BRD - Groupe Société Générale S.A. (BRD) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning, and welcome to the BRD Group Q4 and Full Year 2022 Preliminary Financial Results Conference Call and Webcast. This conference call will be recorded. We have just a few announcements before we begin today's presentation. The event will last approximately 1 hour. [Operator Instructions] Your host today will be Mr. François Bloch, CEO; Mr. Claudiu Cercel, Deputy CEO, Financial Markets; Mrs. Maria Rousseva, Deputy CEO, Global Corporates; Mr. Philippe Thibaud, Deputy CEO, Risks; and Mr. Etienne Loulergue, Deputy CEO, Finance, Treasury. I will now hand over to François Bloch. Sir, the floor is yours.

Thank you, and welcome, everyone, to this presentation of our 2022 results. We presented them at the Board of Directors on February 7. And as you know, at this period of the year, they are not yet audited. That will come later. If I go straight to the introduction, 2022, we mentioned here, is a challenging year. And indeed, it was challenging. It started from a very positive trend. You remember that we were exiting the COVID pandemic, and we are all very optimistic about the year. Unfortunately, starting end of February, the war started in Ukraine and the macroeconomic environment shifted quite remarkably. However, during this year, we have been able to overcome this difficulty and proving the commitment and the solidity of the bank. And I will demonstrate that through first, the commercial activity with excellent results on the production of loans on all segments: retail, corporate. And you see here a few figures, with the overall portfolio growth 10% year-on-year; corporate loans, plus 26%, with remarkable performance on the SME sector. While doing this, we also continued to increase our presence on sustainable financing and green financing, but not only green, overall sustainable, reaching more than RON 1 billion in production this year. So we are well on target to achieve our 2025 objective, which I remind you was to be above EUR 1 billion cumulative financing by -- in sustainable finance by the end of 2025. The loans, again, were very dynamic. The deposits grew as well by 7.5%. And at the same time, we continue our trend on the digitalization of the bank and the usage by our clients, with now reaching over 1 million users on our new platform, You, by the end of 2022. And we will see later as well that we have significantly increased the number of transactions. The GOI, the gross operating income, grew by 14% driven by volumes, rates and discipline on costs. Regarding the quality of the balance sheet, our NPL ratio is very low at 2.5%, whereas we are well covered with a coverage ratio of 77% in terms of provisioning level. Nevertheless, and we will probably go more in detail on this, we decided to pass additional provision on our sound portfolio. We didn't have so much new defaults, but we consider that as the situation is still uncertain with high inflation, high interest rates that could cause difficulties for some of our clients, we decided to pass additional provision and, therefore, we have RON 95 million provision this year. All of this at the end equates to a profit of RON 1.3 billion, slightly higher than last year, with return on equity at 16%, so well above our 12% guidance. If I move now to the next slide, you will see a couple of awards that we received in 2022. But I will not spend too much time on this and leave the floor directly to Claudiu Cercel to tell us more about the macroeconomic environment. Thank you.

Thank you very much, François, and good morning to you all. The performance mentioned earlier by François, the performance of the bank took place in an economic environment characterized by resilience even though the inflation was the real challenge. And we do not yet have the final figures for the GDP growth rate for 2022, but we had the statement coming from the Prime Minister showing that this indicator marked an increase of 4.9%. So we think it's a deceleration compared to 2021, but yet in a satisfactory territory, with the main driver in the first part of the year being rather the consumption, so the services sector which saw some deceleration in the second part of the year; in which period, the main driver of growth became the fixed -- the gross fixed capital formation, so the investment. At the same time, as this structure in the Romanian economy, the net exports remained a drag with current account deficit showing a significant increase at 9.5% to GDP compared to 7% in 2021. Also on the positive front, the budget deficit marked an improvement. So the country is continuing its fiscal consolidation, 5.68% of GDP in 2022 compared to 6.74% in 2021. And even though I mentioned earlier that the inflation was the challenge, apparently, we are now past the peak in inflation. We may have seen the inflection point in November when the indicator touched almost 17%. It went a little bit down in December at 16.4%. And according to the statements we see from the central bank, we would embark now on a gradual increase in cutting inflation, hoping to be again in the single digit territory in the second half of the year and maybe ending 2022 -- 2023 in the territory of between 7% and 8%. In this inflationary environment, obviously, the interest rates went up, propped up also by the hyping policy of the central bank that delivered 575 basis points in hyping power in 2021. It continued even increasing rates in January '23, but by a lower degree by 25 basis points. And the consensus the analysts would seem to be that this was the last one. And now we saw the peak in the monetary tightening policy of the central bank. At the same time, the liquidity conditions which were very tight till October, roughly beginning of November, started easing, and this is affected by a lower recourse of banks to the refinancing operations of the central bank via mainly Lombard. And a significant surplus of liquidity already in December at RON 11 billion, which continued in January. It was even higher at close to RON 20 billion. This also has an impact on rates after having increased significantly in 2022 and having even attained a peak in ROBOR in -- at 8.2% in October. It started gradually going down, ROBOR 3 months, for example which is the main [ tiny part ], it's now at 7.14%. What probably in this context of still attention being paid by the central bank of the inflation will stay at the current level for at least the first half of the year. Indeed, the inflation and the interest rates going up may be considered as a certain drag for the economy. But luckily, there are these supporting programs offered by the government with the European funds being the main anchor. And the government continue with these programs also in 2023, the main one being IMM INVEST PLUS, which is dedicated to local companies, but also with some schemes to help Romanian company been coping with either the shocks coming from the Ukrainian war or with shocks coming from the energy prices going up. And in this environment supported by the government, these various programs, the banks are well positioned to capitalize on opportunities. They continue showing good liquidity position and still adequate, the capital position in spite, let's say, of the challenges have been felt via mainly the interest rate going up and affecting the OCI positions in their capital. At the same time, the risk profile continue to be sound with most metrics in positive territory historically speaking, but also if compared to the averages of the European Union. And that would be in a nutshell on macro. Thank you very much. I would now hand on to my colleagues to continue on the commercial performance. Thank you.

Good morning also from me. I will focus on the commercial performance in 2022. And we'll start with the digital adoption and usage of our digital tools by both retail and corporate clients. As you can see on the slide, we have a significant growth of our mobile banking users for retail. You see above 1 million users, which is a growth by nearly 50%, 46% year-on-year. Regarding the transactions which have been performed in terms of number on the mobile through YouBRD and MyBRD, we have a growth of 12% compared to 2021. Traditionally, on the corporate side, we are exclusively digital, and we have 99% of the corporate clients, bigger corporate clients and 97% of the SMEs transactions being performed via digital channels. As you can see, we have also a very robust and serious performance in digital on the trade finance where we are a recognized player in the market and actually a pioneer on this market. Regarding the FX business on the corporate side, 67% of the FX transactions have been performed to -- through our digital tools. Also, a strong performance on the transaction in terms of acquiring, 21% growth year-on-year, marking 200 million in terms of volume on acquiring transactions during '22. What is new on the products and services side, in the digital tools? So you can see here, we have 2 important new entries into the product portfolio accessible through YouBRD. On the one side, we have the credit card being possible to be issued through the interaction with the online banking or through mobile banking and also the instant payments for private individuals, which have been introduced in '22. Also, regarding consumer lending online, the bank has increased the number of transactions of customers which are initiated that way. Regarding the personal data update and onboarding, we have a serious improvement on both mobile banking and website solutions, which enable clients to perform this activity digitally. On the contact center sales and efficiency, you can see we have 31% growth of the products sold directly and 61% growth versus last year of the meetings, which have been organized by the contact center. In total, 1.9 million calls received through the contact center, show the importance of this channel for our clients. Regarding the size and rightsizing, let's say, on our branch network, which is also connected with the digital adoption, you can see we have decreased the number of branches by 36 in '22 compared to the previous year. And presently, we have 460 branches. As a reminder, throughout the program for resizing of our network, we have started in 2016. We see a decrease of 43% in total. And all this, as I already mentioned, is linked to the fees and rate of adoption of digital tools so that we are able to deliver proper service to our clients. And the last point on this slide, we have, in the meantime, 152 self-service points where our clients can cashlessly deal with their accounts. On the next slide related to the lending business. As already mentioned by my colleagues, we have a really remarkable growth on the corporate lending activity, notably on the SME side, up by 43% in terms of outstanding in December '22 versus last year. We have a remarkable performance regarding the support of the SMEs under the SME INVEST program. In 2022, we managed to support 2,000 SMEs and to grant -- approve actually, the loans to them in total amount of RON 2 billion. All these loans have been approved in '22 by almost 70% higher volume compared to '21. However, a portion of them will be still utilized because many of them are investment loans. Regarding the large corporate portfolio where we are traditionally strong, we have also very remarkable growth of almost 19% of the outstandings year-on-year. Same being [ varied ] also for the leasing activity, very strongly supported by our SME client base, 15% year-on-year growth here. Not to forget to mention now sustainable or green finance or sustainable loans in 2022. On the corporate side, we have RON 590 million new loans approved. Together with the retail loans of sustainable nature, we have more than RON 1 billion, as already mentioned by my colleagues. One innovation related to sustainability is the introduction of the Euromentor initiative, which is targeting to advise our clients, the smaller and the SMEs, of course, are more important from this perspective regarding the capacity to adopt and to access the EU funding. Retail lending, also extremely strong with RON 7.5 billion new loans production for the private individuals in '22. Both the housing and the consumer loans performed strongly. While the consumer loans have the second best year in terms of production, the housing loans by growing 58% versus the previous year marked a record in terms of production [ for their debt ]. Also to mention in the retail side, we have introduced 2 new products. Green nature, which enables us to produce almost RON 500 million of sustainable retail financing, also contributing to the road map. As you can see on the next slide, I'm already on the slide related to the green finance and sustainable economy as part of sustainable economy. You can see some details on both the retail and corporate business with some names, which I mentioned related to particular transactions we arranged and structured in evergreen deals in the real estate business on the corporate side. And we have a total financing of EUR 120 million, now expressed in euros on the corporate and EUR 96 million on the retail. As you maybe remember, until '25, we have to produce EUR 1 billion sustainable finance. We are well advancing towards this target. Not only financing but also the spreading and educating and increasing the awareness of society has been our target in 2022. Most notably, the Climate Change Summit which we organized in the autumn, with very big participation and audience rate. And in fact, it has been the major sustainability event in Romania, co-financed and co-founded and co-organized by BRD, with participation also of many of our experts in the panels. You can see further aspects of our green finance and green activity recognition. We have been announced leader in green finance in Romania and sustainable finance solution provider by different magazines. Moving to the next slide, which is displaying the deposit base. Similarly to the growth of the lending activity, we have a very serious and very important growth on the deposits, 17%, as you can see here, year-on-year, driven by the large corporate at 40% year-on-year and retail deposits grew 3% year-on-year. This ensures, of course, a very comfortable liquidity basis for the bank with a loan-to-deposit ratio at 66% and very comfortable liquidity buffer of 35% of our balance sheet. You can see also on this slide that we have performed some innovations on the savings side. And we have a quite good offer, which is not only consisting of deposits, but also asset management solutions. You can see the products we have introduced. And last but not least, we, BRD, has been very active as usual in the FIDELIS Program of the government with 41% market share to distribute the Romanian government bonds to our private individual clients. Thank you. And now I'm passing the floor to Etienne, our CFO.

Yes. Thank you, Maria. Good morning, everyone. I will comment on Slide 16 on the P&L, and let's start with the net banking income. On net banking income, I'm very glad to comment that we had a very strong dynamic of revenues in 2022 based on 2 pillars: a very intense commercial activity with the growth of the portfolio, as mentioned previously, overall plus 10% of the loan portfolio; and also completed with rising interest rate, with a very positive effect on our revenues. The total growth of NBI on a year-to-year basis is plus 12%, meaning RON 400 million, driven especially by the net interest income plus RON 300 million, meaning almost plus 14% year-on-year. This growth of the net interest income is driven again by the volume effect with the growth of the loan portfolio and the rise of interest rate. Of course, first, the ROBOR 3 months with more than 400 basis points year-on-year, but also by IRCC which is following the ROBOR 3 months pattern with a quarter delay approximately. Nonetheless, one point of attention in the net interest income, we also start to feel the cost of funding increasing with the rising volumes of term deposit and the increase in pricing of the term deposit in the context of changing the behavior of clients. When they can, they try to save more and they put it more on their term deposit, and we are also in a competitive landscape where we had to adjust our pricing of term deposit on a regular basis. The second driver of NBI is the [ mix ] of other income with a very solid growth, plus 25% approximately on a full year basis and a very remarkable quarter 4 with almost plus 66%, driven by excellent activity in both sales and trading. And in terms of product, first on FX but also on fixed-income products. The last component in terms of growth of the net banking income are the fees with a mild growth, plus 1.5% approximately year-on-year. This is driven by the growth in the volume of transaction in [indiscernible] and also higher penetration of some value-added products like health insurance products, but it is partially offset or counterbalanced by lower revenues in asset management. It was indeed a challenging year in terms of volume for the asset management in this context of rising interest rates and decreasing value of bonds. And also, we are collecting, but it's completely conscious and consistent with our strategy, we are collecting less fees in e-banking and some over-the-counter transactions as we offer now to our clients the free-of-charge mobile application and package on YouBRD. So overall, a very significant growth of the revenues, plus 12% year-on-year. If we move to next slide, Slide 17, to comment on the operational expenditure. The first comment is that we had to cope with a strong inflationary context, but we deliver a very solid management of the expenditures and we continue our rigorous discipline. Overall, the growth of OpEx in '22 is approximately plus 9%, which represents RON 150 million approximately, out of which RON 20 million are explained by the higher contribution to deposit guarantee fund and resolution fund on which we have no direct control, we are called by the fund managers. Then the second part of the growth is related to staff expenses with plus RON 70 million on a full year basis, representing 8.5%. And it's the combination of several effects. We have the underlying regular effect of the wage increase, of course, but on top of it, this year, we have some exceptional items. First, we had an excellent commercial performance, which led us to increase the envelope for variable remuneration. So we have 422, a slightly higher variable remuneration number. Second, we had, in the context of high inflation, a renegotiation on the collective labor agreement with the union, which drove to the decision to increase several other benefits and especially the meal tickets average, which has a significant increase in the staff cost base. And last one, it's a completely exceptional item. We have decided to grant on extraordinary premium to address the problem of inflation to support our staff with a specific cost book in Q4. So the growth you see for staff costs in Q4, which is quite impressive, this plus 18%, representing approximately RON 38 million is driven firstly by these exceptional items, this exceptional premium and the adjustment of the variable remuneration envelope. And then we have, of course, the underlying growth. Moving to the other OpExs. The discipline remains very good. The growth year-on-year is plus 8%, representing approximately RON 60 million, and it's driven by several components. Of course, we had to suffer some increase in prices due to inflation, especially in utilities which is visible in the Q4 particularly. But also, we had to continue to accelerate the delivery of our digital road map, and we continue our effort in IT. The overall spending, both OpEx and CapEx for IT purposes in 2022, wherein growth of approximately 50% compared to 2021. Nonetheless, in terms of gross operating income, the growth is excellent, and we delivered plus 14% in '22, with an acceleration in Q4 with 17% growth Q4 '22 versus Q4 '21. It enables to deliver a positive jaws effect and a decrease of the cost-to-income ratio to slightly above 50% on a full year basis, declining by more than 1 point compared to last year. And now we move to the asset quality and cost of risk. So I'll pass the floor to Philippe Thibaud.

Thank you, Etienne. Good morning to all. So this quarter is still a based on a very good quarter. In terms of cost of risk, you will see that there is indeed a slight increase in Q4 of our provisions, which reflects a very conservative approach due to the uncertainties, how you talk about comforting the outlook on the inflation, but yet the inflation level is very high. And one of the things which needs to be underlined is that when we look at all our metrics, we see that early warning indicators are getting more turbulent. So we see some months or from week to the other week, we see indicators going up and down and it's a bit explaining why we still have this conservative approach due to the uncertainties and the impact, especially the impact on inflation of inflation on the default trades. But today, what we see is that the [indiscernible] is very, very resilient. We don't have new defaults or rarely new defaults. So that's actually the impact on the cost of risk in terms of Stage 3 impact is negative. So we recover more than we have inflows. But still on the performing portfolio when we look at the S1, S2, we can see that there is a slight shift from S1 to S2 reflecting the certainty, the rebounding indicators. And that means that at the end of the year also, we reflected this in our managerial overlay. So the level of provisions that we have includes, for a large part, these overlays on top of the peers. So you can see on the slide the net cost of risk at 52 basis points at the end of the year. But this is reflecting these managerial decisions to have this more conservative stance because globally, through the quarter, we have a very stable and very comfortable [ cost of risk goals ] actually close to 0. And that brings us to the NPL level, which is historically low at 2.5%. We are very comfortable. We feel also that in any case, should the default rate rise, we would be capable of managing the NPL partly. We have a very comfortable coverage rate, which is something like 12 points above the Romanian averages on that. So all in all, we are very cautious but very comfortable with our credit risk. And on this, I'll pass the floor back to Etienne.

Yes. Thank you, Philippe. So Slide 19 to comment on the capital position. You can see on the chart on the right side that the capital adequacy ratio as of the end of December 2022 stands at 21%. This is a computation of the capital adequacy ratio without the benefit of the quick fix. You remember, this quick fix enabled us to discount part of the negative impact of OCI in the prudential own funds. It was still valid on the 31st of December. Nonetheless, to give you a better picture of the situation into which we enter in 2023, we have decided to present the figure without the quick-fix benefit. So without this quick-fix benefit, the capital adequacy ratio stands at 21%. And if we compare the evolution versus the end of December 2021, we have 4 main items explaining the change. The first one is, of course, the full impact -- the full negative impact of OCI into the prudential own funds, approximately minus 700 basis points, followed by the fact that we have to fund our growth of the loan portfolio, and we had the growth of the RWA for approximately plus 9%, totally consistent with the growth of the portfolio of loans of 10%. The growth of RWA had an impact of approximately minus 200 basis points into the capital adequacy ratio. And to compensate these 2 negative impact in the capital ratio, we have taken 2 decisions. The first one, to issue a subordinated loan with our mother company, Société Générale, which is a Tier 2 instrument for EUR 150 million in June, and it had a positive impact of plus 250 basis points in the ratio. And complementary, we have decided also to incorporate the first 9-month profit, approximately RON 1 billion into the prudential own fund, representing more than 330 basis points additional in the ratio. At this stage, I would like to take the opportunity to add a comment on the dividend. We have decided to also incorporate the Q4 result into the own fund and, therefore, to distribute no dividend coming from the profit of full year 2022. This additional incorporation of the approximately RON 300 million of net profit in Q4 will increase the ratio by approximately 80 basis point additional. We believe it is really important to do it because we are still in a context with a certain risk of volatility in the long-term yields, on which our OCI are very sensitive. And as a matter of fact, there is no longer quick fix, so our sensitivity to the yields is even higher. Maybe you remember that before we commented that additional 100 basis points in the long-term meals will drive to minus 100 basis points in the capital adequacy ratio, but in fact, this sensitivity has almost doubled. And now without the quick fix, if the long-term yields increased by 100 basis points, we risk to deteriorate much more the capital adequacy ratio. So our level of uncertainty is increasing. That's why we want to address this risk and wait to have a better visibility on the context before making any commitment on the dividend. Moreover, we have received some very clear recommendation of prudence coming from the National Bank of Romania in a context where the national committee for financial stability and also some European institutions are calling the banks for utmost prudence regarding their own funds. So in this context, we believe it completely makes sense to incorporate the full year result. And last point, very important, we want to remind you that BRD has proven its commitment to come back on the long term on a regular and consistent payout policy. So we have it in mind. We have already proven our capacity to do it when the conditions allow it. Recently at the beginning of 2022, after the ban on the dividend in the COVID pandemic was lifted, we have distributed according to our consistent practice, and we distributed RON 1.6 billion beginning of 2022 coming from the returned earnings of the profit 2019 and 2020. So please believe that we have still this policy in mind, and we will come back to it as soon as the conditions will enable us to make it in a full security. I will wrap up with the conclusions. So on Slide 21, if we summarize 2022, this year was rather complex due to the dramatic geopolitical events in Ukraine, triggering some volatility in the economic environment and especially market historic level of inflation, more than 16% in Romania. Nonetheless, the commercial activity of BRD was very solid with a strong momentum of loan production in all business lines. Growth of the portfolio in total plus 10%, driven by extraordinary performance of corporate, plus 26%. In the production of private individuals, some records were reached in housing loan production and still a very solid production in consumer loans. We continue to deliver our road map on various value-strategic initiative. The sustainable positive finance impact loans reached more than RON 1 billion in 2022. We have also a solid momentum in the financial market activities, and we continue to deliver in digital solutions, increasing the scope of services and the penetration in our client base with more than 1 million active clients on You. The financial performance is very good with a positive jaws effect, plus 12% in NBI while only plus 9% in OpEx, enabling to deliver gross operating income growth of 14%, despite again an inflationary context. Bottom line, the return on equity which is 16%, improving by several points compared to last year, while we maintain an excellent quality of our portfolio and balance sheet with a historically low level of NPL, solid capital adequacy ratio and comfortable liquidity. So we are solid to deliver our banking activity in 2023. Thank you.