Banca Sistema — Growth on track

Banca Sistema (MI: BST)

Last close As at 16/07/2024

EUR1.39

0.00 (0.00%)

Market capitalisation

EUR113m

More on this equity

Research: Financials

Banca Sistema — Growth on track

There was a small one-off provision in the first quarter but, that aside, trading was in line with management expectations and Banca Sistema (BST) continues to focus on delivery of its recently published three-year plan which, on our estimates, points to substantial growth in receivables and earnings between 2018 and 2020. The shares in this specialist lender remain modestly valued, both in relative and absolute terms.

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Financials

Banca Sistema

Growth on track

Q118 results

Financial services

16 May 2018

Price

€2.25

Market cap

€181m

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

(2.0)

(2.4)

(4.5)

Rel (local)

(5.8)

(9.2)

(14.1)

52-week high/low

€2.61

€2.10

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 events

Q218

26 July 2018

Analyst

Andrew Mitchell

+44 (0)20 3681 2500

Banca Sistema is a research client of Edison Investment Research Limited

There was a small one-off provision in the first quarter but, that aside, trading was in line with management expectations and Banca Sistema (BST) continues to focus on delivery of its recently published three-year plan which, on our estimates, points to substantial growth in receivables and earnings between 2018 and 2020. The shares in this specialist lender remain modestly valued, both in relative and absolute terms.

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

6.4

4.1

12/18e

90.2

39.2

33.7

9.0

6.3

4.2

12/19e

116.5

52.1

44.7

9.7

4.7

4.6

12/20e

135.9

60.6

52.0

10.5

4.1

5.0

Note: *Reported PBT and EPS.

Q118 shows strong loan and income growth

Factoring receivables and pension and salary-back loans continued to show good year-on-year growth at 35% and 68%, respectively. As expected, the shift in loan mix towards lower-risk/lower-yield assets, including VAT receivables, is resulting in a reduction in the interest income margin, but this is coupled with low impairment levels (22bp) and longer duration. The growth in pension and salary backed (CQ) loans also contributes to this mix change at group level. Interest cost was amplified by a one-off €0.8m provision related to the TLTRO funding rate applied in prior periods and, while reported net earnings growth was limited to 7% year-on-year (to €4.7m), adding back the provision would result in growth of 18% (to €5.2m).

Prospects for receivables growth remain good

BST only recently announced its three-year strategic plan and the first quarter results do not suggest any modification to the outlook. The bank’s focus is on its two core areas in factoring, and CQ lending and the plan targets 28% and 25% CAGR in lending to 2020 respectively. Tax receivables are seen as a particularly promising area within factoring and a potential reduction in capital requirement could add to the attraction of CQ lending. BST reports that the competitive environment remains stable. The political background in Italy is uncertain, but neither business area appears particularly sensitive to this.

Valuation: Estimates and valuation maintained

Our estimates are essentially unchanged following the results (see financial summary, Exhibit 4, page 5) and compared with a selected peer group BST appears modestly valued in terms of P/E and price-to-book multiples. Our ROE/COE valuation is unchanged at €3.40.

Q118 results: Meeting management expectations

Banca Sistema’s first quarter results compared with Q117 showed 10% growth in net interest income and a near-60% increase in net fee income resulting in a 22% increase in operating income. A swing back from an impairment write-back to a charge meant this fed through to a 14% increase in pre-tax profit, while a higher tax rate led to a 7% increase at the earnings level (see Exhibit 1). There are several points to bear in mind when looking at this comparison.

1.

The interest income margin was lower at 4.3%, reflecting a combination of lower yield on factoring receivables, which mainly reflects a mix change towards lower-risk and lower-yield assets, including VAT receivables and PA portfolios already in legal collection when acquired. The larger proportion of pension and salary-backed lending within total customer loans also results in a lower average yield. Against this, the lower-risk, longer duration and, for tax receivables, lower capital absorption all contribute to overall returns.

2.

Most of the fee income arises in the factoring business, where fee and interest income are effectively interchangeable. Adding factoring fee income to the interest income percentage shown below would give figures of 5.6% for Q117 and 5.1% for Q118.

3.

Interest expense for Q118 was increased by a one-off provision of €0.8m relating to TLTRO funding where a benefit of 40bp was recognised in earlier periods, and it now seems likely that factoring and pension and salary-backed lending will instead qualify for a zero interest rate. Without this provision, profit after tax would have been €5.2m.

4.

The positive figure for impairment losses for Q117 reflected a write-back, while the loan loss provision in Q118 at 22bp of average loans compares with the target for below 30bp on average set in the recently announced three-year strategic plan.

Exhibit 1: Q118 profit and loss summary

€000s

Q117

Q417

Q118

Q118/Q117

Q118/Q417

Net interest income

12,423

16,519

13,688

10.2

(17.1)

Net fee and commission income

2,249

3,300

3,558

58.2

7.8

Other banking income

231

12

857

271.0

N/A

Operating income

14,903

19,831

18,103

21.5

(8.7)

Net impairment losses on loans

488

(2,295)

(1,087)

N/A

(52.6)

Net operating income

15,391

17,536

17,016

10.6

(3.0)

Personnel expenses

(4,274)

(4,859)

(4,764)

11.5

(2.0)

Other administrative expenses

(5,052)

(4,776)

(5,071)

0.4

6.2

Administrative expenses

(9,326)

(9,635)

(9,835)

5.5

2.1

Net allowance for risks and charges

(77)

74

(74)

(3.9)

N/A

Net adjustments to property and intangible assets

0

(74)

0

N/A

N/A

Other operating income/costs

193

(65)

4

(97.9)

N/A

Operating expenses

(9,210)

(9,700)

(9,905)

7.5

2.1

Profit/(loss) from equity investments

0

(78)

(43)

N/A

(44.9)

Pre-tax profit

6,181

7,758

7,068

14.4

(8.9)

Taxes on income from continuing operations

(1,783)

(2,813)

(2,351)

31.9

(16.4)

Profit after tax

4,398

4,945

4,717

7.3

(4.6)

Interest income % of average loans

4.9

5.0

4.3

Funding cost % (ex-€0.8m one-off provision relating to TLTRO)

0.9

0.9

1.0

Loan loss provision as % of average loans

(0.14)

0.53

0.22

Cost income ratio (%)

62.6

48.6

54.3

Source: Banca Sistema, Edison Investment Research

Within interest income of €20m, factoring accounted for €15m and within this total late payment interest income (LPI) of €4.8m (24% of total interest income) compared with €3.1m for Q117. Further, within the €4.8m of LPI accruals accounted for €2.9m versus €2.0m in Q117. Cash collections of LPI were €3m (v €1.7m) of which €1.1m (v €0.6m) related to amounts already accrued through the P&L in previous periods. The total stock of LPI at the end of the period stood at €138m, of which only €35.2m has been recognised through accrual in the P&L since June 2016. BST’s historical experience is that 87% or more of this interest should be collected over time. (See our outlook note published in March 2018 for a discussion of the accounting for LPI.)

Turning to the balance sheet, on a year-on-year basis, customer loans were up 44% while BST reports that, compared with end 2017 overall loans at amortised cost increased by 3%, within which factoring receivables were up 1% and pension and salary-based loans were increased 5%. Here it should be remembered that seasonal fluctuation and the incidence of transactions can result in significant quarterly fluctuation in loan growth and factoring turnover, which can in turn influence short-term results.

Contributing to the increase in factoring turnover (+24% year-on-year to €504m) have been partnership agreements with banks, which accounted for 36% of turnover in Q118 compared with 30% in the prior year period. A new agreement has subsequently been announced with Unipol Banca (260 branches), taking the total number of partnerships to 18.

Financials

Our estimates are essentially unchanged from those we made following the publication of the three-year plan (see our last note for detail). Details are shown in the financial summary (Exhibit 4).

As indicated previously, the implementation of IFRS 9 has had only a limited impact on the balance sheet, reducing the CET1 and total capital ratios by 2bp (they stood at 11.8% and 15% respectively at the end of the quarter).

Valuation

We have updated the valuation comparison showing BST and selected peers used in previous notes. BST trades on the lowest P/E multiple and one of the higher yields.

Exhibit 2: Valuation comparison

Ticker

Market cap (€m)

CY18 P/E
(x)

Yield (%)

ROE (%)

Price to book (x)

Banca Sistema

BST IM

177.7

6.5

3.9

20.0

1.3

Arrow Global

ARW LN

667.0

8.7

3.4

27.6

3.4

Banca Farmafactoring

BFF IM

888.8

8.9

9.4

21.7

2.3

Banca IFIS

IFIS IM

1,747.8

11.6

3.1

13.9

1.3

Encore Capital

ECPG US

967.4

9.6

0.0

13.7

1.9

Grenke

GLJ GY

4,471.2

34.2

1.7

15.7

5.2

Hoist Finance

HOFI SS

618.6

10.5

2.4

14.7

2.0

Intrum Justitia

IJ SS

2,829.3

11.3

4.3

10.9

1.2

Kruk

KRU PW

1,024.7

11.8

2.1

18.6

2.8

PRA

PRAA US

1,462.1

19.1

0.0

13.1

1.6

Average

13.2

3.0

17.0

2.3

Source: Bloomberg. Note: Prices as at 14 May 2018.

BST also trades on a below average price to book ratio despite a return on equity of c 20%. Plotting the ROE against price to book for the same companies underlines the relatively conservative valuation on which the company currently trades (see Exhibit 3). With our forecast effectively unchanged we have not amended our valuation of €3.40. This reflected the output of an ROE/COE model assuming 20% ROE, long-term growth of 4% and a cost of equity of 11.9%.

Exhibit 3: Comparing ROE and price to book

Source: Bloomberg

Exhibit 4: Financial summary

Year end 31 December (€000s)

2016

2017

2018e

2019e

2020e

INCOME STATEMENT

Interest income

86,321

87,234

100,770

136,052

164,782

Interest expense

(15,321)

(16,584)

(23,269)

(33,747)

(43,615)

Net interest income

71,000

70,650

77,501

102,305

121,166

Net fee and commission income

9,060

10,652

11,413

12,879

13,395

Dividends and similar income

227

227

0

0

0

Profit on securitisation

0

0

0

0

0

Net income from asset sales/purchases and trading

1,196

940

1,240

1,280

1,320

Net interest and other banking income

81,483

82,469

90,154

116,464

135,881

Net impairment losses on loans

(9,765)

(5,352)

(6,912)

(9,681)

(11,423)

Net income from banking activities

71,718

77,117

83,243

106,783

124,459

Personnel expenses

(15,169)

(17,631)

(20,627)

(23,502)

(24,907)

Other administrative expenses

(22,529)

(19,705)

(23,260)

(31,154)

(38,957)

Administrative expenses

(37,698)

(37,336)

(43,886)

(54,657)

(63,864)

Other operating income/costs

(589)

(726)

(70)

0

0

Operating expenses

(38,287)

(38,062)

(43,956)

(54,657)

(63,864)

Profit/(loss) from equity investments

2,281

(140)

(43)

0

0

Pre-tax profit

35,712

38,915

39,243

52,126

60,594

Tax

(10,399)

(12,122)

(12,164)

(16,159)

(18,784)

Profit after tax

25,313

26,793

27,079

35,967

41,810

Adjustment for normalised earnings

1095

0

0

0

0

Adjusted net income

26,408

26,793

27,079

35,967

41,810

Reported earnings per share €

0.31

0.33

0.34

0.45

0.52

Normalised earnings per share €

0.33

0.33

0.34

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

453,501

453,501

453,501

Due from banks

83,493

36,027

24,652

24,652

24,652

Loans to customers

1,348,329

1,850,290

2,931,025

3,616,876

4,089,727

Property, plant and equipment

23,313

24,272

24,772

24,772

24,772

Intangible assets

1,835

1,790

1,850

1,850

1,854

Tax assets

10,528

10,198

8,271

8,271

8,271

Other assets

17,027

101,046

18,944

18,944

18,944

Total assets

1,999,363

2,309,233

3,463,015

4,148,866

4,621,721

Liabilities and shareholders' funds

Due to banks

458,126

517,533

813,593

1,003,972

1,135,226

Due to customers

1,262,123

1,284,132

2,102,561

2,566,994

2,872,993

Securities in issue

90,330

281,770

283,013

283,013

283,013

Total tax liabilities

8,539

10,118

10,331

10,331

10,331

Other liabilities

59,825

71,996

86,879

86,879

86,879

Employee termination indemnities

1,998

2,172

2,237

2,237

2,237

Provisions for risks and charges

4,105

6,745

9,862

12,169

13,760

Total liabilities

1,885,046

2,174,466

3,308,476

3,965,596

4,404,439

Group shareholders' equity

114,297

134,737

154,509

183,240

217,252

Minority interests

20

30

30

30

30

Total liabilities and equity

1,999,363

2,309,233

3,463,015

4,148,866

4,621,721

Capital position

Risk weighted assets

788,000

1,054,901

1,385,990

1,636,526

1,845,997

Credit risk/customer loans

36%

42%

39%

38%

38%

RWA/total assets

39%

46%

40%

39%

40%

Common equity tier 1

104,600

125,800

145,424

173,602

206,964

Total capital

124,700

162,100

179,324

205,102

238,465

CET1 ratio

13.3%

11.9%

10.5%

10.6%

11.2%

Total capital ratio

15.8%

15.4%

12.9%

12.5%

12.9%

Leverage ratio

6.1%

6.2%

4.6%

4.5%

4.8%

Other ratios

Net interest margin

5.1%

5.0%

3.3%

3.1%

3.1%

Loan loss provision as % of average loans

0.70%

0.38%

0.30%

0.30%

0.30%

Total expenses % of interest and fee income

47.1%

45.9%

49.4%

47.5%

47.5%

Return on average equity

25.4%

21.5%

18.7%

21.3%

20.9%

Tax rate

29.1%

31.1%

31.0%

31.0%

31.0%

Source: Company 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 Pty 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.
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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

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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 Pty 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

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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

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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