National Bank of Greece S.A

Ladies and gentlemen, thank you for standing by. I'm Popi, your course call operator. Welcome and thank you for joining the National Bank of Greece conference call to present and discuss the third 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 third quarter financial results call. I'm joined by Christos Christodoulou, Group CFO, Greg Papagregoris, 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 brief reference to Greece's economic performance and prospects, especially relevant in the current uncertain environment. and then turn to our financial performance. Economic activity in Greece has clearly overperformed in 2022, remaining resilient to the impact from the energy-induced crisis. Specifically, activity should grow by nearly 6% for the full year. The main drivers of this solid activity are, first, an exceptional tourism season, the best Greece has ever experienced, reflecting strong international demand, but also the excellent work done by the sector in upgrading its business model. Second, fiscal support of approximately 6% of GDP has absorbed a significant part of the impact of higher energy prices on households and businesses, despite a budget overperformance, with the primary deficit decreasing by more than 3 percentage points of GDP to below an estimated 2% of GDP, as a result of a strong revenue performance. Third, the Greek economy is in a very different stage of the economic cycle than most other Western economies. It is coming out strongly, and may I say confidently, from a long restructuring period during which an underleveraged private sector has strengthened its balance sheet and improved its viability. By viability, I mean strong profitability for firms and high savings by individuals as can be confirmed by from a continuously growing deposit base. This positive momentum including a real estate market that is coming off a sharp decline will play a critical role in making the Greek economy more resilient than its European peers. Most recent projections for 2023 point to a growth rate of approximately 1.5 to 2 percentage points above the broadly flat outlook for the Euro area. Accepting the higher than usual uncertainty surrounding this outlook, our base case macro scenario is unlikely to produce a large wave of new NPs or a steep slowdown in credit demand. Indeed, through October, early delinquencies have not exhibited any signs of a deterioration, including among our clients previously under stake and bank-sponsored programs. Similarly, corporate and retail credit demand remains strong, with the former experiencing a double-digit growth rate on a year-on-year basis. Apart from their low leverage, loan demand of Greek corporates reflects a strong recovery in gross fixed capital formation, which, relative to the country's GDP, still remains well below the euro area. In fact, investment increased by 1.5 percentage points of GDP during the past 18 months, mostly business investment, most of which was bank-financed. It is also important to note that rapidly rising foreign direct investment, expected to exceed 3% of GDP this year, a record for Greece, is creating significant synergies with business investment activity. the solid macro environment has allowed us to continue delivering strong and above guidance financial results across all aspects of our business. Our nine-month core profitability increased by more than 40% year-on-year and in level terms nearly matched our full-year target of 490 million euros. Organic capital generation amounted to approximately 40 base points in just the third quarter, raising our fully loaded debt one ratio to 15.2% by far the highest domestically. The completion of the EVO payments transaction will raise it further to nearly 16% or 17% on a fully loaded total capital basis. At the same time, organic NP flows remain negative in the quarter, lowering our domestic NP exposure to 5.9% and net approvision to just $0.3 billion. Just a few points to note regarding the profitability performance. First, NII has continued to recover strongly, up 5% year-on-year for the nine-month period, and this despite having to absorb the impact from the large frontier transaction and the expiration of the TLTRO preferential rate, the latter at end June. The key drivers were performing loans, whose NII expanded in a nine-month period by 12%, both from volume and rate effects. Additionally, securities income was up significantly during the same period, reflecting higher yields post-hedging. Second, fee generation continues strongly, up 22% year-on-year in the nine months, driven by higher volumes, especially transactions in trade, finance, and credit cards. Our efforts to cross-sell investment products to our large client base are also starting to pay off, which is encouraging looking forward. Third, we have managed to contain operating costs. They have risen by 2% year-on-year in the nine-month period, despite the difficult environment and the continued rollout of our strategic IT investment plan, mainly through the effective use of VES programs and the shift to digital technologies. When combined with the above-mentioned core income performance, our cost to core income ratio dropped to a record low of 45% in the third quarter, a full 5 percentage points lower versus the first half of 22. Fourth, in view of the uncertain 2023 outlook, our cost of risk has remained conservatively near the 70 base point mark, pushing our coverage even higher to 82%, an increase of 12 percentage points versus a year ago. Looking forward, Guidance for fiscal year 22 is revised upwards. Most importantly, with regards to profitability, we now expect to exceed our full year 2022 core operating profitability guidance of $490 million by about 30%. As a result, our guidance for core return on tangible equity of 10% originally set for 2024 will be delivered this year a full two years ahead of schedule. On the asset quality and capital fronts, we're clearly also ahead of guidance for a year-end 2022 NPE ratio of 6% and a set one fully loaded ratio of 15%. Providing the same clarity for 2023 is more difficult due to the higher than usual economic uncertainty. Nevertheless, under our base case macro scenario, we should be able to continue improving our financial performance, especially with regards to profitability. The main driver, of course, will be higher NII. A final point I would like to make regards the recent ECB decision on the TLTRO. A gradual withdrawal of this liquidity over the next few quarters, combined with repricing to the DFR, strengthens our comparative advantage of a large and stable core deposit base. Thank you, Pablo.

Let's now look into our financial performance in more detail. Starting with the profitability highlights on slide nine, accelerated core income and contained operating costs, drive our nine-month 2022 core operating profit to $464 million, up an impressive 41% year-on-year, almost matching the full year 22 target of $490 million. The sharp improvement in profitability reflects positive NNI dynamics, given by healthy performing loan expansion throughout the year, as well as higher income from securities, comfortably absorbing the significant reduction in NPE and IEI, which is down by about 80 million year-on-year, as well as a lower TLTRO benefit by 28 million year-on-year. Performing loans increased by 1.3 billion year-to-date, despite high repayments in Q3. Given the strong corporate pipeline in Q4, Performing loans are expected to near $27 billion at year end 2022, up by more than $1.5 billion year-on-year, in line with our guidance. Notably, Q3 2022 NII surged by 11% quarter-on-quarter, driving performing loans NII 14% higher, up for a fifth consecutive quarter. Equally impressive is the continued strength on our fee business, where growth at group level is sustained at 22%, year-on-year. Costs were contained despite mounting inflation pressures, while cost of risk stood at 69 basis points in line with guidance. All in all, nine months' 22 attributable profit after tax reached $680 million. Turning to the balance sheet and asset quality highlights on slide 10, our domestic NPE exposure keeps decreasing. amounting to 1.8 billion at the end of September, or just 0.3 billion net of provisions, translating into an NP ratio of 5.9%, already fulfilling our full year 22 guidance. At the same time, our cash coverage kept rising, now standing at 83%, reflecting our consistently conservative approach in the context of the current geopolitical uncertainty and inflationary headwinds. Most importantly, though, organic NP formation remains negative with no signs of early delinquencies so far. Moving to slide 11, our robot capital buffers keep increasing with our fully loaded Z1 and total capital ratios edging 20 basis points carrier quarter on quarter to 15.2 and 16.3% respectively, reflecting our strong co-profitability. With the completion of the merchant acquiring JV with EVO, expected by year end, to form a set one in total capital fully loaded ratio standard 15.8 and 16.9%. Now let's discuss the key drivers of our profitability on slides 12 to 18. Domestic NII recovery accelerated to 11% quarter on quarter, driven by the continuous expansion of our performing loan book, higher interest rates from debt securities reflecting improved yields post-hedging, and partly due to ECBs rate increases in late July and mid-September. In that light, our NIM improved to 213 basis points in Q3 2022, while lending yield bounced back to 326 basis points, partially reflecting ECB's rate hikes in the quarter. Going forward, NII will continue to improve from the crystallization of the full benefit of the existing rate action, as well as that of any upcoming rate hikes. Moving on to fee income on slide 17, the impressive domestic fee growth was sustained at 23% year-on-year, further diversifying the bank's revenue streams. This was driven by higher volumes, with the retail fees up by 30% year-on-year, and corporate also up by nearly 25%. Key drivers to this performance were the card, payments, and trade finance segments, as well as fees from investment products, which have started to pick up, reflecting our efforts to cross-sell on our existing client base. At the same time, e-banking transactions were up by 21% year-on-year in Q3, reflecting the continuing migration of our customers to digital channels. Notably, MBG has been recognized for its excellence in digital offering, ranked in the top 10% of digital champions in Deloitte's Banking Maturity Survey for 2022 out of a global sample of more than 300 incumbents and Challenger Funds in terms of functionalities offered on public side, internet banking platform, and digital applications. Turning to costs on slide 18, despite mounting inflation and the ongoing rollout of our IT investment plan, which includes the replacement of our core banking system, operating expenses were kept at bay, allowing our cost-to-core income ratio to further drop to 45.2% in Q3. Going forward, further branch network rationalization and headcount reduction, supported by the ongoing shift to digital functionalities, as well as process automation and centralization, should allow us not only to continue weathering inflation headwinds, but also keep improving our efficiency levels. Moving on to asset quality on slides 19 to 21, domestic NPs further declined to 1.8 billion, driven by consistently negative organic flows. Contained new defaults and re-defaults are fully offset by curings, keeping the net NP flow negative. Encouragingly, we see no signs of credit quality deterioration in our loan portfolio, despite inflation, including from clients previously under support measures. As a result, our domestic NP ratio in Q3 came down by a further 20 basis points to 5.9%, with coverage at 83% remaining at the sector high end. Tending to liquidity on slides 22 and 23, the stock of domestic deposits increased by 1.4 billion quarter-on-quarter to 53.9 billion, pushing private cash buffers near historic highs while cushioning pressures on household disposable income from inflation. Euro system funding amounts to 11.6 billion. YDCB's recent policy decision on TLTRO in October weighs on future NIEI NBG's excess liquidity, sourced from our high market share in savings deposits, is a comparative advantage coming back into play, also giving us the flexibility to repay early our TLTRO program. Summing up, against the backdrop of high inflation and geopolitical uncertainty, we continue delivering a strong and above expectations performance. We have maintained a strong healthy balance sheet, underpinned by an NNP exposure of just 0.3 billion and best-in-class capital levels. Our nine-month 22 co-operating profit increased by 40% and more, reaching $464 million on the back of accelerating core income, already close to our full year 22 profit guidance. The strong momentum of our results demonstrates the high potential of MBG in the period ahead, indicating we are well on track to increase further returns and value to our shareholders. And on this note, I would like to open the floor to questions.