Piraeus Bank S.A. (TPEIR) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. I am Getty, your Chorus Call operator. Welcome, and thank you for joining the Piraeus Bank conference call to present and discuss the market update. [Operator Instructions] The conference is recorded. [Operator Instructions] At this time, I would like to turn the conference over to Piraeus Bank CEO, Mr. Christos Megalou. You may -- Mr. Megalou, you may now proceed.

Good afternoon, ladies and gentlemen, and good morning to those joining us from the U.S. I'm Christos Megalou, CEO of Piraeus Bank, and I'm here today with our CFO, Theodore Gnardellis; Group Treasurer, Tom Arvanitis; and IRO, Chryssanthi Berbati. Thank you for attending Piraeus Bank market update presentation. Today's market update is aimed to address the recent macroeconomic developments; the bank's latest business trends; as well as the introduction of the Hellenic Asset Protection Scheme, Hercules, and its impact to our strategy. In the presentation we have distributed, we outline our new NPE road map covering period up to year 2022 and elaborate on its main components. At the same time, our strategy is enhanced with certain business accelerators we are pursuing, enabling the bank to achieve its medium-term strategic aspirations of Agenda 2023 1 year earlier than initially planned, hence in 2022. Today's topics are summarized on Slide 5. All of you that have been following us for some time now will agree that year 2019 was a landmark year for Piraeus Bank. We delivered tangible results in all areas of focus: restoring profitability, improving asset quality and liquidity and enhancing our capital base. We are pleased to report that all financial KPIs have improved consistently quarter after quarter. And as the environment in which we operate improves, as we display on Slide 6, we expect our financial performance to further strengthen. Moving on to Slide 7. We illustrate the key achievements of 2019. The bank completed significantly ahead of schedule the very complex transaction of spinning off its legacy platform and, partnering with Intrum, an initiative that will overhaul the bank's derisking efforts. Furthermore, the EUR 400 million Tier 2 in June 2019 was the first one issued by a Greek financial institution since 2008. In total, our decisive actions increased our capital position by about 200 basis points, at the high end of our [ governance ] of 160 to 200 basis points. We are stepping up our actions, and we are working hard in making our bank better and stronger. This pays off in all financial KPIs as well as in our commercial metrics. In 2019, we increased clients by about 150,000 to 5.5 million and digital clients by 280,000 to 2.4 million. On Slide 8, we present our new 3-year strategic and financial road map. We are front-loading our derisking efforts with increased inorganic activity in 2020 to attain a circa 15% NPE ratio in 2022 and single digit by 2023. This effort, combined with a well-laid-out plan about business growth and an improved operating model that is driven by cost efficiency, will enable the bank to deliver around 10% return on tangible equity by end of 2022, a year earlier than initially planned. Our total capital ratio is envisaged to stand at around 15.5% to 16% throughout this period. At this point, Theodore Gnardellis, our CFO, will take you through 2019 financial performance and our new NPE road map.

Picking up from Christos's introduction, let's stay -- turn to Page 10. Here, we summarize the financial takeaways for the full year 2019 period based on our preliminary results. Progress evident on all fronts from pre-provision income restoration to liquidity, to NPE management and to new loan generation. On income. This was enabled by recurring core revenue generation, as one can see on Page 11, while the focus on cost efficiency continued to deliver. Net interest, net fee income higher by 2% and 9% year-on-year, respectively, while these 2 P&L lines combined contribute 96% of recurring net revenues of approximately EUR 1.8 billion. Operating expenses down 5% year-on-year at EUR 980 million. On top of this effort, we are targeting further efficiencies through a number of initiatives. Pre-provision income for the full year '19, up 5% year-on-year on a like-for-like basis at EUR 839 million, 16% on core revenue only excluding trading and other income. Cost-to-income improved to 54% versus 56% last year. Piraeus' solid financial performance in the full year '19 was also facilitated by the EUR 4.1 billion new loans that we have dispersed, with business lending driving the trend, while retail lending also posting a good recovery albeit from a low starting point. These new loans came in with an average rate of 4.7%, supporting our net interest margin. Now on Page 12 and turning to asset quality. Q4 '19, the 17th consecutive quarter of NPE reduction for Piraeus Bank, with a EUR 1.3 billion drop, a cumulative EUR 3 billion drop for the full year, while from the peak of September of 2015, NPE balances have shrunk by circa EUR 13.5 billion. Looking a bit deeper. Q4 inflows at historical low levels of EUR 260 million, while curings, collection, liquidations stood at EUR 0.7 billion. In all, our NPEs on a bank level stood at EUR 23.6 billion at the end of year from EUR 24.9 billion in September '19, while group NPE ratio stood at 49% at the end of 2019. Turning now to our new NPE trajectory. I'm looking at Page 16. 3 elements to note: one, a very positive macro backdrop. Two, we've got our partnership with Intrum that enhances our NPE efforts. And three, the introduction of the Hercules plan as a bolt-on tool that allows us to front-load our efforts. In this context, we decided to expand the bridge perimeter into a larger one called Vega with circa 5 billion GBV, including business loans as well as residential. On Page 17, you can see the indicative structure of the 2 transactions, the circa EUR 2 billion Phoenix securitization, which includes mortgages; and Vega securitization. Senior notes are articulated and disclosed at an estimated EUR 2 billion between the 2 transactions. In essence, what we're doing is bringing forward the 2021 efforts into 2020, as presented on Page 18, by utilizing the guarantees of the Hercules plan. This approach will allow us to accelerate our journey towards lower NPE ratios and reach a 15% level by 2022. Our plan includes a 70% NPE decrease up to 2022, while we assume marginal sales post the 2020 EUR 7 billion transactions. Post 2020, our strategy will be fine-tuned with key execution strategies driving to a single-digit NPE ratio as soon as possible, always in correlation with value maximization for our shareholders. On Page 19, we illustrate the main components of the NPE movement envisaged for the period 2020 to 2022. On capital and moving on to Page 20. We have made significant progress in the first 3 quarters of 2019 on enhancing our capital base, which enables us now to proceed with the announced NPE front-loading, which will pave the way for a lower cost of risk. This, combined with our debt issuance program in 2020, places us at a position to retain a healthy capital ratio of circa 15.5%. This level compares to a 14.25% overall capital requirement or 10.75% CET1 requirement. On Pages 21 and 22, additional information about the indicative time line of the 2 NPE securitizations as well as the necessary hive-down process we will employ to facilitate the NPE transactions. We aim to complete Phoenix by mid-2020 and Vega by year-end. And based on the proprietary work we've done so far, we feel confident for both cases. Turning to our real estate owned strategy. As the market improves, we want to extract further value from our REO portfolio, which is presented in Page 23. We are looking to leverage Intrum as our REO servicer to actively market properties and tap multiple channels to accelerate sales. We'd like now to turn the floor to Christos Megalou for his concluding remarks.

By adopting this well-defined road map, Piraeus Bank will be well on track to attain its medium-term targets to deliver a return of circa 10% on tangible equity by 2022. This is illustrated on Slide 25 and is based on 3 components. Our first component is derisking. The bank will decisively continue derisking its balance sheet while stepping up its pace, with a target to reach a single-digit NPE ratio by 2023. Piraeus Bank intends to front-load its NPE reduction by about EUR 11 billion in 2020, from EUR 7 billion initially, on the back of Hercules. Front-loading EUR 7 billion securitizations in 2020 enables cost-of-risk normalization in the following years as the positive trends are evident in the forthcoming period. The second component is grow. By deepening the existing 5.5 million client relationships, Piraeus Bank will focus on leveraging the competitive advantages of its core business and its performing book, which is the largest in Greece. The bank remains the leading Greek business bank. Along with increased generation of retail business under a risk-adjusted approach, new credit demand is an important driver in our business equation and increased loan disbursements in 2020 versus our 2019 plans. We expect net interest income to withstand the impact from NPE derisking and the increased costs from debt issuance, supported by new disbursements, along with curings and lower funding costs. We aim for a greater fee income contribution, mainly stemming from asset management, new loan generation and enhanced cross-selling. And lastly, simplify. The bank will decisively maximize its resources efficiency. This will be achieved through an improved and simplified structure, further operational cost rationalization measures as well as further optimization and automation of processes. Through the focused execution of its actions already launched, by end of 2022, Piraeus Bank is expected to have evolved in an innovative and efficient financial institution with a cost-to-income ratio below 50% and return on tangible equity around the 10% area. The bridge to the targeted 2022 returns, to all the points made above is illustrated on Page 27. Concluding my remarks, I would like to underline that we remain focused on executing our strategy as we have demonstrated so far and throughout the last 3 years through the successful execution of the restructuring plan, the Agenda 2020 strategic plan and our capital enhancement plan, with full commitment to deliver on our targets. Now we can open the floor to questions.

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

Now my first question starts on Slide 17 and securitizations. I understand that Phoenix is the residential mortgage, and I understand that the bridge, which is now inside Vega, includes EUR 1 billion of secured business loans, right? So now then, what do we have in the remaining EUR 4 billion of Vega? And if there's any kind of indication of coverage level of these exposures or if shall we take the group existing coverage as a proxy for understanding that. Then my second question is on Slide 12. So I think that the debate on the inflows seems very, very positive, similarly on the outflows as well. Now was there any nonrecurring element on those 2 sides of the slide? I mean just wondering if you can give some light on the dynamics of both inflows and outflows. And then finally, I have a question regarding profitability expected for 2020. If I'm not mistaken, you previously have guided for a cost of risk of around EUR 100 million per quarter in 2020. I'm just wondering now that, with the securitizations, this has changed. I see that you have a guidance for capital hit of 180 basis points coming from Vega and Phoenix but just trying to triangulate that with your cost of risk for 2020 and your PBT, which if I'm not mistaken you're guiding for EUR 20 million for the year. So if you can update us on that one as well would be great.

Okay. Regarding the first question, the Vega transaction is a very sizable transaction. It contains a mix of both business and individual loans very much consistent with the mix of the overall portfolio. So it carries a mix of both and represent, to a large extent, the mix of the book that we have overall as a bank. Referring, regarding your question on Page 12, inflows and outflows. This is pure organic generation. There is nothing that's nonrecurring. There's no one-offs in here. This is purely an indication of the macro settlement as well as the collection efforts that are done by our servicer. And regarding your question on profitability. All the intrinsics of the balance sheet regarding profitability are intact, with the exception of a very -- of a contained NII effect from the derisking. And other than that, what we are looking at here is a cost of risk that will be impaired further by the securitization approximately on the 15% rate over GBV. Other than that, everything else is intact.

Got it. Just a quick follow-up. The one on Slide 12, on the flows. Is this the -- should this be also kind of the expected run rate now for 2020, excluding the transactions?

We have assumed a EUR 4 billion inflow rate over the 3 years, which is approximately EUR 350 million, Page 19. I'm referring to Page 19, which is approximately a EUR 350 million quarterly inflow. Now this is the average of '19, and this is what we are assuming. Q4 has demonstrated a more positive result. We should see it for a few more quarters before we make it our base assumption.

The next question is from the line of Kepaptsoglou, Iason with HSBC.

Two questions from my side. Can you give us some more color on the pricing effectively that you expect for the 2 securitizations? So maybe the level of the guarantees that you expect to have and the coverage for the 2 transactions. And then also separately, I know you have guidance for total capital, but am I right to think that even on a fully loaded common equity Tier 1 basis, by the end of your plan horizon, i.e., 2023, you expect to be above 13%?

Iason, as far as the senior -- the size of the seniors, we have disclosed for a cumulative EUR 2 billion of senior notes, approximately, as a result of these transactions. The -- we cannot disclose exactly considerations, but we are guiding for a 15% reduction or P&L impact over GBV for the 2 books. As far as our fully loaded CET1 goes, we are guiding for over 14% throughout the period that we are discussing.

Okay. That's on a transitional basis, obviously.

The next question is from the line of Bairaktari, Angeliki with Autonomous Research.

Two questions on my side, please. First of all, does your plan assume that part of the Pillar II requirements will be covered in the future by AT1 issuance as opposed to equity? And could you give us some color on the CET1 trajectory following 2020, considering that you have some quite sizable annual negative headwinds from IFRS 9 phasing and also from the coupon on the CoCo? And another question on NII. Your NII in the fourth quarter was particularly strong and up quarter-on-quarter. Could you give us some color on what drove this increase on a quarterly basis?

Thank you, Angeliki. Regarding your question on Pillar II, the plan currently does not require coverage of the Pillar II or capital buffer from anything other than CET1 given our quite comfortable distance from the overall requirement. However, CRD 5 has been voted, and we are expecting transposition this year, of course, with the approval of the competent authority. Regarding your question of the headwinds on capital, as you mentioned, and on IFRS 9 and the CoCo coupon, we will be discussing, of course, much more diligently during the business plan. This is a bottom-up, very diligently done strategic exercise, but we will be discussing much more on these numbers with the annual results. That said, we remain confident and we confirm our expectation for IFRS 9 and CoCo coupons to be covered by the organic capital generation of the bank. As far as your question on the NII in the fourth quarter: This is primarily driven by the cost of funding that has been dropping both on the deposit side and overall on the [ lending infrastructure ] as well as the very positive effect from the very healthy rate dispersals that we have evidenced.

If I may follow up on the NII. You mentioned in your presentation today that you expect the initial negative impact from the enlarged securitization perimeter to be offset by higher disbursements going forward. Does your 2023 sort of guidance include an increase in Euribor? And also what kind of negative impact have you factored in from the debt issuance that you have included in your 2020 capital plan?

Thank you, Angeliki. We have not been assuming any Euribor effect from increasing rates going forward. Therefore, we are looking at the current situation. And all of the costs of planned issuances are incorporated in the guidance we've given for 2023.

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

Just one question on the Vega securitization, please. So you previously mentioned that the perimeter represents the broader NPE portfolio. And I see indicative senior size of EUR 1.1 billion, which [ screens ] quite low compared to the other transactions that we've seen so far in Greece and which is approximately 20% of the gross book value. So can we assume the coverage levels are significantly higher than the portfolio coverage that you have here? And also, what coverage levels do you expect to see post the securitizations?

Thank you, Mehmet. We cannot disclose the actual coverage levels. However, this is a book that's primarily denounced and therefore carries a higher coverage than expected. Overall, our business NPLs carry a coverage of 60%, which is the biggest part of our denounced book, where our mortgages are around 30%.

Got it. And we then can assume and -- approximately EUR 900 million equity hit overall. Is that correct?

15%.

As previously mentioned, we are budgeting here an approximately 15% cumulative hit over GBV.

The next question is from the line of Kepaptsoglou, Iason with HSBC.

Since we have [indiscernible] on the call, can we please get a bit more color on how you expect curings and liquidations to improve going forwards? You have given us a bit on Slide 19, but if you could possibly give us a bit more, that would be very helpful on what you expect to drive the outflows.

So it is all, I would say, driven by 2 things. One are the efforts of our servicer going forward, as well as the macro environment. On curings, people are much more eager to protect their assets and therefore want to uphold and engage in restructurings with the banks; equally for liquidations, much more appetite for real estate going forward. As a result, these, I will say, are the 2 macro factors that we're incorporating here.