National Bank of Greece S.A

Ladies and gentlemen, thank you for standing by. I am Maria, your chorus call operator. Welcome and thank you for joining the National Bank of Greece conference call to present and discuss the second quarter 2021 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 U.S. Welcome to our first half 21 financial results call. I'm joined by Chrysos Kostoudoulou, Group CFO, Greg Papadrivoris, Head of IR. After my introductory remarks, Chrysos will go into more detail on our financial performance, and then we will turn to Q&A. So let's begin. In the course of the second quarter, Greece has lifted the mobility restrictions, following a rapid vaccination rollout. Vaccination levels are currently around 55% of the total population and are expected to reach the critical 70% level in autumn. These expectations have bolstered confidence, leading to a strong rebound in business turnover back to 2009 levels and consumption above 2019 levels. In fact, following a much better than expected first quarter GDP outcome, second-quarter activity appears even stronger with all economic indicators accelerating rapidly. The expectations are the second-quarter GDP growth to exceed 10% and continue at an elevated pace into the second half of the year. Full-year GDP growth is expected to be around 5.5% and employment growth to exceed 1.5%. With actual employment creation understated due to the existence of employment suspension schemes during 2020. It is also encouraging that activity has not suffered from the withdrawal of fiscal support. Indeed, most of the extraordinary labor market support measures and payments through the repayable advance scheme have ended in May. Another encouraging sign is a strong pickup in tourism activity. Starting from late June and continuing through all of July, reaching levels on average only about 30% below those of 2019. Finally, and importantly, goods exports are booming, reflecting the global rebound in activity, increasing by 20% year-on-year in the six months of 2021. Now, turning to NBG's results. The key P&L metric, our core operating profit, increased by 18% quarter-in-quarter in the second quarter. reaching $112 million relative to $95 million in the first quarter. With Q2 building on a strong set of Q1 results, core operating profit stood at $208 million in the first half of the year, registering a notable year-in-year increase of 58%. As a result of this solid performance, we have made heavy inroads towards our full year 22 core operating profit guidance of $490 million equivalent to 9% core ROE. The first half performance comprises decidedly positive results across all core operating lines, NII, fees, OPEX, and loan loss provisions. Let's take each in turn. NII increased by 7% year-on-year, driven by the pricing of liabilities, and was also supported by increased loan disbursements. nearly $5 billion during the past 12 months. Fee income accelerated to 10% year-on-year, with a strong recovery post-lockdown in both the retail and corporate segment, with combined fees from the two segments reaching the highest level that has been observed since before the Greek sovereign crisis. Strong OPEX optimization resulted in an 8% reduction year-on-year, driven by personnel cost-cutting which maintained a double-digit pace of the first quarter, mainly reflecting headcount reduction. Loan loss provisions declined by 10 base points in the second quarter to just above 100 base points, increasing coverage by a further 160 base points, Q-on-Q, 350 base points year-to-date. Coverage reached 66.8%, reflecting our conservative approach with generous management overlays due to the still uncertain environment Delta variant. Continuing on asset quality, our domestic NP stock dropped below the $4 billion mark in July, including the frontier effect, with the NP ratio settling at 12.7% at the end of June. Importantly, organic NP flows remain negative, $100 million, with a first-half organic NP reduction of $220 million. Organic NP reduction is set to continue as destructions maintain a very good pace about $40 million per month outside the frontier perimeter. And 35% of remaining NPs, or $1.4 billion of restructured loans, have the potential to cure during the next 12 months. Equally encouraging is the fact that seven plus months after the expiry of all moratorium measures towards clients in need of temporary support, the payment performance of these loans remains strong. with just 3% of the ex moratoria perimeter over 90 DPD. Furthermore, clients in early arrears for these loans are an insignificant 1%, pointing to a strong payment performance going forward. In sum, the impact from COVID on NBG's asset quality is turning to be significantly less than initially expected. Turning to capital, our set one ratio position has improved by 30 base points year-to-date, despite absorbing the full 2021 IFRS 9 transitional impact. Our SET1 ratio stands at 16%, with the total capital ratio 100 base points higher at 17%, reflecting our Tier 2. On a fully loaded basis, SET1 and total capital ratios stand at nearly 14% and 15% respectively, before factoring in the additional 170 base points from the imminent completion of the Frontier Ethnic Key Insurance transactions in the next few months. Regarding Frontier, signing is expected within the next few weeks. At that time, fully loaded Set 1 and total capital ratios will reach close to 16% and 17% respectively. I would like to close with a few points on the strength of our balance sheet as well as the improvements in our core and attributable profitability. As regards the balance sheet, NBG operates with the lowest net of provisions NPE exposure in the system, specifically $1.4 billion. The execution risk of the remaining cleanup should be marginal and with hardly any meaningful capital loss. Thus, the cleanup would leave NBG with high capital buffers and therefore maximize flexibility with regards to future business expansion, as well as the potential to distribute dividends back to our shareholders. As regards core profitability, NBG has made steady progress over the past couple of years. Our cost to core income is near 50%, and our sustainable core profitability on a net operating level, not on a PPI level, has increased by nearly 60% in the first half of 2021 to an annualized level of more than $400 million. The resulting sustainable ROE has risen to a decent annualized rate of 7%, and we're well on course to deliver the 9% target next year, driven among others by our guidance for cost of risk near 60 base points. For 2023, we're looking to deliver an even higher ROE in the double digits. Our track record provides credibility to these commitments. We have built up a strong momentum for change through our successful transformation program, which has just completed its third year. Indeed, I believe we're the change leaders in our sector and that this fact distinguishes us in the domestic banking space. I feel confident that we're getting very close to a sweet spot where a transformed NBG meets a strong and underbanked economy which, moreover, will be receiving substantial RRF funds. This confluence of circumstances will clearly allow NBG to move up to a higher playing field and be the bank of first choice. With that, I would like to pass the floor to our group CFO, Christos, who will provide additional insight to our financial performance before we turn to Q&A. Christos. Thank you, Pablo.

Let's now look into the financial performance in more detail. Starting with the P&L highlights from slide 10, our H-1 profit after tax from continuing operations increased by 34% year-on-year to $622 million. This strong performance reflects our improved co-banking income generation up by 8% year-on-year, our commitment to cost discipline yielding an 8% cost reduction, strong trading gains, and moderate loan impairments with a cost of risk of 104 basis points over net loans. More importantly, excluding trading, our core operating profit increased by 58% year-on-year to $208 million in H1-21, confirming we are well on track to deliver on our 2022 Core Operating Profit Guidance of 0.5 billion and a core return on equity of 9%. Let me now turn to asset quality and liquidity highlights on slide 11. NP formation remained negative in Q2, adding up to an organic NP reduction of 0.2 billion in H1. This compares favorably with our guidance for an organic NP reduction of 0.8 billion by end 2022, excluding inorganic efforts. Domestic NPs dropped to $4 billion, 12.8% over gross loans, of which 35%, or $1.4 billion, are for bond and fees below 30 days past due with good potential to cure within a year. At the same time, the performance of moratoria beneficiaries is far better than anticipated, with only 3% exceeding the 90 days past due mark. Our domestic NP coverage has improved by 360 basis points year-to-date, to more than 66% and remains at the high end of the sector. Deposit covering continued in the first half of the year through 2.5 billion of inflows, mostly from low-cost core deposits. Loan disbursements reached 2 billion over the same period and are expected to accelerate further in the second half of the year, with the growth momentum in our performing loan portfolio picking up. On slide 12, we show our key capital metrics, which evidently are very strong, with Set 1 and total capital ratios up by 30 basis points year-to-date to 16% and 17% respectively. As already discussed in previous quarters, our first-in-class capital position will be boosted by approximately another 170 basis points upon completion of frontier and ethnic insurance transactions, rendering a total capital ratio of nearly 19%. In light of our high capital levels and given the fulfillment of our interim emerald targets, there is currently no obligation for emerald issuances for the remainder of the year. Adding to our superior capital position is the successful completion of the 2021 SSM stress test with a strong performance in relation to NII and credit impairments, confirming the quality and robustness of our balance sheet. Now let me walk you through the key drivers of our improved profitability during the first half of the year on slides 13 to 20. Domestic NII increased by 8% year-on-year, despite the ongoing de-risking, deflecting funding cost benefits from the pricing of deposits, and the rising new loan production levels. The unprovided non-cash NPI NII remains very low, at just 4% of our total NII, highlighting the quality of our lending net interest income. Going into domestic loan disbursements in more detail on slide 15, these reached $2 billion in the first half of the year, reflecting strong corporate disbursements of $1.5 billion, while retail has picked up by more than 2.5 times year-on-year. As a result, our performing book expanded by $1.2 billion, or 5% year-on-year, with corporate performing loans rising by 12% over the same period. The accelerating expansion of our performing book will provide long-term support to the NII, gradually reversing the impact from the balance sheet risk. Moving on slide 18, domestic fees in Q2 increased by 4% quarter-on-quarter, driving H1 fees up by 10% year-on-year, supported by the recovery in both retail and corporate. The key drivers behind this good performance were lending fees in corporate, reflecting the growth momentum in disbursements, as well as intermediation and digital fees in the retail business. Notably, in the aftermath of COVID, bank transactions edged substantially higher and are mainly conducted by digital channels, as you can see on slide 19. Reflecting the ongoing migration of our customers to digital channels, e-banking transactions have increased by 54% year-on-year in Q2 2021, replacing branch transactions that have been reduced by more than 50% year-on-year. Turning to costs on slide 20, our impressive cost-cutting efforts continue, yielding a reduction in operating expenses of 8% year-on-year in H1, while our cost-to-income ratio improved by nearly 9 percentage points year-on-year to 51%. The main driver of our cost-efficiency optimization is a reduction in domestic personnel costs by 15% year-on-year on the back of the 2020 exit scheme. Moving on to asset quality, on slides 21 to 26, domestic NP is kept on a downward trend, dropping below 4 billion or just 1.4 billion net of provisions. Domestic NP ratio was 50 basis points lower quarter on quarter at 12.8%, while coverage increased by further 160 basis points to 66.4%. Organic flows in the quarter remain negative. Curings were fairly stable quarter-on-quarter, driven mainly by mortgage restructurings, while new defaults and redefaults remain at bay and well below the average quarterly 2020 levels. Performance of clients previously under moratoria, seven months post-moratoria expiry remains reassuring, exceeding our expectations. Currently, only 3% of the ex-moratoria performing perimeter of $3 billion is in default, and just 1% in earlier years. Moreover, approximately 60% of performing moratoria beneficiaries have lacked as low risk and have received no subsequent payment relief. This gives us confidence that the impact of defaults from COVID will be much less severe than we expected. Turning to liquidity on slides 27 and 28, domestic deposits increased by $6.3 billion year-on-year, mostly through private deposit inflows against rates reaching near zero levels. Time deposit yields decreased by a further 10 basis points year-to-date to 15 basis points, with new production coming in at 8 basis points. Eurosystem funding to TLTRO stands at $11.6 billion, providing support to NII. Summing up, in the course of H121, we have managed to grow our core operating profit by nearly 60% year-on-year, demonstrating that we are well on track to deliver core operating earnings of $0.5 billion and a core return on equity of 9% next year. Our improving profitability performance is complemented by the sustained reduction in NPEs to less than 13% of gross loans and is safeguarded by the highest coverage ratios and capital levels in the Greek market. And on this note, I would like to open the floor to questions.