Eurobank S.A. (EUROB) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I am Maria, your Chorus Call operator. Welcome, and thank you for joining Eurobank Holdings conference call to present and discuss the second quarter 2020 financial results. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Fokion Karavias, CEO. Mr. Karavias, you may now proceed.

Thank you. Ladies and gentlemen, good afternoon. And welcome to the Eurobank First Half 2020 Results Presentation. Together with me is our CFO, Harris Kokologiannis, and the Investor Relations team. Let me start from an overview of recent developments before we present our results. On the pandemic front, in spite of the recent surge of incidents, Greece, Bulgaria, and Cyprus, our core markets, remain among the least affected countries in Europe. In Greece, in areas of infections increase, the government implemented restrictions at a local level. Any further measures will be locally targeted instead of a countrywide lockdown. Unsurprisingly, the touring season seems quite subdued, that chances for GDP contraction in 2020 closer to the other scenario have increased. However, on the positive side, the policy reforms at the European and domestic level has been unprecedented in breadth and market, exceeding earlier expectations. A reflection of these measures is visible in the government bond yields, which are close to all-time lows. For the European policy initiatives, let me highlight the next-generation EU bankers, from which Greece is expected to get EUR 32 billion over the next 4 years, equivalent to 4 percentage points of PPI, or more than 17 cumulatively. The Greek government implements public support measures of EUR 16 billion, which corresponds with fiscal stimulus of 8.5 percentage points of 2019 GDP. In addition, liquidity support is introduced mainly through state guarantees and subsidy schemes, leveraging EUR 9 billion new business loans. The government considers expanding such support, acquiring the 9-month mortgage subsidy program on primary residences offers a bridge to full payment pattern. Since the pandemic outbreak, our key priorities remain the health and safety of our people, business continuity and supporting our clients with payment moratoria and new lending. Additionally, we concluded the Cairo and FPS transaction with low value in June. This completes our transformation plan as announced in 2018, and give us a major balance sheet derisking, as shown on Slide 4. More specifically, during the last 18 months, the stock of NPEs decreased by more than EUR 10 billion, and now stands at 6.2. The NPE ratio improved by 22 percentage points to reach 15.3%, while coverage ratio increased by 7 percentage points to 61%. The above with combined active capital management shows us impact on capital was contained. In the first half of 2020, our CAD ratio reached 15.5%. As a result, we had a massive improvement in our Texas ratio by almost 50 percentage points. In July's AGM, the distribution of the mezzanine and junior notes through the shares of the SPV Cairo Mezz Plc as a payment in kind was approved. On Slide 5, the highlights of the Cairo Mezz shares distribution are presented. Shareholders will receive 1 Cairo Mezz share for every 12 Eurobank shares, and the distribution will take place during the last week of September. Now let's see our financial results for the first half of the year, as highlighted on Slide 6. Our recurring net profit reached EUR 176 million, of which EUR 117 million in the second quarter. On a year-on-year basis, core pre-provision income was up 8%. Net interest income was marginally up in the first half year-on-year, but 3% higher from previous quarter. Commissions increased by 16% year-on-year, but were down 5% quarter-on-quarter due to the lockdown during the second quarter. Operating expenses were down 5% year-on-year in Greece. The second quarter results also include the combined impact of the Cairo and FPS transactions at minus EUR 1.3 billion. Let me now turn on asset quality. The organic NPE formation was negative by EUR 77 million, while the cost of risk ratio was 1.5% in the second quarter. We reiterate our guidance for annual cost of risk in the 140 to 160 basis points range, which is circa 60 basis points more than what was planned before the pandemic outbreak. Our total capital ratio increased by 110 basis points from the previous quarter, and stands at 15.5%. Customers were actively supported through payment moratoria and new loan disbursement, especially for companies. In Greece, the net organic increase in our performing loans was EUR 1.1 billion in the first 6 months. On top of that, as of July, we are disbursing an additional amount of another EUR 1.1 billion under the current Hellenic development bank programs. Furthermore, once these programs are expanded, and this would happen quite soon, we expect additional loans of around EUR 0.8 billion. So overall, business loans after repayments are expected to grow by more than EUR 2 billion for the full year 2020. Deposits went up by EUR 0.3 billion in the first half. The group loan deposit ratio had reached 82%. Our international operations continue contributing significantly to the diversification of our profitability base, and remains strongly positive across the countries. Our profit reached EUR 82 million in the first half. In summary, our derisked balance sheet, the resilient PPI and the 110 basis points improvement in our capital ratio enable the bank to address more effectively any challenges ahead. At this point, I would like to ask our CFO, Harris Kokologiannis, to present our first half results, before opening the Q&A session.

Thank you, Fokion. Let me first comment on the accounting treatment of the Cairo transaction. In the second quarter, the Cairo loans have been reclassified as assets held for sale. This will be deconsolidated in the third quarter upon the distribution of mezzanine and junior notes through Cairo Mezz Plc shares to the shareholders. At that time, the Cairo senior notes of EUR 2.4 billion will be recognized as an asset in our balance sheet. In this presentation, for comparability purposes, Cairo senior notes have been included pro forma in the June end asset figures. In addition, second quarter results includes the impact from the Cairo loss and the gain from the sale of FPS, which overall, amounted to EUR 1.3 billion. Let's now provide some more insight on the second quarter results, starting from funding and liquidity on Page 11. As shown on the left part of the page, the bank is already making use of a total of EUR 8 billion TLTRO III at a rate of minus 100 basis points. As this rate applies in the last week of June, the incremental benefit from 50 to 100 basis points on NII will appear from the third quarter onwards. At the right part of the page, group deposits decreased slightly in the second quarter by EUR 200 million. This is due to the public sector's deposits, which decreased by EUR 1.5 billion, offsetting private sector's growth by EUR 1.3 billion. Net loans to deposit ratio receded in the second quarter to 81.6%. Moving on Page 14 and on lending growth. During the first half of the year, performing loans increased by EUR 3.3 billion, including the Cairo senior notes of EUR 2.4 billion, as explained above. The organic growth for this period amounted to EUR 1.3 billion, driven by the Greek business portfolio and international. On Page 15, more detail on business loans growth in Greece is provided. Specifically, during the first half of the year, business portfolio balances increased by EUR 1.1 billion. In addition, another EUR 1.1 billion new loans have been approved in the context of the state support loan facilities, and their disbursement has started from July onwards. Finally, the bank is expecting an allotment of approximately EUR 100 million from the upcoming expansion of support programs, mainly through state guarantees. As a result, for 2020, business loan balances increase are expected to increase year-on-year after repayments by more than EUR 2 billion. Moving to profitability on Page 18. Net interest income for the group increased quarter-on-quarter by 2.9% to EUR 649 million. The major part of the increase relates with funding cost improvements, namely, deposits, market repos and LTRO. The positive impact was partly offset by lower net interest income from international, mainly due to reduced base rates and lower yields on placing several liquidities. On a year-on-year basis, net interest income is higher by 0.6%. On Page 19, net commission income decreased quarter-on-quarter by 5.8% as the higher lending and investment property fees were offset by the impact of lockdown on network activities, capital markets and assets under management fees. On a year-on-year basis, commission income is higher by 60.7% due to the impact of Grivalia and high bank assurance lending and capital market fees. On Page 20, operating expenses quarter-on-quarter are lower by EUR 7 million or by 3.1% due to lower staff and branch network costs also affected by the lockdown. On a year-on-year basis, costs, despite the base effect of the merger with Grivalia and the acquisition of Piraeus Bulgaria are lower by 0.8%. In Greece, costs have lowered by 4.7%, and specifically, staff cost, by 10.5%, due to reduced head count and a rationalization of related expenses. Further pre-provision income is on Page 7. On the top left of the page, core PPI increased quarter-on-quarter by EUR 12 million or by 5.8%, as a result of high net interest income and lower operating expenses, which offset lower commission income. On a year-on-year basis, core PPI is higher by 8% at EUR 435 million. Pre-provision income increased significantly to EUR 287 million due to strong trading gains. Before changing topic, let me update you on the latest outlook for the second half and the full year 2020 of the core PPI drivers. First, on net interest income, we reiterate our previous guidance for a low single digit decline for the full year 2020. The most significant impact in the second half will come from the low net interest income from NPEs as a result of prior completion. Furthermore, the decline in corporate spread is expected to continue, also considering that the major part of new loan production relates with low-risk state support programs. On the other hand, second half will be positively affected by the higher loan volumes, as explained above, the TLTRO and the low cost of deposits. As regards to commission income, this is expected to gradually recover from second quarter levels as a further countrywide lockdown is not probable. In this context, we remain to our guidance for a low-single digit increase year-on-year. Finally, operating expenses will continue the [ staffing ] trajectory, driven by reduced staff expenses and further rationalization of branch network. As a result, we expect, for the full year 2020, operating costs lower year-on-year by a low single-digit rate. In summary, we reiterate the guidance we provided in the first half -- in the first quarter results, for the core pre-provision income in 2020 of EUR 840 million. Moving to asset quality, and on Page 8, as shown of the top left of the page, NPE formation was negative in the quarter by EUR 77 million, driven by the business portfolio. Following Cairo completion, NPE ratio stands at 15.3% and NPE coverage at 60.6%, more than 6 percentage points higher than 1 year ago. Cost of risk of our net loans amounted in the second quarter to 1.5% and loan provisions to EUR 145 million. Moving on the capital position, and on Page 10. In the second quarter, total capital ratio increased by 110 basis points to 15.5%. The increase was driven by the result of the period, the market valuation of securities portfolio, the CRR "quick fixes" and the higher result for improvement. The above drivers were partly offset by the increase of [ RWA ] loan disbursements and market reach. Fully loaded Basel III CET1 ratio amounted to 11.2% at the end of June. This completes my presentation, and we may now open the floor for your questions.

[Operator Instructions] The first question is from the line of Floriani, Jonas with Axia Ventures.

My first question is on NII, Slide 18. Just wondering if you have a view on the loan component of the NII going forward, especially after Cairo? I take your comments now that you just mentioned on guidance for NII and PPI. But all in, what is the level we should be thinking of now going forward? And I think that for now as well, most of the dynamics have been around the declining loan margin where you have been supported by a better cost of funding and also the security part of it. So this is the first question. The second is on capital. I remember, in the previous call, you mentioned that the CRR benefit you're envisaging was roughly around 60 to 65 basis points positive. You show here that you booked some in the quarter. I mean are you still -- is the guidance still for 60 to 65 basis points full impact? And if so, how much of that have you booked now in the second quarter? And then finally, I have a question on asset quality, on Slide 23. Just wondering what is the spike on the consumer formation there?

Thank you so much for the question. Let's start from -- I'll get the 2 facts, and then Fokion will elaborate on the asset quality. So starting from net interest income, let's start on the specific that it is spreads on portfolio, and then -- and provide a more broad outlook on net interest income, although I mentioned some change in the report. So on performing spreads of corporates, they are down, as you may see on Page 17, by close to 23 basis points quarter-on-quarter, or close to 45 basis points year-to-date. Half of the reduction is related to new production, which comes at low rates by approximately 50 to 60 basis points. And half due to renewal and the repricing of existing loans at the low rates again. Going forward, we should expect some further reduction in spreads coming also from the state guarantee loan program, that due to the lower risk is coming in at a lower time rate. However, this is expected to be offset by the new loan generation, higher volumes. So overall, for net interest income, in euro terms, you should not expect any material movement, if not slightly positive. Now let's come on the overall outlook for net interest income. There -- as I said, we reiterate our business guidance for a low single-digit decline of net interest income for the full year 2020 probably close to 2 months, 3%. That means that we should expect the net interest income in the second quarter to be lower than in the first one by approximately 4%, I'd say. The most significant negative effect is coming from the Cairo consolidation. So the impact -- the net interest income from -- due to Cairo -- the impact on net interest income in the second half due to Cairo consolidation will be lower by EUR 50 million to EUR 55 million due to the iteration. This will be partly offset by senior coupon, of course. The decline in corporate spreads, as I said, is expected to continue. On that front, net interest income will be positively affected by the Hellenic loan growth rates, the TLTRO III impact that will kick in, in the second half of the year, and the low cost of deposits. If you've seen on Page 17 as well, that there is very well downward progress on the timing of deposit cost. So overall, we reiterate our guidance for a low single decline on NII for the full year 2020. Now coming to capital, on Page 10 of the presentation. Overall, we had an increase of our total capital ratio by 110 basis points to 15.5% at the end of June. A part of 35 basis points related with CRR "quick fixes," mainly -- and mainly the IFRS 9 stage 1 and stage 2 revised transition and the SME loans discount factor. We expected before seeing the final decision of European Commission, we have a larger impact coming from the transit. However, this is very small. So overall, we should not expect any further positive impact on that front. We may have a case of something small, at the area of 10 basis points repeating again, the issue of software, but nothing more than that.

Now on asset quality, which was your third question. The second quarter formation, as I mentioned during my introductory remark, remained negative by EUR 77 million. This is on Slide 8. And that was more or less the figure that we were expecting in the beginning of the quarter. Now on your question, in particular, about Slide 23. And the EUR 22 million positive consumer loan formation, indeed, this figure is quite a huge one. I mean if you compare it with the rest of the bank series. As a matter of fact, it is a second-time issue of reporting a lower formation in the Q1. The current one have been flattish instead of mild spend that we reported. And therefore, the figure was corrected, reversed in the second quarter. Since we're talking about the second quarter, I think it is also important to mention that despite the lockdown that we experienced in the second quarter, cash payments remained quite resilient. As you can see on Page 22, the previous page. We have recorded cash payment of EUR 53 million versus EUR 65 million in Q1, something that we consider being quite positive. Overall, and based on the evidence that we have so far, we believe that the payment culture has not deteriorated. And any participation of the customers in moratoria, either for household or businesses, was in line with our expectations. Now let me mention a few words about the next quarter, Q3. Based on what we see so far, formation is expected to remain in negative territory, maybe flattish formation for businesses, but negative for households. But obviously, in order to have a more clear picture about the client's longer-term ability to service their loan, we should wait until the first quarter of 2021.

The next question comes from the line of Sevim, Mehmet with JPMorgan.

Just 2 quick questions from my side. First of all, would you be able to share with us any color on the expected performance of moratoria loans after their expiry? Do you have any expectations of what the magnitude of NPE transitioned from this EUR 5 billion portfolio could be, taking into account all these support measures, et cetera? And secondly, given your coverage levels are now very comfortable following the completion of Cairo at 60%, do you think this is the new normal? Or would you expect this to come down over time against the previous levels? So are you -- do you have any plans to utilize some of it, so to say, going forward?

Thank you. So let me start from moratoria. On Page 9, we present what is the current situation with moratoria. Let me share with you that we have experienced a slowdown in the moratoria since the end of May. We present the balance, the stock as of June, which was a EUR 5 billion increase. And the applications due today were quite low. And therefore, we don't expect any material change on this balance. Now moving into Q3 and Q4. In line with the decision of the Hellenic Bank Association, we have extended all moratoria until the end of the year. And this is the reason why I mentioned before that we should expect the first quarter of 2021 before we have a passable evidence about the performance. However, as we speak, our priority is to take timely action to minimize any sort of cliff effects when the moratoria measures begin to expire. To this extent, we are segmenting the portfolio so that we can present customer special processes and solutions for each segment. Let me give the example of the Gefyra 9-month subsidy program, which is one such solution. And this program acts as a bridge between the current status of moratoria and a return to full payment pattern. And based on our estimates, about 50% of the mortgage that we have under moratoria should be visible for the program of Gefyra. Now for those households, which may not be eligible, for Gefyra, the bank will offer other customized solutions and, obviously, for SMEs. And we will make active use of the state guarantee loan programs, so that facilitates the exit of the customers from the moratoria. Now in your question, what is the percent of the sales that we expect from this EUR 5 billion to be under stress? Obviously, as I said before [indiscernible] we have to wait to have a more clear evidence. But I would like to stress that the majority of the loans under the moratoria are of very good quality. They are performing or performing for bond loans. And these are clients which have managed to come over the financial crisis increase during the last 3 years, remaining performing. So this makes us optimistic that any problem is going to be small and manageable. So this is where we stand at the moment. Obviously, the recovery, the size of the recovery of the economy 2021 is also going to be an important factor that should affect the asset quality going forward. And therefore, overall, we remain quite optimistic that the impact on the asset quality is going to be quite manageable. Now let me comment on your second question about coverage, and whether this is a new normal, or there is room to move at levels that we have experienced before. We want to keep maximum flexibility on that. At the moment, we don't have any plans to move at a lower coverage, but I cannot exclude this happening during the course of 2021.

[Operator Instructions] The next question is from the line of Boulougouris, Alexandros with Wood & Co.

Just to clarify, because I missed it when you were mentioning this earlier, I think, in your outlook for 2020 on your cost of risk guidance. Does it remain at 140 to 160 bps that you had mentioned in the first quarter? Is that correct?

Sure. Let me confirm that we have reiterated our guidance for 2020 cost of risk being between 140 to 160 basis points versus the 90 basis points that was our guidance in the pre-COVID era. Let me remind you that in order to come up with this guidance, we have assumed a cumulative [ isometric ] reduction in GDP for 2020 and 2021, for the 2 years, of 2.5%. And based on the information we have so far, we believe this estimate still holds. And let me make a reference to the summit forecast of the European Commission for Greece, which was for GDP of minus 9% and plus 6% for 2021, respectively. So an [ isometric ] reduction of about 3%, which is very close to our estimate of 2.5%. So yes, we remain at this range of cost of risk.

And as a follow up, though, on the moratoria that you mentioned, you're saying that you're seeing a slowdown. So the EUR 5 billion should -- we just do not expect this to grow significantly from now on? Or maybe because there's -- yes, there's no evidence that because there's the second outbreak, we're seeing renewed, let's say, interest in moratoria in August, September or anything like that?