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

Ladies and gentlemen, thank you for standing by. I am Mina, your Chorus Call operator. Welcome, and thank you for joining the Eurobank Holdings Conference Call to present and discuss the second quarter 2023 financial results. All the participants will be in the listen-only mode and the conference is being recorded. The presentation will be followed by a question-and-answer session. [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 First Half 2023 Results Presentation. Together with me is our CFO, Harris Kokologiannis and the Investor Relations team. We will start with some key developments, then present our results and answer your questions. Our 3 core markets, Greece, with Bulgaria, Cyprus stand out in terms of growth outlook despite the weakening EU macro environment. Greece, in particular, is expected to outperform in the next 3 years, given the stable political background and the strong investment momentum. The sovereign rating upgrade seems to be only a matter of time and the market is already discounting as evidenced by the Greek Government Bond Spreads. Economic sentiment remains strong, labor market developments are positive, with unemployment declining further and the real estate market appears robust. Furthermore, the investment pipeline is building up and serving them with projects already submitted to the RRF in excess of EUR 15 billion. The banking sector in Greece experienced a mild credit contraction in the first half of the year as corporates use excel liquidity to repay loans in reaction to high interest rates, a trend also seen in other European countries. We expect the loan demand to accelerate in the second half of the year. Private central deposits have also been affected by corporates, utilizing their liquidity to reduce loans while household deposits have increased. Now let's see our financial results for the first half of the year, as highlighted on Slide 5 to 9. Eurobank had a strong performance across all areas in the first half with net profit excluding one-off gains reaching EUR 600 million. As a result, tangible book value per share increased by 19% year-on-year to EUR 1.90, while return on tangible book value reached 18% in the first half of the year. In more detail, net interest income remains in a very strong trend increasing further in the second quarter and rising 56% year-on-year. This was driven by higher [indiscernible], while the deposit beta increase was moderate and below our initial expectations. Fees increased by 10% year-on-year, beating our projections. The cost-to-income ratio reached a new low at 33%. As a result, core pre-provision income was up by 76% year-on-year. Moving now to Asset Quality. In the second quarter, despite a single corporate NPE flow, the underlying asset quality remains stable. The NPE ratio stood at 5.2% and coverage at 73%. The cost of risk reached 81 basis points in the first half of the year. Core operating profit that is core PPI [ minor ] provisions jumped to EUR 705 million up by 89% and 10% year-on-year and quarter-on-quarter, respectively. While our net profits in the first half of the year reached EUR 6,084 million. Our regional operations continued their strong performance, more specifically year-on-year, core PPI increased by 40% in Bulgaria and in excess of 100% in Cyprus. In total, net profits reached EUR 205 million in the first half, more than double on an annual basis. Moving now into capital. In the second quarter, our capital ratios boosted by circa 80 basis points of organic performance. Total capital ratio reached at 19%, while the fully loaded CET1 at 16.3%. So overall, our performance in the first half was above our expectations. As such, we revised upwards most of our financial goals for the full year 2023 as presented in detail on Slide 10. We now expect return on tangible book value to be well above 15% in 2023, with earnings per share at circa EUR 0.28. The recent AGM approved the share buyback, and we are planning to bid for the HFSF stake in early September. And as I also mentioned during our AGM, shareholder reward is a top priority with dividend distribution targeted at 25% out of 2023 profits. At this point, I would like to ask our CFO, Harris Kokologiannis to present our first half results before opening the Q&A session.

Thank you, Fokion. Let's now provide more insight on the second quarter results, starting on Page 19 on lending growth. Performing loans increased organically in the first half of the year by EUR 500 million, driven by Southeastern Europe operations with Greece remaining slow in the same period. In addition to the organic growth, performing loans increased in the second quarter by EUR 450 million related with the BNP consumer business consolidation in Bulgaria. In the second half of the year, SCE will continue its strong momentum while in Greece, we expect an acceleration of corporate lending growth. Overall, for the full year 2023, we expect performing loans to increase by circa EUR 2 billion compared with an initial target of EUR 2.8 billion. Moving on to process and liquidity on Page 20 and 21. As on the left of Page 20, group deposits increased in the second quarter by EUR 800 million, driven by Greek Retail, Luxembourg and Cyprus. Net loan-to-deposit ratio remained broadly stable at 72.6%, while LCR ratio reached 474% as shown at the left of Page 21. As regards assets under management on Page 23, wealth sector continued strong performance showing a year-to-date increase by EUR 0.7 billion and EUR 12.5 billion in manage funds and [ parbake ] customers assets and liabilities, respectively. Moving to profitability on Page 37. Net interest income increased quarter-on-quarter by 7.5% to EUR 540 million. NII has been affected positively by the Euribor increase and new lending and [indiscernible] by the full quarter effect of late MREL issuance. On a year-on-year basis, NII is higher by 56%. On Page 38, commission income increased quarter-on-quarter by 8.7% and year-on-year by 10%. Despite the investment of [ metalware ] business, in June 2022. The strong performance is driven by the lending network-related and credit card is increased. On Page 29, operating costs increased year-on-year increased by 0.8%. On a group basis, costs are higher by 5.7% delivered by the inflationary pressures and the BNP consolidation in Bulgaria as well as by the co-line of the new core IT system in Cyprus. Finally, on this page, cost to core income ratio has been improved year-on-year by more than 12 percentage points, decreasing to 33%. On Page 31, we summarized operating performance for the first half of the year. Core PPI is high year-on-year by 76%, up EUR 869 million driven by the Board effect, higher loan and bond volumes, better commissions and higher core income outside Greece, offsetting higher rate costs. Loan loss provisions for the period amounted to EUR 164 million or 81 basis points. As a result, core operating profit is high year-on-year by 89% at EUR 705 million. Moving on to asset quality on Page 33. As shown at the top left of the page, underlying NPL formation in the second quarter were slightly positive at EUR 13 million and well below the guidance that we had provided. However, we classified as UTP and sync corporate exposure with idiosyncratic characteristics amounted to EUR 119 million. As a result, NPL ratio increased slightly to 5.2% from 5.1% last quarter, while coverage reached 73%. Moving on capital and on Page 38. Our fully loaded CET1 ratio in sense quarter-on-quarter by 40 basis points to 16.1%. This is driven by circa 80 basis points organic growth, partly offset by M&A activity. Specifically by the acquisition of an additional 13.4% at Hellinikon Bank and Bulbank Bulgaria. Furthermore, taking into account the upcoming synthetic securitization and the share buyback by HFSF, the pro forma fully loaded CET1 ratio amounts to 16.3%. Further more on capital on Page 39, our total cap ratio stands at 18.8% or pro forma at 19%. The overall first half performance points from upward revision of our full year 2023 financial targets as shown on Page 10. For PPI, is now expected to reach EUR 1.7 billion versus an initial target of EUR 1.4 billion. This mainly relates with higher labor rates, measured increase of deposits EBITDA, higher commissions and lower OpEx. Core profit is expected to be above EUR 1.3 billion versus EUR 1.1 billion before with cost of risk target remaining at 85 basis points. NPE ratio will be slightly lower at 5% or below. Fully loaded CET1 update outlook is now at 17% and total cap up 20%, 100 basis points higher than initial target. Finally, return on tax in book value is now estimated to be higher than 15% and EPS at circa EUR 0.28. This completes my presentation, and we may now open the floor for your questions.

[Operator Instructions] The first question is from the line of Alevizakos Alevizos with Axia Ventures. Please go ahead.

Congratulations on another good set of results. I've got a couple of questions and a follow-up after that. First question, I feel like the tax expense this quarter is a bit lower. Is that correct? And if so, what is the reason? And then the second question is, can you confirm whether -- what is the dividend accrual for this year, for 2023 that you're taking in terms of percentage of the earnings?

Sure. As regard to your first question, in the second quarter, the group recognized circa EUR 51 million DTA that relates with a tax loss from the sale of an REO Portfolio in Bulgaria. This is the reason why the ETR in the second quarter is circa 10% versus a regular one of 22%, 23%. Now as regards, dividend accrual, according to IFRS, we do not -- we cannot approve for a dividend. What we have included on Page 38 on capital, we present pro forma, the impact of sell buybacks that is indirect dividends on the terminal pro forma second quarter CET1.

Okay. And since you are on Page 38, the other question is for Hellinikon Bank, I'm not sure I understand why it actually reduces the CET1 capital ratio because there is also an income statement positive amount of about EUR 110 million. So what is the reason for that, even though you recognize some negative goodwill?

The reason is that with the 13%, we exceed the 20% threshold and to change the accounting treatment. So in the past, we used account that as a fair value to OCI now, we treat that as an associate -- associates had a different risk weighting. So that differentiates the -- is causing the impact.

Okay. And the last one, which was the follow-up is, do you have some actual timing details about the HFSF buyback?

I said before in my introductory note that we're going to submit a bid for the HFSF stake in early September. So this is the timing and the process should be quite quick from the side of the HFSF. This is the feedback that we have received. Therefore, the transaction should be completed within the month of September.

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

I have 2 questions, please. Firstly, on your growth guidance downgrade, I'd like to better understand it. Firstly, how much of that comes from Greece and how much from the international franchise? And assuming this is partly a result of higher interest rates in the country now, do you see a risk to your longer-term growth prospects? And maybe can you put a number to it, let's say, for 2024? I appreciate it's quite early, but in terms of percentage, et cetera, that will be very helpful. And secondly, on deposits EBITDAs. If I'm not mistaken, you were guiding for an average deposit EBITDA of 35% by year-end '23. Where do you see them now in your revised guidance? And maybe beyond 2023, I do appreciate the structural underpinnings of Greek banks, but assuming rates now at 4%, how sustainable do you think is the current low deposit EBITDA momentum? And where would you see them, let's say, in 2024 and 2025?

Let's start from the loan growth, and then we pass to deposit EBITDA. It is true that there has been a slowdown in the growth of our performing loans in the first half of 2023 in the Greek market. And this was mostly due to the high repayments from corporates and on [indiscernible] liquidity, and in general, due to higher interest rates. Eurobank performing loans have expanded by EUR 500 million in the first 6 months of the year, and this was driven by the SCE business. Now going forward for the rest of the year, we expect loan growth in Greece to accelerate, considering the pipeline that we have in the projects in which we are involved and relate primarily to energy, but also to tourism, shipping, construction, renewables manufacturing. As regards to SCE, we expect a similar strong momentum in the second half of the year, similar as the first one. At any case for the full year 2023, we revised downwards our growth target for EUR 2 billion versus EUR 2.8 billion initially. Now as regards to the composition of this remaining EUR 1.5 billion, 5 -- close to EUR 500 million or 1/3 is expected to come from SCE and the rest EUR 1 billion from the Greek corporate sector. And as we got retail, we don't expect any material contribution. Now as regards to deposit EBITDA, it is true that our first half, we had a mark quite better than what we initially expected in our budget. For the -- that remind you the remarks for the full year 2023, we expected an average of EBITDA of 35%. In the first half, the EBITDA is up 16%. The estimate for the second half is close to 25% and the revised EBITDA for the full year 2023 is slightly above 20%. This is the estimates -- the latest estimates that we have done in order to produce the updated outcome. Now with regards to 2024 and 2025, we haven't updated the EBITDA, of course, we expect to be better than what we have provided in the business plan. Most probably, we are going to provide an outlook as we do every year, in the full quarter in the full year results.

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

I have 2 questions. One is on the capital. So your capital adequacy level guided at 17% this year and further improvement likely in the next years. It's already a quite high number by any standard by European and emerging markets, what capital allocation opportunities do you see except for dividend in the near or medium term? And the second question is with regards to your international exposures, which are quite sizable. And among them, you also have exposure to the Central Eastern Europe. In the Central Eastern Europe, we can hear that inflation is coming down in some Central Bank's guidance for earlier than expected reduction in rates. What outlook on rates do you expect in Bulgaria and what contribution or impact it can have on your NII basically, do you have a positive for neutralish NII sensitivity in your international businesses?

Thank you for your questions. Let me start from the second question. Outside Greece, our 2 main markets are Bulgarian Cyprus, Cyprus is in the Eurozone. And therefore, there is a lot different outlook. In terms of Bulgaria, you know that there is a currency back in Bulgaria. And therefore, the monetary policy follows very closely the [ ACP ] rates. And there is already a plan by the country to join the euro by January 1, 2025. Therefore, we don't expect any sort of deviation from the euro monetary policy. And therefore, we don't expect any sort of effect from our NII in this country. Now in terms of our capital position, you stated very correctly that 17%, we are quite high here than the European average. And definitely, we are quite higher than our target CET1, which is in the area of 14.5%. Now how we can use this excess capital? We have already stated that excess capital will be used to fund the loan growth but there has been sluggish in the first half of the year, but we expect an acceleration in 2020 -- in the second half of 2023 but also in 2024. I mentioned before that already EUR 15 billion of investment projects submitted in the RRF, only a portion of them have been dispensed so far. So there is a strong pipeline for further disbursements. So one use of excess capital is to fund our loan growth, both increased as well as inside Bulgaria. The second piece to finance any sort of M&A opportunities that we may identify in any of the 3 core markets in which we are active. And obviously, the third is shareholder are in vault. I mentioned also in my introduction that we are targeting 25% payout ratio for 2024 out of the profits of 2023. Anyway, the excess capital will not run down by any sort of big extraordinary distribution or any sort of big transaction but it's going to be a gradual process. Proceeds going to be reduced and partially returned to shareholders.

[Operator Instructions] The next question is from the line of Memisoglu Osman with Ambrosia Capital.

Just wanted to get back to deposits and specifically shift to time deposits. I see it's relatively growing less in Greece from your excel sheet, only 2 percentage up or so in this quarter. The international side though, continues to go up quite at a rapid pace. Where do you see that particularly on the international side? And then going to the loan growth side, just following up on your comments. The corporate side seems like they will pick up -- is picking up. Any color on retail lending? I know it's not really anything happening there now. But what's the outlook there? Is there any signals if you think there's a turnaround sometime in 2024?

Let me start with the deposit mix and then Fokion may elaborate on the retail dynamics. In the initial -- in our business plan, we had assumed time contribution to total deposits on a group basis of 40%. In the first half of the year, the mix -- the average mix was up 25%. And our big estimate for the full 2023, the revised estimate is for a time contribution to total of close to 30%. This assumes a second half estimate of close to 35%, this is on a group basis, and we don't see any, let's say, material deviation between the Greece and the international dynamics. Now let's pass to Fokion for the retail.

Okay. With respect to retail lending, you are right that so far has been [indiscernible], but looking forward, if I could rank the different segments in terms of their potential, I would say that we are most active in consumer lending, both in Greece as well as in Bulgaria. In Greece, in a number of different sub segments of consumer lending, this is something that we expect to pick up further in the coming months but also in Bulgaria through the acquisition of the BNP consumer lending franchise in this country. Second, in terms of potentially the small business lending but especially in Greece is expected to gain some momentum. And third would be mortgages with the main reason that we have quite significant amortization of the portfolio every quarter, which reduces the potential for balances increase. So in summary, retail could play a more important role in terms of the lending contribution and composition in 2024 onwards.

And maybe more of a technical question. On the tax side, you mentioned some DTA support for Q2 for the rest of the year and maybe '24, any color on -- has anything changed on the effective tax rate outlook?

No, we don't expect any -- at least I cannot imagine something that going forward may change materially. The ETR that is expected to move at 22% to 25%. Of course, you should, at any point of time, weight the contribution between international and Greek operations. But I don't see any, let's say, divergence -- material divergence going forward.

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