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

Ladies and gentlemen, thank you for standing by. I'm Konstantinos, your Chorus Call operator. Welcome, and thank you for joining Eurobank Holding conference call to present and discuss the third quarter 2020 financial results. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Fokion Karavias, CEO. Mr. Karavias, you may now proceed.

Ladies and gentlemen, good afternoon, and welcome to the Eurobank third quarter results presentation. Together with me is our CFO, Harris Kokologiannis and the Investor Relations team. I will start from an overview of recent developments before we present our results. As we all know, the second wave of the pandemic is in European countries, including Greece, resulting in partial or horizontal lockdowns and a deterioration of the economic outlook. Depending on the pandemic evolution and in an effort to minimize the adverse effect to consumption, the Greek government intends to open up retail in December, in time for the holiday season. In this environment, estimates on economic contraction in 2020 has come closer to adverse scenarios of around 10%. On the positive side, it appears that the end of the crisis is within sight as news from the vaccine front confirmed. In the meantime, state and EU support remains very strong and measures to entry point facilities announced so far add to EUR 25 billion and EUR 80 billion, respectively. Foreign conditions for the state continues to be horrible with yields at historically low levels. While the public sector cash buffer is maintained at a confident level, around EUR 30 billion. Additionally, we see foreign direct investments in a number of sectors such as data centers in a number of Greek corporates in the hotel and leisure sector and commercial real estate. For the banking sector, illiquidity remains something. Income generation is resilient, but the main challenge would be the asset quality in 2021 following the expiration of the current moratoria. Now let's see our financial results for the 9 months 2020 as highlighted on Slide 4. Our regaining net profit in the first 9 months of the year reached EUR 348 million, of which EUR 172 million in the third quarter. Core pre-provision income was up 5% on a year-on-year basis, but 5% down from the previous quarter. This is mainly due to net interest income and the Cairo loans derecognition deprived us from the Hellenic interest income. Commissions increased by 10% year-on-year and 8% from the previous quarter. Operating expenses were down 5% year-over-year in Greece. We concluded the voluntary exit scheme for 800 employees in early October. And as a result, we expect staff costs to continue declining. Additionally, we have further reduced our branch network in the country by another 15% to reach 3,000 branches. We will channel a significant part of the savings in accelerating the digital transformation of the bank and the upgrade of core banking systems in some of our subsidiaries. Turning now on asset quality. The metrics were further improved from the previous quarter. The NPE ratio declined to below 15% in the last quarter, while the cost of risk ratio was 1.5% in during the 9-month period. The accumulated provisions increased further the coverage ratio to 62.5% of NPEs. Regarding capital and deposit, total capital ratio increased by 10 basis points from the previous quarter and stands at 15.6%. Moving now to our customers. We continue to support our clients' ability with new loan disbursements. The net organic increase in our performing loans have reached EUR 1.5 billion in the first 9 months. We are in the process of dispensing an additional EUR 0.7 billion under the Hellenic Development Bank programs, most of which will materialize before year-end. Overall, our core pre-provision income remained resilient and in line with the guidance provided last May. Furthermore, in line with our guidance is the cost of risk at 1.5%, that is 60 basis points higher than our estimate before the pandemic outbreak. This level corporate risk has allowed us to put the coverage ratio to 62.5% in anticipation of the 2021 pandemic effect on us to point. On this front, we are developing a comprehensive strategy as we will discuss shortly. As a final remark, we introduced a segmental analysis of the Eurobank Group as shown on Slide 10. This analysis confirms that earnings and returns on employed capital are diversified and well balanced. It also highlights the strength of our resource subsidiaries, which together with our investment property portfolio, consistently deliver return on tangible book value below 10%. Post the pandemic effect and the cost of risk in Greece normalizes, the Greek banking business will also achieve similar effects. I'm confident that this business model makes Eurobank unique among its local peers, and this would be further reflected in market perception. At this point, I would like to ask our CFO, Harris Kokologiannis, to present our 9 months results before opening the Q&A session.

Thank you, Fokion. Starting from our balance sheet. In the third quarter, EUR 7.5 billion Cairo loans have been deconsolidated and senior loans of EUR 2.4 billion have been recognized as an asset on our balance sheet. Furthermore, Cairo mezzanine and senior notes of EUR 58 million par value have been distributed to our shareholders through Cairo mezzanine shares, and trading has commenced in the Athens Stock Exchange on that market. Let's now provide some more insight on the third quarter results. Starting from funding and liquidity on Page 8. As shown on the right part of the page, group deposits increased in the third quarter by EUR 1 billion. Furthermore, as shown at the left, the bank is making use of EUR 8 billion TLTRO at a rate of minus 100 basis points. In combination with deposits increase, this has led to a substantial decrease of market repos in the last 12 months by EUR 5.2 billion as a commercial reduction of funding cost. Net loans deposit ratio exceeded in the third quarter to 80.1%, and the LCR ratio increased to 122%. Moving on Page 16 on lending growth. During the first 9 months of 2020, the performing loans organic growth amounted to EUR 1.5 billion, favored by the Greek business portfolio in the past month. Taking into account the EUR 0.7 billion second tranche of state-guaranteed loans, the majority of which will be disbursed by the end of the year, organic growth for 2020 is expected to reach EUR 2 billion. Moving to profitability on Page 18 net interest income decreased quarter-on-quarter by 5.2% to EUR 331 million. This is due to Cairo loans deconsolidation with an impact of EUR 28 million. This effect was mitigated by the higher interest income from nonperforming loans and the TLTRO. As regard to gross margin, the impact from the significant decline on higher rates has been offset by higher volumes and the further decline of Euribor. On a year-on-year basis, net interest income is lower by 1%. On Page 19, commission income increased quarter-on-quarter by 8.3% to EUR 95 million, due to the recovery of network activities and credit card-related fees. Furthermore, capital markets, bancassurance and rental income showed positive ratings as well. On a year-on-year basis, commission income is higher by 10.1%. On Page 20, operating expenses are lower year-on-year by 2.5%. This is despite the base effect of the merger of Grivalia and the acquisition of Piraeus Bulgaria. In Greece, costs are lower by 5.6% and particularly staffed by 11.3% due to reduced headcount and rationalization of related expenses. As regard to our initiatives to reduce costs, we have further contained our branch network in Greece to 300 branches compared to 350 at the end of 2019. Furthermore, in October, we concluded the voluntary exit scheme for 800 people. The related costs amounted to EUR 122 million before tax, which has been included in full in third quarter results. The related savings reached EUR 35 million on an annual basis. Going forward, as part of the above savings, we've been solid to the acceleration of this digital transformation, the replacement and upgrade of our core systems and the enhancement of our client experience. Further on pre-provision income on Page 5. On the top left of the page, core PPI decreased quarter-on-quarter by EUR 11 million or by 4.8% as a result of Cairo loans deconsolidation, which offset commissions increase. On a year-on-year basis, core PPI is higher by 5.1%. Pre-provision income increased significantly to EUR 397 million due to strong trading income from Greek government bonds. Moving on asset quality on Page 6. As shown on the top left of the page, NPE formation was slightly negative in the quarter by EUR 46 million, driven by the mortgage portfolio. NPE ratio decreased to 14.9%, while NPE coverage increased further by 190 basis points to 62.5%. Cost of risk over net loans amounted, for the 9-month period, 12.5% and loan provisions for the quarter to EUR 155 million. Moving on the loans under moratoria on Page 22. Our priority is to take timely action to address negative effects and minimize new inflows when the moratoria expires at the end of 2020. Specifically, as shown at the right part of the page, the granular portfolio segmentation is followed, enabling us to group together borrowers with similar characteristics and then apply similar treatment. In this context, the Gefyra program, which provides up to 9% installment subsidy for a period of 9 months, is an important tool for mortgage borrowers as in previous period between moratoria and the return to full payment pattern. Based on the up-to-date approved applications to the program, the take-up for the bank is expected to reach approximately EUR 1.3 billion value of mortgage loans. For households which are not eligible for Gefyra strategy, the gradual restoration of payment pattern will be pursued through step-up programs. For corporates and small business, the liquidity position is enhanced through state programs and bank lending as follows. First, the direct state support advanced payment program amounted to EUR 5.4 billion for the system and then in new bank loans of EUR 8.5 billion through state guarantees and development fund programs. The bank participates to these programs with EUR 1.7 billion in new loans. Finally, as regards tourism sector, moratoria has been extended until the end of 2021 just to address in the free cash flow seasonality. Moving on to capital position on Page 7. In the third quarter, total capital ratio increased by 10 basis points to 15.6%. The increase was driven by the organic results of the period and the decrease of RWAs which offset the impact of the voluntary exit scheme. Fully loaded Basel III CET1 ratio amounted to 11.2% at the end of September as part of the previous period. Before concluding my presentation, let me refer to the segmental analysis shown on Page 10. Specifically, the key metrics of the major business segments of the group are presented, together with a net profit evolution over the last quarters. We intend to update this slide and including our results on an ongoing basis. The data from the analysis that are major subsidiaries in the region as well as investment property segment delivered consistently a return on tangible book value close or higher than 10%. Furthermore, it is shown that our end base is well diversified with a significant part of [ loan stability ] generated outside the Greek banking landscape. Finally, post-COVID outbreak. Considering a normalized and commensurate for our NPE ratio cost of risk, big bank business may also achieve similar returns. Some performance highlights of our investment property portfolio, Bulgaria and Cyprus are presented in the Pages 11 to 13. 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.

I have a few questions. The first one is on cost of risk on your guidance. I remember that you're guiding for 140 to 160 basis points. And if I'm not mistaken, this was based considering a cumulative GDP contraction between '20 and '21 of minus 2.5%. I'm aware that you show on Slide 34 the projections that you can commission. So in those numbers, you see a cumulative decline of 4%. Now going forward, how are you seeing your projections on cost of risk if there's any risk of further, let's say, one-off charges based on the change in GDP estimates? Just wondering if you're still sticking to the -- your modeling based on the minus 2.5% cumulative? Then my second question is on asset quality. I appreciate your color during the call and the slides. Now just wondering, looking at your loans under moratoria, I mean, what is the idea you have or what do you project in terms of defaults out of that EUR 5 billion? And going forward, how is your strategy on further reducing the stock? I mean there's always the talk about seeing the Greek banks with NPE ratios below 10%. I mean considering what may happen next year, what are the offerings you have ahead is the extension of hubs on, let's say, the base case scenario? Are you willing to do more outright sales of NPEs? Any color on this will be helpful. And yes, I'll stay here and then I -- if there's anything else, I'll join the queue later on.

Fokion. Thank you very much for your questions. Let me start from the asset quality, and then Harris will answer the question about the cost of risk. So before going directly into your question about the moratoria, let me give you an overview of what we have seen in the third quarter. What we see as we speak for the fourth quarter and then how we see asset quality forming in the first half of 2021. So in the third quarter, as we show on Page 6 but also on Page 24, where we have the loan segmental analysis, the NPE formation remains slightly negative. And the asset quality metrics were further improved from the previous quarter with the NPE ratio declining 14.9% as per Page 6. It is also worth mentioning that the amount of loans in moratoria was favorable. After Page 22, actually it was slightly decreasing. Now in the -- moving into the current quarter, the fourth quarter of 2020. We see that formation is expected to be slightly positive because of a few corporate amounts, but the improvement in the NPE ratio will continue with many future write-offs, and we expect to end the year with an NPE ratio slightly above 14% compared to 14.9% in the third quarter. And let me also clarify that despite the fact that November in Q4 is a month of lockdown, we don't expect any increase in the loans under moratoria. Now moving into next year. Obviously, our priorities to take the necessary action to manage any cliff effects when the moratoria expire at the end of 2020. Harris already mentioned what our strategy will be as per Page 22 in the presentation, in which we show what we do per segment of the loans under moratoria. And we feel quite confident that we have a quite comprehensive strategy to minimize any inflow of NPEs, of loans under moratoria [ in 20s ]. Now answering your question directly. I think I appreciate that visibility remains low, but based on our base scenario, we see about 20% of loans under payment moratoria becoming NPEs. This corresponds to an amount between, let's say, EUR 1 billion to EUR 1.2 billion, EUR 1.3 billion. This is gross inflows that we'll see in 2021. In addition corporate, the inflow is not only from the moratoria, but overall, the inflows that have been reset for next year. Now if we take into account the planned remedial options and the respective outflows that we expect to have, the NPE ratio may increase by no more than 100 or 200 percentage points in 2021 versus December of 2020. I already mentioned that we expect to end December with an NPE ratio above -- slightly above 14%. Therefore, the NPE ratio that we may see by the end of next year is in the area, let's say, of 15.5%. And this assumes that we have no major transaction of sale or securitization in 2021. Now going forward and answering the second part of your question. Our target remains for a single-digit NPE ratio, most likely in the following year, in 2022. Therefore, summarizing our expectations about the NPE ratios, we see by the end of this year, a ratio of slightly above 14%. A ratio circa 15.5% in the end of 2021, with the assumption of no major transactions taking place next year and significant in 2022. So as regards the cost of risk, we expect for the full year 2020 cost of risk to reach 150 basis points, in line with the guidance we provided during the previous quarters. This represents an increase of approximately 80% versus the pre-COVID estimate of 90 basis points. Or to translate that in euro terms, it is an additional amount of approximately EUR 300 million. As a result, we have been able to capture the expected deterioration in asset quality as well as the deterioration of the macro following the recent developments by increasing the NPE coverage ratio to 62.5%. And this is at a level higher than we initially expected in the middle of the year, basically due to the better evolution of the NPEs. At any case, this level should not be considered as the new normal, but let me add the buffer against new flows and inflows in 2021. And coverage is expected to return to approximately mid to 2019 levels. I would say, close to 55% coverage within next year.

Okay. Just one quick follow-up. In terms of staging of the loans. Shall we expect any more meaningful reclassification between Stage 1 and Stage 2 now into the fourth quarter or maybe Q1 2021?

Actually, the priority that was also expressed by SSM on that front is to manage effectively the key effects. And I would say, all our strategy is concentrated to that front. The solutions that we are providing actually address the temporary liquidity [ substance ] of our clients and not permanent financing efficacies. In that aspect, we don't expect any meaningful reclassification from Stage 1 to Stage 2.

[Operator Instructions] The next question is from the line of Sevim Mehmet with JPMorgan.

Just a follow-up to the previous question. Do I understand it correctly that your expectation of the 20% NPE inflows from moratoria would be without the remedial actions such as the Gefyra program, et cetera? And when we consider those, then you would expect around 1% to 2% increase in the NPE ratio next year?