Eurobank Ergasias Services and Holdings SA

ATHEX:EUROB

Earnings Call Transcript

[Operator]

Ladies and gentlemen, thank you for standing by. I'm Poppy, your Chorus Call operator. Welcome and thank you for joining the Eurobank Holdings Conference Call to Present and Discuss the First Quarter 2023 Financial Results. [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]

Thank you, ladies and gentlemen. Good afternoon, and welcome to the Eurobank first quarter 2023 results presentation. Together with me is our CFO, Harsuorelanis, and the Investor Relations team. We will start with some key recent developments, then present our results and, of course, answer your questions. The economic environment remains benign in Greece as well as in our 2 other core markets, Bulgaria and Cyprus.

The Greek economy shows higher growth and lower inflation than the European average. We expect GDP growth to exceed 2.5% for 2023 as economic sentiment remains strong, support from RRF implementation, and FDI influx continues, unemployment keeps dropping, and real estate prices are resilient. Furthermore, Greece's 2023 Stability Program highlights the strong commitment in solid public finances and outlines a substantial further reduction in the debt-to-GDP ratio. As such, it appears highly likely that the sovereign will return to investment grade in the second half of 2023, something that markets have already started pricing in.

Despite the positive macro background, loan balances were lower in the first quarter for the banking sector in Greece, mainly driven by corporates using excess liquidity to repay loans in reaction to higher interest rates. However, Eurobank showed performing loan balances increasing by EUR 300 million in the first quarter, supported by operations outside Greece. We expect the loan demand to accelerate in the second half of the year.

Now, let's see our financial results for the first quarter of the year as highlighted on Slides 5 to 9. Eurobank reported strong figures across all areas in the first quarter. As a result, tangible book value per share increased by 23% and 5% year on year and quarter on quarter, respectively, to EUR 1.78. In more detail, net interest income remains in a strong trend, rising 56% year on year and 12% from the previous quarter. This was driven by higher Euribor rates, while the deposit beta remains below our initial expectations. Fees increased by 10% year on year, and as a result, core preprovision income was up by 75% and 11% on a year on year and on a quarterly basis, respectively.

On Slide 6 now, asset quality remains resilient with NPE ratio reaching at 5.1% and coverage to 76%. The cost of risk ratio was 75 basis points in the first quarter. Back on Slide 5, core operating profit jumped by 91% and 17%, year on year and quarter to quarter, respectively. Our net profits in the first quarter reached EUR 255 million. Our regional operations had net profits of EUR 79 million, up 80% year on year, continuing their strong performance.

Turning now on capital on Slide 9. Our total capital ratio reached at 18.4% while the fully loaded CET1 at 15.5%, which includes the full effect of all announced M&A actions and that of the 1.4% share buyback. Overall, our performance in the first quarter was above our expectations. Without changing the specifics of our guidance for the full year 2023, it appears that the 13% target for return on tangible book value will be exceeded to approach 14%. Finally, I would like to update you that we received the SSM formal approval for the 1.4% share buyback, and we are now proceeding with the next steps. This is the first initiative of our announced shareholder rewards program, a key strategic priority for us.

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

[Charalambos Harris Kokologiannis, executive]

Thank you, Fokion. Before starting, let me note that in the first quarter and following the binding agreement signed on the 2nd of March, we have reclassified Serbia operations as held for sale. This implies that Serbia's contribution to P&L and balance sheet lines has been removed from the presented figures of the current and previous periods.

Let's now provide more insight on the first quarter results. Starting on Page 18 on lending growth. Performing loans increased organically in the quarter by EUR 300 million, driven by Southeastern Europe operations. In Greece, growth was affected by corporates using excess liquidity to repay loans in reaction to high interest rates.

Moving on deposits and liquidity on Page 19 and 20. As shown at the left of the page, group deposits decreased in the first quarter by EUR 0.5 billion, mirroring the effect of Greek corporate loans repayment. Retail deposits were flat in Greece, while Southeastern Europe showed the EUR 200 million increase. Net loans to deposit ratio remained broadly stable at 72.9% while MCR ratio reached 168% as shown at the left of Page 20.

Moving on Page 22 and assets under management. As some of our deposits were channeled to mutual funds, wealth management rebounded in the first quarter of 2023 with a EUR 400 million and EUR 700 million increase of assets under management and private banking assets and liabilities, respectively. This is a promising performance in an area where the group is investing a lot, expecting significant contribution to its fee-based growth.

Moving to profitability on Page 26. Net interest income increased quarter on quarter by 11.9% to EUR 503 million. NII has been affected positively by the Euribor increase and negatively by the recent MREL and Tier 2 issuances. On a year-on-year basis, net interest income is higher by 55.6%.

On Page 27, commission income increased year on year by 9.5% and by 15.2% on a like-to-like basis. Quarter-on-quarter, fee income is lower by 9.2% due to seasonality and lending growth deceleration.

On Page 28, operating cost year on year increased by 2.6%. On the group basis, costs are stable quarter on quarter and higher by EUR 16 million year on year. The increase is to the largest extent related with Southeastern Europe and the inflationary pressures in Bulgaria. The target set in our business plan refer to 2023 year-on-year cost increase of 5.5% or close to 4% on a like-to-like basis. This target is reiterated considering the Q1 mark and the outlook for the rest of the year. Finally, on this page cost to core income ratio has been improved substantially year on year by more than 11 percentage points decreasing to 35%.

On Page 30, we summarize operating performance for the first quarter of the year. Core PPI is higher year on year by 75% at EUR 410 million, driven by [ Euribor ] effect, higher loan and bond volumes, better commissions, and higher core income from Southeastern Europe. Loans provisions for the quarter amounted to EUR 75 million, or 75 basis points. As a result, core operating profit is higher year on year by 91% at EUR 335 million.

Moving on to asset quality on Page 32. As shown on the top left of the page, NPE formation in the first quarter was almost flat at EUR 7 million, reflecting the resilient asset quality conditions. NPE stock decreased by circa EUR 50 million and NPE ratio to 5.1%. This translates to EUR 2.1 billion gross NPEs for the group, or EUR 500 million net of provision stock. Finally, on this page, coverage in the first quarter increased to 76%.

Moving on capital and on Page 37. Our fully-loaded CET1 ratio increased quarter by 50 basis points to 15.7%. This is due to the quarterly profitability and the disinvestment of Serbia, which more than offset the impact of transition to standardized and of asset growth on RWAs. In addition, taking into account the rest of transactions either completed after 31st of March or expected to be completed in the coming weeks or months, the pro forma fully-loaded CET1 ratio amounts to 15.5%. Furthermore on capital and Page 38, our total CAD ratio stands at 18.6%, also incorporating the remaining impact of IFRS 9. Considering the outperformance versus our plan of key core profitability drivers and without still proceeding to a revision of full-year guidance specifics, it appears that our 2023 return on tangible book value will be closer to 14% versus 13% that was our initial target.

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 Alevizakos Alevizos with Axia Ventures.

[Alevizos Alevizakos, analyst]

Congratulations on this very strong set of results. I've got a couple of questions if I may. The first question has to do with the lending expansion. I just wondered and I hear you when you say that the ROTE now is probably going to reach 14%. I wanted to know how you're thinking about the original target of the EUR 2.8 billion lending expansion that you previously gave for the year, given that the first quarter was a seasonally weak quarter, but I wanted to hear a little bit more about the pipeline, both in Greece but also in the foreign market. That's question number one.

And then question number two is, I can see that you have provided the 20 bps for the share buyback for the HFSF. But I was wondering whether in your numbers you include any accrual for dividend for the year 2023.

[Charalambos Harris Kokologiannis, executive]

Alevizos, let me start from the loan growth and then elaborate on your second leg. It is true that there has been a slowdown in the growth of performing loans in the first quarter of this year in the Greek market. This was mostly due, I would say, to high repayments from big corporates enjoying [ high ] liquidity and this is, of course, an effect of high interest rates and also mirrors to corporate deposits. However, Eurobank, contrary to other big banks, expanded its book by EUR 300 million in the first 3 months of the year. And this was driven by Southeastern Europe business, mainly Bulgaria, this quarter. Now the situation in the second quarter so far is quite similar. So we expect loan growth to accelerate also in the second half of the year, taking into account the pipeline that we have, which is quite strong for projects, I would say, related to field of energy, tourism, infrastructure, real estate, construction, [ renewal ] but also the traditional manufacturing.

Now, regarding your question whether there is a downside risk and whether we could quantify that, I would say that compared to the annual target of EUR 2.7 billion, EUR 2.8 billion, the downside risk is estimated at this stage [indiscernible] 10% to 15%. Now regarding the buyback impact, as you may see, this has been deducted from the end capital ratio that we provide. Accounting wise, of course, we can do nothing more than that. Because accounting wise, we should have certainty provided, first, by the AGM approval, and then from the acceptance of our offer from HFSF. So for that moment in order to be prudent, we have deducted this buyback from our capital ratio so as the market will have the full -- a clean roadmap as regards our capital ratios are concerned.

[Alevizos Alevizakos, analyst]

Apologies. About the second question, I wasn't referring to the 1.4% buyback. I was mainly referring about this year's earnings, whether you accrue something that's going to be paid effectively in 2024 after that AGM.

[Charalambos Harris Kokologiannis, executive]

Yes, the answer is not. The answer is that we accrue dividend according to our accounting policy when there is AGM approval of the respective dividend.

[Operator]

The next question comes from the line of Sevim Mehmet with J.P. Morgan.

[Mehmet Sevim, analyst]

I just had a follow-up question on your guidance for the year. So is it reasonable to assume that the upgraded ROTE guidance of 14% that the drivers are simply higher NII with everything else equal or do you see any upside to other lines? For example, I think you had about EUR 400 million of new NPE formation expectation for the year, but things still look much better so far. And my second question was just on the buyback, could you tell us what the next steps are from here. So as you've now received the approval, in terms of the basically, what would be the timeline and how does it look with the HFSF, et cetera, that would be very helpful.

[Charalambos Harris Kokologiannis, executive]

So let me start from the outlook and then pass the stage to Fokion to elaborate on NPE formation, in general, [ what was called the ] HFSF. So the major driver of the revised outlook on return on tangible book value is, of course, NII, considering first that, as you know, our plan was based on the base rates of 2.5%. We are already 75 basis points higher, and the horizon is for another 50 to 75 basis points still increases expected until the end of the year.

Second, again on NII, it appears that we are moving at better levels, better than our budget, so these are good drivers. Leading NII at levels higher than 20% that was the initial assumption of year-on-year growth. But apart from the fees and commission income, the first quarter was quite better than our expectation for a very weak seasonally quarter, so fees and commission, again, is a positive driver.

On OpEx, as I said, we reiterate our annual target of 5.5% year on year or 4% like to like excluding the acquisition. On cost of risk, we don't expect any material deviation -- any deviation from the 85 basis points cost of risk that we have provided. So summarizing the upgrade of our estimate for return on tangible book value is basically based on the core income lines, namely NII by far the most important 1 and perhaps fees and commissions we may have a positive trajectory as well.

[Fokion Karavias, executive]

And let me add a few things about asset quality and the estimate of EUR 400 million regarding formation in 2023. The short answer to your question is that we are not revising this estimate. It is true that in the first quarter we have seen effectively 0 NPE formation and actually this reading was well below the running rate seen in the previous 3 quarters, but mainly due to technical reasons. For the second quarter, we expect high NPE formation around EUR 60 million. And we want to remain prudent, taking into account the external environment of high inflation and increasing interest rates, we are not changing the projection of EUR 400 million for the 2023 formation. And as such, the guidance for cost of risk also remains at 85 basis points versus 75 basis points in the first quarter.

Now moving into your last question about the next steps in terms of the buyback. First, I would like to say a few things about the greenlight that we received from the SSM, the formal greenlight that we received from the SSM for this 1.4% share buyback. Let me remind you that this is going to be financed by the amount earmarked for dividend distribution out of the 2022 financial results. And this amount corresponds to a payout ratio roughly of 15% based on the core profits of 2022. And as we have stated, we believe that this is the optimal use of these funds for our shareholders and the bank. I think it is also important to note that this is the first approval related to shareholder reward granted to a Greek bank after the 10-year long financial crisis. As such, it is an important step or another step with respect to the return of the banking system to regular business.

Now, in terms of next steps, over the next couple of weeks, the Board of Directors will proceed with the approval of the plan and actually, the proposal -- the formal proposal to the AGM. The AGM will take place in July, and post the approval of the AGM, we will choose the best timing for submitting the official bids to the HFSF. And obviously, the HFSF has to follow its own process, which is going to last, based on what we have seen so far, in terms of the policy that the HFSF will have, it would be a process of about 6 to 8 weeks. As I mentioned during my introductory speech, this buyback is a first step towards our shareholder reward program that we have already announced. And next year, we envisage a dividend distribution with a payout ratio of at least 25% and, of course, eventually we are aiming, but this is going to be a gradual process, we are aiming to reach the European average payout ratio.

[Operator]

The next question comes from the line of Creelan-Sandford Benjie with Jefferies.

[Benjie Creelan-Sandford, analyst]

Yes, it's Benjie here. 2 for me please. The first 1 was just looking at this quarter's P&L trading and other revenue lines were a little bit weaker. So I just wondered if there was anything specific to call out on that and how you expect that to trend through the year. The second question was just a follow up on net interest income. I get you're pointing to upgrade of the initial expectations. There's more of a tailwind coming through from rates. We still have headwinds coming through from rising deposit costs, et cetera. I was just wondering do you still see sequential Q-on-Q growth on NII from here or when do you expect that we'll see the peak in quarterly NII?

[Charalambos Harris Kokologiannis, executive]

Okay. Actually, as regards the noncore income following a great year in 2022, we have come back to some more regular core income. The negative result does not represent nothing more than the 1 leg of our hedging instrument that we have done. So the 1 leg goes to the P&L. The positive impact is coming to our NAV. For that reason, we are going to see that our NAV movement is quite positive. Now going forward, the outlook for the year included also in our business plan. It is for a noncore income for the full year [ in the area ] of EUR 20 million to EUR 30 million, and this has been included in all our guidance ratio. We still stick to this figure for the full year.

Now as regards the NII dynamics, I would say that we would expect NII to pick somewhere between the second and the third quarter of 2023. However, we should put a number of disclaimers on that. If we see a strong acceleration of loan volumes in the second half of the year, if we see the deposit beta to hover at lower than budgeted levels, and if we see a prolongation of increases on base rates until, let's say, the end of Q3 of 2023, then this peak may be somewhat later towards the fourth quarter or even later.

[Operator]

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

[Osman Memisoglu, analyst]

As usual, just a couple of things going back to the NII, if you can provide a bit more detail. Time deposits, as expectedly, did pick up in terms of share. Just wondering what have you been seeing in April and May? Has the pace quickened or pretty much the same? That's the first 1.

And then just maybe a bit more color on beta of the loans, beta of the deposits, and maybe a bit more color if possible on this very impressive performance of the international business. That NII is growing actually at 15% Q-on-Q, above the Greek business performance. So any color there? Obviously, at least I am not following the details as closely on that front. Those are the key bits. And maybe we had discussed this in the previous results call, the securities income has gone up quite impressively. Is that close to flattening out or how are you seeing that part of the NII?

[Fokion Karavias, executive]

Let me start from your question about the Bulgarian and Cyprus business, and then Harris will answer the rest of your questions. Indeed our non-Greek operations have an impressive increase in terms of NII. But this can be explained by the structure of the balance sheet where the proportion of deposits versus loans is higher in these countries, especially in Cyprus, and therefore, they have taken the big benefit of the higher Euribor rates. This is what explains the growth -- the very strong growth of NII in these 2 countries. Now, Harris, for the rest.

[Charalambos Harris Kokologiannis, executive]

So providing more insight on the deposit -- for the deposit beta. In the first quarter, the total beta amounted to 14% versus the target -- full-year target of 35%. So we are still lagging behind that. And you may refer to that on Page 25 of our presentation where we present the bottom right part, the betas of deposits. This is a split between 3% beta on core deposits whereby you may appreciate that it is still at very, very low levels, close to 0. The target for that was 13% for the full year. So we are materially lagging versus the target. And on the time, we are close to 50% compared to a target of 65% beta.

Now with regard to the second quarter so far, we haven't seen any, let's say, material fluctuations. The trend is very smooth. So no material movement in the second quarter so far. As regards the income from securities, actually it is affected also from the pace of base rate increase. So we expect some peak in the in the following quarters. And as regards the beta on loans, let me mention that our floating rate portfolio amounts to close to 82% of total and fixed and base rate is the rest 18%. So actually, this reflects the beta of our lending portfolio. I don't know whether I have missed some leg of your question.

[Osman Memisoglu, analyst]

No, no, that's very helpful. Just to clarify. That 82%, does that include the mortgages?

[Charalambos Harris Kokologiannis, executive]

Yes, this is the total performing portfolio, including the retail and the corporate 1. So retail include mortgages as well.

[Operator]

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

[Luis Garrido Regalado, analyst]

Yes. 2 questions on the TLTRO, please. The first, is it fair to assume that you will simply repay the EUR 8 billion remaining just with cash, which is well in excess of that? And 2, where do you expect your liquidity coverage ratio will land after those repayments?

[Charalambos Harris Kokologiannis, executive]

Okay, let's refer to Page 20. You may see on the upper right part of the presentation that we have a net cash position versus central banks. So we have a TLTROs balance of EUR 8.3 billion. On the other hand, we have cash at central banks of EUR 14 billion, so we have a net positive -- the positive balance of EUR 6 billion. So actually this EUR 8.3 billion are going to be paid out of the cash at central banks, leaving a positive balance of close to EUR 6 billion. So as regards LCR, our medium-term target is to be higher than 150%. I would say higher than 155% to 160%.

[Operator]

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

[Daniel David, analyst]

I've just got a quick 1. Just in terms of MREL, just give us an update of your issuance plans after your senior preferred earlier in the year?

[Charalambos Harris Kokologiannis, executive]

Okay. The outlook -- the picture regarding MREL is that in the first quarter stood at 23%? And it is already above the January 1st 2024 nonbinding target of 22.9%. And the ultimate MREL target at the end of 2025 is at 25% to 27.5%. In terms of new issuances in 2023, as you see, we have no need as we have covered the target for the year. And the actual figure will increase further due to organic profitability in the next 3 quarters. Now depending on market conditions, we may [ access to ] proceed to a Tier 2 issuance. But this is a decision to be taken closer to the end of 2023 or in the first half of 2024 to compensate for the amortization of the existing Tier 2 instruments held by the Hellenic Republic. This is, let's say, the outlook for MREL issuances going forward.

[Operator]

The next question comes from the line of Butkov Mikhail with Goldman Sachs.

[Mikhail Butkov, analyst]

Just 1 question on the commercial real estate assets. Do you have any international exposures through this portfolio? And so far, did you see any changes, let's say, over the past 3 months in any trends related to the pricing [ code ] there, underlying trends around this portfolio? And, more broadly, can you also maybe give few comments on the sales of the repossessed real estate assets and how the things go in that type of assets?

[Fokion Karavias, executive]

Okay. Let me start from the last part of your question about REOs. Overall, the real estate market in Greece, where we have the vast majority of REOs, remains quite strong. Actually we have the real estate prices -- residential real estate prices increasing by 12.2% in the last quarter of 2022, and we see this trend to continue maybe at a slower pace, but we see this pace to continue. So it is -- in terms of timing, it is good for banks to dispose more actively their REOs, and this is something that we're going to pursue in our case as well.

Now with respect to our CRE exposure, overall, it is a small figure. It's EUR 1.7 billion at the group level, or 4% of our group gross loans. Let me clarify that the figure which shows on the EBA transparency exercise report shows a number of EUR 6.4 billion, but these are the total amount of loans that have as collateral commercial real estate property. The actual number of loans, the actual amount of loans with purpose of acquiring commercial real estate is the figures I mentioned before, the EUR 1.7 billion. The rest, the EUR 4.7 billion out of the EUR 6.4 billion, are loans in the sectors of tourism, retail, manufacturing, health, et cetera, with collateral the commercial real estate.

Now in terms of exposure beyond Greece, we have some exposure in Bulgaria and Cyprus obviously. Out of this EUR 1.7 billion, we have some amounts in Bulgaria and Cyprus. And we have also a small portfolio of about EUR 300 million to EUR 400 million in prime real estate in the London market. And this is part of our wealth management business. This is how we have got this exposure.

[Mikhail Butkov, analyst]

And looking into the investment real estate portfolio, so it is this London real estate and that's the main part of the international exposure on the commercial real estate.

[Fokion Karavias, executive]

No, what I mentioned before about international exposure was on the loan market -- CRE loan market. In terms of the investment portfolio that we have, this is entirely an increase.

[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 for our first quarter 2023 financial results. Let me also thank you for your very interesting questions. We are looking forward to continuing the dialog with you. Our Investor Relations, our CFO and myself will be available for any follow-up questions. Thank you very much.

[Operator]

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