Piraeus Finl Hldgs Sa

Ladies and gentlemen, thank you for standing by. I'm Poppy, your course call operator. Welcome and thank you for joining the Piraeus Financial Holdings conference call and live webcast to present and discuss Piraeus First Quarter 2023 financial results. All participants will be in a listen-only mode and the conference is being recorded. The presentation will be followed by a question and answer session. Should anyone need assistance during the conference call, you may signal an operator by pressing star and zero on your telephone. 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 first quarter 2023 financial results. This is Christos Megalou, Chief Executive Officer, and I'm joined today by our CFO, Theo Gnardelis, and by Chris Berbati and Xenophon Damalas. 2023 started on a strong foot for Paireus Bank. The strength of our commercial franchise is releasing the bank's potential and the successful management of our balance sheet is delivering solid results. In the first quarter, we continued to build sustainable and growing profitability. Our consistent progress across all operational KPIs is displayed on slide 5. Profitability, efficiency, asset quality, capital adequacy all showed improvement in the first quarter of the year. On slide six, we report the highlights of our quarter one performance. We generated normalized earnings per share of 15 euro cents. We produced return on average tangible book of 13%. Both EPS and return on tangible book run ahead of full year 2023 guidance provided in late January. We delivered 24% net revenue growth annually. On the back of a 56% net interest income increase, and a 15% net fee income growth. We recorded best in class cost to core income ratio of 36%. We lowered our NPE ratio to 6.6%. We increased our NPE coverage to 55%. and we further strengthened our capital position by 60 basis points in the quarter, reaching a CET1 ratio of 12.2% and a total capital of 17%. I am pleased that as of the first quarter of accrue for a 10% distribution in our capital figures. This paves the way for our aspiration to distribute to our shareholders out of 2023 profits, subject of course to the accomplishment of our targets and supervisory consent. In the following slides, we present the progress recorded in fundamentals. Slides 8 to 10. Download all the information regarding net interest income intrinsics. Our loan pass-throughs are trending at 70% to 75%. while our deposit beta is among the lowest in the European space at 10% at the end of March. Net interest margin stood at 2.4%. Furthermore, our cost containment efforts continue unabated despite the inflationary challenges. we are extracting any remaining inefficiencies from our organization while investing in transforming and strengthening our bank for the future. The strength of our operational efficiency is shown in the best-in-class 36% cost-to-income ratio as shown on slide 12. Slide 13 provides a summary of our asset quality indicators. This is the seventh consecutive quarter of negative NPE formation and the sixth quarter of below 100 basis points organic cost of risk. Our MPE ratio dropped to 6.6% from 13% a year ago, and our MPE coverage is now at 55% above the European average of 50%. Paireus possesses strong liquidity profile. Our deposit base is granular, stable and of high quality. Our liquidity ratios are all solid, as evidenced by the 220% liquidity coverage ratio and the 62% loan-to-deposit ratio, both at the top percentile in the European space. These are presented on slides 14 and 15. On slide 16, we present the quarterly movement of performing loans and deposits. Setting aside early year seasonality, the group's performing loan portfolio grew 8% annually And there is a strong pipeline of business projects for this year, including RRF-sponsored plans, where Paireus has already undertaken the fourth branch, leveraging Euros 1 billion financing. On top, we have had a very strong kickstart in the newly launched program, My Home, co-sponsored by the Greek state and the Greek banks, for which Paereus Bank has currently received more than 40% or 10,000 out of total market applications. Similarly, Our deposits have grown by 4% or more than 2 billion euros annually. The first quarter of the year, we experienced both seasonality as well as a very strong asset management products performance. I'm closing are performance analysis with a capital base on slide 17. Organic capital buildup picked up pace with 60 basis points increase in quarter one, all organic. At end March, Paereus was at 17% total capital ratio comfortably above requirements and supervisory guidance. Our solid financial performance and the supportive macro environment positions us to outperform our 2023 targets. We therefore upgrade our 2023 guidance and we also provide updated 2025 financial ambitions along with key underlying assumptions. All the relevant details can be found on slides 20 to 22. For 2023, we now target a 12% return on tangible book versus 10% previously, or 55 euro cents earnings per share versus 45 previously. Net interest margin is expected to be above 2.2% this year. we also upgrade our NPE ratio target for the year to approximately 5% from below 6% previously. For 2025, we target above 65 Eurocent earnings per share, 12% return, 3% NPE ratio, and 14.5 CET1 ratio post distribution to shareholders. Finally, we are proud to be the only Greek company to be included for the third consecutive year in the Financial Times list of Europe's climate leaders in 2023. Our energy transition business lines will be further expanded, and I will be in a position to discuss more on this front in the following months. 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. Anyone who wishes to ask a question may press star followed by one on their telephone. If you wish to remove yourself from the question queue, then you may press star and two. Those participating via the webcast, please review related information in the Q&A live session tab should you wish to ask a question. For those participating in the question and answer session, please use your handset when asking your question for better quality. Anyone who has a question may press star and 1 at this time. One moment for the first question, please. The first question comes from the line of Iqbal Nida with Morgan Stanley. Please go ahead.

Hi, thank you very much for the presentation and the strong set of results. My first question is on the NIM expansion. It's continued quite nicely this quarter. Deposit betas were low. Can you talk about your expectations going forward for deposit betas and also loan pass through. I see that there hasn't been much repricing on the unsecured portfolio. Secondly, the asset quality, clearly the negative NPE formation is very impressive. But with interest rates rising, what are the risks that you see? Are there any certain sectors you're monitoring or You know, any color on the asset quality side would be great. And then finally, on the 2025 ROTE guidance of 12%, can we better understand what the interest rate assumptions are here, please? Thank you.

Hi, Anita. So you got three questions. First one on net interest margin and how that's planned to move forward. The fact is that we are enjoying right now a very low deposit beta of an average of 9%. The exit run rate of the quote is around 10. And the guidance that we're giving is based on 17. So the current plan assumes that over the course of the year, we will continue to have a pass-through of about 50% on time-depot. It's still 40% currently. And that the mix of TDs is going to change from the current around 20-21% to close to 40% by the end of the year. There is some upside risk there because as the Q2 evolves, this mixed shift, which as per plan should already be happening, is not happening as aggressively. So there is a bit of upside there, but I think we'll be able to talk more after Q2 results. The loan pass-through, Again, currently at 75%. The assumption on the NIM is that this will be around 55%. What you see there in terms of reduced pass-through on the unsecured front is intentional. The unsecured book is primarily non-reward based, is admin rate based. And we have made the decision not to be increasing these admin rates, particularly to allow debtors to continue servicing their debt and to avoid inflows. and hence this well-observed reduced pass-through. But overall, the pass-through is currently at 75% against the budget at 55%. But then on that more in Q2 as spread pressure, we do expect to be happening in the market. Second question was around asset quality, I think, in terms of inflow risk. Yes, so... Obviously, as you see right now from the influence of Q1, nothing particular going on. We are monitoring the book across big and smaller exposures, as well as monitoring forward-looking KPIs on the retail front. The flow rates on the early buckets are still, they do not speak of danger. But we do have, we have proactive moves done. You're all aware of the cap rate imposed on mortgages, as well as other proactive restrictions we'd be willing to do, even if that created some stage two inflation over the course of the year, to avoid the inflow. So I would say things, again, better than what the plan currently implies. To the ROTBV 12% in 2025, that is based on a dropping NIM, which is again driven by a dropping BFR. The assumption is 2% for the deposit facility rate of the Euro. Generally, the plan assumes a peak of 325, which we've just seen happen. and that to be sustained throughout 2023 and start seeing the decumulation as of early 2024 to reach a prevailing 2% in 2025.

Thank you very much. That's very clear.

The next question comes from the line of Butkov Mihail with Goldman Sachs. Please go ahead.

Good day. Thank you very much for the presentation, and congratulations on the strong results. My third question is on the funding and liquidity position. So you have quite good improvement in the funding over the last year and past quarters, and your loan-to-deposit ratio had been decreased, and now it stands at 62% ratio. So what is the optimal loan-to-deposit ratio do you see over the medium term? And also, what's your strategy to allocate the excess liquidity, namely between the real estate, fixed income, and the other sources? So that's the first question. And the second question is on dividends. So you have a dividend accrual of 10%. Is this the level of payout you budget for earnings for the year 2023, or actually it is subject for some further changes and increases throughout the year? And when you think about the future years, what level of dividend payout do you budget in 2024, 2025? Thank you.

Hi, Michael. So, in terms of liquidity, obviously, because of its richness in deposits, Piraeus is now enjoying a very liquid position and the resulting strong NIM, also by the fact that it's a cash-positive bank, even post-TLTRO right now by about $3 billion. Our expansive targets, given the fact that we are strategically positioned exclusively in Greece, is to support the loan expansion of the country. So we are deploying the liquidity that we've got into expanding the credit pool. There will be some expansion on securities as well, very, very targeted on an in-play particularly. But I would say if one was to look at as to how the balance sheet is going to evolve, it is going to evolve expanding deposits from intrinsics and from securing the market share that we've got. on deposits and then deploying, I would say two thirds of that into loans for a stable kind of 65% LDR throughout the upcoming period.

And Mikhail, on the dividend question, first of all, we have established the distribution policy which was approved by our board for dividends. 10% of the 2023 results is potentially being accrued, and that's our aspiration for 2023. This amounts to 18 million euros. The actual distribution, either by way of dividend or by way of buyback, of course, is subject to supervisory approval post-final 2023 financial results. the way we are looking at dividend distribution going forward, we are aiming to be at, let's say, 10%, as I said, subject to supervisory approval by 2023, and then aiming to increase it by 15% and 25% in the years to come. This is what is embedded in our projections.

Okay. Thank you very much. And as a small follow-up and clarification here, the presentation states capital distributions and you also alluded to the buybacks. When you think about buybacks, can it be also potentially expanded to the buybacks from the strategic shareholders? or you speak here all about the distributions to the minority shareholders? Thank you.

We are talking about distribution to all shareholders, not specifically directed buyback.

Okay. Okay, thank you very much. It's very helpful.

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

Hello. Many thanks for your time and congrats on the results. A couple on my side, please. First one, I'm more on a strategic basis with the 24 and 25 figures out there. How are you thinking about spread, loan spread progression? Are you budgeting any spread recovery in 2024 and 2025, given that yields are expected to decline, your budgeting declines? That's the first one. Second one, fee generation continues to be quite solid, impressive, particularly card fees went up, queue on queue, despite the seasonal slowdown, loans coming down slightly. So I'm curious to hear your thoughts on that front. And the third one on cost of risk, given quite sizable negative formation and you're seeing similar trends, sounds like in Q2, could you give us any color on quarterly progression, how you expect it to trend? And for 24, what does that rotate include in terms of cost of risk? Thank you.

Hi, Osman. Well, your first question is around spread recovery, assuming, of course, there's spread compression or continued spread compression, I would say, in 2023. Page 21, where we're showing the guidance for the NII, You're seeing their loan pass through in 24 and 25 of 90 and 100 percent. When the rates drop, that basically means that there is no recovery, that the entire reduction is baked into the end yield. So there is no assumption of spread recovery. We believe that whatever spread compression occurs this year on the rising interest rates, is there to stay, also take into account the delta that spreads in Greece have versus other European jurisdictions, and given the fact that the economy is headed to investment grade. So it's prudent to assume that the ending spreads, the exit of 2023, is kind of a terminal situation when it comes to the Greek spreads. To your question about fees, yes, the fees are right now around 65 basis points over assets. And we are taking those to 80 basis points in the guidance for 2025. The fact is that there are particular moves that will make this change. in both the enhanced credit expansion that we are expecting in the country, as well as all the initiatives that are happening on asset management, rental income growth, and other kind of fee generating initiatives that we are planning. So let's just say it's a good 65 basis points close to the good practices of Europe. but still with room to go against, I would say, the best practices, which are primarily strong asset management houses across the continent. To the quarterly progression of cost of risk and to the expectation of 2024, Cost of risk right now is around 80 basis points. And it has been 80 basis points for many quarters now, not justified by the negative formation. But let's just say we are using these calm quarters to also take some more conservative approach on particular exposure, increasing our coverage, securing also our capital. the guidance still holds for 1.2% for 2023. We will see, and in Q2, again, things still look calm. It is an election quarter, not that this will imply anything in terms of asset quality, or we expect it to, but let's just say we will be able to see what will happen in 2023, after the Q2 result. In the Q2 result, we will see whether the run rate stays at 80 basis points, and if so, how we deploy this benefit, this capital benefit of 2023 into further cleanup or enhanced CT1 or other initiatives. And 2024 has pretty much the run rate that we're seeing right now between 80 and 90 basis points. And as we are disclosing, 25 has 70 on the back of the risk balance sheet.

Perfect. Thank you.

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

Bethany, congratulations on the results and thanks for taking my questions. I've got two. The first one is just on capital. If I look at total capital and what you're guiding to at the end of the year and also how much capital you're accreting, I'm just interested to hear what the headwinds are in that flight path. um if you just explain just what what you think to become to hit the uh the year-end target that would be interesting and then just on emerald um are you uh can you talk us through your thinking for transactions for this year i know also that you've got a tier two uh call in june 24 uh could we see anything in the tier two market this year or is that next year's problem um interested in your thoughts thanks right um so

In terms of capital, what you're basically asking, Dan, I think is you guys did a 60 base point hike in one quarter, and you're telling us that you're going to build something above 30 base points in the remainder of three. So what's going on? It's quite straightforward. It's quite straightforward. The organic capital, the P&L will continue pretty much at the rate that we're seeing right now. There is a little bit of... of a slump because of increased deposit costs in the last two quarters of the year. But more or less, one can assume that the numerator of the capital is going to be organically enhanced at the same pace. That being said, there's an RWA burden that will come from the expansion that will shave off, let's say, if the P&L contributes what we expected of around 200 basis points, 50 basis points of that is going to be growth, right? So RWA consumption, which gets you to a 150 organic build. Then we have one-offs of about 70 base points that have to do with both voluntary exit programs that are planned for the continued FT reduction of the bank, as well as some budgeted cleanup costs that have to do with further actions we are taking on the MPE front. And then the remainder, I would say, is for dividend and other capital deductions that we will be doing. So I would say, hence, pretty much the reconciliation between the 12-2 and what we are saying to be above 12-5. Obviously, the model has a bigger number than 12-5. We can currently, I would say, securely give this guidance. On MREL... Yes, there's a single transaction planned for the year. We're currently at $19,900. We're going after a target of $21,800 for the end of this year. The capital that we built With the plans that we've got right now, we're looking at the transaction up to 500 million to happen at some point within the year. At, I would say, current level costs, that's what the NII assumes. On Tier 2, we all know the pros and cons of action in the Tier 2 market, but yes, we can say that this is next year's activity. Thank you very much.

The next question comes from the line of Gersterkorn Maximilian with Jefferies. Please go ahead.

Two quick ones from me. One on capital. I think in your presentation you alluded to the possibility of an acceleration in the DTC amortization. Perhaps you could just give us a few more details on that one. And then my second question, you've said you've been proactive. There's been the freeze on the mortgage rates, that program. I was wondering if you could quantify that impact a little bit. So perhaps just looking at a few back of the envelope calculations, it looks like the NII foregone at the June 2023 repricing could be looking something like a very high single-digit million number, perhaps very low double-digit number. Perhaps you could give us a few more details on NII foregone because of those actions. Thank you.

Right, so starting with the impact of the mortgage cap, we have capped mortgages at the reference rate of the 31st of March, minus 20 base points. The entire book, well, the majority of the mortgage book of the real estate bank is pricing at one month URI board. Just for you to understand, that basically means an effective 272 cap, while we were pricing at around 250. So, there is a little bit of a lag time until we catch up to the cap. Obviously, the one-month URIBOR right now is higher than 272. So, there is an impact from the cap already there. We are quantifying this against our projected URIBOR, not the current level, but the projected, which has a little bit of space to increase still, of around 15 million. That 15 is baked into our projection, our guidance for NII, and we can say that it is much lower to the potential upside that we are seeing from the evolution of the deposit front. On capital, yes. We have taken an approach where, given the fact that the capital was not the bank, has massively recovered and continues to build very healthy buffers, to at least prudentially accelerate the DTC amortization beyond what the tax law would allow us to do. So therefore, we are now taking the approach where we're doing a linear amortization on a prudential front of something more than 130 million for loans and another 55 million on PSI, a total of around 190 million in total. So let's just say whatever tax law would allow us to do, we're going to do it in the P&L. But if there's a residual charge to reach the 190, we will be deducting from CT1. That way, we can give a stable amortization profile on the DTC against CT1 with a target to reach a ratio of DTC over CT1 of 50% by the end of 2025.

All right, excellent. Thank you.

As a reminder, if you would like to ask a question, please press star and 1 on your telephone. Once again, to register for a question, please press star and 1 on your telephone. As a final reminder, to register for a question, please press star and 1 on your telephone. Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Megalou for any closing comments. Thank you.

Thank you all for participating in our first quarter 2023 results conference call. We look forward to discussing with you all physically or virtually during our investor outreach program. Have all a restful weekend and for all the colleagues in the UK, a great coronation weekend. Thank you very much.

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