Banca IFIS S.p.A. (IF) Earnings Call Transcript

Good afternoon, this is the Chorus Call conference operator. Welcome and thank you for joining The Banca Ifis First Half 2025 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Frederik Geertman, Chief Executive Officer of Banca Ifis. Please go ahead, sir.

Thank you, madam. And welcome everybody to our first half 2025 results call. And today we will first devote some time to the limited transaction which as you know, has closed on July 4, and then we will do the usual update of the results, as you are accustomed that we do every quarter. As always, we will have time for Q&A at the end. So we welcome your calls and your comments and questions at the end of this call. I will take you straight to Page 4 for the update on illimity. Following the completion of the tender offer and the reopening of the terms, the bank has acquired 92.5% of a limited share capital that includes the owned shares. The sellout procedure for the remaining outstanding shares will end on August 29, and the outcome of the offer we think guarantees the full integration of illimity in Banca Ifis, generating obviously higher industrial value than the two entities separately. Thanks to the cost and revenue synergies that the post-merger group will generate and the application of risk and asset quality standards of Banca Ifis to illimity. illimity called the shareholders meeting on September 25, for the appointment of its new corporate bodies and for the review of articles of association, reflecting its inclusion in the new banking group. And we also confirmed to the market that we have appointed PWC to carry out the due diligence on illimity's balance sheet that was requested, as you may recall, by the ECB, which is to be completed by December. Banca Ifis has encouraged illimity to immediately review and assess the asset quality of its portfolio in light of the upcoming due-diligence process and the future alignment to Banca Ifis best practices in terms of asset valuation. The ensuing extraordinary write-offs will not affect the overall risk return profile of the transaction for Banca Ifis or the financial and capital soundness of the combined entity. Banca Ifis is of course, closely monitoring the risk profile, the asset quality and the liquidity of illimity. Page 5, we're ready for the integration, well positioned to benefit from the full integration of illimity. We like to remind everybody of our track record in execution and value creation. We have a first half net income this year or this semester of EUR 87 million, and that's EUR 94 million excluding the EUR 9 million pre-tax one off costs linked to the offer. So we're well on track towards the 2025 standalone guidance. And of course, the track record also includes the 2022-2024 business plan, where we accumulated in excess of EUR 460 million, which was significantly above the targets. We post a very solid CET1 ratio, 16.52%. That's more than 6.6% above the SREP requirement to face both the macroeconomic environment and the integration of illimity while maintaining our attractive dividend policy that supports our growth and ensures a solid capital profile. We stated in January, when we launched the offer and reaffirmed that we have a post-merger CET1 target in the range of 14%. We have a very robust financial position, EUR 1.1 billion in reserves that can be financed in the ECB, further strengthened in July, as you've probably seen with the placement of a senior preferred bond of EUR 400 million. The spread on this bond was at a historical low of 145 basis points, significantly below previous emissions. We have a prudent standard risk profile that you know in terms of diversification, concentration, portfolio duration, rates exposure, loss given default mitigation -- so guarantees. So the bank is well set to execute an integration and to absorb the economic effects of the integration itself. A page on value capture. We confirm cost and revenue synergies as quantified. A very detailed and articulate execution project has already been kicked off with numerous managers on both sides involved, defining the combined [ organisatorial ] setup, the IT, the business structure. Starting on a qualitative and quantitative assessment of illimity personnel at all levels in terms of skills, remuneration and the needs of the combined entity. The balance sheet consolidation of course, in Q3 we will consolidate the results and the balance sheet of illimity and process alignment of operating divisions, the streamlining of the functions to improve efficiency and ensure obviously, operational continuity, and finally the cross selling activation on the revenue side into the respective customer bases. So all this integration analysis and the due-diligence will be completed by the fourth quarter of 2025. In addition, we have started a strategic review of illimity's assets and subsidiaries, considering potential disposals based on the fit with Banca Ifis and we will consider their potential long term value creation and the investments required in terms of capital expenditure, human resources, but also the value that may be captured by potential asset sales. Page 7, the timetable for the integration. So as I mentioned, until the 29th of August, we have the sellout offering to the remaining illimity shareholders, either the same conditions of the tender offer or an alternative cash amount of EUR 4.0767 per share. In September, the delisting of illimity will issue where the exact date is to be defined; depends also on the outcome of the sellout. On December 25, shareholders meeting for the appointment of the new corporate bodies, in November as always, we will present the 9 month result, and they will be consolidated results with the consolidation of illimity. In December, we expect to conclude or we have to conclude the due-diligence on illimity, as requested by the ECB. And in the first half of 2026, we will be ready to share with the market a business plan for the combined group. Having said that, we go to Page 9, on the second quarter results. So quarterly revenues down year-on-year 9%, net revenues at EUR 172 million, that's 4% Q-on-Q. Commercial banking revenues at EUR 83 million, where the Q-on-Q decrease is mainly due to seasonality and structured finance and equity investment. They gave us a very significant boost in the first Q. NPL revenues at EUR 76 million. As we've shared before, we are streamlining recovery activity and we're executing a good focus on the existing stocks and on the new NPL acquisitions that we did in the first half of this year, where we've acquired at a quite quick rate interesting portfolios. Finally, non-core and G&S revenues at EUR 13 million. We confirmed the proprietary book as a recurrent and stable contribution to revenues. I recall on the year-on-year data that the second part of 2024 was positively impacted by, first of all, much higher base rates. So that's between 150 and 200 basis points. And also the starting of a workout of a newly acquired NPL portfolio, and some [Foreign Language] we call them in Italy. So late interest payments on specific files. We will be more clear later in the comments. Page 10, commercial activity. So factoring developed, the turnover developed better than the market. We always keep an eye on spreads there. It's quite easy to get out of turnover from the market. It's more difficult to get it at good spread. Our average spread is 3.55%. That goes on top of the base rate and that excludes commissions which are very relevant in factoring, as you know. So there we have EUR 3.4 billion turnover which we consider, you know, a very good number based on the market. And then in leasing, two slightly different dynamics. Automotive leasing on the right, plus 9% year-on-year when the market is contracting. That's a very encouraging number. We maintain -- focused on our niches. So we maintain an average spread of 3.46%. Equipment and technology looks a bit soft, minus 4% when the market did plus 12%. I think I mentioned this in the last call. The market has seen an increase by large tickets that are not typically our type of activity linked to the PNRR. So it's slightly distorted. If we look at what's going on in our niche, we're holding up quite nicely and also keeping the rates in place. Overall, the leasing business is very healthy. Page 11, NPLs. Usual quarterly cash collection that will go up and down a bit. Also based on how portfolios, specific portfolios perform, new portfolios coming in, et cetera. We confirm roughly EUR 100 million per quarter of cash collection, in terms of revenues EUR 73 million. We add to those revenues some value that we extract from the sale of tails of portfolios. So that's really the back end of the NPL business, which confirms the asset valuation of the NPLs that we have on the balance sheet. Page 12, net interest income sensitivity. So I remind everybody that what we simulate here is a 50 basis point decrease. Of course, if we compare year-on-year, the decrease in base rates has been between 150 and 200 basis point compared to when you measure it. So a multiple of that ,and you see that obviously in our net interest income, as well as the visible effect of these late payment interests that were present a year ago. We are continuing to work on two things. One is the reduction, further reduction of rate sensitivity. And second is a very focused approach towards the reduction of the cost of funding. Page 13, we got some transparency on the dynamics. You can see the graphs with a bit of history. So you can see the speed at which base rates decrease. If we just look at the last Q, we have a base rate effect of roughly 60 basis points. Aggregate interest income, an effect of 40 basis points. The difference of course, is due to the component of the portfolio that is fixed rate. For instance, in leasing we have quite a lot of it. The aggregate cost of funding Q-on-Q, 20 basis points for a net effect Q-on-Q of roughly 20 basis points on the overall spread. I remind everybody that we had a lot of excess liquidity also throughout 2024, given the objective to repay in advance the TLTRO. Page 14, costs. Total quarterly costs down year-on-year through significant efficiency efforts. Q-on-Q, plus EUR 4 million, that is EUR 2 million of an indirect tax related to preparatory finance and bank deposits, EUR 1 million legal and consulting expenses, and EUR 1 million building and maintenance expenses. So overall, in the semester, a contraction year-on-year. And in the last Q also a contraction year-on-year. Cost directly linked to NPO recovery plus EUR 2 million and cost of personnel basically stable EUR 1 million Q-o-Q, and that's just mostly timing effects. Page 15 loan loss provisions still quite low levels. We had EUR 8 million in Q1, EUR 11 million in Q2, so just a few million more. You see that our coverage levels remain that very high. With respect to the reduction of the coverage in bad loans, that is not due to the entry of new bad loans which are less covered. It is due to the exit of very seasoned positions that were very highly covered. So these positions were closed and disappeared from our books. Finally, therefore impacting the average a bit overall coverage ratio of the bank at 46%. If we look at NPE ratios, we see that we go down both on the gross and on the net ratio. That happens not just because of the runoff of the pharma portfolio that you see in gray. We always show it separately, but also a reduction in the actual real NPLs, as we might call them. So you see that we have a 20 basis point decrease from 5.7% to 5.5% on the gross ratio. Gross NPL ratio that we closed the quarter with 5.8%. Net NPL is ratio 3.2%. No real changes in the risk situation of the bank or in the outlook. On Page 16, we show as we always do, we try to be as forward looking as possible. We always get these questions in the calls. So we share with you. Top left payment days in factoring that's not late days, that's just how much time before the invoices are paid. Stable top right Stage 1 and Stage 2 loans. You can see that the stage two remains very subdued between in the last quarter 9%, 7%, 8% no significant increase there. Rating migrations, the upgrades and the downgrades are of similar dimension as they've been in the last quarters. And finally as a result you might say bottom right. The probability of default remaining around 2.9% in the last quarter. Page 17, capital ratios. I already mentioned it because it's obviously, relevant in the context of the integration of illimity, CET1 ratio of 16.52%, what are the key elements of the evolution. Plus 44% due to net income after deducting an estimation of the dividends, minus 7 basis points due to increase in exposure on the calendar provisioning, and minus 40 basis points due to RWA increase mainly due to the credit risk component. And that's just business basically being underwritten and therefore impacting the denominator. I don't normally comment the detail of the quarterly results. You can see the table for yourself. And if that's all right with you, I would here hold the presentation and hand over for any questions you might have on the results or on the press release that we issued a few hours ago. Thank you very much.

[Operator Instructions] The first question is from Manuela Meroni, Intesa Sanpaolo.

I have some questions on illimity and some on the dividends. On illimity, first, what amount of extraordinary write-offs do you expect for illimity in the second quarter of this year? Second, given the recent development, do you still see financial value in the transaction? Third, what common liquidity Tier 1 do you expect at the end of 2025 for the combined entity? I mean, does the 14% common equity Tier 1 you mentioned in the presentation already account for the foreseeable write-offs and the integration cost? And last, the press release you mentioned the spinoff of certain non-core assets to mitigate the impact of the write-off. Could you please clarify which assets are being referred and what is the expected timing. For the dividends, I would like to know, what dividend do you expect in 2025? Your guidance for the year on a standalone basis is EUR 160 million of net income. illimity will bring EUR 110 million of restructuring cost. You have a larger amount of shares. So under this scenario, do you expect to keep the EUR 2.1 dividend per share you paid in 2024? And the last question on dividend is if you will pay the interim dividend in November.

Thank you, Manuela. Quite a list. So, first of all, the extraordinary write-offs. So as the parent company of illimity, we're aware of course of the magnitude of the extraordinary write-offs that are important, but they are consistent with the price paid and the targets that were communicated on January 8. Considering that they will be included in the second quarter results of the company and that the illimity part of Banca Ifis Group starting from July, we believe that the detailed communication regarding the scope of the assets involved and the amounts is responsibility of illimity's current management but I reiterate that the numbers are sizable but consistent with the offer price and the projections we made at the start of the offer period. The amount is in line with what we potentially estimated after the launch of the offer and after previous write-off announced by illimity and we are confident to your question do we still see financial value that they will not affect the overall risk return profile of the transaction for Banca Ifis nor the financial and capital soundness of the combined entity. So we confirmed the rationale. I remind you that the pricing was always based on the premise that, first, significant balance sheet repair would be necessary, and second that the equity story told by illimity management was consistently over optimistic in our view. So to put a number on that, you asked for it. We expect we still expect to maintain a solid set of CET1 level of around 14% after the integration which we think is the correct level to run a bank of our size and to maintain an attractive dividend policy. In terms of dividends, well, first of all we have a guidance of EUR 160 million and as I expressed we think we are on track to meeting that guidance. Remember that when we completed the transaction we had acquired north of 90% of the shares for roughly 1/3 of the book value, right. Part of that book value has already been eroded by the provisions carried out since then but there's still a very sizable bad will. So 2025 dividends, they will depend on many things. The operational results of Banca Ifis, of the illimity, the final results of the due diligence that PWC needs to perform obviously the evolution of the macro environment and I think we'll be more precise regarding the precise numbers that you asked in the third quarter call. Let me say that for 2025, we confirmed an attractive dividend policy overall in line with the policies we had in 2024 in terms of overall cash out, and we think that that is the right way to remunerate the shareholders and to ensure a solid capital profile. Spin-offs we have started a review of all assets and companies that illimity already defined as non-core. On that we are not in a position to tell you exactly what the perimeter of sales will be, right? We will certainly not rush into a forced sale right? So we cannot now tell you which will go out first and which will go out second. We will be more precise in the coming quarter. But we believe that at least some of these transactions will be positive in terms of contribution to capital. I think I answered all your questions, Manuela.

Maybe the interim dividend in November.

Oh, yes.

It's confirmed.

That's very easy. Yes, confirmed. We've done it for the last years and we'd like to keep doing it.

The next question is from Irene Rossetto, Banca Akros.

A couple of questions from my side. When will you start and when do you have to conclude due-diligence requested by ECB for the determination of the bad will? Do you expect further write-off and do you confirm the EUR 110 million estimated restructuring costs related to illimity integration?

Thank you very much. Yes, the due-diligence has to be complete by December because the ECB asked us to complete it within six months. So that's roughly December. I would assume that we will have a clearer point of view on that when we have the 9 months earnings call. Okay, so it won't be maybe fully done, but hopefully we will give you some color on how it's going. I can't tell you how much that's going to generate, if it's going to generate anything, but obviously it might also depending on the extraordinary write-offs that illimity will do before the due-diligence. Right. So that, that should obviously be subtracted. You don't need to do things twice. Thankfully. You asked for the restructuring costs, EUR 110 million we had estimate when we launched the offer. I can reconfirm it. That's roughly a number that we didn't have any reason to change. Okay, so from the basis of the initial analysis that were made, the initial scoping of the project, we don't have today any reason to change it. And we also reconfirm as we don't have any reason to change it, obviously the good side, which is the recurring -- not one-off -- recurring cost and revenue synergies, Irene, okay.

The next question is from Simonetta Chiriotti, Mediobanca.

So I go back to the dividend that you were discussing before. So I don't know if I understood correctly. So you said that you confirm, you think that 2024 total dividend can be confirmed in terms of cash out. So a total amount of around EUR 110 million if I remember well. So this is the first question. And second question on results in the first half there is quite important reduction in terms of NII. When do you see an inflection point on these? So in the coming quarter, do you see an improvement? And finally on NPLs, there is an important contribution of capital gains. So in general terms, are you -- you mentioned the sale of sales. Is this a strategy that is due to continue and should we expect further gains from sales going forward?

Okay. So let me remind you of the dividend policy of our Bank. The dividend policy says that until a certain level of profits, EUR 100 million, we distribute 50%. North of that level we distribute 100%. That's the policy. So if you take the guidance that we have, what follows from that is that the payout doesn't change because the guidance is similar to what happened last year. Now we are now in July, the dividends paid right at the end of the period, obviously on the basis of the profits of the period that have still obviously six months ahead of us and some elements of variability. So I think we've been Simonetta, as specific as is reasonably possible in the month of July. So the dividend policy, as I mentioned, is unchanged and it has that progressive, we think, very efficient and very market friendly approach that as we make excess returns, we give everything to the market. And if we make a bit less, right, then we give a bit less. But north of EUR 100 million we will distribute all. So that's why we talk about consistent dividend policy and that's why we talk about, a market friendly approach. With respect to the first half interest rates and the outlook, I will make a very brief comment and then I ask for some help from Roberto Ferrari, the CFO, because we spoke about this just half an hour ago and he will give some comments. So you see a contraction that obviously, we noted too. You don't need to project that same level of contraction until the end of the year. Also because as we said, you know, first half of last year, there were some elements in there that we can't repeat. But what we're seeing now is as Euribor stabilizes, our cost of funding continues to decrease at a nice rate. So the inflection point that you asked for, so when is the overall spread going to increase? We think you can start seeing that happening. Q3, Q4 of this year, roughly. And then we will have a nice season ahead of us, in which hopefully Euribor will be stable and the cost of funding will continue to decrease. Also when some very, very expensive bonds expire, both from illimity and from Ifis. So some of that progression will be clunky. It won't come in every day. It will also hopefully come in jumps. I will ask Roberto to give you a bit of detail on the net interest income so that you really see where we stand.

Yeah. Thank you, Frederik. So in terms of reduction in net interest income, EUR 17 million are actually due to base rate reduction. The rest is due to three factors, I would say almost equally weighted. One, we sold NPL, so we benefited from higher other income but lower contribution from work out into net interest income. Moreover, last year we had important late interest payment that actually we had a very low contribution from late interest payment this year. And the third is marginally lower spread in our commercial portfolio. So I would say that those three factors have an equal weight in actually explaining why our net interest income has gone down for the year. We stick with a guidance of minus 10% net interest income. We are reducing our cost of funding in June. It was -- for the month of June, it was 3.24% and our target is to reduce it below 3.20% for the year. So actually, we see some further reduction in the second part of the year. And these should help the net interest income going forward. Thank you for asking.

I had a third one, Simonetta on NPLs. Yes, I'll just take that and give you back the floor.

Yes.

You asked us if the sales strategy will continue. The answer is yes. Okay. But keep in mind that we like to sell tails. Right. Or parts of portfolio where additional workout activity and the costs of doing that start to become negative as a trade-off, right. So we're not selling valuable parts that will give us a significant ROE in the next quarters. But we want to keep a cleaner shop than what was done historically where we had very, very large gross book values, eight. And they had very limited relation to the net book value. If you look at the net book value of our NPLs, you see a slight growth, I believe Q-on-Q. And that gives you the answer. So what we're selling is spent tails of portfolios at the end of their life. The reason, as Roberto mentioned, that contributes positively to the P&L is because we don't attribute a relevant book value to those loans. And that gives you also some comfort, not just in the fact that we run a slightly cleaner shop that's easier to read, but also that the value of the NPLs as they're written on our books has a relation with the market value of these things, okay. So we will keep selling. I'm not saying that the next six months will be as intense as the last 6 months because it depends on how much you have. And as I mentioned, we are selective in what we sell. Right. But expect us to continue on this path of probably stable to decreasing gross book values yes, and increasing net book values. Okay.

The next question is from Davide Giuliano, Equita.

I have three. The first one on RWA density. From my calculation, the RWA density of the non-core division seems to have increased quarter-on-quarter. What is the spike due compared to last quarter if you can comment on this point. The second one on calendar provisioning. Are there any updates on co-investment vehicles and what can we expect on capital between now and the year-end on this front? And the third one, you will present the updated business plan for the combined entity in first half '26 after the due-diligence, what are the main areas you will focus on in the immediate future? And can you give us a little more detail on the strategy you intend to adopt at the operational level on illimity?

Okay. Risk weighted asset density of the non-core division of illimity, David, I will be frank, I don't have a point of view. Okay. We really need some more time to get into that type of evaluation. Also if it's too high, too low or if there's any work to be done there. So I get the question, but we need to come back on this in the following quarters. Calendar provisioning. You asked about the update on the structures that we're putting in place on that. So we have an ongoing and positive regulatory conversation. We have conversations with co investors. We are, I think fairly close to being able to present to the market how it will work and to start, expect us to come back on it in the 9 month call. But I would want to add something. You asked us what the impact on our capital would be when that starts and I need to clarify that these structures are not effective if you sell existing loans under calendar provisioning from your book into the structure. They are effective when you buy with the structure, new stuff. So the effect on our capital of the activation of such a strategy, you should assume it is 0. Then of course, progressively it's another story. Right? Because over time this will develop. But I thought you had maybe imagined that we would be transferring a bunch of assets. And the answer is we won't do that. Also because the amount of NPLs under calendar provisioning that we have now on the book is in the tens of millions of euros. So it's not a huge thing. Finally, update on the business plan. Yes. First half 2026 main areas to focus on, I would say grab the presentation we made to the market when we launched the offer. Right. So we want to become a more universal bank. You have read also in the papers that we completed the acquisition of Revalea, which is pending regulatory approval, of course, but -- Revalea was 2 years ago. I'm sorry, of Euclidea. Pending regulatory approval, of course. illimity has a lot of assets in the SME part. illimity also has a -- we think well performing and well-functioning home banking system for retail customers. So expect us to become more multi specialist. With additional service lines and divisions compared to how we already were, with a strong focus on being the premier SME focused bank in Italy. Okay. And then of course, individual business lines is a bit early, right? But this is the philosophy. It was, I think already been described when we launched the offer. And that's the way we are working towards. Is it, okay, Davide?

The next question is from Fabrizio Bernardi, Intermonte.

Can you hear me? I guess you have stated that UN policies are changing. The bottom line is on a pendulum basis.

Fabrizio, I'm sorry, I'm sorry to interrupt, Fabrizio, you are not audible. It's a very disturbed line and I can't hear. Really, I can't hear a word you're saying.

Please, Mr. Bernardi, if you could just reconnect.

Can you hear me now?