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.

The first question comes from the line of Alevizakos Alevizos with Axia Ventures. Please go ahead.

Thank you very much for the presentation. Well done on the results. I've got a couple of questions and plus a follow-up. My first question is, and you mentioned it during the presentation, that your excess liquidity has actually reached about $7 billion because you got such a large deposit base. I noticed that the securities went down this quarter, so I would expect that with your liquidity going up, you would try to beef up the securities portfolio as well, since it's a nice way to boost the NAI even faster. So I want to understand what's the strategy going forward on that front. And then secondly, I can see that the MRL is around the 19.3 level, which means I think you should be around 20% on a kind of a target by the end of the year, but then you got 60 bps from Evo that's going to be coming to the capital. So I was wondering, how do you think about any potential emerald issuance in the 45 days until the end of the year, actually? Thank you.

Okay. On the excess liquidity, the number is correct. I wouldn't link it that tightly to security strategy. Most of the securities are sovereign, so they are self-funded in that sense. The repayments were from some short-dated paper, including P-bills of European sovereigns. But our strategy is not to beef up the NII from significant larger increases in the security portfolio. We're focusing on long growth and not on increasing the size of the security portfolio. MREL, as you know, we've met the January 1st binding target of 2022. The next binding target is down in 26, 1st of January 26. And between that, we need to have a linear movement towards the end target. So we're looking at market conditions. We're trying to space out the issue so it's not smooth through the period. So if market conditions are correct, we would do an issue.

All right. And if I may follow up on that, since you mentioned the lending expansion, I was wondering whether you see any kind of increased competition in terms of rates, effectively, whether you see some of your peers actually just try to, despite the fact that interest rates are increasing, whether they try to push, especially for the so-called trophy tickets. Thank you.

All our clients are trophy clients, so we try to keep all of them. Market conditions are clearly changing the dynamics between yields and spreads. We'll see how that plays out. The answer to the market will determine how this pans out.

Excellent. Thank you very much.

The next question comes from the line of Memisoglu Osman with Ambrosia Capital. Please go ahead.

Hi, thank you for your time and the presentation. Just two on my side. One on the fee growth, which has been exceptional this year. I know it's a bit early, but with EVO happening, I'm guessing, at the end of the year, what kind of growth should we expect for next year, very roughly? And then as a generic question, given all the rate movements, could you remind us on how quickly you reprice your loan book? Any color there would be helpful.

Thank you. Fees in 23 is a tough one.

Clearly, the JV will lead to a... 51% of the fees moving elsewhere to EVO, but upon acquiring. The other fees will depend on activity. As I said, they've increased so far at 23 based on transactions, not any sort of pricing issues on the fees, price changes. So we'll see how strong transactions will be. Clearly, they've been increasing very rapidly in 2022. I think some of that will carry over in 2023. It all boils down to the billion-dollar question, what will activity be in Europe and Greece in 2023? The repricing, it's about three months.

Thank you.

Mr. Mamisoglu, are you done with your question?

Yes, thank you very much.

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

Thanks for taking my questions. I've just got a couple. I can see the cost of risk ticked up slightly in the quarter. Can you maybe talk us through if there's any drivers behind that? Is it just being precautious ahead of an uncertain 2023? And then just a second one just on capital. Is there anything else to come through from Frontier 2 on capital? Are we just looking at the motion acquiring to be the kind of the only pro-form right? And I just wanted to check if there's anything else we should be looking at for in 2023 or this year. Thanks.

Okay. So on the first question with regards to cost of risk, as we discussed also in the remarks, our strategy is to follow a conservative stance given the uncertainty that's coming ahead. So we had 63 basis points of cost of risk in Q2. We had 70 basis points in Q3. So it's not related to any reason for the increase. It's just preserving the red coverage until we see what comes upon us in early 2023. With regards to Franchise 2 and the question of any additional pattern of capital, the answer is No, we will not have any return on capital. On the contrary, once we deconsolidate the assets in the securitization perimeter of Frontier 2, we'll have the risk-weighted asset relief.

So sorry, that risk-weighted asset relief, is that already reflected or is there another benefit to come?

No, it's not reflected. It will be reflected once the transaction has closed.

And so you haven't given guidance on that at the moment or?

The next question comes from Savin Mehmet with JP Morgan. Please go ahead.

Thanks very much for the presentation. Just one last remaining question on my side, and that will be on cost of risk for 2023, just taking into account all the information you have, but also taking into account your conservative stance traditionally.

is it fair to assume that cost of risk next year would be at the levels of this year or would you see it trend okay let's take a step back and how we see this we have a very conservative let me take a further step back the macro as I said the baseline is going to be GDP growth that's slightly higher in Greece than Europe Europe is going to be broadly flat Germany recession France and Italy slightly higher. So with about GDP growth of 1.5% to 2%, that should be not something that creates a lot of MPEs. Two, MBG in particular has a relatively defensive loan book. It has mostly large corporates who are enjoying very high profit margins right now. and also mortgages which are the ones that have survived the crisis and have LPDs of 60, just above 60, 62. The more vulnerable portfolios, SB and consumer, it's about 2 billion, just a bit over 2 billion. So it's a defensive portfolio. as you notice the cost of this this year has been leading to an increase in coverage so we can keep it and there's a buffer so all in all I think the our view is that the first couple of quarters we should keep it where it is and that will be more than sufficient and if things go as the baseline we could actually even see some sort of ability to reduce it but If things go worse, then at that point we'd have to increase it. So I think A, the economy is in a better position. B, our portfolio is relatively defensive. When you put all that together, I think the current cost of risk gives us a buffer. Okay, that's all very clear.

Thanks very much.

We have a follow-up question from the line of Memisoglu Osman with Ambrosia Capital. Please go ahead.

Yes, hi. Just on Frontier, well, two points. One on Frontier 2, should we still expect it to be concluded by the end of the year? And then I think you mentioned it, but just to confirm, the revision to core operating profit was mainly from NII assumptions. Is that correct? Thanks.

Okay.

Okay, on Frontier 2, current expectations are closing in Q1 2023. That's the base case that we have. With regards to the revision of the guidance that we issued for the closing of the core operating program for the year, key drivers are in IEI, but also, as we've seen our revision with regards to fees, which is running at a pace of 22%, and we expect it to be at least by growth rate of mid-teens versus So that are the two constituents that are pushing our core operating profit to the 30% of our performance.

Perfect. Thank you.

We have a question from the line of Buluguris Alex with Wood and Company. Please go ahead.

Good afternoon. Congratulations on the numbers. Very quickly on OPEX and 2023. what should we expect in view of the cost inflation and the VRS plan that you're currently taking place would a flat is overall OPEX guidance OPEX number in our model be okay or that is too optimistic thank you well our expectation for the OPEX next year is we expect

a slight increase in the OBEX in the single digit area. As we discussed in previous calls, we have a wage increase based on the sectoral agreement that we signed back in March. So that's a 5.5% wage increase over a period of three years. That's one of the drivers that are acting as headwinds in improving our OBEX space. On the inflation front, I think we're doing well so far too. to restrain any increase that we face in GNAs. The pressure is still on. So we expect to land more or less where we are at this point. At the year end mark that we'll have for 2022, we expect the same pace for 2023. All in all, we expect a single digit increase in our, a low single digit increase in our ROBEX for 2023. Thank you.

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

Yes, thanks for taking my question. Just one clarification on the fee income. How many fees are attached to the Merchant Aquarium business? Sorry, I didn't get the number. And then the second one, if you can indicate the TRTRO contribution in Q4 that we should expect. Thank you.

Okay. On the fee income, the annualized benefit we get from the acquiring business is about 20 million. So I will keep half of it subject to no increase going forward. So that's on the fees. With regards to TLTRO, as you know, the benefit of the beneficial rate that was available up until the 30th of June is no longer there. We are not recognizing about 20 million of TLTRO per quarter. So it's 40 million less than the benefit we had last year. Based on the new decision of ECB on the 27th of October, up until after the 23rd of November, we will not be gaining any benefit from TLTRO. So effectively, there's nothing to be gained on the TLTRO balance from this point onwards.

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 call. We will be in London for the APEX event. Hopefully, we'll be able to see you in person there. Any further follow-up questions you may have, the team is available. is we'll be waiting for you for your call so thank you all very much and have a good night for the Europeans and a good afternoon good morning for the US thanks