Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Banca Sistema first quarter 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, and good afternoon to everybody. I know that it's been a long day as many banks have announced their results, so we will try to be brief. I'm here, as usual, with Carlo and Ilaria. I will start looking at the slide number two that has been made available. As you can see, the factoring turnover was up 26% on a year-on-year basis, which represents robust growth, which confirms also the last quarter's very important growth that we already had. The CQ outstanding is stable on a year-on-year basis at EUR 919 million, but will grow more in the next quarter as we will finalize the purchase of the portfolio of EUR 410 million from Banco BPM that we announced in the last few weeks.
The Pawnbroking activity has reached EUR 92 million in terms of outstanding, with a growth of 16% on a year-on-year basis, which represents constant growth on a quarter-on-quarter basis. The net income is equal to EUR 20.7 million, up 6% on a year-on-year basis. The cost of funding has reached 20 basis points. The total income is equal to EUR 24.7 million, which, if compared on a year-on-year basis, is - 6%. If we exclude that in the first quarter of last year we had EUR 2.4 million of profit from trading of government bonds, the total income is up at 4%. The cost of risk is equal to 33 basis points, with a loan loss provision that is lower on a year-on-year basis. The total operating cost is equal to EUR 15.7 million, which is slightly up 2% on a year-on-year basis.
The net income is equal to EUR 4.4 million, as I said, where the impact is mainly driven from lower trading revenue, as I said before. The wholesale funding represents 37% of the total funding and is up on a quarter-on-quarter basis. The ECB funding is at EUR 540 million and is stable on a quarter-on-quarter basis and down on a year-on-year basis. The CET1 ratio is at 11.9%, and the total capital ratio is at 15%, which is well above the SREP requirement that we have in place now. Moving to the next slide, as you can see, the factoring outstanding is up on a quarter-on-quarter basis, as I said before, driven by a strong growth. But in particular, the tax refundables are back on the growth path and actually represent a growth of 48% on a year-on-year basis.
The average duration of our factoring portfolio remains at 11 months, and despite the cost of funding that, as I said before, is at 20 basis points and which remains stable at that level for the rest of the year, we have already started a repricing of our factoring portfolio. Moving to the next slide, as you can see, the CQ turnover was up on a year-on-year basis. We have registered a very good performance on a year-on-year basis of our direct component, where in the first quarter of this year, it represents 90% of the total turnover, which is more than 3 x if we compare to the previous year. So we finish our movement towards a more direct origination compared to the indirect acquisition of portfolio.
Our CQ division continues to work on the strengthening of our agent and intermediary network, and we will look at acquisition of a portfolio going forward on an opportunistic basis, as we did with the acquisition of the portfolio from Banco BPM. Also, for this product, the CQ, we have already started a repricing. Thanks to the organic growth, the ProntoPegno has registered 16% of growth, as I said before. Now, let me leave the floor to Ilaria for more details.
Thank you, Gianluca, and good afternoon to everybody. Let me start with comments on the balance sheet on the next slide, slide five. Total assets are up 8% versus year-end, and in particular, loan s at amortized cost is now EUR 2.9 billion and is up quarter-over-quarter, mainly due to factoring assets, for which the outstanding has grown 6%, confirming the positive growth trend of the past three quarters. CQ loans are slightly down quarter-over-quarter. Pawn loans are up 3%, and SME loans have a substantial increase also in this quarter, confirming the recent pattern. Govies portfolio is now equal to around EUR 780 million and is up quarter-over-quarter by around EUR 140 million, with an average duration of just less than 33 months. Due to banks have slightly increased following the increase in interbanking, while ECB funding, as Gianluca mentioned, is stable at EUR 540 million.
Due to customers' quarter-on-quarter increase is mainly driven by the increasing repos related to the Govies portfolio growth in the same period. Debt securities' quarter-on-quarter decrease is driven by the lower funding for ABS as collateral. We now move on to the next page to discuss P&L. We start from interest income on page six. Q1 interest income is lower year-on-year despite a higher contribution from pawn loans and SME guaranteed loans, equal to EUR 1.8 million and EUR 1.5 million, respectively. With EUR 13.6 million, factoring represents 58% of interest income as opposed to 64% in the first quarter last year. Lower year-on-year contribution by factoring is mainly due to lower LPI from legal action, which is now equal to EUR 4.1 million compared to EUR 6.6 million in Q1 last year. Out of the EUR 4.1 million, accrual accounts for EUR 1.9 million, and extra collections accounts for EUR 2.2 million.
There was no sale of LPI in the quarter. Within the factoring, there has been a good diversification effect among the different subsegments as commercial and fiscal receivables compensated the weak performance of LPI. In particular, fiscal receivables, as mentioned already by Gianluca, have registered a good performance both in terms of contribution to P&L as well as origination of new credits. The combined effect of the different performance among the various factoring segments is such that factoring adjusted income margin is down year-on-year, as it now sets at 4.3% compared to 5.4% in Q1 last year and to 4.9% for full year 2021. The main element driving the factoring margins down is the weak performance of LPI, which is lower than any other quarter in 2021.
The comparison versus Q1 last year is also impacted by the fact that LPI had a particularly strong first quarter last year due to one-off extra collection on a position vis-à-vis a Spanish local healthcare organization. Another element affecting the factoring marginality, but to a lesser extent, is the higher weight of revenues on revenues of tax receivables, typically carrying a lower margin compared to average factoring margins. In the secure space, interest income has been negatively impacted by the prepayment effect and by the suspension of installments and extension of the contracts at no cost following, for example, claims for redundancy fund system, which together, the two effects together, caused the income contribution to be slightly down year-on-year at EUR 4.7 million in the quarter.
Weak interest income in the first quarter will be compensated over the year by the income generated from the acquisition of the credit portfolio from BPM, which, as just mentioned, was finalized in May. As a consequence of lower interest income generation, CQ income margin is lower year-on-year. Moving on to pawn loans, its contribution continues to be in line with expectations on a growth trajectory. The margins have been higher in Q1 due to the effect of the repricing of contracts started already in Q4 last year. So pawn's margin is now set at 16.1%, up from 15.2% in Q1 last year. Overall, total adjusted income margin was lower year-on-year from 4.5% to 3.9%. We now move on to total income on slide seven.
Q1 total income is down 6% year-on-year, mainly due to the decrease in other income, while net interest income is up by roughly the same amount. A significant saving in interest expenses positively contributed to the growth in net interest income. Net commissions are down year-on-year due to higher CQ fees paid to agents and to a lower factoring contribution, partially compensated by higher contribution from pawn loans commissions. Other income includes EUR 300,000 gain from the sale of factoring private portfolio and is significantly down with respect to last year due to a lower contribution of the Govies portfolio, with almost nil trading revenues in the quarter. However, the Govies portfolio has confirmed its positive contribution to the NII with EUR 1.0 million revenues. In the pie chart below, we show the usual breakdown of the total income contribution of the three businesses.
The weight of the factoring business relative to the others is stable compared to a year ago, accounting for roughly 70% of total income, while the pawn loan business has now matched the contribution of the CQ with a 15% share each. Let's now turn to costs on the next page. Total operating costs are slightly up year-on-year, and more in detail, we have personal expenses are down year-on-year due to a lower-than-expected distribution of the bonus pool for 2021, which generated a positive impact for around EUR 700,000 in the quarter. All other costs are in line with expectations, as the saving in other administrative expenses, including a significant saving in collection fees, have compensated a higher contribution to the Single Resolution Fund and higher provisions for risks related to legal disputes. We now move on to the next slide on funding.
Cost of funding in the quarter is set at 0.2% and is lower both year-on-year and quarter-on-quarter. The split wholesale/retail reflects the pattern observed during 2021 when we registered a relative increase in retail funding compared to wholesale funding. The weight of retail funding is now 63%. The minor quarter-on-quarter increase in the wholesale component is due to high repos funding the government portfolio growth. High repos had also a positive impact on average funding costs. Retail funding is almost stable in absolute terms but slightly down in relative terms, and term deposits continue to be renewed at a lower cost. We now turn to slide 10 to discuss asset quality. Gross non-performing exposures are almost stable compared to year-end. The UTP has increased, but such increase has been almost entirely compensated by a decrease in past due.
The UTP increase is driven by an exposure to a single name originated by factoring and by an SME loan. Within the factoring, the effective exposure is toward the debtor, but as it is a record transaction, we report the exposures versus the seller. On the loan position, the exposure is 90% covered by the guarantee. Q1 cost of risk stands at 33 basis points and is lower year-on-year as well as quarter-on-quarter. We should remember that 2021 cost of risk was heavily impacted by the non-recurring provisions related to exposures versus cities in conservatorship, which had driven the cost of risk up. This quarter's loan loss provisions are aligned with our historical average. Finally, gross NPE ratio decreases to 9% from 9.3% at year-end and compared to 10.2% in Q1 last year. I now hand the floor back to Gianluca.
Thank you, Ilaria. I'm in slide 11 for the final remarks on capital. The CET1 ratio, the total capital ratio at the end of the first quarter, are slightly down on a quarter-on-quarter basis, which include EUR 6.9 million of negative mark-to-market on HTCS portfolio of government bonds and EUR 2 million of prudential filter for NPE coming from calendar provisioning and EUR 1.4 million of own shares, which has been purchased to serve the remuneration plan of the employee. After the general assembly that has approved the balance sheet, the vast majority of those shares has been used to allocate to the employee, and therefore, this amount has been reduced for most of the amount. On a quarter-on-quarter basis, credit RWA has decreased, driven by factoring business, which has more than compensated the reduction of CET1 and total capital ratio.
Consequently, the CET1 ratio and total capital ratio are up on a quarter-over-quarter basis. Thank you for your time. Now, I leave the floor for the 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. 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. Thank you for the presentation. I have three questions. The first one is on factoring margin. In the press release, you mentioned that the acceleration of payment by the public administration is not continuing. You mentioned some repricing that you are doing in the factoring business. You also mentioned LPI that were particularly weak in this quarter. So I'm wondering how much of the margin can be recovered starting from the 4.3% in the first quarter and comparing it with the 5.4% of the first quarter 2021. The second question is on what is happening on the market, on your clients after the end of the quarter. I'm wondering if you have seen any change in the attitude of your customers impacted by the crisis and so what we can expect in terms of impact of the current crisis on Banca Sistema.
Last question on your target or your guidance. You provided a guidance for net income 2022 above 2021. I'm wondering if you can confirm this guidance and if you can provide us with the guidance on revenues for 2022? Thank you.
Thank you for your question. I will start, and then I will leave also Ilaria the floor if she would like to add something. About the factoring margin, what we have experienced in the first part of the year is that what we are buying today in terms of duration is receivables with longer duration, which means that either the portfolio that has been submitted to us or the delay of payment of the public administration imply that there is more delay coming from public administration. Clearly, this effect will be seen in the future. In terms of LPI, that is the main factor that if you consider the margin, if you calculate the margin, the driver for the reduction of the margin is the LPI. I will not say that it is more weak or it will not be recovered. The situation is very simple.
When we collect LPI, very often it is coming from legal action, and we are not able to predict upfront when the legal action is closed and we are able to collect. So in the first quarter of last year, we have an extraordinary amount coming from one of the legal actions, which has been closed. On the first quarter of this year, we did not have the same. But that doesn't mean that in the second part or in the second quarter of this year, we will have another increase of LPI. Unfortunately, it is very difficult to predict upfront when these cases will be closed. And depending on a case-by-case basis, how much of the interest has been taken in accrual and how much of the interest are released because of the cash component, we may continue to have this fluctuation.
So I think that the best is to look at on an annual basis and compare on an annual basis the income margin based on the outstanding. As I said before, we already started repricing despite the fact that our cost of funding for the entire year is pretty much locked at the 20 basis point level. As the market interest rates are going up, everybody is seeing these interest rates going up, all the costs are going up. So we already start some repricing, taking into consideration that in the future, the cost of funding will go up. So we already start. The average duration of our portfolio remains within the year. So within a year, we are able to reprice. We started now slowly to get to the point where any increase of interest rate will not have a negative impact.
Bear in mind that when ECB will increase interest rate, and we don't know exactly when and exactly how much, but we know that it will happen within the year, our LPI are variable rate because the LPI is ECB + 8%. So all the accrual of LPI will, from that point in time, start to see an increase coming from the increase of ECB. The other point, which I think that is relevant, we are very pleased with the restart of VAT receivable with this important growth. But as we already mentioned also in the past, while on one end is zero capital consumption, the gross yield of VAT receivable is lower compared to the gross yield of the commercial receivable. So some dilution effect exists depending on how big is the size of the VAT receivable.
In terms of return on regulatory capital, clearly, more VAT receivable means an increase of return on regulatory capital and return on capital. The second question on market crisis. Our clients are typical suppliers to public administration. We haven't experienced any problem with any of our clients. We don't have clients that have any exposure towards Ukraine and Russia in particular. The clients that we have in the energy sector are not suffering for the time being of any of the problems. So on the other end, probably with the PNRR, which implies additional money that is going to be spent by the government, most or several of our clients will increase their revenue. But we haven't seen so far any issue with most of our clients. So we only have one case of a client involved in the energy sector, but that is not driven because of the crisis.
I think that is driven because of other reasons, even though this will not have any impact on our PNL. The first quarter is, and I can say ex post, above our budget in terms of phasing of our budget. So I can reconfirm that we expect a guidance of a net income of 2022 that is above the 2021. I may leave also Ilaria the floor if she would like to add any point.
Thanks, Gianluca. Just one additional comment on margins. Confirming what Gianluca has said regarding factoring margin. However, as a general comment in terms of final level for margins within the year, we do not expect margins to revert back to the levels, factoring margins to revert back to the levels that we have seen at the beginning of last year, which had a major impact on consolidated margins for the whole 2021. So although we might expect a slight increase in factoring margins from the current levels, also from these Q1 levels, however, we do not expect 2022 levels to be as high as 2021 levels.
Thank you.
The next question is from Christian Carrese with Intermonte SIM. Please go ahead.
Thank you for the presentation. The first question is on net interest income. If you can elaborate a little bit on interest rate sensitivity, you said on ECB rate, LPI will be accounted, taking into account ECB rate plus the 8%. And in terms of cost of funding, I understand that you should not see a pickup in terms of cost this year. And also, your loan portfolio has a quite low duration. So I don't know if you can provide us with some sensitivity on net interest income, I don't know, + 50, + 100 basis points interest rates. The second question is on the portfolio you just bought from Banco BPM, the EUR 110 million CQ-guaranteed loans. What kind of IRR do you expect from this portfolio?
And in terms of cost, do you expect some inflation also due to the, I mean, in terms of HR cost, but also related to the pawnbroking business? We saw that you set up the business in Greece. So do you see some OpEx in 2022? Thank you.
Maybe, Ilaria, do you want to start the round?
Yes, sure.
I will add on your comment if necessary.
Yes, yes, sure. Okay. I will start from the sensitivity to funding cost. As we said, the cost of funding for the first quarter set at 0.2%, which is significantly down not only from Q1 last year but also from year-end when we had an average funding cost of 0.4%. We have to say that the reduction in the cost of funding was driven, on one side, by the relative increase in wholesale funding, which has an average negative cost, clearly, compared to a positive cost of the retail funding, and also by the renewal of term deposits at the lower cost. For the time being, it's true that we are not facing upward pressure on our funding cost as we have not tapped the wholesale market with new transactions recently. And our main source of wholesale funding is the ECB.
However, we are aware that and also, the expiry of all our funding sources, almost all our funding sources, is beyond the end of the year. However, we are aware that as soon as the ECB is raising the deposit rate, also, the cost of our TLTRO will go up. So we might have an impact on the ECB funding cost before year-end. On the other side, on the retail side, usually, the retail funding cost readjusts with a bit of a time lag with respect to wholesale funding. So for the time being, we do not feel the need to increase retail interest rates. We are still raising money at the current low levels. However, we are carefully monitoring the market, and we would be ready to readjust the rates in the second part of the year if there is a need to do so.
So in terms of outlook for year-end, as Gianluca mentioned, we had a very low target in terms of funding cost, which we still confirm. But bear in mind the risks that I've just mentioned on the ECB side and on the deposit side in terms of retail funding. As far as the sensitivity to interest rates on the revenue side, clearly, the duration of our factoring portfolio is very short. So we believe that if interest rates rise sharply, we will have the tools in place to readjust the pricing of our assets. As Gianluca mentioned, we have already started to do so despite we are not facing any pressure on the funding side. The process can be slow. But as soon as the whole market readjusts, thanks to the short duration, we believe we will be positively exposed to an increase in interest rate in terms of NII.
Maybe I only add one comment just to complement. For the average duration of our factoring business is within a year. Clearly, this is the average duration. We have assets that have a longer duration, but all the assets with a longer duration are the ones that generate LPI. And because they generate LPI, and LPI is at ECB + 8%, this longer duration is automatically adjusted in terms of yield. While for the short duration, we can reprice in a sense that when we renew the contract, if the cost is going up, we are able to continue to reprice as we already started. I think that the other two questions are the IRR on the BPM portfolio and the cost inflation of HR cost in particular in.
Yes, yes. I wanted to give you the opportunity to, as you said, add comments on the first question. So let's move to the second one, the CQ portfolio. The rate at which we bought the portfolio was slightly higher than the rate at which we usually buy portfolios from originators. The average acquisition rate in the past was 2.6%. This one was bought for a rate of 2.9%. So this will have an accretion element in terms of gross margins for the CQ business. However, the aging of the portfolio is a bit shorter with respect to the standard portfolios we buy. Or say it in a different way, the portfolio is older in terms of origination with respect to the ones that we usually buy. So the prepayment effect on this portfolio will be harder and will come sooner than in the past.
Therefore, the net IRR, including the gross interest rate, less the prepayment effect, will be aligned with previous portfolio acquisition, if not a little bit lower. There is going to be a positive component related to the acquisition of this portfolio as we have negotiated the inclusion of a backlog of interest rates in the pricing of the acquisition. So the IRR of the acquisition for the first year, including the effect of this backlog of interest, will be much higher than the historical average rate, reaching almost 3%. But this is going to be just for the first year, again, because the backlog of interest will represent a one-off effect with respect to the IRR of the portfolio. In terms of cost, we are not envisaging any inflationary effect on our cost base. So we have not readjusted our budget for OpEx and CapEx for the year.
About our initiative in Greece, as already mentioned in the previous call, we have already put most of the cost in our PNL for the setup. This implies that it will be a running cost. The cost, in general, in Greece are lower than in Italy. Therefore, it's like opening a new branch with a lower cost that then needs to start to generate turnover. We will see what is going to be the pace of the turnover. In any case, the activity will start most likely at the end of July. We are waiting now for a formal authorization from the police in Greece because in Greece, the only authorization that is needed for the activity is coming from the police force. All the rest has been already authorized by the regulator in Italy. There's no need of other authorization. Thank you.
Gentlemen, Mr. Garbi, there are no more questions registered at this time.
Thank you very much to everybody. We will talk at the next call. Thank you. Bye.
Thank you. Bye-bye.