National Bank of Greece S.A. (OTCPK:NBGIF) Q3 2022 Earnings Conference Call November 10, 2022 12:00 PM ET
Company Participants
Pavlos Mylonas – Chief Executive Officer
Christos Christodoulou – Group Chief Financial Officer
Conference Call Participants
Alevizos Alevizakos – Axia Ventures
Memisoglu Osman – Ambrosia Capital
David Daniel – Autonomous Research
Sevim Mehmet – JPMorgan
Alex Boulougouris – Wood & Company
Alberto Nigro – Mediobanca
Operator
Ladies and gentlemen, thank you for standing by. I’m Poppy, your Chorus 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 Mylonas, CEO of National Bank of Greece. Mr. Mylonas, you may now proceed.
Pavlos Mylonas
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 Papagrigoris, 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 the solid activity are: first, an exceptional tourist 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 from the 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 NPEs or a steep slowdown in credit demand.
Indeed, through October, early delinquencies have not exceeded any signs of deterioration, including among our clients previously under state and bank-sponsored programs. Similarly, corporate and retail credit demand remained strong, with the former experiencing a double-digit growth rate on a year-on-year basis.
Apart from the 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 is 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.
This 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.
Organic capital generation amounted to approximately 40 basis points in just the third quarter raising our fully loaded CET1 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 NPE flows remained negative in the quarter, lowering our domestic NPE exposure to 5.9% and net of provisions 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 continued 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 roll-out of our strategic IT investment plan, mainly through the effective use of VS 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, 4 or 5 percentage points lower versus the first half of 2022.
Fourth, in view of the uncertain 2023 outlook, our cost of risk has remained conservatively near the 70 basis 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 2022 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 front, we’re clearly also ahead of guidance for year-end 2022 NPE ratio of 6% and a CET1 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. The gradual withdrawal of this liquidity over the next few quarters, combined with re-pricing to the DFR, strengthens our competitive advantage of large and stable core deposit base. We have a market share of 36% in savings deposits, which together with sight and current account comprise nearly 90% of our total deposits. In fact, they are the main source of our significant excess liquidity which amounts to €7 billion.
With that last point, 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 the Q&A. Christos?
Christos Christodoulou
Thank you, Pavlos. Let’s now look into our financial performance in more detail. Starting with the profitability highlights on Slide 9. 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 2022 target of €490 million.
The sharp improvement in profitability reflects positive NII dynamics, driven by healthy performing loan expansion throughout the year as well as higher income from securities comfortably absorbing the significant reduction in NPE NII, 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 prepayments 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 the 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 2022 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 NPE ratio of 5.9% already fulfilling our full year 2022 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 NPE formation remains negative with no signs of any delinquencies so far.
Moving to Slide 11. Our robust capital buffers keep increasing with fully loaded CET1 and total capital ratios hedging 20 basis points higher quarter-on-quarter to 15.2% and 16.3%, respectively, reflecting our strong core profitability. With the completion of the merchant acquiring JV with EVO expected by year-end, pro forma CET1 and total capital fully loaded ratio stands at 15.8% and 16.9%.
Now, let’s discuss the key drivers of our profitability on Slide 12 to 18. Domestic NII recovery accelerated 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 ECB’s rate increases in mid-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 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 segment as well as fees from investment products, which has started to pick up, reflecting our efforts to cross-sell in 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, NBG has been recognized for its excellent 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 incumbent and challenger funds in terms of functionalities offered on public site, Internet banking platform and digital applications.
Turning to costs on Slide 18. Despite mounting inflation and the ongoing roll-out of our IT investment plan, which includes the replacement of our core banking system, operating expenses were kept at bay, aligning 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 Slide 19 to 21. Domestic NPEs further declined to €1.8 billion, driven by consistently negative organic flows. Contained new defaults and redefaults fully offset by curings, keeping the net NPE 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 NPE ratio in Q3 came down by a further 20 basis points to 5.9%, with coverage at 83% remaining at the sector high end.
Turning 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.
Eurosystem funding amounts to €11.6 billion. While ECB’s recent policy decision on TLTRO in October weighs on future NII, 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 a net NPE exposure of just €0.3 billion in best-in-class capital levels.
Our nine-month 2022 core operating profit increased by 40% and more, reaching €464 million on the back of accelerating core income, already close to our full year 2022 profit guidance. The strong momentum of our results demonstrates the high potential of NBG in the periods 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.
Question-and-Answer Session
Operator
The first question comes from the line of Alevizos Alevizakos with Axia Ventures. Please go ahead.
Alevizos Alevizakos
Hi, 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 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 NII even faster. So I want to understand what’s the strategy going forward on that front.
And then secondly, I can see that the MREL is around 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 MREL issuance in the 45 days until the end of the year actually. Thank you.
Pavlos Mylonas
Okay. On the excess liquidity, the number is correct. I would link 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 T-bills of European sovereigns. But our strategy is not to beef up the NII from significant large increases in the security portfolio.
We are focusing on loan growth and not on increasing the size of the security portfolio. MREL, as you know, we’ve met the January 1 binding target 2022. The next binding target is down in 2026, 1st of January 2026. 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 issuance. So it’s not smooth through the period. So when market conditions are correct, we would do an issue.
Alevizos Alevizakos
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.
Pavlos Mylonas
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 market, I guess – hence the market will determine how this pans out.
Alevizos Alevizakos
Excellent. Thank you very much.
Operator
The next question comes from the line of Memisoglu Osman with Ambrosia Capital. Please go ahead.
Memisoglu Osman
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 re-price your loan book? Any color there would be helpful. Thank you.
Pavlos Mylonas
Fees in 2023 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 in 2020 based on transactions on 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. Re-pricing, it’s about three months.
Memisoglu Osman
Thank you.
Operator
Mr. Memisoglu, are you done with your questions?
Memisoglu Osman
Yes. Thank you very much.
Operator
Thank you. The next question comes from the line of David Daniel with Autonomous Research. Please go ahead.
David Daniel
Thanks for taking my questions. I just got a couple. So I can see that cost of risk ticked up slightly in the quarter. Can you maybe talk us through what – are there any drivers behind that? Is that just being precautious ahead of uncertain 2023?
And then just a second one, just on capital. Is there anything else to come through from Tier 2 on capital? Are we just looking at the merchant acquiring to be kind of – the only pro forma item? I just wanted to check if there’s something else we should be looking at for in 2023 or this year. Thanks.
Christos Christodoulou
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’re at 70 basis points, 71 in Q3. So it’s not related to any reason for the increase.
It’s just reserving the right coverage until we see what comes upon us in early 2023. With regards to Frontier II and the question of any additional returns on capital, the answer is no, we will not have any returns on capital. On the contrary, once we deconsolidate the assets in the securitization perimeter of Frontier II, we’ll have the risk-weighted asset release.
David Daniel
Sorry, that risk-weighted asset release, is that already reflected? Or is there another benefit to come?
Christos Christodoulou
No, it’s not reflected. It will reflect once the transaction has closed.
David Daniel
And so you haven’t given guidance on that at the moment or…?
Christos Christodoulou
We haven’t.
David Daniel
Okay. All right. Thanks.
Operator
The next question comes from Sevim Mehmet with JPMorgan. Please go ahead.
Sevim Mehmet
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 given all – 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 where would you see it trend?
Pavlos Mylonas
Okay. Let’s take a step back and say 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%, 2%, that should be not something that creates a lot of NPEs.
Two, NBG, in particular, has a relatively defensive loan book, okay? It has mostly large corporates who are enjoying very high profit margins right now. And also mortgages, which have – are the ones that have survived the crisis and have LTVs 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 noticed, the cost of risk 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 for 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’ll have to increase it. So I think, A, the economy is in a better position; B, our portfolio is really defensive. When you put all that together, I think the current cost of risk is gives us a buffer.
Sevim Mehmet
Okay. That’s all very clear. Thanks very much.
Operator
We have a follow-up question from the line of Memisoglu Osman with Ambrosia Capital. Please go ahead.
Memisoglu Osman
Yes. Hi, just on Frontier – well, two points. One on Frontier II, 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.
Christos Christodoulou
Okay. On Frontier II, current expectations are closing in Q1 2023. So 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 profit for the year, key drivers are NII, but also as we’ve seen in our revision with regards to fees, which is standing at a pace of 22%, and we expect it to be at least by growth rate of mid-teens versus last year. So that are the two constituents that are pushing our core operating profit to the 30% of our performance.
Memisoglu Osman
Perfect. Thank you.
Operator
We have a question from the line of Boulougouris Alex with Wood & Company. Please go ahead.
Alex Boulougouris
Hey, congratulations on the numbers. Very quickly on OpEx and 2023. What should we expect on the cost inflation on the VRS plan that you’re currently taking place, more a flattish overall OpEx guidance – OpEx number in model be okay or that is too optimistic? Thank you.
Christos Christodoulou
Well, our expectation for the OpEx next year is we expect a slight increase in the OpEx 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, is one of the drivers that are acting as headwinds improving on OpEx space.
On the inflation front, I think we’re doing well so far to restrain any increase that we face in G&A. The pressure is still on. So we expect to land more or less where we are at this point at the year-end model we 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 OpEx for 2023.
Alex Boulougouris
Thank you.
Operator
The next question comes from the line of Nigro Alberto with Mediobanca. Please go ahead.
Alberto Nigro
Yes. Thanks for taking my question. Just one clarification on the fee income. How many fees are attached to the merchant acquiring business? Sorry, I didn’t get the number. And then the second one, if you can indicate the TLTRO contribution in Q4 that we should expect. Thank you.
Christos Christodoulou
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.
So 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.
Alberto Nigro
Thank you.
Operator
Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Mylonas for any closing comments. Thank you.
Pavlos Mylonas
Thank you all for joining us for the call. We will be in London for the FX event. Hopefully, we’ll be able to see you in-person there. Any further follow-up questions you may have, the team is – we’ll be waiting for your call. So thank you all very much and have a good night for the Europeans, and good afternoon, good morning for the U.S. Thanks.
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