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

Ladies and gentlemen, thank you for standing by. I am Gailey, your Chorus Call operator. Welcome, and thank you for joining the Piraeus Bank conference call to present and discuss the first quarter 2020 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 Theo Gnardellis, Group CFO; and Chris Berbati, Head of Corporate Development and IR. Thank you for attending our first quarter 2020 results presentation. This was a quarter of extraordinary developments. The COVID-19 crisis has proven to be an unprecedented emergency for societies around the world in both health and economic terms. Greece has avoided the worst of the pandemic so far. As of the 30th of May, we had only 2,900 confirmed cases and 175 fatalities, 16 fatalities per 1 million, one of the lowest counts in the European Union. The Greek administration adopted an immediate response to the coronavirus pandemic by taking early containment measures. Today, state officials and medical experts are optimistic for the new day as we gradually return to normality. Importantly, the Greek economy has restarted as of early May, and the persistently good progress post the lockdown to date is very encouraging. On the other hand, the impact on the economy is expected to be severe, although it's still difficult to measure precisely. Tourism in Greece is a bellwether for the economy, and we will need to see during the following months how this will play out and what the impact in the economy will be. As we have seen a series of downward revisions of the Greek GDP by both the official and the private sector, at Piraeus, we have revised the key macroeconomic assumptions, as you can see Slide 2 of our presentation. So we anticipate the Greek GDP to contract by 8% this year and rebound by 7% in 2021. On real estate, our revised estimates for 2021 prices point to approximately 9 percentage points lower than previous estimates trend in the commercial real estate and 10 percentage points in the residential real estate, and this has been reflected in our numbers. Undoubtedly, there has been a massive support for the Greek economy with both domestic and new EU-wide measures helping to mitigate the COVID-19 impact. The recently announced EU recovery fund translates to expected inflows for the Greek economy to the tune of EUR 32 billion or 17% of the GDP, which comes on top of the EUR 20 billion to EUR 24 billion measures already announced by the Greek state. The magnitude of this support mechanism allows us to be constructively optimistic that any damage to the economy can be mended in the near end, and in 2021, Greece will return to sustainable growth. It is my deepest conviction that it is the first time since 2007, 2008 that Greece stands a good chance for a sustained and above-trend period of economic expansion from 2021 onwards. Piraeus Bank has been a pioneer in terms of responding rapidly to the challenges posed by COVID-19. We prioritized keeping our people safe and healthy, while at the same time provided to all our clients all the support they needed from us to weather any consequences. Illustrating the actions of our responsiveness on Slide 4, we would like to share that currently, we have offered debt moratoria to around EUR 4 billion of non-NPL borrowers. An amount of around 20% of eligible corporate and household clients are opting in the moratoria offered. A total amount of EUR 2.2 billion have been disbursed to date, that is, new disbursements in 2020, having covered close to half of our 2020 target of EUR 4.9 billion. Very important to note that for the first time in Q1 2020, the bank's overall gross loans have experienced an increase, while the performing loans were up by EUR 400 million. During the lockdown, technology and digital banking have been instrumental on changing customer behavior. We managed an eightfold increase of registration to our e-banking platform compared to the same period of last year, while 95% of total bank payments was executed electronically versus 88% last year. The work that we have done at Piraeus over the past 3 years has prepared us well, thus entering in the current crisis with stronger -- much stronger and adjusting swiftly to the new conditions. Moving on to Slide 5. Our net interest income was stable year-on-year. Net fee income was up 3%, while operating costs decreased by 7%. New loan generation yields came at a healthy level of 4.2% average yield, while net interest margin was in the tune of 2.4%, also helped by the improving funding cost. Our like-for-like PPI was up 14% in Q1. The update of forward-looking information within the IFRS framework to incorporate the revised macroeconomic outlook led to incremental impairments of EUR 300 million in Q1 2020 for Piraeus Bank. The impact has been incorporated in our Q1 financials, subject to information available as of March 2020. Our effort is now focusing on executing our 2020 budget as initially planned. As you can see on Slide 6, the COVID-19 impact came on top of an otherwise resilient PPI. The underlying cost of risk stood approximately at 190 basis points in Q1, which is within our guided range. However, the IFRS 9 model change burdened our P&L. We expect though that the following quarters will revert to the underlying run rates. Moving on to asset quality in Slide 7. Our effort remains on managing NPE inflows and maintaining the momentum that we have recorded in the past. Inorganic initiatives continue with Iris portfolio, just jumping to Page 13, having received a confirmed offer and entering into final stage of negotiations to conclude the transaction in the following period. The first tranche of Trinity has been signed, while the second tranche is of the nonbinding offer stage with interest coming from investors. Finally, the Forthnet loan sale was completed last week, and it is capital accretive. We provide more color on the debt moratoria offered to non-NPL clients on Slide 8. 27% of eligible retail exposures and 16% of eligible business exposures are under moratorium at the moment. In the business segments, more than 70% of the cases stem from the severely impacted sectors: hospitality, trade, manufacturing and transport. Our total exposure to these business sectors amounts to EUR 5.2 billion as displayed on Slide 9. It is very important to note that the experience to date indicates that any difficulty faced at the moment is concentrated at specific recognized parts of the portfolio and is not disbursed throughout our performing book. Importantly, payment culture hasn't deteriorated. Payment rates remained broadly resilient, especially post-lockdown relaxation, while the state support schemes for financing will prove to be a catalyst in the forthcoming period. Out of the EUR 2.2 billion corporate clients under moratoria, we expect the vast majority of them to participate in the government support schemes. It is worth mentioning that approximately EUR 1.1 billion additional funding will become available to our large corporate and SME clients from the new guarantee scheme, which is launching this week. Another EUR 500 million is expected to become available to our SME clients under the new working capital scheme called TEPIX II. Especially with regards to TEPIX II business financing, we are proud to say that the bank has received 37% of total submitted applications. Also in the program sponsored by the Ministry of Development for interest rate subsidy to existing financing to medium-sized and small enterprises affected by the measures to mitigate the pandemic, the bank is contributing with a market share of 52% of total submitted applications until now. An overview of this is presented on Slide 10. We continue improving our liquidity, as you can see on Slide 11. Deposits were up by 7% year-on-year in March, while we have tapped the ECB funding facilities now at EUR 4.3 billion, also helping our top line. We have also used some of our liquidity to increase our securities book year-to-date. Our LCR now stands at 131% from 171% (sic) [ 117% ] at the end of the year in 2019 and 67% the year earlier. We continue to manage our capital base in an efficient way, and we have managed to reduce risk-weighted asset density by 8 percentage points over the past year. Our capital is displayed on Slide 12 and stands at 15.2%. We need to stress that the amendments introduced by the European Commission in late April with regards to the current capital regime provide an additionally 70 basis points of capital benefit. Changing gear and turning into -- to our de-risking effort, we work full speed to prepare for the EUR 7 billion securitizations as well as the hive-down process. Both work streams are very complex and demanding, yet we are confident that we will be concluding the hive-down before the end of the year. Details of the NPE securitizations as well as the hive-down process are provided on Slides 14 to 16. In parallel, Piraeus Bank is stepping up its efforts on the back of a new transformation plan, the summary of which is depicted on Slide 17 and 18 that is now in the design phase. The plan is paving the way for a fully de-risked, lean and profitable bank, enjoying all the strategic competitive advantages and strengths that our strong footprint in Greece provides. Concluding this opening statement, I would like to reiterate our commitment to our clients and the society at large and our conviction that this period can be a huge opportunity to capitalize on. The support measures and the policy response are sizable and can mitigate any difficulties. For us, year 2020 is a year of intense work to clean up the balance sheet and proceed with the transformation of the bank, securing maximum visibility, paving the way for a strong rebound in 2021. And with that, I would like to open the floor to your questions.

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

Few questions here. The first one is on the hive-down process and the details that you've shared. It seems like everything now is on track for the completion at the end of the year. And I was just wondering, especially given some press release -- press articles around discussions between banks on the postponing of the DTC law for 2020 or even 2021. If you can comment on that, especially because I was thinking that if your hive-down gets done before the end of the year, then you shouldn't be worried about the DTC dilution, right? Then secondly is on asset quality and the information you've shown on Slide 7. Just wondering if you can share a bit more color on the inflows you experienced in the quarter. Where are these coming from and timing, et cetera, et cetera? And then finally, maybe it would be interesting if you could expand more on the new transformational plan. I was just wondering on these proposed changes and the new plan that you have here from Slides 17 and 18. If there is any kind of restructuring charges that you anticipate as well to have these things in place?

Thank you for your questions. I'll take the first question, and then Theo Gnardellis will cover the other two. Now as far as we are concerned, we are focusing in the hive-down process. Work streams are all in place. We are moving ahead as per the plan, and this is what our focus is. We are not aware of any other discussions on other ideas that may have been printed in the press. And our focus is to execute the hive-down as per our plan. I'm handing over to Theo for the inflows in the quarter and the new transformation plan.

Jonas, on the inflows, as we have illustrated, we have approximately something under EUR 400 million of inflows in Q1. This is pretty much the run rate we had also evidenced for most of 2019. And I would say it is rather split between retail and corporate on a business-as-usual basis. On the new transformation plan, it is an ambitious journey that the bank is embarking on. The cost reductions that are currently planned might be subject to restructuring costs that we have done also in the past, the timing of which will be determined at the end of the design phase.

One word, Jonas, on the restructuring plan. This is a plan that we have been designing, and I'm very focused in making sure that we will be implementing and executing as soon as possible. We will be in a position to give you a lot more details in the September presentation of ours, late August, early September in Q2. By that time, the whole plan will be fully up and running.

Okay. Just a follow-up on the NPE question. Do you guys have already any color on the flows for the second quarter? Or maybe if you could share your expectation for the rest of the year in terms of inflows, outflows in light of the measures we've seen being able for the banks to make use of?

We can say that so far, the Q2 inflows with recovery in economy in May have been what we have expected them to be, also using moratoria that are available. And for the overall trajectory, I would mostly refer to the September new plan that we plan on submitting.

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

I just wanted to see if you could give us a bit more color on the NII trends you're seeing shaping up for Q2?

As we said, stable NII year-on-year on Q1. Q2, we have tailwinds that are coming our way. Upside is coming both from new credit expansion, including the dispersals of new government schemes, GGB contribution as well as funding cost support from new TLTRO facility. So overall, I would say, a robust NII is expected also for Q2.

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

Three on my side, please. First of all, is there any risk that you may be asked to keep the coupon on the CoCo this year in order to preserve capital, also considering that the SSM has recommended no payment of dividends to European banks? Second question, could you detail the 70 bps benefit that you expect to see from the EC amendments on Slide 12? If you could break those down for us by proposal, that would be very useful. And a sub-question on this one. How should we think about your RWA trajectory this year? And you do mention that your risk density has improved a lot year-on-year. However, this year, we have loans, which are supported by the government, which should be 0% risk weighted, if I understand correctly. But on the other hand, there might be some credit migration to sort of riskier exposures as the economy deteriorates. So I would be interested to hear your take with regards to risk-weighted asset inflation for this year. And then one last question, more of a clarification. What is the other impairment charge that you have booked? So not impairment on loans, but the EUR 72 million of other impairments.

Angeliki, just to take your first question. Just to remind everybody that CoCo is a bilateral instrument, which is held by the HFSF and is not a public instrument, not to be, let's say, confused with any restrictions on dividends that may or may not apply. As far as we are concerned, the CoCo coupon, we are estimating that we will pay in cash, and this is our current planning for 2020. So payment in cash is what we expect that it will take place for this year. I'd like to ask Theo to talk about the risk-weighted asset trajectory and your other questions.

Angeliki, on your question on the 70 bps, we've got the breakdown available on Page 26, where you see the 3 main levers that are currently in the working paper of the commission. It's approximately 30 basis points from the software lever; the SME and infrastructure lending, another 30; and 10 basis points from the transitional measures on the S1 and S2 dynamic provisions. On your RWA question, we're not expecting any RWA inflation. I would say, overall stable RWAs, given the trajectory of the portfolio. And notwithstanding, of course, the deleveraging that will happen from the securitization, assuming those are concluded within the year. On your question on the other impairments, it has to do with nonlending assets, other types of assets that have been impaired as a result of the assessment that was done.

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

My first question is on cost of risk, please. I understand the worst is now behind us in terms of macro revisions after the front-loading that you've done in the first quarter. Are you able to share with us the sensitivity of provisions to your GDP growth assumptions? So I understand you expect a 1% contraction between 2021. Is there a broad linear relationship here? So if it's, for example, 2%, can we expect it would double going forward potentially? And my second question is just a quick follow-up on the RWAs. It actually looks like you've managed to decrease the density by another percentage point during the quarter. Just wanted to ask about the initiatives that are happening right now? And where do you expect this density to settle in the medium term post the securitizations? And finally, on the securitizations, is there any color that you can share from your discussions with NPE investors? Are you continuing to communicate with them? And I understand that you expect their recognition in the last quarter or the first quarter of '21. When can we expect the signing then within that time line?

Mehmet, on your question on the cost of risk, rightly said, the adjustment of -- that was done fully incorporates the new macro assumptions. So therefore, going forward, the underlying is expected to be at the current range of 180 to 190 basis points. On your question on sensitivity, a better proxy of sensitivity as far as the Piraeus book is concerned is real estate rather than GDP, especially given the 2-year rebound scenario that we are advocating. And each real estate percentage point on a cumulative basis in the 3 years is EUR 20 million to EUR 30 million of impact. On the RWA, the drop is really connected to the evolution of the portfolio. New credit is running at a much lower density than legacy. As a result, the overall RWA drops and also the GGB increase that was done running at 0 RWA also helps with that. To your question about investors, very active discussions going on across portfolios. We have mentioned Iris and Trinity. On securitizations, we can disclose that we are already on discussions and investigating value benchmarks with interested investors already.

And is there any guidance on the potential signing within the time line of their recognition in the last quarter or the first quarter of '21?

As we have announced on Page 15, we are determined to complete both transactions by year-end and beginning of the next.

The next question is from the line of Hatzidakis, Manos with Beta Securities.

I have just one question from my side. With regards to MIG loans, should we expect a transaction taking place in June? Can you give us some color on this?

Yes. We have not disclosed any information on MIG loans. As we don't disclose information on specific clients, so we will not be in a position to share any color with -- in this issue.

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

I just have one question. When looking at the stress test -- the last stress test from the EBA for the European banking sectors, your results were released actually a few months earlier. I see that you have a peak cost of risk of north of actually 500 bps in the adverse scenario. With the provision you book today, you're going to be well below that this year. And yet, the macro outlook is probably much worse now than under the adverse scenario with GDP contraction of 8% this year. So what actually makes you think that your provisions will be lower than estimated in the stress test given that the market situation is worse?

José, it is a very different macroeconomic situation this scenario advocates. This is a full rebound of the economy in 2021 actually supported by recent evolutions also from the EU side. So this -- I would not parallelize this with the stress test assumptions, which was more of a systemics of longer-term retention. On Page 2, where we have the macroeconomic assumptions, you're seeing that we're talking practically a zero-sum between 2020 and 2021.

So just to repeat your guidance because I joined a bit later, so your guidance is that you will revert back to underlying cost of risk of around 180 bps more or less starting in Q2, no?

Yes. But for the rest of the year, we will continue with our current underlying cost of risk range.

[Operator Instructions] The next question is from the line of Mammadli, Mazahir with Morgan Stanley.

I'd like to ask a question about your outlook on the fees and commission income for the rest of the year and maybe to 2021.

Overall, Q1 fees have been resilient with a 3% increase. And on Q2, we are expecting an impact. Overall for the year, I would say, mid-single digit to stable situation for the fees year-on-year.

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

If I may follow-up on the previous question, what is your outlook on NII for the year and on operating expenses? And so what is your estimate for your preprovision income for the year?

As we discussed before, NII, I would say, overall flat with some tailwind there, but we are currently measuring -- investigating. And fees, I would say, the same. On cost, a mid-single-digit reduction similar to what we also saw in 2019.

So just to clarify, NII flat year-on-year, fee and commission income also flat year-on-year, or you said that it will be down by mid-single digit from a year ago?

On the fees, we are aspiring for a flat result with a potential downside of a few percentile points. And overall NII is flat, yes.

Okay. So on that basis, PPI should be better year-on-year, right, at least the core PPI?

Given the cost guidance that we have just given and depending, of course, on the trading result.

Yes, yes. That's why I am -- I discussed about the core. Okay.

On the trading results, just to supplement, we have already seen in Q2 a reversal of the trend that we are now registering in Q1, given the recent values of the bond markets, and we are currently on a positive territory.

Okay. Great. And if I may follow-up, what is your maximum capacity to tap the ECB funding through all these problems, LTRO, TLTRO. Are you already there or we expect some more to draw from these programs?

We are currently at EUR 4 billion LTRO. And in the upcoming TLTRO, the initial assessment is that we will increase to EUR 5 billion. However, our eligible collateral would allow us, if we so wanted, to double our current EUR 4 billion ECB exposure, depending on funding and investment strategies.

We have a follow-up question from the line of Bairaktari, Angeliki with Autonomous Research.

Just with regard to the capital trajectory. Your guidance on the 2 securitizations was a hit of around 180 basis points. So I was just wondering, firstly, if you can confirm this hit. Or if you consider changing the perimeter, for example, so as to have a lower hit? And secondly, could you walk us through a bridge with regards to your capital? Because when I look especially at your fully loaded capital level, which I appreciate is not the one that the regulator is immediately looking at, but that's what the investors are looking at. It is currently at 10.8%. So if I just take the pro forma CET1 figure fully loaded from the transaction, that would be 9% today. So could you walk us through a bridge on how you plan to improve this ratio in the next few quarters to be in a better position to do the securitization?

Angeliki, again, yes, on the securitizations, the expectation for the cost is approximately in the range that we have discussed. As far as your question on CET, well, it assumes a static organic result for the coming years of the IFRS phasing, which is not our base assumption. Organic capital generation is the one that's going to be stepping up the fully loaded capital result, much like it has done for the past 5 quarters of almost 200 basis points, so on a full capital basis. So CET1 assessment is only on the one side, where you're looking at the downside of the securitizations. But organic capital generation on top of the IFRS phasing in the one that will be stepping up that result over the coming period of IFRS phasing.

That's very clear. Can I -- if I can just follow-up on that. In your discussions with the regulator, do you get the sense that they prefer you and your peers to move ahead with the securitizations as soon as possible because the most pressing issue is effectively NPE reduction for the Greek banks or do they prefer in the current environment of COVID-19 crisis, capital preservation? I'm just wondering what is the preference at the moment, then everything that is going on.

In the course of outlining and designing our de-risking strategy, we have a very healthy and constructive dialogue with the regulator. De-risking the balance sheet is the #1 objective right now and completing the transactions in the coming year is of utmost priority. And this is the focus of the bank right now.

[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.

Ladies and gentlemen, thank you all for participating in our first quarter 2020 results conference call. We faced challenging times, but the improvement in the economy over the past couple of years along with our work in Piraeus Bank to improve our balance sheet allow us to be constructively optimistic that we have the ability to effectively weather the current situation. Looking forward to discuss further with you in the following weeks. Stay safe and healthy until we meet up close again. Thank you.

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