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

Ladies and gentlemen, thank you for standing by. I am Lina, your Chorus Call operator. Welcome, and thank you for joining the National Bank of Greece conference call to present and discuss the first quarter 2024 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 morning, everyone. Welcome to our first quarter 2024 financial results call. I'm joined by Christos Christodoulou, Group CFO; Greg Papagrigoris, Group IR. After my introductory remarks, Christos will go into more detail on our financial performance and then we will turn to Q&A. Let me begin with an overview of Greece's economic environment, which provides a consistently positive backdrop to our strong and sustainable financial performance. Then I will turn to the key highlights of our financial results. So let's begin. Economic activity in Greece since the beginning of the year showed signs of acceleration, bouncing back from the temporary slowdown of the second half of 2023 induced by the floods. In fact, in the first quarter of 2024, most leading and conjunctural indicators have improved versus the fourth quarter. Specifically, employment growth has accelerated over 2% so far in the first quarter of 2024 from about half that rate in the fourth quarter of 2023. And combined with real wage growth of 2% to 2.5%, resulted in very healthy increases in disposable income. Business turnover, excluding the energy sector, accelerated to nearly 11% in the first quarter, indicating strong corporate profitability. Tighter capacity utilization rates and buoyant government investment point to a significant pickup in fixed investment. Exports climbed to new highs on the service side with tourism revenues and arrivals up in the high teens year-on-year in the first few months while export orders climbed to multi-month highs in March 2024. Indeed, manufacturing volumes have gathered pace 3.5% in the first quarter so far. Last but not least, Greece's fiscal discipline continues, evidenced by a primary surplus of 1.9% of GDP in 2023 versus a target of 1.1%, already near the 2024 target of 2%. Looking forward, supportive credit conditions and normalizing interest rates, combined with the impact of the RRF facility, the bulk of the spending on which is all ahead of us as currently only 20% has been spent in the economy, will allow Greece to continue to close the investment and employment gap [ with the euro ] area. This will result in sustained strong GDP growth rates, our estimate is 2.5% in 2024, and at similar healthy rates in subsequent years. Now let me turn to first quarter results back. In this positive economic environment, combined with the accomplishments from our ambitious and still ongoing 5-year transformation as well as NBG's inherent competitive advantages, notably our balance sheet strength and the trust of our customers as the bank of choice, the bank's performance has continued to be quite positive. In terms of profitability, we have delivered a first quarter group core profit after tax of EUR 320 million against guidance for full year core profit of EUR 1.2 billion. Our attributable profit after tax was even higher at EUR 360 million. This performance implies a core return on tangible equity of 17.6% compared with our guidance for over 15% for the full year 2024. Among the key highlights of the quarter, which Christos will analyze in more detail, is the small drop in our NII relative to the fourth quarter of 2023, which only reflects hedging costs as well as additional MREL issuance. It is important to note that the increase in loan NII continues to outpace that of deposit NII. Corporate net credit expansion in the first quarter has been sluggish due to seasonality as well as continued cash management optimization by Greek corporates, especially some of the large ones. However, disbursement has picked up sharply in March and April with our April disbursements nearly matching those of the entire first quarter. Moreover, corporate credit approvals outstanding, but expected to be dispersed as the projects are executed approached the EUR 3 billion mark over and above April's disbursements. Also noteworthy, disbursements in the retail portfolio accelerated in the first quarter, more than 30% year-on-year, and matched repayments for the first time in many years despite the headwinds from an old vintage mortgage book. As a result, we stand by our guidance for our net loan expansion similar to 2023. Other key highlights of the first quarter results are the impressive growth in fees up by 15% year-on-year as well as the ongoing gradual normalization in the cost of risk as formation continues not to be significant year-to-date. Our sustained high profitability further enhanced our capital buffers with our CET1 ratio rising by 80 basis points quarter-on-quarter to 18.6% after netting off the quarterly dividend provision. Our CET1 ratio currently far exceeds our internal targets of around 14%, which enhances our strategic flexibility, including regards to shareholder remuneration. On that note, we expect the SSM to respond to our request for a dividend by the beginning of June. Please bear with us a bit longer and we'll receive an unqualified answer soon. Turning to liquidity. Despite our full repayment of the TLTRO, the corporate loan repayment and the switch to mutual funds, our excess cash position increased and stands at over EUR 9 billion. I'm sure you saw in yesterday's announcement by DBRS regarding the rating upgrade of NBG to investment-grade status, basing their decision on the strength of our balance sheet and our sustained high profitability. Certainly, a testament to our successful transformation and strategy execution. As a result, after nearly 15 years since the outset of the Greek financial crisis, NBG is rated once again pari-passu with the Greek Sovereign. Looking forward, our results [ were the effect of ] the supportive macro trends and buoyant banking environment as well as our inherent competitive advantages including our transformation program, which is bringing rapid and efficient change most notably in technology. The decision to vest early and heavily in technology has distinguished us already on digital banking and the concomitant superior customer experience, but gradually and steadily also on our agility and innovation. 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?

Thanks, Pavlos. Let's start with the profitability highlights on Slide 15. Our core profit after tax increased by 45% year-on-year in Q1 2024 driving attributable profit after tax of EUR 358 million, nearly 40% higher year-on-year and 14% higher quarter-on-quarter. This translated into a return on tangible equity of 17.6%, equivalent to 19.7% on an attributable PAT basis before adjusting for excess capital. The year-on-year momentum in core profitability was driven by higher NII, up 22% year-on-year; strong fees, up by 15% year-on-year with operating expenses kept under control in the low single digits on a like-for-like basis and our cost of risk steadily normalizing to 55 basis points in Q1 '24, well inside our guidance for the full year. Going into more detail. Our net interest income on a quarterly basis remained above EUR 600 million mark, just off the Q4 '23 peak with NIM at 326 basis points despite the negative impact from the hedging costs from demand deposits, higher volume-driven wholesale funding costs and the current base effect, all of which are partially absorbed by growth in lending NII as shown on Slide 20. [indiscernible] Providing support for NII when ECB starts to come off. Apart from putting in place structural hedges, we have also gradually increased our exposure in fixed-rate assets. In the meantime, the healthy lending spread normalization we have seen has been in line with our expectations, implying loan [ pass rate ] of circa 70%, while our strong and stable core deposit base comprising nearly 80% of our deposit stock has kept our blended deposit beta lower 12%. Time deposit yields in euro terms means at 195 basis points in Q1, implying [ a bit ] of circa 50%, in line with our guidance. As regards fee income, the positive momentum has been maintained with our fees higher by 15% year-on-year, following a seasonally strong Q4. As shown on Slide 25, main contributors to this performance were our retail fees witnessing double-digit growth across products while corporate fees were also positive yet affected by seasonality in Q1, already looking much stronger in Q2 on the back of accelerating originations and the peak economic activity. The most notable contributions within the retail business were investment products, up by 38% year-on-year, driven by increased financial activity and higher neutral fund volumes showcasing our successful efforts to cross-sell with lending fees also having a strong performance, up by 30% year-on-year. Moreover, our digital transformation continues strong, producing consistent results with the banking transactions up by 26% year-on-year and total customer transactions higher by 15% year-on-year. Cost discipline continues allowing our cost-to-core income ratio to drop below the 50% mark, well inside our full year '24 target. On a like-for-like basis, adjusting for the base effect from variable remuneration buildup in the second half of 2023 versus evenly over 2024, recurring operating expenses were up by just 3% year-on-year after factoring in the union-agreed wage rises in December 2023 as seen on Slide 26. Our ongoing IT and digital transformation continued strong, enhancing our operational efficiency and further improving our commercial offering. Now let me give you a review of the highlights of our balance sheet summarized on Slide 16. Loan expansion stood at EUR 1.1 billion year-on-year to over EUR 30 billion of performing loans, mostly driven by corporates. Retail disbursements have gathered pace in Q1 '24 to EUR 0.4 billion, up by [ 32% ] year-on-year, driven by SBs and consumer loans, while the payments were fully absorbed across all lines of business for the first time in many years, as the CEO said. Corporate disbursements have recovered strongly in March, April while the approved not yet disbursed pipeline currently stands at nearly EUR 3 billion, providing comfort to our full year '24 credit expansion guide. Domestic deposits were affected by Q1 seasonality as well as cash management optimization by large corporates while retail deposits were fairly stable despite a small shift of depositors to asset management products. Our fortress balance sheet on Slide 18 is characterized by our best-in-class liquidity and capital profile with the latter underpinned by continuous organic capital [indiscernible]. Both our balance sheet superiority and our solid and sustainable profitability dynamics have been officially acknowledged yesterday, allowing us to become the first Greek bank to regain investment-grade status after nearly 15 years ranking pari-passu with the Greek Sovereign. With regards to liquidity, we are also the first bank in Greece to fully repay our TLTRO exposure in Q1 '24 while our net cash position increased further to over EUR 9 billion, steadily at the high end of the segment. With deposits from comprising circa 95% of our funding, we remain the lowest funding cost in Greece, with our loan-to-deposit and liquidity coverage ratio standing at 60% and 250%, respectively. Turning to asset quality on Slide 27 to 29. In Q1, net NPE flows were practically 0, well inside our guidance, allowing cost of risk to normalize further with our domestic NPEs net of provisions close to 0. NPE coverage stood at 86% with coverage across all 3 stages being at the high end of the European bank spectrum as shown on Slide 29. Moving to capital on Slide 17. Our impressive capital generation in 2023 continued in Q1 '24, fueled by strong profitability. Our CET1 ratio stood 80 basis points higher quarter-on-quarter at 18.6% with a total capital ratio at 21.3% after factoring dividend accrual for next year's payout. Moreover, our MREL ratio settled at 26.5% exceeding the January '25 requirement of 25.3% by more than 120 basis. On Slide 51 and 52, we provide a snapshot of our key ESG priorities. We remain committed to our ambitious net zero target underpinned by our climate and environmental strategy while we have also launched flagship social initiatives, including financial literacy and inclusion. In sustainable energy, we recently co-signed a milestone deal to finance the construction of 4 photovoltaic projects of 730-megawatt installed capacity under the Green Pillar of the RRF. While earlier this month, we entered in a strategic partnership with Public Power company for the offering of home energy upgrade loans. Summing up, our solid core profitability momentum was maintained in Q1 as we continue to capitalize on the distinct strengths of our balance sheet as well as our successful operational and digital transformation. Core profitability is on a strong and sustainable path, further increasing our capital buffers translating into a return on tangible equity of circa 18%, indicating that we are well on track to sustain high returns and keep generating shareholder value. Testament to these efforts and results, NBG has become the first Greek bank to have regained investment-grade post the Greek financial crisis. And with that, let's now open the floor to questions.

[Operator Instructions] Mehmet with JPMorgan.

Just a couple of questions for me, please. So first of all, on the deposit outflows, you're noting they're seasonal, but they were also quite sizable this quarter. Could you please provide a little more color on what's driven this and whether you expect them to reverse in the coming quarters, please? And secondly, what was the negative carry from the hedging activities within NII in this quarter, please, if you could quantify that? And maybe any other color you can give on the hedging strategy and position, that will be helpful. And finally, would you be able to quantify also how much you're accruing in your capital for 2024 dividends basically that will be paid next year. And maybe any other color you'd like to share on capital at this stage would be helpful.

Okay. Let me start with the first question. Clearly, there's a seasonal impact in the fourth quarter in Greece. Most notably, there are double salaries paid in the fourth quarter, which then gets spent and lead to a drop in the budgets during the first quarter. What I think is notable for us is despite this seasonal effect on the side of the individual, we saw a very small decline in deposits, which equals more or less the shift to mutual funds. So despite what would have been expected to be a seasonal low, we didn't see it on the individuals where there's a high seasonality. We did see a drop on the corporate side and that is, in our interpretation, a reflection of the early repayments that we saw, especially by some of the cash-rich largest firms in Greece, especially ones in the energy sector. But some of the other large corporates as well as shipping, which is also seeing quite a big boom in rates, and therefore, they're cash-rich as well. So I think if you look at it this way, it's a relatively positive message that we didn't see the expected seasonality on individuals, which is the biggest part of our deposits. And we did see it on the corporates, and again, it's due to the early repayments. So for me, it's a relatively a strong sign of deposits. Now let me turn to Christos for the other questions.

Okay. So let's start with the negative carry on the hedges. Effectively, what we've discussed a few weeks ago when we had the year-end results [indiscernible] as we have discussed then, we have placed about EUR 10 billion of structural hedges on demand deposits, most of it last year and some of it at the beginning of this year. The negative carry out of this strategy in the first quarter was in the area of EUR 16 million. Obviously, you have to bear in mind that this is assuming that the rates are now at 4%. So while rates normalize in the future, that cost may become less in the future. And currently, we are monitoring the strategy. We have no intention to make any imminent changes. But nevertheless, we are on top of it. With regards to our accrual for dividend, out of 2024 profits to be paid in '25, as the CEO said in his remarks, first, let's see what we get for this year. Nevertheless, we've started our accruals, what we have in our Q1 capital waterfall is something between 20 and 25 basis points. We will build that up towards the end of the year when we know how we fulfill the strategy [ that we are ] collecting.

That's super. And on this year's dividend payment, is there anything new that you can share at this stage? Probably not, but I just wanted to check.

As I said in my remarks, I know it's a key question of interest from investors. Patience for another approximately 1 month.

The next question comes from the line of Ismailou, Eleni with Axia Ventures.

Congratulations for the strong set of results. I've got three questions from my side. So my first one would be a follow-up on the natural hedges. We see that you increased your exposure in the fixed-rate assets further in this quarter. Could you provide us with your hedging strategy out here going forward in terms of the fixed-rate assets, whether you will keep increasing in the book in the other quarters? And if you could confirm the average duration of the book as well as the targeted portfolio yield. So that's question number one, in terms of protecting the NII. And the second one would be on the NPE kind of shortfall that we read from headlines a few weeks ago related to the Greek State guaranteed exposures. If you let us know whether there would be any impact on your CET1 capital? And if yes, when we should be expecting it? And the third question would be if you could help us understand what the interplay with the pricing in terms of the spread. In the pre-agreed pipeline, you mentioned that you have in place that will accelerate credit growth in the other quarters.

Okay. On the fixed-income portfolio, we are comfortable with the level of security we have. Don't expect any significant increase, point one. Point two is that given where we are in the interest rate cycle, we had previously explained how we were fully hedged when the rates went up. Now clearly, we don't need to be fully hedged because we think rates are at their peak. So there will be -- the hedging is on the long end while on the short end of the curve it's been listed. So that's it on the securities portfolio. Christos, you can take the -- if you want to add anything on that one and take the other two.

The tenor of our book has been extended. It's just below 15 years before hedge. That should be now. Let's move to your second question with regards to the state guarantee. Effectively, this is a prudential treatment of an [ all-state ] guaranteed loans granted under special circumstances to vulnerable groups using the addendum calendar shortfall. In our case, claims mostly related to collateralized mortgage loans, pretty confident with that. Our claims against the state is currently around [ EUR 500 million ] with state payments actually increasing significantly in the past 24 months. We've already taken a prudential adjustment of about EUR 100 million so far. Any additional adjustment will be correlated to the repayments. And if -- we don't expect it to be more than EUR 150 million to EUR 200 million in a year from now. And to be honest, it's expected to come down because this capital burden is a temporary thing. With repayments, you will be getting back whatever you provide proactively. So we will see coming back into play in the following quarters. Our business plan initial guidance, obviously, already accounts for this three. I think the last question was on the spread.

The spreads on the yet-to-be-disbursed, I would say, around 2%, 200 basis points.

The next question comes from the line of Kemeny, Gabor with Autonomous Research.

This is Gabor from Autonomous. First question would be on the loan growth outlook. I saw your disbursement accelerating, and actually if I add up your pipeline, the disbursement so far, I think, it's somewhere around EUR 5 billion, which is 70% of the total disbursements you made last year. So my question is what makes you cautious when you assume like similar net credit expansion for this year? Or in other words, what could be the potential upside to your loan growth target? Another question just on the net interest margin. How would you expect the NIM to evolve in the next few quarters because it seems that the deposit costs are trending better than you may have expected?

Good observations on the loan growth. We have a tendency to be conservative on our projection, so we don't need to -- we can only surprise on the upside and not on the downside. And the repayments continue to be stronger than we expected. So we're being cautious on the net. Let's see how the -- how long these repayments keep coming. As I said in my introductory remarks, they are from a very few number of corporates, but very large amounts. And these are corporates, which for various reasons, are seeing quite good profitability, energy and shipping being two sectors specifically. So those are the 2 tendencies: stronger disbursements, but also strong repayments. And we see -- and we predict that it will be the same as last year. We could see positive surprises, but let's hold off for another quarter before we make that statement.

Let's answer the question on the NIM. As you've seen in Q1, we landed with a NIM at 326 basis points. Our guidance for the year based on the business plan is just around 290 basis points. I think we are well on track to do slightly better than that. But now, you know the headwinds and the tailwinds, we have the expectation of the rates, which will be a big factor going forward when those will come down. We also have to pay attention to the dynamics of the deposit betas as well as the deposit mix, which, again, will look quite positive if we take the first quarter of the year as the first point of reference. And of course, MREL costs, which whatever issuances we have in plan we have executed in Q1. So the path towards the end of the year is obviously a gradual reduction. But yet again, we're very confident that we'll be more than comfortable with the guidance of 290 bps.

And if I can add the key question here is clearly what the ECB will do. And not wanting to preempt what ECB will do, but it seems that if the Fed delays, it argues that ECB could also delay. So let's see.