Eurobank Ergasias Services and Holdings S.A.
Q2 2021 Earnings Call Transcript

Published: 31 Aug 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. I am Maria, your Chorus Call operator. Welcome and thank you for joining the Eurobank Holdings' Conference Call to Present and Discuss the Second Quarter 2021 Financial Results. All participants will be in a listen-only mode and the conference is being recorded. The presentation will be followed by a question-and-answer session. . At this time, I would like to turn the conference over to Mr. Fokion Karavias, CEO. Mr. Karavias, you may now proceed.

[Fokion Karavias:]

Ladies and gentlemen good afternoon and welcome to Eurobank first half 2021 results presentation. Together with me is our CFO, Harris Kokologiannis and the Investor Relations team. Let us present our results and key recent developments before we answer your question. Starting with the half year economic front, despite the spread out of the Delta variant, sentiment remains positive, as shown by domestic economic activity indicators. Before in the banking system, real estate prices are moving upward and the asset volume trends remain resilient and better than given revised estimates. At the same time, foreign direct investment are accelerating across different sectors and economic activity and coverage has seen a vast turnover, moving higher than the 2018 level in the second quarter. The touring season seems stronger than initially expected and current estimates point to revenues of at least 50% of 2019. Greece quickly gained approval for its plan for the resilience and recovery EU fines and expense €7.5 billion disbursement this year of which €4 billion was already received. It appears that the strong growth will extend into the 2021-2026 period for which we expect annual GDP growth of 3.54% on average underpinned by the . The above trends, together with the Greek banking system delivering the balance of the from legacy CPs make a sovereign credit grade accelerating to investment grade likely in the next 15 to 18 months. Now, let's see our financial results for the first half of the year, as highlighted on slide four. Our profits in the first half of the year reached €195 million of which €123 million in the second quarter. Core pre-provision income was up 2.4% on a year-on-year basis and 4.5% from the previous quarter. In line with our guidance, net interest income was lower by 2.8% in the first half of year and stayed more than the previous quarter. Commissions increased strongly by 16% year-on-year and 12% on the previous quarter, while operating expenses were slightly lower. On asset quality now, the better than expected trend continued into the second quarter with organic NPE formation being negative by €43 million. The cost of risk ratio reached 1.2% in the first half of the year. Our total capital ratio stands at 15.6%, while the fully loaded CET1 increased by 20 basis points last quarter and reached 12.1%. New loan disbursements, mainly business loan, reached €3.4 billion in Greece in the first half of the year. Deposits were up by €2.4 billion in the same period and the loan to deposit ratio declined to 75%. Finally, in our international operations, we recently announced two initiatives one, Serbia, the merger with Direktna Bank and the second in Cyprus, a minority participation in Hellenic Bank. This is in line with our strategy to further diversify and strengthen our business in this countries. The increasing operations continue delivering through the meantime, with net profits of €73 million in the first half of the year. Now, moving beyond the second quarter financial results, we successfully completed the 2021 SSM stress test as shown on slide five. Eurobank ranks among top European banks based on the fully noted CET1 depletion of 433 basis points under the adverse scenario in the period 2020 to 2023. This is the best performance among local peers and reflect the NPE reduction already achieved. As the cost depletion under the other scenario is the input for the stress valuation, this will be positive for our regulatory capital requirements in the future. Let me now continue with an update on the Mexico securitization highlight of which are on slide six. On Mexico, we have a binding offer from Dubai . We intend to when then to reclassify the securitized portfolio as held for sale in the third quarter and deconsolidate it in the fourth quarter. Our NPE ratio pro forma for Mexico stands at 7.3% in June 2021. The updated CAD impact per interactions is estimated as minus 10 basis points only. As a result of the better than initially expected CAD value impact of Mexico, our full year 2021 total CAD is estimated now at 16.4%, that is 40 basis points higher than the previous estimate. Regarding the other two capital enhancement transactions, our plan for a strategic partnership is a method of acquiring business, we receive competitive binding offers we aim to decide on the in the next few weeks and sign the agreements in the fourth quarter and this impact securitization of performing loans is also on track to close before year end. So, in summary, Eurobank delivers on all its priorities, namely profitability, asset quality, capital, and retail expansion. The operating performance is in line with our expectations for 2021 and the outlook for 2022 is even better as market trends in Greece improve. In a strong economic environment and having already the best quality metrics and the most diversified business model in the sector, Eurobank is in the full condition to expand it for stability in the coming years, and deliver double-digit return on equity as early as next year. Finally, importantly, as latest NPEs are behind us and the bank has started generating strong organic capital, all necessary preconditions are in place to initiate the supervisory dialogue on dividends distribution. At this point, I'd like to ask our CFO, Harris Kokologiannis to present you our first half results in detail before opening the Q&A session.

[Harris Kokologiannis:]

Thank you, Fokion. Let's now provide some more insight on the second quarter results. We start on the capital position on page 10. In the second quarter, our fully loaded CET1 ratio increased by 20 basis points amounting to 12.1%. The total capital ratio reached 15.6%. The drivers of year-to-date capital movement have been fully anticipating the 2021 custom plan, presented in March. Furthermore, accounting for the updated impact of Mexico is the announced capital enhancement investment that are in progress, the year-end outlook is revised higher with total CAD and fully loaded CET1 ratios at 16.4% and 13.2% respectively. Moving on page 19 on lending evolution, loan disbursements increase continue to be strong at €3.4 billion in the first half of the year. Performing loans increased by €1 billion year-on-year, driven by corporates in Southeastern Europe. We expect loan growth from the group in the second half of the year to reach €1 billion with July already being higher by €300 million. On basis 2020 and 2021, we present our mobile pillars in the little investments with the program sites in the split between grants and loans. As shown on page 21, the loans part may leverage up to €30 million investments to be funded at very attractive blended costs. Eurobank is well-positioned to take the most out of this opportunity and to this extent, a dedicated team is offering the appropriate advisory supports to its clients as regards RRA projects assessment. Participation RRA combined to the underlying credit expansion, driven by the solid growth of the economy for the next few years, are expected to accelerate loan growth for the group to circa €2 billion per annum for the period 2020 to 2024. Moving on funding and liquidity on page 22. As shown on the right of the page, growth deposits increase in the first half of the year by €2.4 billion, largely driven by the excessive state support measures to the economy, loan consumption and increased 2020 loan disbursement. Net loss deposit ratio exceeded in the second quarter to 75% and NCR ratio increased further to 166% as shown at the left of the page. We are addressing the increasing through two main strategies. First, compressing deposit cost, which is approaching the zero level as shown on page 24. And second, by intensifying our efforts to open mutual funds and fund customers products, as will be shown shortly. Moving to profitability on page 25, net interest income was stable quarter-on-quarter at €335 million as the lower contribution from TLTRO or lower lending funding mainly related with corporate portfolio spreads are offset by higher deposit income and revenues from Southeastern Europe. As regards deposits margin, the impact of increasing volumes has been fully offset by the continuing to decrease off client rates. On a year-on-year basis, net interest income is lower by 2.8% in line with what was anticipated. Furthermore, on page 25, on the upper right part, we focused on the qualitative composition of interest income. Specifically, we show that contribution of LP to total NII decreased from high of 30% before clean up to 9% current and eventually is estimated at around 3% in 2023. On page 26, commission income rebounded strongly in tandem with resumption of economic activity, showing a quarter-on-quarter increase of 11.8% and reaching €110 million. The increase is mainly driven by revenues from credit cards and network transactions, bancassurance and mutual funds. Focusing more on wealth management on page 27, the Bank maintains a leading position in a fast growing market, serving its clients through four private banking centers in Greece, Cyprus, Luxembourg, and London and investing heavily in the commodity the new platform, the group secures a competitive advantage versus its peers and is positioned well to become a significant regional players in wealth management. On page 28, operating expenses are flat year-on-year. In Greece, costs are slightly lower by 0.4% as highlighted these salaries expenses are offset by some costs, which is lower by 7.5% year-on-year due to reduced headcount. Moving to the asset quality on page eight, as shown on the top left of the page, NPE formation in the second quarter was negative by €43 million continuing the better than expected trend. NPE ratio decreased 14% and pro forma with Mexico is reduced to 7.3%. Cost of risk for the quarter declined 1% of net loans and for the first half of the year to 1.2%. Coverage in the second quarter increased by 140 basis points, reaching 63.3%. On next page, page nine, we summarized the core operating performance for the first half of the year. Core PPI is higher year-on-year by 2.4%, mainly driven by non-NPEs related NII, higher commission income, and lower staff costs, which more than offset the lower income from NPEs by €82 million. Loan loss provisions are lower by 17% , reflecting the deleveraging fees and the better asset quality trends. As a result, core operating profits are high year-on-year by 35% and €221 million. Finally, let me close with an update on the full year 2021 profitability guidance provided in March. On core PPI, we expect to be in line with our initial estimate of €875 million. Cost of risk, taking into account the latest asset quality trends is estimated for the full year at 1.1% of net loans. The above point to a full year profit before tax over €500 million. This completes my presentation and we may now open the floor for your questions.

[Operator:]

Ladies and gentlemen, at this time, we will begin the question-and-answer session. The first question comes from the line of Floriani Jonas with Axia Ventures Group. Please go ahead.

[Jonas Floriani:]

Hi, guys. Thanks for the presentation and well done on the results. I have a few questions. First of all, at group level, just wondering how you see the early indications of asset quality for the second half. I remember that in previous calls, you're taking a more cautious approach in regards to the inflows and that was also reflected on your guidance for the cost of risk, which now I see that is at the lower end of the range you've reported 110 to 120. So, just wondering, now in this first couple of months, how are you seeing that developing? So that will be interesting to hear from you. And second also, on the real estate side, any views on the resumption of auctions, how can that change your real estate portfolio? And if that also is linked to the investment pipeline that you have? I remember that your number for 2021-2022 in terms of real estate investments was in the range of €300 million. So, just wondering if this number still holds at that level? And then finally, on Cyprus, I've seen that this quarter you booked quite a low provisioning rate in the country, meaning that your bottom-line was relatively higher than the previous quarters. So, just wondering what drove that? And if you expect the provisioning level to remain in line with second quarter or maybe to revert to the -- let's say to the average we've seen in the previous quarters? Thanks.

[Fokion Karavias:]

Okay. Thank you very much for your questions. Let me take the first one and then Harris will take the other two. So, as you correctly pointed out the first half of the year asset quality trends were better than expected. For instance, out of the €4.9 billion of moratoria in 2020, circa 5% only have defaulted, while 85% have returned to normal payments, either on all means or through the bridge programs, programs. There is a 10% of moratoria, which is expiring in the second half of the year, but these are related entirely with the hotel sector. I already mentioned that tourism has done very well, above expectations. I was just reading that in the International Airport the Athens, tourist arrivals have reached in the end of August 70% of the 2019 figure and therefore, we are not concerned at all about the performance of these customers for which one moratoria are ending in a few months. Now, in the second quarter, we recorded a negative NPE information. On slide 30, we present the formation the loan long segments. And as you can see there, the trends are very similar in on for loan segments. For the third quarter and based on the information we have so far, we expect a slightly positive formation, a number let's say below €100 million, in the previews scored, we projected for the full year 2021 an increase -- an organic increase in the stock of NPEs of about €600 million. And based on what we have seen so far and what we expect for the third quarter, this figure appears to be on the high side. However, as state support measures are gradually lifted, we prefer to remain cautious and continue monitoring the assets quality trends. And let me clarify that although we recognize to be €600 million on the high side, at the moment, we don't revise this figure lower. So, based on all of these, we expect that in the end of the year, the NPE ratio will be close to 8% including the effect of Mexico. As Harris mentioned, the cost of risk for the full year will be at 1.1% versus 1.2% that was in the first half of the year. And this should bring the NPE coverage more or less the same level as we are today. And we believe that this high mark would allow us to support a lower cost of risk in 2022 and going forward and further decreased the NPEs towards the 5% area as early as next year in a very cost optimal way. So, this is how we see things in the area of asset quality. And let me now pass over to Harris for the other two questions.

[Harris Kokologiannis:]

Regarding -- coming to the auction question, it looks that as of 1st September, auctions are -- will resuming in all categories apart from the vendor of households for which there are very strict income, wealth and level of deposits preconditions with our -- for the moment, on hold, as well as some auctions in specific areas in Greece that were achieved by recent wildfires. All other auctions just started to progress quite well and we should expect for the sector close to 3,000 auctions to take place by year end -- actually, this is what has been scheduled. And not only that, but the upward -- continuing upward trend on the real estate prices, both residential and commercial, is one more encouraging signal as regards projects from foreclosures. So, in tandem with good level of collections as of the fourth quarter, we expected good resumptions of auction proceeds. Apart from that, we can also summarize and say this in the bankruptcy codes, accelerating auction processes as well. In parallel, we are executing a schedule our program on investment properties expansion, and the outlook that provided the previous calls for investment plan €300 million for the next couple of years, still holds. Now, as regards the provision serves in Cyprus, in the first half of the year, we had provisions for €3 million, that was quite lower from our budget that was close to €5 million. For the second half of the year, the outlook is -- for close to €5 million, however, if the underlying trade quality trend continue to be better, maybe a bit lower, but it should be in that area €4 million to €5 million.

[Jonas Floriani:]

Got it. Thank you.

[Operator:]

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

[Osman Memisoglu:]

Hello, many thanks for your time and presentation. I have two questions. One on the spread trends you're seeing lately, particularly, as we approach potentially more volumes regarding related recovery fund. If you could give us any more color on that front? What are you seeing lately? And what do you expect in Q4 and beyond? And then the other thing is on your international business thinking, obviously, you've made some transactions, particularly one in Cyprus was a minority stake. If you could give us a bit more color on your strategy in Cyprus and maybe in other geographies, what we should expect on that front? Thank you.

[Harris Kokologiannis:]

Starting from the from the express side, I assume your question is about loans, but let me elaborate on both sides on of the balance sheet. On the lending side, in the last quarter, we see some gentle decline over the corporate lending space. This was related to, of course, market competition, but also to some high yield large ticket corporate loan repayments that occurred during the second quarter. Going forward, we should not be surprised if we see some -- my slide of the corporate lending spreads in view of the competition, but also as you correctly pointed, the increase in volume that is expected -- the increase in demand going forward. On the business, especially with the household, mortgage and consumer, we don't expect any material movement from the level we stand today. We should also raise a point as well on the deposit side where we have made a very good progress on decreasing deposit client rates at levels approaching 0x. So, as we speak the stock of time deposits at 15 basis points. However, the new production is at six basis points, so there is a positive, let's say, pipeline to be incorporated in our P&L going forward and therefore, is continuing both in Greece and our subsidiaries, mainly in Bulgaria and such. As regard our strategy on international, I pass to Fokion.

[Fokion Karavias:]

Sure, let me elaborate a little bit on the Hellenic Bank transaction. We bought a minority stake, we believe in a very attractive valuations. However, we have already a very successful operation in Cyprus, this is Eurobank Cyprus and our plan is to expand our business there in organic way as of through Eurobank Cyprus. Now, with respect to Hellenic, we don't intend to increase further our stake, at least in the near-term. In the meantime, we will support the Hellenic Bank management in all the initiatives and all the priorities that it may have, including the cleanup of the balance sheet, which is underway, but also in the effort to improve materially the cost to income ratio, which is on the high side in this bank.

[Osman Memisoglu:]

Thank you.

[Operator:]

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

[Mehmet Sevim:]

Good afternoon and thanks very much for the presentation. Just two quick questions from me. So, first of all, you mentioned on the call that you'd like to start exploratory talks with the supervisor on dividend distribution, could you please give us any additional color on this for example, terms of timing, et cetera? And second question, you also told us that the new capital impact expectation from Mexico is just 10 basis points. Now, if I recall correctly, that was 50 basis points initially. So, could you please tell us what the reasons are leading to the smaller expected capital impact versus the initial expectations, which is obviously very positive? Thanks very much.

[Fokion Karavias:]

Sure. And let me start on the dividend side. As I mentioned during my introduction, we have a number of positive developments with respect to cost and position. One is the result of the stress test that given that the capital depletion in the adverse scenario is one of the critical inputs of stress, we expect this performance -- the good performance reflected positively in the minimum capital requirements of the bank. And we should have some more complete feedback from the regulator on this round before year end. Second positive development was that we have revised upwards our estimate for the year end capital ratio from 16% to 16.4%. And for the fully loaded CET1, 15.2%, which brings us forwards in terms of our capital year plan. And last but not least, even this year, the bank will be able to arrange organic capital in a material way, this trend will accelerate further in 2022. So, taking into account all these facts together with the fact that NPE cleanup is behind us, we feel that all the necessary preconditions are in place to initiate this supervisory dialogue on dividends. Now, on your question on when we should do it, I think the most appropriate time is when we announced our full year 2021 financial results in the beginning of next year, when we will be able to show in place and in our numbers everything I have just mentioned. And that would be the best time for us to start this dialogue for -- with the regulator, so in the beginning of 2020. Now, your second question what has -- what was different we moved from an estimate an initial estimate of minus 15 basis points to minus 10. I think this is a combination of a number of different factors. One of them is the transaction that was better than initially anticipated. As a result of improved real estate prices that have helped the value of the portfolio collaterals. And other factor is that secondary markets in Greece becoming deeper and that has been reflected on the price that we received on the mezzanine. So, these are two important factors of hence, I believe, and the valuation and capital impact on a better level than initially anticipated.

[Mehmet Sevim:]

Great. That's very helpful. Thank you very much Fokion. Maybe just one follow-up to my colleague Osman's earlier question on the international franchise. It does sound like the Hellenic Bank was a valuation opportunity, but you also done Direktna in Serbia, which sounds a lot more strategic. And that was one markets you previously didn't consider as a core market as far as I remember correctly. But now it sounds like that you want to grow there, which is obviously a very interesting and attractive market top down. Is it reasonable to assume that you may explore further inorganic opportunities in those markets? For example, now, you're in Serbia, Bulgaria as well, and maybe even beyond? And do you have any specific targets for international contribution to the group figures in the longer term? I remember there was a, for example, at some point, you were saying 14% of NII would come from international over the longer term, is there a thinking like that that you still have today?

[Fokion Karavias:]

As we speak think in terms of the core pre-provision income, the contribution of international is about 30%. In particular about Serbia, we have not included before Serbia in our four markets, we were saying that core markets for us were Greece obviously, we gain Cyprus. Now, in Serbia, the reason that we have not put it as a core market was at our presence there was another suboptimal, out of , there was a rather small bank, definitely through the transaction with Direktna Bank will increase our size, but still the size remained suboptimal. Therefore, we may use any other opportunity that we may have to further increase our size there or even exit if there is any such opportunity. But in order to consider Serbia core market, definitely, our preference there should increase quite substantially from current levels, even after the Direktna acquisition and increase either organically or through another sort of acquisition. The market there is in a consolidation mode. There are still a lot of banks, a lot of small banks, and therefore, we will keep monitoring the market to see about the right opportunity. Now, on your question, what is the optimal contribution of the international in our profitability or income? I think about over the next three years, and given that Greece has entered a growth phase, we would expect that the Greece -- the income tax from Greece would increase quite nicely. And therefore, I would not expect even if we move with other transactions that the international would be materially more than the 70% level which is said today. In other words, I would expect both international and corporations, to grow at the same pace, may be Greece would grow faster than the other markets because we have entered, as I mentioned during my introductory note, to a period of five or six years with a growth of about 3.5% to 4% on average.

[Mehmet Sevim:]

Okay, that's all very helpful and clear. Thank you very much.

[Operator:]

We have a follow-up question from Memisoglu Osman with Ambrosia Capital. Please go ahead.

[Osman Memisoglu:]

Yes. Hi. Just on the fee performance, along with your peers, it was impressive quarters. What's driving it? Any more color you can provide, obviously, economic activity and so on? But how should we think about this for the next couple of quarters, any color on this would be appreciated. Thank you.

[Harris Kokologiannis:]

Sure. It is true that we had an excellent quarter -- the second quarter of the year after following -- they were lockdown with fee commission reaching an annualized level of 60 basis points over assets. And actually, this is -- and this is an area where we believe it's a major driver for income growth in the coming years. And I would say that the growth of fee commission is core. Starting from the -- increasing lending and investment activity in the country and then, on that topic, we should mention not only the level of disbursements in lending, but also very high level of FDI and the very high final for FDI that took place in -- during 2021, all this creates high levels of lending and capital market-related fees. On the capital market is an area where investment banking, capital market is an area where Eurobank is a leading position. The second pillar is the network transactions and credit cards with very closely related with economic activity and the tourism level. And there we had a very strong increase as regards expectation of tourism this year, exceeding the levels of 50% compared to 2019 and of course, looking forward 2022 and onwards, are much more creating expectations are reaching or exceeding 2019. The third pillar is bancassurance and wealth management and based on page 27, we show that we have a leading market sell on mutual funds as a very fast growing market. Whereas on private banking, we have a privileged position to be able to serve our clients from four private banking centers in Greece, and not just actually Cyprus, Luxembourg, and London. And here this is an area that we've increased substantial our investment amounts mainly on implementing and bringing forward a new platform for asset management. As a fourth pillar that is completely disconnected Eurobank if the income from investment property. Whereas as I said before, apart from the €1.3 billion investment property portfolio, there is a close to €300 million to €400 million for the next three years in the pipeline to be invested. So, all these four pillars create a very good mix for when to expect substantial growth for the next two to three years. And I repeat that most probably this is going to be the major driver of corporate growth going forward.

[Osman Memisoglu:]

Perfect. Thank you for color. Much appreciated.

[Operator:]

Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Karavias as for any closing comments. Thank you.

[Fokion Karavias:]

Let me thank you for participating in this call. Let me also thank you for your question that gave us the opportunity to elaborate further on our results. Our Investor Relations' team will be available for any follow-up questions. Thank you again.

[Operator:]

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