Eurobank Ergasias Services and Holdings S.A.
Q3 2020 Earnings Call Transcript

Published: 20 Nov 2020

[Operator:]

Ladies and gentlemen, thank you for standing by. I'm Konstantinos, your chorus call operator. Welcome, and thank you for joining Eurobank Holding Conference Call to present and discuss the Third Quarter 2020 Financial Results. 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 the Eurobank's third quarter results presentation. Together with me is our CFO, Harris Kokologiannis and the Investor Relations team. I will start from an overview of recent developments before we present our results. As we all know, the second wave of the pandemic has hit European countries, including Greece, resulting in partial or horizontal lockdowns and a deterioration of the economic outlook.

[Harris Kokologiannis:]

Thank you, Fokion. Starting from our balance sheet. In the third quarter, €7.5 billion Cairo loans have been deconsolidated and senior loans of €2.4 billion have been recognized as an asset on our balance sheet. Furthermore, Cairo mezzanine and senior notes of €58 million fair value have been distributed to our shareholders through Cairo mezzanine shares, and trading has commenced in the Athens Stock Exchange on that market. Let's now provide some more insight on the third quarter results. Starting from funding and liquidity on Page 8. As shown on the right part of the page, group deposits increased in the third quarter by €1 billion. Furthermore, as shown at the left, the bank is making use of €8 billion TLTRO at a rate of minus 100 basis points. In combination with deposits increase, this has led to a substantial decrease of market repos in the last 12 months by €5.2 billion as a commercial reduction of funding cost.

[Operator:]

The first question is from the line of Floriani Jonas with Axia Ventures. Please go ahead.

[Floriani Jonas:]

I have a few questions. The first one is on cost of risk on your guidance. I remember that you're guiding for 140 to 160 basis points. And if I'm not mistaken, this was based considering a cumulative GDP contraction between 2020 and 2021 of minus 2.5%. I'm aware that you show on Slide 34 the projection by European Commission. So in those numbers, you see a cumulative decline of 4%. Now going forward, how are you seeing your projections on cost of risk if there's any risk of further, let's say, one-off charges based on the change in GDP estimates? Just wondering if you're still sticking to your modeling based on the minus 2.5% cumulative? Then my second question is on asset quality. I appreciate your color during the call and the slides. Now just wondering, looking at your loans under moratoria, I mean, what is the idea you have or what do you project in terms of defaults out of that €5 billion? And going forward how is your strategy on further reducing the stock? I mean there's always the talk about seeing the Greek banks with NPE ratios below 10%. I mean considering what may happen next year, what are the offerings you have ahead is the extension of hubs on, let's say, the base case scenario? Are you willing to do more outright sales of NPEs? Any color on this will be helpful. And yes, I'll stay here and then I - if there's anything else, I'll join the queue later on.

[Fokion Karavias:]

Fokion. Thank you very much for your questions. Let me start from the asset quality, and then Harris will answer the question about the cost of risk. So before going directly into your question about the moratoria, let me give you an overview of what we have seen in the third quarter. What we see as we speak for the fourth quarter and then how we see asset quality forming in the first half of 2021. So in the third quarter, as we show on Page 6 but also on Page 24, where we have the loan segmental analysis, the NPE formation remains slightly negative. And the asset quality metrics were further improved from the previous quarter with the NPE ratio declining to 14.9% as per Page 6. It is also worth mentioning that the amount of loans in moratoria was favorable. After Page 22, actually it was slightly decreasing.

[Floriani Jonas:]

Okay. Just one quick follow-up. In terms of staging of the loans. Shall we expect any more meaningful reclassification between stage one and stage two now into the fourth quarter or maybe Q1 2021?

[Fokion Karavias:]

Actually, the priority that was also expressed by SSM on that front is to manage effectively the key effects. And I would say, all our strategy is concentrated to that front. The solutions that we are providing actually address the temporary liquidity our clients and not permanent financial difficulties. In that aspect, we don't expect any meaningful reclassification from stage one to stage two.

[Floriani Jonas:]

Thank you.

[Operator:]

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

[Mehmet Sevim:]

Just a follow-up to the previous question. Do I understand it correctly that your expectation of the 20% NPE inflows from moratoria would be without the remedial actions such as the Gefyra program, etcetera? And when we consider those, then you would expect around 1% to 2% increase in the NPE ratio next year?

[Fokion Karavias:]

Yes. Let me clarify that. The 20% default out of the moratoria which translate into €1 billion to €1.3 billion inflows. These are the gross inflows that we expect, taking into account actions like the Gefyra program or the step-up program that we may offer to our customers. But used to take into account in addition to the gross inflows, any outflows that we may have because of curing of loans or liquidation of collaterals. And therefore, the net effect on the NPE stock is expected to be reached 100 to 200 basis points - actually, 200 percentage points - sorry, 200 basis points increase that I mentioned before. Is this clear?

[Mehmet Sevim:]

Yes. That's very clear. Thanks very much. Just a few more questions then from me. It's quite interesting to see the lending spreads have remained resilient, as you show on Page 17, despite the good disbursement trends in the sector, I would assume. So could you share any more color on those? And do you think the lending yields and spreads have found the floor at least for now? And secondly, given the second wave of lockdown that we have also in Greece now, are you sticking to your €840 million PPI guidance for this year, given we may see further impact on fees, etcetera in the last quarter? And just one final question from me on your cost of risk guidance. Given you're saying that you may see single-digit NPEs in 2022, can we assume that this is the normalization year in your base case, so that it may take until then to return to your original pre-COVID-19 cost of risk guidance of 90 basis points?

[Harris Kokologiannis:]

Sure. You noted correctly that in the third quarter, the spreads here are quite flattish trend, especially the business part of the portfolio. And this is related to the new lending, especially the one related with the state support program. Having said that, in our projection in especially for next year, we cannot exclude, let's say, a mild decline of spreads at the area of, let's say, 10 to 20 basis points specifically on the business portfolio. Now turning to the profitability and the core PPI trend, let me provide you an outlook of the main - of the core PPI components for the rest of the year. So starting from net interest income. As we see on Page 18, and as I said before, in the third quarter, the most negative effect is coming from the Cairo deconsolidation, which had been partly offset by the new loan production and the TLTRO. So we can say that approximately third quarter constitutes the new base of our net interest income. For the full year 2020, we reiterate our previous guidance for a low significant decline, something between close to minus 3%, I would say. As regards commission income on Page 19. Net commission income increased quarter-on-quarter by something more than 88% due to the resumption, the recovery of network activities and credit card issuing and acquiring fees. On a year-on-year basis, commission income is higher by 10% due to the impact of Gefyra and the high network and card-related fee. And considering the performance of the third quarter and our expectation and evidence for the fourth one, we may revise our guidance for 2020, slightly upwards and resetting a medium to high single-digit growth. Previously, we refer to a low single-digit growth for fees and commissions. And finally, on operating expenses. For the nine months, operating expense are lower by 2.5% year-on-year, while in Greece costs are lower by 5.6% as we mentioned on Page 20, on the right part of the page. Specifically, staff costs lower by 11.3% due to reduced headcount. Now in the fourth quarter, operating costs should be expected slightly higher due to seasonality and this is a pattern of the previous years as well. For the full year 2020, we reiterate here as well our guidance for group OpEx to be lower year-on-year by a low single-digit rate, something between minus 3%, minus 4%. Overall now, for the core pre-provision income, for the full year 2020 as a result of slightly better performance mainly on commission income, we may revise our guidance upwards to €850 million compared to €840 million that was the previous one and €830 million in 2019. Now regarding the third leg of your question as regards the normalization of cost of rate. Of course, I think it depends on the evolution of the pandemic. But if there is some normalization of the real economy in 2021, then we may assume that we may approach a normalized cost of risk in 2022.

[Mehmet Sevim:]

Thanks very much.

[Operator:]

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

[Osman Memisoglu:]

Just on the international operations, would it be possible to give us a bit more color? You walked us through the asset quality very nicely, I'm guessing for the whole business. What's the outlook for international operations specific on asset quality, but any other part that particularly if you think it's going to be different than the operations in Greece, either in NII front or OpEx front? Thank you.

[Fokion Karavias:]

Fokion. And let me give you some color about the asset quality in Bulgaria and Cyprus, where we have most of the exposures and then Harris will give you some information about the evolution of the income and the expense line. First of all, although Greece is experiencing a period of lockdown, Bulgaria and Cyprus keep their economies open or they apply some partial lockdowns in a small number of cities. In Bulgaria, the percentage of loans, which are under moratoria is similar to the percentage that we have in Greece. Moratoria there are going to end in December of 2020. And we have reviewed a strategy very similar to the one that we described for Greece. And we feel quite confident that we do not expect any major deterioration of asset quality in this country. In Cyprus, in which we have a couple of cities under partial moratoria, again the moratoria are expiring in December of 2020. However, we have a larger percentage of customers or of loan balances, which are under moratoria versus Greece. However, the relevant data that we follow, so a significant part of the orders exceeded credit quality behavior, either they continue to service their loans even if they are in moratoria or they have increased deposits or they maintained active overdraft accounts. One key difference that you should keep in mind between Greece and the two countries, as I mentioned, is that in Greece we have private sector in moratoria, which were initiated by the Hellenic Bank Association. In the case of Bulgaria and Cyprus, we had stayed and used moratoria and this explains the higher percentage seen in Cyprus. Overall, we are quite optimistic about the evolution of the asset quality in both countries. Now Harris on the .

[Harris Kokologiannis:]

Regarding the profitability overall. Last year 2019, closed with international net profit after tax before a loss of €170 million. This year should be expected to be, I would say, close to 25% lower in the area of €130 million affected by maybe two factors. The decrease of commission income the result of the local lockdowns as well as a decrease of spreads in the corporate lending portfolio in either countries. As regard next year, we should expect, I would say a mid-single-digit growth in net profitability coming from the income side, while cost of risk will remain at mainly due to COVID outbreak elevated levels close to 100% , which for international is quite let's say high cost of risk ratio. A return to pre-COVID profitability levels for international should be expected most probably 2022 with profitability of approximately to €160 million again.

[Osman Memisoglu:]

Okay, that's helpful. Thank you.

[Operator:]

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

[Fokion Karavias:]

Let me thank you for your time and for participating in our conference call. Let me also thank you for your questions. We will be available for any follow-up clarification questions, remarks in the coming days. Thank you.

[Operator:]

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