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

Ladies and gentlemen, thank you for standing by. I am your Chorus Call operator. Welcome, and thank you for joining the Piraeus Financial Holdings conference call to present and discuss Piraeus Group guidance for its 2020 financial KPIs [Operator Instructions] and 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 2023 financial estimates. This is Christos Megalou, Chief Executive Officer; and I'm joined today by Theo Gnardellis, Chief Financial Officer; and Chris Berbati, Head of Business Planning and IR. As promised in our third quarter 2022 results disclosure, we are holding today's call to provide information on our financial estimates for 2023, having completed our 2023 budget and incorporating, monetary and market trends. We will try to explain our thoughts and strategies on the various moving parts that are expected to drive this year's profitability. Our full year 2022 financial results will be announced on 24th of February, the earliest ever for Piraeus bank. All of our 2023 financial disclosure dates have been published and the full 2023 financial calendar can be found at the end of this presentation on Page 14. Before we begin, let's start briefly on the economic performance and prospects of risk. Economic growth in Greece remained solid in 2022 with GDP rising 6% year-on-year in 9 months 2022, a level of growth that is expected to be also achieved for the full year 2022. Growth is underpinned by the significant structural reforms that have taken place during the past years, and a strong inflow of foreign direct investment in 2022 with a number of world-leading companies coming to Greece. Greek debt to GDP in 2022 is projected to have one of the largest drops worldwide while similar trend is expected to continue in 2023. On the back of these developments, on Friday evening, Fitch ratings became the third rating agency to upgrade the Greek sovereign rating to BB+ One notch away from investment grade level, which we expect Greece to achieve within 2023. The country remains on a path of economic expansion into 2023, reflecting the different phase that it finds itself in the current economic cycle assisted by its improved resilience and competitiveness. Our house view is that Greek GDP will grow approximately 3% this year, driven by tourism, consumer spending and investments. The deployment of the recovery and resilience funds in the Greek economy is a major catalyst. The total RRF resources that have been disbursed or approved amounts to EUR 11 billion, rank increase among the top of the list in the EU. Turning now to Piraeus Bank. 2023 is expected to be a milestone year. The ambition for the group is to further enhance shareholder returns with more than EUR 0.45 of normalized earnings per share to attain a minimum sustainable 10% return on tangible equity. To boost CET1 capital ratio by approximately 100 basis points. And to further derisk our balance sheet to below a 6% NPE ratio with above 60% NPE coverage. We expect net interest margin to peak at above 2% in 2023 and supported by higher interest rate on a healthy growing balance sheet. All key financial indicators of 2023 are presented on Slide 9 of this presentation, and further analysis is provided on Slides 10 and 13 and with that, let's open the floor to take any questions you may have.

Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] The first question is from the line of Sevim Mehmet with JPMorgan.

I'd like to press you on NII guidance, if I may, and specifically on your underlying assumptions for this year, and also for beyond. So '24, based on where the rates will go. Firstly, on your 2023 guidance, I see that you're assuming a deposit facility rate of just 2.5%, which I believe could be slightly conservative compared to market expectations. So can I ask why you decided to use 2.5%? And also what would the assumptions be if you were to assume higher rates for Berbati you see this year, particularly in terms of the deposit mix shift within the year, but also in terms of deposit beta, which I understand is about 50% based on FR of 2.5%..

Thanks for the question. Well, the DFR was assumed back in December where we actually closed the budget. So it was based on the monetary conditions at the time. I got to say here that this budget was based on -- was driven on making sure that assumptions there are resilient and that returns can be delivered, not dependent on extraordinary macro monitor circumstances. So across the P&L, the double-digit return that we are promising there is based generally on something that we think is rather certain or definitely feasible. Obviously, a DRF above that, which I agree with you, the consensus is that it will be higher might create and would probably create marginal beneficial NII. We would expect, of course, the pass-through on both loans to be reduced and deposits to be increased. We've run some scenarios. I would say that there is a marginal NII benefit up to the level of 3.5%. And we're not budgeting for that. And also to answer your question about beyond '23. Obviously, we don't have assumptions but we're not sure how much that delta would be sustainable going forward. Our assumption is that the current assumed game levels should be defended in a sustainable manner. Beyond that, beyond this year. So we are actually reaching and budgeting for a sustainable return '23 onwards rather than a one-off story for '23. On the mix. I would say that we are already quite, I would say, I don't know if I'd call it conservative, but definitely in alignment with the past history, where we are doubling the mix of TD expected within 2023. Contrary, I have to say to what we've seen in other jurisdictions as well as what we're seeing on the ground right now. So there is already a substantial shift towards the time depot. If you look at the -- if you want to do a back of the envelope sensitivity, a 10% shift on the mix, we're budgeting now for 35%. If it were 25% that creates an annualized uplift of the NII of about EUR 50 million. But as I said in the beginning, all of the assumptions are plugged as per our December reality. So that we can demonstrate sustainable ongoing returns for '23 and beyond.

That's very clear. Can I clarify? You mentioned this DFR were to be higher. So I think 325, NIM would be at 2.5% rather than the 2% that you're guiding now. Is that correct?

Actually, what we -- what I said is that there would be marginal NII benefits and just to give you a figure, it would be a low single-digit NII growth versus '22. So currently, the meaning that you are looking at the above 2% is an NII nominal growth of -- in the high teens area, right? So I would say, between 15% and 20% depending also on how the year closes. Extra define could provide a 23 bump of 1% to 3% [ their ] level.

That's very clear. And just maybe on 2024, again, if I may. So if you assume a DFR reaching, let's say, 3.25% at some point this year, and then it starts coming down and normalizes at 2.5%, 2% levels in '24, maybe '25. Would you expect that NII would peak in 2023 or early 2024. And then if things start normalizing, would come down again? Or how would you think about the dynamics beyond that?

I would say that I think you are right. We do expect that given also the lag time of the pass-through '23 would be a peak NII situation on a nominal basis, potentially also early '24 depending on the speed of the accumulation of interest rates. That being said, for us, the anchor metric is net interest margin to make sure that even if we are some basis points above 2% in 2023, we stay in that area in a sustainable manner past 2023

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

I've got a couple of questions. One question is on capital. You say that there's going to be an organic capital generation of 100 bps. However, that includes 30 bps reduction of other adjustments. And then I was wondering on the same number, the 100 bps, does it include any assumption on any dividend payment for the year? And then the second thing is on the cost and the 2% reduction year-on-year on an underlying basis. How does it compare with your previous number, i.e., do you see any inflation in your cost base?

Okay. So on the capital question, the projection for 2023 is until year end of '23. So it does not include any assumption for dividends. Any such move would obviously happen on the back of the '23 results. So it will not happen within the financial year of '23. The 2% reduction on admin costs and overall on the cost base on a credit basis. Of course, it includes inflationary assumptions. We have had that phenomenon as well also in '22 as we will discuss on the 24th of February. I would say there is a mid-single-digit inflationary effect assumed in the budget of 23%. But the cost and initiatives that we have launched and are continuing to launch are countering that and delivering a nominal drop of 2% throughout the year.

I didn't get the answer for the 30 bps of other adjustments. Can you give us some color on what are those?

All right. It's mostly cost restructuring, so voluntary exit scheme costs for the continued outsizing of the organization. last some, I would say, immaterial kind of marginal NPE cleanup from marginal sales and the tail costs from transactions that we have under completion. -- the majority of it has to do though with cost restructuring.

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

My first question is on the return on tangible equity guidance. So you have revised that upwards from the previous outlook for 2023. Is this mostly driven by higher benefits from the higher rates and the net interest margin or you make in some additional improvements on, let's say, cost-to-income ratio there relative to previous guidance or on the fee income. The second question relates to asset quality in the last quarter. Did you see there any deviation relative to the first 3 years, namely did you see any like deterioration? Or so far, it is -- there are no changes regardless of higher rates? And finally, can you also follow up on the question related to dividends. Do you reiterate your guidance for the dividend payment. The first dividend payment from the profits of 2023 and 2024. Just wanted to reconfirm that.

So indeed, the return is much higher guided than what we have announced, I think, even last April during the business plan presentation. Of course, it is a very different world that we live in now in terms of monetary evolution. And I have to say that the delta is even bigger given the fact that this number now includes all capital elements, including 81 coupon payment. So and the delta is indeed primarily NII. It's a different interest rate environment with active management on loan and deposit pass-throughs that delivered the higher news as a result of higher return. While still, I would say, to be in a cost reduction mode. So it's -- we are not surrendering to inflation. We are continuing the cost reduction. So therefore, even further improvement on the cost to income. The derisking is clear and the cost of risk. Remains, I would say, on the low side, although we have prudently assumed 30 to 40 basis points higher cost of risk for '23. So all of that baked in delivers a better result. On asset quality, as said, so that we can defend what I said also before, a double-digit return under the circumstances that one could budget for or predict for it is assumed to be higher. That being said, this is not evidenced right now. The inflationary effects though are still kicking in, I would say, it is a very liquid economy. Cost of risk is and upside given what we are seeing on the ground right now, but you see our assumption in terms of the returns. And Mikhail, on the dividend question on the basis of our estimates as we present them also here today, by the end of 2023, we expect that we will be substantially above supervisory guidance. Now the decision on dividend as we all understand, will be based on a number of factors, and this includes the capital trajectory at the time, underlying risks, what the economy will be doing going forward. And as a result, we will be assessing the situation as we come closer to those dates. But we estimate that we will be, as I said, well above the supervisory guidance that is we will be observing for ourselves or Paris Financial Holdings.

The next question is from the line of [ KonobiTMogege ] with Citi. Can you hear us, Mr. [indiscernible].

Yes, I can. I think that the cost question has already been unpacked. But I just had a question there. Were there any nonrecurring items to note in the improved cost-to-income ratio and has the cost outlook actually changed since the third quarter results.

The cost income that we [indiscernible] does not have any nonrecurring item. It is actually a recurring normalized metric that we are monitoring. In 2023 the only major nonrecurring item is a cost restructuring elements for voluntary exits. So I would say -- nothing has changed in terms of our trajectory to be reducing costs on a nominal basis, accounting with inflationary effects.

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

Just following up back on the deposit bid. How do you envision deposits behaving after '23? Just some color, if you could, particularly this 35%, does it end there? Or I agree it's conservative, but just want to see your cost does it continue to go up? Also in your budget, is that a linear assumption. So I think it's around 20%. So it gradually gets to 35%, if you could confirm that. And finally, on deposits. In the past, in 2019, site deposits were closer to time. Are you -- from my understanding, you're not expecting that you're expecting them to behave more like savings do i have that corrected just wanted to clarify that. And what's happening currently in the results go, I remember management have expressed that you would not be aggressive and kind of stay behind and observe competition. If you could give us some color on the current behavior of competitors in the deposit market.

Let's start with the mix. The 35% direc TD mix that is budgeted for the end of '23, I would say, is a terminal mix effect with the deposit -- with the interest rate situation that we are seeing. Currently, we haven't seen anything. We haven't seen a mix shift. And I think across Europe will not see major shifts. We were at 17%. We remain at that area, more or less 18% , if I remember correctly. So there's no shift as of now. So we think that, that is a terminal number. And as said, the mix effect would also be an upside for the 23 nominal result. But if it's not really till December, then it will be reached sometime later in '24, that is our view of things. In terms of how it compares in terms of timing in marginal we have assumed the pass-through to happen 2 to 3 months after an DFR move. That is yet to be confirmed, I would say, with the DFR moves that have already happened, but that is how we have calculated above EUR 250 million of deposit cost for 2023. The delays that happened because of market situation, of course, create a tailwind again on the result of '23 but we are mostly focused on the sustainable result going forward and not on temporary peaks of a particular year. In terms of cycle savings, yes, I would say for a different reasons, sites have been the same as TD but they are not budgeted to increase. There's no commercial driver for the sale cost to actually increase. It's fair demand deposits that are expected to stay at the levels where they are today. The sensitivity happens on the terminal rate and the mix of time deposits.

Okay. And if I could follow up on -- link it with the NIM and comments that you just mentioned on beyond '23. Do I understand correctly, although in the presentation, you mentioned a peak, you're pretty confident that you're going to stay at the peak beyond 2023? And maybe if you could give us some color, is that going to be a result of maybe spread adjustment by the sector It's not a lot of players maybe that's how we should think about it. How do we think about the NIM beyond '23?