National Bank of Greece S.A

Ladies and gentlemen, thank you for standing by. I'm Erdo, your course co-operator. Welcome and thank you for joining the National Bank of Greece conference call to present and discuss the second quarter 2020 financial results. At this time, I would like to turn the conference over to Mr. Pavlos Milonats, CEO of National Bank of Greece. Mr. Milonats, you may now proceed.

Good afternoon, everyone, and good morning to those of you joining from the U.S. Welcome to our second quarter 2020 Financial Results Call. I'm joined by Christos Christodoulou, Group CFO, and Grigoris Papagrigoris, Head of IR. After my introductory remarks, the CFO will go into more detail on our financial performance, and then we'll turn to Q&A.

So let's begin.

In the course of the second quarter, we witnessed the enforcement of restrictive measures due to COVID-19, which led to heightened uncertainty and an unprecedented drop in economic activity. At the same time, the country was looking forward to capitalize on the successful management of the health aspect of the crisis. Specifically, restrictions were gradually lifted, including for tourism countries with good track records in COVID-19 containment, in order to restart the economy. Indeed, domestic activity has rebounded strongly in June and July. The more recent tourist data are at close to 60% capacity. up from 70% recently. That being said, the recent pickup in cases, albeit too few and in a few hotspot areas, make it too early to draw any conclusions and reflects how difficult the return to normalcy will be. In the event, the shock to the economy will be softened by the significant actions taken by the government. Specifically, government fiscal support measures total more than $16 billion, equivalent to more than 8% of GDP. To this total, we need to add the estimated 32 billion of resources targeted for Greece from the EU Recovery and Resilience Fund, of which two-thirds will be in the form of transfers and the rest in low-interest rate loan facilities. In addition, the multi-annual fiscal framework provides another 40 billion to Greece until 2027. A combined total support from these mechanisms is in excess of 5% of GDP per annum. The significant support to the economy from the public sector has been complemented by actions from the banking sector in line with a temporary framework announced by the regulators. These actions will be mostly completed over the next few months and are estimated to amount to more than $30 billion. To this end, NBG has been very active in implementing targeted payment moratorium measures and government loan support schemes towards our viable clients affected by COVID-19. More specifically, we have granted payment moratoria to more than 39,000 clients amounting to $3.5 billion of loans. While in terms of new credit, we have dispersed year-to-date new loans of $2.8 billion. This amount includes more than half a billion dispersed in July alone from the largest government-sponsored loan program, the Guarantee Scheme, equivalent to more than two-thirds of the total amount allocated to MBG. S.A. S.A. circa 70% at the peak in mid-second quarter. Despite the pickup in activity, including the above-mentioned actions, the work from home operating model has not hurt our productivity. At the same time, we have been actively pursuing our clients to accelerate migration to digital channels through campaigns and through the introduction of new digital services with increased functionality. The results are impressive. Digital subscribers were up 26% year-on-year in June, reaching 2.7 million. Digital monthly active users increased by more than 50% year-on-year to 1.5 million. Digitally onboarded customers reached 160,000 year-to-date. Even though transactions in June have returned to pre-COVID-19 levels, their composition has changed radically, as more than half of the number of branch transactions have been replaced by transactions through digital channels, and all in the course of just a few months. This rapid migration to digital banking will facilitate our transformation to a far more efficient operating model. Continuing on the issue of efficiency, we have already made impressive headway during the past two years in reducing our operating costs. Specifically, our first half 20 personnel and G&A costs are sharply lower compared with the first half of 2018, two years earlier, by 15 and 26% respectively. The annual savings stand at 80 million for personnel costs, and $60 million for the GNAs, a total of $140 million annual cost savings. This has been achieved through, one, targeted voluntary exits of circa 1,800 employees equal to almost a quarter of the current headcount, closing and merging 100 branches, and three, tight demand management of GNAs that has led to large cost deductions across nearly all constituent lines. Our sustained focus on rationalizing costs is evident in the first half 20 financial results as well as domestic personnel and GNA expenses dropped by 9% and 6% year-on-year and 4% and 10% quarter-on-quarter. This effort has provided resilience to our underlying group core operating performance despite the very challenging environment. In fact, Group core operating profit increased by a solid 21% year-on-year the first half of 2020 to 132 million, i.e., excluding trading results and COVID-19 provisions. Apart from cost control, this result reflects underlying credit risk charges, which came in at circa 100 base points in the first half, excluding the total anticipated COVID-19 provisions of 426 million or 150 base points. that occurred in the first quarter. Nevertheless, NP coverage increased in the second quarter by 100 base points quarter on quarter to 57.2% following an increase in coverage of nearly 300 base points in the first quarter. During the past few months, we have been finalizing the key preparatory steps that will permit us to launch the Frontier Securitization Project later this year. It will comprise MPEs in excess of $6 billion relative to a current stock of $10 billion. We are looking to complete the transaction within the first half of 2021. Our enhanced PPI capacity, a strong capital position with step one and total capital ratios at 16% and 16.9% respectively should comfortably absorb incremental provisions. Two words on the sale of national insurance. We've prepared a post-COVID business plan and are in discussions with potential investors. We will update you on developments. Even though visibility in this environment remains very poor, I feel that the crisis creates opportunities. Specifically, the transition to a new and more efficient digital operating model is being accelerated. For Greece, the successful banks will also need to accelerate the cleanup of their legacy books. Moving quickly to meet these objectives will command a premium. NVG's success in transforming the bank, including through our timely and effective response to the pandemic crisis, provides evidence of our change capacity and momentum. And this is a direct result of the transformation program that we have designed and effectively carried out over the past two years. I'm sure it will continue to provide a significant comparative advantage in the critical years ahead, in a rapidly changing banking environment. With that, I would like to pass the floor to our CFO, Christos, who will provide additional insights to our financial performance before we turn to Q&A. Christos.

Thank you, Pablo. Starting with the P&L highlights on slide 10, profit after tax from continuing operations in H-120 stood at $465 million, 90% up year-on-year, incorporating both the impact of COVID and the strong trading line in Q1. Of equal importance is the improvement in our core operating profit, up by 21% year-on-year to $132 million, underpinned by resilience in core income, sharply lower personnel and admin expenses, and food and loan provisioning. Moreover, core operating profit in Q2 encouragingly stands at $65 million, flat quarter on quarter, despite the challenges faced during the lockdown period. Going into the profitability drivers, detailed on slide 13 to 20, domestic NII stabilizing Q2, coming in at just 1% lower quarter on quarter at 259 million. The reduction in lending yields, which however remain at 30 levels, was offset by funding cost savings on the back of time deposit pricing, and our gradually increased TLTRO exposure, part of which materialized in the course of the second quarter. In addition to the upcoming funding cost savings from the increased TLTRO exposure, our swift response to COVID, including the healthy production of new loans and the extension of payment moratoria and state support schemes, will support NII in upcoming quarters. Year-to-date, domestic loan disbursements, excluding refinancing, reached $2.8 billion. Adding to that, about $2 billion of new corporate loans are already in the pipeline for the remainder of the year. Domestic fees amounted to $54 million in Q2 from $63 million in Q1, reflecting the detrimental impact of COVID on physical channel transactions, which were reduced by circa two-thirds due to the lockdown. Still, on a half-year basis, fees in Greece were up by 3.7% year-on-year, driven by retail banking fees, which were up by 15% on the back of increased cash, intermediation, and lending-related fees. The peak of the impact on fees due to COVID and the lockdown materialized in April and May, as June fees were up by 30% month-on-month. Furthermore, the significant peak of new loan production in July will also support fee income going forward, to high loan origination fees. Notably, post-lockdown, transaction volumes are nearing pre-COVID levels driven by alternative channels with the bank's digital migration efforts covering pays as shown on slide 19. In June, e-banking monthly transaction volumes were up by 20% year-on-year, offsetting the 11% drop in transactions to branches over the same period. At the same time, e-banking number of transactions have registered a 32% increase post versus pre-lockdown. Cost reduction efforts continue to produce impressive results as containment of domestic personnel and admin expenses accelerated in Q2 yielding solid reductions of 9.2 and 6.1% year-on-year, respectively. Personnel expenses in Q2 reflect the full benefit of the 2019 BES, while the provisional VES charge of 90 million booked in Q1 provides flexibility for further cost personalization. Going forward, the new VES, complemented by our efficient admin expense management, as well as further optimization of our branch network capitalizing on the migration to lower-cost digital channels, will provide further cost savings. Moving on to asset quality, Our provisioning approach in the first half of the year has driven our NP coverage to over 57%, nearly 400 basis points higher versus the beginning of the year. Following our conservative stance in Q1 in relation to incurring the total anticipated COVID provisions, cost of risk in Q2 came in at 106 basis points over net loans, increasing coverage by a further 100 basis points quarter on quarter. Bank MPEs dropped by 0.3 billion quarter-on-quarter to 10.1 billion, reflecting our efforts across organic channels, fending off the temporary yet abrupt slowdown of liquidation flows. MPE inflows are down to 140 million this quarter, reflecting the extension of payment moratoria and government support schemes to clients of high credit quality. Curings improved. to 264 million in Q2, compared to 210 million the previous quarter, benefiting from multiple restructurings with substantial debt forgiveness, gradually recovering to pre-COVID levels as shown on slides 22 and 23. The group NP ratio now stands below 30%, down by 90 basis points quarter on quarter, and by an impressive 6% each point year on year. Turning to liquidity, domestic deposits dropped by 0.7 billion quarter-on-quarter, reflecting state deposit outflows of 1.6 billion, while private deposits maintained their positive momentum, rising by 0.9 billion quarter-on-quarter. Compared to ERM-19, deposits in Greece expanded by 1 billion, solely driven by private deposit inflows. The repricing of time deposits continues, with a further drop of 11 basis points quarter-on-quarter, taking the cost down to 41 basis points. Current production, coming in at just 23 basis points, indicates there is still substantial savings to be realized in the second half of the year. Eurosystem funding increased to 10.5 billion EQ2 as MBG capitalized on ECB's TLTRO facilities offered at negative rates. Benefiting from the repricing of time deposits in the low-cost liquidity from ECB, the bank's blended funding cost is currently at 14 basis points and is set to drop further. In terms of capital, the bank is in a strong position with all set one and total capital ratios comfortably above threat capital requirements post the absorption of the total anticipated COVID provisions of $426 million during the first half of the year. including profits for the period, set one stands at 15.9%, 40 basis points higher quarter on quarter, aided by quarterly profitability and fair value gains through OCI as illustrated on the slide there. Total capital ratio stands at 16.9%, 540 basis points above minimum regulatory levels without factoring in the additional capital relief of 50 basis points from the OSII Buffet after ECB's recent communication regarding supervisory response to the COVID crisis. All in all, despite COVID headwinds and high uncertainty with most of the second quarter, the bank produced solid corporate operating profitability. We fortified federal balance sheets, lifting up substantially higher coverage levels. At the same time, we maintained momentum on NP reduction of GAMIC leads as we take the final preparatory steps ahead of the Frontier securitization. Project Frontier constitutes a step change for the bank's residual exposure to NPs, slashing them by nearly two heads and thus bringing us closer to an NP-clean NDG. And on this note, I would like to open the floor to questions.

The first question comes from the line of Florianni Jonas with Axia Ventures. Please go ahead.

Hi, guys. Good afternoon. Thanks for the presentation. First question is on your lending expectation for the year that you mentioned for the second half. Just wondering what kind of rates shall we expect to see? I mean, shall we take the rates you have on your slide 16 as a benchmark, or shall we expect a bit of further deterioration? Secondly, do you still have any... unrealized UGB games that you can use going forward. And then I think finally I'll just leave it here. If you can just comment on expected guidance for the year. I remember that previously you're guiding for NII to be flat or maybe low single digit down. And the cost of risk that you mentioned last time was between the second quarter and the fourth quarter to be around the 108 points if, you know, if things don't change with fees 10 to 15% lower versus 2019. So just to confirm this to the case of there's been any changes from your side. Thank you.

Thank you for the question. I'll take the first and third, and Christos will take the second question. So lending rates, the key issue will be the mix of the disbursements. They'll be corporate, so you need to look at the corporate rates. In Q2, we had some large one-off tickets which brought down the the rate on the new book on the front book the so the back book rate is the more logical one and will be looking more at SMEs than we have in the first half which may which would offset any sort of slight compression we may have so the corporate back book I think is is a good guidance on the first one on the guidance it is It is more or less unchanged since the last call. NII is recovering from the drop we saw in Q2 already. We are seeing good NII results in July, and we think NII, we expect NII to be flat for the year compared to 2019. Fees are doing better than expected. We had given guidance for around a 10% drop, and now we're giving guidance for less than 5% drop given 2019. what we're seeing in retail and the expectation on corporate lending fees. Costs remain the same, mid-single-digit decline for the year, and the cost of risk, if anything, the macro is a bit better, so the 100 base points is still the guidance. And with that, let me turn it over to Christos for the last question you had.

Okay, so just to add on the cost of risk, 100 basis points is the underlying cost of risk. And as far as COVID provisions, our standards, we will be in the area of 150 basis points. So all in all, excluding any one of provisions for inorganic actions, our guidance for the year would sum up to 250 basis points. On the issue of the GDPs, yes, we do have unrealized gains on the GDPs. Allow me not to give you color on that. What I can say is that on the head to collect and sell portfolio with regards to sovereign debt securities, we do have about 100 million of asset in our equity. This is information which will be disclosed in the financial statements, which will be out by end of the week. This is what we can share with you.

Thank you. That's good. Thank you.

The next question comes from the line of Manolopoulos with OptiBank Bank. Please go ahead.

Yes. Hello, everyone. Thanks for the call and the presentation. Actually, I have three questions. I suggest we take them one by one. So the first one has to do with the moratoria. If I'm not mistaken, in the previous call, you said that you had something like $4 billion of loans under moratorium, and today you present on the specific slide $3.5 billion. So did you have any moratorium expiring? Also, if this is the case, how have borrowers exited the moratorium behavior until now? So this is the first question.

Okay, I'll take that. It's quite simple. I think the $4 billion that you're referring to was applications, and that was the number we'd announced, not approvals. So the 3.5 is the ones that have actually taken up. So that's the difference between the numbers. No moratoria has expired. They continue until the end of the year.

Now, again on moratoria, the EFRA program, which is supposed to start at the beginning of next year, These loans would be considered P's, correct, not NPs?

I think the question is that most, the status will not change by the program, okay? So the program is aimed at performing. I think it has a few windows for past 90 days, if I remember correctly. but the status does not change by this program. Okay, but it's mostly aimed for performance, so that answers the question.

Okay, my next question is on the P&L. Actually, what I've noticed is that since this is the third consecutive quarter where you have performing exposures rising. On the other hand, your loan and I.I. was down again. So when do you expect the draft on loan NII? Is it next quarter? I mean, is it next year?

I think in the previous question, I responded to the NII guidance. I said that will be flat for the year. And given the performance of the first half, that implies a pickup in the second half of 2020. We're already seeing it. you see the disbursements we had just in July we had a large pause in disbursements and only started picking up in big time in June so this is the key driving force on the one side for loan NII on the total NII you also have to put in the very important movements on the funding side sure

And what about the VRS? I mean, you've taken the provision. When should we expect to see the benefits? I guess it's going to be next year, right? Meet next year?

Well, clearly we have to do the VES to get the benefits. And even in any case, we're going to have the benefits in 2021. In 2020, we're seeing the benefits of the previous VES. So we need to do a VES to get benefits in 2021. Now, we have taken the provision we need to see the if I can put the word correctly the psychology of staff that they're willing to participate COVID is throwing a difficult task for everyone so once we see that there will be the pickup we'll launch so we hope to launch in the last quarter of 2020 but it really depends on where COVID has us in that period Sorry for not being able to be more precise than that.

Okay, and my final one is on capital. So the SSM latest recommendations affect only your OCR or these are applicable to CD1 as well? And also on capital, what happens after 2023? I mean, will the SSM reinstate the former minimums or it's going to be a gradual process?

Okay, we cannot say what the SSM will do in 2022. They give it as guidance for 2022.

Christos, do you want to take the first part of the question? The reliefs apply also to set one. So effectively, all indicators, both ratios, both benchmarks are, again, the benefit of this purpose issued by the ECD.

Okay, thank you. The next question comes from the line of Paul Gabriel with Goldman Sachs. Please go ahead.

Hello, thank you for the presentation. A couple of questions from my side. So the first one is on NII and in particular, could you tell us what is the impact that you expect on NII from the 6 billion securitization? I see that around 20% of NII comes from your NP and the 6 billion represent around 20%, represent around 60%. So is more or less 10% of an AI a reasonable estimate from the impact? And then the second question regarding the P&L impact of this securitization both on the amount and also in terms of timing. Do you expect to book it before the end of the year in order to exploit the large trading gain that you booked the last quarter? Thank you.

Okay, I'll take the second, and Jesus will take the first. The P&L impact depends on the price, and we can well understand that price expectations are a bit off limits. Now, in terms of timing, we can do it either way. We can do it this year, we can do it next year, depending on where we are in the process and when we get the binding offers. So... but it will be most likely in the beginning of 2021. And we can use the space we have to take provisions towards that. So don't worry about using the gains from the bonds. Christos?

Okay, so with regards to the impact that will happen on NII, also, it has to do with the perimeter. When we finalize the perimeter, it will be definitive there. But the assessment that you've made is pretty much fair. We should expect something in the area of 10% to 20% decrease in MII from the securitization.

Thank you.

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

please go ahead hello many thanks for your time I just wanted to ask you about the Recovery Fund. There was some news this morning that HAPs could be extended or increased with support from the EU Recovery Fund. Any color you can share on this? And in general, what are your views on potential benefits from EU Recovery Fund for the banking system and, if possible, for MBG specifically? I know it's quite early, but any thoughts would be welcome. Thank you.

that's a tough question and I'm afraid I will not be able to give you much insight because this is a fund that has just been well actually to be specific it hasn't yet been approved by the capitals of Europe it's still being formulated I haven't seen the instructions on its uses and how much it can be used in the banking sector that is something that is certainly on my agenda to talk with the government but at this point, I think it's a little bit premature, okay? Hopefully, we can use it, but I don't have insight at this stage. I'm sorry.

Okay, good. Thank you.

The next question comes from the line of Singh Vijay with Fiera Capital. Please go ahead.

Hi. Thanks. Just one question. What are the expectations for the core PPI? after the securitization transaction and also in terms of the RWA intensity with the 2 billion pipeline that you have, do you think your RWA intensity could increase towards the second half of the year and it could sort of reduce the capital ratio slightly?

On the PPI, I think that if you combine the statements I made on that PPI will pick up somewhat in 290, in 220, excuse me, and a bit more in 2021, and then you need to subtract the number that was discussed in the previous question. Okay, so that's the answer to your first point, and then I don't know if Christos has

an answer to the RWA intensity on... We don't expect another sheet on capital because of that, because let me remind you that part of the pipeline that is coming in the second half of the year is in relation to the state guaranteed schemes, which bear the guarantee of the state. As a result, it will be, if I may say, beneficial towards the capital of the bank in terms of the risk-weighted assets versus

loans in the normal course of business. Thank you.

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

Thank you all for joining us in early August for this results call. I wish you all good holidays and hopefully we'll see each other face to face at some point in autumn so thank you very much and any further questions you may have the IR team will be delaying its holidays to answer them so thank you very much