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

Good morning, everyone, and thank you for interest in the presentation of our financial results as of third quarter. Before we start, I just would like to remind that these are 9 months unaudited financials. However, they are prepared in accordance with the IFRS rules. I'll go now to the first page, which is Slide 4 of our presentation, with the executive summary of the highlights of our financial performance. In the first 9 months of the year, we had the growth of our lending portfolio by 10%, which actually has been in all segments, but mostly and the biggest growth has been recorded in the corporate area, with the focus on SME business as in previous periods, GSME has performed as per our road map -- road map, a strategic road map in a very good manner since the beginning of the year. Regarding individual loans and retail in general, we have also very good performance, especially on the field of consumer lending. And we managed to achieve a 16% growth on a year-to-year basis for the first 9 months. The overall loan production for individuals recorded RON 5.6 billion for the first 9 months of '23. This is on the lending side. Regarding another part of the lending, which we consider very important from a strategic perspective, our sustainable commitments. We have approximately RON 1.6 billion of new sustainable financing or sustainability-linked financing in the first 9 months of this year. Regarding deposits, and my colleagues after will detail on the impact, we have a growth of 10% year-on-year as of September across the business lines, both retail and corporate. Regarding our -- another important strategic focus, the digital advancement of the bank and the digital usage. We have continuous growth of the subscribers of our mobile tool for private individuals, YouBRD, and we reached 1.33 million users as of September. And for the first 9 months, we have 17 million transactions performed through this tool. Regarding the NBI, the revenue side, we have a remarkable growth, which is mostly driven by what I already mentioned regarding the lending activity, both because of the volume effect, but also because of the fact that the interest rates have been quite high, given the environment of high interest, which prevailed in Romania. Regarding the expenses, that has been under very strict control. And actually before, below the inflation since the beginning of the year on average, therefore, we reached GOI, which compared to previous year for the first 9 months, is growing by 14% year-on-year. Regarding asset quality, we have a historical low level of NPL, only at 2.1% as of September, which is -- which was by both the write-off of certain bad loans, but also because of the growth of our overall portfolio. And the fact that we have certain integration provisions from previous periods with already built provisions. Therefore, for the first 9 months, we are having RON 35 million compared to minus RON 37 million in 2022. By this -- this line is actually a contributor to the financial results of the first 9 months. And finally, all what I mentioned, commercial and financial performance results in increasing net result by -- and by 21% as of the September figures. The total amount is RON 1.23 billion. And this results in a return on equity of 21% as of September '23. Now I can give the floor for the macro. So before that, I wanted to make one more remark related to our ESG commitment. If you remember, last year, we had -- now I'm on Slide 5. We launched the Climate Change Summit, the most important event of this type in our region. And this year, October 20, we had the second edition of the Climate Change Summit. Few statistics. We had more than 1 million people across the world, which managed to watch these events online. And we had main speakers locally, with physical presence of over 1,700 people there during the 2 days of the event. Now I will pass the floor to my colleague, Claudiu Cercel, to talk about the macro.

Thank you, Maria, and good morning, everyone. As customary, I will briefly touch some features of the macro and banking landscape. First on macro. Our good results where there, despite an environment characterized by slowing down in the economy, it was benefited in the first quarter, it continued alongside the same trajectory in the second quarter. And for the third and fourth quarter, there are some positive signs, but still, for the whole year, we expect the GDP growth, which is inferior to the good performance of 2022, most probably in the region of 2%. IMF expectations are slightly above 2% for this year, and higher for 2024 at 2.75%, whereas for the Romanian government, their expectation for this year, it's still among the highest at 2.8%. The economy is decelerating, which is not necessarily a good point. But the good point with the deceleration in the economy is that the inflation is going down too, after having peaked in double-digit territory last year in November, it started going down. Latest figure is below 9%, September 2023. And for the year-end, the expected inflation figure is 7.5%. This is also what the Central Bank expects, slightly higher than the previous expectations of the same institution. But even though it's gradually correcting, it's still outside the variation band of the Central Bank, which is 2.5, plus or minus 1 percentage point. Even though the inflation is going down, it's not yet well anchored, and that's the reason why the Central Bank refrained as of yet from operating rate cuts. They will probably not cut this year. Expectations for the first cut are coming from most analysts in the second half of next year, even though as Romania enters into an election year, we may probably see some moves even in the second quarter of 2024. At the same time, the banking sector shows significant liquidity surpluses, which are putting some pressures downward on rate. And this is seen in more evolutions. It's corrected gradually. It's now around 6.3%. It could go even lower, having not been for the floor set up by the Central Bank at 6% via its deposit facility. On the banking sector, it continues showing comfortable solvency and liquidity indicators, so not much changes in this quarter. And from an asset quality perspective, Romanian banking sector is now classified as a low-risk one, on 2 important metrics used to describe this NPL ratio below 3% and the coverage ratio above 55%. And maybe one last point on various supporting programs of the economy. On the natural recovery and resilience plan, the country enjoyed the second payment of EUR 2.76 billion under recovery and resilience facility, and this was made possible by the milestones that had to be set and where by the country. The government-sponsored IMM Invest continues till 2023 year-end. And maybe it's interesting to mention that this government [indiscernible] to corporate are now close to 20% of the sector's loan portfolio, which is showing the degree of the support coming from the government for the evolution of loans. And also some good news on other types of funds that are used in the Romanian economy, supporting various sectors as deal recently signed by the country with Canada to benefit from a financing of EUR 3 billion for the new projects on nuclear reactors in [indiscernible], and other programs coming from European Council or European Commission related to various more granular support. And that would be it for this part. I will now hand to my colleague, Madalina Teodorescu for more in-depth commercial and financial.

Thank you very much, Claudiu. This was mentioned in the summary by Maria. The first 9 months of the bank in terms of commercial performance were very good. This was basically supported and sustained by a digital transformation that kept the rhythm. Figures are relevant for retail, above 1.3 million users in the Internet banking, 36% year-on-year growth. 17 million transactions, again, 39% year-on-year growth, while the sales of deposits, both term and saving accounts actually above 70%. In the corporate business, we actually registered as well as very good performance of services into the digital environment, above 95% of the transaction has been performed via digital channels for both large corporate and SME. In terms of L/Cs, LGs and FX transaction, 60% and above all the services have been performed via digital channels. POS split -- extended POS split provide a 23% year-on-year growth, reaching 177 million transaction into the acquiring business. Apart from the growth into the digital activity, we as well enhanced the digital capabilities while focusing on efficient flows, optimizing the processes into the online onboarding with a record of 15 minute into a normal line onboarding and a record of 10 minute into the online lending. Capabilities of voice over readers for person with visual visibility, reinforcing our commitment on diversity, and push notification extended for the inflow transaction. All these, we actually developed while basically optimizing the network footprint, reducing the number of branches with 38% year-on-year, 47% since 2016 when the business model conversion and efficiency has been started, as well as expanding the cashless concept, now we are actually having 24/7 banking points in 172 locations, 20% year-on-year growth. Now moving into the lending activity. Just to mention that the bank actually increased its market share, reaching 10% loan market share after the first 9 months, with a very good performance in corporate and the same increased performance in individuals, 14% market share in individual, 7.1% both growth 50 and 60 basis points in terms of market share. Very good performance in new business activity, strong advance in semi financing, leveraging as well on the governmental program. 26% in SME financing growth, and 30% increase in SME invest. Large corporate portfolio growing by above 16% year-on-year as well as leading portfolio of 20% year-on-year. In retail lending, I would say, a good momentum. Despite the market environment, we seek to grow above the market, with a 5.4% year-on-year growth on the net loan outstanding. That was supported by both individuals from the small business -- the small business. Housing loan production, reflecting the weakening of the market as well as the growing trend of the interest rate. However, our market share has been increased in mortgage as well, while the performance of unsecured consumer loan registered best momentum, reaching 16% year-on-year growth in the first 9 months. Commitment for the sustainable economy. As it was mentioned, we actually reached sustainable financing, almost 1.6 billion during the first 9 months. And this actually commitment has been actually recognized. We [indiscernible] to have a mortgage loan awarded by Association for the Promotion of Energy Efficiency in Buildings, as well as Romanian Green Building Council for the Green Mortgage Program Development. Robust and diversified deposit base. In terms of deposits as well, the bank market share has been increased 60 basis points in the first 9 months, reaching 10.6% market share end of December, with important growth in both individuals and to the corporate companies. Net loan deposit ratio reaching 68.2% until the end of September, more or less stable versus end of September '22. High liquidity -- sorry, diversify -- and we actually have a diversified deposit base. A part of a solid growth in retail and corporate deposits, we basically increase as well into the off-balance sheet product. Asset Management fund being actually in the mutual funds, 19.1% market share, reaching 3.6 billion in the assets under management, as well as an important participation of the Fidelis program, 46% market share on the Romanian government bond issuance for individuals held during July and October. I will pass actually the floor to my colleague, Etienne, talking about liquidity position.

Thank you, Madalina. Good morning to everyone. Indeed, I confirm that we have maintained a very comfortable liquidity position, with a granular deposit base composed by almost 2/3 of retail deposits. Our net loan-to-deposit ratio at the end of September is slightly above 68%, which is more or less stable compared to September 2022, but growing compared to December 2022 by more than 1.5 points. Our liquidity buffer remained very ample and solid, representing 31% of our total assets, which means RON 24 billion equivalent, composed of 3 main categories. First, all to collect and sell portfolio of government bonds, representing approximately RON 13 billion of value, including the negative revaluation which is balanced by CI, minus RON 1.5 billion, fully included. Second, the portfolio of all to collect government bonds, representing approximately RON 5 billion, and last RON 6 billion of cash and -- cash available and interbank deposits. So again, a very comfortable liquidity position. And now I move to the Page 15 to comment on the profit and loss statement. And I'm very pleased to say that, first, starting with the revenues, we have posted the new best quarter in net banking income, reaching a level of RON 969 million, growing by approximately 8% compared to Q3 last year and also plus 4% compared to Q2 2023. So these revenues are definitely supported by the significant volume growth and also still enjoy the elevated level of interest rates. So the 9 months performance in NBI is above RON 2.8 billion, growing by 11.4% or almost RON 300 million in the first 9 months. The first driver is the net interest income component, growing by plus 16.5% year-on-year and mainly driven by the volume effect representing approximately plus 10%, as mentioned previously in the loan portfolio. And on the 9-month basis, still benefiting from the positive interest rate effect, as the ROBOR 3 months average on 9 months 2023 is more than 100 bps above the same average for last year. However, we have to highlight the fact that this effect of interest rates is progressively fading away. As we can see in the third quarter, the average ROBOR 3 months Q3 2023, is already below the average for the Q3 2022. However, again, the volume effect is predominant, and we delivered the growth of net interest income in Q3 by 13% above Q3 last year. We can also comment on the fact that in our deposit base, as you know, the term deposit grew significantly during the course of 2022 and 2023. Nowadays, the cost of interest is -- has grown significantly. However, it grew less than the revenue, of course, coming from interest rates. Second driver for the growth of NBI is other income, with an average growth over 9 months close to 7%. It is explained by the fact that we have a very solid activity in trading and sales, very solid and also less volatile than it was 2023 -- 2022, sorry. As you can see, the average quarter in 2023 is approximately at RON 86 million per quarter, with a maximum variance of RON 6 million per quarter. While in 2022, the average quarter was around RON 80 million per quarter, with a variance up to RON 16 million. So you can see that in Q3, we have a big effect because Q3 2022 was the best quarter in other income last year, while we have the average quarter this year, so we post a decrease in Q3. But on the 9-month basis, we are visibly growing by 7%. Last comment on the composition of revenues is regarding the net fees and commissions. Net fees and commissions are in slight decline after 9 months compared to 9 months last year by RON 12 million or 2%. However, it is continuously improving this year, because you can remember probably that after 6 months, we were 3% below same period last year. And after 3 months, we were 4% below last year. So we are closing the gap step by step and working on collecting better fees. The explanation of the decline are still the same. It's the increasing penetration of our packages and our digital solutions on which we collect less fees than in the previous model at the better service. We have also a base effect regarding the cash transaction, which were extraordinarily high in 2022, and they are back to a more regular level of activity in 2023. But on the positive side, we must highlight the fact that we were, in Q3, especially, very dynamic in brokerage fees, which was RON 6 million above the standard quarter in this respect. And we are also growing our penetration in insurance activities, growing by a few units of million RON this year. This is for the revenue part. And now we can move to the Page 16 to comment on the operating expenses. Thanks to our very good discipline on operating expenses, we were able to contain the growth over the first 9 months in a high single-digit level at plus 9%. And even if we compare the Q3, the growth is even below plus 6%. It is -- the growth of OpEx is first explained by the staff expenses, of course, where we have a growth of almost plus 9% on a 9-month basis, for which an important part of the explanation is coming from the base effect, because you remember that last year, we negotiated a new overall labor agreement, with new benefits for our staff. And we have the full impact of this new labor agreement on 9 months 2023, while for 2022, at the end of September, we had only 3 months of impact. So if we compare overall the growth it's 9%, but if we compare on a comparable basis Q3, the growth is only plus 5% on the expenses. We still benefit from the decrease of the total number of FTEs. However, we must mention that it is now at a slower pace than it used to be, so the financial impact is less significant than it was before. The second important component in other expenses is mostly our effort to transform the bank and our commitment to deliver our IT road map. The growth of other expenses over 9 months is slightly above 10%, representing RON 58 million. And this RON 58 million is mostly driven by IT efforts. Approximately half of the effort is coming from IT, and also external services where we have an effort to change the bank with the support of external providers supporting the transformation of IT especially. And also, we must mention some increase in the [indiscernible] part, especially on cash transportation, where we have still high volumes but also a price effect coming from the minimum salary increase and the inflation pressures. For the rest of the run-the-bank costs, meaning real estate, logistic communication, et cetera, we content them well below inflation with single-digit growth over 9 months. The combination of strong increasing revenues and well contained OpEx enable us to deliver the best quarterly gross operating income ever, above RON 5 billion, reaching RON 523 million in Q3, growing by almost 10% compared to Q3 last year. And the growth of the gross operating income over 9 months is close to 14%. Delivering the positive [indiscernible] effect and also to improve the cost-to-income ratio, in Q3, we have decreased it to a level of 46%, minus 1 point compared to same period and same variance on a 9-month basis, minus 1 point, reaching 49% at the end of September. And now I give the microphone to Philippe Thibaud, to comment on asset quality and cost of risk.

Thank you, Etienne. Good morning, everyone. It may seem paradoxical to release a bit of provisions in Q3, and you saw that globally, until now, we have had quite a favorable position in terms of cost of risk. Comes from our -- it reflects the fact that we have a very good performance in recoveries. We still see no [indiscernible]. And we also see that in terms of data dues and roll rates, clients are doing very well. So these results in, again, a very low NPL. So it's again a quarter where we have a historical low 2.1%. And we are very comfortable with our coverage rate, which is at 76%, way higher than the Romanian peers and even the European peers. So still very strong book. And no major or nothing really significant to report in terms of cost of risk or movements in the portfolio. So very stable cost of risk. So now back to Etienne.

Yes. Thank you, Philippe. Next page, Page 18, to comment on the capital position. So I'm glad to tell you that we have a very solid capital position, and we are in capacity to propose the dividend distribution. So let's start with the capital adequacy situation. At the end of September, including the proposal of dividend distribution, we would reach a level of capital adequacy at 19.4%, so well above our overall capital requirement, including the new [indiscernible] increase, which occurred in October. The main components of the waterfall, if we compare to September 2022 are the following, a quick recap. Of course, we integrated our profit -- H2 profit of 2022, creating approximately 200 basis points additional. However, we had to suffer the end of the quick fix relief on OCI, demeriting a negative impact of more than 300 basis points. Then during the first 9 months of 2023, the pressure on long-term needs decreased and the OCI impact improved, and we were able to recover the negative impact of OCI. And we added more than 260 basis points in our ratio. Last event of the first 9 months is, of course, the growth of our portfolio of flows, generating a growth in RWA and a decrease of approximately 180 basis points of the ratio. And the last element is a proposal of dividend distribution, with an impact of approximately minus 200 basis points in the ratio. However, ratio remaining well above the requirement and still incorporates a significant negative impact of negative OCI above minus 300 basis points in this ratio. So our proposal regarding the dividend distribution is as follows. We propose to distribute the dividend coming from the profit of 2022 at the level of 50% out, representing RON 643 million, and it will be subject to an approval by a general shareholder team to be scheduled in December 2023. This calibration of the payout ratio is below our historical level of payout. However, we keep in mind our intention to convert back to our regular ratio of payouts. But we believe that in the context where we are called to pronounce and cautious attitude regarding the demand, this is a well-balanced proposal at 50%. Moreover, we have to comment also that we are working on incorporating part of the H1 profit, before the end of this year, to reinforce the ratio at the December closing, calibration in progress. So that's it for the capital position and the dividend proposal. And now I give back the floor to Maria Rousseva for the conclusions.

Yes. And finally, to confirm once again that both commercially and financially, we had very good performance in the first 9 months. On the commercial side, we had both in lending and in deposits, plus 10% year-on-year. Both corporate and retail segment performed in a very strong way. Our deposit base is very diversified and quite granular. Therefore, we feel very comfortable liquidity. Regarding the digital road map, we are progressing. And as I mentioned already, our YouBRD mobile is having above 1.3 million users as of end of September. On the financial side, following this very good commercial performance, our revenues grew, mostly because of the strong volume growth of the lending facility. Regarding the cost, we would like to once again point out that we kept them under very strong control and discipline. Regarding the quality of assets, we have historical low NPL ratio and very good coverage ratio. On the profitability, all this resulted with higher than 20% -- more than 20% year-on-year net profit and return on equity of 21% in the first 9 months. As Etienne mentioned, we are very comfortable regarding the capital and the liquidity. Therefore, we are capable also to distribute the dividend as just described. So thank you for your attention. Now we are open for questions.