EGFEF - Eurobank Ergasias Services and Holdings S.A. (EGFEY) Q3 2023 Earnings Call Transcript
2023-11-11 16:39:07 ET
Eurobank Ergasias Services and Holdings S.A. (EGFEY)
Q3 2023 Results Conference Call
November 07, 2023 11:00 AM ET
Company Participants
Fokion Karavias - CEO
Harris Kokologiannis - CFO
Conference Call Participants
Butkov Mikhail - Goldman Sachs
Mehmet Sevim - JP Morgan
Eleni Ismailou - Axia Ventures
Osman Memisoglu - Ambrosia Capital
Daniel David - Autonomous Research
Alexandros Boulougouris - Euroxx Securities
Presentation
Operator
Ladies and gentlemen, thank you for standing by. I'm Costantinos, your Chorus Call operator. Welcome and thank you for joining the Eurobank Holdings Conference Call to present and discuss the Third Quarter 2023 Financial Results. [Operator Instructions]
At this time, I would like to turn the conference over to Mr. Fokion Karavias, CEO. Mr. Karavias, you may now proceed.
Fokion Karavias
Thank you. Ladies and gentlemen, good afternoon, and welcome to the Eurobank 9-month 2023 Results Presentation. Together with me is our CFO, Harris Kokologiannis, and the Investor Relations team. We will start with some key recent developments, then present our results and answer your questions. In an environment with wide European growth and geopolitical margin, the macroeconomic health of our 3 core markets stands out.
Economic growth increase is expected around 2.5% for this year and the next, and multiple of the EU assets. The government is committed to fiscal discipline, with primary balance increasing from 1% this year to 2% of GDP in 2024. Growth prospects, solid public finances, together with the strengthening of the banking center balance sheets, were the primary drivers for the sovereigns in terms of investment grade. Economic sentiment remains positive. Tourism had a record year, unemployment ratio further decreases and real estate prices remain resilient.
Investments play a key role in the growth of performance and Greece aims to close the gap in gross capital protection as a percentage of GDP with the European average. Accelerated investments will be one of the catalysts for faster loan growth in the next years, as also confirmed by the number of projects already submitted to the RRF scheme, now in excess of €20 million. Now let's see our financial results for the 9-month period, as highlighted on Slides 5 to 9. Eurobank had a strong performance across segments and geographies. Net profit, excluding one-off gains, raising €916 million.
As a result, tangible book value per share increased by 21% year-on-year to €1.97, while the return on tangible book value reached 18% in the 9-month period. In more detail. Net interest income remained on the strong side, decreasing further by 3% on a quarter-on-quarter basis and 55% year-on-year. They were driven by high arrival rates, while the deposit base increase remains moderate. Fees, despite a weaker third quarter, increased by 6% year-on-year, which is in line with the trends expected for the full year.
The cost-to-income ratio remains low at 33%. As a result, corporate provision income was up by 72% year-on-year. Core operating profit reached €1.1 billion, up by 85% year-on-year. Our regional operations continued their strong performance with net profits of €342 million in the 9-month period, more than double on an annual basis. Bulgaria's contribution increased €150 million and Cyprus to €170 million. The signed procedure also includes the Hellenic Bank [indiscernible] contribution of €30 million.
Asset quality remains resilient in the third quarter. [indiscernible] NPE ratio at 4.9%, while coverage remained at 75%. The cost of this ratio was 84 basis points in the 9-month period, in line with our full year guidance. And our fully logged CET1 ratio rose to 16.8% in the 9-month period, up by 260 basis points year-on-year, while the total capital ratio to 19.5%. With our capital ratios well above the internal markets, we aim to utilize excess capital along the pillars.
First, to finance loan growth. Although the credit exposure this year is below our initial expectations, this is due to loan repayments and high interest rates. We expect that it will recover in 2024 onwards. Second, to fund M&A opportunities enhancing our business franchise. In this context, we have signed agreements to increase our stake in generic Bank of Cyprus to 55% from 29% currently, subject to regulatory approvals.
This transaction should consume roughly 80 basis points of our capital, and it is EPS accretive. Third, to reward shareholders. We did expect the share buyback of the HFSF CR was completed, leading EPS accretion for shareholders. Furthermore, as previously discussed, we plan a dividend payout ratio of at least 25% out of 2023 profits. Overall, the bank is on a solid trajectory and the 9-month results point to upgrading our full year estimates as shown on Slide 10.
To achieve an intent on taxable provalue of 17% for the full year '20 to '23. At this point, I would like to ask our CFO, Harris Kokologiannis, to present our 9-month results before opening the Q&A session.
Harris Kokologiannis
Thank you Fokion. Let's now provide more insight on the third quarter results, starting on Page 19, organic growth. Performing loans increased organic in the 9-month period by €700 million, still below our estimate. In terms of investments, fourth quarter appears to be the fullest of the year, driving the full year net credit growth to more than €1 billion. Group deposits recorded a solid third quarter, increasing by €600 million as shown on Page 20.
As a result, net loans deposit ratio decreased to 72%, while LCR ratio increased 471%, as shown at the left of Page 21. Onto [indiscernible] funds on Page 23. In parallel [indiscernible] sector, continued strong performance. Year-to-date, managed funds increased by €800 million and private banking assets and liabilities by €1.6 billion. Moving to profitability on Page 27.
Net interest income increased quarter-on-quarter by 3.4% to €558 million. NII has been boosted by the further [indiscernible] increase and [indiscernible] growth. On the other hand, it has been affected by the cost of all deposits in the [indiscernible]. This initiative aims at reducing significantly our NII sensitivity and a downward side of interest rates. On a year-on-year basis, NRI is higher by 55%.
On Page 28, commission income is high year-on-year by 6.2%. In the third quarter, in particular, all the lines are up in the exception of lending fees, mainly due to the seasonaly low patents. Full year outlook post mid-digit growth, which is better than our projections. Operating costs are a slight increase despite inflationary pressures. On a group basis, got up high by 5.9%.
The increase is driven by [indiscernible] operations, mainly salary adjustments and the incorporation of [indiscernible] areas go live on the new core system sector. Finally non this page, cost of core income ratio should be improved year-on-year by 10 percentage points, decreasing to 33%. On Page 31, we summarized operating performance for the 9-month period. Core PPI is high year-on-year by 72%, up €1.73 billion, driven by the politic, high loan in [indiscernible] volumes, better conditions and high core income from SCE, offsetting lower in core income and higher similar costs. Loan provision for the period amounted to €255 million or 84 basis points.
[Indiscernible] core operating profit is higher year-on-year by 85% at €1.08 billion. Furthermore, there is a €30 million additional income, which is important for the moment, as tickup on associates. This corresponds to the quarterly performance of Hellenic Bank for up 29% participation. The above [indiscernible] 10% accretion to our quarterly EPS. Reception of regulatory approvals, cement bank results will be consolidated line by line.
Moving on to our asset quality on Page 33. NPE ratio fell below the 5% mark at 4.9%, while coverage increased to 75%. [indiscernible] accelerated rivals and a contained reformation of €27 million. Moving on to capital on page 38. Our full loaded CET1 ratio increased quarter-on-quarter by 70 basis points to 16.4%.
This is driven by 50 basis points organic growth, while the impact of [indiscernible] shares buyback is also included. Furthermore, taking into account the upcoming synthetic securitization, the pro forma fully loaded [indiscernible] ratio amounts to 16.8%. Financial capital on Page 39. Our total CAD ratio stands at 19.5%. [indiscernible] online mass performance [indiscernible] further amortisation of our full year 2023 financial targets, as shown on page 10.
[Indiscernible] is now expected to be at circa €1.8 billion and core profit of €1.4 billion. NPE ratio is anticipated at circa 4.5%. Full CET1 updated outlook is above 17%. Finally, [indiscernible] or capital value is now estimated at circa 17% and EPS higher than €0.50.
This completes my presentation, and we may now open the floor for your questions.
Question-and-Answer Session
Operator
The first question is from the line of Butkov Mikhail with Goldman Sachs.
Butkov Mikhail
I have a couple of questions. Firstly, on your NII outlook. When do you expect NII to peak considering recent trends? And also, do you use any structural hedges to extend higher net interest margins after the rate cutting cycle begins? The second question relates to the Atlantic Bank.
How do you see this entity operating together with your existing Eurobank operations in Cyprus following the transaction? Do you plan to merge the operations and balance sheet somehow? And also, when do we expect this deal to close? And the last question is on your inorganic expansionary plans. Earlier, you mentioned that you can explore opportunities for international wealth management expansion in some geographies.
Can you please provide an update on that front?
Harris Kokologiannis
Thank you for your question. Let me start with NII and then Fokion will address a couple of questions. In the third quarter, NII was up by 18% quarter-on-quarter, driven by the [indiscernible] rate organic growth, but it can be affected by more or less €3 million in interest [indiscernible]. And as I said in my speech is to reduce NII sensitivity quite significantly. So to be a bit more precise, assuming no change to our current position and deposit bid-out, the sensitivity for 100 basis points decrease of rates is circa 5% from the run rate of the third quarter NII.
Now, the third quarter NII increase was decelerated due to little assets initiation, and assuming current level of testing, we may see the peak in Q4, but I would say, not substantially different levels than the third quarter.
Fokion Karavias
Now in terms of Hellenic Bank, as we have already announced last August, we signed CSPAs with Pimco, Senvest and Wargaming to increase our participation from 29% to 55%. The completion of these transactions suffer to regulatory approvals, and as we speak, we are in this process. We see approvals from the ECB ban cycles. The superintendent of these large companies inside group and the seated competition [indiscernible]. We should have the approval sometime between the second quarter of 2024 or early third quarter.
And so far, the process goes forward according to the plan. As soon as we receive the approvals, we will close the transactions that I just mentioned, and we are going also to launch a mandatory tender offer according to the laws of [indiscernible]. And at that point, we will fully consolidate the financial figures of lending back to our figures, and Hellenic Bank will become a subsidiary of the Eurobank group. In terms of capital, the effect on to be about 80 basis points. In terms of EPS accretion, we should be able to provide you exact figures about EPS accretion, about synergies, as well as about our plan to potentially nurse a euroboxide with Hellenic bank as soon as we receive the regulatory approvals.
However, as Harris mentioned, already in the third quarter, without consolidation, we got earnings accretion of about €30 million out of the bottom line of €300 million, or about 10%, and this corresponds only to 29% of our current participation. For the full year 2023, the Hellenic bank management projects that profit before tax should be of the order of €300 million. Taking into account the Eurobank 2023 estimated profit before tax, let's say, circa €1.5 billion. You could make your own estimates about the size of the accretion, not only in terms of EPS, but also in terms of core PPI upon full presentation. Now on your last question regarding international expansion, we have stated a number of times that our group operates in 3 core markets, which is Greece [indiscernible] and Cyprus.
We operate in these 3 core markets as a universal bank, offering services across all segments of our clients. At the moment, we don't have any plans to expand the universal banking more than 20 other countries. However, in terms of wealth management, we may seek the opportunity to expand our reach in countries on top of the 3 that I mentioned. And this may be countries in Southeastern Europe and Eastern Mediterranean. Now we are in the early stages of designing this strategy, and we will update you accordingly when we have more concrete plans.
Butkov Mikhail
Just a small clarification on NII. So you mentioned that your sensitivity currently for 100 basis points cut is a 5% negative impact on NII and this is because you initiated hedges?
Harris Kokologiannis
Correct.
Operator
The next question comes from the line of Sevim Mehmet with JP Morgan.
Mehmet Sevim
Just one more follow-up on the Atlantic Bank acquisition, if I may. You mentioned the 80 basis points expected capital impact. Would you be able to break this down into the individual components? I know the RWA impact obviously, we can calculate, but just the negative good low from there, but also, would there be any difference in timing when it comes to the recognition of RWAs and the negative goodwill from a regulatory perspective? And can I just check if there could be any implications, therefore, on you have dividend payments, et cetera, for next year, stemming from that?
And finally, would you be able to share, I appreciate maybe not, but anything at this point on your final potential stake and basically where we'll get to following the tender process?
Fokion Karavias
Now the 80 basis points includes all the effects of the negative goodwill as well as the effect of the report assets that will come on our balance sheet. And the 2 steps will come yet at the same moment. Therefore, the effect of the 80 basis points, given the buffer that we have in terms of capital, above the, let's say, the management target of CET1 are not going to affect at all our strategy in terms of business patents. Our profits are in excess of this 80 basis points. Well in excess of the 80 basis points.
So this is about the capital effect. What's the rest of your question, please?
Mehmet Sevim
It was just the tender offer and the final stage.
Fokion Karavias
Okay. Now, as we said, with the transactions that we have already signed, we're going to reach 55%. Then thematically tender offer will follow. We cannot make an estimate of what the participation would be. But in terms of our strategy, the highest participation, the more desirable it would be from outside.
Harris Kokologiannis
One more leg of the question. There is not going to be a time discrepancy between the account consolidation and the regulatory impact. The time will be the same, exactly the same. Not we are going to see [indiscernible] negative goodwill. Both of them will be at the same point of time.
Operator
The next question comes from the line of Ismailou with Axia Ventures.
Eleni Ismailou
Congratulations for this set of results. Just a couple of questions from my side. One is how do you see the evolution of credit spreads and your lending expansion? And how can this affect profitability to other years when rates were flat and mentor going down? And secondly, just another follow-up on Hellenic bank, how do you vision using the bank [indiscernible] going forward?
Fokion Karavias
Let me start from the second question and then I will follow up with the credit spreads. We expect to have a number of synergies with Hellenic, both in terms of cost as well as in terms of revenue. And one sort of synergies from the revenue side comes from the more recent use of the liquidity of Hellenic Bank. We have already some plans about this, but as I mentioned before, I should be able to expand on that as soon as we receive the regulatory approvals.
Harris Kokologiannis
On lending expense, we show a picture on Page 5 of the presentation. So there is a number of observations on this page. First on corporate, this quarter, there is a quite just decline by 7 basis points on corporate spreads. In our budget, we had assumed a quite steeper, I would say, decline, but the situation appears to be quite more monotone although there is quite soft competition on corporate lending. For the moment, it appears that any decline on over spend is very minimal.
On the retail, you may notice the effect on mortgage portfolio of the interest rate cost that we have implemented as of the end of the second quarter of this year. So for this reason, you may observe a 30 basis points decrease on mortgage spreads. While in [audio gap] it's attended, it's a technical impact as [indiscernible] goes up. Why consumer in its vast majority, the product fixed rates. And we are quite careful in repricing onwards that product, taking into in account any potential quality implications.
In general, taking aside the issue of couple mortgage loans, I would say that the trajectory in spreads is a bit better than what we initially expected.
Operator
The next question is from the line of Memisoglu Osman with Ambrosia Capital.
Osman Memisoglu
Just a few on my side, please. First one, just a clarification on the hedging process. Are you coming at where you would like to be? Or are you planning to increase for the hedging activities? Then on asset quality, if you could give us any color on how Q4 is trending, that would be helpful. Any color into 2024, if possible? And finally, on the key loan growth, I noticed a very slight effect in your retail consumer loans in Greece and having heard some encouraging earlier today from a peer of yours. I was wondering how you are seeing retail especially for 2024?
Fokion Karavias
Let's start from the asset quality, but let me make a statement about 2024. We would provide you a full outlook about the year, including financials, asset quality trends and loan growth, when we present our full year 2023 financial results early next year. Now in terms of asset quality, as you have noticed, and we present that on page 33, the third quarter dynamics were rather stable. Formation was very close, here €27 million. And also you would notice that a lot of stage 2 loans have further decreased during the quarter as we present on Page 36.
Furthermore, [indiscernible] remains resilient also in Bulgaria and Cyprus, as we show on Page 14 and 15, respectively, with DNP ratios in both countries declining. We expect fourth quarter formation to be more or less at the same levels of Q3 and the FDA ratio to be further reduced to circa 4.5% at the end of 2023, taking off into account further write-offs. The NPE ratio could decline further below 4% over the next few quarters, not only through in down work out and accelerating [indiscernible] but also through the outright sense of small to medium-sized LP portfolio. And last but not least, in terms of cost of risk for the full year 2023, as I said also during my introduction, it's going to remain at our recent guidance of 85 basis points.
Harris Kokologiannis
[Indiscernible] going to be very short. Actually, we constantly reassess based on the interest rate trajectory and to reassess that on a dynamic basis.
Osman Memisoglu
And on retail lending? Any changes in the environment?
Harris Kokologiannis
I would say that there are 2 things on retail lending. There is more that continues to be quite weak. Not the real estate reduction, but the lending side, we have a lot of transactions taking place with so much cost. On the other side, we see a quite non-realization of consumable, especially some new products and credit cards. Quarter-by-quarter, we see that the, the figures are quite small for the moment, but in the detail, we see a volume of consumer lending. And it is a lot of the areas that we expect more to come in 2024. But as we have the big figures coming, and continue to come for next quarters from the corporate book portfolio.
Operator
The next question is from the line of David Daniel with Autonomous Research.
Daniel David
Congratulations on the results. Just a quick one on debt issuance. Noting your activity last year in Tier 2 markets, just interested to do your thoughts on issuance plans, whether we could see anything in Q4 or what next year looks like? And also, could there be an AT1 in the plan?
Harris Kokologiannis
So third quarter annual ratio stood at 23.7%, and it's already above, the January 1st 2024, slowed by income rate target of 23.19%. The final overall target. So as we show, we said at 27.8% of RWA and the compliance horizon lease until end 2025. In terms of resources in within 2023, [indiscernible] no need, we have covered the target for the year. And the mere increase further in the rest of the year due to organic profitability. However, the city of weather will be proactive as regard to the 2024 issue plan. Will be taken in the coming weeks, I would say. As regards to Tier 2, depending on market conditions, we may consider detailed reasons sometime in the coming quarters, or let's say, for the amortization of the existing Tier 2 instruments by the Hellenic Republic. However, digital program for at least for 2023. As regards to AT1, there's not any plans for AT1 yet.
Operator
The next question is a follow-up question from the line of Butkov Mikhail with Goldman Sachs.
Butkov Mikhail
Just one more question. Do you see any implications from the recent S&P upgrade for your risk rate in densities, if any?
Harris Kokologiannis
You mean the sovereign upgrades, right?
Butkov Mikhail
Yes, the sovereign upgrades.
Fokion Karavias
This will definitely help us. We have the banking sector overall and definitely Eurobank in terms of the cost of our ML issuance. So this is definitely something positive. However, what is going to be even more important is the flow of investments that we expect in the country. Definitely a very strange investment trade should improve investment flow.
And as I mentioned in my introduction, this is one of the main objectives of the economic policy at the moment.
Butkov Mikhail
Okay. And I assume for the risk weighted densities you do not expect big changes from this upgrade?
Fokion Karavias
No, not any material at the moment.
Operator
The next question is from the line of Alexandros Boulougouris with Euroxx Securities.
Alexandros Boulougouris
Congratulations on the results.A quick question on lending growth, especially in the corporate space in the local market. We've seen performing balances a little bit flattish in the past quarter. On the guidance, it gives a bigger guidance for full year in terms of performing. How do you see the outlook for Q4? And maybe if you can give a color on 2024, if possible?
Harris Kokologiannis
So as you may have seen loans has been expanded by €700 million in the first 9 months of the year. This coming primarily from Bulgaria sides. The loan cost on [indiscernible] expectations was too positive, which is better than in other parts of Europe. We expect performing loans to grow over by something more than €1 billion for the full year 2023. So we should expect something more than €300 million in the last quarter of the year and in growth maybe coming by both grades and our competency.
We feel confident that chemical will resume in 2024 as the pace of the payment is being faded out gradually. And the number of projects which were delayed in 2023 are expected to be closed next year. At the first, although we are still in the bad preparation phase, I would say that in 2024 SCE is anticipated to grow by high digit rates, while grid is expected to grow by mid-grade. These are some first debt net. We're going to be more precise during leaders conference presentation early 2024.
Operator
Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Karavias for any closing comments. Thank you.
Fokion Karavias
Thank you. Let me thank you all for participating and attending this call. Thank you also for your questions. Our Investor Relations, Haris and myself will be available for any follow-up. Thank you.
Operator
Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for calling, and have a pleasant evening.
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Eurobank Ergasias Services and Holdings S.A. (EGFEY) Q3 2023 Earnings Call Transcript