A system to profit: Banca Sistema!

The recent turmoil enduring since the beginning of the year affected in particular energy and financial sectors. Italian banks were hit by a panic sell off that shrank, and in the worst cases halved, their capitalization even though fundamental factors are strong for most of them and no rationality can be found in current market prices.

However, an old advice by Benjamin Graham suggests to buy when everyone is pessimistic and sell when everybody is optimistic. Following the principle of the oracle of Omaha’ s mentor, as now, there are some very interesting investment opportunities. Banca Sistema is one of them.

Banca Sistema is a small reality founded in 2011 specialized in factoring, that is the practice of purchasing receivables from companies at discount and providing them immediate liquidity for their operations. Banca Sistema distinguishes itself from other factoring firms for collecting companies’ credits especially with public administration that, excluding countries such as Venezula, Greece and Argentina, has no credit risk basically. The bank went public just several months ago, more precisely on July, 2^nd 2015 with the initial price set at 3.75€ per share. In the current turmoil, the price has fallen by as much as 38% with respect to the initial one, reaching an historical minimum of 2.31€ last week.

However, in our opinion, the market is overreacting and penalizing too much also those who did very well last year and are improving a lot. Let’s see what are the key strengths for this firm and why we believe it shall outperform.

First of all, focusing mainly on public administration receivables, the credit risk the bank faces is very low and this reduces a lot the Risk Weighted Asset value which is used to measure bank riskiness and the amount of capital the bank has to set aside to cover potential losses, as the following table represents.

Source: Banca Sistema Pillar 3 disclosure

Moreover, through the IPO, the bank increased its solidity rising the CET 1 ratio from 10.4% in 2014 to 13.7% in 2015 and rising the total capital from 15.9% to 16.8%.

Source: Banca Sistema website

In addition to that, the business model is characterized by high margin, indeed 58% of 2014 revenues comes from interest margin, an efficient cost structure with cost/income ratio around 50% and a low tax rate due to the relatively marginal impact the labour cost has.

The strategic plan developed by the bank is based on three factors mainly:

• expanding the core business improving the sales team and achieving the complete operability of the branches in Italy;
• continuing the diversification of the business since, as now, as much as 83% of revenues come from factoring;
• expanding the core business creating partnership/joint ventures o through future acquisitions.

Surely, the diversification of revenues will provide a substantial reduction of risk and an increase in value. However, the expansion of factoring turnover is a reliable hypothesis in Italy given the burdensome and slowness of which payment to public administration’s creditors are made

There is empirical evidence that the market is highly concentrated in the hand of major banks showing that specialized firms such Banca Sistema and Banca Ifis have a competitive advantage in term of efficiency and debt collection with respect to the other players in the field. This will likely lead to an increase in factoring turnover for these small companies as numbers confirm. Just to throw in some data, Banca Sistema factoring turnover rose from 1,174 to 1,411 YoY, that in percentage terms is about 20%. The net income has had a similar pattern. It grew about 21.5% YoY to 23.7 mln, if normalized for the extraordinary IPO expenses. Nevertheless, regardless to the positive results, the stock price tumbled as those of other financial institutions.

We do not see any reasonable explanation to justify such a nosedive decline as fundamentals proved to be strong and the growth opportunity are not scarce. Indeed, financial results from the industry confirmed our thesis that the potential growth for factoring is still large.

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