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

Ladies and gentlemen, thank you for standing by. I am Gelli your Chorus Call operator. Welcome, and thank you for joining the Piraeus Bank conference call to present and discuss the 9 months 2020 financial results. [Operator Instructions] And 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 Chryssanthi Berbati from our Investor Relations. Thank you for attending our 9-month 2020 results presentation. Before presenting the highlights of our results and our latest developments, let me provide you with a brief overview of the external environment. The COVID-19 crisis disease in the summer months, yet it has returned as of early Q4. Unfortunately, there has been a significant increase in infections, leading to the current second lockdown. Having said that, the economic sentiment remains broadly resilient, while, as you can see on Slides 1 and 2, the impact on unemployment and residential real estate prices has been relatively mild to date. The encouraging news regarding the COVID-19 vaccines allow us to be optimistic that 2021 will be a year with limited impact from new COVID lockdowns and we will manage the carryover of the damage incurred in 2020. Our base case scenario, as you can see on Slide 2, calls for a minus 3% GDP contraction cumulatively for the period 2021. The substantial support that has been quickly and decisively provided by the European Central Bank and the Greek Government is expected to partially reduce the effects of the pandemic shock. As you can see on Slide 3, the total amount of funds earmarked for Greece stand at EUR 80 billion for the next 7 years and they are expected to top-up Greek GDP growth by 1.5% to 2% per annum. We have been quick to respond to the pandemic in order to support our client base that has been impacted as well as our employees throughout this challenging period. As you can see on Slide 4, new loan generation stands at EUR 5.4 billion year-to-date versus the initial target of EUR 5 billion for the full year, while we have provided EUR 4.2 billion debt moratoria to performing customers. Additionally, approximately EUR 2.2 billion of state sponsored funds were channeled through Piraeus to eligible customers. As you can see on the same slide, both customers and employees rate at high the way Piraeus Bank responded to the circumstances. Our digital mindset has been instrumental in migrating traditional banking transactions into digital channels and we continue witnessing high numbers of new winbank user registrations and transactions. Turning to Slide 5. I would like to present you some of the key financial takeaways for the 9-month period, namely positive trends on the revenue side, solid improvement on the operating cost front as well as good progress in NPE derisking and capital generation. Turning to Slide 6. A summary of the financials of the bank during this reporting period is presented. I would just like to point out a couple of observations. First, the fact that we have received 1,000 applications in the VES launched a couple of weeks ago, the result of which will be more than EUR 40 million in savings per annum as of early 2021. The second point refers to the approximately EUR 1 billion capital actions the bank has already secured to accelerate our NPE deleveraging effort for which I will give you some more details later in the presentation. The next 3 Slides 7 to 9, analyze the bank's performance for the 9 months 2020. All in all, the bank recorded a profit of EUR 229 million, excluding the COVID-19 related impairments, predominantly booked in Q1, with net revenues up 3% and operating costs down 9% year-on-year. During the Q&A session, we will have the chance to discuss further the financial KPIs. Moving to asset quality on Slide 10. During Q3, inflows remain contained, amounting to EUR 130 million with the same quarterly level of outflows resulting to lower NPEs of about EUR 700 million. At the moment, we are intensifying our efforts to complete the execution of our 2 NPE securitization, Phoenix and Vega, where we will use the guarantees of the Hercules program. We expect to complete the transactions in the first months of 2021, at which time, we also expect to proceed with a deconsolidation of the EUR 7 billion NPEs. All the relevant information appear on Slide 11. On Slide 12, we present the latest on the hive-down process, which is in a very advanced stage and close to finalization. It is expected to be concluded by end December 2020 with a necessary AGM called for the 10th of December. Moving on to the COVID-19 related agenda on Slides 13 and 16, we present our utilization of state sponsored programs as well as information on debt moratoria, where we have elevated our disclosure, so as to provide you with all the drivers and moving parts. More specifically, on Slide 14, we present some granular information about the portfolios under debt moratoria. On Slide 15, you can see the evolution of debt moratoria from June to September 2020 as well as the performance of the expired balances with circa 75% of them returning to payment status corresponding to about EUR 1.7 billion. On Slide 16, we provide some additional color on our strategy for managing the anticipated expiration of the moratoria overall. As you can see, we focus on utilizing state programs available, while we also plan to implement customized solution for our customers, giving them some more breathing room. In all, we assume we will have circa EUR 1 billion of NPE inflows or about 25% of the total performing balances under moratoria. I need to stress, however, that these are not new NPE balances on a net basis, but gross inflows. Moving on to new loan generation on Slide 17. As you can see, performing exposures have increased significantly by up EUR 1.7 billion year-to-date, mainly due to business lending. On the liquidity and funding position, Slide 18, things have progressed further with deposit inflows and further utilization of the ECB TLTRO. I would like to highlight here the effort we have made to reduce new time deposit costs down to less than 15 basis points compared to the circa 30 basis points at the beginning of the year, supporting our net interest margin. Turning to our capital position and to Slides 19 and 20, you can see that we have increased our total capital ratio organically by 13 basis points in the third quarter. The supervisory flexibility towards European banks regarding capital requirements as a response to the COVID crisis means that we have a buffer of approximately 5 percentage points. We continuously manage our balance sheet and capital base in an efficient way, and this is evident on the risk-weighted density, which is now at 64% as compared to 78% a year ago. Turning to Slide 21. I would like to refer to the contingent convertible bond and specifically to inform you that we have received the final decision of the governing council of the ECB, which confirmed the stance about nonpayment of the coupon. The bank's Board of Directors in today's meeting, having considered the available options, decided to exercise its discretion under the relevant terms of the CoCo program, and cancel the CoCo interest payment which is due on 2nd of December 2020. This cancellation of the CoCo coupon payment will lead to the conversion of the EUR 2 billion CoCo into ordinary shares of Piraeus Bank based on the subscription price of the 2015 share capital increase currently calculated at EUR 6 per share. As per the CoCo program terms, increasing the age of the subshare holding to 61% from 26% today. Let me remind you that the bank had applied for cash payment in early October according to its strategy as it has been repeatedly communicated to the market. Yet, ECB's decision needed to be taken into account, and as a result, altered our plans regarding the instrument. Having said that, the conversion will enhance the bank's capital trajectory with about 40 basis points of capital every year. Further to this capital savings, we also plan to implement a number of initiatives in 2021, which are depicted on Slide 22. And in all, will create an additional buffer of EUR 1 billion, helping us further to reduce NPEs. Indicatively, we calculate that this buffer could facilitate a further reduction of about EUR 5 billion to EUR 6 billion NPEs on top of the already scheduled EUR 7 billion hub securitizations. During the Q&A section, we can discuss these capital actions in detail. We have all the tools and the plan in place to enhance our capital position and facilitate our effort to transform the bank. Speaking of transformation, we have already completed the design phase of our transformation plan, which will be based on a derisked balance sheet on our human capital and our new technology, as you can see on Slides 23 and 24. Especially Slide 24 illustrates some interesting information regarding our achievements in Q4 and our plans for next year. Concluding this opening statement, I would like to reiterate our commitment to adopting effective strategies and actions, paving the way for a strong bank come back in 2021 as soon as the economy stabilizes. We remain focused to our aspiration for becoming a lean, efficient, derisked and highly profitable bank operating to the benefit of our clients, providing returns to our investors and adding value to our people and the community. The following period will be critical to lay the foundations for improved performance in the following years in a sustainable and recurring manner. And with that remark, I would like to open the floor for your questions.

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

So I have 2 questions to start. The first one will be on the CoCo. So could you share a bit more on the rationale behind the discussions at the Board level around keeping the coupon payment? If I'm not mistaken, you also had the choice of paying the coupon in shares. So any extra color there, I think it's helpful. Then second follows the capital position going forward more on Slide 22. Your comments on the call around the additional firepower you have to reduce NPEs by another EUR 5 billion to EUR 6 billion on top of the planned securitizations. Just wondering if you have anything else in terms of targets? So it could be targets of the NPE ratio, it could also be a target of timing this EUR 5 billion to EUR 6 billion NPE is for 2021, 2022. And also, again, on the NPE reduction, is this assuming that this continues as your main tool to decrease the stock or similar kind of securitization or maybe there's another tool that you be considering as well?

Thank you, Jonas. On the CoCo discussion, given the decision of the ECB, and given that in Europe, there is a directive to preserve capital through this distribution bank, which, of course, applies also to Piraeus Bank. The decision of the Board was to whether we will pay the CoCo coupon in shares or whether we will not pay, and therefore, convert the whole EUR 2 billion into equity. Given the dilution effect and the disproportionality of dilution between the payment of CoCo coupon in shares and the whole conversion of the CoCo, it was pretty evident that the Board decided to go for nonpayment, and therefore, to effect through this, and it was in the absolute discretion of the Board, the conversion into Piraeus Bank equity at EUR 6 per share.

And -- Hi, Jonas from me. Theo here. On your question on the NPEs. Well, our initial plan, let's say, was focused primarily on Phoenix and Vega derecognition, which is a step change for the NPEs of the bank from the current level of the late 40s, 47% in Q3 would get us to the early 30s, between 33% and 35% in 2021, and then on to the 20s in 2022. Obviously, now with the new capital that is being economized from the conversion plus the capital actions that we are presenting on '22, we're looking at a much more ambitious and more aggressive plan that will have material difference as early as 2021. The exact details of this plan and the inherent targets are still being devised, and we'll present them in our Q4 results.

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

My first question will be on the NPE formation from loans and the moratoria, please. You've helpfully given us that 25% figure. However, it does strike me as quite high, especially considering that this is post all the support measures and moratoria were given to customers in good health in the first place. So can I check what do you think this is -- is causing this? And how conservative is this view? And similarly, do you have a view on the forborne NPE moratoria portfolio, which I see was at EUR 1.1 billion. And what would be the inflows there going forward? My second question is on the capital actions that you're planning. Can I check, please, why you've chosen to carve out the merchant acquiring business just strategically? And what will be the impact of it on your fee base going forward? And similarly, what's the impact you would expect from the other actions, such as the synthetic securitization on the P&L following those actions? And my final question is on the tax expense in the third quarter. If you could give us any color on that, that will be very helpful.

Mehmet, on your moratoria question on the 25%, this is an assessment that we have done bottom-up, looking at the portfolio of the moratoria, also evaluating the payment behavior of disburse as they come out of the moratoria then they come back in. It is a dynamic set. Is it conservative? I would say it is a fair assessment right now. And with the second lock down that we're going through, we are targeting for this number. Could it be better? It could be better, and we will try for that. But what is important here to illustrate is that in the grand scheme of things and given the NPE levels of the bank, it is not something that rocks the numbers by that much. If it's EUR 700 million or EUR 1.3 billion, it doesn't make that big of a difference in a program that tries to derecognize more than EUR 20 billion of NPEs. On the FMPs, it's a similar effect. It will basically delay curings by some extent, which will affect the organic outflows. Some of the FMPs will roll into the non status, i.e., are generating a bit increased losses. Again, it's EUR 1 billion of moratoria and the effect of that will be assessed over 2021. But it will have either a curing delay effect or an excess [ announcement ] effect. On the capital actions, the merchant acquiring. This is a deal that has happened across Europe. We've also seen recent big European banks going down that path. It is a very sort of tech-focused business with a lot of key payment players coming into markets. We found value in being the inaugural transaction in this field, and this generates a big capital multiple for us versus other carve outs. For example, in this transaction, our PPI impact is expected to be in the vicinity of EUR 20 million when the consideration is expected to be, as we said, approximately EUR 0.3 billion. This is what we have illustrated. Similarly, the synthetic transactions are -- will mitigate substantial volumes of RWA, and therefore, generating effective capital. The impact is expected to be on the NII of approximately EUR 20 million. On the tax expenses, sorry, almost missed that one. That's an effect of crystallizing tax losses that have to do with the securitizations of Phoenix and Vega. It's a technical adjustment that is happening on the DTA, amortizing the DTA at faster pace. And we can take it off-line and we can explain the technicalities.

The next question is from the line of Cunningham Corinne with Autonomous Research.

A few more questions on the capital plan. You mentioned EUR 600 million of capital issuance. What form would that take, please? And also, any thoughts with the state move into 61% share, are there any thoughts of some kind of state supported recapitalization that might accelerate still further the NPE cleanup? So anything on those 2 would be great.

The EUR 600 million that we have on the page is obviously an indicative number. It will depend a lot on the RWA projection of the bank, which is a product of NPE plan, obviously. So it would probably be a mix of a non-diluted capital issuances of AT1 and/or Tier 2. But I would say that more on that we will give once the plan has been completed. And there's absolutely no thought of any sort of state support or state aid consequences as a result of the CoCo conversion.

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

Just wanted to get some color on the operating expense front. Are you still calling for mid- single-digit decline this year, maybe it could be even higher than that potentially? And then how should we think about 2021? I see some programs, EUR 150 million reduction. If you could give us a bit more color there would be helpful.