National Bank of Greece S.A

Ladies and gentlemen, thank you for standing by. I'm Konstantinos, your course call operator. Welcome and thank you for joining the National Bank of Greece conference call to present and discuss the third 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 nine months 2021 financial results call. I'm joined by Christos Christodoulou, Group CFO, and Greg Papadouris, Group 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. The economy is recovering much faster than expected from the pandemic-caused crisis. Many indicators of activity have already surpassed their 2019 levels, while others, such as tourism, have exceeded expectations, especially in late summer and early autumn. The two key sources of uncertainty are the most recent wave of COVID-19 cases and, as of today, its new variant, and the capacity to constrain supply, creating cost-push inflation, especially in the energy sector. Both factors should be temporary. Regarding the first, the silver lining is that the daily vaccination rate has picked up rapidly to about 400,000 per week, with 74% of the adult population currently vaccinated. A higher level of protection should shield the population from an acceleration of acute cases, thus making unnecessary the need for new restrictive measures that affect economic activity. Regarding the inflation, new government measures of about $1 billion targeted to the most vulnerable should safeguard private consumption. Thus, GDP growth expectations for Greece should not be impacted significantly. Our forecasts have been updated for new developments to 7.5% in 2020 and 4.3% in 2022, while inflation will recede quickly and average 1.2% in 2021 in 2.5% in 2022. Now, turning to NVG. The third quarter performance reflects the impact of the strongly recovering economy, as well as a multi-year transformation effort, with tangible results as regards balance sheet strength, organic profitability, and a thoroughly revamped operating and service model. On the asset quality front, organic NP reduction was notable, down almost one percentage point in the quarter, with a negligible impact on NPs from clients 11 months after the end of their COVID moratorium. In contrast, curings continue unabated, with $1.2 billion of restructured loans having the potential to cure during the next 12 months. As a result, provision coverage increased to a highly satisfactory 7%, in view of the solid underlying mostly real estate collateral. This has allowed a continuation of the gradual reduction in the cost of risk to 94 basis points in the third quarter of 2021. Overall, the domestic NPE ratio stood at 11.9%, with the NPE stock settling at 3.7 billion, implying NPEs of just 1.1 billion net of provisions. Regarding NPE transaction, Frontier is expected to close in a couple of weeks, and the Frontier 2 process, which is under HAPS also, for about $1 billion, has commenced with a schedule to close by mid-year 2022. Turning to profitability, the progress achieved in the first half of the year accelerated in the third quarter, with core operating profit of 20% for a second consecutive quarter to $134 million. As a result, the nine-month 2021 core operating profit increased strongly, up by 50% year-on-year, to an almost 8% return on tangible equity. Solid improvements occurred on all four organic P&L lines, net interest income, fees, operating expenses, with underlying provisions flat at below $100,000. Notably, performing loan expansion on a year-on-year basis nears a billion, among, if not the best, performers of the sector, with high disbursements offsetting unprecedented refinancing from the bond market to the large corporates, around $3 billion of issuance in 2021, and the government's tax advance program providing significant liquidity to smaller firms, $5 billion in 2020 and $2.5 billion in 2021. In addition, the focus on operating costs, especially personnel, has a drop in the additional 8% reduction in the nine months to September, resulting in a cost-to-core income ratio of approximately 50%. Fee income accelerated by 11% year-on-year and 5% quarter-on-quarter, driven by intermediation, card, and digital fees, as we capitalize on our three-year transformation program and the accelerating economic development. As part of our transformation strategy, we are looking to partner with JVs who are specialists in various fintech-like fields. To this end, we're currently in discussion with a world-class player regarding our current acquiring business. These are well along, and we're expecting to make an announcement, hopefully, before year-end. The capital accretive NPE performance, both organic and inorganic, combined with a strong profitability, has led the capital ratios higher to 17.8%, and circa 19% with SET1 and total capital ratios respectively for a form of the closing of Frontier and Ethnic Key. The closing of Frontier 1, as mentioned earlier, is expected in early December, while as regards Ethnic Key insurance, following the agreement with DGC, the buyer is in consultation with DG Comp on the antitrust side. We anticipate completion of the transaction early next year. Looking forward, as the 3Q results suggest, We are well on track to meet our 2022 guidance for core operating profits of about half a billion and an NPE ratio near mid-single digits. The prospects for 2023 and onwards look even better. Specifically, the substantial results from our transformation effort, the revamping of our service and operating models, including the impressive digital turnaround, are coinciding with a unique economic conjunction with the confluence of several positive forces. the long efforts to the structure of the economy, along with a global macro rebound, and the inflow of significant recovery and resilient funds. We are thus well-placed to support and advise our clients in achieving their future plans, including through the NBG platform for the RF Ethnic Key 2.0, with NBG as their partner, 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. So let's now go into the financial performance in more detail. Starting with the profitability highlights on slide eight, our nine-month profit after tax from continuing operations amounted to $714 million, up 19% year-on-year. More importantly, though, Our recurring core operating profit surged by almost 50% year-on-year to $341 million for the period, reflecting a 6% year-on-year growth in core income and a sharp reduction in operating expenses by 8%. Looking to asset quality and balance sheet highlights on slide 9, domestic NP organic flows in the quarter remained firmly negative, bringing the cumulative organic reduction to about $0.4 billion for the nine months. This bodes well with our guidance for an organic NP reduction of $0.8 billion cumulatively for 2021 and 2022, before factoring in any inorganic actions. Domestic NPs thus dropped further to $3.7 billion, or 11.9% of across loans, of which nearly a third, or $1.2 billion, are FNPs below 30 days past due with a good chance to cure. In light of negative organic formation trends, our gradually normalizing cost of risk keeps pushing our domestic NP coverage successively higher, as on a year-to-date basis, we have added more than 70 percentage points of coverage, reaching 70% in Q321. Domestic performing loan balance additions are maintained at sector-high levels of plus 0.8 billion year-on-year as of September 2021, driven by net loan disbursements of 2.8 billion over the same period. Deposit gathering remains strong as we experience the inflows of 2.6 billion in the nine-month period, mostly from the private sector, despite client rates reaching near zero levels. Our capital position is robust and keeps improving as shown on slide 10, with set one and total capital ratios settling at 16.4 and 17% respectively. The completion of Frontier and Ethnic Insurance Day will increase our already best-in-class capital position by another two percentage points, rendering a total capital ratio of circa 19% well above our guidance for year-end 2022 capital levels. Now let's go through the key drivers of our improved profitability on slides 11 to 17. Domestic NII recovery accelerated in Q3. driving the nine-month period NII 5% higher year-on-year. This reflects the expansion of our performing loan book by a solid 0.8 billion year-on-year, as well as funding cost benefits from the repricing of deposits and the utilization of ECB's TLCRO facility. Encouragingly, loan NII remains resilient, driven by the rising performing balances offsetting the reduction in NPNII and the ongoing normalization of lending yields. Going into domestic loan evolution in more detail on slide 13, net loan disbursements for the period reached 2.8 billion in September 21, up by 18% year-on-year, excluding COVID-19 programs. Corporate net disbursements remained strong, amounting to 2.1 billion, while retail net disbursements surged by 36% year-on-year. As a result, Our performing book expanded by 0.8 billion year-on-year with corporate performing exposures rising by a billion or 7% over the same period. The growth momentum of our performing book gradually offset the impact from the , providing sustainable and long-term support to the net interest income. Moving on to slide 16, domestic fees increased by 5% quarter-on-quarter and 11% year-on-year. capitalizing on the economic growth in our transformation program initiatives. Growth was strong across all key areas. Retail up 8% year on year, corporate up 9%, and non-core banking fees up 35% year on year. The most notable recovery was witnessed in corporate lending fees at 24% year on year, as well as intermediation and digital fees in the retail business. reflects the successful shift of our clients to digital functionalities, facilitating the bank's transition into an efficient and more flexible operating model. Indeed, e-banking transactions surged by 24% year-on-year in Q321, replacing branch transactions that have declined by 44% year-on-year. Let me now turn to costs on slide 17. Building up on the stroke track record of the first half of the year, operating expenses were down by a solid 8% year-on-year in the nine-month period, further improving our cost-to-core income ratio by nearly 8 percentage points year-on-year to circa 50%. The key driver of this performance is the sharp reduction in personnel expenses by 15% year-on-year as the bank realizes the benefits of the 2020 VES, reducing the headcount by circa 800 employees. Upcoming targeted exit schemes driven by the optimization in our branch network operating model and footprint and further leveraging of our digital offering will allow us to fulfill our targets. Moving on to asset quality on slides 18 to 22, domestic NP is kept on a downward trend reaching 3.7 billion or just 1.1 billion net of provisions. Domestic NP ratio came 90 basis points lower quarter on quarter at 11.9% while coverage increased by further 370 basis points quarter-on-quarter, breaking the 70% balance. For Carrigan, the reduction year-to-date remains impressive. Curings cut a page in Q3 2021, reflecting increased mortgage restructurings in the respective period last year, while the flow of new defaults and redefaults remains broadly stable. Most importantly, the payment performance of ex-moratoria clients, nearly one year post-moratoria expiry, remains far better than expected, indicating a much lower COVID-19 impact than initially anticipated and provided for. As shown on slide 22, less than 4% of the ex-moratoria perimeter was in default as of November 21, while total loans onboarded to NBG step-up facilities remain low at just 0.3 billion. Turning to liquidity on slides 23 and 24, Domestic deposits increased by 13.5% or 5.9 billion year-on-year, reflecting strong inflows in savings accounts, with time deposit evolution remaining negative. Time deposit yields are down by 13 basis points year-to-date to 10 basis points, while new production comes in at just 7 basis points. So, to conclude, evidently we had a great run so far in the year. We have managed to grow our core operating profits by nearly 50% year-on-year, consistently over the quarters and across profitability lines, demonstrating we are well on track to deliver on our guidance for core operating profits of half a billion euros for 2022. Our improving profitability performance is complemented by the sustained balance sheet re-risking, with the remaining NP reduction entailing minimal execution risk and zero capital consumption safeguarded by our high coverage ratios and capital levels.

And on this note, I would like to open the floor to questions.

The first question is from the line of Floriani. Join us with Axia Ventures. Please go ahead.

Good afternoon, guys. Thanks for the presentation. I have a few questions. The first one relates to slide 13. I was just wondering where do you expect to finish 2021 in terms of disbursements and growth in performing exposures and also a similar figure for 2022. If you can also give us a sense of growth and net disbursements, that would be great. Second question is on your data from slide 18. I take the comments from the presentation now that you had some mortgage restructuring that is resulting now into the curing of the exposures. So I just wonder if you have more, let's say, positive carryover effect from those restructuring that will continue to show in the coming quarters. And linked to that, how should I think about your cost of risk for 2022 and how it also links to your coverage level going forward? And maybe if you connect to this question, Dan, if you could remind us of the expected impact from Tier 2. I think you just mentioned that giving you a high coverage level, that impact, and given the size of the scutization should be quite limited. So if you could just give us a rough indication of capital impact or P&L. And then finally, On your reduction of staff, I think you just mentioned now that you're expecting to reduce even further the number of employees. So I was just wondering what can we expect in terms of charges, like amount of charges to cover that, or how many people you'll be targeting as well in this exercise? Thank you.

Okay, let me start and Christos will cover the rest.

Regarding net disbursements, we're going to finish the year at close to a billion. And we expect that to be near one half billion next year. On curings, we are seeing the The higher quality mortgages and restructuring that remain post-Frontier 1 on the balance sheets, along with the macro improvements in the second half of the year. You're seeing that in the curings of both the second and third quarter, especially the third. This will continue to a certain pace in the following quarters. The only thing I can say, it's a much smaller portfolio, so don't look at the absolute numbers, look at the percentages. Frontier 2, there will be no loss budget taken care of. And then, in terms of further reduction in personnel, we have launched another D.S. just recently, and it's being also provided. Christos, do you want to give the numbers there on that?

Yeah. The provision regarding the program that we are launching actually today, it's in the area of 53 million. We've already provided for it in Q1, so there's no additional burden from that. And next year, given the additional elections we intend to have, we're looking at something in the area of 30 million. But it's still a work in progress. One last question I have noted down is with regards to our outlook of cost of risk for 2022. So as we've shared with you in previous calls, we are keeping still a conservative stance in 2021, despite the fact that and NP flows and expected losses suggest that a much lower cost of risk could be adopted. So we'll be patient until the first quarter of 2022. And our guidance continues to be the same. We are looking to have a cost of risk for 2022 in the area of 60 basis points.

Excellent. Thanks a lot.

Hello, many thanks for your time and presentation. Just on the income side, first one on the fee front, how should we think about next couple of quarters? Is there room for you to take some pricing here potentially? Things are going well for you and the sector, but maybe you have a bit more upside? That's the first one. And then just technicality, I've seen your NII breakdown loan, NP loan income went up. It was a surprise for me. If you could give color on that, that would be great. Thank you.

Investment product.

Sorry, we didn't turn on the unmute.

Sorry.

On the fee front, it's not pricing that will drive up fees. It's volume. And the key areas are what has already happened in the past quarters. It's intimidation fees, card fees, and I think we'll see far more on the capital and investment products and mutual funds side in 2022. Yeah, and

Oh, and the NII, do you want to take the NII question? The NP increase in terms of interest has to do with settlement of certain NP accounts, which resulted in recognition of additional interest as a result of the final settlement. So it's non-recurring, and the only reason is this one of settlement.

Perfect. Thank you.

The next question is from the line of Boulogouris Alexandros with Wooden Co. Please go ahead.

Yes, hello. Quick question on the merchant of the sale of the merchant acquiring card business. Could you please give us some guidance on the capital impact you expect from this transaction?

Thank you. This is an ongoing transaction and until it closes you can understand my hesitation to reveal valuations. So

you need to be a bit patient on that one. Okay, but I understand that capital is not obviously the reason of doing this transaction. It's more about the partnership, I would imagine.

That's correct. It is a JV. We're not selling 100%. We're keeping broadly half. I can say that. We want a partner who has expertise in acquiring that we can work with and build up the acquired business from strength to strength and get more fees. So it is not done for capital purposes. It's done for business purposes.

Thank you.

The next question is from the line of Negro Alberto with Mediobanca. Please go ahead.

Yes. Thanks for taking my question. I know that Capital is mounting quarter after quarter, but are you planning to issue any AT1 or TR2 in the coming quarters? The second one is, again, on the merchant book, if you can give us the current contribution to P&L. And the last one is, again, on Capital, on Basel IV, if you have any update on the potential impact after the last proposal from the European Commission and how you expect to manage that impact due to the very long phase D period that the Commission is proposing. Thank you.

Okay. On the issuance question, as you know, we need to meet our MRL targets and the logic there is that to issue some tier two or 81 to buffer the senior issuance. So yes, there will be issuance in 2022, either 81 or tier two.

What was the second question? I lost you.

on the merchant book if you can give us the acquiring is close to 20 million thank you and can you repeat the last question sorry we missed that

Yes, was on Basel IV. If you have any update on the potential impact after the last proposal from the European Commission and also considering that the phase-in is a very large period, we are talking about 2032. So if you have any update on the potential impact.

We have run some internal exercises about that, but it's a bit early to share information

basis points in terms of capital maybe but the Basel 4 mostly affects us because it affects more banks with more sophisticated financial transactions for us it's mostly the uncovered the credit lines the unused credit lines and there the impact which we estimated was relatively small already for 23 So this stuff pushes it even further back, if I understand correctly.

Thank you.

The next question is from the line of Gladys Panayiotis with Eurobond Equities. Please go ahead.

Yes, hello, gentlemen. Just I would like a comment on the loan spreads, what you have seen so far in the year, and what are your expectations for next quarter, or if you can comment for the next year as a whole. Thank you.

So, yes, this year we've seen a compression in spreads, mostly in the corporate, in the larger tiers, in the area of around 10 base points. We expect this to continue also in 2022, for corporates at least, and the bid on the ESBs as well in our portfolio. While on the retail, we expect more or less the same spread as we see them this year as well. That's the view that we have today.

Great. Thank you very much.

The next question is a follow-up question from the line of Boulogouris Alexandros with Wood & Co. Please go ahead.

Yes, sorry, one follow-up. On the NAI, I think initially you had guided for 2021 an NAI that would be slightly down, very low, single-digit down. Seems this was too conservative, could be a bit up this year. But could you give some guidance for 2022 post-frontier What should we expect on the key drivers for net interest income?

Thank you. Yes, of course. So, indeed, this year we will end up slightly higher than the guidance that we've given. Obviously, that has to do with the fact that frontier is in our books still. So, it will be flourished compared to last year. Now, going to 2022, obviously, we'll have the headwinds because of the NP recognition, mostly coming from frontier. We are expecting at this point in time to be in the, let's say, high single-digit reduction versus 2021. The negative, obviously, is the volatility risking and the compression on the spreads. But on the upside, we'll have the further repricing of our deposit base. And the growing of our performing book, which is evidently already supporting our NII. So that's the positives and the negatives. On the other hand, we do have TLTRO. It's helping out the NII position, as we speak. So depending on the decisions that ECB will make about 2022, it could be also a driver that would push the NII down next year as well. As far as we know today, the TLT program ends end of June 2022.

Thank you. Can you remind us the amount of the TLTRO that you have booked this year and what we should expect for next year based on the current expectations?

It's about 85 to 90 million annualized for this year and half of it the next year.

Very clear. Thank you.

The next question is a follow-up question from the line of Memisoglosman with Ambrosia Capital. Please go ahead.

Yes, thanks for taking my follow-up question. Just on growth next year, obviously with recovery fund expectations and all that, you mentioned 1.5 billion. When should we really start this happening? Early in the year or should we expect more of a back-loaded 22 pickup for the sector and for yourself? Any comments would be helpful.

Thank you. I think it's going to be even. I don't see any reason for it to be either front loader or back loader, more or less either.

So everything going as planned? Yes. Okay, 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 Q3 results call. We'll be available for follow-up questions. And have a good evening. And for those of you celebrating Thanksgiving, I hope you continue to celebrate for the rest of the weekend. Thank you very much.