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

Ladies and gentlemen, thank you for standing by. I am Gaily, your Chorus Call operator. Welcome, and thank you for joining the Banca Transilvania conference call to present and discuss the first half 2022 financial results. At this time, I would like to turn the conference over to Mr. Omer Tetik, CEO; Mr. George Calinescu, CFO; Ms. Luminita Runcan, CRO; and Ms. Diana Mazurchievici, Head of ESG and Investor Relations. Mr. Tetik, you may now proceed.

Okay. Thank you. Thank you very much for joining us. I hope the sound quality is also good. Thank you for the operator helping us to set up because now we are in the -- a part of us, we are in Bucharest, part of the team is in Cluj. We will try to briefly speak about the first 6 months of Romania, Romanian banking system and give you some insight about our numbers, what we have done, what we managed to do and what we couldn't. And then we would like to hopefully proceed as usual with the Q&A. On the other hand, if there will be other questions after you see the presentation, which is already on the website of BT. If there are further questions, you can always address our Investor Relations site. Diana, Vlad and their colleagues will try to help answers as soon as possible. First 6 months of 2022. I don't think it was easy for anyone, any business, any country because of all the geopolitical and financial and commercial changes, a huge impact of the world just after the pandemic. Still Romania, a small economy from Europe, I would say. But on the other hand, with large population and with nature resources is slightly better positioned, if you can say so, in the existing macro environment. The first quarter was very much supported by the momentum brought by the post-pandemic spending and investments and government programs. In the second quarter, we have seen that this momentum started to fade and actually partially reversed because there are investments being canceled or postponed or production couldn't keep up due to supply chain issues, due to high energy costs and other challenges which came through the war. And we have seen the industrial production contracting almost 1% year-on-year in the first month, but still consumption has kept the economy functioning. Our macroeconomic scenario is BT by our Chief Economist, Andrei Radulescu, is still on the brighter side of the expectations. We think that the GDP will grow around 3.8% this year and over 4% next year. We are trying to refrain from doing a very long-term forecast now because many things are changing very drastically. It depends on how the world energy crisis and other supply chain issues will prevail or fade away. And -- but on the other hand, we see a good momentum of at least post-pandemic investment cycle supported by the European Union funds in Romania. We have been -- also -- when we look at the lay numbers, we have to also keep in mind that Romania was also under inflationary pressures and the consumer inflation in June for year-on-year was 13%, up from 12.4% in May. And this was also inducing National Bank of Romania to update and adapt monetary policy at the end of May, June, actually, we have seen the first increases. And then, as you know, we are already at 5.5% of benchmark rate. The high, let's say, inflation, on the other hand, is helping the budget deficit to GDP ratio because taxes are -- consumption is keeping up and the budget deficit's decreased by 1.7%. This is also related with the investment spending, but slightly better collection -- tax collection rate of the natural finance and fiscal administration. The impact of macroeconomic and geopolitical changes on the interest rates was definitely by lifting the yield curve. Although we see -- in the third quarter, already some, let's say, relaxation of normalization maybe. In the first 6 months of the year, increases in the bond yields, ROBOR benchmark has been quite significant. And the 10-year bonds of Romania has reached record levels after following years of declining trend. And the Bucharest Stock Exchange, the BET index, especially couldn't avoid sufferance, although as compared to regional peers, it had better performance by losing less of shareholders' value. The banking sector entered further the house in 2022 with good capitalization and liquidity. And despite several adverse effects and forecast, lending activity didn't decrease. And actually, the nongovernmental loans has increased for the -- as they did for the last 2 years, for the 25th month in a row in June, reaching RON 353 billion. On the other hand, the increase of deposits wasn't as fast as the lending, which has seen its impact on the loan-to-deposit ratio by pushing it slightly high, but still Romania is below par in terms of loan-to-deposit ratio, at comfortable liquidity levels as compared to regional peers maybe. And we see that the growth has been positive, supported in all segments. Also, let's say, we see corporate loans increasing 14% year-to-date. Household loans increasing over 4%. And we see that also the good balance of between Leu and Euro lending continues to keep up. Meanwhile, NPL ratio is quite low. Romania has finished -- Romanian banking system had 3.2% NPL ratio, nonperforming loan ratio, at the end of June. This ratio is now actually as of end of July, it's even below 3%. I would like to switch to BT's numbers about first half. In the first half, we continued -- the remnants of governmental programs, IMM invest, SME invest, AGRO invest, construct invest, road invest type of programs where we have seen in IMM invest and SEM invest program. 37% of the allocated funds were intermediated through Banca Transilvania. This shows our strength and good foothold definitely in the SME segment as we always claim to be the bank of choice in SMEs. And Banca Transilvania was very active in all programs in cooperation with SME guarantee funds and the guarantee -- and contract guarantee fund. We see that AGRO IMM is also -- has been very useful for our customers, AGRO IMM invest. We have a strong shareholding in -- a strong market share -- sorry, a strong market share in agribusiness finance in Romania. And also in AGRO IMM invest, rural invest programs, we were the bank of choice intermediating over RON 2 billion. And we will definitely continue this. Our investments in digital banking, digitalization of our internal activities but also customer-facing activities is continuing. We have over 3 million customers uniquely digitalized at cost so that they use at least 1 of the digital channels quite frequently of BT. These are both passive company customers, but also retail customers. And we have seen the digitalization of customers grow almost 15% in the first 6 months. And we are already enrolling customers online, we are opening accounts online and servicing needs payments, some of the loan products, lending products online. We also have annex project with Idea Bank that we are soon going to be rebranding where we are creating the first 100% digital fully licensed bank in Romania. We have moved -- I will say that the key person of our retail banking, Ms. Gabriela Nistor, our Deputy CEO in Retail Banking and Cars is the CEO of Idea Bank. We're looking forward to receive her accreditation approval of by National Bank of Romania. And then we will focus in full steam to the development of Idea Bank as well. It is a complementary product. It is more of a fintech approach to banking. It will be a simpler bank. It will not be a bank of doing everything to everyone and not addressing like BT, everyone, any segment. So we are more universal or we will remain more universal as compared to Idea Bank, that's the new name that we will announce soon. In terms of the financial performance, our net interest income, definitely supported by the structure of our loan book with variable interest rates has increased almost 25% in the next 6 months of this year. We are seeing that due to the pressure on the funding side, the growth might not be as spectacularly in the second half of the year. But we are also happy to see another year of -- another 6 months of over 20% growth in our net fee and commission income. This is a very, let's say, strong focus for us. We are trying to, I'll probably say, grow our interaction and definitely fee and commission income incurred with the customers. So far, our focus and efforts have been flow-through and this is being seen in the numbers. Operating expenses definitely under high pressure due to inflation, due to salary adjustments. I would like to mention that we had been doing a couple of -- actually, in 2022, we have -- for some of the loyalty programs, for the nonexecutives of the bank, we were due some payments, which have been postponed from previous years, which has been done. We have adjusted the salaries of our employees at the beginning of the year, in the first quarter of the year to the inflation. But on the other hand, everything that we consume we do is becoming more and more expensive. Still our net profit was above last year's similar period. And we have maintained a good return on equity with 23.7%. The increase in the cost-to-income ratio will be very, let's say, attentively tackled in the next months to come. Management is pursuing several cost-controlled projects. We are not planning to do restructurings or, I'll say, any decrease in the number of network or personnel, but we are willing to increase our, let's say, operational efficiency and optimize some of the things we do. The loan book has grown almost 15% and the deposits by 5%. This brought loan-to-deposit ratio closer to 60%. We are still below 60% in the first 6 months, with a quite comfortable PAR 90 below 2%. And we've mentioned a couple of times, our Tier 1 capital ratio or total capital ratio are above the minimum required levels and at around 20%, 22% for each. Our loan book maintains the previous structure, although we see more growth in the corporate side, we still are, I would say, lender in local currency. We don't sustain or promote necessarily foreign currency risk for our customers and 75% of company loans or 87% of the individual loans are in local currency. NPL ratio, as I mentioned, is below 2%, which is coming down from much higher levels, as you may remember from the previous crisis. I guess for everyone, it was lesson learnt and good management of collection and recovery activities. We are slightly below banking system average as well. This shows our prudent approach. And our deposits, as we are main salary payer bank in Romania and also a strong SME bank, our deposits from companies and households are also growing despite the negative impact of initial, let's say, reactions to work of higher consumption, increase in the installment, customers have been increasing their deposits with us. This is making us -- happy to see that we are still their preference. Because in the banking system, in general, we didn't see much of an increase in the deposit amounts. Retail banking loan portfolio is over RON 28 billion with 3.3 million active customers. And we are being active in several streams, several activities, projects now to develop packages of -- new packages of product services relevant for our customer base. In SME banking, we have reached RON 8 billion. Our SME banking definition is a bit different from our corporate or European Union definitions. We are more on the smaller tickets, smaller sites, but I'll say RON 8 billion is quite significant besides the very strong foothold of BT Microfinance, our macro lending company, in the same segment or even at lower segment. We are growing also well in corporate banking with larger tickets. We have reached almost RON 20 billion in the first 6 months of the year. In terms of ESG and sustainability, which is quite a hot topic from regulatory perspectives from the questions and attention that we receive from our shareholders but also as responsible citizens because of our responsibility. We are glad that we have managed to announce here I would like to thank our colleagues from Diana and Diana's team but also risk and finance teams to explain our stance so that from Sustainalytics, we received a score of 17, which puts us at the top notch of global banks, in top 15% of Sustainalytics universe and in top 8% of the regional banks in terms of governance, exclusion lists of polluting sectors, responsible marketing and sales policies and initiatives that we have implemented for human capital development and gender diversity. Also, we have signed the first-ever blue loan agreement with IFC. This is -- the loan targets better use -- efficient use of water resources, fighting with draught, and also improving the waste water treatment in Romania. We already have discussions with our customer base. And we think that this will be just first of its kind among many other. And also, as you see in the presentation, 1 out of 5 mobile loans are green mortgages with Grade A energy certificates that we have granted in 2022. This is something that we want to grow as also Romanian construction sectors, development sector is more focused on this. We have RON 784 million value of corporate green loans in the -- assets by the climate assessment for financial institutions platform methodology in the first 6 months. This is 130% increase as compared to previous year. It shows percentages are too high maybe because the numbers were small, but we think that in the next period, our focus fully and mainly will be on green responsible lending. Our group had been also -- the BT Financial Group had been also offering good results. Now we are in the middle of integrating 3 leasing companies, BT Leasing that we have, Idea Leasing and Tiriac Leasing. In asset management -- data asset management became leaders -- market leaders in terms of assets under managed and number of customers. And we see that all our subsidiaries are having a positive contribution to the bottom line. It's one of the businesses that for us, at our side, at our dimension, our market share of BT Group is still small, but we want to develop is BT Pensions, the pillar 3, pension fund, that we want to grow further. And here, we see huge potential to grow profitably and operationally. I would like to leave it here for the presentation and switch to Q&A. As I mentioned that we will try to answer your questions now on the spot. But in case we cannot, we will come back by updating our presentation or directly to you. Please do not hesitate to approach us through Investor Relations address. Thank you very much. We can start the Q&A.

The first question is from the line of Hai Thanh Le Phuong with Concorde Securities.

Just a quick question from my side on loan growth. I think you mentioned during the presentation, you may expect somewhat of a slowdown on the dynamics, and I was wondering like what should we expect in the second half of the year or maybe moving to 2023? Maybe if you could share your view on that. And also one other question from my side is on other expenses. I think it increased significantly in the first half and also in the second quarter. And I was wondering if there was any one-off to those other expenses.

So I don't want to be misinterpreted or maybe I misguided you. We think that the increase will decelerate, but we don't expect lower returns or lower income. It's definitely -- cost of funding is getting higher. But on the other hand, our loan book will continue growing, especially on the company segments. Europe, Romania, although has reached over 60%, almost 65%, actually, absorption of European Union funds. Still, we have upside potential there. That's why we think that there will be growth both on the SME, mid-core and large core segments. We may see a small temperation of the consumer demand, but it will come back next year with the adjustment of salaries. Romania has also almost zero technical unemployment ratio. So it's not a I'd say -- besides the GDP numbers, which are very statistical and high level. On the other hand, the impact on the household income is not there, and we are not expecting to be there. That's why we will continue delivering strong NII, net interest income, but the growth might not be as fast as the first 6 months. In regard to the other expenses, I will ask George to answer.

Hello? So in terms of other expenses evolution, the growth in the year 2022 was driven primarily by the increase in terms of utilities expenses. I think that we have had a growth there in terms of increase in line with what happened in the economy. However, what I can say is that we have noticed that this growth is in accordance with what we have budgeted for the year 2022. So it's not a surprise. Even we think that midyear, we are a little bit below the budget that we had for the same period of the year. Other areas that increased in addition to utilities is related to the IT licenses where we continue our investments into IT and -- in both, in terms of infrastructure also in terms of development of software solutions for the bank.

The next question is from the line of Marta Czajkowska with IPOPEMA Securities. Mr. Czajkowska, can you hear us? Ms. Marta?

Yes. Hi. Hello. It's Marta Czajkowska-Baldyga from IPOPEMA here speaking. Do you hear me?

Yes, we can hear you. Please proceed with your question.

Okay. Perfect. I have a question regarding the monetary policy rate. Where do you expect this to go by the end of 2022 and maybe in 2023? And in this -- was connected with that, if you could remind us Banca Transilvania sensitivity to the 100 bps increase in the monetary policy rate that would be really useful. And the second question is on your cost of risk expectations for 2020. While we've -- CPI going higher, with the utility prices going higher, is that concerning you with regards to the asset quality of retail and maybe corporate segment with regards to utilities. And yes, any thoughts on that.

I hope I remember the questions rightfully. Please remind me if I skip anything. But as regards to the monetary policy rates, we are foreseeing maybe another -- between 50 to 100 basis points increase this year. But on the other hand, with the deceleration of the consumption, I mean, on the lower growth of consumer spending and some precautions, I think NBR will be more careful about not inducing recession through the monetary policy side. We are estimating monetary policy, as I said, maybe plus/minus 75% higher. Very generally, most of our -- I mean, heavily actually, our loan book is with variable interest rates and being repriced between 6 to -- between 3 to 6 months period. The impact usually is about the higher net interest income. It depends very much on the change in the deposit rates or funding costs. How much of this will be impacted. As we have seen in the first 6 months, there was a big, let's say, desire of the customers, maybe especially retail customers to convert into euro. But it didn't create pressures on the exchange rate. On the contrary, as you may see in the last couple of days actually exchange rate is even decreasing because this money and also remittances of Romanians abroad is entering economy back again. In terms of asset quality, we are probably -- we think that the impact as long as employments and economic activity will continue, it will not be very significant. Most of the companies, larger companies as everywhere in the world, they managed to reflect partially or fully the price increases in their -- the cost increases in their prices. For the retail customers, yes, they are paying higher installments, but on the other hand, salaries are being adjusted all around the sector, not only at BT or banking sector. So Romania is actually catching up in terms of labor costs and still relatively cheap country. That's why -- although I wouldn't expect asset quality to continue decreasing or to maintain here, we don't see that the deterioration of the asset quality would delete the impact of higher income. So it's obviously still -- will be on the -- let's say, the bottom line will be on the positive side. In regard to 100 basis points increase, what will be the -- impact will depend very much again on the liquidity structure that we have and -- because we also can invest in higher interest rate deals and bonds. We can give loans at higher rate. So it will be -- I just assume I will ask my colleagues to calculate and maybe put it in the presentation later. It should be 150 basis points of equity. Anything that I missed, please ask again.

The next question is from the line of Roman Fuzaylov with Prince Street Capital.

Hello? Hi, can you hear me?

Yes, Mr. Fuzaylov. We can hear you. Please proceed with your questions.

Great. Congrats on the good numbers. I was wondering about the announcement about converting the Idea Bank license to be a digital bank in Romania. Can you talk more about the timeline for when the digital bank is going to be launched? And I guess, more broadly, what you hope to be able to achieve with this project, how it might supplement what you're doing with BT already and how impactful or how meaningful it can be financially for the company longer term?

Thank you for the question. This is -- I'll take. Among all the challenges, this is an interesting challenge that we pursue. So I don't want to be -- again, for clarification purposes, we are not changing the license. Idea Bank is an operational, fully licensed bank already. We purchased it from Polish Getin Holding. We are converting their business model. We already closed the branches of Idea Bank. They do, at a very low, small level, I would say, some digital lending. But the purpose of this digital bank is both to go focused on a segment where we see is BT with legacy systems -- legacy services and with millions of customers, we cannot really allocate full focus. That's why the creators of our most successful digital banking product, BT Pay. Ms. Gabriela Nistor is running the new bank now, smaller bank. It will be also -- it remains as an AB testing environment because any product service platform, API from cloud services to core banking, anything that functions now at Idea Bank that we consider that we can escalate, we will be moving, transferring as a know-how as a platform also to BT. Some of those things is quite expensive or delicate to do at BT because I'll say switching systems, switching platforms when you are doing 35% of the daily payments, then you have a significant market share in online payments, POS payments, acquiring ATMs and so on, we cannot risk anything. So we want to -- this is our bank of subsidiary where we will learn by clean things. We will be opening up also new resources. As you know, our head office is in Cluj and we are very much focused on our very talented IT technical, let's say, pool of people from Cluj. But Idea Bank with head office in Bucharest will be also attracting talent from Bucharest. So it's a bit of increasing our foothold learning, doing new things, learning, doing things more agile for a niche customer base. I mean these are the customers of several fintechs who are not necessarily willing to do a Western Union transaction with a mobile phone, from an ATM, type of things. So it will be a very basic product package addressing 95% of customers' needs as many other fintechs in Romania are doing, and we see their numbers. We appreciate what they do. But it will be about it. Once it will reach a certain maturity. I don't know if it is, 7, 8 or 10 years. We don't have necessarily decided that, but most probably, it will be merged with the mothership with the mother bank.

Understood. So it sounds like there is much desire to make this a kind of experimental lab for BT rather than have the bank itself make a huge difference financially. The idea is to help improve the functions.