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

Ladies and gentlemen, thank you for standing by. I am Geli, your Chorus Call operator. Welcome, and thank you for joining the Piraeus Financial Holdings conference call and live webcast to present and discuss Piraeus Group's first half 2022 financial results. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Piraeus' Financial Holdings CEO, Mr. Christos Megalou. Mr. Megalou, you may now proceed.

Good afternoon, ladies and gentlemen, and welcome to today's conference call on our half year 2022 financial results. This is Christos Megalou, Chief Executive Officer, and I'm joined today by Theo Gnardellis, Chief Financial Officer; and Chrys Berbati, Head of Business Planning and IR. Today, we have released a milestone set of half year results, the key highlights of which are set on Slide 5. We report normalized earnings per share of EUR 0.21 for the half year. We have achieved a 9% NPE ratio ahead of schedule with strongly negative formation, EUR 226 million of core profitability with interest income and especially fee income growing strongly. We are generating a more than 10% normalized return on tangible book. Our fully loaded CET1 ratio is at 10.2% ahead of our year-end target, which we are upgrading, and we have grown our loan book by more than EUR 1.5 billion in the first half, also beating the year-end target with resilient yields. Before elaborating for the bank's performance, let me comment on the macroeconomic situation. On Slides 6 and 7, we see that the Greek economy is expected to grow strongly in 2022 at a rate of almost 6% as previously guided by Piraeus. This is double the EU average. Employment is continuing to rebound and the tourist season is beating the 2019 record. Real estate prices continue to grow while remaining significantly below the peak. The ECB recently increased its deposit rate by 50 basis points, which, obviously, will boost banking revenue pools. Such rate hikes are expected to continue as the Central Bank acts against inflationary pressures across the continent. At this stage, a looming energy crisis is the biggest concern. However, the country's energy sources are sufficient to withstand supply constraints, as Greece's dependence on Russian natural gas is relatively small. We emphasized that Greece is at a unique different point in the economic cycle compared to almost all European peers, still coming out of a decade-long recession with a major investment gap, the momentum in favor of economic growth is powerful and investment flows are showing no sign of abating with EU next-generation funding favoring in Greece. We do remain vigilant, though closely monitoring all forward-looking indicators to identify any issues the current environment might trigger. However, present facts and conditions on the ground do not point to severe or unmanageable outcomes in the coming period. Turning now to our financial results. We start on Slide 8 with a major achievement, which is the massive deleveraging of NPEs to bring us to a single-digit 9% ratio today. The Hercules deals have been the major factor but organic reduction is also a significant driver, and this will lead us to the European average by 2024. The drastic reduction of the NPE ratio is part of the market improvement in our fundamentals, as shown on Slides 9 and 10. This has resulted in large part from the successful execution of the Sunrise Plan as well as rigorous optimization of operations and strong performance by our frontline staff in retail and corporate to grow our loan books and revenues. On Slide 11, we see a markedly stronger balance sheet with ample liquidity, much smaller amount of NPEs and a growing tangible book value. On Slide 12, we see the bank had another profitable quarter, which, on Slide 13, is shown to generate EUR 0.21 of normalized earnings per share for the first half of 2022, driven by EUR 0.16 per share of core operating profit. Solid trends in key core operating lines are apparent on Slide 14 with special mention of our fees and commissions line where we posted a 22% increase year-on-year. Slide 15 illustrates our strong organic NPE trajectory at negative EUR 250 million for the quarter. Our accelerated NPE reduction kept underlying cost of risk at 50 basis points for another quarter down from 100 in first half 2021. Slide 16 shows the solid, healthy and profitable credit expansion of EUR 1.5 billion in the first 6 months of 2022, with EUR 1.2 billion achieved in Q2. This means that we have achieved our end-of-year target, a full 6 months earlier, creating a significant tailwind for NII and allowing us to upgrade our expectations for the full year 2022. The total new disbursements of EUR 4.4 billion were made at an average yield of 3.6%, protecting the overall loan book yield. Obviously, a larger loan book originated earlier benefits to a greater degree from rising ECB reference rate. Our capital position continues to improve, as shown on Slide 17. Our regulatory capital is at 16.7%, with more than 200 basis points buffer versus the requirement, while our fully loaded CET1 increased by another 20 basis points to 10.2% with 2022 NPE cleanup costs fully absorbed. Our capital position benefits from the recent signing of the 3 synthetic securitizations that delivered a cumulative EUR 1.1 billion of risk-weighted asset relief, all executed ahead of schedule and with favorable terms. The first half '22 performance sets the stage for a much stronger 2022 than initially planned. Going through to the next slides and landing on Slide 26, where we outlined our renewed full year 2022 expectations. Normalized earnings per share is now expected to land at EUR 0.35. Fully loaded CET1 ratio, we end the year at 11%, approximately 100 basis points ahead of previous estimates. We expect the NPE ratio to continue to decrease to the 8% area, while returns on tangible book value will be 8% this year on a normalized basis. On Slide 27, we see the broad components of our guidance upgrades with revenues, in particular, coming in stronger. The revenues upgrade is depicted in more detail on Slide 28. We now expect EUR 300 million of incremental revenues, of which EUR 200 million relate to front loaded expansion, resilient spreads and rising rates. Slide 29 illustrates the accelerated restoration of our CET1 buffers. The organic capital generation that we foresee, together with additional synthetic securitizations in the pipeline minus other restructuring costs, will bring us to the 11% CET1 on a fully loaded basis by year-end. This, together with 16% fully loaded total regulatory capital, will take Piraeus into 2023 with strong capital buffers and a growing revenue pool, allowing us to withstand potential headwinds. And from 2023 onwards, we expect to consistently generate 100 basis points of organic capital annually. Our operating achievements give us confidence in this trajectory. In light of the strong operating performance and results in this quarter, we would like to draw your attention to the relative value analysis implying significant upside in our stock. Slide 32 shows our price-to-earnings ratio versus peers and their respective difference. While Slide 33, we see a similar relative analysis based on an annualization of first half results. From Slide 34 to Slide 45, we put forward a reality check of where we stand in terms of a number of metrics: Slide 34, return on tangible book; Slide 35, net fees ratio; Slide 36, operating efficiency; Slide 37, cost control; Slide 38, loan growth. With the largest retail customer base as shown on Slide 39, we are most levered to Greek GDP growth. Slide 40 shows that our regulatory capital is efficient with somewhat smaller CET1 buffers today, but as indicated on Slide 41, our strong operating results are growing our capital buffers beginning with the 2022 outperformance. On Slides 42 and 43, we note the single-digit NPE ratio already achieved alongside peers and a clear path to the European average with progress, again, ahead of schedule. Given these metrics and taking the relevant disclaimer into account, in a growing market like Greece, Piraeus Bank has significant upside potential. And with that, let's open the floor to take any questions you may have.

[Operator Instructions] The first question is from the line of Sevim Mehmet with JPMorgan.

Congratulations on the results. I'll have a couple of questions, please. So first of all, on your new guidance, obviously, quite significant upgrades. Could you please dig a bit deeper into the individual guidance lines for the P&L and give some color on where you would expect those trends to continue and where we may see some pull-down in the second half? And a couple of questions on your capital as well, please. You indicated the fully loaded CET1 should grow to 11% by the end of the year. And of that, you expect 80 basis points should be organic capital generation. If you could please provide some more specific color on this point, that will be very helpful. And on a related note, given you've upgraded your CET1 target effectively to the level you are aiming to reach at the end of next year, can I ask if there's an element of front loading of any capital measures here that you were initially planning to do in 2023? Or should we expect that 1 percentage point higher next year, all else equal, based on your original guidance?

Thanks a lot for the questions. On Page 27, we're actually illustrating where the organic profitability is primarily driven from. As you'll see, it's the top line that drives the delta in the revised forecast. And that primarily comes from interest income from the accelerated loan expansion as well as minority effect is the interest rate hike that has already happened and we have seen as soon. So it is pretty much things that have happened that are leading the overall revenue to a higher run rate and a higher expectation for the year. That, in combination with a slightly lower cost of risk guidance to what we have said so far, again, based on the run rate that we have seen, guides for this kind of renewed guidance for the new return expectation for the 8% of the year. To your second question and regarding the capital expectation, the 11%. The 80 basis points are basically the bottom line result as expected in our forecast for the year, right? It's something north of EUR 200 million of organic capital generation that we are expecting based on the profitability expected in Q3 and Q4, but that is the major part and a new synthetic program that we've got in place that gets us to the 11% mark. To your question around 2023, it really depends on the profitability of 2023. The guidance that we have given is indeed a point higher, and this is where we basically stay. That does not take into account the tailwind effect that we've got on the NII, of course, nor has taken into account any questions that one might have on the cost of risk for 2023. But keeping everything equal, the '22 to '23 single percentage point delta was purely based on organic profitability. So no capital acts have been front-loaded.

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

The first question is a follow-up effectively. What was really great about this quarter was not only the NII, but also the improvement in the fees and commission much quicker than we hoped. I was wondering how you feel about the EUR 530 million target for 2025? I know it's still far ahead, but especially for something like, for example, the rental income, it seems to me like the run rate is already higher than the figure that you've guided 3 years ahead. So I was wondering whether there is something there. And then secondly, one of the other things that seems to be working very nicely is the interest income on securities. And we all know that the liquidity in the Greek system is increasing and you've been benefiting as well with a lot of new deposits coming in. So I was wondering whether now you've got an updated number on how much securities you further want to take on the balance sheet? I remember like in the past, the figure was about EUR 15 billion, but you are already above EUR 14 billion. So I was wondering whether there's a new number.

On the fees and commissions, the general point to make is that this was a strategic decision and a concerted effort on behalf of the management team to work around in actually making sure that we have now these results that we see in front of us, both in terms of what we are achieving in terms of the rental income that you pointed out, but also through increased fees for lending products, increased fees from a number of other areas, including asset management, transaction banking, the credit card and debit card business and so on. So I mean, we are happy with the progress we are making. We have upgraded our number for the end of the year. And of course, going forward, we think that similar trends will be followed. So very good results so far. And of course, it's looking the way forward for the years to come. Now I'll pass on the floor to Theo for your securities question.

So your question about securities, we have grown the book on a face value basis quite substantially in Q2, right? I mean what you're seeing there is also the effect of fair value hedging the EUR 500 million increase. Actually, we have grown face value by more than EUR 1.5 billion. And we're currently running at an interest income from securities of about EUR 60 million per quarter at an effective interest rate of something short than 2%. So overall, we're talking about quite a well-yielding book with what we have added so far and the guidance for this year and the next does not assume any further increase. We feel that we've reached a level with which we're comfortable as a percentage of the balance sheet and with various moves that we've made, including the introductions of this EUR 1.5 billion, we are happy also with the yield. So this is kind of an NII generator on a static basis for the years to come.

If I can have one follow-up for you. I just want to confirm one thing that the synthetic securitization of the EUR 500 million is actually something that incrementally was announced today. It wasn't something in the original plan. Is that correct?

Yes, Al, that's correct. Our plan had a program of EUR 1.1 billion for the full year with the expertise we've built in that area. We managed to get it all signed within the first half of the year. And actually, one of the deals has already received SRT and the relief is already in the reported figures. The rest are coming by the authorities in the coming quarters. So we're -- because of this leeway and by looking at our book, we have discovered perimeters that we would like to protect that will provide more than EUR 500 million of RWA relief. We intend to execute them in the second half of the year.

The next question is from the line of Lougovtsov Alexei with Bank of America.

Thank you very much for the presentation and for the great results. If I may, I would like to ask a question from the fixed income side. What's your bond issuance needs for this year and maybe next year? And also, do you think the regulator can postpone some of the deadlines for raising MREL debt by Greek banks?

On Page 57, we are disclosing our current MREL position as we stand. So we have a guidance requirement for an 18.8% level for the 1st of January '23, right? Given that and also the new guidance we provided for how our capital is going to evolve in our RWA profile, this means extra MREL liabilities required of less than EUR 0.5 billion, right, versus a different number that we've given in the past. This is an informative guidance number that the regulator has given. So it's not a binding target. That being said, and given the reduced requirement that we've got from our new guidance and capital generation, it sounds that we absolutely would like to meet, and we're looking at all available options until the end of the year to get that done.

So for this year, EUR 500 million, right, of MREL?

Less than that, yes.

Less than that. And is it more likely to be in the form of senior preferred?

Well, an [ NPL ] issuance is always the primary options. There are also other alternatives someone can look at for eligible liabilities that will be the minority of this story. But definitely some sort of [ NPL ] issuance would be in the plan to meet this informative target.