Banca Transilvania S.A. (TLV) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of Banca Transilvania regarding the Q3 2020 results. At our customers request, this conference will be recorded. [Operator Instructions] I now hand you over to Ömer Tetik, CEO, who will lead you through this conference. Please go ahead.

Hello. This is Ömer Tetik from Banca Transilvania. I'm glad that we have the occasion to have this teleconference. I hope everyone is safe and healthy. And from now on, the new vaccine news are coming one after another. We will be having only good discussions about the health situation and pandemic and focus on economic and financial vessels more. I would like to start -- although knowing that all of you are well informed, I would like to start with the situation in Romania, macroeconomic development and how we see the next few months ahead. It's very difficult to make long-term forecasting now because the situation is quite volatile. The news are being also taken as highly sentimental. But on the other hand, as we were telling in our last conference, it seems that Romania avoided the technical recession by delivering quite a decent growth after second quarter's decrease of over 10% of the GDP. In the third quarter, our GDP grew 5.6%, although year-on-year contraction of the GDP is around 6%. So we think that Romania has outperformed both its peers in the emerging markets and many other European countries in terms of GDP. This shows both the resilience of small Romanian businesses, but also the strength of Romania as a culture to provide IT service hub and also benefiting from maybe partially from internal tourism, development of internal tourism, although volatile industry in the big cities is being hit -- affected by the lockdowns or measures taken by the authorities. We have seen also the impact of definitely both the move, but also the financial impact, the economic impact of government-led programs, starting with the famous SME invest, IMM invest program, which has been big part disbursed and disseminated through the economy in the third quarter. That good part of the house entitlement and registration, as we see, is that we see a good alignment between fiscal efforts, the development efforts and also monitoring policy. National Bank of Romania has been also accommodative in the third quarter. And the reference rate has been cut to 1.5%. It's a record low level for Romania. There is a perspective. There is a possibility of further rate cuts. We don't know if it will be a single rate cut or 2 steps. Our Chief Economist is estimating that there is a room of at least 50 basis points of further rate cut. And also, although it's not the third quarter, you have most probably seen that last week, National Bank of Romania has decreased the minimum reserve requirements on foreign currency deposits, which brings another EUR 350 million -- almost extra EUR 350 million liquidity to the market. So whilst we think that if we will be able to finish that -- pass through the next few weeks, few months with no bigger challenge in the funding situation, Romania will be in the right track to recover both in terms of GDP, in terms of economic growth. What is lost during 2020, we might be recovering in 2021, at the light of also good news coming from the vaccine and treatment side. We have seen also -- although there has been -- has a very tight range volatility of euro loan, we see that it's quite stable, thanks to heavy foreign exchange results, strong foreign exchange results, but also quite good interest rates comparatively offered by Romanian borrowers, be it the sovereign or the companies as compared to other currency interest rates. So although so-called record levels have been touched by euro loan exchange rate, we see that it's below RON 4.87 and quite stable at its level. Banking system has been, as you know, from the very beginning, very active. The declarations from us and from our peers that we are here to support economic activity to our customers. And we will be, not just that we want to be, but we will be part of the solution. It has been seen in the real economy that the lending growth was quite strong. And the corporate loans increased almost 3.5%. And also thanks to IMM, that program or the wins created by such programs. And again, on the exchange rate front, maybe one of the comfort factors is that the loan growth is continuously in the late. And also in retail, we have seen, in the third quarter, quite a strong demand on the -- not only just consumer lending but also in mortgage lending. Probably the retail customers are benefiting from low interest environment, but also creating alternative investments for their loans. Plus, as we all know, Romania needs new housing and better standards for its population. So far, the loan-to-deposit ratio of the banking system stays beyond 70%, and this is also kind of good news that, during the pandemic, during lockdowns, during economic activities decreased. Romanian households and companies have accumulated savings. And although the consumption was slightly picking up, they're also continued having savings. This gives both the liquidity, access to capital, but also enough buffer to meet futures or near future fluctuations in economic activity and maybe loan payments. If I would come back to -- by the way, I forgot to mention that we have already our presentation in our website. It is being uploaded before our conference call. You can follow the numbers and also statements from that. If not, you can download it later. So in terms of Banca Transilvania, as we said, that we wanted to position ourselves at these difficult times as support of the -- as a support factor of the economy of our customers and existing and new customers. And initially, we have -- before the public moratorium, we have announced that we are ready to offer a private moratorium. And also with the public moratorium, we said that we are not going to use the legal option of charging interest to interest. So 41,000 customers, almost 14% of our loan portfolio, below RON 6 billion, benefited from the moratorium. But already 8,000 of those customers are out of moratorium paying their dues. So we don't see yet a pressure on the non-performing loan formation. And we think that -- I'll say if we will be able to pass the next couple of months like this in terms of Romanian economy, actually, all the worst-case scenarios or bad scenarios will remain more for academic study. In terms of our support to businesses, thanks to, but also with our additional effort to government support measures with IMM Invest, we have granted almost -- I'd say, as you know, the program was increased to RON 20 billion, and our partners increased to RON 4.15 billion. Out of the 71,000 customers who benefited from IMM Invest program, SME Invest program, almost 40% choose to have their lending activity, their borrowing to be from BT. This definitely increased our assets in the interest-bearing assets. And 1/3 of the loans granted by us have been to new customers. This is also -- reconfirmed our role that we assumed verbally. Our network has been almost fully functional. From time to time, we need -- we had to keep 1 or 2 locations as a backup. But actually, on average, almost all our locations were up and running. Our systems performed very well. And at maximum, we reached half of our teams from head office and support departments to work from home and sometimes part of the branch team. Now we have 40% of our colleagues for our team working from home. And thanks to increased usage of digital offers of BT, now we have this possibility of servicing our customers from home. But on the other hand, also, customers can have the convenience, not only the safety, but also the convenience. Already 1.7 million customers are using our digital solutions, BT Pay, BT24, Neo, Apple Pay, Fitbit Pay and so on. We are adding up definitely also new facilities to our functionalities, and BT Pay already has even health care and fitness options. Our visual health, our virtual assistants, has been accessed 3.5x more in the last -- in the third quarter of this year as compared to first quarter. And we have been also internally getting more than 7,000 donations through our -- all those application through BT Pay. On the company side, we have managed to open hundreds of accounts online for capital formation, for establishment of new companies. And also, our online lending activities, including the company side, increased 62%. Again, in the company side in the physical person side, our interaction -- virtual interaction with the customers increased more than 4.6x. Coming back to our financial performance. Actually, after a very tough second half of March and almost inactive April due to the lockdown severe measures, May, June, July started an upward trend in terms of consumption, in terms of spending, in terms of borrowing or lending for us, and we started catching up. Our net interest income is at RON 1.9 billion, slightly lower than the same period last year. This is also partially impacted by the fact that, as I said, that we postponed for 3 months credit card payments. We declared that our customers don't need to pay interest on their delayed or postponed payments, which is going to expire at the beginning of next year or sometime during next year, based on the discussions that banking associations have with the government. And part of it will be recovered on the way. Our pre-provision operating profit was close to RON 1.6 billion, with a decrease of almost 4% as compared to last year, despite all these changes. But definitely, the most important change came from our cost of risk, which increased to 168 basis points from previous 4 basis points. Where we are adapting our models between our, how to say, base scenarios of, how to say, after the health care crisis being passed. Definitely, there will be volatility in economic activity and financial pressure on our customers. We want to be prudent in order -- and try to forecast what may happen. Despite this, we are glad that we managed to deliver over 14% return on equity with a very strong growth of liquidity, capital base, which is quite comfortable, I would say, cost-to-income ratio of 45%. Currently, our equity is at RON 8.9 billion. And if you include our profit for this year so far, our capital ratio is at 21.8%. If you will go to loan quality. Our non-performing loans, the PAR 90 ratio is at 205 basis points, also impacted by the write-offs that we have done in the last month of the third quarter in September 2020 of almost RON 400 million. And our NPL coverage ratio, including the collaterals, is at 130%. Our deposits, as you know, our strength, which shows us -- which shows us the track and preference of the customers in Romania had been growing strongly, although putting heavy pressure on the asset generation side as well. And then most of our deposits both on the retail and corporate banking side are in lei. All business lines sufficiently funding their own businesses, if you look from this perspective. And our interest funding cost from deposits is on a decreasing term together with the interest rates in the markets. In retail banking, we reached 3 million active customers. And in 2020, in the first 9 months, we have disbursed over 55,000 loans, excluding cards -- credit cards granted to the retail customers. We've maintained our leadership position in the plastic card market between 3% market share. Both on the issuing and acquiring side, we have 4.3 million active cards, over 65,000 POS terminals and over 1,700 ATMs. So not only through our branch network, but also through our peers and ATM network, we are offering physical accessibility available to our customers, 7/24. And what is that we are proud of, especially on the digital banking side, is that over 1.2 million customers have enrolled to BT Pay and Apple Pay applications, which, as you know, BT Pay has been developed in-house. And this is becoming a local but also regional success story itself. In SME banking, we have 330,000 customers. And in the third quarter, actually more than 2,000 of our colleagues were involved in direct lending and interactions with SME banking customers. With other 7 banks, we have also joined the distribution of EU grants, the grants of EUR 1 million support schemes, sorry. And out of this EUR 1 million grant, 50% -- slightly above 50% will be intermediated through accounts to the customers at BT. In corporate banking, mid corporate and large corporate, we have over 10,000 customers. The loan balance has increased close to 5%. We have maintained our focus on agribusiness, fast-moving consumer goods. The value grew also in e-commerce, thanks to our virtual platform, industry manufacturing, communication and definitely health care. And our factoring volumes are also increasing constantly. We are glad that despite our prudent provisioning policy and modeling of -- remodeling of IFRS model, still we have a very robust capital to weather even the worst-case scenarios, which we don't consider would be the case in the near and medium future. And the bank enjoys over 20% capital ratio, well above requirements of regulatory bodies, locally and internationally. Within all these, how to say, activities, lending and keeping businesses up and running, not only ours but also our customers, also, we are reading more carefully. We are following the developments in the ESG part, in the sustainability, and we are willing to allocate more funds and resources to that. We want to come with very strict commitments to the market. It's not to be just a requirement, but as BT, as a leader of Romanian markets, we would like to lead the conversation there in the financial sector. And we have signed and initiated several programs, including with European Energy Efficiency Fund with IFC, EBRD, our long-term partners. We are kicking off the ESG reporting in line with the International Standards. And obviously we started already analyzing our customers from this perspective. I would like to mention that also the first 9 months of the year was good for all our subsidiaries for BT micro-lending, BT Leasing, BT consumer finance, BT Direct. And so have been delivering over, how to say, good results as compared to the FPS to market conditions. And we've been continuing our growth also. We are committed to grow our businesses also on those sites. Thank you very much so far for listening to me. I would like to allocate more time to Q&A. I'm here with Luminita Runcan, our Chief Risk Officer; Mihaela Nadasan, our Head of Financial Markets and Financial Institutions, Investor Relations; and our CFO, George Calinescu. In case we cannot answer any of your questions on the spot, we will try to update our presentation. I'll come back to you by e-mail later on. Thank you very much. Let's start the Q&A.

[Operator Instructions] The first question is from Mr. Brzoza of PKO BP Securities.

I have, for the moment, 2 questions. First, if you could provide a more detailed breakdown of the provisioning provided in the third quarter. We see that the provisioning level was broadly -- was generally relatively high, even though the share of the Stage 2 or Stage 3 loans was under control. So I'm wondering why this discrepancy. And then what's the COVID versus IFRS 9, general provisioning versus other sources of provisioning? And my second question is on the reserve requirement. I'm seeing that at Transilvania, the reserve requirement held at the Central Bank sits at about 15%, 1-5 percent, of your deposit base, whereas the average of [ debt trigger and BRD ] is rather in the range of 7% to 8%. So I'm wondering whether you have any hints where this difference is coming from? And finally, how this reserve cut requirement would impact your reserve requirement and the deposit with the Central Bank?

Okay. So this is Mihaela. I'm going to respond on the positioning side, where we were mentioning a couple of times during the year ago, also in the latest press release that we have changed the methodology. So in fact, the higher portal fleet compared to what we were having last year, it's not already related to changing the behavior of our clients, but is more or less forward-looking to the possible problems which might occur in the future. So as you know, there is a public moratorium in place. So definitely, some companies, which might face financial difficulties, are still benefiting of that program. So we prepare ourselves for the future. When it comes to the split of the provision, it's more like 90% provisioning rate, 10% normal kind of activity related to the extent we can have such a structure given the fact that we are seeking to book a completely new entitlement this year. So it's hard to give final clarity. But in terms of changes in the methodology, 90% of the provisions are defined -- arising from those changes. When it comes to your second question, I'm not quite sure if we got your question properly. So that require -- so the level of lending requirements depends on the [Technical Difficulty] we are having on our liability side. It's connected to the currencies in which those liabilities [indiscernible] clients have expressed in. So definitely the level might differ from 1 bank to another, depending on the current disruption and also on the funding side those banks are carrying. We think we can provide you some details with regard to how the minimum reserve requirements are being computed in Romania.

Minimum reserve requirements are being, how to say, managed as an average -- daily average. That's why there -- you will see fluctuations between different banks depending on the market conditions, depending on the -- I would say, treasury management decision. But actually the rate -- minimum reserve requirement rates are fixed or same for all banks. So there are no differences. But sometimes Banca Transilvania or any other bank can keep a smaller amount for a couple of states. And in order to compensate, then it's end of month where the liquidity signing interest rates are lower in the market, you keep higher reserves. That actually -- sometimes when you arbitrate with the national banks because they pay better interest rates as compared to that -- those marketplace.

[Operator Instructions] The next question is from [ Alex Logos ] of Morgan Stanley.

If you could go back a bit on the provisioning, please. Maybe if we could have an outlook for the full year, what do you expect in terms of cost of risk? This 160 basis points is something that we should expect for the full year. And in your press release, as you correctly said in highlights, the methodological changes in terms of provisioning. And it says on the press release in line with the recommendation of the NBR and EBA. If you could give exactly a bit more clarity on what these recommendations were. And then maybe if there's any outlook for 2021, if it's not too early?

Okay. With regard to the provisions for the full year, we keep to what we were mentioning in the market, which was roughly at the beginning of the year. So we are maintaining that conservative approach in terms of total cost of bid for this year. So no changes in that effect. And then when it comes to the guidance received from different regulatory bodies the information in terms of how the banking sector across the world should have a prudent behavior and embrace for future potential problems connected to this pandemic.

It's already, as Mihaela said, public information that National Bank of Romania said publicly that the banks -- and I don't think this is the case of Banca Transilvania then, how to say, dividend, prior dividends calculate the effects of pandemic, the economic downturn that we had. And also the last quarter of this year, although we are not speaking about a lockdown, still, there are strict measures. And that the sentiment is not as high -- as good as the third quarter, although economic activities are up and running. That's why I'm not sure if we are over pessimistic or just prudent as necessary.

Okay. And there is no change on the mid-cycle provisioning that you used to guide of 100, 110 bps post pandemic, obviously?

In the medium and long run, this is what we want to manage. I mean, while we were having actually 4 basis points -- or 10 basis points, we were saying that this should be our guidance, or let's say, the level of course, saying that we are very strong in micro-lending and semi-lending and retail banking. But on the other hand, also such fix will be temporary. And based on the economic developments, macroeconomic indicators in Romania, in Europe and globally, we will adjust our models.

Okay. And maybe one last question regarding the moratoriums. I mean, do you have any early indications of -- from client activity where they stand? Or what will happen once this ends? Do you see any early indications? Or it's too soon to say of any trends?

I mean it's -- especially on the corporate side, definitely, we maintained our relationship with the customers. We follow the sectors, we follow their businesses, their financials and try to understand how they stand, where they stand. What I can tell you that as we also put in our presentation, as I mentioned, already 8,000 customers started paying their dues, their monthly installments. So -- and considering that deposits of Romanian customers in Romanian banking system has increased significantly, we don't expect too many, let's say, very bad surprises, I would say. But on the other hand, we are also -- keep in mind that in the next -- if there won't be any new fiscal stimulus or different regulatory changes in the first quarter of next year, all those people should pay their banking financial debt. They should pay their rents for the commercial spaces also, whatever they are using under rent contract. There will be tax payments. So if there was -- we also support that there should be a smoothening out of all these burdens, which are kicking in, in the first quarter of next year. And we see that there is a discussion on that. I'll say, we are quite comfortable that most of the customers that applied precautionary measures to moratorium because in March and April, the economic forecast, including our own budget estimations, were much more pessimistic. They will be able to, and they will be willing to pay their debts.

Very clear. And one last question and the last one, I promise. On the net interest income in the budget, you had a decline of about 11%, if I remember correct, for the full year. And it's clearly much better in the 9-month period. Could you maybe tell us what is the reason for the better performance up till now? Is it better loan growth? Or a different assumption for the policy rate cut? What are the biggest delta on that front?

So if you remember from our previous conference call, when we were mentioning that for those payments which were delayed, we were not getting the interest rate, and that was having a negative impact on the net interest income. So the net interest margin is definitely affected in quite substantial part by those postponed payments, repayments in terms of loans. So that it has been a quite significant impact of around half of what is the decrease in terms of NIM for this year. Definitely the movement we are going to have, again, and even more efficient order than what we were saying for the last couple of quarters that we are targeting to become more efficient in terms of loan to deposit ratio. That's for sure going to help the recovery on the net interest margin. So that interim deposit for the public moratorium is not going to be continued next year. We might assume, even though it's a little bit too early that we are going to be, again, in that position in which we were mentioning that we can defend 300 basis points in terms of net interest margin.

The next question is from Simon Nellis of Citibank.

Sorry. I came a bit late to the call, so apologies if these questions have been asked. I can listen to the transcript if they have it. My first question would just be on trading and other income. It seems to be quite positive in the quarter. I think it was like RON 230 million, around 20% of revenue. What's driving that? And what's the outlook going forward? Do you continue to see such strong trading and other not fees and not net interest income revenues going forward? That will be my first question.

Indeed, I would say it's close -- in terms of our, how to say, distribution of income items, definitely, our revenues from fee and commissions were badly affected from the second quarter's economic downturn and lockdowns, which started picking up. But because we have some good results, I will let Mihaela who is running the treasury and portfolio management to answer why or how we did.

So why? The saving income has, let's say, several items, including and when it comes to the FX income, there -- here, we have seen higher volumes and the economic activity, which picked up much better in the third quarter compared to quite frozen second quarter, is showing some pretty good results there, in terms of the -- as an important part of the net trading income. Then when it comes to the securities portfolio, there, again, let's say, we do have -- and you might remember, quite asking it for positioning. And we are trying to both have some trading income on the other end to make sure that the structure of the portfolio is well balanced so that we are minimizing on the loan part, any kind of negative effect when it comes to result in equity or potential future losses when it comes to those instruments which are going through the P&L side in terms of evaluation. So moreover, it was like compared to the other 2 quarters of this year, it was with a flat impact of volume of transaction and also with the planned in terms of the recovery of the overall market in Romania.

I mean are there any bond sales that have kind of led to one-off gains in this line that might not recur in COVID?

So it was nothing significant. So there were just, let's say, normal type of trade, daily trade, which are, if the market is there, those should continue on a quarterly basis. But definitely, the market has to be on a positive trend in order to be able to have all those that we desire.

Got it. And my second question would just be on lending growth. I think in the second quarter call, you were talking about the SME state -- SME lending guarantee program. I mean, how is your involvement in that? Has your limit been increased? And what's the outlook for loan growth going forward from here?

I mean, indeed, this -- I tried to touch base on that during the presentation. So because the program was -- the SME invest, IMM Invest program was launched late May, actually, the biggest impact was in the third quarter. That's coming out at 3.5% -- most of the 3.5% loan growth. And there are -- our initial limit was RON 3.5 billion, but it was increased to RON 4.15 billion later on. And we'll be utilizing those. So -- 1/3 of the SME invest loans granted were issued for new customers so that it's just not, I'd say, growing banking customers, but refreshing our loan portfolio as well. With SME invest program itself was a limited program, but we expect that as for also declarations of the officials and politicians from different parties, there will be more similar programs to come, with different sizes and different -- in different segments. So far, if you look at IMM Invest, SME invest, if you look at the EUR 1 billion grand scheme distribution, where we had also 50% market share, I think from the upcoming programs also, which are, I would say, good performance so far, we'll be having a good share. I mean, many years -- many conferences, we had been mentioning that almost 40% of the new companies -- newly established companies, they were opening their capital account at BT. All the government programs in different sectors, we had between 35% to 50% market share. And I guess this will prevail because we are trained to do and our colleagues, our team have shown excellent modernization to deliver in-time results for the customers as well. So if there will be more to come, which I would say, yes, but I don't know exactly the details. We will be growing our lending portfolio definitely.