Good afternoon. This is the Chorus Call Conference Operator. Welcome, and thank you for joining the Banca Ifis first half 2024 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. Frederik Geertman, Chief Executive Officer. Please go ahead, sir.
Thank you, madam, and good afternoon, everybody. Welcome to our second quarter conference call. We present a very encouraging set of results this afternoon. I will take you straight to the presentation briefly go through it, and then, as usual, open up for Q&A. I'm on page four of the presentation, and what we deliver in Q2 is a net income of EUR 46 million. That's 3% increase year-on-year. First half net income EUR 94 million. That comes on the back of very resilient revenues in all divisions. And we're happy to say and to record that the bank seems to be able to deliver fully on offsetting the cost of funding increase and even increasing its financial performance.
We've reduced the sensitivity to net income by using a couple of levers. The first one is increasing the duration of our Govies bond portfolio. The second thing is growing in the mix of fixed and variable rates, commercial business, growing the fixed rate business. So we're using the apparently longer time that the central banks are taking to reduce rates, to diminish our sensitivity to the rate cuts, and thereby improving the sustainability of the results that we are, that we are presenting. On asset quality, we maintain a very positive risk return performance of the loan book. That's still extending into 2024. You've heard me comment before on it. We usually share the outlook, but we have, you know, no signs of asset quality deterioration.
We have some anecdotes, but nothing widespread. So asset quality is confirming its contribution to our results, and we reiterate that we're not using the overlays yet to that we put aside on the performing book. So, the numbers you see are actual numbers. They are not improved by recourse to the overlays. On the back of this, we confirm our 2024 guidance of EUR 160 million. We have to take into account that Q3 is usually characterized by a bit of softer commercial activity. It's usually the slowest quarter in our year.
So, we will see how that goes, and for now, consider that we confirm EUR 160 million net income for the year. Cash position, very solid, EUR 1.7 billion of available cash and counterbalancing capacity. We've almost completed our TLTRO repayment. What remains is EUR 0.4 billion to be repaid in September, which means that we've already reimbursed over EUR 1.6 billion, and we are in the liquidity position that I mentioned. So, that is certainly a thing that we can put behind us in terms of challenge. Capital, CET1 ratio growing to 15.3%, including the net income, after deducting the accrued dividends.
We confirmed the dividend policy, so we'll be paying an interim dividend in November, as we did last year. Going a bit more specifically, page five, revenues. Revenues are EUR 189 million, significant growth year-on-year. Commercial banking, EUR 87 million. As we mentioned, commercial performance, that is a bit of volume growth and pricing discipline offsetting the cost of funding increase. So if you would consider growth revenues, right? We are up 13% year-on-year in that division. NPL revenues, once again, resilient, EUR 86 million, growing vis-a-vis last quarter, driven by, you know, some slightly more judicial activity. Q2 2024 includes a contribution from Revalea, which is a transaction we are quite happy with, and that's already contributing positively to our results.
Non-core and G&S, finally, EUR 60 million revenues. A bit more trading activity, confirming, as you saw the last quarter, recurrent and stable contribution to revenues. So overall, we think we are, as I mentioned, delivering on offsetting the cost of funding increase, obviously a relevant item given our business model. Page six, mitigated net interest income sensitivity. So we decided to share some transparency on that. What happens in case of a theoretical shock of 50 basis points decrease in the reference rate? Quarter ago, we would have had a negative impact of EUR 11 million-EUR 13 million. In June, that's EUR 9 million-EUR 11 million. That's given both the increase of the duration of the bond portfolio, the increase, the origination of fixed rate products and deposits in Bank of Italy decreasing.
Also, given the repayment of our bond and given the repayment of the TLTRO. Now, of course, we maintain a very sizable counterbalancing capacity, so the overall liquidity position is, as I mentioned, extremely comfortable. We will keep working on these levers. So, as it seems, we'll be given a bit more time to prepare for the reduction in rates. You'll remember that at the start of the year, we had forward curves that indicated very rapid and strong decrease. Given that these scenarios did not materialize, and we seem to have a bit more time, we're using the time to increase the resilience of the results you're appreciating today. Page seven, commercial. So, factoring, stable year on year.
We took a lot of attention to making sure that we have some resilience of the turnover, meaning that the turnover leads to loans, right? Of course, they are two different things. If the invoices are paid right away, you won't have a lot of loan stock, right? So customer loans are up 7% year-on-year, versus a market that's basically flat. And we maintain a very rigorous stance on pricing. Average spread is up 14 basis points year-on-year, even though the base rate obviously increased. On leasing, right-hand side of the slide, new leasing equipment and technology, in line with the market, new business. On automotive, significantly more growth than the market. You see it 10% year-on-year.
That's obviously always a bit driven by external factors, specifically tax incentives, right? So when these programs become active, is when the SMEs decide to invest in equipment and technology, and that obviously drives our volumes. On automotive, I reiterated, we have a focus on the premium and luxury segments, on margin discipline, and we make sure that we have remarketing agreements in place, meaning that we do not expose ourselves to a sizable risk of a stock of cars that we financed, decreasing in value. Certain brands, you know, execute certain pricing strategies that then reverberate into the residual value of the assets, and we make sure, given the remarketing agreements we have in place, that we're not exposed to that. Page eight, NPL portfolio.
Quarterly cash collection, EUR 94 million, that excludes Revalea, okay? So it's like for like, you can, you can compare with the previous quarters. From judicial and extra judicial activity revenues, you can see the, the increase. It's once again showing a very healthy performance of our portfolio. You may remember that when we acquired Revalea, we, became a bit more selective on purchases. It doesn't mean we are not in the market, we are purchasing, but we're purchasing, more selectively. And even in this scenario, so not including Revalea in these numbers, right, you can see how the, how the portfolio is performing, beautifully. Page nine: costs.
Of course, we have a continued impact of inflation, and it also reverberates into maybe contracts that are expiring, that you need to, that are expiring, sorry, that you need to, to renew. So there's a bit of time lag, as you know, right? In inflation that, that comes in. If you look at other operating costs that are exposed to that, we have EUR 1.4 million increase due to IT and marketing expenses. We keep investing in the future of the bank, and EUR 0.5 million more software depreciation. That's a consequence of the very significant IT transformation that we invested in, in the last years of the plan. We include here EUR 8 million of IT expenses that are substantially stable, right? As we execute on the business plan projects.
Costs directly linked to NPL recovery are stable and cost of personnel is stable Q on Q. That obviously feels a gradual impact of the new Italian labor contract. You'll remember that that feeds into the actual costs over a number of years. There was a very sizable increase that was negotiated by the banking association, and that's gradually coming in. A word on projects. We are now halfway into the third year of our business plan. We had shared with the market a program of digitization, of transformation of the bank, that has been almost delivered. We're into the last bits and pieces.
So, capacity to execute, digital transformation and also infrastructure IT projects and a lot of regulatory work that also has IT implications, is something we are really, really very happy with. We will close this plan, and not only with financial results, but with a business system that we think will be fundamentally transformed, both on the client-facing side and on the internal side. Page 10, asset quality. So we have loan loss provisions in Q2 of EUR 7 million. As I mentioned, stable overlays, we didn't use them, and coverage remaining at very comfortable levels. Bad loans, 78%, UTP, 45%, past due, 7%.
The ratios then, on the bottom part of the slide, gross NPE ratio from 5.7-5.4, net from 3.3-3.0. We like to look at the darker colored parts of the bars, given that one percentage point of that number is, as you know, classification of loans to the Italian public health system. And we expect in the next quarters that 1% to further decrease, but especially we note that the ratios excluding this effect, so the dark blue and the green elements, improve from 4.7-4.4, and from 2.2-2.1, respectively, gross and net. Consider that we are a bank that does not benefit from a large commercial retail mortgage stock, for instance.
So we don't have, in the computation of these ratios, those types of low margin, but low risk businesses that. And therefore, what you see here is NPE ratios of a traditional factoring and lending activity to Italian SMEs. So if we consider that that's the portfolio we're talking about, these numbers are, we think, very solid. And, in terms of the Italian health system, we will be seeing further decrease in the next months. I always get questions on the outlook of risks. As you know, we have this rather sensitive gauge, you know, of the financial health of the Italian corporates that's given by factoring. So on page 11, we start with that.
So how are the companies paying? Normally, when you enter into a higher risk, higher financial tension phase, you see these days increasing, and that's even before they get into past due, right? Just approaching the contractual terms. And what we see here is that the payment days are at historical lows. They're even, you know, 10, 15 days below what we had last year. So we have no signs in our customer base of financial stress in the system, important to note. Another element that you might take a look at is Stage 1 and Stage 2, right? The mix, more or less, stable. Not a lot there to report.
So there, too, even though this is slightly more backward-looking, right, we don't see, anything that would, you know, anticipate an increase in UTPs or NPLs. Rating migration is a consequence of these things. You can see we had, more upgrades than downgrades this quarter: 16% improvements, 69% rating flat, 15% deterioration. So there, too, really not a lot to report, and as a consequence, the probability of default in our portfolio, that remains below 3%. Are we seeing an increased risk, just at the, you know, at the single company level? Nothing widespread. We're having some first. And it didn't happen for a couple of years. We're seeing some cases of industrial corporates, maybe slightly more leveraged, slightly undercapitalized, running into some issues.
It's really single cases. As we mentioned, the loan loss provisions were EUR 7 million, so very moderate, without recourse to overlays. And so there are single cases, they are few and far between. Very unlikely that this is an indication of an imminent deterioration. We can be, I think, reassuring on that regard. Page 12, quarterly results. I would not get into the detail of this. You can probably analyze these numbers yourself. And I would go to page 13, the capital ratios evolution. CET1 ratio increasing by over 30 basis points.
Part of it is net income after deducting dividends that were accrued, and then there were two very minor contributions of calendar provisioning and risk-weighted assets increase. We received a SREP indication from the Bank of Italy that places the SREP at 9%. It was slightly lower, so very moderate increase in SREP. So, at this point, we have 6.3 percentage points between the SREP level and our current capital position. Definitely solid, and that might potentially further increase during the year. At this point, I think I presented the most significant facts.
As we mentioned, we're quite pleased with the way the year is going, and I'm encouraged by it, and I'd be very happy to take your questions if you have any. Thank you.
Thank you, sir. Excuse me, 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 touchtone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. The first question comes from Irene Rossetto of KBW.
Yes, hello, and thanks for taking my question. So you reported a net income of EUR 94 million in the first half. Shall we expect, if it's, to be to the net income guidance of EUR 160 million for the full year? Then what are your expectations for 2025, and, when do you expect to present the new business plan? And finally, what kind of M&A opportunities are you considering also in terms of size? Thank you.
Thank you, Irene, for your questions. So, yeah, 94 is certainly a very constructive number, considering the full year guidance we have out there. When we prepare those numbers, we obviously use a base scenario, a slightly negative scenario and a better than base scenario, as you would expect. And we presented the central scenario, right? When we planned for EUR 160 million, we had priced in 3 rate cuts of 75 basis points in total, and we had priced in, especially, some more significant asset quality deterioration than we've seen. It is my opinion that what we've had in the last years cannot probably be considered indicative forever.
There are reasons why the asset quality deterioration was so low in the Italian banking system. They have to do with the enormous amount of liquidity that was provided by the banks and by the recovery of the economy, that was a bit faster, probably, and there was a bit more also. Probably good for Italy, right? So it appears things are moving better. I'm sorry, may I ask you to switch off your mic? 'Cause I'm getting a bit of return. Thank you. So it appears on those things that things are moving a bit better. We like before we touch the expectations for the full year, we like to see how Q3 goes.
We like to see how Q3 goes. It's traditionally a much weaker quarter. When we have the evidence of how that develops, we'll present Q3 numbers, and it will be November. At that point, we are in a much more comfortable position to reevaluate, if we will do it, the guidance. So for now, I would say that we are looking at it with a lot of confidence, but we're not ready to increase the guidance yet. We will examine first Q3, and we will see how that goes. So expectations for 2025, we do not have a business plan yet, for the next three years, right?
This is the last year of the plan, and we will work on it this fall and the first months of 2025. So I'd rather not be too specific on numbers after the time horizon of the plan. What I would say, though, is that we are confident we will continue to grow the core business, that we will not deviate from a good risk-return profile. We always emphasize that we have a certain approach to liquidity risk, and we have a certain approach to credit risk, which is not just caution. Everybody can say they're cautious, right? But it's the structure of the balance sheet, right? So the duration of the loans, which is short, and the amount of underlying securities we have, right?
In leasing, where we have the physical goods, in lending, where we have the government guarantees, in factoring, where we have the double risk evaluation of the client and the debtor. So, we're looking at this development confidently. The numbers we present today are numbers of built up, of recurring revenue, of industrial revenues. There is very little financial gimmickry involved. I will, I will—I think I would comment so qualitatively on 2025, in 2025, as I've done, and not go further. I mentioned the business plan. Yeah, we will start working on it this fall. We expect to present it before the summer. We'll choose a time, so and somewhere in the first half of 2025.
Better to have it solid than to rush on that. Once again, it's a three-year plan. I expect we'll present three-year projections, so somewhere in the first half of 2025 is probably the right time to do that. And then finally, in terms of M&A, yeah, we actually we've always been open to M&A, but you know what, but normally gets underlined is criteria. Not so long ago, we bought Revalea for EUR 100 million, and for EUR 150 million in debt, so the actual transaction size was EUR 250. Not small. And this is the type of transaction that we would continue to evaluate.
I wouldn't probably not on the NPL side, if I just look at targets, so maybe more towards commercial banking and those types of businesses. So if the transaction has a reasonable size compared to ours, and if it is credible that we will benefit from the combination, be able to add synergies and probably leverage on our skills, then we are definitely open. But I underline the selectivity on this. I think, Irene, you had four, right? I think I answered them all.
Yes. Thank you very much.
The next question is from Manuela Meroni of Intesa Sanpaolo.
Yes, hello. Thank you for taking my questions. I have a few. The first one is on the sensitivity. You reduce your sensitivity to 50 basis point rate moves from EUR 11 million-EUR 13 million down to EUR 9 million-EUR 11 million. I'm wondering if you are planning to put in place additional action to further reduce the sensitivity, and if you have, let's say, a target point for that? The second question is on the loan loss provisions. Could you please provide a breakdown of your loan loss provision in the second quarter of 2024? And could you please share if you are seeing some sign of economic slowdown. Third question is on the capital.
Your risk-weighted asset has remained broadly flat quarter-on-quarter, while your loans are increasing by over 3% quarter-on-quarter. So, I'm wondering if you are adopting some risk-weighted asset optimization action, and what we should expect going forward in terms of risk-weighted assets evolution and risk-weighted asset density. Another question is on your government bond portfolio. I'm wondering if you are going to apply the sterilization of the government bonds in the fair value through the OCI reserve, and what is the value of this reserve as of June 2024. Another question on the TLTRO. You still have EUR 400 million of TLTRO. Are you going to repay that in September this year?
Finally, on the guidance, you confirm your guidance for 2024, opening the door to a potential revision, maybe, with the f- in the third quarter. I'm wondering if you are still confirming also your dividend policy and the payment of EUR 110 million as last year. Thank you.
That's quite a bit. I think I have them all. I would, you started with, I think, the net interest sensitivity. I would turn that over to our CFO, Roberto Ferrari, and then take back for the sequel. Thank you.
Yeah. Hi, hi, Manuela. Yes, positive. Actually, we are taking additional action to reduce our sensitivity. Clearly, the target is to be below EUR 10 million, and actually I would say between EUR 5 million and EUR 8 million negative impact with 50 basis point decreasing rates. And clearly, the guidance that we have this year already embeds 3 cuts, so we do expect to land this year at 325. And we will start next year with a lower sensitivity to a reduction in rates. Thank you for asking.
Okay, so I'm taking it with respect to your question on loan loss provisions. So, referring to page 10 and 11, right, on the provisions we had and on the outlook. So first of all, breakdown of the provisions, I think, I can answer like this. So we have EUR 7 million, right? It's really not a lot. Most of that comes from flows to default, so new UTPs and new stage two, if you would consider a default, technically, that is obviously still performing. We don't have a lot of deterioration from UTP to NPE to NPL, for instance, or deterioration in the coverage. It's mostly single cases of new flows.
With respect to the outlook you asked for, yeah, the outlook is, you know, I keep saying every call in these quarters, I keep saying, so far so good. We still don't see even prospectively any issues, as I mentioned, and we also don't see any sectors that are really worrying us. Keep in mind that there are places where we are not present, though, right? So you won't find commercial real estate lending in our bank, for instance. You won't find real estate leasing in our bank, for instance. You won't find... So there, you don't find construction to a significant extent, right? So there are sectors that we don't really see, and that might, in at least internationally, in some other cases, you know, provide some cause for concern.
Where we are, which is basically, you know, the industrial base of Italy, we don't see anything sector-wide that would, you know, worry us. More leveraged, undercapitalized, single cases where you have issues, they are, you know, progressively appearing. I would expect them to continue appearing. But once again, you know, we're talking about in the semester, EUR 15 million of loan loss provisions is really a low number for an SME bank. So I wouldn't put too much statistical relevance into the single cases. Sterilization of the govies in fair value OCI, yeah, we will apply it. As at 30 June, the negative reserve sterilized had a value of EUR -21 million. I think you asked for the number, so there you have it.
On TLTRO, yeah, only EUR 400 million left to be repaid in September. September is the deadline, so that's not optional for us, right? That's a given. Next time we talk, you can be sure that TLTRO will be completely behind us. I reiterate that we were able to repay EUR 2 billion, most of it in advance, so, because 80% is already done, and that we're coming out of that exercise, including the repayment of a bond that happened just this June, for another EUR 400 million, with a billion and a half, right, of liquidity, so that's both cash and counterbalancing capacity. So, obviously, that's very comfortable. How is it that we became so comfortable? Because we invested in it.
So we made a significant push in retail deposits in December, January, February. That added up to roughly EUR 500 million of growth in retail deposits. Very serious number, obviously, that costs. We came out with the issue of the new bond, that was, you may remember it, that was so significantly oversubscribed. We came months early with that. We would have done it, maybe if we, you know, if we planned it, we would have done that maybe during the summer. There was no real liquidity reason to do it. It was just that we had such favorable market conditions that we decided to execute. So these strategies that lead to this anticipation of repayment of the TLTRO, and this very comfortable liquidity position, these have a cost, right?
You can see that in the cost of funding, obviously. So the good news is that we took this prudent stance, but we managed to offset the impact. Moving on to what I think was your final question, dividends. Yeah, dividend policy is unchanged, so if we deliver EUR 160 million in the year, which is obviously a guidance, it's not a certainty, but you know, we reiterate our confidence in that, then mechanically, we would pay EUR 110 million in 2024. And therefore, yes, Manuela, the answer is we- that's what we planned for. Now, of course, if things would go better, then the dividends would increase a bit.
You had a question on risk-weighted assets. I see that the CFO, Roberto Ferrari, is voluntarily candidating himself to reply, probably on a more technical level than I could. So I'll gladly pass over to him, and he will be certainly more specific.
Yeah, Manuela, it's important to say that in the second quarter, 2024, we disposed NPL. So we have a reduction in risk-weighted assets through this disposal of around 70 million-75 million risk-weighted assets. This clearly actually has a positive impact on our CET1 ratio. In terms of evolution, what we can say is that we do expect to end this year above 15.5%, and considering also the impact of the realization of fair value OCI on government bonds. Thank you for asking.
Thank you.
Did we cover everything, Manuela?
Yes, thank you very much. Very clear.
Okay. Thank you.
The next question, sir, is from Fabrizio Bernardi at Intermonte.
Hi, everybody. A very short question. Which is the level of capital that you believe is right for you? I mean, it seems you are long capital. You have a nice dividend policy, but this may be, let's say, enlarged somehow. I know that there are some issues about your shareholders, but you created, if I remember well, 34 basis points of common equity in one quarter, including the dividend. So, what I'm asking is, let's say, relating to a question made before by other colleagues, let's say, if the dividend policy may be revised up just because the capital level is very high.
And secondly, I would like to ask something about the organic business, in terms of factoring, if the current level of rates may put the factoring business, let's say, high for longer, in the sense that, if rates are high, the factoring business could be very welcome for small mid-cap corporates. So, this is a question not for you only, but for other, let's say, banks. But it seems to me that, with the rates high, this business can generate more revenues for everybody.
Thank you. So on, on the capital, let me refer back to what we said when we presented the plan. We said that we would, and we started at, in the high 15s, I think. We said that we would, through the plan, remain above 14% of CET1 ratio. Obviously, it's, it's gone better than that in terms of risk-weighted assets, right? So we have a a higher ratio, and that means we have, I agree with you, we have space, right? The, the 34 basis points are actually not in a quarter, they're in a semester, because we, we, we computed the, the, the, the, the, the contribution of, of profits, I think, over the semester. Still, right, we are creating capital, and we are fairly high.
Now, what we put in place is a dividend policy that is progressive. I need to be a little bit technical here, but it is useful because you will then, I think, better appreciate the answer. On the first 100 million of profits, we pay 50%. On the remaining, we pay 100%, meaning that even if we make 160, just taking it as an example, because it's the guidance, right? We pay out 110. But if we would make more, we would pay out more, because every increase obviously goes on the marginal part, which is fully paid out. That means that every year, as long as we make at least EUR 100 million net profit, we will add EUR 50 million of capital.
Now, EUR 50 million of capital is something that will more or less support, right, 5%-6% growth in the credit business, which in our opinion, is healthy. So, as a rule, we would put away the amount of capital that is needed for a healthy growth, provided that we are commercially capable of evaluating it. With respect to what we will do with the excess capital that seems to be available today, if you assume that 14 is a relevant benchmark, but you could argue that given the risk profile of the bank, it could also be 13.5. It's a matter of, I think, judgment in the end. So if you assume that there is an excess capital at the end of the plan, then obviously that gives us space to put it to work.
That could be done in various ways. I don't think we would ever entertain the idea of maxi dividends or of you know one-off things. We would probably much rather invest it in growth, meaning also inorganic growth, that could add to the P&L and to the generation of future profits. So dividend policy is stable, but keep in mind that when things go better, the payout ratio increases, the overall amount increase, but also the payout ratio increases, and you know firm commitment, determination to put any excess capital to work. When we will close this business plan, we'll take a look at the level at which we are.
We might have even some further growth of CET1 ratio during this year, and that will be, I think, a basis for a credible, solid growth plan, also inorganically, of the bank.
Okay, thank you. One more thing, if I can ask. We saw three banks reporting in the last few days. One made 1 basis points of loan loss provision for a number of reasons, and the other made 25, 30. So, you said that you don't see big risk in terms of credit quality. Is this, let's say, possible? Because numbers are very, very different, because from the bank we monitor, we have many, many different guidance. Maybe given the job you do, sorry, you can be more clear.
Yeah, I can only maybe repeat what we see and try to support that with, with numbers. Hard to say... Hard to comment on other banks, especially not knowing which they are, right? But I wouldn't even want to go there. I think there are a few things that may lead us to have a you know different point of view or a different different experience. First of all, you have to remember business mix, right? So I mentioned a couple of sectors and a couple of places where things can get bad pretty quickly, and these are places where we are not present. Okay?
So secondly, when you talk about basis points, you have to be careful because, you know, if you have a gigantic retail mortgage book that leads to, you know, intrinsically lower basis points, you should, if available, you should compare us with the cost of risk of the SME divisions of banks, if they publish it, right? With respect to our outlook, if I interpret you correctly, and then I also have the question on interest rates and factoring is still there. I'll get to it. If I interpret you correctly, you're saying how is it that you say that things are looking rather positive, right? When we hear other banks making more mixed signals, giving more mixed signals on this.
Now, I mentioned we have a few single cases of clients defaulting, but you should-- I mean, you have thousands of clients, you should expect the bank to have single cases of clients defaulting, right? So that's happening, first of all. The actual impact of those things is EUR 15 million in a quarter, in a semester. In our opinion, when things turn sour systemically, the forward-looking indicators that we shared with you, they look a lot worse. So I can only tell you, look, I can share some very specific data that are typical of an SME factoring business that, to my opinion, you know, no other bank has.
It appears, on the basis of the data, that our client base, so there's obviously selection before that, that our client base appears to be still very comfortable in terms of financial position, because otherwise you would see the payment days increasing, even without delinquency increasing, just the payment days. To what extent that is our selectivity or truly representative of the whole Italian economy, I don't know. I think it is fairly representative, and therefore, I think I have data to sound constructive. Hard to say something intelligent and meaningful about the comparison with others, as I don't really know what data we're talking about and what bank we're talking about. I hope I became a bit clearer on this, on this thing. I'll get to rates.
You say, you know, when rates are high, factoring business becomes attractive. I think you're seeing two things. I think the real bottleneck on the growth of factoring is excess liquidity in the market. Because when you have companies that have all this money sitting on their current accounts, normally not well remunerated, right? And in the meantime, they can do factoring, but pay our spreads, and they are not low, right? They would normally opt for using the excess liquidity they have at hand, right? And I think what we've seen in the last few years, the holding up of the factoring business, even in a context where we have so much liquidity in the system, is a real testament to the commercial effectiveness of our network.
So I think a real support to the factoring business might come when a bit of that excess liquidity has dried up further. In terms of rates, I think it will become less easy to finance short-term needs with long-term credit. That happened during COVID, then after, but that stuff should go away. If reference rates remain so high, adding our spreads, the overall cost of factoring will remain fairly high. So, you know, I think... I'm not sure we can say that, you know, having high rates will help the factoring business much, because a company will look at its all-in cost.
But I will say that the reduction of liquidity in the system should give us some help, because I think that's the real enemy, if I can use the term, right, of growth in factoring. That you have all these companies that have all this money sitting on their accounts, and that they can just pay the bills and not worry about, you know, maybe use the factoring, but without having the anticipation of the payment. Yeah?
Yes, thank you very much. One top-up question, if I can. Is there any business where you would like to be? Any other business, let's say, on top of those you are already in?
Yeah, I would love to have a gigantic mass market segment of free deposits. That would be really nice.
This is a good answer. Thank you very much.
That would be really nice. Now, if you can help me, you know, get one, unfortunately, it involves building branches or buying traditional banks, so these are not easy though.
Yeah, buy a bank, buy a bank. No, I'm joking. Sorry, but given the diversification of your group, this question at this stage was, let's say, normal, let's say like this.
No, no, I agree. I mean, I didn't think-
You have a longer capital position. You're paying a huge cash dividend, so the question was more or less normal.
I agree, and I take it as such. I think, you know, historically, we've been in places where there are margins and where industrialization and specialization helps. These are normally our preferred segments. So you could see there are a couple of places where we're not yet present, which might fit that bill, and these are the types of things that we would look at. Okay?
Thank you for the answer. Thank you.
No, thank you.
The next question is from Simonetta Chiriotti of Mediobanca.
Thank you. Good afternoon. A couple of questions on the NPL sector. So the first is on results. Revenues from this segment were very strong, even stripping out the contribution of Revalea, growth was very strong. So if you could help us to understand what happened, if it is a level of profitability that can be that we can see also in the coming quarter, or if there is some something particular in this quarter. The second question is on the strategy in this sector. Many things are happening in terms of mergers between servicers, JVs in the European space. So how do you see the sector?
How do you see Banca Ifis competing in this changing sector? Thank you.
Yeah. Thank you. Yeah, we had quite a nice revenue contribution from also from judicial. You can see it there on page eight, right? That's also always – that's always a mix of things. And I, and I don't think you should automatically assume that that will be the same in the next quarters. It's a mix of what? It's a mix of the timing with which we work the portfolios, and it's a mix of court productivity, which is entirely unconnected to us. So, as we, as portfolios enter, and we've had in the last years, before Revalea, right, we've had obviously very significant purchases also on the secondary market. You will remember there, there were purchase of of multiple billions of gross book value of certain portfolios.
As you work through them, right, and you, and you establish that there is space for judicial recovery, meaning that you have a place of work or an asset that you can, that you can repossess, right? Then that, then, then that, as you work through them, at some point, you get to a point where you have that information, and then you put in place the, the actions to make it happen. Separately, courts, they have, they're a bottleneck, right? So, as you move through the stages of judicial recovery, right, every time you move a step further, you get a little bit of revenue recognition on the loan, right? So first stage, you have the, the ..., et cetera, right?
You have this business system, which makes sure that the loans traverse this judicial system. So if the courts happen to produce a bit more, you get a contribution, and if the timeline with which you work your portfolios, it works in your favor, right, then you may have a little bit of a seasonal bump. It's not really a strategy thing, and I don't think it is easy to repeat it or that something has materially changed, and somehow, right, magically, we are able to do a lot more judicial work. Actually, if you think about priorities, we're spending a lot of time thinking about extra judicial, so friendly recovery.
And if you were to ask me, I think over the next years, that's probably an area where we could have more impact of, you know, projects, of, you know, improvement in our capacity, improvement in the even the social aspect of recovery, right? So the offering, the better path to financial inclusion, which is a big thing that we are working very seriously on, given that we have this very relevant size and very relevant presence in this activity in Italy. So it happened this quarter. I don't think it is something that you will see repeat itself. It's partly endogenous, partly exogenous, and but it... And it contributed nicely, right?
Another thing I want to add, it wasn't your question, but I want to take the opportunity to share it with you, is that we've been quite successful in selling tails of portfolios this semester. The CFO mentioned it when he said there are a risk-weighted asset reduction out of that. So what's happening? We've given the NPL division a fairly stringent indication to start making sure that the aggregate gross book value of the loans we manage will not keep growing. Meaning that at some point, when the portfolios are spent, worked, and when our recovery style has reached the end of its use, right, then we package those, and we sell them on to people who are specialized in working the tails.
So we sold quite a significant amount of tails in this semester, and we will keep doing that, so that we can present to the market a gross book value that will stabilize a bit, and that we can get out of this multi-year growth phase, which in our opinion is something that is not necessary to have a healthy business. You mentioned on the NPL market, yeah, the transformation, the things that are happening on the market. I agree with you. Well, first of all, the huge amount of non-performing loans that the Italian banks have had on their books—it was worked and it was transferred, and that's now leading to secondary market transactions, both the restructuring of GACS and the sale of portfolios on the secondary market.
So it's still coming to the market, but secondary. In any case, the big bonanza of banks selling huge amounts of portfolios under stress because the regulator was asking them to do that quickly, that part is over. You see servicers therefore reaching for scale, and I think it makes perfect sense. You mentioned the, you know, the M&A going on and all that. We look at that from our specific position, which is market leader in small tickets, unsecured NPLs, that does the servicing of the loans they own. Okay? We think there will be a fairly continuous production of consumer credit NPLs in this country.
Also because the consumer credit inherently generates a certain amount of default, it's part of the business system, and because the consumer credit in this country is still growing and it's, compared to other places, vastly under-penetrated. So, if you look at it from a specialist point of view that does this type of work, right? We see the evolutions in the market, but we are not so interested in looking for scale in servicing, as we are primarily an investor that services our very specific business with our very specific capabilities. That's our view. I hope I was clear.
Yeah. I was wondering, more on the part of in, in the investment side, how the business, if we should expect, sooner or later, I suppose so, some activity together with partners to consolidate some part of the portfolio. I mean, when the calendar provisioning is due to become something to be managed?
Yeah.
So that's the question.
Yeah. Thank you for the question. Yeah. So you should expect two things. One is us being quite active on the secondary market. We've had very profitable transactions on that front, and we want to continue doing it. And secondly, working on structures that will allow us to keep... to remain an investor and to remain a servicer, while not running into the calendar provisioning limitations, and that requires co-investors. So we will be more specific on this when we present the plan, right? Because it still requires some work, it would require some conversations with the regulator and everything, but we are quite confident that we can have both quite a number of interested parties that would like to be with us in this business, firstly, and secondly, structures that will allow us to do that.
And so you could see the company partly, right, moving into an asset manager model, and less, and not only an on-balance sheet model.
Thank you.
The next question is from Davide Giuliano of Equita.
Yes, good afternoon. Thank you for taking my questions. The first one is on loan demand. What are you seeing in terms of loan demand? Are the advertising campaigns you are doing bringing an improvement acceleration in new business generation? The second one on factoring. Can you give us some color on the net fee reduction on factoring in second Q, despite in line, slightly better turnover? I saw also second quarter 2023 was very strong, so maybe a comment on this, and if you see room for shifting some of the factoring revenues from NII to commission in the future. And the last one on cost of risk and overlays. Do you have any updates on the overlays release strategy?
Are you evaluating a possible increase in NPE coverage in the second half in light of the uncertain macro scenario? Thank you.
Okay. Thank you, Davide. Loan demand hasn't been particularly high in our country for a long time. So it, it's a lot of effort to keep the stocks up. And certainly advertising helps. Now, you will never have the counterargument, because you don't know what would have happened if you hadn't positioned yourself so clearly and communicated so much, not just on the advertising that you see, but also on the digital advertising and everything that's a little bit, you know, more below the horizon. So loan demand is not particularly high. It hasn't been since 2020. A lot of the long-term lending that was made is actually has actually been substituting what used to be short-term lending, not just in our shop, but in other places.
Having been able to keep up the stocks, as we have, I think is a, is really a testament to the strength of the relationships and the commercial activity and the, and the, you know, the way that the network is proposing the loans. And what they tell me, it's anecdotal, is that having a bank that's more clearly positioned is very helpful. They used to have to explain years ago who Ifis was, right? And that's commercially not a good place to start, right?
When you're entering in a conversation and you are seen as, you know, the SME bank, that has, you know, a credible story, is positioned in that way and all that stuff, you, you start talking about the deal and not talking about who you are. So I would say loan demand soft, lot of, commercial activity in order to compensate this, and definitely the positioning of the bank precious. And we will. We have invested a lot, we know that. It should be clear to the market that we will continue doing this, because this is really long-term, this is really long-term protection of the franchise, in our opinion. Moving, and that interesting come to commissions and factoring is an interesting idea. I'll just take this as an interesting suggestion.
I'm not sure I have an answer to it. I think logically it should be possible. I think it would be especially beneficial in times when payment dates are short, right? So, you know, you emphasize the service element, and you're not so dependent on the payment dates of the client. I cannot comment more intelligently, other than saying that it's a very interesting thought, and I'll take it with me on the holidays to think it through. Cost of risk, overlays. Are we going to increase the NPE coverage? No, not really, and I'll tell you why: because normally when, you know, when we get to the end of a process where we either sell the loan, because we sell them too, right?
The stuff we don't put our own NPEs in the NPL business. You know that, right? So we either liquidate it or we get rid of it. And normally, when we sell, we have gains in almost... I wouldn't say in every case, but in many cases, right? So we have a situation in which coverage levels appear to be very, very comfortable. So not expecting that. So what's gonna happen with the overlays? Well, the overlays need to have a statistical and quantitative justification, both for the regulator and for the auditors. They were put in place as a prudence measure in times of extreme shocks. The first part, COVID, the second part, inflation, Ukraine, supply chain disruption, energy disruption.
There wasn't a real, methodology, quantitative, to determine, exactly, right, how much it should be. So we, we just put aside significant amounts in order to be on the safe side. And you've seen, I'm sure, that we have about 120 basis points overlays currently, which is high. So, in the meantime, work has been done to justify that, quantify it, put, you know, some, some rigorous, method, underneath those, decisions. And these will lead to the fact that either they are used in a fairly short term, or they will flow back to the P&L. So expect that in 2025, expect that in 2025, and from 2025 onwards, if we don't have some really unexpected shocks, good part of the overlays will flow back to the P&L.
Thank you.
As a reminder, if you wish to register for a question, please press star and one on your touchtone telephone. For any further questions, please press star and one on your telephone. Mr. Geertman, at this time, there are no questions registered, sir.
Well, thank you, everybody. That was... And thank you for the questions. We had a nice conversation. I'm really happy to see you all with the Q3 results, and maybe we will have a little bit more of clarity on how the year went. And, in the meantime, I wish everybody a happy holidays, given that it's the 2nd August. So thank you all for your time and attention.