Good afternoon. This is the Chorus Call Conference Operator. Welcome, and thank you for joining the Banca Sistema 9 months 2025 results conference call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing *N0 on their telephone. At this time, I would like to turn the conference over to Mr. Gianluca Garbi, CEO of Banca Sistema. Please go ahead, sir.
Good afternoon, everyone, and thank you for joining the first 9-month 2025 results of Banca Sistema. I am pleased to comment on a very positive set of results in the first 9 months 2025 characterized by a strong increase in revenues and profits, a marked improvement in capital ratios, higher than the level registered at the end of 2024 despite the new classification of past-due registered in the first quarter in accordance with Bank of Italy findings, and finally a positive trajectory of gross NPEs, which are declining quarter-by-quarter with an increase in coverage ratios. Let's start with 9-month operating trends. Revenues grew by 25% year-on-year thanks to a solid growth in net interest income, which grew by 49% year-on-year, supported by a strong discipline in terms of asset spread and a positive evolution of cost of funding.
The financial portfolio also contributed positively in the period. A good cost control and a cost of risk at physiological levels enabled the bank to close the first nine months with a net profit of EUR 21 million, representing a year-on-year growth of 71%. One of the most significant aspects of the period was the bank's ability to achieve strong profit growth while simultaneously absorbing the negative capital impact of the reclassification of past due loans that occurred in the first quarter of 2025. As a matter of fact, gross NPEs grew in the first quarter by 75% quarter-on-quarter due to the new classification of past due loans in accordance with Bank of Italy findings related to mitigant adopted by the bank to reduce the effects of new default rules.
Several actions undertaken since the start of the year allowed the bank to reduce gross NPEs, which declined by 12% since the end of first quarter 2025 when the reclassification took place. In the third quarter, one position linked to a municipality under conservatorship has been reclassified from bad loans into past due loans category, as the municipality formally exited the conservatorship status in July. That position was part of the ruling by European Court of Human Rights, which imposed the government to ensure the enforcement of judgments that had not been complied with by the Italian debtor, but we will elaborate on this point later on during the presentation. As a further confirmation that the government will have to pay what is owed by the municipality under financial insolvency comes from the draft 2026 budget law, which has established a dedicated fund to cover these debts.
In addition, the government has recently approved a decree, the so-called Economy Decree, which provides funds for large cities that have emerged from conservatorship to cover past debts. In our opinion, the municipality that has emerged from financial distress and is our debtor will be able to draw on these funds, which can amount to up to EUR 40 million per city. Net of this reclassification, past due loans decreased by 24% since the end of first quarter 2025. Let me remind that despite the reclassification of those loans as past due, the credit risk remains unchanged as 89% of past due loans refers to public administration.
On the capital side, all the actions undertaken in the first nine months, including among the others SRT, disposals, new securitizations, faster collections, all part of the capital plan, allowed the bank to increase year-to-date CET1 ratio in total capital ratios by 55 basis points on average, and despite the significant capital impact the bank incurred in the first quarter due to loans reclassification, equal to -115 basis points. Capital buffers vis-à-vis SREP threshold is now between 350 and 400 basis points. As for funding, term deposits decreased 5% year-to-date due to lower funding needs as a result of loans reduction. Retail funding represents 74% of total funding, while cost of funding continues to go down, now at 3.01% or -56 basis points year-to-date.
Turning to commercial performance, factoring turnover decreased by 17% year-on-year due to lower receivables bought from the pharma sector, which were ensuring low returns. The decrease was also due to the natural decrease in receivables linked to Superbonus. As for salary and pension guaranteed loans, we kept reducing the stock thanks to lower new production and repayments. Disposals for EUR 22 million have been done in the third quarter 2025. We have already reached the level of CQ loans embedded in the plan for 2026. Pawn loans grew by 21% year-on-year thanks also to Portuguese acquisition and despite faster auctions completed in the first half 2025 to reduce the stock of what Bank of Italy considers past due loans. These are cases in which the asset underlying the pledge is not sold within 90 days.
It should be noted that only 3% of pledges are not repaid and the asset is sold. Furthermore, the borrower has no obligation to repay as the debt is extinguished exclusively by the sale of the asset at auction. For example, it is the appraiser who must pay if the value of the asset is not enough to cover the value of the loan. To counteract this interpretation by the Bank of Italy, we have accelerated the sale of assets at auction, leaving less time for pawnbroking customers to renew their loans. Turning to the performance of the factoring division, turnover decreased by 17% year-on-year due to lower exposure to the National Health Service sector to reduce the risk of Past Due increase.
Much lower receivables from Superbonus also negatively impacted the first nine months due to the expiry of the tax shield by the government, which implied, as expected, lower receivables which can be bought. The decline in outstanding -9% year-over-year can be attributed to more selective new production, higher collections, and some disposals. Non-recourse component accounted for 56% of the total outstanding, while tax receivables accounted for 12%. In terms of the breakdown by obligor, public administration accounts for 50% of the total portfolio compared to 54% registered at the end of 2024. The remainder consists of corporates, public companies, and companies pertaining to the entertainment business. Moving to Slide 4, CQ dynamics are in line with what was envisaged in the plan, and we are ahead of 2026 targets as for credits outstanding.
Turnover decreased by 33% year-on-year, and together with repayments helped to obtain a decrease of 17% year-on-year of the stock of CQ loans, which reached EUR 619 million. The private sector accounts for 18%, while public sector employees and retirees account for 82% of the total. As for the pawn loans business, outstanding continues to grow, equal to +21% year-on-year with total turnover including renewals equal to EUR 213 million in the first 9 months 2025 or +28% year-on-year. The division is keeping its growth strategy through organic growth and acquisition of portfolios. I turn the floor over to Ilaria to comment in detail the balance sheet and income statement numbers. Please, Ilaria.
Thank you, Gianluca, and good afternoon. Total assets decreased year to date by 8% due to lower customer loans and lower financial assets together with lower Superbonus loans. The 7% reduction in factoring outstanding was due to lower turnover as well as some contractual resolutions, disposals, and finally higher collections, while the 12% reduction in CQ loans was driven by lower turnover and repayments but also EUR 22 million disposals carried out in the third quarter. Pawn loans kept growing with a +8% year to date, also thanks to EUR 8.9 million portfolio acquisition and despite higher number of auctions completed.
Italian government bonds classified in the held-to-collect category slightly decreased year to date due to the expiry of some bonds and amounted to EUR 50 million with a duration of 29 months, while the bonds classified in the held-to-collect and sell category decreased by EUR 204 million year to date due to the rebalancing of the portfolio, including some disposals, amounted to EUR 930 million and have a duration of almost 19 months, slightly higher quarter-on-quarter due to customer deposits decrease by 8% year to date driven by lower repos with customers and lower term deposits partially compensated by slightly higher current accounts. The decrease in term deposits was driven by lower funding needs due to lower loans and helped to further reduce interest expenses. Turning to revenue performance, total gross income decreased by 8% year-on-year led by factoring and SMEs guaranteed loans, while positive contribution came from pawnbroking business.
CQ contribution was pretty flat year-on-year. The decrease in gross income was more than compensated by lower interest expenses. As far as factoring, commercial loans and tax credit revenues were down year-on-year as well as LPI from legal action due to lower contribution from accrual and extra collection component. The 9 months were also impacted by EUR 2.1 million loss from disposal of receivables classified as past due completed in second quarter. The LPI from legal action include a portion of LPIs related to few positions linked to ECHR rulings, most of which is still off balance sheet. The decrease in LPI from legal action was partially offset by higher extrajudicial interest. Superbonus revenues amounted to EUR 23.8 million, of which EUR 22.8 million from trading Superbonus. As regards to adjusted income margin, the first 9 months registered broadly stable core business margins despite lower interest rates.
Factoring margins stood at 7.4% due to tighter Superbonus margins, and also disposals and contractual resolutions which led to lower contribution from LPI. On the other hand, positive trend both in pawnbroking, +140 basis points year-on-year in CQ business, +50 basis points year-on-year. Looking at the breakdown of total income, adjusted net interest income increased by 28% year-on-year despite a decrease in factoring interest income contribution thanks to pawnbroking, higher revenues from financial portfolio, and significantly lower interest expenses due to lower stock of deposits and lower cost of funding, which dropped from 3.59% for full year 2024 to 3.01% for the first 9 months 2025. In detail, factoring posted interest income contribution of EUR 70 million versus EUR 80 million in 9 months 2024. Pawn loans increased to EUR 13.6 million from EUR 10.6 million. CQ stood at EUR 13.7 million, up from EUR 13.2 million.
Treasury portfolio was EUR 22.6 million, up from EUR 13.6 million. Trading Superbonus was stable with just less than EUR 23 million contribution. Adjusted net interest margin was supported by significantly lower interest expenses, EUR 88 million, down from EUR 110 million. Commissions were flat year-on-year as higher fees from pawnbroking and servicing offset lower commissions from factoring, which had benefited from a one-off transaction in the first half 2024 with a significant fee. Overall, total income grew by 25% year-on-year. The bottom right chart, which represents the contribution to total income by business line, where the contribution of Treasury portfolio is allocated to factoring and CQ, shows a relative increase of pawnbroking and CQ business. Turning to the cost base, total costs have grown 7% year-on-year driven by administrative expenses, while personnel costs were flat year-on-year.
Administrative costs grew by 24% year-on-year and include non-recurrent consultancy costs, for example related to the capital plan and other actions requested by Bank of Italy, but also some credit-related costs such as credit insurance and SRT premium. Admin expenses also include higher costs related to Kruso Kapital and higher risk provisions. The increase in FTE is mainly related to acquisition by Kruso Kapital, pawnbroking in Portugal plus 44 FTEs. The next slide shows the contribution of individual business units to group profit, which stood at EUR 21.0 million. Factoring closed with a net profit of EUR 24 million. Still negative instead was the contribution of the CQ division, but the net loss reduced to EUR 7.5 million. Pawnbroking division registered a positive contribution with EUR 4.4 million net profit, figure which is already net of minorities. All the figures include the contribution of the Treasury portfolio allocated to the business divisions.
As for funding evolution, the bank decreased retail funding year-on-year with term deposits at EUR 2.4 billion vis-à-vis EUR 2.6 billion in first nine months 2024. Part of the decrease has been registered in the second quarter 2025 to achieve a more efficient funding structure given the decrease in loans. In the third quarter 2025, the weight of retail funding on total funding was equal to 74% vis-à-vis 72% in first half 2025 and 69% in the third quarter 2024. In terms of cost of funding, it was equal to 3.01% vis-à-vis 3.57% for full year 2024, with the cost of wholesale funding at 2.65% lower than retail funding, which was equal to 3.14%. I now turn the floor over to Gianluca for some remarks on asset quality and capital ratios.
Thank you, Ilaria. As of 31 March 2025, the bank classified past due loans in line with what we assume to be the request from Bank of Italy, which stated the full inefficacy of almost all the mitigants used up to then. The reclassification has caused an increase quarter-on-quarter in past due loans by 2.2 times and total gross non-performing loans by 75%. The bank has, since then, taken various managerial actions aimed at reducing the stock of past due loans. Among the actions undertaken, it's worth mentioning faster collections, contractual resolutions, portfolio disposals. All those actions allowed the bank to sharply decrease past due loans by -24% vis-à-vis the level registered in the first quarter 2025. These figures are calculated net of one position related to municipality exited from conservatorship last July and reclassified from bad loans into past due loans.
Total gross past due loans net of the above-mentioned reclassification were equal to EUR 252 million. It's also important to point out that the municipality exited from conservatorship is part of recent ruling of the European Court of Human Rights, which imposed the Italian government to ensure the enforcement of judgments that had not been complied with by the Italian debtor. On this matter, the Italian government has prepared the draft 2026 budget law, which introduces a EUR 2.2 billion fund for 2026 to address financial effects from national and European disputes. According to the competent minister, as reported by press, this includes cases pending at the European Court of Human Rights, and we believe it will include funds for the municipality, which was part of the ruling of the European Court of Human Rights.
The government has also recently approved a decree according to which municipalities that have exited from Conservatorship, under certain circumstances, will be entitled to receive up to EUR 40 million financing from the central administration to repay their debts, and we believe our position may fall in the legal scope. In addition, the draft 2026 budget law introduces a EUR 2.2 billion fund for 2026 to address financial effects from national and European disputes. According to the competent minister, this includes cases pending at the European Court of Human Rights. The amount of total LPIs off balance sheet linked mainly to municipalities in Conservatorship are still equal to EUR 99 million. We remind that the new classification of loans requested by Bank of Italy does not change the risk profile of the bank, as 89% of past due loans consist of exposure to public administration.
Cost of risk in the first nine months 2025 stood at 42 basis points. From the perspective of capital ratios, we have done an excellent job. Thanks to the improvement in asset quality, portfolio disposals, SRT completion, and new securitizations, all in line with the capital plan, we have been able in the second quarter to increase CET1 and total capital ratios phased in, reabsorbing the negative capital hit deriving from reclassification of loans as past due. The capital trend was confirmed in the third quarter with capital ratios pretty stable quarter-on-quarter as earnings were able to offset a slight increase in RWA. The increase in CET1 ratio and total capital ratio since the end of first quarter was equal to more than 140 basis point and 170 basis points. Those numbers do not include dividend accrual in line with Bank of Italy requests.
On this point, it's important to point out that one of our competitor received notice from Bank of Italy on the closing of the proceedings linked to the ban on dividend and variable remuneration payment, resulting in the removal of bans on distribution of profits or other equity reserves. The notice clarified also that it can resume bonus payments to employees. As far as we understand, the decision was part of the SREP process which was concluded with the decision to lift the dividend ban and the payment of variable remuneration to employees. We are currently in the middle of the SREP process which we expect to be concluded in the next 3 months. The improvement of capital ratios in the last 2 quarters boosted capital buffers vis-à-vis last available SREP to 354 basis points.
In conclusion, first nine months results showed the resilience of the bank in terms of profits and capability to deal with new classification of past due loans. Several actions have been immediately undertaken to strengthen the balance sheet in capital position. We are now better equipped to seize the opportunities that will arise in the market to support future assets growth. We are working hard to cash in the amount due by the municipality under conservatorship, which was part of the ruling by the European Court of Human Rights, and we think we are on the right path. Finally, as you well know, Banca CF+ has announced a public offer for 100% of Banca Sistema shares. As of now, the offeror received the authorization from the Antitrust and the fulfillment of the condition relating to the Golden Power procedure.
Authorizations from the Bank of Italy and EC were still pending. For the time being, we therefore kindly ask participants to avoid asking questions about the offer since Banca Sistema is prevented by operations of law from addressing any such questions at this stage. Operator, now we are ready for Q&A session.
Thank you. This is the Chorus Call operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. To remove yourself from the question queue, please press star and two. We kindly ask you to use the handset when asking questions. Anyone who has a question may press star and one at this time. First question is from Irene Rossetto, Banca Akros.
Hello. Thanks for taking my question. A few questions from my side. The first one is on your expectation for net interest income in the fourth quarter and more in general also your expectation for total revenues evolution in the last part of the year. Then could you also provide an outlook for the marginality expected in the different business, meaning factoring, CQ, and pawn loans? And finally, you mentioned that the reduction in the cost of funding is gaining momentum. What are your expectations for the cost of funding at the end of the year? If I remember correctly, your forecast was 3%. Thank you.
I would like to thank you for your question. I will leave it to Ilaria to answer your three questions.
Sure. Thank you, Gianluca, and hello to everybody. I would start from the margins questions. Core business margins have broadly remained stable year-on-year and also quarter-on-quarter despite decreasing market interest rates. Specifically for factoring, factoring margins have decreased versus year-end 2024, mainly driven by weaknesses in the LPI space caused by, as we have described, by resolutions of contracts and portfolio disposals carrying accrual of LPI, while margins on commercial and fiscal receivables are keeping on track. And that's I mean, the decrease in LPI margins has occurred mainly in Q1 and Q2, while factoring margins overall are now stable quarter-on-quarter. CQ margins have increased quarter-on-quarter thanks to a bigger contribution of the new business versus the legacy portfolio, while Pawn margins have increased since year-end driven by a higher number of auctions carried out and have been stable since then.
In terms of outlook for the next quarter, we expect factoring margins to keep stable at current levels. CQ margins are expected to remain stable as well, as the legacy portfolio will keep amortizing over time, and Pawn margins will continue to be boosted by accelerated auctions. So overall, as a result of the described dynamics, consolidated margins should remain stable through year-end vis-à-vis Q3. Now, in terms of outlook for the NII, as we have seen, NII has rebounded in Q3 versus Q2 driven by factoring income performance, mainly thanks to a recovery in accrual of LPI. We expect to see a stable NII in Q4 with a strong performance from factoring commercial receivables potentially offset by other components. Trading from Ecobonus should be slightly lower than for the first 9 months, while commissions will continue to be robust, mainly driven by Pawn commissions.
In terms of contribution from the treasury portfolio, we can expect a slightly lower contribution with respect to the first 9 months, and therefore, as a result of the various components, total income in Q4 should be slightly lower than in Q3. In terms of provisions, cost of risk is expected to be in line with the first 9 months at around 40 basis points. And finally, on cost, Q4 cost should be broadly flat versus what we have seen year to date, excluding, of course, any extraordinary item. So in a nutshell, Q4 net income should reflect the performance of total income, which is slightly lower than Q3, but with potential upside in the LPI space. So I've expanded a bit more than the question on outlook on the NII.
Thank you.
In terms of cost of funding, very briefly, we have registered the cost of funding at 3% year to date, which is decreasing from 3.07 in June and also from 3.57 at the end of 2024. We had communicated a 3% average cost of funding for 2025, but we should expect to end at around 2.9%-2.95%, which is lower than our expectation.
If I may, I only add one comment, which is on the outlook. Of course, the outlook that Ilaria described does not include any payment on the municipality in conservatorship that exited. As I mentioned in my speech, the government budget included EUR 2.2 billion of a fund dedicated to these cases, plus other EUR 40 million for larger cities that exited by mid of this year from the conservatorship. The government, these are public information, expect to approve the government budget by the mid of December. By the time that everything will be in the official gazette, these funds we expect not to be available before the beginning of next year. So for this reason, the outlook of Q4 does not include any repayment coming from the government or from the city, either one or the other, but never know.
We keep having conversations and, I would say, also from a legal grounds action, so the things may also speed up. That is not fully under our control.
Thank you.
Next question is from Lorenzo Giacometti in Intermonte.
Yes. Good afternoon and thank you for taking my questions. I have actually two. So the first one is if you can give us some color about the increase in administrative costs you posted in the third quarter. And the second one is if you could share your expectations about the cost of risk trends approaching the fourth quarter of the year. Thank you.
Ilaria, do you want to answer to both?
Yeah, sure. As you pointed out, we posted an increase in total costs around 7% year-on-year, which were mainly driven by an increase in administrative expenses while personal costs were flat year-on-year. Administrative expenses have grown by around 24% year-on-year, and the increase was driven by specific elements. The first one is that we had non-recurrent consultancy costs, for example, related to the preparation of the capital plan and other actions requested by the Bank of Italy. The second element is related to credit costs. So we have registered an increase in credit insurance, which also includes the SRT premium, for example. A third element is related to higher provisions for risk and charges and to IT costs. And finally, we have registered higher administrative expenses related to Kruso Kapital. So these elements broadly explain most of the year-on-year cost increase.
In terms of cost of risk, we should expect Q4 cost of risk to be flat vis-à-vis what we have registered in Q3, which is around 40 basis points.
Okay. Thank you.
Next question is from Davide Rimini in Intesa Sanpaolo.
Good afternoon. I have two questions. Thank you for taking it. The first is on the outlook that you provided on the press release regarding the factoring business and the prospect that you, if I'm not mistaken, highlighted already in the second quarter to expand the business in the entertainment sector. We noticed turnover still declining in the third quarter. I was just wondering whether you could share with us the timeline when we'll see that reverting. And the second question instead is on risk-weighted assets. I was wondering whether you could share with us that risk-weighted assets were broadly flat in the quarter. How would you expect that evolving over Q4? Thank you.
In terms of turnover activity, as mentioned also before by Ilaria, the turnover on factoring, we have an increase on the entertainment that is also driven by the securitization that was put in place, that was part also of our capital plan that allowed to also for the future increase the activity without higher consumption of capital. So return of regulatory capital will be more favorable because the bank will only own the senior part of the securitization. Then reduction of turnover is in factoring, as we consider part of the factoring is the Ecobonus. So the Ecobonus, it's over. So we do not expect, of course, Ecobonus to continue, if not for a very small proportion, in the future.
So to some extent, probably it's not properly correct to put the Ecobonus turnover in comparison with the past simply because we know since the beginning that the Ecobonus was an event that will not repeat in the future. We have been very cautious on the pharma in particular because a lot of the past due that the Bank of Italy obliged us to reclassify is also connected to some of the obligor in the healthcare sector. And what we are doing, we are working on also some possible transaction that allow us to reduce the exposure towards past due obligor.
And going forward, when this will be over, we can restart to buy also those kind of obligor because just to make a step back, the reason why those obligor became past due was simply because we did not take legal action at the same time when there were opposition from the obligor within the 180 days, simply because the interpretation of the rules and the change of the rules was back value, and there was nothing that you could have done back value. But as soon as these obligor will no longer be accounted as past due, we can restart to buy. And I think that in the first quarter of next year, we will be able to reduce through some extraordinary transactions some of those exposure. And starting from second quarter of next year, we will be able to gain turnover also on the pharmaceutical side.
So the RWA that remained flat is we are keeping under control the RWA thanks to what I just described. So being able to somehow reduce the past due, use more structured solution like the securitization, the SRT, or the insurance to reduce the capital consumption without being obliged to sell some of these assets that, as we have seen on the second quarter, when we had to sell some of the assets, these had a negative effect on the P&L. So we do not expect to sell assets but use structured solution to reduce the exposure. So for this reason, we will be able to keep the RWA flat over time despite the increase of expansion of activity.
Thank you.
As a reminder, if you wish to register for a question, please press star and one on your telephone. For any further questions, please press star and one on your telephone. Sir, Garvey, there are no more questions registered at this time.
Thank you, everybody, for attending to our call. Thank you. Bye.
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