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

Ladies and gentlemen, thank you for standing by. I'm Poppy, your Chorus Call operator. Welcome and thank you for joining the Piraeus Financial Holdings Conference Call and Live Webcast to present and discuss Piraeus First Quarter 2023 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 welcome to today's conference call on our first quarter 2023 financial results. This is Christos Megalou, Chief Executive Officer and I'm joined today by our CFO, Theo Gnardellis; and by Chryss Berbati [indiscernible]. 2023 started on a strong foot for Piraeus Bank. The strength of our commercial franchise is releasing the bank's potential and the successful management of our balance sheet is delivering solid results. In the first quarter, we continued to build sustainable and growing profitability. Our consistent progress across all operational KPIs is displayed on Slide 5, profitability, efficiency, asset quality, capital adequacy all showed improvement in the first quarter of the year. On Slide 6, we report the highlights of our quarter one performance. We generated normalized earnings per share of EUR 0.15. We produced return on average tangible book of 13%. Both EPS and return on tangible book run ahead of full year 2023 guidance, provided in late January. We delivered 24% net revenue growth annually on the back of a 56% net interest income increase and a 15% net fee income growth. We recorded best-in-class cost to core income ratio of 36%. We lowered our NPE ratio to 6.6%. We increased our NPE coverage to 55% and we further strengthened our capital position by 60 basis points in the quarter, reaching a CET1 ratio of 12.2% and a total capital of 17%. I am pleased that as of the first quarter of this year, we are in a position to accrue for a 10% distribution in our capital figures. This paves the way for our aspiration to distribute to our shareholders out of 2023 profits, subject, of course, to the accomplishment of our targets and supervisory consent. In the following slides, we present the progress recorded in fundamentals. Slides 8 to 10 download all the information regarding net interest income intrinsics. Our loan pass-throughs are trending at 70% to 75%, while our deposit beta is among the lowest in the European space at 10% at the end of March. Net interest margin stood at 2.4%. Furthermore, our cost containment efforts continue unabated despite the inflationary challenges. We are extracting any remaining inefficiencies from our organization, while investing in transforming and strengthening our bank for the future. The strength of our operational efficiency is shown in the best-in-class 36% cost-to-income ratio as shown on Slide 12. Slide 13 provides a summary of our asset quality indicators. This is the seventh consecutive quarter of negative NPE formation and the sixth quarter of below 100 basis points organic cost of risk. Our NPE ratio dropped to 6.6% from 13% a year ago and our NPE coverage is now at 55%, above the European average of 50%. Piraeus possesses strong liquidity profile. Our deposit base is granular, stable and of high quality. Our liquidity ratios are all solid as evidence by the 220% liquidity coverage ratio and the 62% loan-to-deposit ratio, both at the top percentile in the European space. These are presented on Slide 14 and 15. On Slide 16, we present the quarterly movement of performing loans and deposits. Setting aside early year seasonality, the group's performing loan portfolio grew 8% annually and there is a strong pipeline of business projects for this year, including RRF sponsored plans, where Piraeus has already undertaken the fourth tranche, leveraging EUR 1 billion financing. On top, we have had a very strong kick start in the newly launched program, My Home, co-sponsored by the Greek state and the Greek banks for which Piraeus Bank has currently received more than 40% or 10,000 out of total market applications. Similarly, our deposits have grown by 4% or more than EUR 2 billion annually. The first quarter of the year, we experienced both seasonality as well as a very strong asset management products performance. I'm closing our performance analysis with a capital base on Slide 17. Organic capital build up picked up pace with 60 basis points increase in quarter one, all organic. At end March, Piraeus was at 17% total capital ratio, comfortably above requirements and supervisory guidance. Our solid financial performance and the supportive macro environment positions us to outperform our 2023 targets. We therefore upgrade our 2023 guidance and we also provide updated 2025 financial ambitions along with key underlying assumptions. All the relevant details can be found on Slides 20 to 22. For 2023, we now target a 12% return on tangible book versus 10% previously or EUR 0.55 earnings per share versus EUR 0.45 million previously. Net interest margin is expected to be above 2.2% this year. We also upgrade our NPE ratio target for the year to approximately 5% from below 6% previously. For 2025, we target above EUR 0.65 earnings per share, 12% return, 3% NPE ratio and 14.5% CET1 ratio post distribution to shareholders. Finally, we are proud to be the only Greek company to be included for the third consecutive year in the Financial Times List of Europe's climate leaders in 2023. Our energy transition business lines will be further expanded and I will be in a position to discuss more on this front in the following months. And with that, let's open the floor to take any questions you may have.

[Operator Instructions] The first question comes from the line of Iqbal, Nida with Morgan Stanley.

My first question is on the NIM expansion. It's continued quite nicely this quarter, deposit betas were low. Can you talk about your expectations going forward for deposit betas and also loan pass-through? I see that there hasn't been much repricing on the unsecured portfolio. Secondly, the asset quality, clearly, the negative NPE formation is very impressive, but with interest rates rising, what are the risks that you see? Are there any certain sectors you're monitoring? Or any color on the asset quality side would be great? And then finally, on the 2025 RoTE guidance of 12%, can we better understand what the interest rate assumptions are here, please?

So, you got 3 questions. First one on net interest margin and how that's plan to move forward. The fact is that we are enjoying right now a very low deposit beta of an average of 9%. The exit run rate of the quarter is around 10% and the guidance that we're giving is based on 17%. So the current plan assumes that over the course of the year, we will continue to have a pass-through of about 50% on time depo, it's still 40% currently and that the mix of TD is going to change from the current around 20%, 21% to close to 40% by the end of the year. There is some upside risk there because as the Q2 evolves this mix shift which as per plan should already be happening, is not happening as aggressively. So there is a bit of upside there, but I think we'll be able to talk more after Q2 results. The loan pass-through, again, currently at 75%, the assumption on the NIM is that this will be around 55%. What you see there in terms of reduced pass-through on the unsecured front is intentional. The unsecured book is primarily non-durable base, is admin rate base. And we have made a decision not to be increasing these admin rates, particularly to allow debtors to continue servicing their debt and to avoid inflows. And hence, this well observed a reduced pass-through, but overall the pass-through is currently at 75% against the budget at 55%. So -- but then on that more in Q2 as spread pressure, we do expect to be happening in the market. Second question was around asset quality, I think in terms of inflow risk. Yes, so, obviously, as you see right now from the inflows of Q1, nothing particular going on. We are monitoring the book across big and smaller exposures as well as monitoring forward-looking KPIs on the retail front. The flow rates on the early buckets are still -- they do not speak of danger. But we do have -- we have proactive moves done. You're all aware of the cap rate imposed on mortgages as well as other proactive restructurings would be willing to do, even if that created some Stage 2 inflation over the course of the year to avoid the inflow. So I would say things, again, better than what the plan currently implies. To the RoTE 12% in 2025, that is based on a dropping NIM and which is again driven by a drop in DFR, the assumption is 2% for the deposit facility rate of the euro. And generally, the plan assumes a peak of 3.25%, which we've just seen happen and that to be sustained throughout 2023 and start seeing the de-accumulation as of early 2024 to reach a prevailing 2% in 2025.

The next question comes from the line of Butkov, Mikhail with Goldman Sachs.

My first question is on health -- on the funding and liquidity position. So you have quite good improvement in the funding over the last year and past quarters and your loan to deposit ratio had been decreased and now it stands at 62% ratio. So what is the optimal loan-to-deposit ratio do you see over the medium term? And also what's your strategy to allocate the excess liquidity namely between the real estate, fixed income and the other sources? So that's the first question. And the second question is on dividend. So you have a dividend accrual of 10%. Is this the level of payout you budget for earnings for the year 2023? Or actually, it is subject for some further changes and increases throughout the year. And when you think about the future years, what level of dividend payout do you budget in 2024, 2025?

So in terms of liquidity, obviously, because of its richness in deposits, Piraeus is now enjoying a very liquid position and the resulting strong NIM, also by the fact that it's a cash positive bank even post TLTRO rate now by about EUR 3 billion. Our expansive targets, given the fact that we are strategically positioned exclusively in Greece is to support the loan expansion of the country. So we are deploying the liquidity that we've got into expanding the credit pool. There will be some expansion on securities as well, very, very targeted on the NIM play particularly, but I would say if one was to look at as to how the balance sheet is going to evolve, it is going to evolve expanding deposits from intrinsics and from securing the market share that we've got on deposits and then deploying, I would say, 2/3 of that into loans to -- for a stable kind of 65% LDR throughout the upcoming period. And Mikhail, on the dividend question. First of all, we have established a distribution policy, which was approved by our Board for dividends, 10% of the 2023 results is prudentially being accrued and that's our aspiration for 2023. This amounts to EUR 18 million. The actual distribution either by way of dividend or by way of buyback, of course, is subject to supervisory approval post final 2023 financial results. As of the way we are looking at dividend distribution going forward, we are aiming to be at, let's say, 10%, as I said, subject to supervisory approval by '23 and then aiming to increase it by 15% and 25% in the years to come. This is what is embedded in our projections.

And as a small follow-up and clarification here. The presentation states capital distributions and you also alluded to the buybacks. When you think about buybacks and can it be also potentially expanded to the buybacks from the strategic shareholders? Or you speak here about the distributions to the minority shareholders.

We are talking about distribution to all shareholders, not specifically directed buyback.

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