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

Ladies and gentlemen, thank you for standing by. I'm Poppy, your Chorus Call operator. Welcome, and thank you for joining the National Bank of Greece Conference Call to present and discuss the first quarter 2022 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 first quarter 2022 financial results call. I'm 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. I will begin with a description of Greece's economic developments and prospects in light of the spiking inflation resulting from Russia's invasion in Ukraine that have pushed up energy and commodity prices. Inflation is clearly going to be higher and for longer than previously expected 3 months ago. In Greece, it is currently expected to peak close to 11% in the second quarter and decelerate notably only from the fourth quarter, an average 7.5% for the full year. That being said, there appear to be several countervailing forces to offset its impact on the real economy. First, employment growth is very strong and looks to remain so in view of the surprising buoyancy of tourism, the so-called travelers revenge. Employment growth is expected to be 4% in 2022. Second, wages are also an upward trend and appear to be heading for a 3% increase on average in 2022. Third, fiscal support targeted at offsetting the impact of higher energy prices, especially for more vulnerable households, is estimated to reach EUR 5.8 billion, equivalent to nearly 3% of GP and offset approximately 80% of the increase in energy bills. The contribution of these 3 factors should exceed 7% of disposable income and should offset the impact of inflation on household disposable income spend. Turning to business. The increase in production costs due to the deterioration in the terms of trade and higher wages is estimated to be around EUR 8.5 billion, equivalent to 4.5% of GDP and approximately 1/4 of business operating profit of the previous year. This hit appears manageable due to the recent improvement in this metric, business operating profit, which has increased by 40% year-on-year in 2021 to an 8-year high of over EUR 30 billion as well as their strong liquidity buffers, bank deposits of corporates are near all-time highs. And this impact should be mitigated further in view of the [indiscernible] as household spending should remain resilient and tourist spending looks set to outperform as just described. All in all, we expect GDP growth to be in the area of 3% in 2022, with unemployment declining by another 1.5 percentage points to near 11% to the lowest level in the past 12 years. This is clearly not a scenario in which a new wave of NPEs will be created. Nonetheless, despite this aggregate picture of resiliency, we remain vigilant in search for any signs of client or sector-specific stress to the current terms of trade shock. Turning to NBG. Our first quarter financial results indicate a continuation of last year's strong performance with positive trends in both the P&L and the balance sheet. Starting with asset quality. The reduction in NPEs continued in the first quarter of 2022 with bank level NPE reduction remaining negative at EUR 130 million. It should be judged against a significantly reduced pool of potential cures following the past year's NPE cleanup and significant [indiscernible] flows in 2021. It is important to note that defaults and redefaults continue to edge lower quarter-on-quarter. Additionally, neither defaults or early delinquency roll rates have shown any upward tendency so far in 2022. Overall, the domestic stock of NPEs amounted to EUR 2 billion, declining by 40 basis points compared with the previous quarter to 6.5% comparing well to our annual guidance of 6%. On a net of provisions basis, NPEs stand at just EUR 0.4 billion equivalent to about 1.5% of loans. A high provision coverage of 81.5% reflects a high level of conservatism in the form of post-model overlays. Turning to capital. Our fully loaded CET1 ratio stood at 15.1% in the first quarter, increasing by a further 20 basis points on the back of organic capital generation. In terms of total capital, again, on a fully loaded basis, the respective ratio stood at 16.2%. Both capital metrics will benefit by an additional 65 basis points approximately upon close of the joint venture transaction with EVO Payments expected in the fourth quarter of this year. In view of the good progress on our NPE cleanup and the robust capital adequacy, our attention has increasingly shifted towards recurring core profitability. In fact, core profitability in the first quarter of '22, which excludes trading gains and other nonrecurring items, increased by 32% year-on-year, reaching EUR 125 million, continuing the significant progress achieved in 2021. The key drivers behind performance, as Christos will analyze in more detail shortly, have been the impressive recovery in our fee income line, up by 25% year-on-year and the pickup NPE NII, reflecting the large loan disbursements that occurred in the past few quarters and especially in the fourth quarter of 2021. These 2 developments have more than offset the loss in NPE interest from the deconsolidation of the Frontier transaction. Specifically, our core income rose by 2% year-on-year in the first quarter. Moreover, the corporate loans pipeline remains strong, though disbursements are choppy for large transactions, and we expect a net loan expansion of around EUR 1.5 billion in 2022. Turning to operating costs. We keep edging lower, minus 1% year-on-year, despite higher inflation. As a result, our cost to core income ratio declined further down by 160 basis points on a year-on-year basis, reaching 51.5%. As a final point on profitability, the cost of risk continued to normalize dropping to 70 basis points versus 100 basis points in 2021. Overall, the bottom line in terms of profits after tax reached EUR 360 million, supported by trading income and the Ethniki Insurance sale accounting treatment affecting positively discontinued operations. Looking forward, as the first quarter results suggest we are well on track to our 2022 guidance for core operating profitability of around EUR 0.5 billion and should outperform our guidance on the NPE ratio set to drop below 6% before the end of the year. With regards to capital, on a fully loaded basis, we already exceed year-end 2022 guidance pro forma for the EVO Payments transaction. Despite increased economic uncertainty, our core profitability trends have remained strong in the first quarter and are anticipated to maintain that momentum for the remainder of the year. In this context, we are not revising upwards our core profitability target of EUR 0.5 billion for the year. However, we feel confident on achieving the target with upside risk on the core income side. As communicated already in the full year results of 2021 announcement, we intend to seek permission from the regulator for distributing the dividend out of this year's earnings. As a final point, we should not forget there also exists upward risks in the baseline scenario arising from a tightening of monetary policy in line with today's market expectations in view of the structure of NPE's balance sheet comprising a very high share of core deposits on the one hand and floating rate loans on the other. 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. Let's now look into our financial performance in more detail. Starting with the profitability highlights on Slide 9, our group profit after tax from continuing operations amounted to EUR 208 million in Q1, with core operating profit, 32% higher year-on-year at EUR 125 million on the back of strong core operating trends. The increase in performing loan interest income, along with the impressive [ fee ] recovery, which is up by 25% year-on-year, more than absorb moderate NII headwinds following our significant NPE cleanup in 2021, driving core income higher by 2% year-on-year. Costs were contained further despite price inflation with cost of risk normalizing to circa 70 basis points from circa 100 basis points in full year '21, in line with our guidance. All in all, including trading income and results from discontinued operations, our attributable profit after tax reached EUR 360 million. Turning to balance sheet and asset quality highlights. As depicted on Slide 10, sustained organic NPE reduction in Q1 drove our domestic NPE exposure down to EUR 2 billion or just EUR 0.4 billion of provisions. NPE ratio in Greece dropped to 6.5%, down by 40 basis points relative to year-end '21, a nearly 7 percentage points lower on a year-on-year basis. While our domestic cash coverage rose further to nearly 82%, despite cost of risk normalization capitalizing on favorable NPE formation trends. Domestic loan disbursements increased by circa 50% year-on-year, reaching EUR 1.1 billion, pushing domestic performing loans higher by EUR 1.5 billion year-on-year. Moreover, in the course of April and May, we are seeing a strong pipeline in corporate credit demand with disbursements in mid-May, reaching EUR 1.8 billion, giving us confidence on our full year '22 guidance [ profit ]. Our robust capital position improved further in Q1 '22, as shown on Slide 11, reflecting the banks of current capital generating capacity. Our fully loaded CET1 ratio increased by 20 basis points quarter-on-quarter to 3.1%, while the fully loaded total capital ratio stood at 16.2%, circa 70 basis points higher quarter-on-quarter. The completion of the merchant acquiring JV will further boost our capital ratios, except as 65 basis points, rendering the Q1 2022 pro forma capital metrics already higher relative to the year-end '22 guidance. Let's now go through the key drivers of our profitability on Slides 12, 13. Domestic NII to by just 3% year-on-year, despite the significant NPE leverage following France deconsolidation in 2021, supported by higher disbursements in both retail and corporate segments, driving an expansion of our domestic performing loan exposure. Interest income from rising performing loans keeps growing for a third quarter in a row, absorbing part of the NPE cleanup impact on the NII. At the same time, lend yield normalization is bottoming out at around 300 basis. Going into domestic loan evolution in more detail on Slide 14, loan disbursements remained strong in Q1, growing by circa 50% year-on-year to EUR 1.1 billion, with retail and corporate credit growth at 42% and 52%, respectively. As a result, the growth momentum of our performing loan book was maintained with loan balances expanding by EUR 1.5 billion year-on-year, providing sustainable support to our NII. The driver of our performing loan book expansion remains the corporate segment as performing retail loans exhibit stabilizing trends following years of leverage. In essence, mortgage deleveraging is broadly offset by increasing exposures in the small business and the high-margin consumer segments. Moving on fee income on Slide 17. Domestic fees increased by an impressive 26% year-on-year, supported by loan origination while card and intermediation fees drove a strong recovery. Our digital transformation continued to produce impressive results with e-banking activity up by 16% year-on-year in Q1 '22, replacing banks transactions as customers keep switching to digital functionalities. For the remainder of the year, we anticipate fees to continue on a strong recovery trend as April and May continue exhibiting similar strong performance. Turning to operating costs on Slide 18. Sustained personnel cost reduction absorbed increased depreciation charges coming from the rollout of our strategic IT investment plan, which includes the ongoing replacement of our core banking system as well as investing in the bank's digital transformation. As a result, operating expenses reached lower by 1% year-on-year, with our cost-to-core income ratio further improving by 160 basis points to 51.5%, aided by core income growth. Going forward, further cost optimization efforts driven branch network rationalization and the shift to digital channels is anticipated to offset inflation headwinds, netting out to consistently lower operating costs. Moving on to asset quality on Slide 19 to 24. Negative organic flows in Q1 '22 drove domestic NPEs lower by EUR 130 million approximately, down to EUR 2 billion or just EUR 0.4 billion net of provisions. Curing flows is well below the quarterly levels of previous periods in absolute terms, reflecting the contained FNPE perimeter post a significant cleanup in 2021 while new defaults and redefaults also edged lower quarter-on-quarter in the absence of large corporate defaults in the quarter, aiding negative organic formation trends, which came in line with our full year 2022 expectations. Domestic NPE ratio came 40 basis points lower quarter-on-quarter at 6.5%, while coverage increased further to 22%. Moreover, despite uncertainty in inflationary pressures, year-to-date, the performance of clients previously understated on support programs remain far better than expected, as shown on Slide 24. The ex-moratoria client perimeter currently in NPE status is a [ chart ] 4% while with regards to our clients, we exited the Gefyra I and Gefyra II programs and NBG step up facilities. Payment performance is equally reassuring, as just 4% of [indiscernible] default and circa 2% in early arrears. Most importantly, we have seen no impact from the surge in inflation. Turning to liquidity on Slide 25 to 26, domestic deposits settled just 1% over quarter-on-quarter at EUR 51.3 billion with households and corporates utilizing only a small fraction of the incremental deposits to accumulated over the past 2 years, despite the inflationary pressure in disposable incomes. Time deposit yields have edged lower to just 7 basis points, while Eurosystem funding to TLTRO was stable at EUR 11.6 billion, with overall funding costs remaining at marginally negative levels. Summing up against accelerated inflationary pressures and economic uncertainty, NBG enters 2022, maintaining a strong momentum increasing core operating profitability by 32% year-on-year and producing an even stronger profit after tax result aided by trading gains. Our balance sheet is near clean with the stock of NPEs maintaining a declining trend while best-in-class coverage and capital levels are further enhanced. This enables us to continue on our transformation journey, maintaining our focus on improving customer experience and adding value to our shareholders. And on this note, I would like to open the floor to questions.

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

I have a couple of questions. The first of them is on NII. I was just wondering if you can confirm your sensitivity to interest rates? If I'm not mistaken, your previous guidance was for around EUR 70 million on the first 50 basis points going up to EUR 350 million or so in case the rates go up by 200 basis points. And also linked to that, what kind of TLTRO dynamics going to expect for 2022? Just confirming that your number for the year is around the EUR 45 million level versus the EUR 90 million in 2021? And then my second question is on asset quality. I acknowledge the comments during the presentation about NPE ratio for 2022 that has been kept at the same level below the 6%. Also considering the very high coverage level that you have right now, I mean, why does the cost of risk is still, let's say, maintain at previous level? I mean, what kind of coverage level you expected to finish 2022 as well?

Thank you, Jonas, for the questions. On the first question with regards to NII sensitivity, the NIIs are more or less, as you have quoted them, we are running them every week to be frank. So current view with regards to the sensitivity of our balance sheet is at the first 50 basis points of rate increases will benefit the bank's profitability by EUR 80 million while the next 50 basis points, so that's from 0 to plus 50, an additional EUR 120 million, and the same amount more or less would be expected for the extra 50 basis points on top of that. With regards to your question on asset quality, indeed, I think the performance of the [indiscernible] with regards to the NPE trends is really good. We have provided the first quarter in line with our guidance in the area of 70 basis points. We indeed acknowledge there are [ upside ] risks with regards to cost of risk. But in where we are with regards to the new crisis that is on us, we're trying to be conservative this first quarter. And going forward, depending on developments, we obviously will adjust our cost of risk subject to that.

Have you made the adjustments to inflows levels that will require you to be more active on write-offs, for example? And I think we probably forgot the 2 things that 1 is the expected coverage for end of the year and the second one is the TLTRO for 2022?

On the TLTRO, the numbers you have quoted are more or less there. Our expectation for the remainder of the year with regards to TLTRO income is around EUR 40 million. After the end of June, TLTRO III program ends, as we know it. So our expectation is that this benefit will fade out, but that was part of the [indiscernible] alone. With regards to the levels of coverage, it will depend going forward, as we said. We maintained this high level of coverage of around 8%. The [ level of ] NPEs is going down. So it becomes less and less relevant as we go ahead. But at this point in time, it's not the guiding principle on the NPE coverage, at the end of the year, is not the market we want to achieve. Stage III coverage for the remainder of NPEs will be maintained in the area of 55 more or less percent.

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

Just a couple of rather technical questions on my side. For -- you touched upon TLTRO, was that the reason -- when I look at Slide 13, what you had in Q4 of plus 5% from Eurosystem wholesale, et cetera, has disappeared. Just wanted to see if you could give us any color on what drove that? And then the other bit is on your tax expense line. It did jump quite a bit. So should we expect going forward these levels per quarter? Or any other color guidance you could give would be appreciated.

Okay. With regards to the TLTRO numbers, we are accruing more or less evenly across the quarters. So there's nothing out there or a spike because of the TLTRO. Obviously, we recognized net of the excess cash and amount in the area of EUR 18 million to EUR 20 million in Q1. That's the number that's included in the slide that you see. With regards to taxation, yes, we've recognized accounting tax in Q1. We have a profitable quarter. And more or less, this is what you should expect going forward.

Okay. So going back to Slide 13, so that [ delta of 5 ] was not TLTRO-driven? I guess it's repos or some other moving parts.

Wholesale funding is included in there. That's why you see the volatility. It's not down to the TLTRO.

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

One question on the fees, please, which were exceptionally strong this quarter. Can you please discuss in more details the driver of this? And would you see level of the run rate for the remainder of the year, so say, around EUR 80 million or so levels increase?

We had provided guidance for an increase in 2022 of around 10%. I think that it will probably be slightly higher than that in mid-teens. The drivers are clearly from the loan side. I think you're going to be seeing more fees from treasury products, more fees from investment products. The credit cards are going to be doing. Transactions are increasing a few more from that. Also, intermediation fees [indiscernible] sites will also go up. .

Okay. And just longer-term, would it be still reasonable to expect around 10% per annum growth in that line going forward as in your guidance that you provided earlier this year? Or should we think that some faster growth should be followed by slower growth in the coming years, would you say? .

Our objective is to increase that number further and specifically, we're trying hard to transfer deposits into investment products and then get more fees. I think there's a great potential for that. And if we get that going, I think we'll see that line increasing by more than 10%.

And just technical questions clarification. The discontinued operations this quarter, this is upon the completion of the Ethniki Insurance sale, was that correct?

Yes, that is correct. .

And this basically now the reported capital ratios reflect the full benefit from the completion at this stage?

Yes, indeed. The Q1 metrics actually incorporating everything with regards to the transaction.

And finally, just a follow-up on the tax expense. So should we then say -- if profitability continues at these levels, should we expect the tax expenses around or the rate -- effective tax rate at some 10%, 15% levels? Would that be reasonable to think?

The effective tax rate that we have incorporated in the first quarter is in the area of 23% to 25%. So that's more or less the way you should expect it going forward.

The next question is from the line of David Daniel with Autonomous Research.

Congratulations on the results. I just got a couple. Just on the NPE target for the end of the year here, less than 6%. Can you just refresh us what that assumes in terms of organic flows and also whether that gives you any headroom if there is a deterioration as a result of rising costs in Greece? And then secondly, just on your issuance plans. I think in the past, you talked about maybe 1 to 2 transactions this year MRELs. Could you set out the year if markets remain volatile? How are you looking at the issuance markets for the moment update would be good.

Okay. Given the quite low levels of NPEs to get to 6%, we already did 0.5% almost in the first quarter. Another 0.5% is only a couple of hundred million. So these are the numbers we're looking at to get to 6%. And if we do EUR 300 million, we're below. So it is not exactly very large numbers that we need to get below 6%. Now on MREL, clearly, the markets are turbulent. We are lucky with the capital that we've created organically into the transactions, and we will be looking at likely 1 transaction towards the end of the year the way it's panning out.

Okay. Just with regard to your answer to the first question, is there a reason why you're not revising your 6% down?

In my opening remarks, I said we will overperform and be below 6%. I didn't say how far below 6%. But I think -- and given the uncertainty, I don't want to say how much. But I do think that given the performance of the first quarter, given where we are in the second quarter, I think that we'll do better.

The next question is from the line of Butkov Mikhail with Goldman Sachs.

Two questions from my side. First is on the performing loans growth. So can you maybe share some trends in the beginning of the second quarter? And so where do you expect the strongest growth in the second half of the year to be? Will that be corporate or other segments? And the second question is on asset quality. So thank you for providing the sensitivity of NII [indiscernible] interest rates. Is there anything that you can share on the sensitivity of cost of risk to the higher interest rates or any other scenario analysis with regards to the relationship of asset quality and rates?

Thanks for the question. I will take the first one on the loan growth. So as I said in my remarks, we've seen that we had a very good performance, a good pipeline in the months of April and May. It comes mostly from the corporate segment. Sectors like retail, energy sectors, manufacturing, tourism industry where sectors are marketing the new loans, the pipeline, we expect the same for the second half of the year. Retail, as we said, is currently bottoming in terms of the leverage. We expect growth in the [indiscernible] and the consumer as well as in mortgages towards the latter half of the year, but the main growth is coming from the corporate sector. With regards to the asset quality, Pavlos will take the question.

It's not a linear type of relationship as is the NII. But as I mentioned in my introductory remarks, we see a lot of offsetting factors that will offset the impact of the decline in the disposable income from inflation. So that's 1 point. Number two, as we've mentioned, we are already putting on post-model overlays on the cost of risk. Therefore, combining those 2, I don't think that you will be seeing an increase in our cost of risk from the high inflation. The opposite going on.

The next question comes from the line of Nellis Simon with Citi.

Yes. My first question would just be about the loan pricing outlook. If you could just elaborate a bit on how you see loan spreads, yields on performing lending going forward? My second question would just be if you could elaborate a bit on the risks you see on the asset quality side, it sounded like you are still a bit cautious given the outlook? I mean which sectors do you think could be negatively impacted from what's going on. And I'd be interested in knowing if you have any shipping exposure primarily to oil tankers?

Okay. On the spreads, I think that on retail, we're not seeing any significant compression. On the corporates, on the other hand, there is some -- something like 20 basis points for the next 12 months is [indiscernible]. The other question was on shipping. We have -- yes, sorry, go ahead. Sorry.

Yes. I was just going to say, just if you can kind of walk through which parts of your portfolio you think could come under some stress? I mean, where are you most worried about and where you would you be putting on those overlays? Where are you concerned?

We are pleasantly surprised but usually when there's [indiscernible] the exports and the tourism which have been affected. It looks like tourism and exports are doing much better than expected and remain buoyant. So the shock is hitting the economy through the higher inflation. So becoming a domestic shock. The sectors where wages cannot increase you see household suffering though there is the fiscal [indiscernible]. And in the corporates, it's the sectors that cannot reprice up some part of their costs. So -- but so far, we haven't seen any of that.

And on the shipping?

On the shipping, we have about EUR 2 billion of shipping exposure. Tankers are about less than half of that. So these are the numbers on tankers.

And do you know how much of that is Russia-linked -- Russia, roughly?

That I don't know.

[Operator Instructions] The next question comes from the line of Tsourtis Petros with Optima Bank.

Congratulations on the results. One question, if I may. Can you give us color on the organic NPE formation in the second quarter?

Well, thanks for the question Petros. The trends that we see in April and May are more or less in the same lines as the ones that we've seen in the first quarter of the year. So unless we have any surprises in June, we shouldn't expect more or less the same information for the second quarter of the year.

Mr. Tsourtis are you done with your question?

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 on a Friday afternoon for some -- Friday morning for others for this call. We're available for follow-up questions. And hopefully, we'll be traveling to see you soon in the weeks to come. So thank you, all.

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