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

Ladies and gentlemen, thank you for standing by. I am Gail, your Chorus Call operator. Welcome, and thank you for joining the Banca Transilvania conference call to present and discuss the first quarter 2022 financial results. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Omer Tetik, CEO; Mr. George Calinescu, Deputy CEO, CFO; Ms. Luminita Runcan, Deputy CEO, CRO; and Ms. Diana Mazurchievici, Investor Relations expert. Mr. Tetik, you may now proceed.

Hello, good morning, good afternoon, depending on your time zone. For us, it's one of the most difficult teleconference that we are participating because as you know, as you remember, usually I was accompanied by Mihaela Nadasan, our Deputy CEO of Investor Relations, Financial Institutions and Financial Markets. Unfortunately we have lost Mihaela. She had a stroke 2 weeks ago and on Friday she passed away. Was an exceptional person, a perfect colleague and a good friend. She was a good human being. We will be missing her a lot and it's very painful sitting here during this teleconference without her, but I'm here with George, our CFO; Luminita, our CRO; and Diana, who was working close with Mihaela. We will soon inform you also about the new contact details and directions. We will try to accommodate your request for meetings calls. We will try to take them over. But in case we missed because you have been trying to communicate to Mihaela and you didn't receive an answer, please resend your request, question or observation, and we will take it from there. We wish that she will rest in peace. And hopefully we will take good care of the good legacy that she left. She had been working for Banca Transilvania for 24 years. And in all the remarkable, memorable moments of BT from listing to stock exchange to acquisitions, handling different crisis locally or internationally, she was a key person. We owe her a lot and we will try to, as I said, take good care of what she has started with us. With regard to the presentation, I will, for the reason that you may understand, I will try to be very succinct with the presentation, and then we shall switch to Q&A. We will try to accommodate your questions as much as we can. But definitely, Romania, not only Romania, but whole world are passing through very difficult and strange days after finishing the pandemic when everybody, including ourselves, we are ready for a new period, new era in business. In economics and social environment, we had been hit by the news of war, then volatility in markets, energy prices, higher inflation after years of very accommodating monetary policy, a very severe change starting with U.S., followed by many other markets, including emerging markets and Romania. But still we see that the employment rates all around the market is good or unemployment rate is quite low. The inflation kind of being paid for, although it is reflected at the cost structure bids, cost of goods sold with the interest rate. But also Romania, although being closer to the war zone benefits from increased interest from its partners; European Union, NATO, U.S. in terms of also investment, in terms of new diplomatic relations and hopefully when the war, as soon as possible we hope that it will be over, we think that Romania will have new opportunities of development in front. Definitely, we have been seeing very similar trends to other emerging markets, enabling countries, a shift in the yield curve, a shift in the monetary policy. But on the other hand we also see that in Romania especially, there is the foreign direct investments, but also local investments on the company side is accelerating at the level not seen in the last couple of years. This is seen also in the loan demand and loan growth on this segment. And we are -- we think that this is a good base for a later healthier growth of the economy and social wellbeing of Romanians. In the first quarter of the year, the customer deposits started to increase, but not at the same pace as it was in the previous years. We see a kind of efficient -- more efficient improvement in loan-to-deposit ratio of the banks and banking system because loans have been growing as well. Due to the volatility, initial reaction of population was moving mostly to foreign currency, especially Euro deposits, but this trend also slowed down. And we see the signs of normalization of reversal. And on the other hand, as I said, it's good that Romanian companies and foreign investors in Romania, they had investment plan so that the loan growth was quite strong as compared to previous years. In the first quarter of the year, as I mentioned already, our growth above the market average, around, I'd say, the 4.5% loan growth of BT, over 3.7% average of the market came mainly from corporate loans. When I say corporate loans, these are companies micro, small, medium-sized and large companies, supported by programs like [ MME ] invest, SME invest are great, SME invest, and different grants. We see high enrollment and good alignment with at coalition surprising us in a place and manners, different political parties who have been fighting with each other for the last year. They are very much aligned in supporting the economy. The messages of continuation of the coalition even after the elections in 2024 show how okay is their cooperation and how less fragile it becomes. This is a good sign. But on the other hand, we hope that the trend will be continued once the war will be over. On the other hand, obviously, we have been continuing our investments and we see with the new trend, higher digitalization of our customers, more number of digital interactions. And in the first quarter of this year, we have also announced the inauguration of our technology subsidiary, Code Crafters, which will definitely service BT Financial Group Company, starting with Banca Transilvania and Idea Bank, but also other businesses that we are foreseeing. And we had been, as you will see in the presentation that is already in our website, we have been investing in online lending platforms, file share, document sharing platforms with customers and new payment systems, including BT POS. In terms of financial performance, although there are several items that we are proud of, the bottom line was below last year's and below quarter of last year. But actually if you look at operational performance, as you have already mentioned, we have been reading also the reports of several analysts, and they have been mentioning a strong growth in net interest margin and net interest income, strong growth in fee and commission income, which is definitely impacted also by the higher increase in operational expenses, starting with staff expenses, which is related to inflation. And our usual, I would say, prudential approach at the beginning of the year with higher provisioning of our loan portfolio, we are trying to adapt our models to the ever-changing market conditions, but we wanted to be on the prudent side. So in the first quarter of this year, our cost of risk reached 70 basis points, with almost 3% net interest margin and cost to income ratio is at 50%. But actually the impact -- the negative impact is mostly one-off. The positive development, although it may decelerate, will continue. So we are still comfortable in delivering our budget that was approved at the General Shareholders Meeting. And in the first quarter, the biggest change came from the deposit contribution to the deposit guarantee fund because our deposits had been increasing, our systematic role in the system is increasing based on the calculation of the funds, our contribution has increased to RON 143 million, almost RON 60 million more than last year. And also the volatility and increase in the interest rate impacted our portfolio and has shown its impact slightly on the bottom line and the profitability of the bank. However, with strong growth in revenue items, which they are going to be quarter-by-quarter bringing in new revenues, we have managed to deliver a good return on equity. And if you would have actually annualized the one-off items, the number would be even looking better. Our loan book increased to RON 62.7 billion, deposits from customers to RON 107 billion. With PAR 90 -- our NPL ratio PAR 90 is below 2%, it's at 1.75%. And our total capital ratio, if we include the capital, is over 21%. We also stayed quite good in terms of NPL coverage ratio, almost if you include the real estate collaterals at the liquidation value, it's close to 125%. And we see that our par 90 is almost half of the market average with good coverage due to the provisions that we have been registering also during the first quarter and in the last couple of years. Retail banking loan book reached over RON 27 billion almost RON 27.5 billion and we have a very good stronghold in the payment systems with cards, online payments, wallet applications, having 4.8 million cards and card transactions were up 27% compared to the previous period, which shows that customers are using more and more, which is also coming back in terms of salary accounts, the deposits or fee and commission income back to our financial results. With 86,500 POSs and 1,790 ATM, I guess we have the widest, most extended network of interaction with the customers, including our branch network of 500 -- more than 500 locations. SME business grew to 7.2 billion with over 379,000 active customers. And in the first quarter, we have granted 1 billion loans, RON 1 billion of loans to our SME customers with new platforms and new investments as well. And corporate banking, we have 11,400 customers with 400 new loans granted for a total of RON 3.4 billion, and we continue our growth in especially larger SME and mid corporate segments, where we see a diversified and stable growth opportunity. Our focus in company business is continuously agri business, health care sector, manufacturing, utilities, fast moving consumer goods and goods and public sector. Our capital lease is much above the minimum regulatory limits. I'll say, after calculating older buffers, we are staying at almost 21% in terms of total capital adequacy, which is covering well all the requirements of the regulatory -- local and international regulatory bodies. We have also had at the end of April, our GSM, the general meeting of shareholders, General Shareholders' Meeting. And there have been 2 new board members elected, both of them are independent members. The payment of cash dividend of RON 0.12 had been approved, totally RON 800 million. And we have also decided about the capitalization of the remaining of the profit. We have informed about our shareholders and investors about our strategy, the businesses that we target in the months to come and our also preoccupation in terms of the market goals with it, but we will be also growing faster in terms of our businesses to our subsidiaries, including asset management, leasing, micro lending, consumer finance and so on. And we have -- there has been a share buyback plan of 40 million shares approved and we have also asked the approval of shareholders to consolidate the nominal value of the shares of TLV to [indiscernible] by consolidating 10 shares. We think that it is not against the market practice of splitting because we had given a penny stock actually at EUR 0.5 value per share. The fact that now the value, with the approval of shareholders will be close to EUR 5, will not block retail investors to continue investing in Banca Transilvania's share, but it will also help, as you know, to our institutional investors to have an easier reporting and most investment opportunities. We are also foreseeing now the closing of the transaction of Tiriac Leasing. We have approvals that are waiting any time as we speak, closing, we are assuming will be in June 2022. And then we will continue developing our leasing business with a stronger foothold in the segment of interest. Sustainability is an important subject that actually also Mihaela had been presenting to very often. We have started analyzing our own existing portfolio, but also products and services that we offer continues with our customers. And now the numbers you will see in the presentation in more detail, but we are making efforts to decrease the carbon print of the bank on one side. On the other hand we want to help our customers to decrease their carbon print and to invest more in green. Our green loans to companies reached RON 538 million and green certified related projects, RON 360 million. And in the retail, we have granted RON 144 million layoff loans to private individuals in partnership with EBRD. And we are also having this RON 959 million financing under the green mortgage loan product. The bank itself through recycling through efforts in environmental responsibility has decreased usage of paper by 111 tonnes, 111,000 kilograms. And the recycling of cards of our customers, we have been also saving over 1.2 tonnes of plastic production. Our electricity consumption is coming 87% from renewable sources. And if you look at the business lines also with our subsidiaries, electric cars, electric vehicle we even reached 25% of the total leasing that we grant to our customers. As a part of the governance and sustainable and social responsibility of ESG, we have been a social bank by nature. It's in our DNA. We have been in the areas disfavored by the market, by the economy. And we prove that we can grow businesses, communities together with us by being closer to them. Our group performance is also in the presentation. The first quarter was generous to BT Group totally, all our subsidies delivering good results. I'm happy to say that BT asset management is going on a sprint of assuming market leadership. Now it's the second company in terms of multi-founded management in Romania. And our banks subsidiaries like Victoriabank or Idea Bank benefited from the efficiency projects that we have done and delivered good results. I would like to leave the floor to questions, trying to answer as much as we can. As usual, if we cannot able -- if we'll not be able to answer on the spot, we will come back to you with our answers or we will be adding the information requested to the presentation. Thank you very much.

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

So my first question would be on fixed and variable loans. Could you tell us like what is the proportion of variable loans in the retail and also corporate? That would be my first question. My second question would be on gains and losses from financial assets because I saw some negative figures. So could you confirm whether it was due to bond trading or was there anything like unusual in the first quarter? And then my last question would be on Victoriabank. If you could share with us your view on the bank, maybe on the macro in Moldova. Do you see any worsening there? So that would be my question. Thank you.

So thank you. Related to the variable interest loans, I don't have exact numbers, but what I can say in the retail segment, except short-term loans, consumer cards, which are already at very high rates, mortgage loans or other longer-term loans are almost 80% with variable interest rate. And in the company loans, except for a few, let's say, back-to-back or hedged portfolios, although all our portfolios is with variable interest rates. We have been mentioning this also when the interest rates were going down, that this was the, let's say, strategic choice of the bank because we are financing ourselves with local deposits mainly. We are benefiting from the trust confidence of our customers. But on the other hand, deposits tend to be short term. So we didn't have the courage to offer long-term loans with fixed interest rates. The market doesn't offer too much of hedging opportunities. That's why here the increase in the net interest margin. Net interest income is coming definitely from this. The deposits, the liquidity being still high, deposits are a bit more sticky, interest rates didn't increase much, but loan interest are being repriced every 3 to 6 months. And as the reference rates are increasing, we are repricing at new rates. The new repricing will be at the end of June. Second question you asked about the financial impact. It is -- has, as you know, the impact, the main impact is under equity because we don't pass through our income statement, but still the transactions we did, this repo or market transactions or other assets, investment evaluation had an impact of RON 130 million in the first quarter, negative impact as compared to last year. But we see some of it, and hopefully, that will be returned either in April or stabilized in May. So we are not -- unless there will be more bad surprises, unpleasant surprises to come in the market, we don't expect it to be a trend on a quarterly basis. In terms of Moldova, currently, this is an investment that we learned a lot of lessons that we didn't want to necessarily learn. But now after a strong 2021, a profitable 2021, that our, let's say, deposit number of customers have been growing in Moldova, the first quarter, especially in the -- after the recent threat, business is a bit definitely stressed. However, we continue our business plan. The impact of Victoriabank to the bottom line of BT Group is less than 2%. This is the, let's say, good part of it. But on the other hand, we think that with the efforts of joining European Union, pro-European government and structures and as we see fellow from local colleagues and local media that the pro-European opinion of public with the decreasing threat we are also, let's say, learned our business plan that we want to grow in retail. We want to grow in small and medium-sized enterprises, in agri business without assuming big tickets and big risks, which any case the market doesn't allow. The interest increase, the interest rate increase in the Moldavian market has helped Victoriabank to significantly increase its core stability. I don't want to make a wrong geopolitical comments, I would refrain from it but as we have our teams and the banks functioning that, definitely our business making appetite remains.

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

Thanks very much for the opportunity, and let me forward like condolences. That's really shocking news. But yes, thanks for the call. I guess I'd like to unpack a bit further the decline in equity. I think you said that you think most of the impact of higher yield has already played out, but I think yields continued to rise in the second quarter. So why do you not think you'll still see a further increase in losses through equity in the second quarter? If you could elaborate on that. And then just on the margin outlook, I'd be interested to know what kind of further rate hikes you think are coming and what's your sensitivity to interest rates for the rate hikes? And then last, on capital. I see from your full financial statements that consolidated capital, the CAR was 19.87%. I think that's a different number than you have in your presentation, I guess, because that number probably excludes profit of the first quarter. If you could just confirm that? And then also, could you let me know if the RON 800 million dividend is deducted from the first quarter reported capital position or will that happen in the second quarter?

Thank you for your thoughts and after hearing your voices I remember I wish that Mihaela would be together with us here. But coming -- if I skip any questions, please repeat. Basically the RON 800 million is included in the financials that you have seen and the difference is coming from, indeed, the profits that -- because we didn't audit first quarter, it's not included in the report, but we are showing you as it is and actually, we are planning to go through an audit process at the first half of the year, so which will help us to add this. So with regard to interest rates, with the, let's say, we see also mixed messages from National Bank. We also understand their concerns, but they will not rush very aggressively, yes, sure. But in the next monetary meeting, we may see another 50 basis tomorrow, we may see another 50 basis points increase in the reference rate and Lombard rate. Still, it will be in the negative yield territory, and it is still below inflation and robust being transacted. On the other hand, they will take a cautious approach. If they will increase another 50 basis, I would go with the forecast of our chief economist, maybe another 50 basis points this year but it depends very much also on the inflation, which we see that in the market energy prices stabilize or start to decrease. Agricultural harvest looks to be good, which will help the food inflation to decrease in Romania. So if the inflation will give a more positive finance, I guess, also National Bank of Romania will be more prudent. But on the other hand, the market due to its liquidity position and growth of loans and deposits had it all reference rate, which is lower and the real impact we have seen there. In terms of interest rate sensitivity, we will come back to that in more detail, but having most of the loan portfolio with variable interest rates, actually, more than what we -- are impacted maybe in the fixed treasury build or bond portfolio is actually coming as a positive impact on our balance sheet to the loan book from the repricing and the new production. But the impact is mainly that you have seen in the capital position related definitely with the reevaluation of the portfolio market to market. And what is only a very small part of it, you have seen in the income statement or the transacted amount of other related financial investment. We are also -- because we have a portfolio with a relatively short duration. We are also renewing our portfolio in a rather shorter period of time. That's why we will be -- we are investing now in the fixed income instruments at higher yields, which help us to improve the -- net yield real on our portfolio.

So do you think the impact of the further rate hikes or the market rates going up in the second quarter should lead to a smaller negative revaluation in the second quarter? Is that the message because of the…

Yes, thank you for clarifying. Yes, this is the message. Although you have seen what happened after federal reserves, let's say, announcement, initially, markets took one day, everybody was very optimistic than pessimistic. So here, I would say that the next rate hike is already priced in and because it is not over the years already in the market, I don't see a big reaction in the market. On the other hand, as everybody is reading now international news, world news, energy crisis. So volatility might be, but we don't expect the impact being every quarter as it was in the first quarter.

Okay. And maybe one last question for me, if I could. Just on Tiriac Leasing. Can you kind of tell us what's the benefit of that? And what kind of financial impact do you expect that acquisition to have?

We have been also publicly announcing that we are looking to grow in the non-banking financial institutions, leasing in terms of financial platforming, security of lending and benefits to economy and our customers. It's always a good tool. It's mainly financial leasing and mostly car leasing, be the corporate or individual or company acquisitions. Tiriac Leasing gives us access to the biggest car dealership network in Romania, almost 10 brands, medium and high-end brands will be having cooperation with us in the years to come. And this gives us quite a strong kind of first right of refusal for the customers who will be buying cars. On the other hand, it's a profitable business itself, and we think that it is a good placement for our liquidity, leaving yield as real positive yield and with our funding costs, we think that it is a good way of also placing our highly excessive Euro liquidity because [indiscernible] mainly in foreign currency in Romania, so that's it. Although the leasing market itself and the leasing company themselves are quite small, it is Tiriac Leasing has total assets of EUR 250 million and it's quite -- I'm expecting to see increase the yields 1.5%, 2% on this amount through financing and grow the business further. It will definitely have a positive impact on, let's say, the bottom line, plus definitely for new customer acquisition, it's a good tool.

[Operator Instructions]

If there are no questions, we can also continue taking your questions through our Investor Relations address, in case we will be sending -- circulating a short contact detail memo hopefully tomorrow, providing in case you don't have Diana's contact details, you can always contact me as well. I mean the e-mail address is quite easy to estimate, it's [email protected]. We will try to, let's say, rearrange our agendas to accommodate all the meetings to be scheduled. And hopefully we will continue our good communication and interaction from here as well. Thank you for good -- for your kind thoughts and messages. I will deliver it to our chief. I'm sure they will appreciate that. And that's it. Light a candle for her whenever you have the occasion. Thank you.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for calling and have a good afternoon.