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

Ladies and gentlemen, thank you for standing by. I'm Constantinos, your Chorus Call operator. Welcome, and thank you for joining the Piraeus Financial Holdings conference call to present and discuss the first quarter 2021 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 Financial Holdings' 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, and I'm here today along with Theo Gnardellis, Group Chief Financial Officer; and Chryssanthi Berbati, Head of IR and Financial Planning. Thank you very much for attending our Q1 '21 financial results conference call. This conference call is our first outreach since our landmark EUR 1.4 billion share capital increase. Piraeus is now facing the future from a position of strength which will support an attractive financial outlook built on sustainable growth. Before deep diving into the developments of the first quarter of 2021, let me start with a few words on the macro backdrop. Starting from Slide 4, as you can see, after a challenging 2020 due to COVID-19 crisis, the macroeconomic environment is expected to gain pace in terms of GDP growth. Real estate prices have been resilient throughout the crisis, and now we see further upside building up. The funding coming from the EU to support the country in the post-COVID recovery is a significant lever to heal the economy. EUR 87 billion are earmarked for the period 2021 to 2027, details of which you can see on Slide 5. The government's Greece 2.0 plan is a granular, well-thought plan and will assist our country in the following years. This is a unique opportunity for Greece to set the foundations for a sustainable economy. Piraeus Bank is prepared for this transition, and the recent corporate actions along with the ones that follow in the rest of 2021 and onwards will allow us to lead the effort. On Slide 7, we present some key highlights of the support Piraeus has been offering to our clients and the economy overall. New loan generation has reached EUR 2.1 billion to date, on track to meet our full year target of EUR 5.7 billion. Our digital offering is instrumental in addressing new cash consumer and banking behaviors, while we continue to offer tailored support to our clients and to businesses that are recovered from the COVID crisis. On Slide 9, we present the highlights of 2021 to date performance of our group. Despite the headwinds and the COVID-19 lockdowns we had to address, core pre-provision income was up 9% year-on-year in Q1. Net interest income was resilient, while net fee and commission income grew in the high single digits, testament that our effort to diversify into new sources of income is delivering. Efforts on the operating expenses front continued, posting a downward trend of minus 4% year-on-year while preparation for further cost efficiencies is underway. Moving on slides 10 to 11, we highlight that our recurring pretax line was profitable by EUR 257 million when we exclude one-off items. On the revenue side, one-off items were EUR 200 million booked in trading gains from Greek sovereign securities, while on the loan impairment side, we booked EUR 800 million for 50% sales scenario for the cost of Phoenix and Vega NPE securitizations that are expected to be completed during the second quarter. Underlying cost of risk stood at 1.4% compared to 1.9% in the respective quarter of 2020. Our NPE ratio stands at 35% pro forma for the Vega and Phoenix transaction of EUR 7 billion gross book value. Organic NPE derisking continued during Q1, as presented on Slide 13. The organic NPE flow was in line with our Sunrise plan estimates, both on NPE inflows as well as NPE outflows. COVID-related inflows came at par with our projections, and we continue managing associated delinquencies with a number of tools, and of course, the assistance of state-sponsored schemes such as Gefyra I and II. The rest of our NPE derisking actions, as you can see on Slide 14, are progressing, and expected to be completed in the following quarters. Specifically, the EUR 7 billion Sunrise 1 project is in advanced stage, and we expect that the recognition to take place in Q3. While the EUR 4 billion Sunrise 2 NPE securitization should be completed by the end of the year. The NPE outright sales, apart from the HAPS deals, are also to be completed by the end of the year with a leasing transaction being the most advanced. All in all, we are on track to meet our pledge for a single-digit NPE ratio in the next 12 months, mainly at the back of the Hercules scheme. The EUR 1.4 billion capital raise we completed a few weeks ago is instrumental for the success of our plan. On top, we have secured EUR 800 million of nondilutive capital actions with the remaining EUR 200 million expected to be concluded in the fourth quarter of the year. These actions include the agreement we had with Euronet worldwide for the carve-out and sale of our merchant acquiring business, 2 synthetic securitizations, the first already signed with CRC. And of course, the securities portfolio gains we realized in Q1. In total, our pro forma total capital ratio stands at 17.5% on a transitional basis, as you can see on Slide 15, well above regulatory requirements. Our fully loaded total capital ratio stands at 15.7%. Along with the capital actions undertaken, key focus for Piraeus Bank is now organic capital generation and profitability improvement. Slide 16 and 17 present our 2021 estimate based on the results of the first quarter and how this compares to our already shared medium-term aspirations. As you can see, we are confident that we will meet our targets for both revenues and expenses. Net credit expansion is expected to defend loan income against the impact of the NPE cleanup. The enhanced economic activity is expected to support net fee income growth in areas like asset management, bancassurance and payments that provide significant room for fee margin expansion, especially for operating costs, our effort is to front-load the achievement of medium-term targets and strategy in which we are 100% committed. Theo Gnardellis will have a chance to elaborate on this set of numbers during the Q&A session. At the same time, we remain ESG conscious. And we have set aside funds in the tune of EUR 2.5 billion for green investment, while we will add another EUR 1 billion by 2024. The environment and the society remain core dimensions of our strategy, and we continuously trying to improve our performance in this regard. Our efforts seem to be bearing fruit. And only last week, the Financial Times included Piraeus Bank to Europe's top 300 climate leaders list, one of only 2 Greek institutions and the only Greek bank. Climate change poses a challenge to economies around the world, businesses and the banking sector and society as a whole. Towards this direction, Piraeus has prepared a 2-year road map to incorporate climate risk within its risk management function and make an effort to install it in our decision-making process. We anticipate additional tangible results that we will be sharing with you on that front and strive to capitalize on the recognitions we have already achieved. Another important distinction came last week from the EBRD. Piraeus Bank will be receiving the gold award in the category financial intermediaries for its ESG performance this year, a great honor for our bank. That acts as additional motivation to pursue our sustainable banking strategy. Concluding my presentation today, I would like to emphasize that we are committed to meet the expectations of the investors who believed in our plan and made Piraeus capital raise a success. We remain focused on the accelerated execution of the NPE cleanup plan, and will allow us to achieve a single-digit NPE ratio within the next 12 months. We pursue, unequivocally, the significant improvement in the group's organic capital generation capacity and the enhancement of the Piraeus Bank's position as a domestic market leader that will enable us to obtain a return on tangible equity above 10% in the medium term. And finally, we commit to safeguard the group's capital position firmly above regulatory requirements in the short and medium term. The progress recorded and our execution track record signifies the potential that Piraeus can realize as soon as the macroeconomic fundamentals recover. And with that remark, I would like to open up the floor to your questions.

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

Yes. I have a few questions. So first of all, is on your new lending. So it looks like the progress now in Q1 and the first 5 months have been quite strong. So I was just wondering how we should think about new disbursements in the coming years of our business plan. I remember you mentioned about a EUR 10 billion net increase over the 4-year period. The EUR 5.7 billion is a strong start to that on a gross basis. But I was curious to understand how this EUR 5.7 billion disbursement compares with the estimated amount for 2022 and 2023 and beyond. Okay, that's the first one. The second, it was a question on your yields. I remember you had a slide where you used to have the domestic yields on loans. So just wondering if you could comment a bit on what you saw differently in Q1 versus the previous quarters? And if there's any specific outlook you would like to comment? And then finally, just a technical one on the Phoenix-Vega transaction. So I think you mentioned now during the introduction that the completion is for the second quarter. So is this when we should expect to book the other half on the P&L?

Thank you, Jonas. Let me take the first question on the new lending trajectory for this year and beyond. And Theo Gnardellis will cover the yields and Phoenix-Vega cost. First of all, we are very happy for new disbursements in the first quarter. EUR 2.1 billion already, and accounting also where we are right now. So well on track to cover the EUR 5.7 billion. We have new production for 2021, which is an encouraging start. The trajectory for the next few years, and we are estimating a total of EUR 10 billion between now and 2024 is for EUR 6 billion to come in 2022, EUR 6.7 billion in '23 and a bit more in '24. So we are very confident that '21 will be a year as per the plan. And looking forward to continue growing our good balances for the next few years to come, taking advantage of the recovery and the resilience fund, and the credit expansion that we expect to happen in Greece.

And Jonas, on your question on yields, I'd turn you to Page 23, where we are disclosing the tight monitoring that we're doing on the revenue generation capacity of the performing exposures versus the nonperforming with such a radical cleanup plan. What is important is to monitor the revenue pools, as you understand, from the emerging clean balance sheet of Piraeus Bank. On yield, the -- we're looking at really a stable situation, right, where the disbursements are coming out at the 3.6% range, pretty much what we're seeing on the stock of the PE book. The plan is for this to tighten a little bit, I would say, over the years. But with a careful management of mix and underwriting, we believe those revenue pools can grow, as has been our articulation on the Sunrise plan. On your question about Phoenix and Vega cost. The -- we have -- we're very close to completing and recognizing these transactions. We're basically waiting for the SRT decision from the SSM as well as the HAPS approval from the Ministry of Finance. Both of these actions should be happening over the coming days or weeks, from the feedback that we have received. As a result, both the P&L, but also the RWA derecognition of these transactions should be happening in the second quarter.

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

Congratulations on the results. Just 2 questions -- follow-up questions to my colleague earlier. First of all, on loan growth. So most recently, we've started seeing other peers also talk about significant growth opportunities in Greece over the next few years. And when aggregated, this would obviously constitute to significant growth numbers expected by the bank. So how do you expect this to impact the competitive environment over the next few years? And especially how do you expect this to impact the margin environment also in the corporate segment? And in the EUR 335 million NII run rate that you show for 2024 or the medium term, what kind of margin assumptions are you applying? And my second question was just a technical one on Phoenix and Vega, again. Can I please confirm that the amount you've booked this quarter is 50% of the total amount that you expect to book later? So I'm asking specifically because I was expecting EUR 1.4 billion total impact from these 2 securitizations. So just wanted to check if I had something wrong here.

Indeed, we have been monitoring also other statements that are, I would say, supporting the macro story and the credit expansion story that Piraeus Bank advocated with its Sunrise plan. And if you put it all together, as you're very rightfully doing, this does come with not simply a -- I would say, an alignment to the GDP growth, but also deepening of the leveraging of the economy with performing exposure against this GDP. However, as we also said, and we are articulating the Sunrise plan, we expect these numbers to be valid and confident given the fact that even with this expansion, the leveraging of the economy is way below our European averages. To your question about competitive behavior and sort of potential yield contraction. Yield contraction should happen, and this is what we've planned. As we've said also in the Sunrise plan, the new disbursals will be coming in at lower yields to what we're seeing right now. The corporate segment is a question, but there's also other segments that are currently of lower concentration in the overall mix. We are expecting retail, for example, to play a bigger role than what it has played, defending, I would say, the average yield of the new productivity. The competitive landscape in Greece is very particular. We're talking about 4 more or less equally sized peer banks. Therefore, defending, I would say, the market against irrational behavior. So as a result, what we're seeing and what has been stated pretty much defends our assumptions on the overall evolution of the market. In terms of your -- regarding your question about the 50%, yes, it is correct. That is 50% of the charge. The EUR 1.6 billion are the numbers that we have already included in the Sunrise plan. So the overall cost that had there -- that was there for Phoenix and Vega, out of the overall charge for the cleanup, EUR 1.6 billion was what was budgeted. And 50% is what we're taking right now.

[Operator Instructions] The next question is from the line of David Daniel with Autonomous Research.

I just got a quick one. In the previous time, there was an AT1 baked in. And obviously, your capital raise went really well, and it was upside. So I just wanted to take your temperature on where you see or whether you see that AT1 still being needed? And if you can give any more cadence, that would be great.

Yes. David, thanks for the question. The original plan, as you know, was calling for about EUR 600 million AT1. Of course, now with the higher CET1 that we have raised currently, we don't envisage that we will be raising that number. We will be going for a lower number. And essentially, we have achieved operating readiness for AT1, evaluating market conditions for a possible issuance in the future, but it will be a lower number.

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

You mentioned retail lending. Given all the approaching recovery funds and corporate lending and all that, when should we expect retail borrowing to really show a sizable increase?

The expectation in our numbers and from what we're seeing in the macro environment is that as of 2022, we should be seeing an escalation of the new dispersals and the overall retail credit activity, which will result in the reversal of the current trend and the start of the net credit expansion of the retail side.

And maybe just a follow-up on the NPE recognition side. You mentioned 12 months to get to single digit, but could you get there earlier? If I understood you correctly, you may -- you recognize not only Sunrise 1, but maybe even Sunrise 2 by the end of the year?

Well, the bank is working around the clock on the execution of the Sunrise plan. If I show you the time line for execution of all these transactions, it's a very sort of a detailed and -- plan that requires a lot of diligence. The current plan does speak for full derecognition by the end of this year. This is our target. But of course, we need SRT decisions. We need HAPS approvals. All of these things will play a role as to the actual timing. IFRS treatment as well. The plan for now speaks for Q4, but a quarter here or there could slip for multiple reasons.

Perfect. And if I may, on the cost side, when I look at year-over-year developments, your staff costs are significantly lower, but your admin expenses are higher. Is this the new norm? Shall we expect maybe slightly lower, i.e., better cost performances for the remainder of the year?

So the -- what we've seen in Q1 does have a one-off effect of EUR 7 extra million on admin expenses. On the back of all of the transactions that have happened, the bank has gone through hive-down and multiple other complicated things, have increased consulting and legal costs. That being said, the trajectory for costs of the bank and the intrinsics are very positive. We have an aspiration, as we've said, in the Sunrise plan for an EUR 800 million cost base in the medium term, translating to 2024. There is a very strong effort in the bank right now to achieve that milestone number earlier than this, and to achieve that run rate between '22 and '23.

The next question is from the line of Alberto Nigro with Mediobanca.

The first one is just a clarification on capital. Can you repeat what is included in the pro forma basis, the capital increase and what else? And is it fair to assume you will book the cost for the capital increase in the second quarter? And then finally, can you give us more color on the amount of unrealized gain you still have from the bond portfolio, and what we should expect from the trading line this year?

Yes. So the 17.5%, Alberto, includes the pro forma for the share capital increase as well as the charges that we have taken in Q1, right? So including also half of the cost of Phoenix and Vega. Second quarter, of course, we'll be creating the share capital increase. The numbers that you see here are net, are actually the net inflow of capital as a result of this share capital increase. So net of any charges that the deal has incurred.

No. Just if you can give us more color on the amount of realized gain you still have from the bond portfolio, and what we should expect from the trading line this year?

Nothing to mention right now, Alberto. The program that we've done and we've executed has realized the targeted number. We've booked that now on capital. So there's always a movement in the valuations. But right now nothing to consider.

The next question is from the line of Alexandros Boulougouris with NBG Securities.

A quick one. On your capital ratios, where do you expect -- at what level do you expect the CET1 ratio, the total capital ratio, to land after the completion of the NPE cleanup?

Well, post the cleanup now and with the resulting capital increase that we have achieved, the CET1 should land north of 11%, while total capital should be in the 16% area. That is, as you said, post the cleanup. So it's not a point in time. It's actually -- it's not a calendar expectation right now. It will depend as to when the derecognition happens and the cleanup is achieved.

[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. Apologies. We do have a follow-up question from the line of Mehmet Sevim with JPMorgan.

Just one on the investment securities and the fixed income holdings. They've been going up continuously in the last few quarters. Can I please ask what should we expect on that front going forward? And where you would expect this portfolio to settle, so to say, or will you be buying more bonds as we go ahead?

So we've made a substantial shift in our securities holding over 2020, right? So we reached a bond holding of around EUR 8 billion, that further grew in Q1 by approximately EUR 1.5 billion. I can tell you that even in quarter 2, given opportunities that we've seen from the widening of the yields and the tightening of the prices, we have increased that further to the EUR 11 billion mark. It is and it was a Sunrise plan for securities to play a bigger part in the balance sheet given the liquidity situation that we've got. I'd say that we are currently now reaching those aspirations, but we're always on the lookout for investment opportunities given the fact that the bank has ample liquidity that it wants and will be deploying over the coming months.

[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.

Well, thank you all for participating in our first quarter 2021 financial results presentation conference call. We look forward to speaking with you over the next few days for any additional questions. And in the meantime, stay all safe and healthy. 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.