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In the eye of the storm Bff Bank, a bank specialized in the disinvestment of receivables without recourse towards the public administration.
The crash on Piazza Affari continues today for Bff Bank (-32.39%). At mid-morning the stock was at a standstill after the opening due to an excessive variation in contracts, given the findings raised by the Bank of Italy: at the end of a long inspection Bankitalia decided to temporarily suspend the distribution of profits by the bank specialized in disinvestment of receivables without recourse from the public administration. But not only that: there were also findings regarding the remuneration of top management.
Here are all the details, starting from the bank’s activity and the institute’s shareholders, the decision of the Bank of Italy and the position of the institute’s top management under a financial and regulatory storm.
WHAT THE BANK DOES
“The subject of the dispute is technical, but has substantial effects that are anything but trivial – we read on Only 24 hours of today – And it concerns the method of classification of commercial credits claimed from public administrations, which Bff Bank inevitably hoards given its business model. In fact, Bff buys non-recourse credits from supplier companies owed to the Public Administration and National Health Systems, thus helping the disinvestment process. Well, the Supervisory Authority’s attention is focused precisely on the method of classification of these credits”.
BFF BANK MANAGEMENT
WHO ARE THE SHAREHOLDERS OF BFF BANK
American funds and the bank’s top managers are among the institution’s major shareholders. Here is what we read on the bank’s website with the latest updates on shareholders:
“As of 09/18/2023 Capital Research and Management Company held 9.7 million shares, for a share equal to 5.2% of the Bank’s share capital. As of 11/13/2023, JPMorgan Asset Management Holdings Inc. held 5.9 million shares, for a share equal to 3.2% of the Bank’s share capital.
As of 31/12/2023, pursuant to the Market Abuse Regulation, Massimiliano Belingheri – Relevant Person of the Bank – and his Closely Related Persons are beneficiaries (directly or indirectly) of a total participation of 10.9 million shares equal to to 5.8% of the Bank’s share capital. The remaining management share refers to the BFF shares held by the 4 Vice Presidents in force at that date, and by their respective Closely Associated Persons.
As of 10/03/2023, pursuant to the legislation on ownership structures, the Bali Trust indirectly held 9.0 million BFF shares equal to 4.8% of the Bank’s share capital. The Bali Trust is an irrevocable trust attributable to Massimiliano Belingheri and his heirs”.
HERE ARE THE FINDINGS FROM THE BANK OF ITALY
The object of the dispute concerns the methods of classification of commercial credits claimed from public administrations. More specifically, last April 29th Via Nazionale sent the company a report with the results of the “follow up” inspection which concluded on January 22nd 2024, formalizing a “conformity finding” with respect to the current credit classification . The finding, as the bank itself explained in the note announcing the first quarter accounts, is based on an interpretation of the EBA guidelines on the new definition of default. «Regardless of the representation of a related credit risk, these credits must be classified differently from that adopted by Bff» with particular reference «to the application of the suspension to the calculation of the days of arrears for the purposes of the prudential classification of the credit exposure ».
THE FINDINGS ALSO ON THE REMUNERATION OF MANAGEMENT
Bankitalia also formulated findings on the bank’s governance and corporate practices regarding remuneration, with particular reference to some contractual provisions relating to the CEO. Furthermore, the Regulator, while waiting to examine the bank’s decisions based on the inspection findings formulated, has ordered that Bff Bank temporarily refrain from further expanding its operations abroad, through the opening of new branches or the expansion in new countries under the provision of services regime. The bank will have to respond to the Bank of Italy in July 2024.
BELINGHERI’S WORDS
The words of reassurance expressed yesterday by the CEO, Massimiliano Belingheri, during the conference call presenting the first quarter results were of little use. «We believe that Bankitalia’s findings should not lead to substantial changes regarding the future management of the company and its assets. The bank’s prospects will not change,” he said yesterday. Speaking with analysts, the CEO also ruled out a change regarding the dividend policy. “I don’t think it can change,” he said. “We have a solid reserve of capital and the ability to generate new capital,” he added, underlining that “these are mitigating factors” for the risk. «We will dialogue with the regulator to resolve the situation within the next few months». Meanwhile, yesterday evening Borsa Italiana announced that from today, and until a subsequent provision, the placing of orders without price limits on Bff Bank ordinary shares will not be permitted.
THE NOTE FROM BFF BANK
After the inspection conducted by Bankitalia on Bff Bank, Via Nazionale specifies that – despite the presence of compliance findings – «it expressed its conviction that the renewed corporate bodies, in their entirety, will be able to make an important contribution to the prompt resolution of the critical issues detected, and that the findings, based on the historical experience of the bank, do not imply an increase in credit losses of the BFF Group’s portfolio, instead having as their object reporting profiles for prudential purposes”. The bank communicated this in a note, adding that the board of directors confirmed its full trust in the CEO, Massimiliano Belingheri, and started a “frank and constructive” dialogue with the Supervisory Authority, in order to arrive at a “prompt resolution of the findings ». Furthermore, the bank specifies, Bff’s current policy regarding dividends will be resumed after the revocation by the Bank of Italy of the temporary suspension of the payment of dividends.
During the inspections, the note continues, Bff had represented to the Bank of Italy an extreme scenario of classification of the credit portfolio as of 30 June 2023, based on the “disapplication of mitigants used on that date”, which was the subject of a compliance assessment. In particular, in this scenario, an increase in Past Due (i.e. expired and/or overdrawn exposures) of approximately 1,292 million euros could have been generated, with additional Rwa of approximately 1,722 million, corresponding to an additional absorbed capital of 207 million to reach the capital target threshold of 12% for the payment of dividends. In this scenario, coverage would take place from an excess of capital at 31 March 2024 compared to the consolidated Cet1 ratio target (equal to 12%), equal to 49 million; an excess of capital already generated with the profit of the first quarter of 2024, equal to 41.5 million and an increase in the accrual rate of late payment interest and the lump sum compensation for credit recovery (from the current 50% to 60/ 70%), estimated in a one-off capital increase of approximately 70/140 million.
Assuming an estimated recovery percentage of 70%, the bank would have approximately 24 million in capital in excess of its Cet1 ratio target for the distribution of dividends. With 60% Bff Bank would be “significantly above its Srep requirements but would need to maintain approximately 45 million in additional profits generated in 2024 in order to reach its Cet1 target for the distribution of dividends”. All of this, the bank specifies, “conservatively assumes the non-application” of further levers and managerial options available to the bank, such as the use of further mitigants, the selective transfer of credits and the application of the Facility Level Approach following the possible implementation of Airb, on which BFF is already working. Finally, the board of directors reiterates that “the prospects and underlying risk profile of the business remain unchanged”.
