Core business delivery
Banca IFIS (MILAN:IF) has used the significant profits generated from its bond portfolio to invest in its receivable financing operations, and in Q114 we saw a material increase in headcount on Q113. The core business is being positioned to deliver growth. In the near term the discipline has been shown in only re-investing part of the maturing bond portfolio. This has led to a reduction in estimates, but the impact on our valuation is limited – we had built a material reduction into our 2016 estimates for this anyway.
Q114 core business strong
The core trade receivables business saw a 31% rise in net banking income (revenue) and an 84% rise in net profit. The former was driven by an increased customer base (account numbers up 6.5% to nearly 4,000), wider margins from dealing with smaller customers, widening deposit spreads and a 37% increase in turnover. Impairments saw a material fall with a further improvement in underlying credit metrics. The distressed retail loan unit saw a 9% increase in profit with the pipeline for future profit much stronger than this as increasing numbers of customers are signing settlement plans. The reported profit in tax receivables fell by 35% but on an underlying basis grew, excluding non-recurring Q113 items. Management has invested heavily (adding c 100 to the headcount) and Q114 saw €1.2m of costs from the Italian deposit protection scheme, which should be non-recurring, as well as higher deposit stamp duty.
Q114 government bond portfolio
Profits in the governance and services unit fell 16% driven by lower bond volumes. In Q114 €1bn of bonds matured and only a quarter of them were reinvested. Management has promised discipline and that it would only reinvest if appropriate financial hurdles were achievable, and by stepping back in this period, has kept its word. It does mean that forecast profits are reduced in the near term, but we had been expected them to fall away and it has simply happened a little earlier than forecast. Should appropriate market opportunities arise we would expect further re-investment and with it, the potential to reinstate our earlier estimates.
Valuation: Around fair value
We had built in a 40% reduction in profits in 2016 in our DCF model to reflect the non-sustainability of bond portfolio profits. This has been reduced to 25% given the non-reinvestment seen in Q114. As a consequence, the impact of lower estimates does not see a reduction in our valuation (average €14.40).
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