Good afternoon. This is the Chorus Call Conference Operator. Welcome, and thank you for joining the Banca Sistema Full Year 2024 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 0 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 Full Year 2024 Results of Banca Sistema. In this presentation, we will first analyze the outcome of the Bank of Italy's inspection report received on the 20th of December, the next steps of the dialogue and the actions taken so far. We will then focus on the bank's performance from an operational point of view, which confirms a decisive recovery in revenues and profitability. Finally, the evolution of funding, asset quality, and capital ratios. Let's start from Bank of Italy.
As you know, last December we received by Bank of Italy the results of the inspection carried out in the second half 2024, in which Bank of Italy requested the adoption of a series of initiatives necessary to address implementation of rules related to impaired loans classification, definition of default, and consequently shortcomings in governance, internal control structure, also through the drafting of an updated three-year capital plan, which could lead to change of part of board members in board of auditors. As for the classification of loans, Bank of Italy asked to exclude some mitigants with book value effect of the rules prior to 2021 when definition of default entered into force, and to reclassify some loans as past due. We will reclassify those loans as past due from the first quarter 2025 onwards.
The prudential reclassification requested by Bank of Italy increases past-due loans from EUR 79 million to EUR 372 million as of first half 2024, of which EUR 346 million related to factoring non-recourse. This amount, applying the same metrics as of first half 2024, would be reduced in final year 2024 results to EUR 256 million, of which EUR 225 million related to non-recourse factoring. Capital ratios at year-end restated for the loans' reclassification would be anyhow above CPDR level. Turning to operating performance, the bank is showing positive trends at top-line level thanks to adjusted net interest income, which grew by 18% year-on-year, and fees grown by 36% year-on-year.
Cost grew by 7% year-on-year, while cost of risk stood at 3 basis points thanks to EUR 8 million writeback related to one position on municipality and conservatorship done in fourth quarter on the back of a positive ruling from European Court of Human Rights, which stated that the respondent state shall, within three months, ensure by appropriate measures the execution of the outstanding domestic judicial measures. The judgment was rendered in the context of the court's well-established jurisprudence. As a reminder, this position is equal to EUR 61 million in principal plus about EUR 43 million in late payment interests that are currently off balance sheet. The LPIs continue to accrue up until the payment will maybe made at ECB rate plus 8%.
As for the commercial performance, factoring turnover grew by 3.9% year-on-year in net of one-off registered in 2023, pawn loans by 18% or 5% on a like-for-like basis, excluding the acquisition in Portugal, completed in November 2024. On the other hand, the stock of salary and pension guaranteed loans decreased by 12% year-on-year in line with what we stated in the business plan. As for balance sheet figures, assets grew by 3% year-on-year thanks to the replenishment of Govvies portfolio, which was sold in fourth quarter 2023, which offset lower loans due to the repayment in first half 2024 of some one-off loans.
As for funding, we repaid in full the TLTRO facility for more than EUR 500 million in 2024, increased term deposits by 7% year-on-year, while overall retail funding was pretty flat year-on-year due to current account decrease, also due to some one-off deposits reimbursed in first half 2024.
Capital ratios improved in the last two quarters, which allowed the bank to end 2024 with CET1 ratio and total capital ratio phased in respectively at 13.3% and 16.1%. Solid liquidity ratios well above minimum requirements. Now moving to Bank of Italy's inspection, we highlight in slide number 3 how is the breakdown of the contagion portfolio related to only factoring non-recourse split between what was originated before 2021, the year in which new definition of default rules kicked in, and receivables bought after 2021. We show on the left that most of the contagion portfolio derives from receivables bought before 2021, while loans bought after that time are marginal. It's worth to highlight that the stock of contagion portfolio decreased in six months by almost 19%.
On the right part of the slide, you can appreciate the decalage of total past-due aggregate, which include contagion portfolio and the portfolio that was contaminated. In the third quarter, there was some pickup of the portfolio related to receivables bought before 2021, but already in the fourth quarter we reduced the amount. From a managerial point of view, we are implementing several actions to reduce the stock of past due as accelerating the legal proceedings, increasing collection procedures, disposals. All these actions allowed to reduce the overall stock of restated past due from EUR 372 million as of first half 2024 to EUR 256 million as of year-end 2024 using the same methodology asked by regulator and during the inspection.
Moving to slide 4, we show the evolution of restated capital ratios taking into account the reclassification of loans required by Bank of Italy on the sample and hours during the inspection. Restated CET1 ratio moved from 9.9% in first half 2024 to 11.8% at year-end 2024. Total capital ratio moved from 12.3% to 14.3%. Year-end ratios show some buffers vis-à-vis SREP level. Few options still to be exploited and not accounted for the time being. For example, the potential cash in related to the loan toward the municipality and conservatorship, on which the European Court of Human Rights has stated that the respondent state, within three months has to ensure the execution of the domestic judicial measure. The principal is equal to EUR 61 million, while the late payment interests are equal to EUR 43 million.
The SRT is another action which should free up capital, and other actions are ongoing.
All these actions should help to offset regulatory headwinds such as CRR update rules on gold treatment as collateral. Turning now to the performance of the factoring division, as mentioned, turnover decreased year-on-year due to some one-off registered in the fourth quarter 2023. Net of this items, turnover grew by about 4%. The decline in outstanding can be attributed to higher collections and some disposals. Non-recourse component accounted for 61% of the total, while tax receivable accounted for 12%. In terms of the breakdown by obligor, however, there has been a slight rebalancing toward non-public administration, which brought public administration to account for 55% of the total portfolio, compared to 58% achieved in the third quarter 2024. CQ dynamics are in line with what was envisaged in the plan presented last year.
Turnover slightly decreased year-on-year, and together with disposals and repayments helped to reach a decrease of 12% of the stock of CQ loans, which reached EUR 701 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 +18% year-on-year with total turnover, including renewals rising to EUR 222 million in 2024 or + year-on-year. On a like-for-like basis, net of acquisition in Portugal, the stock of loans grew by 5%. 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 grew year-on-year by 3% thanks to the government bond portfolio, which was completely replenished after the disposals that occurred at the end of 2023 and offset the decline in outstanding in both factoring and CQ. It is worth noting that the decline in factoring year-to-date is in line with expectations and is mainly related to the repayment of some one-off loans originated at the end of 2023 and fully repaid, as well as some retrocessions of receivables and finally higher collections. Italian government bonds classified in the HTC category remained unchanged year-to-date and amounted to EUR 61 million with a duration of 31 months, while those classified in the HTCS category increased by more than EUR 500 million year-on-year and have a duration of 15 months.
The held-to-collect category included EUR 92 million investment in securitization notes, due to banks decline by 80% year-on-year, mainly due to the TLTRO, whose last tranche was repaid in the fourth quarter. Due to customers, on the other hand, grew 16% year-on-year due to strong growth in term deposits that partially offset the reduction of current accounts. The remaining part which contributed to increase the aggregate was related to repos. The increase in debt securities is driven by higher structured funding with both factoring and CQ receivables collateral. Turning to revenue performance, total gross income grew 30% year-on-year led by factoring, SMEs guaranteed loans, and pawn loans. Slightly down on the other side was the contribution of salary guaranteed loans, CQ due to disposals during the year, and negative contribution from the legacy portfolio.
On this point, it's worth to highlight that the direct channel now represents more than 50% of the entire portfolio. Factoring benefited from the positive business performance, including Superbonus credits. As far as factoring LPI from legal action, they were slightly down year-on-year due to lower contribution from accrual only partially offset by higher extra collection component. Finally, the year-on-year comparison for factoring extrajudicial LPI was positive, almost +60%. Superbonus revenues amounted to EUR 35.5 million, of which almost EUR 33 million from trading Superbonus. As regards to adjusted income margin, very positive trend in factoring, which increased from 7.2% in 2023 to 8.2% in 2024, as well as in pawn loans, which increased from 19.6% to 21.9%. The margin of the CQ business was slightly down year-on-year.
Looking at the breakdown of net revenues, adjusted net interest income reversed the negative trend year-on-year seen since the end of 2021 and showed an 18% increase year-on-year thanks to factoring plus super bonus and pawn loans contribution. Commissions also increased by 36% year-on-year thanks to higher fee-based products sold to clientele. And last but not least, the contribution of Treasury Department and asset disposals was lower than last year, confirming furthermore the quality of the full year 2024 results in the sense that positive operating trends were achieved thanks to higher core revenues. Turning to the cost base, personnel costs grew 9% year-on-year due to the higher number of FTEs and the increase in the national labor contract. The comparison year-on-year is negatively affected by some release of bonus pool done in the third quarter of last year.
Administrative costs grew by 5% year-on-year due to some one-off costs, for example, industrial plan preparation, IPO of Kruso Kapital, M&A costs linked to acquisition in. Also, IT costs went up due to investments as embedded in the business plan. Overall costs increased 7% year-on-year. The next slide shows the contribution of individual business units to group profit, which stood at EUR 25.2 million or EUR 19.8 million on an adjusted basis, excluding EUR 8 million writeback on one position booked in the fourth quarter 2024. As for non-public administration portfolio, 40% is covered by insurance policy. Factoring closed with a net profit of EUR 38.3 million or EUR 33 million adjusted for the above-mentioned item.
Still negative instead was the contribution of the CQ division, which closed with a loss of EUR 15.3 million while the pawn-broking division made a positive contribution of EUR 3.2 million, figure which is already net of minorities.
As for funding evolution, the bank has sharply increased retail funding year-over-year, bringing term deposits to EUR 2.6 billion vis-à-vis EUR 2.4 billion in 2023. This trend more than offset the targeted reduction in current accounts and brings the weight of retail funding on total funding to 70% vis-à-vis 78% one year ago. We repaid in full ECB exposure in 2024. In terms of cost of funding, it was equal to 3.57% or minus 6 basis points quarter-over-quarter, but higher by 73 basis points year-over-year with a narrowing of the spread between retail and wholesale funding, cost to 8 basis points vis-à-vis 28 basis points in the first half 2024. I now turn the floor over to Gianluca for some remarks on asset quality and capital ratios.
Thank you, Ilaria. As for asset quality, we recorded in 2024 a substantial stability in both bad debts and unlikely to pay while there was an increase in past due loans. The cost of risk was three basis points or 30 basis points net of fourth quarter writeback. From the perspective of capital ratios, the CET1 ratio and total capital ratio stood at 13.3% and 16.1% respectively. RWA increase was due mainly to higher exposure to private sector and the increase in NPEs. In conclusion, the full year results confirm the positive operating trends seen at top-line level with core revenues accelerating the growth pace. We are very proactive in reducing the capital impact deriving from the loans reclassification. The ruling of European Court of Human Rights is an important element as it could open to a positive impact in terms of capital.
43 million late payment interests are off balance sheet. We are working on SRT to improve further capital buffers to deal with any regulatory headwinds. Cost of funding going down should help to recover profitability also in the CQ business. Operator, we are ready now to answer any questions that will come from the audience.
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 the 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 Fabrizio Bernardi of Intermonte. Please go ahead.
Hi all. Good afternoon. I would have several questions. Sorry for my voice. I'm not, let's say, perfect. The question is if you consider to expect further rulings by any European court about, let's say, municipalities in, let's say, dissesto to boost LPI and balance sheet because the numbers that we have seen so far are striking, are very strong. Another bank, which is, let's say, a competitor, has announced something similar but to a lower extent. But the point is if I compare your market cap to the ruling, there is, let's say, a relative significance in terms of magnitude, in terms of potential, let's say, benefits in terms of P&L and balance sheet. The second question I would have is related to M&A.
We have on the table more or less 4, 5 tender offers on paper, and there are even some of your competitors that are doing tender offers on other banks that are technically competitors. So I'm not saying I want you to give me or add your thinking about M&A, but if there is something that is changing about the regulator and the, let's say, in general case, the number of banks we have in Italy. I know your background. I know where you come from. So I think you are the perfect person that could give us some flavor on M&A. And the last thing is on CQ. I see that CQ is getting down in terms of stock of loans, but also the interest rates are getting down.
So I'm wondering if the CQ is becoming something that you want to get out or sooner or later may become another source of revenues. Let's put my question in the context. I think that the M&A environment is based on interest rates going down, and so banks are trying to get additional sources of top line. And the CQ is technically, when interest rates are going down, a source of top line. So maybe this could become another point of strength of Banca Sistema giving the net profit of the bank. So my point is that maybe with interest rates very low, CQ could become, again, another point of strength of Banca Sistema.
Okay. Thank you for the question. And first of all, apologies for the late start of this call that was due to technical delay in the uploading of the press release.
Let me start with the first question about European court. We already announced that beside the case that we already won in the court, we already have file EUR 27 million in terms of nominal, which carry about EUR 19 million of interest. We will continue to file situations that are similar to these cases. Just to summarize how does it work, is the court in Strasbourg, they don't look inside the resolution that has been taken by domestic court. Their perspective is very simple. Any member, any state that is member of the court of Strasbourg has to guarantee that any judgment, final judgment in the domestic country, has to be executed in a timely manner.
So anytime and when this is related to any part of the public administration, whether this is a municipality, whether it's a city, whether it's a healthcare institution, or even a company owned by the government or indirectly owned by the government that carry out national interest, the government has to guarantee the execution of a sentence from the domestic court. What happened in the case of this city in conservatorship, we have done all the steps that got us to have a sentence of payment final, so without any possibility of recourse, and that quantified the amount that was due as well as the fact that the amount carry on late payment interest at ECB plus 8% up until the payment. Because the municipality, the city, is in conservatorship, they did not make the payment.
Now, we have always said that our credit, even when they are classifying our balance sheet as UTP, they will pay because they are related to public administration. And basically, the court in Strasbourg simply say, "If it takes too much time to execute the payment, it's the government that has to guarantee the execution of the payment because any layer that goes below the government doesn't matter for the court." So we will continue to move in that direction. Let me highlight that besides what we have received from the court, we also have received another information from the court that state that this resolution is final and cannot be appealed by any party. So there's no any second level, third level. It's final and it's guaranteed. And let me say that Italy is currently also under a reinforced procedure for the execution of this situation.
Now, there's nothing new in this situation because since probably before even 2010 that the court started in Strasbourg to issue this resolution and this sentence. What was new is that was the first time that also a bank, or actually two banks at the same time, got the same resolution. Before, there were company, even large corporate or group of companies that appeal in Strasbourg. Now, being a bank like any other corporate also has the right. And we will continue in the same direction up until we will be able to get the payment from the government. When this is going to happen, in theory, they have three months to pay. Let's see because it's when effectively the payment will be made.
In the meantime, the ECB + 8% continue to accrue, and don't underestimate the fact that from the date of the sentence, whoever is not making the payment is responsible for damages against the public administration. So that is pressure that if the amount were little, probably was not a big deal. But if the amounts are significant, clearly there is ultimately a responsibility by who's not making the payment. On the second question about M&A, difficult to comment on what is going on. Certainly, the start was, as far as I can see, was driven by also some government or political pressure with the idea of creating what is called a third pole. And as a subsequent, there were also other transactions. So you mentioned other specialty finance that has been involved. Probably this is a trend that will continue, but I cannot comment more on that respect.
On the CQ, as Ilaria mentioned in her speech, clearly interest rates are going down. The CQ will benefit because clearly, on one end, as time goes on, the heritage portfolio is reducing. Overall, the outstanding of the CQ is also reducing because we are deploying more money in credit that have a higher return. We have also implemented the strategy to distribute third-party product. And as I said also in the past, if there will be a process of consolidation, the CQ area, or if there is an interest by banks on this type of asset, we are always prepared to sit down and talk.
Okay. Thank you.
If I can ask you something that is more, let's say, flavorish, the fact that the PA is not paying is a problem of lack of funding because there is, let's say, just an employee that has to follow the single receipts. And so they may be long in paying all the receipts. So is it a problem of bureaucracy or a problem of funding? Or both? I don't know.
Well, it depends on a case-by-case basis. Clearly, when we look at our portfolio and we look at the past due, as has been also mentioned before, a lot of what is considered past due are assets that we bought in the past. And the majority of those assets are related to utility bills.
Where, when you look at utility bills, you are talking about a large supplier, of course, from whom we bought this utility bill and a lot of dispute between the public administration and the supplier because since the market became a free market, also public administration has moved from one provider to another provider and so on, creating a lot of confusion to a certain extent of the amount to be paid, whether the utility bill is correct, is not correct. Now, it's about two years since we stopped to buy those type of receivables. Unfortunately, we have this backlog of receivable where there are these disputes with the public administration that say that it's not their responsibility. They don't have to pay because there is no due amount.
On the other side, the suppliers say, "No, you have to pay." Because of the new rules that are backvalued, this dispute did not solve. This created this past due. There are one case because it's a public information, so I can disclose because it appeared in the press. For instance, just to give you an idea, in the city of L'Aquila after the earthquake, what happened is that they create a satellite city where the electricity was provided to the houses of the people that have been relocated. The city of L'Aquila did not well. First, they got the commitment from the government that they will have received money from the government. Then the money did not come from the government. And at the same time, they were not able to recharge the individuals that occupied these homes.
This ended up in a dispute on the amount to be paid, not to be paid, who has to pay this amount, and so on. So these are cases that are nothing to do necessarily with the liquidity, but with the dispute on who has to pay. The city in conservatorship, clearly, there is also an issue of liquidity. And most of the problem from the city is because they are unable to collect bills. They are not able to collect taxes and so on. And that creates a shortage of cash that brings them into a conservatorship situation.
Okay. Thank you.
The next question is from Luigi Tramontana of Banca Akros. Please go ahead.
Yes. Good afternoon. Many thanks for your update on both the court ruling and the requests from the Bank of Italy. Can you please give me a clarification on the approximately EUR 44 million LPIs attached to your position with the Catania municipality? What are your expectations regarding the cash-in of those LPIs? I mean, do you expect to cash them in 100% within end March, or do you expect a lower percentage? And if so, should they have been paid immediately or in a longer time frame? This is quite important given that post-tax, it may represent some EUR 30 million more than one year net profit and some 180 basis points on your capital. Many thanks.
Yep. Yeah. Well, first of all, we don't know when the government is going to pay, okay? So just to be clear on that front. The only thing that we know is that up until the government will pay, the ECB plus 8% will continue to accrue. As many situations, also for smaller position, we are always keen to sit down with the obligor. And either. Also for smaller position, we are always keen to sit down with the obligor and either to provide a discount in part of this LPI, to agree a repayment plan, and to sit down and see how this can be repaid. We are not at this stage able to do anything up until the three months will elapse in a sense that clearly, the government has three months to execute.
Before that, we have to give the benefit of the doubt that they will execute everything EUR 100+ million in one shot. That is at least what the government has been condemned to. Usually, but that is our experience and also my experience from my past life, it is not so straightforward that they will make a payment one-off without sitting down, talk, try to negotiate, in particular when these are relevant numbers. But on the other hand, if a government, which is a public information, will not pay this amount that is EUR 100 million, then it can backfire the government themselves.
Because even for investors that invest in even Italian government bonds, the idea that a government is condemned without any possibility of recourse to pay EUR 100 million and is not paying, it can be irrelevant information vis-à-vis even exposure or derivatives contract that are associated with the government.
So we expect that we will be able to sit down and have some conversation on how, when, to receive the payment. Clearly, we are sitting in a sort of government bond with the ECB + 8% yield.
Okay. For the time being, we should expect just the payment of the principal, approximately EUR 60 million.
No, I didn't say that. I didn't say that. I don't expect anything at this stage. So at this stage, we know that the government has been condemned to pay more than EUR 100 million. And every month, there are EUR 600,000 of additional interest that goes on top. We will see what is going to happen. Clearly, we are starting to make some approach to the government. In this situation, it's the Minister of Finance that is responsible by the Italian law not only to make the payment but also to recover the money from the municipality. Because clearly, the government is condemned to pay, but that is not going to be a gift that the government is giving to the local authority. The government needs to then find a repayment plan with the local authority that can be a loan or anything that they have to agree.
And so I think that there may be also ongoing negotiation between the government and the Minister of Finance on behalf of the government and the local authority for their recovery of whatever amount the government will have to disburse. So we don't know if in three months, from the date of the sentence, we will receive the payment. We will sit down and try to understand. The only thing that I may add is that we receive a formal notification from the Minister of Finance that recognized the fact that they have been condemned to pay for this sentence. So the Minister of Finance, since last week, has been also wrote to us to say that they recognize the fact that they have been condemned for this sentence.
Many thanks for the clarification. It's also clear to me why the outlook for this year remains quite vague. Many thanks.
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. Mr. Garbi, there are no more questions registered at this time.
Thank you again, everybody, for this call. Apologies again for the late start of this call due to, as I said, the technical delay in uploading the press release. We remain at your disposal, of course, for following up. 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.