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 second quarter 2022 financial results. All participants will be in a listen-only mode and the conference is being recorded. The presentation will be followed by a question and answer session. Should anyone need assistance during the conference call, you may signal an operator by pressing star and zero on your telephone. 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 second quarter financial results call. I'm joined by Fyssos Kistadoulou, the group's CFO, and Greg Papagregoris, group head of IRR. After my introductory remarks, Christos, we'll go into more detail on our financial performance, and then we'll go to Q&A. I will begin with a slightly longer than usual description of Greece's economic developments and prospects in view of the high uncertainty created by the current turbulent environment, and then I will turn to the financial performance. Despite the gloom, I am cautiously optimistic that the Greek economy will outperform most of its European peers. Let me explain why. First, the energy dependence of the Greek economy in Russia is relatively low and will be replaced by alternative sources. Specifically, natural gas comprises less than 20% of final energy consumption, of which 35% is from Russia. The rest is sourced from LNG, 45%, and the TAP pipeline from Azerbaijan, 20%. The amount coming from Russia, around 8% of final energy consumption, is mainly used for electricity production. Greece plans to replace Russian gas by one and increase the contribution of lignite-powered power plants from 5% to 10% of total energy consumption. A switch of a number of electricity generation plants from using gas to oil and three lower gas use in industry as committed to the EC, European communities. Second, though energy access risk appears to be minimized, energy price risk remains high but manageable. Specifically, the reduction in real disposable income from higher inflation has been to a large extent offset by fiscal measures. Specifically, any energy-related fiscal measures targeting mostly low-income households are expected to exceed $6.5 billion in fiscal year 2022. Out of a total package of fiscal measures equivalent to greater than $8 billion, which would address the impact of inflation. And this amount could rise further still. Our estimates are that these will offset approximately two-thirds of the direct energy hit to these households, thus dampening the impact on consumption. Further support to real disposable income will come from surprisingly strong employment growth, estimated to be 4.5% at fiscal year 2022, it is 10% in five months 2022, combined with wage increases of around 3% on average for the private sector, including nearly a 10% increase in the minimum wage. These should offset higher food costs and residual energy costs not covered by the fiscal measures previously described. In fact, real disposable income may not suffer a meaningful decline in fiscal year 2022, although some downside risks exist for 2023 if the energy crisis is prolonged and greater than expected. A strong economic backup includes an outstanding tourist season. It is called revenge tourism. We are experiencing near peak levels of arrivals combined with a strong positive terms of trade impact for much higher spend per head, estimated at about 15 to 20% year on year. Indeed, The tourism sector will enjoy its best year ever. In addition, enterprise profitability was up 15% year-on-year in the first quarter, and it's at a 10-year high, suggesting a large capacity to absorb higher input costs. In fact, a nominal increase in profits over the 2019 level exceeds the estimated hit from higher energy costs. In addition, business turnover continues to outpace 2019 levels by significant margins, 26% higher in 2022 versus the first five months of 2019, and this excludes energy-related activities. All in all, GDP is expected to increase by 4% to 5% in 2022, while the projections for 2023 have a wider range around the midpoint of 3%, between 1.5% and 4%. This greater resilience versus European peers also reflects the fact that one, the Greek economy is in a very different phase of the economic cycle, coming off an extensive period of destruction which eliminated players. Second, collateral values, mainly real estate, are still undervalued. Following the 60% drop in prices during the economic crisis, they are on a steady growth path, increasing by almost 9% year on year in the first quarter.

Third,

The leverage of corporate households is quite low compared with European peers. Indeed, the expected tightening of monetary policy by the ECB of the order of 150 to 200 base points, mostly over the next 12 months, is not expected to lead to difficulties in debt servicing capabilities. Do not forget that performing loans represent only 55% of GDP, two-thirds of which to corporates, who have relatively strong balance sheets and can handle the approximately 1% of GDP higher debt service payments in view of their strong profitability as described previously. A strong normal GDP growth around 10 to 11% in fiscal year 22 leading to high tax buoyancy with tax revenue significantly above budget helping to offset the cost of the extra measures or the debt-to-GDP ratio should decline by more than 15 percentage points of GDP in 2022, two levels below the pre-COVID-19. This is clearly far from a scenario in which a new wave of MPEs will be created or a new loan demand slows. Indeed, to date, early delinquencies show no increase through July, including those loans previously under state and bank-sponsored programs, despite the several months of high inflation. And credit demand remains strong in the corporate sector, running at nearly 10% per year, pace through June, and for NBG, continues at these rates into July. Not surprisingly, in view of the buoyant activity, our first-half financial results show a continuation of last year's strong performance, with positive trends in both our balance sheet and especially our profitability. Starting with asset quality, the reduction in NPEs continues with the second quarter organic flows remaining negative as our successful restructuring products continue to boost solid cure rates despite a shrinking FNPE pool. As a result, A domestic NPE ratio dropped further in the second quarter by 40 base points to 6.1%, practically meeting the end-year target. Net of provisions, NPE stands at just 400 million, equivalent to about 1% of our loan book. Turning to capital. A set one in total capital ratios stood at 15% and 16.1% on a fully loaded basis. A positive impact of the completion of the merchant acquiring transaction with EVO payment should add approximately 60 base points to this ratio in Q4. And the Frontier 2 transaction signed today would add another 25 base points upon closing. In view of the soundness of the balance sheet, our efforts have been increasingly focused on improvements in core profitability. In the second quarter, core operating profit, which includes trading gains and other one-off items, increased by 24% quarter-on-quarter to $155 million, and by 40% year-on-year in the first half to $280 million, reflecting strong upward momentum for the fifth quarter in a row. Looking at composition, NII in the first half 22 edged higher, despite the loss, as the performing loan book increased by $2.3 billion on a year-on-year basis. Indeed, NII recovered sharply by 8% quarter-on-quarter in Q2, as the domestic PE loan book increased by more than $1 billion a single quarter. In view of improved performance and outlook, our full-year guidance for NII is revised upwards to broadly flat. from a high single-digit decline that we had provided a few months ago. On the fee income side, our efforts continue to deliver strong results with the first half fees up by 23% year-on-year, driven by both the retail and corporate segments. In view of the performance in the first seven months of the year, our guidance on this line is also being revised up to mid-teens growth from approximately 10% that we had guided previously. Turning to operating costs. As Christos will explain shortly in more detail, despite spiking inflation and the rollout of our strategic IT investment plan, we managed to maintain operating costs broadly flat. In the second half of the year, we anticipate being near this trend. Combined with core income growth, our cost to core income ratio remains on a declining trend, dropping below 49% in the second quarter and was 50% in the first half of the year 2022. Finally, our cost of risk continued to normalize, dropping just below 70 base points in the first half of the year, in line with our full-year guidance, supported by the above-described favorable asset quality trends. All in all, our attributable PAT reached $550 million in the first half of the year, as strong core operating profit growth was aided by trading income, which benefited from the volatile fixed-income interest rate environment.

Looking forward,

We're well on our way to meet, if not exceed, our full year 22 guidance for core operating profit of half a billion, despite the fact that the potential upside to NII from rising rates mostly affects post-2022 results. Guidance for 23 at this stage is difficult to articulate in view of the uncertainty surrounding mainly, but not only, energy developments in Europe and the degree to which they will impact the positive momentum in domestic trends, including the boost to NRI from the envisaged tightening of monetary policy by the ECB. With that, I would like to pass the floor to our group C4, Christos, who will provide additional insight to our financial performance before we turn to Q&A. Christos.

Thank you, Pablo. So let's now look into our financial performance in Mokite. Starting with the profitability on slide 10, A group profit after tax from continuing operations amounts to $490 million in H-122, driven by core operating profit growth, which comes in at an impressive 40% year-on-year to $218 million, driven by solid core income growth and supported by cost contains. Domestic loan disbursements accelerated in Q-222, reaching $1.9 billion, up by 80% quarter-on-quarter, driving performing loans higher by an impressive $1.1 billion, helping NII to record a sharp recovery by plus 8% quarter-on-quarter. This puts H-122 NII back to a growth trajectory with increasing interest income from performing loans as well as higher bond income, already fully absorbing the impact of frontier wanted consolidations. Positive NII trends, coupled with sustained income growth of 23% year-on-year, drives our core income higher by 5% year-on-year. Costs were kept near flat despite searching inflation throughout H-122, while cost of risk normalized to just over 70 basis points in line with guidance. All in all, including a strong trading line, our attributable profit after tax for the first half of the year reached $546 million. Turning to balance sheet and asset quality, as depicted on slide 11, negative organic NP flows led our domestic NP exposure lower to 1.9 billion, just 0.4 billion net of provisions. NP ratio in Greece dropped to 6.1%, 40 basis points lower in the quarter, and nearly 7 percentage points on a year-on-year basis, already fulfilling our 6% NP ratio guidance for the year-end 2022 half-year revenue. Despite major cost of risk normalization, our domestic cash coverage is up by 300 basis points year-to-date, standing at 81%, by far the highest in the sector. Our vast capital position was maintained in 2022, as shown on slide 12, with fully loaded Z1 and total capital ratios standing at 15 and 16.1, respectively. In terms of quarterly trends, we continued on a capital-accredited trajectory, Now let me walk you through the key drivers of our profitability on slides 13 to 19. The impressive domestic NIA recovery by 9% quarter on quarter was mostly driven by the expansion of our performing loan book, resulting from the acceleration in loan disbursements in the corporate segment, driving interest income from performing balances higher for a fourth consecutive quarter. At the same time, lending yield was sustained at a healthy level of 307 basis points. Moreover, the moderate rebalancing of our fixed income portfolio has aided interest income from securities, providing sustainable support to court income. As a result, NII aged higher in H-122, absorbing fully the significant lower contribution from MPS following frontier 1D consolidation in late 2021. Moving on fee income on slide 18, the impressive domestic fee growth of Q-122 was sustained in the second quarter, pushing fees up by plus 24% year-on-year in H-122 supported by both retail and corporate fees, up by 31% and 21% respectively. Key drivers to this long performance were card fees, payments, trade finance, and loan origination. Our digital transformation continues to produce impressive results, with e-banking transactions up by 23% year-on-year in Q2, reflecting the ongoing migration of our customers to digital channels. This solid performance comfortably supports our positively revised guidance for fee growth in 2022 in the mid-teens area, relative to circa 10% guided for at the beginning of the year. Turning to costs on slide 19, operating expenses were kept near flat year-on-year, driving our cost-to-core income ratio further down to 50%, leveraging recovery in core income. Personnel cost reduction of 3% year-on-year, reflective of lower headcount, along with tight demand management, absorb the pressure on GNS due to inflation, and increase depreciation driven for our strategic IT investment plan. The last step includes the ongoing replacement of our core banking system, which will constitute a step change in MBG's competitive position, both in terms of improving our service offering, as well as increasing productivity and efficiency. Going forward, further headcount and branch network rationalization will allow us to continue weathering inflation headwinds, keeping costs at bay. Moving on to asset quality on slides 20 to 23, consistently negative organic flows keep pushing domestic NPEs lower, reaching $1.9 billion in June, or more importantly, just $0.4 billion net of provisions. Organic NPE flows reflect our strong and continuing track record of successful destructuring. Low EQRs in value terms this year represent a natural consequence of the reduced FNP portfolio, especially in the aftermath of the upfront transactions. Nevertheless, new defaults and redefaults are maintained at low levels, while targeted debt forgiveness, supported by the high stock provisions we have built over time, supports FNP reduction. As a result, our domestic FNP ratio came down by a solid 40 basis points quarter-on-quarter at 6.1%, while coverage stood above 80%. Encouragingly, for yet another quarter, and so far in July, we see no sign of pick-up in MPEs from clients previously understayed or banked funds or profits. Turning to liquidity on slides 24 to 26, fiscal support measures have predicted the high and still rising stock of domestic deposits, which settled 3% higher quarter-on-quarter at $52.7 billion. Even though our stock of deposits is large and almost two times that of our performing loan book, the increase in deposits is welcome as it ensures that private cash buffers remain at very high levels, thus cushioning the pressure on households' disposable income from inflation. Time deposit yields have remained at close to zero levels, while the same applies to the bank's blended funding costs aided by ECB's monetary policy. Summing up, despite headwinds from geopolitical uncertainty and surging inflation, NBG delivered a very strong financial performance in 2022. Our balance sheet has been rendered near clean, our capital profits maintained at best-in-class levels, and our core operating profitability keeps on a positive trajectory, increasing strongly and sustainably. These results demonstrate both our capacity as well as our commitment to deliver or even exceed our targets, continuing on the strong track record of credibility we have built. And on this note, I would like to open this note to questions.

Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their telephone. If you wish to remove yourself from the question queue, then you may press star and two. Please use your handset when asking your question for better quality. Anyone who has a question may press star and one at this time. One moment for the first question, please. The first question comes from the line of Alevizakos Alevizos with Axia Ventures. Please go ahead.

Hi, thank you very much, gentlemen, for a very good presentation. I've got a couple of questions, if I may. So I realize that you've changed the guidance for the NII for the from going down maybe a single digit to going flat right now, but you see it's clear actually upgrading your ROTE expectation for a year. Will you think about doing that now or you will wait for another quarter? And secondly, do you plan also to change the guidance for the cost of risk given that the NP information remains at basically negative levels at this stage? And I've got another one for you.

Okay. Hi, Alvisos. So I will start with the second question. It's a bit early and premature to change our cost of risk guidance for the year end. So we reiterated our guidance for about 70 basis points. We're currently at 68 basis points. And as far as the return on the tangible equity is concerned, as you rightly said, it's a bit early to revise our figures. So we'll monitor the developments. We'll see how the income comes in in the third and fourth quarters in the We'll see about it then. The second question?

The second question was regarding some of the NII sensitivity scenarios. Now that we've got a bit of better clarity with the SED, well, that's 50 bits. First of all, could you update us a bit like on the numbers going forward? And as a second part of that question, what are you using your model as the incremental and real cost? Thank you.

Okay, so the interest rate is more or less in the lines that we shared with you guys in the previous results. Also, I will talk about additional interest income subject to chunks of 50 basis points increases. So the first 50 basis points that we've seen gives about 70 million of NII. The second 50 basis points increases an additional 120 million. And if we talk about the 150 basis points cumulative increase, then another 100 million. And then it goes down to around 50 to 60 million for the fourth 50 basis points chunk. Now, with regards to the MREL plan that we have and what we have assumed going forward, the plan assumes for probably depending on market conditions and issuance towards the year end. We are exploring other MREL eligible instruments at the same time, but given current market conditions, what we have put in the draft is something over 5% with regards to the cost of such an issuance.

Thank you very much.

The next question comes from the line of Budkov Mihail with Goldman Sachs. Please go ahead.

Good day. Thank you very much for the presentation. The first one question is on NIA in the second quarter. So you mentioned that you had quite strong performance of the performing loans and also flat yields, but looking on the quarter increase, it was 7% which is still quite higher than the expansion of the performing book. Were there any other factors which contributed to this expansion in the second quarter? And the second question is a broader one. So you started the presentation with the discussion of the macro outlook and that Greece is coming out of the in a different economic cycle than the Europe, which was a very, very useful comments and the outlook but still discussing some of the adverse and stress test scenarios what scenarios maybe do you see and how do you think this can how do you see this translating into asset quality or some capital metrics if discussing the stress test scenarios thank you

Okay, I'll take the first one, and then the CEO will address the second one. So with regards to our NII growth, yeah, as you rightly said, this is mostly driven by our loan, our performing loan base. So as we disclosed on slide 14 of our presentation, about $10 million of the increase is driven quarter-on-quarter, is driven by the increasing performing loan base we have. But we also, as I said in my remarks, have support. in the NII growth from securities. That's down to the fact that we are trying to rebalance our portfolio to optimize on it. We've achieved an increase of about $7 to $8 million versus the first quarter with regards to NII.

Tough question on 2023. Clearly for 2022, we seem to be doing well for the first half, and the tourist season, which will extend through October, will more or less take us to the end of the year with little uncertainty that we will have a solid macroenvironment until then. Now, December, the winter, and 2023, less clear, very hard to judge. I mentioned my opening remarks that for 23 we have a lower bound on growth would be around 1.5% so it's still a growth scenario even with that scenario comprising slightly higher than current levels and extending to 23 at that level. depending on the scenario you can get a different result you can say the price can go up 30% from the current levels and stay there for a year and a half that would be a different scenario but I think that almost any scenario you can think of A. the Greek economy will outperform the European and two it's going to be very hard to see us going it's negative territory under almost any scenario unless you have something really draconian

Okay. Okay, thank you.

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

Hi, good afternoon. Congratulations on the results. I've just got a couple of quick ones. So in your capital slide, I don't think you've got the pro forma benefit of Frontier 2. Could I just check, was it 25 bits boosted to CQ1 that would happen upon the completion of Frontier 2? And then just secondly, picking up on your comments on MREL, make sure you're looking at other instruments. Just wondering if you could disclose just a few more details of what they might be, if it's a private issuance such as some of your peers looked at towards the end of last year or anything else. Thanks.

Okay. Now, with regards to Frankel, yeah, we just came out today announcing the signing. Based on today's research, we say that we expect an upside of about 25 basis points. It's a capital activity transaction. And yes, this number is not in the numbers that we've disclosed in the presentation, neither in the actual nor in the performance. The only additional to the actual numbers so far in the presentation has to do with the completion of the mentioned acquiring, which is expected to materialize towards the end of the year, the fourth quarter, and then you will see that number. eligible instruments other than just going out with an issuance that we investigate have to do with structured deposits that fulfill the criteria for emerald eligibility. We're also exploring a possibility of synthetic securitizations. So we're not putting all this in one basket and try to be ready to be compliant with our non-binding targets for the 1st of January 2023 if markets don't allow for an issue.

Thanks. Could I just double check on the frontier, too? Is there any kind of date that you think that one might be completed?

The expectation is by end of the year, subject to approvals at that time.

As a reminder, if you would like to ask a question, please press star and 1 on your telephone. The next question comes from the line of Savim Mehmet with JP Morgan. Please go ahead.

Good evening. Thanks very much for the presentation and congratulations on the results. I'll have two quick ones please. The first one on the very strong long growth momentum. Clearly the environment is quite supportive, but the momentum in the second quarter is above and beyond, if I may say so, any expectations from just a few months ago. So can you please give us some color on what's driving this specifically? Are there any corporate segments where you're seeing more growth than you expected previously? or is there any one-offs in those numbers that we should be aware of? And secondly, on the trading income, clearly, again, a very strong quarter. And if I assume correctly, this will be related to your hedging-related instruments. How should we think about this line in the medium term? Previously, some of the non-core lines, so trading and other income, would come to about zero euros, so about flat levels. Going forward, is there any structural change here that we should be taking into account? Would trading income specifically be higher, let's say, come 2023, given the new rate environment, etc.? Thank you.

Okay, let me start with the long-growth momentum. Clearly, the long-growth is coming from the corporate side. the corporates are a bit choppy if you go and see in the slide the disbursements you see that there are strong quarters and weak quarters so there is some choppiness in there I wouldn't call it one off the sectors that are seeing the disbursements are clearly hospitality energy shipping is there infrastructure you know what you would expect for the Greek economy as well as manufacturing so but there is a little bit of choppiness so I would just move a little bit what you think rather than saying there's a one-off with any one size and okay on the second question with regard to fading gains indeed

In the first half of the year, we had gains from derivatives that were included in hedging relationships. Obviously, the rising interest rate environment gave an opportunity for that. And as you rightly say, we wouldn't expect the trading line going forward to be at zero. But certainly, you shouldn't expect the level of trading gains that we've recognized in the first half of the year.

Okay, thanks very much. Just on the long growth then, would you say that the momentum so far is higher than what you were expecting, let's say in the first half, or is there some front loading that we saw so that we would see some slowdown in the second half?

The pipeline that we're discussing with clients is stronger in the second half than the first half. Now, That being said, will there be any delays? Some people wanting to hold back a bit because of the environment? I don't know. But the pipeline is much stronger in the second half than the first half. That's very clear. Thanks very much.

The next question comes from the live of Miguel Alberto with Mediobank. Please go ahead.

Yes, thank you for taking my question. It's a very quick one on discontinued operation. If you can give us what is included in the quarter and if these restructuring costs should lead to some cost savings in the coming quarters. And the second one is on the bond portfolio. If you can elaborate more and give us maybe a guidance on the level that you can reach. on the bond portfolio. Thank you.

On the discontinued operations, we do have taken some provisions that would lead to some cost savings in the future. As we said in the remarks, we are trying to rationalize our footprint across network and FT footprint. So work has been done on that respect. With regards to our bond portfolio, Currently, we have about 14 billion of loans, most of 95% of loans of debt securities. 95% of it is classified under debt to collect, so we don't have any volatility in equity on that. And the rest is debt to collect and sell, which is fully hedged, so we don't have any volatility overall in equity from that. We don't have an appetite to significantly increase the position. We think we are well aware at the moment. So you shouldn't expect any great movements in the next quarters.

Thank you.

The next question comes from the line of Mamisoglos Man with Ambrosia Capital. Please go ahead.

I mean, thanks for taking my question. Just follow up on the previous question on issuance plans. You were mentioning in the past maybe appetite for tier 2 or tier 1, but under these conditions of the market, are we assuming it's just going to be a senior issuance for the end of the year? Thanks.

Yeah, most probably, yes. If we decide to come out, it looks like it's going to be more like a senior.

Thank you.

Once again to register for a question please press star and one on your telephone. As a final reminder to register for a question please press star and one on your telephone. Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Milianas for any closing comments. Thank you.

Thank you for joining us on a Friday afternoon in late July. I hope you all have a relaxing vacation. Don't turn on the air conditioning too high. It consumes electricity. And hopefully we'll see you in September.

thank you ladies and gentlemen the conference is now concluded and you may disconnect your telephone thank you for calling and have a pleasant evening