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

Hello, everyone, and welcome to this webcast. And thank you for taking the time to spend part of your summer with us this morning. We will present to you our results that were reviewed by the Board of Directors on the 2nd of August. And as it is usual, they are not audited but prepared under the IFRS norms. If I go straight to the main elements on Slide 4, we had a very good quarter and a very good half year as well with -- on the business side and on the financial side, and I will outline some of the main elements. Starting, of course, with the commercial activity. And here on the lending side, I'm very pleased to report that our overall market share in outstanding -- so on the portfolio is rising on all segments, both corporate and retail with 8% year-on-year for portfolio growth at the end of June 2023 compared to June 2022. And the growth was especially seen on the corporate side, as you see on this slide. with the corporate loan book increasing by RON 2.3 billion, plus 18%, whereas our overall portfolio, all segments combined stands now almost at RON 40 billion. On the retail side, we had a very good production at RON 3.5 billion for the first half of the year, mostly on consumer loans, plus 13% year-on-year. At the same time, we continue to finance the energy transition. And we have RON 1.2 billion of new sustainable final transactions this semester, so which is an acceleration of this kind of business. We see a lot of interest for clients on all segments, not only corporate anymore. We see that we're getting some traction as well on the individual segments. On the deposit side, we had a good growth as well at plus 9% and -- plus 9% represents sorry, RON 4.7 billion of growth of deposits. In terms of digital banking, we reached 1.3 million users on YouBRD at the end of 2023. With an increased usage, almost plus 20% year-on-year at RON 11 million of transactions for the first semester. When we look at the gross operating income, it grew by 16% year-on-year. thanks to -- on 1 side, the increase of NBI and good management on the OpEx side. And our gross operating income stands now over RON 900 billion with an improved cost income ratio that we will be discussing a bit later. In terms of asset quality, we are at historical low on our NPL ratio at 2.2% while our coverage ratio remains high at 74%, well above both European average and Romanian average. The net cost of risk, sorry, is reversal this year of RON 5 million versus contribution, RON 46 million last year. And all of this resulted in net profit increasing by 24% at RON 768 million, whereas the return on equity stands now at 20%, which in itself is a very good result. And I will now pass the floor to Etienne to talk about first, the economic -- macroeconomic environment.

Good morning, everyone So on Slide 6, some information on the macroeconomic environment. First, we can mention that the GDP of Romania posted a growth of 2.4% during Q1. This is still well above the European Union average growth at 1.1%. However, we must also notice that it's lower than the previous quarters of 2022. So there is an economic slight slowdown in Romania as it is globally seen across the European Union. The driver for growth of GDP remain the consumption of households and the fixed capital formation which are two very positive news. The overall estimation for GDP growth in 2023 are still in a positive range between 2% and 3%, might be even slightly higher, if everything goes well in H2. Regarding inflation, the positive news is that we are confirming the decreasing trend of inflation in H1. At the end of June, the 12-month inflation was at a level of 10.3%, declining by approximately 6 percentage points compared to the end of 2022. However, we also let's still pay attention because it is still a double-digit level of inflation. The forecast for the end of the year remains at high single-digit, around 7% according to the latest National Bank of Romania forecast. Now we can move to the next slide, Page 7, to comment on the interest rate and the liquidity situation at market level. First, we confirm that the National Bank of Romania maintained stable its monetary policy rate at 7%. It was even concerned in July. The liquidity situation overall in the market is very comfortable, and we have a liquidity surplus in RON at national level. Regarding the interbank rates, let's mention that the above 3 months continued to slightly decline since the beginning of the year, reaching the level of 6.5% at the end of June. And -- also important to notice that at the end of June, the rate curve of the Romanian RON was almost flattish as the long-term yields, the 10-year yields were at approximately 6.6%. Coming to Page 8. Just to comment on the main national program and European programs to support the development of the economy, we highlight here the 3 main topics. First, the national recovery and interest plan is still ongoing. And Romania has fulfilled several milestones and targets to enable the unlock of the second payment tranche of EUR 3.2 billion. We are still forecasting it in the coming months. Regarding M&A Invest plus program. As already mentioned, it is extended until the end of 2023. With an increased envelope reaching RON 4.1 billion equivalent in terms of warranty. And the last driver to comment is the decision by the World Bank Group to grant a second development policy loan to Romania -- of approximately EUR 600 million equivalent. On Slide 9, a brief overview of the banking sector, which remains very sound and solid in Romania. The overall capital adequacy of the banking system is very satisfactory, slightly below 22% the liquidity situation as well, for example, the loan-to-deposit ratio is just slightly below 70%. In terms of asset quality at market level, it is also very good with 2.7% nonperforming loan ratio, which is below the recommendation of EBA of 3% and a very comfortable coverage ratio at 66%, which is well above the European Union average. One interesting also comment on this slide on the bottom right chart, you can see that we have observed in the previous quarters, an increase in the share of FX loans, especially euro loans within the overall loan portfolio. But during Q2 2023, this trend has stopped, and we can see that at the end of June, the share of FX loans has increased in the overall loan portfolio at the market level. And now we move to the Q2 and H1 commercial results, and I give the floor to Maria Rousseva.

Thank you, Etienne. Good morning, everyone, also from me. On Page 11, I will detail what was already mentioned by Francois in the beginning regarding our digital transformation, which indeed is accelerating. As mentioned, 1.3 million mobile banking individual clients recorded, which is a 45% increase year-on-year. And the transactions performed through YouBRD is, in the meantime, quite high with 11.1 million number of transactions in the first half of this year. Regarding the operations which are -- transactions which have performed through this tool, we are very glad to confirm that now we have also quite high usage of deposits and savings account services, which are now more than 70% of them performed through YouBRD. As usually, we report very high and stable high usage of digital channels by our corporate clients. both SME and large corporates, which is confirmed also in the first half this year. Traditionally, our bank is considered a pioneer in the trade activities, and therefore, we have quite high percentage of usage of our digital channels from the [indiscernible] business, as you can see here. And of course, also the FX activity for corporate clients happens mostly through the digital tools. Acquiring also recorded 23% growth year-on-year and it's also in line with our strategy. Regarding more details of our functionality in You. To be more concrete, what we have developed in the first half of the year. We have now the landing page for loans and credit cards available also in the mobile app. The visualization of the [indiscernible] management products is also there, and we have improved our security features. Now I would like to detail something which is especially important, which we saw in the last days of the last month, actually, after the June results, but I want to report it because it's extremely important. In the meantime, we see that the digital sales, the share of digital sales in the YouBRD for private individuals has increased in terms of percentage from 10% to 25%. So it's very much confirming our ambition and our strategy to move progressively our daily and including consumer finance activity on the store. Regarding the corporate segment, which is also valid for the small business, we have now also the instant payments available in our tools, tool called the FD Officer online tool for corporate clients. Regarding the network, as you can see, we have decreased by 40 branches of our network to 441 as of June 23. And to confirm the trend from 2016, we have a decrease of 46% of the whole network. When we mentioned here the expanded cashless approach, we have, in the meantime, 169 24/7 points in our network. Which is 22% higher year-on-year compared to last June -- June '22. I would like also to detail here something which is not on the slide to give you a better view In H1, we have implemented more than 600 new machines if we count our ATMs and the [indiscernible]. So as you see, our commitment to digital transformation in a balanced manner, combined with solid prices in physical network is confirmed also in this H1. Now I will move to Page 12, where I will detail the performance of the lending activity of both retail and corporate. And I'm very Happy to share with you something in more detail, something which Francois already mentioned in the beginning. We not only grew our production and our outstanding in both segments, retail and corporate, but we managed to increase our market share, which we find as a confirmation of our policy to grow our business on the market. And all the efforts which our commercial teams have performed now also shown in this increased market share across products and the growth segment. I will here talk about the lending, of course, because this is a slide that gets you to lending. As you can see in the corporate, we had almost 18% growth year-on-year as the outstanding portfolio. While for SME, the growth was 29%. For the large corporate, it was still a very high 12.2% year-on-year. And the leasing portfolio outstanding increased by 18.2% year-on-year. You can see that our strategy to accelerate our presence in the SME market in which we have been a bit underrepresented in the previous period, it's now really confirmed that we can see that in the meantime, we have a very balanced portfolio in the corporate segment between SMEs and large corporates with the respective contribution to the results of the bank exactly as we wish to see in our strategy. And then I would like also to mention the market share regarding the loans to corporates, which have increased year-on-year our market share by 60 basis points. Regarding retail lending, despite the slowing down economy with the respective impact of the capacity of the consumers to have additional indebtedness, we see growth of our outstanding by 3.4% year-on-year, which has been supported by a very solid growth of the production. And I can mention here that in the market share of production of consumer loans in the second quarter was 17.7%, which is a record performance, actually. And these, along other -- the other segments, which performed also better than the market, have led to growth of the market share in the retail lending activity as well. And the outstanding is higher compared to last year for individuals by 20 basis points. So small business has similar growth as the corporate segment. It has a growth of 16% year-on-year, which is also in line with our strategy. Now moving to Page 13 to start before giving further the floor to Etienne. We'll start on the commercial side with deposits, you can see almost 9% growth year-on-year in the outstanding deposits, generally attractive funds, 13.3% growth on this corporate, 6.6% growth on the individuals, maybe for your information, a few details on the structure. So we have seen that in RON, our growth was mostly in the term deposits. While we have been in both retail and corporate, while we have been quite stable in the current account, which is very good news because the current accounts have not been victims of this growth of the deposits. We just attracted from outside new term deposits. Regarding the euro, this is what I mentioned was on the wrong side. Regarding the euro, we are observing the same. We have more current deposits in euro than before, obviously, because of the growing interest rates. And we are adjusting that our next year, Etienne will detail also accordingly, our pricing structure on all segments in order to deal with these changes of interest rate and behavior of our clients.

Yes. Thank you, Maria. Indeed, we had to adjust our pricing of term deposit to remain competitive in the market, it was pretty successful on the currency of RON, as explained by Maria. On euro, we are at the beginning of the changes, if I may say, because of the increase in euro rates only started during Q1 this year to be really significant. And we observed the change of behavior of the clients. So we observed some shifts from current accounts to term deposit and also some net outflows to other instruments with a better [indiscernible] on euro. So this is a topic on which we are very vigilant, and we are regularly observing the market evolution to stay competitively in terms of pricing of our term deposits in euro, our strategy being to maintain a good level of market share, a good level of liquidity without compromising our profitability, of course. The overall liquidity situation is still very satisfactory. Our net loan-to-deposit ratio stands at 67.7% in slight decline compared to last year because the deposits grew faster than the loans despite the solid growth of loans explained just previously. The liquidity buffer is still very solid and diversified. We have equivalent, RON 25 billion in total, representing 32% of our total asset with different elements. Basically, we have RON 13 billion of gold at fair value [indiscernible] RON 4 billion of [indiscernible] is at historical cost and RON 8 billion equivalent in Interbank and cash at the National Bank of Romania. Last point we can comment on this slide is the performance of BRD Asset Management. So it's off-balance sheet items for us. They were -- they confirmed their positioning the firm largest asset manager in the market with more than 19% market share with RON 3.5 billion of assets under management and with a high single-digit increase during H1 2023, which is a very good news, knowing that 2022 was difficult for asset managers in the context of changing rates. And the last comment on BRD Asset Management. They continue to innovate with very smart ideas, and they recently launched a new ESG strategy fund, which is a premier on the local market. And now we can move to the profit and loss, Page 14, to start with the revenue. So I'm very glad to comment that the growth of NBI was really excellent in first half 2023, with plus RON 220 million additional or plus 13.4% compared to the same period last year. The 2 main drivers for growth are: first, net interest income with a growth of RON 206 million, representing plus 18.3% and this growth of net interest income is composed of two main components. First, we have obviously the volume effect with a growth of approximately 8% of the outstanding portfolio of loans. And the second effect is the rate effect, which is a bit more complicated to analyze. Overall, it has, of course, a net positive impact as we mentioned here, the main index for us, the [indiscernible] finance grew by more than 230 basis points during first half '23 compared to first half '22. This has definitely a positive impact on the interest income. Our interest income, for example, in the first half, we are very close to RON 2 billion. We were only RON 9 million below the RON 2 billion net interest income growing by more than 50%. But on the other hand, we have also -- we have to cope with an increasing cost of funding, especially driven by the fact that we have more term deposit and in RON, it's very visible. Our term deposit in RON the PI segment grew by 100% and on corporate segment by more than 25%. So the overall growth of the interest income -- interest expenses, sorry, was more than 4x. But Overall, the growth of net interest income is plus 18%. The second driver for growth of the NBI is the trading activities which are positioned in the item of other income. The overall growth is also plus 18% on the period, representing plus RON 28 million. It is mostly driven by 2 main products, the foreign exchange and also the fixed income. We have this semester, no material miscellaneous effect in other income. The third item of the NBI is the net fees and commission. On this item, we are slightly declining in H1 '23 compared to H1 '22. The decline is minus RON 12 million or minus 3.4%. There are 2 main components, quite well balanced, minus RON 6 million each. The first one is the base effect, maybe you remember that last year, when the war in Ukraine started, there was some kind of emotional effect in Romania, and we observed a significant increase of cash operations at the ATM and at the cash desk, and this effect generated higher fee income last year. We don't have any longer of this effect, hopefully, in 2023. The second effect is more structural. The penetration of the packages is continuously growing, which means that we are collecting more fees on packages [indiscernible], but we are -- and we accept it, losing some fees per operation, especially at the cash desk or at ATM because all these operations are now fully embedded in the packages. The overall net impact is minus RON 6 million on the period. And at this stage, I would like to mention 3 things. We observed that on the market, it is consistent this trend, and our competitors focusing primarily on retail banking, have also posted a slight decline of the fees and commission in H1 2023. Second, when we do regularly benchmark of our different indicators. And based on the full year 2022 data, we observed that BRD is very well positioned in the ratio of fees and commission per client or fees and commission within the overall NBI. And we are rather in the upper part of the market on these indicators. And the last comment is that we are very conscious of the importance of fees and commission in our structure of revenues. So we are regularly making analysis and taking actions to reprice in a relevant manner, what we can reprice according to the market practice. And we have started this kind of actions in Q2, and Q2 is already better than Q1 in terms of fees and commission. So overall, we posted a very solid growth of NBI in H1 2023. Now if we move to the OpEx on Page 15. The OpEx are also growing, mostly influenced by first, the high level of inflation, still and the fact that the labor market remains very, very tight. The overall growth of OpEx in the first half is RON 91 million, representing 10.7% with two main components. I exclude the contribution to deposit guarantee fund and resolution fund as the overall cost is stable year-on-year. So the 2 main drivers for growth of the OpEx are: first, the staff cost with a growth of RON 47 million, representing 11% growth, and there are two main components in this growth. The first one is an exceptional item. You remember that last year, we signed a new labor agreement in June 2022. And Therefore, in first half 2023, we had the full effect of these new labor agreements, while in first half 2022, we had almost no effect of this agreement. This agreement was mainly focusing on the repricing of the mill tickets and some other additional benefits. The overall effect of these new benefits represent RON 18 million in the first half, which means 40% of the overall growth of staff costs in H1. The remaining part, RON 29 million growth represents the increase of wages as we have a yearly increase of wages. And it is partially compensated by a slight negative volume effect as we continue to make structural optimization, especially in the network. But we must also admit that this structural optimization is going now at a slower pace than it was in the previous years. The second driver for growth of the OpEx is other expenses, and it's mostly driven by our strategic efforts in IT and external services that we use to develop our IT and deliver our transformation road map of digital. If we exclude these items, the run-the-bank cost without IT and external services remain under a very, very good control as the growth was only 6% to be compared again to inflation at double-digit 10%. It enables to deliver a substantial growth of the gross operating income by 16% in H1 with a positive jaw effect, enabling to reach a cost-to-income ratio at 47% in Q2 which is improving compared to last year. And the cost-to-income ratio for the first half is slightly above 50% at 50.7% is declined by 120 basis points compared to same period last year. And now I give the floor to Philippe Thibaud to comment on the cost of risk and the asset credits. Philippe, the floor is yours.

Thank you, Etienne, and good morning, everyone. So on Q2, things are improving. We did better than last quarter, and we did better than last year. So when you look at the Slide 16, you can see that our cost of risk was a net release of 6 bps. You see also that from a quarter to another, we are closing around 0. So we have a very stable cost of risk. And when looking at the guidelines or our expectations for the whole year, I believe we can be slightly more optimistic than what we were previously in terms of bps usually, we are between 30 bps and 40 bps in cost of risk on the early basis. And when we look at where we are today compared to last year, when we had the war in Ukraine, we are on the rising inflation. What we see today is that there are still no major impact on our portfolio. The portfolio is being very resilient. We see that the past dues payment behaviors are not deteriorating. So we are quite confident that we can do better this year than what we did in the past unless there is obviously something major happening. We see it also reflecting in the NPL. We had a relook NPL ratio, the lowest again last year, we thought that with 2.5 we reached the lowest level, but we did even better, thanks to also good recoveries, which also explains why the cost of risk translates into [indiscernible]. And we have a very comfortable NPL coverage with better than the average of the sector, which is the comforting for us. So strong portfolio. No change in the behavior of the clients and the difficulties of the clients. So, so far, we have quite a good outlook on what's happening this year. Considering also the macroeconomics guidelines that we presented earlier by Etienne. So that's it for me.

Thank you, Philippe. I will comment briefly on the Slide 17 on the capital adequacy ratio. So we have a very satisfactory capital position at the end of June, reaching the level of 22.4%, which is almost stable compared to June 2022. But I will guide you through very briefly the waterfall, you can see on this chart because there are several important component to keep in mind. You remember that we were a bit concerned and very cautious on the end of the quick fix release, which occurred on the 1st of January 2023, because it has an impact of almost minus RON 900 million of additional negative OCI into our own fund representing approximately minus 300 bps negative impact in the ratio. And to offset -- to address this problem, we have decided to fully incorporate the H2 profit into our credentials onsets. It was an amount of approximately RON 600 million with a positive impact of 200 basis points in the ratio. It enables us to support the growth of our loan portfolio with a growth of 8% translating into a growth of RWA a bit more 26% and a negative impact in the ratio of minus 138 basis points. But the good news is the long-term yield relaxed. And it enables to decrease the negative impact of OCI into the own funds for approximately RON 600 million, representing a positive impact in the ratio of 260 basis points. So all in all, we have almost a stable capital adequacy ratio. Keeping in mind that we are still within this ratio of 22.4%, still a negative weight of the negative OCI representing more than 400 negative basis. So we think we are very solid in terms of capital. And the last comment on this slide is just to confirm that regarding the new requirement of MRL, minimum required own funds and eligible liabilities for all the recovery and resolution topics. We are fully compliant with the requirements set by the National Bank of Romania posting a ratio of 32% at the end of June. This is all for my part, and I give the floor to Mr. Claudiu for the conclusion.

Thank you. So we are now on Slide 19. The conclusion. Indeed, we had a very good performance in H1 2023. It was a very dynamic semester and very dynamic second quarter as well. on all products and segments as we have seen, except, of course, the known market slowdown in mortgage loan given the level of interest rates and therefore, the impact on the housing demand in Romania. We ended up, but again, with net loans outstanding increasing by 8% at the end of 2023 and again, an increase in market share. On the deposit side, Etienne has commented a lot already the margin effect due to the switch from current account to term deposits. And therefore, it was important for us to continue the increase of the amount of deposits to mitigate this margin impact. And indeed, we had a nice increase there, compensating somewhat the switch from current accounts to term deposits. At the same time, digital adoptions continue to grow. And this is very positive for 2 reasons. First of all, it allows us to answer to customer demand. And you know that Romania -- in Romania, customer are very digital savvy, and it's important to continue, therefore, to have new services offered to them, and we are continuing to do so. But it's also -- and this is the second positive element of the digital adoption is that it allows us to better manage our cost base because it allows us to continue to work on the network optimization. And you saw -- and you remember what Etienne was telling us about the fact that the run-the-bank is increasing only at half of the -- roughly half of the inflation level. At the same time, the NBI grew by 13.4%, so above inflation. Thanks, of course, to the commercial activity. And you saw the results on the gross operating income and on the net profit increasing by 24%. In terms of capital, the very positive news is that we have been able now to fully absorb the end of the OCI good fix. We have long-term interest rates that came down nicely as well compared to previous quarter and the end of year 2022. So all of this gives us a lot of confidence in our capacity in the future to continue to grow the business and deliver value to shareholders.