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 second quarter 2021 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.

Ladies and gentlemen, good afternoon, and welcome to the Eurobank First Half 2021 Results Presentation. Together with me is our CFO, Harris Kokologiannis, and the Investor Relations team. Let us present our results and key recent developments before we answer your question. Starting with the macroeconomic front, despite the set out of the Delta variant, sentiments remains positive, as shown by domestic economic activity indicators. Deposits keep increasing in the banking system, real estate prices are moving upward, and the asset quality trends remain resilient and better than even revised efforts. At the same time, foreign direct investments are accelerating across different sectors, and economic activity recovers, as seen in [indiscernible] turnover, moving higher than the 2018 level in the second quarter. The touring season seems stronger than initially expected, and current estimates point to revenues of at least 50% of 2019 sales. Greece, we regained approval for its plan for the Resilience & Recovery EU funds, and expects EUR 7.5 billion disbursement this year, of which EUR 4 billion was already received. It appears that the strong growth will extend into the 2021-2026 period, for which we expect annual activity growth of 3.5% to 4% on average, underpinned by the RRF. The above trends, together with the banking system delivering the [indiscernible] NPEs make a sovereign credit rating upgrade to investment grade likely in the next 15 to 18 months. Now let's see our financial results for the first half of the year, as highlighted on Slide 4. Our profits in the first half of the year reached EUR 195 million, of which EUR 123 million in the second quarter. Core pre-provision income was up 2.4% on a year-on-year basis and 4.5% from the previous quarter. In line with our guidance, net interest income was lower by 2.8% in the first half of the year and stable versus the previous quarter. Commissions increased strongly by 16% year-on-year and 12% on the previous quarter, while operating expenses were slightly lower. On [indiscernible] now, the better-than-expected trend continues into the second quarter with organic information being negative by EUR 43 million. The cost of risk ratio reached 1.2% in the first half of this year. Our total capital ratio stands at 16.6%, while the fully-loaded CET1 increased by 20 basis points last quarter and reached 12.1%. New loan disbursements, mainly business loans, reached EUR 3.4 billion in Greece in the first half of the year. Deposits were up by EUR 2.4 billion in the same period and the loan-to-deposit ratio declined to 75%. Finally, in our international operations, we recently announced 2 initiatives: one in Serbia, the merger with the Direktna Bank; and the second is Cyprus, a minority participation with Hellenic Bank. This is in line with our strategy to further diversify and strengthen our business in these countries. The existing operation continue deliveries in the meantime with net profits of EUR 73 million in the first half of the year. Now moving beyond the second quarter financial results, we successfully completed the 2021 SSM stress test, as shown on Slide 5. Eurobank ranked among top European banks based on the fully loaded CET1 definition of 433 basis points under the adverse scenario in the period 2020 to '23. This is the best performance among local [indiscernible] and reflects the NPE reduction already achieved. And the capital depletion under the adverse scenario is the key input for the SREP evaluation. This should be positive for our regulatory capital requirements in the future. Let me now continue with an update on the Mexico utilization, highlight of which are on Slide 6. On Mexico, we have a binding offer from Dubai. We intend to reclassify the [indiscernible] portfolio as held for sale in the third quarter, and we consolidated in the fourth quarter. Our NPL ratio pro forma for Mexico stands at 7.3 in June 2021. The update in capital impact transactions is estimated at minus 10 basis points only. As a result of the better than initially expected capital impact of Mexico, our full year 2021 total cap is estimated now at 16.4%, that is 40 basis points higher than the previous estimate. Regarding the other 2 capital disbursement transactions, our plan for a strategic partnership is [indiscernible] acquiring business, we received competitive binding offers. We aim to decide [indiscernible] in the next few weeks and sign the agreement in the fourth quarter. And the synthetic synchronization of performing loans is also on track to close before year end. So in summary, Eurobank delivers on all its priorities, namely, stability, asset quality, capital and regional expansion. The operating performance is in line with our expectations for 2021, and the outlook for 2022 is even better as macro trends in Greece improve. In a slow economic environment and having already the best support schematics and the most diversified business model in the sector, Eurobank is in the full position to expand its profitability in the coming years and deliver double-digit return on equity as early as next year. Finally, and yet importantly, as ledgers and [indiscernible] are behind us, and the bank has started generating strong organic capital, all necessary conditions are in place to initiate the supervisory dialogue on dividends distribution. At this point, I'd like to ask our CFO, Harris Kokologiannis, to present you our first half results year-to-date before opening the Q&A session.

Thank you, Fokion. Let's now provide some more insight on the second quarter results. We start from the capital position on Page 10. In the second quarter, our fully-loaded [ CET1 ] ratio increased by 20 basis points, amounting to 12.1%. The [ trade-in ]total capital ratio reached 15.6%. The drivers of the year-on-year capital movements have been fully anticipating in the 2021 capital plan presented in March. Furthermore, accounting from the updated impact of Mexico, there are now capital investment initiatives that are in progress. The year-end outlook [ is a lot ] higher with total cash and fully-loaded CET1 ratios at 16.4% and 13.2%, respectively. Moving on Page 19 on lending evolution. Loan disbursement increase continue to be strong at EUR 3.4 billion in the first half of the year. Reported loans increased by EUR 1 billion year-on-year, driven by corporates in Southeastern Europe. We expect loan growth for the group in the second half of the year to reach EUR 1 billion, with July already being higher by EUR 300 million. On Pages 20 and 21, we present an overview of the RRF pillars and eligible investments. The program side is split between grants and loans. As shown on Page 21, the loans part may level up to EUR 30 billion of investments to be funded at very attractive blended cost. Eurobank is well positioned to take the most out of this opportunity. And to this extent, is dedicated [ to offering their pool of advisers ] to support its clients as regards RRF project assessments. Participation to RRF, combined with the underlying credit expansion, driven by the solid growth of economy for the next 3 years, are expected to accelerate loan growth for the group to circa EUR 2 billion per annum for the period 2022 to 2024. Moving on funding and liquidity on Page 22. As shown on the right of the page, group deposits increased in the first half of the year by EUR 2.4 billion, largely driven by the extensive same support measures for the economy, lower consumption and increased 2020 loan disbursements. Net loss deposit ratio exceeded in the second quarter to 75%, and NPR ratio increased further to 166%, as shown at the left of the page. We are aggressively increasing several liquidity cost challenge due to [indiscernible]. First, compressing deposit costs, which is approaching the 0 level, as shown on Page 24; and second, by intensifying our efforts to offer mutual funds and bank [indiscernible] products, as will be shown shortly. Moving to profitability on Page 25, net interest income was same quarter-on-quarter at EUR 335 million as the lower contribution from [ TLTRO ] and the lower lending margin, mainly related to corporate portfolio spreads, are offset by higher bonds income and revenues from Southeastern Europe. As regards to deposits margin, the impact of increasing volumes has been fully offset by the continued decrease of client rates. On a year-on-year basis, net interest income is lower by 2.8%, in line with what was anticipated. Furthermore, still on Page 25. On the upper right hand, we focus on the qualitative composition of interest income. Specifically, we show the contribution of NPE to total NII decreased from a high of 30% before [ June half ] to 9% current year. And eventually, is estimated at around 3% in 2023. On Page 26, commission income rebounded strongly in tandem with the resumption of economic activities, showing a quarter-on-quarter increase of 11.8% and reaching EUR 410 million. The increase is mainly driven by revenues from credit cards and network transactions, Bancassurance and mutual funds. Focusing more on wealth management on Page 27, the bank maintained the leading position in a fast-growing market, serving its clients through 4 private banking centers in Greece, Cyprus, Luxembourg, and London, and investing heavily technology in a new platform, the group secures a competitive advantage versus its peers and is positioned well to become a significant regional player in wealth management. On Page 28, operating expenses are flat year-on-year. In Greece, costs are slightly lower by 0.4%. As highlighted, [indiscernible] expenses are offset by sub-costs, which is lower by 7.5% year-on-year due to reduced headcount. Moving to the asset quality on Page 30. As shown on the top left of the page, NPE formation in the second quarter was negative by EUR 43 million, continuing with better-than-expected trends. NPE ratio increased to 14% and pro forma with Mexico is reduced to 7.3%. Cost of lease in the quarter declined 1% of net loans, and for the first half of the year to 1.2%. Coverage in the second quarter increased by 140 basis points, reaching 63.3%. On the next page, we summarize the core operating performance for the first half of the year. Core PPI is higher year-on-year by 2.4%, mainly driven by loan NPE-related NII, higher provision income and lower staff cost which more than offset the lower income from NPEs by EUR 82 million. Loan loss provisions are lower by 17%, reflecting the deleveraging of NPEs and the better asset quality trends. As a result, core operating profit is higher year-on-year by 35%, up EUR 221 million. Finally, let me close with an update on the full year 2021 profitability guidance provided in March. On core PPI, we expect to be in line with our initial estimate of EUR 875 million. Cost of risk, taking into account the latest asset quality trends, is estimated for the full year at 1.1% of net loans. The above point to a full year profit before tax, over EUR 500 million. This concludes 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.

And well done on the results. I have a few questions. First of all, at group level, just wondering how you see the early indications of asset quality for the second half. I remember that in previous calls, you're taking a more cautious approach in regards to the inflows, and that was also reflected on your guidance for the cost of risk, which now, I see that is at the lower end of the range you gave before, the 1 10 to 1 20. So just wondering, now in this first couple of months, how are you seeing that developing? Yes, so that will be interesting to get from you. Now second, also, on the real estate side, any views on the resumption of auctions? And how can that change your real estate portfolio? And if that also is linked to the investment pipeline that you have. If I remember that your number for 2021, 2022 in terms of real estate investments was in the range of EUR 300 million. So just wondering if this number still holds at that level? And then finally, on Cyprus, I've seen that this quarter, you booked quite a low provisioning rate in the country, meaning that your bottom line was relatively higher than the previous quarters. So just wondering what drove that, and if you expect the provisioning level to remain in line with second quarter or maybe to reverse to the, let's say, to the average we've seen in the previous quarters.

Okay. Thank you very much for your questions. Let me take the first one, and then Harris will take the other 2. So as you correctly pointed out, the first half of the year core events were better than expected. For instance, out of the EUR 4.9 billion of moratorium in 2020, circa 5% only have defaulted, while 85% have returned to normal payments, either on old means or through the [ 2 new ] bridge programs, [indiscernible] programs. There is 10% of moratoria, which is expiring in the second half of the year, but these are related entirely with the hotel sector. I already mentioned that tourism has done very well, above expectation. I was just reading that in the international airport departments, tourist arrivals have reached in general forecast, 70% of the 2018 year. Therefore, we are not concerned at all about the performance of these customers for which moratoria are ending in a few months. Now in the second quarter, we recorded a negative NPE formation. On Slide 30, we present the formation per loan segment. And as you can see there, the trends are very similar in all 4 loan segments. For the third quarter, and based on the information we have so far, we expect a slightly positive formation in, let's say, below EUR 100 million. In the previous analyst call, we projected for the full year 2021, an increase -- an organic increase in the stock of NPEs of about EUR 600 million. And based on what we have seen so far and what we expect for the third quarter, this figure appears to be on the high side. However, as state support measures are gradually lifting, we prefer to remain cautious and continue monitoring the asset quality trends. And let me clarify, the [ 4 loans ] we recognized to be EUR 600 million is on the high side. At the moment, we don't revise this figure lower. So based on all this, we expect that in the end of the year, the NPE ratio will be close to 8%, including the effect of Mexico. As Harris mentioned, the cost of risk for the full year will be at 1.1% versus 1.2% that was in the first half of the year. And this should bring the NPE coverage more or less at the same levels as we have today. And we believe that this high mark would allow us to support a lower cost of risk in 2022 and going forward. And further, increase the NPEs towards the 5% area as early as next year in a very cost optimal way. So this is how we see things in the area of asset quality. And let me now pass over to Harris for the other 2 questions.

I think coming to the auction question, it looks like as of 1st of September, auctions are well resuming in all categories apart from the vendor households for which there are very strict income wealth and level of deposits reconditions, which are, for the moment, on hold, as well as some auctions referring to specific areas increase that were achieved by recent wildfires. All other auctions are -- have started to progress quite well. And we should expect for the sector close of 63,000 auctions to take place by year-end. Actually, this is what has been scheduled. And not only that, but it could be upward -- continued upward trend on the real estate prices, both residential and commercial, is one more encouraging signal as regards to proceeds from [ loans ]. So in tandem with a good level of collections as of the fourth quarter, we expected good resumptions of auction proceeds. Apart from that, we had also some recent [ safety ] in the bankruptcy codes accelerating the auction processes as well. In parallel, we are executing a schedule of our program investment property expansion, and the outlook that we had provided in the previous calls for an investment plan at [indiscernible] of EUR 300 million for the next couple of years still holds. Now as regards to the provision chart in Cyprus, in the first half of the year, we had provisions of EUR 3 million. That was quite lower from our budget, that was close to EUR 5 million. For the second half of the year, the outlook is more close to EUR 5 million. However, if the underlying credit quality trend continue to be better, maybe a bit lower, but it should be at that area, EUR 4 billion to EUR 5 billion.

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

I have 2 questions. One on the spread trends you're seeing lately, particularly as we approach potentially more volumes regarding related to recovery fund, if you could give us any more color on that front? What are you seeing lately? And what do you expect in Q4 and beyond? And then the other thing around your international business thinking. Obviously, you've made some transactions, particularly the one in Cyprus was a minority stake. If you could give us a bit more color on your strategy in Cyprus and maybe in other geographies, what we should expect on that front?

Starting from the spread side, I assume your question is about loss, but let me elaborate on both sides of the balance sheet. On the lending side, in the last quarter, we see some debt decline of the corporate lending spread. This was related to, of course, the market competition, but also to some high-yield large-ticket corporate loan repayment that we kept during the second quarter. Going forward, we should not be surprised if we see some -- mild slide of the corporate lending spread in view of the competition. But also, as you already pointed, the increasing volume that is expected, the increasing demand going forward. On the retail business, especially on the household, mortgage and the consumer, we don't expect any material movement from the level we stand today. We should also raise a point as well on the deposit side, where we have made a very good progress on decreasing deposit client rates at levels approaching the [indiscernible]. So as we speak, the stock of time deposits is up 16 basis points. However, at new production, it is at 6 basis points, so there is a positive, let's say, pipelines being incorporated in our P&L going forward. And therefore, it's continuing, both in Greece and our subsidiaries mainly in equity area and such? Now as regards our strategy for international, I pass to Fokion.

Sure. Let me elaborate a little bit on the lending bank transaction. We bought a minority stake, we believe, in a very attractive valuation. However, we have already a very successful operation in Cyprus. This is Eurobank Cyprus. And our plan is to expand our business there in an organic way, first of all, through Eurobank Cyprus. Now with respect to Hellenic, we don't intend to increase further our stake, at least in the near term. In the meantime, we will support the Hellenic Bank management in all the initiatives and all the priorities that it may have, including the cleanup of the balance sheet, which is underway. But also in the effort to improve materially the cost-to-income ratio, which is on the high side in this bank.