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

Ladies and gentlemen, thank you for standing by. I'm Pope, your Chorus Call operator. Welcome, and thank you for joining the Piraeus Financial Holdings conference call and live webcast to present and discuss Piraeus 9 months 2023 financial results. [Operator Instructions] At this time, I would like to turn the conference over to Piraeus Financial Holdings CEO, Christos Megalou. Mr. Megalou, you may now proceed.

Good afternoon, ladies and gentlemen, and welcome to today's conference call on our 9 months 2023 financial results. This is Christos Megalou, Chief Executive Officer of Piraeus Group, and I am joined today by our CFO, Theo Gnardellis, Chryssanthi Berbati, and [indiscernible]. Piraeus Bank's strong operating performance in the 9 months 2023 period confirms that we are well on track to meet or surpass our targets. In the third quarter of 2023, we have delivered yet another quarter of solid results, maintaining our focus on net revenue growth and operational excellence. Before diving into the details of the bank's performance, I would like to comment on the macroeconomic environment. In 2023, the Greek economy maintains its growth momentum with first half real GDP increasing by 2.4% annually higher than the Eurozone average of 0.9%. The recent announcement that the Greek sovereign has regained its investment grade status, marks another milestone for the country and the banking sector in the journey of convergence with the European Union. Let's start our presentation with Slide 5, which displays our impressive performance in the third quarter and 9-month 2023 period. Third quarter profit increased strongly, continuing the positive trends of previous quarters, supported by top line over-performance, improved efficiency and normalization of low loss provisions in line with our expectations. Slide 6 points out the highlights of our third quarter performance. We generated normalized earnings of $0.11 per share, running ahead of full year 2023 guidance provided in July. We produced a return on average tangible book of 17.6%. We delivered 9% net interest income growth versus the previous quarter on the back of continued net interest money expansion and deposit cost containment. We recorded historically low operating expenses down 8% year-on-year -- despite the inflationary environment with best-in-class cost-to-income ratio of 29% from 32% in Q2. Our asset quality dynamics remain resilient with the NPE ratio standing at 5.5% and NPE coverage at 57%, up 50 basis points versus the previous quarter. We achieved EUR 240 million net credit expansion in the quarter. And EUR 830 million in the 9 months 2023 period, building on the strength of our franchise. Our CET1 ratio stands at a solid 12.9%, 54 basis points higher quarter-on-quarter, while we have already met our 1st of January 2024 MREL target of 21.8%. The remaining relatively manageable NPE portfolio of EUR 2 billion, as shown on Slide 14 is on a clear path to run off through a combination of organic strategies. On Slide 15 and 16, we present the movement of our performing loans. Q3 was a solid quarter with net credit expansion of EUR 240 million that drove net credit expansion for the 9-month period to EUR 830 million. The expansion has been supported by Piraeus strong take-up of the RRF. So we have already disbursed close to EUR 270 million to approximately 50 credit Greek businesses, 2/3 of which are SMEs, this corresponds to more than 40% market share. Piraeus has a superior liquidity profile presented on Slide 17 and 18. Our deposit base is granular, stable and of high quality. Our liquidity ratios are all solid as evidenced by the 242% liquidity coverage ratio and a 62% loan-to-deposit ratio. Both in the top percentile of the European space. Turning to our capital base on Slide 19 and 20. The Q3 capital position is already at par with our full year 2023 target, led by elevated capital generation of 130 basis points in 9 months 2023, while accruing for 10% dividend pay-out. This drove the CET1 ratio to 12.9% and total capital ratio to 17.6% in September 2023. Moreover, on Slide 21, our new wealth and asset management strategy continues to produce strong results with assets under management reaching EUR 8.5 billion at the end of September, recording a 4% increase in Q3. Finally, as Slide 22 shows, it is clear we are well on track to meet or exceed our 2023 financial targets. Our established track record of financial transformation makes us confident in our ability to deliver in the longer term. We offer an attractive and sustainable opportunity for our investors, both in terms of returns and profitable growth. In Slide 24, we summarized the competitive advantages of Piraeus Bank across all areas, the commercial positioning and the financial strength of the bank indicate why its valuation remains attractive compared with this local and European peers. From Slide 25 to Slide 32, we present the drivers behind this performance and where we stand against our domestic and European peers. We benchmark ourselves in terms of net interest margin. Net fee margin, cost-to-core income ratio, NPE ratio and capital ratio. In all KPIs, we are now either at par or best-in-class while we are growing our already sound capital buffers at an accelerated pace. We expect to generate significant value for our shareholders. And with that, let's open the floor to take any questions you may have.

Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Butkov Mikhail with Goldman Sachs.

Congratulations on strong results. I have 3 questions. The first question is on net interest margin outlook. In the short term, let's say, on the 1-year horizon, what dynamics do you expect as we enter the period of stable rates probably for -- until the second half of next year. And beyond that, do you have or work on any hedging strategy to extend the high net interest margins before the rate cutting cycle starts. That's the first question. The second question is S&P has recently upgraded the sovereign rate of Greece. Do you see any positive implications from that on any risk exposures on your balance sheet? And the third question is on assets under management. You recorded quite substantial growth year-to-date 23%. Was it related to the fact that customers relocate their funds into the securities or mutual funds or you actually see market share gains from the competitors there?

On NIM outlook, I mean we are looking at high 2s right now. So I mean, we saw Q3 in itself was 2.7%. We're looking at the NIM at the 2.5% area. I would say, assuming that ‘24, we have stable interest rates, as you said, there's no reason to move from that level, right? So 24% on average is expected to be most like 23% is on average, so rather static situation there. Then on, obviously, I mean, with the current mid-swaps are speaking for a long-term hedging strategy, structural hedging on the liability side is a big strategic priority for the balance sheet. We have a strategy in place. We will be executing it over the coming months so as to contain the NII and potential NII erosion as interest rates go into dropping cycle. On your question about ratings, yes, rating upgrades help, not directly linked to the S&P upgrade, but generally, upgrades are helping. There will be some RWA relief from that on particular exposures, especially on the corporate side. We haven't budgeted for it yet. We're still quantifying the impact. I think we will know more, especially as of the new-year. And Mikhail, on assets under management, our wealth and asset management division is a key strategic focus of ours for this year and the next years to come. It is the result of a restructuring reorganization and an acquisition that we have concluded last year, and we see the benefits of the work that is being done in the division this year, and we expect to see this continuing over the next few years to come. The increase is mostly coming from an increase in penetration of asset management products in the market. We have already observed that as a percentage of GDP, the asset management products in Greece are at the lowest part of the European spectrum. And we expect this trend to be reversed. We gain our fair share and more of this increase through the work that we have done in putting together wealth and asset management division that is doing quite a lot of work on new products and reaching out at segments in the market that we have not reached before. And what we have seen up to now is the benefits of this work, which as I said, we expect this to continue.

The next question comes from the line of Ismailou Eleni with Axia Ventures.

Congratulations for this set of results. Just a couple of questions from my side. One is how do you see the evolution of credit spreads and your lending expansion? And how can this affect profitability in the outer years when rates will and then start going down? And the second one is, I just wanted to ask how should we think of the asset quality in the coming quarters?

Well, the spreads have been, I would say, one of the positive surprises of the story so far. We started out on the way up, talking about pass-throughs of 60% and 65%. Now the pass-throughs are around 80%, 70%, and 79. Now we are seeing a contraction of spreads in the new production. There is about a 30 to 40 basis point erosion of the latest loans versus the stock. So I would say that we do expect and we are budgeting for an erosion of the overall spread at those levels between 30 and 40 basis points, but still at quite high levels of above 2%. We're expecting spreads to stay at those levels on the way down. We don't expect them to widen so the pass-throughs are going to reverse. But still with the deposit payers that we have kind of observed together with the spread levels. Net interest margin is expected to stay at high levels even then. So the strategic target for above 2% area seems to be feasible. But we'll come back with more information on the 3-year outlook with the Q4 results. On asset quality, look, I mean the inflows have been quite low. Even with rising interest rates, we have not seen any deterioration. Formations are neutral, the stock is static. The NPE ratio is dropping, and we will continue to have erosion of the stock with curing's and organic things that we're doing. It looks like a positive story. It is a risk going forward, especially depending on how long the interest rates are going to stay at these levels. But given the trajectory that we have that we're now looking at is not a major concern.

And again, congratulations for the results.

The next question comes from the line of [ Gudekar Sam ] with JPMorgan.

Just continuing with the theme of NIMs, and in particular, net interest income. So you've obviously outperformed deposit betas are effectively at come September where you think they will settle potentially and spreads are higher than expected with a stable NIM outlook. I think what the market is grappling with is when we actually reach peak, the peak in terms of interest income and arguably, you keep going higher than market expectations. So from an NII perspective, can we now assume you have peaked in the third quarter? And then the second question is on your guidance. Because from what I can see, you're not making any revisions to the guidance for this year, yet you've effectively delivered a very substantial amount of your targets. And in particular, you have outperformed on cost of risk. So what sort of extent of upside to the very near-term outlook might we expect? And is it going to continue to be on these 2 line items?

I mean the NII peak has been the big bet of the year. And every time we say we're at the peak and every time repeating the peak ones exactly how to answer that. Look, I think after October 26 and the announcement of DCB that we're kind of plateauing on the DFR, at least for now, the suspended action. Let's just say that we have reached the peak of the mountain range, right? Maybe there's an extra peak somewhere next to it with a few tens of millions higher than what we are right now. But I think we are now at the NII of Q3, what was at 531. I think we are now at peak area, right? Q4 might have another good surprise for us for a few tens of millions, but I think it's safe to say that we have reached the plateau of peaks. Now how long that's going to stay there. On interest rates, I think it depends on how long the impact stays there, the assumption right now is at 24%. We are going to stay at that plateau. Deposit beta has been very good as you said, we could expect a further erosion of the mix in 2024, so a slight increase even given rates. But generally, a good NII story, I would say. I think it's trying to simulate $10 million up or down. I think the 2.5% NIM is what people should be anchoring themselves to as long as interest rates stay where they are. And to the guidance story. I mean, obviously, as you rightly pointed out, both in terms of returns and EPS the forecast and the guidance is kind of already beaten. So sticking to it or kind of reiterating would definitely be an older conservative statement. We have a 9-month return of above 15%, 15.5%, if I remember correctly. We had a quarter of '18. We have an NII that looks static. So there's practically no way that we're going to close the year. I mean not good at 14%. We're looking at above 15% return for this year and EPS is probably going to be at $0.70. So all the stuff that you mentioned on OpEx and cost of risk are organic sustainable. They're based on actions that have been done for many, many quarters, years. So there's no one-off there. This is what the bank looks like right now, these interest levels who can take Piraeus bank is returning 15%.

And congrats once again.

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

Congratulations on the results. Just wondering, just sticking on NII slightly. Is there any guidance you can give for sensitivity to rate cuts, it will be interesting here. And the second question is on Slide 40, I'm noticing that on deposits, you're seeing some outflows in the corporate sector, clearly offset by inflows in other sectors. But just any commentary you can give around what you're seeing for corporates there would be interesting. And then the final one is just on MREL. I know that you're kind of bang on your target for the start of next year. Any interest in tapping markets before year-end to build a bit of headroom? Or should we assume that you're just going to build on the organic capital creation. And then just into 2024, any guidance on issuance activity would be interesting. I know that you've got a Tier 2 coming up for call in June. Is that the first order of business or potentially would you look at senior markets before that? Any drivers would be useful.

I mean on the NII sensitivity, as you are right now, a 25 volatility would translate with current pass-through rates between $35 million and $45 million of NII volatility. This is a number that's very sensitive to hedging levels as well as pass-through assumptions. But right now, given where we are, I think that's what you can use. Nothing to comment on your deposit movement on corporates, the erosion I think you're looking at of what is that turning around $ 0.5 billion. It's really a seasonality story. Nothing to write home about. On MREL, we don't need to do anything, as you pointed out for '23, especially on the senior front, I don't expect that we will. Well-spotted on the Tier 2 for '24. As we approach June and depending on market conditions, there probably will be Tier 2 action on our side to replace on the cost-effective manner on that data. I would say that is the number 1 priority given the organic profitability of the bank. There will be senior action as well. But I think, again, Well-spotted Tier 2 is the number priority right now.

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

I wanted to ask if you have -- maybe I missed it, if you have the latest feeling on the deposit mix, given the very slow progression, where do you see it approaching in the middle of next year or end of next year? That's the first question. And tied to that, given to hear your comments just a few minutes back, is 15% the kind of the preliminary figure for [indiscernible] next year, assuming rates do what the swap markets expect them to do? Those are my questions.

Let us wait until Q4, until we confirm a returns number for '24. As I said before, the elements and the constituents of the profitability are such that assuming a static interest rate environment with stable cost of risk, we don't see much room or reason for change versus ‘23. But let us numerically confirm that in Q4. On the deposit mix, look, right now, yes, it has been much, much lower. We thought that our -- what was it, 17% TD mix at the beginning of the year, it could reach the 30s. It's currently in the low 20s. But we do have an assumption that the erosion will continue throughout ‘24 at current rates. This could be conservative. People might say that if people have moved, they have moved and the rest are not going to and have a big granular deposit base, that's true. But right now, I think as long as we're not seeing any dramatic change in interest rate expectations, I think it's safe to assume for the erosion to continue at current levels.

And maybe if I can squeeze in on asset quality. You mentioned formation is neutral. Was that just for Q3? Or are you seeing muted or benign trends for Q4 as well?

Q3 was neutral, given a seasonality on the curing front where we had reduced strength in Q3 on the business front. This is something that we expected because we're looking at the case and also a few that we're looking at them case by case. Q4, we do expect a higher curing rate, in some cases that will flow into Stage 2. This is also the way that the NPE ratio from its current 5.5% is going to drop to the below 5% that we have guided for. So yes, I don't want to comment on formation. But in terms of nominal outflows, we do expect a higher number in Q4.

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

First one on capital. In light of the strong capital generation in this quarter, can you talk about Q4 evolution and if there is any headwind coming into Q4 that has prevented you not to upgrade the capital target for this year? The second one is on cost. If there is any specific item in the G&A cost that does lead to the reduction that we have seen in Q3? And the last one is on digital Europe. What do you see as a risk opportunities of the digital Europe implementation? Have you budgeted the impact to your business model?

Look, Q4 is expected to be a big growth quarter. So I would say that is mainly the reason together with some one-off costs that we're going to be having in Q4. That's mainly the reason we don't expect a dramatic kind of upsizing of the capital target enough for us to change guidance. So a big credit expansion is expected for Q4 to meet our guidance as well as the restructuring costs that we're going to be burning throughout Q4, given the voluntary exit program that's going on right now to substantially reduce to do yet another substantial lift reduction in the profile of the bank. So that's mainly the reason. Nothing to report, particularly to report in G&A. This is all very granular structural work that has been done across all lines. So you're really looking at run rate situations. On digital euro, yes, we've looked at the initiative. We understand the --I would say, on a qualitative basis, what could be pluses or minuses. We are now quantifying them, and they will be baked into our new business plan, and we'll come back in the Q4 results to give you its impact.

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. Thank you all for participating in our 9-month 2023 results conference call. Very soon on November 27, 28 we will be in London for the Athens Stock Exchange Greek Investment Conference. So we look forward to see you there, and discuss with you our investor outreach program as well, which will unfold also in '24. In the meantime, have a relaxing weekend.

Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for calling. Have a good afternoon.