Piraeus Bank S.A. (TPEIR) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I am Galley, your Chorus Call operator. Welcome, and thank you for joining the Piraeus Bank Conference Call to present and discuss the full year 2019 financial results. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Piraeus Bank's CEO, Mr. Christos Megalou. Mr. Megalou, you may now proceed.

Good afternoon, ladies and gentlemen, and good morning to those joining us from the U.S. I'm Christos Megalou, CEO of Piraeus Bank, and I'm here today with Theodore Gnardellis, our CFO; and Chris Berbati, our Corporate Development and IR Head. Thank you all for attending Piraeus Bank Full Year 2019 Results Presentation. I trust you are all safe and healthy. Under normal circumstances, our team and I would start presenting you the results of what has been a milestone year for the bank, a year in which we returned to profitability and positive returns. We completed 2 major transactions. The first, issue of Tier 2 post 11 years in Greece and the spin-off of our legacy unit, launching the strategic partnership with Intrum. And overall, we produced tangible results across all areas of business. However, coronavirus has changed the economic and social landscape in an unprecedented way and in a very short time span, just some weeks after the release of our market update with our new corporate aspirations and the issuance of our EUR 500 million Tier 2 in February 2020. We, at Piraeus, have as our top priority at this point, the health, safety and well-being of our people, our clients and all stakeholders. We are actively managing the situation and we have activated all necessary protocols and actions to mitigate its possible effects. We have fully deployed our business continuity plan with now more than half of our people working from the safety of their homes, thanks to our technological infrastructure and digital solutions. This ratio is at 75% if we exclude our front line, which continues to be fully operational, taking all the necessary safety measures. Also with this opportunity today, I wish to thank the 4,000 of our people that work at the front line and continue serving the needs of our 5.5 million customers. Their commitment to the bank and the needs of the Greek society is highly appreciated and respected. Same goes for all our people at IT, digital banking and all areas of business who have been working hard this past few weeks, making sure that the banks continues working uninterruptedly, contributing to the efforts of the Greek economy to withstand the results of the current crisis. Turning to the economy. We adapt to the new reality. The economy inevitably will take a hit from the lockdown. Instead of the 2.5% GDP growth, which was the previous estimate, Greece will have a GDP contraction this year. We do believe that the final print would not be as bad as many assume. The rebound will be strong in the second half of the year. We are happy to see the Greek government taking all the necessary measures early in the pandemic curve. The envelope earmarked to directly support businesses and employees amounts to EUR 6.8 billion or 3.5% of GDP, well above the European average. This is backed by the Greek budget. On top, European structural funds will contribute EUR 5 billion or another 2.7% of Greek GDP for guarantees for new financing and investments. This potentially could go even up to EUR 10 billion or 5.5% of GDP. We think this swift reaction already pays off, as evidenced by the GDP's movement and we will get out of this situation earlier rather than later with the lowest possible social and economic impact. Slide 17 of our presentation provides a summary of the measures taken by the Greek administration along with the European monetary and supervisory measures. The various measures are unprecedented and are in place. On the banking sector, ECB announced initiatives regarding increasing liquidity to the banks, lower capital thresholds as well as the more flexible regulatory framework with regards to exposures hit by the pandemic, while an extensive bond buyback program of 12-and-more-billion Greek debt has been put forth. All these actions are expected to address the consequence of the current adverse situation. The abolishment of the 3.5% primary balance target is also a catalyst. The Greek government provides cash relief to support businesses and households directly and has unfolded a series of measures. The determination of policymakers overall makes us optimistic that the current shock will be absorbed, and the impact will be mitigated. For 2019 performance, we have discussed also in our market update in early February. We had healthy results and the work we have done so far in strengthening our balance sheet has been evident. The executive summary of our presentation summarizes all our relevant KPIs. On Slide 13, we discussed the enhancement of our capital base by about 300 basis points outperforming the initial expectations. Total capital ratio at the end of the year stood at 15.7%, with CET1 ratio at 14.8%. If we include the EUR 500 million Tier 2 issued in February 2020, our total capital reaches the level of 16.8%. This is against 11.75% minimum requirement for 2020 post the ECB measures to address COVID-19 impact and translates to a capital buffer of EUR 2.3 billion. Our capital base and the diligent work we currently do on the background gives us confidence that we can weather the storm broadly unscathed. The healthy NPE dynamics of Q4 '19, we have already presented are at historic low inflows. We are currently assessing the situation and we are in close contact with our partner, Intrum, and our customers in order primarily to see the full extent of the COVID-19 economic side effects, and secondly, propose the most appropriate tools that will facilitate the smallest possible impact on the economy, the society and the bank. Some initial facts and solutions are presented in Slide 19 to 23 of our presentation, and we can discuss during the Q&A session. We are working hard to calibrate our approach to be granular, targeted and efficient in setting up the right strategies for each client segment and industry. On the other hand, our NPE securitization preparations continue unabated. While as you might already know, we have been granted the 0% risk weight on the senior notes of their forthcoming HAPS transactions. We would expect that under the current conditions, the transaction's time frame may push back to some extent. However, we follow a very tight action plan and time schedule, and we stand ready to tap any opportunity to proceed with the deals as soon as market conditions allow us to do so. Our liquidity position remains solid and ample. During Q1 '20, private sector deposits have been increasing, whereas, our liquidity coverage ratio is hovering around 120% higher than year-end 2019. As you know, the ECB has proceeded to new LTROs to provide additional liquidity until the next round of TLTRO are announced in June this year. Piraeus Bank has tapped this facility of LTRO within March, optimizing its funding mix profile. Concluding this opening statement, I would like to emphasize that Piraeus Bank has taken action early on to support its clients and the economy in accordance with the measures taken by the Greek and EU authorities to alleviate the economic consequences of the pandemic. We remain confident that as soon as these extraordinary events subside, the economy will revert to a healthy growth. Piraeus Bank remains committed to fully leverage on its capacity to generate value, to serve and support customers, shareholders and employees. And with that, I'd like to open up the floor to your questions.

The first question is from the line of Floriani, Jonas with Axia Ventures.

I hope everybody is well, safe and healthy over there. Starting my question on Slide 21. I'm just wondering how we can draw the relationship between what you present as severely affected exposures with the government guarantee on losses and also the subsidy on interest. The government amount has been circulated around EUR 5.8 billion. So out of these exposures that you show over there, I'm just trying to see if there's any visibility on what could be the results in terms of real NPE recognition, if not on the new loans, but also on the stock and also on cost of risk, if anything? Then the second question is on -- it's still on volumes and credit for 2020. If I remember well, you had this target of new loans of around EUR 5 billion for the year. Now the situation has changed quite dramatically. So now how do you see the new loans in combination with the efforts to support the economy as well progressing throughout the year? So what changes now would the new government -- were the new measures taken by the government and Europe? And then finally, it's on some capital for the year. Given that now the capital requirement is lower than it was, I'm just wondering if your end of year target or guidance in terms of capital, I know that your guidance is for the -- is for 2022, right, the -- on CET1 and total capital level. But what kind of the level of capital do you think you might be at December 2020, given that you're not required to hold the 14% anymore. So I'll leave at that for now.

Jonas, thanks for the questions. First one have to do, I believe, with how much of our portfolio is impacted and affected by the crisis and how does that correlate with the measures that are currently being discussed. On Page 21, this is the work that has been done to identify the sectors and the areas that are mostly and most immediately affected by the crisis. You're seeing that on the business level, we have identified something approximately around EUR 10 billion, something under EUR 10 billion that are severely and moderately affected, of which EUR 5 billion are the severely for affected sectors. This access has been done in conjunction and taking into account the Ministry of Finance classification, of course. And we have also modeled the level of redemption and servicing that is required. I can tell you that this is in the vicinity of EUR 300 million of capital redemption I expect for the year. And approximately the same amount is for interest. So pretty much in conjunction with what has been announced and within the levels of the government initiatives. As far as your question on new loans, this is where I can tell you that we have already dispersed. We're quite on track with the EUR 5 billion aspiration that we had mentioned in previous communications. Quarter-to-date, we're already at EUR 1 billion. So pretty much on track with what we're doing. The effect that the crisis will have on that is a bit, as you can understand, up for grabs and we're monitoring the situation and looking forward. As far as your question on capital, nothing changes right now until it does, right? Because we are looking at the intrinsics that we have on the P&L. PPI, we expect it to be quite resilient this year. The cost dynamics that we have from work that has been done in the past year creates some tailwind on the cost base for this year. NII, not much expectation for direct affecting. And then it all comes down to our cost of risk, which will determine the organic result and therefore the capital base. So, so far, we are working on all fronts on this hypothesis, but we'll know more on guidance for the end of the year once we have identified and we have better perspective on how this will evolve.

Okay. If I may just follow up on the first one on the affected exposures. So out of your, let's say, out of your EUR 8.8 billion you've shown on Slide 21, how much do you think it's the extra support you need to give to these companies, which may be benefiting from the government guarantees and the subsidies. I think that's where I was trying to get, because it seems like if we add all of the exposures from all of the banks in terms of severely affected that the government support shouldn't be enough. I know that there are 2 things to take into account, right? One is the total stock. And then the second is the new disbursements for the companies under distressed situations. So yes, so back to the question, so out of your EUR 8.8 billion, how much you think these companies will be requesting in terms of emergency loans that could fall under the government guarantee for both losses and also interest payments.

First of all, Jonas, out of the EUR 8.85 billion are the business related exposures, which I think you're alluding to.

Correct. That's correct. Yes, yes, yes.

Right. So for the total of EUR 5 billion of severely affected and the EUR 5 billion that are moderately affected, the redemption -- capital redemption required is around EUR 300 million and another EUR 300 million is interest. This is just for you to get a feel as to how big the issue that we're looking at could potentially be. So far, we have already contacted almost all of our clients in these 2 buckets and 70% actually of our total number of clients already. And what I can tell you is that we are looking at potential to be treated immediately exposures of approximately EUR 1.2 billion. So we have identified EUR 1.2 billion that require immediate treatment.

The next question comes from the line of Bairaktari Angeliki with Autonomous Research.

Three questions, please. First of all, with regards to cost of risk for 2020, I do appreciate that it's probably a bit early to provide us with guidance. But I just wanted to see your -- to hear your thoughts on how cost of risk is going to progress in the next few quarters. And especially, is there going to be an automatic update of cost of risk on the back of the IFRS 9 model update? Because now I suspect all banks will have to introduce harsher macro scenarios. So when should we expect you to update your model? Is that going to be in Q1? Or will you wait for some ECB guidelines on this, and so we won't really see anything until Q2? And then if you could also give us some guidance sort of some broader thoughts on how do you see the corporate book that you have, how post those liquidity support measures, is there any risk that some of the corporates may not be able to make it? And then second question on your NPE book, how should we think about provisions there? Does the fact that the macro environment has deteriorated a lot imply that you now need to increase your coverage in your exposure? And third question, with regards to the RWAs, and you had previously communicated that you are constantly looking to optimize your RWAs relative to your credit exposures. And you had announced earlier this year a shipping partnership. So I'm wondering if there is more to be done potentially that could mitigate somewhat a potential increase in credit risk.

Okay, I get it, Angeliki. Thanks for the questions. As far as your question on cost of risk, the IFRS 9 models are taking, and we have been guided that they should take a long-term perspective. Therefore, there is no immediate updating that will or can be done to these models until we know what are the fair assumptions that one should assume on a long-term basis. And we will get guidance for that also going forward. So nothing to report for the coming period until we get further guidance. I can't help you more on the cost of risk. It depends a lot on the inflows and how the measures will affect. There's a massive support both fiscal and monetary in that respect. And also we have been given, as banks and the banking system, a lot of tailwind to support the companies during this crisis. So the important thing right now is to mitigate the effect that this will have on these companies by supporting them through this period. And the first step to do that is to properly identify them and size the problem, which is what we have been doing and are reporting today. The -- as far as the NPE book goes and your question on provisions, very similar question, very similar answer. The -- this is not a situation of a cyclical sort of durable recession. This is an effect that we're seeing, that we're measuring and speculating how long and by when it will last. So nothing that will affect immediately the NPEs in terms of the provision coverage required is currently in place. This is very much linked to the macro assumptions and what one will believe on real estate, for example, going forward, which is much more a long term assumption. So nothing again to report there. On your question on RWA, a constant effort, RWA density has been dropping throughout the past period as we're also illustrating in the presentation, this is a continuous effort.

If I may just follow up on your household portfolio and the support measures there. Given the previous track record with sort of the primary residence moratorium that was imposed back in 2010 and this is still in place today in some form, some investors are wondering whether that creates any risk of a new moral hazard among retail customers. Any thoughts on that would be very much welcomed.

In terms of the mid-term approach of treating household debt, we don't expect anything to change nor for the new bankruptcy law, neither for the approach to liquidations and the real estate perspective. What matters right now is to make sure that we treat households that have been making it, that have been performing and have been servicing their debt through short-term modifications that can allow them to continue being classified as that. The longer term perspective, very similar to what we talked about on the cost of risk and provisions.

The next question comes from the line of Abad, José with Goldman Sachs.

Three questions from my side. First one is -- and I'm sorry, I got late into the call so maybe you already addressed this. Wanted to see whether you could give us actually the volume of undrawn credit lines to corporates, which is outstanding as of today, if possible? And whether you could give us some color on what the demand actually is for this product actually from your clients. The second is about actually the credit -- the warranty line from the government, whether this is already in place, or this is already effective? Or if not, when -- and if this is not still in place, whether you are already advancing actually the money to your customers in the expectation that the warranty will have a retroactive impact. And the third one is on NII, you mentioned before that you don't expect much impact here. So should we understand then that you expect no change in the mix from the crisis? I would expect actually some potential actually declining maybe consumer and if so also an impact to NII. So how are you thinking in terms of potential changes in mix rather than just volumes?

José, good to hear you. Just on the undrawn committed lines, this is EUR 400 million. And we expect that may or may not be drawn, but that's the number that we have in place. Now as to the guarantees and generally, the measures that have been taken by the Greek government at national level, we have in our presentation, Page 17, we believe it clarifies in a way the -- in a concise way, the actual effort. We are talking about EUR 6.8 billion of fiscal measures, mostly involving direct financing by the Greek government to either corporates or to individuals and consumers. And this is about 3.5% of GDP. And the guarantees amounting to about 2.7% of GDP. And there, we may have some increase going forward. We estimate that the total impact to the economy from the guarantees could be as high as EUR 5 billion, and there is a possibility that this could be increased. The guarantees are in line with the European commission's decisions in view of support to the affected sectors. It has not been finalized yet. It's in the process of being finalized. It has leveraged into the economy and the financing. The exact numbers we have to be finalized in order to be announced. But as soon as the finalization comes and the agreement is in place and this becomes a Greek law, the execution is going to be very quick because it follows the known path of other European funds that have been deployed in the Greek economy over the last few years. And therefore, there is an increasing urgency in actually deploying this very quickly.

And José, to your question about NII, the intrinsics of the NII guide for it to decline -- to be quite resilient also throughout the year, both in terms of the new disbursals being on track so far as we were talking about before as well as the method of accruing in IFRS throughout the year. So NII, we expect to be quite resilient, as said before. And overall, I would say, I would repeat that the PPI, the pre-provision income, is expected to be quite strong this year as well.

But with regard to the mix, so what are your expectations regarding the mix?

The question regarding the mix of PEs -- NPEs, sorry, what was the question?

No, the mix in volumes, the composition -- or the contribution from consumer to your loan book?

Okay. So this is about 80-20. So 80% business, 20% household. So this is where the mix is right now and expect it to stay.

Next question is from the line of Sevim, Mehmet with JPMorgan.

Congratulations on the results. My question is on the DTC law this year, please. So I just wanted to ask you what your view is. If we assume that despite the resilient pre-provision profit this year, assuming that cost of risk would spike temporarily, for example. Have there been any discussions on any potential forbearance measures when it comes to the DTC law, if the situation was that you would go into a negative territory in terms of the bottom line this year. Has there been any discussions? Or are there any views already on that?

Thank you. Thank you, Mehmet. It's Christos Megalou. Look, we all know that there was a publication of the European Commission's temporary framework for stay date on the 19th of March. And following this publication, there is the right environment and possibly, let's say, the right time for possibly a discussion that could take place around the subject. So we are where we are in terms of the crisis and the regulatory reaction to the crisis. So we will have to wait and see how this is going to plan out. But this could possibly be taking place in the future.

And my second question is on the -- well, on the CoCo, I'm sorry for asking that. But would the current situation change your view on the payment of the coupon this year? Or is everything as planned and communicated earlier?

Again, I would say it's the same as far as the CoCo is concerned as well. I mean, there has been the stated commission's temporary framework for stay date, again, which makes it, let's call it, a bit easier to have this conversation -- this discussion. So there's nothing more to report on that front. But again, it's making this discussion a little bit easier, and this could possibly, again, going to take place.

And my last question is, is there any news once again on the single insolvency framework that the government was working on, given the expectation was that this would come in place by the end of April?

We understand that this is work in progress. And the latest communication we had also by the adviser to the financial or the economic adviser to the Prime Minister is that this is a work in progress and is going to be happening and progressing as per the plan.

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

The Greek government has already announced supporting impacted companies by taking over the interest payments. Do you think in this current situation, a broader holiday of interest payments would -- or could be necessary? And have there been any discussions on this at the EU regulator level?

It is -- Osman. It is very important that -- at this stage to leverage all available relief measures to support the -- all the companies that are currently facing difficulties. Blanket solutions of generalized holidays will not help in the midterm, and we do not expect that this will be something to apply, at least not right now. It is very important to continuously evaluate all the cases on a case-by-case basis, size the required support and provide the support with the tools that are available. And for banks to continue doing that, and this is our current plan.

Okay. And no regulatory discussions on that level, I guess, at the EU level?

Well, guidance on that has been given with both -- from both the SSM and recent EBA clarifications. It is very important to maintain a long-term risk assessment perspective for our customers. So that does not go hand-in-hand with blanket solutions. That is why we're very much focused right now on evaluating each and every customer separately, assessing their particular situation, their particular needs and treating them with the multiple tools that have been made available to us.

The next question is a follow-up question from Bairaktari, Angeliki with Autonomous Research.

Just to confirm on the CoCo coupon payment. Could this be subject -- do I understand correctly that you said this could be subject to a discussion around state aid? Because I would think that differently to the DTC law, the CoCo coupon has to be paid under all circumstances, otherwise you get conversion. So I don't really see how state aid could circumvent that, but I may be wrong, so I just wanted to check that. And then just a clarification on the subsidized interest for corporates by the state. Is that going to be paid by the state in cash for the next 3 months? Or is that effectively a promise by the state and it will have to be paid in cash over -- at a future period?

Angeliki, just to clarify my comment, I was referring to the restructuring of the CoCo -- to the potential restructuring of the CoCo rather than the specific payment. So at this stage, this is the most I can say in this context.

And Angeliki to your question on the interest subsidy, the actual mechanics of how this will be done are not final yet. What we know is that for the affected companies, this will be eventually covered by the state, the mechanics of which are still under discussion.

Okay. That's very helpful. On the potential restructuring of the CoCo, I appreciate you may not be able to share much more, but just to give us an idea, would that be sort of like paying, for example, the coupon in shares or in some sort of other instrument or exchanging it with another instrument? Could this be contemplated?

There are a number of solutions that are contemplated. And of course, all of them, let's say, include the payment in some form of an instrument. But at this stage, these are theoretical discussions that now are facilitated by the fact that the European Commission came forward with this publication on the 19th of March.

[Operator Instructions] Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Megalou for any closing comments. Thank you.

So thank you all. Really, thank you for participating in our full year 2019 results conference call. We -- there is no doubt that all of us, we face challenging times, but the improvement of the economy over the past couple of years along with the work that we have done to improve the balance sheet of Piraeus Bank allow us to be optimistic that we have the ability to effectively weather the situation. Of course, a few months ago, we never expected to find ourselves in this situation. However, we draw a lot of confidence from the fact that Greece starts from the strongest growth output before the virus. And that the policy response has been stronger than ever. We look forward to discussing further with you in the following weeks. I just wanted to say to all of you, stay safe and healthy until we meet again. 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.