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Edited Transcript of IF.MI earnings conference call or presentation 7-Nov-19 4:00pm GMT

Q3 2019 Banca IFIS SpA Earnings Call

Mestre Nov 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Banca IFIS SpA earnings conference call or presentation Thursday, November 7, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrea Martino Da Rio

Banca IFIS S.p.A. - Head of IR & Corporate Development

* Luciano Colombini

Banca IFIS S.p.A. - CEO, MD & Director

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Conference Call Participants

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* Andrea Lisi

Equita SIM S.p.A., Research Division - Research Analyst

* Christian Carrese

Intermonte SIM S.p.A., Research Division - Research Analyst

* Manuela Meroni

Banca IMI SpA, Research Division - 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 afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Banca IFIS First Quarter 2019 Results Conference Call. (Operator Instructions)

At this time, I would like to turn the conference over to Mr. Luciano Colombini, CEO of Banca IFIS. Please go ahead, sir.

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Luciano Colombini, Banca IFIS S.p.A. - CEO, MD & Director [2]

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Thank you very much. Welcome, everybody. Today, the Board of Directors has approved the third quarter results.

Before going to the results, I would like to update you on the main management initiatives. We are working on industrial plan to be presented in mid-January which will be focused on 3 main pillars: becoming the [preferred] partner for business with a dedicated service model and a full range of products; second, preserving leadership in unsecured NPLs, broadening the servicing and purchasing skills to other [P&S] classes while maintaining control of IFIS NPL and FBS, now fully owned; further capital certainly and maintaining strong liquidity position.

We will present our NPL strategy in the business plan. In the next 6, 8 months, our first priority is to streamline the recovery of securing NPL. We have acquired the 10% minority share in FBS to speed up the integration with FBS. We want to fully integrate FBS and achieve synergies that are leveraging on complementary know-how of Banca IFIS, which is specialized unsecured NPL; and FBS, which is specialized in secured NPLs.

Once we have completed the full integration of FBS, we will look for potential acquisition, partnership or agreement transactions with specialized services and sort potential hiring of professional in order to broaden our NPL services to medium, large corporate and bankruptcy procedures.

Just a few words on the potential transaction with -- between us and [the created scenario]. The transactions between servicer and investor are quite complex. You need to find an agreement on strategy, governance servicing and shareholder structure. During negotiation, we could not reach an agreement with (inaudible) due to difficulties defining a satisfactory agreement for both parties, especially on governance.

The other key priority, as we anticipated in our first quarter conference call, is capital strengthening. In third quarter 2019, for CET1 we reached 11.1% plus -- 0.80% up versus fourth quarter '19 -- '18 result, and plus 0.30% versus previous quarter. This level has been achieved by organic capital generation does not include the third quarter '19 net income and is well above the 8.12% net requirements.

In addition, we expect the capital gain on the disposal of our non-core real estate in Milan, for which we have already received by the notice. We estimate completion of the transaction in fourth quarter of this year or in the first quarter of next year. The disposure is on [investor rationale] who comes here to buy about 8,000 square meters for just 300 employees. And it is not efficient in terms of course. With the disposal of one real estate in Milan, we will realize a capital gain and achieve cost savings.

In terms of funding, customer deposits reached EUR 5.3 billion, confirming Banca IFIS' strong capital and liquidity ratios and ability to attract, especially with their clients.

I will now hand over to Martino, who will describe the details of our results in detail.

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Andrea Martino Da Rio, Banca IFIS S.p.A. - Head of IR & Corporate Development [3]

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First of all, thanks, Luciano, and (inaudible). So let's focus on third quarter net income. The net income came in at EUR 16 million, which is impacted by seasonality in nonperforming and some physiological decline in the purchase price allocation. There is a limited room for a movement to move out this effects over the quarter.

You can see this effect, if you go to Page 5, we have just summarized these ones. And you configure the net interest income. We tend to do, on average, EUR 16 million, EUR 17 million net interest income in a nonperforming unit per month. While in August, due to the shutting down of the court, we tend to do EUR 5 million to EUR 6 million.

So usually, the third quarter is the weakest one of the year. Then you have the write-back of the PPA, the write-back of the PPA this quarter came in at EUR 10 million, while in the previous quarter was 21%. And in the quarter -- in the third quarter of 2018 was EUR '17 million, and this is variable by nature because depends on the prepayment disposal of the former in the bank customer loans or forming the bank and nonperforming loans. And then there is -- there are the capital gains from real estate disposals. This one are quite variable, [are this in] disposal of the nonperforming that we have already worked out and we sell to specialized operators.

As you can see on Page 5, in Q2, we had a reported capital gain of EUR 8 million. And in the first quarter, when we did -- we didn't perform any disposal so they were 0. And these are quite volatile. It really depends on the appetite that we find in the market on how much we go into the market for these type of portfolios.

So there is -- again, there is some volatility and you have to look more at several quarters rather than a single quarter in terms of net income. If you look at the third quarter net banking income. So they came in at EUR 112 million, 37% nonperforming business, 39% by receivable, 12% leasing and 12% corporate and others. The operating costs were -- came in at EUR 74 million, which is $10 million higher than the previous quarter, but the previous quarter was impacted by some one-off due to the closing of a tax proceeding of former Interbanca, which, by the way, did not have any impact on the net income.

But on the other hand, the operating costs are stable versus the first quarter 2019. And the cost of risk is a positive news. It came out at EUR 40 million versus the EUR 22 million of the second quarter results. So the loan of provisions was about 100 bps and in enterprise segment and is showing some normalization. Of course, 100 bps is considerably higher compared to other Italian banks, but you have to consider that we operate in very small, medium enterprises. So we tend to have higher margins. If you have -- if you reach higher margins, then it's normal to have a slightly higher cost of risk.

Customer loans at EUR 7.1 billion. Trade receivables for factoring was down around EUR 300 million, as some larger transactions with limited revenue contribution were not pursued in this quarter. Nonperforming are stable quarter-on-quarter due to limited nonperforming loans acquisition. There were very limited disposal on the market, so we didn't -- let's say that we didn't do an acquisition.

On the other hand, there are several transactions coming in, in this quarter. We are looking at all of them. We are speaking about something like EUR 4 billion transaction. We are losing in terms of gross book value for sure. And we are looking at all of them. We will buy, but we will be disciplined on price. Price is still the first thing for us.

So then let's move quickly on Page 8 and 9. In Page 9, we just summarized the strategy that we will present in our business plans in our nonperforming business. So as you see, the nonperforming is -- are quite complex. And that's something that we have already discussed in the nonperforming meetings that we had in September, for the ones that attended.

So there are a lot of operators, banks, company services, investors, regulators impacting this market. In this market, we have a particular acquisition. We are an investor and we are a servicer, so we are an investor with a very strong performing servicer inside. We are a leader in unsecured non-performing. We want to do a strength in servicing, accelerated integration of FBS, we have recently acquired 10%. And as you see in Page 9, which describes our short term strategy, you see the first months, then in the next, let's say, 6, 12 months, we focus on consolidating this. We have complementary business. We are focused on unsecured. FBS a focal point, small, less-secure corporate.

So we have a complementary business leveraged on the know-how of this both party integrating them together. And then we try to grow, growth while maintaining control. And this, medium corporate, large corporate, [bankrupts for] procedures for all these segments, we can -- there are a lot of options we can do. We can either make a position of more servicing, hiring teams, we can make some specific agreements for some transactions. So let's say that we look what is in the market, for -- and acting for now as a hopeful date.

In -- I would like to stress then if you move to Page 12 and 13, just to stress the other 2 points of our business which are quite strong. So trade receivables, we had a, let's say, a decrease in the turnover in the customer and in the customer loans. If you see here, about EUR 200 million, EUR 300 million, with limited impact on revenues.

So net banking income was stable at EUR 43 million, while let's say, the net banking income divided average customer loans went up to 5.1. And this was one of the drivers, one of the drivers that the CEO described that led the increase in the CET1 in the previous quarter. This shows also the flexibility of our business. Just we could make 30 bps in terms of CET1, just simply not pursuing some large transactions, which by the way, did not show a very strong revenue contribution.

Leasing. Leasing is a very stable business. As you see, net banking income, stable; asset quality, let's say, stable EUR 3 million, EUR 4 million per quarter. So this, let's say, is a part of our business which is performing well.

And just, let's say, on Page 14, we wanted to show that, yes, we made very limited in terms of acquisition, we made just 2 -- let's say, EUR 0.2 billion, but we are looking at all the transaction in the market. This transaction is expected to be closing fourth quarter or the first quarter 2020. We look at all of them.

Our market share. We are market leader in the unsecured nonperforming. Especially in the unsecured, [notice that] we are definitely market leader. And if you look, we cover. We have -- we recover above our model. Every quarter, we recover, and you can see on Page 16, above our model and we have cash in. We have, in this quarter, the cash collection came in at EUR 59 million. And so it's a constant rate and a constant increase where you see just the cash collection in the first 9 months of 2019 are up 45% compared to the previous -- the 9 months of 2018.

ERC, EUR 2.4 billion, of which EUR 1.4 billion in the first 5 years. Just a point. This is based on actual numbers and experience. Since 2014, we have cashed in something like EUR 0.9 billion. So we have a proved track record and constant delivery in collection.

I'll hand over to my CEO for the conclusion.

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Luciano Colombini, Banca IFIS S.p.A. - CEO, MD & Director [4]

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Okay. Thank you, Martino. In conclusion, we are working on the business plan to be presented in mid-January, and I must say that we are a little bit late, but we had to manage the potential deal with was back in last 2 months. CET1 of 11.1%, which does not include the third quarter net income. And in conclusion, we expect 2019 net income at around our guidance provided on February of this year, subject to the inclusion of the capital gain and the inclusion of real estate in Milan in the last quarter of this year.

Thank you. We open to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Christian Carrese of Intermonte.

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Christian Carrese, Intermonte SIM S.p.A., Research Division - Research Analyst [2]

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I have a few questions. The first one is on NPL division. You said at the beginning of the conference call that the deal didn't go through because there were some problems in terms of governance and so on. So if you can just clarify, from now on, so you've said the business plan will be focused also on NPL. Just a clarification of how crucial is the NPL business for Banca IFIS?

Second question, still on NPL. Slide 17. I see a decrease quarter-on-quarter in terms of cash collection compared to previous years. So I don't know if there is any specific reason of this decrease q-on-q.

The third question is on capital, 11.1% is for sure better than the 10.8%. And I would expect a further increase in the fourth quarter or beginning 2020 thanks to real estate disposal. I was wondering, what would be the goal for you going to the new business plan, sort of the leverage rationalization, trying to strengthening the capital ratio first, and then looking at revenues later on? Or do you think that the current capital position is adequate to support revenue growth going forward?

And finally, on the guidance you gave. It's clear that is a little bit different from the previous one because you are including the expected capital gain on real estate, but it is normal because the interest rate conditions and also market condition are different from a few months ago. So I was wondering, going forward, what should we expect in terms of normalized earnings, looking at 2019 as a starting point?

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Andrea Martino Da Rio, Banca IFIS S.p.A. - Head of IR & Corporate Development [3]

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Okay. Thank you, Christian. I respond to all your question. And of course, if there is any follow-up, please do not hesitate to do it.

Nonperforming on division, yes, it is core for us. And we'll be -- definitely we'll want to invest. We let's say, we pursue for a potential agreement, and we couldn't find a transaction, an agreement with regard to the parties. But as you know, this type of transaction are quite complex. So because they include governance, servicing, strategy and 2 different parties, where it's not just a simple transaction between 2 services, is a transaction, whether a servicer which -- sorry, an investor which have a servicer. And so it's -- which is Banca IFIS. And so eventually, mainly on governance, we do not find an agreement.

For sure, let's say, we have several option. We have a very strong know-how in this sector. And with Banca -- with FBS, we have recently, immediately acquired 10% in order to proceed with the integration to achieve the synergies. We appointed that certain market is moving quickly, we have to move quickly as well. So probably, yes, some of the synergies that we wanted to achieve in integration or in other segment in nonperforming was slightly, let's say, longer than expected. But we reacted quickly, immediately, acquisition of FBS, full integration, and move forward.

The impact on the net interest income, yes, we have, but it's somehow mitigated compared with other banks. Why? Because we have some factoring. First, factoring has 2 components: net interest income and commission. So yes, there is a pressure on net interest income. But in our clients, which are very small client, it's not so strong. Because for us, we tend to -- our clients are very small enterprises, so there is not such sensitivity in terms of price.

There is for sure, but it is -- where we see the strongest competition is on medium, large clients, top ranking. There, the competition is definitely strong, for the rating model, pushing that direction. And we have a business model, luckily for us, which mitigates this impact.

In terms of capital, 11.1%. It's, let's say, a better point than we were before. I cannot make any disclosure on the business line, for sure. We are still working on that. But we know that in a priority. We definitely look at that. And we want to show just that -- just not pursue some transaction factoring. We achieved 30 bps add, some production in factoring. Are we performing better our, let's say, some (inaudible) optimization on our security portfolio? Just we achieved 30 bps more, and without including net income. FBS, already the impact of the EUR 12 million, mostly is already impact that is included our CET1.

So we look at that. We know this approach for the market. I cannot make any -- yet, I cannot make a disclosure of the target of the business plan yet. And also, I cannot make any disclosure on normalized earnings. Future, we want to do the business plan. We are working on that. We will deliver in mid-January. And there, I think we can really provide a full detail.

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Christian Carrese, Intermonte SIM S.p.A., Research Division - Research Analyst [4]

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But do you expect, if I may, the fact that you are more -- you're going to make a higher selection in terms of factoring, maybe to be a little bit more choosy, will have a negative impact on net interest income in the coming quarter? For example, we know that in the fourth quarter, there is a positive seasonality for factoring. Do you expect a slowdown by the end of the year compared to the previous years?

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Andrea Martino Da Rio, Banca IFIS S.p.A. - Head of IR & Corporate Development [5]

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We were just a bit more disciplined this year. But for sure, we -- there is seasonality. We look at that. And if there is -- if this is opportunistic, I don't think that we will -- we will pursue this opportunity with a bit more of a opportunistic approach. But for sure, in the fourth quarter, will be -- we have to expect that, probably, if we expect a pick up in leasing and in factoring. It's just -- you simply don't take 2 or 3 large (inaudible) a few large transactions, and that is the impact. But there is -- it's not a change in our business model.

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Operator [6]

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The next question is from Andrea Lisi of Equita.

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Andrea Lisi, Equita SIM S.p.A., Research Division - Research Analyst [7]

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Well, the first question on the interest rate was pretty uncertain before. In particular, another point I was focusing on was if, given your improved capital position and the challenging environment, that you think if to compensate/offset the pressure on margin, there is rumors to increase the volumes both in terms of loans and the turnover, which is your commercial effort. But I don't know if maybe you've already answered it, saying that you are a bit more selective. But if you can provide also a bit more color on that.

Then if you can remind us whether in the fourth quarter, there is a possibility to recover fully the fact that, in the NPL, the quarter were closed. And so it is reasonable to see a strong recovery in the last quarter?

And another question is on the ratio between the cash collection NPL and end P&L contribution. We see, if I made a comparison among the third quarter in '17, '18 and '19, I always see that this ratio improved over time. And I want to ask you if it is only the effect of efficiencies there? Or if there is something else I don't see.

And the last point is that I see an increase in the NPL ratio from 9.5% to 10.1%, and I want to ask you if it is -- which is a level to which you are confident -- it is a level with which you are confident? Or do you think there is a need to maybe reduce it further?

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Andrea Martino Da Rio, Banca IFIS S.p.A. - Head of IR & Corporate Development [8]

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Okay. Thanks for your question. In terms of -- let's start from the last one. In terms of gross nonperforming exposure loans, yes, it increased, 10.1%. Let's say, it's not so material for us. We monitor that very carefully, and we will address this question in the business plan. But for sure, it's one of our, let's say, capital, liquidity, asset quality, of course, are the main drivers.

In terms of cash collection net banking income contribution. I don't know if you look at Page 17. We have to remind that we put these 2 lines, but the cash collection to not really match with the contribution to P&L to the same, let's say, class of nonperforming. We put this just to provide, let's say, our presentation. For sure, the contribution to P&L is lower due to the fact that we have, let's say, the shutting down of the court in August. That's the main reason. That's why the contribution of the P&L in the first quarter is even lower compared to the others.

And also, the cash flow action remind that there is also the voluntary, let's say, the [actual individual] activity is proceeds much lower, a much lower piece. In terms of contribution in terms of contribution to our factoring and leasing, this quarter, we were just a bit more opportunistic. This does not represent a change in the strategy. For this quarter, we acted in this way, then we look at the return, and we'll guide, we will decide if it is convenient for us to go for the transaction or not. But for sure, we expect a pickup in factoring and -- and in leasing in the coming quarters.

And of course, please, when you look at our capital, at our liquidity, et cetera, consider also the speed and the how we can adjust our -- due to our flexible business model, we can adjust very quickly depending if we find -- if we are opportunistic, if I want to push a bit further in the customer loan or not, if you have excess of liquidity, if we have [ability to attain to be] excess of capital, et cetera. So we are quite flexible in terms of that.

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Operator [9]

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The next question is from Simonetta Chiriotti of Mediobanca.

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Simonetta Chiriotti, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [10]

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Thank you for the detailed presentation that is extremely useful, considering the number of segments in which the bank operates. I have a question, a general question on NPL. I'm referring to Page 9. In the box at the bottom of the page, you say that you -- refer on examining potential acquisition, partnership and agreements with servicers, with -- and you don't mention other investors, like the case of Crédito Fondiario. So I'm wondering if this is what we should expect going forward.

And the second question, in the part where you outline future growth strategies. You mentioned new and different asset classes like secured corporate and so on. These asset [classics] require higher capital investment invested. So in terms of capital absorption are different from retained and secured. So I'm wondering how this type of strategy can be adopted, considering the level of capital that you have at the moment.

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Luciano Colombini, Banca IFIS S.p.A. - CEO, MD & Director [11]

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Thank you. I'm Colombini. I must say that when we are talking about servicing, so -- but it's not a question of capital in this. And now we are able to serve and to face a lot of asset class except large corporates or large [CPOs]. So what we want to do is to buy if possible or to have a partnership, another player which has the correct skills in this asset class. But it doesn't mean that we invest in this asset class.

Now we are talking about servicing, very different. There is not a problem of capital in servicing.

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Andrea Martino Da Rio, Banca IFIS S.p.A. - Head of IR & Corporate Development [12]

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And might be sorry just to add, of course, we wanted to present several potential acquisition partnership agreement on specific transaction with realized operator in this segment or potential hiring of small teams experienced in this professional. Of course, the skills that a professional should have, the professional skill in unsecured retail are completely different from the professional skills in large corporate.

Then on point that you are right that you look at capital, et cetera, but we have also to look at return, or what for us is the most important thing is return and the time frame of cash collection. So for this, let's say, we want to remain flexible. We are opportunistic, but what we do in terms of acquisition, we acquire the portfolios for which we have the skills to manage and a competitive advantage.

The servicing, yes, needs to be expanded because we show clearly that we are, let's say, in a segment where we need to integrate and streamline this service. We serve this segment in the servicing and in the purchasing.

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Simonetta Chiriotti, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [13]

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Yes. But I suppose that if you expand servicing activities in corporate secured, it is because you want to invest in this asset class. Am I correct?

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Andrea Martino Da Rio, Banca IFIS S.p.A. - Head of IR & Corporate Development [14]

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Let's see. We can also act as servicer; FBS is a servicer. They are opportunistic in investment. They have some portfolios. Yes, they buy. And what we want to do is be opportunistic. Also FBS is a servicer, but sometimes they bolt something else on their portfolio or some small portfolios, and they recover. Then of course, we'll present this -- we'll be more detailed in the business plan presentation.

We want to describe -- let's say, what we want to do now is show that we have, at least in the short term, in the long term, let's wait for the plan, clear strategy where to go.

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Operator [15]

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The next question is from Manuela Meroni of Banca IMI.

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Manuela Meroni, Banca IMI SpA, Research Division - Research Analyst [16]

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Some question on my side, this first one is on the NPL business. If I look at the investment income for NPLs vis-a-vis in the third quarter, for sure, it is lower compared the second quarter due to the seasonality, but it is even lower compared with the third quarter 2018. So I'm wondering if you can provide us with some color on the decline of net interest in the NPL business in the quarter, year-on-year.

Then speaking on nonperforming loan business, you made a few acquisitions in this quarter. The pipeline is quite rich. So I'm wondering if you can share with us, share with us some target in terms of acquisition within the end of the year or before the beginning of next year.

Third question, again on nonperforming loans. You said in the last quarter of the year, you made some disposal so you can add some capital gains. So I'm wondering if you can expect some capital gains in the fourth quarter of this year.

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Andrea Martino Da Rio, Banca IFIS S.p.A. - Head of IR & Corporate Development [17]

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First, on capital gains. I would like to stress that we also, in this segment, we are opportunistic. We have probably -- even if you don't see these ones, because maybe we don't find an agreement. We have -- we are approached or we approach proactively for -- to dispose some queues, some things -- sorry, some things of our portfolios. For sure, sometimes, this transaction goes through; or sometimes, you can say we are analyzing some of them. Sometimes goes through, sometimes not. And when we dispose, usually, we tend to do capital gains because, let's say, we -- up to now, it seems to (inaudible) valuation of our portfolios.

In terms of net interest income. There is -- let's say, there are several impacts, and this is due to the fact that we constantly update our model. Okay? In the first 9 months of 2019 -- in 2018 in the first quarter, we just update our model, and we, let's say, increase the valuation of the judicial nonperforming step-by-step from (foreign language). And this, of course, realized an increase in net interest -- higher net increase in net interest income in 2018.

Then there is also another impact, which is the fact that the courts are becoming slightly longer in processing our nonperforming. So even 3, 4 months, discount at 20% because we discount at 15%, 20%, because it's a very high rate at which we discount, has a material impact. And that's why you see that our net banking income is even -- is, let's say, slightly lower, but we don't have an impact on future cash flow. It's just a matter of higher -- of longer time frame, slightly longer time frame. Just a few months may have an impact.

I don't know if I was clear on that because of this complex, but it's just an update on our model, which constantly reflect an update, our assumptions. For you, eventually, maybe that our cash collection tend to be much more closer than the net interest income [portion].

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Manuela Meroni, Banca IMI SpA, Research Division - Research Analyst [18]

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And on NPL acquisition?

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Andrea Martino Da Rio, Banca IFIS S.p.A. - Head of IR & Corporate Development [19]

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NPL acquisition is the same. We look at the portfolios. We are on all transaction that are on the market. We are currently looking at portfolios that are between -- higher than EUR 4 billion in terms of gross book value. We look at all of them, but we are disciplined on price. Sometimes, you have some new entrants or some players who are very aggressive on price. We have to look at our return. So sometimes, if our returns are not matched, or our pricing, we don't proceed with the transaction.

Of course, the second half is with this in the primary market. Then in the secondary market, we expect the more activity, and we compete also in the secondary markets.

Don't expect that we buy -- we are looking at EUR 4 billion transaction, but don't expect that we'd like EUR 4 billion in the last quarter. We can buy an amount depending on the price, a fraction of that. Just to be clear, sorry.

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Operator [20]

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(Operator Instructions) Gentlemen, there are no more questions registered at this time.

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Luciano Colombini, Banca IFIS S.p.A. - CEO, MD & Director [21]

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Thank you, everybody, and see you for the presentation of our business plan.

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Andrea Martino Da Rio, Banca IFIS S.p.A. - Head of IR & Corporate Development [22]

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Of course, if any of you ask questions, we are more than happy to organize follow-up calls or meeting with myself or the CEO or other management of the bank. Thank you very much for attending our call.

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Operator [23]

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Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephone. Thank you.