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

Ladies and gentlemen, thank you for standing by. I am Yota, your Chorus Call operator. Welcome, and thank you for joining the National Bank of Greece Conference call to present and discuss the third quarter 2020 financial results. [Operator Instructions] and the conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Pavlos Mylonas, CEO of National Bank of Greece. Mr. Mylonas, you may now proceed.

Good afternoon, everyone, and good morning to those of you joining from the United States. Welcome to our third quarter 2020 financial results call. I'm joined by Christos Christodoulou, the Group's 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 third quarter of the year has been strongly positive in terms of economic trends, while the impact of the second lockdown should be absorbed with only a slight pause in economic activity. Specifically, on the one hand, third quarter GDP is likely to have expanded by high single-digit growth rate, around 7% quarter-on-quarter. Responding positively to lifting of protective restrictions as well as the implementation of approximately EUR 12 billion in fiscal and liquidity support measures. On the other hand, worsen pandemic trends during October and November led to a second round of restricted measures. It should be less disruptive and mitigated by a new set of fiscal [indiscernible] measures of about EUR 3.5 billion and possibly more from accelerated EU funding. Alongside the significant support to the economy from the state, we have been very active in implementing targeted payment moratoria measures and government support schemes towards our viable clients affected by COVID-19. Currently, active payment moratoria measures extended to our clients amount to EUR 3.6 billion, both households and corporate clients. In addition, in terms of new credit, we have dispersed new loans of EUR 3.5 billion year-to-date. These amounts include in EUR 0.8 billion, EUR 800 million, of disbursements from the largest government-sponsored loan programs, the guarantee scheme, and we are proceeding to disburse a second tranche from the same program of a slightly smaller size, EUR 600 million. By year-end, disbursements would have exceeded EUR 4.5 billion, excluding the rollover of working capital lines. Throughout the year, of the utmost priority has been ensuring the health and safety of our employees and clients, including through the adoption of stick measures and head offices and branches. The work-from-home operating model with appropriate operating and -- operating risk and cyber risk controls remains in place with approximately 50% of our staff currently working remotely. There is no measurable impact on productivity or client service levels. This has been facilitated inter alia by the large migration to digital channels, including the use of targeted campaigns as well as introduction of new digital services, which have increased functionality. The results on the digital front are truly impressive. Digital subscribers are up nearly 30% year-on-year, reaching 2.9 million. Digital monthly active users have increased by more than 50% year-on-year to 1.6 million. Customers on boarded to digital have reached almost 0.5 million year-to-date. In fact, the total number of transactions in October from all channels exceed the pre-COVID levels, while their composition has changed irreversibly, with approximately 6% of branch transactions replaced by digital channels. That's a number of transactions. We are working on 2 transformatory transactions for NBG. The divestment from our insurance subsidiary and the securitization of the Frontier portfolio. The divestment from [ SME ] key will optimize our operations in a highly regulated business, allowing us to focus on distribution in the underpenetrated yet highly promising insurance market. As regards Frontier, following finalization of the key proprietary steps, including the rating agency's feedback, we are nearing the launch of the transaction in the next few weeks. It will comprise of NPEs of circa EUR 6 billion within an NPE pool of just below EUR 10 billion at the bank level. Predominantly a mortgage securitization, the successful completion of Frontier would reduce our current mortgage NPE exposure by 80%, while pushing our NPE ratio below 15% [indiscernible]. We expect to receive binding bids in late first quarter or early second quarter '21. The transaction is facilitated by the fact that it does not include either a carve-out of a servicer or a [indiscernible]. In line with previous guidance, the incremental provisions required for the completion of the transaction will be borne mainly through our 2020 and part of our 2021 P&L on the back of our enhanced PPI capacity and high coverage levels, thus limiting the impact on our capital position. Turning to our financial results. 9 month attributable PAT reached EUR 461 million, up 22% year-on-year. Despite absorbing sizable COVID-related provisions as well as the provisions for the large-scale VES launched earlier this month. Excluding COVID provisions and trading gains, the 9 month core operating profit stood at EUR 228 million, up by 13% year-on-year. Importantly, the third quarter core operating profit was nearly EUR 100 million, up 50% year-on-year. This result reflects a strong recovery in both NII and fees as well as continuous tight management of personnel and G&A expenses and moderate provisioning charges close to levels of the previous quarter following the front-loading of COVID-19-related charge-offs in the first quarter of 2020. Overall, our total provision charges in 9 month '20 reached 250 basis points over net loans. Even though the country is undergoing a recessionary period with restrictive measures necessary to safeguard public health, recent developments with regards to the quicker than expected availability of COVID vaccines have improved our visibility, allow us to be more optimistic, is still realistic looking forward. I will briefly touch upon 3 things: NPEs, cost-cutting and our transformation program. First, clearly, developments on the EP front arising from COVID are a key concern we're addressing. The critical issue regards the successful exit from the payment moratoria without a large deterioration in asset quality. Our analysis leads us to expect a new gross NPEs be of the order of EUR 1 billion with the bulk arising from loans currently under moratoria. A default rate of about 15% to 20% with a net increase of about half or less of this amount following curings, debt forgiveness, on new restructurings and other organic actions. This result will be supported by the state sponsored mortgage subsidiary program Gefyra. It will also be supported by our step-up solutions provided to both households and corporate clients that may continue experiencing short-term economic difficulties due to COVID following the expiration of moratoria. Second issue is cost cutting that remains a high priority. The new VES launched earlier this month, targeting more than 600 employees, is aided by a new round of branch network restructuring. We will further optimize our physical reach, reducing branches by an additional 40 and continue to move to the more agile operating model. The latter comprises the shift of simple transactions to alternative channels, the introduction of leaner and more automated back-office functions, so that branches focus on the delivery of value-adding services. These developments on costs add to the progress made over the past 2 years. In fact, our 9 month 20 OpEx results point to annual cost savings of EUR 160 million stemming from targeted VESs, involving 1,800 employees, the closure of about 100 branches and tight G&A demand management. The third issue is that we will continue to implement the transformation program that has been successfully changing the bank over the past 2 years, included through our effective response to the pandemic crisis, a testament to our change, capacity and momentum. The focus will be a rapid shift towards a more digital operating model, both as regards to back office, but also to further improve customer experience. To this end, NBG has already made significant progress in its digital offering. NBG is a market leader in the Greek market with its digital onboarding and instant consumer credit loans with more innovative products in the pipeline. We're also using data analytics intensively to manage client product offerings. These developments keep us on the path to meet our business plan objectives, both as regards profitability guidance, but just as importantly, the quality of client service, taking us steadily to our vision of making NBG, a Bank of first choice. With that, I would like to pass the floor to our group CFO, Christos, who'll provide additional insights to our financial performance before we turn to Q&A. Christos?

Thank you, Pavlos. So starting with the P&L highlights on Slide 10. Profit after tax from continuing operations in Q3 stood at EUR 137 million relative to EUR 58 million in Q2, more than 2x higher, driven by strong core income recovery, sustained momentum in OpEx reduction and stable loan provisions. Similarly, our core operating profit registered a sharp improvement by a solid 50% quarter-on-quarter to EUR 97 million, underpinned by the double-digit growth in both NII and fees. Factoring in strong operating trends in Q3, profit after tax for the 9 month period stood at EUR 461 million, up 22% year-on-year despite COVID headwinds. Going into the profitability drivers, detailed on Slides 13 to 20. Domestic NII rebounded sharply in Q3 coming in 12% higher quarter-on-quarter at EUR 290 million and at the highest level of the past few quarters. Funding cost savings stemming from our gradually increased TLTRO exposure and the sustained repricing of the time deposit back book more than offset the normalization of lending yields, which remain at healthy levels despite the historically low interest rate environment. Most importantly, NII from performing loans increased for the first time in many quarters, reflecting the strong pickup in the disbursement of new loans aided by the extension of state support schemes. Year-to-date, domestic loan disbursements, excluding the usage of working capital facilities amount to EUR 3.5 billion with performing corporate balances, up by EUR 1.2 billion over the same period and by EUR 1.6 billion relative to last year. For the year 2020, new disbursements are expected to exceed the EUR 4 billion free COVID target to over EUR 12.5 billion. Domestic fees bounced back following the COVID graph, increasing by 13% quarter-on-quarter on the back of both retail and corporate fee growth. On a 9-month basis and despite COVID headwinds, fees in Greece are up by 3% year-on-year to EUR 179 million, reflecting the growth in retail fees by 13% year-on-year on the back of strong consumer cards and intermediation fee business. Notably, post the second quarter lockdown, transaction volumes have recovered to pre-COVID levels or higher, recording an impressive physical to digital channel substitution, as shown on Slide 19. In October, in e-banking monthly transaction values were up by 18% year-on-year, offsetting the 15% drop in transactions through branches over the same period. At the same time, the number of e-banking transactions has registered an impressive increase of 48% year-on-year, absorbing the drop of branch transactions over the same period, which is attributed to the pandemic but also reflects our efforts to shift transactions towards digital channels. Following a strong reduction of personnel and admin expenses in H1 '20, costs were further reduced in Q3, yielding sharp year-on-year reductions of 8.5% and 9.7%, respectively, for the 9-month period. Our recently launched VES program, targeting more than 600 FTEs, complemented by our aggressive cost management and the rationalization of our branch network will maintain the strong momentum. The reduction of our branch network by an additional 40 units in the next few months capitalizes on the swift migration to lower cost digital channels, aided by the mobility restrictions imposed due to the pandemic. Moving on to asset quality. Our provisioning approach in the 9 months of 2020 has driven NPE coverage up to nearly 57%, circa 330 basis points higher versus the beginning of the year. Following our conservative stance in incurring COVID-related provisions of approximately 145 basis points over net loans, our cost of risk for the 9-month period stands at 244 basis points at group level, implying circa 100 basis points on an underlying basis, in line with our guidance. Margin fees dropped by EUR 161 million quarter-on-quarter to just below EUR 10 billion, aided by a small pickup in liquidations, restructurings involving debt forgiveness and the application of moratoria measures. The contribution of inorganic actions and write-offs to the NPE reduction of the quarter was near 0. As shown on Slide 22, new defaults remain low as the drop in economic activity is cushioned by the targeted application of payment moratoria and government fiscal support measures. Our clients with temporary liquidity difficulties, as a result of the pandemic, will be offered a sponsor step up solutions as well as the state subsidy program, Gefyra, accompanying NPE flows going forward. Curings, as expected, remained fairly stable to the average of the past few quarters with our group NPE ratio settling at 29.3%, down 60 basis points quarter-on-quarter and by more than 4 percentage points year-on-year. Turning to liquidity. Domestic deposits increased by EUR 0.4 billion quarter-on-quarter and EUR 1.5 billion year-to-date on the back of private deposit inflows, reflecting higher corporate and household savings. The repricing of time deposits continued, providing support to the net interest income and net interest margin. Yields quarter-on-quarter edged lower by 10 basis points to 31 basis points in Q3, with current production coming in also a further 10 basis points lower at 20 basis points. Eurosystem funding remained flat at EUR 10.5 billion, an exposure that will keep providing NII cushioning in 2021. On the back of ECB's TLTRO facility and the repricing of our deposits, our funding cost is down to an all-time low of 12 basis points. In terms of capital, the bank retains a strong position with our capital ratios comfortably above threat requirements post the absorption of COVID charters. As illustrated on Slide 30, including profits for the period, our CET1 ratio stands at 15.9%, while the total capital ratio stands at 16.9%, almost 600 basis points above minimum regulatory levels. Both capital ratios do not include a benefit of approximately 20 basis points of software intangibles. Last but not least, the successful placement of the first green senior bond by a Greek bank and the first senior bond issuance since 2015 amounting to EUR 500 million, demonstrates our commitment to support the green economy and our strategic focus on the energy sector. This issuance also forms part of our strategy to enhance further capital buffers via the gradual extension of MREL packet. In a nutshell, despite COVID headwinds and with our top priority being the health and safety of our employees and clients, the bank had a solid quarter with core operating profitability up by 50% quarter-on-quarter on the back of recovering core income and further cost containment, but at the same time, maintaining high level of provisions. Organic NPE reduction momentum has been maintained ahead of the aiming and launch of our transform-oriented securitization that will push our NPE ratio to a level below the 15% mark. And on this note, I would like to open the floor to questions.

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

I have a few questions on asset quality. Just trying to understand how should we think about the absorption of the loss of Frontier into the P&L? Are you planning any additional impairments to come? Or I don't know if there's anything you can share in terms of what hits to capture in terms of basis points we should think about? Or a level of -- like a pro forma coverage level after frontier, so we can also try to work out from that? Then secondly, into 2021, after you mentioned that the closing of Frontier should be around the second quarter. Is there anything to lend for the second half of the year? Are you planning to engage into any other transaction still in 2021? Or how should we think about asset quality in the second half of 2021 after Frontier is done and as you manage the COVID-related inflows? And then finally, can you share any number on unrealized gains on your trading book as well?

Okay. Let me start Christos can jump in. Okay, on Frontier, as I said in my opening remarks, we will absorb all hits on Frontier and insurance from our PPI of 2020 and 20 -- and part of 2021. So from that, you can infer that the hit to capital is minimal, more like an opportunity cost rather than a reduction. In terms of more transactions after Frontier in the second half of 2021, we are looking at some ones, but there are several small ones. When we have more visibility on that, we'll let you know. And then on the unrealized capital gains, they're mostly on the held to collect. And therefore, they will remain there. I don't know, Christos, if you have anything more to add?

Yes. With regards to the heir to collect and sell portfolio, the old EFS, our unrealized gains as of the end of September is about EUR 70 million to add to what Pavlos just said.

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

Thanks very much for the presentation. My first question will be on the disbursement and deal trends, please. So you're showing that new disbursements have indeed been extremely strong in the quarter, especially in the corporate portfolio. But on the other hand, we're also seeing new lending yields for corporate loans going higher. And I think many would expect that yields would actually come down in an environment like this. So I just wanted to check what is causing this? And if you had any views on the interplay here. And can I also ask if you have any early views on any disbursement dynamics for 2021? So do you think is there any front-loading that the corporates are doing in 2020, for example? Or would you expect this trend to continue into 2021?

On the yields, if you're talking about total yields, there's a mix effect that has more retail disbursements in the composition of disbursements, and that leads to a pickup in the overall yield on new disbursements. On the disbursements in 2021. Again, it will depend a lot on the programs that are sponsored by the government. As you know, a large share of the disbursements are -- of all the banks, but NBG as well are coming out of these guarantee scheme at the peak in about -- almost EUR 2 billion in our case.

Okay. And just one technical question on the TLTRO. Can I check how you're accruing for it? So do you already accrue for the full benefit? Or is it at the 50 basis points for now?

We do accrue the TLTRO effect starting from the initiation of the program back in June. So we are recognizing some upside from the TLTRO, yes.

Okay. Is it 50 basis points or 100 basis points full benefit?

The full benefit is 100 basis points.

The next question comes from the line of Boulougouris Alexandros with Wood & Co.

On adjusted to clarify, what you mentioned earlier regarding the loans on the moratorium and the potential new gross NPE inflow in 2021. You mentioned that about 15% or 20% default rate. Do you -- I don't see in your presentation, what is the level of loans on the moratorium at the moment? And also, you said, I think that the net increase would be half of the gross new inflow, does this include the Gefyra program, I assume? That is my first question. And my second question is regarding the provisions. Do you think that the provisions taken in 1 -- in the first quarter, I think it was more than EUR 400 million, are enough to cover this gross new NPE inflow that you're expecting. So should we expect a cost of risk that would be in the range of 100 bps as we seen this quarter, for the following quarters even in 2021?