National Bank of Greece S.A. (ETE) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. I'm Costantino, your Chorus Call operator. Welcome, and thank you for joining the National Bank of Greece conference call to present and discuss the first quarter 2023 financial results. At this time, I would like to turn the conference over to Mr. Pavlos Mylonas, CEO of National Bank of Greece. Mr. Mylonas, you may now proceed.

Good afternoon, everyone, and good morning to those of you joining from the U.S. Welcome to our first quarter financial results call. I'm joined by Christos Christodoulou, Group CFO; Greg Papagrigoris, Group Head of IR. After my introductory remarks, Christos will go to more detail on our financial performance, and then we will turn to Q&A. I think it would be useful if I begin with a brief overview of Greece's economic performance, before I turn to our financial performance for the first quarter of '23. Let us begin. Greece ended the year with strong momentum from a very dynamic 2022. Recall that fourth quarter GDP increased by 5.2% year-on-year and 1.4% quarter-on-quarter seasonally adjusted. Furthermore, economic developments continue to be very positive in the first months of the year despite the slowdown in the [indiscernible] and the sharp tightening of monetary policy. Employment creation remains strong with the unemployment rate fast approaching a psychological barrier of 10%. While expectations for tourism revenues are high on the back of a sharp pickup in bookings and airport traffic. Tourism revenue should exceed the record for 2022 by a solid margin. On the fiscal side, Greece recorded a small primary surplus in 2022, overperforming strongly against the budget target for our primary deficit of 1.6% of GDP. The over performance continued in the fourth quarter of 2023 over the first 4 months of 2023, I should say, with a primary surplus of 1.1% of GDP in the same budget compared with a target of a deficit of 0.3% for GDP. On the inflation front, pressures are easing in a faster-than-expected pace with a harmonized index down to 4.5% year-on-year in April, on the back of falling energy and flattening food prices. Adding to the positive outlook, fixed capital formation should be strong due to the large pipeline of private sector investments and the increasing use of RRF funds. In fact, fixed investments are expected to rise at a double-digit pace for a third year in a row, driven by high capacity utilization rates, strong corporate profitability and positive demand prospects. Overall, GDP estimates are continuously being revised upward and output is now expected to increase in the 2.5% to 3% range in 2023, with the potential for further upward divisions. With macro developments being increasingly supportive and government policies assisted and more vulnerable, the country is unlikely to experience a new wave of NPEs nor a notable slowdown in credit demand, especially from the more dynamic corporate sector with many projects in advanced stages. Indeed, nearly halfway through 2023, it is comforting that in the case of NBG, early Delinquencies remain controlled, while there has not been a meaningful increase in LPEs. An additional factor has been the banking sector's initiatives to absorb part of the rate increase. These comprise support to vulnerable borrowers in the form of interest rate subsidies and rate caps regarding further increases in variable rate mortgages. Additionally, in the case of NBG, as regards overall loan pricing, we have already absorbed about 30% of the base rate increases since the beginning of the rate cycle last year. Moreover, we also introduced the market a series of flexible to fixed mortgage refinancing products. Regarding loan demand, corporate credit remained strong in the first quarter of '23. Specifically, NBG's domestic corporate performer -- corporate [performing] loans were up 16% year-on-year despite repayments of working capital facilities and corporates with excess cash. We expect demand to be significantly stronger in the second half of the year. Now to turn to the P&L results. Combining the positive economic factor with the results of our multiyear transformation and the competitive advantage of our solid balance sheet, we have continued delivering strong profitability in the first quarter of 2023. Our NII continued to grow, up by 18% quarter-on-quarter to EUR 0.5 billion. Fee growth continued at a double-digit pace after adjusting for the impact of the deconsolidation of the merchant acquiring business. And finally, operating as well as credit costs were contained despite the inflationary environment. As a result of the strong core income growth and relatively inelastic operating costs, we have reduced our cost of core income to just 34% in the first quarter. This is an all-time low which compares favorably across banks in Europe. Please recall that the level of this KPI was 70% on the previous quarter. As a result, we have delivered a core PAT of EUR 230 million in the first quarter '23, which translates into a core return on tangible equity of nearly 15%. This exceeds our cost of equity for the first time in many years. Among the key components of our success remains our strong capital and liquidity positions. On the liquidity front, NBG's traditional deposit base, comprising mainly of the core deposits of many small depositors provide an important and relatively scarce advantage in a period of much tighter liquidity conditions. Indeed, our deposit mix has not changed significantly despite the higher rates with savings and [indiscernible] deposits accounting for more than 80% of our total deposits. As regards to capital on the back of the strong recurring profitability, we have added a solid 90 basis points of core capital in just the first quarter of 2023, driving our fully loaded CET1 ratio to 16.5%, a high level by European centers. Now let me turn to dividend distribution. In view of the high economic uncertainty, the regulator considers a distribution in 2023 out of 22 profits to be premature for the Greek banks. On the positive side, based on our ongoing regulatory dialogue, prospects are very good for our dividend distribution next year out of 2023 earnings. This will be of the order of 20% to 30% payout ratio, significantly higher than what we would have envisaged for our payout ratio this year. And I remind you that this year's dividend hasn't occurred would have had as its main objective to signal the end of the dividend [indiscernible]. Please note that we will be building reserves for this higher amount over the year. One final point. Our results indicate a significant overperformance in the first quarter versus guidance. In view of the stronger-than-expected economic backdrop, combined with our solid fundamentals. We plan to review guidance and provide an update at a time later in the year, which will allow us to look at the key profitability drivers and allow to see them stabilize. Clearer guidance will be significantly more of us. And now with that, I would like to pass the floor to our group CFO, Christos, who will provide additional insights to our financial performance before we turn to Q&A.

Thank you, Pavlos. Starting with profitability on Slide 15. Our attributable profit after tax in Q1 '23 climbed to EUR 260 million. Core profit after tax reached EUR 228 million, 16% higher quarter-on-quarter and nearly 3x higher year-on-year, translating into a core return on tangible equity of 15%, where above our full year '23 guidance of circa 11%. The drivers behind this strong performance derived mostly from our solid core income, which is up by 14% quarter-on-quarter. . This sharp improvement in core revenue generation is a tale of 2 parts. Firstly, performing loan growth of EUR 2.1 billion year-on-year, factoring in are exceptionally strong last quarter in 2022 in corporate investments coupled by [ACV] base rate effects drove NII up by 18% quarter-on-quarter, far offsetting higher deposit and MREL-related funding costs. Secondly, double-digit growth across our retail and corporate fee businesses, drove fee income 11% higher year-on-year on a like-for-like basis, excluding merchant acquiring, showcasing our efforts to close and enhance the bank's fee generating capacity. At the same time, our costs remained relatively contained with depreciation charges driven by our ongoing strategic IT investment plan and with the increase in personnel and G&A expenses year-on-year managed in the low single digits in line with guidance. The accelerating growth of our core income, combined with relativeley [inelastic] costs, led our group cost-to-core income ratio lower by more than 17 percentage points year-on-year to an all-time low of 34%. Cost of risk remained at 70 basis points in Q1 reflecting 0 [indiscernible] formation below the full year '23 guidance of circa 80 basis points. Moving to the balance sheet and asset quality on Slide 16. Disbursements amounted to EUR 1.2 billion in Q1 '23 up by 15% year-on-year driven by corporates. Domestic performing loans, up by 8% year-on-year, stood at EUR 27.6 billion, flat against year end '22 levels on the back of higher repayments of working capital facilities from cash [indiscernible] corporates. Domestic deposits eased by EUR 0.4 billion or 0.7% quarter-on-quarter, reflecting seasonality as well as some corporate balance sheet optimization, as mentioned above. On a year-on-year basis, deposits were up by 3%. NPEs remained flat quarter-on-quarter at EUR 1.6 billion, just EUR 0.2 billion [out] of provisions, reflecting 0 organic [NP flows] with no signs of appreciable pickup in those areas. Domestic NPE ratio stood at 5.1% compared to 6.5% a year ago, combined with the best-in-class cash coverage of 89%, slightly higher quarter-on-quarter. Moving to capital on Slide 17. In Q1, we maintained high capital generation, a strong profitability drove our fully loaded CET1 and total capital ratios 90 basis points higher quarter-on-quarter to 16.5% and 17.6%, respectively. As disclosed on the graph, organic capital generation, including DTC amortization, reached 80 basis points for the quarter. On Slide 19, you may see the high-quality traction of our balance sheet, which is coming into place supporting profitability. On the asset side, almost 90% of our loans are floaters, while our securities portfolio is [catched] effectively recovery [ floating ] as well. On the liability side, deposits comprise circa 98% of the total funding, net of LTL balances of which 81% in core and highly pricing elastic with an average balance of less than EUR 4,000 per customer, necessitating a marginal rate pass-through. The substitution of core deposits by time is not significant and derived mostly from corporate balance sheet optimization. Overall, our deposit base provides an important advantage in a period of much tighter liquidity conditions. Our superior liquidity profile is also manifested by our net cash flow [indiscernible] position of circa EUR 6 billion post full TLTRO repayment, which supports NII and NIM going forward as well as by our liquidity coverage ratio of 270%, which is the highest in Greece and among the highest in the [indiscernible]. Now let me provide some further insight to the key drivers of our profitability. Starting with domestic NII on Slide 20. The strong recovery in interest income from performing balances was sustained by 18% quarter-on-quarter benefiting from higher volumes and higher ECB rates that drove loans yield to 5% in Q1, up by circa 70 basis points quarter-on-quarter, implying a 70% rate pass-through since the second quarter 2022. Additionally, interest income from securities reached EUR 90 million in Q1, up by 15% quarter-on-quarter. Time deposit spreads have picked up by 47 basis points quarter-on-quarter in Q1 with new production yields coming in at approximately 120 bps in Q2, implying EBITDA at circa 40%. As a result, NIM was up by nearly 50 basis points quarter-on-quarter to 260 basis points in Q1. Moving on to fee income on Slide 25. Adjusting for the deconsolidation of the merchant acquiring business, domestic fees expanded by 13% year-on-year further supporting the bank's sustainable core revenue stream as retail and corporate fee businesses were up by 18% and 10%, respectively. With growth spearheaded by cars, deposit product bundles and [create] finance-related fees. At the same time, transaction volumes picked up year-on-year across channels with the most notable movement witnessed in e-banking transactions up by 16% year-on-year testament to the quality of our digital offering, also acknowledged by third party service and awards. Operating expenses are presented on Slide 26. Personal and G&A expenses were up by 3% year-on-year, in line with guidance. reflecting increased union agreed wages and inflationary pressures exceeding 6% during the first quarter of the year, while the 10.9% year-on-year increase in depreciation charges, the [indiscernible] CapEx for IT investments which includes the ongoing replacement of our core banking system. All in all, operating expenses were up by 4.7% year-on-year with further optimization of actual stripping costs under control going forward. Turning to asset quality on Slides 27 to 29. We have not experienced notable deterioration in Q1 as domestic NPEs were flat quarter-on-quarter and net and [indiscernible] fee flows stood at 0 levels. Default [indiscernible] remain low, while [indiscernible] normalized back to 2022 average levels, excluding an exceptionally strong Q4 '22 that have benefited from a few large [indiscernible] within our corporate portfolio. For core NPEs, less than past 2 comprised 30% of our NPEs [indiscernible]. Notably, the sector initiatives to support vulnerable borrowers and to cap further increases in variable rate mortgages combined with government policies to protect household incomes from the increase in energy prices should also shift asset quality going forward. Finally, in terms of provision coverages we maintained sector-leading levels across all stages, as shown on Slide 29. On Slides 31 and 32 will provide our key ESG priorities. We are pushing forward with our environment and climate strategy within our broader ESG agenda, leading the market in sustainable energy financing, materially supporting the clean transition of businesses and households. Our ESG achievements are widely recognized with NBG included in the most sustainable companies in Greece for 2023 by QualityNet as well as in the platinum category for ESG transparency index for 2023. NBG has delivered another quarter of strong results. We have demonstrated sustained strength across our business. Home profitability is sharply higher, translating into a core return on tangible equity of 15%, while the quality of our balance sheet and our robust capital partners remain resilient to tightening monetary conditions. Our Q1 performance is testament to our capacity to deliver class-leading results and returns to our shareholders staying committed to NBG being the bank of first choice in Greece. And with that, please now open the floor to questions.

The first question is from the line of Butkov Mikhail with Goldman Sachs.

I have a couple of questions. Firstly, on the net interest margin. in the light of higher interest rate environment and the number of hikes since your guidance and also the caps on the interest rate hikes for the mortgage loans. What level of pass-through do you expect from the remaining rate hikes on the performing loan yields? And what outlook on the net interest margin could you share for this year? That's the first question.

Okay. Let me answer the question there. So as we said already that we will provide update on guidance later in the year when the profitability drivers will stabilize or be more clear. We have inflation. We have ECB rates expectation for further increases. Deposit betas moving volume growth MREL issuance. So it's not that easy to guide you now on the revision on our NIM, but certainly, there are significant upside risk there. Now with regards to pass-through on loans, we have seen so far a pass-through of about [ 70% ] if we measure that since the beginning of the increase in the rates in the second half of 2022. What we have said in previous quarters and we continue to see happening is that about 1/3 of the increase in the rates will be passed through the customers. So we aspire that we'll remain at these levels in terms of pass-through rates. With regards to the cash of mortgages, the effect that we have is effectively a forgone income, it is not material. It's in the area of less than EUR 10 million. So we are comfortable with that.

Okay. Then another question. May I ask to clarify a bit on the dividend. So as you guided previously, you plan the dividend payment for -- from the profits of 2022 was the approval from the regulator received with this regard. And also give you accrue the portion for the dividend for this year, for the year 2023 already in your capital?

Okay. So as the CEO said in his remarks, the regulator given the economic uncertainty, considers that distribution this year out of 2022 profits is premature for all Greek banks. So if you remember, last year, we had already provided about 20 basis points for dividend. Our intention, given the expectation that we would be paying dividend next year out of 2023 profits in a more substantial manner, we will be accruing during the year the amount required to reach a payout ratio in the area between 20% and 30%.

And as long as you already accrued 20 basis points, you will add another 20 basis points on the top of that or...

Yes. So we will accrue whatever it takes even the expectation of profitability for the year to achieve a payout ratio in the area of 20% to 30%, yes.

Okay. And finally, the question is what implications do you see from the possible investment-grade upgrade on operational on NBG that through on the securities portfolio or any other considerations which you could share?

So with regards to the long-awaited investment grade. I think that we will see some upside has to do with the supply and the pricing with regards to the liability side of MREL issuances. In terms of our securities portfolio, given the fact that the bonds are fixed rate, we don't expect to receive any upside on our NII from the securities will have some benefit on trading because of the hedging and the fact that the bonds will receive a better rate.

The next question is from the line of Alevizakos Alevizos with Axia Ventures.

Well done for these set of results. I wanted to follow up a bit on the previous question regarding the dividend. It seems to me like perhaps some of the [indiscernible] conversations were a bit, let's say, conservative this year. And at the same time, I understand that you are very profitable right now and you generate a lot of capital per year. So I was wondering whether the -- perhaps the regulator would be -- it could be easier for the regulators to kind of allow you to use your excess capital in other ways. And I wanted to ask you how you are considering to use this excess capital perhaps apart from doing the obvious which is lending. And then the second question, which is related to that is I can see a very strong investment securities growth during the quarter. I think it's more than 10%. What made you actually invest so much during this quarter? You think right now that you can get a lot of better yields compared to, let's say, this quarter that it was a bit weak in terms of lending disbursements due to seasonality?

So on the first question with regards to capital. Obviously, the level of capital that we have gives us optionalities. Obviously, being a bank that operates in Greece, our main priority is to help the economic grow and lend greek business and households. Having said that, given the level of capital illiquidity, we have we're exploring opportunities of assets that would share us generate value, given the level of target return -- or the return on equity we have outside the Greek jurisdiction as well. Obviously, going forward, any way of remunerating our shareholders is something that we will consider. But all that is subject to the [collaborate] dialogue as we already said. With regards to the investment in our securities portfolio, we don't have a point that we want to reach. We said many times that we are comfortable with the level of securities we have. In the first quarter, [indiscernible] we participated in acquiring about EUR 0.5 billion of [free covenant bonds] as well as treasury bills, which is a good option for us now given the level of the rates that are available at the moment. So that was it. It's not a change of our strategy overall, and we are comfortable with the position of GDPs we have for the last [indiscernible] years.

Yes. And if I may follow on the -- on the investment securities. Was the higher-than-expected trading income in the quarter a result of something that was one-off related to the investment securities?

We did materialize some profitability in the trading income from disposal of securities, yes.

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

It's Benjie here at Jefferies. My first question -- sorry, it's another follow-up on the dividend. I guess I was just wondering in the context of the discussion with the regulator. I know you flagged these sort of the economic uncertainty. I'm just wondering if there's any other sort of factors being taken into account by the regulator when thinking about dividend approval in particular, whether the size of deferred tax credit portfolio is a discussion factor with the regulator when considering payout approvals. The second question was just on asset quality. The NPE ratio was flat quarter-on-quarter. I guess you can argue that there was a modest sort of tick up in the gross inflows in the quarter, but nothing material. I'm just wondering whether you're seeing any kind of red flags on the asset quality front at this point, any particular sectors that you're concerned about? And obviously, you're undershooting the cost of risk guidance for the full year? Any reason to update that at this point?

So on your first question, Benjie, we discussed -- I cannot put myself in the shoes of the regulator, but I understand that given that this is a country that has had a dividend bank for a period of over 10 years. And given the level of our asset quality, asset sector now, they want to be extra careful before opening the door. I think that's more or less it. With regards to asset quality and the question that you got there, indeed, we had a better-than-expected first quarter with a flat NPE formation. In the second quarter, we do expect to have some formation. But the good thing for us in that is much better than expected originally. So if you remember, we had about EUR 350 million of formation budgeted for this year. We don't see that happening so far. But Q2 is going to be based on what we expect something with [as more formation].

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

Just wondering on the NII dynamics, how you see it, where do you see peeking with the current trends you've been observing in Q2 with the deposit mix shift that if anything is changing on that front, for example? That's my first question. And related to this, loan growth for obvious reasons have been relatively muted for the sector negative. How do you see that evolving in Q2 and beyond as we get closer to the end of election uncertainty? And just a technical one, your tax expenses picked up. How should we model that for the next few quarters and maybe beyond as much color as you can give?

Okay. Christos is going to take the tax. I'll take the other 2. The NII will peak in line with the peak of the increase in interest rates by the ECB. One more -- 2 more -- second quarter, third quarter, okay. 1 quarter or 2 quarters after that is the peak for the NII [indiscernible]. Second question was on disbursements. I think in the second quarter, we are seeing a slightly better result Q-on-Q than we did in Q1. But most of the strength and our guidance for about 1.5 net expansion will come in the second half of the year. Christos, on the tax.

On the tax question, so our effective tax rate is at around 27%. So this is driven by the corporate tax rates of the banks in Greece, at [ 29% ]. Let me remind you that other companies in Greece, including our domestic subsidiaries had a corporate tax rate of 22%. And our foreign operations in North Macedonia up 15% saw effectively. The 27% is a mix of all these factors and the different [indiscernible] compared to last year to take it a step further has to do with the change in mix in our profits and the contribution of the bank versus the other elements in operability. And last year, [we also] took some different tax assets and extraordinary profits that we had in the year. But we should be expecting this effective rate going forward as well.

And maybe if I can squeeze one last one on TLTRO, just from an asset size perspective, what's the outlook for that balance? Will it go to 0 by the end of the year or early or later, any color?

And so as you saw, starting from the EUR 11.6 billion back in Q3 2022, we're now down to EUR 5 billion. We then repaid EUR 3.1 billion in Q1, and we have a normal repayment at the end of June of another EUR 3.1 billion. So that would take us down to EUR 1.8 billion. that [indiscernible] matures in 2024. So we'll explore whether we would repay this year or at the beginning of next year. But in any case, the amount is not meaningful.