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Edited Transcript of BFF.MI earnings conference call or presentation 8-Aug-19 12:30pm GMT

Half Year 2019 Banca Farmafactoring SpA Earnings Call

MILANO Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Banca Farmafactoring SpA earnings conference call or presentation Thursday, August 8, 2019 at 12:30:00pm 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

* Giuseppe Marsella

Exane BNP Paribas, Research Division - Equity Analyst

* Luigi Tramontana

Banca Akros S.p.A., Research Division - Analyst

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Presentation

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Massimiliano Belingheri, Banca Farmafactoring S.p.A. - CEO & Director [1]

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Thank you. Thank you, everybody, for joining us today for the conference of first half results. We're pleased to report a strong financial performance for the group with over EUR 41 million of adjusted net income, which is a 3% growth year-on-year and with 33% of adjusted return on tangible equity. It's a strong result because that's despite having had EUR 7.4 million of lower net late payment interest over-recovery compared to the first half 2018.

And as you will see in the presentation, see that underpins the strong set of results since we have achieved those without the benefit of those over-recoveries. Over recoveries, that haven't come through, not because we had higher discounts on the recovery of LPI is simply because we haven't transacted as much in the market. In fact, our back book reserve, the uncollected, unrecognized portion of the LPI of balance sheet has grown to almost EUR 400 million, EUR 391 million, increasing EUR 33 million year-over-year.

The operating performance has also been underpinned by good performance on the cost side, with the operating cost of the loans down from 2.29% to 2%. Customer loans have continued to grow at double digit, 15% year-over-year in the process of internationalization of the group continues with 34% of the loans outside Italy. Currently remains plentiful, not exposed to ECB policies or to the Italian government bond yield, and we maintain a very healthy liquidity buffer with over EUR 400 million of committed undrawn funding at the end of the quarter and an LCR of over 250%.

Credit quality has improved significantly compared to December and compared to last year. Net NPLs over loans are down to 0.1%. If we excluded Italian municipalities in conservatorship, 75% of total impaired assets are toward the public sector. And therefore, we have actually reduced significantly the exposure of net impaired assets, including clearing the past due towards the private sector, down 41% compared to the year-end. That's with cost of risk that remains low at 3 bps and mostly coming from the SME factoring portfolio, which we can run-off in BFF Polska 1.5 years ago.

Capital has improved compared to year-end. Total capital ratio is over 16%, and the Core Equity Tier 1 is at 11.6%. It's actually not including the earnings of the period. Otherwise, the ratio would be significantly higher at 17.8% and 13.3%.

In terms of the business plan, we've announced the business plan in June, and we have already launched a number of initiatives to actually develop the business plan over the next few years.

We finally received the authorization to open a branch in Poland, which should be operational at the end of Q3. We have been authorized to operate in Greece cross border that represents the ninth country covered by the group in terms of non-recourse factoring -- and France, sorry, the ninth country covered by the group. And we have actually done a small deal in August, the operations in that market.

We also filed to operate in freedom of service for the collection of online deposits in Ireland and the Netherlands, as indicated in the business plan. And finally, we've purchased the first receivable towards the non-healthcare public administration in Greece in July.

Looking at more details into the numbers, starting from Page 4. Adjusted net income has grown a 3%. ROTE has grown as well to 33%. And as it's mentioned, net LPI over-recovery has been EUR 7.4 million lower than first half 2018, with the back book reserve, which has increased to EUR 391 million.

Adjusted net interest income is basically flat year-over-year, again, affected by the EUR 7.4 million of lower net LPI over-recovery, otherwise would have grown at almost double digits, and the annualized return on risk-weighted assets is now at 7.7%. Again, if we exclude the net LPI over-recovery, we see a pretty flat trend in terms of return on risk WA. The slight decline is actually fully compensated by the higher operating leverage from the cost side.

Credit collection costs that we actually recover from the debtors are included in a separate line from the P&L although clearly a part of the income we generate from our portfolio. And it has grown to EUR 2.6 million in the first half of 2019.

In terms of interest income, same trend, flat year-over-year, again, without taking into consideration the EUR 7.4 million of lower net over-recovery. The amount of LPI cashed-in, in the first half of 2019 has been EUR 23.3 million, lower by EUR 14.2 million compared to last year. The recovery rate has been actually higher despite the lower overall amount. So the rate of recovery to discount we'll give to the debtor has been better for us. And therefore, the stock of LPI has grown to EUR 616 million, of which, as I mentioned before, EUR 392 million have not gone recognized yet through the P&L.

Cost of funding continues to decline, as you can see on Page 7, to 1.56% in the first half of 2019. Growth in the absolute amount of interest expense has been driven by the increase in the portfolio and also by the increase in the zloty funding, which represents now a significant portion of our overall cost of funding, given the higher Wibor rate compared to the Euribor rate. There is a gap of more than 2 percentage points.

We don't have any funding linked to government bond yields and we don't have any ECB refinancing risk that use the TLTRO and with the launch of the deposit gathering capabilities in Poland and soon in Ireland and the Netherlands, we expect to have potential upside there.

Page 8, operational efficiency remains good. Operating cost over loans have gone down to 2% in the first half of this year. Personnel costs have increased 8% year-over-year, whereas other operating expenses are down 1% year-over-year, keeping a good cost control, despite many initiatives to support the growth of the business. And the cost income ratio is marginally worse, but that's again driven by the lower amount of LPI over-recovery.

Portfolio has grown 15% year-over-year across the many businesses, including Italy, which has grown at double digit, but the international business has grown marginally more. We still have EUR 2 million -- EUR 2.5 million of residual SME factoring exposure, which we continue to collect. And most of it is clearly classified in the backlogs and represent a large portion of our bad loans portfolio as you will see later.

In terms of new business production, the first half of the year has been flat, to slightly declining for different reasons. We, I would say, Italy has been softer. Portugal we had last year, it peaked last year in January. Slovakia has been exposed to the overall injection of liquidity by the government. Greece has grown nicely year-over-year, but clearly, from a very low base. What is important, actually, we have seen in July, a recovery of this gap, and we have a decent pipeline for the rest of the year.

In terms of business plan initiative, we announced a number of strategic initiatives to underpin our growth for the next few years, and we've already implemented the basis to actually deliver those over the period of the plan.

And so we finally got authorization to open a bank branch in Poland, that allows us to access a deposit market that in terms of spread over base rate is more attractive than the deposit markets where we operate. It allows us to actually access more zloty funding without being reliant only on the wholesale market. And there is a significant cost gap between what we pay at the moment in that market in terms of spread and that the rate that the most aggressive banks in the market charge -- pay to their customers.

Secondly, we've added a new market to our roster, France, where we have received the authorization to operate in freedom of service. The first test start to operate. And yesterday, we've done our first test of non-recourse purchases of health care receivable from one of our clients coming from Italy.

In terms of deposits, we have filed to collect deposits in Ireland and the Netherlands in freedom of service and we're waiting for the authorization of the authorities that will be the same model we use in Germany. And as you can see in the table here, clearly, those are markets where the offer rate for deposits is significantly lower than any markets where we operate, even if we take account, for instance, in Poland, a different base rate.

Finally, we've expanded the coverage for our clients of our business in Greece, by purchasing the first portfolio of public administration receivables, which again differentiates us in terms of our overall customer offering in that market.

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Emanuele Bona, Banca Farmafactoring S.p.A. - VP of Finance & Administration Department [2]

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Thanks, Massimiliano. In terms of funding, the funding structure of the group remains very well diversified. As you can see, on Page 12, it's based on a healthy mix of wholesale bank funding, securitization, capital market instruments and online deposits, which represents around 29% of the total drawn funding.

Let me remind you that these deposits have very limited prepayment options. So these are really true term deposits extremely resilient. The group benefits from a very strong liquidity position. There's about EUR 400 million of undrawn committed bank lines. There's a very high liquidity ratio. As you can see, LCR ratio is well in excess of 250% and the NSFR ratio is well above 100% and will benefit from favorable regulation entering into force starting second quarter of 2021.

As Massimiliano said, no funding cost is linked to Italian government funding cost. And finally, let me point out that there is limited refinancing risk. We're not using any ECB funding instruments and the first bond will mature in -- will expire in June 2020. We have an EMTN program that we started November 2018, which allows us to access the capital market opportunistically, if needed.

If we move on to Page 13, you can see the -- our balance sheet, as discussed in the past, we ran a very conservative asset liability policy. With the asset side of the business turning around faster than the liability side, the bond portfolio, which you can see in the bottom left corner is around EUR 1.1 billion. It's been steadily declining, and it now represents 23% of total assets going down from 26% a year ago.

The group runs no currency risk through to a natural currency hedge. All of our foreign exchange assets are funded through foreign exchange-denominated liabilities. And as we discussed in the past, our balance sheet is positively geared to interest rate because most of the Polish assets are denominated a floating rate and the LPI part, late payment interest part, of the asset side and the rest of Europe is also denominated a variable rate, ECB rate plus 8%.

Then Page 14 is something we discussed at the beginning of the presentation, the credit risk has been significantly declining since the previous periods. The net NPLs, excluding Italian municipalities in conservatorship, now are down to EUR 5 million -- EUR 5.1 million, which is 26% less than at the end of December, and 50% of it, roughly 50%, EUR 2.5 million is represented by the SME funding business in Poland, which has been in run-off for the past 1.5 years.

The NPL ratio, excluding Italian municipalities in conservatorship, is now down at 0.1%. So virtually 0. You might remember that the Italian municipals in conservatorship have to be classified as NPL. But this is only a technical classification because the bank remains entitled to receive 100% of the capital and the late payment interest at the end of the process.

This has been achieved through more -- very effective collections and most -- more effective way to run our -- to manage our portfolio has also allowed us to reduce significantly the amount of past due, which reached peak a year ago and now are down to EUR 39 million. So over EUR 100 million less than a year ago, and 79% of it is represented by public sector. So virtually without any credit risk.

And if we look at the cost of risk that flow through our P&L that was only 3 basis points. And again, let me stress how 2 of this 3 basis points are linked to the Polish SME business, which is now in run-off. So virtually, we run 0 credit risk as a group.

Following page shows you our strong capital position. As discussed by our CEO, the capital ratios are well in excess of both regulatory requirements and our target. We have a total capital ratio, excluding the net income of the first half at 16.1% and CET1 at 11.6%. This ratio are impacted by the negative mark-to-market of the held to collect and sale bond portfolio, which was around 14 basis points.

The RWA calculation remains extremely conservative. We use a standard model. So the way the portfolio is risk weighted depends on the rating of the countries where we operate. There is very little downside risk because Italy should be downgraded by 9 notches in order for the risk weighting of the public administration to go up. There's some upside risk because 1 notch upgrade would reduce the RWA. Overall, the RWA density is at 63%, which is down from 67% a year ago. And this reduction has been achieved through a mix of decreasing impaired assets, but at the same time, a better loan mix going towards lower risk-weighted debtors.

So I'll leave it to Massimiliano again to conclude.

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

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Yes. So to recap, we see the first half results to be good, particularly taking into account the lower collection of net LPI. We see continuous growth in loans, and we have a solid funding base and capital to continue to deliver the growth that we have indicated to the market.

Quickly, as Emanuele also pointed out by the ability to control risk, so it was easy to grow the business by taking more risk, but we pride ourselves of being able to have that under control. And importantly, we have already exceeded the number of initiatives, which should drive growth in the next quarters and years for the business in line with what we've indicated in the business plan.

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 with Morgan Stanley.

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

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Two very quick questions for me, please. One, could you please add to your comments on the latest volume dynamics, perhaps with a focus on the public administration segments across the key geographies. Where are you seeing most of the uptick in the pipeline and then perhaps a comment on the competitive landscape, please?

Second question is on the -- on your comments around the -- on the funding. You've mentioned you filed with relevant authorities for the possibility to raise online deposits in Ireland and the Netherlands. You mentioned the work done in Poland, and that's clearly consistent with your recent strategy to optimize the funding base. How much are you targeting to raise? When I look at deposits, they currently make just less than 30% of your funding base. What do you think this number could be in the medium term?

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

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Let me answer first the question on deposits. As you know, we use deposits as one of our sources of funding. This is a business which has very little credit risk, but we always manage it very carefully in terms of liquidity. And so we keep access to as many funding avenues as possible, the institutional bond market, the wholesale market and deposit market. And so the opening of the branch in Poland, the freedom of service operations in Ireland and in the Netherlands, go in that direction and you're having further sources to have more funding and also cheaper funding.

In Poland, in particular, we clearly want to maintain also the relationship with the local banks, but we plan to grow the portfolio over time of deposits, so to take a larger share of our funding. At the same time, for the other 2 markets, it's an issue more of cost, so we can switch on and off those markets, depending on the needs of the business and the cost for deposits in those markets. So overall, we plan to continue to maintain a balanced mix between the various sources of funding. I would say, probably with the growth of the business deposits will contribute slightly more going forward but it's a matter of trade-offs between availability and cost of funding. For us a deposit platform are really an insurance against the liquidity crunch in the market. And so as you've seen historically, there have been periods where we've actually managed outflows because the bonds were much more expensive than other funding lines. And the other funding lines for us are committed, the deposits to term, so we see the same liquidity risk in that respect.

In terms of the volumes, may be one comment. I think, first of all, on Polska, we need to remember that volumes of Polska also included not only purchases of receivable but also loans, a lot of which are actually over 1-year duration. So the volumes in Polska tend to accumulate much more in terms of them resulting loans and it's apparent if one just looks at the overall loan volume.

On the Polska Group, we knew that we had a volume in Slovakia, this was due to below this year, simply because of the maneuver of the government to basically trying to accelerate the payments. And so that has made less interesting for clients to sell. We think that may change particularly next year. We've seen second half of this year. But overall, we'll see Polska recover growth also in terms of new business volumes, which will have a knock-on effect on the overall accumulation of assets.

In the other markets, Spain simply had a shift of some volumes in July. We actually signed a very important contract there. So we are quite bullish actually on the country, and we're seeing a good growth also in the volumes done by our target IOS that we have signed an agreement to acquire. So we see a market where particularly, I think, because of the uncertainty around the government and politics, customer will probably do more towards the end of the year.

Portugal, there will be a seasonality effect last year. The government has injected cash in June, again, that opens up more opportunity in the second half. We're a bit more disappointed by the performance there, but it's also the first year where we have the branch operationally. We see opportunities in the market, and we're seeing the results. We see the opportunity to grow there.

Greece is small, has contributed little, disappointed more than appointed one. Disappointed one is being Croatia. We have yet to unlock the key of that market. It's a market which has stayed profitable for us on the margin side, not a major issue.

Competition. Real competition that's still playing relatively quick in the market. The issue for us also because we don't want to go necessarily after our -- the clients of our competitors, but in large the market is really to get a more disciplined commercial effort to convert customers, who actually don't sell the receivable to customers who sell the receivable more than taking share from others. And so the efforts we are making in most markets is actually to enlarge the market is particularly true in the markets outside Italy but it's true in Italy, too.

And I think we will be the -- the volumes will depend at year-end also in terms of the political instability and the performance of payment by the public administration, which I would say at the moment is fairly stable. Competition, I don't -- we don't see any particular change in the markets where we operate. And clearly, Spain, we are still separated from the business we've agreed to buy. So obviously competing with them.

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Operator [4]

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The next question is from Luigi Tramontana with Banca Akros.

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Luigi Tramontana, Banca Akros S.p.A., Research Division - Analyst [5]

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Again on new business volumes, with a focus on the Italian market, which has been quite weak in the first half in terms of turnover for you. We have seen one of your smaller competitors becoming larger in terms of volume in the first half. Do you expect different seasonality this year? So basically, the question is, do you think that you'll close 2019 with higher new business volumes compared to last year? Or should we expect -- should we have to wait for next year to go back to growth?

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Massimiliano Belingheri, Banca Farmafactoring S.p.A. - CEO & Director [6]

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No, I think, -- sorry, go ahead.

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Luigi Tramontana, Banca Akros S.p.A., Research Division - Analyst [7]

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That's the full question. Yes.

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

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So on volumes, look, we already are back to growth in July. So we're talking about small movement and we expect to actually resume to growth across I would say almost all our market to potentially exception of Slovakia for what I said before this year. So that's for us, issue more of seasonality. Last year, if you look at the trend line on Page 10, was a particularly strong year in Italy, for instance, compared to the year before. So we don't see, as I said, any major issue in continuing to growing the business.

I think if -- the competitor you may be referring to, I think, had announced previously that it has won a major contract from another competitor of ours. So it's been a shift from one of our competitor to another. So no change in our relative market share from the data that we have.

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Luigi Tramontana, Banca Akros S.p.A., Research Division - Analyst [9]

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Okay. Second question is on the net over-recovery of LPIs, which was even negative in the first half. Given that it's reducing compared to the past, do you think that you will be able to report a higher net profit this year compared to 2018?

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

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Yes. I mean, that's the expectation. I think we have a growing business. The -- I think it's important to flag that the way we account for the over-recovery of LPIs when we actually cash-in the LPI compared to other people. We don't sell portfolio of LPIs to book a higher earning. We actually want to preserve our ability to extract value from the portfolio. So for me, you always need to see the growth in -- the performance of net over-recovery also compared to the growth of the portfolio, we are recognized on the -- unrecognized LPI. We already indicated in the first quarter that we have put some changes through in our credit collection team, and that's playing out. And we expect to recover a good performance in terms of over collection in the second half where by the way, most of the deals with the public sector tend to happen, given the closed accounts in December, and then we decide towards the end when to collect. But for me, the collection of LPI, it's a swing factor that can happen in the second quarter or the other, but we're not targeting necessarily to hit the quarter and then deplete the value of the LPI. We need to see the overall value for the shareholders in combination between the 2 to happen.

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Operator [11]

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The 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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Three brief questions. The first one is the cost of risk. Could you give us an idea of the cost of risk for the next year, one, the portfolios in Poland, it will be completely run off. The second one, just get back for a second on the net over-recovery. Could you give us a sense of when we will postpone the cash-in of LPIs. So basically, you expect now to cash-in some LPI in the next quarters and so on. Basically recovering what is -- what you use in cash-in this quarter and even the quarter before? And finally, is it fair assuming that we would expect that the first tangible collection with LPI next year is also from the Spanish business that you started across 2015 and '16?

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

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On the Spanish business, we're already collecting some LPIs. Now we provide disclosure in the -- in our half year results that we already collect. And clearly, that's a business which will grow -- it's an amount which will grow over time because the portfolio has actually grown over time as well. So for instance, this year, we've collected about EUR 3.7 million of LPIs paying at 100% recovery rate. So there's a positive effect of continue to growing the business.

In terms of cost of risk. I think it's on Page 14, give already an indication where we think will be. The -- if you look at the bottom left, the components of our cost of risk come from -- the Italian municipalities are going to take some provision, simply by regulation. And this quarter, we had a decline in the amount of stock of receivable towards Italian municipalities in conservatorship, so we didn't have actually a provision there that will grow when we continue to grow to that portfolio. But again, it's a bit of a wash, if you think about long term, you need to recover everything. And the SME portfolio, look, we are trying to collect that portfolio, we think, is fairly covered. It has a 62% coverage ratio, that is none -- is with recourse, so a reality in terms of exposure that we can recover. It's even more provided and that most of them are actually legal cases. So we need to wait for the collection through the legal centers as well. It's a marginal impact anyway. I think where we are pleased is that actually the rest of the portfolio is performing quite well. And as you can see, it's pretty marginal in terms of cost of risk.

And you had another question on -- sorry, the expectation of LPI over-recovery. At least the dynamic is there, you have to think that we are dealing with 4,000 different debtors. So it depends on the decision then on which legal debtor if we want to transact. If you don't want to transact. What we never want to do is to basically put ourselves in a position where we want to transact at any cost. These are repeat case. So it's important, particularly the new public administration. We set a level of expectation of how much we want to recover at the right level because it actually will set the expectation of any future deals. And so we prefer to be patient than to accelerate simply to maximize the over-recovery. But I think we have a good pipeline. As I mentioned, we have moved people from the back office to the front office to improve our collection capabilities and actually quite positive in next quarters and also next year, that performance will improve.

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Operator [14]

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(Operator Instructions) The next question is from Giuseppe Marsella with Exane BNP Paribas.

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Giuseppe Marsella, Exane BNP Paribas, Research Division - Equity Analyst [15]

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A quick one. I've not seen any mention to the guidance you've provided for 2019. Yes, we're on track in terms of loans, but not in terms of adjusted net profit. Do you still feel confident on the around 10% net profit growth during the year?

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

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Let's just say one thing and then I will answer. First of all, we gave guidance on the 3-year plan on average. So we then gave yearly guidance to be clear. Are we on the right track? I think so. If you take -- if you readjust for the lower net LPI over-recovery, we're actually growing at around 10% per annum. So there's an issue, can we recover in the second half part of volatilities and more? That's a negotiation game. But I think the fact that we are actually delivering growth with a growing portfolio means that actually we're in a rising tide in terms of our overall performance on -- positive, that we actually have many levers to get to that point. But again, let's remember, we gave guidance mostly, all right.

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Operator [17]

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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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Thank you, everybody, for joining us today. We know it's never a pleasant to have this conference call in the middle of the holiday season. I hope you guys can take a good rest and, sure, we'll talk in the weeks to come. Thank you very much.