Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Banca Sistema nine months 2023 results conference call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Christian Carrese, Head of IR of Banca Sistema. Please go ahead, sir.
Good afternoon, everybody, and thank you for joining the Banca Sistema nine months results conference call. I'm Christian Carrese, head of IR, and I'm here with Banca Sistema CEO Gianluca Garbi and Banca Sistema CFO Ilaria Bennati. Before leaving the floor to the CEO, I would like to remind you that you can find the press release, presentation, and all the key figures on the website www.bancasistema.it. Please, Gianluca, go ahead.
Thank you. Thank you, Christian, and good afternoon to everybody. We are happy to announce the first nine months result, which are in line with the guidance that we gave in the previous quarter, which foresaw a second half profitability in line with the first half of this year. I think that it's worth to highlight that we have reached this result strengthening the balance sheet, where we have an increase of 40 basis points in the CET1 ratio and 100 basis points in the NPL coverage ratio, and strengthening also the liquidity position, which is well above the minimum regulatory requirement ratio. In terms of commercial performance, looking at the same slide, number two, the performance of factoring has continued to grow on a double digit in the first nine months, which is up 13%.
The pawnbroking loans outstanding have also increased at 13% on a year-on-year basis, while the CQ outstanding decreased by 13% also on a year-on-year basis due to natural redemption of the loans and more selective approach in terms of origination. From a P&L perspective, the net interest income was weak due to the higher cost of funding linked to the IR rate and larger liquidity buffer. This higher cost of funding has been transferred in full only to the factoring and the pawnbroking activity. On the other hand, the cost grew in the third quarter at a lower pace than the previous one, and cost of risk was absolutely under control, referred to 18 basis points, thanks also to the lower NPLs. The total assets were pretty stable on a year-to-date.
There was a positive mix effect on funding in favor of more sticky technical instruments, in particular term deposits for individuals, mainly outside of Italy, while the wholesale funding now represents 34% of the total funds. In the previous quarter, it was 43%. As for the government portfolio, we have reduced the size by EUR 150 million in the quarter. Moving to the next slide, we showed the breakdown of loans outstanding for factoring division, which marked growth in non-recourse loans up 15%, while a slight reduction in tax receivables and recourse loans. In terms of obligor, there was an increase in local healthcare organizations and corporates vis-à-vis a decrease in state central administration. Exposure to public administration accounts now for 75% of the total loans.
Moving to slide four, the CQ outstanding went down by 13%, as I said before, and we were more disciplined in the new production, which dropped half on a year-on-year basis. So since the beginning of the year, we have originated EUR 131 million, while for the same period last year, we originated EUR 273 million. As for pawnbroking business, the turnover grew by 13%. More and more transactions are now also finalized through digital application. We remind that pawnbroking is also a business that has very low capital absorption, or almost zero, as the collateral is 90% represented by gold. Now, I leave the floor to Ilaria to describe more in detail the balance sheet and the P&L evolution. Thank you.
Thank you, Gianluca Garbi, and good afternoon to everybody. Let's turn to slide five, where we start with comments on the balance sheet. Looking at the table, total assets are stable compared to year-end 2022 and lower compared to Q2 2023, mainly driven by a decrease in factoring assets and in government bonds, and to a lesser extent in CQ assets. Govies portfolio booked in Held to Collect has been reduced by EUR 150 million, and its duration is now 10.9 months.
The size of the Held to Collect and Sell portfolio is pretty much unchanged, and its residual average duration is now 18 months. Its mark-to-market is still in negative territory but has improved since the end of Q2, therefore reducing the negative impact on the reserve of capital, as Gianluca Garbi will better show later. As regards to the core business assets, they stand at almost EUR 3 billion, slightly down Q&Q.
Factoring assets at EUR 1.73 billion have slightly decreased quarter-over-quarter but are still higher versus year-end. CQ loans are slightly down Q&Q and EUR 100 million lower than year-end due to a more selective approach in origination and also due to the sale of a portfolio of credits for EUR 54 million in total executed in Q2 and Q3. Pawnbroking loans have increased to EUR 117 million, confirming, as mentioned already, a sustained organic growth. On the liability side, due to banks, it is down Q&Q due to a combined effect of a decrease in interbank funding and a decrease in repos executed with institutional counterparts. Due to customer quarter-over-quarter increase, it is driven by the sustained growth of term deposits, whose stock has increased by EUR 300 million, or 17%, since the end of Q2, confirming the positive trend started at the beginning of 2023.
The growth of deposits since year-end has been almost EUR 700 million, or 48%. Debt securities Q&Q decrease is driven by lower structured funding, both for CQ ABS and BS IVA. We'll add further color on funding in the dedicated section of the presentation. Before that, we move on to discuss P&L on the next slide. Confirming the positive trend of the previous quarters, interest income has registered a solid growth also in Q3 and on a nine-month basis is up 73% year-on-year. The factoring business generated almost EUR 16 million interest income, which represents 52% of interest income of the period. The third quarter has confirmed the outstanding performance of LPI from legal action, already registered in the two previous quarters. Nine-month legal LPI in total accounts for EUR 26.7 million compared to the EUR 11.3 million in September 2022.
The breakdown is the following: accrual is worth EUR 21.8 million, and extra collection is worth EUR 4.9 million. Three components have positively impacted the accrual figure in the nine months. EUR 4.2 million is resulting from the update of the reference rate of the LPI, the ECB rate, which has been reset to 10.5% in Q1 and to 12% in Q2, as already indicated. This figure is unchanged with respect to Q2 results, and the remaining ECB rate hikes will be reflected in the LPI income in the fourth quarter. EUR 1.9 million is the accrual of the EUR 40 per invoice compensation claim. As already indicated, this amount represents 53% of the value of the credit which you have claimed so far, and also this figure is unchanged with respect to Q2 results.
Finally, EUR 1.2 million is resulting from the update of the accrual rates and time value that we regularly do in the third quarter on the basis of the outcome of the backtesting process. The strong performance of LPI was coupled with a higher contribution of new commercial credits originating, carrying much higher yield than in the past. Indeed, new commercial credits, excluding pharmaceutical receivables in Q3, have been originated with a price gross yield of 7.4%, which compares with a price gross yield of 4.5% in Q3 2022, although with a shorter funding period than in the past. The repricing of new credits will carry on over the next quarter. VAT credits have improved both in terms of contribution to P&L and price yield, and they have improved also vis-à-vis last quarter, although they continue to have a dilutive effect on the margins.
Overall, factoring margins set at 6.3% in the first nine months, which is up from 5.9% in the first half and, of course, also up from the 4.6% at year-end. Factoring margins are expected to increase further over the next quarter thanks to the new origination activity. Also, in Q4, we'll see further increasing in the margins. In the CQ space, the interest income contribution in absolute terms is slightly up versus last year, and also the adjusted income margin is higher, also thanks to the sale of a portfolio, which, as we said, we performed in Q2 and Q3. However, although new credits are originated at a higher yield than in the past, as the vast majority of CQ assets in the portfolio, which carry a fixed rate, were originated before 2022, the average yield of the stock is much lower than the dedicated funding cost.
The future trajectory of the CQ average margins will depend on the relative weight of the new loans on the stock outstanding, which will be a combination of both the pace of the new origination activity as well as the amortization of the old portfolio. Moving on to pawnbroking, its contribution continues to be robust and on a growing trajectory, also thanks to the quick repricing of the yield of the loans outstanding quarter by quarter due to the short original duration and to the fact that at each renewal, the contractual rate gets reset. Indeed, pawnbroking margins have added another 20 basis points since June, reaching the current 19.2% compared to what it was, the 15.9% in September last year.
As a result of the described dynamics, consolidated gross margins of the three businesses stand at 5.7%, which is up from 5.4% in June and, of course, significantly up compared to last year. To complete the total income picture, quickly going back to the top chart on interest income, the item Other, which is now worth EUR 37 million, includes, among others, EUR 20.4 million from Govies portfolio, which was EUR 2 million last year, and EUR 10.8 million from the SME loans, which was less than EUR 5 million again last year. We now move on to the total income on slide seven. Despite the remarkable increase in interest income, total income is down 10% year-on-year due to lower net interest margin. Net interest margin decrease is driven by higher interest expenses, which have grown by EUR 17 million year-on-year following a sharp increase of the funding cost.
Funding cost that was equal to 2.7% for the nine months compared to 2.4% in the first half of 2023 and to 0.2% in the nine months 2022. The cost of funding has continued to increase over the next quarters, but we believe it's not far from reaching its peak in 2024. Net commissions are up 24% year-on-year, mainly thanks to higher pawnbroking commissions. Other income is up year-on-year thanks to better trading results on the govies portfolio, equal to EUR 2.8 million, while gains from the sale of factoring and CQ assets are stable and with a combined value equal to EUR 3 million. From the bottom pie charts, you see that the relative contribution to total income of the three businesses is pretty stable quarter-on-quarter, as a significant change occurred, as we have widely commented, in the past months.
The factoring contribution to total income is now 81% compared to 66% last year. Pawnbroking contribution has slightly increased to 20% from 18% in June and from 13% last year. On the other side, the relative weight of CQ to total income contribution has become negligible due to the already discussed suboptimal yields of its assets. We now turn to comment on costs quickly on page eight. Total costs are up year-on-year by 5%, mainly due to all other expenses having increased by EUR 3 million year-on-year, driven by higher IT expenses, higher marketing costs, and higher costs related to the legal collection. Cost increase is also due to the consolidation of the subsidiaries Art-Rite and ProntoPegno Greece within the Kruso Kapital universe. Personnel expenses, on the other side, have decreased year-on-year as a consequence of lower provisions for variable compensation.
Let's now move on to slide nine. In the third quarter, the sustained increase of retail funding has continued with the retail component reaching 66% of total funding, up from 57% in June. It's interesting to comment the evolution of retail funding since year-end 2022. With respect to that, not only the amount of retail funding has increased in size from, as you can see, EUR 2.07 billion to EUR 2.53 billion, but also its composition has significantly changed. Indeed, while in December, out of the, say, EUR 2 billion, the funding from physical individuals was EUR 1 billion, as of the end of Q3, the funding from individuals is EUR 2.2 billion with a total net inflow over the period of EUR 1.2 billion. As indicated already, we have switched most of our funding from corporates to individuals, as the latter is by far more stable than the first.
Retail funding is composed in large majority by term deposits, EUR 2.12 billion in total, of which the foreign component accounts now for EUR 1.7 billion, which is equivalent to 76% of total. Also, in the fourth quarter, the bulk of net inflows occurred through online platforms abroad, and the average take-home rate was higher than what we had witnessed in the first part of the year. Indeed, the average take-home rate on deposits in Q3 has been 4.5% compared to 4% in Q2 and to 3.2% in Q1. As far as the duration is concerned, the average take-home duration was 17 months, which is slightly less than 21 months registered in Q2. Overall, the residual maturity of the total outstanding stock is now 14 months.
On the back of higher take-home rates and following a higher weight of new deposits raised in 2023 out of the total stock, the retail funding cost is expected to increase further by year-end and to peak in 2024. Wholesale funding cost has increased as well in line with the rise of market interest rate, but is expected to remain stable over the next months in line with the revised expectations of ECB hiking campaign having reached the end. So overall, as mentioned before, the average cost of funding has increased to 2.7% for the nine months. We confirm our expectations for the average cost of funding for the year to reach 2.9% in line with our previous forecast. Compared to market rates, we're still raising funds at a negative spread. For the nine months, the spread over 12-month Euribor has been minus 110 basis points.
We now turn on to slide 10 to discuss asset quality. As highlighted by Gianluca, gross NPL has moved down quarter-over-quarter, driven by a decrease in past due and UTP, although coupled with a minor increase in bad loans. The UTP decrease is related to a single exposure to the same factoring counterpart, which had determined the increase in UTP in Q2. Gross NPL ratio is down year-over-year and stable Q-over-Q at 9.5%, while net NPL ratio has decreased also quarter-over-quarter from 7.7%-7.5%, also thanks to a higher NPL coverage ratio. Cost of credit risk is confirmed lower than in 2022, now at 18 basis points compared to 28 basis points in the nine months last year. I now hand the floor back to Gianluca for the final remarks.
Thank you. I'm now in slide number 11. The CET1 ratio, the total capital ratio, has improved on a quarter-over-quarter basis, as I mentioned before, at 11.9%-12.3% and from 15%-15.4% respectively. It is worth to highlight on this front the positive action that has been undertaken also to keep the RWA pretty stable. Actually, it's slightly down. The positive impact of earnings and lower held to collect and sell reserve, which passed in the quarter from -EUR 31.8 million to EUR 28.5 million. This reserve has further improved on quarter to date to EUR 24.5 million. Taking into account the short duration of the portfolio, where actually most of the portfolio will expire in August next year, while the overall duration is 16 months, we expect, regardless of the movement in interest rate, that there will be a further recovery in the coming months.
We also like to remind that the package of reform of the Basel III regulation that will most likely be published at the beginning of next year, if not even before, will allow the neutralization of all or part of the Held to Collect and Sall reserve on government security. So as soon as this change will enter into effect, there will be an immediate positive impact on the capital ratio. If we assume a full neutralization of Held to Collect and Sell reserve as of September, the capital ratio would stand as follow, with the CET1 ratio at 13.6% and total capital ratio at 16.7%. In the last part of the year, we expect a similar trend as we register in the last few quarters with the factoring pawn loan division to compensate the still weak revenue from the CQ division.
We don't exclude that in the last part of the year, we may complete other disposal of factoring or CQ portfolio and also potential upside that could come from the government portfolio with the further reduction. As also we highlight in the press release that has been issued today, we also start the process to build the new three-year business plan, which should be able to present to the market on the first half of next year. Let me thank you, everybody, for your attention. Now we can switch to Q&A session. Thank you.
This is the Chorus Call conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. To remove yourself from the question queue, please press star and two. We kindly ask you to use the handset when asking questions.
Anyone who has a question may press star and one at this time. The first question is from Luigi Tramontana with Banca Akros. Please go ahead.
Yes. Good afternoon. Thanks for the presentation. First question on my side is regarding your capital position. If we assume the neutralization of the Govies reserve, you're going to have a pretty strong capital position. You never enjoyed that historically. Given this new capital position, what are your thoughts regarding the use of this capital? Would you rather think to better remunerate your shareholders to accelerate your organic growth, or may you consider some acquisitions, and if so, in which businesses? And also on capital, do you have any update on the possible listing of Kruso Kapital? Second question is on the guidance. Thank you for the updates you gave us on the funding cost. My question is rather on the operating costs.
Do you have any estimate of the impact of the new labor contract in the sector for next year? And do you think you have any levers you can move to compensate this increase, given that your cost income ratio is rather high? Thank you.
Thank you. So about the capital position, correct, we will have a stronger capital position. Consider the high return that we are able to generate, for me, the priority will be to growth and to make acquisition, in particular, in the pawnbroking area where there are possibilities not only in Italy but, in particular, outside the country. This is something that we continue to explore. And with also the digitalization, we launched, and I think that is important, very important, last week, the first service at domicile.
This is you're going to see in the Italian generalist television of Fininvest Group, the advertisement starting next week. People will be able to do the ProntoPegno from home. So we are going to collect directly the asset from their house, which is going to enlarge the use of this product. This is something that we will be able to launch also in other jurisdictions. That's the reason why our priority is to try to expand as much as we can this product and to make it more a normal product rather than only a niche product. Clearly, if there will be, at the end of any process, spare capital remuneration to shareholder, of course, is not ruled out. We will continue to maintain. This is a priority. As I said, in terms of the process, first, we try to use the spare capital for acquisition.
If we don't find anything, of course, we have to return the money to our shareholder. In terms of listing, we started the pilot fishing. The expectation is still that the Kruso Kapital will be listed by year-end. I'm positive based on the first contact we have so far, also with the potential anchor investor. Due to the size that we are placing to the market is not substantial. And the pickup of this product is significant. But clearly, we are at the early stage of the process in terms of pilot fishing. But everything is going ahead. In terms of guidance, as I said, in the last part of the year, everything will be in line with the first part of the year.
As Ilaria mentioned before, the operating cost has been partially improved also to the variable component that we have decreased because while the company continues to produce profit, the profits are below the previous year. The employee will be rewarded based on the reward also of the shareholder. The variable compensation will go down. In the impact of the labor contract, clearly, the new labor contract is not being finalized yet. Probably next week, it will be the time. Based on the first information we have, our impact in the next two years will be about EUR 700,000, so EUR 350,000 per year. It's not a huge impact because most of our employees will absorb in the current salary the increase. This is the impact. But let's wait and see what is going to be the final outcome of the new contract.
And then we will be able to be more precise. Now, these estimates are simply driven by information available, which are probably not the full package.
As a reminder, if you wish to register for questions, please press star and one on your telephone. For any further questions, please press star and one on your telephone. Mr. Carrese, there are no more questions registered at this time.
Okay. I don't know if anybody else. Okay. So if there are no more questions, thank you very much all for joining the call. We are available for any question you should have. You have all the contacts at the end of the presentation, press release. So feel free to call us. Thank you and have a nice weekend.
Thank you. Bye.
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