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

Ladies and gentlemen, thank you for standing by. I'm Costantino, your Chorus Call operator. Welcome and thank you for joining the Eurobank Holdings conference call to present and discuss the third quarter 2021 financial results. [Operator Instructions] The conference will be 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 the Eurobank 9 months 2021 results presentation. Together with me is our CFO, Harris Kokologiannis, and the Investor Relations team. We will start with some recent developments, then present our results and answer your questions. So starting from the macro level, the full year 2021 GDP growth is expected to exceed 7%. Despite the recent pandemic surge, which may have a small impact on the fourth quarter. The touring season was expected in late October, and the 2021 revenues maybe close to 60% of the 2018 mark. While the prospects of 2022 are even better based on the [indiscernible]. Industry production has fully recovered and at least 10% higher than pre-pandemic level in the third quarter. At the same time, foreign direct investments are accelerating and have already topped EUR 10 billion in 2021. Greek corporates and banks have tapped the market with debt and equity issues of EUR 7 billion and EUR 3.6 billion respectively. Combined with investment supported by the resilience and recovery in EU funds, for the next year we expect strong GDP growth close to 5%; and for the 5-year period, '22 to '26, around 3.5% to 4% per annum on average. The third quarter of '21 is an important milestone for the Greek party system as Eurobank becomes the third Greek bank achieving a single-digit NPE ratio after a 10-year loan crisis. We expect the home sector to be a single-digit ratio within next year, thus laying the ground for the sovereign investment-grade rating. Now moving into our financial results for the 9 months of the year, these are highlighted on Slides 6 to 9. Our net profit in the 9 months reached EUR 298 million, of which EUR 103 million in the third quarter. Core pre-provision income was up by 4.1% on a year-on-year basis driven by strong fee growth. In the same period, the loan provisions are down by 25%. And as a results, the core operating profit is up by 61%. Our international operations continued their strong performance, with net profit of EUR 111 million in the 9 months of the year. Performing loan balances have increased by EUR 600 million. Deposits were up by EUR 3.8 billion in the same 9-month period. And the loan-to-deposit ratio declined to 74%. Regarding the debt issuance, our second investment [indiscernible] was completed in September in order to meet the interim MREL target. Moving now on asset quality on Slide 8, let me highlight the massive improvement achieved, with a decrease by EUR 20 billion of NPEs since 2016. Following the Mexico securitization, the NPE ratio reached 7.3% and is expected to remain at current levels in the fourth quarter of this year. The coverage ratio was at 73%. Moving on Slide 9, our total capital ratio stands at 15.7%, while the fully loaded CET1 increased by 20 basis points last quarter, reaching 12.3%. Now beyond Q3 financial results, our 2 capital accretive transactions are in their final stages. The strategic partnership in the domestic acquired business will be signed in the next few weeks and they close in the first half of the year. Further securitization of EUR 2.1 billion performing corporate loans is on track to close before year-end. Outside this, the merger of Eurobank Serbia with Direktna Banka is also closing before year-end and will improve our footprint to the local market. So in summary, as we approach year-end, it becomes evident that Eurobank is outperforming all key targets for this year of stability, capital and NPE ratios. Given a positive macro backdrop in all our core markets, we aim to deliver on our next target, namely a double-digit return on equity as early as 2022. Furthermore, next year after we announce the full year 2021 financial results and having submitted the '22 budget and our 3-year business plan, we aim to initiate a supervisory dialogue on dividend policy. 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. Let me first comment on the accounting treatment of the Mexico securitization. In the third quarter, EUR 3.2 billion Mexico loans had been reclassified as assets for sale and will be deconsolidated in the fourth quarter upon the closing of the transaction with doValue. At that time, the Mexico senior loans of EUR 1.6 billion will be recognized as an asset on our balance sheet. In this presentation for comparability purposes, Mexico senior loans have been included pro forma in the September end [indiscernible] figures. In addition, third quarter results include the impact from the Mexico loss of EUR 72 million. Let's now provide some more insight on the third quarter results, starting with Page 17 on lending evolution. Performing loans increased organically year-to-date by EUR 600 million, of which EUR 400 million in the third quarter driven by Greek corporates and SEE loans. During the last few months, loan demand has been accelerated. And considering the pipeline, we expect loan growth for the full year to reach approximately EUR 1 billion. Moving on funding and liquidity on Page 18. As one can derive from the page, group deposits increased in the third quarter by EUR 1.4 billion and year-to-date by EUR 3.8 billion. Out of this increase, EUR 2 billion are coming from Greece and EUR 1.8 billion from SEE. Net loans to deposits and our LCR increased in the third quarter to 74%, and LCR ratio increased further to 168% as shown on the left of the page. Moving to profitability on Page 23. Net interest income decreased quarter-on-quarter by 1.5% to EUR 330 million due to the lower contribution from TLTRO and the cost of several bond issuance, which offset the higher performing loans margin. On a year-on-year basis, NII has grown by 2%, in line with what we anticipated. On Page 24, commission income continued its growth trajectory, showing an 18.4% year-on-year increase. Quarter-on-quarter, commissions increased by 6.1% to EUR 117 million, mainly driven by network transactions and credit cards income, also boosted by tourists. On Page 25, operating expenses are flat quarter-on-quarter and year-on-year as higher IT and digital-related expenses, including depreciation, offset by lower staff costs. On Page 27, we summarized the core operating performance for the first 9 months of the year. Core PPI is higher year-on-year by 4.5%, mainly driven by loan increase related NII, high pre-provision income and lower staff costs, which more than offset the lower income from NPEs by EUR 97 million. Cost of risk amounted to 1.1% for the 9-month period. And loan loss provisions are lower year-on-year by 25%, reflecting the deleveraging of NPEs and the better [indiscernible] trends. As the result, core operating profit is higher year-on-year by 61% at EUR 357 million. Moving on to asset quality on Page 29. As shown on the top left of the page, NPE formation in the third quarter was negative by EUR 26 million, continuing the better-than-expected trends. NPE ratio post Mexico decreased to 7.3%, with the remaining NPEs of EUR 2.9 billion. Coverage in the third quarter increased to 73%. Considering the write-offs planned for the fourth quarter, coverage is expected to be at the end of the year between 66% and 68%. Overall, we are very pleased to note that we are outperforming all our profitability targets for the year as we said it in our first investors call of 2021. More specifically on core PPI, we expect to be higher than our initial estimate of EUR 875 million. Cost of risk is estimated, for the full year, lower by 20 basis points versus guidance at 1.1% of net loans. As a result, profit before tax is expected to be higher than EUR 540 million compared with the initial guidance of EUR 500 million. A similar outperformance is expected on capital as shown on Page 34. More specifically, accounting for the announced capital [ investment ] initiatives which are at their final stage, the year-end outlook is for capital ratios higher by 50 basis points compared to the initial guidance. Therefore, we expect to close the year with a total CAD and a fully loaded CET1 above 16.5% and 13.3% respectively. 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.

Well done on the results. I have a few questions. First of all on asset quality, I remember that in the previous call, Mr. Karavias was expecting some inflows in the second half linked to the end of the moratoria and some support. I think we see now in Q3 some of it already materializing on July 30. Just wondering now how you're feeling for the next quarter, given that you're also keeping your cost of risk stable in terms of guidance. So just wondering what kind of magnitude of inflows we can expect in the year -- in the last quarter of the year? Then secondly, a question on margins and linked to your Slide 22. I was just wondering if you could give us an indication of margins on new business that you're giving out right now in terms of loans, so we could compare to the numbers on Slide 22. And then finally, just a quick one on the other income, if you could give us a breakdown of the other components of the other income, that would be great.

Jonas, thank you for your questions. Let me take the first one, and Harris will comment on margins and other income. You are right that in the last conference call, we have said that we were expecting for the second half of the year an NPE increase of about EUR 600 million. It appears that this estimate was overly conservative. But let's take it from the beginning. Overall what we have seen in the 9 months of this year is that NPE formation has been substantially lower than initially anticipated. And flow from moratoria has been slow and falls less than 10%. So as a result as Harris mentioned, as you can see on Slide 29, the NPE formation in the third quarter was negative by EUR 26 million. And as you can see Page 13, this performance was uniform along all segments of loans. Now based on what we have seen so far about the fourth quarter, we expect formation to be positive around EUR 100 million, so quite lower than what we said last quarter. Taking into account we expected the loan growth and the write-offs that we are planning to do in the fourth quarter, the NPE ratio should remain broadly unchanged from the current level, so around 7.3, and the coverage to be below 7% in December of 2021. In terms of cost of risk, we keep the same guidance, which is 110 basis points for the full year 2021. Now obviously there are a number of factors that affect asset quality either positively or negatively. Starting from the negative factors, I think you would agree with me that one of the main things is the resurgence of the pandemic. However, the economy still remains 100% open. And I think then such effect would be muted unless we see a serious deterioration. Now a more important factor may be the elevating energy prices that we observed both for households and for businesses. And this affects the disposable income. On the positive side, retail sales have recovered from 2020 levels, and they are at level similar to 2019. For instance in the third quarter of this year, retail sales were 12% higher than the expected quarter of 2019. So performance is quite strong. And there is also a positive to wealth effect are residential real estate prices in Greece are up 7.9% year-on-year in the third quarter of this year based on Bank of Greece income that came up a few days ago. So this is where we stand with asset quality. Let me pass over to Harris about your next question.

As regards the third leg of your question, the other income almost exclusively is coming from sales of investment securities mainly GDP recover bonds. Now as regards the spreads, we've seen a bit that it is quite stable in the last few quarters, in the sense that we see some debt decline on the corporate spread. The new loans are coming in with a bit lower spreads. While on the retail, the spreads are broadly stable. And this is depicted actually are going to face in the next year as well. But already the acceleration of new demand actually offset this debt decrease that we've seen on the spread. So we should expect -- we already see, but we should expect as of next year especially that the impact of the new volume to offset any decrease of negative impact from margin, especially in the corporates.

Got it. Could you please just remind what is your expectation for 2022 in terms of disbursements and increase in the net loan book or performing loan book?

Sure, Jonas, and let me provide you an overview of where we stand on loan growth in the context in general before answering to the specific numbers. As we mentioned during the introduction as Fokion mentioned, economic sentiment in Greece is becoming very strong, according to EU data it is approaching a [indiscernible] as we said before the pandemic. Tourist [indiscernible] season, manufacturing more indicated high and construction in all fronts is back. So we see significant activity across all sectors that is also underlined by the high amount of FDI that we had year-to-date. Specifically, the FDI exceeded, for the 9 months of this year, are EUR 10 billion. And more important actually, it extends to all sectors of the Greek economy. Now going forward, the sectors of the economy that are expected to play a key and leading role are, of course, those of tourism, shipping, energy, infrastructure, real estate and industry including manufacturing. And in this dimension, there our loans will act as an accelerator for that part. At the same time, demand from individuals is also accelerating. The strong real estate market supports the demand for more of this. While in consumer lending, we see strong demand on local loans and [indiscernible] loans. I also should not forget about the regional subsidiaries that showed, in the last quarter, a very strong loan growth. So when it comes to the numbers, year-to-date we have seen an organic -- net organic growth of performing loans at EUR 600 million. And looking at the pipeline, this is expected to reach EUR 1 billion by the end of the year. And going forward for the next year, we should expect an average annual growth at the area between 6% and 7%. I'm talking about Greek and SEE.

Jonas, I hope we answered also the third question about other income.

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

I just wanted to follow up on the previous question regarding performing loans and what you have mentioned on loan disbursements. The 37 million received, should we expect that to move to 37.5 or something like that by the end of this year? Just to get a benchmark for next year. And then the second question is there have been some news in the media over the last couple of months, touching upon potential negative deposit rates for commercial deposits or maintenance fees. Is there any color you can share on this topic with us?

Starting from the second question, we are exploring all different options at the moment, but we are not making any sort of decision yet.

Are you trying out anything yet? Or you're just considering?

We're just considering. Regarding your first question if I got it rightly, at the end of the year, we expect to be performing loans, a balance close to 37.3, 37.4.

Okay, versus 37.0 or...

Correct.

So about 300, 350 increase?

Close to 400 million.

Perfect.

[indiscernible] 400 million.

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

I'll just have one technical question, first of all please. Can you remind me how I should think about TLTRO contributions in the coming quarters, given it's been a little volatile this year? So is the current run rate what we should assume for what will come in the coming quarters?

So the background is that in the first half of the year, we had a gross impact of close to EUR 60 million. In the first quarter, we [indiscernible] in the first and [indiscernible] in the second. In the third quarter, we had 19 million. And in the fourth quarter, we should expect some pickup there of EUR 12 million. Once we sum up to total gross impact is quite important of approximately EUR 90 million. For next year, we should expect a similar amount or slightly higher.

Okay, that's very clear. And secondly looking at your original 10% ROE guidance for next year with this EUR 0.15 of EPS, which levers are tracking ahead of your expectations so far? So are you able to provide any early guidance of what could go better next year than your initial expectation, which was presented late last year? And what could go worse, if any?

For -- okay for next year, we should be able to provide you some more detailed guidance during the next presentation we have when we have the full year 2021 financial results. At the moment, we are finalizing the budget for next year. So let's wait a little bit more, and we will be able to provide with more detailed guidance. However, we stick on our commitment about this double-digit return on equity, this 10% return on equity for 2022. And this is something that is going to be delivered based on from the first half that we have seen out of this budget. It is important that we're going to start 2022 from a solid base, given that this year we have outperformed, as Harris mentioned, in all the relevant KPIs, including pre-provision income, profit before tax, NPE ratio and capital ratio.

Okay, that's very clear. And finally if I may on Bulgaria, how do you expect the competitive environment to shape up there, with this ongoing consolidation that's happening? So obviously you do have a solid market share as the #4 player. But the top 3 seems to be consolidating quite aggressively, and recently we've seen some of them in there well. So in the next 2, 3 years, do you see any risk of increasing pressure there? We've also seen M&A at pretty good prices recently. So how do you see Bulgaria as a franchise to your overall group in the next coming years? Would you see any M&A or sale potentially or acquisition, et cetera? So any broad views would be very helpful.

You are right that we have seen a very interesting transaction out of this jurisdiction at a quite high multiple of tangible book value. I think this is positive news for the market because consolidation is moving forward. And as you could have seen, this is good news for all remaining participants. The pricing power of the remaining banks, in theory, should improve. Also the multiple that was paid for the bank was sold saw also the market participants don't believe in the growth potential of this market. And this is a view that we share for quite some time now. And this is the reason why we have strengthened our presence in this market during the last several years. And just to give you a figure for us, if we were to apply the same multiple to our Bulgarian subsidiary, the value would be close to EUR 1.5 billion, which is a very significant portion of our total current market cap. Now from our side as we have said, Bulgaria is one of our core markets. Therefore, we're trying to grow our presence there either organically. Or if there is some sort of opportunity through an acquisition, it is something that we are going to consider, again at valuations that would make sense for us. But we see very good prospects in the market overall.

The next question is from the line of David, Daniel with Autonomous Research. Mr. David, can you hear us? [Technical Difficulty]

Just a couple of quick ones. Could you just give us an update on the moratoria balance you have outstanding, and essentially the balances in the step-up and the bridge scheme? And then secondly, just looking at your debt stack and [indiscernible] bonds trade, would you ever consider refinancing the [indiscernible] that you have outstanding, which is held by the government?

Okay, the line was not so great. So the first question was about moratoria and the step-up program that we have as we speak. In terms of the moratoria, effectively the balance have remained under moratoria is very small. The last exposures under moratoria has to do with the tourism sector, the leisure sector. But any way doing very well, as we mentioned already. And therefore effectively, we have no outstanding balances in moratoria. Now there is -- we have been in 2 step-up programs, program 1 and 2. The first one is [indiscernible] mortgages, the second for SMEs, which are going to be active at the end of 2021. It is important to note that these programs have been structured in a way that provides strong incentives and is to go to performing after the end of the programs. And I think it is fair for someone to ask how we would expect these loans, under these 2 programs to perform in the beginning of 2022 when the state support will not be there anymore. So we are positive overall. One of the reasons we are -- why we are positive is the way that these programs have been structured, the -- let's say support have declined over time. And if at some point, the customer misses a payment, then he loses the full state support that he has received. So for any customer, it would be very important to remain performing. And second issue that...

Sorry. Could I just ask on that? Could you just give us a feel for the size of the balance that you were just kind of talking about having in scheme?

It is EUR 2.4 billion into the 2 programs.

Yes. And the second was from the tier 2, whether you'd consider refinancing it, given where it's trading on the line.

Sure. We have a debt outstanding of EUR 950 million. That was issued back in 2018 and fully subscribed by Hellenic Republic. We had a call option as of January 2023, and this is at a cost of 6.4%. And considering the recent market dynamics, there may be an opportunity for cost optimization. However, this is something that we are going to explore more going closer to that date.

The next question is a follow-up question from the line of Floriani, Jonas with Axia Ventures.

I had a question on risk-weighted asset density. I was just wondering if you can give us a high-level comment on how your risk weights are changing, now that you see there's a significant change in your balance sheet? Any kind of indication on percentage points? If I look at the stock reported numbers versus where you're seeing the risk weights right now, where do you expect them to be? That would be good.

To be quite quick to -- on my answer, the new production that we expect on loans going forward, should lead as regards the credit risk, talking to an increase to our RWA with a density between 55% and 60%.

Okay, so that's for the blend of the disbursements, which I think the vast majority should be on the corporate side, right?

Mr. Floriani, have you finished with your questions?

No, I just asked. So this is for the total new disbursements, meaning that the vast majority of it is corporate, because the retail carries a much lower number anyway.

No. Going forward, retail are going to -- we get a higher and higher contribution on that. Of course up to now, corporate should [indiscernible] impact. But in the long horizon, retail will have a significant contribution. Having in mind for the budget figures, the representation I provided to you actually concern the blended mix of the growth going forward.

[Operator Instructions] The next question is from the line of Manolopoulos, Konstantinos with Optima Bank.

I have a quick one on capital, please. So you are [ adding ] that you expect your capital ratios to increase by 100 bps by year-end. And you have planned for the synthetic swaps securitization along with the sale of your [indiscernible] business, which I think you said it's going to happen in 2022 in the first half. So the driver for the 100 bps enhancement, if we say 20-something bps from your typical quarterly profitability and the rest, 80 bps is the synthetic swap, is it something else? I mean do I miss something?

Sure. Let me clarify the landscape on that. The total CAD, the total capital ratio of September end was at 15.7%. So the outlook for the year-end is for the total CAD higher than 16.5%. This includes the impact of both transactions, i.e. securitization and [indiscernible] acquiring this investment. We -- for which our estimate is that the result -- the impact will be at least 100 basis points. However, we have some positive and some negatives. On the positive side is the impact of this total transaction. It's going to be on the quarterly profitability, of course. But on the negative side, we have a negative markdown of Greek government bonds. We should expect some further increase of RWAs due to growth. And if we are going to have a negative impact from the increase of expected loans shortfall due to write-offs that we are going to have at the end of the year. So the mix of all this concludes to the amounts that we provide.

As far as the swap is concerned, you're targeting something like 2.5 billion, right?

A low perimeter, and it's about corporate and SMEs is close to EUR 2.2 billion.

And the saving of this perimeter in terms of RWA?

Given that we have not announced yet the other transaction, let me -- I'm thinking about the competition acquiring these investments, something that will be done in the first half of December. Let me repeat our estimate that for both transactions i.e. [indiscernible] acquiring, we expect an impact of at least half 400 basis points.

[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.

Thank you. So we conclude our conference call. Thank you very much for participating. Also thank you for your questions. And we will be available, either Harris or myself or our Investor Relations team, for any follow-up questions, for any follow-up on this call.

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