Eurobank Ergasias Services and Holdings SA

ATHEX:EUROB

Earnings Call Transcript

[Operator]

Welcome, and thank you for joining the Eurobank Holdings conference call to present and discuss the second quarter of 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 Eurobank's first half of 2022 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. Two contrasting trends emerged in the first half of the year.

First, and although early today, we heard Eurozone's economic releases, bidding estimates on growth and inflation, overall, the global macroeconomic environment has deteriorated. As geopolitics and supply chain bottlenecks led to high inflation, mainly through energy prices. Faced with such challenges and elevated uncertainty, major European economies are expected to slow down and may even go into recession. Against this backdrop, Greece employs a better outlook.

The GDP projection for 2022, 0.4% growth, or even higher. Growth is supported by a number of factors, such as strong investment flows and business grade demand, amplified conditions, and continued deposit inflows, lower employment, and rising real estate prices, and last but not least, by a strong touring season. Tourism revenues in 2022 may even exceed the 2018 figures.

Despite the strong trajectory increase year-to-date, we follow closely the risks from the weak global macroenvironment, including asset quality trends, high energy and commodity prices, and rising interest rates are a burden on the household income and small business profitability. To alleviate the impact, the government is reduced this year close to EUR 10 billion, one-off support measures, on the back of strong fiscal performance.

Let us now focus on our financial results for the first half of 2022, with highlights shown on Slide 5. In the first half of this year, we exceeded our targets in all lines and across almost every sector of activity. As a result, our tangible book value per share increased by USD $0.18 to USD $1.60 through organic profitability, exceptional net trading profits, and the merchant acquiring business aids. Our net profit in the first 6 months reached EUR 941 million, of which EUR 621 million was in the second quarter. There was strong performance in all core operating lines. NII increased 4.5% on a year-on-year basis. Fee and commission income grew by 22.4%. Operating expenses were flat year-on-year increase, and higher by 3.9% at the group level. The above drove corporate provision income to EUR 506 million, up 13.5% year-on-year. In the second quarter, in particular, core PPI was EUR 265 million.

On asset quality metrics, we have flat NPE formation in the first half of the year, which is clearly better than our initial expectations. The NPE ratio dropped below 6% and the coverage exceeds 71%. The cost of risk was at 64 basis points. As a result of the above, core operating profit, that is, core PPI minus provisions increased to EUR 380 million. This is up 72% year-on-year.

Our income stream remains well diversified with profits from international operations reaching EUR 102 million, up by 39% year-on-year. We are also recording an impressive custom hedgement-our total capital ratio reached 17%, up 140 basis points during the last 12 months, while fully-loaded CET1 ratio increased by 190 basis points to 14%. Deposit gathering and loan underwriting accelerated significantly in the second quarter. As a result, in the first 6 months, imported and performing loans increased by EUR 0.8 billion and EUR 1.6 billion, respectively. The increase in lending volumes was mainly driven by business loans.

Overall, we cannot underestimate the expressed outlook for the Europe economic growth and the challenges ahead of us. Europe is Greece's main trade counterparty. Therefore, some impact on the Greece economy should be expected, which is difficult to estimate at this point. On the other hand, the first half of the year results were clear evidence of our strong franchise and business potential.

Accordingly, we are revising upwards our estimates, and we now expect core PPI to exceed EUR 1 billion for the full year 2022 and the recurring return on tangible book value to be higher than the initial target of 10%. The joint profitability should improve further the fully loaded CET1 ratio to 14.2% by year-end, despite the higher loan growth. In this context, we continue to construct the dialogue with the supervisor as the strong performance delivered so far increased our confidence and dividend distribution out of 2022 earnings. At this point, I would like to ask our CFO, Harris Kokologiannis, to present our results and the outlook before opening the Q&A session.

[Charalambos Harris Kokologiannis, executive]

Thank you, Fokion. Let me start with two clarifications regarding the second quarter results. First, net income includes EUR 230 million after-tax profit from the disposal of card acquiring business as the transaction closed assumed. Second, loans of EUR 274 million gross book value included in solar securitization having classified adapter sales. Let's now provide some more insight to the period's performance. Starting on Page 19 on lending growth, performing loans increased organically the quarter by EUR 1.2 billion, driven by corporate sector in Greece and Southeastern Europe loans. For the first half of the year, performing loans grew by EUR 1.6 billion, out of which $1.1 billion coming from Click business loans, EUR 400 million from Bulgaria, and EUR 140 million from Cyprus. Considering the first half performance and current loan demand, which maintains its momentum, we revised outlook for the full year's net organic growth to EUR 2.9 billion. This is an increase of retail target by EUR 600 million and is mainly related with big corporate portfolio prospects.

Moving on funding and liquidity on Page 20, as shown on the right of the page, group deposits increased in the second quarter by EUR 1.5 billion, mainly related with retained large corporate increase and size. For the first half of the year, group deposits are up by EUR 800 million. Net loan-to-deposit ratio remained stable at 75%, while LCR ratio increased 174% as shown on the left of the page. Moving to MREL on Page 21, despite the high market volatility, the bank completed successfully made a EUR 500 million single preferred issuance. In the last 12 months, we have tapped the market 3x, raising in total EUR 1.5 billion.

Considering the internal target for January 1, 2023, the actual asset ratio as assumed, and the profitability outlook for the second half, we do not need to proceed to any further issuance this year. Moving to profitability on Page 25, net interest income increased quarter-on-quarter by 6.3% to EUR 362 million due to higher bonds and loans income, mainly related to volumes and better performance of Southeastern Europe. On a year-on-year basis, NII is higher by 4.5%, much better than initially anticipated.

On Page 26, commission income increased quarter-on-quarter by 8%, reaching EUR 133 million, driven by higher lending, transactions-related, and credit card fees, both in Greece and SEE. On a year-on-year basis, commissions are higher by 22% and fees over asset ratio increased to 67 basis points. On Page 27, group costs are higher year-on-year by 3.9% due to Direktna merits in Serbia and higher staff cost in Bulgaria. In Greece, operating expenses are flat year-on-year as the higher IT and depreciation expenses, as well as electricity costs, were offset by lower cost and other arenas.

In the first half of the year, we successfully completed the VES increase, exceeding 400 apiece. Furthermore, we continue 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 see if the resources come around the bank, grow the bank but also to address inflationary pressures on staff salaries, energy, and premises-related costs. On Page 29, we summarize the operating performance for the first half of 2022.

Core PPI is higher year-on-year by 13.5% at EUR 506 million, driven by performing assets NII, mainly bonds and loans, high commissions, and core income from Southeastern Europe, which more than offset lower income from NPEs. Cost of risk amounted to 64 basis points for the period and lower loss provisions are lower year-on-year by more than 40%. Acting prudently, we maintained cost of risk in line with the initial finance, although NPE net flows were much lower than the budgeted figure for the first half of the year.

As a result, core operating profit is higher year-on-year by 72% at EUR 38 million. Furthermore, profit before tax amounted to EUR 933 million for the first half of the year. This figure includes EUR 572 million as other income for the period of with EUR 372 million is in the second quarter. This is mainly related with realized trading gains of certain positions, which more than offset valuation losses of bonds at fair value to OCI.

Considering the core profitability of the first half of the year, and the prospects for the second half, we revised upwards our guidance of core operating profit for the full year 2022 to circa EUR 750 million from EUR 610 million before. This translates to a year-on-year increase of 5% and 50% and the better performance versus our initial guidance by EUR 140 million. The above reading assumes a core PPI of about EUR 1.2 billion. It also assumes a cost of risk for the year of 65 basis points.

Moving on to asset quality on Page 31, as shown on the top left of the page, NPE formation in the second quarter was slightly positive by EUR 17 million, which leads to a flat rating for the first half of the year. NPAs decreased to 5.9%. This translates to EUR 2.5 billion of gross NPEs for the group or EUR 700 million net of provision stock. Coverage in the second quarter increased to 71.5% as shown at the bottom line of the page.

Finally, on capital and from Page 36, our fully-loaded CET1 ratio increased quarter-on-quarter by 130 basis points to 14% due to acquired business disposal gain, the quarterly profitability, and the excess of getting realized gains over cost valuation. The advanced figure also includes the impact of business growth related to new loans, loan commitments, and letter of guarantees. Furthermore, on capital and on Page 37, our total capital ratio increased by 120 basis points to 17%. Taking into account the first half mark and the updated profitability outlook and despite the high growth of loan balances, we revised our guidance for the year-end fully-loaded CET1 ratio at 14.2% and for the total capital ratio of 17%. These ratings are higher of the initial targets by 60 basis points. This completes my presentation and we may now open the floor for the questions.

[Operator]

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

[Mehmet Sevim, analyst]

Good afternoon. Thanks very much for presentation and congratulations on the very, very strong performance. My first question will be on NII and loan growth, please. This was particularly strong this quarter, especially in business lending. So could you please provide some color on where new origination is coming from, so what kind of customers are these. This is demand related, and do you see this continuing in the second half of the year, or were there any one-offs such as maybe syndications, et cetera, that you participated?

[Charalambos Harris Kokologiannis, executive]

Thank you for your question. This is true. The second quarter actually was characterized by a strong NII, much better than we anticipated and, actually, this was due to NII dilated with bonds income due to both higher volumes and better yields and higher loan relating NII, mainly related to volume and a small part due to the rate effect.

Now as regards the second half of the year, another -- let me provide you guidance on the full year 2022. You may recall that in our full-year results, we provided for a year-on-year decrease of NII by almost 3%. Now, for the full year 2022, our latest outlook is for an increase by about 7% to 8% versus 2021, and this is related to higher income from Eurobank that we are going to see the effect in the second half of the year.

Actually, for this outlook, we have incorporated the recent 50 basis points increase in ECB rates, increased bond position and high credit expansion. Now, as regards the lending growth, let me provide you some insight. As of 2022, especially as of the second quarter of 2022, loan demand is strongly picking up, driven by-to a very high extent-the business sector, such as in this category, energy, shipping, tourists, real estate, construction, last syndicated loans and renewals.

Now, on top of that, the RRF is acting and will act more in the next year as an accelerator for loan growth. At the same time, our subsidiaries in Southeastern Europe and especially Bulgaria and entire Russia are producing a steady flow from Delta.

In the first 6 months of 2022, increased performing loans by EUR 1.6 billion, out of which EUR 1 billion from presenters from the SEE. And as I said, this performance is leading us to increase our growth target. Considering the cost of the pipeline that we have in our mind for the full year of 2022 from EUR 2.6 billion to EUR 2.9 billion. out of which 1.9 million in Greece and EUR 1 billion in Southeastern Europe. The major part of this target revision is related to, I would say, to the Greek corporate portfolio.

[Mehmet Sevim, analyst]

Thanks very much, that was very, very helpful and clear, and my second question would be on asset quality, taking into account the most recent developments, are you seeing any incremental pressure in any part of the book? I understand the net new flows are flattish so far this year? And if I recall correctly, you were expecting about EUR 400 million of net new NPE formation for this year. So how are you seeing the environment this year, but also probably even more crucially going into next year? Any color will be very helpful.

[Fokion Karavias, executive]

Okay. Thanks for the question. Let me start with a summary of what we have seen in the first half of 2022 in terms of asset quality. As you can see on Slide 31, In the first quarter, we had a slightly negative formation, very much slightly positive formation in the second quarter. So overall, for the first 6 months, effectively, we had the flattish, as I said before, formation.

It is also interesting to look at Page 32 of our presentation in which we present the formation per loan segment, and there you can see that during the last 3 to 4 quarters, there is a small positive formation from retail portfolio. Small countries and small businesses and negative formation coming out of corporates. In July, based on the new data that we have, effectively, this pattern continues. We have also a flattish formation in July and which also is the same for retail rent on corporate portfolios.

Therefore, so far, we have not seen any deterioration in the asset quality trends. However, we remain cautious because high energy, high food prices, and rising interest rates are obviously a burden on households' available income. Let me say a few things about the potential effect of rising interest rates, because we have already the first 50 basis points and most likely more is going to follow. Based on our initial calculations, the impact from higher interest rates is going to be manageable in terms of asset quality. The most sensitive loan segment is obviously mortgage loans.

However, given that most of them were originated at least 10 years ago, the impact from the current increase of 50 basis points is less than 5% on the monthly installment, but even if we assume a cumulative rate increase of 150 basis points, which is the most likely scenario coming out of the ECB, the impact also remains manageable at about 10% to 12% of the month installment, and it is also interesting that more of this originated during the last 3 years, so the most recent origination, almost all of them are coming with fixed range.

There are also a number of factors, positive factors, supporting the asset quality. We already mentioned some of them, but let me summarize. First, are the government support measures, mainly on the back of the high energy prices, which account for almost EUR 10 billion so far. Definitely, this is something that is helping the household income. Also, growth is quite strong. We expect more than 4% for the year.

Unemployment keeps dropping month after month with the most recent leading up 12.5%. We had also a base salary increase for this year, which was quite general. It is also worth noting that the deposits have remained relatively stable during the first 6 months of the year, around EUR 108 billion, despite the pressure on the household income.

And finally, a couple of days ago, we had some official statistics about the household gross disposable income, which increased by 3.8% in the first quarter of 2022, so overall, we had of a ground, which creates some sense, but there are some positive factors that mitigate some of the risks. In summary, we will continue monitoring very closely the asset quality trends.

And as we mentioned already, we are not changing our projection for EUR 400 million net inflow for the full year of 2022, ergo someone would argue that we could have adjusted it downwards given the better-than-expected performance in the first half of the year. We feel it is better to be conservative and prudent at risk besides. So, as a result of this low cost of risk and NPE ratio maintains the same guideline that we had provided a few months ago.

So, cost of risk is at 65 basis points and the NPE ratio at the end of the year is 5.8%. Now, if you ask me how we maintain a lower NPE ratio versus the current one, despite this inflow of EUR 400 million, the answer is that we are planning for some write-offs in the second half of 2022. And as a result, coverage may drop somehow from the current levels of 72. So, this is how we see asset quality for the second half of the year.

Now for 2023, that you asked me, you could appreciate that it is quite difficult to make any sort of a projection at the moment, given all the uncertainties with respect to the energy markets for this coming winter. So, let me refrain from making any sort of estimates.

[Operator]

The next question is from the line of [indiscernible] from Axia Ventures.

[Unknown Analyst]

Hi, thank you very much for the presentation. Couple of quick questions from my side. You've done really, really well on increasing the NII, and you gave us a nice detail on the lending balances. Can I ask regarding the investment securities portfolio? How much would you plan to grow the investment securities from where you are right now? And as a second part of that question, are you done now with the heavy swap sales or are we going to be seeing anything in the second half? And as a second question, if I may. I suppose now that the Q1 capital ratio increased further with the 14% that you've got, will that be helpful in your SSM conversations when you go back to them to discuss the dividend.

[Fokion Karavias, executive]

So on the first couple of questions, we have grown quite substantively our total investment securities portfolio in the last, let's say, three quarters. So, it is also envisaged to grow at least at the same pace going forward. It is already at close to EUR 12 billion. Now, as regards the paying gains from the hedging instruments, we had quite strong gains in the first and the second quarter. We do not expect in the second -- in the third and the fourth quarter to give an addition on this business. So, the trade gains are expected to be substantially lower. Now, in terms of your second question about the digital distribution, it is needless to say that the dialogue with the supervisor is an ongoing process. It is a constructive dialogue, and it is also true that the results of the first half of the year but also, we expect the result for the full year 2022 that are going to be much better than our initial plan makes this discussion even more constructive. Our base scenario is that we're going to pay dividends out of 2022 profits. However, as a prudent payout ratio, as we have also mentioned in our previous calls.

[Operator]

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

[Daniel David, analyst]

Good afternoon and thanks for the call. I think most of my questions have been answered. I just got one quick one on the Tier 2 symmetrical, and I hear what you're saying about MREL, you've been very active and not to expect any further prints in MREL for the rest of the year. I just want to check your thinking on the Tier 2. You've mentioned in the past that if it's not called, you'd look to issue in Tier 2 to mitigate the reduction in Tier 2 value. Is that still the thinking? I would just be interested to hear your thoughts given the current market volatility.

[Charalambos Harris Kokologiannis, executive]

Sure. Thank you for your question. Let me provide you an outline about according to the agreement signed with the Greek state, as cooption kicks in as of February 2023. And in parallel as the instrument is in its sixth year of tenor, it starts the gradual phaseout of regulatory contribution by about 30% per annum or by EUR 190 million. Now regarding our plan, taking into account the marketable activity, of course, we will explore all options at the time, including to proceed to smaller part aliases commensurate to the early phaseout of the current resources.

[Operator]

The next question is from Dgebuadze Otar with Morgan Stanley.

[Otar Dgebuadze, analyst]

Good afternoon. Thank you for the presentation and taking my questions. In your introductory remarks, you highlighted great strong economy as it outside from Europe and is driven by one of the reasons, rising real estate prices. And you also mentioned real estate lending environment profile at a strong loan growth. And then, looking at the Slide 32, which you referred earlier in your presentation has become positive for last the 4 quarters, after many quarters of negative trend. So, I understand your point about interest rates. At the same time, you mentioned strong disposable income growth, unemployment drops, and generalizing real wages. So, what do you see the reasons behind the mortgage NPE formation trend?

[Fokion Karavias, executive]

Can you repeat the question because it was not very clear. The last part of your question, please.

[Otar Dgebuadze, analyst]

So given the strong real estate prices and the low unemployment, what do you see the reasons behind the mortgage NPE formation, which increased in the last 4 quarters.

[Fokion Karavias, executive]

Actually, yes, it was clear. If you look at the Slide 32, you're going to see that the increases are really small numbers. So, effectively it is not something really that worries us because overall, the figures are very low. So, I cannot say that there is any sort of trend or something that would create some sort of concern out of that. You are right that the real estate market remains strong. However, there is some pressure on the household income despite the measures that the government has taken, despite some increase in the base salary. Overall, the household income feels pressure because of higher energy prices, because of higher food prices. So far, the figures that we have seen in terms of this NPE positive flows for mortgages are small.

[Operator]

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

[Luis Garrido Regalado, analyst]

Yes, good afternoon. I have 2 connected questions, please. First, can you give some detail on what is driven in these very large trading gains. You mentioned in the first quarter that you had short bond positions that contributed to these gains. So, with the credit market rallying a little bit into July, should we now expect a net negative impact on the P&L from trading? That's number one and number two, on capital, is there anything other than the trading gains that is driving your upgraded capital guidance by year-end?

[Fokion Karavias, executive]

For the trading gains, we had explained also during the previous call that effectively these are positions which are hedging our one portfolio that is the fair value to OCI, and also they are ceding some of our interest rate positions in the banking book. Most of these positions have been closed. Therefore, the P&L has been realized as we speak, and this is a reason why Harris mentioned before that we do not expect any sort of additional trading gains or losses during the third quarter. So, the position that we had in the previous 2 quarters have been sort the market and sort the trade, and this has resulted in the gain that we have seen. So, on your second question, Harris.

[Charalambos Harris Kokologiannis, executive]

This conversion was about our capital outlook in the second half of the year. Correct?

[Luis Garrido Regalado, analyst]

Yes, exactly. And if there's anything other than these trading gains to explain the improved guidance.

[Charalambos Harris Kokologiannis, executive]

In the second half of the year, actually in the fully-loaded CET1, we expect this to be approximately 20 basis points better than the one recorded at June end. We do not expect it to be affected by any more trading gains. Actually, the drivers for this movement, for the positive side, is the organic profitability by approximately 90 basis points. And on the negative side, the expected asset growth by minus 60 basis points and another minus 10 basis points, other items with major parties, DAC and amortization. For that reason, we have provided an outlook for the fully-loaded CET1 at the end of the year, close to 14.2%.

[Operator]

This question is from the line of Nida Iqbal Ahmed with Morgan Stanley.

[Nida Iqbal, analyst]

Thank you for the call and congratulations for the great set of results. Can I just get an update on how things are progressing in terms of the RRS funds coming into Greece and the projects related to these funds please? And secondly, just confirming that the guidance assumes 50 bps of ECB rate hikes? And if you can get updated sensitivity for each 50 bps or 25 bps of rate hike, please.

[Charalambos Harris Kokologiannis, executive]

Okay. Thank you for your question. I'll get the second part of your question, and then Fokion will elaborate on the first one. Starting from the sensitivity, based on updated calculations for negative rates, i.e., from minus 50 to 0, the impact has been estimated at approximately EUR 70 million per annum. Once you go rate-positive, of course, the costing effect accelerates and from 0 to plus 50 basis points, the additional impact is the additional impact is circa EUR 130 million. For rates higher than 50 positive basis points, the sensitivity starts decreasing because we assume that part of interest rate increases will be passing to the positive. Overall, for rates ranging between minus 50 basis points and plus 100 basis points, the cumulative impact is approximately EUR 300 million. And on your question as regards to the outlook, the answer is yes. In the outlook that we have provided, we have incorporated that the recent 50 basis points increase of ECB rate took place on July 21st, but no further increases.

[Fokion Karavias, executive]

Now on the question regarding RRS, it is our understanding that the investment projects that have been already submitted to the RRS is close to EUR 3 billion. This is the total investment, so about 30% to 40% of them of this figure is going to be financed by the IRS. And it is my expectation that by year-end, this EUR 3 billion may be between EUR 6 million to EUR 8 million.

[Operator]

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

[Osman Memisoglu, analyst]

Good evening and thanks for taking my questions. Just a detailed one on the sensitivity. Your floating book, is it policy rate of ECB or the year that impacts more.

[Fokion Karavias, executive]

Yes.

[Osman Memisoglu, analyst]

So you have already seen some impact in Q2, I guess, positive or by small.

[Fokion Karavias, executive]

Correct. Absolutely. The impact in NII from Euribor increases in the second quarter, after the virtual period. Why? Because the major movement took place in the 3 months and 6 months Euribor rate where the majority of our loans is close to 0. On the contrary, the majority of the on-floor loans are denominated in the one last labor that shows almost no movement in the second quarter.

[Osman Memisoglu, analyst]

Got it, and if I could squeeze in one general question on overall trends in your international business, which we sometimes probably forget about, particularly on asset quality-you've given us talon the group-any color on how things are going on that front?

[Fokion Karavias, executive]

Our 2 other core markets, Bulgaria and Cyprus are doing quite well in terms of loan origination. Harris has already elaborated on their performance. Now, in terms of the asset quality, as you can see on Page 15 for Bulgaria, first of all, there is a substantial improvement in terms of NPE coverage, reaching 8%. But also, there is a decline over the last few quarters in terms of the NPE ratio. And at the moment, we do not really have any sort of alarming signs there, quite the opposite.

Wage increases in this country were very supportive for households and borrowers. In size groups, we do not have any sort of material exposure into retail business, and it is mainly corporate business. As you can see on Page 16 of the presentation, the NPE ratio there is anyway very low, 2.2%. The coverage is close to 100% and again, we do not really have any sort of signs that would make us for it. The tourism season that was a point of concern in the beginning of the season because of the high reliance to Russian and Ukraine tourists is doing quite well, and the country was able to replace these tourists with visitors coming from Western Europe.

[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 call. And let me also thank you about your questions and the dialogue that we had. Our Investor Relations team, and myself will be available for any follow-up clarifications. Thank you very much.