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BFF Bank Embarks on Swift Recovery After Regulatory Review

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Robert Tavares

May 14, 2024 - 12:52 pm

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BFF Bank CEO Assures Resumption of Dividend Policy Post-Bank of Italy Probe

In the wake of a painstaking review by the Bank of Italy that has temporarily put a hold on profit distributions, BFF Bank SpA's CEO, Massimiliano Belingheri, has expressed confidence in the bank's future. As the financial institution enters into dialogues with the regulator, Belingheri has assured that once the suspension is lifted, the bank will resume its previous dividend policy.

CEO Belingheri’s Vision Amidst Regulatory Hurdles

During an interview with Bloomberg on Monday, Belingheri conveyed optimism stating, “There is a positive and constructive dialog with the Bank of Italy.” Following the temporary suspension, he assured that the bank's target was to restore its dividend policy. This policy previously involved distributing all capital that exceeds 12% of the bank's Common Equity Tier 1 (CET1) ratio.

"We are working constructively to make this happen within a reasonable timeframe," Belingheri said with a tone of determination.

Market Turbulence Following Regulatory Review

The specialty lender, with more than three decades of history, faced a precipitous drop in market capitalization last week, losing over a third of its value; from €2.3 billion ($2.5 billion), which has been partially recovered in subsequent trading. The tumult followed the Italian regulator's mandate for a temporary suspension on profit distribution fuelled by a review of how the bank classifies its credits.

"The Bank of Italy found some of BFF’s loans should be classified as past due instead of performing based on its application of the European Banking Authority guidelines that define defaults," added the CEO, pointing towards a technical disagreement rather than a financial misstep.

BFF Bank's Specialty and The Regulation's Impact

Founded by a consortium of pharmaceutical companies in 1985, BFF Bank has expanded its reach across nine European countries. The bank has a unique focus on purchasing and managing credits, especially those owed to public administrations. This niche market has been a cornerstone of its business model.

A significant part of BFF's sizeable €5.5 billion portfolio consists of bills due from the Italian public administration, which are known for delayed payments. Belingheri emphasized the solidity of these assets, stating, “But since the debtors are state bodies that eventually pay, the bank argues they entail a limited exposure to risk.”

A read-through of the original Bloomberg article provides more insight on the recent events surrounding BFF Bank and its obligations under regulatory review.

The Consequences of Reclassification

When loans are deemed past-due, banks are required to earmark additional capital to cover them due to their higher risk profile. “There isn’t a divergence of views on the creditworthiness of our loans, it is just matter of a prudential classification of part of our credits that can lead to a risk-weighted assets increase,” the CEO explained. He also reassured that the bank is equipped to handle the subsequent capital requirements with its available resources.

After conducting a preliminary review, BFF Bank has not anticipated significant changes in its economic and financial forecast. This outlook also factors in the €628 million reserves that haven’t been recognized in the books just yet.

Navigating through an 'Extreme Scenario'

Even in the face of what the bank describes as an 'extreme scenario', where a loan portfolio reclassification could tack an additional €1.7 billion onto risk-weighted assets (RWA), the bank's executives remain unflustered. The potential hike in RWA might require around €207 million in extra capital to reach a stable dividend yield target. However, Belingheri emphasized that the bank could still cover this with its own capital and other mitigating actions.

“Based on our assessment, even in an extreme scenario, the bank expects to be able to implement remedy actions to reach its targets,” he asserted.

While it is challenging to predict the exact outcomes of the review, Belingheri concluded that the odds of the most adverse scenario coming to fruition were low.

Governance Under Scrutiny

The central bank’s examination extended beyond the reclassification of loans. Unspecified findings were also made concerning BFF’s governance and corporate compensation practices, particularly those in relation to the Chief Executive Officer's contractual arrangements. Consequently, the regulator instructed BFF to put a hold on variable compensation temporarily.

Despite these challenges, the lender’s board of directors expressed unwavering support for Belingheri. The CEO, who has helmed BFF for over a decade and holds a 5.8 percent ownership stake, hinted that recent board changes would contribute positively toward resolving the issues highlighted in the Bank of Italy’s review. However, details on the specifics of governance or the halt of his variable compensation were not discussed.

Conclusion

The ongoing events at BFF Bank highlight the balance between regulatory oversight and the operational strategies of financial institutions. As the bank navigates these regulatory challenges, its leadership assures stakeholders that measures are in place to safeguard the bank's financial stability and its commitment to shareholder returns. Balance sheets are being scrutinized, long-term strategies are being discussed, and governance is being strengthened to align with regulatory expectations.

BFF Bank's resilience is being tested as it addresses both external and internal expectations, all while maintaining focus on its core business strength: managing credits for public administrations. The bank's dedication to resolving these issues swiftly underscores a proactive approach to regulatory compliance and investor confidence.

As regulatory reviews and corporate governance adjustments unfold, stakeholders and market watchers will be closely monitoring how BFF Bank manages the balance between regulatory compliance and its business interests. The narrative of BFF's navigation through the stormy seas of financial regulation will no doubt act as a barometer for the industry at large, signaling the depth of impact that governance and regulatory practices can have on even the most niche financial businesses.

(end of news article)