Banca IFIS — Update 28 January 2016

Banca Sistema (MI: BST)

Last close As at 20/12/2024

EUR1.39

0.00 (0.00%)

Market capitalisation

EUR113m

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Banca IFIS — Update 28 January 2016

Banca IFIS

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Banca IFIS

Transformation delivered

FY15 results

Banks

29 January 2016

Price

€27.91

Market cap

€1,482m

Net debt/cash (£m)

n/m

Shares in issue

53.1m

Free float

35.4

Code

IF

Primary exchange

Borsa Italiana
Star segment

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(1.0)

29.4

82.0

Rel (local)

15.4

58.6

99.2

52-week high/low

€28.9

€15.2

Business description

Banca IFIS’s core business is financing Italian SME trade receivables and non-performing loans. There are modest operations in Romania, Hungary and Poland. The Italian government bond portfolio is now less than 10% of net profit from financial activities.

Next event

FY15 annual report

March 2016

Analysts

Mark Thomas

+44 (0)20 3077 5700

Martyn King

+44 (0)20 3077 5745

Banca IFIS is a research client of Edison Investment Research Limited

IFIS is generating balance sheet growth across many businesses including core trade receivable financing (with initiatives in pharmaceuticals and multi-utilities) and distressed retail loans. Despite this growth, capital ratios remain exemplary. In 2016 and beyond, this loan growth should deliver underlying, sustainable profit growth. Credit remains excellent. Our forecast 2016 PBT and EPS are largely unchanged.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/14

284.1

144.9

179.8

65.0

15.5

2.3

12/15

408.0

245.6

299.8

76.0

9.3

2.7

12/16e

286.6

139.3

168.8

80.0

16.5

2.9

12/17e

322.8

164.9

197.3

85.0

14.1

3.0

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

FY15 preliminary results

Headline net banking income rose 44% y-o-y to €408m and the net result from financial operations by 50% (helped by improving credit). Net profit rose 69% to €162m and the equity base by 31% to €573m. FY15 saw a number of unusual items, including a gain from restructuring the bond portfolio (€124m), a gain on sale of DRL portfolios (€15m), a one-off transaction in tax receivables (gain €5.2m), a negative impact of updated cash flow simulation DRL models (income down €8.4m), AFS impairments of €9m (primarily a small number of historic bank investments) and financial compensation scheme costs for four banks (one-off costs up €8m, with additional ongoing costs of over €2m). Detailed accounts will be released in March but we do not expect to change our forecasts.

Outlook

FY15 was a critical year of transformation for Banca IFIS. Its historic dependence on profits from government bonds has been eliminated and it has multiple, strong growth options. Loans grew by 22% and create a good base to generate accelerated income in FY16 (our FY16e net interest income is 4.6x Q415). Additional initiatives have been undertaken including multi-utilities receivable financing, which started in December 2015. Competition remains focused on major corporates, which account for just 5% of IFIS clients (by number) Credit quality remains excellent with no material lead indicators of deterioration. Capital ratios, helped by bond portfolios profits, are 20-30% stronger than most peers, allowing further balance sheet growth without the need for recourse to shareholders.

Valuation: Building in growth

The average of our valuation approaches indicates a fair value of around €22.3/share. However, it gives modest credit for growth beyond 2017. We estimate the current market price is recognising above-modelled growth beyond our forecast period. Given the opportunities in the Pharma, utilities and distressed retail loans operations, this is not unreasonable given the company's strong track record.

FY15 results

Trade receivable finance

Divisional net banking income rose 2% y-o-y to €159m. Loans rose by 16% (driven by customer number growth, the pharmaceutical and multi-utility initiatives), while the margin fell by a similar percentage. The latter was significantly affected by a change in pricing strategy to attract pharmaceutical business, with purchases of receivables at par and income being generated from late payment interest (previously bought at a discount). Looking forwards, more of the loan growth seen in 2015 should feed through to interest income in 2016 given the timing of late interest payments and the utilities agreement. The net result from financial operations rose 12% to €137m (from €122m). The key driver to the latter was a €12m reduction in impairments with continued improvements in excellent asset quality (NPL to loans 1.1% vs 1.3% at end 2014). There have been a limited number of individual losses in Q415, but no general trend for deterioration in lead indicators.

IFIS saw turnover rise by 22% to €10.1bn with customer numbers up to 4,487 (from 4,200 at end 2014). The company has now disclosed the mix: 696 sole traders, 3,022 SMEs with turnover less than €10m, 545 with turnover of €10-50m and 224 with turnover of more than €50m. This is important as the competitive pressures have to date been largely confined to the large corporate space.

Pharmaceutical receivable finance: Banca IFIS Pharma

In 2010, IFIS started a new business for pharmaceutical companies wishing to transfer non-recourse receivables due from public administration. Its presence in this market was significantly expanded in 2015 as on 17 June, when it announced the hiring of a team of nine specialists, including two credit analysts, who have had relationships with about one-third of this market, and that it was aiming to gain about 500 new pharmacy clients a year (there are c 15k pharmacies across Italy, so the target does not appear unreasonable). The group will provide short and medium-term financing.

Multi-utilities working for public administration and local authorities

In December IFIS, targeted a new sector of public debt. It entered into an agreement with an unnamed leading market player, which saw debt added to the balance sheet but, given the timing, little income recognised in the period.

Distressed retail loans (DRLs)

As noted below, IFIS has been active in DRL acquisitions with the gross book value of loans up from €5.6bn at end 2014 to €8.2bn at end 2015 despite the sale of €1.4bn of DRLs in December. It now has over 1 million positions (with debtor numbers of over 850k). Net banking income rose to €56m in FY15 from a restated €33m in FY14 and the net financial result increased to €53m (from €31m). FY15 included €6.5m of non-recurring income and €4m of non-recurring costs associated with the negative impact of update cash flow simulation models – income down €8.4m – and the sale of €1.4bn DRLs – gain on sale €14.9m – costs €4m higher. Additionally, there was a revised accounting treatment of expected cash flows on receivables classified as bad loans previously recognised as impairment: income up €3.2m, impairments down €3.2m, net financial result zero. In business terms, the number of clients moving towards bills of exchange and expressions of willingness (ie more likely to pay) rose to €244.5m from €122.2m faster than the nominal book growth and is indicative that new collections procedures are working. Management also notes that its Legal Factory operations (where debtors with some income from pensions or new employment face a judicial collections procedure) had accelerated debt collection time from three years to 18 months, now with the potential to go to 12-15 months. Management believes that over time 15-25% of its portfolio will have some type of income to which repayment will be attached, and that collection rates should be very high through the Legal Factory.

Exhibit 1: Announced purchases of DRL through 2015

Date Announced

Nominal Amount €m

Positions (000s)

Comment

29/12/15

365

48.0

Personal loans 70%, credit cards 20%, other loans 10%, seller major Italian financial

29/12/15

60

0.6

Current account overdrafts and unsecured loans, seller Banca Popolare Volksbank

2/12/15

230

60.0

Personal loans (66%), purpose loans (34%), seller Consel (part of Banca Sella)

30/11/15

1,400

180.0

Personal loans (47%), purpose loans (29%), credit card (29%), ticket size €5k to €30k, bought in secondary market from securitisation vehicle with US backer

4/8/15

230

18.5

Personal loans (73%), targeted loans (23%), ticket size €5k to €30k, seller Santander

4/8/15

400

50.0

Personal loans (46%), targeted loans (30%), credit cards (24%), ticket size €5k to €30k, seller Santander

23/6/15

650

67.0

Personal loans (67%), targeted loans (16%), credit cards (16%), ticket size average €9k, seller Monte Di Paschi di Siena. Joint purchase with Ceberus taking similar amount

23/6/15

200

27.0

Personal loans (66%), automotive (30%), other targeted loans (4%), ticket size avg €7.5k seller, major player in the international banking sector

23/6/15

33

2.8

Overdrafts (56%), unsecured loans (39%), ticket size average €12.5k seller Banca Sella

2015 total

3,568

453.9

Source: Banca IFIS, Edison Investment research

IFIS has been active in selling portfolios. In December it announced the sale of three portfolios with a total face value of €1.4bn (137k positions). The gain on sale was €14.9m although costs of €4m were also recognised. The net gain on disposal (0.8% of nominal value) is a fraction of the profits we would expect from the residual book and reflects:

€0.9bn in older accounts (many pre-2000) where management expected repayments to be minimal. Aged accounts nearly always see lower recovery rates than new ones (for example the debtor may have moved, died etc.) and resources may be better deployed by focusing on fresher accounts. Old accounts, where collection of debt is less likely, may not have seen the market-wide improvement in pricing in recent years. We understand that a substantial proportion of the oldest accounts have now been sold.

€477m (34k positions) related to re-forming receivables where repayment plans had successfully been implemented. With regard to these accounts:

Some of the improvement in re-forming loans will already have been recognised in IFIS's financials.

IFIS uses four channels to make recoveries. The receivables sold had re-structuring plans with bills of payments (where the customer basically has given an intent to pay). The recovery on these accounts may be significantly less than through other channels (such as the Legal Factory, where known income streams are committed through the courts). The lower expected repayment is reflected in a lower price.

The gain on sale reflects the mix of positions sold. Two-thirds were very dated while the residual third will already have seen some profit recognised and is in accounts in the lowest expected recovery channel. These should not be viewed as reflective of the portfolio as a whole.

Tax receivables

Net banking income rose to €20.3m from €11m in FY14 but Q415 included a one-off gain of €5.2m. The underlying business saw an improvement in cash flows.

Governance and services

The centrals division reported full-year net banking income of €172.7m (2014 €84.3m) including €124m one-off gains from restructuring the bond portfolio. The ongoing contribution is modest (Q415 €5.8m vs Q114 €17.8m) given the lower coupons on the reinvested bonds. We do not consider this a key driver of the group anymore. The historic positioning was extremely profitable and generated equity, which is now being deployed to generate growth across the group.

Funding and capital

Retail deposits come via its Rendimax and Condomax brands. Balances are now more than €3.1bn (2014 €3.3bn, 2013: €3.8bn). Balances were down in 2014/15 as it has been widening spreads materially. It was previously towards the top of best-buy tables, but now targets the higher end of second-quartile pricing. It is noteworthy that IFIS’s attrition is very different to that of, say, EGG, an early UK-based rate-dependent savings institution whose customer loyalty proved to be minimal.

As a retail bank, credit risk accounts for 90% of IFIS’s regulatory capital requirements. It has adopted the standard approach, so most of its customer exposure is 75%-weighted, with a zero weighting for Italian government debt and exposures. The Core Equity Tier 1 ratio is 14.7% (FY14 13.9%), and is all equity and reserves. There is no debt within Tier 2 capital.

Valuation

We use approaches that are based on long-term assumptions and our current forecast period (two years). For a company such as IFIS this is somewhat unfair as we expect meaningful increases in profit beyond this current forecast period. Moving our base valuation year from 2016 to 2017 sees the benefit of expanding the pharma business, greater delivery by acquired DRLs and lower headwinds from falling bond profit, and material equity retentions. The average of our valuation approaches is now €22.3 (previously €20.3), driven by moving our base year forwards.

Peer comparisons

IFIS does not have any immediate peers in terms of business model. Banca Sistema (BST.IM) is the closest comparator, but it only came to market in early July 2015. Investors wishing to consider smaller Italian banks may look at Banca Finnat (BFE.IM), Banca Popolare dell’Etruria e del Lazio (PEL.IM), Banco di Desio e della Brianza (BDB.IM) and Credito Valtellinese (CVAL.IM). In terms of trade finance plays, there is also Tungsten in the UK (TUNG.LN), although it has recently announced it is selling its loss-making bank. Looking at comparisons with these banks, we need to bear in mind their very different operations, capital and funding structures.

Gordon’s growth model

As a specialist house in a niche area of financing, and with a material element of service income that does not attract the same regulatory capital requirement as lending, we believe IFIS should generate returns above its cost of capital. For the purposes of our valuation, we have assumed a sustained ROE of 15% against a cost of capital of 12% (including a premium for Italian risk, which may be expected to reduce over time). We have assumed long-term growth of 4%, around nominal GDP, generating an expected price-to-book of 1.4x. Our near-term premium remains 30% to better capture the core business growth continuing into 2018 and remains well ahead of our assumed growth of 4%. While our 2017e ROE is in line with our long-term forecast, higher earnings into 2018 may be expected to see the ROE above our long-term assumption. Our valuation rises to €22.92 from €21.07 with an increase in equity from rolling forward our base year from 2016 to 2017.

Exhibit 2: Gordon’s growth model and sensitivity

 

Base

1% ROE

1% growth

1% COE

ROE

15.0

16.0

15.0

15.0

Growth

4.0

4.0

5.0

4.0

COE

12.0

12.0

12.0

13.0

P/B

1.38

1.50

1.43

1.22

2017 NAV (c)

1,282

1,282

1,282

1,282

Implied fair value (c)

1,763

1,923

1,832

1,567

Premium for near-term performance (%)

30

30

30

30

Performance implied fair value (c)

2,292

2,500

2,381

2,037

Difference (c)

208

89

(255)

Source: Edison Investment Research

Dividend discount model

We take explicit forecasts for 2016 and 2017. For 2018 we make two adjustments: firstly, we make a step change in dividend pay-out to 73% (reflecting our long-term return on equity of 15%, but growth in equity of 4%). Secondly, we have an incremental 2018 growth of 25% to reflect core business growth in that year to try and capture growth beyond our forecast period. Beyond that we continue to grow this dividend at the expected 4% rate for 10 years. These cash flows are discounted at cost of capital (12%). We also make an upfront pay-out to bring the initial core Tier 1 down to 10% (value €3.6 per share, previously €4.0). This approach indicates a value of €21.7 (previously €19.5), again primarily driven by rolling forward our base year.

Financials

Changes to forecast

The changes to our 2016e normalised PBT and EPS forecasts are negligible. We have included a small gain on sale of portfolios helping income, allowed a small improvement in credit losses offset by further costs.

Exhibit 3: Changes to estimates

Revenue (€m)

PBT (€m)

EPS (c)

Old

New

% chg

Old

New

% chg

Old

New

% chg

2015

391.5

408.0

4

253.7

245.6

(3)

311.7

299.8

(4)

2016e

278.3

286.6

3

138.8

139.3

0

168.1

168.8

0

2017e

N/A

322.8

N/A

N/A

164.9

N/A

N/A

197.3

N/A

Source: Edison Investment Research

Exhibit 4: Financial summary – profit & loss (€m)

Year-end 31 December

2008

2009

2010

2011

2012

2013

2014

2015

2016e

2017e

Gross interest income

74,532

55,898

64,084

106,092

289,480

345,747

314,938

250,210

295,000

330,000

Interest expense

(47,190)

(33,727)

(36,791)

(63,847)

(110,475)

(139,003)

(93,263)

(41,584)

(84,834)

(87,795)

Net interest income

27,342

22,171

27,293

42,245

179,005

206,744

221,675

208,626

210,166

242,205

Net fees & commissions

38,997

52,278

66,844

78,788

65,420

57,164

58,352

58,783

66,402

70,608

Dividends and similar income

27,863

17,325

17

161

9

84

0

0

0

0

Net result from trading

(26,612)

(16,880)

(218)

(245)

(175)

193

302

(78)

0

0

Profit from sale of AFS assets / receivables

37

5,916

494

504

6,154

11

3,812

140,627

10,000

10,000

Net banking income

67,627

80,810

94,430

121,453

244,917

264,196

284,141

407,958

286,568

322,813

Net value adjusts/revs due to impairment of receivbls

(6,403)

(20,218)

(24,444)

(32,143)

(53,751)

(44,587)

(34,510)

(34,250)

(31,000)

(34,000)

Net profit from financial activities

61,224

60,592

69,986

89,310

191,166

219,609

249,631

373,708

255,568

288,813

Personnel expenses

(17,701)

(21,544)

(25,176)

(27,235)

(36,319)

(37,094)

(42,553)

(48,342)

(50,564)

(53,564)

Other admin expenses

(10,111)

(12,108)

(13,902)

(21,527)

(30,927)

(39,022)

(59,319)

(78,828)

(65,478)

(70,128)

Net allocat to provisions for risk and charges

0

0

0

(17)

(1,549)

(215)

(3,009)

(229)

0

0

Net value adj to tangible and intangible assets

(2,080)

(2,371)

(2,483)

(2,948)

(3,229)

(3,004)

(1,843)

(3,746)

(4,180)

(4,180)

Other operating income (expenses)

966

1,406

1,436

4,252

3,656

2,987

2,036

3,026

4,000

4,000

Operating costs

(28,926)

(34,617)

(40,125)

(47,475)

(68,368)

(76,348)

(104,688)

(128,119)

(116,222)

(123,872)

Pre-tax profit from continuing operations

32,298

25,975

29,861

41,835

122,798

143,261

144,943

245,589

139,346

164,941

Tax

(9,497)

(8,759)

(11,235)

(15,300)

(44,722)

(58,420)

(49,067)

(83,623)

(46,960)

(55,585)

Profit after tax (FRS3)

22,801

17,216

18,626

26,535

78,076

84,841

95,876

161,966

92,386

109,356

DPS €

0.30

0.37

0.20

0.25

0.37

0.57

0.65

0.76

0.80

0.85

Earnings calculation

Reported EPS c

71.5

52.7

36.1

50.6

146.0

161.2

179.8

299.8

168.8

197.3

Diluted EPS

70.5

52.0

36.0

50.6

146.0

161.2

179.8

299.8

168.8

197.3

Source: Banca IFIS, Edison Investment Research

Exhibit 5: Financial summary balance sheet (€000s)

Year-end 31 December

2008

2009

2010

2011

2012

2013

2014

2015

2016e

2017e

Assets

Cash and Cash equivalents

15

4,614

31

67

28

30

24

34

100

100

Financial assets held for trading

396

325

293

188

0

10

0

259

0

0

Available for sale financial assets

3,134

387,705

818,507

1,685,163

1,974,591

2,529,179

243,325

3,221,533

2,462,533

2,192,533

Held to maturity financial assets

0

0

0

0

3,120,428

5,818,019

4,827,363

0

0

0

Due from banks

207,102

182,859

228,013

315,897

545,527

415,817

274,858

95,352

95,352

95,352

Due from customers

1,008,649

1,247,026

1,571,592

1,722,481

2,277,882

2,296,933

2,814,330

3,437,136

4,237,136

5,037,136

Property plant, equipment and investment property

34,217

34,506

34,309

39,224

39,972

40,739

50,682

52,163

52,163

52,163

Intangibles assets

3,459

3,916

3,686

6,096

5,683

6,361

6,556

7,170

7,170

7,170

O/W Goodwill

837

826

868

792

850

837

819

820

820

820

Current tax assets

165

69

14

1,024

951

3,940

1,972

22,315

22,315

22,315

Deferred tax assets

1,808

4,928

9,931

32,424

24,636

33,982

38,342

39,422

39,422

39,422

Other assets

100,459

107,463

135,743

111,607

120,000

192,787

51,842

82,336

125,000

125,000

Total assets

1,359,404

1,973,411

2,802,119

3,914,171

8,109,698

11,337,797

8,309,294

6,957,720

7,041,191

7,571,191

Liabilities

Due to banks

924,189

840,546

752,457

2,001,734

557,323

6,665,847

2,258,967

662,985

1,000,000

1,000,000

Due to customers

157,855

909,615

1,802,011

1,657,224

7,119,008

4,178,276

5,483,474

5,487,476

5,188,511

5,661,793

Outstanding securities

91,356

20,443

0

0

0

0

0

0

0

0

Financial liabilities held for trading

2,392

0

0

600

389

130

0

21

21

21

Hedging derivatives

0

0

0

34

3

0

0

0

0

0

Current tax liabilities

25

742

960

1,275

6,395

1,022

70

4,153

4,153

4,153

deferred tax liability

2,943

3,196

3,897

9,567

13,308

16,340

14,268

21,396

21,396

21,396

other liabilities

26,481

41,975

35,121

45,599

101,141

93,844

111,059

204,598

204,598

204,598

Severance indemnities

0

0

0

1,449

1,565

1,482

1,618

1,453

1,453

1,453

Provisions for risk and charges (pensions)

1,057

1,055

1,060

407

1,549

533

1,988

2,171

1,971

1,771

Total liabilities

1,206,298

1,817,572

2,595,506

3,717,889

7,800,681

10,957,474

7,871,444

6,384,253

6,422,103

6,895,185

Shareholders' equity

153,106

155,839

206,613

196,282

309,017

380,323

437,850

573,467

619,088

676,006

Total liabilities

1,359,404

1,973,411

2,802,119

3,914,171

8,109,698

11,337,797

8,309,294

6,957,720

7,041,191

7,571,191

Number of shares (m)

33.1

32.3

51.6

52.8

53.6

52.7

52.7

52.7

52.7

52.7

NAV per share (c)

462

482

401

372

577

721

830

1,088

1,174

1,282

Equity/assets

11.26%

7.90%

7.37%

5.01%

3.81%

3.35%

5.27%

8.24%

8.79%

8.93%

Equity / loans

15.18%

12.50%

13.15%

11.40%

13.57%

16.56%

15.56%

16.68%

14.61%

13.42%

Source: Banca IFIS, Edison Investment Research

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New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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