National Bank of Greece S.A

Ladies and gentlemen, thank you for standing by. I'm Poppy, your course call operator. Welcome and thank you for joining the National Bank of Greece conference call to present and discuss the first quarter 2022 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 quarter 2022 financial results call. I'm joined by Christos Christodoulou, Group CFO, and Greg Papadrigoris, 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. I will begin with a description of Greece's economic developments and prospects in light of the spiking inflation resulting from Russia's invasion in Ukraine that have pushed up energy and commodity prices. Inflation is clearly going to be higher and for longer than previously expected three months ago. In Greece, it is currently expected to peak close to 11% in the second quarter and decelerate notably only from the fourth quarter an average 7.5% for the full year. That being said, there appear to be several countervailing forces to offset its impact on the real economy. First, employment growth is very strong and looks to remain so in view of the surprising buoyancy of tourism, the so-called traveler's revenge.

Employment growth is expected to be 4% in 2022.

Second, wages are also an upward trend and appear to be heading for a 3% increase on average in 2022. Third, fiscal support targeted at offsetting the impact of higher energy prices, especially for more vulnerable households, is estimated to reach $5.8 billion, equivalent to nearly 3% of GDP, and offset approximately 80% of the increase in energy bills. The contribution of these three factors should exceed 7% of disposable income and should offset the impact of inflation on households' disposable income spending. Turning to business, the increase in production costs due to the deterioration in the terms of trade and higher wages is estimated to be around $8.5 billion, equivalent to 4.5% of GDP and approximately one quarter of business operating profit for the previous year. This hit appears manageable due to the recent improvement in this metric, business operating profit, which has increased by 40% year-on-year in 2021 to an eight-year high of over $30 billion. As well as their strong liquidity buffers, bank deposits of corporates are near all-time highs. And this impact should be mitigated further in view of the buoyant turnover as household spending should remain resilient, and tourist spending looks set to outperform, as just described. All in all, we expect GDP growth to be in the area of 3% in 2022, with unemployment declining by another 1.5 percentage points to near 11%, to the lowest level in the past 12 years. This is clearly not a scenario in which a new wave of NPEs will be created. Nonetheless, despite this aggregate picture of resiliency, we remain vigilant in search for any signs of client or sector-specific stress to the current terms of trade shock. Turning to NBG, our first quarter financial results indicate a continuation of last year's strong performance with positive trends in both the P&L and the balance sheet.

Starting with asset quality,

The reduction in NPEs continued in the first quarter of 2022, with bank-level NPE reduction remaining negative at $130 million. It should be judged against a significantly reduced pool of potential cures following the past year's NPE cleanup and significant curing flows in 2021. It is important to note that defaults and re-defaults continue to edge lower quarter on quarter. Additionally, neither defaults or early delinquency roll rates have shown any upward tendencies so far in 2022. Overall, the domestic stock of NPEs amounted to $2 billion, declining by 40 base points compared with the previous quarter to 6.5%, comparing well to our annual guidance of 6%. On a net of provisions basis, NPEs stand at just $0.4 billion equivalent to about 1.5% of loans. The high provision coverage of 81.5% reflects a high level of conservatism in the form of post-model overlays.

Turning to capital.

Our fully loaded Set 1 ratio stood at 15.1% in the first quarter, increasing by a further 20 base points on the back of organic capital generation. In terms of total capital, again on a fully loaded basis, the respective ratio stood at 16.2%. Both capital metrics will benefit by an additional 65 base points approximately upon closure of the joint venture transaction with EVO payments expected in the fourth quarter of this year.

In view of the good progress on our NP cleanup and the robust capital adequacy,

Our attention is increasingly shifted towards a recurring core profitability. In fact, core profitability in the first quarter of 22, which excludes trading gains and other non-recurring items, increased by 32% year-on-year, reaching 125 million, continuing the significant progress achieved in 2021. The key drivers behind this performance, as Christos will analyze in more detail shortly, have been the impressive recovery in our fee income line, up by 25% year-on-year, and the pickup in PENII, reflecting the large loan disbursements that occurred in the past few quarters, and especially in the fourth quarter of 2021. These two developments have more than offset the loss in NPE interest from the deconsolidation of the frontier transactions. Specifically, our core income rose by 2% year-on-year in the first quarter. Moreover, the corporate loans pipeline remains strong, though disbursements are choppy for large transactions, and we expect a net loan expansion of around $1.5 billion in 2022. Turning to operating costs, these keep edging lower, minus 1% year-on-year, despite higher inflation. As a result, our cost to core income ratio declined further, down by 160 base points on a year-on-year basis, reaching 51.5%. As a final point on profitability, the cost of risk continued to normalize, dropping to 70 base points versus 100 base points in 2021. Overall, the bottom line in terms of profits after tax reached $360 million, supported by trading income, and the ethnic key insurance sale accounting treatment affecting positively discontinued operations. Looking forward, as the first quarter results suggest, we are well on track to meet our 2022 guidance for core operating profitability of around half a billion. It should outperform our guidance on the NPE ratio set to drop below 6% before the end of the year. With regards to capital, On a fully loaded basis, we already exceed year-end 2022 guidance pro forma for the EVO payments transaction. Despite increased economic uncertainty, our core profitability trends have remained strong in the first quarter and are anticipated to maintain that momentum for the remainder of the year. In this context, we are not revising upwards our core profitability target of half a billion for the year. However, we feel confident on achieving the target with upside risk on the core income side. As communicated already in the full year results of 2021 announcement, we intend to seek permission from the regulator for distributing a dividend out of this year's earnings. As a final point, we should not forget that there also exist upward risks in the baseline scenario arising from a tightening of monetary policy in line with today's market expectations. In view of the structure of NBG's balance sheet, comprising a very high share of core deposits on the one hand and floating rate loans on the other. 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.

Let's now look into our financial performance in more detail. Starting with the profitability highlights on slide 9, A group profit after tax for continuing operations amounted to $208 million in Q1, with core operating profit 32% higher year-on-year at $125 million, on the back of strong core operating trends. The increasing performing loan interest income, along with the impressive free income recovery, which is up by 25% year-on-year, more than absorbed moderate NII headwinds following our significant NP cleanup in 2021, driving core income higher by 2% year-on-year. Costs were contained further, despite rising inflation, with cost of risk normalizing to circa 70 basis points from circa 100 basis points in full year 21, in line with our guidance. All in all, including trading income and results from discontinued operations, Our attributable profit after tax reached $360 million. Turning to balance sheet and asset quality highlights, as depicted on slide 10, sustained or current NP reduction in Q1 drove our domestic NP exposure down to $2 billion, or just $0.4 billion net of provisions. NP ratio in Greece dropped to 6.5%, down by 40 basis points relative to year-end 21, and nearly 7 percentage points lower on a year-on-year basis, while our domestic cash coverage rose further to nearly 82% despite cost of risk normalization, capitalizing on favorable NPE formation trends. Domestic loan disbursements increased by circa 50% year-on-year, reaching $1.1 billion, pushing domestic performing loans higher by $1.5 billion year-on-year. Moreover, in the course of April and May, We are seeing a strong pipeline in corporate credit demand, with disbursements in mid-May reaching 1.8 billion, giving us confidence on our full year 2022 guidance. Our robust capital position improved further in Q1 2022, as shown on slide 11, reflecting the bank's organic capital generating capacity. Our fully loaded Z1 ratio increased by 20 basis points quarter-on-quarter to 15.1%. while the fully loaded total capital ratio stood at 16.2%, circa 70 basis points higher quarter on quarter. The completion of the Merchant Acquiring JV will further boost our capital ratios by circa 65 basis points, rendering the Q1 2022 pro forma capital metrics already higher relative to the ERN 22 guidance. Let's now go through the key drivers of our profitability on slides 12 to 18. Domestic NII dropped by just 3% year-on-year, despite the significant NPT leverage following frontier deconsolidation in 2021, supported by higher disbursements in both retail and corporate segments, driving an expansion of our domestic performing loan exposure. Interest income from rising performing loans keeps growing for a third quarter in a row, absorbing part of the NP cleanup impact on the NII. At the same time, Lending yield normalization is bottoming out at around 300 basis points. Going into domestic loan evolution in more detail on slide 14, loan disbursements remain strong in Q1, growing by circa 50% year-on-year to 1.1 billion, with retail and corporate credit growth at 42% and 52% respectively. As a result, the growth momentum of our performing loan books maintained, with loan balances expanding by 1.5 billion year-on-year, providing sustainable support to our NII. The driver of our performing loan book expansion remains the corporate segment, as performing retail loans exhibit stabilizing trends following years of deleveraging. In essence, mortgage deleveraging is broadly offset by increasing exposures in the small business and the high margin consumer sector. Moving on fee income on slide 17, domestic fees increased by an impressive 26% year-on-year, supported by loan origination, while cut and intermediation fees drove a sharp recovery. Our digital transformation continued to produce impressive results, with e-banking activity up by 16% year-on-year in Q1-22, replacing branch transactions as customers keep switching to digital functionalities. For the remainder of the year, we anticipate fees to continue on a strong recovery trend as April and May continue exhibiting similar strong performance. Turning to operating costs on slide 18, sustained personnel cost reduction absorbed increased depreciation charges coming from the rollout of our strategic IT investment plan, which includes the ongoing replacement of our core banking system as well as investing in the bank's digital transformation. As a result, operating expenses each lower by 1% year-on-year, with our cost-to-core income ratio further improving by 160 basis points to 51.5%, aided by core income growth. Going forward, further cost optimization efforts, driven by branch network rationalization and the shift to digital channels, is anticipated to offset inflation headwinds, netting out to consistently lower operating costs. Moving on to asset quality on slides 19 to 24, negative organic flows in Q1-22 drove domestic NPs lower by 130 million approximately, down to 2 billion, or just 0.4 billion net of provisions. Curing flows evolved below the quarterly levels of previous periods in absolute terms, reflecting the contained FNP perimeter post the significant cleanup in 2021. while new defaults and re-defaults also went lower quarter-on-quarter in the absence of large corporate defaults in the quarter, aiding negative organic formation trends which came in line with our full year 2022 expectations. Domestic NP ratio came 40 basis points lower quarter-on-quarter at 6.5%, while coverage increased further to 82%. Moreover, despite uncertainty and inflationary pressures, Yet today, the performance of clients previously under state or bank support programs remain far better than expected, as shown on slide 24. The exploratory client perimeter currently in NPE status is at just 4%, while with regards to our clients who exceeded the EFERA 1 and EFERA 2 programs and NBG step-up facilities, payment performance is equally reassuring, as just 4% of this pool is in default and circa 2% in early areas. Most importantly, we have seen no impact from the surge in inflation. Turning to liquidity on slides 25 to 26, domestic deposits settled just 1% lower quarter on quarter at $51.3 billion, with households and corporates utilizing only a small fraction of the incremental deposit stock accumulated over the past two years, despite inflationary pressure and disposable incomes. Time deposit yields have edged lower to just 7 basis points, while Eurosystem funding through TLTRO was stable at 11.6 billion, with overall funding costs remaining at marginally negative levels. Summing up, against accelerated inflationary pressures and economic uncertainty, NBG enters 2022 maintaining a strong momentum, increasing core operating profitability by 32% year-on-year, and producing an even stronger profit after tax result aided by trading gains. Our balance sheet is near clean, with the stock of NPs maintaining a declining trend, while best-in-class coverage and capital levels are further enhanced. This enables us to continue on our transformation journey, maintaining our focus on improving customer experience and adding value to our shareholders. And on this note, I would like to open the floor to questions.

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

Hello, good evening team. Thanks for the presentation. I have a couple of questions. The first of them is on NII. I was just wondering if you can confirm your sensitivity to interest rates. If I'm not mistaken, your previous guidance was for around 70 million on the first 50 base points going up to 350 million or so in case the rates go up by 200 base points. and also link to that what kind of TLTRO dynamics can we expect for 2022? Just confirming that your number for the year is around the 45 million level versus the 90 million in 2021. And then my second question is on asset quality. I acknowledge the comments during the presentation about NP ratio for 2022 that has been kept at the same level below the 6%. also considering the very high coverage level that you have right now I mean why does the cost of risk it's still let's say maintain that previous level I mean what kind of coverage level you expected to finish 2022 as well thank you thank you Jonas for the questions on the first question with regards to RNA sensitivity the numbers are more or less as you have coded them

we're running them every week to be to be frank so current view with regards to the sensitivity of our balance sheet is that the first 50 basis points of rate increases will benefit the bank's profitability by 80 million while the next 50 basis points so that's from 0 to plus 50 an additional 120 million and the same amount more or less will be expected for the extra 50 basis points on top of that. With regards to your question on asset quality, indeed, I think the performance of the bank with regards to the NP trends is really good. We have provided the first quarter in line with our guidance in the area of 70 basis points. We indeed acknowledge there are upside risks with regards to cost of risk. But being where we are with regards to the new crisis that is upon us, We're trying to be conservative this first quarter. And going forward, depending on developments, we obviously will adjust our cost of risk subject to that.

Have you made adjustments to inflows levels that will require you to be more active on Rytos for example? And I think we probably forgot the two things that one is the expected coverage for end of the year and the second one is the TLTRO for 2022.

On the TLTRO, the numbers you have quoted are more or less there. Our expectation for the remainder of the year with regards to the TLTRO income is around 40 million euros. After the end of June, TLTRO3 program ends as we know it. So our expectation is that this benefit will fade out, but that was part of the planning all along. With regards to the levels of coverage, it will depend going forward, as we said. We maintain this high level of coverage of around 80%. The number of NPs is going down, so it becomes less and less relevant as we go ahead. But at this point in time, it's not the guiding principle on the NP coverage. At the end of the year, it's not the mark that we want to achieve. Stage 3 coverage for the remainder of NPEs will be maintained in the area of 55% more or less.

Thank you.

The next question is from the line of Mamisoglu Osman with Ambrosia Capital. Please go ahead.

Hi, just a couple of rather technical questions on my side. You touched upon TLTRO. Was that the reason, when I look at slide 13, what you had in Q4 or plus five from Eurosystem, Wholesale, etc., has disappeared just wanted to see if you could give us any color on what drove that and then the other bit is on your tax expense line it did jump quite a bit so should we expect going forward these levels per quarter or any other color guidance you could give would be appreciated thank you

Okay, with regards to the TLTRO numbers, we are accruing more or less evenly across the quarters. So there's nothing odd there or a spike because of the TLTRO. Obviously, we recognize net of the excess cash and amount in the area of 18 to 20 million in Q1. That's the number that's included in the slide that you see. With regards to taxation, yes, we recognize accounting tax in Q1. we have a profitable quarter and more or less this is what you should expect going forward okay so going back to slide 13 so that that delta of 5 was not TLTO driven I guess it's repos or some other moving parts wholesale funding is included in there that's why you see the volatility it's not down to the TLTO okay thank you

The next question is from the line of Sevim Mehmet with JP Morgan. Please go ahead.

Good evening. Thanks very much for the presentation. One question on the fees, please, which were exceptionally strong this quarter. Can you please discuss in more detail the driver of this, and would you see this level as the run rate for the remainder of the year, so say around 80 million or so levels in Greece?

we had the you provide guidance for an increase in 2022 over on 10 percent I think that the probably be slightly higher that mid-teens the drivers are clearly from the loan side I think you're going to be seeing more fees from Treasury products more fees from investment products

the credit cards are going to be doing transactions are increasing I see more from that also intermediation fees of other sorts will also go up okay and just longer term would it be still reasonable to expect around 10% per annum growth in that line going forward as in your guidance that you provided earlier this year or should we think that some you know, faster growth should be followed by slower growth in the coming years, would you say?

Our objective is to increase that number further, and specifically we're trying hard to transfer deposits into investment products and get more fees. I think there's a great potential for that, and if we get that going, I think we'll see that line increasing by more than 10%.

Okay, great. Thanks very much. And just two technical questions. Clarification. The discontinued operations this quarter, this is upon the completion of the technique insurance sale. Was that correct? Yeah, that is correct. And this basically now the reported capital ratios reflect the full benefit from the completion at this stage.

Indeed, the Q1 metrics are actually incorporating everything with regards to the transaction.

Okay, great. Thanks very much. And finally, just the follow-up on the tax expense. So should we then say if profitability continues at these levels, should we expect the tax expense at around or the rate, effective tax rate, at some 10%, 15% levels? Would that be reasonable to think?

The effective tax rate that we have incorporated in the first quarter is in the area of 23% to 25%. So that's more or less the way you should expect it going forward.

All right. Great. Thanks very much for the color. Thank you.

The next question is from the line of David Daniel with Autonomous Research. Please go ahead.

Good afternoon. Congratulations on the results and thanks for taking my questions. I've just got a couple. Just on the MPE target for the end of the year, I hear less than 6%. Can you just refresh us what that assumes in terms of organic flows and also whether that gives you any headroom if there is a deterioration as a result of rising costs in Greece? And then secondly, just on your issuance plans, I think in the past you've talked about maybe one to two transactions this year for Emeralds.

could you could you set out the year if markets remain volatile how are you looking at the issuance markets at the moment update would be good thanks okay given the quite low levels on MPs to get to 6% we already did half a percent almost in the first quarter another half percent is only a couple hundred million so these are the numbers we're looking at to get to 6% and if we do 300 million we're below so it is not exactly a a very large the numbers that we need to get lost percent I'll now on I'm real clearly the markets turbulent I'll we're lucky with the capital that we created organically into the transactions and the we will we will be looking at likely one transaction toward the end of the year way it's panning out.

Okay, thanks. Just with regard to your answer to the first question, is there a reason why you're not revising your 6% down?

In my opening remarks, I said we'll overperform and be below 6%. I didn't say how far below 6%, but I think given the uncertainty, I don't want to say how much. But I do think that given the performance of the first quarter, given where we are in the second quarter, I think that we'll do better.

Understood, thanks.

The next question is from the line of Butkov Mikhail with Goldman Sachs. Please go ahead.

Good day. Thank you very much for the presentation. Two questions from my side. First is on the performing loans growth. So can you maybe share some trends in the beginning of the second quarter and so where do we expect the strongest growth in the second half of the year to be will that be corporate or other segments and the second question is on asset quality so thank you for providing the sensitivity of NIA to interest rates is there anything that you can share on the sensitivity of cost of risk to the higher interest rates or any other scenario analysis with regards to the relationship of asset quality and rates. Thank you very much.

Thanks for the question. I will take the first one on the long road. So as I said in my remarks, we've seen that we had a very good performance, a good pipeline in the months of April and May. It comes mostly from the corporate segment. sectors like energy sectors, manufacturing, tourism in the industry, where sectors that are giving the new loans, the pipeline, we expect the same for the second half of the year. Retail, as we said, is currently bottoming in terms of the leverage. We expect growth in the ESVs and the consumer, as well as in mortgages towards the latter half of the year, but the main growth is coming from the corporate sector. With regards to gas equality, Pavlos will take the question.

It's not a linear type of relationship, as is the NII, but as I mentioned in my introductory remarks, we see a lot of offsetting factors that will offset the impact of the decline in real disposable income from inflation. so that's one one one number two as as as we mentioned we're already putting on postmark post-mortem overlays on the cost of risk therefore combining those two I don't think that you will be seeing an increase in our cost of risk from the higher inflation the opposite okay thank you very much

The next question comes from the line of Nelly Simon with Citi. Please go ahead.

Oh, hi. Thanks very much for the opportunity. Yeah, my first question would just be about the loan pricing outlook. If you could just elaborate a bit on how you see loan spreads, yields on performing lending going forward. My second question would just on the asset quality side, it sounded like you are still a bit cautious given the outlook. I mean, which sectors do you think could be negatively impacted from what's going on? And I'd be interested in knowing if you have any shipping exposure primarily to oil tankers. Thanks.

Okay. On the spreads, I think that on retail we're not seeing any significant compression. on the corporates a on the other hand that there is some a something like a any base point for the year for the next four months is or property the other question was on to be we have just both yeah sorry but I was gonna say just just to you know if you can walk through which parts of your portfolio you think could come under some stress and where are you most worried about and where would you be putting on those overlays where are you concerned we are pleasantly surprised but usually when there's an external shock it's the exports and the tourism which should have been affected it looks like tourism and exports are doing much better than expected and remain buoyant also the shock is is uh... hitting the economy through the higher inflation so uh... become a domestic shock uh... the the the the sectors where wages uh... cannot increase you see household suffering though there is the fiscal subsidy uh... and in the corporates it's the uh... sectors that cannot replace up uh... some part of the uh... their costs uh... so uh... but so far we haven't seen any of that. And on the shipping? On the shipping, we have about $2 billion of shipping exposure. Tankers are about less than half of that. So those are the numbers on tankers.

And do you know how much of that is Russia linked, roughly?

That I don't know.

Okay, thanks very much.

The next question comes from the line of Curtis Petros with Optima Bank. Please go ahead.

Good afternoon.

Congratulations on the results. One question, if I may. Can you give us a color on the organic NP formation in the second quarter? Thank you very much.

Thanks for the question, Petros. The trends that we see in April and May are more or less in the same lines as the ones that we've seen in the first quarter of the year.

so unless we have any surprises in June we should expect more or less the same information for the second quarter of the year Mr. Chourdis are you done with your question yes thank you thank you very much you're welcome ladies and gentlemen there are no further questions at this time I will now turn the conference over to Mr. Milonov for any closing comments. Thank you.

Thank you all for joining us on a Friday afternoon for some Friday morning for others for this call. We're available for follow-up questions and hopefully we'll be traveling to see you soon in the weeks to come.

So thank you all.