Eurobank Ergasias Services and Holdings SA

ATHEX:EUROB

Earnings Call Transcript

[Operator]

Ladies and gentlemen, thank you for standing by. I am Emma, your Chorus Call operator. Welcome, and thank you for joining the Eurobank 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 Mr. Fokion Karavias, CEO. Mr. Karavias, you may now proceed.

[Fokion Karavias, executive]

Ladies and gentlemen, good morning, good afternoon, and welcome to Eurobank's First Quarter 2021 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.

Looking first at the macroeconomic background, sentiment is positive as shown by all indicators of domestic economic activity. The vaccination pace has recently accelerated and the economy is opening up. In spite of the anticipated GDP contraction in the first quarter, economic growth is expected above 4% and 6% for this year and 2022, respectively, according to the latest EU estimates.

Strong state support measures have been extended in 2021, and this is reflective in nonliquidity conditions and continued loan deposits. It contained unemployment and increasing real estate prices and last but not least, investment [ as an olive branch ], as evidenced by lower than initially anticipated NPE inflows from loans under moratorium. However, we will keep monitoring asset quality evolution as state supported schemes are eventually removed in the second half of the year.

Early signs for the touring season are encouraging and the estimates currently point to 50% revenues of the 2019 season versus 20% last year. Greece, together with Portugal, were the first countries to submit a robust plan for the resilience and recovery due to funds and the approval is expected until the end of June. Additionally, the Greek banking system has accelerated the NPE reduction and stop the market to strengthen its balance sheet. Such initiatives are reflected through the recent upgrades by credit rating agencies for the sovereign and the banking system.

Eurobank was the most proactive in enhancing its capital base through the merger with Grivalia and executing an accelerated NPE reduction plan, which is driving our NPE ratio to single digit this year. The organic CapEx generation of 100 basis points per annum will be more than adequate to support the expansion of the loan portfolio. As such, our focus now is shifting towards business development in all our core markets and profitability.

Let's now focus on our financial results for the first quarter with highlights shown on Slide 5. Our net profit in the first quarter reached EUR 72 million. On a year-on-year basis, core pre-provision income was up 3%, as lower NII was offset by higher fees and commission. Operating expenses were down 2.2% year-on-year with Greece 3.1% lower. Our income stream remains well diversified with profits from international operations reaching EUR 32 million in the first quarter.

Now on asset quality, we have positive NPE formation of EUR 72 million, which is substantially lower than initially expected. The cost of risk was at 1.4%, resulting in stable NPE coverage at 62%. Our total capital ratio incorporating the full year 2021 regulatory transitions and adjustments reached at 15.5%. The CET1 ratio was 13% and 11.9% on a transitional and fully loaded basis, respectively.

Deposits gathering continued through the first quarter with EUR 1 billion in deposits, while the loan disbursement exceeded EUR 1 billion and are expected to accelerate further in the second half of the year. The loan to deposit ratio declined to 78%.

Finally, as you know, we successfully [ adopted ] the debt capital markets with a 5-year senior note in April. This is our first MREL issuance, and there was strong demand, especially among international investors.

Let me now continue with an update on the Mexico securitization and our capital assessment transactions. On Mexico, the discussions with stakeholders regarding the advancing are well advanced. The pre-rating has been received and relevant economics are better than initial estimates. We intend to apply for Hercules II and SRT in the next 2 weeks, then re-classify the securitized portfolio as held for sale in the third quarter and the consolidation fees in the fourth. As a result, our NPE ratio will decline close to 8% by the end of the year.

Regarding the capital assessment transactions, namely the synthetic securitization of performing loans and the strategic partnership for the merchant acquiring business. We are also on track to close both transactions before year-end.

So based on the above update and the first quarter results, we remain very constructive as the certainty of achieving our 2021 business plan has increased. In this context, we reiterate our outlook for this year profitability, NPE ratio decline and capital plan as presented in the previous analyst call. Overall, we keep delivering in a consistent way on our business plan.

At this point, I would like to ask our CFO, Harris Kokologiannis, to present our first quarter results and the outlook before opening the Q&A session.

[Charalambos Harris Kokologiannis, executive]

Thank you, Fokion. Let's now provide some more insights on the first quarter results, starting from the capital position and from Page 7. In the first quarter, our fully loaded CET1 ratio remained stable, close to 12%. The total capital ratio amounted to 15.5%. The main drivers of the period's movements were the full year transitions, new definition of default and an increase in RWA due to investment securities purchases. The above were mitigated by the organic profitability of the quarter.

The regulatory transitions and adjustments have been fully reflected in the capital non-presented in our previous call. Furthermore, accounting for the impact of Mexico and the announced capital adjustment initiatives, the outlook remains for a total capital ratio and the fully loaded CET1 at 16% and 12.8%, respectively, at the end of the year.

Moving on funding and liquidity on Page 8 (sic) [ Page 9 ]. As shown at the right-hand of the page, group deposits increased in the first quarter by EUR 1 billion and in the last 12 months by EUR 3 billion. The increase is largely associated with the extensive state support measures to the economy and increased 2020 loan disbursements. Net loan-to-deposit ratio decreased in the first quarter to 78% and the LCR ratio increased 141%, as shown on the left of the page.

Furthermore, the group is making the use of EUR 8.8 billion TLTRO at a rate of minus 100 basis points. In combination with the deposit increase, this has led to a substantial decrease in the balances of other funding instruments and to a commercial reduction of funding cost.

Finally, in April and in the context of meeting our MREL transactional target, the bank adopted successfully the debt markets. We had EUR 500 million senior preferred issuance at a cost of 2.125%.

Moving on Page 16 on lending growth. During the first quarter of the year, performing loans increased slightly to EUR 35.3 billion, which is mainly associated with our strong liquidity conditions as explained above. However, the reopening of the economy following the progress in vaccinations, a pickup of several high-indicating investment projects that are in the pipeline and expected leverage from RRF pointed to an acceleration of new lending as of the second half of this year.

Moving to profitability on Page 18. Net interest income increased quarter-on-quarter by 1.6% at EUR 335 million. This is due to the higher contribution from TLTRO and the further decrease of wholesale funding costs, which offset [indiscernible]. As regard to the deposits market, the impact of increasing volume has been offset by the continued decrease of client rates. On a year-on-year basis, net interest income is lower by 1.4%.

On Page 19, commission income decreased quarter-on-quarter by 9.3% at EUR 99 million. The decrease is mainly actively due to the record capital markets fees in the previous quarter, while all other fee drivers stayed at par with the seasonally strongest period of the year. On a year-on-year basis, commission income is higher by almost 7%.

On Page 20, operating expenses are lower year-on-year by 2.2%. In Greece, costs are lower by 3.1% as higher IT and digital-related expenses are offset by staff cost, which is lower by 11.2% year-on-year due to reduced head count.

Further on pre-provision income on Page 5. On the top left of the page, core PPI increased quarter-on-quarter by EUR 2 million or by 0.7% at EUR 218 million, as a result of higher net interest income and lower operating expenses, which offset commission decrease. On a year-on-year basis, core PPI is higher by 3%. Pre-provision income amounted to EUR 231 million, including EUR 13 million of trading and other income.

Moving on asset quality and on Page 6. As shown on the top left of the page, NPE formations in the first quarter amounted to EUR 72 million, significantly better than our initial estimates. NPE ratio increased slightly to 14.2% and pro forma with Mexico securitization amounts to 7.4%. Despite better-than-expected formation, we remain conservative on provisioning with cost of risk at 1.4%.

Going forward, all in all, we should keep monitoring the behavior of our clients as the government measures are gradually lifted. The evidence we have from the first months of the year together with the expectations for a strong economic recovery in the second half show that the decrease of NPE for 2021 may be at least 30% lower than initially expected. In this context, it is envisaged that the cost of risk for the year should be at the area of 1.1% to 1.2%, lower than the 1.3% provided in our guidance.

Overall, as regard to the profitability guidance provided in year-end 2020 results, we reiterate our core PPI, despite the risk related to deposits, growing 5% on loans. However, it is mitigated by a better outlook on asset quality. As a result, our profit before tax guidance remains intact.

This completes my presentation, and we may now open the floor for your questions.

[Operator]

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

[Jonas Floriani, analyst]

I have a few questions. The first is regarding Mr. Karavias' comments on the Mexico securitization now that the record of the pre-rating received. So if I'm not mistaken, I've heard something about better economics for the deal. I remember that the guidance was for a 50 basis points impact to capital. So I just wonder if we should expect that this guidance will be changed or maybe it's less than 50 basis points impact.

Then the second question is on your real estate portfolio, Slide 19. I was just wondering if there's any outlook you can give us in terms of how this picture could look by year-end. Just wondering about specific number of assets or if there's any area of this portfolio you're focusing or preferring over the others. And also maybe some thoughts on the outlook for the yield of the real estate assets.

And then final is on the NPE formation. So I see, as you mentioned, it is better than expected. But I couldn't see anything on the outflow. So if you could explain a bit how was the Q1 performance on the outflow side, that will be helpful.

[Fokion Karavias, executive]

Okay. Jonas, thank you very much for your questions. I will answer the first and the third and Harris will discuss about the loan portfolio and the outlook for it.

So in terms of the Mexico transaction, as I mentioned already, discussions about the transaction is very advanced. We received the pre-rating letter and the economics appear to be better than initially estimated. We had, as you said very correctly, a CAD impact of 50 basis points and it appears that the impact is going to be well below this figure.

The next steps are to apply for Hercules II and SRT in the next few weeks. Then the mezzanine non-binding offers should be received in late July and binding offers for the mezzanine by the end of September. And as I mentioned, the assets will be classified as held for sale in the third quarter and are going to have full derecognition and closing by year-end.

Now following the completion of Mexico and taking into account the net inflows that we expect for this year and how we'll operate further about it shortly, the NPE ratio is expected to decline from the current levels to close to 8% by year-end.

Now in terms of asset quality, which was your third question, the trends that we have seen so far are better than initially anticipated. And this holds both for the first quarter in which NPE formation was at EUR 72 million. If you also look at Page 22, in which we provide the segmental analysis, you can see that this good performance is across all segments. But also in the second quarter, we observe a similar pattern. And based on the current data, and most likely formation in the second quarter is going to be lower than the one in the first quarter.

However, as I also mentioned during my introduction, we should keep monitoring the asset quality evolution, especially for the second half of the year, which is the time at which the state support measures will be lifted. Overall, I can say that we are optimistic about the asset quality patterns, but we have to remain also cautious at the same time.

Now during the last analyst call, we had projected about EUR 0.9 billion increase in the stock of NPEs. Based on the data that we have today, we should revise downward this increase by, let's say, 30%, so to go from EUR 0.9 billion to EUR 0.6 billion. And envision that drives also lower the cost of risk for 2021. In the first quarter, it was 1.4%. Our guidance for full year 2021 was at 1.3%. This is what we mentioned during the previous analyst call, and we revise that downwards to 1.1% to 1.2%.

So this is about the asset quality, and let me pass over to Harris about your second question.

[Charalambos Harris Kokologiannis, executive]

Jonas, your second leg of the question was about real estate, correct?

[Jonas Floriani, analyst]

Yes. I think I mentioned the wrong slide, Slide 11.

[Charalambos Harris Kokologiannis, executive]

Let me provide the general outlook of real estate prices, apparently shown on Page 43 of the presentation. There, we may underline that despite the COVID outbreak, the growth of the real estate prices, both in apartment and in office, continues; at a slower pace, but continues. So we see a very resilient market there. Something that continues in the first month of 2021 as evidenced by the latest data of multiple REITs. So the real estate market is very resilient, something that has and continues to have positive impact, both on our investment portfolio as well as on the collateral points of our loan portfolio, as it affects positively the LTV ratio.

Now on Page 11, we can comment that the gross yield remains above 7%. And the mix of the portfolio [ has done ] very successfully through the crisis. As the sectors, always this is the portfolio which is being invested, actually has not been affected in the majority by the COVID outbreak. The return on tangible book value of this segment is again expected to reach or exceed 10% for 2021.

And overall, we are, I would say, very optimistic on the development of the real estate. And on that front, we continue deploying our middle term strategy for a EUR 500 million investment property, new investments, out of which, by the end of 2020, close to EUR 200 million have already been invested, more or less in the sectors presented in Page 11, while the rest EUR 300 million will be invested in the years 2021 and 2022 [indiscernible].

[Operator]

The next question comes from the line of Alexandros Boulougouris with Wood & Co.

[Alexandros Boulougouris, analyst]

Two questions from my end. First is on the guidance on core PPI in your presentation. In your last presentation in March, you had a guidance for EUR 875 million, if I remember correctly. You mentioned that this should be slightly lower because of the negative impact on NII. I think that was minus 3%, I think, in the previous presentation. So what is your new guidance on this, if you could clarify?

And the second question regarding NII, if you could provide a bit of color on TLTRO. I see It's EUR 33 million in Q1 from EUR 10 million in Q4. And what is the level that we should expect in the following quarters, maybe in Q2 and Q3, just to get a color for the full year TLTRO impact?

And one more question on this, on NII, just to get a bit of better understanding, I see the loan margin that is a bit down Q-on-Q, although spreads are quite stable. I mean if you could explain the reason for that, that would be useful.

[Charalambos Harris Kokologiannis, executive]

Alexandros, the last part of your question was about loans margin, you mentioned?

[Alexandros Boulougouris, analyst]

Sorry?

[Charalambos Harris Kokologiannis, executive]

The last part of your question was about loans margin?

[Alexandros Boulougouris, analyst]

Loan margin. The loan margin, which is on Page 18 of the presentation, which is down, I think, EUR 8 million quarter-on-quarter. So I was trying to see -- because spreads are quite stable. So I was wondering what is causing this decline?

[Charalambos Harris Kokologiannis, executive]

Sure. So let me start from the core PPI and the profitability outlook in general, and then we'll go to the specific matters.

So the outlook that we provided in the year-end results call was about core PPI of EUR 875 million. As regards to net interest income, we provided for a slight decrease -- low single-digit decrease versus 2020, coming from a positive contribution from TLTRO; wholesale -- positive contribution from wholesale funding; lower cost and higher NII from international.

On the outflow very negative, we had the lower loans and margin and may impact from the NPE cleanup of portfolio. On commission income, we provided for another strong year with a low double-digit increase, with the main drivers being the assets under management and mutual funds, acquiring rental income and lending conditions. And on operating expenses, we expect staff and the administrative cost will be declined in 2021. Certainly, a significant part of the savings in accelerating the digital transformation of the bank and the upgrade, of course, as you can see in some of our subsidiaries. Now we expect it and continue to expect in 2021, total OpEx to be flat versus 2020.

Now as regards to the picture in the first months of the year, despite the lockdown repeated in the first quarter of 2021, the effect on households and business has been mitigated by very strong government measures. As a result, deposits continued growing further. And the real estate prices, as I mentioned before, continued increasing.

In terms of operating performance, first quarter results are fully in line with full year 2021 annual guidance. However, as I said before, there is some risk associated with a higher-than-anticipated increase of deposit flows, especially compared with the respective growth of loans. As regards to the latter, it is expected to accelerate in the second half of 2021, together with the economy rebound.

At any case, any low risk for core PPI will be offset by better cost of risk. So from 1.3% to the area of 1.1%, 1.2%, which will be the result of lower than initially anticipated NPE flows from moratorium. So overall, the profitability target remains intact, as I said before. Profitability in the area of approximately close to EUR 500 million before tax.

Now coming to the TLTRO. First quarter includes EUR 13 million benefit not accrued in the second half of 2020 and overall amounts to EUR 33 million. For the full year, we expect close to EUR 90 million impact from TLTRO and another similar amount in 2022.

Now as regards to loan margin, on Page 18, here, we have the days effect that it got shown separately, but it is included in the loan margin. So here, written as an impact of EUR 4 million, then we have a days impact by EUR 2 million coming mainly from small business portfolio. And we have another EUR 2 million, but it is a one-off recovery interest in the fourth quarter of the year. So the absence of this one-off creates another EUR 2 million. But the major part is the days effect, but including the -- that is included in the lending margin of EUR 4 million.

[Operator]

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

[Mehmet Sevim, analyst]

I have 3 questions, please. First of all, on loan growth. You disbursed about EUR 1 billion in the first quarter, and you mentioned that you expect it to pick up in the second half. Based on the latest trends, what kind of a figure would you expect for the full year? And secondly, many of your peers are also talking about significant loan growth opportunities in Greece with the flow of the EU funds, et cetera. Against that backdrop, how would you see the competitive environment going forward, so let's say, in 2022, 2023?

My second question is on capital. You've taken a 30 basis points regulatory adjustment. Will there be any further adjustments that you would expect given you've been guiding for approximately 50 basis points? Or should that be the full amount?

And finally, just if you could comment more broadly on your international strategy, please? At one point, I -- if I remember correctly, your ambition was that 40% of NII would come from international operations. Where do you stand today against that? And strategically, what are your thoughts given you have a very meaningful franchise in Bulgaria, [ more subscale in ] Serbia, et cetera.

[Charalambos Harris Kokologiannis, executive]

Thank you for your question. Starting from the lending growth evolution. Overall, for the year, we should expect net increase of performing loan balances in the area of EUR 1 billion to EUR 1.5 billion, net increase of performing loan balances. For the full year, this is expected to accelerate, reaching EUR 2 billion per annum for the -- for each of the next 3 years, as a result of economic recovery and the impact and leveraging of RRF.

Now as regards to the regulatory adjustments of 30 basis points, this is fully in line with the capital plan that we presented in year-end results call. It is about the impact of the new definition of default. So as we have said at that call, the overall impact from new DoD amounted to 50 basis points. This is still our guidance for the full impact, and there's no change on that. Actually, in all of the drivers that we presented in the capital plan, we are still there and we are reiterating our guidance, apart from Mexico that we should expect a better than initially estimated impact.

Now I pass to Fokion to talk about the competitive environment of loans in Greece and about the strategic perspectives [ holding the brush for us ].

[Fokion Karavias, executive]

Okay, more specifically about the RRF and the boost that this would provide to loan growth. This is mainly -- should be expected mainly in late 2021 and '22 onwards. These funds will be directed to investment projects and a lot of working capital. And I think each of the banks will get its fair market share in terms of the allocation of these funds. You know that we are very active as a bank in financing of big scale projects. For instance, we are one of the main banks financing the Hellinikon project. It is a big real estate project.

In Athens, we are very active in [ its renewables ] and therefore, we expect that we're going to have a significant participation in the RRF. If we should quantify that, we expect net delta increased loans, '22 onwards, about EUR 2 billion per annum to EUR 2.5 billion per annum for the next 3 years or -- so definitely, RRF is going to be a good contributor to this delta.

Now let me come to our strategy about our international subsidiaries. We have mentioned a number of times that Eurobank operates in 3 core markets; one is Greece, the second is Bulgaria, the third is Cyprus. Therefore, in these markets, we want to grow both organically, but also through any potential acquisition, if there is a good opportunity for that. You may recall that when there was such opportunity in Bulgaria, we took advantage of that twice in the past.

In terms of the contribution of the international segment in our profitability, as we speak, in terms of core PPI, the international subsidiaries contribute about 30%, and we expect this to continue going forward because both the business in Greece and the business in the other core markets will grow proportionately. So this ratio will remain more or less unchanged.

[Operator]

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

[Osman Memisoglu, analyst]

Just 2 on my side. One is just a clarification on TLTRO. The EUR 90 million that you mentioned, I assume it includes the EUR 13 million that was kind of accrued for last year. That's the first one.

And then the second one, given that you're lowering your cost of risk guidance for '21, should we assume, if this trend continues, some level of reduction for your cost of risk guidance for the future years, particularly '22?

[Fokion Karavias, executive]

Sure. The answer is, yes, EUR 13 million is part of that -- the answer is yes, EUR 13 million is part of the EUR 90 million that is expected overall impact for TLTRO for this year.

Now in terms of cost of risk, in the previous analyst call, we have indicated cost of risk of 60 basis points for 2022. We -- I think it would be premature to revise this figure. As I mentioned before, we are optimistic, but we should remain a little bit cautious about the asset volume in the second half of the year as the state support measures are lifted. Therefore, we revised full year 2021 from 1.3% to 1.2 -- 1.1%, 1.2%. And we keep the 60 basis points for '22 at the moment unchanged.

[Operator]

[Operator Instructions] 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.

[Fokion Karavias, executive]

Thank you. Let me thank you all for participating in this call. Let me also thank you for your questions. We would be available for any sort of clarification that you may need. And we may meet some of you in some video course that we're arranging for the next couple of weeks. Bye-bye.

[Operator]

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