Good afternoon, this is Carlos, conference call operator. Welcome, and thank you for joining the Banca Sistema First Half 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 star and zero 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 half 2025 results of Banca Sistema. I am pleased to comment that a positive set of results in the first half 2025 characterized by a strong increase in profits, more than doubled year-on-year, 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 Q1 in accordance with Bank of Italy findings, and finally a positive trajectory of gross NPEs which grown in the Q1 due to the reclassification have been sharply reduced in the Q2 .
Let's start with the latter point: gross NPEs grew in the Q1 by 75% quarter-on-quarter due to the new classification of past due loans in accordance with Bank of Italy findings related to mitigants adopted by the bank to reduce the effects of new defaults rules. Several actions undertaken since the start of the year allowed the bank to reduce gross NPEs and past due loans in the second quarter by 11% and 21% respectively. To achieve this goal, we have taken several actions including a marked acceleration in collection, portfolio disposals, and contract terminations. As for capital ratios, we managed in the Q2 to sharply reduce RWA which are now back to 2024 year-end level. The goal has been reached thanks to SRT completion on CQ loans, past due disposals, better collections, contractual resolution, and lower turnover.
All these actions, together with positive earnings generation boosted CET1 ratio and total capital ratio phased into 13.8% and 16.6% with a sharp increase in the Q2 equivalent to plus 140 basis points and 170 basis points respectively. Those ratios do not include the positive hold to collect and sell reserve which at the end of the semester was equal to EUR 3.5 million net. The improvement in capital ratios compared to the end of 2024 is remarkable bearing in mind that we have since reclassified the portfolio in accordance with Bank of Italy findings with a sharp increase in past due loans. Capital buffers of vis-à-vis SREP threshold is now between 350 and 400 basis points. As for funding, term deposits decreased 6% year-to-date due to lower funding needs as a result of loans reduction.
Retail funding represents 72% of total funding while cost of funding continues to go down now at 3.07% or minus 50 basis points year-to-date. Turning to commercial performance, factoring turnover decreased by 18% 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. No disposals have been done in the first half 2025. We have already reached the level of CQ loans embedded in the plan for 2026. Pawn loans grew by 23% year-on-year thanks also to Portuguese acquisition and despite faster auctions completed in the first half 2025 to reduce the stock of past due loans.
Turning to P&L dynamics, revenues grew by 27% year-on-year thanks to net interest income and higher Superbonus contribution. Cost increase was contained to 2% thanks to DGS cancellation. Cost of risk stood at 35 basis points in line with our last 10-year average. Net profit grew by 145% year-on-year. Turning to the performance of the factoring division, turnover decreased by 18% year-on-year due to lower exposure to National Health Service sector to reduce the risk of past due increase. Lower receivables from Superbonus also negatively impacted the first half due to the expiry of the tax shield by the government which implied, as expected, lower receivables which can be bought. Overall turnover towards public administration slightly decreased by 9% year-on-year due to the decrease in receivables towards National Health Service, partially offset by the increase of receivables towards central administration and other PA entities.
The decline in outstanding quarter-on-quarter can be attributed to higher collections in some disposals. Non-recourse component accounted for 49% of the total outstanding while tax receivables accounted for 18%. In terms of the breakdown by obligor, public administration accounts for 51% of the total portfolio compared to 57% achieved in the Q1 2025. 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 42% year-on-year and together with repayments helped to obtain a decrease of 14% year-on-year of the stock of CQ loans which reached EUR 652 million. The private sector accounts for 19% while public sector employees and retirees account for 81% of the total.
As for the pawn loans business, outstanding continues to grow equal to +23% year-on-year with total turnover including renewals equal to EUR 143 million in the first half 2025 or +26% 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 quarter-on-quarter by 7% due to lower customer loans and lower financial portfolio together with lower Superbonus loans. The 3% reduction in outstanding and factoring was due to lower turnover as well as some contractual resolutions, disposals, and finally higher collections, while the 7% reduction in CQ loans was driven by lower turnover and repayments with no disposals carried out in the first half. Pawn loans kept growing with a +6% 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 HTC 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 those classified in the HTCS category decreased by EUR 121 million year-to-date due to the rebalancing of the portfolio and have a duration of 12 months, due to customers decrease by 6% year-to-date due to lower repos with customers and lower term deposits partially compensated by higher current accounts. The decrease in term deposits was driven by lower funding needs due to lower loans and helped to further reduce cost of funding. Turning to revenue performance, total gross income decreased by 7% year-on-year led by factoring, CQ, and SMEs guaranteed loans, while positive contribution came from pawn broking business. The decrease in gross income was compensated by lower cost of funding.
As far as factoring, LPI from legal action were down year-on-year due to lower contribution from accrual and extra collection component. The quarter was also impacted by EUR 2.1 million loss from disposal of receivables classified as past due. The LPI from legal action include a portion of LPIs related to few positions linked to ECHR rulings which were off balance sheet. The decrease in LPI from legal action was partially offset by higher extrajudicial interests. Superbonus revenues amounted to EUR 17.6 million of which almost EUR 16.9 million from trading Superbonus. As regards to adjusted income margin, the first half registered a minor decrease in margins for factoring which stood at 7.4% due to lower Superbonus, disposals, and contractual resolutions. On the other hand, positive trend both in pawn broking plus 130 basis points year-on-year in CQ business, plus 10 basis points year-on-year.
Looking at the breakdown of net revenues, adjusted net interest income increased by 43% year-on-year despite a decrease of factoring interest income contribution thanks to Superbonus trading, pawnbroking, higher revenues from financial portfolio, and lower cost of funding. In details, factoring plus trading Superbonus posted a decrease in interest income contribution of 5% year-on-year, pawn loans an increase of 29%, CQ 2%. Financial portfolio more than doubled its contribution and cost of funding went down from 3.6%- 3.07%. On the other hand, commissions were down 15% due to tough comparison year-on-year as first half 2024 had been impacted by some non-recurrent large transactions in factoring division which generated some one-off fees. Turning to the cost base, personnel cost grew 2% year-on-year due to the higher number of FTEs and the increase in the national labor contract. First half figures do not include accrual of variable compensation.
Administrative costs grew by 22% year-on-year and include non-recurrent consultancy costs, for example related to the capital plan requested by Bank of Italy, but also some credit-related costs such as risk provisions, credit insurance and collection, and IT costs. Costs do not include any deposit guarantee scheme provision as it is no longer due. The next slide shows the contribution of individual business units to group profit which stood at EUR 14.6 million. Factoring closed with a net profit of EUR 17.3 million. Still negative instead was the contribution of the CQ division, but the net loss reduced to EUR 5.8 million. Pawn broking division made a positive contribution of EUR 3.1 million net profit, figure which is already net of minorities. All the figures include the contribution of the treasury portfolio.
As for funding evolution, the bank decreased retail funding year-on-year with term deposits at EUR 2.4 billion vis-à-vis EUR 2.7 billion in first half 2024. Most of the decrease has been registered in the Q2 2025 to achieve a more efficient funding structure given the decrease in loans. The weight of retail funding on total funding was down quarter-on-quarter from 75%- 72% with net outflows of term deposits abroad and in Italy. In terms of cost of funding, it was equal to 3.07% vis-à-vis 3.6% last year with cost of wholesale funding 2.71%, lower than retail funding which was equal to 3.21%. 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 European Banking Authority circulated a consultation paper among European associations in which actually proposed to delete from the existing guidelines certain mitigants that Bank of Italy already asked us to delete. Basically, it seems that the European Banking Authority intends to ratify ex post the de facto deletion of certain mitigants the Bank of Italy already asked us not to apply. After the new classification, gross NPEs went up by 75% quarter-on-quarter. In the Q2 , we have done an excellent job to reduce the overall stock of gross NPEs with a specific focus on 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 -21% and overall gross NPE loans by -11% quarter-on-quarter. We remind that the new classification does not change the risk profile of the bank as 86% of past due loans referred to Banca Sistema only are toward public administration. As a confirmation of this statement, it's worth to highlight that cost of risk in the first half 2025 was equal to 35 basis points in line with last 10-year average despite the reclassification of past due loans.
As for municipality and conservatorship, recent ruling rendered by European Court of Human Rights, ECHR, provided some clarity on the fact the Italian government has to guarantee the execution of final ruling of Italian court and therefore guarantee the payment of the nominal value plus the late payment interest. One municipality under the conservatorship which was part of ruling of ECHR emerged from the conservatorship in early July and we are dealing with Ministry of Economy and Finance to get repaid. We remind that that position at the end of 2024 represented EUR 61 million nominal value plus EUR 44 million LPIs which at the end of first half 2025 were equal to EUR 48 million. From the perspective of capital ratios, we have done an excellent job.
Thanks to the improvement in asset quality, portfolio disposals, and SRT completion, we have been able in the Q2 to increase CET1 ratio and total capital ratios phased in by 140 and 170 basis points respectively. RWA now are at the same level pre-reclassification of past due loans required by Bank of Italy and capital ratios are above the level registered before the reclassification. In particular, SRT allowed a release of EUR 125 million RWA while portfolio disposal of about EUR 50 million. CET1 ratio at the end of first half 2025 stood at 13.8% while total capital ratio at 16.6%. All those ratios are calculated on a phased-in basis and do not include the positive HTCS reserve for EUR 3.5 million net. The improvement of capital ratios boosted capital buffers vis-à-vis SREP to 350-400 basis points.
In conclusion, first half 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 and capital position. We are now better equipped to seize the opportunities that will arise in the market to support future assets growth. Finally, as you well know, Banca CF+ has announced a public offer for 100% of Banca Sistema shares. Banca Sistema is working to complete the team of advisors and will provide its opinion on the offer and the consideration in due course as required by law.
The opinion of the board of directors on the offer and its consideration will be made available to the shareholders and the public through the press release to be prepared by Banca Sistema's board within the time set by and in accordance with applicable law. Meanwhile, Banca Sistema will continue to work hard to deliver the best results in the interest of the company and shareholders. 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 Carlos Conference 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 to use handsets when asking questions. Anyone who has a question may press star and one at this time. We will pause for a moment as callers join the queue. The first question is from Irene Rossetto of Banca Akros. Please go ahead.
Yes, hello to everyone. Thanks for taking my question, a few questions from my side. First of all, can you provide us with an update on the potential lift of Bank of Italy restriction? Then could you comment on the expected evolution of factoring turnover and CQ loans in the second part of the year? Then we have seen a significant reduction of the cost of funding. Which level should we expect for the year-end? And finally, on capital which came very strong this quarter, could you share guidance for the full year? Thank you very much.
Okay. Thank you again. Let me try to answer to the first, second, and fourth question and I will leave the third one to Ilaria to answer. Vis-à-vis your question about restriction from Bank of Italy, I am not able to predict the decision of the regulator. I think that in this context, any prediction about the decision of any institution could be immediately contradicted when there are wide margins of discretion. You know that there are other cases of other banks that temporarily should precede us. In terms of your question about the turnover on factoring and the turnover on the CQ, let me say that when we look at the turnover of EUR 2.3 billion that we realized in the first half of the year, I will consider a strong result.
Let me also highlight the fact that turnover is not necessarily connected to revenue, which depends on the type of credit we are buying, the duration of those credits, the late payment interests that are associated with those credits, and the collection. We do envisage a turnover that, as we also said when we announced the three-year business plan, that we remain pretty much stable over the course of the three-year plan. When we look at the second question was about the CQ business. The business plan we expected to reduce the outstanding where the old portfolio that is the less profitable one will over time continue to decrease and the new portfolio that will increase. We will continue to run the CQ by trying to focus on profitable loan and distribution of third-party product as we also said during the business plan presentation.
That is what I could say. In terms of the capital, clearly we had to consider that the authorization we receive on the SRT that allow us to free up 100 basis points of capital has been received 2 working days before the end of the semester. As we were not sure about the timing, we were very conservative in maintaining the outstanding on assets with an IRB RWA absorption and that's the reason why the private sector has declined. Clearly, that decline is not driven by lack of turnover but is driven by the fact that rather than hold and all those private sector receivables, we bought it and we sell it. Now that we have more space on the capital, we can reduce the sale of those assets. By doing so, we increase the outstanding and by doing so, we increase the revenue.
We announced a few weeks ago the first securitization on the entertainment business. As you know, we are very active on this area, in particular on football. Thanks to this securitization, we will envisage an increase of activity. The first securitization will allow us to purchase EUR 1.2 billion and on that securitization, we will only maintain the senior component while we have an investor on the junior part. By doing so, we will be able to have low capital consumption because we only have a senior piece of the securitization but thanks to the IR activity that through this securitization which is also a partnership in terms of origination, we are buying receivables throughout all Europe. And in that respect, I would like also to thank my team that is covering this particular area of the business and the effect of that will be an increase of the RORAC.
In other terms, thanks to this structure, we'll be able to maintain a strong capital ratio while increasing the activity on businesses where the profitability is quite substantial with, as I said, low capital consumption. I will leave then the third question to Ilaria to answer. I hope that I have answered to all the other questions.
Thank you, Gianluca. So on the funding cost, for the first half this year, we have registered a cost of funding at 3.07% year-to-date which is composed by a funding cost for Q1 at 3.14% and the funding cost for Q2 at 2.98%. So for the first time after a few quarters, we have registered the funding cost below 3%. So two messages here. On one side, we are confirming the decreasing trend in funding costs which started almost a year ago from a peak of 3.6%. And on the other hand, we can confirm that we are heading towards a 3% average funding cost for the whole 2025.
Thank you very much.
The next question is from Fabrizio Bernardi of Intermonte. Please go ahead.
Hello everybody. I would like to ask for an update on the exposure to some public administration things like Catania. And then more interesting is the update on volumes considering that the capital position is improving evidently quarter- after- quarter. Thank you.
Okay. In terms of exposure to Catania, first of all, we registered the exit of the municipality from the conservatorship and this happened 10 days ago more or less. This was also a surprise because we would have predicted this could have happened no earlier than the end of the year. It is clear for us that the government is trying to make it directly the city of Catania to pay perhaps using some indirect support. And I will not be surprised if maybe within the government budget that will be approved by year-end, there will be some special funds that will be allocated to the municipality that come out from conservatorship. We already have registered and actually this is a very recent news because it's yesterday that the payment happened where there was another city and the city of Massarosa.
I mentioned the name because there are plenty of articles in the press about some debate between majority and opposition at the local political level whereby they were also part of one of the resolutions from the Strasbourg court and they had paid the full amount of capital and the late payment interest with a small discount that we authorized. As I said, in terms of volume, let me maybe repeat that the EUR 2.3 billion that we reached on the first half of the year is still a significant number. The securitization that we have put in place for entertainment will allow us to boost the volume without absorbing 100% of RWA because we only own the senior piece and this will increase in general the RORAC.
We are working also on other possible structures that may allow us to increase the turnover even associated to those public authorities that are in the Past due that today we are not buying so much. Well, actually in particular on the healthcare segment, we only buy receivables that are paid very fast and unfortunately on the healthcare, there is this strange situation where all the invoices that were old are on standby and everything that is fresh is paid very fast or when I say very fast, of course, I mean within six months which for Public Administration can be considered very fast. And so that is the type of receivable we are buying. But as I said, we have visibility on turnover. We have a lot of recurring clients. In this period, there are also some VAT receivables credits that we are buying.
So, I will expect the turnover in line probably with the past year, but as I said also before, revenue are not a direct link to the turnover. It depends on the type of credit we buy, the duration, the late payment interest, the collection, and so on. Okay. Thank you.
Thank you very much for the answer.
The next question is a follow-up from Irene Rossetto of Banca Akros. Please go ahead. Ms. Rossetto, your line is open. Please go ahead.
Yes. Hello to everyone. Thanks again for taking my question. Couple of follow-ups. The first one is on the pawn business. What kind of growth should we expect on top of the external growth? So in terms of organic growth and then what should we expect going forward in terms of evolution of past dues?
Okay. So if I look at the pawn broker business, the receivables so the loan sorry, not the receivables. The loan to customer grew by 6% thanks to Portugal that contributed EUR 2.9 million and acquisition of portfolio in Italy that more than offset the decrease of past due component that we are able to achieve thanks to a higher number of auctions and more goods brought to auction. If we exclude the acquisition and we look at Kruso Kapital on individual basis, the loan grew by EUR 5.4 million. So that means that the business continued to grow on individual basis. What we expect is to and we are also looking because that is part of our standard activity. We are looking at other portfolio in Italy and also outside of Italy.
We are also looking at the possibility of opening new branches where we see that there are opportunities so that we will see this business to continue. In terms of the evolution of the past due, we will continue as we did on the first six months of this year to reduce the past due that are linked to public administration. The way to reduce it, of course, the first way to reduce it is through collection and collection is also driven by agreement that we are able to reach with public administration. We don't rule out disposals even though the disposal is something that we will consider only to reach the target. So that is what I could say. Clearly, the reduction of the past due is not fully in our hand because it's not me or Banca Sistema that is able to dictate the timetable of Italian court.
We are not so powerful, so it's not in our hand the decision of the timing of the decision-making process of Italian court. The only thing that I can say is that all the past due including the conservatorship situation are all addressed and are all addressed in court with the support also of a network of external lawyers. Therefore, the timing of the collection is not fully in our hand. What we can do is certainly continue to do what we have done in the first six months to monitor, to make pressure, and we will continue to do so in order to further reduce the past due and give us additional free capital that first of all, we will use to reduce the resales of receivables.
The first way to deploy the capital is not to buy new receivables but simply not to sell it in particular with private sector. Rather than buy and sell it, we can buy and hold it until the obligor pay. On the other hand, of course, if there is space, we can look at also those receivables that may carry more late payment interest with them and improve our P&L.
For any further questions, please press star and one on your telephone. As a reminder, if you wish to register for a question, please press star and one on your telephone. Mr. Garbi, there are no more questions registered at this time.
Thank you very much to everybody, and I wish you, for the ones that are taking some time off, a good summer holidays, and we will reconvene at the Q3 result.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.