Banca IFIS: Government Bond Portfolio Profits Continue
Edison | May 10, 2013 06:19AM ET
In Q113, the key profit driver for Banca IFS (IF) has been the government bond portfolio, which contributed €32.4m (Q112: €26.9m). There was a good underlying performance from the core business, where SME trade receivables income rose 29%. IFIS has adopted a more aggressive management of non-performing loans (NPLs) leading to higher-than-expected impairments in Q113. The direction of the results was flagged in the AGM statement on 30 April and we do not expect a material reaction to them.
Bond portfolio
The bond portfolio delivered profits of €32.4m in Q113, with a further c €4.5m taken directly to equity increasing in valuation reserves. With most bonds accounted for on a held-to-maturity basis, volatility in market prices is significantly neutralised (unrealised net gains €14.7m vs €74.5m at end-2012). Given that market movements since end-March have been driven by greater political confidence, the current unrealised gain is around €90m, well above end-Q113 and end-2012 levels.
The size of the portfolio has only been increased modestly to €7.5bn (year-end €7.2bn) and we believe any further increases from here will be small. The bonds continue to be funded through the repos market at a cost of 20-25bp.
Core business
Market concerns over the enactment of the EU Late Payments Directive have yet to materialise. Core business loans increased by 5%, and turnover by 8%. Customer numbers rose by 19%, as IFIS targeted smaller customers to maintain margins. The group continues to expand the NPL business, buying €130m notional value loans at around 3c in the euro. Income in the NPL division increased 35.5%, and in trade receivables by 28.8%.
Valuation: Some upside
Our earnings forecasts are largely unchanged, although the further gains in equity from the bond portfolio increase our Gordon’s growth model from €9.7 to €9.75.
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