National Bank of Greece S.A

Ladies and gentlemen, thank you for standing by. I am Yota, your chorus call operator. Welcome and thank you for joining the National Bank of Greece conference call to present and discuss the full year 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 full year 2020. Financial Results Call. I'm joined by Christos Christodoulou, Group CFO, and Greg Papagrigoris, Head of IR. After my introductory remarks, Christos will go into more detail on our financial performance, and then we will turn to Q&A. So let's begin. A few words on the economic backdrop. There's clearly a sense of optimism due to the knowledge that vaccines will soon permit a return to normalcy. albeit a new normalcy. The imminent receipt of funds from next-generation EU of the order of 3% of GDP in 2021 and 2.5% of GDP in 2022 reinforces this optimism, as does the better-than-expected performance of the Greek labor market, with total compensation in 2020 remaining broadly unchanged compared to 2019 and unemployment actually declining. This positive development is a direct result of the large and targeted fiscal support, which amounted to 9.5 percentage points of GDP in 2020. Clearly, there's frustration in society due to the successive waves of the pandemic and the resulting lockdowns, and impatience with the rollout of the vaccination programs. But there's light at the end of the tunnel, and in my view, it is quite strong, especially in the case of Greece. let me explain why first there's a continued fiscal response which will provide additional fiscal stimulus to the economy in 2021 of about six percentage points of GDP over and above the aforementioned nine and a half percentage points in 2020 second latent household and corporate demand should be unleashed in 2021 household savings reached a 10-year high in 2020 also reflected in the record high 10 billion increase in household bank deposits. The release of these savings should provide a strong boost to consumption as confidence returns. On the corporate side, the loans provided for liquidity support in 2020, including those with government guarantee, should recirculate in the economy as fixed investment spending. Note that corporate deposits have also increased by about 10 billion in 2020. Third, Tourism will certainly increase from 2020 levels. The question is, by how much? Even if tourism receipts only reach 50% of 2019 levels versus 23% in 2020, the contribution to GDP will be two percentage points. And the potential for an upset scenario, in my view, is high with the contribution to GDP potentially reaching four percentage points as vaccination programs pick up in Greece as well as as in its main tourism source markets. Early bookings appear to confirm a more optimistic scenario. All in all, in-house projections for GDP growth are for nearly 5% in 2021, averaging 10% year-on-year in the final three-quarters of the year. That was a longer-than-usual description of the macro, but at this turning point in the economy, I believe it was useful. So, let's turn to MBG now. 2020 has been a year of challenges, but also a year of opportunities. We remained at the forefront of support extended towards our household and corporate clients, implementing targeted payment moratorium schemes and interest payment subsidies, mostly to SME and SB loans for a total of more than 85,000 clients. Furthermore, aided by state support schemes, we dispersed $4.7 billion of new credits an increase of about 40% versus disbursements in pre-COVID-19. Our top priority throughout the pandemic remained the health and safety of our employees and customers. We ensured that our employees could work remotely, efficiently, and cybersecurity. A silver lining benefit from this disruption is that it will form the foundation of our new work from home model. At the same time, we accelerated the migration of customers to digital channels enhancing digital functionalities in order to better serve them remotely. Just two examples, both first for the Greek market. One, the introduction of digital onboarding for individuals, and two, instant consumer credit from your mobile in a few minutes for up to 2K. The digital transformation has been impressive, with digital monthly active users reaching 1.7 million in 2020, up by an impressive 50% year-on-year. This shift in behavior will form the basis of our new branch service model. Despite COVID headwinds, we made significant progress towards completing two key strategic transactions, the sale of our insurance subsidiary and the frontier securitization. As regards to the key, I'm pleased to announce that today we agreed to sell a 90% stake to CVC Capital. The transaction includes a 15-year bank assurance agreement which will be mutually beneficial and result in strong fee growth going forward. The transaction is meaningfully capital accretive and fulfills an important commitment from our restructuring plan. As regards Frontier, in view of the progress made on the transaction, the rating of the senior tranche, the application for the guarantee of the senior bond from the United Republic, and the entry into the final stage of the process, we have classified the portfolio perimeter as held for sale and importantly took the implied $400 million of provisions for the transaction in Q4, a year ahead of schedule. The transaction will be capital neutral upon completion when the RWA reduction of about $3 billion occurs. Frontier, combined with negative organic NPE formation, led to an NPE ratio of 13.6% at the end of 2020, just about $4 billion in terms of gross NPEs. The asset quality of these remaining NPs has improved compared with the previous stock. Specifically, nearly one-half comprise restructured loans which are performing or less than 30 days past due with a good chance to cure. Moreover, the LTV of the mortgages in this remaining NP portfolio, comprising about half of the $4 billion, is now close to 100% post-frontier. Our final point is that the provision coverage of the remaining NPs increased to over 63% at end year 2020, implying net NPs of just 1.6 billion. As important as a significant NP reduction is the fact that it did not absorb capital. Group set one capital ratio at end year 20 stands at 15.7%, and it will increase by an additional 170 base points, of which 110 base points are due to Frontier RWA deconsolidation following the completion of the Frontier and Ethniki transactions during the next few months. On a pro forma basis, Set 1 capital is above 17% and total capital above 18%. Turning to the full year financial performance, our results have been strong. Despite a COVID-induced background in which GDP declined by 8%, group core operating profit, i.e., recurring profitability, excluding trading gains and once-off provisions for COVID and frontier, increased by 41%, reaching $328 million. This performance reflects the following. First, The resilience in our core income, despite the strong headwinds to NII from the $5 billion reduction in NPs in 2019. This was achieved through the expansion of performing loans, funding cost improvements, and the strong growth in retail fee generation. Second, the aggressive cost cuts, which yielded an 8% year-on-year reduction in personnel costs and a 12% year-on-year reduction in GNAs, The good 2020 OPEX results follow on from those in 2019. Indeed, cost savings has amounted to $150 million in fiscal year 2020 compared with fiscal year 2018 and comprised inter alia a reduction of about 2,000 FTEs and about 100 branches. Looking at the bottom line, full year PAT from continued operations reached $591 million as trading gains of $1.1 billion fully absorbed provisions of more than $800 million related to COVID-19 and Frontier. Most of this part was used for once-off restructuring costs, most importantly the DES, Voluntary Exit Scheme, as well as for the additional impairments for Ethnic Key Insurance. With the momentum achieved in 2020 and the expected strong economic recovery, I feel confident we will continue to deliver on the three key goals of our strategy in 2021 and 2022. Complete the asset quality cleanup, enhance the current high level of capital, and achieve high returns for our shareholders. Starting with NPE developments going forward, and you can follow on page 14 of the presentation. The key question concerns the impact from the pandemic on asset quality. We have already said that this would comprise mostly a subset of the loans that received moratoria, 3 billion performing loans in the case of MBG, all of which expired at end December 2020. The good news is that approximately 50% in value terms have not asked for further support and have returned to normal pre-COVID installment levels. The remainder received step-up solutions or government support schemes, the so-called Yefira or bridge schemes. Importantly, very few of these 3 billion have shown early signs of payment difficulties. Specifically, less than 4% are over 30 days past due, nearly three months after the expiration of the moratorium. This is much better than expected, and even though it's too early to claim victory, we cannot see more than 15% to 20% of the 3 billion initially in moratorium defaulting. Outside this moratorium perimeter, NPE formation will be more than offset by curing. Finally, on the inorganic front, we envisage one additional transaction of 1 to 1.5 billion, as well as several individual loan sales of bulkier and more complex corporates. Overall, we expect NPEs in 2022 to reach 1.8 billion, equivalent to an NPE ratio of about 6%. Moving on to capital. slide 15. From a solid starting point of a set one ratio of 15.7% at end 2020, increased by about 170 base points of capital upon completion of the frontier and insurance transactions, as I mentioned previously, tributary profits are expected to generate another 250 base points of capital during the two years to end 2022. These two positive factors will fully absorb 200 base points of IFRS 9 transitional adjustments, Remember that there will be no further adjustments from 2023 onwards. 80 base points of DTC amortization and the RWA impact from our anticipated credit expansion. Thus, Set 1 will be increased by about 50 base points to 16.2% at the end of 2022. This is a very solid 15.2% on a fully loaded basis. This strong capital position will provide NBG with significant strategic flexibility and permit us to think seriously of finally distributing capital to shareholders. Moving on to profitability on slide 16. We lay out the path to a core ROE of 9% in 2022. Starting from a core operating profit of 328 million in fiscal year 20, the three main drivers are the following. Core income will be negatively affected from the hit to NII of about $125 million from the NPE cleanup, which is expected to be almost fully offset by NII from new loan expansion as well as double-digit compounded annual growth rates and fees. Second, cost to core income is envisaged to improve by about 400 base points despite slightly lower core income over the period. This mainly arises from annual cost savings of $70 million on the back of further FTE reduction and branch network rationalization following the switch of transactional banking to digital channels, stripped G&A demand management, and the leveraging of the work from home model. Third, our cost of risk is expected to improve by another 40 base points compared with the underlying level of full year 20 and reach 60 base points in 2022. This reduction reflects high coverage levels, already above 63%, which are expected to increase further as we clean up the balance sheet. Factoring all the above, our core operating profit is projected to reach nearly 500 million in 2022, translating into the core ROE of 9%. A positive trend in profitability will continue in 2023 and onwards. A large part of our achievements, past and future, are due to our successful transformation program, currently in its third year. It has helped focus and prioritize a rapid and effective change of our operating model, including the two key constituents, our IT systems, core, peripheral, and digital, and HR management. Leaving our legacy problems behind us, our focus will henceforth be on our core banking business. will remain committed to position NBG as a bank of first choice in Greece, providing added value to our clients and shareholders and supporting sustainable, environmentally friendly economic growth. With that, I would like to pass the floor to our group CFO Christos, who will provide additional insights to our financial performance before we turn to Q&A. Thank you, Pablo.

Starting with the P&N highlights on slide 18, Profit after tax from continuing operations in 2020 increased by 26% year-on-year to $591 million, utilizing our trading gains to absorb loan impairments of $1.1 billion or 403 basis points over net loans, following our strategy of incurring COVID and frontier-related provisions of $0.8 billion in the course of the year, implying an underlying cost of risk of 106 basis points in line with our criteria. At the same time, our core operating profit before non-recurring provisions registered a sharp improvement of 41%, reaching 328 million, reflecting the resilience in core revenues despite COVID headwinds, as well as a significant reduction in domestic personnel and GNAs. The bank retained its very strong capital position post the absorption of frontier and COVID charges. As illustrated on slide 20, Our year-end Z1 ratio reached 15.7%, with the total capital ratio at 16.7%, nearly 6 percentage points above minimum regulatory levels. The positive impact on our capital ratios upon the deconsolidation of the risk-weighted assets related to frontier completion is estimated at 110 basis points and is expected to be realized mid-year 2021, fully offsetting the negative capital impact booked in Q4, thus rendering the transaction capital neutral. Upon completion of both frontier and SMEG insurance transactions, capital in 2021 would be boosted by approximately 170 basis points compared to ERN20 levels. Going into the profitability drivers, detailed on slides 21 to 27, domestic NII continue to recover in Q420, rising by 2% quarter-on-quarter to $296 million, driven by the expansion of lending NII and funding cost reduction that more than offset the normalization of lending yields which remain at healthy levels despite the ongoing low interest rate environment. Following a sharp rebound in the second half of the year by 12% half-and-half, full-year 20 NII ended marginally lower year-on-year despite the rapid NP cleanup over the last two years. Excluding the impact of NP NII, core pre-provision income settled 25% higher year-on-year. The resilience in our NII in 2020 reflects funding cost savings stemming from our increased TRO exposure and the sustained repricing of time deposits as well as the expansion of our performing loan book following the strong pickup in new loan disbursements. 2020 domestic loan disbursements, including repayments of working capital facilities over the period, increased by 40% year-on-year to $4.7 billion, aided by the extension of state support funds. Performing corporate balances were up by $1.8 billion, or 14% over the same period, offsetting mortgage leverage. The expansion of our performing book would provide longer-term support to the net interest income, partially offsetting the negative NII impact arising from the balance sheet risk in the next two years. Despite headwinds from restrictive measures due to COVID, domestic fees kept recovering in Q420, a plus 5% quarter on quarter, driving the full year 20 levels slightly higher year on year on the back of solid retail fees, especially due to strong growth in the card business and intermediation fees. Fees from our digital business remained broadly flat, negatively affected by the sharp reduction in fees from international card holders, as a result of COVID-induced travel restrictions during the year. Adjusting for this impact, fees from digital channels were up by 25% year on year, reflecting our efforts to engage clients in our digital offerings. COVID restrictions inevitably accelerated the bank's digital transformation, with digital becoming the preferable channel for transactions. As shown on slide 27, The total number of transactions is nearing peak COVID levels, with e-banking transactions up by nearly 50% in Q420, replacing branch transactions that have been gradually reduced by two-thirds versus peak COVID levels over the same period. The ongoing migration of our customers to digital channels facilitates a more cost-efficient and flexible operating model, as we are steadily transforming into a more dynamic and agile bank. Our cost-cutting efforts have yet again produced impressive results, with domestic personnel and GNAs registering solid reductions of 8% and 12% year-on-year, respectively. Cost containment reflects the reduction in the number of employees, the rationalization of our branch networks supported by the swift migration to lower-cost digital channels, as well as the optimization of spend through our demand management framework. The V.S. program launched last November with participation exceeding 550 FTs by end of year, complemented by the ongoing branch network optimization and other cost-cutting measures, will produce additional cost savings going forward. Moving on to asset quality on slides 29 to 31, following the transfer of frontier portfolio under assets here for sale, there is significant improvement in our asset quality position. frontier, combined with negative organic NP formation of 0.7 billion during the year, pushed our year-end group NP ratio down to 15.6% from 31.3% at year-end 19, with cash coverage of 63% compared to 54% a year ago. It's worth highlighting that despite COVID provisions and avoiding going through a high town, we have managed to fully accommodate in the bank's full year 20 P&L 0.4 billion incremental provisions required for the frontal portfolio, outperforming our earlier guidance as regards frontal provisions spilling over into 2021. Domestic NPs reached 4.3 billion in Q4 20, or only 1.6 billion net of provisions. As shown on slide 29, our FNPs below 30 days past due comprised of circa 40% or 1.7 billion of residual NPEs, demonstrating the quality there. Adding to this, post-frontier DLTV for mortgage NPEs drops significantly to 108% compared to over 120% pre-transaction. Organic flows remain negative, with accounting write-offs at near zero in the quarter. New defaults remain low, has been cushioned by the fiscal support while curings have remained fairly stable to the average of the past few quarters. Out of the 3 billion performing loans under moratoria for MBG, all have expired at the end of 2020. More than half have returned to normal payments while at the same time we are actively providing step-up solutions to customers that continue to experience temporary financial difficulties due to COVID. These measures are complemented by the state subsidy programs. As the CEO said, although still early days, states are nearly three months post-moratoria expiry are very encouraging with accounts in early areas currently below 4%. Turning to liquidity on slides 33 and 34, domestic deposits increased by 4.7 billion year-on-year, mostly through private deposit inflows reflecting the fiscal support from the government due to the pandemic. The same time, the repricing of time deposits has provided support to the net interest income and net interest margin. Time deposit yields edged lower by 41 basis points year-on-year to 23 basis points in 2020, with current production coming in even lower at 16 basis points. Eurosystem funding remained at 10.5 billion, an exposure that will keep providing NII cushioning in 2021 when the full impact will be realized. The TLTRO subsidy, coupled with the deposit repricing, has led the bank's blended funding cost to the level of 7 basis points in Q420, compared to 41 basis points in Q419. 2020, despite the pandemic, has been a year of many achievements and success for our bank. Against COVID headwinds, we reported a solid operating performance, with core operating profitability up by 41% year-on-year. on the back of resilient core income and rigorous cost-cutting. The strong credit line more than offset both COVID and frontier one of provisions, yielding a path from continuing operations of nearly 600 million. At the same time, driven by frontier securitization, our NP ratio went down to 15.6% from over 30% a year ago, while impressively and despite the aggressive NP deleverage, the state one ratio was maintained at 15.7% proposed the absorption of the $0.8 billion of non-negating provisions. As already mentioned, further capital enhancement upon completion of transactions with increased capital adequacy by an additional 170 basis points. 2020 is now behind us, and we look forward to the challenges ahead of us in 2021.