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

Ladies and gentlemen, thank you for standing by. I'm Merdo, your Chorus Call operator. Welcome, and thank you for joining the Banca Transilvania conference call to present and discuss the third quarter 2021 financial results. At this time, I would like to turn the conference over to Mr. Omer Tetik, CEO; and Mrs. Mihaela Nadasan, Deputy CEO and Head of Financial Institutions, Markets and Investor Relations; and Mr. George Calinescu, Deputy CEO and CFO. Mr. Tetik, you may now proceed.

Hello. Good morning or good afternoon. Thank you for joining us for the presentation of third quarter results of Banca Transilvania. I hope everyone is safe and preparing for the year-end celebrations. I would like to start with a brief overview of Romanian economy and the local development. Most probably, as you know, since the first week of October, Romania is in a process of reestablishing the government coalition. And it seems that this week, we will -- we might be having the coalition of national leverance with Social Democrats so that can focus back on building the budget -- the state budget for 2022 and preparing other plans. On the other hand, for 2021 have been treating fairly well Romanian economy. We have accelerated growth, strong rebound in foreign direct investments, around EUR 4.5 billion in the first 8 months. This figure will be much higher towards the end of -- at the end of the year. We have been seeing that the inflationary pressures started building up coming from energy prices and lack of goods. Nation Bank of Romania, although I guess the most prudent in the whole Central and Southeastern Europe, started the reversal of the monetary policy and the increase -- by increasing the rates twice consecutively by 0.25 basis points. The main increase in the monetary policy rate can be seen at the Lombard rate, which has been raised by 0.5% as per the market expectations, although the normal increase of reference rates didn't meet the market expectations. It shows clearly that also Nation Bank of Romania and most of the local economic analysts are thinking that the inflationary pressures are transitory. They are related for the sudden shocks of changes in the prices with the energy prices and with the capping off energy prices for the power sold and other companies, most probably the impact will be fading out in the days -- in the months to come. By the way, we have posted also our presentation at the Investor Relations page of our website at Banca Transilvania's website, so that if you would like to follow the numbers from there now or later, please do not hesitate. The consumer price inflation had been close to 5.2% -- it's actually 5.2% at the end of September and reaching 7% in the end of October as you have always been informed. On the other hand, Romania still enjoys despite the increases -- significant increases in the state debt -- sovereign debt still enjoys the logos indebtedness ratio, which make say so. And the budget deficits have been this year in the first 9 months, below 4% compared to 6.4% a year ago. And the debt to GDP ratio is slightly above 50% for Romania, which gives comfort both economic analysts and the bank financial sector. The yields have been increasing in anticipation of the monetary policy change, and we see that market has stabilized since Nation Bank took the necessary steps. There is still -- we see that there are talks about the euro run exchange rate and depreciation pressures, on the other end, considering the increase in foreign direct investments, high savings ratio point of euro savings and banking system and also the upcoming European resilience and recovery funds, which will -- as the program has been approved, we are expecting the funds to be in cash once the government will be up and running. So that was also, let's say, some safety margins or measures to follow. The bank sector has grown faster than -- our expectations has grown faster than the GDP growth. The loan -- the denominated bonds in the last 12 months to September 2021, grew almost 18.5%, and foreign exchange denominated loans grew by 2.3% in the last 12 months to September 2021. The main component was definitely the increase in household loans coming from mortgages or consumer loans by -- which grew in the first 9 months of this year by 8.3%. But on the other hand, corporate loans also had been advancing quite fairly, thanks to government stateless programs like the second version of the IMM invest but also slightly higher appetite of different companies to invest or to further improve their businesses. And convenient banking system is still offering a comfortable NPL ratio at 3.65%. This is the record low level for the last years, despite all the talks of emerging markets, small companies, moratorium and so on, we see also a similar impact or trend in our numbers result that you will see. The explanation in the lending helped the loan-to-deposit ratio to slightly improve towards 16 -- 69.5% in September, a slight increase from August. While the household deposits was growing in the first 9 months, 6.5%. The corporate deposits grew by 9 -- almost 9.5%. Together with the recovery going out of the pandemic, we are expecting the loan-to-deposit ratio further to normalize towards maybe 75 basis points towards the end of the year depending on the utilization of the bank and loans and core financing packages. If you come to Banca Transilvania, we are happy once again to see that government-led programs like IMM Invest, Banca Transilvania had been the bank of choice for the applicants. And so far, for the second iteration of IMM Invest in 2021, we have credited almost 18,000 customers -- the market created 18,000 customers, of which 25% chose BT. We have granted 2,300 loans in Banca Transilvania under IMM Invest agreement program, an amount close to RON 1.5 billion. And also, there were the state grants through which we have offered RON 2.02 billion with almost 20,000 payments. These are mostly working capital loan grants. And HoReCa scheme also 61% of the companies chose Banca Transilvania and out of which 20% were new customers. If you look at the public moratorium and the impact of public moratorium in our numbers, the remaining amount is close to RON 50 million, 200 customers, which we don't see as a business significant risk compared to our numbers. We had been investing further in digitalization. And now 68% of our customers are using at least one of the banks digital solutions, Internet banking, mobile banking or smart banking applications. BT Pay, our own wallet application, together with Apple Pay, Google Pay and other types of apps that we have [indiscernible] paid wallet. We have -- we are close to 2 million cards enrolled and over 1.5 million customers enrolled. We have seen a huge increase in the number of transactions online and with the card. This help definitely to our fee and commission income, but also to the fiscalization of the country. We have seen the mobile payments doubling in the last 12 months to 20 million transactions in one quarter. On the other hand, in the first 9 months of this year, we have processed almost 1 billion transactions with debit and credit cards. And we have also BT Visual Help, which had close to 37% increase in the interaction with the customers. We are -- also on the company side, we are now switching to Neo account, where the onboarding and interaction will be fully online. We have launched our new digital signature solution e-sign, and we are also offering file exchange, file depositing solutions to our customers to FileShare. And we see also in the company's more than doubling the number of online digital interactions. If you look at the financial numbers, the result of our operational efforts, you will see that the net interest income of the bank has grown 3.5% despite decreases in the interest rates in the first 6 months of the year. And in the consolidated basis, we see a 4.2% growth of our net interest income. We are mentioning this in our all calls, and we pay a lot of attention to that. The net fee and commission income of the bank has grown almost 26% and the whole group's slightly over 25%. This is -- a couple of years ago, when we started speaking more about the growth of our net fee and commission income and our focus on it, we were saying that we will be pursuing double-digit growth in the years to come. And this will be also our target for the next year. The preprovisioning operating profit of the bank was at RON 1.7 billion, and the net profit after tax is RON 1.470 billion, very much also definitely supported by the cost of risk, which is at 0. Cost of risk is coming mainly -- actually cost of risk being 0 is not a change in our provisioning policy. We have been provisioning almost EUR 100 million this year, but an amount equal to that, we had been either reversed by reimbursements or sales of assets so that it netted off our provisioning efforts. At the end, return on equity reached close to 20%, with the net interest margin at 2.55 -- 255 basis points, which we think that will be the last quarter of such a tight net interest margin with the interest rate policy change and the market increasing, the reference rates are being adjusted. And as 80% of our loan book is with variable interest rates, we will start from the next quarters, we will see the impact on our numbers positively. Our loan book -- gross loan book at the end of September, it's at RON 48.5 billion and deposits from customers at RON 96.9 billion, with, again, comfortable loan-to-deposit ratio, 50% -- or 50%, which gives us enough liquidity to grow our asset base further and quite comfortable [ partner ] 90 below 2%. If you look at our, let's say, trends in the income structure, the net interest income, despite the stress of decrease in interest rates has grown by 3.5%. Our net fee and commission income, 25.7%. We have seen a growth in our net trading income, which we -- the percentage is high, but the differences are not that significant for our bottom line. But also we have seen that our operating expenses growth has been in line with our expectations, which offered us the preprovisioning profit -- operating profit 8% higher than last year. I would not bore you with the numbers that you can definitely take out from the presentation and from our numbers. I would like to switch to Q&A to offer you the chance to clarify numbers as much as we can.

The first question comes from the line of Nellis Simon with Citibank.

I have 2 questions. First question is just on net interest income and margin. I see that you've grown nicely year-on-year. But quarter-on-quarter, your growth -- your net interest income fell by, I think, 5%. Could you just explain what was going on there? It seems to be driven by lending interest income from loans going down. That would be my first question. And my second question is my usual question, which is how are you generating such high trading FX income, insurance income, other revaluations? I mean all other income other than net interest income and fees seems to be very robust. I think it was 18% of revenue. And what's the outlook going forward? Just worried that, that could decline over time.

Thank you very much. I will start with the second and go to the first question. As regard to the second question, the couple of years ago, actually, we have put it as an ambition because our starting point was low. As compared to our peers, our net fee and commission income was quite low. We were not the transaction bank of some of our customers or most of our customers. So we may spend a lot of effort to get their wallet to get their portfolio of transactions and operations. We have signed also new bank insurance partnerships, changing the mode of offering these products, we have been bundling them with our existing products, not just trying to sell them as separate products. And we are also possibly getting more revenues from the products we sell on behalf of our bank insurance partners. In terms of exchange rates, again, it was a strategic change. We have increased our sales team. We have been paying attention by special campaigns actions and through our network. We are assuming also a couple of operational, let's say, burden in Romania. If you look at our market share in terms of total assets versus our market share in terms of number of payments, in terms of number of cards, cash operations. So we are taking an extra mile. We are assuming some burden so that we can get other transactions of our customers from which we can earn some fees and commissions. So far, this has been paying back. So I would say that we are not still at a level that we should be or we could be. But all the banks, all our sales channels and business lines are paying special attention to that. And this had been year-to-year giving us a very solid revenue base. So I don't know if it's enough of detail, but we can also discuss it further. Coming back to net interest margin, indeed, it has been squeezed because especially on the retail loans, the reference rate, the IRCC is coming with a gap of almost 6 months -- between 3 to 6 months because of the establishment procedure. So now we see that the IRCC on a daily basis is increasing. Our repricing period of our loans be it in December or January come, they will be repriced at a slightly higher IRCC and then in the years -- in the further quarters to come, it will be aligned to those type actual markets -- market rate. We also didn't change our borrowing or funding policy, most of our funding is coming or at least almost half of our funding is coming from current accounts with 0 interest rate, but we didn't charge negative rates or we didn't say no to customers. So this -- I'll say it's also the quite positive sentiment in the first 6 months of the year which pushed the treasury bond and fixed income instruments yield down, obviously, made an impact, which we see now. But as we have also the portfolio average maturity rather short, as we are replenishing our portfolio, we are replenishing at the current rates, and hopefully, we will see an increasing net interest margin. When we were discussing about NIM, about net interest margin in the last quarters, we were not aggressive on the upside, we were maybe more defensive, but now we see more, let's say, clear life of an increase in our net interest margin and thus the incomes.

So the decline over the quarter was driven mostly by repricing of consumer loans? Is that what you're saying now?

It's Mihaela now. Yes. So the effect on all the types of loans were repricing had to happen, considering that. Yes, Romania was having the lowest reference rate for the first 6 months of the year, while in the -- during the third quarter, the entire loan book came to a repricing.

Okay. But going forward, you hope to see some margin expansion. That's the message, yes?

Yes.

Exactly.

And just on the trading and other income, I guess, a large portion of this is actually FX. How much of that is kind of trading around your own portfolio? And how much of it's client-driven?

So the majority of the FX part is client-driven.

So it should be pretty sustainable.

Yes.

Yes.

The next question comes from the line of Boulougouris, Alex with Wood & Co.

Yes. On cost of risk, I have a question on cost of risk, I mean, given that we had another quarter of provision reversals in Q3, like in the first quarter. And I think in the previous conference call, you mentioned on a cost of risk guidance of between 80 to 100 bps, does this still hold for the full year or it is still applicable for the full year? Or how do you see the trends in the fourth quarter up to now? This is my first question. And my second, again, if I can revert a bit on the NII that my colleague mentioned in the first question. I mean in the budget, you were assuming an NII growth of about 7 -- 13% this year and loan growth has been better than, I think, initial expectations with a growth of more than 10%. And I think during the budget, we already were aware of the reduction in the reference rate. So on the other hand, we see fees going significantly better than what you had in the budget. I mean there is no reclassification here or anything like that. This is a pure reference rate that you mentioned below that came in beyond what you were expecting or something like that.

Thank you. I hope I will remember all the questions. If not, please remind me again. But coming back to fee and commission income growth. Also, we have been taking, as I said, very condense, very focused action. Last year due to pandemic moratorium and the economic conditions, we have given up, we have either postponed or canceled several action points that we were supposed to start with which kicked in starting with this year at different quarters. We didn't also throw all the, let's say, ammunition that we have yet. But the bigger change as compared to last year is maybe not fair to tell, it's kind of this year, partially smoothing out also what we didn't do in the last year. But this is indeed sustainable, as we consider and client-driven -- client number-driven as we are opening over 1,200, 1,300 accounts continuously as we speak every day. We think that -- obviously, we have already proven ourselves as the transaction Bank of Romania for retail and company customers. That has been, let's say, recent last week also, we have this Black Friday event and we look at the numbers, I don't want to tell you now the numbers that we will also tell in the next -- in this quarter's call later at the end of the year. But we see a huge market share in terms of transactions, merchant-related, client-driven, which are all revenue generating. In terms of the net interest income, yes, it is a slight increase. It's lower than the loan growth because it was being squeezed by the, let's say, lower interest rates -- reference rates in the market. And we are -- I'd say, we had been growing our loan book, we didn't want to, let's say, stop the asset generation side. We are seeing all this, but we will be seeing more of actualization of the recovery of the net interest margins in the next month. You had asked one more question. The first one I forgot that.

Cost of risk.

In regard to cost of risk, sorry. Cost of risk, there has been quite good recovery. Actually, out of this EUR 100 million, almost provision, around EUR 50 million, we have recovered from of balanced asset sales, several of them. It was also especially in the first 6 months, the markets help us to verify some of the assets that we were not putting necessarily a liquidation value. On the other hand, we have seen customers which we considered a bad rating or high risk, they had been paying their dues. They partially -- or fully close their debt to the bank. So another almost 50 million came from that. We had some recovery potential until the end of the year due to -- based on the ongoing discussions. That's why I don't think that we will be reaching 80 or 100 basis points cost of risk. But it is possible to see between 40 to 50 basis points cost of risk at the end of the year. If I skipped anything, sorry, ask me again.

Sorry?

If I skipped anything, please ask again, sorry.

No, no. I was covered, yes.

The next question comes from the line of Unger Thomas with Erste Group.

Yes. I would stick with the same subject, cost of risk and also the net interest margin. Maybe just on the net interest margin, beginning with that. If you could give us an estimate of how much in terms of improvement you expect in the coming 2 quarters on the margin itself? And then in cost of risk, you just mentioned the 40 to 50 bps for the full year 2021. Is there anything you can tell us on 2022 already, are we going back to a normal risk cost rate or around 80 bps? What do you expect for the next year?

I mean it differs very much -- regarding the cost of risk, it depends very much on the market conditions in which direction if there will be new governmental programs. So if there will be the forecasted induction of European funds in the economy, you might see a trend where we further have recoveries or improvement in the company's balance sheets, their businesses. That's why it is difficult to forecast now. But we are always reiterating that causing that our business is retail, micro lending, SME, 120, 140 basis points cost of risk should be considered normal. We are usually budgeting like this. I will not be able to give you too much of debt in terms of 2022 numbers or the quarters to come because now, as we speak, we are also working on the budget for next year. It hasn't been presented to our Board of Directors or to our shareholders yet. That's why I don't want to take, let's say, a long step here. On the other hand, considering that 75% of our loan or close to 80% is in lane, and 80% of those loans are with variable interest rates based on the market reference rate, it's quite almost an arithmetic calculation that you could also run, how much would be the positive impact on the net interest income on the portfolio at the actual size. Plus, definitely, we will be growing our lending. I mean we are -- we will be promoting high growth, higher than GDP growth as usual in terms of loan growth to our shareholders. This is what you will ask their approval for. And this will come on top of it.

Yes. And as long as our loan-to-deposit ratio is as low as it is now, like around 50%, clearly, there is no real pressure on the deposit side, on the liability side to have, let's say, any increases in terms of interest rates there. So therefore, within 6 months, the loan book is coming to a repricing, new production is done at higher rates. And on the liability side, we are not expecting to see any kind of pricing pressure in the first period of 2022. So the positive impact should be visible in the net interest margin. That's our expectation.

Okay. And do you expect any impact on loan growth from rising rates? Any slowdown that you anticipate for the coming year? And then lastly, if I can ask one more question, if that's okay. Inflationary pressures on your cost side, what do you see right now? What do you expect for the coming year?

I mean this -- again, next year's budget is a, I would say, brief guidance. What I can tell you is that the automation and improvements in terms of technology help us to control part of the cost. On the other hand, wage inflation and the salary increases, we cannot fight against, and we will be adjusting salaries as per the inflation but performance adjustments. But here, I'm comfortable to say that our team of 11,000 employees have been paying back to the shareholders each year regardless of the increases. They have been performing well because it's -- the loyalty is two-sided here. On the other hand, I'll say, it's very difficult to estimate now some of the items, including the impact from energy prices or different supply chain issues. We don't have any major investment -- urgent investment needs or requirements. So it should be more controllable. The other question was related to...

To the growth of the loan book versus GDP.

The growth of loan book, maybe you are also following the banking system numbers already, there is a slowing down of the demand. It's for different reasons, either people want to understand where the markets are heading. So we see that consumer demand is slowing down. It didn't say here, it didn't shut down, but it is slowing down. But on the other hand, the good thing for Romania for the economy itself is that next year, we are expecting loan growth mainly from company side. European funds, the recovery and resilience funds once they start entering the economy, they will go to diversified projects from education, health care, infrastructure, digitalization of the economy, trainings and so on. All these will go through company balance sheets. It will create cofinancing or extra financing opportunities for us and for our competitors. And I think we are comfortable to say that the slight slowing down of consumer demand will be more than matched by the company loan growth. And if also the consumers will have the comfort that the price increases or volatility will be smoothened out. They will be coming back to market because compared to many other countries developed or emerging, Romania has housing needs. We have been always mentioning that the average age of housing stock in Romania is quite old, the housing from isolation to quality. There are several issues and Romania in the last couple of years have been showing that once they manage to save the first investment they do is to buy a house. We are a country, a nation very inclined to invest in residential real estate, and we think that it will continue.

We have a follow-up question from the line of Nellis, Simon with Citibank.

Just a few more for me. Yes, just on the large increase in the Stage 2 loans, is that all driven by migrations? Or is there something else going on there? That would be my first one. And then onto my usual question, can you give us an update on the Moldovan court case that is a risk?

Yes. So with regards to the loans, it's similar as we were having also in the second quarter of the year. It has to do with the way in which we were trying to put aside additional provisions and everything that was under moratoria. Last year, we were moving to the second stage, even though, yes, the repayment behavior is proper and in fact, we are having releases once the loan exposures are coming to their agreed maturities. So from this perspective, it's, yes, driven by our way of trying to be as conservative as possible with the reserves, we are setting aside for potential credit risk. So this is on your first question.

But the increase is coming mostly from migration from Stage 3 to Stage 2? Or was it coming from reclassification of Stage 1 loans, too?

It was more from Stage 1 to Stage 2 and in the observation period.

Okay. Sorry.

Okay. No problem. In regard to Moldova, there is no development yet. If you have been following the news, there has been some changes in the prosecutor's office some developments, which we are also following. The general prosecutor himself is being accused of different wrongdoing. We don't know -- we cannot -- we don't have to comment, and we don't know. We are also willing to, I would say, the case to come to court and to be clarified as soon as possible. But on the other hand, the bank is functioning under normal perimeters, and it's a profitable institution contributing to our bottom line. They started -- they restarted their loan growth in the segments of our interest. Unfortunately, retail and small companies is not a segment of high growth in Moldova, yes. But we don't want to enter into bigger tickets in Republic of Moldova, and we want to maintain our -- we rather have comfortable market share in the segments of interest instead of trying to go for the general market share. And so far, our colleagues have been doing a good job there. We have done several, I'd say, new products and services, the level of digitalization, digital services of Victoria Van is almost at the level of Banca Transilvania. We have been renovating our network this year, the physical network, offering better access, better conditions for the customers. And we see almost double-digit growth in our retail and micro lending there.

Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to management for any closing comments. Thank you.

Thank you very much. I mean if there are further questions or need of clarification, please do not hesitate to contact our Investor Relations, Mihaela and her team will try to answer on time. I just received a couple of e-mails now that some of the participants couldn't dial in and couldn't join. We will try to, let's say, improve the situation as well. I'm sorry for that. On the other hand, hopefully, after closing the year, we will come with more important news, both related to the 2021 numbers and maybe some guidance on the 2022 budget. Looking forward to meet with you again online and maybe hopefully in person in the investor conference. Until then, stay safe and during Christmas enjoy the holidays. Thank you.