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 first quarter 2023 financial results conference call. 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 and CRO; and Ms. Diana Mazurchievici, Director Head of ESG and Investor Relations. Mr. Tetik, you may now proceed.

Hello. Thank you very much for joining us. And I'm here, as mentioned, with my colleagues. After a brief presentation, we will try to answer your questions. During this call, maybe it's a premier for us at least. We have also investors from DCM, analysts from the capital markets. We will try to also organize ourselves better for separate calls to answer your questions and to listen to our observations better in time. And hopefully, if we will be able to manage the logistics until then, we are planning to do our next call representing June results in a video format. At least, you will be able to see ourselves and presentations live on screens once we set everything. So after a relatively, I would say, good year for Romania in 2022 with over 4.7% GDP growth, still Romanian economy with the, let's say, highest level of economic confidence indicators, increase of exports and also increase of foreign direct investments shows signs of stability and continuity. Definitely, there is still a lot room to pursue because we are -- although our per capital income had been growing substantially in the last couple of years, still we are below our peers of Western European countries. But with the recovery and resilience funds and several aspects, which we'll try to present also the change in corporate banking investment, industrial environment, the prospects also for this year are quite good. We don't see much of a talk about any, let's say, recession. Maybe a slowdown in economic growth, but Romanian economy seems to deliver economic growth also this year. Inflation also had been on a decreasing trend. You are following Eurostat numbers, so it's already 12.2% end of March. We are coming close to 10% most probably end of May. Energy price almost is there, and especially gas and electricity much lower than last year, and petroleum prices being also lower. With the summer's agricultural input effects, the inflationary pressures will probably [ be ] down. And this end of the year, we are expecting to see a single-digit number, which gives us also kind of confidence in National Bank of Romania's policy where expectations are that the interest rate cycle has been peaked. And from now on, we don't expect, maybe one, but most probably none increases to support economic growth. This is also seen at [ ROBOR ] and local market interest rates. So there's quite a rapid deceleration or a reversal in the interest rate. Banking sector's first quarter cannot be as good as the previous years because of the high interest environment and high lending growth. There is -- there are several aspects. Definitely, in retail, we see lower demand due to higher interest rates, but also a lot of mortgage lending had been accelerated for the last quarter, actual last days of 2022 because of the changes in the fiscal regime and, starting with 2023, VAT on residential transactions had been increased to 19%. This motivated customers' banks to accelerate their last quarter lending last year. But on the other hand, we see corporate lending picking up, but also corporate deposits picking up so that companies in Romania maintaining their liquidity position, they're investing further with or without European Union funds of state aid. And we see, I'd say, a growth of last year's 12% of total assets this year. Most probably, the growth will be single digit, but most of the growth will be coming from corporate lending, as we expect, and the numbers so far showing this. On the other hand, despite the interest rate increases' inflationary pressures, we see still a positive trend in NPL generation and NPL -- nonperforming loans are well below 3% at 2.66%. And we don't see any, let's say, trend change there even the month after the first quarter. I would like to come back to our numbers. We had been also reading a couple of analysts, how they interpreted. So we tried to give some guidance and clearance on the numbers. But definitely, during Q&A or after our call, if you have any questions, please do not hesitate to contact us. I mean, for us, the first quarter of this year had been more or less in line with the banking sector trend in Romania, growth in corporate lending, deceleration in retail lending. But still, we managed to, let's say, present for us, at least from our point of view, strong profitability, in line, actually even slightly higher than expected budgeted levels. Our net interest income reached over RON 1 billion, with quarterly net fee and commission income RON 0.25 billion, RON 250 million. There is an increase in operating expenses as compared to last year, but part of it was also kind of a spillover effect related to the increases which we have seen in the last couple of quarters during 2022. Our cost of risk has been at negative level, minus 24 basis points, with net interest margin as compared to 1 year ago, higher by 40 basis points at 3.2% and with positive -- solid cost-to-income ratio of below 47%. We managed to deliver exceptional return on equity, 34%. If you have time to read our budget proposal approved by the general shareholders' assembly, you will have more, let's say, guidance about where we see ourselves at the end of the year. And as I said, although I cannot give much of information about how second quarter is going ahead, but I can basically confirm that we are in line with our budgeted numbers further ahead. And actually, also, there are decrease in the interest rates in entire bank and international -- local markets, sorry. It's improving our risk indicators and also financial position. The first quarter of the year, if we include also the profit, we closed at 17.22% Tier 1 capital ratio. Our total capital ratio is at 19.86%. As you may know, already public information, also in April, following Easter holidays, we managed to tap the markets for our MTN program, attracting EUR 500 million from investors to support our capital base and ESG growth. When you look at the income structure -- by the way, I guess, I forgot to tell, but the presentation is already uploaded to the website of the bank. In case you cannot access it, you can always drop an e-mail to Investor Relations address, so they will forward the presentation or the link to you. So our net interest income as compared to last year's first quarter increased by 27.3%, net fee and commission income almost 15%. And the changes in the net trading income and net gain and loss from financial assets more or less netting each other off helped us to show the profitability that we have presented. The trend of decrease that you had been also sometimes asking last year's net interest margin, especially when we started paying higher interest rates to deposits, thanks to stabilization of our current account base and also diversification of the deposit portfolio, plus higher lending rates with repricing -- our frequent repricing issued us to deliver a 3.2%, 320 basis points of net interest margin. We have been continuing our activity in terms of lending, despite the decrease in the demand, especially on the retail, as I said, due to interest rate hesitation or problems of maybe eligibility. In the SME segment, because of the upcoming SME invest -- IMM Invest programs, most of the lending had been postponed. So we will see both with us and rest of the banking system more accelerated growth in the second and third quarters of this year. And -- but loans to companies, in general, had a good performance of increase. Our deposit base was also quite solid. The ones who have been historically following us, you may remember that usually during the first quarter of each year, our deposit base was either stable or slightly decreasing due to tax payments, dividend payments and so on. But this year, we have seen a continuous growth in deposit base, which continues also in the months ahead. Our retail banking portfolio loans, as I mentioned, it was more or less stable, but the support of retail customers to deposit base is significant from our point of view. SME and corporate banking, let's say, the pause in SME banking has been compensated by corporate banking. And we see more in pipeline for the next quarters -- next months ahead. Our NPL ratio -- NPL coverage ratio, according to EBA definition, is close to 200%. And -- but if we include -- if you look at the NPL coverage ratio for PAR 90, including mortgage or real estate collaterals, it is close to 130 basis points -- 130%, sorry. And the NPL ratio is below market average. It's 2.40%, it's 240 basis points. Our loan provisions have been slightly increasing during the first quarter by 1.3% for the bank itself, where we have the bulk of the production. And thanks to some strong recovery from corporate loans and also adjustment of the PDs, as we do quarterly, we do have a minus, let's say, cost of risk. We are estimating that for the year, the guidance will be still between 50 to 70 basis points. Our budget is over 100 basis points, but we are planning and we will be adjusting the numbers, informing you, during the course of the year based on the trend of the market. Our solvency capital ratio is at almost 20% at the end of the March, at the end of the first quarter. And our risk-weighted asset debt is at 40%. Our liquidity, as you have been seeing for the last years -- quarters is quite strong with loan-to-deposit ratio of 55% and with LCR at 345%. Definitely, the extra liquidity from MTN program will be also helping us. I don't want to enter into too much of details of the GSM (sic) [ GMS ] decisions that you have already in written. We have decided partially to increase our share capital and then also share dividends and decided for the share buyback plan. On the other hand, we are also absorbing by merger BT Building, which owns some real estate where the bank itself is the tenant. And this year, most of the investments -- our investment budget will be going to technology side, digitalization with especially focused on our application -- wallet application BT Pay, which became the most popular application payment channel in Romania. We are expecting BT Pay to become our main banking platform for -- as a digital channel with our customers. During the first quarter, all subsidiaries of the group have been performing well, contributing to the bottom line. The only one not generating new business, Idea Bank, that we are now under the license of Idea Bank, building our digital bank. Hopefully, towards the end of the year or early next year, we will be launching our first digital banking platform at Idea Bank. Other than that, all subsidiaries have been seeing stable growth and profitability in our case. I would like to stop here and leave the floor for Q&A. And as I mentioned, in case we cannot answer any questions on the spot, we will try to update the presentation or come back to you directly once we have the answer. Thank you very much.

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

Just a couple of questions from my side. The first one would be on your NIM outlook. Because if I heard it correctly, you don't expect that much or that significant change in monetary policy for this year. And I was wondering if we may have seen the peak of NIM already maybe in the first quarter? Or do you see a chance for an improvement from this level? And also on the capital side, I saw that your regulatory equity Tier 1 declined in absolute terms. And I'm not sure about the changes -- the transitional changes because of the regulatory change. And I was wondering like if there was any negative impact in the quarter and if we should expect any further negative impact apart from what you have guided so far? And then my third question would be on retail lending. And you said that it's weak and you expect to pick up maybe in the second or third quarter. And I was wondering if you still expect it to go down further from Q1 level and then go up or maybe like from this level that we have seen in the first quarter.

I also read your comments today. Thank you very much. First of all, coming back to net interest margin outlook, as you know, a big chunk of our retail lending had been adjusted with a gap between IRCC, which entered -- I mean the -- most part of the interest rate increases' repricing has been reflected starting with January and starting with April. On the other hand, we are not expecting a significant increase in net interest margin. So I would say that most probably, we will be stable around these levels. And once we see it, I'd say, we are sure about the trend in the interest rate decreases when we start also adjusting our deposit interest rates. We might be benefiting from a temporary increase, which in time, again, in a competitive market might be adjusted. So shortly, you can say that -- we can say that it will be more or less around this level. And then capital, as you said, big -- I mean the impact is coming from the, I would say, market application because of the regulations of the transitory filters and treatment of reevaluation. So there is nothing more to come. And actually, we see a positive impact from the reevaluation. Now as you know, most of our portfolio except RON 1 billion -- except EUR 1 million, our portfolio is available for sale. So we see, especially in the second quarter and from now on, the impact will be on the corporate side -- hopefully on the corporate side. In retail lending, we see some interest coming back. We don't expect numbers of 2021 or early 2022 this year. But on the other hand, I'd say, we have started growing our base portfolio on the net, but with much smaller steps. Again, this year, the increase will mainly come from SME and corporate lending. I don't know if it answers your questions.

Yes, perfectly.

The next question comes from the line of Brzoza Robert with PKO PB (sic) [ BP ] Securities.

I have three quick questions. One is on the risk-weighted assets. Could you explain the reasons for, like, RON 3 billion increase quarter-to-quarter in risk-weighted assets, given the flattish development on the customer loans? Second, regarding regulatory costs, should we expect the level from the first Q '23 to be representative for also '24, potentially for '25? And three, are there any new developments regarding second half of the year? And regarding the dividend payments, could we think of it as depending to some extent on the development of government bond yield; second, on the growth in the deposit base in the domestic banking system?

I will start with the last one. I mean, here, I would try to refrain from any, let's say, commitment of date. Definitely, we are comfortable about our business growth, but also capital position and capital generation possibility, but as we have also the strong recommendation from European and local supervisory authorities. Coming back to what we said, I mean, until we see certain changes in the market trends, more -- I'd say better comfort from interest rate environment and also a relaxation on the authorities' side, we would rather maintain our position. But also, we are aware that both our shareholders and investors will appreciate. On the other hand, this is also a challenging year with MREL requirements and several markets' volatility. So I think we are creating good value to -- for shareholders, but also to our bond investors. Now I would say this is mainly the issue. Coming back to -- sorry, your second question, I forgot, I have to admit. If you can repeat.

That was on the regulatory cost, and other one was also on risk-weighted asset increase quarter-to-quarter.

Yes. Risk-weighted assets, the main increase is coming from -- I mean, part of it, smaller part, I would say, is coming from lending growth, but mainly it's coming from reevaluation of the fixed income portfolio, where -- with the decrease of interest rates, yes. And we have been also replacing some of the portfolio. But regulatory cost, we don't have...