National Bank of Greece SA

ATHEX:ETE

Earnings Call Transcript

[Operator]

Ladies and gentlemen, thank you for standing by. I am Gale, your Chorus Call operator. Welcome, and thank you for joining the National Bank of Greece conference call to present and discuss the second quarter 2018 financial results.

At this time, I would like to turn the conference over to Mr. Paul Mylonas, CEO of National Bank of Greece. Mr. Mylonas, you may now proceed.

[Paul Mylonas, executive]

Thank you. Good afternoon, everyone, and good morning to those of you joining from the U.S. Welcome to NBG's second quarter financial results call. I'm joined by Ioannis Kyriakopoulos, the group CFO; George Angelides, Head of Finance; Greg Papagrigoris, Head of IR. After some quick introductory remarks from my side and then from the CFO, we will turn to questions and answers.

So let's begin. Uncertainty in the Greek economy has gradually receded, and investor and consumer sentiment has improved leading to healthy and sustainable progress in the country's economic fundamentals. Further impetus will arise following the country's exit from the third program in August, along with a disbursement of EUR 15 billion, which creates a circa EUR 30 billion cash buffer sufficient to cover debt service payments through 2020.

Turning to NBG. We have been continuously strengthening our balance sheet over the past several quarters. We have reduced nonperforming exposures, built up provision coverage and boosted liquidity buffers. These elements are important prerequisites that will allow the bank to achieve higher levels of profitability, utilizing its superior liquidity position to finance Greek corporate and households.

The second quarter results evidenced these developments. Our cost of risk has been reduced to levels previously observed before the crisis, albeit benefiting from the EUR 2 billion sale of nonperforming unsecured retail loans, which was at a consideration that was capital accretive to 18 basis points. However, even after excluding such one-offs, the underlying cost of risk charge is around 110 basis points.

NPE declined by EUR 0.5 billion in the second quarter, with more than half due to negative formation and the remainder due to accounting write-offs. Indeed, we have already managed to achieve our end 2018 target and are ahead of the SSM plan by about EUR 1.3 billion. Our provision coverage remains the highest among peers at 60%, which will support efforts to reduce NPEs at an even faster pace going forward.

The liquidity position has strengthened further. Following the elimination of ELA in November 2017 and our successful effort in tapping the wholesale and interbank markets, our LCR ratio is now at 117%, and our liquidity buffer is sufficient to allow us to actually pursue corporate credit opportunities. Encouragingly, domestic deposits were up in the second quarter to -- continuing the gradual upward trend over the past 2 quarters despite the relaxation of capital controls. Note that the loss of ECB eligibility of Greek sovereign paper had no impact on either NBG's liquidity or cost of funding.

In the second quarter, Group P-A-T, PAT, from continued operations stood at a positive EUR 21 million, a second consecutive quarter of profitability, with first half PAT at EUR 41 million compared with a loss of EUR 59 million in the first half of '17.

Return to profitability reflects the reduction of the cost of risk to a much lower yet sustainable level, factoring in the high coverage levels and better formation trends. This development offsets the decline in PPI mainly due to lower NII and the poor trading results.

NII for Greek banks has been under pressure from all sides, high provisions on nonperforming loans, restructurings and deleveraging. Indeed, NBG's NII declined by a further 4% Q-on-Q due to an EUR 8 million negative impact from the repricing of part of our mortgage book, circa EUR 800 million, contractually linked to the 1-year T-bill rate. The trading results reflect the turbulent international environment following the elections in Italy.

The main short-term profit drivers are cost of risk at a circa 110 basis points, a VRS (sic) [ VES ] for about 500 FTEs which is near completion and further containment of G&As. NII pressure should dissipate, reflecting loan mix effects and higher corporate disbursements. In the medium term, the bank is designing a deep transformation of its operating model, which aims to boost its underlying profitability significantly. It will be announced to investor community in the next several months.

With that, I would like to ask Ioannis to comment on the financial results.

[Ioannis Kyriakopoulos, executive]

Thank you. Let me start with profitability on Slide 7. Group operating profit reached EUR 69 million in H1 relevant (sic) [ relative ] to a loss of EUR 33 million a year ago, on lower cost of risk fully offsetting the NII pressure as seen in the upper left waterfall chart. On a quarterly basis, NBG produced a core operating profit of EUR 59 million at the group level translating into a core operating margin of 77 basis points in Q2 versus 0 in Q1. This reflects the sharp reduction in credit risk charges to 50 basis points versus 156 in Q1, offsetting the drop in PPI as seen in the lower right-hand chart. In particular, PPI amounted to EUR 81 million this quarter from EUR 145 million in Q1, weighed mainly by the trading income swing with loss and a weaker NII. Trading income swing is mainly due to severe adjustments, while NII drop incorporates an EUR 8 million negative one-off impact from Greek treasury bills linked mortgage repricing.

Going in a bit more detail on Slide 8. Domestic NII amounted to EUR 255 million in Q2 from EUR 269 million the previous quarter. The NII decline reflects sustained deleveraging at the retail book and restructurings on top of the one-off negative impact from the repricing of part of the mortgage book as mentioned before.

Net loan balances were down by EUR 300 million Q-on-Q, which relates exclusively to retail book deleveraging and as seen in the lower left-hand chart. As a result, domestic NIM dropped by 20 basis points Q-on-Q to 662 -- 267 basis points in Q2. That said, if we adjust NIM for credit risk charges, the risk-adjusted NIM improves to 219 basis points in Q2 from 120 basis points the previous quarter.

Turning to Slide 9. Domestic deposits picked up in Q2, driving an 8% year-on-year growth despite the continuous relaxation of capital controls since the beginning of the year. Time deposit yields improved to 84 basis points, with the front book yield hovering at circa 75 basis points. Notably, circa 68% of domestic deposits are core, providing a clear funding advantage, while the bank retains a leading market share of 36% in ultra-low cost and sticky savings accounts.

On the other side of the balance sheet, on Slide 10, lending yield dropped further by 9 basis points Q-on-Q to 368 basis points. The drop in lending yields mainly reflects the repricing mortgages where our yields contacted by 25 basis points Q-on-Q. However, corporate yields were up by 5 basis points Q-on-Q to 387 basis points, while corporate balance stabilized from disbursements of 600 million in Q2.

Moving on to fees, Slide 11. Domestic fees increased by 3% year-on-year to EUR 57 million, reflecting the benefit from the elimination of the ELA fees, which were EUR 7 million in the first half of '17. Adjusting for ELA fees, domestic banking fees dropped by 4% year-on-year mainly due to the decline in fund management, brokerage and other fees.

Moving on to OpEx, Slide 12. Domestic cost increased by 3% Q-on-Q, driven by the 7% Q-on-Q rise in G&As on increased expenses related to professional services with personnel relative stable over the same period. On an annual basis, domestic OpEx increased by 3% year-on-year to EUR 433 million, driven again by the pickup in G&As, which is due to seasonal factors and should reverse in H2.

Operating expenses are expected to return to negative growth upon completion of the ongoing Voluntary Exit Scheme. The latter is expected to reduce head count by 500 employees, benefiting personnel expenses in the second half of the year and onwards.

Turning to asset quality on Slide 14. The NPE reduction came at EUR 0.5 billion this quarter, adding up to a solid reduction in the stock of NPEs by EUR 5.5 billion since the end of 2015, driven both by negative NPE formation which was EUR 2.1 billion and write-offs which were EUR 3.4 billion of which EUR 200 billion (sic) [ EUR 2 billion ] were subsequently sold. Such performance allows NBG to fulfill the SSM requirement for the year in Q2, with the bank overshooting its Q2 target by EUR 1.3 billion.

On Slide 15, total domestic NPE balance contraction at EUR 500 million Q-on-Q was driven by negative NPE formation of EUR 0.3 billion aided by the unsecured NPL sale and write-offs of EUR 0.2 billion in Q2 as seen in the upper right waterfall chart. Domestic NPE ratio settled at 42.6%, down by 50 basis points Q-on-Q. Importantly, NPL flows, including recoveries and liquidations, steadily outpaced inflows resulting in negative NPE movement as seen in the lower right chart.

Looking at the NPE formation in a bit more detail, Slide 16. NPE formation remained negative accelerating to minus EUR 264 million from EUR 91 million the previous quarter. Q2 NPE formation incorporates a positive impact from the EUR 2 billion NPL sale, of which EUR 200 million were in Q2 and liquidation, which had a EUR 30 million impact. Excluding sales and liquidations, NPE formation remains in negative territory mainly due to the corporate loans, while NPE formation in the mortgage book was practically 0 from EUR 69 million in Q1.

With regards to the 90 days past due formation on Slide 17, total domestic 90 days formation remained in negative territory in Q2 at minus EUR 200 million from minus EUR 57 million in Q1, aided again by the EUR 2 billion NPL sale. Formation was negative in consumer, SBLs and corporates.

Moving on to Slide 18. Domestic NPE ratio dropped by 50 basis points Q-on-Q to 42.6% with coverage of 60.1%. Domestic 90 days past due ratio also dropped by 50 basis points Q-on-Q to 30.4% and combines with a coverage of 84%. Furthermore, our below 90 days past due forborne NPEs stand at EUR 4.3 billion, of which EUR 3.5 billion are below 30 days.

Slide 19. We highlight that our exposure on stage 3 group loans has declined by EUR 500 million Q-on-Q to EUR 16.9 billion, combined with a sector high coverage of 56%.

Turning to Slide 20. I'm following the IFRS 9 first-time adoption, NBG comes up as a bank with the highest NPE and NPL coverage level of 60% and 83%, respectively, highlighting our conservative profile. At the same time, we have the lowest 90 days past due ratio in the sector. This compares favorably to our tangible book value, as can be seen in the right table, with the ratio of unprovided NPLs over tangible book value at 0.43 versus 0.7 for the second last year.

Turning to Slide 21. NBG's auction activity gathers pace with 835 auctions held year-to-date, out of which 29% were successful, 32% not successful and 39% suspended or canceled. Overall, the number of planned auctions stands at 1,276 for NBG based on July data, the second highest among peers.

Slide 22, we present the NBG schedule of NPL projects either completed or in the pipeline. Particularly, we closed in June 2016 the sale of EUR 76 million portfolio of consumer unsecured loans in Romania at 16% of the receivable amount. In July, we completed the disposal of EUR 2 billion of unsecured retail and SBLs in Greece at 6% of the outstanding principal amount. The transaction was capital accretive, adding 18 basis points to our CET1 ratio.

Currently, we work on the disposal of a secured SBL and small SMEs portfolio of around EUR 800 million, which is expected to conclude in the first quarter of the next year, and also -- we are also planning an unsecured retail NPL sale of circa EUR 0.7 billion for the next year.

Turning to liquidity, Slide 24. Eurosystem remains at EUR 2.75 billion comprising of TLTRO funding from the ECB. Following ELA elimination in November, our LCR ratio is now well over the minimum regulatory requirement of 100%. The removal of ECB's waiver leaves NBG's funding cost unaffected as the Greek sovereign paper was replaced by investment-grade covered bonds.

With regards to deposit evolution on Slide 25, Greek deposits picked up by 2% Q-on-Q. On an annual basis, group deposits increased by 8%, reflecting deposit flows of circa EUR 3 billion in Greece. As a result, NBG's best-in-class loan deposit ratio improved further to 73%.

Finally, the capital -- regarding capital adequacy, Slide 27. Our CET1 ratio stood at 16.2%, factoring the Banca Romaneasca and Albania impairment charges and compares favorably to the state requirement for 2018 of 9.375% for CET1 and 12.875% for OCR. Pro forma for the first half profit and the reduction in risk-weighted assets as a result of the completion of NBG Albania, our CET1 settles at 16.4% and 13%, taking for account also the full impact of IFRS 9.

And on this note, I would like to open the floor to questions.

[Operator]

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

[Jonas Floriani, analyst]

Just questions on updated guidance for the year. I remember during Q1 results, you were saying that the EUR 289 million for NII was supposed to be a good run rate for the year. So just wondering if you have any update on that? Also, on cost of risk, I appreciate your underlying cost of risk in the quarter, which was pretty good. Previous guidance, that was from minus 70 basis points when compared to 2017, so just wondering if that still holds? And the -- as a result, I think your PPI was -- is still expected to be above 2017 level, right? So I'll stay here, and then I may come back later for follow-ups.

[Paul Mylonas, executive]

Okay. On NII, I think the Q2 level is a broadly good estimate for the rest of the year. Fees should pick up and should be up about EUR 20 million compared to 2018. Trading should be positive in the second half of the year, and it's already positive in Q3. Cost should come down slightly with the seasonality that Ioannis mentioned on G&As and the impact of the VRS. So that's happened the first half of the year. So well, with all of that, we're looking at a PPI that is definitely down compared to 2017 by -- it should be around -- a bit below EUR 500 million. Provision should continue at the run rate of Q2 more or less, unless anything happens in the corporate. We adjusted...

[Ioannis Kyriakopoulos, executive]

We adjusted the run rate.

[Paul Mylonas, executive]

We adjusted the run rate. Okay, does that cover your question?

[Jonas Floriani, analyst]

Yes, that's great guys.

[Operator]

Next question is from Ulargui, Ignacio, with Deutsche Bank.

[Ignacio Ulargui, analyst]

I have 2 questions, gentlemen. One is on the NII performance. What would be driving the flat NII in the second half compared to the 2Q numbers? Do you think there is additional pressure from competition on the margin front? Just if you could update us a bit on that? And regarding the cost, if you could update us on what would be the savings from the VRS, that will be great.

[Paul Mylonas, executive]

The NII in the second half would benefit from a large amount of corporate disbursements that we expect to occur, and that will -- then you can have a mix effect as mortgage is going to be paid and corporates get disbursed. And that difference in the loan yields between those 2 portfolios will help NII as well as the fact there will be loan expansion overall. And then the negative factors that we've had in terms of restructurings and this one-off from the 12-month T-bill rate that was issued, those will not occur. So even if you look at Q2, if you adjust for this one-off, it looks like NII is strong. Ioannis, you want to take on this?

[Ioannis Kyriakopoulos, executive]

Yes. Of course, we expect an annual reduction of EUR 25 million. Now the -- what we expect for the second half is probably something like EUR 10 million as the VRS is still ongoing.

[Operator]

The next question is from the line of Cherevach, Victoria, with Bank of America Merrill Lynch.

[Victoria Cherevach, analyst]

Three from me. The first is on this cost of risk, the underlying charge, you said it's 110 bps. Could you just confirm whether that's on net or gross loans, please? My second question is about inflows, NPE inflows specifically. I mean, they continue to be sort of persistently high, so I just wondered whether you might be able to give some kind of outlook or just color on where you expect that to go over the coming quarters. That would be very helpful. And my third question is just around sort of how you think about NPE reduction levers because I see you're now down to bank NPEs of EUR 16 billion. That is already achieving your full year 2018 target. Now you still have some sales that are planned and you've helpfully given us a slide on that. But at this stage, since you have effectively like 6 months of capacity in there, do you think you'll focus a bit more on, say, trying to turn around the curings that you can do? Because then you can sort of reap the rewards of future revenues if you cure rather than, say, sales where you're effectively selling potential future revenue and depending on the type of portfolio that you have. So just any sort of -- just to give us some sort of clarity about how you think about that, that would be very helpful.

[Paul Mylonas, executive]

Okay. Very quickly on the cost of risk...

[Ioannis Kyriakopoulos, executive]

On net loans.

[Paul Mylonas, executive]

On net loans. On your last question -- yes, sorry.

[Ioannis Kyriakopoulos, executive]

On inflows.

[Paul Mylonas, executive]

Okay, go ahead.

[Ioannis Kyriakopoulos, executive]

Yes. We're also asked about the NPE flows. I guess, the level that we're going to experience is the inflows don't have enough [ work ] and it is steady. And we expect [ dedication ] from July seeing that the rest of the year will be at rather the lower level of what we have seen in the first one. In terms of...

[Paul Mylonas, executive]

Yes. Also, just to add one other point to what Ioannis said. In the second quarter, especially in the first 2 months, we had a, in my view, a somewhat strange behavior with our pickup in the -- in defaults of -- from the new book -- from the non -- from the book that never defaulted in the crisis, which seemed very strange. In the past few months, that's gone back down to much lower level. So that's -- if that continues, and August will not help as much because August is a seasonally bad month, people on vacation and NPEs and NPLs go up. So come September, we will see whether the defaults from the new books is again going to trend down. On the defaults from restructuring products, I think we're getting better in terms of the design of our products. We're getting more generous to the ones that we think are people who are cooperating and getting tougher with the ones who are not in terms of increased auctions. So I think that should also improve. So I'm somewhat more sanguine on that -- on those flow, but time will tell. We haven't seen anything in the numbers. July was good, but it's only 1 month. Now on your last point, clearly, we've been working very hard and curing is the best thing, right? You will get more profits if you cure something than if you sell it. We are offering better products, and we are being more tough on noncooperative borrowers through auctions. And you see the number that we've caught up with our peers in auction numbers and compared to a few quarters ago where we were just starting to send clients to auction. So that also should help. That being said, we also understand that the target set by, probably agreed to the SSM, for 2021 will be aggressive and, therefore, we also have to look at nonorganic solutions as well. Okay. So I think the full gamma of strategies are being used.

[Operator]

The next question is from the line of Boulougouris, Alexandros, with Wood & Company.

[Alexandros Boulougouris, analyst]

Yes, just a quick question on capital and the small reduction in the second quarter compared to the first, EUR 200 million on an absolute basis. Could you explain that a bit better? Sorry, if you had already explained that in the beginning of the call.

[Ioannis Kyriakopoulos, executive]

No. The reduction is due to the losses in the fair value for OCI, so it's a valuation result.

[Operator]

The next question is from the line of Kladis, Panagiotis, with Eurobank Equities.

[Panagiotis Kladis, analyst]

Yes. Can you please repeat the annual benefit from your Voluntary Exit Scheme upon completion? And also, can you please clarify on your NII? You said that second quarter figure would be representative for the second half of the year? Or you would expect some improvement in the second half of the year.

[Ioannis Kyriakopoulos, executive]

The benefits from the Voluntary Exit Scheme, we expect that this would be around EUR 25 million on an annual basis. Now on NII, we said that the tier 2 firms are the base for the next quarters as their one-off effect will be -- it will continue -- it's not a one-off effect. It will be repeated, of course, in the next quarters, the effect of T-bills. And the -- with -- the growth in the corporate book will offset the leverage in the retail book.

[Panagiotis Kladis, analyst]

Okay, that's very clear. If I may have a follow-up question on the issue with your National Insurance, if we can have any comments about where we stand, how do you see the offer from -- the one offer that you have, or you're still examining any alternative plans. Any comment on that would be appreciated.

[Paul Mylonas, executive]

We're still in negotiations with Gongbao.

[Panagiotis Kladis, analyst]

Okay. So if I may follow up, is there enough time for an alternative plan if for any reasons -- for any reason these negotiations do not -- are not completed successfully?

[Paul Mylonas, executive]

I mean, I think that's a theoretical question but what would limit our time.

[Panagiotis Kladis, analyst]

I -- if I'm not mistaken, you have a deadline by this action plan or not.

[Ioannis Kyriakopoulos, executive]

True, but 1 or 2 months one way or the other will not [ completely ]...

[Operator]

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

[Paul Mylonas, executive]

Thank you all for joining us for the results call. As usual, we'll be available to answer follow-up questions after you have more time to go through the material. And I'm sure that we'll be meeting each other in the couple of conferences that are scheduled in the fall. So with that, I thank you all for joining, and have a good weekend.