To overcome the economic crisis caused by the Covid-19 pandemic, the European Union has promised to allocate about $2.8 trillion to support and reinforce businesses via loans. Thanks to this huge allocation of resources, many European companies will find financial support for their investments, especially in the digital, green transition and resilience spaces. Through these projects, the members of the EU will also implement structural reforms, with the southern countries being the most committed ones. As a result, the number of loan applications will increase, most likely reaching a historical peak.
However, such an outpouring of loan resources to these large-scale projects will naturally result in a higher number of business failures and failure to pay back loans. Many companies will not be able to honor their commitments with the banking system, resulting in an increase in the value of non-performing loans (NPLs).
The European Central Bank forecasts that in 2022, the non-performing loans in the Eurozone might hit $1.7 trillion, exceeding the $1.2 trillion peak reached after the great financial crisis of 2008 to 2009. Thus, many banks in the EU might be in serious trouble in the upcoming years.
The spread of debt problems will continue to feed a profitable business for the financial services of companies that operate in the market of NPLs. In Europe, these are essentially private equity funds and credit recovery firms.
Amid these entities, Banca Ifis (MIL:IF, Financial), a Venezia, Italy-headquartered credit services company engaging in the purchase and management of deteriorated credit, represents an affordable opportunity with the potential to deliver robust growth in the upcoming months and years.
About $1.2 billion was recovered from a nominal value of $30 billion of impaired loans purchased over the past decade by Banca Ifis, which produced a much lower net profit margin of 20% compared to the credit services industry median of 33.5%, sending the share price down nearly 30% since 2016. This has created an interesting opportunity to spend much less for a stock whose share price might bounce back strongly in the months ahead.
Thanks to its position as one of the most active players in the domestic market of deteriorated credits, the company should be able to capitalize on an expected increase in the sale of NPLs from Italian banks. According to a report of Banca Ifis, these transactions will reach more than $40 billion in 2021, exceeding the yearly average amount of $15 billion invested over the past five years. Besides this, the percentage of performing loans (PLs) that become NPLs is expected to double last year's level, hitting a 2.6% rise in 2021. The unlikely to pay loans and past-due positions, which together account for 30% of the total market share, are also set to give a strong contribution to the bottom line of the company.
Sell-side analysts on Wall Street estimate that Banca Ifis will increase its net profit per share by 26.80% per annum over the next five years. From such a significant improvement, shareholders can expect positive repercussions in the share price.
On the Borsa Italian stock exchange, the stock price was trading at 13.90 Euros (approximately $16.50) at close on July, determining a market capitalization of about $883.2 million and a 52-week range of about $7.90 to $16.91.
The stock doesn't appear expensive as it has a price-earnings ratio of 11.89, which is almost in line with the industry median of 11.44, and a price-book ratio of 0.49, which is well below the industry median of 1.01. Furthermore, the price-sales ratio is 1.9 compared to the industry median of 2.73.
The 14-day Relative Strength Index of 61 tells that the company is neither overbought nor oversold.
Four sell-side analysts on Wall Street have issued ratings on this stock, recommending one buy and three holds. The average target price is set at $28 per share.
Disclosure: I have no position in any security mentioned.
