Good afternoon. This is the Chorus Call Conference Operator. Welcome, and thank you for joining the Banca Sistema First Half 2024 Results Conference Call. As a reminder, our participants are on 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 2024 Results of Banca Sistema. The First Half Results showed an improvement of operating profits before systemic charges. The improvement was the result of the positive commercial dynamics and the constant asset repricing, which helped to enhance the adjusted income margin. It's worth to highlight in the second quarter a stabilization of the cost of funding, which, although growing year-on-year, is substantially stable quarter-on-quarter. From a commercial point of view, factoring confirmed double-digit growth in turnover, plus 13% year-on-year. Same trend for the pawn loans business, showing a 10% year-on-year increase in outstanding, and for the CQ loans, whose turnover grew by 42% year-on-year. Despite the strong new production, the CQ outstanding, as planned, showed an 11% year-on-year decrease due to prepayments and portfolio disposals.
Positive, finally, the growth in the outstanding of SMEs state-guaranteed loan segment. While the adjusted net interest income recorded a decline year-on-year, the total income grew by +10.8% year-on-year in the first six months of the year, thanks to higher contribution of fees from factoring and pawn broking due to a higher number of fee-based products sold to clientele. In the semester, there was also a positive trend year-on-year of Treasury Department and other revenues linked to CQ and factoring loans disposal. In particular, adjusted net interest income, which is the sum of net interest income and trading Superbonus, recorded a decline of 9.4% year-on-year, figure which marked a clear improvement over the -22% year-on-year decrease in First Quarter 2024 figure.
We expect this trend to improve further in the coming quarters, thanks to the contribution of trading Superbonus and asset repricing. The cost of funding, as expected, stabilized in the second quarter at 3.6%, flat quarter-on-quarter but up year-on-year by 120 basis points. Cost of risk was up slightly year-on-year to 24 basis points from 19 basis points in First Half 2023. Operating costs, including systemic charges, grew 15.3% year-on-year, but the increase stems from the accounting of Deposit Guarantee Scheme provisions in the second quarter instead of the fourth quarter, as was the case in previous years, which raised costs by EUR 5.1 million.
Net of this effect, operating costs grew by 5.3% year-on-year, the adjusted pre-tax profit equal to EUR 15.7 million plus 19% year-on-year, minus 9% year-on-year on a stated basis, while the adjusted net profit equal to EUR 9.4 million plus 10.6% year-on-year, minus 20% on a stated basis, also due to higher tax rate. The adjustments have been made to exclude the Deposit Guarantee Scheme and the Single Resolution Fund from the calculation of the figure, as the booking of the Deposit Guarantee Scheme in the second quarter makes the year-on-year comparison less significant. Regarding the balance sheet, assets grew by 1.9% year-on-year, also thanks to a partial replenishment of the reduced government bond portfolio at the end of 2023, while the CET1 ratio and Total capital ratio are growing year-on-year to 12.4% and 15.5%, respectively.
These ratios, applying the newly approved CRR regulations that allow sterilization of HTCS reserves on government bonds, are 13.1% and 16.2%, respectively. The ratios are slightly down quarter-on-quarter due to growth in RWA tied to factoring to individuals. Turning to the performance of the factoring division, as mentioned, turnover grew 13% year-on-year, while outstanding dropped to EUR 1.6 billion or EUR 1.8 billion, including trading on Superbonus. The decline in outstanding can be attributed to higher collections in some disposals. Non-recourse component accounted for almost 60% of the total, while tax receivables accounted for 17%. In terms of the breakdown by obligor, however, there has been a slight rebalancing toward private individuals, with public administration accounting for 65% of the total compared to 71% achieved in the first quarter of 2024.
CQ dynamics are in line with what was envisaged in the plan just presented at the end of May. Turnover continues to grow with a more disciplined approach and serve to offset prepayments. The outstanding drops to EUR 761 million due to portfolio disposals. The private sector accounts for 20%, while public sector employees and retirees account for 80% of the total. As for the pawn loans business, outstanding continues to grow double-digit year-on-year, with total turnover rising to EUR 113 million in First Half 2024 or +15% year-on-year. 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-to-date by 3.7%, thanks to the government bond portfolio, which was largely 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 big tickets originated at the end of 2023 and fully repaid. Italian government bonds classified in the HTC category remained unchanged year-to-date and amounted to EUR 61 million with a duration of 38 months, while those classified in the HTCS category increased by EUR 516 million year-to-date and have a duration of 10 months. Deposits declined 62% year-on-year or -44% year-to-date, mainly due to the TLTRO repayment, which now stands at EUR 317 million.
Due to customers, on the other hand, grew 23% year-over-year due to strong growth in term deposits that more than offset the reduction of current accounts in repos. The decline in debt securities is driven by lower structured funding, with both factoring and CQ receivables collateral. Turning to revenue performance, total gross income grew 43% year-over-year in the first half, 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. Factoring benefited from the positive business performance, including Superbonus credits. In addition to that, we registered a positive trend in extra collection of LPI from legal action and extrajudicial. Superbonus revenues in the first half 2024 amounted to EUR 12.6 million.
As regards to adjusted income margin, very positive trend in factoring, which increased from 5.8% in First Half 2023 to 7.5% in First Half 2024, as well as in pawn loans, which increased from 19% to 22.1%. The margin of the CQ business was stable. Looking at the breakdown of net revenues, adjusted net interest income, down 9% year-on-year, was more than offset by commission performance and factoring and CQ portfolio disposals, as well as higher profits from Treasury. Noteworthy is the stabilization of adjusted net interest income in the second quarter 2024 compared to the first quarter 2024 and the good performance of commissions, which was driven by higher commission product placement in factoring as well as in the pawn loan segment.
Turning to the cost base, personnel costs grew 11.2% year-over-year due to the higher number of FTEs and the increase in the national labor contract. Administrative costs grew by 6% year-over-year due to some one-off costs, for example, industrial plan preparation, IPO of Kruso Kapital, but also due to higher credit-related costs, for example, origination and collection and insurance costs on credit. As mentioned, overall costs increased 15.3% year-over-year due to accounting of Deposit Guarantee Scheme for EUR 5.1 million in second quarter instead of fourth quarter as occurred last year. Net of systemic charges, operating costs grew by a smaller 5.3% year-over-year. Recall that this different accounting should increase the positive seasonality of earnings in the fourth quarter of the year.
The next slide shows the contribution of individual business units to group profit, which stood at EUR 9.4 million on an adjusted basis excluding systemic charges. Factoring closed the first half of the year with a net profit of EUR 13.3 million, registering a growth of 13.3% year-on-year. Still negative instead was the contribution of the CQ division, which closed the half-year with a loss of EUR 8.1 million, while the pawn broking division made a positive contribution of EUR 1.4 million, figure which is already net of minorities. We expect that in the second half of the year, repricing on the one hand, stabilization of the cost of funding, and the absence of Deposit Guarantee Scheme, which weighed negatively by EUR 5.1 million gross, may improve the divisional trends recorded in the first half.
As for funding evolution, the bank has sharply increased retail funding year-on-year, bringing term deposits to EUR 2.7 billion vis-à-vis EUR 1.8 billion in First Half 2023. This trend more than offset the targeted reduction in current accounts and brings the weight of retail funding on total funding to 72% vis-à-vis 57% one year ago. We kept reducing the exposure to ECB reimbursing EUR 239 million in First Half 2024, bringing the outstanding to EUR 317 million. In terms of cost of funding, it was equal to 3.6%, flat quarter-on-quarter but higher by 120 basis points year-on-year, with a narrowing of the spread between retail and wholesale funding, cost to 30 basis points vis-à-vis 50 basis points in the first quarter 2024. I now turn the floor over to Gianluca for some remarks on asset quality and capital ratios.
Thank you, Ilaria. From the asset quality point of view, we recorded in the semester a substantial stability in both bad debts and unlikely to pay, while there was an increase in past due loans due to some limited positions. The cost of risk was 24 basis points in the six-month period compared to 19 basis points in the first half of 2023. From the perspective of capital ratios, the CET1 ratio stood at 12.4% while the total capital ratio stood at 15.5%. These ratios, on a transitional basis, applying the newly approved CRR rules that allow sterilization of HTCS reserves on Italian government bonds, would be 13.1% and 16.2%, respectively, confirming the ample capital buffers with respect to SREP, minimum CET1 ratio set at 9.4%. In conclusion, the first half results confirm the improved operating trends.
The half-year was negatively impacted by the anticipation of Deposit Guarantee Scheme to the second quarter, a factor that will release earnings in the second half of the year. Cost of funding has stabilized in the second quarter at a level envisaged up to the year-end. Capital ratios and liquidity ratios confirm the improvement seen over last year and support asset growth and the bank's ability to remunerate shareholders as it has always been done since the bank has been listed. 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 their telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from Luigi Tramontana of Banca Akros.
Good afternoon and thanks for the presentation. Two questions on my side. The first one is on the evolution of the loan impairments. Given that they are becoming quite erratic from a quarter to another, you closed the first half with approximately EUR 1 billion additional loan losses compared to the first half of last year. Can we assume a similar trend for the full year? And the second question is on the evolution of the tax rate, which is significantly higher compared to last year, 38% in the first half, 40% in Q2. What are the expectations for the end of the year? What are the reasons for that? Is it related to the cancellation of ACE or other things? And what do we have to expect for the full year and next year as well? Thank you.
Thank you for the question. First of all, I hope that you appreciate that we did, on the presentation of the business plan, the use of our avatar that has been created with the artificial intelligence to make the speech more precise for all the audience. Now, I answer to the second question and I will leave to Ilaria the answer to the first one. About the tax rate, it's only related to ACE. There's nothing else. This is the effect on our P&L. We expect that it will remain unchanged unless government decides to reintroduce something similar to the ACE. Ilaria?
Yeah. Regarding the second question, the provisions in Q1, Q2, and up to year-end are in line I mean, in Q1 and Q2 are in line with what we had envisaged at the beginning of the year and are in line with what we envisaged up to year-end. The cost of risk in 2024 is therefore going to be higher than the cost of risk in 2023 and higher than what we have estimated and communicated for the last year of the plan horizon, which is 2026. So it's not erratic. It was absolutely expected. The cost of risk in 2023 was lower than the historical average cost of risk for the bank. So 2024 cost of risk is more in line with what we had historically and what we will have in 2024 and 2025. So nothing to be worried about.
The next question is from Fabrizio Bernardi in Intermonte.
Hi, everybody. I have a few questions. The first one is on factoring. We saw one year ago an acceleration of net new money in factoring in the last few quarters. So I was asking if we can imagine the same trends going forward. I know that there were a few big tickets, but in any case, the net new money was very strong. Then if you can give us a little bit of visibility on the CQ business in terms of funding cost, there is a slide in the presentation that is very strong in terms of the net profit impact of the CQ. So maybe you can give us a forward idea about what can happen.
Then on M&A, if you can tell us if you have an idea about the expansion of the business, especially of pawn broking in Europe, if you have some identified targets or if, for the time being, we should not expect anything new?
Okay. Thank you for your question. I briefly comment and I leave to Ilaria to comment more in details, starting from the last one. This year, there will be the closing of Portugal. There will be some probably acquisition of some portfolio. And for this year, I think that there's not going to be any other important news, I would say. Maybe a few other small acquisitions of portfolio, but nothing significant outside of Italy. On the CQ, the net profit negative impact this year is most likely going to be the peak of the negative contribution because the majority of the portfolio is related to the legacy portfolio with low interest rates. And then year-on-year, as mentioned also during the presentation of the business plan, the new portfolio will overcome the legacy portfolio that in the meantime will be fully reimbursed.
In the third year, the component of the legacy portfolio will be a small tail on the total portfolio. Then Ilaria can comment more. About factoring, I mean, turnover continues, if this was the question, continues to remain strong in all the area. So I don't have any specific comment on that respect. We see volume coming through in the various business lines with a bit less of VAT receivable but more than compensated by the other tax receivable, Ecobonus in particular, as well as the entertainment business that continues to play a quite interesting role. Ilaria, if you'd like to comment more in detail.
Yeah, sure. I'll start with the CQ. First of all, regarding your comment related to how strong is the slide showing the different contribution to the net income from each business unit, we wanted to achieve exactly that. We wanted to highlight how different was the performance between the three business lines in order for you to better understand how the net income is built up piece by piece, in order to give you all the elements to be able to monitor how the evolution of the performance of the CQ will move over time. In terms of more details, in addition to what Gianluca has already mentioned, the performance of the CQ this year will reach its peak in terms of negative contribution. And compared to the first half last year, it's almost double. So we had a negative contribution of around EUR 4.5 million in the first half 2023.
This is double. It's related to the fact that while on one side, the margins on the top line are more or less unchanged with respect to what we had in the first half last year, I think we had an average yield of 2.6% on the outstanding credits, which exactly compares with the 2.6% this year. No major changes there. While in terms of cost of funding, the cost of funding, if you look at the cost of funding for the firm, of course, internally, we allocate the cost of funding to the three business lines. But if you also look at the consolidated ones, we had 2.4% last year versus 3.6% this year. Really, in terms of net interest income, the calculation is pretty easy.
Regarding the evolution of the CQ, what we can say is that, as Gianluca said, the negative weight of the legacy portfolio will marginally decrease over time. And in terms of total income, we can say that, of course, the 2024 is going to be absolutely the worst year for the CQ. Looking at the future, in terms of total income, the total income for the CQ will turn positive already in 2025 and, of course, will grow in 2026. In terms of net income, we not necessarily will reach a positive net income by 2026. This information was already commented in the presentation of the business plan. But we might have some upside if the interest rate environment is more favorable than the one we have envisaged when we put together the business plan.
Sorry, if I can make a top-up. Given what you said, is there any chance that going forward, the payout policy can be a little bit more, let's say, proactive in terms of shareholders' remuneration? I'm talking about this because if we put in our Excel files, let's say, like this, the fact that the CQ may become less unprofitable going forward, the bottom line may be much better because the CQ is currently a little bit unprofitable in terms of contribution. So my question is, many banks are, let's say, assuming a payout policy that is extremely shareholder-friendly. So what I'm asking is, in time, when the CQ becomes a little less profitable, can we assume that maybe the payout policy may be more friendly? Because now it's not.
As I mentioned.
I know the point. Sorry, I know the point. I know that you get EUR 1 and you want to invest EUR 1 in what is, let's say, investable and in what is profitable. But there is another side of the coin in which people are looking at not exactly at the bottom line, but to what they can get in terms of cash. So this is the reason of my question. I don't like big payers of cash dividends. This is a question in terms of strategy.
And we mentioned also during the presentation of the business plan that we are going to have, by year-end or beginning of next year, also this managerial buffer. That we are going to use this buffer first. If there are acquisitions in your question before you ask, do you have any acquisition this year on the pawn broking, my answer is no. But I didn't say that we don't have any potential acquisition in the future that we would like to make in the pawn broking. So the first allocation is, besides continuing to give to shareholders a guaranteed stream of dividend, any spare amount will be first allocated to where I see more return also for shareholders, which is in the asset class that has a double-digit return like the pawn broking or like also the factoring, if there would be more possibility to deploy money on the factoring.
Anything left, it will go to shareholders.
Okay. Very clear. Thank you very much.
As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question is from Davide Rimini of Intesa Sanpaolo.
Good morning. Thank you for the presentation. I would have a few questions, if I may. The first is on Superbonus activity. I noticed that in the quarter, tax credits for Superbonus kept rising. And I was wondering, since the contribution to trading income has been rising over the last few quarters, if you could give us a sense whether, in terms of time horizon and magnitude, this item in the balance sheet will keep rising over the forthcoming future. The second question, I don't know whether I should go one by one or I go all at once.
As you prefer. We can answer to this question, Ilaria.
Sure. Regarding Ecobonus, we are very close to the maximum amount of assets in our balance sheet. We might be able to originate to buy more assets in the second half of the year, but pretty much, we should have reached what was our target. At the moment, we have EUR 351 million of Superbonus tax credits, which are accounted for in other assets. In terms of the contribution of these assets to P&L, what you have seen in terms of contribution for this quarter, which was from the trading activity, it was around EUR 7 million. This figure can be assumed to be the target for the next couple of quarters up to year-end. And of course, for the following years, this amount will start to decrease in line with the amortization of the assets as long as we sell them down.
Thank you. The second question was on factoring margins, which we noticed has been rising quarter-over-quarter, year-over-year. I was wondering whether, since in the recently updated business plan, you conservatively highlighted a small decline over the period given sort of a different interest rate scenario. I was wondering whether you could share with us when we should expect sort of profitability margin for the business, for the divisional unit, to sort of plateau given the usual duration of the assets.
Yeah. For 2024, we would expect the factoring margins to be around current levels. So we are not expecting a decrease. We'll start seeing a slight decrease in margins probably over 2025 and onwards. But what we expect for 2025 is anyway margins above or around 7%. So don't imagine a sharp decrease in factoring margins.
Okay. Thank you. And if I may, I have a few other short questions. One is regarding the message that you've delivered over the recent 2024-26 business plan. You highlighted on the CQ business the intention to level the business unit into a retail more sort of type of offering. And I was wondering, despite being just the first quarter since you presented a new business plan, whether sort of we could have some anecdotal or some reference on this evolution, which I assume is already started, and when we should expect instead sort of the first more tangible evidence of that happening.
Okay. I will pick up this question. During the presentation of business plan, probably was not 100% clear. The reason why we are moving towards distributing third-party products, mortgages, personal loan, leasing, and so on, is to keep our commercial network of agents happy. Because more product we give to our network, more fees they're able to get from the origination. While, on the other hand, we ask to generate a turnover on the CQ at a level of return that not necessarily are the best price on the market. We are very in the CQ, we would like to originate business only at good price. We are not working on market share increase. While other players may reduce their yield offering to clients in order to gain market share, this is not what we are doing. We are very selective.
We deploy money only if the margin is fine, assuming to have the outstanding over time that remain unchanged or eventually even slightly less than what we have today. In order to compensate the fact that we are not so aggressive in pricing, we are giving more product. Now, the commission that other banks or leasing companies pay for those products, for mortgages, the majority of those commissions go directly to our agent. So our agent, despite the fact that they will not see a dynamic of growth of CQ, they will see a dynamic of growth of their return in terms of commission. Vis-à-vis Banca Sistema balance sheet, this commission will not have a major impact on our P&L. Absolutely, it would be marginal. I mean, interesting, we are talking about maybe a few 100,000 EUR of commission on a quarterly basis.
So nothing that is going to be a game changer. What you will see is that, on the other hand, the indirect result is that we will have more margin on the CQ because we are not aggressive on pricing, but we are very selective on pricing. Okay?
Sure. So the tangible evidence that we will get is on sort of what you were referring earlier on the CQ getting back to profitability. So.
Correct.
Okay.
You will see when you compare the average when you will compare Bank of Italy average yield applied on the CQ product, where today we are at the average, that we probably will price above the average, maintaining turnover, but above the average. That is what is our target. But that is what we would like to see.
Okay. Thank you. And one last final update on the Portuguese acquisition. I was just wondering, since you mentioned it will be closed before year-end, I was just wondering two very short questions. A, you could share with us how the asset is performing so far this year. And the second question is, I know that you answered already sort of in the previous Q1 call, so there was sort of a regulation change, so that has postponed the closing of the deal. I was just wondering whether, in the way you described, despite not being an official guidance, there is implied that I don't know whether sort of you refer specifically to EUR 1 million sort of contribution from this acquisition or not in the way you see Banca Sistema 2024 sort of earnings.
So the Portuguese acquisition, we expect to close by end of October with value date September 30. So we will have the contribution to our P&L only for a quarter. And this quarter, in terms of net contribution, it will be around EUR 300,000. So on a yearly basis, this acquisition will generate more than EUR 1 million. But in terms of when you look at the balance sheet of the P&L of Kruso Kapital, it's a multiplier of the P&L. In terms of 2024 contribution, because it's going to be only a quarter, it's about EUR 300,000.
Thank you.
For any further questions, please press star and one on your telephone. The next question is a follow-up from Fabrizio Bernardi of Intermonte.
Hi again. I would like to ask you how is going the direct funding, so the deposit side or non-deposit side of Banca Sistema. Given the burden of the DGS scheme that we've seen this quarter, if we can cancel all from 2025?
Well, on the second part of the question, if I understood correctly, the question is whether there's going to be new contribution to the fund going forward. The answer is, as far today, no. So if there will be anything else new that has not been appearing on the horizon, probably. But today, we have made the last contribution, the fund has reached the ceiling amount. So going forward, there's not going to be any contribution. And that's the reason why we don't like to make a usually adjusted number. We prefer to give a number of P&Ls straight away.
For this quarter, because it was so relevant, it was EUR 5.3 million that has been charged to the second quarter that usually in the last year has always been charged on the last quarter, we decided to give you probably a more transparent picture that gives you also the correct P&L and net profit on the semiannual result. If I understood correctly your question, with this EUR 5.3 million, there's not going to be any other payment for the fund, unless, of course, there may be any default.
Right. A lot of money. So this is why I'm asking it, because it's on your P&L, it's impacting. So this is why I'm asking.
Yeah. Maybe then, Ilaria, if you'd like to complete the answer and also adding on the direct funding as well.
Yeah. Sure. In terms of size of term deposit, the current stock is definitely much higher than what we had in June last year. We have reached EUR 2.7 billion versus EUR 1.8 billion at the end of June. We don't expect this amount to further increase over the second part of the year. We'll have some redemption in term deposits that not necessarily will be extended considering the fact that we are envisaging a decrease in the rates that we will be offering in Italy as well as abroad. In terms of average cost, as we had mentioned in the previous call, we believe we were very close to the plateau. We can now confirm that we have reached the plateau. Our cost of funding has moved from Q1 to Q2. We had 3.6% in Q1, which compared with 3.3% in Q4 last year.
So really, only 30 basis point increase quarter on quarter from Q4 2023 to Q1 2024 and zero increase from Q1 2024 to Q2 2024. The 3.6% is as well the average cost of funding that we had envisaged for the full 2024. So unless interest rates will have a completely different trajectory from the one that we had estimated at the beginning of the year, we should be quite confident that 3.6%. Different trajectory from the one that we had estimated at the beginning of the year, we should be quite confident that 3.6% should be the average cost for 2024. And of course, from 2025 onwards, we expect that to be lower.
Okay. Thank you.
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, everybody, and have a lovely summer break. We will have a new call for the third quarter result after the summer break. Thank you.
Ladies and gentlemen, thank you for joining the conference. It's now over. You may disconnect your telephones.