Banca IFIS: Core Business Now Replacing Bonds

Core business replacing bond
In 2014 Banca IFIS (MILAN:IF) management delivered what it promised. The strong profits historically earned on the Italian government bond portfolio have been fully replaced by core trade receivable and distressed loan growth. Credit quality has continued to improve. Looking forward the franchise growth delivered in 2014 bodes well for future growth. These trends were expected but we have modestly increased our 2015 pre-tax profit and EPS forecasts.

IFIS

2014 results summary
Banca IFIS reported pre-tax profits of €145m in 2014, marginally up on the €143m reported in 2013. Net profits rose 13% to €96m with the non-recurrence of one-off bank taxes applied in 2013. The underlying business performance was much stronger as the group earned c €16.5m less on its bond portfolio where reinvestment returns fell to an unacceptable level and the portfolio shrank from €8.4bn to €5.1bn. The core business saw the trade receivables business growing its customer base by 13% and turnover with those customers by 46%. Retail deposit spreads widened significantly with only a modest outflow of funds. The nominal value of the distressed loan portfolio grew by 44% to €5.6bn, and there are now 775k positions. The book value (€135m) is just 2.6% of the nominal value of this portfolio. Credit quality across the group improved by every measure allowing for a significant reduction in the impairment charge.

2015 outlook
2015 should be an encouraging year for Banca IFIS. The growth in customer numbers and activities should have a full period effect. Non-personnel costs doubled in Q413 compared with prior quarters due to costs on a disposed portfolio and investment spend – the former should not recur. The asset quality improvements and improved coverage bode well for the impairments outlook. In the distressed loan business, the accounting is conservative in its recognition of income and so 2015 should benefit from the actions taken in 2014. With such a low value on the book, relatively small improvements in collections can lead to a material uplift in earnings. The drag from the bond portfolio should start to moderate (€2.2bn of bonds mature in 2015 against the €3.3bn maturing in 2014).

Valuation: Upside c 20%
Moving forward our valuation by a year, together with modest estimate increases, sees an uplift in our average valuation to €16.9 from €14.9. We expect IFIS to show good growth and hence valuations rise as we roll forward a year.

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