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A specialist lender growing in niche segments

Banca Sistema 18 October 2021 QuickView
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Banca Sistema

A specialist lender growing in niche segments

Financial services

Deutsches Eigenkapitalforum 2021

18 October 2021

Price

€2.32

Market cap

€187m

Share price graph

Share details

Code

BST

Shares in issue

80.421m

Core equity tier 1 ratio

12.2%

Business description

Banca Sistema is a speciality finance provider with three core activities: the largest is factoring receivables from the Italian public sector (public administrations or PAs); salary and pension-based lending is the second; while the third and newest segment is gold- and jewellery-backed lending (pawnbroking), which has been expanded organically and through acquisition.

Bull

Lender in niche areas with opportunities and plan for growth.

Relatively low credit risk.

Capital headroom for expansion with CET1 of 12.2% versus a requirement of 7.75%.

Bear

Faster Italian PA payments would reduce factorings opportunity.

Funding costs unlikely to fall much further.

Unforeseen regulatory or economic developments could hamper delivery of three-year plan.

Analyst

Andrew Mitchell

Banca Sistema (BST) is an Italian speciality finance provider with factoring as its main activity. The long payment times that characterise public administrations (PAs) in Italy, together with EU-mandated late payment interest, create an attractive opportunity with low credit risk for a specialist lender such as BST. In consumer finance, BST has established a strong position in salary and pension-backed lending and has a small but growing pawnbroking business, providing alternative sources of growth and diversification.

Proven know-how and resilience

BST’s factoring business (60% of customer loans, 69% of total income in H121) focuses on purchasing trade receivables owed by Italian PAs or the tax authority, mainly to leading multinationals and corporates. Established in 2011, BST has strong analytical capabilities and knowledge of the PA obligors and their suppliers, which supports pricing, new business wins and the yield achieved. Pension and salary loans (37% of loans, 19% of total income) are mainly purchased but are increasingly originated directly. More than 80% are backed by PA salaries or pensions. Pawn lending has grown from a small base aided by an acquisition from Intesa Sanpaolo in 2020 and a portfolio purchase this year: loans reached €83m at end H121. This was only 3% of the group total but the share of total income was 11%. The group proved resilient during the onset of the pandemic and, on a longer view, between 2012 and 2020 its customer loans, total income and net income grew at compound annual rates of 23%, 20% and 37% respectively.

Three-year plan 2021–23: Developing core areas

In its three-year plan, BST looks to consolidate its position in factoring in Italy, while looking to develop internationally (it has a Spanish partnership). For pension and salary loans, the aim is to originate more loans directly and digitise a relatively traditional business. The pawnbroking business is seen as having good growth potential with new branches to be opened and an IPO for the unit a possibility. The target is to increase group net customer loans from €2.6bn in FY20 to €4.2bn in FY23 (compound growth of 17%), with the total income margin stable at 4.5%.

Valuation

Using an ROE/COE model (assumed long-term growth 2% and 10% cost of equity), the current share price implies an assumed ROE of c 8%, which is cautious compared with an FY21e consensus of 10.5% and potentially over 14% in FY23 if three-year plan targets are met (explicit three-year plan ROTE target >16%).

Consensus estimates

Year
end

Total income
(€m)

PBT
(€m)

EPS
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/19

100.9

41.3

37.0

9.30

6.3

4.0

12/20

101.5

36.3

32.0

9.30

7.3

4.0

12/21e

111.5

35.4

30.3

7.44

7.6

3.2

12/22e

121.6

43.1

37.8

9.45

6.1

4.1

Source: Refinitiv

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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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been prepared and issued by Edison. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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