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

Hello. Thank you very much. To everyone, thank you for joining us for this presentation of our results. As usual, we are going to present you preliminary consolidated and separate financials related to the first half of the year, and they are not audited, of course, it's usually. So I'll start with the introduction before passing the floor to my colleagues to go through the details of the financial and the commercial performance. What I can start with is an excellent commercial performance we recorded in the beginning of this year, in first quarter but especially in second quarter, in general, the first 6 months. We have grown our lending portfolio by more than 14%. And this in all segments. Regarding the SME business, we have grown in line with what we have planned, and thanks to a very high extent to the contribution of [ M&A ] West program, which has been extended also for 2024. Even stronger, we have grown in the large corporate segment. To remind you, a large corporate with considerable companies about EUR 50 million with 27%, which is an example of our capacity to maintain these excellent relationships with partnerships with our big clients, which are traditional strength of our bank. Regarding the retail lending activity. We have reduced year-on-year higher amount by more than 50%. And we reached a total of RON 5.2 billion in the first half of the year. I would like to recall what we have discussed in the previous call, our SRT transaction with IFC, which has targeted to increase our capacity to finance the economy, but also especially to finance the green transition. And as you can see, we have in the first half of the year, already RON 700 million of new sustainable loan production. And this is just one further step related to our journey we started several years ago, and we are already over performing, but my colleagues are going to go back to that detail after. We are overperforming our targets of 2025. Regarding the deposits. Similar to the lending activity, very strong momentum. We grew by 12% year-on-year, again, across segments. My colleagues will give detail after that. Some new products we implemented in our digital offer. We have implemented the 100% online capacity to originate [indiscernible]. And in the meantime, we have 1.6 million users of our mobile app retail client, YouBRD, which represents 20% growth compared to 1 year ago. Another feature we implemented, and it's actively used in the first week of its implementation by our retail clients, is the Cashback loyalty program. Long awaited, and it's immediately very much liked. Regarding the operating performance then we reached a really good result based on this very strong commercial figures. We had 9.2% growth of the GOI year-on-year in [ C. ], excluding the new tax on turnover, which has been put in place. You know that this tax is booked in OpEx and this impacts our GOI. Regarding the asset quality. I would say the same things, which I have said in the previous quarter. NPL ratio stands very well at 2.2% at the end of June, devolve the average on the market, but close to it because the market itself is quite healthy. The coverage ratio is at 77%. Traditionally, we have this very high ratio. And the net cost of risk, we have RON 91 million in the first half of the year versus RON 5 million in the first half of 2023. But for us, this is -- we consider it a normalization. If you remember in the previous years, we had a lot of recoveries from previously book provisions or written off backlog. So obviously, this activity started decreasing because we have consumed a big part of this. And now we are normalizing our cost of risk to reflect our active commercial performance. Finally, the net profit is around RON 700 million. And this marks a 16% return on equity, which we consider very healthy and above our target. Now I will give the floor to Claudiu Cercel, who is going to talk about the macroeconomics.

Thank you, Maria, and good afternoon, everyone. The bank compacted its activity in an environment characterized by a continuation in the easing the inflation and also, by a certain deceleration in the economic growth. If I refer to this last one, you remember that in the first quarter, there were some losing momentum in the GDP growth, even though it increased in that quarter by 0.5% compared to last quarter 2023. On a year-on-year basis, it was at 1.8%, a slight deceleration compared to 2023. I recall you that from that year, the economic growth was 2.1%. But still this season, election year, we do see increases in wages, we do -- we will see increase in FDI. Therefore for the whole year, we expect a regaining of the lost momentum and GDP growth for the whole year, more in the region of 3%. The consensus of the analysts pointed at between 2.8%, slightly above 3%. For the inflation it continues going down. It's closely aligned with the forecast of the Central Bank for year-end at 4.9%. And with the trajectory of continue growing towards 3.5% until end of 2025. In this environment, the Central Bank perform its first cut aligning somewhat to other actions of the Central Bank in the region. It operated 1 of 25 basis points in July. There are still 3 monetary policy meetings in year-end. The next one is soon actually, in August, on 7th of August. And the consensus of analysts would point to at least another 2 cuts until year-end, even though there are some pointing to an additional one. So let's say, we would expect the additional cuts from here at between 25 and 50 basis points until year-end. The liquidity in the banking sector continues to be very abundant. And there is a certain pressure on interest rates to go down. Still, they are anchored to the deposit facility in the Central Bank currently at 5.75 and it would -- it will most probably continue to be anchored for the subsequent quarters. Whereas for the banking sector, somehow the things remain the same. It continues to be solid, very comfortable levels in both liquidity and solvency whereas the asset quality, even though a little bit more challenged than 2023, continues to be comfortable with the NPL ratios at 2.4% in March, just slightly above average and with very also comfortable levels of coverage, whereas from a macro prudential stands, the FX loans have continued to remain roughly in the region of 30%, which is relatively comfortable from the Central Bank perspective. I will stop here, and I will pass the floor to my colleague, Madalina– to...

Thank you very much, Claudiu. Continuing the with a bit more details what Maria point out is very good momentum into the commercial performance. In the Slide 10, we actually confirm our omnichannel journey by scaling up the digital penetration. So daily banking, a part of increasing number of users in the digital channels, also the daily banking actually across all segments, retail and corporate are confirmed increases in daily transactions, in deploying actually deposits and saving accounts as well as acquiring transactions for the corporate has been increased above 20%. Import letter of credit or letter of guarantee are process through -- mainly through the channels that are existing. Apart of scaling up the existing sales channels in digital, we basically enhance our offer in digital by deploying, on one hand, new processes like 100% online app or digital signature or video call through the retail process as well as new programs that increase significantly the engagement of digital channel utilization, like Cashback program that has been mentioned, a loyalty program that reach its excellence according to our vendor in the first months, above 300,000 users have been engaged into this platform. A part of the digital channels, we also -- in the bottom left on corner, you can see our focus on customer satisfaction in order to provide supported advices through via call center. A call center that improved significantly compared with the previous half of the year, handling above 90% of the call that has been executed as well as a very good service level, 88% of the calls being answered in 30 minutes. In the same time, in terms of addressing efficiency, we improved significantly the average time into taking the call. And all this performance during the second quarter has been rewarded during the customer care conference in '24 in Romania. This being best internal call center at the medium side. A part of these services in digital and via the phone, we continue optimizing our traditional footprint while expanding and improving even at the footprint at the brick and mortal level, the automated processes. So we reduced the network in this year up to 389 branches. So we concentrate most of the efficiency gains in the first half of the year in order to be able -- second quarter and the second half to accelerate and continue the good commercial momentum. Cashless, we enhanced as well in our method footprint, the cashless approach. We currently cover more than half of the branches with 24/7 areas, offering cash-in, cash-out facilities, also processes that are enhanced in our future plan. Moving forward, talking about the strong commercial momentum. Actually, the -- both segments across all segments, corporate and retail, has actually grown even above the market average. For example, in end of June, we reached 90% -- 90 basis points increase versus year-end, 100 basis points versus December '22, beginning of '23, which was actually the point in which we turn around the growth of the bank. So a part of our year-on-year increases comparing with the market, the commercial momentum in terms of growing market share is confirmed also outside the bank. Most of the increase in market share is coming from corporate, 900 basis points year-on-year. In both segments, SMEs and large corporates, as it was mentioned by Maria. Of course, supported by the SME invest -- [ MMA ] invest program as well as a very strong focus on sustainable financing, which [ owns ] in the first half of the year, booked RON 0.7 billion in financing. So cumulative financing over the last 3 years exceed EUR 1 billion target that was supposed initially to be achieved in '26. So we actually have a new target, even higher for the period to come. Retail market was -- actually retail loans booked a new record. So 51% year-on-year growth, RON 5.2 million in both consistent increases in both unsecured and secured retail loans, which actually give us the comfort that we will be able to preserve our positioning in the market for retail as well. Moving forward, Slide 12, in terms of deposit base. We actually even here performed above the market, having actually an increase of 20 basis year-on-year. And on top of the -- on balance sheet and the traditional solutions for investment, we -- as historically confirmed, we actually continue to diversify our saving portfolio. It was an amazing performance. BRD Asset Management reached the first position in the market. The -- I would say, the first time in its history, reaching RON 5.1 billion assets under management, almost 50% -- 46% increase year-on-year. Last but not least, BRD Insurance, which is basically an important source of savings as well as offering value-added solutions for the customers in insurance life and nonlife insurance as well, consolidate its fourth position targeting the top 3 as well with almost 12% market share in terms of insurance life. I would pass the floor to my colleague, Etienne, talking about the liquidity and further on the [indiscernible].

Thank you, Madalina–. Good afternoon, everyone. Just to say 1 minute on the page regarding the liabilities to comment on the liquidity position. We do confirm that BRD keeps a very comfortable liquidity position with an overall loan-to-deposit ratio at 68.8% at the end of June 2024, growing by 1.1 percentage points compared to June 2023. This is, of course, explained by the very dynamic growth of the loan portfolio. The high-quality liquidity buffer remains very comfortable, representing approximately 1/3 of the total balance sheet, which means around RON 28 billion in total and composed in vast majority by treasury bills. Now we can move to the next page to comment on the income statement, and let's start with the revenue part. The growth of the revenue is very solid. For the first half of the year, it's 5.7%. And for the second quarter, it's even better with plus 6.2%. The first driver for the growth of revenues is still the net interest income component with a growth of 7.3%, representing almost RON 100 million for the first half of the year. And on this point as well, the growth is accelerating in the Q2 with a 7.7% growth. The underlying drivers for this growth are the following: this is mostly -- almost excluded now the volume effect driven by the very good commercial momentum on the loan portfolio, both corporate and retail, enabling to grow the gross interest income by 18% on the first half but it is for part of it, centered by an increasing cost of sending as expected. As we know that in this environment of still elevated interest rates, we have growing mix of term deposits or interest-bearing deposits in our total deposits. They were representing approximately 35% at the end of -- the total deposit at the end of June '23 and there, at 39% at the end of June '24. But important to comment that we are already working on decreasing the average blended pricing of this term deposit in full consistency with the market, but we keep the pace in order to present the profitability on the net interest income segment. The second driver for growth of the revenues are fees and commission, growing by RON 23 million in the first half of the year, representing 6.5%. And we are quite satisfied with this growth, which is driven by really the commercial activity. I will mention sales activity, transfers and the penetration of packages. And also supported by custody and brokerage and we can make the link also with the excellent performance of BRD Asset Management, for example. The flip side on the revenue in terms of fees remains the point on the cash transaction, which are decreasing year-on-year due to the high penetration of packages. Now also part of these are, in fact, embedded into the revenues from the package. And I will conclude on the revenue path on the last component, the other income revenues, which were representing RON 158 million for the first half 2024, decreasing by 8% compared to the same period last year, and this is fully explained by 2 unfortunate one-off item we mentioned already at the end of March. But we had to book some provision on all sides to fully cover the underlying risk. So this was booked in the first quarter. And in the second quarter, we had to book the loan portfolio of BRD Finance, our dedicated consumer finance company. We had to book their loan portfolio as held for sale and apply the mark-to-market pricing, accelerating net impact of minus RON 9 million because a large part of these loans were originated when the rates were higher. And we had to do this because we are in the process of running off and closing this company and the sale of the portfolio was actually closed in beginning of July 2024. So for the sake of a fair presentation of the IFRS accounts, we had to book this one-off loss at the end of June. Apart from these 2 one-off items, the activity regarding trading and sales of the market room are still excellent and performing slightly above the level of last year and with a limited volatility quarter-to-quarter. So we are optimistic for the second half of the year on this front. We can move to the next page to comment on the operating expenses. The overall growth of the operating expenses for the first half is close to 9%, representing RON 84 million growth, out of which RON 62 million are explained by the new tax turnover. So this is a massive impact. Without this tax, the net growth of OpEx for the first half would have been only 2.3%. If we focus more specifically on the purely internal components of this growth, we have first the staff expenses growing by 7% on the first half but only 4.8% in Q2 2024 compared to Q2 2023. This is very satisfactory achievement considering the pressure we have from the [indiscernible] market, which remains very competitive for attracting talent. So this is the translation of our price effect, the average price effect on the wages slightly compensated by a small volume effect in number of colleagues. On the other expenses, the growth for the half year is 3.6% and slightly accelerating in Q2 with a 5.8% growth. This growth is still explained by our intense activity in delivering our digital and IT road map to transform the bank. So it's fully conscious and under our control. The cost-to-income ratio. If we exclude the tax effect benefits from a positive effect and stands at 49.1% in the first half, decreasing by 1.6 percentage points compared to the same period last year. And if we reinclude the tax, it is unfortunately around 52%, the tax representing approximately 3% in the cost-to-income ratio. And now I hand the floor to Philippe to comment on the asset quality and cost of risk.

Thank you, Etienne. Good afternoon, everyone. Stability control within the risk appetite is really the key objective of the risk team. And this quarter, I'm quite glad, like the previous quarter, to show that we have results, which are quite -- or which were quite predictable and which are still very stable. Let's say that the cost of risk at 30 bps is on the lower side of our guidance. Actually, we started the year probably through the cycle numbers which were much different to what we were used in the previous quarters because we were releasing the provisions. Today, we do have a very stable -- we have the stable developments. And so actually, there is not much to report on this side. And the NPL ratio is at 2.2%, slightly increasing compared to the previous quarter, which was also slightly increasing from end of 2023 at 1.9%. But again, 1.9% was a historical low level. It is still much below the average in Romania. It is actually at the same level as we were last year in June 2023. So 2.2% is for something which is completely comfortable and we have no fear of having faced increasing numbers. So we do think that we have a good control of the growth of NPLs. Likewise, we do have a very comfortable coverage ratio. It is still at 77%, way above what we have in the sector. So a good quarter. And since we do not see any alerts, good confidence for the rest of the year so far. And then I hand the floor back to Etienne.

Thank you, Philippe. To comment on the capital position. At the end of June 2024, the overall solvency ratio stands at 23.1%, growing by 80 basis points year-on-year. The main explanation for this growth are the following: first, we remind you that we have distributed a dividend at the beginning of 2024 coming from the 2022 profits, representing 50% of these profits with a negative impact on the solvency ratio. But it was more than compensated by the incorporation in the own funds of 50% of the profit 2023, which was higher than the 2022 profit. Then we benefit also from the improvement of our stock of negative OCI within the owned funds. It's quite visible impact, 70 basis points improvement on the ratio. However, we still have an important stock of negative OCI in the owned funds representing approximately RON 1 billion. Then we had, of course, the growth of RWA impacting the solvency ratio, but a large part of it was offset by the implementation of our significant risk transfer with IFC at the end of March 2024. So the net negative -- the net impact of RWA is negative in the ratio, thanks to this risk transfer. But of course, for the second part of the year, we will have the impact of the growth of our loan book that will impact relatively that -- sorry, negatively the ratio with growing RWA. I would like to comment one thing that is not on the slide. It is the fact that in July, we have observed that a new quick fix release on the negative OCI will be possible following the publication of the last version of the [ CR ] by the European Union authorities. We have the intention to apply this new quick fix release. It will have a very positive impact within the capital adequacy ratio. But 2 points of attention in this respect. This new quick fix release has temporary -- will have a temporary effect because it will be possible only until the first of January 2026. And we have a second point of attention is that Basel IV rules will come to first on the 1st of January 2025 and they will wait on the capital adequacy ratio. So we are in the process of updating our capital planning, taking into account the positive elements and also the point of attention on the ratio, to calibrate our capacity to distribute our next dividend. And of course, keep in mind our traditional payout average ratio has kind of target again, subject to the capital planning and the blessing from the National Bank of Romania. And I give back the floor to Maria Rousseva for the conclusion.

Thank you. And I will be fast with the conclusion because I think we mentioned the most important point several times today. A very good first half of the year, both commercially and financially, especially commercially, we are happy because the trend of last year is continuous in both corporate and retail businesses with growing -- lending facility with a growing deposit base, with a growing positive impact financing and with the important transaction we have performed with IC to make us able -- to enable us to continue this very dynamic commercial activity. Digital, a strategic pillar for us growing further. We continue investing in our clients continue subscribing to our platform. All these very good commercial performance regarding very good financial results as presented by Etienne. Good profitability, good liquidity, good capital and very normalized in the meantime, cost of risk at comfortable level. So I finish here to give the floor for questions and the opportunity to discuss any other points. Thank you.