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

Thank you, everyone, for joining our webcast. First, we will start with the usual disclaimer that the results, which we will present to you today, are the preliminary consolidated ones of BRD Group as of end of March '24, and they have been approved by our Board of Directors on the second of May. Of course, they are in accordance with all applicable rules and notably, IFRS. So I will move now to the first slide of our presentation, which is the executive summary to shortly describe our performance in Q1 '24. As you maybe remember from the previous quarters, we continue with a very good growth of our commercial activity, both in retail and in corporate business. And if you look at the right side of our slide, you'll see that our loan portfolio grew by 12.3% year-on-year compared to last year March. And the corporate loans in this period grew even by 20.4%. The individual loan production recorded again a very good level at RON 2.3 billion in Q1 '24, and it is confirming the capacity of our commercial teams to deliver very good results. Before I move to the deposits and to other details of our performance in Q1, I would like to share with you that this excellent lending activity brought us 50 basis points year-on-year growth of our lending market share in total to 10.1%. And related to the individuals, it is 40 basis points year-on-year, while the corporate grew by 70 basis points year-on-year. You see that we have managed for another consecutive quarter to deliver growth of our market share, which has been also our target throughout the previous period. While growing our business, we also wanted to make sure that we have enough resources to achieve this growth. That's why we managed to perform end of Q1 an important transaction for synthetic securitization of our corporate portfolio in a total amount of EUR 700 million, this is the reference portfolio with a commitment to deploy around EUR 300 million of the released capital for ESG-related projects. In fact, through this transaction, we are managing to create enough space for commercial growth and also this growth to be mostly channeled through sustainable transactions. Now I will move to the deposit growth, which was also very healthy by 13.3% year-on-year as of end of Q1. And if you look at the lending and lending growth overall and the deposit growth, you will see that thanks to that, we are also having a very solid loan-to-deposit ratio, which allows us to continue growing also from the liquidity perspective. A highlight related to our digital development. Our channel YouBRD, the mobile app for private individuals, reached 1.5 million users by the end of Q1. We can say that in the meantime, in one quarter, we managed 7.2 million transactions through this channel, which is a 24% growth year-on-year and displays the engagement of our clients with our tools, which we give to that disposal. The gross operating income grew by 6.5% year-on-year. My colleagues after that will detail especially on the drivers of this change. I will not take the chance of our CFO, who will explain what has influenced this growth. I would like to mention also the NPL ratio, which remains very good, 2.1% end of March. And we know that this 2.1% is better than the average in the market. And our coverage ratio is 76.4% at the end of March, again, very solid, very high end above the benchmark. This time, we had a net cost of risk of RON 54 million in Q1 versus RON 9 million last year at the same time. And our CRO will detail the normalization of the cost of risk for our bank in this contribution in detail. All this resulted in net profit of RON 326 million, slightly lower than what we had in Q1 2023. But please also have in mind that this is the first quarter in which we are also having our tax over the turnover of 2%, so our financials in 2024 Q1 are also impacted by the environment, especially the fiscal one, which imposed the 2% tax on revenues. And now I will pass to my colleague, Claudiu Cercel, to talk about the macro.

Thank you, Maria, and good afternoon, everyone. A short conversion into the macro context and some more banking highlights. First, on the macro, remember that we ended the last year in a losing momentum as far as economic growth is concerned. Still that currently benefited the amount of taxes was one of the fact that the economy in terms of opportunity growth and even though we started this year in January and February, also in a lackluster environment, there are some encouraging signs in March and in April that would point to a resumption in growth. It's a bit better manufacturing in March and in April. It's a bit better consumption, which is driven also by the lending and also being an election year, it is expected that the economy will outperform in 2024 compared to 2023 with inflation quite widely between 2.75% as per the IMF ratings up to 3.4% as per the European Commission rating, our own forecast is 3.4%. The other important KPI of the macro environment is the inflation. It is easing, but still in Romania, it remains quite high compared to the Eurozone and even other countries in the region is still above 6% -- 6.6% even though in Czech Republic and Poland, now it's around 2%, Hungary 3%. And the Central Bank estimates that it will go down gradually until year-end, but it will still stay in 2024 above the targets they have in their inflation marketing mechanism at about 4.5%. It is expected for the inflation to return within the boundaries earlier than end of 2025. So in this environment, the Central Bank is rather in a wait-and-see attitude as far as interest rate cuts are concerned. We may still see the first cut in May, but now there are more and more analysts rather considering the Central Bank will continue waiting till later in the year before operating in the first half. And that in spite of the liquidity, which is very abundant -- that continues to be very abundant in the system. Even though the liquidity is abundant, the rate somehow are now more at the reported utility rate of the Central Bank, which is 6%. The government securities yield curve is relatively flattish. It was a bit of volatility lately being influenced by the evolution especially in the U.S. Now it's a bit subsiding, but it will probably continue to be for that 6% for as long as the central bank stays unchanged. And I will wrap up with the main KPI on the banking sector. The capital adequacy ratio continues to be comfortable at above 22%, loan to deposit ratios close to 6% to 8% and very comfortable ratios on both LCR and NSFR. The asset quality continues to remain robust. NPL ratio, 2.4%, just marginally up compared to the end of 2023, whereas the coverage ratio continues to be among the highest in the European union, and we are now back to a gradually decreasing share FX loans as the gap between the Romanian Leu and Euro interest rates narrow. That will be all for me. And I will now pass to my colleague, Madalina to deep dive in the commercial space.

Thank you, Claudiu. Hello, everybody. First quarter, as Maria mentioned, it was actually a very good start of the year, continuing the commercial growth on all segments, while actually managing efficiency and cost. Main -- key successful factor was to continue the digital adoption increasing almost 30% year-on-year number of users into the Internet banking application and growing across all transactions, double digits, reaching 7.2 million number of transactions in new, above 80% in saving accounts open directly in the up, above 95% of the transactions performed via digital channels in corporate customers as well as in private individuals. One of the most important achievement of the first quarter is as well the customer satisfaction that is managed via call center. We improved significantly the service level, reaching 91% of the calls answered in 30 seconds average time for a time call versus 32 seconds in the previous quarter of last year. Significant improvement in terms of FX transaction via tools, letter of credit and letter of guarantee process through the trade finance line interface. Another important achievement is basically part of the deployment into the digital application, enhancing the visualization, buying or selling into the investment funds directly in YouBRD and multiple other features that enable customers to interact with the digital channels of BRD. While improving the usage of these channels, we reduced the traditional channels of the bank, decreasing almost 20% in the network year-on-year, reaching 391 branches end of March, and expanding cash services to more than half of the branches having available 24/7 banking points. In terms of lending activity, above 12% year-on-year growth in terms of outstanding with a remarkable growth on corporate lending on both SME above almost 27% year-on-year in terms of loans outstanding as well as the consistent growth in leasing, above 20% year-on-year. In terms of sustainable financing, we almost reached the RON 1 billion target with RON 970 million cumulated over the last two years as well as Maria mentioned, and it will be detailed into the capital position. The landmark SRT transaction made with IFC, that will as well be associated with a new deployment, a new commitment for deployment of EUR 300 million in ESG financing. In terms of retail, the new production is a record year with -- a record quarter with new loans granted to individuals growing almost 50% year-on-year. A very good quarter for consumer loans, 51% growth year-on-year as well as the new housing loans, both growth actually in terms of value and number above 30%. Core retail outstanding growing year-on-year 8.2%, underlying -- underpinned by both individuals and small business loans. In terms of deposit base, we continue to diversify our portfolio and maintain the stability in an ample funding stores, 13.3% year-on-year overall, 12% at March '24 end, building a strong collection of -- in terms of retail. Corporate deposits grew as well above 15%, driven by both SME clients as well as large corporates. As I mentioned, a part of the own balance sheet growth of the deposit, we continue to grow on saving products in our asset management maintaining a very solid third place position in the market with about 20% market share as well as maintaining an important position into an active participation in FIDELIS program, having a 30% market share for individuals in the first quarter. BRD insurance life, an important activity in both increasing in liability base as well as preserving the risk on bundled bancassurance products with the lending, having a significant contribution for the bank income as well as repositioning, increasing one position of BRD insurance life, reaching the top 4 life insurance companies in Romania. I would pass the floor for the liquidity to -- and the income to Etienne.

Thank you, Madalina. Good afternoon to everyone. Indeed, this amicable growth of deposits, plus 13.3% year-on-year enable us to confirm the robustness of the liquidity, very, very ample and very granular and stable as mostly predominantly composed by the retail deposits. Our net loan-to-deposit ratio stands at 69% at the end of March, which is stable compared to end of March last year. And our liquidity buffer remains extremely comfortable with representing 33% of the balance sheet, which means RON 28 billion approximately out of which approximately RON 20 billion of government bonds portfolio of very high quality. Now if we move to the next page on Page 13 to comment on the profit and loss statement, we can start with the revenues. Again, very dynamic quarter, mostly driven by our excellent commercial performance during this quarter. The net banking income for the first quarter of 2024 stands at RON 985 million in growth by RON 50 million or plus 5.3% compared to Q1 2023. The first driver for growth of NDI is the net interest income growing by RON 45 million or almost 7% which is driven itself by the volume effect. This is the direct translation of our excellent commercial performance by growing the loan book by plus 12% that enables to grow the net interest income. However, we start to feel also the fact that we have a slightly negative interest rate effect. We saw that the 3 months average decreased in the first quarter 2024 by almost 100 basis points compared to the first quarter 2023. Another important comment we must make on the net interest income is that as expected, we grew significantly the interest income -- the gross interest income grew significantly and more on the growth of the loan book by volumes. But we have also to cope with the growth of interest expenses because of the growth of the term deposits within the mix of total deposit. Anyway, the net interest income posted a very nice growth by plus 7% this quarter. The second driver, for which we are also very satisfied with is the growth of the net fees and commission plus 8% or RON 14 million net growth this quarter. This is an achievement. Maybe you remember that it was difficult to grow the fees and commission last year. But this year, we are on a very good momentum. This growth is mostly driven by better fees on transfer and card, approximately RON 7 million, still on capital market activities that remain very solid, plus RON 4 million. And moreover, we are also growing our collection of fees on all the off-balance sheet commitments that we continue to develop, plus RON 7 million. But we still have to manage to address the fact that we migrate more and more clients to the package offer. And therefore, we have a lower net revenue from the OTC operation, approximately minus RON 7 million. But all in all, we are growing the fees and commissions. The last component of the net banking income is the other income on which we have a net decrease of minus RON 10 million. This is fully explained by a one-off sale for which we have decided to have a prudent approach and to cover risk at 100%. This is a limited impact fully under control, and we stick with this prudent approach. If we take this element aside, the revenues coming from the activity, so trading activity, sales activity and the banking book activities are overall stable. And if we look at the components, we have slightly less revenues on FX, but it is well compensated by more revenues on the fixed income activities. Now if we move to the Slide 14 to comment on operating expenses. The main comment is that these costs remain under very good control. We posted a total amount of operating expenses for the first quarter. So including all the IFRIC 21 elements at RON 529 million, growing by RON 21 million, representing 4.2%. Three main components. I will start with -- can't say, the exceptional item, the seasonal item. We have the contribution to deposit guarantee fund and resolution fund that decreased this year from RON 76 million in '23 to RON 43 million in '24. So we have the net improvement of RON 33 million. But this improvement is, unfortunately, almost fully compensated by the implementation of the new levy tax on the turnover, so 2% of the turnover. And I remind you that the turnover is not exactly the net banking income, but it is a larger base. For example, we have the interest income in the base but not the interest expenses. And this tax on turnover for the first quarter represented RON 13 million. And the bad news is that this cost will remain for the approximately the same level for the coming quarters, unfortunate. The second element of the operating expenses is the staff expenses growing by RON 20 million, representing approximately 9% growth. This is mostly driven by the price effect, the annual increase of wages, which was decided in an [indiscernible] environment and quite intense competition to attract and retain talent in the banking industry. But it was partially compensated by our effort to continue to reduce the number of headcounts at the bank level, especially coming from the optimization of the physical network. We decreased by approximately 100 FTEs year-on-year. The last component of the operating expenses is composed by other expenses they are definitely under very strict control. The only item in net growth is regarding IT investment, where we grew by RON 11 million, all the other items are either flat or decreasing. Overall, this other expense components grew by only 1.4%, representing net RON 3 million. The gross operating income grew by 6.5% year-on-year representing the total amount of gross operating income of RON 455 million of the Q1, including all the IFRIC 21 and the new tax. But if we exclude the IFRIC 21 element and the new tax to focus on the core gross operating income, the amount was RON 529 million, which is in continuous growth compared to the previous quarter. So the per gross operating income is continuously growing. Moreover, the cost-to-income ratio improved by approximately 50 basis points year-on-year, thanks to a positive effect with more than 5% growth of the revenues, while the growth of cost was contained at approximately 4%. This is for the GUI statements. And now I give the floor to Philippe Thibaud to comment on the cost of risk.

Thank you, Etienne. Good afternoon. In recent years -- recent years have been exceptional. You know that I love to put this [indiscernible]. And as a CFO, we have quite a rich problem releasing provisions, although today, we see that the cost of risk has increased. It does not come as a surprise. And let me give you a few elements on this. The first point is that the cost of risk lands at 34 bps this year on an annual basis. And this is exactly in the guidance that reminded last quarter, the guidance of cost of risk, which is between 30 and 40 bps. So it's a normalized cost of risk that we see. It is not unprecedented neither, as you can see on the Page 15, to see such a strong Q1. Actually, it is a bit of seasonal pattern to have a strong Q1 and we had it previously in 2021 and 2020, we had such levels of customers. The third point is that this level of RON 36 million just for database fund alone, we some -- and even if we take the total group database, we reached about 10% of the overlays that the bank has built over the years. These overlays are by the way still maintained, we have a healthy buffer of overlays. And when you look at the NPL, you see that we are at 2.1%, very low and very good NPL ratio, evidencing the quality of the resilience of the portfolio. We have also a very strong coverage ratio. At 76%, we are more than 10 points above the Romanian market. And I'm not even -- yes, I do mention the EU average ratio, which is only at 43 percentage. So we have a strong provision buffer. But we did indeed, encounter in Q1, more defaults. Day past dues in total amounts are still stable, but they are getting older, we get more default, we have a slightly more default rate, especially on the retail segment. On the non-retail portfolio, we have no major change. On the retail, we see that the consumer finance have suffered a bit more, which was to be expected -- which was expected. And we had also this impact, which affected the smaller agriculture players because the moratorium that was put in place didn't really help them in terms of rescheduling or having benefiting from the moratorium because of how heavy the process was and how -- yes, cumbersome it was to provide all the documents. So all in all, we had slightly more defaults. We are still in the guidance. The outlook for -- at least for Q2 is unchanged. And that's it for the cost of risk and -- this year. Come back to Etienne.

Yes. Thank you, Philippe. Last slide to comment on the Slide 16, the capital position. So again, a very strong capital position at the end of March 2024. We are at 24.1% overall solvency ratio, which is in growth by more than 220 basis points year-on-year with four main components. The first one is, of course, the fact that we used at the beginning of how we distributed 50% of the profit coming from 2022, but we offset this elements by the retained profit of 2023 basically 50% as well. The third element is the improvement on the long-term yields that enabled to improve the stock of negative OCI in the provincial owned fund by approximately RON 600 million net impact in the own funds, representing approximately 120 basis point improvement. And the fourth element is neutral growth -- net growth of RWA, almost zero explained by two components. The first one is, of course, we grew the portfolio of loans significantly, as you saw, approximately 12% overall growth of the loan book. But on the other hand, we also signed this significant risk transfer transaction with IFC, International Finance Corporation. They are part of the World Bank Group and they benefit from an excellent trading, enabling to decrease our RWA on the credit risk portfolio significantly. So the net impact of RWA at the end of March 2024 on a year-to-year basis is almost neutral. This enables to have a very, very comfortable capital position, and we will monitor closely the situation, especially on OCI until the end of this year to see if we have any possibility to contemplate any decision regarding the capital. And I give back the floor to Maria Rousseva for the conclusion.

Thank you, Etienne. Since we have been very detailed in our explanation, I would just shortly summarize that we continue observing a very good dynamic related to the commercial activity, which, of course, then results in improved performance NDI wise. Then we have been able to grow our market share in all segments. In the same time, we managed to securitize part of our portfolio, so that we see an additional space for further commercial growth. The deposits are developing in a very satisfactory manner. So we are gaining market share there as well. The digital adoption is in line with our plans, and we are introducing two functionalities, which improve the client journey. The financial results, therefore, are very positive, especially the positive jaws effect, which leads to the improvement of the cost/income ratio despite the fact that this quarter, we have, for the first time, the tax impact, the impact on the turnover tax. Our profitability remains quite high. The return on equity is 15%, and within our ambition. So everything is in line with what we have planned and we can continue growing based on these solid results. Thank you.