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

Ladies and gentlemen, thank you for standing by. I am Vassilios, your Chorus Call operator. Welcome, and thank you for joining the Eurobank Holdings conference call to present and discuss the second quarter 2024 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 the Eurobank First Half 2024 Results Presentation. Together with me is our CFO, Harris Kokologiannis and the Investor Relations team. We are starting with some key recent developments, then presenting our results and answering your questions. In the European environment of [ financial ] growth and political noise, Greece clearly stands out in terms of GDP growth and political stability. Economic sentiment gained momentum in the first half of the year with investments accelerating, the labor market improving, while real estate remaining robust. The economic scenario continues to be favorable in our key markets with Bulgaria and Cyprus as well, with the latter earning an uplift in its sovereign rating to BBB+. Following the Greece sovereign rating upgrade, agencies also recognize the banking sector progress. Notably, for the first time since 2011, Eurobank has achieved investment-grade status by 2 agencies, Moody's and DBRS. Rating agencies noted the improvement in fundamentals as well as the fulfillment of key commitments. More specifically, in terms of M&A, we have achieved a majority holding in Hellenic Bank in Cyprus with our ownership now at 56%. The mandatory tender offer period ended yesterday, paving the way towards full consolidation, which creates a regional banking group with a balance sheet size of EUR 100 billion. We are particularly excited about the growth potential as we will start working on synergies. Furthermore, meeting our organic growth commitment has been supported by the economic performance in our 3 core markets. Demand for loans has increased and deposit accumulation accelerated, meeting or surpassing our goals. Wealth Management is increasingly integral to our strategy, leading to net flows in assets under management and private banking already exceeding our full year targets. Finally, on shareholder reward, besides the EUR 342 million dividend distribution, which is actually paid today, our recent AGM, approved the cancellation of treasury shares equal to 1.4% of the share capital. Now let's see our financial results for the first half of the year, as highlighted on Slides 5 to 9. In the first half of 2024, Eurobank had a strong performance across all areas. As a result, earnings per share amounted to EUR 0.20. Tangible book value per share increased to EUR 2.25, while the return on tangible book value reached 18.5%. In more detail, net interest income was up 9% year-on-year, better than our projections, while quarter-on-quarter remain resilient. Fees increased by 5% year-on-year, driven by a strong second quarter. Operating costs were stable and the cost to income reached a new low at 32%. As a result, corporate provision income was up by 10% year-on-year at EUR 958 million. Our regional operations substantial contribution to the above results continued. More specifically, core PPI increased by almost 14% and 15% year-on-year in Bulgaria and Cyprus, respectively. The asset quality metrics remained stable. The NPE ratio stood at 3.1% and coverage at 93%. The cost of risk declined to 69 basis points compared to 81 basis points in the first half of the previous year. Core operating profit reached EUR 814 million, up by 15% year-on-year, while our net profit reached EUR 732 million in the first half of the year. The regional operations contributed by EUR 277 million or 38% of the total. On capital, the fully loaded CET1 ratio reached 16.2% in June 2024, pro forma for the dividend distribution and the Hellenic Bank consolidation. Overall, we had a solid first half with increased volumes in loans, deposits and assets under management. We also exceeded our sustainability targets, which is 20% of corporate loan disbursements classified as sustainable. We expect trade demand to maintain space in the second half of the year, supported by potentially lower interest rates and strong investment pipeline. With the financial performance of the first half being above our expectations, we revised upwards our goals for the full year 2024 as presented on Slide 10. We now expect a return on tangible book value to be around 16.5% for the full year 2024, substantially higher than our previous guidance of 15%. At this point, I would like to ask our CFO, Harris Kokologiannis, to present our first half results in more detail before opening the Q&A session.

Thank you, Fokion. Before start, let me refer to the treatment of Hellenic Bank acquisition. Second quarter includes income from associates, 29.3% of Hellenic Bank's previous period profits. Furthermore, following the additional 26% acquisition in June, and EUR 100 million negative goodwill has been recorded. As of third quarter, Hellenic Bank's figures will be consolidated line by line. Let's now provide more insight into the second quarter results. Starting on Page 23, on lending growth. Group loans showed the [ stock ] performance increasing in the second quarter by EUR 800 million and in the first half by EUR 1.2 billion, a trajectory, which is fully in line with our full year target. Growth was mainly driven by corporate loans in all countries and the retail in Bulgaria. Group deposits on Page 24 had also a solid quarter, increasing by EUR 1.4 billion. The increase was mainly related to the business deposits in Greece and Cyprus. Net loan-to-deposit ratio remained stable at 72%, while LCR ratio increased to 182% as shown at the left of Page 25. As regards to managed funds on Page 27, in the second quarter, wealth sector continued and updated its growth pace. Quarter-on-quarter, managed funds increased by EUR 500 million and year-on-year are higher by EUR 1.6 billion or 32%. Private banking customers' assets and liabilities reached EUR 12.2 billion, increased by 15% year-on-year. Both KPIs have already reached or exceeded the respective full year targets. Moving to profitability on Page 31. On a year-on-year basis, NII is higher by 8.6% better than expected. Quarter-on-quarter, net interest income slightly decreased by 1.8% as the impact from higher loans and bond volumes was offset by the lower Euribor, higher MREL in deposit costs and lower lending spreads. Finally, net interest margin for the first half of the year amounted to 283 basis points. On Page 32 and on commission income, we had a strong [ outlook ] raising EUR 147 million, which is a record performance. This was driven by high lending commissions, solid platform fees and higher income from wealth management. Year-on-year, group fees are up by 4.8%, with fees over assets reaching 73 basis points and increased 79 basis points. On Page 33, operating costs are lower year-on-year in Greece by 1.2% as the discontinuance of resolution contributions and savings of [ Eurobank ] bank costs, offsetting transaction of variable compensation and higher IT spending. On a group basis, costs are stable quarter-on-quarter, but also year-on-year. Taking into account, the impact of BNP Bulgaria consolidation in the mid of 2023. Furthermore, on this page, cost-to-core income ratio for the second quarter reached 32.3%. As regards to the outlook for the year, we stick to our target for a low single-digit increase, excluding Hellenic Bank consolidation effect. On Page 35, we summarized operating performance for the first half of the year. Core PPI is higher year-on-year by 10% at EUR 958 million. Loan loss provisions for the period amounted to EUR 144 million or 69 basis points compared to 81 basis points in the first half of 2023. As a result, core operating profit is higher year-on-year by 16% at EUR 814 million. On top of that, there is a EUR 72 million additional income which corresponds to the 29.3% stake of Hellenic Bank's net profit and is currently recorded as income from associates. From next quarter onwards, this effect will be part of core profit. Moving on to asset quality on Page 37, NPE formation amounted to levels similar to the previous quarter with asset quality dynamics unchanged. NPE ratio remained broadly stable at 3.1%, while NPE coverage increased further to 93.2%. Moving on capital and on Page 42. Our fully loaded CET1 ratio increased organically by 50 basis points as profitability offset the impact of a strong asset growth quarter. Pro forma with the expected effect of Hellenic Bank consolidation and the dividend, CET1 ratio amounted to 16.2%. This is in line with our full year 2024 guidance for a ratio higher than 17%. Finally, on capital on Page 43, our total CAD ratio also pro forma for the 2 events mentioned above, stood at 19.3%. The overall first half performance points to an upward revision of our full year 2024 financial targets as shown on Page 10. Core profit is now expected to exceed EUR 1.6 billion. On NII, we upgrade our outlook as a result of higher deposit volumes, better deposit mix, front-loaded loan growth and higher bonds income. This forecast assumes 2 more rate cuts for the rest of the year in line with our business plan. Furthermore, we have not changed any of the assumptions related to Hellenic Bank's contribution in terms of state participation, low synergies and static balance sheet. As regards to cost of risk, it is now anticipated to be around 70 basis points. NPE ratio is expected to be lower than initial guidance and close to the current levels at circa 3%. Finally, return on tangible book value is now estimated at circa 16.5% versus 15% in our initial guidance. Tangible book value per share at circa EUR 2.35. This completes my presentation, and we may now open the floor for your questions.

The first question comes from the line of Mikhail Butkov with Goldman Sachs.

Two questions from me. Firstly, on the Hellenic Bank. Could you maybe please elaborate a bit on what synergies you potentially -- could potentially see between Hellenic Bank and the Eurobank? And maybe which of them are faster to [ realize ] and which are more medium and longer term, it looks like that there is -- that Hellenic Bank has fee income to asset ratio a bit lower than in Eurobank. Also, loan-to-deposit ratio is lower there. So maybe it is an area for some collaboration. And then also just to clarify on guidance, you briefly mentioned that you anticipate cost of risk now at around 70 basis points compared to -- I think less than 80 bps before. Is that the key reason for return on tangible equity revision upwards or you also changed any other forecast on the other lines?

Okay, Mikhail, thank you for your questions. Let me start from Hellenic Bank like find a couple of issues around the next steps. So having completed the mandatory tender offer, and having secured a majority shareholding to Hellenic, the next step is for the Board of Directors to -- which is going to be elected by the next shareholders' meeting to appoint the new management. In the foreseeable future, Hellenic Bank and Eurobank Cyprus will operate as separate entities. This is fine as their business models are quite complementary. Now planning in terms of synergies, this is something that we will begin as soon as the new management is in place. Synergies appear to be possible in almost all lines of the income statement, and let me become a little bit more specific on that. First, we expect synergies in terms of NII through higher loan balances. Synergies in terms of fee and commission income, as you pointed very correctly, fee and commission income is lower at Hellenic bank, not only compared to the Eurobank group, but also compare to HPS in Cyprus. And we see opportunity there through the integration first of all, of CNP Cyprus, but also by launching the bancassurance and asset management business in the retail segment of Hellenic. In terms of cost, we see opportunities for OpEx rationalization. And we see also opportunity in reducing the MREL-related cost of Hellenic Bank. Now we should be able to present our full business plan about Hellenic Bank, including synergies from a quantitive point of view, in the full year 2024 financial results announcement, which is taking place early in 2025. This is the point, as you recall, that we provide guidance about the ''25, ''27, 3-year group business plan. So at that point, we should be able to give quantitative targets over this 3 period -- 3-year period about the realization of synergies. Now, as regards the drivers so far, tangible book upside, actually, I would concentrate on 4 categories. First, and I think the major one is NII. As I said previously, we expect higher NII as a result of higher deposit volumes first. Better deposit mix. Front loaded, if not higher, our loan growth, and higher bonds income. So as a result of these, from a 260 basis points net interest margin that was our business plan, we expect a margin at the area between 270 to 275 basis points. So this is an upside in euro terms between EUR 100 million and EUR 120 million. The second is cost of risk by almost 10 basis points. The third is higher income from Hellenic Bank both in the line of income from associates, but as well as negative goodwill. And the fourth driver is other income based on the first half actuals and not providing for any significant amount of other income in the second half. These are the 4 drivers that actually drive up the TBV per share versus our business plan.

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

I have just one clarification question on the guidance. And specifically, can I clarify whether this core operating guidance that you are presenting today, assumes the contribution of Hellenic for the remaining 2 quarters as it's moving to line by line from associates. And that -- this was the assumption also in the previous guidance. So is there any change in the core guidance that is coming from Hellenic as well? And my second question would be on NII. I remember you didn't have meaningful derivative hedges in the first quarter. Can I check if you have opened any new positions in the second quarter? And do you -- do the numbers that we see now show any negative carry from that? And thirdly, on capital, can I confirm that you're not accruing any dividend for 2024 in the pro forma numbers that you're showing?

Yes. I'll take the first and the third question and then Fokion will elaborate on the second one. As regards our guidance, we have not made any change as regards the assumption on Hellenic Bank contribution. So first of all, technically, we have not made any change in both business plan and this guidance, Hellenic Bank is assumed to be consolidated line by line as of the third quarter of the year onwards. And as regards the number of assumptions. We have not made any change in our assumption either. That means a static balance sheet, no synergies and no [ change ] of our stake in Hellenic Bank. So this is exactly the same. Now as regards capital, your assumption is correct. Actually, our capital follows accounting, i.e. dividend is -- impacts capital once it is spent. Now Mehmet, on hedging to clarify, once [ expect,] but in second quarter results, we show capital pro forma with a dividend that actually spent now.

Okay. Mehmet, moving to the second question about hedging. As a matter of fact, there exist hedges in our book. And if you turn on Page 7 of the presentation, where we compare NII first half of 2023 versus first half of 2024, there is an amount of EUR 27 million negative between the 2 years, which is the effect of hedging. So in the first half of 2023, we didn't have any hedges. We initiated them in June of 2023. And as a result, the impact on our NII is EUR 27 million. Because of these hedges, the sensitivity that we have now, in terms of interest rates is for 25 basis point rate cut, roughly circa EUR 25 million. And this is for a rate cut in addition to what we have assumed in the business plan, which is 2 more rate cuts in 2024, plus another 2 rate cuts in 2025. So this is the effect that we have in our net interest income.

This is really clear. If I may just follow up on this one, I do remember you had closed some of the hedging positions in the fourth quarter to take profit on them. So my question was maybe looking at this chart, which shows the 1-year trend. Has this changed in the last quarter at all? Is there any color that you can give us some more...

As we have explained, in previous call, hedging is a dynamic exercise and we may have some rebalancing from quarter-to-quarter in the second quarter versus the first, we had increased the amount of hedging. And therefore, the impact on NII was about EUR 6 million more negative effect in the second quarter versus the first quarter.

The next question comes from the line of Gabor Kemeny with Autonomous Research.

A couple of questions from me. First one is on loan growth. I mean I understand you talked about a solid pipeline and the support from lower rates. But if you think about the loan growth outlook for the second half, should we take this EUR 1.2 billion organic growth as a proxy? Or do you think you could possibly do better than that? And my other question was a follow-up on Hellenic. It [ include ] a very sensible acquisition I hear you on the synergies potential. So I guess my question is, how do you see your willingness and your ability to reach a higher stake than this 55%, 56% you have now?

So thank you for your question. On loan growth, actually, we had much accelerated second quarter that brought us at EUR 1.2 billion. Our business plan assume a loan growth of EUR 2.3 billion for the full year 2024. We are fully on track to achieve business plan, although with some variations in the mix, not only in international, international, we assumed a loan growth of approximately EUR 1 billion. So more or less will be there. On corporate, we assumed a loan growth of EUR 1.1 billion will be higher than that. And on retail, we had assumed that EUR 0.2 million growth most probably are going to be a bit lower than that, although we see some stronger mortgage demand in the second half of the year. Now on your second question, let me reiterate what we have said also in the past that the merger of the 2 banks, Hellenic Bank and Eurobank Cyprus remains our ultimate objective, and we feel confident that this will take place over time. However, the exact timing does not depend only on us, but also on minority shareholders.