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

Ladies and gentlemen, thank you for standing by. I'm Costantino, your Chorus Call operator. Welcome, and thank you for joining the Banca Transilvania conference call to present and discuss the first semester 2021 financial results. [Operator Instructions] And the conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Omer Tetik, CEO; Ms. Mihaela Nadasan, Deputy CEO, Head of Financial Institutional Markets and Investor Relations; and Mr. George Calinescu, Deputy CEO and CFO. Mr. Tetik, you may now proceed.

Hello. Thank you for joining us. I hope that you had your summer vacations, managed to travel a bit and enjoy the summer of 2021. We will try to give you some brief insight about Romania, Romanian banking system, and then we will go deeper in Banca Transilvania's numbers. And definitely, we'll try to answer your questions and listen to our observations. In case we will not be able to answer for any reason at this very moment, we will come back to Mihaela, and her team will take over and come back to you. We are trying a new platform. I hope that our sound -- our voices are being heard well. And also the Q&A will be on an online platform, so that we will be trying something new. And let's see how it goes. With regard to macroeconomic situation, as you might be following actually, Romania is very much in line with the European and global trends. But actually, in some numbers, positively passing the global sense of averages, especially in the second quarter. If you look at the numbers, the GDP of the country grew 13%. This is definitely coming from the fact that lockdowns heavily affected last year in the second quarter, Romanian economy. So quarter-to-quarter comparison might not be very correct. But still, we are expecting the economy to grow 6% to 7% -- between 6% to 7% this year throughout the year despite the ongoing discussions, debate on the Delta variant and what might follow with the fourth wave. The macroeconomic and market situation, it's quite stable so far in Romania, the National Bank of Romania maintain the policy rate. They want to see more, have to say, profound changes in the GDP structure, more -- bigger pressures in the inflation or on the prices. Because so far, especially in the second quarter of the year, main growth came from consumption, which grew almost 25%. And this didn't create that much of inflationary pressures on the prices. Plus Romania is also having its best year in terms of agricultural production. This is a year with record production. When the prices are also relatively higher in global markets, so the economy will be benefiting, but also the fact that we are not importing heavily agricultural products, will help us with the local economy. The budget deficits have been growing, now it's around 4.3% at the end of the first half of the year. And this is -- yes, it's positive partially from the growth programs, partially due to the tax expenses granted, but with the EU funds with the rebound of real economy, we will be recovering the deficit hopefully. We see quite good efforts on the fiscal discipline from the government side. The -- on the money markets and fixed income markets, we have seen that the yield curve is getting steeper. In 10 years, loan yields have increased more than the short-term yields. This gives us the belief that ROBOR will be also quite stable in the next 3 to 6 months. We will be expecting a sign from the National Bank in terms of the monetary policy change. This helps definitely the economic growth, lending, savings. Despite the fact that savings are increasing, we see also activity in the capital markets in Romania, where the domestic stock market is at the record lows as it's vesting in European and U.S. equivalents. Banking system has been quite robust. During the pandemic last year and also this year, the banking system lending have been growing quite fast. And only in June, we see month-to-month 1.4% growth of nongovernmental loan book and 11% -- more than 11% growth year-on-year. The growth is coming definitely mostly from main lending and also supported by the government programs like SME invest, AGRO invest and so on. But contrary to the expectations or the initial forecast early last year, the NPL ratio so far is below 4%. Banking system is [indiscernible] region. And the biggest challenge remains still the financial inclusion and to increase the bankability of SMEs, smaller companies, our households, and that's to increase mostly the GDP ratio, hopefully, to similar levels of European Union. Deposits have been also increasing. It's a good sign that we have been nice -- also last year, Romania until last year and in each financial crisis of any positive cycle with a very high loan-to-deposit ratio, with low liquidity and dependency on liquidity from external partners and markets. But in the last couple of years, loan-to-deposit ratio went below par. Now it's actually around 68%. Although the lending activity has increased the loan-to-deposit ratio by 0.6%, which is still insignificant, still we are at a very comfortable level. And this also shows the possibility of both the households and solar companies to meet their debt obligations to banking system or to other parties. Coming back to BT, we have been quite active last year in the governmental programs. But this year, we have built our strategy that we come back to normal lending, normal banking activity. So we have seen a very strong growth in retail lending in terms of number of operations. in the company side from micro lending up to the large corporate, actually 60% of the loan activities being supported by government programs. But 40% is our own initiatives, and we are getting more and more active and we see also a real -- have the real sense of the markets and see our customers, how they react with, how they stay off the almost 1.5 years of funding in some financial crisis. So we have been -- over 6,200 companies this year have been obtaining grants or loans to the grants of government programs this year. The most active one's being SME invest and AGRO invest. When you see in our presentation, IMM, [indiscernible] SME, this is our main segment. But also with the funding digitization efforts that we have been spending has accelerated, now we can comfortably say that almost 70% of our retail customers are digitized. So they use at least 1 of our digital solutions. BT Pay, our wallet application, has tripled its number of transactions. We have been launching several different options and opportunities. I don't want to bore you with all what we do there. But I guess we are kind of leading the digital transformation -- digital adaptation in Romanian market with number of contact-less payments reaching 27 million in the first 6 months, with BT Pay, our wallet, having almost 1.5 million users. And our customers using heavily our visual health and omnichannel support activities -- support channels to interact with the bank. But this is also valid for company's site where we are more interacting or offering them alternatives to our network. On the other hand, we are also happy to see that BT network is 100% capacity back to work. And we are almost at the point that we will see, again, crowds of customers with different transactions or a different request. This is our strong point, we trust our network and also we need their presence because they have been a driving force for our growth. And they are fully packed in the front line of our financial and commercial growth. In terms of financial performance, I don't want to just read the numbers that you already have seen or might have seen, but we have delivered quite a strong profitability with, I would say, very prudent provisioning policy for the loan book. Although the decrease in interest rate monetary policy, in general, is putting pressure on our net interest margin, what we are maybe moving that we had been mostly compensating from net fee and commission income, which grew very strongly. And this almost every 3 months when we are discussing with analysts and investors, this is what we say that this was our maybe weak point. Now we are at a very reasonable and comfortable level and we see further opportunities. So customers are doing more and more of their transactions with us. Our interactions with them are becoming profitable. So these are definitely at the end, the bank to deliver almost 19% return on equity with a cost-to-income ratio of below 46%, which is quite a good practice, even if it's not best practice in this part of the region. In Romania, they are the best practice. So with RON 46 billion loans and RON 94 billion deposits, our loan-to-deposit ratio is at 49%. We are enjoying the trust of the customers. We are enjoying the transition -- transactional volumes and fee income generated by them. But definitely, our focus from now on will be accelerated growth of lending book so that we can provide more interest income for the liquidity that we have. Our capital ratio if we include also our profits for the first 6 months is at 23.6%. And this is beyond regulatory minimum levels, beyond even our basic levels. And it gives quite a good positioning for organic growth. And if there will be further acquisitions definitely in M&A activity where we are interested further on. In the -- our net interest income has been -- if you compare half year's -- half -- first half of 2020 to the first half of 2021, our interest income grew by 5%. Fee and commission income that we were mentioning grew 27%. Trading income due to the management of our fixed income portfolio grew over 45%. But we also see the pressure on the operating expenses, especially from the human resource side. Romania, both demographically and also economically, becoming a more expensive market. But I think, with some adjustments we have been doing, we are offering good commissions, good benefits to our employees. And they issue good results of the bank that we are presenting to you. There has been some impact from postponed benefit that we were supposed to grant for 25th year's celebration of the bank early last year, due to pandemic we decided to postpone for prudentiality reasons. But this year, we are allocating those benefits, some special royalty premiums to our employees, who are working 5 years, 10 years, 15 years and so on with the bank, which is mostly a one-off of which the impact will fade in the next years to come. Our loan structure is mainly in local currency. We are kind of naturally hedged in terms of our foreign exchanges. And also this improves customers' payments, payment performance, payment [indiscernible] as well. And we don't see any change on this. There will be clear and precise plan to adjust European Monetary Union, we will be focusing on late. In terms of loan policy, we are -- our NPL par [ 90 ] is at 1.96%, it's low 2%. And NPL coverage ratio, it includes also the collectors, it's the real -- as to collectors, it's close to 130%, which as I said it also gives us comfort that we are well provisioned and well prepared for the growth to come. In terms of liquidity, I have already explained. By the way, our presentation that we are using in the guidance now, it's already in our website. If you didn't access it, you can definitely access it now. Our strong points had been always retail banking and small business banking in Romania. Our retail loan portfolio reached RON 25.7 billion at the end of June 2021 with 3.1 million active customers. And only in the first 6 months of this year, we have granted over 100,000 retail loans. This comes also from the fact that both with our network of branches, [indiscernible], ATMs, we are quite an available bank, accessible bank for them, not only to -- just to digital channels. And if we look at the digital customers, actually, we have 2 million digital natives, 2 million customers using at least 1 of our channels as I have mentioned earlier. In SME banking and small business banking, we have a loan book of RON 6.5 billion with over 350,000 customers. Last year, the boost from SME invest, EMMA program has been crucial to reinvigorate and to keep alive this segment. This year, we see that customers are already caring for their own investment or working capital lease. And the payment performances are very good. There are almost no customers left from moratorium and if you look at the payment performance, we don't see any, let's say, alarming levels. In corporate banking, we have 11,000 customers. We have been growing also in the slightly larger [ sector ] this year, especially in the utilities, FMCG manufacturing, health care, communication. And these sectors will remain our interest together with the [indiscernible]. I mentioned already that our capital ratio, even if you don't include the profit of the first 6 months, it's over 20%, with the profit including [ 3.6% ]. And we will be continuing our growth organically. We are prepared and praying for that. But on the other hand, we are also thinking that the consolidation in Romanian financial sector will continue. So we'll be looking to maybe some other banks, maybe to leading companies in order to extend our reach and to use our capital better. When it comes to sustainability, I have to admit that we have 1 of the best leaders of support and sustainability and he is in Romania among us. So I would like to give the floor to Mihaela to tell us a few words on our sustainability efforts.

Yes. So maybe we are going to repeat part of the information, which you already have seen on our website or that we were publishing in previous press releases. What we have started this year is definitely to be much more vocal and much more transparent with regard to all the initiatives we were having in that respect. And the fact that we were having already since 2008, all kind of programs, which were designed in order to increase energy efficiency when it comes to investment projects of our clients, of our SME clients. Then we continued with different partnership with other investment funds. Also for energy efficiency, mainly when it comes to municipality projects that were started in 2012, again, we entered also the retail side of green loans back in 2015. And what we can say now is that we expanded everything what is meaning a sustainable kind of approach within the analysis for the loan contract and the loan arrangement we are having now with our clients. Besides this, we are going to -- or we are transforming slowly everything what is plastic in our interaction with clients into green kind of banking. So virtual cards are going to be, let's say, the drivers when it comes to the new portfolio of cards, which the Banca Transilvania is offering to its clients. That's, let's say, maybe a couple of -- these are a couple of details when it comes to the green, the environmental part of the sustainability topic. When it comes to the social part, only the very nice words which Omer was saying with regards to the managers of the bank are to complete the scene here. So looking at the structure of the human resources in Banca Transilvania, you are going to see that diversity and equal chances is, let's say, a practice for us for already a significant number of years. And so we are going to pass this practice and this good examples. Also, when it comes to the relationship we are having with our clients, and in this respect, through different programs, we are supporting everything what is related to women in business and entrepreneurial approaches coming from different layers of the society and trying to bring, let's say, the financial inclusion at the table each and every time when we have the chance. While from coproprietor governance, you have maybe seen the scoring, the ratings we were obtaining with regard to the transparency of our reports. Definitely, we are doing our best to improve everything what we are having there, not only with regard to the financial reports we are presenting, but also with regard to the entire activity of the bank. And in terms of the way in which we are organizing our shareholders' meetings, and we are interacting with all the stakeholders of the bank. Thank you.

Thank you, Mihaela. Just before we close our presentation and switch to Q&A, we are also very happy to see the growth of our subsidiaries. Before closing the first 6 months, actually, BT Asset Management was just slightly under RON 5 billion assets under management. And we -- if you look at the consolidated numbers presented also to you, our subsidiaries are having significant contribution. They are adding almost RON 350 million to our operating income, and over EUR 1 billion to our total balance sheet, our total assets. And we see continuous potential in terms of the third pillar of the pension fund in terms of asset management, leasing, but also our micro-lending company that is [indiscernible] is having a tremendous performance despite all the challenges that they had. They are both -- they are not only growing, but they are growing profitably. This day, you might see just a couple of photos. If you look at the presentation, throughout the corners of the pages, actually these are some pictures from our new head office. We are -- since June 2021, we are in our new offices. And from a couple of different buildings, we have gathered all our staff back into new head office. It's good to see that over 80% of our personnel is coming to office. So we are working from work. And also, our personnel is enjoying the, let's say, much better conditions of the new head offices. Hopefully, when everything that's crazy will be over, we will be organizing maybe an investor event and we'd like to host you in our new head offices maybe in 2022. Thank you very much. Now I would like to switch to Q&A. We will be -- there's an online platform I understand that we will be taking questions. Me, Mihaela and George will try to answer as much -- as many as possible during the time we'll have.

[Operator Instructions] The first question is from the line of Le Phuong Hai Thanh with Concorde.

Can you hear me?

Yes, we do.

Okay. I just joined the call, so sorry if you mentioned or you already -- if you already answered my questions. So just a couple of questions from my side. The first one would be on Stage 2 loans because I observed that they increased quite a bit in the second quarter. And I was wondering if there was any special cases or if asset quality really deteriorated to that level? And then my second question would be on cost. So it feels like on -- even on a quarterly basis, your tax increased as well. And I was wondering if you could elaborate on your outlook, what would -- what shall we expect in the coming quarters? And then third one would be on NIM, whether you could elaborate on your outlook for the rest of the year?

Could you repeat your third question because, unfortunately, we were not able to get it properly. The third one, the last one.

Yes. It was on interest margins, like how you see an outlook for the rest of the year.

Okay. So I'm going to start with your first question. So maybe you remember that we were mentioning that we remain conservative in terms of provisioning policy. And this is the reason why we were shifting some exposures looking at potential risks arising in the future, but without any kind of signs when it comes to early payment deterioration. So this reflection is, in fact, also in the way in which the weight of Stage 2 loans was growing. Otherwise, it would have been quite impossible to set aside provisions for the performing loan book. So this is for number one. For number two, the operational cost, Omer was mentioning some details in his presentation. So that only, we are keeping them as much as possible under control. And as you know, we were always looking at the cost, not like a single item, but in correspondence with the income so what we are controlling with the cost income ratio, and we intend to keep it at reasonable level. Definitely comparing this -- or if we compare the figures for operational costs also with last year, last year, we were not having that much of, let's say, activities. There were a lot of savings happening because of the lockdown. So part of this growth is coming due to the savings from -- or the base impact from last year is part of this quite high growth that you are seeing this year. Plus we will have in that loyalty program for people working with the bank for a large number of years, which should have happened -- and those amounts should have been paid last year, but we postponed it for this year. So plus the fact that, yes, we are continuing with all the investments when it comes to the digitalization of the bank or improving all the systems we are having trying to improve not only the interaction with clients, but also internal kind of processes and flows. So this is something what is going to continue, but definitely, we are going to keep it well under control so that we are keeping the cost income ratio at levels which we committed in front of our shareholders.

Still, we have -- I mean, with the level at least, we are -- we will say that we are comfortable for the bank -- fast-growing bank. But on the other hand, as Mihaela was saying, last year, suddenly after February, especially we stopped trainings, we stopped advertising, we stopped marketing activities, projects with consultants, several different things have disappeared from our day-to-day activity. Indeed, suddenly, we have to spend some bucks on mask and gloves and plexiglass, but they were not that significant. So it's not very, let's say, maybe fair to compare semester to semester. On the other hand in Romania, this is the general issue, especially on the human resources side, the cost of employment is increasing. And technology is not just itself a solution because it's also a cost investment, although we are heavily investing in that. I guess, your last question was related with the NIM. Yes. And while we are enjoying our liquidity to grow from deposits, we are also very committed. We have said this a couple of times, we are not going to at least until things will get so drastically -- we don't want to cause negative interest rates to our customer deposits. We don't want to penalize Romanians coming to a bank, trusting a bank and making deposits there. This is something that we have to develop further. This is part of the financial education. So we almost see it as our marketing cost. We actually cover part of the expenses there from the increase in the net fees and commission income that we were mentioning. What we think is that both the ROBOR and monetary policy rates mostly will in the next 3 months at least be stable. Maybe towards the end of the year or early next year, National Bank may give the first timer of changing the direction in the policy rate. This will have an impact on the interest rates in general. Although it will impact the fixed income market on the other hand, for banks like us having heavily main loan portfolio with variable interest rate, it will also help us to increase our net interest margin. We didn't grow our asset loan very aggressively till the last 1 year. Although we are the market leader in terms of growth as well, we didn't want to be overaggressive with -- every day when we have the comfort of economic data, the financial data from our customers, we will be accelerating our lending growth, which will also have a positive impact on the NIM.

The next question is from the line of Boulougouris Alexandros with Wood & Co.

I would like to ask regarding cost of risk, maybe regarding a bit to the question from my colleague previously on Stage 2 as well. Do you still -- I think in your budget and your guidance, you were assuming around 120, 130 bps cost of risk. In the first half, it has been above 50 bps and quite volatile from one quarter to another. Should we still assume this level that you have in your budget as a full year guidance is still reasonable? A second question regarding fees. In your budget as well, you had a small decline year-on-year, but it seems that first half trends are moving well above these expectations. May be a reason behind this strong performance compared to your initial assumptions, that would be useful. That's all on my end.

I will start with the second one, second question. Last year, if you may remember, during this period, we have been also -- we had opened certain channels which were fee-based, commission earnings, free of charge to our customers. We have postponed payments. We have -- I mean, there was no activity. So definitely, part of the increase is coming from the revival of the economic activity of our customers. Part of it is coming from increased volumes. But we are very attentive. I mean this year, actually we are also accelerating what we -- in terms of volumes and number of products that we do on bank assurance or what type of other needs our customers have. That's why although we cannot -- we will not promise, we will not commit to 25% growth every 6 months, we think that still there is room for double-digit growth a couple of more years to come for BT in terms of fees and commissions income. Despite the challenges that we had from -- in regards to the decrease of interchange fees of different regulations, still as we grow our number of customers as we grow in terms of account volumes and deposits, this helps us a lot. So that's why -- and we see the customers' profitability itself, not just from the net interest income point of view, we see it as a role of itself and we try to take the best part of this role for each customer with the customers. In terms of the cost to income -- sorry, cost of risk, in this, I mean, maybe we have made a tradition of being more prudent each year in terms of expectations. Last year and this year, all the talk was about, let's say, increased NPLs and need for provisioning. So we tried to address this. There are not really too many one-offs. We have been also changing our rating model which impacted on the upper side, the cost of risk. But now we are comfortable with it. I'm not sure if you will be able to go -- if you -- not be able to. If you will be going towards 120 basis, but closing of the year, you'll be slightly higher than where we are, between 80 to 100 basis points, I guess.

Yes. And here just to add something, what we were also mentioning earlier this year, is that all those clients who benefited of the public moratoria are still monitored by us. Still repayment behavior is very fine. But yes, we are waiting for the third quarter and fourth quarter prior to confirming that indeed, yes, we have cost without negative surprises. The price is generated by COVID. So this is also 1 of the reasons why we are not changing, let's say, the expectations when it comes to a more conservative level of provisioning. But we -- yes, we are going to be able to come with more details and have a clearer picture once we are closer to the year-end. And so we have a confirmation of the economic performance of our clients.

The next question is from the line of Peter Christian with [indiscernible].

Just to make sure regarding cost of risk so you are paying around 80 to 100 basis points for the whole year? And my...

This will be something what we could anticipate now, looking at how the portfolios are performing. But we are not coming with any, let's say, kind of budget rectification or any changes on the budget. So it's an assumption based on the current standing of the situation.

Okay. So just to make sure, what is the estimation in the budget, 120 or something...

120.

Yes, yes.

120.

120. And regarding the dividend, I mean, is there any plan to distribute any dividends this year, I mean, taking into account the new position of the NBR and other announcements made by other banks?

Yes, maybe you have also seen that we have convened a shareholders' meeting in order to approve a dividend topic. Definitely, we were tracking with authorities, and we are coming with a balanced, let's say, proposal in terms of how much cash dividend we are proposing to be distributed. The shareholders meeting should take place in September, and we are assuming that it is going to approve the dividend proposal prepared by the bank's management.

The next question is from the line of Nellis Simon with Citibank.

I'm going to ask, I think, a question I usually ask, which is how can you have such high [Technical Difficulty] exceeds your fee income this quarter. Is that sustainable? That will be my first question. And second question will be on M&A.

Sorry, can you repeat the first question because it's not -- the line. I mean, how can we have -- what? We couldn't get that, sorry.

Such high trading and other income. I think your trading and other income is in excess of your fee income this quarter.

Thanks, and you have 1 more question.

The question was on M&A. There were some press reports that you're finalizing a transaction to buy Getin's business in Romania. Can you just share us the logic of that transaction and what it can bring to you? And any other potential transactions that might be there?

Sure. I will try to answer the first question. I mean definitely, we are -- due to our liquidity, a important part of our balance sheet is in fixed income. We are not trading too much or significantly out of Romania exposures. But Romania has been trending well. Our treasury has been managing well. When we managed to catch based on our know-how, experience, our connect -- I'll say connected us to the local market. When yield curve was moving, we did the right move. So that -- it helped us with the trading income. And the other income, it's mostly -- if you look at our balance sheet, actually, and loan portfolio, most of it is coming from recoveries usually, either asset sales or other types of recovery, but positive. This not something we can predict. We are not trying to make our budget, but it will be quite stable. I hope this answers the first part of your question.