Eurobank Ergasias Services and Holdings SA

ATHEX:EUROB

Earnings Call Transcript

[Operator]

Ladies and gentlemen, thank you for standing by. I'm Costantino, your Chorus Call operator. Welcome and thank you for joining the Eurobank Holdings conference call to present and discuss the first quarter 2022 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, executive]

Ladies and gentlemen, good afternoon, and welcome to the Eurobank First Quarter 2022 Results Presentation. Together with me is our CFO, Harris Kokologiannis and the Investor Relations team. We will start with some key recent developments, present our results and then answer your questions.

In the third quarter of 2022, macroeconomic prospects dimmed and inflationary pressures became more pronounced, increasing the risk of stagflation in the global economy. Volatility remains high, fueled by geopolitical uncertainty and disruption of supply chains, leading to spiraling commodity and energy prices. In this environment, the estimates for the Greek economic growth are trimmed down from close to 5% previously to around 3% to 3.5% for 2022, which is still a good performance.

As the result of the external challenges, domestic economic sentiment dropped in April, although in a measured way. On the other hand, unemployment is at the lowest levels in the past decade and keeps improving. Job creation trends return to pre-pandemic growth path and the minimum wage was recently increased by 7.5%. High inflation is obviously a burden on household's available income and corporate margins, but it is mitigated by the government's recently announced support measures relating to energy costs.

All indicators point to a strong touring season, and revenues are expected to reach the 2018 level, which is at least 60% higher than last year's respective figure. Given the size of growth, which had a high share of Ukrainian and Russian oils in previous years, is expected to offset a loss revenue from vehicles coming from many European countries. We see healthy investment appetite across all segments of the economy, while FEI remains solid and local core point M&A is picking up.

Energy is the leading sector in this investment cycle, and the country is becoming an energy hub for the Southeastern Europe through several infrastructure projects. As a result of the above, demand for business loans is robust as working capital needs have increased and investments, including those projects under the EU programs are progressing smoothly. Finally, after the recent upgrades from 2 rating agencies, Greece is just one notch below investment grade.

Now let's see our financial results for the first quarter of the year as highlighted on Slides 5 to 11. Despite the negative external environment, the first quarter recorded solid figures across all areas. Net interest income was better than expected, fee and commission growth was strong, asset quality metrics continue to improve and profits of our regional activities increased substantially year-on-year. All of these contributing to a robust bottom line results. Consequently, our conviction is getting stronger that our full year targets will be met or even exceed it in some areas.

Let me go into some more detail. Our net profit for the first quarter of 2022 reached EUR 305 million. Core pre-provision income was up by 10.4% on a year-on-year basis, driven by higher than initially expected NII, up 1.4%, and strong fee growth, up 25% year-on-year. In the same period, loan provisions are down by 53% at 63 basis points, and as a result, core operating profit more than that. Our regional operations are giving you a very strong performance with net profit of EUR 47 million in the first quarter, up 46% year-on-year.

Now in terms of asset quality, it is clearly encouraging that NPE formation remained slightly negative in the third quarter. However, we remain cautious because of the rising energy cost and inflation and implications on household income. In this environment, we continue to improve our NPE ratio to reach 6%. Our remaining NPEs perimeter is limited to EUR 2.4 billion or net NPEs of just EUR 700 million after the accumulated provisions. The coverage ratio also improved at 72%. Our total capital ratio stands at 16.5%, while the fully loaded CET1 at 13.6%, reaching already our full year balance.

In all our core markets, credit demand remains solid. Loan disbursement increased, reached EUR 2.3 billion in the third quarter, and there is a strong pipeline for the second quarter and the rest of the year. We see private prospects, especially in the energy, including sectors, shipping, infrastructure and development projects. So concluding my introduction, we operate in a global environment, which is volatile and fragile to external source. On the other hand, Greece's expansion in geographical logistics that mitigate some risks. Following a strong first, quarter, we reiterate our guidance for the full year 2022, especially for at least 10% development of book value and dividend distribution out of 2022 profits.

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

[Charalambos Harris Kokologiannis, executive]

Thank you, Fokion. Let's now provide some more insight on the first quarter results. Starting on Page 19 on lending growth. Performing loans increased organically in the quarter by EUR 400 million, driven by great corporate and SEE loans. Including April, year-to-date growth amounts to EUR 700 million, as it's almost equally split with increase at Southeastern Europe. Considering the low demand for new investments and working capital and the existing pipeline, we reiterate our outlook for a net organic growth of performing loans by EUR 2.3 billion in 2022.

Moving on funding and liquidity on Page 20. As shown on the right of the page, group deposits decreased in the first quarter by EUR 700 million, mainly related with a few large corporates. This change was fully reversed by EUR 1.2 billion inflows in April coming from the same segment. Net loans deposit ratio increased in the first quarter to 75% and LCR ratio remained broadly stable at 151%, as shown at the left of the page.

Moving to profitability on Page 25. Net interest income increased quarter-on-quarter by 5.7% to EUR 339 million as the lower income from Mexico NPE consolidation has a base effect, were more than offset by TLTRO, lower funding cost and higher bonds and performing loans income. On a year-on-year basis, net interest income is higher by 1.4%, better than anticipated.

On Page 26, commission income continued its growth trajectory, increasing by 25% year-on-year, has been dropped EUR 7 million lower than the previous quarter's mark. Asset management and bancassurance fees in the third quarter had inflows that are lower than our plan due to market volatility. In tandem with transactional fees and credit cards, custom markets and lead commissions performance point to a full year outlook in line with our business plan.

On Page 27, operating expenses are flat year-on-year in Greece and higher by 3% in the group due to direct prompt measure and high staff cost in Bulgaria.

In the first quarter, we successfully completed a VES increase, reaching 350 FTEs. The pretax amounted to EUR 42 million and is fully included in the first quarter restructuring costs.

Furthermore, we continued the rationalization of our network, closing another 25 branches, representing 8% of our footprint. These initiatives are in line with our business plan and strategy to fix resources from other banks to grow the bank. On Page 29, we summarized the operating performance for the first quarter of 2022. Core PPI is high year-on-year by 10.4%, up EUR 240 million, mainly driven by performing assets NII, high conditions and core income from Southeastern Europe, which more than offset lower income from NPEs. Cost of risk amounting to 63 basis points for the period and loan loss provisions are lower year-on-year by more than 50%. As a result, core operating profit is higher year-on-year by more than 100% to EUR 178 million.

Finally, on this page, profit before tax increased to EUR 404 million for the quarter. This includes EUR 212 million trading gains from hedging instruments, fully offsetting revaluation classified as FVOCI.

Moving on to asset quality on Page 31. As shown on the top left of the page, NPE formation in the first quarter was slightly negative by EUR 24 million. NPE rates decreased to 6.7% and pro forma with solar securitization to 6%. This translates to EUR 2.4 billion gross NPEs or just 700 million network provision stock. Coverage in the first quarter increased to 70.6% and pro forma with solar to 71.5%, as shown at the bottom right of the page.

Finally, on capital and on Page 36. Our fully loaded CET1 was stable at 12.7% as the quarterly profitability was offset by VES costs and primarily by business growth. This includes new loans, loan commitments, letters of guarantee and investment securities. Pro forma with project Triangle, that is expected to close in the next few weeks. Our fully loaded CET1 ratio increased to 13.6%.

Furthermore on capital on Page 37. Our total cap ratio amounted to 15.8%. This is 30 basis points lower than the previous reading due to the full year IFRS 9 phasing. Pro forma with Triangle, total CAD ratio amounts to 16.5%, which is already 10 basis points higher than our full year 2022 outlook, as provided to the previous results call. Wrapping up on Page 7. Despite the challenging environment, we remain fully on track of all our goals set for this year or even outperforming some of them. This completes my presentation, and we may now open the floor for your questions.

[Operator]

The first question is from Floriani, Jonas with Axia Ventures.

[Jonas Floriani, analyst]

I have a few questions. First of them is on asset quality. I remember that in the previous conference call, you were mentioning the expectation for EUR 400 million NPE closed in 2022. Given what you mentioned now about the impact on disposable income, I'm just wondering if this figure remains the same for the year.

Secondly, I was wondering if you could go through the breakdown of your disbursement figure. I see the EUR 2.3 billion disbursement increase, but there is no increase on the Greek side of things in terms of performing loans, right, the increase is coming from the international. So just wondering if you could also mention about, of this EUR 2.3 billion, what is corporate, SME and mortgages. And also if there is any kind of unexpected higher-than-expected one-off in terms of repayments in Q1 that it was like a headwind for your performing loan growth. And I'll leave it there.

[Fokion Karavias, executive]

Okay, Jonas, thank you for your questions. Let me go through the asset quality one, and then Harris will elaborate on the loan disbursements. Let me start from the first quarter. And as you can see on Slide 21, we have reported the negatives and information of EUR 24 million. Further on Page 32, we saw that the formation from households was slightly positive, whereas that from business loan was a slight negative. And in April, the trend has not changed with formation in rates. And overall, for the second quarter, we expect formation to be slightly positive. So May and June should be a little bit positive.

But overall, the payment behavior of our clients has not really changed in any sort of a material way. It is, I think, true that the high inflation, especially, what we see with increased tenant's cost and food prices are burden on household's available income. But at the same time, there exists a few mitigating factors that I would like to share with you.

The first is what I already mentioned about the government's support measures, the amount year-to-date to a figure of close to EUR 7 billion, what has been announced so far. It is also important, as I mentioned, that employment -- unemployment keeps dropping and we have reached a level of 12.2%, which is the lowest of the past decade.

We have a graph on Page 47 in which we present the evolution of unemployment. It is also important that household deposits have remained unchanged between year-end and today, around EUR 135 million despite the fact that there was increased spending need. So on these factors, together with the fact of growth, we still projected at 3%, and also that residential real estate prices remain firm.

Let me remind you at this point that in 2021, we had an increase of 7%. These factors, I think, make any sort of deterioration if it happens to be quite contained. So this is what we have seen so far and what we expect based on the fact that we have at this point. As we mentioned very correctly, we have projected for the year a positive net inflow of EUR 400 million. And despite the fact that effectively for the first half of the year, we expect to be around 0. We can expand to negative figure in the first quarter. We expect a positive figure in the second quarter.

So overall, the first half of the year will be flattish. Again, we keep this estimate of EUR 400 million for the full year 2022 because we feel that we should remain cautious and be on the conservative side. So based on that, we also reiterate our guidance for cost of risk and NPE ratio at 65 basis points and 5.8%, respectively.

And in terms of coverage, we have reached 71%, as you can see on page 31, if I remember correctly. This is quite higher than what we had projected a few months ago about reaching 64% in year-end, but coverage may well drop from the current levels due to the expected write-offs on the second half of the year.

[Charalambos Harris Kokologiannis, executive]

Harris Kokologiannis, here. Your second leg of the question. By far, the major part of the EUR 2.3 billion disbursement related with business launch, corporate and SME. But on that occasion, let me provide you a fresh outlook on how we see loan growth in the year. I would say that as of the last month of the first quarter, in March, and the first 2 months of the second quarter, April and May, low demand is picking up driven by the business sector.

And I would say, mainly energy renewals are shaping where we saw a very strong performance are tourist, mineral, estate, construction and manufacturing. And in this context, RRF loans are already acting as an accelerator for loan growth in the next years. At the same time, our regional subsidiaries are producing a quite steady and healthy flow of loan delta. Overall, investment in advertising remains strong despite economic uncertainties. And furthermore, we see -- apart from investments, we see increase on demand for working capital headways, especially by big corporates.

In the first 4 months of 2022, as I said previously, we increased group performance loans by EUR 700 million, and this is equally split EUR 350 million from Greek corporate and another EUR 350 million by international. So we are on track to meet our 2022 target of EUR 2.3 billion net increase of performing loans, as we said in our previous call.

[Jonas Floriani, analyst]

Got it. Just a final question then. Can you share anything on the interest rate environment, if there's any change to NII expectation or general P&L trajectory into the end of the year and 2023? I mean we already heard from some European banks guiding for that. So I'm just wondering where do you stand and what we can expect.

[Fokion Karavias, executive]

As we discussed during the call and in the previous quarter, our guidance and business plan for the 3-year period, including 2022, is under the assumption that we have no interest rate increases. Obviously, it appears that this is not going to be the case. We expect the first rate increase in July, maybe a second one in September. We have provided some sensitivity, what is the upside because of that. And let me turn to Harris to provide you some figures on our interest rate sensitivity.

[Charalambos Harris Kokologiannis, executive]

So let me provide an update on that. I remind you that the majority of our loan book is floating rate and floor to 0. Based on our basic calculations, for negative rates, i.e., between minus 50 to 0, the impact on a growth basis is approximately EUR 80 million, 8-0. Once Euribor rates turn positive, of course, the reported CapEx accelerates and from 0 to plus 50 basis points, the additional impact is circa EUR 150 million. And for rates higher than 50 basis points, the sensitivity starts decreasing because we assume that a latter part of interest rate increases will be passing to the positive. Overall, for rates ranging between -- from minus 50 to plus 100 basis points, the cumulative impact has been calculated at approximately EUR 300 million. And I repeat what Fokion said in our business plan for projects proposition here, we haven't incorporated any impact from that.

[Operator]

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

[Mehmet Sevim, analyst]

Just 3 questions from me, please. So firstly, on the asset quality side. Is there any color you can share with us with regards to the loans that were under any pandemic support schemes at the end of last year, particularly the ones under the Gefyra program or any bank-specific programs, if there were any? How are they faring so far? And is the performance in line with your expectations?

And secondly, on the RWA growth in the quarter, which looked quite sizable, can you talk about the nature of this growth? Is this related to rating migration? Or how should we think about it? Also for the full year, if possible. And finally, on the trading gains. I see you mentioned this is related to hedging instruments. But is this one-off in nature? Or are these existing hedges that would further benefit the trading line should, for example, the government bond yields continue to go up? Any color on that would be helpful.

[Fokion Karavias, executive]

Okay, starting again from the asset quality question. In the third quarter, we have already seen to a great extent the effects of the end of moratoria, which overall has a performance according to our expectations. Before, this segment continue to remain low. And therefore, this is not the point that raised any sort of red lights to us at the moment. As I said before and my previous answers, overall, asset quality is something that we monitor very closely for the different segments of our portfolio. Definitely, loan coming from moratoria is one of these segments of -- that require high monitoring as well as the segment of the performing -- for bond loans that we also monitor very closely. But so far, we have not seen any sort of signs of deterioration in these segments.

[Charalambos Harris Kokologiannis, executive]

On RWA's growth from -- related to RWA's increase related to asset growth. If you go on Page 37, for example, we provide there note 5. That actually explains the drivers of this increase, but it is mainly -- it's coming from loans by EUR 400 million. Loan commitments and LTs, that it is actually on balance sheet, by EUR 300 million and investor securities by EUR 160 million. This is the main drivers of RWA's increase.

Regarding your question about potential trading gains in the second quarter, the answer is that we may have some as well. But however, the overall impact on capital from, first, hedging instruments and second, investment securities valuation from FVOCI, so far in the second quarter is flattish.

[Operator]

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

[Osman Memisoglu, analyst]

A couple on my side as well, please. First one, if I understood you correctly, you mentioned a couple of times that NII was better than expected, a positive surprise. Where is that coming mostly? Is it more volume or pricing? That's my first question.

Second one is you mentioned on asset quality a few times, but I'm just looking if you could give us a bit more color on the international side, given the geopolitical developments we've had, the unfortunate events we've had over the last few months and your exposure to Bulgaria and Cyprus. And then final one is on your issuance plans and specifically, would you consider skipping issuance at all for MREL reasons this year?

[Charalambos Harris Kokologiannis, executive]

Okay. I'll get the first and the third one, Fokion, you may comment on the asset quality of trends on international. As regards to the NII category, you may recall that in our last year call, we provided for a full year trend of NII, minus 3%. It looks -- we run in the first quarter by 1.4%. And it looks like on that aspect, we may be -- this trajectory may continue. The reason is that, primarily, we have better cost income, which is a combination of higher positions and high yields. Second, it looks that we have a better funding cost, both in terms of capping and in terms of deposit cost and slightly higher on performing loans, net interest income, mainly due to the carryover of the very strong quarter that we had in the fourth quarter of 2021. This is the main driver of so far better performance versus our initial outlook.

Now as regards to -- let me provide you an update as regards MREL and funding plan, et cetera. As on Page 21 of the presentation, based on the latest official SRB decision, the average requirement stands at 27% of RWAs, including 3.7% of CBR. And this shortfall should be covered by the end of 2025.

The interim nonbinding MREL target for first of January 2022 was 17.8% and had been already fully met. The interim nonbinding MREL target for January 1, 2023, is 20.5%. And the major part versus the 18.3% that we have today will be of the distance versus the one that we have to date will be covered by the full year profitability, first of all, and the client capital impact of 80 basis points that is not included in the MREL ratio at that pace. Furthermore, we monitor the market. We understand you may appreciate the market volatility so far. We monitor the markets for any opportunities for senior issuances, includes, of course, potential issuance of short-term paper.

[Fokion Karavias, executive]

Now let me discuss your question about asset quality outside Greece and in our 2 other core markets, mainly Cyprus and Bulgaria. Cyprus definitely was the country that has the largest exposure to Russia and Ukraine due to the services that they offered to customers on these 2 countries. And mainly in the area of tourism, about 25% of the tourists were originated from Ukraine and Russia in the previous years. So that was a point of concern for the economy. But as I mentioned already in my introduction and having already discussed the situation with a number of our customers in the island, it appears that 2022 is not going to be worse than 2021 in terms of tourist revenues because visitors from the 2 countries would be replaced from visitors coming from Europe.

Let me remind you that the markets of U.K., which is a very important market for Cyprus, was closed until August last year because of the COVID, and obviously this is not the situation this year. So overall, we expect positive growth in Cyprus, close to 2.5%. And definitely, this would be a factor -- a positive factor for the overall performance.

Second point, our bank in Cyprus has almost 0 exposure in retail. We are only in corporate banking, which also is another comfort level. And our current NPE ratio is very low. It's 2.3%, as we can see on Page 16. Actually, it dropped 30 basis points during the first quarter of 2022. And also coverage is the highest in our group at 94%. So overall, we feel quite comfortable with the asset quality in Cyprus.

Let me now go to Bulgaria. And I'm sure that we have followed some recent developments about the stock of natural gas supplies from Russia to Bulgaria, which obviously was an important development. But as you can see on Page 52 of our presentation, natural gas is only 15%, 1-5, in the energy mix of the country. So although this is an important development, it's not going to affect the economy of the country in any sort of significant way.

And Greece has stepped in, replacing some of the supplies that Bulgaria was getting from Russia in terms of natural gas. Greece is providing some supplies out of LNG coming to our country. So there is not going to be a factor that will affect the economy because of the stop of supplies out of Russia.

The economy is expected to grow between 2.2% to 2.3%. Also, we have a low NPE ratio in the country, 4.5%, which also dropped further in the first quarter, about 40 basis points, and coverage has also increased at levels north of 70%. So at the moment, we don't have any sort of signs pointing to alarming trends. But definitely, asset quality is our main concern because of the current situation, and we will monitor this very, very closely.

[Operator]

The next question is from the line of Tsourtis, Petros with Optima bank.

The next question is from the line of David, Daniel with Autonomous Research.

[Daniel David, analyst]

I've got 3, hopefully not too long. On Slide 25, you show that the TLTRO income has been a boost in this quarter. I was just wondering if you can give us a bit of guidance on what you think TLTRO is likely to drop to in Q2, 3 and 4. And then just to retouch on the MREL slide, thanks for the disclosure. I'm just interested that you mentioned a nonbinding target. Is there any consequence of not meeting that nonbinding target at 1 Jan '23?

And then finally, just a question on the Tier 2 that you've got coming up the call. I hear your comments on market conditions being a bit volatile at the moment. And I guess, if you can't issue a new Tier 2, my assumption is that you wouldn't be able to call. I guess I'm interested, could you revisit that instrument at a later date? So I guess I'm asking, if you don't call, is an LME on the table to potentially reduce that government-held Tier 2 and come back to the market? I'd be interested in your thoughts.

[Charalambos Harris Kokologiannis, executive]

Thank you for your question. As regards TLTRO, let me provide you some insight. In 2021, we recorded an impact of -- positive impact of close to EUR 90 million from TLTRO. In the first quarter, we had an impact of EUR 25 million. This compares to close to 10%, 11% in the previous quarter. For that reason, we had this plus 16% quarter-on-quarter. And for the following quarter, we expect similar amount. So overall, for the year, the TLTRO impact is expected close to EUR 100 million, more or less evenly distributed throughout the quarters.

And now as regards the MREL, the nonbinding means no consequences. However, from a strategy point of view, we intend and will meet this target for 2022 and 2023 and year onwards. Now as regards Tier 2, a call option, as we have discussed in the previous calls as well, a call option kicks in as of February 2023. In tandem, as of 2023, there is a gradual 5-year phaseout of 20% per annum. Of course, there is no or any possibility for LME. We don't intend to execute an LME. So who haven't thought about that?

Now what we intend to do actually is if the current market volatility persists, we intend to proceed to partial issuances as of next year, it's up in the market, of course, addressing the phaseout part of the existing instruments, does not have any impact on capital. So if the market volatility is up and if it persists, we are going to go to smaller tranches of new issuances, replacing the one that it is a gradual phaseout.

[Daniel David, analyst]

So just to clarify, so if you can't issue the -- or refinance ahead of the call date, I guess that the option would be not to call but then to issue the pieces of capital that phase out over that 5-year period?

[Fokion Karavias, executive]

Correct.

[Operator]

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

[Alexandros Boulougouris, analyst]

A quick question on your targets. As you mentioned, NII seems to be the trajectory and NII should be getting better than what you had input, the minus 3%, on a year-on-year basis. And fees also seem to be very strong, as we saw in the first quarter. But you keep the target of -- on core operating profit and core PPI despite the interest rate hikes that potentially would provide an extra boost. Is there some other line that you feel less confident? For example, the OpEx or the cost of risk line, and that's why you maintain the targets, which seem to me the absolute minimum at the moment.

[Charalambos Harris Kokologiannis, executive]

Overall, as regards our stance vis-a-vis the targets that we have announced in the previous call. The first quarter performance indeed was strong across all areas despite the volatile environment. As you said and we said, net interest income was better than anticipated. We had a solid performance in commissions in a seasonally weak quarter. And on OpEx, I would say we're in line with our annual target despite the inflationary pressure.

Finally, NPE formation was slightly negative compared with an annual outlook of provision of positive EUR 400 million, as Fokion extensively elaborate. In summary, first quarter results, I would say, an increased conviction of achieving full year 2022 targets or even outperforming some areas. However, at this stage, and you may appreciate the economic uncertainty, we are not going to revise our goals and targets. But we have to wait and remain cautious given the current asset conditions. Having said that, despite the challenges and based on the performance of the first quarter, we should reiterate our target for at least 10% return on that book value for the year and the dividend distribution out of 2022 profits, of course, the latter subject to regulatory approval.

[Alexandros Boulougouris, analyst]

Okay. Just on the cost side, do you see the inflationary pressures mounting up at all? Or is still relatively in check with what you were expecting?

[Charalambos Harris Kokologiannis, executive]

The line of cost is one of the risk areas related with the recent inflationary pressures for 2 reasons. First, related with the higher administrative expenses for electricity. And second, related with the pressure for wage increase. However, and starting from the latter, let me note that the collective bargaining agreement recently signed with the unions calls for a cumulative increase of the base salary for bank employees of 5.5%, cumulative for the next 3 years.

So far, we don't see pressure for a wider level wage increases. However, a separate case is a highly skilled staff where in that area, there is some pressure. And on the second area that it is the admin cost, on energy-related admin costs, we are already implementing a set of initiatives targeting to reduce both electricity and fuel cost footprint. So overall, despite the risks coming from the inflation, we expect not to exceed the guidance provided for the full year 2022.

[Operator]

The next question comes from the line of Garrido, Luis with Bank of America Merrill Lynch.

[Luis Garrido, analyst]

I have a couple, please. First, could you clarify 2 things. Number one, on the trading gains, you said something about your expectations, but just to come back on this quarter, can you very simply explain what the hedging influence were that led to the very large trading gains? And what is your hedging strategy that explains this gain?

And secondly, on the risk-weighted asset move, you pointed the disclosure on the increase related to loans. Apologies if I missed it, but I don't think you've explained how much of that is linked to volumes and how much is linked to risk-weighted asset inflation or credit migration.

And then two, bigger questions. Can you provide a sensitivity of your capital to move in government bonds? And very finally, quite simple, do you expect to meet the nonbinding 2023 MREL target?

[Fokion Karavias, executive]

Let me take the third question about the trading gains and the hedging targets that we have used and effectivity is very simple instruments. It is interest rate swaps and some credit for swaps and some short positions in bonds that helps our portfolio on an aggregate basis. These are under the economic hedging in terms of accounting. And they intend to hedge our balance sheet as a whole. And obviously, because of the deterioration in terms of credit spreads and rising interest rates, this has made the money in the third quarter of the year.

And as Harris said, second quarter today also we saw some sort of positive income. But again, these are for hedging purposes and therefore, they balance any sort of evaluation we have on the fair value through OCI investment securities. Now in terms of sensitivity that we have in this book, given that we report separately the effect of trading gains versus the effect on the NAV, you can get an idea of what is the sensitivity in the first quarter of the year. We showed this number on the capital page. I'll hit the rest of the questions.

Regarding MREL, I repeat that the target is nonbinding, however, our intention and goal is to achieve this target on 1st of January 2023. And I'm not sure I have gotten your question about the RWAs. May you repeat that, please?

[Luis Garrido, analyst]

Yes. No, I just wanted to know what portion of the increase in RWAs is linked to loans. How much of that was just higher volumes? And how much of it was the same volume of loans, but just credit deterioration?

[Fokion Karavias, executive]

So actually, the whole part is coming to asset growth. We haven't seen any category of our assets showing any deterioration. On the contrary, some has also improvement. So exclusively, the increase is associated with asset growth.

[Operator]

The next question is a follow-up question from the line of Memisoglu, Osman with Ambrosia Capital.

[Osman Memisoglu, analyst]

Just 2 follow-ups. One, coming back to the NII front. Some of your competitors were mentioning spread stabilizing. I just wanted to get color on your side, both for the Greek part and the international bit. And then a bit of a technicality, apologies for that, but the other income in this quarter, which is usually a slow quarter, a negative quarter, is showing a positive EUR 31 million. So I just wanted to -- if you could share any color also on that.

[Charalambos Harris Kokologiannis, executive]

Regarding your first question on comment on the spread side. Indeed, on the retail portfolio, we don't expect any material change versus 2021 levels. On the contrary as regards the corporate portfolio, as a bank, we have seen a decline in trend during the last couple of years, which we have extrapolated in our 2022 budget and the whole 3-year plan. If you ask me to clarify that, it is close to 15 basis points per annum for the corporate portfolio. Now the -- as regards other income, there is a EUR 32 million again for selling a part of our participation to Grivalia Hospitality.

[Operator]

[Operator Instructions]. The next question is from the line of Tsourtis, Petros with Optima bank.

[Petros Tsourtis, analyst]

I apologize for earlier, some technical problem. Just a quick question, please. Did you intend to increase your stake in Hellenic Bank by the end of the year?

[Fokion Karavias, executive]

We have already said that Hellenic Bank is something that we follow closely. But we don't have any sort of plans at the moment that can be announced or discussed in the market. At the moment, we are at the 12.6% equity participation in the bank and we don't have any sort of deals or transactions to increase it.

[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, executive]

Let me thank you all for participating in this conference call. Let me also thank you for the very interesting questions that gave us the opportunity to elaborate on our results. Our Investor Relations team, Harris and myself will be available for any further clarifications. Thank you very much.