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The Board of Directors of BFF approved today the FY18 consolidated accounts of BFF Banking Group.
- Adjusted Net Income of €91.8m in FY18 (+10% y/y) for 37% Adjusted RoTE vs. 33% in 2017
- €91.8m cash dividends (+10% vs. 2017): 100% pay-out ratio of Adjusted Net Income, €0.539 DPS equivalent to 10.8% dividend yield
- Adjusted Net Interest Income +9% y/y and stock of unrecognized off-balance sheet LPIs at €356m
- Strong growth in business activity with Customer Loans up by 19% y/y and New Business Volumes up by 17% y/y
- 35% of Customer Loans outside Italy, up from 32% in 2017
- Ample excess liquidity with €0.4bn of Committed Undrawn Funding and no recourse to TLTRO or other ECB’s emergency liquidity measure
- Strong capital position: Total Capital Ratio of 15.2% and Common Equity Tier I Ratio of 10.9%, including mark-to-market effect on HTC&S portfolio and excluding €91.8m of Adjusted Net Income of the period
- Low risk profile: Net NPLs/Net Loans at 1.1% and Cost of Risk of 13bps
Milan, February 8th, 2019 – The Board of Directors of BFF Banking Group (BFF) approved today the FY18 consolidated accounts.
In FY18 the Group reported a net income of €92.2m (Reported Net Income) compared to €95.5m in FY17, with the latter including €11.8m of net positive extraordinary items and a high cash collection of late payment interests (LPIs).
FY18 Adjusted Net Income reached €91.8m vs. €83.7m in FY17, +10% y/y despite (i) two additional months of Tier II cost for €0.9m not present in 2017 and (ii) lower LPIs collection (€90m vs. €114m in FY17), with the stock of unrecognized off-balance LPI (back book income reserve) at €356m. 2018 Adjusted Net Income is also net of €1.4m (post tax) of provisions related to BFF Polska’s SME business placed in run-off at the end of 2017.
€91.8m cash dividends proposed for 2018 (vs. €83.7m for 2017), equivalent to a 100% pay-out ratio of the 2018 Adjusted Net Income and €0.539 DPS. This implies a dividend yield of 10.8% based on the BFF share price as of February 7th, 2019.
Adjusted Net Interest Income increased by 9% y/y, mainly driven by higher stock of Net Customer Loans and despite funding cost affected by Tier II issuance for additional €1.0m of costs (Tier II outstanding for 12 months vs. 10 months in 2017). The stock of unrecognised LPIs off-balance (back book income reserve) at the end of 2018 is equal to €356m.
Costs have been kept under control with a Cost/Income Ratio of 36% vs. 34% in FY17 despite (i) the investments to establish a branch in Portugal and Poland, as well as the freedom of service operations covering Greece and Croatia and (ii) the increase of employees in Poland, in order to bring in-house some of BFF Italy processes that were outsourced, with net savings to be achieved in 2019.
Customer Loans at the end of 2018 amounted to €3,583m, +19% compared to €3,018m at the end of 2017. Volume of New Business is up by 17% y/y to €4,697m. At the end of 2018, the international markets (Spain, Portugal, Poland, Slovakia, Czech Republic, Greece and Croatia) accounted for 35% of loans (32% at the end of 2017).
At the end of 2018 the Total Capital ratio was 15.2%, above the company’s 15% threshold, and the CET1 ratio was 10.9%, confirming the Group’s solid capital position and ability to organically fund growth and a strong dividend pay-out. Both ratios are calculated excluding €91.8m of Adjusted Net Income of the period set aside for dividend distribution, which would have increased both ratios by 406bps. Both capital ratios include, instead, the negative exchange rate on forex exposure and the mark-to-market effect on HTC&S portfolio.
The Group continues to enjoy a low risk profile, with Net NPLs at 1.1% of Net Customer Loans (0.2% net of Italian municipalities in conservatorship – “comuni in dissesto”) and a Cost of Risk of 13bps (3bps net of BFF Polska's SME factoring business placed in run-off and Italian municipalities in conservatorship). In FY17 Cost of Risk was 20bps (10bps net of the same effects).
In the fourth quarter 2018 the Group completed the first purchase of receivables in Croatia and established an EMTN programme.
KEY CONSOLIDATED ACCOUNTS ITEMS
FY18 adjusted P&L numbers exclude the following items:
- €1.9m post tax (€2.6m pre-tax) positive impact in P&L due to the change in €/PLN exchange rate on the acquisition loan for BFF Polska (previously Magellan), which is counterbalanced by a negative change in equity reserve (included in the capital ratios), reflecting the natural hedging between these two balance sheet items;
- €0.9m post tax (€1.3m pre-tax) costs related to the accounting of the Stock Option Plan: this item generates a positive equity reserve, with therefore no impact on Group’s equity;
- €0.5m post tax (€0.7m pre-tax) costs related to the extraordinary contribution made in 2018 and related to the Resolution Fund 2016.
FY17 adjusted P&L numbers exclude the following items:
- €17.8m post tax (€25.2m pre-tax) one-off income related to the change in LPIs estimated recovery rate from 40% to 45%;
- €3.3m post tax (€4.7m pre-tax) negative impact in P&L from the change in €/PLN exchange rate on the acquisition loan for the purchase of BFF Polska, which is counterbalanced by a positive change in equity reserve;
- €1.7m post tax (€2.4m pre-tax) extraordinary costs related to the IPO. All IPO costs are now fully expensed;
- €1.1m post tax (€1.5m pre-tax) costs related to Stock Option Plan. This item generates a positive equity reserve, with therefore no impact on Group’s equity.
Main balance sheet data
Customer Loans at the end of 2018 amount to €3,583m (of which €760m related to BFF Polska), compared to €3,018m at the end of 2017 (of which €627m related to BFF Polska), and up by 19% y/y. Customer Loans in Spain increased by 26% y/y (from €213m at the end of 2017 to €268m) and in Italy are up by 14% y/y at €2,345m. Portugal is up by 69% y/y to €192m. International markets (Spain, Portugal, Poland, Czech Republic, Slovakia, Greece and Croatia) account for 35% of Customer Loans, up from 32% in FY17.
The residual amount of Net Customer Loans related to BFF Polska's SME factoring business placed in run-off at the end of 2017 is equal to €3m in FY18 (down from €6m at the end of 2017).
The Group saw strong business activity in the period, with overall New Business Volumes of €4,697m (of which €548m related to BFF Polska), representing a 17% growth compared to FY17 (€4,001m including €546m of BFF Polska). The growth was mainly driven by Italy (€3,162m, +10% y/y) with DSO increased from 173 in 2017 to 180 in 2018, Spain (€701m, +67% y/y) and Portugal (€266m, +77% y/y); the Portuguese branch, opened in July 2018 in Lisbon, should continue to support new business volumes growth going forward. Business volumes in Slovakia decreased by €14.5m y/y to €52m, more than compensated by an increase of €9.7m of volumes in Poland and of €6.6m in Czech Republic. Greece contributed for €17.4m and Croatia, with first deal completed in December, for €2.1m.
In 2018 the Group launched several new business initiatives to support future growth:
- A new financial solution in the infrastructures renovation sector, that ensure BFF the purchase of receivables due from PA and coming from the multi-year contract of supply and maintenance in relation to the technological and energy renovation of infrastructures.
- First revolving agreements signed in Greece in less than 9 months after the first deal.
- The Portuguese branch opened in July in Lisbon with 4 people. The local presence will allow the Bank to boost the growth of the business and to enter partnership agreements with third parties’ distributors, with the objective of further strengthening the business that has been conducted in the country on a cross-border basis since 2014.
- A new partnership agreement with Pfizer to extend the credit management and collection services of the receivables to the entire pharma value chain (pharmacies, private healthcare institutions and wholesalers) in Italy. Thanks to this contract, BFF will cover all the debtors (public and private) in the pharma segment in Italy. This agreement can be replicated with other customers in the pharma and medical devices sector and give the opportunity to learn credit recovery in those new segments and potentially open new areas for non-recourse factoring in the future. The agreement currently covers only the credit management and collection services.
- A new Dynamic Discount solution, that allows BFF’s clients to improve their efficiency in cash management by offering their suppliers specific payment terms; the service is provided through a digital platform developed in cooperation with FinDynamic.
- Filed with Bank of Italy for the opening of a banking branch in Poland (expected in 2Q 2019), to further diversify and reduce its Zloty cost of funding.
- Establishment of the EMTN programme, to promptly benefit of the potential funding opportunities in the international capital markets.
- First purchase of receivables in Croatia, the 8th market covered by the Group, completed in December.
The Total Available Funding of the Group amounts to €3,607m as of December 31st, 2018. Online Deposits represent 29% of Drawn Funds and are equal to €924m at the end of 2018, substantially in line with YE2017 (€1,000m) despite reduction in offered yields. The Group does not offer current accounts, but only term deposits with no/limited prepayment options. Moreover, the Group has ample excess liquidity with Undrawn Funding available at the end of 2018 equal to c. €0.4bn, and the committed wholesale funding increased over the year at competitive rates despite market instability. The Group has no bond expiring before June 2020 (except for the residual €11m of BFF Polska’s bond issued before the acquisition and expiring in the first nine months of 2019) and has not drawn TLTRO or other ECB’s emergency liquidity measure funding. None of BFF’s funding lines are linked to the Italian Government’s funding cost or rating. In November 2018 the Group has also announced the establishment of an EMTN programme for €1.0bn to promptly benefit of the potential funding opportunities in the international capital markets.
The Government bond portfolio (HTC e HTC&S) decreased to €1,109m at the end of 2018 compared to €1,222m at the end of 2017 (-9% y/y). The negative mark-to-market as of December 31st, 2018 of the HTC portfolio (not included in the equity) was €5.4m post tax, while for the HTC&S portfolio was €4.2m post tax (already included in the equity). The duration of the entire portfolio is 31.4 months (29.1 months for the HTC portfolio and 44.4 months for the HTC&S portfolio).
The Group maintains a very healthy liquidity position, with a Liquidity Coverage Ratio (LCR) of 234.6% at the end of 2018. The net stable funding ratio (NSFR) and the leverage ratio, at the same date, are equal to 108.5% and 5.0% respectively.
Main profit and loss data
In FY18 Adjusted Net Banking Income reached €194.9m, compared to €180.3m in FY17, and Adjusted Net Interest Income reached €188.7m (vs. €172.8m in FY17), both driven by higher stock of Net Customer Loans. Adjusted Net Interest Income in FY18 includes in its interest expenses additional €1.0m of Tier II issuance for 12 months vs. 10 months in 2017 (the bond was issued at the end of February 2017).
Adjusted Interest Income amount to €231.6m in FY18 compared to €212.8m, driven mainly by higher stock of net customer loans and despite lower Late Payment Interest (LPIs) collections.
The Net LPIs over-recovery accounted in P&L was higher y/y (€19.5m in FY18 vs. €16.9m in FY17) despite lower cashed-in LPIs. In particular, cashed-in LPIs were €90m in FY18 and €114m in FY17 and the Net LPIs over-recovery was €2.6m higher compared to FY17 thanks to the combined effect of (i) higher LPIs recovery rate and (ii) lower rescheduling impact in FY18 vs. FY17. At the end of 2018 the unrecognized off-balance sheet LPIs fund (back book income reserve) reached €356m, +2% higher than the stock at the end of 2017 (€350m). The total LPIs stock amounts to €563m pre-tax (+5% y/y).
Net Interest Margin on Customer Loans was 5.7% vs. 6.1% in FY17 and the Gross Yield on Customer Loans FY18 was 7.3% (vs. 7.9% in FY17). The return on RWAs (RoRWA) was 8.8% in FY18 vs. 9.0% in FY17.
The Average Cost of Funding in FY18 shows a reduction compared to the same period of last year: the combined figure (including BFF Polska) decreased from 1.96% in FY17 to 1.73% in FY18, which includes the Tier II bond cost for the entire period (vs. 10 months in FY17).
The interest expenses increased from €39.9m to €42.9m in FY18, mainly due to:
i. the impact of Tier II (€5.9m in FY18, €4.9m in FY17);
ii. one-off commission cost for €0.3m on the refinancing (at lower rate) of part of BFF Polska acquisition financing;
iii. the increase of drawn funding (from €2.6bn to €3.2bn) due to the growth of the business and
iv. the increase in Zloty funding, which has a higher base rate (Wibor 3M 1.72% vs. Euribor 3M -0.309% as of December 31st, 2018) and, therefore, a higher cost (BFF’s Zloty funding cost is 3.33%).
The Group had good access to the wholesale market at competitive rates, with Cost of Funding decreasing in each quarter over 2018 (from 1.95% in 1Q18 to 1.66% in 4Q18). BFF has no funding costs linked to Government bond yields and no ECB refinancing risk. Moreover, the opening of the Polish branch (expected for 2Q 2019) would allow the collection of online deposits at a lower rate compared to Zloty funding, thus further decreasing BFF’s funding costs.
The operating leverage improved in 2018 with Adjusted Costs/Loans Ratio decreasing from 2.32% in 2017 to 2.24% in 2018 and with an Adjusted Cost/Income Ratio of 36%. In FY18 Adjusted Operating Costs were €69.3m, up by 13% vs. €61.2m in FY17 due to:
i. a 20% y/y increase in personnel costs driven by higher employee base and higher bonuses;
ii. Ordinary Resolution Fund and FITD contribution in 2018 equal to €2.5m in total vs. €1.7m in 2017;
iii. an increase in other operating expenses to sustain growth initiatives.
The higher employee base was driven by: (i) personnel recruited for establishment of Portuguese and Polish branches, as well as for the Greek and Croatian operations in freedom of service and (ii) some BFF Italy processes, previously outsourced to Italian suppliers, have been brought in-house in Poland with 19 employees as of December 31st, 2018, with net savings to be achieved in 2019.
The employees at Group level increased from 412 at the end of 2017 (of which 177 in BFF Polska) to 452 at the end of 2018 (of which 197 in BFF Polska).
Loan loss provisions reached €4.8m in FY18, vs. €6.0m in FY17, and include €1.7m of provision on the Polish SME factoring business placed in run-off at the end of 2017 and €1.9m of provision required on Italian municipalities in conservatorship (“comuni in dissesto”). The exposure to the Italian municipalities in conservatorship is classified as NPLs by Bank of Italy’s regulation, despite BFF being legally entitled to receive 100% of the capital and LPIs at the end of the process. The Cost of Risk was 13bps in FY18 (3bps excluding 5bps related to the Polish SME factoring and 5bps related to the Italian municipalities in conservatorship) and 20bps in FY17 (10bps excluding the Polish SME factoring and the Italian municipalities in conservatorship).
FY18 Reported Net Income was €92.2m compared to €95.5m in FY17, which included €11.8m of extraordinary net positive items.
FY18 Adjusted Net Income reached €91.8m, +10% y/y despite:
i. two additional months of Tier II cost for €0.9m vs. 2017 (since issued at the end of February 2017);
ii. €24m of lower LPIs collection.
2018 Adjusted Net Income is also net of €1.4m of provision related to BFF Polska’s SME business placed in run-off at the end of 2017.
The RoTE for FY18 is equal to 37% (vs. 33% in 2017) based on the Adjusted Net Income.
The proposed 2018 cash dividend is equal to €91.8m, implying a 100% pay-out ratio of Adjusted Net Income and a dividend per share of €0.539.
The Group maintains a solid capital position with a 10.9% CET1 ratio (vs. SREP requirement for 2019 at 7.80%) and a 15.2% Total Capital ratio (vs. SREP requirement at 12.00% and a company’s threshold for the dividend policy established at 15%) calculated on the Banking Group perimeter (pursuant to TUB – Testo Unico Bancario).
The RWAs used in the denominator of the above ratios are calculated based on standard model and, therefore, the risk weighting factors for the exposures towards NHS and other PA different from local and central Government depend on the Sovereign Rating of each country. Since DBRS (BFF’s ECAI) rating for Italy is BBB (High), the Italian exposure to NHS and other PA is risk weighted at 100%, up from the 50% risk weighting applied before the downgrade in January 2017. Consequently, one notch Italian rating upgrade would move the risk weighting on the Italian exposure to NHS and other PA (different from local and central government) from 100% to 50%, with a 2.2% increase on CET1 ratio and 3.1% on Total Capital ratio. On the other side, in order to have a negative impact on the risk weighting factor for the Italian public exposure to NHS and other PA, the Italian rating needs to be downgraded by 9 notches.
The above capital ratios do not include the €91.8m of Adjusted Net Income of the period (equal to 406bps of additional CET1 and Total Capital) and available for dividend distribution and are net of the negative exchange rate and the HTC&S mark-to-market impact (respectively -13bps and -19bps). Both ratios are already net of the own shares to buy under the buy-back plan announced today for the maximum amount of €1.7m.
The RWA density decreased from 67% as of December 2017 to 63% as of December 2018, thanks to a better loan mix and despite the increase in past due and non-performing loans. The Group uses the Basel Standard Model.
Superior asset quality is confirmed with a Net Non-Performing Loans/Net Loans Ratio of 1.1% at end of 2018 (vs. 0.6% at end of 2017). Net of Italian municipalities in conservatorship, the net NPL ratio is 0.2% (vs. 0.1% at the end of 2017).
The increase in net NPL from €18.2m at end of 2017 to €40.3m at end of 2018 is driven almost entirely by the growing activities towards the Italian municipalities. In particular, the exposure to Italian municipalities in conservatorship classified as NPLs at the end of December 2018 (classified as NPL as requested by Bank of Italy’s regulation, despite BFF is legally entitled to receive 100% of the capital and LPIs at the end of the process) amount to €33.4m (€15.0m at the end of December 2017), and represent 83% of the total net NPL exposure at the same date. The aforementioned €33.4m of exposure to Italian municipalities in conservatorship includes €7.9m related to Italian municipalities already in conservatorship at the time of purchase. The net NPL include also €1.2m related to the San Raffaele Hospital exposure, on which BFF expects to recover an amount higher the net amount in balance sheet. The NPL Coverage Ratio net of the municipalities in conservatorship is equal to 75% (86% at the end of December 2017), while the Coverage Ratio including also the municipalities in conservatorship is equal to 38% (54% at the end of December 2017).
Net Past Due, equal to €72.6m (€69.8m at year-end 2017), are due from the Public Administration and public sector companies for 64%. Total impaired loans (non-performing, unlikely to pay, past due) – net of provisions – amounted to €119.7m (€94.7m at year-end 2017) and are due from the Public Administration and public sector companies for 67%.
Significant events after the end of FY18
During the meeting held today, the Board of Directors has also approved the start of the buy- back plan to support the remuneration and incentive policies, in accordance with the resolution of Shareholders’ Meeting of April 5th, 2018 and following the authorization received by Bank of Italy. The plan allows the Bank to purchase a maximum of 390,000 BFF ordinary shares, corresponding to 0.23% of the total outstanding shares, for a maximum amount in cash allocated to the plan equal to Euro 1,680,000.
Statement of the Manager responsible for preparing the company’s financial reports
The manager responsible for preparing the company’s financial reports, Carlo Zanni, declares, pursuant to paragraph 2 of Article 154 bis of the Consolidated Law on Finance, that the accounting information contained in this press release corresponds to the document results, books and accounting records of the Company.