Good afternoon. This is the Chorus Call Conference Operator. Welcome, and thank you for joining the Banca Sistema 2023 First Half Results Conference Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Gianluca Garbi, CEO of Banca Sistema. Please go ahead, sir.
Thank you very much. Good afternoon to everybody. I'm as usual on the call with Ilaria Bernacchi and Carlo Di Pierro. As usual, I will make reference to the slide that has been made available to the participants. Starting from the slide number 2, let me start by saying that in this environment, we have registered a very good commercial performance. The factoring turnover was up 18% on a year-on-year basis, almost EUR 2.5 billion, with growing gross margin on a month-by-month basis. The CQ spending is down on a quarter-on-quarter and on a year-on-year basis, with negative net interest margins once we deduct the cost of funding relative to the business division. Then on this point, Ilaria will comment further later on this point.
The pawn loan reached EUR 113 million in terms of outstanding, with an increase of 15% on a year-on-year basis, with constant growth on a quarter-on-quarter basis. Looking at the P&L, the net interest income is equal to EUR 35.8 million, which is down due to the higher cost of interest expenses, which is more than compensating the year-on-year increase in interest income, which is 55% on a year-on-year basis. The cost of funding has reached 2.4%, which is higher on a quarter-on-quarter. As you may recall, last year, the average cost of funding was 0.4%. The total income is equal to EUR 49.4 million, so up at 10%. The cost of risk is 19 at this point. The total operating costs are EUR 35 million, and the net income is equal to EUR 7.5 million.
The wholesale funding component is down at 43% in terms of total fund, mainly due to the lower interbanking activity, while the retail component is up in absolute terms due to the higher stock of term deposits mainly collected outside of Italy. The total assets have reached EUR 4.6 billion and are up on a quarter-on-quarter basis. As additional information, during the board on the 21st of July, the bank has decided to approve the sale up to the total outstanding of all the government bonds held in the HTC Portfolio that had a nominal value of EUR 666 million at closing on the 27th of July, of which EUR 541 million, so almost the total amount, has a realized profit of EUR 13.5 million, while the remaining portion, which is about EUR 110 million, has a realized loss of EUR 3.1 million,
So resulting overall in a net profit of EUR 5.4 million. This transaction will be carried out by the end of the year, depending on the market condition and most likely in different tranches during the course of the remaining part of the year. The disposal of the portfolio will allow the bank to reach a higher liquidity buffer as a proportion of assets and at the same time generating also positive results based on the current market condition. The CET1 ratio is at 11.9%, and the total capital ratio is at 15%. If we exclude the reserve on the HTC Portfolio and sale portfolio, the ratio will become 13.3% and 15.5%. I will comment later on that this is mentioned simply because we expect the neutralization that will take place by year-end based on what has been approved at the level of European trilogue of discussion.
Moving on to slide number 3, as you can see, the factoring stock, so not only the turnover but also the stock, has been increased on a quarter-on-quarter basis due to this higher volume, in particular in May and June, with the majority of the turnover generated in the business without recourse. The factoring division, as you may recall, is also offering for our factoring client only financing granted by the government, which has increased on a year-on-year effort of 73%, where we basically originated the first half of this year at EUR 72 million. Although we have originated good tax receivable volume in the first half of 2023, looking at the pie by product comparing to last year, the outstanding has been reduced simply because several tax receivables that we have purchased have been repaid, and therefore, the outstanding has been decreased despite the growth of the turnover.
Moving to the slide number 4, commenting on the other product, the CQ stock is down on a year-on-year basis, and the main driver is also the sale of a portfolio of EUR 35 million that happened on the second quarter of this year. As you remember, we are focusing today in direct channels where we originate directly, and we don't buy portfolio unless there is a smaller portion. The pawn loan business keeps growing on a year-on-year, on a quarter-on-quarter basis, and increase the turnover as well as the outstanding. Now I leave the floor to Ilaria for more comments on the result.
Thank you, Gianluca, and good afternoon to everybody. Let's turn now to slide five, where we comment on the balance sheet. Looking at the table, total assets have increased compared to year-end 2022 and also compared to Q1 2023, mainly driven by factoring assets. Govies portfolio is likely down quarter-on-quarter, and the average duration is also down. Indeed, the residual average duration of the HTC Portfolio in-house portfolio is now 19.8 months, and the HTC Portfolio portfolio has a duration of 11.6 months, and its mark-to-market at quarter-end was positive by EUR 1.9 million. As regards to core business, we have that loans at amortized cost stand at EUR 3.07 billion and is likely up quarter-on-quarter. In particular, factoring receivables, which stand at EUR 1.8 billion, have increased by 20% versus year-end and also quarter-on-quarter.
CQ loans are down quarter-on-quarter due to the sale of portfolio credits in June for an amount of EUR 35 million, and pawn loans are up, confirming the sustained organic growth. On the liability side, we have the B2B is stable quarter-on-quarter as a combined effect of an increase in interbank and an increase in repos executed with institutional counterparts. B2C customer quarter-on-quarter increase is driven by the massive growth of term deposits from individuals, whose stock has increased by EUR 375 million since the end of Q1. Debt securities quarter-on-quarter increase is driven by higher structured funding, both Schuldschein and ABS. As usual, we'll provide more comments on funding later on in the presentation. We now move on to the next page to discuss P&L.
First off, interest income is up 65% year-on-year and is also up quarter-on-quarter with a higher contribution from factoring, which generated almost EUR 45 million interest income. Factoring now represents 54% of total interest income. Higher year-on-year contribution by factoring is largely driven by a sustained increase of LPI from the collection, which is now equal to EUR 20 million compared to EUR 6.8 million in June 2022. The breakdown of LPI is the following: accrual is worth EUR 16.4 million, and extra collection is worth EUR 3.6 million. I'll give you a few more details on the EUR 16.4 million accrual. Two components have positively impacted the figure. In particular, EUR 4.2 million resulting from the update of the reference rate for the LPI, which has been reset to 10.5%, up from 8% since the 1st January 2023, and to 12% since the 1st of July 2023.
1.7 million is the accrual of the EUR 40 per invoice compensation claim, which we have started to account for in this quarter. This amount, the EUR 1.7 million, represents 53% of the value of the credit, which we started to seek for so far, which is worth EUR 3.2 million. Further increase of LPI rate following the rate hikes will be reflected in future quarter figures. Strong performance of LPI was coupled with a higher contribution of new commercial credits originated in the quarter, carrying much higher yields than in the past. Indeed, new commercial credits excluding pharmaceutical receivables in Q2 have been originated with a price gross yield of around 7%, with respect to a price gross yield of 3.3% in Q2 2022, although with a shorter funding period than in the past. The repricing of new credits will continue in the second part of the year two.
On the other side, VAT credits, confirming what has already been observed in Q1, had a lower contribution to P&L and continue to have a negative effect on margins. Overall, factoring margins set at 5.9% in the first six months, up from 5.4% in Q1 and, of course, also up from 4.6% at year-end. As said, margins, overall factoring margins, are expected to increase further over the next quarter. In the CQ space, the interest income contribution in absolute terms is likely down versus last year, but the adjusted income margin is higher, also thanks to the sale of the portfolio carried out in the second quarter. Although the new credits are originated at a higher yield than in the past, for example, new CQ loans originated in Q2 have a gross yield of 5.2% compared to 2.6% a year ago.
However, as a vast majority of the CQ assets carried a fixed yield that was set before basically starting the hiking campaign, the average yield of the stock is lower, much lower than the dedicated funding cost. The future outlook of the CQ margins will depend on the relative weight of the new loans on the stock outstanding at the end of the next quarter. Moving on to pawn loans, its contribution continues to be in line with expectations on a growing trajectory. Indeed, the margin is now 19% compared to 15.9% in the first half last year and compared to 16.4% at year-end. This business has by far the strongest stability of repricing the contract quarter by quarter, also thanks to the short renewal duration and to the fact that at each renewal, the economics get reset.
As a result of these five dynamics, consolidated gross margins among the three business lines stand at 5.4%, significantly up compared to last year. We now move on to total income on the next slide. First off, total income is down year-on-year due to lower net interest margin. The net interest income decrease is driven by higher interest expenses, which registered an increase in absolute terms of almost EUR 42 million year-on-year, following a sharp increase of the funding cost, which was equal to, as Gianluca mentioned, 2.4% compared to 0.1% in the first half 2022. The cost of funding is definitely on a growing trajectory and has not reached its peak yet. At year-end, it was 0.4%, and at the end of Q1, it was 2%.
Net commissions are 45% up thanks to higher premium commissions and also due to the different accounting of CQ commissions, as already described in previous course. Other income is likely up year-on-year and includes EUR 0.1 million gain from the sale of a factoring portfolio and EUR 1.1 million gain from the sale of the CQ portfolio. In addition to that, it includes a better trading result and a growth portfolio equal to EUR 1.3 million. From the bottom pie chart, you see that the relative contribution to total income of the three business lines has changed significantly versus a year ago. The weight of factoring is now much higher, contributing for 81% of total income compared to 66%.
Pawn loans contribution has also increased to 18%, while on the other side, the relative weight of the CQ is much smaller than in the past, as its gross margin has been heavily penalized by the stock outstanding, as we said, yielding much lower rates than current market rates. Given the longer duration of the CQ asset, the repricing process of these assets taking it far more time than for the factoring and the pawn loans. Let's look at costs on the next page. Total costs are up by 12% year-on-year, mainly due to all other expenses having increased by EUR 3.3 million year-on-year in absolute terms, driven by higher net provisions for risks, higher IT expenses, higher marketing costs related to the advertising of our funding campaign in Italy, both for the current accounts and the term deposits.
The cost increase is also due to the consolidation of the subsidiaries of Kruso Kapital, meaning Art-Rite and ProntoPegno Greece. Personal expenses are only marginally up year-on-year, mainly as a consequence of the fact that there was a higher-than-expected release in the first half last year of the bonus related to 2021. Let's now move on to slide 9 on funding. As you can see from the top chart, the wholesale retail mix has changed, and the retail funding has reached 57% of total funding, up from 50% at the end of Q1. As discussed already during the last earnings call, the reduction of retail funding in Q1 was only temporary and was part of a strategy to reduce the funding from corporate accounts, both in the form of current accounts and term deposits, and to replace it with more stable funding from individuals.
On the deposit side, the reduction of corporate deposits had been entirely replaced by March by deposits from individuals, in their majority through the foreign channel, while on the current account side, the reduction of the corporate current accounts had been temporarily replaced by interbank funding, with the aim to repay the interbank gradually as the stock of term deposits would increase. This has been achieved, indeed, in Q2. The stock of deposits has increased from EUR 1.44 billion to EUR 1.52 billion just over a quarter, leveraging on higher rates offered and on a dedicated marketing campaign, and that has allowed for reimbursed interbank funding and also other forms of wholesale sources less convenient from a cost standpoint. The bulk of new deposits were taken on through online platforms abroad, and one aspect to highlight is that the take-home duration was much higher than in the past.
Indeed, the average take-home duration was up from 14 months to 21 months through increasing the residual maturity of the outstanding stock from what was 12 months to the current 15 months, in line with our funding strategy. As regards to the cost of funding, the increase in the cost of all instruments, wholesale and retail, has continued, as we mentioned, over the second quarter. The retail funding cost has been slower to adjust at the end of last year, but over Q1, it has started to rise sharply and increase as continued in Q2. The new take-home rate, to give you an example, the new take-home rate on deposits in Q2 has been 3.7% compared to 3% in Q1.
On the back of the recent adjustment to interest rates, both on deposits and current accounts, and following the higher weight on the overall stock of new deposits rate raised in 2023, the retail funding cost is expected to increase further over the year. On the other side, also, the wholesale funding cost is expected to rise in line with the growth of market interest rates, but at a lower pace than they once seen in the recent past. As mentioned before, the total cost of funding has increased to 2.4% for the first half, and we expect the average funding cost for the entire year to reach 2.9%, in line with our previous forecast. However, despite the increase, we are still raising funds at a negative spread over Euribor.
With respect to the average per month Euribor, our funding cost in this semester has been with a spread of minus 130 basis points. We now turn to slide 10 to discuss asset quality. Gross NPEs has moved up quarter-on-quarter, driven by a significant increase in unlikely to pay, which has not been entirely compensated by the decrease in past due. The UTP increase is due to a single position related to a factoring counterpart, with the majority of the exposure guaranteed by SACE. The cost of credit risk is down at 19 basis points compared to 29 basis points in the first half last year. I now hand the floor back to Gianluca.
Thank you. I move to slide number 11. The CET1 and total capital ratio are respectively equal to 11.9 and 15%, which are slightly down due to the increase of outstanding. These include EUR 21 million of equity allowance and reserve of a portfolio of government bonds. As you know and I anticipated before, among the valuation changes that are part of the package of the Basel III regulation, there will be the neutralization of the equity allowance sale portfolio reserve on government bond security, which has been approved by the European trilogue meeting. This change will come into effect with the publication of the official gazette, which is predictably going to happen by the end of the year. As Ilaria mentioned before, the duration of our portfolio is 19.8 months, while the neutralization will cover a period of three years.
So we'll cover the full period of the duration of our portfolio. For this reason, if we consider the neutralization with the data of the June data, the CET1 ratio will move from 11.9 to 13.5, and the total capital ratio from 15% to 15.5%, which are under 50 basis points. In the second half of the year, so basically for the full year, the overall result will be affected by the ability of our sector division and Kruso Kapital for the pawn loan to make up for the CQ contribution, which at the total income level is virtually nil, as the cost of funding is exceeding the return on the portfolio, which has been originated before the hiking of interest rates, as Ilaria mentioned before.
The net result could be positively affected also by the possible sale up to the total amount, as I mentioned before, of the government bond portfolio that has a realized gain of overall more than EUR 5 million. If we only consider the majority of the portfolio, 550 out of 256, the gain could be up to EUR 13.5 million. I will finish here, so I will leave the floor for questions.
This is the conference operator, Global MeetingPlace, the question and answer session. Anyone who wishes to ask a question may press star and one on your touchtone telephone. To remove yourself from the question queue, please press star and two. We ask you to use the handset when asking questions. If anyone has a question, may press star and one at this time. The first question is from Christian Carrese from Intermonte. Please go ahead.
Hi. Good afternoon. Thank you for the presentation. My first question is on revenues. Could you provide us the outlook for the second half of the year, and how should we look at the different moving parts of the revenues? I mean, as far as I understand, there could be some capital gain on the financial portfolio, on the government portfolio, but on the net interest income, what do you expect? I think that in terms of cost of funding, we should still see some quarter with a higher cost of funding, but on the asset side, what do you expect, in particular on factoring, if you will be able to increase the rates on that item? The second question is on capital. I presume you will free some capital by next year, thanks to also regulation and the disposal of some GOVs.
Which area do you think is where you want focus to invest the additional capital to grow revenues? And finally, on cost, if you can provide us guidance for the full year 2023.
Okay. Thank you for the question. I will comment on the GOVs portfolio, and then I will leave then maybe to Ilaria for more comments where the trend of the value struggle. As I said, there will be this goodwill. That is coming from the sale of the portfolio. This goodwill could be used eventually even to consider the sale as part of the CQ if there would be the condition. So not all will necessarily become part of the P&L. This is something that we have to see what are the market conditions and so on. But then I will leave to Ilaria to comment on the NII on the value struggle and the cost of funding. And then I will comment on the capital.
On the NII, we see NII at the end stable or slightly higher. Let's say stable, more than higher, with respect to what we have registered in the first half of the year. As mentioned, we see the cost of funding to go further up in the second part of the year, but we believe that revenues will be able to offset the increasing funding cost. Not all revenues, of course. The trend that I described earlier on regarding the different ability of the three products to reprice, we continue to hold also in the second part of the year. So on one side, factoring and leasing would be able to reprice the purchase and the origination of new loans, while CQ, well, CQ, as mentioned, will still be able to reprice even if credits have been originated at much higher yields, but the weight of the new credits with respect to the outstanding stock is non-significant. So in relative terms, the outstanding stock weighs much more than the new loans. So we'll have to wait for time to come before the new CQ loans would be able to have a significant impact on average margins in the CQ space. On the other side, as we said, the factoring and leasing have been able and will continue to be able to reprice and to compensate CQ margins.
So really, the upside for the second part of the year will rely on factoring and leasing to more than compensate the implicit loss or the implicit margin loss that we have in the CQ space. The base case is for net interest income to remain stable with respect to what we have registered in the first part of the year, which means that the increase in cost of funding will be coupled with an increase in revenues. In terms of cost, the outlook for the second part of the year is for the cost base to remain stable with respect to what we have seen in the first semester, which means it can double more or less the cost base up to year-end.
In terms of the free capital, the free capital can either be used through acquisition, in particular in the space of pawn broking, where there are some ongoing potential transactions on that space. It can also be used to eventually set a higher target in terms of total capital ratio, CET1 ratio, at least a part of it, and it can be also used as an increase of the payout depending also on what is going to be our new three-year business plan. As you may recall, we have the three-year business plan that is expiring this year. So at the end of this year, we have to put forward a new plan, and in the new plan, there will be new initiatives connected to the plan, and we will decide at that point where to allocate this spare capital.
Very clear. Thank you.
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Okay. There's no further questions. So let me thank the banks for your attendance, and let me wish you a happy holiday to all the ones that will take time in the day off. Thank you. Goodbye.
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