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Edited Transcript of BFF.MI earnings conference call or presentation 8-Nov-19 11:30am GMT

Nine Months 2019 Banca Farmafactoring SpA Earnings Call

MILANO Nov 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Banca Farmafactoring SpA earnings conference call or presentation Friday, November 8, 2019 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Emanuele Bona

Banca Farmafactoring S.p.A. - VP of Finance & Administration Department

* Massimiliano Belingheri

Banca Farmafactoring S.p.A. - CEO & Director

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Conference Call Participants

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* Antonio Reale

Morgan Stanley, Research Division - Equity Analyst

* Filippo Prini

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Simonetta Chiriotti

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to BFF Banking Group conference call of 9 months 2019 Results. (Operator Instructions) Please note this event is being recorded.

I would like to turn the conference over to Massimiliano Belingheri, Group CEO; and Emanuele Bona, Vice President, CFO. Please go ahead.

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Massimiliano Belingheri, Banca Farmafactoring S.p.A. - CEO & Director [2]

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Thank you, everybody, for joining us today, and welcome. We are pleased to report our 9 months results for 2019 as well as the closing of the IOS acquisition, which we will provide some further details compared to what have already been announced to the market.

The acquisition of IOS closes with a goodwill of EUR 9 million. We have completed on the 30th of September. There's no impact on the P&L results, whereas we have expensed all the integration costs already, which have been covered by the positive impact of the goodwill tax setup. Therefore, the P&L figures don't include any results from the IOS Finance accounts as of September, while clearly, consolidated balance sheet includes all the assets and liabilities of the acquisition at the fair value.

The financial performance of the business, therefore, excluding IOS, has been strong and improving compared to what we've shown in the first and second quarter. Net income is at EUR 60.6 million, 4% year-on-year, with a 33% adjusted return on tangible equity, improved compared to last year. And this has been despite the lower level of net LPI over-recovery we have seen in the previous 2 quarters. So the growth actually has been, we think, quite strong of the underlying business. The stock of balance sheet LPI has increased significantly with if you want, the back book reserve increase of EUR 38 million year-on-year. And we continue to have a good discipline on cost because with adjusted operating cost over loans declining at almost 20 bps to 2.05%.

Our growth resumed both in volumes and loans. We continue to add loans at a 15% year-on-year level. The percentage outside Italy is now closer to 40% of the overall customer loans, and volumes are up 3% with a good contribution from almost every geography.

Funding remains plentiful with a good LCR, excess liquidity. And we have launched, as we have mentioned already to the market a number of initiatives to actually strengthen our funding capacity outside of Italy. Plus recently, we issued a first-rated senior unsecured bond in October for 1.75% yield after having achieved a Ba1 rating from Moody's.

Overall, we continue to have a good discipline on risk and provision. We continue to have a decline in net impaired loans with the net NPL to loan ratio down to 0.1%. It's excluding the Italian municipalities in this setup. And importantly, 80% of the total net impaired assets are towards the public sector. The private sector exposure in terms of NPLs actually declined quite strongly on the back of good recovery from those exposures. The cost of risk is marginal. It's 1 bps, excluding the SME factoring business, which we put in run off 1.5 years ago.

Capital is plentiful. If you look at total capital and core equity Tier 1 ratios, those are equal to 15.8% and 11.2%, respectively. That excludes every -- any income for the period, which means we actually funded the acquisition of yields and the growth of the business with existing excess capital in the book. And therefore, the entire amount, so far, created by the company in terms of net profit is set aside in terms of our capital reporting for dividend distribution.

Looking at Page 3 on IOS. We have completed the acquisition. We think it's strategically quite important in terms of strengthening our presence in the Spanish market, particularly given the outlook in that market, also in terms of political instability and potential more interest from customers to sell their public sector exposure. That strengthen our position, particularly around the health care system, where IOS has a similar size to ours. And the acquisition has been done at what we think are attractive multiples, pre-synergies of 8.3x P/E 2018 and 1.5x price to tangible book. So we think bringing together the 2 businesses, our Spanish business and IOS will strengthen our presence in the market. And importantly, we have been able to actually cover the entire cost of the integration, including the one that we expected to happen in the next months, where we integrate for the IOS platform with the positive impact from the goodwill step-up.

We have moved the portfolio of IOS receivables to our accounting method, where we assume a lower recovery than what IOS has had in their books, and therefore, we are deferring some income for future IOS. But overall, we're quite pleased we have completed the acquisition of this project.

So going back to our own results before the acquisition on Page 4. Net income, as I mentioned, is EUR 60.6 million for the 9 months. We have seen growing profitability with 33% adjusted ROTE. And again, that's not considering that we had EUR 7.4 million of lower net over-recoveries is in the 9 months to -- compared to 9 months 2018. So if you graph for that after tax, clearly, the growth like-for-like is in the double digit.

The back book income reserve has increased. That's important because it actually shows our ability to continue to have forward visibility on our future earnings. And therefore, it's a source of future profitability that we know is there to be recognized.

Looking at how we go through the net income. In terms of net interest income and net banking income, we've seen a growth in the 9 months to September. We actually were in a decline in the numbers to June. So we see that's a very positive trend for the business. And again, there's a slightly lower net over-recoveries. If you look at annualized return on risk-weighted assets, adjusting for the lower net over-recoveries, actually, we have kept a very good level. The fact, in line with the 9 months 2018. We keep also having good recovery of credit collection costs, which should have reached EUR 4 million in the 9 months to 2019, and those contribute clearly to our overall P&L.

In terms of interest income on Page 6, that clearly shows the same trend that we've seen before for the net interest income. We've seen the same consideration around the lower LPI cashed-in in this period. The lower LPI has resulted in lower over-recovery, but we had actually a higher rate of over-recovery, which means we have depleted less of our LPI stock. So if you look actually on Page 6, at the bottom, you can actually see the growth in the unrecognized LPI stock from EUR 362 million to EUR 400 million year-on-year, which is a strong growth for the portfolio.

Looking at the other component of net interest income, i.e., funding costs. We continue to see a reduction in funding costs at 1.6% compared to 1.79% we had in the 9 months of -- the first 9 months of last year. The overall absolute amount of funding costs have increased driven by the increase in the portfolio and also the proportional higher base of zloty funding, which has a higher interbank rate compared to the Euribor on more than 2 percentage points.

We are -- remember, no -- we have no funding costs linked to government bond yield or we have no ECB refinancing risk. And we see further opportunities, as you will see later with Emanuele, on the opportunity to reduce further our funding costs through online deposits in Poland, The Netherlands and Ireland [3 years, the issuance of bonds].

Operating efficiency on Page 8 remains strong despite us continuing to invest in our growth. The operating cost over loans has decreased to 2.05% in the 9 months -- the first 9 months of this year. In terms of [accurate] numbers, operating costs are up 8% year-on-year driven mostly by the personnel cost, where we'll continue to invest in the infrastructure to actually drive growth in the business. And we have a cost-income ratio at 40%, which is actually -- given it has an income component, if you take into account the lower LPI of our recovery will be in line with last year's numbers.

In terms of balance sheet, on Page 9, customer loans have increased 15% year-on-year. That's excluding IOS Finance. Italy has grown 8%. The international business has actually had good performance, I would say, across every country and represents 37% of total loans, including also the IOS Finance portfolio.

Importantly, as you see at the bottom of the left table, also IOS Finance had a very good performance compared to last year. Clearly, we [went] included those in the like-for-like comparison, but we see that as a growing business and an attractive one overall.

Growth in loans has been supported. They resumed growth in new business production across many countries, Spain, Poland in particular. Italy and Portugal have been flat year-over-year. Slovakia, as we have seen already, has been impacted by the government extraordinary debt relief plan, while Greece has contributed industry volumes to the group as a whole.

We've just appointed on the 1st of October a new CEO, and we have had since April a new COO in Slovakia and Czech Republic, and we think that will allow us to actually revamp the growth in those businesses in the quarters ahead.

I'll give you now the floor to Emanuele to walk you through understanding the other part of the presentation.

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Emanuele Bona, Banca Farmafactoring S.p.A. - VP of Finance & Administration Department [3]

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Thanks, and good afternoon, everyone. In terms of funding, our funding structure, which is represented on Page 11, remains well diversified and extremely flexible. The online deposit part has increased significantly by 25% versus a year ago and now represents about 32% of drawn funds. We maintain a strong liquidity position with a very, very high LCR ratio of 352% and EUR 400 million of committed but undrawn funding.

As Massimiliano said earlier, no funding costs are linked to Italian government, and we bear limited refinancing risk. Particularly, we don't use any ECB liquidity instruments. We have an EMTN program, which we can use promptly to -- at the capital markets. In fact, after the closing of the quarter, we successfully issued a new bond for EUR 300 million during the month of October, leveraging the recently issued first-time public rating by Moody's, which we refer to on Page 12. Moody's issued a rating of Ba1 with a positive outlook. This is a very successful outcome for us because the rating is just one notch below the rating of the Italian Republic, and it's the highest rating of any Italian banks not directly supervised by the European Central Bank.

And by the way, in the Moody's report, they stated that there is a possibility for a higher rating should we sustain our fundamentals at current levels. So the opportunity for an upgrade is real.

We also received a long-term deposit rating of Baa3, which will certainly further strengthen the possibility for us to raise deposits, particularly from corporate savers.

If we move on to Page 13, once again, we refer to the bonds that were issued in October. To give you a bit more color on the bond, demand was extremely high. It was about 3x the issued size. In the final year, it was 1.75% for a 3.5-year maturity. The bond is listed. It was issued at par and is now trading well above par.

In terms of other measures for further reduction of the cost of funding, as Massimiliano mentioned earlier, we launched a deposit business in Poland during the month of September, late in September. And that will allow us to reduce our cost of funding in zloty the average deposit rates in the market are significantly lower than the rate at which our Polish business funds itself locally.

We also launched deposit-gathering activities in The Netherlands and Ireland, which are also markets where the average term deposit offering in the market is significantly below the other markets where we're present. We don't have a physical presence there. We use the same model that we have adopted in Germany a couple of years ago. We place deposits through a third-party platform, and we operate under the freedom of provision of services authorized by Bank of Italy.

On Page 14, a quick glance at the balance sheet. As we discussed in the past, our asset liability management strategy is very conservative with assets which they are shorter duration than our liabilities. The government bond portfolio continues to decline. It now represents less than 22% of total assets. There's a negative mark-to-market on the held-to-collect and sell portfolio of EUR 0.3 million after taxes, which is significantly lower than where it was at the end of the first semester. And then we have a positive mark-to-market on -- by EUR 11.6 million on the held-to-collect portfolio, which is not recognized in P&L or balance sheet.

Currency hedge. Natural currency hedge remains our preferred currency mitigation strategy with 4 denominated assets and liabilities, mainly in zloty in equivalent size matching each other. And as discussed in the past, we are positively geared to interest rates should they go up given that most of our Polish assets are denominated at variable rates. And the nonrecourse portfolio in Italy is denominated at a variable rate for what concerns the late payment interest.

On Page 15, the credit risk continues going down, as mentioned by the CEO at the beginning. The net NPLs, if we exclude the Italian municipalities in conservatorship, are now down to EUR 4.8 million, which is 33% less than a year ago and representing 0.1% of net loans. The -- if we look at the total net NPLs, the increase vis-à-vis the end of the year and a year ago is entirely driven by growing activities towards Italian municipalities in conservatorship. As you know, we consider these technical NPLs. We are obliged by regulation to classify those loans as NPLs. Although, in fact, the bank remains legally entitled to receive 100% of the capital, and delayed payment interest at the end of the conservatorship process.

If we look at the past due, those are significantly down versus the peak of June 2018. This is due to a much better execution, which stems from the reorganization of the team responsible for this activity. 88% of these past due loans are towards the public sector.

In terms of cost of risk, there was about 4 basis points in the first 9 months of the year. But if we exclude an SME factoring business which -- in Poland, which has been in runoff for the past year, the total cost of risk would be only 1 basis point.

Moving on to capital position on Page 16. Our capital ratios remain very strong, 15.8% total capital and 11.2% common equity Tier 1. This ratio excludes the reported net income for the first 9 months, but net of the impact of the acquisition of IOS Finance, which was entirely funded by excess capital and with no need to allocate any earnings from the period to the acquisition.

The RWA calculation remains very conservative with a significant RWA density at 61%. Although through a better mix of loan and decreasing net impaired assets, it has gone down significantly versus a year ago when it was at 67%. RWA is based on a standard model. There's a good upside there, should equally be upgraded by one notch. The risk weighting of the NHS in Italy could go down to 50%, with a 3.3% positive impact on total capital ratio.

Portugal has been upgraded over the past quarter, and so another notch rating upgrade by DBRS. Would also have -- for Portugal, would also have a positive impact on the capital ratio, potentially 0.5% of total capital.

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Massimiliano Belingheri, Banca Farmafactoring S.p.A. - CEO & Director [4]

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Thank you, Emanuele. To summarize, again, the message is pleased that we have completed the acquisition of IOS, particularly just ahead of the peak hunting season for our business in Spain. We're also pleased to have seen a stronger financial performance in this quarter compared to where we were in June, having resumed the volume growth in the business -- throughout the business, I would say. And the fact that we have been able throughout also the volatility of tender in the discussion around the Italian [sovereign] to continue to have a plentiful of liquidity and funding. Again, a sign of strength for the business, the fact of having achieved a quality investment-grade credit rating. I think it's a sign of strength again for the business, and we are quite hopeful to be able to improve on that further, giving us access to better, plenty -- more plentiful and cheaper funding.

And finally, although our risk profile has always been controlled and low, we're also pleased to continue to reduce the exposures of [NPLs], particularly in a [CoF] provision environment with risk clearly under control.

Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Antonio Reale, Morgan Stanley.

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Antonio Reale, Morgan Stanley, Research Division - Equity Analyst [2]

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I've got 3 questions, please. The first one, on the outlook for purchased volumes. We've seen a return to growth in the quarter, which is great to see. However, Italy was somewhat weaker, particularly on the Public Administration segment. Could you maybe spend a word or 2 on what you're seeing there and if you still expect the usual strong seasonality that you see normally in Q4?

Second question on the costs. They remain under control. And how do you expect the cost base to progress going forward given the integration of IOS and the international growth?

And lastly, I realize it's really material for you, but perhaps just for our broader understanding, could you just explain to us what's going on in Slovakia, spend a word maybe on the government debt relief and if you see any other country's potentially implementing similar measures?

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Massimiliano Belingheri, Banca Farmafactoring S.p.A. - CEO & Director [3]

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Yes. Let me take Slovakia first. What the government has done in Slovakia, is we have achieved this maneuver because what they have done is to limit the ability to execute against the government for a period of time and then offer the reverse tendering process to have accelerated payments from the government to the suppliers who had outstanding debt. Now we control a sizeable portion of the expanding commercial debt of the health care system. We haven't affected the terms of proposed. I mean we are taking as we do the assets through [court].

The underlying cause of the problem of linked to premium times has not been addressed. Now the nominal payment time is likely to decrease because of this cash injection. But clearly, the deficit of the public sector hospital in Slovakia has not been changed. And so we are still -- we're already seeing accumulation of DSOs, which we think will bring back the problem in that market.

Clearly, if you would just receive cash as a supplier, you are not so inclined to sell your receivables because your DSO is franked, although, at a cost. Since if you think about the average spread that we paid, our debt has not been paid. So actually, the supply have a lower DSO than what we have. But that will come back. So it's a temporary issue, so much that actually we have hired a new CEO in Slovakia, who covers also the Czech Republic, who comes from the hospital sector and who's actually quite positive on the long-term trend of our business there.

Second, in terms of volumes in Italy. We have had, I think, a good performance overall on our existing client base, which is more biased towards the health care systems, less biased towards the Public Administration. You might remember, in February, we hired a new Commercial Director. We have changed some members of the commercial team, and we think now we have the machine that should be able to deliver the growth in volumes that we expect from a market, which is, yes, more mature but still significantly underpenetrated like Italy. So I don't see a problem in the market per se. We actually issue our own execution as we flagged before, which I think has been addressed.

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Antonio Reale, Morgan Stanley, Research Division - Equity Analyst [4]

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Policy?

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Emanuele Bona, Banca Farmafactoring S.p.A. - VP of Finance & Administration Department [5]

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In terms of cost, look, we have clearly a number of growth initiatives that have already seen the cost through but are not yet saturated. So we expect, given the outlook of the business, the cost structure to become more efficient over time. We don't target per se, cost-to-income level, certain level of cost. And so far as IOS is concerned, I think the level of efficiencies there will be a function of how much we can actually grow the business. And we have had already some people leaving voluntarily, which also reduces our need for intervention. So on that respect, the cost base of IOS is relatively small, but a significant part of that was actually 2 founders was left, and that will not oblige us to incur any cost.

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Operator [6]

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The next question is from Simonetta Chiriotti with Mediobanca.

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Simonetta Chiriotti, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [7]

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My first question is about IOS. There are some impacts recorded in the first 9 months. So the question is if there will be further one-off impacts in the last quarter of the year or the contribution will be only the share of the earnings of this -- of the company.

The second question is around the cost of funding, which was 1.6 in the first 9 months from 1.56 in June, so a slight increase if you can explain this trend.

And finally, on over-collection. Interest income [do] quite strongly in the third quarter despite flat over-collection with respect to the third quarter of 2018. So if you can comment on this, which is probably related to higher loans that was not so positive in the previous quarters, and when you expect the over-collection to give a stronger positive contribution to interest income.

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Massimiliano Belingheri, Banca Farmafactoring S.p.A. - CEO & Director [8]

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Let me take first one on IOS. On IOS, we have expensed an extraordinary costs that we expect to have and also the positive impact of the affrancamento goodwill. And therefore, from now onwards, we should have just the ordinary income from IOS. That's actually been done exactly to give a more simpler representation of our earnings.

The impact on the P&L, so far, on the adjusted earnings is 0 because we had a marginal positive benefit compared to the extraordinary cost for the goodwill tax step-up. But we've taken out from the reported numbers. So the adjusted numbers are net of that EUR 200,000 of effect.

I leave the cost of funding comment to Emanuele. I think there's -- our strategy, always kept in mind is the mix between [zloty and euros].

In terms of over-collection, the over-collection is driven by our efforts and the vision that the data takes. For us, the last quarter is always the peak of activity. We have, I think, a good pipeline in terms of deals. We have had lower, particularly, first and second quarter in that respect, but we are hopeful that we have quite a good pattern to get to where we want to get.

The conditions in the market are that the public sector debt are not in the limbo in terms of recent government change, which often freezes the decision. So we're quite hopeful of actually getting to different results on that stock.

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Emanuele Bona, Banca Farmafactoring S.p.A. - VP of Finance & Administration Department [9]

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On the cost of funding, this is what Massimiliano was hinting at, the components of the interest expense is coming from a zloty-denominated debt, which is more expensive than our euro debt. It's higher. So the mix of interest expense coming from Poland is higher, and that has driven the cost up. And then there's also a matter of intra-quarter seasonality of it, which drives the way we utilize flexible and cheaper lines. So it was a mix of what lines we are utilizing when, but the effect of currency is the main one.

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Massimiliano Belingheri, Banca Farmafactoring S.p.A. - CEO & Director [10]

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For the same reason, going back to your point on interest income, you should note that the contribution of the Polska business to the overall group result has actually increased this year significantly compared to last year, and so you see a higher yield, you see higher cost of funding. The spread has actually been in our favor. And so that's what explain also the other question you have.

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Operator [11]

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(Operator Instructions) Next question is from Filippo Prini with Kepler.

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Filippo Prini, Kepler Cheuvreux, Research Division - Equity Research Analyst [12]

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Two brief questions, if I may. The first one is on cost of risk. Can we take for next year as a guidance of cost to risk just around 1 bps? Do you think the cost of risk will (inaudible) when in the runoff of a synergy power will be completed?

And the second on Portugal. I've noticed a quite good recovery, but good growth of turnover in the third quarter. Could we expect to consider the benefit from the new established structure there? And so would you expect further growth [with the] growth of [order banking] in the next quarter or maybe this quarter? The past quarter benefited from some on the acquisition of [comfort].

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Massimiliano Belingheri, Banca Farmafactoring S.p.A. - CEO & Director [13]

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On cost of risk, given the level of -- the low level, I can't promise 1 bps, more bps, less because we are talking really about splitting the atoms here. I think we think the SME portfolio is well provided. Here, we are trying our best to recover those exposures, and the rest of the business is fairly well improved. The fact, as you've seen in the data that we've seen, then the total net impaired assets of the private sector has actually declined significantly. I think it's a very strong indication of how we have reduced our exposure to the areas where more risk can come from. So I think it's -- we are talking, again, extremely low level of risk.

In terms of Portugal, look, we know that we have long sale cycles for our customers. The fact of being present in the market physically, I think, strengthen our position. It's also true that when we establish a new market, we have less recurring yield than we have one shop. And so they can be a bit more lumpy as we see those in the number for Portugal, but we have a strong team there. I think we can deliver good numbers.

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Operator [14]

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The next question is from [Shin Shikbar] with Sycamore.

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Unidentified Analyst, [15]

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I was wondering -- I think the question was asked, but maybe if you could reconfirm my understanding. If you look at the net interest, the adjusted interest income grew 4% for the first 9 months. This is on Slide 6. It was almost flat in June, which means the growth in Q3 was north of 10% on that line. So is this all driven by the -- by Poland higher in the mix? Because it seems like it's a pretty big move just on a quarterly basis. Or is there anything else that's driving it? And is this something that can continue going forward, which would point to an acceleration of growth? If you could explain.

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Massimiliano Belingheri, Banca Farmafactoring S.p.A. - CEO & Director [16]

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Yes. Let's not forget that the business is growing at 15% in terms of assets year-over-year. So it's certainly -- Poland it's a contributing factor because simply the growth of the business.

In terms of movement, again, within the quarter, we think that it depends also how the book moves within the quarter, as also Emanuele mentioned, in terms of cost of funding. So there are various effects in that number.

I think what we are seeing, we are seeing a good ability from us to actually keep the profitability of the business, excluding the LTI over-recovery at a good level and, again, of cost of funding. And so we plan to grow by keeping the profitability of the business at a good level.

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Operator [17]

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(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Massimiliano Belingheri for any closing remarks.

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Massimiliano Belingheri, Banca Farmafactoring S.p.A. - CEO & Director [18]

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Well, thank you, everybody, for joining us today. I'm actually quite pleased by the results and the changing trends in a number of drivers and [we're pleased about the] third quarter of the year. Thank you.

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Operator [19]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.