Core franchise set for growth
Banca IFIS, (IF) announced its preview of FY13 results on 22 January 2014, with its detailed results on 6 March. 2013 saw excellent profits generated from the bond portfolio allowing further investment and growth from the receivable financing businesses. Credit quality has improved significantly due to both management action and early signs of economic recovery. Management of recoveries from distressed receivables, purchased for a few cents in the euro, has particularly good growth opportunities into 2014 and beyond.
2013 record revenue and profits
Revenue rose 8% to €264m and pre-tax profits 17% to €143m. The core SME receivables business is showing steady growth helped by the limited appetite of many Italian banks to lend to SMEs. IFIS has increased the number of smaller enterprises it deals with and where it has better negotiating power and has offset the limited impact of the government shortening its payment periods. It is increasing net banking income strongly from recently acquired businesses in distressed and tax receivables (up 31% and 145% respectively). Impairments fell 17% helped by aggressive provision in prior periods, an economic recovery and the inclusion of recoveries on distressed loans. The government bond portfolio delivered excellent value in 2013 and IFIS has shown commendable discipline in only re-investing when market pricing was above its hurdle rates.
2014 growth opportunities in core businesses
Banca IFIS has invested heavily in building its collections operations from a large portfolio of distressed receivables purchased for a few cents in the euro. Relatively small improvements in recovery rates can have a dramatic effect on profits and the portfolio IFIS has purchased gives it many years of growth opportunity. The core receivables business is again expected to show steady growth. We expect the progressive re-pricing of deposits from Q413 to be strongly positive on 2014 earnings and note deposit volumes have been remarkably stable. The pricing of Italian bonds in Q413 saw the opportunity for re-investment, which has seen the portfolio re-built to levels above our previous expectations. The income from this will continue longer than expected and is a factor in our upgraded 2014 estimates.
Valuation: Upside of nearly 10%
Our valuation approaches indicate a value of €14.4. This is up from our previous estimates as bond portfolio profits are now assumed to be sustained for longer than previously forecast. We have also rolled the Gordon’s growth model to 2015 NAV.
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