Good afternoon, this is the Chorus Call conference operator. Welcome, and thank you for joining the Banca Sistema 2024-2026 Business Plan 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.
Thank you for joining 2024-2026 Banca Sistema Strategic Plan presentation. I'm Gianluca Garbi, CEO of Banca Sistema. I'm here with Ilaria Bennati, CFO of the group, and Christian Carrese, head of IR team. Before we start, I remind you that the presentation is on our website, bancasistema.it, on page 2, today's agenda, which includes a brief overview of our growth path since the group was born, what were the main achievements of the last 2021-2023 plan, the background to the new 2024-2026 plan, the strategic levers on which the plan is based, and finally the financial 2024-2026 KPIs. Let's start with slide 4. In this slide, we wanted to give a brief summary of what the bank has done since its inception in 2011.
The core business is and remains factoring, but over the years the bank has evolved, first by launching online retail funding, which now accounts for 72% of total funding, with a high component coming from foreign channels, then by entering the tax receivables business, and in 2014 the salary and pension-backed loans business. In 2015 the IPO, the growth in the salary-backed loans business through acquisition, and the first wholesale bond issuance. In 2016 we started the pawn-broking business, which brought to the creation of our subsidiary Kruso Kapital, which in January 2024 has been listed to the EGM segment. The fil rouge that has characterized Banca Sistema over the years as a specialty finance has always been the attempt to attack market niches having high returns and low risk.
Moving to slide 5, we can see how the bank has always shown the ability to grow and outperform the market in the business segments in which it operates. The factoring division, for example, recorded a turnover aggregate growth over the period 2011-2023 of 39%, with 2023 being the record year in both volumes and profitability. Kruso Kapital's pawn loans division also did very well. Born from scratch, generated strong volume growth and confirmed double-digit growth in 2023 as well. The company has begun a process of internationalization that has led it to open operations in Greece and will soon consolidate the acquisition already announced in Portugal. Finally, the CQ division has grown both internally and externally through the expansion of the agent network and acquisitions. It was born from the need to diversify business lines. Outstanding since its inception has grown at a CAGR of 58%.
In the last three years it has experienced a decline in loans due to our more selective approach in terms of origination. This was done in light of the changed interest rate environment and more portfolio disposals. In the next slide, six, as we said, the focus of Banca Sistema is to develop business niches that have low credit risk, such as factoring to PA or salary and pension-guaranteed loans, which are guaranteed by insurance policy and one-fifth of the salary, or finally the pawn-broking business, which has gold as collateral with virtually zero default rates. All this has been expressed in a low cost of risk, 35 basis points on average over the period 2015-2023, in a RORAC that has always been double-digit, and even in the last three years of the previous plan has grown, if we exclude the negative contribution from the salary-guaranteed loans business.
This has allowed, in the last nine years since listing, to maintain a solid capital and always distribute to shareholders a dividend that, on average, has guaranteed a yield of 4% through the cycle. Let's analyze the results of the previous 2021-2023 plan in slide 8. In the 2021-2023 period, the sudden rise in rates inevitably impacted our cost of funding, but we managed to offset it with solid loan growth plus 4.6% CAGR 2021-2023, dynamic treasury management, effective repricing of factoring and pawn loans. Revenues declined slightly due mainly to salary-guaranteed loans and in particular to its backbook at fixed rates, whose yield was not adequate to the changed market rate conditions. In the following slide, 9, you can see how the adjusted income margin, calculated as gross revenues on average loans, net of treasury, increased in the previous plan to 6.2%.
The cost income increased to 61% while the RORAC decreased to 8%. These indicators were negatively impacted by the lower margin of salary and pension-guaranteed loans, which had an adjusted income margin of 2.8% and an operating loss at the end of 2023. Group RORAC, net of the salary and pension-guaranteed loans division, would have been increasing over the plan period from 11% in 2021 to 17% in 2023. On the balance sheet side, the NPE ratio fell to 7%, CET1 ratio rose to almost 13%, and the cost of risk confirmed the quality of our loans, which have a moderate credit risk profile. The slide 10 shows the commercial performance and profitability of the three businesses. Factoring grew both in terms of turnover and profitability, recording record profits of EUR 26 million in 2023.
The CQ division, on the other hand, due to the legacy portfolio, recorded a sharp decrease in revenues and a loss in 2023 equal to EUR 11 million. Pawn-broking, which, although still has a limited size in terms of lending, is showing steady growth in profits. It is clear from this slide that without the negative impact of the CQ backbook, the bank is alive and kicking. Looking at the composition of the loan book in slide 11, about 70% is represented by factoring receivables, about 25% by CQ receivables, and the remaining by the pawn-broking business. Factoring presents high predictability, being turnover composed of 25% revolving contracts and 30% recurring customers. It also exhibits high asset turnover and has high-standing counterparties such as public administration or, as in the case of corporates, there is insurance to back the credit.
Kruso Kapital operates against a collateral, mainly gold, that represents 90% of the total. Finally, the CQ division has a historically low risk profile but has been impacted by rising rates and needs greater scale to be profitable. As anticipated, the group RORAC of 8% in 2023, net of the CQ component, would have been 17%, and we expect the gradual recovery of CQ to give a boost to group profitability. Let us turn then to the context of the new business plan from slide 13, where you can see our strategic goals for the next three years. We want to do better what we do well, which is to continue to focus on our niches, consolidating leadership in the factoring and pawn-broking segments to bring out the economic value which is currently off-balance.
We want to enable the evolution of the CQ business unit into a retail business unit, offering a full suite of services through the distribution of other retail products, through Banca Sistema's commercial platform with no consumptions of capital. We will work to make the operating machine more efficient, and finally we will take actions to put in place the conditions to create a managerial buffer through the enhancement of existing collateral. The underlying basic assumptions of the plan in slide 14 are a gradual GDP recovery below 1% in 2026, a gradual decrease in inflation rate 1.6% by 2026, and a decrease in average three-month Euribor, which is expected to be at 2.2% by 2026.
Looking at slide 15, we see how in the previous plan we had a drop in profitability due to CQ division, but on the other hand, it's worth to highlight we had strengthened the balance sheet and liquidity ratios. In the next three years, we are convinced to recover our previous profitability path doubling net profit thanks to CQ recovery and further improvement in factoring and pawn loans businesses. I said we are convinced to deliver such a result, as you can appreciate from slide 16, of the nearly EUR 600 million in gross revenues, not including treasury, about 70%-75% comes from initiatives already addressed with low execution risk and the remaining 25%-30% cumulated revenues from initiatives under implementation. It's worth again to highlight how a big part of our business is recurring and some revenues are already in-house, for instance, late payment interests.
Let's go to our ambitions and guidelines in slide 18. The key operational objectives of the 2024-2026 plan are to consolidate our position in the factoring business as market leader, to continue the fast-paced growth of the pawn-broking business, and to recover profitability in CQ business through the amortization of the backbook and increase of adjusted margin through new production at higher yields. The turnaround of the CQ division will also pass through refocusing the business unit into a wider-focused retail business. We will realize our objectives with an ESG approach and utilizing the support of AI to simplify processes and improve origination. Let's move to slide 19. One of the bank's watchwords has been diversification. This has also been the case with factoring. We started with only healthcare receivables, then PA trade receivables, then tax receivables, including the Superbonus, and finally private debtors and the entertainment world.
A mix of public administration, private, and football, always trying to combine volumes, profitability, and efficient capital employment. We added also third-party servicing and securitization vehicles servicing. In the beginning, revenues were derived almost exclusively from the originator, and today there is also an important component paid by the borrower. Over the next three years, we want to continue with the provision of state-guaranteed financing only to our factoring clients, Superbonus-related credits, third-party accounts receivable, intercept credits arising from the PNRR, counteract the effect of the likely decline in rates with repricing activity, maintain a high share of PA receivables in acquired turnover, develop activity on entertainment receivables, strengthen distribution agreements with third parties, continue growth abroad, in particular Spain and Portugal, grow further in the collection of late payment interest and indemnity, finally starting in 2025 reduce loans disposals through insurance policies to optimize capital absorption.
Turnover, then, in business plan horizon, despite a 2023 baseline inflated by some big-ticket items, is expected to grow at 1.5% CAGR with margins pretty stable. Moving to slide 20. The CQ division is called to recover profitability that will go through acceleration of CQ backbook amortization and repricing of new production. We are targeting the evolution of CQ business unit into a retail business unit, which will distribute third-party retail products through agreements with major players. You will see more in the next slide. CQ, through our own platform, we will make more efficient the division through cost optimization and repricing. All these actions will be completed without allocating more capital to the division. Today the division already distributes third-party products, as you can see in slide 21, through agreements in personal loans, mortgages, lifetime loans.
We want to develop agreements with third parties also to distribute long-term rent and leasing products, PMI loans, according to an originate-to-distribute model. According to our projections, the average CQ loans should decrease in the next three years by 7.2%, while the adjusted income margin should increase by almost two percentage points. At the same time, we will consider any initiative that prompt to a consolidation of this business. Moving now to slide 22. Kruso Kapital is expected to continue the fast-paced growth registered in the last few years through organic growth and completing the integration of the acquisition recently announced in Portugal, likely to be done in the second half of 2024. We believe the pawn-broking business can be exploited also abroad. We have already opened a branch in Greece, and we look at the Iberian Peninsula with interest, but also any other countries that accelerate our internationalization.
We also believe that the digitalization of the process can increase the pawn loans reference market, and we have already completed investments to be ready to catch this opportunity. In the plan, we have assumed gold price to be flat. Any increase of the commodity would be positive in terms of loans growth. Kruso Kapital is listed on the EGM segment, and in case of M&A, we have one more option to our bow that is listed paper that can be used. Today Banca Sistema holds 70% of Kruso Kapital. So in the plan horizon, we expect growth in average loans of 14.2% or 10.5% on a pro forma basis, including the acquisition in Portugal. In terms of adjusted income margin, we expect an increase in the yield by approximately 150 basis points by 2026. Let's now talk about capital in slide 23.
This is one of the pillar of the plan as we want to further optimize capital position through targeted actions on existing assets in our balance sheet to reduce capital absorption. The capital managerial buffer we expect by the end of the plan amounts to approximately 150-200 basis points compared to the target TCR threshold, including the countercyclical reserve expected between 2024 and 2025 and equivalent to EUR 25 million-EUR 30 million. How to use it? It can be used to invest in short-term assets, for example, factoring to private sector, which have short durations, or to make accretive acquisitions, for example, in pawn loans business. The buffer will give us also the possibility to invest in digital transformation, for example, generative AI, digitalization of the processes, and/or give more flexibility on shareholders' remuneration. Moving to next slide. It's worth to highlight the ESG activities.
We assign the coordination of ESG activities to risk and sustainability department. As far as the credit sustainability, we will support the green transition of companies by assigning ratings produced by third parties. We will also take actions to increase diversity and continuously monitoring the gender pay gap. As for artificial intelligence, we will make investments to support Board of Directors, IR, and marketing activities with a multilanguage approach. We will improve data analysis to support lead origination. We will optimize pricing process, and finally we see positive outcome to improve recruitment and evaluation processes. We also see positive implications for compliance and risk management functions as through AI, we can make remote KYC and improve fraud prevention. We can do data analysis on clients and debtors' behavior to reduce default risk. Finally, we see room to improve back-office activities, simplifying and accelerating the processes.
We are now moving to the final part of our presentation. In slide 26, you can see the financial targets and KPIs. Average net customer loans and Superbonus to 2026 are expected to grow at a CAGR 2023-2026 equal to 4% thanks to the positive trend in factoring and pawn loan business. Total gross income, which do not include the contribution from treasury, are expected to grow by a CAGR 2023-2026 equal to 9% thanks to margin recovery, positive contribution from the CQ division due to Backbook amortization effect. In terms of marginality, adjusted income margin is expected to grow by about 1 percentage point. In slide 27, we show our expectations in terms of funding mix with a rebalance between retail and wholesale funding, with the latter expected to represent 31% of the total.
As for cost of funding at the end of the plan, we expect to be pretty in line with 2023 level. We would like to remind you that in the first quarter 2024 results just presented, we showed a cost of funding of 3.6%, so we expect that it may slightly decrease at the end of the plan. In slide 28, we show the contributions of the different divisions that will allow us to grow total income from EUR 103 million to EUR 149 million and net income from EUR 16.5 million to EUR 33.8 million. All divisions will make a positive contribution compared to 2023. It should be noted that the CQ division will also contribute EUR 7 million to the profit growth compared to 2023 when it made a loss of EUR 11 million.
We expect factoring to exceed the record profits of 2023, as well as pawn loans to continue to grow thanks in part to the acquisition we are making in Portugal and which in 2023 generated profits of about EUR 1 million. Group RORAC then is expected to rise from 8% in 2023 to 16% in 2024. It should be noted that RORAC is calculated on the basis of a TCR capital benchmark of 15%. From a capital perspective, moving to slide 29. We estimate that profits generated in the plan horizon can more than offset RWA growth. Capital relief actions should, according to our projections, free up 150-200 basis points of capital, which will give us more financial flexibility for our core business and investments. In our plan projections, we have assumed a dividend payout at 25%.
In slide 30, we have the group's financial KPIs, which predict CAGR 2023-2026 growth in total income of almost 13%, adjusted income margin improvement of one percentage point, cost/income ratio expected to fall from 61% to 57% against CAGR 2023-2026 growth in operating costs of almost 7%. These dynamics will increase profit from EUR 16.5 million to EUR 33.8 million with a CAGR 2023-2026 growth of 27%. RORAC then is expected to rise from 8% to 16%, ROE from 9% to 15%. Cost of risk in slide 31 is expected to slightly increase from 17 to 19 basis points at the end of the plan due to the actions we will take aimed at mitigating credit risk. Total capital ratio and CET1 ratio are expected to be 18.5% and 15.3% respectively.
Regarding the remuneration policy, we expect to be able to distribute EUR 18 million cumulative dividends over the plan period, which compares with the EUR 16 million distributed over the previous plan period. We therefore are planning to increase dividend payout by +10%, but at the same time, we expect to be able to increase capital by almost 250 basis points vis-à-vis 2023 level, which means that by the end of the plan, we will have higher managerial buffers, which will give us higher financial flexibility.
Thank you all for your attention, and now I leave the floor to my principal, Gianluca Garbi. Please go ahead.
Well, let me thank my avatar, which is being created with the use of artificial intelligence, and now let's turn to the Q&A session.
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 telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone with a question may press star and one at this time. The first question is from Luigi Tramontana of Banca Akros.
Good afternoon. Many thanks for the presentation of your three-year business plan. Some questions to reconcile the different parts, the different moving parts of your plan. Starting from the assumptions, I see that you expect a reduction of the average three months' Euribor of about 140 basis points in the plan horizon, while your funding costs compared to Q1 this year should be down only 85 basis points. So why is that? Why do you think that your funding costs will be higher than the average Euribor at the end of the plan?
You said that you are remixing your funding sources. Is it due to a longer duration or are there other elements? Second question is on your evolution of the CQ division into a full retail division, where you are planning a very significant boost in terms of margin, of gross margin, some 170 basis points of higher income margin. Can you please give us some details given that the competition level in the retail arena is pretty higher than the niche markets where you have been concentrated up to now? How do you plan to activate the different agreements there, and how will the distribution be realized given that you don't have a branch network? Do you plan distribution mainly digitally based, and how do you think to develop in this direction?
Then on the factoring business, which will remain your main, your core activity, you expect a reduction in the gross margin of about 30 basis points in the plan horizon, so much less than the evolution of the official rates. Once again, do you have any details that you can share with us regarding this element? And finally, regarding your capital optimization, which are the actions that you are going to take there, you said that you are going to increase the collateralization of your lending book. Can you please give us some details? Thank you.
Thank you. Let me start to answer some of the questions, then I leave the floor to Ilaria. I will start with the second question about the CQ business. The driver for the increase of the yield actually is not because of the more third-party product, but it's simply because currently, 80% of our asset, of our outstanding, is related to the backbook portfolio. 20% is the new portfolio. At the end of the plan, it will be the other way around. So we will have only 20% of the old portfolio, while the 80% is represented by the new portfolio. And the new portfolio is coming in with a yield that is above 5%. And that's the reason why this change of mix between backbook and new portfolio will increase the overall yield. While the other product, which by the way, are going to be distributed through our existing network of agents and already started to be distributed.
Already last year, we really had several million EUR of personal loan that has been secured through our network of agents. We already started with the mortgages. The reverse mortgages are starting in these days. And leasing or long-term rental are products that our network agents are able to distribute. This is something that is going to contribute less than EUR 1 million over the period, so it's not going to be the main driver of the change of yield. So the main driver is the fact that the old portfolio is going to mature and decrease with a small tail at the end of the third year. And the new coming-in portfolio has a much higher yield, and these two components make the different mix. In terms of the factoring business, the small decline of 20 basis points, taking into consideration one big part that is part of the LPI.
As you can appreciate from the slide number 16, 70%-75% of our revenue has been already addressed. Part of this revenue is coming from LPI that we already have accumulated over the period. So EUR 59 million is the amount of LPI being accumulated, and we expect that EUR 22 million will come through the PNL from those municipalities that a few years ago went to conservatorship and one after the other are coming out from conservatorship. And these LPI, which have not been going through our PNL, are coming through the PNL and will positively contribute to the cumulative revenue of the factoring.
So despite the fact that there will be some decreasing of the yield in line with the market interest, there is this safe box that we have accumulated over the period of the years that are all these municipalities in conservatorship that little by little are coming out from this situation, and they are going to pay the LPI. And this is only done when they come out from the conservatorship. I would say that this is a prudent assumption because we assume that only a small portion of the municipality will exit, even though based on the aging, probably there will be more. But we have assumed only EUR 22 million coming from that.
In terms of capital relief, we are working in different directions, insurance that can be used for some of the product starting from the CQ that can be reassured and release further the capital consumption, so reducing from the current 35% to a lower RWA thanks to that, as well as private factoring where, thanks to the credit insurance, can have a lower consumption of capital. The cost of funding, which was your first question, actually, I will leave it to Ilaria, but in a nutshell, it's because we have assumed that the reduction of interest rate will start from the half of this year. But our term deposit that has an average duration of 15 months has been in our book, and therefore, before our average cost of the deposit will start to go down, it will take some time.
That's the reason why we have assumed a prudent reduction of the cost of funding. Then, of course, it will depend also on the ECB and so on. So if there will be a much sharper reduction or faster reduction compared to what is the situation today, probably our cost of funding can become even lower. But just to be on the safe side, we remain with the assumption to be conservative and to maintain pretty much the same cost of funding. But I will leave maybe Ilaria to further comment on all these four questions.
Yeah, sure. I'll add a couple of details to what Gianluca has mentioned regarding the cost of funding.
First of all, in terms of basic assumptions, if we look at page 14, where we highlight a few assumptions underlying our projections, it's true that your IBOR, three-month Euribor, is expected to decrease over the plan horizon, definitely in terms of Euribor point in time, which means at each year-end. But if we look at the average Euribor for each financial year, we can see that, for example, in 2024, the average three-month Euribor is expected to be higher than the average three-month Euribor in 2023 because the pace at which the rates cut are expected to occur is different from the pace at which rates have increased during 2023. So in a way, just looking at these figures, it's kind of natural that also from, say, a wholesale component, average funding cost for 2024 is higher than average funding cost for 2023, which is exactly the case.
As Gianluca mentioned during the core presentation, we have already announced that in Q1 2024, average funding cost was at 3.6% compared to the 2.8% prevailing in 2023. In general, so I cover a couple of other details so we can, say, finish in terms of funding and cost of funding. As you can see from the presentation, our funding structure will continue to be well-balanced between retail and wholesale sources. The retail funding, however, will remain the predominant source of funding over the plan horizon, although the wholesale component will slightly increase from the lowest level that we have seen at the end of 2023. So our average funding cost will basically be driven by the evolution of the retail funding cost. Within each component, so retail and wholesale, we do not expect any significant changes in terms of specific funding sources.
As you know already, we will reimburse the full TLTRO during 2024 ahead of its final expiry in December. In terms of cost of funding, if we compare 2023 and 2026, the average cost is about flat, so 2.8%, and we end up at 2.8% again in 2023. However, in the trajectory up to 2026, we will have an increase in the first part of the plan horizon and then a decrease. The funding cost will peak at 3.6% in 2024 and then slowly start to decrease down to 2.8%.
In terms of the reason why the retail funding cost will slowly adjust to the evolution of market rates, the reason is exactly what Gianluca mentioned, that we have got some bulk of retail funding stock that has an average funding cost take-home rate higher than even current market rates, and that will have an impact up to 2026.
Many thanks.
As a reminder, if you wish to register for a question, please press star and one on your telephone. Once again, if you wish to ask a question, please press star and one on your telephone. The next question is a follow-up from Luigi Tramontana, Banca Akros.
Yes, sorry. Just a brief follow-up on the LPIs that you booked in 2023 to understand how this compares to the EUR 22 million you named just some minutes ago. Thank you. Ilaria, do you want to take maybe with more details?
Yeah, sure. The EUR 22 million that Gianluca mentioned is just a portion of the LPI component that will be recorded in the PNL over the plan horizon. This is just an abstract of the EUR 159 million of LPI which have been already accrued but have not been recorded in the PNL yet. This EUR 159 million stock is composed on one side by LPI accrued on positions that are related to municipalities in conservatorship, which by our accounting policy are not eligible to be accrued in PNL.
Another portion of that contribute to the EUR 159 million stock is the component of LPI accrued already so far in terms of accessory rights that have been already accrued on the positions we have in the balance sheet that have not been recorded in PNL because our accounting model allows only for a limited portion of accrued LPI to be recorded in PNL. You know that more or less we account for a little bit more than 50% of accrued LPI in PNL. The remaining part will go to PNL either on a cash basis or on an accrual basis if there is going to be any change to the model.
So the EUR 22 million that Gianluca mentioned is a portion of this EUR 159 million stock that will be recorded in PNL, which are related to LPI accrued on positions related to municipalities in conservatorship, which as of 31 December 2023, so end of 2023, amounted to EUR 105 million, and which at the end of the first quarter 2024 amounted to EUR 88 million.
Thank you.
To give you another information, is that the city that entered into conservatorship, there was a peak from 2016 to 2020. And since 2020, there is a continuous reduction in terms of number of cities that enter into conservatorship. So looking at the future, because there are this peak from 2016 to 2020, the period that usually is a five-year period will get to the end. Therefore, when they exit the conservatorship, these will be treated like all the other cities, and these will start to pay the LPI. We already had experience from that, and so I would say it's natural to see this LPI to come through to the P&L.
Many thanks for the clarification.
The next question is from Davide Rimini of Intesa Sanpaolo. Good morning.
Thank you for the presentation. I have a few questions, if I may. The first is on the slide 19 and more specifically on the CAGR that you have assumed in terms of turnover in the factoring, whether you might this 1.5%, whether you might add few words versus historical performance, which, if I'm not mistaken, has been stronger than that.
The second question is regarding, so far as I understand, out of the last few quarters, a stronger component in terms of activity has come from the Ecobonus trading activities. And I just wonder whether you might add a few words extrapolating out of the financial target how much it will come from that activities. The third question would be instead, if you could highlight whether sort of out of this EUR 34 million net income target, there is any contribution in terms of treasury activities. And lastly, sort of a bit of a follow-up on the cost of risk assumption over the plan. Thank you.
Let me start, and then I leave to Ilaria to further elaborate. In terms of the turnover, the base where we start 2023, we said that this has been inflated by some big ticket that happened at the end of the year. So this EUR 5.6 million is not the average outstanding of 2023, but is end-of-the-year outstanding 2023. And therefore, there was a big ticket that took place actually at the last few days of the year, which, by the way, we have already collected the full amount. For this reason, the number may look conservative at 1.5%, but on average, we see a trend slightly less than in the past, but not much less than in the past, okay? So it's simply because we look at end-of-the-year data, and at the end of 2023, we have this big ticket.
The Ecobonus , as I mentioned in the slide 16, almost all the Ecobonus has been already acquired. So these are assets that are already in our book, and they will be paid in the next remaining three years. Then I will leave it to Ilaria to quantify what is the contribution coming from the next three years. I will also leave to Ilaria the comment on much of the treasury activity and cost of risk.
Thank you, Gianluca. So we'll start from Superbonus. The bulk of contribution to revenues for the Superbonus will occur in 2023 because in 2024, we'll have the peak in terms of exposure to these credits. And then over the plan horizon, year by year, we'll sell down our exposure until we'll have zero exposure remaining in 2027. Overall, in terms of cumulated contribution, gross revenues from this product will be around EUR 50 million over the three-year plan horizon.
Thank you.
Then in terms of, sorry, contribution to the treasury activity, can you just please repeat the question because I missed the first part of it?
I was wondering whether perhaps sort of I don't know whether sort of I missed. Out of the EUR 33.8 million, the EUR 34 million net income target, if there is any contribution, whether sort of you could quantify the contribution coming from activities in treasury.
Yeah, sure. Okay. So in terms of net income, yes, definitely. The net income, the EUR 33.8 million represents the full consolidated net income for the group. So it should be read in terms of comparison vis-à-vis all the results that we have communicated so far. So it does include the component of the treasury activity.
We have to say that in terms of projections, we have been quite prudent in terms of forecasting revenues from the sales activity on the government bonds because with respect to 2023, the current size of the government bond is much lower than it was last year because, as you remember, we sold down a good portion of the held-to-collect portfolio in the last quarter of 2023. Therefore, revenues should be definitely lower than what we have registered in 2023. Then I wouldn't really go farther than that in terms of giving out details, but do not expect a huge contribution as we had last year.
Thank you. The last question was the cost of risk.
Yeah, the cost of risk will slightly increase in 2024 with respect to 2023 where we marked the bottom of cost of risk. Then it will increase a little bit in 2024 and then decrease down to reach around and to settle at around 20 basis points over the last part of the plan horizon. So definitely, if we compare this three-year plan vis-à-vis what we have commented regarding the average cost of risk of the initial times, we have definitely lowered the bar in terms of average cost of risk.
Thank you.
The next question is from Fabrizio Bernardi of Bestinver .
Sorry. It's Intermonte, not Bestinver. In any case, I may missed a part of the call at the beginning. I was wondering whether you may give us other details about the M&A activity of Kruso Kapital. I know that the business plan that you presented today is on a standalone basis, but maybe you may give us more color about the potential extension of the company in the pawn brokering system. Thank you.
Okay. So in the plan, we only included the acquisition in Portugal, which, by the way, received the green light from Bank of Portugal and Bank of Italy last Friday. Now we only need to wait the three months of creditor opposition that is due by the law in Portugal in order to finalize the acquisition. Thanks to the action we are taking on capital relief with the creation of this managerial buffer that you can see in page 23 as well as in page 29, we will create over 50-200 basis points of this managerial buffer that we can use in different ways. We can either simply reduce the sales of receivables that we are used to do every year, in particular with private factoring, and this will generate revenue and use it for them, use it for acquisition, in particular in Kruso Kapital if we see opportunity, or we can increase the remuneration to shareholders.
The current assumption underneath the plan is the 25% distribution of the net income. But clearly, this managerial buffer that we are going to create will allow us to be flexible and use it in a different way in order to increase the return. We continue to scout the European market to see if there are opportunities for Kruso Kapital. Sometimes those opportunities are portfolio acquisition. And so in this case, there's no any M&A activity. And so we can easily finance it through the yearly P&L. Or if there are opportunities like the one that we have seen in Portugal where we are going to end up the first banking operator in the Portuguese market for pawn, we have enough capital to make those acquisitions.
Maybe I can add a top-up in other questions, if I can. I mean, you have a dividend policy that is not, let's say, very aggressive in terms of payout on one side. On the other side, you answered now that there is an M&A appeal for a part of the business. So my question is that if we have to take this for granted in terms of the business plan, as you said.
The second question is a question that I asked probably even during the conference call of the last quarter about the calculation of RWAs because there are other banks that I mean, this is not my question, to be honest. It's something that some clients were asking about how you feel comfortable about the way you calculate RWAs.
Yes. In terms of dividend policy, the assumption under the plan, as I said, is the 25% distribution. Then clearly, we are retaining this 75%, and we also create this managerial buffer. So if you look at slide 29, you see that the autofinancing, which is retention of dividend, represents 250-300 basis points. Then the capital initiatives are under 50-200 basis points. The increase of volume in terms of average outstanding will absorb from 150-200 basis points.
So basically, we have room to do M&A, to increase further the asset with the short duration in order to be compliant with the idea that this is a managerial buffer, or to increase the distribution of dividends that we cannot rule it out. And as you have appreciated also last year, we have increased to 37% the dividend payout while we have maintained we have increased the CET1 ratio. In terms of calculation of RWA, since the introduction of the new definition of default, we had, at the beginning, inspection from Bank of Italy. I think that we align the application of these rules with the expectation of the regulator. Looking at our balance sheet, you can appreciate that in 2021, 2022, we have an increase of overdue due to the application of this new definition of default.
For this reason, we feel confident that we have been compliant with the interpretation of the regulator. On that point, if you compare the overdue by player in the market, you can appreciate that probably our overdue since the introduction of the new Definition of Default versus the outstanding has been much higher than probably all the other market players in our segment of activity with Public Administration. That is a fact that comes from balance sheet. In terms of interpretation, it's always interpretation. But as I said, I feel confident that after having followed the inspection of Bank of Italy, that at the beginning, one year after the application or the introduction of the new Definition of Default, we feel to be compliant with what are the expectations.
Okay. If I can ask something else, do you see any other, let's say, headwind in terms of regulatory capital coming in the next couple of years? I mean, what I'm asking is that you have a very comfortable capital position, and you have a very, let's say, conservative payout policy. So my question is that if we may expect your capital to be even increasing versus today.
Well, certainly, there is the introduction of the new CRR that reduces the that we are waiting the publication of the Official Gazette . But this will have an effect on 2024 with the neutralization of the negative return on government bonds. But over the plan, in any case, it does not have any effect. It is worth to say that while you look at the percentage, we have also to look at in absolute term.
In absolute term, our managerial buffer is EUR 25 million-EUR 30 million. With EUR 25 million-EUR 30 million , which is the absolute term, clearly, this can be the size that it can be used for M&A. It's a matter of also absolute number that we have to consider. If we have to make an acquisition and we don't want to go to shareholders to ask for money, we need to envisage how much can be the size of an acquisition. To think about EUR 20 million, EUR 25 million, EUR 30 million, I think that this can be something that it can be in our scope of a potential acquisition. Clearly, if there's not going to be any acquisition, we can use it as a dividend.
But we like to keep ourselves as flexible as possible, not to create expectation, and to remain conservative and make sure that we are able to take all opportunities that we find in the market if there would be any. Or otherwise, I mean, our shareholders would be more than happy to receive certainly more dividend.
Okay. Thank you very much for the answer.
For any further questions, please press star and one on your telephone. Mr. Garbi, there are no more questions registered at this time.
Okay. So thank you very much to everybody. We will have the next call for our semiannual results. Have a good day.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.