Good afternoon. This is the Chorus Call Conference Operator. Welcome, and thank you for joining the Banca Sistema First Quarter 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 0 on their telephone. At this time, I would like to turn the conference over to Mr. Gianluca Garbi, CEO of Banca Sistema. Please go ahead, sir.
Thank you. Good afternoon to everybody. I'm on the call, as usual, with Carlo and Ilaria. We continue to see signs of the change in monetary policy, but despite the environment, we have registered a very good commercial performance with a factoring turnover that was up 9% on a year-on-year basis. The CQ outstanding is almost stable, so we'll be able to replace redeemed receivables with new receivables. The pawn loan had increased 19% and keeps growing on a constant basis. At the P&L level, the net interest income is equal to EUR 20.6 million, which is stable on year-on-year. But it's important to notice that the interest income have increased 70% compared to the previous year, and similar increases also the interest expense.
The higher funding cost, on year-on-year, is at 2%, although we're, we're able to manage a very good level of diversification that Ilaria will cover afterward. The total income is equal to EUR 25.3 million, so it's up 3%, thanks to a better performance of the pawn loan, net of commission. We have a, a low cost of risk at 15 basis points, which is almost half of the same information from the last year. The operating cost is equal to EUR 18.4 million, which is up on a year-on-year basis, and the net income is equal to EUR 3.7 million, which is 0.7 less than last year. The wholesale funding component represents 50% of the total fund.
As a group, we have maintained a strong liquidity position with the liquidity coverage ratio that is almost 300% and the NSFR, and the leverage ratio that were equal to 123% and 4.9%, respectively. The total assets are at EUR 4.4 billion, stable compared to the previous period. The Tier 1 ratio is at 12%, and the total capital ratio at 15.3%, fully loaded. So as you remember, with the end of last year, the component the negative mark-to-market that we did not account in the calculation, as now went back to the calculation because of the end of the period. And most likely, the new CRR will put back these parameters to neutralize the negative mark-to-market from September based on the information that we have.
Moving to the slide number three, as you can see, the factoring stock is up on a year-on-year basis based on strong volume, in particular on the last month of March, with a little bit less turnover in the tax receivable. Very recently, yesterday, the Italian Minister of Finance confirmed that the split payment rules has been postponed, that was due to expire in June is going to be postponed to 2026, and that will, of course, contribute to the sale of tax receivable, VAT receivable, going forward. In the slide number four, as you can see, the CQ turnover is now at 100%, just direct, so we didn't buy any portfolio, like last year where we have EUR 4 million of indirect.
The new turnover is running as a definitely higher fixed rate compared to the past, even though the new component of the new loans is a small portion of the total outstanding. The pawn loan business is growing on a quarter-on-quarter basis. At this stage, I don't have anything to add. I will leave the floor to Ilaria, and then I will come back for the last part and the Q&A. Thank you.
Thank you, Gianluca, and good afternoon to everybody. Let's now look at the balance sheet on slide five. As you can see, total assets are stable versus year-end 2022. The Govies portfolio is just less than EUR 1.25 billion, and it is slightly up quarter-on-quarter with an average duration of 15.3 months versus the 18.4 months at year-end. The residual average duration of the held-to-collect and sell portfolio is now 22.7 months, while the held-to-collect portfolio has a duration of 9 months and the mark-to-market are at quarter-end, positive by EUR 1.65 million. As regards to the core business, we have that loans at amortized cost stand at EUR 2.9 billion, and it is slightly up quarter-on-quarter. In particular, factoring assets have slightly increased quarter-on-quarter influenced by a strong origination, especially, in the month of March. CQ assets are down versus year-end 2022, and pawn loans are up, confirming a sustained organic growth.
On the liability side, we have that due to banks quarter-on-quarter increase is driven by interbank growth. We continue to hold EUR 540 million of TLTRO, which is stable quarter-on-quarter. Due to customers quarter-on-quarter decrease is driven by the decrease in funding from corporates, both from current accounts and term deposits, partially compensated by higher term deposits from individuals, mainly through the foreign channels, and also by higher repos related to the Govies portfolio. Debt securities quarter-on-quarter decrease is driven by lower funding through ABS instruments, in particular the one collateralized by fiscal credits. We now move on to the next page, slide 6, to discuss the P&L development. As you can see, Q1 interest income is up 70% year-on-year, and it's also up quarter-on-quarter with a higher contribution from factoring for EUR 8.7 million.
Factoring now represents 57% of total interest income. Higher year-on-year factoring contribution was mainly due to higher factoring LPI from legal action, which is now equal to EUR 11.1 million compared to EUR 4.1 million in Q1 2022. The breakdown is as follows. Accrual is worth EUR 9.1 million compared to EUR 1.9 million in 2022, while extra collection accounts for EUR 2 million in line with EUR 2.2 million in 2022. Looking at accruals more in detail, the EUR 9.1 million income includes EUR 3.8 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 of January 2023, following the multiple ECB rate increases occurred before December 31st. Over the next quarter, the LPI rate will further increase to reflect the additional rate hikes that the ECB will have carried out by the end of June.
The next adjustment will occur from the 1st of July, so with effect on Q3 results. Strong performance of LPI was coupled with a higher profitability of the new commercial credits originated in the quarter, while VAT credits continue to have a dilutive effect on margins. Overall, factoring margins sets at 5.4% in the quarter, up from the 4.4% in Q1 last year and also up from 4.6% at year-end. In the CQ space, the income contribution is slightly up versus last year, and interest margin stands at 2.3%, stable versus Q1 2022 and also stable versus year-end. And this is due to the fact that the vast majority of CQ assets carry a fixed yield that was set before the ECB started the hiking campaign. Moving on to the pawn loans, its contribution continues to be in line with expectations on a growing trajectory.
Indeed, the margin is now 18.6% compared to 16.1% in Q1 last year and to 16.4% at year-end. The impressive growth testifies the effect of the continuous repricing of the contracts carried out quarter by quarter. As a result of the described dynamics, consolidated gross margins stand at 5%, which is up from 3.9% in Q1 and also up from 4.2% at year-end. In total margins, we also include the income from Super bonus and SME loans, with the latter registering a strong increase versus last year. We now move on to discuss total income on the next slide. Q1 total income is slightly up year-on-year due to higher net commissions. Net interest income is flat year-on-year and is the result of the strong increase of interest income just described and an equally high increase of interest expenses.
The cost of funding reached 2% in the quarter, while it was 0.2% in Q1 2022 and 0.4% for the whole 2022. We will add more comments on funding costs and its outlook, in the section dedicated to funding. Net commissions are slightly up year-on-year thanks to the higher pawn loans commissions driven by higher credits outstanding as well as by the repricing. Other income is slightly down year-on-year, and it includes EUR 0.2 million gain from the sale of a factoring portfolio and the flat contribution of the govies portfolio. From the bottom pie charts, you see that the relative contribution to total income of the three businesses has changed considerably versus a year ago.
The weight of factoring and pawn loans relative to CQ is much higher now compared to a year ago because the gross margins of these two products have increased, while the gross margin of CQ has been heavily penalized by the stock outstanding yielding much lower rates than current ones. Given the longer duration, the repricing process of these assets takes indeed far more time than factoring and pawn loans. We now turn to page eight to discuss cost. Total operating costs are up year-on-year mainly due to net provisions for risk, higher IT expenses for Kruso Kapital, and the consolidation of the auction house Art-Rite and the subsidiary of Kruso Kapital in Greece. Personal expenses are up year-on-year as a consequence of higher than expected release of the bonus pool relative to 2021, which had occurred in Q1 2022.
We now move on to the next slide on funding. As you can see from the main chart, the wholesale retail mix changed slightly, reaching now a 50/50 mix, while at the end of, of last year, the retail funding was prevailing with a 55% share. The wholesale component quarter-on-quarter increase was mainly due to higher interbanking and repos and more than compensated the decrease of the collateralized funding due to the reduction of tax receivables ABS. I think it's important to share more details about the reduction of retail funding over the quarter. This reduction is part of a strategy to reduce the funding from corporate accounts and to replace it with more stable funding.
Indeed, in an increasing interest rate environment, corporates are more likely to adopt an opportunistic approach to cash investment, perhaps switching from one deposit to another according to the rates offered, therefore jeopardizing the stability of funds. With that in mind, we decided to manage a reduction in funding from corporates, both in the form of current accounts and term deposits, with the aim to replace it with funding from individuals. On the deposit side, the reduction of corporate deposits has been entirely replaced with an increase in deposits from individuals, in large majority through the foreign channel. On the current accounts, the reduction of corporate current accounts has been temporarily replaced by interbank funding, but the strategy is to further increase term deposits abroad and in Italy, leveraging on higher rates offered and on dedicated marketing campaigns.
As regards to the cost of funding, we've registered an increase in all instruments, wholesale and retail. The retail funding cost has been lower to adjust at the end of last year, but over Q1 has started to rise sharply. The new take-home rate on deposits in Q1 has been 3.2% compared to the 2.6% in Q1 in Q4, sorry, 2022. On the back of recent adjustment to rates, both on deposits and current accounts, the retail funding cost is expected to increase from this quarter. Also, wholesale funding cost is expected to rise in line with the growth of market interest rates, but at a much lower pace than the one seen in the recent past. We now turn to slide 10 to discuss asset quality.
In terms of asset quality, this quarter has confirmed a positive trend started in 2022 with decreasing gross NP driven by a further decrease in past due. The cost of risk for the quarter was 15 basis points. I now hand the floor back to Gianluca.
Thank you. So in the last slide, 11, so the fully loaded, Tier 1 and total capital ratio as at the end of the quarter are respectively equal to 12% and 15.3% that are up on a quarter-on-quarter basis. And these include EUR 21.4 million of negative mark-to-market in the portfolio of held-to-collect and sale reserve. On the other end, our held-to-collect portfolio of government bonds has a positive mark-to-market. The capital adequacy, as I said also before, is well above our regulatory requirement. And when after this trilogue process of the Basel III change, the European Parliament will approve most likely this Ecofin proposal that neutralizes at least part of the held-to-collect and sale reserve. And in this case, our capital adequacy will further improve. That's all. So now I leave the floor for Q&A.
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 Manuela Meroni from Intesa Sanpaolo. Please go ahead.
Yes, good afternoon. Some question from my side. The first one is on deposits and cost of funding. You reduced your corporate funding, and you have claimed that you want to increase your time deposit in the retail segment by increasing interest rates offered. So I'm wondering, what is the cost of funding that you are expecting for 2023, and what is the cost of funding of retail deposits that you are expecting? The second question is on 2023 results. In the press release, you mentioned that the result is going to be influenced by some transactions. Could you please elaborate a little bit more on what kind of transaction you are referring to? The other question is on Kruso Kapital. I don't know if this is one of the transactions you're referring.
I'm wondering if the process is still ongoing and if you are expecting to cash in a capital gain from the IPO? And finally, on the split payment, is it fair to say that the split payment postponement is broadly, let's say, neutral for you as you have more opportunity to buy tax receivable while the invoices of factoring is lower than the situation without the split payment? Thank you.
Okay. Thank you for your question. Maybe I go in reverse, and I will start with the last one and on reverse and then leaving the floor to Ilaria. About the split payment, yes, it's pretty much neutral because on one end, if the split payment will have been stopped, we will have an increase of turnover of receivables business that will have an RWA on average of 30%-35% depending on which obligor. While with the split payment still ongoing, we will have more VAT receivables with an RWA at 0%. So while the yield is less in VAT receivables, the return on regulatory capital is higher on the VAT receivables because the capital consumption is zero compared to the other receivables. And we already made some hypotheses also during the last call in case of the split payment will have been stopped.
I reconfirm that we are pretty much neutral on the split payment. Maybe the timing will be different because the collection of VAT receivable it happened when people claimed the VAT credit. And this happened once a year plus a quarter-on-quarter basis, while when you buy receivable you buy maybe on a monthly basis. So this component comes in on a monthly basis. But all in all, I think that for us that we do both type of we buy both type of receivable, VAT and commercial receivable is pretty much neutral. I confirm that we are on track on the IPO of Kruso Kapital. This will not generate capital; it will not generate an additional profit because the idea is to do the transaction through a capital increase.
So, we will not sell. We don't have any intention to sell any shares, but the intention is to raise capital in order to make investment. On the second question about transactions, certainly in the pipeline, as in particular on the CQ space, we had in the pipeline the sale of a part of the CQ portfolio. This will happen partially by mid of this year and the other part by the end of the year. So this will have a positive effect in terms of revenue when the sale of the portfolio will happen. So it's not. It cannot be accounted on an ongoing basis. That is one of the transactions that we have in mind.
But I may leave also the floor to Ilaria to further expand on this point as well on your question about the cost of funding.
Yes. Thanks, Gianluca. Yes. I don't have much to add to this point regarding future transactions apart from the fact that, in addition to transactions foreseen in the CQ space, we might have transactions in the factoring space as well in line with what we have already done in the past by selling LPI stock in an opportunistic way. So only when it makes sense from a, you know, income standpoint. So these are the two key elements that might drive the net income up in the second part of the year. Regarding the first question on funding cost, we expect the funding cost to trend higher in the second quarter and in the second half of the year in general. The average funding cost for the quarter, as we said, was 2%.
We might see it higher between 2.5%-3% on average for the whole year. In the retail space, as I said, the take-home rates on deposit is going up. It moved from 2.6% in December to 3.2% in Q1 as an average take-home rate. At the moment, we are currently offering rates at a higher level than these ones. For example, we have a 24-month offer at around 4%, which might, which will, raise the average deposit cost for the year for sure. But on the other side, as I said, we are also envisaging to increase the funding on current accounts where the rate is much lower. So on average, there will be an increase definitely an increase in funding cost, but not for with the same proportion and pace that we have registered between last year and the first quarter this year.
Let me only add one point that for the time being, we were able to raise a very long-term deposit with the German citizens using the two platforms, where we were pioneering doing that. And we continue to do it. And clearly, it's not only a question of being able to have a well-diversified term deposit from individuals, but it's also the point that we are also able to get duration, which is today priced at a level that is well below what could be a price of issuing a bond for the same duration. On the other hand, the strategy is also to have the corporate represent less and less the funding for us, as a corporate may be more volatile in the future.
We believe that, with interest rate that going up, maybe more, corporate will use the money to reduce their debt, and therefore they have to withdraw the money from accounts. So we don't want to be dependent. And so the amount of corporate that we have nowadays is irrelevant or not so significant for our funding, for our business.
Very clear. Thank you.
Thank you.
The next question is from Christian Carrese from Intermonte. Please go ahead.
Hi. Good afternoon. Back on funding. If I'm not mistaken, in the previous call, you guided for a funding cost in 2023 at 2% compared to 0.4% or something like that in 2022. I see that in the first quarter, you already reached a 2% funding cost. So, there is any update for the full year? Maybe I missed your point on this. And still on funding, would you take into consideration an issue of a bond? Maybe today is too costly, but I don't know if you are planning to do so in the coming quarters. The second question is on a more strategic one on the CQS business. I see in the first quarter, the contribution was very low.
fixed rates, margin squeeze, currently, but going forward, do you see the C-CQS still creating value, for the bank, or you could, do something different on this kind of segment? Thank you.
Okay. So let me maybe repeat a little bit what Ilaria said. Our forecast for the 2% cost of funding for the year was made when the expectation of ECB increase of interest rate were 50 basis point lower than the current expectation of increase of interest rate from the ECB, which are now at the level of 4%. And for this reason, we believe that the average cost of funding for the year will be in the area of 2.5%. At the same time, we have repriced, so our factoring and CQ and pawn broking business are constantly updated with the internal transfer pricing of funding. And we are passing on this expected increase to the commercial team. So we now expect an average cost of funding to go up 50 basis point.
At the same time, this will be followed by our asset repricing at the same time. About issuing a bond, as I said before, today we are able to raise money through term deposits, in particular abroad, with also a duration above 24 months and that are on average on 30 months, which is below 4%, which is much less than what we may expect to pay if we issue a bond. We keep all the doors open, but for the time being, raising deposits with duration is cheaper than issuing a bond despite all the other positive effects of not having a bullet instrument but having an instrument like deposits that will have a much longer period of replacement.
About the CQ, the contribution of the CQ, we have on one end, we have the legacy portfolio that is what it is. So we cannot change interest rate. On the new portfolio, we are repricing higher. By selling part of this portfolio, we are able to generate additional profit. And these two component will average the two things. The idea of stopping the activity or selling the activity nowadays is simply infeasible with the current level of interest rate because it will certainly not take into consideration only the past and is not able necessary to embed the fact that the product is also repricing on the upper side and therefore averaging the legacy portfolio from the past.
So for the time being, while we continue to remain open to consolidation of any kind, we are not considering nowadays either to stop the production or to simply sell the portfolio because it's, there's no value in doing so.
Sorry, just on a follow-up on the adjusted income margin that went up in the first quarter, quite a lot compared to the average of 2022. What do you expect for the full year? Maybe I don't know if you already said about that.
Ilaria?
Yes. Sure. Yes. The income margin went up, you know, significantly. And that has regarded the factoring business and the pawn loan business. While for the CQ, as we mentioned, there have been more difficulties in transferring the increasing market rates to the stock of credits mainly due to the fact that the majority of the credits in our portfolio have been originated before the ECB started the hiking campaigns and therefore are still carrying a lower yield. You know, CQ assets have a longer duration. So it takes by far more time than factoring and pawn loans to replace old loans with new loans. As far as the factoring and the pawn loan business is concerned, the increasing gross margins will continue over the quarters.
For factoring, we said that there has been a boost due to the reset of the LPI rate. The reset has regarded the first 250 basis point hikes that the ECB carried out before December 31st last year. So there is another 125 basis point already announced and implemented that will be included in the LPI rates from the 1st of July onwards and any other additional rate hikes that the ECB will implement by the end of June. If any rate hike would be implemented after the end of June, it will be reflected in the LPI rate since from the 1st of January 2024. So the LPI index, with some kind of time lag, we've included at the end all the rate hikes, you know, implemented by ECB.
So these will continue to give a nice boost to factoring margins also for the next quarter, although really the adjustment will occur, you know, in one shot. It has occurred in one shot in Q1. And the second adjustment will probably occur in one shot in Q3. Alongside the nice performance of LPI, we have registered and will continue to register a nice performance also on the commercial receivables side. So all in all, factoring margins will increase from current levels. It's difficult to forecast by how much, but we can foresee probably between 70-100 basis points overall increase in margins by year-end. The outlook for the CQ has already been, you know, commented. So I don't have much to add to this. Just one comment on the indication and the forecast for the cost of funding.
I've double-checked my notes. I think we have indicated above 2% in the last call, not 2%, because we at the time were already envisaging a funding cost above 2%. Over the last three months, we have probably readjusted a bit higher our forecast. That's why today, we are indicating between 2.5% and 3%, just indicating that probably there is gonna be 25 to 30 basis points higher rates than with respect to what we had envisaged last time.
Okay. So basically, the commercial activity on the factoring plus the LPI update should mitigate the higher cost of funding in 2023 with a rebound in the second half of 2023. So we should see,
Yes.
Exactly. And the upside, I'm sorry.
Yeah. Yes. Just to answer in a single word. Yes. Taking into consideration also another component, that is, that is negative, but we are able to include it anyhow, which is all the parameters where we are not taking an accrual look of LPI. So we have EUR 200 million of assets that are outside the LPI, simply because they are in the area of distress with cities. And this component that represents EUR 43 million of embedded LPI will increase because the LPI will continue to increase. But because today we are not able to put it on an accrual, you have the cost of funding on EUR 200 million that keeps going up without any revenue because the LPI only goes on a cash basis. So you have some mismatching on that front.
But even taking that into consideration, we do expect that the cost of funding and the gross yield will continue to move in parallel. And so on a P&L standpoint, the two components will move in parallel, also absorbing this temporary negative effect of this part of the portfolio that doesn't generate on accrual any LPI.
Thank you. Very clear.
Mr. Garbi, there are no more questions registered.
Okay.
At this time.
Thank you very much to everybody. Have a nice weekend. We will have a new call for the next semiannual result. Thank you.