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

Ladies and gentlemen, thank you for standing by. I am Maria, your Chorus Call operator. Welcome, and thank you for joining the National Bank of Greece Conference Call to present and discuss the first quarter 2021 financial results. [Operator Instructions] The conference is being recorded. [Operator Instructions] 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 U.S. Welcome to our first quarter financial results call. I'm joined by Christos Christodoulou, Group CFO; Greg Papagrigoris, Head of IR. After my introductory remarks, Christos will go into more detail on our financial performance, and then we will turn to Q&A. So let's begin. During the first quarter, the country, more or less, remained in a state of lockdown, albeit more targeted than previously. However, confidence began to return with the vaccine becoming a reality, e-commerce [ easily ] being more ingrained, thus supporting activity, while a similar situation worldwide led manufacturing and good exports to further highs. Overall, it is estimated that economic activity in Greece grew by 1% quarter-on-quarter in the first quarter of 2021. In the first 2 months of the second quarter, with the pace of vaccinations in Greece accelerating, and the expectations that nearly half the population will have at least 1 vaccine in the first 2 weeks of July, greece's economy is starting to return to normal. For the last 3 quarters of the year, the Greek economy is anticipated to grow near 10% year-on-year. I described the main factors in the last results call. One, pent-up demand reflected in the increased household and corporate deposits; two, improving prospects for a strong recovery in tourism, potentially exceeding a recovery of 80%, year-on-year, to reach over 50% of the 2019 levels; three, a higher than initially expected fiscal stimulus; and last but not least, a faster than expected arrival of recovery fund flows starting in the second half of 2021. This favorable conjuncture will allow Greece to experience strong growth past 2021 and for several years to come as the European funds are used to upgrade Greece's economic growth model towards one that is more agile and sustainable. Turning now to NBG's results. Despite COVID-induced economic pressure, the Q1 results were solid with improvements across the 3 key areas: profitability; asset quality; capital. Let me address each in turn. As regards profitability, core operating profit in the first quarter from continued operations increased by 42% year-on-year, standing at a solid EUR 95 million. Core income was up by about 5%, led by NII, up by 6% year-on-year, despite the drag from lower NPE interest. Disbursements, especially corporate, continued strong, but there's also signs of life in retail. These showed resilience, up by 1% year-on-year despite mobility restrictions. Our perseverance on cost containment continue to bear fruit. OpEx was down 9% year-on-year, with personnel expenses, nearly 17% lower year-on-year, reflecting savings from the VS voluntary exit scheme programs, largely in play through 2020 concerning approximately 900 FTEs. This combination yielded a notable 9 percentage point reduction in our efficiency ratio with a cost of core income settling at 52%. The resulting core operating profit, annualized, puts us well underway to meet our guidance for full year '22 core operating profit of EUR 490 million, which, you will recall, would yield a core return on equity of about 9%. Overall, profitability after tax came in at a very strong EUR 580 million, supported by large trading gains. These reflect an optimization of bond holdings as we approach the end of a low interest rate environment. As regards asset quality developments. Despite the adverse environment in the first quarter, with the renewed restrictions and the termination of EUR 3 billion of moratoria of previously performing loans at end year 2020, we experienced negative organic formation of EUR 130 million quarter-on-quarter. The experience through May 20 is even better than our guidance as ex-moratory appliance in earlier years, i.e., greater than 30 days past due, are less than 7% of the aforementioned 3 billion stock. [Audio Gap] of amount are over 90 days past due, less than 2%. Overall, the impact from COVID on asset quality is likely to be significantly less than initially expected. At the end of the first quarter, domestic gross nonperforming exposures stood at EUR 4 billion, net NPEs at EUR 1.5 billion and these include EUR 1.5 billion of forborne NPEs less than 30 days past due with strong possibility to cure. Indeed, cure's at over EUR 200 million in the first quarter remained robust. Our first quarter cost of risk came at 114 basis points, and our coverage increased by 200 basis points quarter-on-quarter to 65%. This outcome reflects generous management overlays in view of the still high level of uncertainty. I expect this to subside and the cost of risk to come down. As regards to the Frontier securitization, the transaction is well on track, with signing and completion expected in early third quarter just around the quarter. Turning to capital. Our CET1 ratio improved by 40 basis points in the first quarter despite absorbing the full year 2021 IFRS 9 transitional impact. What our CET1 ratio now exceeding 16%. On a fully loaded basis, CET1 and total capital ratios stand at 14% and 15%, respectively, even before we factor in the additional 170 basis points that would come from the completion of the Frontier and Ethniki insurance transactions in the next few months. With solid future profitability and thus positive capital generation, and the remaining NPEs having the encouraging characteristics described previously, and thus, highly unlikely to absorb a significant amount of capital. And our CAD ratio closing in on 19%, excluding -- including Frontier and Ethniki, I would like to stress for one more time that NBG does not need a capital increase. Indeed, our goal is to distribute capital back to our shareholders, all subject to regulatory's approval. To conclude, I believe our track record speaks for itself. We have created strong momentum for change through our successful transformation program currently completing its third year. It has become a distinguishing factor for NBG. When you combine this with a strong and sustainable economic recovery starting in second quarter of 2021, I feel confident we are on a steady course to deliver on the key goals of our strategy for 2021 and 2023: to complete the asset quality clean up quickly within 2022; to achieve high returns for our shareholders, we are 9% core operating return on equity in 2022; and to provide added value to our clients while supporting sustainable growth. We remain committed to be the bank of first choice in Greece. With that, I would like to pass the floor to our group CFO, Christos, who will provide additional insights to our financial performance before we turn to Q&A. Christos?

Thank you, Pavlos. Starting with the P&L highlights on Slide 10. NBG delivered a very strong performance in the first quarter of the year with profit after tax from continuing operations at EUR 578 million, up by 42% year-on-year. This performance reflects our solid core operating trends and a strong trading result benefiting from realized gains on debt security transactions. Moderate loan impairments of 114 basis points over net loans, follow-up from our strategy of incurring COVID and Frontier-related provisions of EUR 0.8 billion in 2020. Excluding trading, our core operating profit registered a sharp improvement of 42% year-on-year to EUR 95 million, providing a solid pace for our guidance on core operating profitability for year 2022 of nearly EUR 0.5 billion. With regards to capital adequacy. As illustrated on Slide 12, the bank improved further its market-leading capital position despite absorbing the full IFRS 9 phasing adjustment for 2021 this quarter. CET1 and total capital ratios are up by 40 basis points quarter-on-quarter, standing at 16.1% and 17.1%, respectively. As illustrated on the slide, upon completion of both front-end insurance transactions in the next few months, capital will be boosted by another 170 basis points versus current levels with a total capital ratio nearing 19%, without factoring in profitability in the remainder of the year or any additional MREL issues. Going into the profitability drivers on Slide 13 to 20. Domestic NII in Q1 '21 increased by 7% year-on-year, driven by funding cost benefits on the back of TLTRO utilization and the sustained pricing of time deposit. The improvement in our funding cost fully offset the reduction in the NPE NII on a year-on-year basis following the rigorous NPE clean-up. Anticipated normalization of lending is continued, reflecting the nominal impact of the lower yield, lower risk COVID-related trade-guaranteed loans as well as the back price. On a quarterly basis, the reduction in the NII is driven by the NPE component, as shown on Slide 14, as well as lower NII from debt securities, following the crystalization of trading gains from sales in the quarter. The [ assets ], apart from strengthening our capital base, up to improve the term structure of our bond portfolio at a point in time where interest rates seem to have reached their bottom. Most importantly, NII from performing exposures remains resilient on the back of the expansion of our performing loan book. Domestic disbursements, including repayments of working capital facilities over the period, reached EUR 1.1 billion in the first quarter of the year, driving the expansion of our performing corporate book by EUR 1.6 billion or 12% year-on-year, while retail balances show signs of stabilization. The continued expansion of our performing book will provide longer-term support to the net interest income, gradually offsetting the impact from the balance sheet derisking of the next few quarters. Despite the lockdown in Q1 '21, domestic fees were up year-on-year, supported by intermediation fees and the flourishing digital business as we continue to successfully engage active clients in our digital offering. Fees from digital channels were up 14% year-on-year. Notably, the pandemic has boosted the pace of digital adoption with digital becoming by far the preferable channel for transactions. As shown on Slide 19, transactions have now surpassed the COVID levels, despite sustained lockdowns in Q1 '21 with the banking transactions up by 33% year-on-year, replacing branch transactions that have been reduced by more than 51% over the same period. The ongoing migration of our customers to digital channels, facilities are plans for a cost-efficient and flexible operating model in line with our transformation strategy. On OpEx, as you can see on Slide 20, our cost-cutting efforts continue to produce impressive results, with domestic operating expenses dropping by 9% year-on-year. This is driven by the sharp reduction in personnel costs by almost 17% year-on-year, while G&A expenses are also down by 4%. The cost containment reflects the reduction in our headcount by circa 900 employees during 2020. The continuing rationalization of our branch network, driven by the migration to lower cost digital channels as well as the optimization of spend to our established demand management framework. As a result, our cost to core income ratio improved sharply by 9 percentage points year-on-year, down to 52.1%. Moving on to asset quality on Slides 21 to 25. Domestic NPEs were down by EUR 0.2 billion quarter-on-quarter to EUR 4.1 billion or just EUR 1.5 billion net of provisions. With our FNPEs below 30 days past due, comprising nearly 40% of residual NPEs. Domestic NPE ratio set at 50 basis points lower quarter-on-quarter at 13.3% while coverage was up by almost 200 basis points quarter-on-quarter to 64.8%. Organic flows in the quarter remained negative, supporting our guidance for 2021 and 2022. New defaults have reduced as the economic activity has been cushioned by a larger than initially positive fiscal support with [ curings ] remaining well above defaults. During the first months of the year, we have been offering stable solutions to customers that continue to experience temporary financial difficulties due to COVID. While this is complemented by the state subsidy programs, Gefyra I and II, designed for both retail and SMEs, evidenced nearly 5 months post moratoria expiry are encouraging and much better than expected. Accounts in that is over 30 days past due from less than 7% of the ex-moratoria perimeter, while only a significant amount of less than 2% are in defaults, comparing favorably to our guidance for defaults of approximately 15% to 20%. Turning to liquidity on Slide 26 and 27. Domestic deposits increased by 6% or EUR 2.7 billion year-on-year, mostly to private deposit inflows, reflecting the fiscal support from the government due to the pandemic. LCR and the NSFR ratios stand at 250% and 123%, comfortably above regulatory requirements. At the same time, the repricing of time deposits continue to support the NII [indiscernible]. Time deposit yields decreased by a further 7 basis points quarter-on-quarter to 16 basis points with current production coming in at 11 basis points. Eurosystem funding increased by EUR 1.1 billion to EUR 11.6 billion to TLTRO, and we'll keep providing NII cushioning in 2021. Against an economy operating with targeted restrictions, NBG entered 2021 with strong momentum, increasing core operating profitability by a solid 42% year-on-year. At the same time, our NPE ratio continues to improve, going down to 13%, with our provision coverage up by another 200 basis points to 65%. Capital ratios increased further with total capital ratio pushing 19%, including the impact upon completion of Frontier and Ethniki insurance transactions in the next few months. Our strong start to the year confirms our commitment to capture the growth potential of the country post the pandemic, as we leverage our progress in the NPE cleanup and market-leading capital position to improve recurring profitability to a core return on equity of 9% next year and beyond that, the year after. 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.

My first question is on the Frontier. I've noticed a small change in the perimeter side. Just wondering if this is related to the [ outgrowth ] you have in the quarter or anything else. So interesting if you can expand it more on the situation there. And also in relation with the timing of Frontier. It looks like now, [ SSP ] and the timing has been pushed to Q3 instead of Q2. So any update will be helpful. Then my second question is on cost of risk. So it looks like your NPE flows under control, good news on the flows also from the moratoria and also from [indiscernible] saying in the call that he expects the cost of this to come down in 2021. So just wondering what are the expectations for the year now. And also, how should I think about your coverage level maybe 2021 and 2022? And my final question is in relation to Securities and Trading. Also, if you guys still have any annualized [ trading ] things left there. Yes, that's it for now.

Okay. I'll take some of them and then leave the rest for Christos. In terms of Frontier, the timing, it is about perhaps few weeks later than we expected. That goes over the June to early July trade date. I don't think that's any real concern. On the cost of risk, we are feeling more optimistic. The guidance we gave was 100 basis points. I think it will come in for 2021. I think it will come in lower than that. I don't think -- I think it's a bit too early to try to give -- put a number on that, but I am optimistic that it will be lower. And the coverage, clearly, we are at good levels, and I don't think that much higher levels are required. And with that, I don't know, the securities question, Christos?

Yes, Jonas. So as you've seen on the securities, we have optimized the transaction of our securities portfolio in Q1 in an environment of very low interest rates. So our optimized capital and at the same time, shortening the duration of our securities portfolio at the best time possible, let me say. Obviously, we do still have unrealized gains in our balance sheet. But I mean, that's something that we cannot share. And going forward, I don't think that we'll be proceeding with any other major transactions in the year.

The next question comes from the line of Memisoglu Osman with Ambrosia Capital.

Two, please, on my side. One on -- given the better-than-expected trends in asset quality, where do you see the NPE ratio at the end of this year? And do you still expect -- leave close to 6% was your guidance for year-end '22? And then the second is on your effective tax rate, how should we think about it, particularly for '22, '23? What kind of tax rate had you incorporated for the return on equity of 9% in '22?

Okay. As we mentioned before and the guidance we gave on NPE, we are planning one more large transaction. It will probably complete in the first quarter to half of 2022. That will be the next large reduction in NPEs. Organically, we expect the continuing trends of the first quarter to continue and perhaps accelerate as the macro environment improves during the year. And the tax rate, Christos?

Yes. You should not expect any change in the way we adopt the tax rate compared to this year going forward, given the levers of DTA in our book. So nothing as to say in that.

For medium term, say, '23, '24?

Same. The same applies.

Very, very low tax rate.

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

Just one question on the disbursement trends, please. So previously, you were guiding for around EUR 3.5 billion of new disbursements for this year, and you've done EUR 1.1 billion until April as you're showing. Do you see any upside to the EUR 3.5 billion number and taking also into account the incoming EU recovery funds and the many reasons that you've mentioned earlier in the call would -- where would you see new disbursements in '22 and '23?

Disbursements with the recovery funds should be a bit stronger. I think that something of the order of close to EUR 5 billion per year in the '22, '23 spaces is probably on target.

So '22, '23, around EUR 5 billion in total?

No, per year.

Yes, yes, per year. And for this year, do you think a little bit...

But it could be a bit further than the guidance we gave.

The next question is from the line of Manolopoulos Konstantinos with Optima Bank.

Congratulations on the results. I'm happy to see your very strong capital. And actually, I was wondering, given the very high level of capital, would you consider any acquisitions, not in Greece, but abroad? And are you allowed to make acquisitions abroad, given that you have completed your digital commitments?

Okay. As you know, to get out of the restructuring plan, we need the sale of insurance closed, and we expect that to happen before the end of the year. Having said that, though, I think that we are concentrating on the very exciting and dynamic Greek macro story. And the focus will be on using the capital on the organic growth within Greece. So we're not looking abroad.

[Operator Instructions] The next question comes from the line of Boulougouris Alexandros with Wood & Co.

A quick question regarding Greek lending yields. We saw a bit of a decline in the first quarter. And maybe if you could comment on the trends in the following quarters and the broader NII outlook for the year?

Well, thank you for the question. As we also said in the previous results call, we expect a compression in the spreads on a corporate book. In the area of, I would say, up to 20 basis points in the year. And more or less, this is what we have started to see in the first quarter of the year. So [ know ] our prices there, and everything is according to what we have foreseen for the rest of the year.

[Operator Instructions] We have a follow-up question from the line of Floriani Jonas with Axia Ventures. Mr. Floriani can you hear us, sir?

Sorry, yes, I think I was on mute. Yes. So just a follow-up on your capital position and also in the comments that it's a very strong capital position now and you're considering also future distribution. So how should we think about the optimization of the capital structure with the room for Tier 2 and CET1? I mean is that something that could happen, I don't know in 2022? I mean how should we think about that?

Thanks for the follow-up question, Jonas. So in terms of our MREL obligations, let me just repeat what we said 3 months ago, 2 months ago. We've already made our interim funding target for 2021, following our senior preferred Green bond issuance back in September. Going forward, our plan up until the end of 2022 is to proceed with, I don't know, probably a couple of issuances of about EUR 1 billion in total. So that's our plan up to now.

The following question is from the line of Nigro Alberto with Mediobanca.

It's more a strategic one. So the fully loaded ratio is mounting. And on a pro forma basis, you already have 15.7%. Which level do you think is optimal for a Greek bank? And how much capital you expect to deploy for the growth in the future years?

The first question has to be seen from the point of the regulator. We have a SREP requirement. It is -- that is the determined -- that plus a buffer is a determining effect of the level of capital that we need. We need to reduce R&Ps to near single digits, mid-single digits for the regulator, I think, to start proceeding with reducing the Pillar II buffers -- Pillar II requirements. Once that has occurred, there's also the -- I don't want to say the word, confusion, but there's the lower, the lower capital due to COVID, which then will bounce back up. Once all that works out, we will see where our capital requirement from the regulator are. You will recall that pre COVID, it was going to be 16.25. So the question is, how much further down it will come. I'm sure that due to the NPE reduction, it will be reduced, but don't ask me to put words in the mouth of the regulator, okay? So we'll see how that goes, and I think we'll have something in the next couple of years as we reduce the NPEs. So I think that's a driving force in your question. So I hope that answer your question.

[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.

Okay. Thank you all for participating in the Q1 results call. Follow-up questions, as usual, will be taken by IR and ourselves, if you would like. And I expect that we'll see many of you on visits in the next couple of days as we take more calls. So thank you very much, and see you soon.

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