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

Ladies and gentlemen, thank you for standing by. I am Konstantinos, your Chorus call operator. Welcome, and thank you for joining the Eurobank Holdings conference call to present and discuss the full year 2022 financial results. 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. Before we start, I would like to say that we all at Eurobank are devastated by the recent railway tragic event and express our deep grief and condolences to the families of those lost. I will start the call with a quick review of the 2022 performance and then focus on our business plan and the financial targets for the year 2023-'25. Harris will give you more details on the business drivers for the 3 year period. Finally, we will answer your question. In 2022, Eurobank outperformed 4 targets set for the year as can be seen on Pages 6 and 7. Core operating profit increased by 84% to EUR 885 million and adjusted EPS, that is excluding one-off items, to EUR 0.18. Our adjusted return on tangible book value reached 11.4%, while tangible book value per share increased by 20% to EUR 1.70. Asset quality improved further with NPA ratio declining to 5.2%. Our regulatory capital ratios boosted to 15.2% fully loaded CET1 and 19% total CAD or an annual increase by 250 and 290 basis points respectively. These results were delivered and meet a strong economic background despite the negative impact of increased geopolitical volatility, disruption in supply chains and persistent inflationary pressures. GDP was up by almost 6% in both Greece and Cyprus and by 3.7% in Bulgaria. So growth in all our core markets outperformed the EU average. Economic expansion among other factors were driven by investments underpinned by the RRF and [indiscernible]. This has also contributed to the strong expansion of our loan book by EUR 3.3 billion in 2022. As can be seen in Slide 8, where we show a sustainable finance initiatives in 2022, a green financing share in this loan expansion is material and is increasing. Let's now present the highlights of our 2023-25 business plan, the macroeconomic assumptions of which are summarized on Page 12. The economic growth outlook remains relatively strong for Greece with gain in cycles with average annual growth rate between 2% and 3% for the next 3 years. In particular, it appears that the economic growth increase may be well above 2% in 2023, as pointed out by the most recent data from tourists' early footings, lower energy prices and the investment pipeline. Additionally, rates are already moving higher than our initial assumption. High interest rates allow for some headroom in terms of net interest income, but on the other hand, could affect adversely loan demand and asset policy. The financial goal for the '23-'25 business plan are summarized on Page 13. Over the 3-year period, we expect EPS to grow at an average rate of around 12% per annum, front loaded in 2023. We upgrade our target of return on tangible book value from 10% to the area of 12% to 15% on a sustainable and securing basis over the same period. As such tangible book value per share should exceed EUR 2.70 in 2025. Our strong profitability translates to organic capital generation of more than 200 basis points per annum. This will be used to finance asset growth with loans expanding at a 7% compound annual growth rate and should allow us to explore further potential M&A opportunity. However, organic capital generation should facilitate the old shareholders through dividend distribution and share buybacks. Shareholders' report is now becoming key in our statement. Specifically, for 2023, the amount year mark for dividend distribution will be used in an optimal way to bid for the 1.4% HFSF stake through a share buyback fee. The initiative has been discussed with this provider when [indiscernible] to proceed with an official submission. For next year onwards, we envision a payout ratio of at least 25% in the form of cash dividend and share buybacks. The above financial objectives rely on our well diversified business model with more than 1/3 of our core operating profit coming outside Greece. In our 3 core markets: Greece, Bulgaria and Cyprus; along with Eurobank Luxembourg, which is our wealth management center, we actively seek to enhance our presence organically and through potential M&A in this context. And in line with our strategy, we recently executed a capital reallocation by disinvesting from Serbia at several valuation terms and proceeding with the already announced investments in Bulgaria and Cyprus markets, which offer higher profitability potential. Overall, we are pleased that we consistently outperform our target for severance. Our strong balance and advanced business model makes us confident about capturing the growth opportunities in our region, delivering sustainable returns and rewarding our shareholders for years to come. At this point, I would like to ask Harris to present our business plan drivers in more detail.

Thank you, Fokion. I will start with NII and the evolution of volumes on Page 15. Loan growth is expected to slightly decelerate from the 10% recorded rate in 2022 to an annual average of 7.5% on the transfer. Specifically, performing loans are anticipated to grow by EUR 2.8 billion in 2023 and by EUR 9 billion the prior-year period, driven by business loans in Greece and Cyprus and by both retail and corporate portfolio in Bulgaria. Business lending growth in Greece will be mainly powered by investments in 5 pillars; infrastructure, energy and green transition, digitization of economy, storage and manufacturing. Still on the same page at the right part, Group deposits are expected to increase in 2023 by EUR 2.4 billion, and for the 3-year plan, by EUR 6 billion which translates the annual average growth rate of circa 3.5%. Moving on spreads on Page 16. Lending spreads are expected to decline by circa 30 basis points in 2023, mainly affected by new production of corporate loans at lower margins as well as by the outstanding loans with fixed rate, i.e., consumer, small business and fixed rate mortgages. Deposit spreads, at the right part of the page are affected by the pass-through rates and the deposit mix. More specifically, we expect time deposits pass through rate to reach 65% in 2023 and further increase to 75% in 2024 and 2025. Pass-through rate for core deposits is anticipated to move at low levels and not exceed 20% during the plan period. On the deposit mix, we anticipate an increase of time to total deposit ratio from circa 25% currently to 40% for the full year 2023 and then up to 60% in 2025. Finally, on this page, net interest margin mainly reflecting deposit spreads should be increased to 235 basis points in 2023 before slightly decreasing to 220 basis points in 2025. Finally, on NII and on Page 17, net interest income is expected to increase by 20% or EUR 320 million in 2023 as a result of Eurobond increasing euro production, which offset higher [ M&A ] costs and lower lending spreads. In the following years, NII may slightly decline as deposit impact from loan production is offset by higher deposit passthrough and M&A costs. Moving on fees and commissions on Page 18. Following a 20% annual increase during the last few years, that trend is anticipated to slow down during the 3 -year plan period. Commissions will increase on average by 3.5% per annum raising 70 basis points over assets in 2025. Specifically, in 2023, fees may technically decline as they incorporate the full year effect of [indiscernible] acquiring these investments. Asset management and private banking are key to our strategy. The lending fee are anticipated to increase up double-digit ratio in 2023 and assets under management [indiscernible] over a 3-year period. Network and transaction related fees should also show a remarkable growth in 2023, reflecting the resilient economic activity condition in our core markets and the record tourism season expected this year in Greece. Lending fees following a 50% year-on-year growth in 2022 are expected to be slightly reduced in 2023 as corporate loan disbursements may slow down. Finally, our EUR 1.3 billion investment in property portfolio will continue to produce approximately EUR 400 million rental income per annum. Moving on the transformation plan in the Pages 19 to 21. The launch initiatives should already start to deliver tangible results in all 6 pillars of the plan. We are enhancing our client-centric model, delivering more business in retail banking with less resources. Major achievements include the launch of new digital and phygital products, new customer onboarding journeys, new banking service pockets and redesign Bancassurance holdings. In the context of providing more targeted solution to our customers, we deploy machine learning, risk analytics and risk-based bright pricing tools in household and small business lending. Finally, we continue the simplification and streamlining of internal processes, increasing end-to-end efficiency and that is the above initiatives apart from the top line strengthening, streamlining our cost base to address the new challenges are shown on Page 22. More specifically, in Greece, we target saving more than EUR 40 million on an annual base of [indiscernible] bank costs, through staff rationalization, [indiscernible] space optimization, branch network and positive initiatives. And finally in the savings to address the persistent inflationary pressures, but also to grow the bank related investments. In information technology digitization, our total return on capital for [indiscernible] both developing and property [indiscernible] new skill sets. Overall, we expect operating cost in Greece to increase by 2% in 2023 and remain stable over the 3-year period, taking also into account, the impact of contribution to Resolution Fund expected to be received by 2025. In Southeastern Europe, cost base will be adopted this year due to the acquisition of the BNP in Bulgaria. Furthermore, costs are anticipated to increase organically by 5% to 6% per annum, reflecting the implementation of new core systems in Cyprus and Luxembourg. The inflationary pressures which are more intensive in Bulgaria and the resources may be to attract anything valid stuff considering the high attrition rate in these countries. Concluding this page, the undertaking cost initiatives, combined with the deployment of transformational program enabled the bank to address the growth challenges with less resources and drive the cost to core income ratio from 44% in 2022 to 40% or below even from 2023. Moving on Page 23 and on Southeastern Europe operations, net income is expected to increase by circa 60% over a 3-year period, reaching EUR 360 million in 2025. Main drivers for this outlook are; loan growth at the high single digit ratio per annum, lending and transactional related commissions and the large deposit base which gets an additional value of the current interest rates bonds. Finally, on capital, and on Page 24. Fully loaded CET1 ratio is anticipated to increase by circa 80 basis points in 2023, reaching 16%. Organic profitability will generate circa 240 basis points of capital. Part of that will be challenged to asset growth and the buyback of 80% shares. Impact from already announced M&A activity is expected to be moderate of the capital consumption for the acquisition of BNP in Bulgaria and the increase of our stake in Hellenic Bank 29% are offset by the positive impact of Serbia Eurobank. In addition, this year, we plan another synthetic securitization of EUR 1.5 billion corporate loans, contributing circa 40 basis points to capital. Furthermore, we will proceed to switching from IRB Standardized risk weighting method with an adverse impact of circa 30 basis points. For 2024 and 2025, the organic profitability is anticipated to generate circa 460 basis points of capital, out of which almost half of value profit growth at 90 basis points to dividends and buybacks. Fully loaded CET1 ratio is expected to be higher than 17% at the end of 2025. Finally, on capital, on Page 25. Total CAD will remain safe in 2023 at 19% and increase up 20% by 2025. This capital plan does not include any issuance of CET1 which may be considered in the future as an optimization tool to increase further distribution capacity. Concluding this presentation, we are very pleased about our budget for 2023 and new 3-year business plan. It's KPIs are summarized on Page 14. For this year, we target with core PPI of circa EUR 1.4 billion, which combined with a prudent cost of risk of 85 basis points concludes the core operating profit of EUR 1.1 billion. This drives the return on tangible book value to 13% and EPS to EUR 0.22. In 2025, retail tangible book value remains robust at a level of at least 12% and in conjunction with the forecasted capital position, set the stage for conventional shareholders' rewards in the coming years. This completes my presentation, and we may now open the floor for your questions.

The first question comes from the line of Siddiqi, Nida with Morgan Stanley.

Thank you very much for the call, and the detailed guidance on the '23 to '25 business plan. I have a few questions. Firstly, it would be great to get some color on the dividend decision for 2022. As per my understanding previously, Eurobank was planning to initiate dividends from 2022 profit. So any color around that would be much appreciated. Second, just wanted to get a clarification in terms of the underlying assumptions for the '23 to '25 business plan. Is my understanding correct that the ECB rate assumption that you have baked in is 2.5%? And if that's the case, the real expectations at this point are much higher. So firstly, what is the reason for this conservative assumption? And secondly, if could perhaps talk about sensitivities to NII and also bottom line. If you know, assuming rates are higher than this assumption, because I understand, of course, NII sensitivities are lower as rates keep increasing, and one also needs to keep in mind the impact on asset quality and loan growth. And then my third and final question is on M&A and your plans for M&A in the '23 to '25 plan. And if you could just comment on how you're thinking about it, which countries are you particularly looking at and what's the criteria in terms of which countries are attractive for you?

Let me start for your middle question as regards the underlying assumptions about base interest rates are concerned and then Fokion may address the issue of dividend decision and the M&A. I think, it's true what you said. On Page 12, you may see that the ECB deposit facility rates used in our assumptions in our business plan is 2.5%. And the reason is that, when we prepared and filed our business plan to the Board and that was in December, the prevailing outlook was for such ECB rate projection. Of course, as you very correctly noted, we are -- as we speak to a higher interest rate environment of approximately 100 basis points and this, of course, may have a positive [indiscernible] P&L, but also some further threats. Let me start from the hard numbers. We have some sensitivities on that and assuming no change to the business plan pass-through rate and deposit mix. And 100 basis points increase in base rates result in additional approximately 200 million of NII. Of course, this is the positive side of the story. However, as you correctly pointed, we may have some repercussions on the asset quality, as well as on the loan growth or the spreads. So on that front and I think our sensitivity is on asset quality. And we can say that, on the corporate book, we feel quite confident about the asset quality of corporate loans. The most sensitive loan category I would say is a mortgage loan. And from that part, we have run also sensitivity, increasing the base rate to 3.5%. And for almost half of the mortgage portfolio, the monthly installment increases by approximately 15% and for the rest, 50%. The increase is quite high and close to 30% on average. However, should be noted here that the actual euro impact on the monthly installments for the London cluster of the portfolio is close to EUR 100. In our business plan, we have to say that we have already adopted a prudent approach to account for the potential impact of increased interest rates on disposable income of all the customers. For 2023, we have assumed NPE formation positive of EUR 400 million against EUR 46 million in 2022. And this forecast appears quite conservative and may account for the potential impact of even higher interest rates than those assumed in the business plan. Now going to loan growth. On the loan growth, we may have an increased risk from some acceleration of loan repayments by large businesses enjoying our liquidity position. And in addition, we may have lower attractiveness of investments due to higher IRR required. However, we have to note here that we anyway have reflected some slowdown on figures in our 2023 lending growth as group performing loans are forecast to increase by EUR 2.8 billion in 2023 versus EUR 3.3 billion in 2022. Second, the great majority of expected growth is based on the corporate book, where it is again based on a number of investment projects that are in pipeline and in advance progress of -- in a status of advanced progress. Third, a part of growth is expected to come from the RRF loans. And there, we should accept that investments funded by RRF, if anyway lower required IRR due to the lower average cost of funding. So they are less affected, one could say by additional equalization of interest rates. Now, when it comes to -- coming to the last part of the case as regards loan spreads. In our business plan, we have already assumed a 40 basis points contraction of corporate loan spreads as regards 2023 versus 2022. And a further 10 basis points for the following years. Now, interest rate increases above 2.5% base rate is not expected based on some, let's say, market sensitivity that we have run, not result in an additional load of spread pressure, not I would say, worse than 5 basis points to 10 basis points contraction. So I think I provided a thorough overview of the sensitivity and I may pass over to Fokion for the other 2 legs of your question.

Let me start from your question regarding the dividend of the 2022 financial results. And as you are aware, the HFSF announced its investment plan for the 4 direct systemic banks back in mid of January. Having reviewed this plan, we believe that it is optimal for Eurobank shareholders to use the earmarks dividend amount in order to bid for this 1.4% HFSF's rate through a share buyback scheme. And I think there's some thorough view. First of all, the buyback is EPS accretive by about 1.4%. We buy the stock below the book value. And furthermore, the bank will exit the HFSF framework. This is something that we have discussed quite extensively with the SSM. We have received positive feedback and we have already filed the formal application for the share buyback with the regulator. We expect the formal approval over the next couple of months, then obviously, the interim approval has to follow. And that will drive us most likely in the second half of 2023 to submit an official offer to the HFSF. Now, as I mentioned in my introduction, the shareholders reward has become key in our strategy for this 3-year plan. And therefore, we envisioned a payout ratio of at least 25%, forecast dividends 2023 onwards, and potentially some additional share buyback programs. Moving now into your last question about the M&A opportunities and which countries this may have referred to. We have said the number of times that our group operates in 3 core markets; Greece, Bulgaria, and Cyprus. In these 3 markets, we opt to increase our activity organically, but also through M&A opportunities, if such opportunities arise. So the M&A would be focused on these 3 core markets. And these markets are in a consolidation mode, especially I'm talking about Bulgaria and Cyprus. And therefore, we would explore the opportunities along these lines.

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

I have a couple of additional questions, please, both on NII, as well as the capital trajectory from here. Firstly, on NII, I'm even taking into account a 2.5% deposit rates by the ECB, I think the outlook looks quite conservative. Because I think Harris you mentioned, EUR 330 million increase in 2023, which on a quarterly basis implies the same level of NII as in the fourth quarter. So is there anything else that you see will create some pressure like deposit betas or any additional color you can give here or is that simply just a very conservative outlook? And in terms of the TLTRO contribution, which looks quite high in the fourth quarter unusually, what was the reason for that, please? And excuse me, please, if I've missed that in the presentation. And finally, on the dividends and buybacks, your CET1 target of 17.4% for 2025 looks quite strong. Is this where you would see normalized levels of capital going forward or do you think this trajectory may allow a higher payout ratio than the 25% that you have? Specifically, I'm trying to understand is that a target that you want to reach or is it simply an output based on those general assumptions in the guidance?

Okay. Let me start from the first couple of questions regarding NII and then Fokion may comment on the last or the last part. First of all, you might have understood that we --- you always build some degree of conservatism on our plan. But apart from that, we have to know that in 2023, we invested a significant increase of deposits possible rates for time deposits will increase -- we expect an increase to 60% to 65% compared to close to 35% that used to be the case in the fourth quarter and 45% as we speak. Furthermore, we expect, let's say, "Deteriorating of mix," in favor of time deposits, but from the current contribution of 25% is expected to increase in 2023 on average 40%. Furthermore in 2023, which have a significant embedded in our NII from MREL and Tier 2. So in aggregate, these 2 drivers are expected to have enough contribution of close EUR 75 million to EUR 80 million compared to 2022. And the further impact, adverse impact from the contraction of spread, so these are the reconciling drivers between 2022 fourth quarter and 2023. Now as regards TLTRO, it is not straightforward to make some reconciliation as the quarterly bookings on TLTRO are based on the maturity of its program on the accruing [indiscernible] follow et cetera. So this is the reason that you may observe this amount in the fourth quarter. Now I pass to Fokion to comment on ratio of capital level and distribution list.

Okay. On Page 24, we project the capital transactory based on the assumptions of the business plan as they have been discussed so far. So I would like to clarify that there is no CET1 ratio targeted implied by what we have projected here. If it just the evolution of the CET1 ratio, as per the assumptions of the business plan. This ratio reached 17.4% in 2025, obviously is a very healthy CET1 ratio that should allow us to execute the dividend strategy that we have outlined, but it should be also able to help us execute any sort of M&A opportunity if it comes through. Now in terms of the payout ratio, we have assumed a number of at least 25%, let me comment on that, our position is that we have to gradually rebuild our payout policy, taking into account the consensus for stakeholders. Starting already in 2023, we payout [indiscernible] the share buyback of circa 16% and therefore we build on that and we are planning to move to higher payout ratios day in after day out. I would like also to add that on Page 25, we present some additional capital auctions from the write-back of the days that are not part of the business plan that we have presented so far. So these are additional tools that we would potentially use in an effort to optimize further our capital structure and through that to enhance even more shareholder reward. Let me come back on the previous leg of your question regarding TLTRO tends to be absolutely clear with my answer. If you go on Page 46 of the presentation, on the left part of the page, in this we show, I think an increase of TLTRO from EUR 9 million to EUR 34 million. However, as you may know, that the footnote said this analysis is based on gross income and it's not margin, and this is net of placements to Central Bank. So the major part of the increase is coming from surplus liquidity to Central Bank and is of course related with interest rate trajectory.

The next question is from the line of Alevizakos Alevizos with Axia Ventures.

Congratulations on the set of results. I've got a couple of questions. The first question is regarding the cost of risk target, the 85 bps and the 60 bps. I understand that some of that will go down to the protection fee paid for the synthetic securitization. So I was wondering whether you can give a split. How much of that is actually going into the synthetic securitization and also which asset classes or regions are you prioritizing on securing? And the second is a technical one on RWA, you said that you are switching from IRB to standardize, there was already an adjustment in your capital and your density is already higher than the average in Europe, so what was the reason for that change?

Let me say a few things about cost of risk. Why 85 basis points and then Harris can give you the break down into the different components of the cost of risk. As Harris mentioned already, we have assumed a formation for the course of 2023 of EUR 400 million, EUR 450 million. This formation is quite higher from what the GDP growth and unemployment level would imply. But just taking into account and more of fresh interest rate environment, then 2.5% that we mentioned before, we have already taken into account, Eurobank reaching 4% in this formation. And this formation is in line with the cost of risk of about 85 basis points and which, as you said correctly, it also includes the course that we have for the defense synthetic securitization that we have done so far. So let me pass over to Harris to give you some more details on that.

Sure. So let's start from your last part of the question regarding suites to standardize. Actually it is about simpler cost benefit analysis. So taking into account the continuously increasing cost to maintain IRB models in tandem with shrinking benefit, and I will elaborate further on that versus the standardized approach led us to the decision to treat on the IRB to standardize in 2023. And so that's how following supervisory dialogue, our IRB model here to be calibrated to take into account the severe financial crisis increased over the past years and especially taking into accounts the years 2011 to 2015 where there is a great difficulty pass over a very severe financial crisis. Without having the ability for any upside, as up. This you may have that was produce very punitive are the real factors which do not reflect at all the current economic conditions in the country. Therefore it was decided to switch from the IRB to standardize with a negative capital impact of approximately 30 basis points. Now as regards to your first part of the question, out of the total cost of risk of 85 basis points, almost 2/3 of these normal provisions, normal increase of provisions stock with 1/3 is both servicing fees to our services, the value and cost of synthetic securitization. On that front, again, out of this 1/3, 2/3 is legal fees, legal collection fees to do value and plus there is a cost of synthetic securitization.

Your next question is from line of [indiscernible] with Goldman Sachs.

Some of my questions were already asked. The first one from me is the investors and the market keep [indiscernible] Greek sovereign debt case in investment-grade rating. So from your perspective, what implications, operational implications do you see and maybe more specifically, if I may ask on the Greek government bonds sensitivity sales and repricing of debt. Can you get any rollbacks to the capital ratios in case of bond yields appreciation, what would be the size of that? And then more broadly on your guidance, you mentioned a reasonable level of conservatism, particularly the topics discussed around the NII? Do you see any other areas of upside for maybe risk on the downside around the guidance, which you might share or highlight?

Okay. Let me start with your first question. The investment-grade in Greece and how these may affect our [ DTP ] Holdings. First of all, we would expect investment-grade, most likely in the second half of the year, given the progress that the country has done but also the progress that the banking sector has done in terms of the NPE ratio and the capital ratios. Now the effect of investment-grade into the banks are going to be 2-fold, it should allow us to issue MREL securities at lower spreads for the lower cost, which is something quite important given the size of the MREL securities and would also benefit to the spread of this, which to some extent already happening as you see DTPs are trading through the Italian DTPs. So this is something that the market has already started pricing. Now, in our case, given that most of our bonds is in the amortized cost portfolio. We don't expect to see any sort of immediate bottom line effect because of the investment-grade. I will say that for Eurobank, the main positive effect will come through the issuance of MREL securities. And Harris, do you want to take the second question.

Yes. Now regarding -- trying to let's say to list the downside and upside risks of our plan, in general just try to be quite prudent on the assumptions. Regarding downside risks, of course may have receive interest rates may affect positively NII, but negatively -- a negative impact on loan growth and asset quality in the way that I explained before. We have referred to the low spreads contractual due to higher interest rate but also to market conditions and the intense competition that is in the market for corporate loans. Another risk is the passthrough rates is a very sensitive driver of our business plan, although we try to accommodate a quite conservative to on the passthrough rates on the mix and perhaps the political grid facing culture to account the latest, the latest development. However, you may have received that there are also some exciting -- starting from the macro assumptions that we have made and that are summarized on Page 12. We have assumed a GDP growth of 2%, it may be the case but the growth may be higher than 2%. We have assumed unemployment of 11.8% average for the year already January we enjoy an unemployment of 10.8% embark that we have many, many years to see if, of course the higher base rates, as I explained, are expected to have a positive impact on our NII at the first place. Now then we have made quite conservative assumptions on asset quality. We have assumed the formation of EUR 400 million and the cost of risk that actually reflects information of 85 basis points. The situation may be that due to a number of credit positive factors for -- maybe lower and in term may have also lower cost of risk. So these are in an nutshell the upside, the downside. The risk, I don't know, Fokion, if you want to add.

Mr. [indiscernible] line has been disconnected. So we'll now move on to our next question. And the next question is from the line of Memisoglu, Osman with Ambrosia Capital.

Many thanks for the presentation and your time. I have a question on your NII breakdown, the bond and derivatives income seems to have jumped quite sharply from about 70 to 88. Could you give us some color on that. Is that more derivatives driven because I see the securities book had a slight increase or maybe yield pickup and what should the outlook be, what is the outlook in the guidance for these things? And then on the capital side. I'm guessing this 30 bps and the switches one-off and it's not included in your walk through for capital going forward. If you could confirm that?

Sure. Let me start from the second leg of your question. The answer, it is included if you go on Page, give me a second, on Page 24 and you go to note 5, the minus 15 basis points includes another impact from market risk, a positive impact from synthetic securitization that I just mentioned, EUR 1.5 billion and the switch to a standardized approach the 30 basis points. So it is plus 40 coming from the securitization, minus 30 and we have minus 30 from standardize and another 20, 25 basis points from market risk and other regulatory adjustments. So it is there included. Now turning to your next question regarding bonds and derivatives. I repeat what I said before that, here we have the numbers based on the gross income basis, so these are affected and these are affected by the interest rate movement and considering that our bonds have turned into floating almost 100% through derivatives. This reflects first the movement of base in that space, but also we had an increase of -- in the volumes of both the securities from EUR 15 billion at the end of September to EUR 13.4 billion, so an increase of close to EUR 400 million that also contributed to this increase. So that's…

Could I follow-up? All right. If you go to Slide 17, the walk-through to '23 NII, you have a EUR 40 million from other. So what would the bond/derivatives contribution be year-over-year? Can you provide color?

Sure. So the bonds showed a positive contribution in 2023 of close to EUR 200 million. So part of this EUR 40 million, it is the very income at EUR 200 million that becomes close to EUR 210 million in 2025. Furthermore, on that investment -- in that line we have included the negative impact from [indiscernible], the negative impact from senior MREL and the negative impact of Tier-2 and the main, let's say, negative variance as you may observe that plus 40 becomes minus 410, the major driver of this negative variance, it comes from using resources and we have to research, as we described on Page 15 the write-down on the bottom right part of the presentation.

The next question is from the line of Nellis, Simon with Citibank.

Most of my questions have actually been answered, but I've got a few. Can you just indicate what the nature of the quite strong trading and other income was in the fourth quarter, that'd be interesting and the outlook there? Also, could you just help walk through your NPE reduction plans over the next 3 years and how you expect to deliver that? Another one-off costs that aren't in the budget or in the plan that haven't been disclosed but you make that happen? And then last, if you could just talk a bit about your Southeast operations and how you're going to deliver that 60% profit growth, is it coming mostly from Cyprus or from Bulgaria, was it even mix between the 2? And just on your intentions with Hellenic Bank, are you looking to acquire more to hit that target?

So let me start on the non-core income advocates in the fourth quarter of 2022. It is EUR 100 million on a group basis. First, it includes investment property fair value that it takes place at the end of the year. This is EUR 40 million and the rest, EUR 60 million more or less, it is tied to gains related to sharing derivatives. Now because the one-off that we expect for the budgets, we expect below the line, let me make a step result, as regards other income, trading and other income, we expect these to return back to normalized levels no more than EUR 80 million to EUR 100 million per annum. And as regards the below the line items, we expect a positive impact of close to EUR 100 million, the major part coming from the negative goodwill, coming from the recognition of Hellenic Bank as an associate upon the completion of the acquisition of the 16% that we have acquired by [indiscernible], something that is expected by the end of months. So, let me pass to Fokion to explain you all about the background of RFP plan, and will return to the composition of our profitability in Southeastern Europe.

In terms of BNP evolution, as mentioned already, we ended [Technical difficulty]. Despite the fact that we have assumed in our plan for 2023, upon the formation of EUR 400 million. The NPE ratio will remain at 5.2% due to the number of acquisition, write-offs and also the growth of our loan book in from the neighbor effect. By 2025, we project the NPE ratio to decline to 4.5% or lower and this is going to be done primarily through internal workouts and collections. We are not in presenting at this point any further material transaction.

And the reduction this year are you going to have to take some extraordinary costs that aren't really being flagged here, too? So, everything is included in the risk cost lists.

Everything is included on the 85 basis points cost of risk.

So, I think that the composition of profitability in -- from international 50% is coming from Bulgaria, I think about 25% in 2025 and 50% is coming from Bulgaria, 40% from Cyprus and 10% from Luxembourg.

No, that's clear. And to get the Cyprus number, do you need to increase your stake in Hellenic further?

This is something that we would evaluate according to developments that we see in this market. So we monitor very carefully and if there is any opportunity, we will -- are going to consider it very seriously.

The next question is from the line of Garrido, Luis with Bank of America.

I have 2, please. The first on capital. You noted that on Slide 14, the capital guide that you have is just sort of an output of the other assumptions. Do you have a management target for the CET1 ratio, please? And in that context, can you give us a sense of how many percentage points of CET1 ratio you would be comfortable giving up for M&A? And then my second question is on the acquisition of BNP personal finance in Bulgaria. Can you talk a little bit about, why this is a more interesting asset of Eurobank than for BNP?

Okay. Let me start from the second question. BNP had vast this operation in Bulgaria, which as a matter of fact was and still is a very profitable operation with very interesting penetration in the local consumer lending market. Eurobank is a universal bank in Bulgaria. Therefore, we have the full spectrum of products across retail, but also important relationship with corporates and retailers. And therefore, we expect to have quite some interesting synergies out of the acquisition of this operation. You may recall that we have done a number of mergers. In Bulgaria, 2016, we had absorbed the Alpha Bank operation there. 2019, it was the Bank of Greece operation. All of them produce quite important synergies, both in terms of revenue, as well as in terms of cost. And the same we expect will be the case for the absorption of this consumer lending unit. Now, in terms of capital targeting, and we want to be comfortable about the regulatory ratios, I would say to be about 100 basis points to 200 basis points, may be closer to 200 basis points more than the regulatory ratios. From what we have presented here, we're well above this buffer that we want to have in our CET1, which should allow us either to move on the M&A side, again, only if there is the right opportunity or to be more active in terms of our shareholding rewarding 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 participating in this conference call. We had quite a number of questions. I think, we should have provided more color to our plan. We are planning to be in London early next week and in the U.S. in the beginning of April. Therefore we are looking forward to meeting you there, if you have more interest, let's discuss about our plan. Thank you.

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