National Bank of Greece S.A

Ladies and gentlemen, thank you for standing by. I am Iota, your chorus call operator. Welcome and thank you for joining the National Bank of Greece conference call to present and discuss the third quarter 2020 financial results. At this time, I would like to turn the conference over to Mr. Pavlos Milonas, CEO of National Bank of Greece. Mr. Milonas, you may now proceed.

Good afternoon, everyone, and good morning to those of you joining from the United States. Welcome to our third quarter 2020 financial results call. I'm joined by Christos Christodoulou, the 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 will turn to Q&A. So let's begin. The third quarter of the year has been strongly positive in terms of economic trends. while the impact of the second lockdown should be absorbed with only a slight pause in economic activity. Specifically, on the one hand, third quarter GDP is likely to have expanded by a high single-digit growth rate, around 7% quarter on quarter, responding positively to the lifting of protective restrictions as well as the implementation of approximately $12 billion in fiscal and liquidity support measures. On the other hand, worsened pandemic trends during October and November led to a second round of restricted measures. It should be less disruptive and mitigated by a new set of fiscal relief measures of about 3.5 billion and possibly more from accelerated EU funding. Alongside the significant support to the economy from the state, we have been very active in implementing targeted payment moratorium measures and government support schemes towards our viable clients affected by COVID-19. Currently, active payment moratorium measures extended to our clients amount to 3.6 billion, both households and corporate clients. In addition, in terms of new credit, we have dispersed new loans of 3.5 billion year-to-date. These amounts include 0.8 billion 800 million of disbursements from the largest government sponsored loan programs the guarantee scheme and we are proceeding to disperse a second charge from the same program of a slightly smaller size 600 million by year end disbursements will have exceeded four and a half billion excluding the rollover of working capital lines throughout the year of the utmost priority has been ensuring the health and safety of our employees and clients including through the adoption of STIC measures at head offices and branches. The work-from-home operating model with appropriate operating risk and cyber risk controls remains in place with approximately 50% of our staff currently working remotely. There is no measurable impact on productivity or client service levels. This has been facilitated inter alia by the large migration to digital channels including for the use of targeted campaigns as well as introduction of new digital services which have increased functionality. The results on the digital front are truly impressive. Digital subscribers are up nearly 30% year-on-year, reaching 2.9 million. Digital monthly active users have increased by more than 50% year-on-year to 1.6 million. Customers onboarded to digital have reached almost half a million year-to-date. In fact, the total number of transactions in October from all channels exceed the pre-COVID levels, while their composition has changed irreversibly, with approximately 6% of branch transactions replaced by digital channels. That's the number of transactions. We are working on two transformatory transactions for NBG, the divestment from our insurance subsidiary and the securitization of the Frontier portfolio. The divestment from Ethnic Key will optimize our operations in a highly regulated business, allowing us to focus on distribution in the under-penetrated yet highly promising insurance market. As regards Frontier, following finalization of the key preparatory steps, including the rating agency's feedback, we are nearing launch of the transaction in the next few weeks. It will comprise of NPEs of circa 6 billion, within an NP pool of just below 10 billion at the bank level. Predominantly, a mortgage securitization, a successful completion of Frontier would reduce our current mortgage NP exposure by 80% while pushing our NP ratio below 15% . We expect to receive binding bids in late first quarter or early second quarter 21. The transaction is facilitated by the fact that it does not include either a carve-out of a servicer or a hide-down. In line with previous guidance, the incremental provisions required for the completion of the transaction will be borne mainly through our 2020 and part of our 2021 P&L, on the back of our enhanced PPI capacity and high coverage levels, thus limiting the impact on our capital position. Turning to our financial results, nine-month attributable PAT reached $461 million, up 22% year-on-year, despite absorbing sizable COVID-related provisions, as well as the provisions for the large-scale VES launched earlier this month. Excluding COVID provisions and trading gains, the nine-month core operating profit stood at $228 million, up by 13% year-on-year, Importantly, the third quarter core operating profit was nearly $100 million, up 50% year-on-year. This result reflects a strong recovery in both NII and fees, as well as continuous tight management of personnel and G&A expenses, and moderate provisioning charges close to the levels of the previous quarter following the front-loading of COVID-19-related charge-offs in the first quarter of 2020. Overall, our total provisioning charges in 9 months 20 reached 250 base points over net loans. Even though the country is undergoing a recessionary period with restrictive measures necessary to safeguard public health, recent developments with regards to the quicker than expected availability of COVID vaccines have improved our visibility, allowing us to be more optimistic, yet still realistic looking forward. I will briefly touch upon three themes. and P's cost cutting in our transformation program. First, clearly, developments on the front arising from COVID are a key concern we're addressing. The critical issue regards the successful exit from the payment moratorium without a large deterioration in asset quality. Our analysis leads us to expect a new gross MPs be of the order of a billion, 1 billion, with a bulk arising from loans currently under moratoria, a default rate of about 15% to 20%, with a net increase of about half or less of this amount following curings, debt forgiveness, on new restructurings, and other organic actions. This result will be supported by the state-sponsored mortgage subsidy program, Yetira, It will also be supported by our step-up solutions provided to both households and corporate clients that may continue experiencing short-term economic difficulties due to COVID following the expiration of moratorium. Second issue is cost-cutting that remains a high priority. The new VS launched earlier this month targeting more than 600 employees is aided by a new round of branch network restructuring. will further optimize our physical reach, reducing branches by an additional 40, and continue the move towards a more agile operating model. The latter comprises the shift of simple transactions to alternative channels, the introduction of leaner and more automated back-office functions so that branches focus on the delivery of value-adding services. These developments on costs add to the progress made over the past two years. In fact, Our nine-month 20 OPEX results point to annual cost savings of $160 million stemming from targeted VESs involving 1,800 employees, the closure of about 100 branches, and tight G&A demand management. The third issue is that we will continue to implement the transformation program that has been successfully changing the bank over the past two years, including through our effective response to the pandemic crisis, a testament to our change capacity and momentum. The focus will be a rapid shift towards a more digital operating model, both as regards to back office, but also to further improve customer experience. To this end, NBG has already made significant progress in its digital offering. NBG is a market leader in the Greek market with its digital onboarding and instant consumer credit loans, with more innovative products in the pipeline. We're also using data analytics intensively to manage client product offerings. These developments keep us on the path to meet our business plan objectives, both as regards profitability gains, but just as importantly, the quality of client service, taking us steadily to our vision of making NBG the bank of first choice. With that, I would like to pass the floor to our group CFO, Christos. will provide additional insights to our financial performance before we turn to Q&A. Thank you, Pablo.

Starting with the P&L highlights on slide 10, profit after tax from continuing operations in Q3 stood at $137 million relative to $58 million in Q2, more than two times higher, driven by strong core income recovery, sustained momentum in OBEX reduction, and stable loan provisions. Similarly, our core operating profit registered a sharp improvement by a solid 50% quarter-on-quarter to $97 million, underpinned by the double-digit growth in both NII and fees. Factoring in strong operating trends in Q3, profit after tax for the nine-month period stood at $461 million, up 22% year-on-year despite COVID headwinds. Going into the profitability drivers, detailed on slides 13 to 20, domestic NII rebounded sharply in Q3, coming in 12% higher quarter on quarter at 290 million and at the highest level of the past few quarters. Funding cost savings stemming from our gradually increased TOTRO exposure and the sustained repricing of the time deposit back book, more than offset the normalization of lending yields which remain at healthy levels despite the historically low interest rate environment. Most importantly, NII from performing loans increased for the first time in many quarters, reflecting the strong pickup in the disbursement of new loans aided by the extension of state support schemes. Year to date, domestic loan disbursements, excluding the usage of working capital facilities, amount to 3.5 billion, with performing corporate balances up by $1.2 billion over the same period and by $1.6 billion relative to last year. For the year 2020, new disbursements are expected to exceed the $4 billion pre-COVID target to over $4.5 billion. Domestic fees bounced back following the COVID trap, increasing by 13% quarter on quarter on the back of both retail and corporate fee growth. On a nine-month basis and despite COVID headwinds, fees in Greece are up by 3% year-on-year to $179 million, reflecting the growth in retail fees by 13% year-on-year on the bank of strong consumer, card, and intermediation fee business. Notably, post the second quarter lockdown, transaction volumes have recovered to pre-COVID levels or higher. recording an impressive physical to digital challenge substitution as shown on slide 19. In October, e-banking monthly transaction values were up by 18% year-on-year, offsetting the 15% drop in transactions to branches over the same period. At the same time, the number of e-banking transactions has registered an impressive increase of 48% year-on-year, absorbing the drop of branch transactions over the same period. which is attributed to the pandemic, but also reflects our efforts to shift transactions towards digital channels. Following a strong reduction of personnel and admin expenses in H-120, costs were further reduced in Q3, yielding sharp year-on-year reductions of 8.5% and 9.7% respectively for the nine-month period. Our recently launched VES program, targeting more than 600 FTEs, complemented by our aggressive cost management and the rationalization of our branch network will maintain the strong momentum. The reduction of our branch network by an additional 40 units in the next few months capitalizes on the swift migration to lower cost digital channels aided by the mobility restrictions imposed due to the pandemic. Moving on to asset quality, our provisioning approach in the nine months of 2020 has driven NP coverage up to nearly 57%, circa 330 basis points higher versus the beginning of the year. Following our conservative stance in incurring COVID-related provisions of approximately 145 basis points over net loans, our cost of risk for the nine-month period stands at 244 basis points at group level, implying circa 100 basis points on an underlying basis in line with our guidance. Bank NPs dropped by 161 million quarter-on-quarter to just below 10 billion, aided by a small pickup in liquidations, restructurings involving debt forgiveness, and the application of moratorium measures. The contribution of inorganic actions and riders to the NP reduction of the quarter was near zero. As shown on slide 22, New defaults remain low as the drop in economic activity is cushioned by the targeted application of payment moratoria and government fiscal support measures. Our clients, with temporary liquidity difficulties as a result of the pandemic, will be offered our sponsored step-up solutions, as well as the state subsidy program Gefera, dampening NPE flows going forward. Curings, as expected, remain fairly stable to the average of the past few quarters, with a group NP ratio settling at 29.3%, down 60 basis points quarter-on-quarter and by more than 4 percentage points year-on-year. Turning to liquidity, domestic deposits increased by $0.4 billion quarter-on-quarter and $1.4 billion year-to-date on the back of private deposit inflows reflecting higher corporate and household savings. The repricing of time deposits continued, providing support to the net interest income and net interest margin. Yields quarter-on-quarter edged lower by 10 basis points to 31 basis points in Q3, with current production coming in also a further 10 basis points lower at 20 basis points. Eurosystem funding remained flat at 10.5 billion, an exposure that will keep providing NII cushioning in 2021. On the back of ECB's TLTRO facility and the repricing of our deposits, our funding cost is down to an all-time low of 12 basis points. In terms of capital, the bank retains a strong position with our capital ratios comfortably above SREP requirements post the absorption of COVID charges. As illustrated on slide 30, including profits for the period, our SED1 ratio stands at 15.9%, while the total capital ratio stands at 16.9%, almost 600 basis points above minimum regulatory levels. Both capital ratios do not include a benefit of approximately 20 basis points and software intangibles. Last but not least, the successful placement of the first green senior bond by a Greek bank and the first senior bond issuance since 2015 amounting to $500 million demonstrates our commitment to support the green economy and our strategic focus on the energy sector. This issuance also forms part of our strategy to enhance further capital buffers via the gradual extension of MREL budgets. In a nutshell, despite COVID headwinds and with our top priority being the health and safety of our employees and clients, the bank had a solid quarter with core operating profitability up by 50% quarter on quarter on the back of recovering core income and further cost containment. But at the same time, maintaining high level of provisions. Organic NP reduction momentum has been maintained ahead of the aiming and launch of our transformatory NP securitization that will push our NP ratio to a level below the 15% mark. And on this note, I would like to open the floor to questions.

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

Thanks for the presentation. I have a few questions on asset quality. Just trying to understand how should we think about the absorption of the loss of frontier into the P&L. Are you planning additional impairments to come or I don't know if there's anything you can share in terms of what hits to capital and thermal basis points we should think about or a level of like a performer coverage level off the frontiers. So we can also try to work out from that. Then secondly, into 2021, after you mentioned that, you know, the closing of frontier should be around the second quarter. Is there anything planned for the second half of the year? Are you planning to engage into any other transaction still in 2021? Or how should I think about asset quality in the second half of 2021 after Frontier is done and as you manage the COVID related inflows. And then finally, can you share any number on unrealized gains on your trading book as well? Thank you.

Okay, let me start and then Christos can jump in. Okay, on Frontier, as I said in my opening remarks, we will absorb all hits on Frontier and insurance from our PPI of 2020 and part of 2021. So from that you can infer that the hit to capital is minimal, more like an opportunity cost rather than a reduction. In terms of more transactions after frontier in the second half of twenty twenty one uh... we're looking at someone but that's their their several small ones uh... when we have more visibility on that and then uh... on the uh... unrealized capital gains uh... they're mostly on the help to collect and therefore before they will uh... remain there.

I don't know, Christos, if you have anything more to add. With regards to the hair-to-collect-and-sell portfolio, the old EFS, our unrealized gains as of the end of September is about 70 million euros, to add to what Pablo just said.

Thank you.

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

Good evening. Thanks very much for the presentation. My first question will be on the disbursement and deal trends, please. So you're showing that new disbursements have indeed been extremely strong in the quarter, especially in the corporate portfolio. But on the other hand, we're also seeing new lending yields for corporate loans going higher. And I think many would expect that yields would actually come down in an environment like this. So just wanted to check what is causing this and if you had any views on the on the interplay here. And can I also ask if you have any early views on new disbursement dynamics for 2021? So do you think is there any front loading that the corporates are doing? in 2020, for example, or would you expect this trend to continue into 2021? Thank you.

On the yields, if you're talking about total yields, there's a mixed effect that there's more retail disbursements in the composition of disbursements, and that leads to a pickup in the overall yield on the disbursements. on the on the disbursements in 2021. Again, it will depend a lot on the programs that are sponsored by the government. As you know, a large share of the disbursements are of all the banks, but as well are coming out of these Guarantees even at the peak in about almost two billion in our in our in our in our case Okay, thank you and just one technical question on the TLT arrow Can I check how you're accruing for it?

So do you already accrue for the full benefit or is it at the 50 basis points for now?

We do accrue the TLTRO effect starting from the initiation of the program back in June. We are recognizing some upside from the TLTRO. Yes.

OK. Is it 50 basis points or 100 basis points full benefit?

The full benefit is 100 basis points.

OK.

Thank you very much.

The next question comes from the line of Boulogouris Alexandros with Good & Co. Please go ahead.

Yes, hello. Thank you for the presentation. Just to clarify what you mentioned earlier regarding the loans and the moratorium and the potential new gross NP inflow in 2021, you mentioned that about 15% or 20% default rate. I don't see in your presentation what is the level of loans and the moratorium at the moment. And also you said, I think, that the net increase would be half of this gross new inflow. Does this include the Yefira program, I assume? That is my first question. And my second question is regarding the provisions. Do you think that the provisions taken in the first quarter, I think it was more than 400 million, are enough to cover this gross new NPE inflow that you're expecting?

so should we expect a cost of risk that would be in the range of 100 bps as we see in this quarter for the following quarters even in 2021 thank you the moratorium currently in place are 3.6 billion more or less half mortgages half corporate I said in my opening remarks gross NPEs mostly for moratoria but from all books about a billion. And net NPEs after you take into account curing debt forgiveness etc. is about half.

Even less. The provisions we took in the first quarter account for that. Okay. That's very clear. Thank you.

The next question comes from the line of Mimi Sogloosman with Abrogia Capital. Please go ahead.

Hi, two questions on my side, if I may. One on the insurance sale. Can you give us a color on what kind of impact on capital do you expect once that's finalized? And also, just following on the last question regarding that half billion net figure, do you incorporate any potential support from the recent legislations that went through, particularly with the insolvency law? Thank you.

Okay, let me start with the second question. Yes, clearly all our projections include the institutional framework in play. Now, on insurance, it is an ongoing transaction. We're getting close, so it's a sensitive question that you're asking.

Okay, fair enough. Thank you.

It's just the previous guidance. Got it.

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

Yes, hello. Thank you for the presentation and your time for the call. I have a very quick one on DTCs. We read some press reports today arguing that you plan to submit a proposal to the Ministry of Finance aiming to get the approval to sell for the creation of a secondary market, etc., and maybe sell part of your DTCs. Do you confirm these reports? I mean, do you have any plans or ideas on how to tackle the issue? That's my question.

Thank you. You're reading the blogs and you shouldn't always put that much faith into them. Clearly, one option available to deal with DTCs is international experience. such as in the United States where DTCs are transferable from companies that have DTCs to companies that have profits and they can use those to offset their tax liabilities so that is something that exists internationally it is something that could be considered in Greece let me leave it at that okay thank you very much we have a question from the line of Negro Alberto

with Mediobanca. Please go ahead.

Yes, thank you for taking my question. Sorry, clarification on TLTRO contribution. If I understood well, you are already accruing 100 BIPs. So if I look at slide 14, this will mean that repo expenses are increasing the quarter, if you can give us more color on that. And can you repeat what you expect in terms of moratoria going into MP next year? and if you can give us more color on the asset quality in the coming quarters.

Okay, let me start on the TLTRO. The graph on slide 14, the numbers that you see there is net of wholesale funding. But yes, I confirm what we said before that we are taking since June the full effect of the TLTRO basis points, 100 basis points. With regards to the asset quality going forward and the moratoria, as Pablo said a few minutes ago, what we see is about 15 to 20% default rate at this point in time with regards to the moratoria that are active currently, which are about 3.6 billion. So that more or less forms the biggest chunk of the 1 billion Gross NP Flows that we see for the next year, for the next few months.

Thank you.

We have a follow-up question from the line of Memisoglou's man with Ambrosia Capital. Please go ahead. Mr. Memisoglou, can you hear us?

Sorry, I was on mute. Just wanted to ask if you could give us any rough color for cost of risk for next year. Thank you.

Well, as we mentioned already, what we see for next year is more or less the same underlying cost of risk as we see this year. So you shouldn't expect in basis points a cost of risk to be below 100 basis points. That's more or less what we see now for next year.

Got it. 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 for the results call. We'll be available for questions in the next few days. So hope you all keep your health and hope to see you in person soon. Thank you. Good night.