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

Ladies and gentlemen, thank you for standing by. I'm Costantino, your Chorus Call operator. Welcome, and thank you for joining the National Bank of Greece conference call to present and discuss the third quarter 2021 financial results. [Operator Instructions] 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 U.S. Welcome to our 9 months 2021 financial results call. I am joined by Christos Christodoulou, Group CFO; and Greg Papagrigoris, Group 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. The economy is recovering much faster than expected from the pandemic caused crisis. Many indicators of activity have already surpassed the 2019 levels, while others such as tourism, have exceeded expectations, especially in late summer and early autumn. The 2 key sources of uncertainty are the most recent wave of COVID-19 cases and as of today, it's new variant, and the capacity constraint supply creating cost-push inflation, especially in the energy sector. Both factors should be temporary. Regarding the first, the silver lining is that the daily vaccination rate has picked up rapidly to about 400,000 per week with 74% of the adult population currently vaccinated. The higher level of protection should shield the population from an acceleration of acute cases, thus making unnecessary the need for new restrictive measures that affect economic activity. Regarding the inflation, new government measures of about EUR 1 billion targeted to the most vulnerable should safeguard private consumption. Thus, GDP growth expectations for Greece should not be impacted significantly. Our forecasts have been updated for new developments to 7.5% in 2020 and 4.3% in 2022, while inflation will recede quickly an average of 1.2% in 2021 and 2.5% in 2022. Now turning to NBG. The third quarter performance reflects the impact of the strongly recovering economy as well as a multiyear transformation effort with tangible results as regard to balance sheet strength, organic profitability and a thoroughly revamped operating service model. On the asset quality front, organic NPE reduction was notable, down almost 1 percentage point in the quarter with a negligible impact on NPEs from clients 11 months after the end of the COVID moratorium. In contrast, curings continue unabated with EUR 1.2 billion of restructured loans having the potential to cure during the next 12 months. As a result, provision coverage increased to a highly satisfactory 7% in view of the solid underlying mostly real estate collateral. This has allowed the continuation of a gradual reduction in the cost of risk to 94 basis points in the third quarter of 2021. Overall, the domestic NPE ratio stood at 11.9% with the NPE stock settling at EUR 3.7 billion, implying NPEs of just EUR 1.1 billion net of provisions. Regarding NPE transaction, Frontier is expected to close in a couple of weeks and the Frontier 2 process, which is under HAPS also for about EUR 1 billion has commenced with a schedule to close by midyear 2022. Turning to profitability. The progress achieved in the first half of the year accelerated in the third quarter with core operating profit of 20% for second consecutive quarter to EUR 134 million. As a result, the 9-month 2021 core operating profit increased strongly, up by 50% year-on-year to an almost 8% tangible -- return on tangible equity. Solid improvements occurred on all 4 organic P&L lines. Net interest income, fees, operating expenses with underlying provisions flat at below 100 basis points. Notably, pro forma loan expansion on a year-on-year basis nears EUR 1 billion, among, if not the best performance of the sector, with high disbursement offsetting unprecedented financing from the bond market for the large corporates around EUR 3 billion of issuance in 2021, and the government's tax advance program providing significant liquidity to smaller firms, EUR 5 billion in 2020 and EUR 2.5 billion in 2021. In addition, the focus on operating costs, especially personnel, has seen an additional 8% reduction in the 9 months to September, resulting in a cost-to-core income ratio of approximately 50%. Fee income accelerated by 11% year-on-year and 5% quarter-on-quarter, driven by intermediation, card and digital fees as we capitalize on our 3-year transformation program and the accelerating economic activity. As part of our transformation strategy, we are looking to partner with JVs for specialists in various fintech like fields. To this end, we're currently in discussion with a world-class player regarding our card-acquiring business. These are well along, and we are expecting to make an announcement hopefully before year-end. The capital accretive NPE performance, both organic and inorganic, combined with the strong profitability has led the capital ratios higher to 17.8% and circa 19% with CET1 and total capital ratios respectively pro forma of the closing of Frontier and Ethniki. The closing of Frontier 1, as mentioned earlier, is expected in early December, while as regards Ethniki Insurance following the agreement with CVC, with buyers in consultation with Digicom on the antitrust side. We anticipate completion of the transaction early next year. Looking forward, as the 3Q results suggest, we are well on track to meet our 2022 guidance for core operating profits of about EUR 0.5 billion, and an NPE ratio near mid-single digits. The prospects for 2023 and onwards look even better. Specifically, the substantial results from our transformation efforts, the revamping of our service and operating models, including the impressive digital turnaround are coinciding with a unique economic conjuncture, with a confluence of several positive forces, the long efforts to restructure the economy along with a global macro rebound and the inflow significant recovery in resilient funds. We are thus well placed to support and advise our clients in achieving their future plans, including through the NBG platform for the RRF Ethniki 2.0 with NBG as their partner, the bank of first choice. 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. So let's now go into the financial performance in more detail. Starting with the profitability highlights on Slide 8, our 9-month profit after tax from continuing operations amounted to EUR 714 million, up 19% year-on-year. More importantly, though, our recurring core operating profit surged by almost 50% year-on-year to EUR 341 million for the period, reflecting a 6% year-on-year growth in core income and the sharp reduction in operating expenses by 8%. Looking into asset quality and balance sheet highlights on Slide 9, domestic NPE organic flows in the quarter remained firmly negative, bringing the cumulative organic reduction to about EUR 0.4 billion for the 9 months. This bodes well with our guidance for an organic NPE reduction of EUR 0.8 billion cumulatively for 2021 and '22 before factoring in an inorganic actions. Domestic NPEs dropped further to EUR 3.7 billion or 11.9% of the gross loans, of which nearly 1/3 or EUR 1.2 billion are FNPEs below 30 days past due with a good chance to cure. In light of negative organic formation trends, our gradually normalizing cost of risk keeps pushing our domestic NPE coverage successively higher. As on a year-to-date basis, we have added more than 70 percentage points of coverage, reaching 70% in Q3 '21. Domestic performing loan balance additions are maintained at sector high levels of plus EUR 0.8 billion year-on-year as of September 2021, driven by net loan disbursements of EUR 2.8 billion over the same period. Deposit gathering remains strong as we experienced inflows of EUR 2.6 billion in the 9-month period, mostly from the private sector despite client rates reaching near zero levels. Our capital position is robust and keeps improving, as shown on Slide 10, with CET1 and total capital ratios settling at 16.4% and 17%, respectively. The completion of Frontier and Ethniki Insurance sale will increase our already best-in-class capital position by another 2 percentage points, rendering a total capital ratio of circa 19% well above our guidance for year-end 2022 capital levels. Now let's go through the key drivers of our improved profitability on Slides 11 to 17. Domestic NII recovery accelerated in Q3, driving the 9-month period NII, 5% higher year-on-year. This reflects the expansion of our performing loan book by a solid EUR 0.8 billion year-on-year as well as funding cost benefits from the repricing of deposits and the utilization of ECB's TLTRO facility. Encouragingly, loan NII remains resilient, driven by the rising performing balances offsetting the reduction in NPE NII and the ongoing normalization of lending yields. Going into domestic loan evolution in more detail on Slide 13, net loan disbursements for the period reached EUR 2.8 billion in September '21, up by 18% year-on-year, excluding COVID-19 programs. Corporate net disbursements remained strong amounting to EUR 2.1 billion, while retail net disbursement surged by 36% year-on-year. As a result, our performing book expanded by EUR 0.8 billion year-on-year with corporate performing exposures rising by EUR 1 billion or 7% over the same period. The growth momentum of our performing book gradually offset the impact from the balance sheet derisking, providing sustainable and long-term support to the net interest income. Moving on to Slide 15. Domestic fees increased by 5% quarter-on-quarter and 11% year-on-year, capitalizing on the economic growth and our transformation program initiatives. Growth was strong across all key areas. Retail up 8% year-on-year, corporate up 9% and noncore banking fees up 35% year-on-year. The most notable recovery was witnessed in corporate lending fees at 24% year-on-year as well as intermediation and digital fees in the retail business. The latter reflects the successful shift of our clients to digital functionalities, facilitating the bank's transition into an efficient and more flexible operating model. Indeed, e-banking transactions surged by 24% year-on-year in Q3 '21, replacing branch transactions that have declined by 44% year-on-year. Let me now turn to costs on Slide 17. Building up on the strong track record of the first half of the year, operating expenses were down by a solid 8% year-on-year in the 9-month period further improving our cost-to-core income ratio by nearly 8 percentage points year-on-year to circa 50%. The key driver of this performance is the sharp reduction in personnel expenses by 15% year-on-year as the bank realizes the benefits of the 2020 VES, reducing the headcount by circa 800 employees. Upcoming targeted exit schemes, driven by the optimization in our branch network operating model and footprint and further leveraging of our digital offering will allow us to fulfill our targets. Moving on to asset quality on Slides 18 to 22. Domestic NPEs kept on a downward trend reaching EUR 3.7 billion or just EUR 1.1 billion net of provisions. Domestic NPE ratio came 90 basis points lower quarter-on-quarter at 11.9%, while coverage increased by further 370 basis points quarter-on-quarter, breaking the 70% barrier. Organic NPE reduction year-to-date remains impressive. Curings got a pace in Q3 '21, reflecting increased mortgage restructurings in the respective period last year, while the flow of new defaults, early default remains broadly stable. Most importantly, the payment performance of ex-moratoria clients, nearly 1 year post-moratoria expiry, remains far better than expected, indicating a much lower COVID-19 impact than initially anticipated and provided for. As shown on Slide 22, less than 4% of the ex-moratoria perimeter was in default as of November 21, while total loans onboarded to NBG's step-up facilities remain low at just EUR 0.3 billion. Turning to liquidity on Slides 23 and 24, domestic deposits increased by 13.5% or EUR 5.9 billion year-on-year, reflecting strong inflows in savings accounts with time deposit evolution remaining negative. Time deposit yields are down by 13 basis points year-to-date to 10 basis points, while new production comes in at just 7 basis points. So to conclude, evidently, we had a great run so far in the year. We have managed to grow our core operating profits by nearly 50% year-on-year consistently over the quarters and across profitability lines demonstrating we are well on track to deliver on our guidance for core operating profit of EUR 0.5 billion for 2022. Our improving profitability performance is complemented by the sustained balance sheet derisking with the remaining NPE reduction entailing minimal execution risk and zero capital consumption safeguarded by our high coverage ratios and capital levels. And on this note, I would like to open the floor to questions.

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

I have a few questions. The first one relates to Slide 13. I was just wondering where do you expect to finish 2021 in terms of disbursements and growth in performing exposures and also a similar figure for 2022? If you can also give us a sense of gross and net disbursements, that would be great. Second question is on your data from Slide 18, I take the comments from the presentation now that you had some mortgage restructuring that is resulting now into the curing of the exposures. So just wondering if you have more, let's say, positive carryover effect from those restructurings that you continue to show in the coming quarters? And linked to that, how should I think about your cost of risk for 2022 and how it also links to your coverage level going forward? And maybe if you connect to this question then, if you could remind us of the expected impact from Tier 2? I think you just mentioned that giving you a high coverage level that impact and given the size of the [ acquisition ], it should be quite limited. So if you could just give us a rough indication of capital impact or P&L? And then finally, on your reduction of staff, I think you just mentioned now that you're expecting to reduce even further the number of employees. So I was just wondering what can we expect in terms of charges, like amount of charges, to cover that? Or how many people you'll be targeting as well in this exercise?

Okay. Let me start and Christos will cover the rest. Regarding net disbursements, we're going to finish the year at close to EUR 1 billion, and we expect that to be near EUR 1.5 billion next year net, okay? On curings, we are seeing the higher quality mortgages restructurings that remain post-Frontier 1 on the balance sheets along with the macro improvements in the second half of the year. You're seeing that in the curings of both the second and third quarter, especially in the third. This will continue to a certain pace in the following quarters. The only thing I can say is it's a much smaller portfolio. So don't look at the absolute numbers, look at the percentages. Frontier 2, there will be no gross budget been taken care of. And then in terms of further reduction in personnel, we have launched another VES just recently. And it's being also provided. Christos, do you want to give the numbers there on that?

Yes. We -- the provision regarding the program that we are launching actually today, it's in the area of EUR 53 million. We've already provided for it in Q1. So there's no additional burden from that. And next year, given the additional actions we intend to have, we're looking at something in the area of EUR 30 million, but it's still a work in progress. One last question I have noted down is with regards to our outlook of cost of risk for 2022. So as we've shared with you in previous calls, we are keeping still a conservative stance in 2021 despite the fact that NPE flows and expected losses suggest that a much lower cost of risk could be adopted. So we'll be patient until the first quarter of 2022, and our guidance continues to be the same. We are looking to have a cost of risk for 2022 in the area of 60 basis points.

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

Just on the income side, first one on the fee front. How should we think about the next couple of quarters? Are you -- is there room for you to take some pricing here potentially? Things are going well for you and the sector, but maybe have a bit more upside. That's the first one. And then just the technicality. I see in your NII breakdown loans -- NPE loan income went up. Bit of a surprise for me. If you could give color on that, that would be great.

Sorry, we didn't turn on the unmute. On the fee front, it's not pricing that will drive up fees. It's volume. And the key areas are what has already happened in the past quarters. It's intermediation fees, card fees, and I think we'll see far more on the capital and investment products, mutual funds side in 2022. And the NII, do you want to take the NII question?

Yes. The NPE increase in terms of interest has to do with settlement of certain NPE accounts, which resulted in recognition of additional interest as a result of the final settlement. So it's nonrecurring and the only reason it is one-off settlements.

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

A quick question on the merchant -- of the sale of the merchant-acquiring card business. Could you please give us some guidance on the capital impact you expect from this transaction?

This is an ongoing transaction. And until it closes, you can understand my hesitation to reveal valuations. So we will need to be a bit patient on that one.

Okay. But I understand that capital is not obviously the reason of doing this transaction. It's more about the partnership and margin.

That's correct. It is a JV. We're not selling 100%. We're keeping probably half, I can say that. We want a partner who has expertise in acquiring that we can work with and build up the acquired business from strength to strength and get more fees. So it is not done for capital purposes. It's done for business purposes.

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

I know that capital is mounting quarter after quarter, but are you planning to issue any AT1 or Tier 2 in the coming quarters? The second one is again on the merchant book, if you can give us the current contribution to P&L? And the last one is, again, on capital on Basel IV. If you have any update on the potential impact after the last proposal from the European Commission, and how you expect to manage that impact to the very long period that the commission is proposing?

Okay. On the issuance question, as you know, we need to meet our MREL targets. And the logic there is to issue some Tier 2 or AT1 to buffer the senior issuance. So yes, there will be issuance in 2022 either AT1 or Tier 2. The -- what was the second question?

On the merchant book, if you can give...

The merchant book, the acquiring is close to EUR 20 million. And can you repeat the last question? Sorry, we missed that.

Yes, it was on Basel IV. If you have any update on the potential impact after the last proposal from the European Commission and also considering that the phasing is a very large period we are talking about 2032. So if you have any update on the potential impact?

We have run some internal exercises about that, but it's a bit early to share basis points in terms of capital, maybe next year. But the Basel IV mostly is -- affects us because we are not -- it affects more banks, more sophisticated financial transactions. For us, it's mostly the uncovered -- the credit lines -- the unused credit lines, right? There, the impact, which we estimate was relatively small, already to '23. So this stuff pushes even further back the time, if I'm correct.

Next question is from the line of Kladis, Panagiotis with Eurobank Equities.

Just I would like to comment on the loan spreads. What you have seen so far in the year? And what are your expectations for next quarters? Or if you can comment for next year or the fall?

So yes, this year, we've seen a compression in space, mostly in the corporate, in the larger tickets in the area of around 10 basis points. We expect this to continue also in 2022 for corporates at least, while -- and a bit on the ESPs as well in our portfolio. While on the retail, we expect more or less the same spreads as we see them this year as well. So that's the view that we have today.

[Operator Instructions] The next question is a follow-up question from the line of Boulougouris, Alexandros with Wood & Co.

Yes. Sorry, 1 follow-up. On the NII, I think initially, you had guided for 2021 on NII that will be slightly down, very low single digit down, seems this was too conservative, could be a bit up this year. But could you give some guidance for 2022 post from there? What should we expect on the key drivers for net interest income?

Yes, of course. So indeed, this year, we will end up slightly higher than the guidance that we've given. Obviously, that has to do with the fact that Frontier is in our books still. So it will be flattish compared to last year now. Going to 2022, obviously we'll have the headwinds because of the NPE recognition, mostly coming from Frontier. We are expecting, at this point in time, to be in the, let's say, high single-digit reduction versus 2021. The negatives, obviously, is the balance sheet derisking and the compression on the spreads. But on the upside, we will have the further repricing on deposit base and the growing of our performing book, which is evidently already supporting our NII. So that's the positives and the negatives. On the other hand, we do have TLTRO. It's helping out the NII position as we speak. So depending on the decisions that we will make about 2022, it could be also a driver that would push the NII down next year as well. As far as we know today, the TLTRO program ends end of June 2022.

Can you remind us the amount of the TLTRO that you've booked this year? And what we should expect for next year based on the current expectations?

It's about EUR 85 million to EUR 90 million annualized for this year and half of it the next year.

Next question is a follow-up question from the line of Memisoglu, Osman with Ambrosia Capital.

Just on growth next year, obviously, with recovery from expectations and all that, you mentioned EUR 1.5 billion. When should we really expect this happening, early in the year, or should we expect more of a backloaded '22 pickup for the sector and for yourself? Any comments would be helpful.

I think it's going to be even. I don't see any reason for it to be either front-loaded or backloaded, more or less even.

So everything going as planned?

Yes.

[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.

Thank you all for joining us for the Q3 results call. We will be available for follow-up questions. And have a good evening. And for those of you celebrating Thanksgiving, I hope you continue to celebrate the rest of the weekend. Thank you very much.

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