this, the contagion portfolio, shall we consider the EUR 1.4 billion of additional risk-weighted assets in a, I know, a reasonable time frame as a, you know, temporary increase in the risk-weighted assets and temporary decrease of your capital ratio? Thank you.
Thank you, Giovanni. On the last question, to be clear, the EUR 1.4 billion is the past due. The incremental RWA is EUR 1.8 billion, but the reasoning that you made applies. We clearly can manage now that portfolio by being more aggressive on the legal collection. We used, in the past, in Italy, particularly, ordinary legal collection because that stopped the past due, but had the drawbacks of actually much a more lengthened collection time through the courts. So, the move to an injunction process actually should accelerate that, and make also our recoveries not only faster, but in higher level in terms of LPIs and EUR 40, getting to more frequently to sentences.
So, that clearly is something which will deflate the past due over time. It's a function of how good we are in terms of managing that and how fast the court process is. In terms of the business plan's target to 2026, look, we have higher accruals. The over recoveries will be based on a higher accrual rate, so by definition, that will be lower. And so there are a number of moving parts, but overall, we feel confident about our 2026 targets.
In terms of the LPI regulation, yes, in case of a change in increasing the recovery cost, and in the shortening of the maximum payment times, you generate more more LPIs, we can quite simply calculate what will be the impact of that. In case of the recovery cost of EUR 50, which is the original parliament proposal, the expected additional revenues for BFF in the first full year will be between EUR 18 million and EUR 20 million. It was 13-15 at a 50% accrual rate. You can do the proportion for the run rate in the same way.
And in case of recovery cost of an average of 100 EUR, which is the, sorry, the Parliament proposal, the previous one was the Commission proposal, the expected additional revenues for us would be between EUR 62 million and EUR 68 million in the first year. And again, you can proportionally put that number on the full run rate after year 5. In terms of the line you mentioned on page 25, that's actually the effect of the step up on the EUR 40 . That don't go into the interest income line, but go in that line of the P&L.
The next question is from Fabrizio Bernardi of Intermonte. Please go ahead.
Hi, good evening to everybody. I may have missed the initial part of the presentation, so my question is about the dividend policy, which was very remarkable at BFF. So what I'm asking is, why didn't you go directly to 77.5%, and you just stopped at 65%, from 50% of, let's say, recovery cost rights? Because this would give you more room for paying a better, let's say, dividend. And so the question is, and I say again, I may have missed part of the presentation, when do you think you can recover the dividend policy? Thank you.
Thank you. In terms of dividend policy, as Giorgio mentioned, the dividend policy remains the same, as the one we have, we've announced. The resumption of dividends, it's a function of us reaching the 12%, 15% target for CET1 and total capital ratio respectively, and importantly, the Bank of Italy lifting the ban. So that's really the, I would say, the gating item for us. In terms of the step-up of LPIs, why we moved to 65% and not only, and not to 77% plus.
Look, it's an estimate, what we project for the future, and so although on the IFRS, the concept of prudence in accounting has gone down the drain, we thought that is, in any case, the best approach for the company to have a prudent approach on accounting, since it's a forecast on collection. But we expect to be able to maintain the level of performance we've had over the last nine years, even going forward.
So, sorry, a top up, and on this, let's say, matter. Do you think the... I mean, and I know you don't work for the Bank of Italy, obviously, but do you think that the Bank of Italy is fine with your answer? Is okay with the new methodology? Or maybe there can be other further discussions.
We have entertained plenty of conversations with Bank of Italy, and we believe that our answer addresses their concerns, but it's not to me to opine if that's the full address of their concerns. We are looking forward to a positive response from the regulator, but you know, that's a hope is not certainty.
Okay, thank you.
The next question is from Antonio Reale of Bank of America. Please go ahead.
Hi, everyone, Antonio from Bank of America. Two questions for me, please. The first one is on capital. So in one quarter, you basically replenished your capital base, you're only EUR 7 million short of the 12% threshold for dividend payment, and I think that's quite remarkable given the full reclassification and no disposals or securitization. So my question is: what are the moving parts on capital going forward? Do you retain the optionality on disposing, securitizing parts of the past year? Do you plan to use that optionality, or should we expect just organic volumes affecting your capital base from here? That's my first question. Secondly, really a question to do with your slide eight on the presentation.
I see you're confirming all targets, including your 2026 net profit guidance of EUR 255 million-EUR 265 million. My question is, when do you plan to update these targets, given that with the LPI change, leaving aside even the parliamentary discussion, just the change in the collection rate, you're gonna be higher than that level, potentially much higher. So I'd like to hear your thoughts around how we should think about that guidance in 2026. Thank you.
Yes. On targets, we confirm the targets. We include a lot of moving parts, and we think that's already positive message to the market. We will most likely revisit those once there is a clearer view around the regulatory situation, particularly around the LPI regulation. And so for us, at the moment, the focus very much to execute on our plan, both in terms of commercial development, but also, and that goes to the answer to your first question, in terms of managing our back book. We haven't ruled out to sell the back book, but certainly that's not currently our base case.
We believe our collection team is capable of freeing up a lot of the capital, which at the moment is trapped there. We don't want to do that sacrificing profitability. Those receivables are money good, no? It's EUR 1.8 billion of incremental past due, EUR 0.7 million of IFRS 9 provision. That gives you a sense of what we are talking about. And so we think there is a lot of value, actually, in reducing the back book and alleviating the contagion effect on the front book, on our own being, frankly, the most specialized player in this sector. And we think the stricter approach of Bank of Italy may even allow us to have a better commercial development.
If you think people coming, wanting to come into this market, probably they will see this as a complicated method to manage, and we need to see also what happens of the rollout of this approach across the market.
Thank you.
The next question is from Simonetta Chiriotti of Mediobanca. Please go ahead.
Thank you. Good evening. A couple of questions from my side on the factoring and lending business. The first is on volumes and in particular on the public administration segment that continues to be very weak. So if you could give us a flavor of the reason of this trend. The second question is on the margins of the factoring and lending business. The gross yield on average loans was 7.6% in the first half from 7.5 in the first quarter with different and less favorable accrual rate. So my impression was that the margins would have grown more.
Can you give us an idea of the other parts of the revenues, so for the factoring business, how are maturity commissions going over recovery and so on? Thank you.
Yeah, you see the net recoveries have moved much. If you think about the step up in LP, in LPI, as probably around 8% impact on the gross interest income. So you shed a few tens of bits on the yield. So that's what explains the mix. You also have we also have because we have less of Italy proportion than the other markets, we end up having a bit less headline profitability, for instance, in Spain, but we have a higher return on regulated assets on that once we strip out the effect of the past due.
On public administration, we have been hit, if you wish, in Italy, in particular, by utilities selling less receivables than in the past. That's driven by partially their better financial position in the first half of the year, driven by their own results, and less pressure on selling receivables. We need to see what happens in the second half when they want to optimize their financial position at year end.
Thank you.
The next question is from Andrea Lisi of Equita. Please go ahead.
... Hi, good evening. Thank you for taking my question. The first one is just if you have any update on the timings of a possible answer by the Bank of Italy, if you can provide us an update on that. The second is just a follow-up to understand if I understood correctly, if the benefit on the PNL of the step up of LPIs is EUR 11 million positive, just because I'm not so sure to have understood well.
The other question is on the Security Services business in particular, what should we expect in terms of new mandates related to the Casse, if the issue that emerged has in some way delayed in some way the process that we're in due course? The other question is on your funding strategy, and in particular, if the expectation on rate movement led you to some changes on your initial thoughts about funding, so the mix between deposits, online deposits, repos, and so on. And if the increase in risk-weighted asset led you to some thoughts about also the bonds you have issued. Thank you.
Let me go through. On funding, we don't expect to want to change our funding strategy, which in any case was predicted on using online deposits more by lowering our average cost of funding because the spread actually on the deposits became more attractive for us. Remember, we basically don't collect online deposits in Italy, it's mostly in Spain and in Poland. So we have a very different exposure to other banks, to the market, also because we distribute in Spain and in Portugal through our own branch, so we don't pay a distribution fee as other people do with a third-party platforms. On repos, which, by the way, have gone down by about EUR 1 billion compared to last year, that's basically a plug, right?
We have a bond portfolio, so if you have more liquidity, we use less repos. If you have less liquidity, we use more repos to fund that bond portfolio. It has been always a balancing item in our balance sheet, and we said we will keep the balance sheet the same in terms of size, which means if you have more liquidity, the repos will be down and vice versa.
In terms of increasing our RWAs and the change in our strategy, we might, depending on what we see the outlook for our past year-end, and overall our funding plan, we might issue more bonds for our MREL requirements, but that, again, would be more an issue of timing in our plan compared to what we had before. In terms of Security Services, yes, there has been a delay in onboarding the Casse . That's been driven mostly by the fact that the Casse have not issued new tenders, which was good for us, because in this period of uncertainty, certainly we have not been able to win as many mandates as we wanted.
So the fact that the decree that applies the Casse to have the Depository Bank has not been published yet is actually positive for us, because it give us more time to get to a resolution of Bank of Italy, the timing of which we don't know. It's in the hands of the regulator, and it's in their gift to lift the restrictions. In terms of the overall impact, the EUR 109 million is for both LPIs and 40 euros. And as I mentioned the answer before, you can see the different impact for 40 euros and an LPI in terms of one-off in the adjustment.
Thank you.
Gentlemen, there are no more questions registered at this time. Back to you for any closing remarks you may have.
Thanks, everybody, for joining us tonight. I hope you will have a restful summer, and I'm sure we'll talk very soon. Thank you again.