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

Ladies and gentlemen, thank you for standing by. I am Mina, your Chorus Call operator. Welcome, and thank you for joining the Banca Transilvania conference call to present and discuss the first quarter 2024 financial results. Please note that the conference is being -- [Audio Gap] Mr. Aurel Bernat, Executive Director of Financial Institutions and Investor Relations. Mr. Tetik, you may now proceed.

Hello. Thank you for connecting to our video conference for the first quarter results of 2024. Indeed, it was I'll say, quite a busy quarter. We have seen exceptional -- [Audio Gap]

macro data overall. Just in a few words, I would say that Romania had in 2023, a higher growth rate than the EU average, having 2.1% increase in GDP. If we take a look to our outlook or expectations, we believe that the increase will also follow in the quarters later on. In terms of then the average in the European Union, which was 2.6%. Both in April and also today, National Bank of Romania maintained its policy, its monetary policy at 7%, which is stable for a couple of meetings now in line with our expectations. In terms of lending dynamics, we see a good dynamic both for corporate loans and also households. On the corporate side, we have a higher increase than the European level despite the fact that it decreased during January and February due to increases in December, late December last year. And in terms of household loans, what we saw is an increase of demand. We had a poor 2022 first half. But afterwards, it started building up. And now we have an increase in this regard, much higher than the European average. Going to the next slide. From the deposit perspective, both on the corporate and also on the household side, we are well above the EU average higher in terms of household, where we see a remarkable gap but in the meantime, we also see an increase on the European average as well, '22. In terms of capital, as you already saw previously, the Romanian banking sector is well above the European average. And regarding the return on asset and return on equity ratios, we had 1.8% and slightly higher than 20%. That would be the macro perspective -- [Audio Gap]

The first quarter of the year 2024 started with very good performance on all the business lines. You've seen the published results at the level of the income statement, both of the individual and consolidated level, the bank managed to exceed the results that were reported in the first quarter of 2023. And with cost of risk, we are showing a very good result, which is better than our peers in terms of evolution in the first quarter with minus 0.24%. This is mainly driven by the fact that we had recoveries on individual levels of exposures that were previously provisioned. While on the level of provision for the first 3 months of the year. In terms of balance sheet evolution, both at consolidated and individual level, total assets increased by over 3.5%, individual 3.6% consolidated 4%. This is driven primarily by the increase in loans. When you look at the evolution of the loans portfolio, you see 1.5% in the first quarter of the year at the individual level and year 2024. Going forward, in terms of trends in income, as I mentioned a little bit earlier, net interest income increased by 28% at the individual level, bringing the net interest margin to 3.5%. Net fees and commissions, again, a very good increase with 18% and this is driven primarily by the commissions coming from the payments to a testing terms of efficiency of the personnel. As I mentioned, cost-to-income ratio is without taking into consideration this time of attacks, which I will mention had an impact on other operating expenses, that 45% increase that you see there is actually driven primarily by this turnover tax, which amounted to RON 65 million for the first 3 months of the year organic growth. And in the first quarter of this year, all business lines have managed to outperform the results from last year as compared to first quarter of last year. We have seen almost 2.5% growth in retail lending and almost 1% growth in corporate company lending, including SME loans. I have to make a point here in SME banking. The bulk of the -- is kicking in as well. We are also happy to see that the distribution of the lending in terms of currencies have been quite in favor of a prudent approach. We have seen almost 50% of each foreign currency and local currency company. We have had above 6 million cards. We would say that we are the backbone of the Romanian payment systems, both in retail consumption, but also in terms of bank-to-bank payments. SME lending has grown 3.5%, as I mentioned. SME loans grew 18% and corporate loans, 3.5%. In SME, we will see even further growth, starting with second quarter. As we speak, our teams, colleagues from network and from underwriting departments they're processing the [indiscernible] plus program loans. We are a very active part of those programs. We have already RON 6.5 billion lay in our balance sheet, but also with the new program, which is for RON 12.5 billion, definitely as we are the bank of SMEs, Bank of entrepreneurs in Romania will being a boost besides the general economic advance it will bring. We do a lot of activities in terms of social responsibility, but also sustainability. We have the -- in the first quarter, we have seen the credit of the farmers, credit family. We have done special programs for health care professionals and lending to companies with female executives and entrepreneurs. I would like to switch to Luminita to see what risks we generate and how we manage.

Thank you, Omer. From the risk side of the activity, I do not have too much novelty to present to you. Nevertheless, I would like to stress a couple of things that we consider important for the stakeholders as you are. As depicted in the graph of the land and -- sorry, left-hand side of the slide, our cost of risk evolution in Q1 2024 reflects a very good quality of the loan portfolio and very low NPL ratio. Based on the results presented, we are confident that the bank can deliver a cost of risk below 100 basis points by the end of this year, in line with our initial guidance for 2024. If we look on the right-hand side of the slide, you can observe that the provision stock increased slightly in Q1 2024, proving once again our conservative and prudent risk approach. Therefore, the negative cost of risk at the end of Q1 2024, was due to the recoveries from previously written-off loans and also due to the revision of the ECL from other risk and loan commitments as depicted in the notes of the financial statements. We can observe if we compare March '24 level to the figures from 2021, that ECL of the bank increased by over 22%. As we have mentioned in the previous video conferences, the provisioning of the bank increased in a smaller pace than the loan growth of the bank during the same period. It is important to observe the decreasing trend of the NPL ratio over the last 5 years, reaching a level of nearly 2% at the end of March 2024, which is well below the local market average 2.33% at the end of December. It is also important to add the fact that even in this downward trend of NPL over the years, the provision remained constant, giving us and our shareholder the comfort about the way in which we are managing the assets of the bank. Q1 2024 shows a very slight increase in NPL ratio, mainly driven by consumer loans and SMEs but not levels that reflect significant concerns. When it comes to PAR 90, the figures are presented on the right side of the slide. We are mirroring the tendency of NPL, and this is being influenced by good recovery, but also by market trends in terms of lending. As we mentioned in our 2023 year-end video conference, we observed a slight increase in PAR 90 ratio during 2023 and which continued during the first quarter of 2024 coming from retail and SME customers. This is due to the inflationary pressure that these type of clients have been facing over the last 2 years. But we do not have any significant concerns when it comes to the evolution in terms of asset resilience. When it comes to the capital position of the bank, we can be proud of having comfortable solvency levels as depicted in the waterfall graph. The capital adequacy ratio of the bank reached 21.47% profit included and is significantly above the requirements set by the Central Bank of Romania. The bank benefits, as we already mentioned previously, from a strong and stable capital base, mainly due to the profit capitalization, which is an instrument that the bank has been using over time. On fund structure is also presented on this slide, depicting the significant capacity of internal capital generation. We are also mentioning the fact that the risk weight asset density reached 39% level, which is stable compared to the last 2 quarters, whereas our own funds stays at RON 13 billion as of end of March 2024. The bank, along with the local market enjoys a very high liquidity levels. That's why what we are presenting to the stakeholders in terms of liquidity ratios are presented here. We have a loan-to-deposit ratio at 56.27%, immediate liquidity at 52%, sorry. The LCR ratio records very high level, around 773%, well above the regulatory limits. This is showing the trust that the clients we have in the name of Banca Transilvania and also reflects the high-quality assets that the bank has under management. More than that, it is worth to be mentioned the fact that the pool of assets we have managed under management is very well balanced. On the right side of the slide, we inform you about the structure of the security portfolio by March 2024. The bulk of our security portfolio is composed by Romanian government treasury bills as a feature of our local footprint. Also very important in this context is that 73% of the security portfolio is measured at fair value through OCI. 23.5% is held to collect at amortized cost, and the remaining part is measured at fair value through P&L. Therefore, our books account virtually for all changes in fair value driven by the volatility in the interest rates.

Thank you, Luis. I will just want to touch briefly the General Meeting of Shareholders decisions, thanks to our investors, shareholders since that they appreciated the results, so when approved also the budget. But besides that, also a total amount of RON 1 billion from the net profit has been approved as cash dividends. It's RON 1.25 of cash dividend. And also, RON 1.18 billion had been decided to allocate to increase of the share capital to support the growth of the business, support the growth of our lending portfolio. Basically, in terms of the assets -- in terms of the budget, sorry, we are targeting over 13.5% growth of total assets with 6% growth of loan book and net income on a stand-alone basis of RON 3 billion where we will be continuing our heavy strong investments in technology, infrastructure and other digital initiatives. You have seen that we are trying to maintain despite fiscal changes or other pressures, our cost-to-income ratio under control, but we also want to maintain the impact on OpEx from the wage inflation and headcount also under control using the available technology. As I said already, there was RON 1.18 billion of incorporation to capital of the bank. The share buyback program also has been approved. We also shared brief information as regard to OTP Bank, BT Asset Management and OTP Romania acquisitions. Nothing much changed. We are hoping that during this quarter, we will be getting the necessary approvals so that we can focus on integration. And hopefully, between 6 to 9 months, we will be finalizing the integration of OTP Group, OTP Bank and OTP Bank's asset subsidiaries in Romania to BT's entities. We have been poly happy to see the depreciation. The most important reflection is the stock exchange, the shareholders or investors reactions. We have been receiving a lot of questions about dividend policy. Maybe it's also in the Q&A section. We, first of all, target creating value by growing our business. So as long as there are strong opportunities, we will be focusing to that. But excess capital in the last couple of years, we have been distributing to shareholders. I guess, on average, just below 6% dividend yield we have offered even in the tough times. And we hope that with strong efforts from all BT team, we will be maintaining this. Although with all the, let's say, external pressures global volatility, we don't want to commit to a number going forward. As regard to sustainability, we'll come back Luis again?

Yes, I just want to say a couple of words when it comes to sustainability, and we want to inform you that in the first quarter of 2024, we continued our initiative of informative roadshow organized for local entrepreneurs, during which we aim to share and discuss the opportunities and challenges of the green lending products. And also our product offer, therefore, we have organized two events in two important Romanian cities, namely Cluj and Constanta. In this period, where we encountered a big interest for this topic, we have had more than 380 participants because we believe in education, and we think that education is the most important asset for any successful business, we partnered with the University of Agricultural studies from Cluj-Napoca a program called Agro intergeneration dedicated to agricultural entrepreneurs. The program lasts for 6 months period. And right now, we are at the fourth addition of this program. In this cohort, we have 30 students from 14 Romanian counties. Basically, this represents another important commitment of Banca Transilvania to support the development of the Romanian agriculture. More details on the initiatives and progress in 2023 is to be found in the four-sustainability report that the bank is going to publish in a couple of days. After you read this, we will be more than happy to answer your questions if there are any. Thank you.

As mentioned already, a big portion of our investment budget is going to technology and additional initiatives. We are very happy to see that more than actually EUR 1 million -- almost 1.5 million questions have been answered by Intreas BT, which is one of our first AI initiatives. But also, we are using the questions coming from those customers, almost 100,000 questions in order to say modify, adapt our products and services flows. It gives us a better idea of also user experience where we are trying to improve ourselves. We have integrated our artificial intelligence to policy educational platforms. We use Microsoft copilots and GitHub copilots for our employees in order to also help them support them with the new working habits and new working environments. BT Pay is already the most successful wallet application in Romania. And we have seen a very strong growth in terms of the users, in terms of the payments in our, let's say, medium-term and long-term plans. BT Pay will become our -- that's why we continue investing in BT Pay, where you will see also how the account opening foreign exchange transactions. But we are also happy that BT Kiddo, a relatively new initiative has already more than 120,000 accounts where we are trying to definitely educate, but also obtain customers from younger ages. And we see also a positive thing that the access from rural areas, smaller cities have grown threefold in the last 3 years, and we think that this is a trend to stay in the next years, we will see fast adapt adoption by the, let's say, rural areas and some other cities in our digital incentives. One good surprise, although it is between first quarter and second quarter, the launch of Salt Bank. Salt in Romanian means lead forward, jump. So, it's not sold, but it's salt. We are emotionally overbed and positively surprised by a high number of new accounts opened. We are already close to 200,000 users and RON 150 million lay brought in. It's good to see that a big portion of these customers and amounts are coming from bigger cities where we targeted, especially Bucharest, but also from our peers in terms of neo banking, digital banking, out of good practices. So, Salt will become even much more popular. We are aiming to reach 1 million active customers in 3 years and bringing that's why breakeven. For the moment, it's the first iteration but it will have all banking products and services soon within the ecosystem. If we look at the BT Financial Group, George?

Thank you very much, Omer. So, Banca Transilvania, of course, is leading the financial group in terms of results as net profit total assets, return on equity, return on assets, but there are also some other companies that have presented a very good strong position in the first quarter of the year. And I would like to mention here, better leasing where net profit reached RON 31.2 million in the first quarter of the year, with total assets almost RON 4 billion and return on assets even higher than Banca Transilvania with 6%, with 3% Saudi, 6% is for BT Mic, which was the second one I wanted to mention with RON 15.8 million result for the first quarter of the year and RON 1 billion in terms of assets at the end of the first quarter. We also have very strong results in BT Direct with RON 11 million net profit for the first quarter and almost RON 1 billion in terms of total assets and a return on assets of 4.7% with 32% return on equity. Victoriabank is showing a good result as well. Here, RON 18 million result for the year with RON 5.6 billion in terms of total assets at the end of the first quarter and over 300,000 active clients with Victoriabank for the first time, brought in an additional acquisition in terms of the composition of the group. And as you've seen in the financials, we're talking here about BT, a company which became part of the group at the beginning of the year 2024 and for which the results are incorporated. We're happy to report that we are presenting a bargaining gain on the transaction in the first quarter at consolidated level. Salt Bank is at the beginning. So we expect to have positive numbers for Salt Bank very soon. But now we are investing there. And as you can see, the number of new clients, as Omer was saying is 200,000 already in the first month of operation.

Thank you, George. Indeed, Salt Bank at least at the beginning, March, let's say, over past our initial plans. Definitely, it's up to us now to bring in some new features as soon as possible to maintain those customers loyal and active to Salt Bank. BT Asset Management grew its assets under management 7% year-to-date. We have seen be Capital Partners very active in local administrations, bond issuances. And also we just completed 15 arrangement of our Mitral Finance special borrowing program for retail customers, targeting retail customers. We are also happy to see in BT leasing more than 30% of the portfolio comprises of electric or hybrid cars. BT Mic, which is already a small bank in itself has reached more than 20,000 customers having an outstanding loan. It's the size of a small bank comparably in Romania. And we are growing further our pension business, having also ambitious plans there. But so far, we are happy also to see the year-to-date growth of numbers there. Thank you very much. I would like to also say although it took a bit longer than even we aimed to, we would like to allocate some time for the Q&A. We already started gathering questions.

Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions]

First question is coming from Wood & Company. Miguel Dias is asking us if we can provide some more color on the quarter-on-quarter drop in corporate loans. What dynamics can we expect in the next quarters.

It is some seasonality. Actually, there is, I guess, one more question about seasonality, but there is seasonality here because in the last quarter, the activity is much higher. And in the first quarter, traditionally, the activity is lower, but a lot of SME lending activity in the company side had been postponed. Last year, beginning of the year, there were a couple of big projects supported by government-led or European Union programs. So we are much more positive about the dynamics of the growth in the second quarter or starting with the second quarter. That's why we don't see it as a structural thing or it's a risk, but also there had been, I guess, in the presentation, you will see there has been also the segmentation between business lines. So part of the growth has been seen only in the other business line from micro to small from small to mid-co and from mid-co to large corporate. That's why we are comfortable with the numbers you have seen, but it will be much better in starting with second quarter.

The second question is actually related to the net interest margin coming from Daniela Mandru from Swiss Capital. Daniela is asking us what evolution of net interest margin should we expect for the upcoming quarters given that the current levels are relatively high compared to historical levels on one side and on the other side, that the total deposits grew at a slower pace as compared to the net loans.

Daniela, thank you for the question. Actually, indeed, lending grew faster, but we were not very aggressive because we have seen our, let's say, flexibility and attractiveness in deposits. We are not the highest payer of deposits. We have seen also in the company side, a lot of deposits, especially state-owned enterprises have been gathered special at certain institutions or by the state treasury. We are not see it as a trend itself usually in the last quarter of each year towards the end of the year, liquidity is being accumulated and distributed within the say, private sector, economic stakeholders and then first quarter, we used to see a slight decrease. This is more or less kind of back to normality. And in terms of net interest margin, we think that we don't see an upside from here, but at around 330-340 basis points will be flat throughout the year.

Third question coming from Franklin Templeton. Catalin Diaconu is asking about if there is any one-off for the mode of operation. And if we can elaborate on the strong performance of insurance intermediation income from Visa, Mastercard. Is there any seasonability in this income?

I will start by seeing John results. You answered yourself, I guess, the question later. Yes, the house minority interest exceptional profit is mainly related with batteries closing I mean, Victoriabank's closing the transaction with BT Kiddo. In regard to how say, insurance or bank assurance income, this is always our, I would say, focus, we have been growing constantly double-digit semester basis.