National Bank of Greece S.A. (ETE) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Constantinos, your Chorus call operator. Welcome, and thank you for joining the National Bank of Greece Conference call to present and discuss the full year 2019 financial results. [Operator Instructions] 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. Pavlos Mylonas, CEO of National Bank of Greece. Mr. Mylonas, you may now proceed.

Good morning, good afternoon, everyone, and good morning to those of you joining from the U.S. Welcome to our full year 2019 financial results call. I'm joined by Christos Christodoulou, Group CFO; and Gregory Papagrigoris, Head of IR. After my introductory remarks, the CFO will go into more detail on our financial performance, and then we will turn to Q&A. So let's begin. The advent of the COVID-19 virus, this extraordinary ramifications for the world economy clearly lessened the importance of the Q4 '19 results. As they represent developments from a past that is significantly different from what we face today and expect to face in the near future. I would like to begin by describing our response to this crisis over the past critical several weeks. NBG has shown that it can act quickly by, first, creating a functional new work from home operating model, able to protect the health of its people. Currently, more than 70% work from home despite maintaining open all our branches. Second, adapting processes to remote access functionality for our employees, including improvements in our digital offering for our clients, while minimizing operational risk, including cyber risk. Indeed, the total transactions are severely down, the number of digital transactions is up. And third, by participating in the establishment of actions to meet the immediate need of clients, e.g., as regards appropriate payment holidays, and new government-guaranteed working capital facilities. Today, NBG and all its people are operationally and psychologically ready to operate in this rapidly changing new world. Key to success in this turbulence will be: one, a strong balance sheet; two, a flexible and efficient strategy to adopt the new reality; and three, effective empathetic leadership from the management team, working closely with the BoD. In this regard, NBG's balance sheet has significant competitive advantages, combined with changed infrastructure developed for its transformation effort, and this provided a significant edge. First, beginning with liquidity. NBG can withstand extremely adverse developments in markets due to a combination of a solid cash buffer, approximately EUR 4.5 billion and its low recourse to repo market, only EUR 1.5 billion in the repo market, as well as it has a small -- a held to collect and sell portfolio, less than EUR 1 billion. Second, NBG's capital ratio currently stands at 18.5% at a time when regulatory limits have been reduced significantly. This is a buffer of approximately 700 basis points and it follows the EUR 800 million capital gains achieved in the first 2 months of this year. Third, a strong management team, leveraging off a very effective transformation program, has been successfully changing the bank, improving significantly its efficiency and profitability as the full year '19 financial results reveal. This team has a proven track record in implementing effective change, a critical asset in today's environment. The highlights of full year 2019 financial results in brief. A strong recovery in core operational profitability by 38% year-on-year to EUR 235 million through: one, core income expansion as well as a 9% reduction in operating costs, adjusted for IFRS 16 and Pangaea; 11% at a bank level, including a Voluntary Exit Scheme for approximately 1,100 FTEs; also, a significant reduction in fees by circa 1/3, EUR 5.3 billion at the group level, EUR 4.7 billion at a bank level without a significant impact on credit charges. Other notable developments are: First, we finally completed the long saga with the auxiliary pension fund on March '19 with the voting of a new law by parliament. These pensions have been taken over by the state with our liability capped at a 12% contribution on an annual wage bill or the order of EUR 35 million to EUR 40 million per year for the next several years. The result is consistent with our May 2019 business plan guidance. Second, the other saga with Ethniki Insurance continues, and we're currently examining the outcome of the process with our BoD. We have taken an impairment on National Insurance to reflect our fair valuation exercise, and please note that there is no impact on our regulatory capital from this impairment. At present, visibility as regards the future is extremely limited. It is clear that the Greek economy will suffer, experiencing significant negative output growth in Q2 and Q3, despite a very large policy stimulus. Specifically, the government is introducing about EUR 6 billion in fiscal actions, mainly in the form of wage support, around EUR 2 billion for 2 months, and the pushback of tax and social security obligations, again for 2 months. A further EUR 6 billion support will arise from government guarantees and the diversion of EU funds towards the crisis. The impact of the economic standstill may also be mitigated by the relatively close nature of the Greek economy and its lack of dependence on the international supply chains. Its low level of gross fixed investment and consumption comprising basic goods, both a result of adjustments made during the previous crisis, are the positives. The extent to which the tourism season is affected is another critical factor. Albeit early days, the threat of COVID-19 virus appears relatively more muted than in other countries due to the early policy response. Let's knock on wood on that. What I can commit to is that NBG will be close to its clients and efficient in implementing the new policies approved by national and European authorities to ease the impact from the unprecedented shutdown of a large swath of the economy. Moreover, NBG's transformation will not stop. Indeed, NBG will speed up changes to its operating model, especially digitalization, improving services to both corporate and retail clients. In addition, NBG will be ready to launch its large NPE securitization greater than EUR 6 billion as soon as market conditions permit. In conclusion, I have no doubt that in this very difficult period, NBG will live up to its tradition and play a critical role in supporting the economy and the society. With that, I would like to pass the floor to our CFO, Christos, who will provide additional insights to our financial performance before we turn to Q&A. Christos?

Thank you, Paul. As you commented, the advent of COVID-19 has a profound impact on the economic prospects of countries and businesses across the globe. And at this point, the uncertainty around the duration of the economic shock makes any commentary on past financial performance diminish in value. In that light, I will comment briefly on the financial trends of 2019, and I will try to give a forward-looking spin where possible. Starting with profitability. In 2019, we have managed to grow our core income by 6% year-on-year, reflecting strong NII from securities, absorbing the cost of the EUR 400 million Tier II issuance in July as well as a contained reduction of just 2.8% in lending NII as a result of healthy production of new loans. Indeed, in 2019, domestic loan disbursements were up 13% year-on-year to EUR 3.3 billion, driven by corporates at EUR 2.8 billion. At the same time, the quality of lending interest income kept improving with more than 3/4 of the 2019 nonperforming interest in either cash or fully provided for. Domestic net interest margin decreased by just 6 basis points year-on-year to 265 basis points, while risk-adjusted NII remains at healthy levels of EUR 793 million, approximately 5% higher year-on-year. On fees, results have been equally encouraging as we were up by 6% year-on-year, driven by retail banking fees, which are up by 13%. This has been the result of heightened growth across major fee business contributors, namely digital channels, bancassurance and lending-related fees. The cost reduction efforts are also producing impressive results. Domestic personnel expenses declined by 8.2% year-on-year as hefty reductions from VES started to pay off. Approximately 1,100 employees accepted the VES offering that expired in February 2020, with the cost saving impact from this exit expected to provide a strong support to our 2020 operating result. Moreover, on the back of rigorous demand management and cost containment, admin expenses were reduced by 17% year-on-year, which translates to an impressive 9% adjusting for the impact of IFRS 16. Combining cost reduction with the expansion of our core income, group cost-to-core income dropped by 7 percentage points year-on-year to 58%. And after factoring in our sizable trading gains, group cost-to-income ratio dropped by nearly 20 percentage points to 50% on a year-on-year basis. Despite the aggressive NPE reduction, 2019 group credit risk charges were contained at 123 basis points, supporting our core operating profit, which climbed to EUR 235 million, up by 38% year-on-year. Factoring in strong trading line, aided by the sale of sovereign bonds and noncore assets, 2019 profit after tax from continuing operations reached EUR 484 million relative to EUR 65 million a year ago. The sharp recovery in our core operating profit, coupled by strong capital gains, mostly from our treasury, absorbed sizable one-off costs, leaving our tangible equity unaffected. Amongst them, the VES charge, the resolution of the LEPETE issue and the impairment of the net asset value of our insurance subsidiary. Turning to asset quality. Bank NPEs dropped by EUR 0.8 billion quarter-on-quarter, bringing the 2019 NPE decline to a sizable EUR 4.7 billion at the bank level and EUR 5.3 billion for the group, exceeding the SSM NPE reduction target for the year. The domestic NPE ratio now stands at 32.2%, down by 190 basis points quarter-on-quarter and by an impressive 9 percentage points year-on-year, combining with a solid cash coverage of 53%. This result arises out of the combined efforts across nonorganic as well as organic channels. On the organic side, our efforts have resulted in an accelerated reduction versus 2018 of EUR 1.4 billion year-on-year. Efforts reflect the pickup in viable restructurings involving significant debt forgiveness, predominantly to our mortgage clients through our innovative product Split & Settle as well as a pickup in liquidations applying only to noncooperative borrowers. Organic formation, excluding accounting write offs, remained in firmly negative grounds, accelerating quarter-on-quarter as a result of lower defaults and considerably higher curing. As Paul said, NBG will keep preparing for a large-scale securitization expected to be over EUR 6 billion, comprising approximately 2/3 of our existing NPE stock and ready to be launched as soon as market conditions permit. On the liquidity front, domestic private deposits expanded by EUR 2.3 billion year-on-year, excluding state deposit withdrawals of EUR 1.8 billion, while our LCR and NSFR ratios stand at 207% and 115%, respectively, well above regulatory thresholds. Eurosystem funding remains at EUR 2.2 billion, comprising only of TLTRO funding, while interbank exposure was reduced by EUR 3.3 billion year-on-year, reflecting our funding cost optimization. Low interest rate deposits increased their share to 74% of total deposits compared to 69% a year ago, allowing our blended deposit yield to edge lower to 33 basis points with new time deposit production coming in at 30 basis points. The repricing, already evident this quarter, will support our 2020 NII and net interest margin as the ongoing repricing becomes fully factored in. Finally, in terms of capital adequacy, the bank is in a very strong position with both CET1 and total capital ratios comfortably above our SREP capital requirements. Pro forma for the impact of agreed divestments of less than 20 basis points, year-end CET1 and total capital ratios stand at 16.2% and 17.1%, respectively. Most importantly though, after factoring in the capital gain of EUR 0.5 billion, following the GGB swap completed in the early days of January this year, our total capital ratio climbs to 18.5%. And on this note, I would like to open the floor to questions. Thank you.

[Operator Instructions] The first question comes from the line of Floriani, Jonas with Axia Ventures.

Now my first question is just a clarification on the LEPETE issue. I get that has been resolved. Now in terms of the accounting and the cash flows, I think that now in Q4, there was an additional EUR 54 million on top of the EUR 36 million. So is this related to the previous periods? I mean just trying to understand, because the ongoing number should be looking at and should have in our model should be around the EUR 36 million in the coming years, right? So that's the question number one. Now question number two, probably is a similar discussion you already had with the other Greek banks in terms of the expectations for the year, but also not only in terms of expected hit or expected decline. But also how the -- how do you feel that the government measures and also measures from the ECB both on capital NPE, but also the guarantees from the government? How do you expect this to attenuate or to soften a bit of the impact that you may see in your financial statements? Especially because it seems like -- from the other conference calls, it seems like quite a big chunk of what could be negative impacts coming on the Greek banks way will be attenuated by one or more measures. So if you can please comment on that as well, it will be great. I'll leave it there.

Florian, this is Christos. I'll answer to your first question regarding LEPETE. So the EUR 54 million extra provision that you see in Q4 is relating exactly to EUR 50 million of provision for 2019, 2018 and another EUR 40 million for 2019 with a total up to EUR 90 million. Now in Q3, we have provided for EUR 36 million. So this extra EUR 54 million you see in the last quarter of the year is simply to come up to the number that the change in the law obliges us to go. And yes, you are right, going forward, you should expect something in the area of between EUR 35 million and EUR 40 million for the next several years.

Okay. Your second question, we'll see how we can answer it. It's a lot of moving parts. And clearly, there's been a lot of help from the -- from both national and international authorities. As I've mentioned on the Greek authorities, only just for the 2-, 3-month period, it is EUR 13 billion, approximately 6% of GDP stimulus. That's a lot for such a short period of time. On the NPEs, we have flexibility on what is UTP and can provide relief to both households and corporates in terms of their payments for the next months. For households, it is a 3-month pushback on installments; and for corporates, it's until the end of the year on their capital. And there has been an announcement by the government for the interest -- full interest subsidy for the performing corporate loans, so that's another thing. So combined with the wage support, combined with the reduction in rents for affected individuals as well as corporates, all this is -- the guarantees which will provide working capital support for the affected companies, which includes most of the economy right now. All these will provide significant relief. Now the question is, how much of this -- and I forgot to mention the tax and social security relief as well for affected companies. So the big question is how long this will last. Because the second question is, this fiscal stimulus cannot keep going month after month, after month, after month. If it is as currently expected, we're at the trough and things are starting to improve as it looks like in Spain and Italy. And as I said, we seem to be having a smoother ride so far. Then we can even save some of the tourist season and things will look significantly better towards the last months of the year. But the question is how long will this crisis last and that is more for the doctors to answer that correctly.

Yes, but your base case is for -- as it stands for recovery starting mid to end of Q3 compared to second half?

I think we're going to -- the good scenario, and it looks like it may be the base scenario is that we will save some of the summer season, that this thing will end in May, June. So July, August can look better. Now we'll soon find out.

The next question is from the line of Bairaktari, Angeliki with Autonomous Research.

First of all, you have now signaled another EUR 300 million of bond gains in the first quarter, if I understood correctly from your presentation. So that's EUR 800 million of bond gains just in the first quarter of 2020, which I estimate is around 200 basis points of capital. So I was wondering if you could give us some color on the different moving parts of your CET1 ratio in 2020. And especially, how much of those EUR 800 million do you expect to utilize for the NPE securitization that you're planning to do once the March conditions normalize? And that's my first question. Then with regards to the principal moratorium for corporates and also the installment moratorium for households, what percentage of your loan book do you expect to actually apply for these payment freeze? And one more question. On Slide 23, you showed the reallocation of mortgage loans from Stage 2 to Stage 1 on the back of the annual changes in your model. What was the provision release attached to these reallocations? And I guess, is there a risk now that you have to revise again those PDs. And so we see a migration back to Stage 2 on the back of the deterioration of the macro in the coming quarters?

Okay. Your calculations are correct, around 200 basis points of CET1. In terms of how much will we use Frontier, you ask me what the price of Frontier will be and I don't know. We'll see when the markets open up, how they will be. But what -- how much we'll need for Frontier is unknown. All I can tell you is that given our current CET1 capital, it's not going to be any constraint for Frontier. The payment freeze. The payment freeze, how much will -- what percentage of our loans it will cover? I can tell you it's a growing percentage day by day. How much it will be finally is still to be determined. But right now, the government keeps increasing the sectors that it considers affected by the crisis, and currently it is a very large share of the economy. So I expect a large share of our loans will be affected by these temporary payment freeze. What you need to understand here is, one, is the flexibility given by the SSM on this front. Two is that there is no NPV reduction. So this is just a pushing back of payments by a few months. So it is not a big change neither on the NII nor on the NPV, as I said before, of the loan. Now on the stage -- to the Stage 3, Christos?

So the recalibration of the model did not result in any material difference in terms of provisions, the coverage of Stage 2 being at 5% did not give any impact worth mentioning. And so we don't expect any reclassification on the back to Stage 2 and no volatility in our profitability because of that.

The next question is from the line of Abad, José with Goldman Sachs.

Just 2 questions from my side. The first one is on loan growth, if you could actually give us some color. What are your expectations now for loan growth during the year and also in particular, what do you expect the contribution from consumer lending to the overall loan book actually this year? The second question is -- I joined a bit later in the call so maybe I surely missed this, which is actually any color on the sale of the insurance business. You guided for a -- between 100 and 200 basis points of capital impact potentially, so I believe this will be on the lower bound. But any clarity on the time line of these and actually potential impact would be quite helpful.

Okay. On loan growth, it's a bit counterintuitive, but I think we'll see positive loan growth in 2020. And the logic is as follows: there are few corporates that are going to repay their working capital facilities. Actually, they'll be increasing them with the help of the guarantee scheme. The holidays on capital will lead to a reduction in loans, stock of loans. So my base scenario is that the loans outstanding will be higher at the end of 2020 than they are at the end of 2019 for the simple reason that people who are hoarding cash and are not going to be using it to pay back anyone, especially when we give them the opportunity for the holidays. Now...

One follow-up here. Can you tell me what's the amount of undrawn credit lines for corporates as of February, March?

Yes, of course. Christos?

So the committed undrawn facilities is currently around EUR 0.5 billion, just shy of [ EUR 0.5 billion ].

Okay. All right. Now on National Insurance, yes, I made it in my opening remarks. That's an ongoing process, and therefore, that limits what I can say. But we did take, from an accounting point of view, an impairment of...

Around EUR 0.5 billion.

EUR 0.5 billion. Okay, in the final quarter.

[Operator Instructions] We have a follow-up question from the line of Bairaktari, Angeliki with Autonomous Research.

Just 2 clarifications, please. On the NPL sales that you report for this quarter, EUR 228 million, do these refer to the Romanian portfolio that you have put for sale? And then do I understand correctly that effectively, the write-down of around EUR 500 million on the insurance business has also reduced the amount of significant investments for your CET1 threshold calculation? And that's why it is neutral to the CET1 ratio. Is that the right mechanic to think about it?

Let's start from the end. Yes, Angeliki, that's correct. You got the math right. So no effect in capital, as the CEO said, about -- from this impairment.

And in terms of the transactions, we -- despite the turmoil, we are confident of concluding the transactions with -- but with its ongoing negotiations with all bidders.

Yes. Sorry, just one clarification. The sales that you reported already in Q4, to which portfolio do they refer?

It was -- it's NBG Cyprus and the Romanian portfolio. That's the 2 additional.

[Operator Instructions] Next question comes from the line of Memisoglu, Osman with Ambrosia Capital.

Just a question on the cost side. With the pandemic, the banks have been forced to operate with less personnel in the branches. And so far all seems to be going relatively well. With the digitalization efforts you already have been taking, is there a chance that this could lead to some cost savings -- additional cost savings eventually or at least over the next couple of quarters?

It's a good question. We've all been -- we had a Board today. We're discussing that in the Strategy Committee that the recent developments has forced us to rethink our operating model and see the successes we've been having from work from home and et cetera. So that will certainly be taken advantage of in the future. I'm not sure if it's going to be the next few quarters. But down the road, clearly, with the lessons learned from the operating -- new operating model will be applied and they will certainly lead to lower operating costs. So yes, I agree.

[Operator Instructions] The next question comes from the line of Nigro, Alberto with Mediobanca.

Just one clarification on loan volumes. You said that you expect higher loans in 2020. But what do you expect in terms of margins? All these liquidity provided to companies will come with some margin attached.

I think that we won't see a significant differentiation either up or down on margins. Most of the extensions are being done at the current rates. And the guarantees for the new working capital facilities will be more or less, as I understand it, in line with the rates we are offering now. So I don't expect a significant change either way.

[Operator Instructions] Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Mylonas for any closing comments.

Thank you very much for attending our call. I hope -- I don't think we'll be seeing you soon. We may be hearing you soon. So we'll be doing it from a distance. Hope everyone has good health in the next months, and we'll be at least talking to you soon. Thank you very much.

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