Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Banca Sistema first quarter 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 quarter 2025 results of Banca Sistema. I am pleased to comment on a very positive set of results that saw a marked acceleration in the group's revenues and profitability. Revenues, in fact, grew 60% year-on-year, or 21%, net of late payment interest accrual component tied to exposures subject to judgments rendered by the European Court of Human Rights. In particular, the adjusted interest income more than doubled year-on-year, thanks to the widening of the asset spread, a higher contribution from the financial portfolio and the lower cost of funding that is starting to positively impact the income statement with first tangible signs of improvement for the CQ division profitability. Costs grew by 9% year-on-year due to a higher number of employees.
43 new colleagues from Portugal entered the group at the end of last year and higher administrative costs. Cost of risk stood at 57 basis points vis-à-vis 17 basis points one year ago. Nevertheless, pre-tax profit almost tripled year-on-year, equivalent to +24% net of accrual on LPI, mentioned before, confirming the trend registered in recent quarters. Net income stood at EUR 11.6 million. We reached in one quarter, around 45% of the profits made in the whole 2024. Looking at the profits on a divisional basis, factoring registered an increase in net profit equal to 64% year-on-year. Pawnbroking an increase equal to 250%, while the salary and pension guaranteed loans division reduced the loss year-on-year from EUR 4.2 million to EUR 2.8 million.
Turning to the balance sheet figures, total assets went down by 4% quarter on quarter due to lower financial portfolio and a reduction in customer loans. The outstanding for factoring went slightly down quarter on quarter due to lower exposure to National Health Service and faster collections. CQ was down due to lower new production and current portfolio's decoulage, while pawnbroking loans were up, thanks to the acquisition carried out at the beginning of the year of a portfolio for almost EUR 9 million. As for funding, term deposits grew by 2% quarter on quarter, and retail funding represents 75% of total funding. Now moving on to capital ratios and asset quality.
This is the first quarter in which we are accounting for past due loans, hopefully in line with the criteria outlined by the Bank of Italy, which entail the de facto exclusion of almost all mitigants applied by the bank to date in order to reduce the impact of the definition of default regulations. The actual figure for the quarter is substantially in line with the forecast we communicated on March 23, which predicted past due loans equal to EUR 337 million at the end of March, while the actual figure was EUR 333 million. Capital ratios were as well, slightly better than forecasted, being CET1 ratio equal to 12.4% vis-à-vis expected 12%, while total capital ratio was equal to 14.9% vis-à-vis 14.4% expected.
We are working hard to reduce the impact of Definition of Default rules through faster collection, loans disposals to other factor companies, which can classify those loans not as past due, and finally, contractual resolutions. Please consider that a large portion of reduction is linked with the collection of those receivables that were not overdue, but they had to be classified as past due for the so-called Contagious Effect. We almost stopped to buy receivables related to debtors classified as past due, or we bought them only if we had agreements to resell them to other factors. Capital ratios vis-à-vis SREP requirements show 200 basis points on average capital buffers.
Turning to the performance of the factoring division, turnover decreased by 20% year-on-year due to lower exposure to National Health Service sector to reduce the risk of past due increase and lower receivables, as just mentioned, towards the corporate sector. Superbonus receivables were also down year-on-year due to the expiry of the Tax Shield by the government and lower receivables, which can be bought. Overall, turnover towards Public Administration was flat year-on-year, as the decrease in receivables towards National Health Service were offset by receivables towards central administration. The decline in outstanding quarter-on-quarter can be attributed to higher collections and some disposals. Non-recourse component accounted for 52% of the total outstanding, while tax receivables accounted for 17%.
In terms of the breakdown by obligor, Public Administration accounts for 57% of the total portfolio, compared to 55% achieved in the fourth quarter of 2024. Moving to slide four, CQ dynamics are in line with what was envisaged in the plan presented last year. Turnover decreased by 48% year-on-year, and together with repayments, helped to obtain a decrease of 16% of the stock of CQ loans, which reached EUR 675 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 +24% year-on-year, with total turnover, including renewals, equal to EUR 74 million in the first quarter, 2025, or +34% 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-over-quarter by 4% due to lower customer loans and lower financial portfolio. The 3% reduction in outstanding and factoring is due to lower turnover, as well as some retrocessions of receivables, contractual resolutions, and finally, higher collections. While the 4% reduction in CQ loans was driven by lower turnover and repayments with no disposals carried out in the quarter. Pawn loans kept growing, with first quarter increased quarter-over-quarter, driven also by an EUR 8.9 million portfolio acquisition. Italian government bonds classified in the HTC category remained unchanged year to date and amounted to EUR 61 million, with a duration of 29 months. While those classified in the HTCS category decreased by EUR 105 million quarter-over-quarter and have a duration of 20 months.
Due to customers decreased by 3% quarter-on-quarter due to lower repos, while term deposits were slightly up or +2%. Turning to revenue performance, total gross income grew 10% year-on-year, led by factoring, pawn loans, and CQ. SMEs guaranteed loans contribution was down year-on-year. Factoring benefited from the positive business performance, including Superbonus credits. As far as factoring LPI from legal action, they were down year-on-year due to lower contribution from accrual, only partially offset by higher extra collection component. 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 more than offset by higher extra judicial interests. Superbonus revenues amounted to EUR 9.1 million of which almost EUR 8.8 million from trading Superbonus.
As regards to adjusted income margin, very positive trend in factoring, which increased from 7% in first quarter 2024 to 8% in first quarter 2025, as well as in pawn loans, which increased from 20.1% to 21.5%. Figures calculated ex auction fees. The margin of the CQ business grew this quarter to 2.9% vis-à-vis 2.3% registered last year. Looking at the breakdown of net revenues, adjusted net interest income more than doubled year-on-year, thanks to a positive contribution of all the divisions of the financial portfolio and lower cost of funding. In details, factoring plus trading Superbonus posted an increase of 23% year-on-year. Pawn loans 44%, CQ 9%. Cost of funding went down from 3.62% to 3.16%.
On the other hand, commissions were down 34% due to tough comparison year-on-year, as first quarter 2024 has been impacted by some non-recurrent large transactions in the factoring division, which generated some one-off fees. This quarter numbers are more normalized figures for the future. Turning to the cost base, personnel costs grew 6% year-on-year due to the higher number of FTEs and the increase in the National Labor Contract. First quarter figures do not include accrual of variable compensation. Administrative costs grew by 16% year-on-year and include non-recurrent consultancy costs, for example, related to the capital plan presentation, but also some credit-related costs, such as origination, collection, and insurance, and IT costs, as envisaged in the business plan presented last year. Overall costs increased 9% year-on-year.
The next slide shows the contribution of individual business units to group profit, which stood at EUR 11.6 million. Factoring closed with a net profit of EUR 13.1 million. Still negative is instead was the contribution of the CQ division, but the net loss reduced from EUR 4.2 million in first quarter 2024 to EUR 2.8 million in first quarter 2025. Pawnbroking division made a positive contribution of EUR 1.4 million net profit, figure which is already net of minorities. As for funding evolution, the bank slightly decreased retail funding year-on-year, with term deposits at EUR 2.6 billion vis-a-vis EUR 2.7 billion in first quarter 2024. The trend is positive quarter-on-quarter, with term deposits increased by 2% and retail funding increased by 1.7%.
The weight of retail funding on total funding was up quarter-over-quarter from 70%-75%, with net inflows of term deposits from abroad, which more than offset few outflows from Italy. In terms of cost of funding, it was equal to 3.16% vis-à-vis 3.62% last year, with cost of wholesale funding 2.9% lower than retail funding, which was equal to 3.27%. 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 I assumed to be the request from Bank of Italy, which assumed the full inefficacy of almost all the mitigants used up to then. Past due loans, as at 31 March 2025, include also pawn loans deemed overdue for more than 90 days, and LPIs deriving from the contagious portfolio. We communicated to the market on the 21 March, a forecast of expected past due at the end of March, in accordance with the findings delivered by Bank of Italy. The actual data are in line with estimates: EUR 333 million vis-a-vis EUR 337 million estimated.
On the back of the new classification, gross past due loans went up quarter-on-quarter from EUR 101 million to EUR 333 million, which explains the plus 75% increase in gross non-performing loans registered in the quarter. The bank is dealing with the new classification through several managerial actions to reduce the stock of past due as fast as possible. Among those actions, it is worth mentioning the stop of buying debtors classified as past due, unless expected. Very fast collection, faster collection processes, disposals of past due to other factors, which can classify those loans as performing as they do not exceed the threshold imposed by the new rules or contractual resolution of some loans.
We remind that the new classification does not change the risk profile of the bank, as 92% of past due loans referred to Banca Sistema only are toward Public Administration. As for municipality and conservatorship, recent ruling rendered by the European Court of Human Rights 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. For this reason, we accounted in the quarter a small part of late payment interests linked to receivables, subject to ECHR rulings in which we're off balance sheet. Talks with government for the payment of those receivables are ongoing. We remind that just one position represents EUR 61 million nominal value plus EUR 44 million LPIs.
From the perspective of capital ratios, the CET1 ratio and total capital ratio went down quarter-on-quarter by 87 and 115 basis points, respectively. The decrease was fully due to RWA increase linked to the new classification of past due loans, according to new interpretation of definition of default rules and the ineligibility of non-investment gold as collateral. On March 21st, we gave an estimate of CET1 ratio and total capital ratio expected by the end of first quarter 2025. The actual data were slightly better than estimated, with a CET1 ratio of 12.4% vis-a-vis 12% preliminary forecast, and a total capital ratio of 14.9% vis-a-vis 14.4% forecast. Positive earnings evolution in the quarter helped it to mitigate the RWA inflation registered in the quarter.
Current capital ratios show a capital buffer of 200 or 300 basis points vis-à-vis SREP requirements. Ratios have been calculated without any dividend accrual and not taking into account HTCS reserve, which was positive for EUR 0.6 million. The bank is working to reduce RWA through the actions outlined before to reduce past due loans. On top, we are working on SRT, which should free up between 80 and 100 basis point capital. In conclusion, the first quarter results showed an increase in profitability, thanks to widening an asset spread and lower cost of funding, which should continue in the coming quarters. CQ division is expected to benefit the most from lower cost of funding, reducing the negative net interest margin of the legacy portfolio. We are confident in our ability to properly address past due loans reduction in the coming quarters.
Capital Plan has been sent to Bank of Italy at the end of March, and there are continuous talks ongoing. Operator, now we are ready for Q&A session.
Thank you. This is the Chorus Call 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 touchtone 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 questions. The first is if you could provide an outlook for the adjusted income margin evolution this year, and then if you can also provide your expectation on the factoring turnover evolution. Thank you.
I will leave to Ilaria to answer to the first question. I will take on the second one.
Yeah, sure. Hi, everyone. As far as the adjusted income margin is concerned, we expect it to grow vastly up to year-end. Clearly, as outlined in the presentation, the adjusted net income margin for Q1 was positively impacted by LPI accruals related to positions subject to European Court of Human Rights ruling. This is not expected to repeat over the course of the next quarters, at least not in such a magnitude. But apart from that, so even net of this effect, the adjusted income margin is expected to be robust and stable with respect to what we have registered in Q1.
In terms of the factoring, we expect the outstanding to remain flat over the course of the year, with the exposure more towards the central governments and less towards the NHS system. While the private activities, the private factoring will continue to be used depending of the availability of the capital, so we can increase or reduce that because the duration is very short.
Thank you.
The next question is from Fabrizio Bernardi of Intermonte. Please go ahead.
Hi, everybody. I have a few questions. The first is a curiosity. Why gold of the pawnbroking is not considered as a valuable asset in order to cover risk? If I didn't read bad the press release, just a curiosity. The second is about the cost of funding. I've seen that from the P&L page 11, cost of funding is improving. So I was wondering if you can say when the CQ division may run in a better shape? Sorry. And then the biggest question is about the common equity.
We have seen that the common equity, despite you cannot pay out anything, is let's say, flat-ish, or in any case, not improving that much. So my question is actually, if there is a condition by the Bank of Italy to remove the restrictions, considering that, let's say, common equity capital base. Thank you.
Can I ask you to repeat the first question about pawnbroking? Because I didn't fully understand the question.
No, I'm reading on page. I don't remember, page seven.
Yeah.
That gold is not admissible in terms of guarantee because it's not an investment. So I was asking why gold is not a fully fledged collateral for pawn business. Looks to me a little bit particular. This was the first question.
Yeah. I mean, for pawn broking, yes, we confirm that at the consolidated basis, the CRR3 is interpreted in a way that the pawn, the gold, is not considered as an eligible collateral, and therefore, the risk, the, we are applying on a consolidated basis, 75% RWA. As you probably have seen through a press release from Kruso Kapital, we have started the first issue, the first CLN, and through the issues of the CLN, we will be able to reduce, apologies, reduce the capital consumption. I will leave it maybe to Ilaria to comment the cost of funding evolution.
Yeah, sure. In terms of cost of funding, as we, as you may remember, last year, we reached the peak of our funding cost, which had remained pretty much stable over the four quarters at 3.6%. In the first part of this year, so in Q1 2025, the average cost of funding was registered at 3.2%, so there has been a significant improvement by 40 basis points. And this is for Q1. What we would expect the cost of funding to be for the whole 2025 is indeed a lower figure, so we are targeting an overall cost of funding around, an average cost of funding for the whole year, around 3%.
So trajectory is 3.6, down to currently 3.2, up to down up to 3% by 2025. In terms of I now switch to the second part of your question, which, if I'm not wrong, was referring to the performance of the, of some divisions. I think you were referring to the security division in particular, depending on the evolution of the funding cost. Before switching to that, I can give you a comparison figure, which is the cost of funding that we had envisaged when we prepared the business plan. At that time, cost of funding for 2025 was estimated to be 3.3%.
Considering that we are now targeting for 2025 a 3% funding cost, there is going to be an improvement by 30 basis points on average for the whole year. Now, moving on to the second question. Definitely the consolidated PNL will benefit by this upside in terms of funding cost. But in terms of breakdown of divisional PNL, we will not necessarily register an improvement of the say CQ net income, compared to what we had envisaged in the business plan. For 2025, the estimate for the PNL generation from the CQ division was still a net loss, which we confirm. So, the division will not reach the breakeven by 2025.
Compared to what we had estimated to be the size of the net loss, we have to say that the expected improvement in the funding cost will not be enough to make a better estimate in terms of net income generation or lower net loss generation out of the CQ business. Because rates, our market rates are lower than we had expected, and this is affecting the asset margins more than, for the CQ business, more than what is affecting the cost of funding.
So compared to our previous estimate, there is going to be a lower margins generation out of CQ assets in current market conditions vis-a-vis what we had envisaged in the business plan. While for broking and factoring, the upside in the funding cost will be transferred into an upside in the asset spread, generating therefore a higher net income.
Yeah, thank you.
A comment.
Oh, sorry, go on.
Yeah, no, the last question was about the common equity. As has been mentioned during the presentation, the SRT that we expect to be approved will release from 80 to 100 basis points. Then, the collection of past due receivable is continuing to speed up. In particular, we have advanced negotiation with obligor that are classified as past due, that represent for about EUR 42 million. There are going to be more decision by the Strasbourg Court and during also few months, but also going forward, we will not have, we have offloaded all the receivable that have been part of the so-called contagious effect, but we are not rebuild this position.
In particular, this apply to the SSN service, and as you can see, we have already reduced to 9% of the total exposure to SSN. But we will not build in the new receivable in this sector also because the return are less interesting for us, compared to other field. That means that the common equity will continue to improve over time, as we have also forecasted for our Capital Plan. When there will be the decision, a revised decision by the regulator, we are not able to forecast. We don't know. That is, we are doing our part of the job to continue to improve the situation.
I think that, even, after a few months, we have proven to be able to do so, and we will continue to do so. We are not able to forecast any decision by the regulator.
Sorry, a follow-up, if I can. On page 11, I see that the cost of risk is rising a bit. I read risk of EUR 7 million. Is this, let's say, another a tone of conservative view also related to what you stated before? Or is there anything else that I cannot see?
I think that is part of the normal process, so there's not anything particular on this movement of the cost of credit. I don't know, Ilaria, if you have any comment further on that?
No, absolutely. I confirm what you have just said, that this is a part of the normal, credit assessment. You know, it can vary from one quarter to another, but there isn't any specific situation we should worry about.
Okay. Thank you.
The next question is from Davide Rimini of Intesa Sanpaolo. Please go ahead.
Good morning. Thank you for taking the questions. Yeah, literally, one follow-up questions, since most of the questions have been already posed. The first one is on LPI contributions in the four moving quarters. I was just wondering whether on slide 11 there is a reference on this EUR 6.7 billion accrued to PNL, and I just wonder whether that number should be compared with the 40+ part of the municipalities under conservatorship that you mentioned in the presentation generally, and whether sort of we shouldn't expect over the coming quarters more to be accrued.
The second follow-up question is just whether it is on cost of risk, whether we could consider the 30 basis points for the full year still as a general guideline. And the last question was instead on personnel cost. I noticed that it was a 6% up in the quarter, and that despite sort of a level of FTEs significantly higher, due also to the consolidation of the pawn broking business in Portugal. So we're just wondering... I know, as has been said, the variable compensation was included in the quarter, but whether you could elaborate it more, whether this kind of growth rate where it should be trending towards the end of the year. Thank you.
Okay. Let me try to answer to the LPI. As you know, there is an important position that we are negotiation, as has been mentioned also by Ilaria, where there is an accrual on the back of this position. Because of the particularity of this position, I'm personally undertaking a discussion at the senior level of the government. In the meantime, that specific city, the specific municipality, has filed a process to exiting from the conservatorship. So that means that we could eventually expect some evolution, which will bring also some LPI on the back of it.
On the other side, there are ongoing more decisions, as I said at the beginning by Strasbourg court, which imply that when the decision takes place, there will be accrual on the back, because there will be a guarantee by the government also for those positions. So, we could imagine some evolution on the LPI going forward. I remind that the amount of LPI that are not in the balance sheet are quite significant. So, a part of this amount will go to the PNL. In terms of FTE, and then I will leave it to Ilaria to comment on the cost of credit. The increase was driven by two factors.
One is the new colleagues that we had in Portugal through the acquisition. So the increase of cost is driven by the control entity of Kruso Kapital, because they're more FTE. And second, because compared to the first quarter of last year, there was the increase of the national contract for bankers that has increased the cost overall. So that is this cost we do expect it to go to remain stable now, but if you compare to the same quarter of the previous year, of course, that is an increase. I hope I answered to your question, and I will leave to Ilaria to answer to the cost of the credit, whether the 30 basis point is the guideline.
Yeah, sure. And maybe just adding a small comment to on the personal expenses, so the overall cost that the Q1 cost has not represented a spike, so you can assume this to remain pretty much stable up to year-end. So if you want to, you know, have a view up to year-end, which I think was part of your question. In terms of cost of risk, as we said, this is part of the provisions this quarter are part of a normal credit assessment process.
Probably the provisions we have set aside this quarter are higher than the quarterly average provision that we would expect up to year-end. So indeed, this quarter, cost of risk was probably a bit higher than the overall cost of risk that we would see for the whole 2025. We are not expected any any release differently from what we have registered in Q4 last year.
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. Ms. Bennati, Mr. Garbi, there are no more questions registered at this time.
Thank you very much to everybody, and, have a nice weekend. Thank you.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.