Eurobank Ergasias Svcs

Ladies and gentlemen, thank you for standing by. I'm Konstantinos, your chorus call operator. Welcome and thank you for joining the Eurobank Holdings Conference call to present and discuss the third quarter 2023 financial results. At this time, I would like to turn the conference over to Mr. Fokion Karavias, CEO. Mr. Karavias, you may now proceed.

Thank you. Ladies and gentlemen, good afternoon and welcome to the Eurobank 9-month 2023 results presentation. Together with me is our CFO, Haris Kologiannis, and the investor relations team. We will start with some key recent developments, then present our results and answer your questions. In an environment of weak European growth and geopolitical turmoil, the macroeconomic outlook of our three core markets stands out. Economic growth in Greece is expected around 2.5% for this year and the next, a multiple of the EU average. The government is committed to fiscal discipline, with primary balance increasing from 1% this year to 2% of GDP in 2024. Growth prospects, solid public finances, together with the strengthening of the banking sector balances were the primary drivers for the sovereign's return to investment rate. Economic sentiment remains positive. Tourism had a record year, unemployment ratio further decreases, and real estate prices remain resilient. Investments play a key role in the growth of performance, and Greece aims to close the gap in gross capital formation as a percentage of GDP with the European average. accelerated investments will be one of the catalysts for faster loan growth in the next years, as also confirmed by the number of projects already submitted to the RRF scheme, now in excess of €20 billion. Now, let's hear our financial results for the nine-month period, as highlighted on slides 5 to 9. Eurobank had a strong performance across segments and geographies. net profit, excluding one of gains, reaching €916 million. As a result, tangible book value per share increased by 21% year-on-year to €1.97, while the return on tangible book value reached 18% in the nine-month period. In more detail, net interest income remained on a strong trend increasing further by 3% on a quarter-on-quarter basis and 55% year-on-year. This was driven by higher URI rates, while the deposit's beta increase remains moderate. Fees, despite a weaker third quarter, increased by 6% year-on-year, which is in line with the trend expected for the full year. The cost-to-income ratio remains low at 33%. As a result, core pre-provision income was up by 72% year-on-year. Core operating profit reached €1.1 billion, up by 85% year-on-year. Our regional operations continued their strong performance nine-month period, more than double on an annual basis. Bulgaria's contribution increased to €150 million and Cyprus to €170 million. The Cyprus figure also includes the Hellenic Bank quarterly contribution of €30 million. Asset quality remains resilient in the third quarter. More specifically, We reached an NP ratio at 4.9%, while coverage remained at 75. The cost of risk ratio was 84 basis points in the nine-month period, in line with our full-year guidance. And our fully-loaded Z1 ratio rose to 16.8% in the nine-month period, up by 260 basis points year-on-year. while the total capital ratio to 19.5%. With our capital ratios well above the internal targets, we aim to utilize excess capital along three pillars. First, to finance loan growth. Although the credit expansion this year is below our initial expectations, this is due to loan repayment. and high interest rate rates, we expect that it will recover in 2024 onwards. Second, to fund M&A opportunities, enhancing our business franchise. In this context, we have signed agreements to increase our stake in Hellenic Bank of Cyprus to 55% from 29% currently, subject to regulatory approvals. This transaction should consume roughly 80 basis points of our capital, and it is EPS accretive. Third, to reward shareholders. In this respect, the share buyback of the HFSF shares was completed, leading to EPS accretion for shareholders. Furthermore, as previously discussed, we plan a dividend payout ratio of at least 25% out of 2023 profits. Overall, the bank is on a solid trajectory and the nine-month results point to upgrading our full-year estimates as shown on slide 10 to achieve a return on tangible good value of 17% for the full year 2023. At this point, I would like to ask our CFO, Haris Kokonoyanis, to present our nine-month results before opening the Q&A session. Thank you, Fakir.

Let's now provide more insight on the third quarter results, starting on stage 19 on lending growth. Performing loans increased organically the nine-month figures by €700 million, still below our expectations. In terms of disbursements, fourth quarter appears to be the strongest of the year, driving the full-year net credit growth to more than €1 billion. Group deposits recorded a solid third quarter, increasing by 600 million euro, as shown on page 20. As a result, net long-term deposit ratio decreased to 72%, while LCR ratio reached 171%, as shown at the left of page 21. As regards managed funds on page 23, in parallel with the positive trajectory, wealth sector continued its strong performance. Year-to-date, managed funds increased by €800 million and private banking assets and liabilities by €1.6 billion. Moving to profitability on page 27, net interest income increased quarter-on-quarter by 3.4% to €558 million. NII has been boosted by the further euro-bond increase and the SE growth. On the other hand, it has been affected by the cost of core deposits interest rate hedging. This initiative aims at reducing significantly our NIA sensitivity in the downward side of interest rates. On a year-on-year basis, NIA is higher by 55%. On page 28, commission income is higher year-on-year by 6.2%. In the third quarter in particular, all three lines are up, with the exception of lending fees, mainly due to the seasonal low on disbursements. Full year outlook points to a mid-singlet growth, which is better than our projections. Operating costs are almost flat in Greece, despite inflationary pressures. On a group basis, costs are higher by 5.9%. The increase is driven by AC operations, namely salary adjustments and the incorporation of BNP in Bulgaria, as well as the goal life of the new core system in Cyprus. Finally on this page, cost to core income ratio has been improved year on year by 10 percentage points, decreasing to 33%. On page 31, we summarize operating performance for the nine-month period. Core PPI is higher year-on-year by 72%, up to 1.33 billion euro, driven by the BOR effect, higher loan and bond volumes, better commissions, and higher core income from SCE, offsetting lower TLPRO income and higher MRL costs. Low-loss provisions for the period amounted to 255 million euro, or 84 basis points. As a result, core operating profit is higher year-on-year by 85% at 1.08 billion euro. Furthermore, there is a 30 million euro additional income, which is recorded for the moment as income from associates. This corresponds to the quarterly performance of Hellenic Bank for our 29% participation. The above constitutes a 10% accretion to our quarterly EPS. Upon reception of regulatory approvals, Hellenic Bank results will be consolidated line by line. Moving on to asset quality on page 33, NPE ratio fell below the 5% mark at 4.9%, while coverage increased to 75%. This is the result of accelerated write-offs and the contained NP formation of 27 million euro. Moving on capital and on page 38, our fully loaded C2R ratio increased quarter to quarter by 30 basis points to 16.4%. This is driven by circa 50 basis points organic growth, while the impact of HFSF sales buyback is also included. Furthermore, taking into account the upcoming synthetic securitization, the pro forma fully loaded CQR ratio amounts to 16.8%. Finally, on capital end of page 39, our total CAD ratio stands at 19.5%. The overall nine-month performance points to a further upward revision of our full year 2023 financial targets as shown on page 10. Core PPI is now expected to be at circa 1.8 billion euro and core profit at 1.4 billion. NPI ratio is anticipated at circa 4.5%. Fully loaded CP1 updated outlook is above 17%. Finally, return on tangible value is now estimated at circa 17% and TPS higher than 30 cents. This completes my presentation and we may now open the floor for your questions.

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

Good day. Thank you very much for the presentation. I have a couple of questions. Firstly, on your NII outlook, when do you expect NII to peak considering recent trends? And also, do you use any structural hedges to extend higher net interest margins after the rate cutting cycle begins? So that's the first question. The second question relates to the Hellenic Bank. How do you see this entity operating together with your existing Eurobank operations in Cyprus following the transaction? Do you plan to merge the operations and balance it somehow? And also, when do we expect this deal to close? And the last question is on your inorganic expansionary plans. Earlier, you mentioned that you explore opportunities for international waste management expansion in some geographies. Can you please provide any update on that front? Thank you very much.

Thank you for your question. Let me start with NII, and then Fokion will address the rest, a couple of questions. In the third quarter, NII was up by 18 million euro quarter-to-quarter, delivered by the Euribor rates and the SE growth, but it has been affected by more or less 15 million euro due to interstate hedging. And the purpose, as I said in my speech, is to reduce significantly the NII sensitivity quite significantly. So to be a bit more precise, assuming no change to our current head decomposition and deposit beta, the sensitivity for a 100 basis points decrease of rates is circa minus 5% from the run rate of the third quarter NII. Now, of course, in the third quarter, NII increase was decelerated due to interest rate hedges initiation. And assuming current level of hedging, we may see the peak into fall, but I would say not substantially different levels than the third quarter.

OK. Now in terms of the Hellenic Bank, as we have already announced, last August we signed three SPAs with PIMCO, Senvest and Wargaming to increase our participation from 29% to 55%. The completion of these transactions are subject to regulatory approvals and as we speak we are in this process. approvals from the ECB and Bank of Cyprus, the superintendent of insurance companies in Cyprus, and the Cypriot Competition Commission. We should have the approvals sometime between the second quarter of 2024 or early third quarter, and so far the process goes forward according to the plan. As soon as we receive the approvals, we will close the transactions that I just mentioned, and we are going also to launch a mandatory tender offer according to the laws of Cyprus. And at that point, we will fully consolidate the financial figures of Hellenic Bank to our figures, and the Hellenic Bank will become a subsidiary of the Eurobank Group. In terms of capital, the effect is going to be about 80 basis points. In terms of EPS accretion, we should be able to provide you exact figures about EPS accretion, about synergies, as well as about our plan to potentially merge a Eurobank side with Hellenic Bank as soon as we receive the regulatory approvals. However, as Hannes mentioned, already in the third quarter, without consolidation, we got earnings accretion of about 30 million euros out of the bottom line of 300 million euros, or about 10%. and this corresponds only to the 29% of our current participation. For the full year 2023, the Hellenic Bank Management projects that profits before tax should be of the order of 300 million euros. Taking into account the Eurobank 2023 estimated profit before tax, let's say circa 1.5 billion euros, you could make your own estimate about the size of the accretion, not only in terms of EPS, but also in terms of core PPI up on full consolidation. Now, on your last question regarding international expansion, we have stated a number of times that our group operates in three core markets, which is Greece, Bulgaria and Cyprus. We operate in these three core markets as a universal bank offering services across all segments of our clients. At the moment, we don't have any plans to expand the universal banking model to any other country. However, in terms of wealth management, we may seek the opportunity to expand our reach in countries on top of the three that I mentioned. And these may be countries in Southeastern Europe and Eastern Mediterranean. Now, we are in the early stages of designing this strategy, and we will update you accordingly when we have more concrete plans.

Thank you very much. Just a small clarification on NII. So you mentioned that your sensitivity currently for 100 basis points cut is 5% negative impact on NII, and this is because you initiated hedges.

Is that correct? This is absolutely correct.

Good. Thank you. Thank you very much for the answers.

The next question comes from the line of with JP Morgan. Please go ahead.

Good evening. Thanks very much for the presentation. Just one more follow-up on the Hellenic Bank acquisition, if I may. You mentioned the 80 basis points expected capital impact. Would you be able to break this down into the individual components? I know the RWA impact Obviously, we can calculate just the negative goodwill from there, but also would there be any difference in timing when it comes to the recognition of RWAs and the negative goodwill from a regulatory perspective? And can I just check if there could be any implications, therefore, on dividend payments, et cetera, for next year stemming from that? And finally, would you be able to share, I appreciate maybe not, but anything at this point on your final potential stake and basically where we'll get to following the tender process? Thanks so much.

Now, the 80 basis points include both the effect of the negative goodwill as well as the effect of the risk-weight assets that will come on our balances. And the two steps will come together at the same moment. Therefore, the effect of the 80 basis points, given the buffer that we have in terms of capital above, let's say, the management targets of set one, are not going to affect at all our strategy in terms of dividend savings. our buffers are in excess of these 80 basis bonds, well in excess of these 80 basis bonds. So this is about the capital effect. What was the rest of your question, please?

Thank you. It was just the tender offer and the final stake.

Okay, now... As we said, with the transactions that we have already signed, we're going to reach 55%. Then a mandatory tender offer will follow. We cannot make an estimate of what the participation would be, but in terms of our strategy, the higher the participation, the more desirable it would be from our side.

Just to clarify one more leg of your question, There is not going to be a time discrepancy between the accounting consolidation and the regulatory impact. The timing of this will be the same, exactly the same, nor we are going to see a T0 RWB recommendation and T plus one, the negative could be. Both of them will be at the same point of time.

That's great and all very clear. Thanks very much.

The next question comes from the line of Ismailo, Lending with Axia Ventures. Please go ahead.

Hello, and congratulations for this set of results. Just a couple of questions from our side. One is, how do you see the evolution of credit spreads and your lending expansion, and how can this affect the stability of the outer years when rates will flatten and then start going down? And secondly, just another follow-up on the Hellenic Bank, how do you vision using the bank's liquidity going forward? Thank you.

Let me start from the second question and then Haris will follow up with the credit spreads. We expect to have a number of synergies through Hellenic Bank, both in terms of cost as well as in terms of revenue. And one source of synergies from the revenue side comes from the We have already some plans about it, but as I mentioned before, I should be able to expand on that as soon as we receive the regulatory approvals.

On lending spreads, we show the picture on page 25 of the presentation. So, there is a number of observations out of this page. corporate this quarter, there is a quite dense decline of by seven basis points on corporate spreads. In our budget, we had assumed a quite steeper, I would say, decline, but the situation appears to be quite more manageable, although there is a quite strong competition on corporate lending. For the moment, it appears that any decline on corporate spread is very measurable. On the retail, you may notice the effect on mortgage portfolio of the interest rate cap that we have implemented as of the end of the second quarter of this year. So for this reason, you may observe a 30 basis points decrease on mortgage spreads. While in consumer, it's actually a technical impact as Uribor goes up, while consumer, in its vast majority, the products are fixed rates. And we are quite careful in repricing upwards such products, take into account any potential In general, and setting aside the issue of capital mortgage loans, I would say that the trajectory in spreads is a bit better than what we initially expected.

That's very clear. Thank you very much.

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

Hello, many thanks for your time and presentation. Just a few on my side please. First one, just a clarification on the hedging process. Are you currently at where you would like to be, or are you planning to increase further the hedging activities? That's the first one. Then on asset quality, if you could give us any color on how Q4 is trending, that would be helpful. Any color into 2024, if possible. On the PE loan growth, I noticed a very slight pickup in your retail consumer loans in Greece. And having heard some encouraging news earlier this day from a peer of yours, I was wondering how you are seeing retail lending, especially for 2024. Thank you.

Okay. Let me start from the asset quality, but let me make a general statement about 2024. We would provide you a full outlook about the year, including financials, asset quality trends, and loan growth when we present our full year 2023 financial results early next year. Now, in terms of asset quality, As we have noticed, and we present that on page 33, the third quarter dynamics were rather stable. Formation was very close to zero, 27 million euros. And also, you should notice that also stage two loans have further decreased during the quarter, as we present on page 36. Furthermore, asset quality remains resilient also in Bulgaria and Cyprus, as we saw on pages 14 and 15 respectively, with the NPE ratios in both countries declining. We expect fourth quarter formation to be more or less at the same levels of Q3, and the NPE ratio to be further reduced to circa 4.5% at the end of 2023, taking also into account further write-offs. The NP ratio could decline further below 4% over the next few quarters, not only through internal workouts and accelerated write-offs, but also through the outright sale of a medium-sized small to medium-sized NPE portfolio. And last but not least, in terms of cost of risk for the full year 2023, as I said also during my introduction, it's going to remain at our initial guidance of 85 basis points.

I think that my answer is going to be very short. Actually, we constantly reassess the situation based on the interest rate trajectory and to reassess that on a dynamic basis.

Thank you. And on retail lending, any changes in the environment?

I would say that There are two phases on retail lending. There is mortgage that continues to be quite weak. Not the real estate transactions, but the lending side. We have a lot of transactions taking place with surplus cash. On the other side, we see a quite noticeable revitalization of consumer lending. especially some missed projects and credit cards. Quarter by quarter, we see that the figures are quite small for the moment, but in the detail, we see a revamping of consumer lending, and it is one of the areas that we expect more to come in 2024. But as you may appreciate, the big figures are coming and will continue to come, for the next quarters from the corporate book portfolio.

Understood. Thank you.

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

Good afternoon. Congratulations on the results. Just a quick one on debt issuance. Noting your activity last year in Tier 2 markets, just interested to hear your thoughts on issuance plans, whether we could see anything in Q4 or what next year looks like. And also, could there be an 81 in the plan? Thanks.

Okay. So third quarter, the ratio stood at 23.7%. and is already above the January 1st, 2024 non-binding MREL target of 23.19%. The final MREL target, as we show, is set at 27.8% of RWAs, and the compliance horizon is until end 2025. In terms of new issuances within 2023, as you may see, we have no need, as we have covered the target for the year. and the MRLA ratio will increase further in the rest of the year due to organic profitability. However, the definitive decision whether it will be proactive as regards the 2024 issuing plan will be taken in the coming weeks, I would say. As regards Tier 2, depending on market conditions, we may proceed to a Tier 2 issuance sometime in the coming quarters to compensate for the amortization of the existing Tier 2 instrument by the Hellenic Republic. However, this is not probable for at least for 2023. As regards 81, there is no any plan for 81 issues.

Mr. David, have you finished with your questions? Oh, okay. Thank you. The next question is a follow-up question from the line of Butkov Mikhail with Goldman Sachs. Please go ahead.

Yeah, thank you very much. Just one more question. Do you see any implications from the recent S&P upgrade for your risk weighted densities, if any? Thank you.

You mean the sovereign upgrade, right?

Yeah, the sovereign upgrade.

This will definitely help us on... We have the banking sector overall and definitely Eurobank in terms of the cost of our MRL issuance. So this is definitely something positive. However, what is going to be even more important is the flow of investments that we expect in the country. Definitely, the return to investment rate should improve the investment flow. And as I mentioned in my introduction, this is one of the main objectives of the economic policy at the moment.

Okay, and... I assume for the risk-weighted densities, you do not expect big changes from this upgrade?

No, not any material at the moment.

Okay. Okay, thank you very much.

The next question is from the line of Boulogouris Alexandros with Euroc Securities. Please go ahead.

Yes, hello. Congratulations on the results. A quick question on lending growth, especially in the corporate space in the local market. We've seen balances, performing balances relatively flattish in the past quarter. On your guidance, you've used the video guidance for a full year in terms of performing. How do you see the outlook for Q4? And maybe if you can give a color on 2024, if possible. Thank you.

So, As you may have seen, performing loans have been expanded by €700 million in the first nine months of the year, this coming primarily from Bulgaria and Cyprus. The loan growth, we have to accept that although below our expectations was still positive, which is better than in other parts of Europe. We expect performing loans to grow overall by something more than 1 billion for the full year 2023. So we should expect something more than 300 million in the last quarter of the year. And big growth may be coming by both Greece and our Southeastern Europe subsidiary. We feel confident that credit goals will resume in 2024 as the pace of the repayments has been faded out, is being faded out gradually. And a number of projects which were delayed in 2023 are expected to be launched next year. As a first hint, although we are still in the budget preparation phase, I would say that in 2024, SCE is anticipated to grow by high single digit rates, while Greece is expected to grow by mid single digit rates. These are some first estimates. We are going to be more precise during the business plan presentation early 2024.

Thank you very much. Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Karavias for any closing comments. Thank you.

Thank you. Let me thank you all for participating and attending this call. Thank you also for your questions. Our investor relations, Harris and myself, will be available for any follow-up. Thank you.