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 the Eurobank Holdings conference call to present and discuss the full year 2020 financial results. [Operator Instructions] And 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.

Thank you, ladies and gentlemen, good afternoon, and welcome to Eurobank's 2020 Results Presentation. Together with me is our CFO, Harris Kokologiannis, and the Investor Relations team. I will start with our last year's performance, present the highlights of our updated NPE plan as well as our medium-term financial goals. And then Harris will elaborate further. 2020 was a challenging year due to the pandemic. However, the economic shock was mitigated to some extent by strong policy measures at the European and domestic levels. In Greece, the policy support was reflected in a number of areas: in containing unemployment at about 16%, in ample liquidity conditions supported by the TLTRO, in deposits increase by about EUR 20 billion across the banking system, in historically low sovereign bond rates as a result of the ECB's PEPP, and finally, in resilient real estate prices, residential and commercial. In our group's other core markets, beginning in Cyprus. It is positive that the economic shock was milder than the initial expectations. The adverse effect of the pandemic continues in the first quarter of 2021. However, on the positive side, Greece is one of the most advanced EU countries in vaccinations, which should significantly improve economic activity in the second half of the year. Tourism revenues are expected at 40% to 50% of 2019, which is more than double of last year's performance. Additionally, Greece is well ahead in the planning and preparation of the resilience and recovery plan, which should bring forward disbursements even this year. The banking sector is expected to play an important role in channeling and leveraging these funds to the economy. Coming now to Eurobank's initiatives. Since the pandemic outbreak, our top priorities have been to protect our employees and support our clients with new financing and payment moratoria. It is noteworthy that credit expansion for business loans increased and reached a 10-year record in 2020. Finally, through leveraging on our digital infrastructure and transaction channels, we were able to fully service our clients. Our operating performance remained resilient with core PPI exceeding initial guidance. Harris will give you the full details in a few minutes. A major milestone for the bank was the completion of the Cairo securitization. It significantly derisked our balance sheet and delivered the best NPE ratio among Greek banks at 14%. Coverage of NPEs increased to 62%, which includes EUR 400 million provision overlays in anticipation of the COVID-19 impact. As a result, our Texas ratio has improved by about 30 percentage points to 63%. Moving now into the 2021 outlook. We intend to reach a single digit NPE ratio not in 2022 but instead in this year. As you can see on Slide 7, we are launching a new securitization of EUR 3.3 billion with a code name Mexico, which translates to a pro forma NPE ratio of around 6.7%. Taking into account the potential impact of the COVID-19, which has assumed a EUR 900 million positive formation, the NPE ratio should be at 9% or lower by the end of 2021 and then further converge towards the European average in 2022. The cost of risk ratio reflects that improvement, declining materially to 60 basis points in '22. Now moving on Slide 10. Our financial goals reflect the updated NPE plan and cost of risk improvement. Let me highlight the earnings per share of around EUR 0.10 and EUR 0.15 in '21 and '22, respectively, and the return on tangible book value of 10% in 2022. Despite the cleanup of legacy NPEs, our fully loaded CET1 ratio is increasing by almost 100 basis points per annum, both in '21 and '22, as you can see on the top of Slide 9. Coming back on Slide 10. Organic capital generation could exceed 100 basis points after 2022, paving the way for dividend distribution. Overall, we are pleased to keep delivering in a consistent way on what we promised in terms of NPE reduction and resilient operating results. With Mexico, we will maintain our leading position in asset quality terms, moving decisively in single visit NPE ratio in 2021 and then double-digit returns on tangible book value and capital accretion of more than 100 basis points as of '22. At this point, I would like to ask our CFO to present our full year results and the outlook before opening the Q&A session.

Thank you, Fokion. Let's first see our financial results for the full year 2020 as highlighted on Page 12. Our recurring net profit for 2020 reached EUR 544 million, of which EUR 196 million in the fourth quarter. Core pre-provision income was up 4.2% year-on-year and 1.6% from the previous quarter, exceeding our guidance. This is mainly due to commission income, which increased by 8.6% on a yearly basis and by 14.4% from the previous quarter. Net interest income was lower year-on-year by 2% and slightly lower quarter-on-quarter by 0.6%. Group operating expenses were lower year-on-year by 3.6% and decreased by 6% due to lower personnel costs. Asset quality metrics were further improved from the previous quarter. NPE stock decreased by EUR 343 million and the NPE ratio declined to 14% at the end of 2020. Cost of risk for the year amounted to 1.5% of net loans. Provision coverage stood at 61.9%, which is higher by 660 basis points year-on-year, incorporating about EUR 400 million of management overlays in anticipation of any potential adverse effect of the pandemic post moratoria expiration. Regarding capital adequacy, our total capital ratio increased by 70 basis points from the previous quarter standing at 16.3%. We continue supporting our client liquidity with new loans. The net organic increase in our performing loans reached EUR 2.1 billion in 2020. Finally, deposits increased by EUR 2.4 billion and loan-to-deposit ratio receding further to 79.1%. Concerning the 2021 outlook and on Page 8. Net interest income increase is expected to be lower by around 3% versus 2020 as the lower income from loans and the revenue from disposed NPEs are mitigated by lower wholesale funding cost, TLTRO and income on new loans. Fees, on other hand, should grow by circa 10% year-on-year, offsetting the loss from the net interest income. Growth is expected in assets under management of the bank as well, network fees, credit cards and income from investment properties. Operating expenses in Greece should be flat versus 2020 as staff and redundant bank admin cost reduction should be broadly matched by higher investments in IT infrastructure and digitization of operations and client experience. Overall, considering also the expected increase of Southeastern Europe, core PPI should be higher by approximately 1% at EUR 875 million. Cost of risk is expected lower at around 130 basis points from 152 in 2020. Moving to capital outlook for next 2 years and on Page 9. Total CAD is expected to stand at the end of 2021 at 16% as the impact of the new securitization, the loan growth effect, the IFRS 9 transition and various regulatory adjustments are mitigated by the organic capital generation and planned capital accretive transactions. These refer to the synthetic securitization of performing business loans and the strategic partnership on merchant acquiring business. In 2022, total CAD increases to 16.6% as the higher profitability more than offset the transitions and other adjustments impact. In that year, on a fully loaded basis, the bank should organically generate around 100 basis points of capital. The above analysis does not include the additional capacity of Tier 1 and Tier 2 issuance, reaching in total EUR 1 billion or 250 basis points of capital. So this completes my presentation, and we may now open the floor for your questions.

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

Hello, good afternoon, everyone. Congratulations for the results achieved in the year and for the outlook. My first question is on the new securitization. Just wondering if there's any dates to share in terms of nonbinding and binding periods? And also on the capital impact you show on Slide 9, I suspect that the minus 50 basis points includes both the P&L impact and the RWA relief, right? Second, still on capital, so how should I think about your strategy behind the AT1 and Tier 2? Is it something that you are considering adding to your capital position or maybe do something this year? Just wondering how we should look at your capital position going forward, including or not those instruments. And then on Slide 8, in terms of new disbursements for 2021, just wanting to understand how do you think about what kind of level of new disbursements on a gross base you expect for the year? I think that 2020 is probably a stronger than usual year given what we went through. So as we start to normalize, what that level should be in this year? And also some view on rates, I remember in previous calls you were guiding for a small decline in corporate yields. I suspect that this still holds. So I'll stop here.

Thank you very much for your questions. I will take the first one. And then Harris will answer the questions about capital, disbursements and rates. In terms of the securitization, as we mentioned, this is about EUR 3.3 billion in size. It involves different segments of loans, including retail, which would be around 85% of the securitization. And the SME and corporate loans would be around 15%. The capital impact in terms of fully loaded CET1 is 25 basis points. And it increases to 50 basis points if we consider the impact on total CAD. And this includes the loss, obviously, from the mezzanine disposal, the impact on the expected loss excess and the risk-weighted assets relief. Now in terms of the time line that you asked, we have just started discussions with the rating agencies about the tranching and the re-rating of the securitization. And this should be completed by the end of April or beginning of May. Then subsequently, we're going to apply for perhaps protection, Hercules 2. And this securitization may be one of the first or the first to apply for Hercules 2. The process for the sale of the mezzanine tranche may start sometime during summer, receiving binding bids by the end of September. And based on this time line, we should be able to classify the assets as held for sale by the end of the third quarter of 2021 and have full recognition and closing by year-end provided that we will receive the SRT from the SSM before year-end.

Now as regards to capital, as you may see on Page 9, the projection shows that the bank is comfortably above, not only from the extraordinary levels that have been put in place until the end of 2022 in the context of the pandemic, but also comfortably above from the current requirements that would apply if these measures were not in place. So in this context, we just show at the bottom the capacity of the bank as regards AT1 and Tier 2. However, it is not included in our original capital plan. Now as regards to disbursement, 2020 was a very strong year, also boosted by the state support programs. 2021 is expected to be a strong year as well on new loan production. However, given that we're not going to have these state support programs, you should expect the net increase of performing loans to be close to 20% lower than the one we had in 2020. I remind you that in 2020, we had a loan growth of, the net growth of performing loans was EUR 2.1 billion. And this is expected to offset any impact that we might have from a mild further decline of corporate loans.

Okay. Just a quick follow-up on Mexico. Shall we expect also to see a distribution of the shares like we saw in the Cairo transaction?

This is something that we have not decided yet. As soon as we have something new on that, we will update you.

The next question comes from the line of Memisoglu, Osman with Ambrosia Capital.

Just 2 questions, really. One is, are you able to give us a bit more color on the trends for loans coming out of moratoria? And then just a confirmation, if I got it right. The Mexico transaction is supposed to be happening towards the end of the year. So there is no NII impact from that in your guidance. Would that be correct?

Okay. Let's start in terms of asset quality, what we see about moratoria and so on and so forth. And then Harris will take the second question. I suggest we turn on Page 30 of the presentation, in which we're trying to provide an analysis of the moratoria evolution and an assessment of payment pattern segmentation post moratoria. So on this page, on the left part, we show that out of the EUR 4.9 billion moratoria increase in the fourth quarter, EUR 3.3 billion expired during the course of 2020. EUR 0.9 billion are expiring as we speak, during the first quarter of '21. And the rest, which is about EUR 0.7 billion and are related mainly to the tourism sector, will expire within the coming year towards the end of the year. Now on the right part of the same page, we show that about 80% of the clients post moratoria had expired during December or are about to expire returned to normal debt servicing. And let me become more specific on that. 42% of total moratoria, so 42% of the EUR 4.9 billion are clients who restore normal debt servicing based on their own means. 20% are clients who have used the subsidy of Gefyra, but still to resume into a full payment pattern. 5% are clients who are returning into payment but through a gradual restoration. This is the so-called Step-up program, and this includes a 50% installment during 2021 and then moving into 100% in January of '22. Please make a note here that 5% is lower compared to what we were initially anticipating, which is obviously something positive. Then we have about EUR 0.7 billion or 13% of the moratoria which are expiring until year-end, the tourism sector. And let me note here that these are very good quality customers, strong customers, and we don't really expect any sort of problems from this segment. And therefore, our analysis concludes with about 20% of clients which may face the risk of default. Now this is obviously a theoretical exercise. It is a segmentation that we have done, but early signs are encouraging and verify the segmentation and the majority of clients returned to normal payment. However, it is early to draw any final conclusion. Based on January and February data, we expect NPE formation of about EUR 250 million positive for the first quarter of 2021. For the full year, as we have shown on Page 8, we expect NPEs to increase by about EUR 0.9 billion. Sorry, not Page 8, Page 7, where we show this increase of EUR 0.9 billion for the full year. And this obviously is a net increase. That means that includes inflows from moratoria, inflows from other loans, minus outflows either because of curings or other remedial actions. This scenario appears to be a reasonable one, which, combined with the Mexico securitization, will lead the NPE ratio at a single-digit level at the end of 2021 at 9% or lower. Now let me add a few words about the cost of risk, which is related to this asset quality outlook. We expect the 2021 cost of risk to decrease from 1.52% to about 1.3%, 130 basis points this year. And then we will have a very serious, a very material decline further to 60 basis points in 2022. You can see these figures at the bottom of Page 7. In terms of NPE coverage, we are at 62% in the end of 2020. This stock of provisions includes EUR 400 million of provision overlays in anticipation of the pandemic impact. That means that we have about 7 percentage points buffer, and we expect that the coverage by the end of 2021 to come closer to what we consider a normalized level, which is 55%.

Now as regards Mexico, you are right that we envisage the closing of the transaction at the end of the year, so there is no impact on NII in 2021. Any impact will be as of 2022. And this is estimated at approximately EUR 35 million, which is the loss on NII from this, less the proceeds from the coupon. However, in order to have the big picture, we should compare this with the great benefit on the provision line as of 2022, as Fokion said, that it is approximately EUR 250 million improvement year-on-year on cost of risk. Second, we have to take into account the improvement in the quality of our revenue. So in this context, this provides you with 2 figures. In 2019, we had close to EUR 350 million out of EUR 138 billion, close to 25% NII coming from impaired loans. In 2022, this figure comes down to less than 60, that is out of close to EUR 1.3 billion or something less of net NII. So this is something close to 5% of total net interest income. So you may notice a very substantial improvement in the quality of our revenues.

Yes. If I can follow-up on one thing. Are you able to disclose roughly how much write-offs do you plan to do this year?

This is part of the EUR 0.9 billion increase in the NPE stock. As I said, it includes both inflows and outflows and write-offs. But at the moment, we don't have the final breakdown between these figures.

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

Congratulations on the results. My first question will be on your cost of risk guidance for 2021, please. So you're guiding for a 130 basis points cost of risk. And I suspect that this contains the impact from the Mexico transaction. Could you confirm that this is correct? And secondly, I mean, the 60 basis points cost of risk guidance for 2022 is obviously very positive, but also a significant decrease from the 2021 level. And also, when we look at your previous guidance, which was basically in 2022 -- sorry, in 2020 before COVID hit, you were targeting a 75 basis points cost of risk back then. My question would be, what makes you more optimistic now on the 2022 level that the cost of risk will be lower than pre-COVID guidance back then? These will be my first 2 questions, and I'll have one more later.

Okay. First, let me elaborate that the cost of risk for 2021, the 130 basis points does not include the impact that we may have from the sale of the mezzanine tranche. This comes on top. And as you can see from Page 9, where we have the capital evolution. The impact from the sale of mezzanine is included in the negative 50 basis points, which is the impact on the total CAD. And as I said before, this figure incorporates the loss from the mezzanine disposal, again, on top of the 130 basis points, the impact on the EL excess and the risk-weighted assets relief. I hope this is clear now. And now moving to 2022, indeed, we have a more optimistic scenario than before. Obviously, there are a number of things which are different. The difference is not that big, but there are a number of things which are different. One is that compared to the previous analysis, if I remember correctly the previous scenario, if I remember correctly, now we have an even cleaner book in 2022. Second, a number of parameters are behaving in a better way. Let me mention the real estate values, which have remained very resilient either through the shock of the pandemia. And that would allow us to have a lower cost of risk than the previous forecasted.

That's very clear. And if I may ask, I mean, I think what's very impressive is that you're still keeping your '22 ROTE target of 10% despite COVID-19 and all the challenges that come with it. What do you think is the main risk then today that may negatively impact your plans for this? So do you think that 60 basis points guidance is, for example, would that be on the bullish side or would that be rather on the base case side, for example? And do you see any other risks that may come in the way?

The main risk the banking system is facing is the potential inflow that we may have from the moratoria, the inflow that we may have from COVID. As we have discussed already on Page 7, we have an estimate of EUR 0.9 billion. We believe that this is a fair estimate and based on what we have seen so far in January and February. But I already mentioned that it is early to draw any final conclusions. Therefore, from what we have discussed, I would say that one thing that we have to follow very closely is this figure. Now on the 50 basis points impact on the securitization. We feel quite comfortable that the loss is going to be contained within this envelope.

The next question comes from the line of Boulougouris, Alexandros with Wood & Co.

I would like to ask regarding the loss on the mezzanine that you mentioned on the disposal of the mezzanine on accounting-wise. Would this go directly from the P&L and the profitability of 2021 or you can use the previous write-down? How will that work accounting-wise? That's my first question. My second is regarding the slide on capital where you mentioned the 100 bps capital accretive transactions. If you could tell us a bit what that will entail? And then also on Page 7, where you show your group NPE coverage. I was just curious on 2022 where that grows to 65%. Is that a coverage you're comfortable going forward with? Just curious also about the increase from 55% to 65%.

So the P&L impact from mezzanine loans will pass through our P&L. Of course, our profitability in 2021 will be such for us to absorb it. But the answer is yes, will pass through P&L. Now let me elaborate on the capital accretive initiatives that we envisage for this year. First, on the strategic partnership for the merchant acquiring business, actually, the bank is considering to think a strategic partner for its merchant acquiring business within 2021. And this transaction would allow actually management focusing more on growth of card issuing, credit extension and other core business. I would say that there is a European trend that major banks spin-off their credit card acquiring business. And the main reason is that this business going forward relies heavily on technology innovation and CapEx and this area becomes day-by-day no-go. Now as regards synthetic securitization, the project refers to synthetic risk transfer transaction for SME, large corporate performing portfolio that the bank is currently working on and plan to implement in the second half of 2021. The bank, in this case, will buy loss protection on the mezzanine tranche of its securitized business portfolio. And we should be able to quantify the effect of this transaction on total CAD by midyear. Actually, let me explain to you that the loans are not removed from the balance sheet from an accounting point of view. But actually, the bank enjoys a capital relief through a decrease of RWA. So together with a strategic partnership for the merchant acquiring, the 2 transactions should add 100 basis points of total CAD in this year.

May I ask on this, what is the impact on net interest income and fees? Because I assume that you gain capital, but you give up some profits, I guess, from these relief measures?

Sure. The impact on P&L, actually, you are right, it decreases a bit our fee level at the area of close to EUR 20 million per annum. However, this impact has been already incorporated in the outlook we provide for 2022. And I forgot to say that also the impact on NII coming from the Mexico securitization has been also incorporated in the outlook that we have provided for 2022. Now with respect to the coverage, which increases at 65% in 2022. Still, we believe that a normal level in terms of coverage is around 65%. But in 2022, the amount of NPEs is so low that small changes in the provisioning increases the coverage. So it is more like a mathematical effect than the intention to increase coverage.

So it increases basically from the cost of risk of 60 bps. That's the effect for the year?

That's correct. Yes.

The next question comes from the line of Cordara, Alberto with Bank of America Merrill Lynch.

I join my colleagues in congratulating for this good set of results. I have 3 questions. The first one related to the fact that you mentioned earlier on dividends. So could you be a bit more specific which year you think you can start paying dividends again? And in case, what would need to be the payout ratio that we factor in our models? The second question relates to the slide when you show the Stage 2 loans. I saw that this had been quite stable throughout the year. So they are up 0.6% quarter-on-quarter. And they're basically flat on a year-to-year basis. Now my question to you is, I found this number a bit strange because looking at some other European banks, we had a pretty sharp increase. In some cases, even a 80%-plus year-on-year or 40% or 20%. So why your Stage 2 during the pandemic they kept stable? The final question is, you're going to have some risk-weighted asset relief thanks to the sale of NPEs and the securitizations, but you are the only Greek bank that is adopting internal models. So the question is whether we should factor in some headwinds related to the fact that this sale may be conductive to you having to reassess the PD or the LGD of the performing loan portfolio.

Okay. Let me start from actually the outlook on dividend, and then Harris will then take the other 2 questions. As we state on Page 10, organic capital generation of more than 100 basis points post-2022 paves the way for dividend distribution. Actually, there are 3 important elements which drive toward dividend payments. The first, in our view, is a single-digit NPE ratio, which, as we have already discussed, should be reached in 2021 with the completion of Mexico and further decrease the following year, 2022. Second is, second element we have to consider is the internal capital generation capacity of the bank that we have already discussed to be about 100 basis points, which corresponds to double-digit return on equity. And I think we tick this box also in 2022. There is a third parameter, which is also important, which is the full phase-in of the IFRS 9, which is completed in the beginning of 2023. And therefore, there is no impact after that in the capital ratios. So under these 3 conditions, we could consider capital distribution. Now the exact timing and the percentage of net profit that could be distributed, I think it is too early to discuss.

As regards the absolute numbers of Stage 2 loans, actually, this is a question of inflows and outflows. And here, we had a peculiar situation in 2020 where due to the moratoria, the situation was a bit frozen. So that is the main reason that explain the low variation on the Stage 2 loan number. Now I'm not sure that I have understood your question about Mexico.

I think, sorry for intervening, it was not about Mexico, it was about the synthetic securitization, right?

Yes.

And the effect that this transaction may have on the LGD and the PDs of our loans, correct?

Yes. Correct.

Yes. As a matter of fact, this is not a true sale of the portfolio. We're not selling the loans. We are just releasing risk-weighted assets. So the concern that was the case for the sale of NPLs, which were outright sales does not apply to the best of our knowledge. In this case, we keep on balance sheet these loans. It is just a way of releasing risk-weighted assets.

[Operator Instructions] We have a follow-up question from Sevim, Mehmet with JPMorgan.

Just 2 technical questions from me, please. So one, you've had meaningful trading gains in 2020, obviously, supported by the current market environment. I just wanted to ask how we should think about this line in 2021 and if there's any further room for the gains that you may book this year? And secondly, could you please give us more color on the goodwill impairment and the DTA write-off that you mentioned, which are impacting the net profit line negatively, but not the capital. So just from an accounting perspective, if you could give a little more color on this that would be great.

Sure. So in 2020, we had close to EUR 450 million trading gains, mainly coming from GGBs as well as from a swap transaction with the Greek state that we made at the end of the previous year. Of course, we do not expect similar levels of trading gains in the following year. I would say that a more normalized level should be at the area of close to EUR 100 million per annum. Now as regards the DTA and the Grivalia goodwill, actually, DTA write-down, the right word accounting-wise, reflects the DTA recoverability analysis that we performed at every year-end and takes into account, of course, the COVID-19 outbreak and its impact on the macroeconomic factors, which led us to take a more conservative view as regards tax planning and DTA recoverability. Such impairment, such write-down does not affect DTC but only DTA on temporary differences, and you saw any impact on the regulatory capital. Now as regards the Grivalia goodwill impairment, first of all, let me stress that the Grivalia goodwill impairment has no impact on Eurobank tangible book value, its regulatory capital ratios or the revalued investment property book line. In the context of accounting housekeeping, let's say, in a year of high trading gains, we just align the accounting figures with regulatory capital ratios and the tangible book value of the bank.

The next question is from the line of David, Daniel with Autonomous Research.

You flagged Tier 1 and Tier 2 having capacity tied to your capital ratios. I just wanted to ask, is this something you're considering in the short term? Should we think about this in 2021? And secondly, have you been set an interim MREL requirement? And if so, when does that become binding as well as the end state?

Yes. Regarding your first question, as Harris mentioned, it is not in our planning to issue Tier 1 or Tier 2 either in 2021 or 2022. This is additional capacity that we have for these 2 instruments and additional capital buffers, but our capital plan does not rely, and I repeat, does not rely on the issuance of these instruments.

Now on the second question regarding MREL, let me take you on Page 16 of the presentation whereby we plan in the context of MREL for planning purposes to issue EUR 1 billion of senior unsecured preferred debt in 2021, out of which close to EUR 500 million is the transaction envisaged in the first half of the year. And similar issuance, similar issuance volumes of senior unsecured again preferred is scheduled for 2022 and 2023.

[Operator Instructions] Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Karavias for any closing comments. Thank you.

Let me thank you all for participating in this call for your questions and the discussions that we had that was quite interesting. We will be available for any follow-up questions any time that you would like. Thank you.

Ladies and gentlemen, the conference has now concluded and you may disconnect your telephone. Thank you for calling and have a pleasant evening.