Strong lending growth and capital position

Banca Sistema 7 November 2018 Update
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Banca Sistema

Strong lending growth and capital position

Nine-month/Q3 results

Financial services

7 November 2018

Price

€1.69

Market cap

€136m

Net debt/cash (£m)

N/M

Shares in issue

80.4m

Free float

54%

Code

BST

Primary exchange

Borsa Italiana

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(16.1)

(18.7)

(29.5)

Rel (local)

(11.3)

(8.8)

(15.5)

52-week high/low

€2.5

€1.6

Business description

Banca Sistema is a speciality finance provider with a primary focus on factoring receivables from the Italian public sector (public administrations or PAs) with salary and pension-based lending forming a second core activity. The bank is also opportunistic and is looking to diversify into new areas such as its gold and jewellery-backed lending business.

Next event

FY18 results

February 2019

Analyst

Andrew Mitchell

+44 (0)20 3681 2500

Banca Sistema is a research client of Edison Investment Research Limited

Lending has grown by more than 40% year-on-year but mix changes and some lumpiness associated with late payment interest (LPI) have constrained earnings growth in 9M18. This effect should unwind as the business continues to grow. It would not require full delivery of the bank’s three-year plan targets, including ROE of over 18%, to warrant a higher valuation. The capital position remains strong with a CET1 ratio of 11.1%.

Year end

Net operating income (€m)

PBT*

(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/17

82.5

38.9

33.3

8.6

5.1

5.1

12/18e

87.0

39.0

32.4

9.0

5.2

5.3

12/19e

118.4

53.6

44.7

9.7

3.8

5.7

12/20e

139.3

62.3

51.9

10.5

3.3

6.2

Note: *Reported PBT and EPS.

9M18 results: Rising lending, stable banking income

Banca Sistema (BST) reported factoring turnover of 29% for 9M18 ahead of the same period last year and outstanding receivables up by 42%. Salary and pension-backed lending (CQ) outstanding was up by 44%. The group adjusted interest and fee income margin was 150bp lower at 5.3%, primarily reflecting mix change within the factoring business and to a lesser extent towards lower yielding CQ loans. This left interest, fee and other banking income 3% up versus 9M17 and, after an 11% increase in expenses and higher tax rate, earnings were 12% lower. The return on average equity was 18.4%, within the financial target range set in BST’s three-year plan (18–24%).

Looking for further factoring and CQ growth

The bank indicates that there has been no significant change in the market background for factoring. If anything, pricing on a like-for-like basis has been on an upward trend, and potentially the political and economic uncertainties prevailing in Italy could prompt an increased appetite from international companies for factoring to reduce exposure to the country. A significant contract has been signed with a pharmaceutical company that is set to generate turnover of €700m per annum, starting next year. The niche CQ market has good potential for growth and BST’s position should be strengthened by its acquisition of Atlantide, expected to complete in Q219. Our estimate for FY18 is modestly lower (EPS -3.7%) to reflect the nine-month result, while earnings estimates for FY19/20 are only marginally lower and remain aligned with BST’s three-year plan targets.

Valuation: Allows for below-target outcome

The share price (in common with peers) is down by around 30% over a year and, at the current level, our ROE/COE model indicates this would discount an ROE of below 15%. With modest changes in estimates, we still factor a 20% ROE into our ROE/COE valuation model and this results in a valuation of c €3.30 (€3.40 previously). See page 6 for further discussion.

Nine-month/Q318 results

BST’s nine-month results showed net interest income marginally lower, while sharply higher net fee income meant that total income was up 3% compared with the same period in 2017. Customer loans (at amortised cost) increased by 44%, with similar increases for factoring and salary and CQ loans. The disparity with net interest income growth reflects mix changes, both within factoring and towards CQ loans (see further discussion of interest income below). Higher headcount, reflecting the increased scale of the business and investment to support growth, resulted in a 10.8% rise in administrative expenses, leading to pre-tax profits 6.9% lower than 9M17. An increase in the tax rate (34% versus 29%) left net profit 12.4% lower at €19.1m.

Full P&L figures are shown in Exhibit 1 and other points from the results were as follows:

Net interest income was effectively stable y-o-y, if we allow for the one-off impact of the €0.8m provision relating to TLTRO funding that affected Q118.

The cost of funding was likewise stable at 0.9% (excluding the TLTRO provision). The proportion of retail funding has increased from 43% at the end of H118 to 52%, with conditions in the bond market understandably less favourable currently. A further increase in the percentage of retail funding is likely in Q418.

Net fee income increased by nearly 45% – a sharp rise – but this largely reflects variations in the mix of contract terms associated with factoring where agreements based on discount or fees are interchangeable and subject to customer preference.

The impairment charge increased by 42% in absolute terms but 9M17 benefited from a net release of €2.3m arising from a reduction in provision for municipalities in distress partly offset by an increase in SME provisions. Relative to average loans, the charge was stable at 28bp and in line with management expectations. For Q318 alone, the impairment rate was lower at 25bp versus 36bp for Q218 and 42bps for Q317; well within the historical range of fluctuation and in line with the three-year plan target of sub-30bp.

Exhibit 1: Nine-month/Q318 profit and loss analysis

€000s

Q317

Q218

Q318

9M17

9M18

Change Q318/Q218 %

Change Q318/Q317 %

Change 9M18/9M17 %

Interest and similar income

28,374

24,672

26,870

65,938

71,584

8.9

-5.3

8.6

Interest expense and similar charges

(4,128)

(5,752)

(6,440)

(11,807)

(18,546)

12.0

56.0

57.1

Net interest income

24,246

18,920

20,430

54,131

53,038

8.0

-15.7

-2.0

Net fee and commission income

2,745

3,801

3,265

7,352

10,624

-14.1

18.9

44.5

Other banking income

490

34

(23)

1,155

868

-167.6

-104.7

-24.8

Net interest and other banking income

27,481

22,755

23,672

62,638

64,530

4.0

-13.9

3.0

Net impairment losses on loans

(1,630)

(1,852)

(1,395)

(3,057)

(4,334)

-24.7

-14.4

41.8

Net income from banking activities

25,851

20,903

22,277

59,581

60,196

6.6

-13.8

1.0

Personnel expenses

(3,900)

(4,796)

(4,888)

(12,772)

(14,448)

1.9

25.3

13.1

Other administrative expenses

(4,899)

(5,934)

(5,242)

(14,929)

(16,247)

-11.7

7.0

8.8

Administrative expenses

(8,799)

(10,730)

(10,130)

(27,701)

(30,695)

-5.6

15.1

10.8

Net allowance for risks and charges

(24)

23

0

(82)

(51)

-100.0

-100.0

-37.8

Net adjustments to property and intangible assets

(76)

(141)

(72)

(229)

(213)

-48.9

-7.0

Other operating income/costs

(312)

48

81

(350)

133

68.8

-126.0

-138.0

Operating expenses

(9,211)

(10,800)

(10,121)

(28,362)

(30,826)

-6.3

9.9

8.7

Profit/(loss) from equity investments

(30)

(186)

(126)

(62)

(355)

-32.3

472.6

Profit (loss) from continuing operations

16,610

9,917

12,030

31,157

29,015

21.3

-27.6

-6.9

Taxes on income from continuing operations

(4,745)

(3,413)

(4,115)

(9,309)

(9,879)

20.6

-13.3

6.1

Profit after tax

11,865

6,504

7,915

21,848

19,136

21.7

-33.3

-12.4

Net interest margin

6.2

3.7

3.6

4.9

3.4

Loan loss provision as % of average loans

0.42

0.36

0.25

0.28

0.28

Cost income ratio (%)

32.0

47.2

42.8

44.2

47.6

Tax rate (%)

28.6

34.4

34.2

29.9

34.0

Source: Banca Sistema, Edison Investment Research

The next exhibit shows the progression of factoring turnover and receivables outstanding over the longer term. This demonstrates the increase in scale of the business, particularly from Q117, together with the normal quarterly fluctuation in turnover driven by seasonal factors and the incidence of larger transactions. Turnover for 9M18 increased 29% y-o-y with tax receivables, as expected, growing in importance. Q4 tends to see larger transactions as customers with calendar year-ends adjust their exposures in the final quarter. The level of turnover in this quarter can therefore be a sensitivity for near-term results as seen in Q416, which was relatively subdued for BST.

Exhibit 2: Factoring turnover and receivables outstanding by quarter

Source: Banca Sistema, Edison Investment Research

Exhibit 3 gives an analysis of interest income, highlighting in particular the details of LPI given by BST. As a reminder, LPI, earned on public sector receivables in legal collection, was accounted for on a cash basis until June 2016. Thereafter, a proportion of LPI outstanding has been accrued; initially this was 65% for healthcare and 15% for other public sector receivables. The accrual rate for other public sector receivables was increased to 31% in Q317 as additional data were fed into the statistical model used to determine accruals. With the third-quarter results, a further annual adjustment has seen the healthcare and other public sector accrual rates rise to 68% and 48%, respectively. The larger increase in the ‘other’ category reflects a shorter existing track record of collections so the incremental data added have a bigger impact. The group average accrual rate has increased from 37% to 44% and is net of a time value adjustment for an increase in the expected collection time. The accrual rate still well below the 86–87% collection rates recorded, suggesting that both the extra collection level and accrual rates are likely to continue to rise over time. While extra collection was lower for the 9M18 period and last two quarters, this reflects seasonal factors and instances of delays in the court process and should be reversed over time; in the meantime, BST earns a return of 8% plus the ECB reference rate on the outstanding balance (€100m at the end of Q318, of which €45m has already been recognised in the P&L).

Exhibit 3: Interest income analysis

€m

9M17

9M18

Change

Factoring late-payment interest (LPI):

LPI crystallised by Beta Stepstone related transaction

2.8

-100%

Change in accrual rate net of longer assumed time to collection in 9M18

9.0

6.6

-27%

Accruals - constant rate

4.7

9.3

98%

LPI extra collection

5.4

4.2

-22%

Total LPI

21.9

20.1

-8%

Other factoring interest (mainly amortisation of discount)

32.3

33.5

4%

Total factoring interest

54.2

53.6

-1%

CQ and other interest

14.1

18.0

28%

Group interest income

68.3

71.6

5%

Adjusted interest income margin*

6.1%

4.6%

-150bp

Interest + factoring commission income margin

6.8%

5.3%

-150bp

Source: Banca Sistema, Edison Investment Research

Reflecting growth in customer balances, interest from CQ and other loans increased by 28% with the annualised interest rate (calculated on period-end balances) stable at c 3.7%. The group interest income and interest plus fee income margin both fell by 150bp, primarily reflecting changes in the asset mix towards tax receivables (13% of factoring outstanding at end-Q317 and 27% at end-Q318), and lower transaction and accrual change elements within LPI. While the return on tax receivables is lower than the average for factoring, the fact that they have a zero regulatory capital risk weighting and a longer duration means that they represent an attractive area of business for BST. The interest margin was also affected by an increase in the proportion of average balances in the CQ business (CQ and other loans accounted for 32% of the total versus 29% in the prior year period).

Turning to asset quality, net bad and unlikely-to-pay loans, at 2.8% of customer loans, and provision coverage of 29% were both at similar levels to those seen in Q317 and H118. Bad loans in isolation increased from 1.6% to 1.8% of total loans between the second and third quarters (Exhibit 4), reflecting one private exposure and the purchase of a portfolio in Q318. Despite some quarterly variation, the overall position has remained broadly stable in the period shown.

Exhibit 4: Net bad and unlikely-to-pay loans as % of customer loans

Source: Banca Sistema, Edison Investment Research

Finally, capital ratios for BST remained comfortably above regulatory requirements. At the end of Q318, the CET1 ratio stood at 11.1% and TCR 14.2% compared with 11.0% and 14.1% at the end of H118. The minimum CET1 ratio set by the Bank of Italy is 7.125% and TCR 11.225%.

Outlook, estimates

As at the half-year stage, BST indicates that there has been no change in the factoring market background with yields, on a like-for-like basis and including fees, showing a slight increase in recent quarters. As noted earlier, changes in business mix will also affect the trend in reported yield in this area with increased tax receivables and purchases of portfolios with a higher proportion of receivables going straight to legal collection, potentially lowering the yield.

During its conference call, BST highlighted that it has secured a two-year factoring contract with a large pharmaceutical company, which is due to begin next year. This is set to generate factoring turnover of €700m per annum. This will help the group generate the growth envisaged in its three-year plan. The turnover will comprise three roughly equal components: payments that are expected to be on time, those likely to see a slight delay in payment and a tranche that will go into legal collection and will accrue LPI and consume regulatory capital.

The uncertain political and economic background in Italy has had a negative impact on the valuation of the Italian bank sector and has pushed up the yield on Italian government bonds. While this has resulted in a small negative valuation impact on BST’s short-dated portfolio of government bonds and is unhelpful for BST’s share price, in terms of credit risk the bank’s main credit exposure is to the public sector and factoring volume and yields may be strengthened by increased appetite among international corporations to reduce their exposure to Italy.

On the CQ side of the business, the prospects for growth in this niche area remain good. The pace of growth will be augmented by the acquisition of Atlantide announced in September with an initial consideration of €2.4m. This is a registered financial intermediary operating in this area and will provide BST with more direct access to business flow, enhancing its yield on business sourced in this way from a current rate of c 3.5% to over 4%. Atlantide may contribute up to €60m in turnover, potentially contributing approximately half of the targeted purchases for CQ. The acquisition, expected to complete in Q219, would affect the CET1 by the equivalent of 15bp (based on the June 2018 balance sheet). The group continues to monitor progress of the proposal in the European Parliament to lower the risk weighting applied to CQ loans from 75% to 35%, where loans are secured by one-fifth of salary or pension payments. If agreed, the change could add about 150bp to the CET1 ratio, facilitating expansion of the CQ business.

As a reminder, the financial targets set out in BST’s three-year strategic plan announced in April this year are summarised in Exhibit 3 with further detail and discussion in our note published in May.

Exhibit 5: Financial targets 2018–20

Target

Comments

Factoring turnover

18% CAGR to €3.3bn

Strong growth, though high relative to market expectation, is similar to prior three years, reflecting VAT receivables opportunity and increased sales effort.

Factoring outstanding

28% to €3.0bn

Outpaces turnover growth, reflecting mix change towards longer duration receivables, including those under legal collection or VAT receivables.

Consumer finance

25% CAGR to €1.0lbn

Extension of origination network and drive to increase market share.

Return on average equity

18–24% range

Compares with 21.5% FY17 and three-year average of 24.6% FY15–17.

CET1 ratio

c 10.5% over period and >11% end-period

FY17 11.9%. Prospective figures before any weighting change for consumer finance. RWA density* is expected to reduce from 46% in FY17 to c 38%, reflecting mix including growth in VAT receivables, which have a zero weighting.

Interest income margin**

400–450bp

Average for last three years 480bp: reduction reflects mix and allowance for slightly lower discounts in the market.

Interest expense

c1% on average

Expected to be lower initially, reflecting lower retail cost but increasing towards end of period.

Cost of risk

<30bp on average

Last three years average 49bp: reduction reflects mix/exit from SME loans.

Cost income ratio

47% on average

Expected to rise in 2018 but then be held stable as business expands.

Source: Banca Sistema, Edison Investment Research. Notes: *RWA density = total RWA/ total assets. **Interest income margin = interest income/average loans excluding income from securities portfolio, credit due from banks and repo.

As before, our estimates are aligned with these targets. We have reduced our estimate for the current year (-3.7% at the EPS level) to allow for the results year-to-date, with a slightly lower figure in total for net interest income and fee income and a higher assumed tax rate, partly offset by lower assumed costs. Although there are small changes in the make-up of the estimates for FY19 and FY20, at the EPS level there are only marginal reductions.

Exhibit 6: Estimate revisions

Net operating income (€m)

PBT (€m)

EPS (c)

DPS (c)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

12/18e

89.9

87.0

(3.3)

39.2

39.0

(0.7)

33.7

32.4

(3.7)

9.00

9.00

0.0

12/19e

116.6

118.4

1.6

52.1

53.6

2.8

44.7

44.7

(0.1)

9.70

9.70

0.0

12/20e

136.1

139.3

2.4

60.6

62.3

2.9

52.0

51.9

(0.1)

10.50

10.50

0.0

Source: Edison Investment Research

Suggesting a cautious view on BST’s financial targets, we note that consensus estimates for FY19 and FY20 (company-collected) are noticeably below our own with net earnings of €29.4m and €34.7m, respectively, compared with our estimates of €35.9m and €41.8m. Sensitivities in achieving the bank’s financial plan include the phasing of turnover in both factoring and CQ, changes in competitor behaviour, the timing and level of changes in LPI accrual and the delivery or otherwise of changes in risk weighting for CQ assets. Further detail on our estimate is shown in the financial summary (Exhibit 9).

Valuation

We have updated our valuation comparison table in Exhibit 7. In a period that has seen markets correcting in the face of heightened macro concerns, the peers shown here have seen a 30% decline in share price over 12 months, in line with the fall in BST’s share price. This has left BST trading at a P/E multiple of close to 5x, the lowest in the group; Encore and Arrow also trade below 6x.

Exhibit 7: Valuation comparison

Ticker

Market cap
(€m)

CY18 P/E
(x)

Yield
(%)

ROE
(%)

Price to book (x)

Banca Sistema

BST IM

134.9

5.2

5.1

20.0

0.9

Arrow Global

ARW LN

396.0

5.4

5.7

26.5

2.0

Banca Farmafactoring

BFF IM

775.7

7.9

10.8

21.9

2.5

Banca IFIS

IFIS IM

879.3

8.4

6.1

10.8

0.6

Encore Capital

ECPG US

710.8

5.5

0.0

15.1

1.1

Grenke

GLJ GY

3,648.1

27.7

2.2

13.3

3.5

Hoist Finance

HOFI SS

605.0

11.0

2.7

14.3

1.6

Intrum Justitia

IJ SS

2,843.1

12.2

4.3

8.4

1.3

Kruk

KRU PW

837.0

9.2

2.6

17.7

2.1

PRA

PRAA US

1,228.0

17.4

0.0

14.0

1.3

Average

11.0

4.0

16.2

1.7

Source: Bloomberg. Note: priced at 5 November 2018.

Our chart showing ROEs versus price to book for the same group of companies (Exhibit 8) also suggests that Banca Sistema is conservatively valued and we would need to assume a ROE of below 15% to place the company more in line with peers. As noted earlier, consensus estimates for BST have been reduced that would potentially pull the prospective ROE in this direction although probably still above 15%. On modestly reduced estimates, our ROE/COE points to a valuation of c €3.30 (€3.40 previously) using assumptions including a 20% ROE, long-term growth of 4% and cost of equity of 12.6%.

Exhibit 8: Comparing ROE and price to book

Source: Bloomberg

Exhibit 9: Financial summary

Year-end 31 December (€000)

2016

2017

2018e

2019e

2020e

Income statement

Interest income

86,321

87,234

97,251

135,142

167,694

Interest expense

(15,321)

(16,584)

(25,258)

(33,544)

(45,349)

Net interest income

71,000

70,650

71,993

101,598

122,345

Net fee and commission income

9,060

10,652

13,900

15,540

15,675

Dividends and similar income

227

227

227

0

0

Profit on securitisation

0

0

0

0

0

Net income from asset sales/purchases and trading

1,196

940

861

1,280

1,320

Net interest and other banking income

81,483

82,469

86,981

118,418

139,340

Net impairment losses on loans

(9,765)

(5,352)

(6,138)

(8,914)

(11,381)

Net income from banking activities

71,718

77,117

80,842

109,504

127,959

Personnel expenses

(15,169)

(17,631)

(19,449)

(24,034)

(25,595)

Other administrative expenses

(22,529)

(19,705)

(21,932)

(31,859)

(40,034)

Administrative expenses

(37,698)

(37,336)

(41,382)

(55,893)

(65,629)

Other operating income/costs

(589)

(726)

(131)

0

0

Operating expenses

(38,287)

(38,062)

(41,513)

(55,893)

(65,629)

Profit/(loss) from equity investments

2,281

(140)

(355)

0

0

Pre-tax profit

35,712

38,915

38,975

53,611

62,330

Tax

(10,399)

(12,122)

(12,897)

(17,691)

(20,569)

Profit after tax

25,313

26,793

26,078

35,919

41,761

Adjustment for normalised earnings

1095

0

0

0

0

Adjusted net income

26,408

26,793

26,078

35,919

41,761

Reported earnings per share (€)

0.31

0.33

0.32

0.45

0.52

Normalised earnings per share (€)

0.33

0.33

0.32

0.45

0.52

Dividend per share (€)

0.076

0.086

0.090

0.097

0.105

Balance sheet

Assets

Financial assets available for sale

514,838

285,610

241,705

241,705

241,705

Due from banks

83,493

36,027

43,100

43,100

43,100

Loans to customers

1,348,329

1,850,290

2,881,861

3,840,885

4,525,719

Property, plant and equipment

23,313

24,272

27,164

27,164

27,164

Intangible assets

1,835

1,790

1,850

1,850

1,854

Tax assets

10,528

10,198

8,103

8,103

8,103

Other assets

17,027

101,046

116,979

116,979

116,979

Total assets

1,999,363

2,309,233

3,320,762

4,279,786

4,964,624

Liabilities and shareholders' funds

Due to banks

458,126

517,533

646,892

862,164

1,015,889

Due to customers

1,262,123

1,284,132

2,108,432

2,820,534

3,315,565

Securities in issue

90,330

281,770

308,073

308,073

308,073

Total tax liabilities

8,539

10,118

15,905

15,905

15,905

Other liabilities

59,825

71,996

79,551

79,551

79,551

Employee termination indemnities

1,998

2,172

2,412

2,412

2,412

Provisions for risks and charges

4,105

6,745

8,916

11,883

14,001

Total liabilities

1,885,046

2,174,466

3,170,181

4,100,522

4,751,397

Group shareholders' equity

114,297

134,737

150,551

179,234

213,197

Minority interests

20

30

30

30

30

Total liabilities and equity

1,999,363

2,309,233

3,320,762

4,279,786

4,964,624

Capital position

Risk weighted assets

788,000

1,054,901

1,236,666

1,596,851

1,821,436

Credit risk/customer loans

36%

42%

39%

38%

37%

RWA/total assets

39%

46%

37%

37%

37%

Common equity tier 1

104,600

125,800

141,474

169,592

202,904

Total capital

124,700

162,100

175,374

201,092

234,404

CET1 ratio

13.3%

11.9%

11.4%

10.6%

11.1%

Total capital ratio

15.8%

15.4%

14.2%

12.6%

12.9%

Leverage ratio

6.1%

6.2%

4.7%

4.3%

4.4%

Other ratios

Net interest margin

5.1%

5.0%

3.4%

3.4%

3.23%

Loan loss provision as % of average loans

0.70%

0.38%

0.29%

0.30%

0.30%

Total expenses % of interest and fee income

47.1%

45.9%

48.2%

47.7%

47.6%

Return on average equity

25.4%

21.5%

18.3%

21.8%

21.3%

Tax rate

29.1%

31.1%

33.1%

33.0%

33.0%

Source: Banca Sistema data; Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Banca Sistema and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Banca Sistema and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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