Good afternoon, this is the conference call operator. Welcome, and thank you for joining the Banca Sistema Full Year 2022 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. Good afternoon to everybody, and as usual, I'm here with Carlo and Ilaria. Clearly, let me start by saying that since the last conference call, we have now started to see the signal coming from the new monetary policy that the ECB has put in place. Starting from the commercial performance, we are pleased to say that the factoring turnover was up 22% on a year-on-year basis, which is clearly better than the market as a whole. That is also the record year in terms of total turnover that exceeds EUR 1 billion. The secured funding has remained stable at EUR 933 million, in line with our plan to maintain this level, and most is, if not all, coming from the direct origination.
The portfolio, which 107 million in terms of outstanding, with an increase of 19% on a year-on-year basis, which represent a constant growth in terms of turnover as well as, contribution margin, of the business. Looking at the P&L, the net interest income is equal to EUR 85.4 million, which is up 4% on a year-on-year basis.
Clearly, we are sure we can leverage on higher net contribution from factoring per loan for the next months and quarter, considering also that the factoring business will register a positive increase due to the higher level of the late payment interest threshold, starting from the first of January, 2023, has now moved up from 8% to 10.5% of rate as a consequence of the higher ECB rate. On the other hand, the leasing net contribution cannot be positive, in particular for due to the older portfolio of the stock, which is a fixed rate. This portfolio will expire over time and will continue to be replaced by new volume originated at the higher yield.
The funding cost is stable on a year-on-year basis at 0.4%, even though in the last part of the year, clearly there was an increase of the cost of funding that will continue on the following year. The total income is equal to EUR 105.9 million, which is minus 2%, so pretty much stable. The resulting is influenced by lower income from the sales of the CCT portfolio and lower trading margin from government bond, which is something that even during the last conference call, I already anticipated that we were not in a position to sell the CCT portfolio at this new level of interest rate, as well as the mark-to-market of the current bond portfolio do not allow any gain that we have done always in the past.
The lower cost of risk remained at 29 basis points. The total operating cost is equal to EUR 64.2 million, which is pretty much stable, as the cost-to-income is also stable. The net income is equal to EUR 22 million, corresponding to a rate of 13.3%. The wholesale funding is up on a quarter-on-quarter basis and represents 45% of the total funding. The Group, the Bank was able to maintain a strong liquidity position with the liquidity coverage ratio, LCR, at 271%, which is up on a year-on-year basis. The Net Stable Funding Ratio and the leverage ratio are equal to 133% and 5% respectively.
The total assets is equal to EUR 3.4 billion, which is up on a year-on-year as well as on a quarter-on-quarter basis. The total ratio is at 13.6%, and the total capitalization is at 15.9%, and that is the transitional reference, which is up on a quarter-on-quarter basis. Moving to the next slide with a few more details. As you can see, the factoring stock is lower, even though the turnover was much higher, but that is due to the strong collection of the tax receivable.
This year, in particular, this segment has registered on one end, a very strong growth in terms of turnover, and part of the older portfolio of tax receivable, as well as a part of the recently acquired tax receivable, has been reimbursed by the tax authority. Moving to the slide number 4, as you can see, the CQ turnover, excluding the portfolio that we acquired from Banco BPM, was substantially driven by direct origination. We are continuing to work on the strengthening of agent and intermediary network. Our brand of QuintoPuoi, that we are using in the branch, which is part of our strategy, continue to grow and our presence is becoming more and more visible.
The pawn business is growing on a quarter-on-quarter basis. In October 2022, we have opened a branch in Athens, and we also purchased Art-Rite, an auction house, in line with our business plan. Considering that the auction house has a lot of things in common with our pawn loan business, and we expect important growth also on that part. As you probably have seen, today, we also have announced that we have started with the process of the IPO of Kruso Kapital. So all our pawn broking and auction house business, which has been approved yesterday by the board, by the company, and today by Banca Sistema, approved as well.
We believe that there will be an important space for growth in the market, not only in Italy, but also abroad. We expect that we will see the proceeds coming from the IPO, where only a minority of the company will be placed into the market to continue with acquisition of activity, in particular, outside of the country. Now, let me leave the floor to Ilaria to comment on more in detail the result.
Thank you, Gianluca, and good afternoon to everybody. We now move on to slide 5, where we make some comments on the balance sheet. As you can see from the table, total assets are up 19% versus year-end 2021, mainly due to the increase in the growth portfolio. Indeed, the growth portfolio is now slightly less than EUR 1.3 billion and is up quarter-on-quarter, with an average duration of 18.4 months, lower than last quarter. Mainly thanks to the reduced duration of the held-to-collect portfolio, where the additional EUR 400 million bonds are all floaters. The residual duration, average duration of the held-to-collect portfolio is now 1 year. The held-to-collect and sell portfolio is stable quarter-on-quarter, with a lower negative mark-to-market.
We will provide more details on the level of the reserve later on when we cover regulatory capital. As regards to core business, we have that loans at amortized cost stands at EUR 2.85 billion and is likely down quarter-on-quarter. In particular, factoring assets have likely decreased year-on-year, influenced by a sharp decrease quarter-on-quarter, due to a sustained collection of tax receivables, as Gianluca mentioned just before. On the other side, SME loans outstanding, which is run by the same factoring division, increased year-on-year and also quarter-on-quarter. CQ assets are stable versus year-end, and term loans are up 19%, confirming sustained organic growth. On the liability side, we have the due to banks quarter-on-quarter decrease is driven by a reduction in both short-term ECB funding and interbanking.
We currently hold EUR 514 million TLTRO. This figure is unchanged, and further to the announcement by ECB of changes to the rates of the program, we have not changed our initial plan to keep it outstanding for the whole 2023. Due to customers, quarter-on-quarter increase is driven by the increase in repos related to the quarterly growth of the COVID portfolio and the increase in current accounts. Also, in December, we have drawn a EUR 66 million credit line from Cassa Depositi e Prestiti, using the portion of our portfolio of state-guaranteed loans as collateral. The credit line has an average maturity above 3 years. The securities quarter-on-quarter decrease is driven by lower funding through ABS. We now move on to the next page to discuss P&L.
We start from interest income, which is up 4% year-on-year, and is also up quarter-on-quarter, with a higher contribution versus last year from term loans for EUR 1.9 million. EUR 1.9 million is the difference year-on-year. And from SME state-guaranteed loans and tax credit for Superbonus for an additional contribution of EUR 4.3 million vis-à-vis last year. Factoring accounts for EUR 56.6 million of total interest income, and represents a relative share of 56% in line with the nine months, but lower year-on-year.
Lower overall year-on-year contribution by factoring is mainly due to weaker factoring LPI from the collection, which is now equal to 15.2%, and is down from the 21.5% million, excuse me, EUR 15.2 million, and is down from the EUR 21.5 million in 2021. Breakdown is the following: The accrual is now worth EUR 9.1 million, while extra collection is worth EUR 6.1 million. There was a sale of LPI in Q4 worth 400K. The 400K is the net contribution to PL- to P&L related to the sale. Lower contribution from legal LPI was partially compensated by extra-judicial collection of LPI, which has registered revenues for EUR 9.4 million, up from the already strong level of 2021....
A good diversification effect was also provided by tax receivables, which have registered a good performance, both in terms of origination of new credits, as Gianluca mentioned, as well as PNL contribution. To be mentioned, again, is the accelerated pace of collection in the last quarter, as already highlighted. As a result of the different performance among the various factoring segments, full-year factoring income margin stands now at 4.6%. This is up in the second half of 2022 compared to the first half, but it's slightly down year-on-year. Over the quarters, we've managed to adjust margins on commercial receivables in line with the new interest rate environment, but not enough to completely offset the impact of the weak performance of LPI with respect to the past year, which mainly explains the year-on-year reduction in factoring margins.
To a lesser extent, a higher weight on credits portfolio of tax receivables, which typically carry a lower margin compared to commercial receivables, has also contributed to a margin reduction. However, for 2023, we expect to be able to further charge higher discounts on by receivables, such that the overall factoring margins should increase. In addition to that, the LPI rate has increased, as Gianluca mentioned, on the back of the increase in ECB rate . So since the first of January, LPI rate is now 10.5%. So also thanks to this adjustment, the contribution of LPI to income generation should get back to levels more in line with past results.
In the CQ space , the income contribution is slightly down versus last year, and the interest margin stands at 2.2%, mainly impacted by what should be the final tail of the prepaying dynamics, and also by pricing reduction occurred in the first part of the year. Also, 2021 margins had been positively influenced by a sale of assets that had generated a significant capital gain, which was impossible to achieve this year to the same extent, given the different interest rate environment. Moving on to the term loans, its contribution continues to be in line with expectations on a growing trajectory. The interest income contribution for the year has been EUR 7.8 million, up from the EUR 6 million in 2021.
The margins, including commission income for EUR 8.3 million, are now 16.4%, which is up year-on-year and also quarter-on-quarter, thanks to the continued repricing of the contracts carried out quarter by quarter. We expect further margins increase over the next quarters, in line with the increase in market interest rates. So overall, total adjusted income margins have been positively impacted by higher interest income contribution from other assets, mainly a significant guaranteed loans carrying from Superbonus and government bonds. Specifically, interest income generated by SME loans is EUR 7.1 million, compared to EUR 4.4 million in 2021. Income from Superbonus was EUR 1.8 million, compared to almost zero, basically zero in 2021, and the government bonds contribution was EUR 5.3 million.
So as a result, total adjusted income margin is lower year-on-year, but stable quarter-on-quarter, expected to increase considering what we just said about the ability to reprice the yields on most asset classes. Now, we turn to slide 7 to comment on income. 2022 total income is slightly down year-on-year due to the lower other income. Net interest income, 4% year-on-year increase, is driven by the increase in interest income just described, while interest expenses were flat. Net commissions are slightly up year-on-year, thanks to the higher term loan commissions and lower than expected CQ negative commissions in the third quarter, due to the revised accounting treatment of fees paid to agents, which we have commented in the last call. On the other side, other income is significantly down year-on-year.
This includes EUR 2.2 million gain from the sale of a factoring portfolio and EUR 1.5 million gain from the sale of a CQ portfolio . The sale of the CQ asset had contributed for EUR 3.7 million in 2021, as the sale was executed for a bigger size than in 2022. We had already anticipated in previous calls that it would have been very, very unlikely to sell any assets in the second part of the year, given the higher interest rate environment, and so it was. Also, the contribution of the Govies portfolio to other income was down with respect to 2021, although the portfolio has contributed more to the NII than last year, as commented already. In the pie chart below, we show the user breakdown of the total income contribution of the three core businesses.
The weight of the factoring business relative to the others is slightly lower compared to a year ago, accounting now for 67% of total income with respect to 60%. Also, the leasing has seen its relative share decrease. The difference has been covered by the term loans, whose weight in total income has increased from 11% to 14%. Now, let's discuss costs on page 8. Total operating costs are slightly up year-on-year, mainly due to net provision for risk. In particular, personnel expenses are stable year-on-year, if adjusted by extraordinary items worth EUR 2.4 million. These items include, among others, EUR 1 million higher than expected release of the bonus pool relative to 2021 fiscal year. All other expenses are EUR 3.5 million up year-on-year, of which EUR 2.8 million is related to net provision for risk.
Let's now look at funding on next slide. The wholesale retail mix has remained unchanged with respect to the last quarter, with a 45-55 split. In the wholesale component, there has been an increase in repos, as already commented, related to the government's increase, and the drawdown of the new credit line from the CDP that have more than compensated a slight decrease in the year funding and the reduction in interbank funding. In the retail space, we have registered a minor decrease in term deposits and an increase in current accounts. Our average cost of funding is flat year-on-year at 0.4%, but constantly up quarter-by-quarter. In the first part of the year, our cost of funding, which is flat with 0.1% in June, and since then it has taken an increasing path, with a sharp rise in Q4.
Our well-diversified funding base allowed us to absorb the increase in market rates with a limited impact on our interest expenses in 2022, which, as we said, remained flat vis-à-vis the previous year. More in detail, the retail funding cost set at 0.6% at year-end, down from 0.7% the previous year, despite the fact that we had to increase retail interest rates in the second part of the year. In particular, we increased the rates offered on term deposits in October and December, both in Italy and abroad, and also the rates on current accounts. On the wholesale side, the increase in cost has been material, from the lowest level of -0.6% in June to the highest of 0.1% in December.
As we said, the net effect of these dynamics for 2022 was a flat cost of funding, but in terms of outlook for 2023, we expect the cost of funding to increase as many of our funding instruments will reprice. We now turn to slide 10 to discuss asset quality. Nothing too relevant to report in terms of asset quality. As you can observe in the graphs, gross NP is down quarter-on-quarter and also year-on-year, driven by the decrease in past due. We highlighted that the figure for bad loans includes exposure to cities in conservatorship, which is the EUR 144 million figure shown in the bottom left table. Net bad loans without cities in conservatorship amount to EUR 4.3 million.
Cost of credit risk in 2022 stands at 29 basis point, down from the 14 basis points in 2021, which, as you remember, was impacted by the more recurrent provisions on the provision vis-à-vis a city in conservatorship. The 29 basis point is indeed more in line with our usual cost of risk. I now hand the floor back to Gianluca.
Thank you. Let me briefly comment on the capital. So the fully loaded core tier one total capitalization as at the end of the year, which includes EUR 24.7 million of the held to collect and sell reserve from government bond portfolio, is lower on a quarter-on-quarter basis. On a quarter-on-quarter basis, credit RWA decrease is driven by factoring business, mainly by lower exposure to corporate and lower past due. The capital position is well above the regulatory requirement, and when after the three-leg process of Basel III that is taking place at the level of the European Parliament, we've approved the Ecofin proposal to sterilize the held to collect and sell reserve, our capital position will be even better and better. Thank you, and now I leave the floor to the question.
Thank you. This is the call conference operator. We'll now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from Manuela Meroni with Intesa Sanpaolo. Please go ahead.
Good afternoon, and thank you for taking the questions. The first one is on the cost of funding. Could you please share with us what you are expecting in terms of cost of funding for 2023? You mentioned that the cost of fund, cost of deposit, is repricing quicker compared with the assets. So when do you expect that this effect to reverse, and so when do you expect the NII to increase on quarterly basis? The second question is on the TLTRO. If I understood correctly, you are not going to reimburse the TLTRO. I'm wondering if you want to pre-fund the TLTRO during 2023, although you are not going to reimburse it. The third question is related to your loan portfolio.
Loans declined by five percent quarter-on-quarter, mainly on factoring business. Maybe you mentioned something during the call, but I didn't get it, so if you can please repeat why loans declined on quarterly basis and what you are expecting going forward. The fourth question is on the Lexitor ruling. The Italian Constitutional Court took a decision in December. I'm wondering if you expect some impact on your consumer credit business. And finally, I'm wondering if you feel comfortable in giving us, giving us a guidance on the full 2023 in terms of revenues and net profit. Thank you.
... Thank you for the question. I will leave some of the question to Ilaria, but let me start to take some of that. In terms of the common repricing of the cost of funding quicker than the asset, this is mainly driven to the CQ, because the CQ has a duration that is longer for here, and no repricing the asset because it's a fixed rate.
While the other products are repricing very fast, as you can see also on the number, the average yield, sorry, the contribution margin, adjusted contribution margin in the slide number 6, looking at the factoring in September, where we were at 4.3%, and at the end of the year, that moved up already to 4.6%, and keep moving up. On the other side, on the pawn loan, you have an increase of 15.3%, then move up to 16.4%, while the CQ is, the contribution is going down, and that is the reason why all the portfolio at a fixed rate, so, and has a longer duration, so you need to reprice more.
But then I leave them it to Ilaria to comment more to that. In terms of the third question about the fact that the outstanding has been reduced. So, as Ilaria mentioned before, the main reason is, and I also said at the beginning, is because a lot of the V8 receivable that has been purchased in the past, as well as purchased during the year, has been paid by year-end, so that there was a faster collection of the receivable.
But the other reason is because we decide in order to have a proper return on regulatory capital to reduce by selling a lot of factoring that we did in favor of a private client that has 100% of the way. And so we have to change, but at the same time, we have also sold more than in the past, and we will continue to do so. Bear in mind that most of the factoring with private clients that we do is guaranteed by the insurance, and we have a platform of, a selling platform that with the other factoring and banks that buy on a regular basis. So for these two dynamics, we reduce the outstanding, that is for the fact to not increase.
Clearly, when we sell, when we receive a payment earlier than expected, the yield goes up, and at the same time, when we sell the receivable to other factoring company, we receive the upfront, the yield, by selling back, and we improve also the capital consumption. The fourth question is about Lexitor. We are taking a EUR 1.3 million provision after the constitutional court decision. Let me add, at the same time, that yesterday, the European Court of Justice on a case that has been put forward by Unicredit Group for mortgages, has resolved that the upfront fees should not be returned back.
I simplify, so the sentence is longer and complicated, but in a nutshell, the court, the same court of the same European Court of Justice, has said that for mortgages, the upfront fee should not be given back to the client. And as the same European rule that apply to any type of loan, because this is a rule in protection to individuals, is now clear that we have one sentence Lexitor by the European Court of Justice that goes in one direction, and then now we have the same European Court of Justice that for the same type of commission, has taken exactly the opposite direction.
That means, that, this will open back case, that will have to be put forward again at the European Court in order to understand what is has to be done, is one or the other. In the, the Constitutional Court, let me add, that, in their decision, while on one end they said that, it's unconstitutional, the decision by the government, that has been taken by the government, at the same time, they said that, in, that, the, the way in which the, the regulator has implemented and interpreted the, European directive, was incorrect. And so there is a responsibility, which, eventually translate in, also economic, obligation of, of returning the money to, any financial individuals that have suffered a loss.
There is a responsibility by the authority that will come up with the implementation and interpretation of the European directive. I will leave then to Ilaria to better comment on the cost of funding 2023, the TLTRO, and if you'd like to add something to other, to the other points.
... Thank you, Gianluca. Regarding the cost of funding, you covered most of the question. Just in terms of numbers, we, as you said, our cost of funding has been on an increasing path, starting from June this year. So the average cost increased quarter by quarter, and we believe— so really, this year cost of funding is not a good predictor of what our cost of funding would be in 2023. If we close the 2022 with 0.4% cost of average cost of funding, we believe the 2023 cost of funding would be more of 2%. But it would then stabilize during the course of 2023 around these levels.
In terms of the margins, to summarize what I had already, you know, anticipated during the comments through the slides and adding to what Gianluca has said in terms of the capability to reprice the various assets purchased. To summarize all of that, we can say that definitely the gross interest margin for factoring and term loans will increase in 2023. But following on from what Gianluca said, the CQ net margin could be a sort of a drag, so that the consolidated net margins outlook for 2023 should be of a stable, slightly increase in net margins vis-à-vis current levels.
In terms of the TLTRO, we are planning to reimburse the TLTRO by the end of 2023, in the last quarter of 2023. We will replace the TLTRO funding using existing source of funding. When we reimburse the TLTRO, we'll have some collaterals that will become available, that can be utilized as a collateral for diversified funding, in line to what we are already doing. I think that was pretty much all.
The next question is from Christian Carrese with Intermonte. Please go ahead.
Hi, thank you for taking my question. My question, the first question is on payback. The government is preparing a move on this issue for healthcare factoring. I was wondering if you assume any impact, potential negative impact from this new rule, if approved, and maybe it's in April, or not. And, as for 2023, in terms of cost of risk, if you can give us an outlook on what kind of level do you think it will be adequate for next year? Thank you.
Payback, I don't think that we will have any specific impact on that because the payback is always something in particular in the large pharmaceutical company that has always been the case. I think that you are referring, if I'm not mistaken, to the fact that some of the suppliers had to return some of the money back to the government.
Correct.
And, clearly, that has nothing to do with us, because when we purchase the receivables, and we have already paid the receivables, it's not an issue. In case the amount of the receivables will be reduced, in this case, we go back to the original seller, because the original seller always guarantee the existence of the credit. So in case there will be credit note driven to this payback, clearly that is something that we can go back. But I think that they are not using the instrument of credit notes, but they simply are going to charge an amount that is on the overall, on the overall payment.
Which imply that the local authority, the healthcare administration, will charge the supplier, but not relating to any specific invoice. If it's not relating to any specific invoice, this cannot be offset against invoice that we have purchased. Because we have purchased invoice, we notify the purchase of invoice, so they can net the invoice if there is anything specific to the specific invoice. So for instance, if you have an invoice for 100 pills of the whatever prescription, and then you will give the amount, in this case, this can be offset against the specific invoice.
But if this, as usually are, the payback is a full amount based on turnover and not relating to specific invoice, it cannot be opposed to the purchaser. In case we are not, that simply mean that we have to return back to the original seller and ask for compensation. Most of the amounts are, again, pharmaceutical industry. So, I, to be honest, I don't have any fear that if I turn back to Roche or Novartis or MSD, they would not be able to return the money back.
Mm-hmm. Probably if you are exposed to small companies, pharmaceutical companies, but I, I think that, this is not your case.
No, we are not exposed to small pharmaceutical companies, but usually when we purchase from smaller supplier, we don't finance 100% of the invoice amount. So we always have a buffer that we call a second installment. So we are debtor in favor of these in favor of the supplier, which means that a part if not full of this eventual amount can be easily offset by the by the second installment that is due to client from Banca Sistema. Because when we buy from Novartis, clearly from these large pharmaceutical company or large institution, we always finance 100% of the amount, net, of course, of the discount, which is our return.
But when we purchase from a smaller player, we price the invoice, but we don't pay the full amount. We pay in the region of 80, 85 or 90%, depending on a case-by-case basis, and we give back the difference when the collection will take place, so within a certain date. So that means that we have some debit that we can offset in case of a credit coming. But I doubt that this will be done on invoice-by-invoice basis, as I said. This, as they did the payback for the pharmaceutical industry in the last years, this is something that is being linked to turnover, and so this is an amount that is linked to the overall turnover and not to any specific invoice.
So the only one that has to pay for this amount are the seller, the client, and not the one that has purchased the invoice. But as far as we see... Well, let's see when these rules will be approved and how they will look like, but for the time being, I don't see any specific risk. I leave to Ilaria to comment the cost of risk 2023, our-
Yes. We do not really foresee any deterioration in our asset quality for 2023. Therefore, you can assume the cost of risk will remain stable at current levels around 29-30 basis points.
Thank you.
As a reminder, if you wish to register for a question, please press star and one on your telephone. For any further questions, please press star and one on your telephone. Gentlemen, Mr. Garbi , there are no more questions registered at this time.
Thank you very much to everybody. Have a nice weekend. Take care.