Banking the bond profit in April 2015
Banca IFIS (MILAN:IF)’s Q115 results continued recent trends with the core businesses delivering profit growth, which more than offset the decline in contribution from the managing down of the bond portfolio. Net banking income (revenue) was up 3% and pre-tax profits 6% on Q114. In April 2015, IFIS sold its existing bond portfolio for a pre-tax gain of c €120m. There has been reinvestment in longer-term bonds at a lower yield.
Q115 results
Q115 on Q114, core business delivered strong growth in risk-adjusted revenue (net profit from financial activities: trade receivables +19%, distressed loans 22%, tax receivables 75%, combined €46.7m against €37.8m, up 23%). Around half the improvement came from lower impairments (receivable impairments €4.0m versus €8.4m in Q114). Despite a €5m reduction in the contribution from the bond portfolio, group pre-tax profits grew to €39.5m from €37.7m in Q114. One-off factors were a small net gain (€2m impairment in value of Popolare di Vicenza, other income €3.3m against a three-year average of €0.8m and a modest change in tax receivable collection assumptions). The key business message is that the strategic objective of replacing bond profits with core business profits has been achieved.
Outlook
The strong core business growth is largely unchanged from previous estimates although we have reduced our impairment charges to reflect continued excellent asset quality. Given good collection rates, IFIS may make further DRL purchases which could accelerate this growth further. In April 2015 IFIS sold much of the existing bond portfolio at a pre-tax gain of €120m (post tax €105m). There has been reinvestment in somewhat lower-yielding longer-term bonds reducing 2016e annual profits by c €45m; the longer duration means there should be earnings until 2020.
Valuation: Modestly above fair value
The change in the bond portfolio has seen our discounted cash flow model valuation reduce as the long-term profit generation is lower (and more than offsets the immediate increase in surplus cash). This is offset by our Gordon’s growth model seeing a material uplift from recognising equity gains, which previously were unrecognised. Our average valuation is now €17.0 (previously €16.9). The current market price is assuming growth of c 6% pa against our long-term assumption of 4%. The market assumption remains undemanding relative to the near 20% profit growth delivered by core business quarter on quarter.
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