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

Ladies and gentlemen, thank you for standing by. I'm Poppy, your Chorus Call operator. Welcome, and thank you for joining the Banca Transilvania conference call to present and discuss the third quarter 2022 financial results. [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, Deputy Director, Head of ESG and Investor Relations. Mr. Tetik, you may now proceed.

Hello. Thank you very much for joining us. This is Omer Tetik from Banca Transilvania. I hope you hear as well in case you don't, please make sure, please warn us. So interesting times continue and interesting news, volatility prevail in the market. We would like to give you a brief update about the Romanian macroeconomic situation as we see and as it's been reported. Some few things about banking system, and then we will give some insight about the numbers that we have already announced. By the way, our presentation is uploaded at the website of the bank at the Investor Relations menu. You can access it. But as we always say, in case you have other questions, which we cannot address this or manage to answer during the Q&A today, please do not hesitate to contact Diana at our Investor Relations address, and we will try to improve information feedback on that. So third quarter numbers came slightly stronger than expected. This, I guess also pushed European Commission to update the GDP forecast for Romania over 5%, which I would say that was quite an update that we have read over the weekend. In the first, let's say, 6 months of the year, GDP has grown 5.1%. Now European Commission's expectation is over 5.5% for the whole year. Definitely, IT&C agriculture manufacturing contribute a lot to this growth. Confidence of the companies, although it's been slightly decreasing, still at good levels. That also shows itself in the, I would say, European Union funds or European funds absorption rates, new projects tapping into the market. And we see that also in the banking sector, the loan demand had been quite strong in the third quarter as well, even beyond our, let's say, forecast and expectations. This is almost 28 months of continuous growth in lending in Romania, if we would take out actually a couple of months of shop from, due to the pandemic, I guess we have a very long ride that after the previous financial crisis, loan book since 2012, 2013 had been growing on a constant basis. The growth was mainly at the retail side until recently. But since the pandemic, together with the state schemes and European funds, we see growth is coming, being supported by corporate demand, by demand from companies, still very much balanced in favor of lei lending so that both the economy and the banking sector is continuing its nature of hedge. The corporate loan this year grew 20% to RON 192 billion. And we think that this will continue, although it might not at be 20%. There was still double-digit growth also throughout next year or years. Household loans rose, increased by 5.2% in the first 9 months. And is very much supported by the mortgage lending as well. It showed also Romanian households' resilience to increasing interest rates. But with the last couple of months, we see the demand is being subdued because there are expectations about market, too many news. I guess, retail customers would like to make acquisitions, their purchases at a more stable market. For Romania, in general, the market economic situation is also well supported by the literally 0 unemployment. It's a very low unemployment environment. This supports the labor market, although it pushes partial pressure on the wage-related inflation, on wage inflation. Still, it assures that both consumption, bank payments due payments are being respected. These are also keeping, let's say, the engine of the economy on the ramp further. The loan-to-deposit ratio of the banking sector was climbing to 74% because as we have already mentioned, the loan growth was about deposit growth this year and liquidity becoming more and more scarce. But still, we see in the last couple of weeks or maybe beginning of September, retail customers, households, started saving again and the household savings started slightly increasing again. We assume that with the precaution and discussion about the ongoing or upcoming crisis, this precaution will also be there. If you come to BT, in the first 9 months, more or less along with the market, our loan growth came mainly from corporate lending, SME and mid-corporate lending. We played a very active role in Goldman related programs or state programs. And you see that in 2022, also the new EMA SME invest program is, I would say, quite impactful in the markets. And almost half of the new demand is coming as investment loans. This is a very healthy growth in the market. We didn't see for a very long time, such a balanced, let's say, approach, such a balanced demand on the investment loans. This is on the medium and long run, a good thing. On the other hand, definitely, the working capital needs also increased at least by the inflation itself, but companies have been well prepared as we have seen. We have been also traveling around Romania, all our business units and visiting customers and branches. So the feedback is that as compared to 2008, 2009, this time, customers, both retail and SME, they did their homework, they prepared in terms of liquidity, indebtment ratio and their exposures, still challenges are definitely quite big. And I would say, this year, one of the important matters in the third quarter was also the public moratorium, which was legislated towards the end of second quarter and active in the third quarter. On the other hand, we have seen a very, very, let's say, low rate of demand by the customers. It's not even significant. So the total moratorium requesting customers are below RON 50 million. That shows that also customers prefer on all segments. They want to pay their dues, as long as the interest rates are relatively lower. We see also the inflation in Romania as well kind of picking out although we don't have expectations of a sudden fall in the inflation, still month-to-month, inflation rates are coming lower than the previous months. I guess, throughout the next year, we will see, let's say, normalization and maybe decrease in the inflation rate, which will help us also on the OpEx side. We are adapting our operating model since the beginning of the pandemic with very big focus on digital banking, consultancy advisory for our customers on the normal, let's say, traditional commercial banking businesses. And we still maintain one of the highest Net Promoter Scores in Romania, especially in the banking system. When we look at the financial results data, we see a [indiscernible] due to, thanks to increase in the loan book but also higher interest rates. Our net interest income has grown to RON 2.6 billion, by 30%. Our net fee and commission income, this is something that we are proud and, let's say, encouraged to present, has grown more than 21%. We see some upside here as we continuously increase our active customers with open accounts. And we increased, let's say, the wallet of interaction with our customers in all segments. The most, let's say, painful part this year had been most notably for us, especially, operating expenses, which grew also over 30% and ate up partially our increase in profitability. But we managed to have the offer RON 1.5 billion net profit with cost of risk below 40 basis points. And this assured us to deliver over 23% return on equity. We are very careful in the months to come on our cost-to-income ratio, on the cost of risk. Due to our, let's say, customer portfolio, we are very also prudent in terms of our provisioning approach. Maybe it's not very fair to compare to last year 9 months when we had been diverse of provisions. That's why even 40 basis points of cost of risk has an important impact. So what we see is that our net banking income, I mean, before provisions, actually has been growing very strongly, and this is something that we can comfortably say that it will keep up, without, let's say, any [indiscernible] of shocking the provisioning numbers or other cost items. And as I said, in 2023, we will have a more frugal approach to costs, and we don't expect -- actually, we will assure that our personnel expenses and operational expenses will decrease below inflation numbers. With 20%m over 20% Tier 1 capital ratio without the profits, and if we include the profits, it's actually 23%, we will say a good base to continue our growth in lending to the customers. As you know, our balance sheet and numbers, our loan structure is quite well balanced. Almost half of our portfolio is retail, the other half is SMEs, mid-corporates and large corporates and a very good, let's say, natural hedge between foreign currency and local currency. We are funding ourselves from local customers in lei and most of our lending is also in lei. For the ones who are following Romanian markets more closely, you may know that the benchmark rate for retail customers, IRCC, is moving with a 6-month gap. So ROBOR is over 8%, where IRCC is slightly above 4%. In January, we will have the repricing of IRCC. It will go towards 6%, still below ROBOR, but all retail loans will be repriced at that new IRCC rate. We have been, I wouldn't say necessarily a pioneer, but we were the first large bank increasing funding rate, deposit rates. We knew what may follow. We are very attentive on our liquidity position, although we always enjoyed high liquidity. That's why about say, in the first quarters of this year, first 3 quarters of this year, the impact on the deposit interest rate change has also put pressure on our net interest income, although still, as I said, we managed to deliver 30% more net interest income as compared to last year with net interest margin of 290 basis points. And the loan quality also is quite good continuously. It shows, it's an indication that also Romanian customers, they show resilience and they want to maintain a good relationship with their bank, the financial partners. Our NPL ratio is below 2%. It's actually close to 1.5%. And NPL coverage ratio, if we include also related collaterals, it's close to 130%, well above, let's say, even Western European averages. The nonperforming loan ratio per above indicators at 2.55%. So it's on a downward trend. But I say, as I said a bit earlier, we still stress our portfolio. That's why we have been provisioning and we want to see numbers really improving before we change, before we make any change in our provisioning for the foreseeable. I would like to also briefly thank our shareholders for their trust because we had been. We had our GSM, General Shareholders Assembly, where we have obtained the approval of our medium-term note program, MTN program. Although, the amount, 1 billion looks big. We didn't want to, we did never aim to do a single transaction of that size. But also, the current market conditions and high volatility doesn't necessarily encourage us to cap the market now. We will be looking to go into market during the first half of next year, whenever we have favorable conditions. We don't want to borrow excessive liquidity, excess liquidity at excessive costs for us. That's why we will be, let's say, following the markets very carefully. But also since we have our GSM approval, the interest from different investors, institutional investors and investment banks, show that if we manage to tap the market at the right time, there will be a good interest on the transaction. You have been hearing also very recently, the sustainability and climate sustainable banking, social banking had been talk of the markets, also with COP27 happening in Egypt. We are trying to keep up. We are trying to learn our, let's say, homework, and we have obtained good ratings recently, also, Refinitiv position as among, let's say, a 47th position among 1,100 global banks. We are also trying to develop this further. We look at their, let's say, remarks, observations and improve ourselves. And we are looking what we should continue doing and what we should improve, so that we will have not only better rating, but also better bids for the community, for the world that we are living in. And the other end working have been very active also. They are guiding us throughout this. If you have any questions in regard to our ESG stance and activity, you can definitely ask us, Diana, directly. We have also opened Stup, the high that we were mentioning, and the high growth, a big wide better than we expected. There are already over 3,000 entrepreneurs who joined program with Stup. And that is a community that we built, helping entrepreneurs to from scratch either to establish their business to inaugurate their business or to develop, improve their businesses to differentiate their sales channels through our partnerships. And it has been receiving quite good feedback. Also, BT Asset Management, another subsidy that we are proudly presenting, has become the largest asset manager in Romania. Now they are managing over RON 4.4 billion. And despite the volatility, they maintain their core customer base. And hopefully, when the trust will return to the market, as it is somehow maybe happening these days, we are expecting better asset management also to increase its asset size quite significantly I would like to leave the conversation here on our side and start the Q&A. We will try to answer as many questions as possible in the next 20-25 minutes. But if anything is left out, as I said, please do not hesitate to contact us. Thank you very much. We can start the Q&A.

The first question comes from the line of Petre, Cristian, with NN Pensii.

Hello. Congratulations for the results. Just a question related to the reclassification of the government securities. How do you plan to classify from now on? I see there is a large movement in the available-for-sale securities and to the amortized instruments. Thank you.

So thank you for your encouraging message. As regards to the reclassification, as we were discussing also I guess in the last call, this is quite a complex matter that we are documenting together with our also auditors. We are working on the, let's say, finalization of that [ investigation ]. On the other hand, from now on, we will be having a more active management of the portfolio for the new established portfolio. We have been also learning our lessons, I would say, but also Romanian markets are getting more mature and deeper in order to ensure such movement. So we do not have a public policy now how we will classify fixed income instruments that we will buy from now on, but it will be depending on the, let's say, our liquidity position, our risk appetite plans and our hedging needs. But from now on, there will be a mix of it. We are also about to finalize our management structures, both system-wise and also organizationally, we will be making some changes so that we will manage the portfolios equaling.

Mr. Petre, are you done with your questions?

One more last question regarding the retail and how do you see the coming quarters? Thank you.

It's very difficult to forecast. This is also the reason that we are in the last couple of weeks actively traveling within the country because we don't want to do our budget without moving our customers' plans and budgets. What we think is that there will be a significant slowdown in mortgage lending and a slight decrease in consumer lending. This is mainly, I'd say, due to the precaution of the customers or their expectations. They don't want to make a fast move. Also, in some segments, we see that the high interest rate customers might not be eligible anymore for new lending. But on the other hand, the encouraging factor is that book savings rates started picking up. And NPL, nonperforming loan, formation is very low. So that, I guess, as compared to previous experiences or several other emerging markets, Romanian retail customers are buckling up for a tough winter, but they also have the ammunition to position themselves. That's why, as I said during the short presentation, we think that in the next couple of quarters, corporate demand, companies' demand in lending will take over what was happening in consumer lending in the last couple of years. Thank you for the questions.

The next question comes from the line of Le Phuong, Hai, with Concorde. Please go ahead.

Hi. Thanks for the presentation. Unfortunately, I just joined so I made the first part. And maybe my question was already answered. But my question would be on NPLs. So how do you see your risk outlook in general in the last quarter and maybe in '23? So I see that NPL on the individual level was 1.5%. So do you see staying below 3%? Or shall we expect higher figures to come? Also on costs, I was wondering what is your view on personnel expenses. So what is the pace that we should expect next year? Do you see further pressure still? Thanks.

So your second question, we couldn't hear due to some background noise. Can you repeat, please?

Yes. So it was on OpEx. And in OpEx, it was on personnel expenses, whether you still see pressure on that? Or you are seeing some ease?

With your 2 questions, you are covering my presentation, so you didn't miss it. But roughly coming back to NPL generation, although the existing signs, indicators, do not show any change. And as I said, our NPL ratio has been decreasing in the last couple of months on a month-to-month basis. And due to the fact that there was a very low demand for the public moratorium. We don't expect a change. We think that our NPL ratio will remain well below 3%, maybe during winter when the invoices will be higher, energy invoices, which are also limited for retail customers, actually, it may show a moderate increase. But for that, we have been also updating our macroeconomic model, and we had been updating our provisioning policy, which you see the impact also substantially during the third quarter. That's why I would say that we are in the comfortable zone. As regard to OpEx, we have been also mentioning in the previous calls this year that there were some dues we had to cover from the pandemic, some of the fidelity bonuses, some of the actions that we had in our collective labor agreement we had to respect with 1 or 2 years delay. That's accumulated together with an increase, substantial increase for the inflation adjustment. Next year, we will be maintaining our OpEx increase well below inflation. And there are no one-offs that should hit as it was happening. There are no, let's say, delayed payments or postponed expenses that will hit in 2023. That's why, although I don't -- we will struggle to bring it to single digits. Still, we don't -- as I said, we are committed as the management to keep the OpEx increase below inflation level.

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

Yes. Thank you very much, good afternoon. Thank you very much for taking my questions. I would right away follow up with your last answer on OpEx. Now there was quite a substantial difference in operating costs between the Q2 and Q3. Is the Q3 level now the normal level, something that we can expect to see in the coming quarters also? That will be my first question. The second one would be on NII. And you mentioned it already, the benchmark will increase on retail loans from January, but you also said that with higher deposit rates, the interest expenses are going up. What do you expect for the coming quarters? And where do you see, especially your interest expenses going, the loan deposit ratio has been moving up slightly in the recent quarters. Do you see an urge to raise more deposits and thus, increase the interest expenses more? And then lastly, on risk cost, I would be interested in how much of the bookings that you had in Q3 were forward looking? And what do you expect to be booking in Q4? Do you want to be very prudent about 2024 and do more reserving for 2023? Or don't you expect to anticipate such forward-looking reserves to be booked in Q4? Thank you.

Thank you for joining and asking questions. If I skip any please hit again. As regard to the, let's say, high increase, there is also one item related with the Tiriac Leasing integration, which impacted both expenses and income on both sides. That's why there is a -- Actually, it singles itself out, but you see a big increase in the expense side as well. On the other hand, we are seeing that, except that, let's say, one-off related to Tiriac Leasing integration, all other items have been well under control. The increases were not even close to previous quarter's increases. Second question was, I guess, related with the provisions, if I'm not wrong?

The question is exactly on...

Can you repeat?

Just on the second question was actually on net interest income and the interest expense is rising.

Okay. We noted. Net interest income, as I said, we had been one of the first banks and we have a large deposit base, so it impacted a lot when we started increasing interest rates in order to adapt to the increasing, let's say, ROBOR interest rate environment. We do not increase that much. I mean if you think like this, from 3rd of January until July, our interest rate on customer deposits increased 2.5x. But from that on, the increases are, or will b, 25 to 50 basis points. We don't need. And our, as I said, customer savings are increasing. We don't see the need, because also both the benchmark rate and market ROBOR seem to stabilize. We don't see the need to access. So from now on, we should be benefiting only or mainly from IRCC or other benchmark rate increases. And as we were saying, almost 2/3 of those increases, we will see directly reflected in our financial data. Coming back to provisioning. I mean, this year, we don't expect to exceed the provisioning budget, the provision budget that we had. But indeed updating our models to the macroeconomic environment and doing some precautionary moves led us to an acceleration in the third quarter. This, as we said, as I said a couple of times today, is mostly precautionary, and we will adapt our policy to the market, to the macroeconomic developments. I guess, next deep dive on that should be beginning of second quarter, so that we will pass through the winter.

And how much of the risk costs booked in Q3 were precautionary measures? Can you quantify that?

I'm not sure if I can give a percentage now. But I will say that at least half. I'm sure it's more than half, but it at least half is a safe.

The next question comes from the line of Mandru Daniela with Swiss Capital. Please go ahead.

I have one question related to the cash dividend. Given the NBR advice to consolidate capitalization, should we expect the payout ratio for the cash dividends to decrease?

Daniela, indeed, now we see that European Commission Parliament, EBA, [ FRD ], National Bank of Romania. There are lots of debates going on. As regard to recommendations or even possible limitations, I don't want to tell anything. But as we always said, if we will have excess capital, we don't see the reason not to distribute it partially at least to our shareholders. However, I don't want to mislead or create a wrong price perception now. But at least, based on our feeling, I think. And also even though according to the messages circulated in the public space, as long as the banks and us can convince regulators a small portion. I mean, even this is the wording as long as you can convince us, a small portion of the profit could be distributed as cash dividends. We will see, we will have more clarification on that as we are building our budgets also. That's why my final and official answer would be that we are not in a position to detail a percentage or number now.

So you are seeing that there is also the possibility that no cash dividends to be distributed next year? Because I thought, in fact, the payout will decrease, but not will disappear.

I repeat. I'm not telling you a percentage. I'm not saying that it will disappear, it will increase or it will remain stable. I am saying that we will seek more clarity from international and local regulators. And if we have this comfort that we can give to them and to our shareholders, definitely, we will continue our cash dividend for the sales. I mean your knowledge, your insight is not necessarily based on what we know because there is a lot of public debate going on. And we don't have the comfort of last year or the previous year that we were saying, okay, in this percentage, we think that we can distribute. We are just in the middle of our budget exercise. On the other hand, the growth, as I said, is coming from corporate loans, company loans, which are more capital intensive. And if internally, we will also be convinced that this is a trend that will continue, and we want to be taking active part of it as we did for the last couple of years, we should be more careful with our capital planning.

Okay. Thank you. And, I don't know, just to grasp a bit, regarding the cost of capital, the cost of risk for 2023. Can you give us a range, I don't know, should be at least, I don't know, from a precautionary point of view, where it should be, I don't know, around 200 at the normalized level much above the current level, double the current level. I don't know, something guideline.

I mean, this is something we could even, let's say, put it on a recorded message almost, because it should be, I guess, in front of our shareholders, we should say that it should be 0, although considering that our customer profile markets and products that we are active, the returns that we have, we think that with 120 to 140 basis points is a normal affordable level. We are well below that. So it seems that we are maybe either more pessimistic or prudent about our own portfolio, but we will continue proposing to the shareholders a budget, which will see cost of risk around 100 basis points at least. Repeat, we don't have the budget exercise done. We didn't get our Board of Directors approval, and we didn't propose it to shareholders yet. That's why, take it as my personal opinion.

Okay. Thank you. And for example, by comparison with BRD, given the strong corporate lending, should we expect next year, for example, and the corporate performance in general next year to see some provision reversals for this segment? I don't know, something that I noted that BRD pointed out for next year. I'm wondering if it's the same for Banca Transilvania?

I mean, provisions are being built up not only in 2022. They are coming with history. I don't have all the insights of their numbers. and what type of reversals they may think of and -- but I know that they are, let's say, very prudent, very stable institution with very strong cultures in risk management. So I would take it for their word and respect what they want to do. But we cannot compare necessarily provision waterfall just for 1 year to another. We have been also having some exceptional years or quarters when some banks were provisioning, we were having reversals. It is also related with recoveries. If a bank has a big recovery during a quarter, it may impact strongly the financial result. We don't have big ticket, let's say, provisions necessary that we would be reversing. If macroeconomic situation will improve that quick and that significantly, yes, we will adapt our model. And then as I was saying, half of what we have been provisioning this year, we might be partially reversing, but we need to see not only 1 month or 2, a couple of quarters of very strong macroeconomic data, and we should stop speaking about polycrisis. That's why I would say that we don't. We will continue our other income, you see we have recovered as well. But next year, again, we will be budgeting although we don't aim to deliver that, but we will be budgeting over 100 basis points cost of risk.

Okay. Thank you. And regarding the lending activity next year, yes, retail lending probably will decrease, corporate lending for sure will increase. I don't know, do you have a view at this moment on the total lending activity increasing next year for the bank?

This is very much hitting to the budget. As I said, I don't have the first draft approved by the Board. But it will be -- I don't expect the loan growth to be double digits next year. Once we have the final numbers, we will be immediately and probably come to the shareholders' approval, but it will be a, let's say, decelerated growth. Yes. I would say that if we could make it the last question and then take the rest of the questions to the Investor Relations. We will appreciate it.

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 for joining us for listening and helping us to clarify a few things. Again, in case there is any missing item, please come back to us. I hope that in case with some of you, we will not be able to speak again until the end of the year, we wish you a peaceful healthy and prosperous 2023. I hope that the ones who spend the holidays with their beloved ones enjoy, or everybody will enjoy the holiday period. And our colleagues will be active in a couple of conferences in the next couple of weeks. If you will be able to join those conferences, you can continue the conversation with Diana and her team. Thank you again. Take care of yourselves. Bye-bye.