Banca d'Italia

The BFF Bank case: What happened (explained in detail)

The BFF Bank Case: A Deep Dive into the Controversy

The BFF Bank case has stirred strong emotions in the Italian banking sector, causing panic among investors and triggering a 33% drop in stock prices at Piazza Affari.
At the core of this turmoil is an inspection by the Bank of Italy that unveiled discrepancies in BFF Bank’s management of public credits, as the institution specializes in acquiring and handling commercial credits from public administration suppliers.
The inspection highlighted issues related to credit classification and corporate governance, leading the central bank to enforce stringent measures.

These measures comprise a temporary halt in profit distribution, a freeze on variable parts of salaries, a prohibition on international expansion, and a limited time to address the raised concerns.
These restrictive actions have fueled uncertainty in the market, with analysts and investors pondering over the bank’s response and its future prospects.

Events Leading to the Bank of Italy Inspection

In recent months, BFF Bank has faced a series of events raising alarms in the Italian banking sector.
A pivotal moment was the bank losing its Small Medium Enterprise (SME) status under the prevailing regulations, publicly announced on January 4, 2023, marking a turning point in the financial institution’s position and perception.

Subsequently, on February 20, 2023, BFF Bank disclosed the repurchase of its own shares, initiating an authorized buyback program sanctioned by the Bank of Italy.
This strategic move was followed by internal changes, including a collective layoff procedure due to client exits and the approval of the annual financial statements and dividend distribution.

Furthermore, on June 27, 2023, the BFF Bank’s Board of Directors endorsed a five-year strategic plan outlining the institution’s objectives and future directions until 2028.
This plan encompasses initiatives to reinforce the bank’s presence in key sectors like factoring, lending, transaction services, and enhance its international footprint.

However, on September 11, 2023, the Bank of Italy initiated an inspection, concluded on January 12, 2024.
Preceding this inspection were several bank actions, including the approval of a new Social Bond framework and an update to its medium and long-term bond program.

All these events have cast shadows on compliance issues and corporate practices, compelling the Bank of Italy to impose consequential restrictive measures.
The financial market’s reaction was immediate, significantly impacting BFF Bank’s stock and investors’ perception of the institution’s stability.

What to Expect Next

Following the Bank of Italy inspection and the related constraints, BFF Bank faces a period of adaptation and stabilization.
The bank’s management, led by CEO Massimiliano Belingheri, affirmed that despite uncertainties, the bank maintains a solid financial outlook, supported by unaccounted reserves and planned operational actions.
However, the temporary dividend suspension and the overseas expansion freeze, mandated by the Bank of Italy, have negatively affected market perception and stock value.

Operationally, the bank closed the first quarter with an adjusted net profit of 41.5 million euros, down 21% from the previous year.
Excluding extraordinary gains from the 2023 sale of a variable-rate State bond portfolio, data reveals an 8% increase.
Adjusted total revenues grew by 15% to 202.4 million euros, while the loan portfolio expanded by 9% to reach 5.5 billion euros.
These figures suggest the bank still maintains a stable financial footing, with a Cet1 ratio of 13.5% and a Total Capital Ratio (TCR) of 18.2%.

However, the climate of uncertainty prompted some analysts to reassess BFF Bank.
Equita Sim downgraded the rating from “buy” to “hold” and lowered the target price from 14 to 10 euros per share, citing concerns about the regulatory review’s impact on the bank’s loan portfolio.
The main uncertainty revolves around the portion of the portfolio influenced by the Bank of Italy’s calculated backlog days, potentially leading to an increase in Risk-Weighted Assets (RWA) and a consequent dividend reduction.

Other analysts have also revised their assessments.
BNP Paribas Exane downgraded the rating from “outperform” to “neutral” and adjusted the target price to 11 euros, while Mediobanca Research shifted its stance to “neutral” and reduced the target price from 14.5 to 11.5 euros.
Banca Akros even suspended the rating and target price, emphasizing the uncertainty surrounding the new capital rules’ impact.

Author: Hermes A.I.

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