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 full year 2021 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 our call. Together with me is our CFO, Harris Kokologiannis and the Investor Relations team. I will start the call with a quick review of the 2021 performance and then focus on our business plan update, financial targets for 2022 in the next 3 years. Harris will give you more insight and analysis on the business drivers for the planned period. Finally, we will answer your questions. 2021 was a milestone year for Eurobank being the strength in the sector to reach a single-digit NPE ratio of 6.8%. Furthermore, as you can see on Pages 6 and 7, we outperformed all targets in Israel set for the year. Our corporate provision income reached EUR 900 million, higher 4% than in 2020, while the cost of risk declined to 1.1% from 1.5%. The main drivers for this performance were the high teens increase in fees, the resilience in net interest income, the operating cost discipline and the substantially lower than initially anticipated NPE flows. Our high NPE coverage allowed us to execute the Mexico securitization with effectively no impact on capital. The capital ratio reached at 16.8%, up 50 basis points, following the execution of non-diluted capital transactions and robust organic profitability. Before we move to our business plan and the financial targets, let me refer to the macroeconomic conditions. In 2021, the economic activity posted a strong recovery in Greece, underpinned by the reopening of the economy and the COVID-19-related support measures. Real GDP increased sharply by 8.3% for the full year 2021, driven by the strong growth range of exports of goods and services, gross fixed capital formation and the rebound of private consumption. Moving now into the period 2022 to '24. The macroeconomic assumptions used in our business plan are summarized on Page 9. The economic growth outlook remains strong for Greece, and our other core markets, namely Bulgaria and Cyprus with average annual growth rate between 3.5% and 4% for the next 3 years, especially in Greece. Growth is expected higher than 4.5% in 2022, supported by increased investment pipeline, a record FDI flows, strong industrial production and tax for trends, the ongoing rebound in tourism and the healthy demand for real estate assets. However, the recent geopolitical turmoil in Ukraine adds a new risk element, particularly through energy prices and inflation with its far reaching and long-term consequences. As the events are still unfolding, any assessment of the impact is premature. From one side, geopolitical risk is going to wait negatively for a protracted period of time, had ordinated measures may mitigate some of the headwinds. Let me now turn into our 2022 budget and the 3-year business plan. Back in late 2018, when we announced our transformation plan, we set 3 clear objectives: a single digit NPE ratio, enhancing our capital base through non-dilutive initiatives and a double-digit return on tangible book line. Clearly, the capital strengthening and the balance became up are behind us. In 2022, we expect stronger profitability to reach 10% return on tons food book volume. As Greece exits at the case of deleveraging, the economic recovery will be investment-driven as banks have a crucial role to play. We are in poor position to capitalize on this growth side and our profitability will be boosted by the following drivers: loan growth by about 7% per annum for the period 2022 to '24, our leading position in fee businesses with fees contribution over total income increasing from 24% to 29% in the 3-year period. Cost visibility with a clear shift from around the bank to grow the bank as we will invest in people and systems to leverage data and digital tools. Last, but not least, normalization of the cost of risk at levels below 65 basis points. The financial goals of this strategy are summarized on Page 11. For the 3-year period, we expect EPS to grow at an average rate of around 30% per annum, front loaded in 2022, in which we expect more than 20% EPS growth. Our return on tangible book value will be 10% on a sustainable and recurring basis over the same period. The strong organic capital generation of more than 100 basis points per annum out of profitability. We financed asset growth, dividend distribution and increase our capital ratio by circa 200 basis points over the next 3 years. In this context, we have already initiated a dialogue with the supervisor on dividend distribution. And the base scenario is to pay dividends out of 2022 profits at a prudent initial payout ratio of around 20%. Overall, we are pleased that we have been able to deliver in a consistent way on the target set in previous years and the 2021 achieved outperformance. Without underestimating the risks from the current crisis, we have the business model, the capital, the people and the drive to capture the opportunities in the new growth phase, aiming to sustainable returns and create value for our shareholders. At this point, I would like to ask Harris to present our business plan drivers in more detail.

Thank you, Fokion. Starting on Page 12 and on the 2022 profitability. Core operating profit is expected to increase by 25% year-on-year to circa EUR 610 million. Net interest income is anticipated to decrease by 3% as the lower income from NPEs and the rent costs will be partly offset by new loans, high bond income and lower deposit cost. Commissions will continue to grow, albeit at a slower pace compared to 2021, driven by assets under management, capital markets and transaction-related fees. Operating expenses are expected to increase by 2%, driven by international and the merger with Direktna in Serbia, while cost increase should remain flat. Finally, lower NPEs and high coverage lead to a significant cost of risk decreased from 1.1% to 0.65% in 2022. The above, point to an EPS of about $0.14, which allowed us to meet our commitment for return of test value of 10% this year. Moving on the interest income on Page 13. And starting on the volumes at the left of the page. 2022 is expected to be the beginning of a multiyear trend to be leverage. Performing loans are anticipated to grow by EUR 2.3 billion in 2022 and by EUR 7.4 billion in the 3-year period, driven by business loans in Greece and the region. In addition, household lending will show a further acceleration, particularly in the last 2 years of the plan, increasing substantially the contribution of retail to the group core PPI from 20% in 2021 to 30% in 2024. Deposit growth after 2 very strong years is expected to slow down at an annual increase rate of circa 3%. On the right part of the page, we show the NII evolution during the plan period. The decrease of income from NPEs, the gradual phaseout of TLTRO and the increase in cost will be offset by higher income for performing loans, lower deposit costs and higher bonds income. Furthermore, our balance cleanup is evidenced by the reduction of net interest income from impaired loans from 9% in 2021 to 3% in 2024. On Page 14, it is shown how the commission income will continue being the major driver of top-line growth. Test in Wealth Management Assets under models that should double reaching EUR 10 billion during 2024, driven by targeted business initiatives and further investments in technology. Then in bancassurance, an average annual increase of more than 15% in premium is anticipated. Capital markets, which includes investment banking equities brokerage fees as ordinary cleaning services will show a high contribution driven by the higher investment competition in the country, also reflected to the recent FDIs and emanates activity. Transaction and movement fees will continue to have a significant contribution is accounting for circa 20% of total fee income. And finally, rental income generated from our EUR 1.4 billion investment property portfolio should contribute approximately EUR 100 million per annum. Commissions increased results in higher fees over asset ratio from 64 to 80 basis points in 2024 and to an increased participation of total income from 24% to 29%. Also, on Pages 15 and 16, the revenue growth to a large extent enabled and accelerated by a number of same initiatives, focusing on promoting the physical client communication, selling and transaction model, simplifying and streamlining our operating model with special emphasis on credit underwriting, leveraging on data analytics, transition to cloud, targeted initiatives to accelerate wealth management growth, high value retained segments penetration and business consistency development. The above initiatives, apart from the top-line investments, aim at sanity and streamlining our cost base, so as to address new challenges are shown on Page 17. Specifically, we target savings circa EUR 60 million per annum of rent demand cost through rationalizing staff, premises and other G&A expenses. And finally, these savings to go the bank investments in information technology and digitization, but also in human capital through bringing on board, developing and properly remunerating new skill set people. Overall, including the nonorganic savings from the completion of contribution to Resolution Fund by the end of 2023, we expect operating expenses to increase -- to decrease in 2024 to circa EUR 600 million. This drives cost-to-core income ratio to improve from 50% in 2021 to 43% in 2024. Moving on Page 18 and on Southeastern Europe operations. Core PPI is expected to increase by circa 16% over the plan period, driven by new loans fee growth and the method with Direktna. Combined with lower cost of risk, net profit should decrease by circa 35%, approaching EUR 200 million in 2024. Summarizing group profitability on Page 19. Core PPI is anticipated to be EUR 1.1 billion in 2024, higher by 22% versus last year's mark. In corporate, also the decline of cost of risk to circa 50 basis points lead to another net profit and EPS growth over the plan horizon of circa 13% per annum. As regard to our NPE plan on Page 20, we expect NPE ratio to further decrease below 6% in 2022 and below 5% in 2024. Coverage throughout the business comp period remains high at around 65%. Finally, on capital, on Page 21. Fully loaded CET1 ratio is anticipated to increase by almost 200 basis points by 2024, reaching 14.6%. A major driver of the increase is organic profitability with us circa 400 basis points in the 3-year period. Furthermore, [indiscernible] acquired this investment up another 90 basis points. The above generated capital, we comfortably finance our growth and pave the way for the initiation of a dividend payment based on 2022 profits at a circa 20% payout ratio. We are very pleased about our new 3-year business plan and our targets for 2022. It is true that the recent political developments having produced some serious downside risks and uncertainties. As the events are still unfolding, it is too early to quantify any impact. At the same time, our execution track record makes me optimistic that once more, we will demonstrate a solid performance. This completes my presentation, and we may now open the floor for your questions.

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

Congratulations. Can I please ask just on your Ukraine and Russia exposure, are you able to give us a little more guidance on what you would expect to see in terms of sensitivities to your balance sheet or P&L. So do you have any exposure in Greece or international markets? And I'd be particularly interested in your normalized cost of risk guidance for Greece. Have you done any pre-analysis to see what sensitivities lie there arising from this situation?

Okay. Thank you for your question. Let me start from the direct exposures and let me state that the Eurobank's direct exposure to Russia, all Ukraine-related assets is material. And let me become more specific. In terms of loan exposure, this is below EUR 80 million. And the full amount is secured either with cash collateral, which is for most of the amount or with prime location or real estate assets, mainly in London. There is also an exposure of less than EUR 50 million coming from securities related to legal entities from Russia. So this is a net exporter, which is as you can appreciate, immaterial. However, the main exposure comes from the economic impact of this situation to the economies of the countries in which we have a presence. And as we have already said, it is really early to make any assessment. Things are evolving on a daily basis. But we can state some facts as we have them right now. Starting from Greece, the revenues that this has either from exports to Ukraine and Russia or from tourist revenues are really very small in terms of export of goods, the combined percent of 2 countries is less than 1.5% of the total exports of the country. And the same percentage, more or less applies for touring revenues from visitors coming from Russia or Ukraine. So we are talking about very small figures. And since I mentioned tourism, let me confirm that we still expect a very strong tourism for 2022. An estimate would be that we should reach revenues of about 80% of 2019, if not higher, versus to less than 60% of 2021. So direct impact for Greece is more and the impact on the economy is coming mainly through the mechanism of energy prices and inflation. A few days ago, the Minister of Finance presenting some projections that for every euro sustained increase in the average price of natural gas, there is an effect of about EUR 600 million from the current account and this is about 0.3% in terms of GDP. This effect may be mitigated if the Greece transition fund stopped or through other EU coordinated measures. Now moving into [indiscernible] where the exposure is higher the effect is coming from tourism and services business with Russian customers or Russian [indiscernible]. In terms of tourist revenues from Russians, and this account to about 20% to 25% of the revenues. 2022 season has started very strong. Obviously, a great extent if all of these Russian revenues may be lost. But based on what we have now in terms of indications, a significant part of that may be recovered through a cash flows from Ukraine, Israel and Germany and some other countries. But definitely, the effect here is more significant than increase. Given that we operate a subsidiary bank in Eurobank [indiscernible]. We have run a weak stress test to see the impact that we may have on our profitability there. And based on our calculations, the impact is less than 10% of the profit before tax for our subsidiary. This is less than EUR 5 million to EUR 7 million, which is a figure very small compared to the total group profitability. Overall, the combination of increased energy prices inflation, increased market volatility and economic uncertainty may accelerate the pace of the expected growth. And they are already, as you know, some analyst who project at the European level, a decrease of GDP between 1% to 1.5%. But again, we believe it is too early to make such an assessment. And it is also important to see if any of this effect can be mitigated from any sort of EU coordinated measures. Now with respect to our business plan and any sort of effect that we may have there, let me pass over to Harris to give us some qualitative elements of how we can be affected.

Thanks, Fokion. As regards to our business plan, first to note that our business plan was finalized at the end of 2021. The impact, I would say, may be located in the following areas. First, on loan growth. Considering an averages for the planned period, GDP annual growth rate of 3.5% for Greece and the region. This has been translated in our business plan to almost double our percentage annual net loan growth, meaning close to 7%. In case of a lower GDP growth, there might be a negative effect for low demand related to new investments. However, demand for working capital loans may increase and [indiscernible] that we stay back in 2020, where we saw a very high demand for working capital loans. One more, let's say, side effect is that the bond issuance by Greek corporates may not be affecting the category, which is in favor of bank loans. Furthermore, the current crisis may lead to a deceleration of the spread contraction that we observed during the last couple of years in corporate loans. Overall, the effect of net interest income, I would say, is expected to be more effective. We should also consider a onward factor that we may also give an upside if we see interest rate increases, a scenario, which is not unlikely for late '22 onwards, taking also into account the today ECB announcements. As you may have seen a big decline in our business plan, this is based on the assumption of more interest rate increases. Now going down to the P&L, inflationary pressures before coming to OpEx, as interest income, this may be more sensitive than NII, especially the one related with assets under management and capital markets, especially in the short term. Now inflationary pressure was mostly coming from energy prices may have a negative impact to OpEx primarily through G&A and the related expenses. Finally, in the high [indiscernible] and the inflation predict for a longer time, we may have an impact on asset quality as they will affect the real income. So far in the first quarter of 2022, we haven't noticed a [indiscernible] as NPEs formation is flattish. Further, [indiscernible] include the fact that increase in the last 2 years. We had a very substantial increase of deposits in the sector by about EUR 76 billion, which under the current circumstances, is a significant buffer in view of inflationary pressures on real income. Anyway, on the issue of asset quality, we closely -- it is very early to make a quantified estimate, but in closely monitor and developments and the latest trends on this front, especially in the period Q2 and [indiscernible]. Now as a conclusion, I will say that it is quite early to sense how the recent crisis could affect the economy and our business plan after we could say a year of impressive recovery and being ready to embark on a sustained growth. However, the headwinds coming from the geographical appearance, it is quite likely to be mitigated with coordinated measures, both at local government, but more importantly, at the European level. And when the landscape cliffs half, we assure that the fundamentals for the positive scenario still in place, we should take into account the pro-business environment, the investment appetite and the source of facing not forgetting, of course, the role of RF.

Okay. Let me add one more thing. As soon as you asked about our cost of risk was 65 basis points for 2022. As you can see on Page 20, this is based on the assumption of the expectation of EUR 400 million net inflows for the year. And definitely, as Harris mentioned, there is a concern that the high energy prices and inflation put pressure, especially on households. But at the same time, we should take into account that there is a very good decline in unemployment in 2021. And the market remains quite tight going into 2022, which means that we should see some increases in wages. This which is another mitigating factor against inflation and high energy prices. Now against this EUR 400 million expected NPE net flow, as Harris mentioned, in the first quarter, what we have observed is effectively 0. Therefore, this EUR 400 million effectively applies for the following 3 quarters.

The next question is from the line of Floriani Jonas with Axia Ventures.

And well done on the results achieved in 2021. So my first question is on dividends. I'm just wondering what is the process around that now going forward and especially considering the geopolitical environment. I understand that the ECB has already asked the banks to kind of indicate some potential risks coming from Russia, Ukraine. But not only, also what you discussed previously on the potential impact of higher inflation prices on local sectors in the economy and how that could affect the business plan. So I'm just wondering if you already had this kind of conversations with them and if you see this as a significant risk to the dividend story. And also linked to that, when I look at your Slide 21, the 50 basis points that you mentioned as dividends for 2023, '24, does that assume the same level of payout going forward? Or is there any change there? Secondly, I think just to confirm something that Harris said, if I understood correctly, that the NPE formation for Q1 2022 since flattish, I understand that you are showing a decrease in Stage 2 and Stage 3 loans in Q4. And you also have that EUR 400 million expected inflows for 2022 in the absence of headwinds from inflation, energy and geopolitical right? I'm just confirming that the Q1 number is the flattish that I heard if or didn't understood it. Then my final question would just be on asset quality. Looking at your 2024 targets, I was just wondering if you could have gone for a more aggressive reduction in NPE ratio? And why not? I mean, why -- I understand that you're already very conservative on provisioning, but also it seems like you have the coverage levels and capital and profitability to be more aggressive on that. So I'm just wondering what's the rationale behind the current price?

Okay, Jonas, thank you for your questions. Let me answer the one about dividends, and Harris will comment on the NPE plan and the targets that we have set for 2022, '23 and '24. But before that, let me confirm what both Harris and myself said, that formation or net NPE flow for the first quarter is flattish, is close to 0. Now in terms of the dividends. As you can see on Page 11, dividend distribution is one of the pillars of our 3-year plan. The bank has made, we believe, great progress in derisking its balance sheet, enhancing its capital ratio and boosting profitability. And in this context, we have already presented our 3-year plan to the supervisory. And we have already started a dialogue with him about the dividend distribution policy. And I should say that this is a constructive analog. Although we have not touched on the most recent issues of the Ukrainian crisis because in any case, it's very premature to discuss about it. I already mentioned that any direct exposure that we have is immaterial. Any sort of impact is going to come from the economy. So we had a constructive so far discussion with the regulator. And under the base scenario, we expect to pay dividends out of the 2022 profits at a prudent initial pay-out ratio of around 20%. And answering your question, coming from Page 21, we have assumed in the business plan for both periods, the same payout ratio of 20%, yes. Now Harris, on the NPE plan.

So I'll say you rightly noted, we envisage a decrease of NPEs at below 6% in the end of 2022, equivalent to EUR 2.4 billion NPEs and below 5% by the end of 2024, implying NPE population of EUR 2.2 billion. The major driver of the plan being organic decrease initiatives. And I would say that our target is in line with -- if you see the Greek NPL ratio before the financial crisis. And also, you may note that grade was never below 5%. And also, this ratios are compared with countries, other countries in the periphery. And although, as I said, the plan was prepared at the end of 2021, and considering the current developments, we believe this is a realistic and prudent target taking into consideration the banking environment. Of course, we cannot ignore the high coverage ratio that we closed the year with 70% coverage ratio that gives us some plan of comfort as regards future initiatives on that front.

Okay. If I may just follow-up quickly. I was just wondering if you have any kind of back of the envelope calculation for sensitivity of GDP slowdown impact on loan growth, cost of risk and NPE inflows. I mean now that the plan accounts for around 12% growth in 2022, assuming that, let's say, the figure, it's half of a 2.5, do you have any figures to share in terms of how much your loan book could grow? How much your cost of risk could change and also inflows or NPEs?

We don't have such sensitivity at the moment. What we use in terms of credit growth is that loans will create expense will be twice as high as GDP rate. So for the 3-year period, with an average GDP of 3.5, we have assumed 7% credit growth. But let me remind you that back in 2020, when GDP was negative, heavily negative, we had a very significant increase in corporate loans because most of the corporates have asked to get working capital in anticipation of being an own environment that we're facing. So the business activities are not really very robust and depend on a number of other parameters. So -- and if you remember, back in the last couple of years in the COVID context, we assumed very high NPE formation figures, which were never realized for a number of reasons. So the context is so complicated and let's say, support medical center risk, but it is -- at least at this stage quite risky to make any qualified projections.

The next question is from line of Alberto Cordara with BofA.

So first of all, congratulation for the good set of results at the very good plan. Just some questions about the plan. The first one is around the final capital level, commodity fully loaded 14.6% in 2024. This seems to be a pretty high number. So I just wanted to understand what is the rationale to aim for such high number. And if you had a discussion with rig about this or not and if this number can be maybe reduced, so you could pay more dividends if you and be more successful in cutting down, you are not performing exposures. And then related to this question, again, I think you should provide some clarity about this. What could be the impact of Basel IV in the following year in time, which we don't see in these numbers. Then the other question that I have is the one thing that I think on the cost of risk, I guess what your point on the -- you articulated your little in very well. The one thing that is at is a bit additional, so is the asset management part where you know as a managing by 30% cargo. So it seems to be that maybe this year has not been fully taken into account. So my question to you on this issue is what we should see in terms of AUM trend this year? I think it's too early to say, but just explain more about the that you are seeing? And the second point is given that there is a trend, we are growing our cost base by 2%. If there is any contingency plans that you can activate on that cost in order to offset maybe weaker revenues than the one that we have in the plan.

Okay. Alberto, thank you for your questions. In terms of capital, which is your first question, I think you refer to Page 21, in which we saw 14.6% fully loaded CET1 in 2024. It is correct?

Yes. So it seems to be a high number this but I'm not sure...

It's -- we don't think this is a high number. We always want to be on the prudent side. So whether we could go with a more aggressive dividend distribution policy, I mean to have a higher payout. Let's remind ourselves that the Eurobank does not distribute any dividends for more than 10 years now. Therefore, in the discussion that we have with it later, we should start from something which is prudent and relatively low and then gradually to increase it. So we believe that this is the right level to have starting this discussion with the regulator. Now in terms of the asset management and your comment that we have aggressive cumulative growth over the 3-year period. Let's remind ourselves have started from a relatively low base because during the 10-year long financial crisis, households in Greece has totally disinvested from any sort of investments, mainly mutual funds and they had only deposits. So effectively through this growth rate, we aim to reach the levels of assets under management that we had before the crisis. Therefore, under a good macro scenario, we believe that this is feasible. Definitely, for 2022, given the volatility that we see in the market, the Greece becomes a little bit more challenging. This is one of the risks that Harris mentioned before, but let's see how things will evolve over the next few weeks and months to reassess this rate. But for the 3-year period, the objective is to reach levels that we have seen before. Therefore, we don't think that this is an over aggressive level. Now on costs, let me pass over to Harris to give you a comment whether there is some buffer there to cut in case that we see some shortfall in terms of revenue.

Let me provide you with an overview regarding on the cost line. As we show on Page 17 of the presentation, our focus now becomes -- the OpEx base increased to sit from around the bank to grow the bank. For the period 2021 to 2024, we expect EUR 55 million savings from the reserves of funds, as the contribution ends in 2024. And circa EUR 60 million from FTEs and other administrative expenses. Out of these savings, we could say that 2/3 of that is coming from staff and 1/3 coming from the rest of the G&A. In terms of FTEs, we will continue reducing the number through voluntary scheme. And for instance in 2022, we announced a new VS scheme in February with an expected take-up of high 600 FTEs and annual savings at the order of EUR 13 million per annum. Consulting the brand's network, it is the smallest increase and we have already reduced it by 10% during the last few weeks at 275 branches. On the other hand, we start part of the cost savings to investments in [ 90 ] digital and human capital, as we said, to grow the bank and to digitize the market, this will increase related cost by around EUR 75 million by the end of 2024. Overall, in Greece, we expect under the base scenario OpEx to be reduced by circa 6.5% from 2021 to 2024. And the cost of core income ratio improved from 50% in 2021 to 43% in 2024. In Southeastern Europe now, we have the one-off impact of direct now, and then we expect cost to grow by approximately 2% per annum. However, the cost to core income ratio will decrease from 48% in 2021, 46% in 2024. Now as regards to your question, of course, there are some lines in the OpEx where we have flexibility to cost to cut. And this refers both to the staff expenses and to other January. However, following a very low period of continuous cost cutting. And under the current inflationary pressure, you may appreciate that this is not as easy as it used to be some years ago.

Mr. Cordara, have you finished with your questions?

Yes.

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

Just coming back to the asset quality side, I wonder if you could give us a bit more color on what kind of inflows outflows are based due to that EUR 400 million and would it be safe to assume, given this was done at the end of the year and you see pretty much no formation that your EUR 400 million, putting aside all the [indiscernible] we're going through is a bit conservative? And then my second question is you kindly shared color on Greece and Cyprus, if you could share any color on potential impact on the Bulgarian business. And finally, just a technicality on the 20% payout ratio, you will get quite a gain from the Triangle project. Will that gain be included? So those are my questions.

Let's start with the first and the third leg of your question. As regards the net NPE flow, this be composed as regards to '22 NPE net flow, this is [indiscernible] to approximately EUR 770 million of gross inflows and close to EUR 350 million outflows, and this come up to close to EUR 400 million net flow. Out of that, there is plant that should be prepared was for about close to EUR 100 million in net flow for the first quarter. However, as we still run through March, the first evidence is that the formation is flattish. Regarding your third question, the answer is that this payout ratio is based on the normalized profit. I mean before the significant one-off gains of method acquiring this event.

Now in terms of Bulgaria, there is no quite -- didn't make any special reference to these countries because the business that it has with any sort of rational Ukrainian related accounts is very small, is close to 0. Anyway the figures that I mentioned are at the group level and are anyway very small. So any impact that our subsidiaries there may have is from the impact in the Bulgarian economy that, in our view, is going to work in a similar way like Greece. So the resting impact for the Bulgarian economy is going to be relatively small. And then any impact should be through the mechanism of energy, prices and inflation.

And if I can follow-up on the NPE inflow bit. I'm guessing these were incorporating majority coming from the fallouts from Gefyra 1 and 2, what was that -- was that the thinking?

Just a part of that, as more part of that because both Gefyra 1 and 2 has been structured in a way that provided store incentives to borrowers to remain performing. These incentives being the decreasing subsidy quarter-by-quarter. And the 18 months for basal period during weeks the clients would remain performing. Based on the above and the overall good performance of this portfolio so far, we expect the default rate from Gefyra to continue to be low, i.e. between 5% to 10% of the overall Gefyra loans. And in order not to look around what it is our Gefyra cap is EUR 2 billion, out of which EUR 1.2 billion is coming from mortgage loans related to -- with mortgage loans and EUR 800 million with small business loans.

Okay. And if I may just follow up on one more. You mentioned the new flattish formation. Was it pretty much similar across the board, like particularly in SMEs, are you seeing any deterioration yet?

There is no some specifics as regards to the specific sectors.

The next question is from the line of Domingo Santiago with [indiscernible] Value Investors.

I have three. The first one would be around the growth out of risk. Do you think all this conflict that we are living right now is going to refrain you, limit you to grow, I would say, Greece? Or are you going to continue with your previous plans? My second question would be around the weak investment property, Grivalia, if you could share with us what's the NAV of this business or the market value? And third question would be, did you think about doing some kind of share buyback instead of dividend or at least to propose this to the expected regulator?

Okay. I will take the first and the third question, and Harris will comment on our real estate investment property. In terms of weather, the recent developments, unfortunate developments change our plan with respect to Greece. The answer is a clear no. We feel very comfortable with the business environment and the prospects for the Greek economy. And therefore, we're going to be fully committed to this business. Most of the loan growth increase was related with businesses, business loans, corporates and SMEs. A significant part of that was related to Greece 2.0, which is the RRF EU program. And Greece business has to do with the green transition of the economy. So investment in renewables, the digital transformation of the country. So investment in fiber optics and the high Internet and also support for the export industry of the country. All these segments remain, I think, very valid even under the current environment. Therefore, we are fully committed in supporting that. Now in terms of your third question, whether we consider any sort of buyback. I would say that one step at a time. As I mentioned before, we have not paying any sort of dividend for so many years. So we believe it's prudent to start with some sort of dividend policy. And then down the road, we can consider other options. But at the moment, we are not considering any shorter share buyback. Regarding your second question, let's go on Page 30 and 31 of the presentation that are quite relevant, you may have set that the investment property is part of the bank's balance sheet. It's not a separate entities for us to have a separate NAV, so we can make any assumptions about what is implied NAV. One assumption is could be the following: that the RWAs of -- the assets of investment property are EUR 1.4 billion. The RWAs are equivalent. So -- and we are talking about the book value that is equal to the market value. So the implied NAV may be the meaning requires capital to employ this business, but it is [indiscernible] multiply by, let's say, 16%. It comes up to an implied NAV of close to EUR 100 million. If you use this ratio, then the return on capital employed is huge. So for that purpose, we have made -- it is on Page 30, on the Note 5, we have made an arbitrary assumption so as to avoid the beautification that this [indiscernible] values based on an internal capital allocation, assuming debt-to-equity ratio of 2.1. But one can take its own assumption in order to calculate this. And as I said, again, the book value of investment property is EUR 1.4 billion.

Mr. Domingo, have you finished with your questions?

Yes.

The next question is from the line of Iqbal Nida with Morgan Stanley.

I have a question on the sensitivity of your NII to potential rate hikes in Europe. Can you provide like a numeric sensitivity to that, please?

Okay. First of all, let's say that most of our loan book is on a floating rate. So there is full sensitivity in the libor rates. And a significant part of that also flowed to 0. That makes the analysis a little bit more complex and let's explain what we mean with that. Currently, the libor is well below 0, it's -- grow to minus 50 basis points. So for any movement of libor between, let's say, the current levels to 0, and we have a sensitivity of about EUR 12 million per 10 basis points. So moving from minus 50 to 0 for this 50 basis points, there is a sensitivity of EUR 60 million bottom-line effect. These changes at the time that libor moves at levels higher than 0. So let's say, for leverage of libor between 0 and 50 basis points, the sensitivity increases from EUR 12 million to EUR 30 million by 10 basis points because there is a reason that more loans come at work at this level. And therefore, on a cumulative basis, if your libor moves from 0 to 50. The total effect in terms of bottom line is 150 basis points. Now if we move at higher levels, the sensitivity decreases below EUR 30 million per 10. And the reason is that for higher libor rates, some of the increase are surpassed to depositors. And therefore, the sensitivity becomes smaller. Hopefully, I described that quite clearly, but let me know if you have any sort of follow-up question on that.

The next question is from the line of Butkov Bihari with Goldman Sachs.

I have two clarifying questions. One is on the dividends. So maybe could you comment on some minimum targeted level of capital adequacy ratio by management, which would you like to see going forward when you make big decisions on capital distributions or other investment projects? And another question is on sensitivity. So you provided the sensitivity for the bottom line, maybe you could add some color also on net interest income, if I could ask that.

Regarding your second question, the answer is very easy. It's exactly the same. It's the sensitivity of NII directly flows down into the bottom line. But Harry, in terms of the first question.

So we can say that we feel comfort with CET1 ratio between 13.5% and 14%. And we are already -- we have already reached that level as of the end of the year pro forma with clients. As we saw on Page 20, based on our 3-year business plan, we aim to generate approximately 400 basis points of fully loaded CET1 capital until the end of 2024 out of profitability. This will allow us to finance growth, address regulatory requirements and resume dividend payments, maintaining at the same time, a solid capital position.

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

I've got two quick ones, actually. Just we're seeing a lot of volatility in rates markets. I'm just interested to hear of any volatility in your CET1 ratio to movement in Greek government bond yields, any details you can provide there would be great. And then secondly, just assuming that capital markets return to some sort of normalcy in -- maybe in Q2 or H2. Can you just talk us through your issuance ambitions in credit markets this year, that would be great.

Thank you for your questions. I would say that -- let's start from the GDP that GDP is our major holding. The majority of GDP bonds are classified in amortized cost. So there's no any impact on NAV. The remaining GDPs are classified as investment securities at [indiscernible] are almost fully hedged against interest rate risk. The capital impact year-to-date is approximately 30 basis points, which includes the negative mark-to-market of total [indiscernible] position not only GDPs, but our total [indiscernible] position. Due to spread widening gains on hedging instruments and some impairments that we have performed on Raiffeisen fixed income position that as oil mentioned, before marking them down substantially. So if we add all this, we have an overall impact of approximately 30 basis points. Now let's go to MREL. But actually, it is related with our issuance activity. Based on the official SMB decision. And this formation is already known to the market. The MREL requirement is 26.9% of RWAs, including 3.56% of CBR and the overall shortfall should be covered by the end of 2025 -- by the end of 2025. [indiscernible] this year, we have -- although the target is not binding. We have to raise -- we plan to raise EUR 1 billion for MREL purposes. Of course, this has become more challenging on the current volatile conditions. But experience has shown that the high volatility is temporary, and we expect it to come down in the next few quarters, which would open the window to tap the market at more reasonable rates.

Great. And just on top of that MREL issuance, should we think about potentially Tier 2 refi in addition. I guess I'm talking about the Tier 2, I think the call dates approaching next year.

Sure. I remind you the -- to our audience that we have outstanding EUR 950 million year 2 at 6.4% fully subscribed by the Greek sale. The accountability starts in February 2023, and we plan to exercise it most probably in 2 tranches. Of course, again, the market is very volatile. But we have, in front of us, 1 year horizon from now, and we expect by markets to normalize so to tap them at a better rate.

The next question is a follow-up question from the line of Memisoglu Osman with Ambrosia Capital.

Just a quick clarification. You have a 6% growth of fees, is that excluding negative impact from merchant acquiring carve-out? Or how should I think about that?

In this 6%, we have accounted for the negative impact from this investing investment required. Otherwise, it would be high.

How much was the impact would you share to -- would you care to...

Close to EUR 15 million.

How much?

Close to EUR 15 million. 1-5.

The next question is from the line of Luis Alvaro with Morgan Stanley.

This is Alvaro from Credit Research at Morgan Stanley. I have two questions. One is a follow-up from Daniel regarding your capital plans. Just to be clear, so your assumption is that no AT1 issuance from now until 2024 and just refinancing the Tier 2 external with the market. And if you can confirm that, it would be great. And my second question is about Cyprus. What are your kind of plans in Cyprus given the recent purchase of participation in Hellenic Bank?

Let me start from the first leg of your question. We confirm both your understanding that we do not intend to that included in our plan and issuance. And we intend to exercise the addition and refinance the Tier 2 from the market once the market conditions allowed.

Now on Cyprus and I will say at Hellenic Bank, we have a very clear strategy, which is we are interesting to increase our stake. But we are not in a rush in doing so. And obviously, this only can be done at levels that we believe are -- we feel comfortable to pay. Therefore, at the moment, we are on a waiting mode without rushing to do any extra step.

Okay. That's very clear. And then a quick question. Why not issuing AT1, it is because of pricing or because what is the rationale to be that clear that general penetration in AT1 in the next 2 years?

We have not just included that in our capital plan. It is obviously an option, but at some point, we could exercise. But as we speak, it's not part of our capital plan.

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 attending this call. And especially, thank you very much for your very interesting and constructive questions. We would be available, Harris, myself and obviously, our Investor Relations team for any follow-up discussions. 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.