NBGIF - National Bank of Greece SA (NBGIF) CEO Pavlos Mylonas on Q2 2022 Results - Earnings Call Transcript
National Bank of Greece SA (NBGIF)
Q2 2022 Results Conference Call
July 29, 2022 12:00 PM ET
Company Participants
Pavlos Mylonas - CEO
Christos Christodoulou - Group CFO
Greg Papagrigoris - Group Head of IR
Conference Call Participants
Alevizakos Alevizos - AXIA Ventures
Butkov Mikhail - Goldman Sachs
David Daniel - Autonomous
Sevim Mehmet - JPMorgan
Memisoglu Osman - Ambrosia Capital
Presentation
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 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. [Operator Instructions]
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 second quarter financial results call. I’m joined by Christos Christodoulou, the Group CFO; and 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 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’m 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 source 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 an increase in the contribution of lignite powered plants from 5% to 10% of total energy consumption. A switch over number of electricity generation plants from using gas to oil. And three lower gas use in industry as committed to the EC European Community.
Second, low energy access risk appears to be minimized energy prices 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 target mostly low income households are expected to exceed €6.5 billion in fiscal year 2022 out of a total package of fiscal measures equivalent 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 the real disposable income will come from surprisingly strong employment growth, estimated to be 4.5% of fiscal year ‘22, it is 10% in five months ‘22. Combined with wage increases of around 3% on average for the private sector including nearly a 10% increase in the minimum wage. It should offset higher food costs and residual energy costs not covered by the fiscal measures previously described.
In fact, disposable income may not suffer a meaningful decline in fiscal year ‘22 although some downside risks exist between ‘23 if the energy crisis is prolonged and greater than expected. A strong economic backdrop 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 trading back from much higher spend per head estimated 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, the nominal increase in profits over 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 ‘22 versus the first five months of ‘19 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 a very different phase of the economic cycle, coming off an extensive period of destruction, which eliminated weak players.
Second, collateral values mainly real estate are still on the value following the 60% drop in prices during the economic crisis, we are in 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 to the European peers. Indeed, the expected tightening of monetary policy by the ECB for the order of 150 basis points to 200 basis points mostly over the next 12 months is not expected to lead 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.
The strong number of 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 for the debt to GDP ratio should declined 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 NPEs will be created or a new loan demand flows. Indeed, to-date, early delinquencies show no increase still July, including those loans previously understate bank’s 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, due to 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 continued with the second quarter organic flows remaining negative as our successful restructuring products continued through solid curates despite a shrinking FNPE pool. As a result, our domestic NPE ratio dropped further in the second quarter by 40 basis points to 6.1% practically the MREL target. Net of provisions NPE stands at just €400 million equivalent to about 1% of our loan book.
Turning to capital CET1 and total capital ratios stood at 15% and 16.1% on a fully-loaded basis. A positive impact of the completion of the merchant acquiring transactions EVO payments should add approximately 60 basis points to this ratio in Q4, and the Frontier II transaction signed today with add another 25 basis points upon closing.
In the other [indiscernible] of the balance sheet, our efforts have increasingly focused on improvements in core profitability. In the second quarter core operating profits, 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 the first half of ‘22 hedged higher despite the loss of meaningful NII from Frontier I. As the performing loan book increased by as a 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 in the second 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 continued to deliver strong results with the first half fees up by 23% year-on-year, driven by both retail and corporate circles . 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've 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 ratio remains on declining trend, dropping below 49% in the second quarter and was 50% in the first half of the year 2022.
Finally, of course, the risk continue to normalize, dropping just below 70 basis points in the first half of the year in line with our full year guidance supported by the favorable asset quality trends.
All in all, are attributable PAT reached to €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 €05 billion despite the fact that the expense, despite the fact that the substantial 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 NII from the envisaged tightening of monetary policy by the ECB.
With that, 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 Q&A. Christos?
Christos Christodoulou
Thank you, Pavlos. So let's now look into our financial performance in more detail. Starting with profitability on Slide 10, our group profit after-tax from continuing operations amounts to €490 million in H1, 22 driven by core operating profit growth, which comes in at an impressive 40% year-on-year to €280 million driven by solid core income growth and supported by cost containment.
Domestic loan disbursements accelerated in Q2, ‘22, which in €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 H1 ‘22 NII back to growth trajectory with increasing interest income from performing loans as well as higher bond income already fully absorbing the impact of Frontier I to consolidation. Positive NII trends coupled with sustained income growth of 23% year-on-year drives our core income higher by 5% year-on-year.
Cost are kept near flat despite setting inflation throughout H1 ‘22, 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 NPE flows led domestic NPE exposure lower to €1.9 billion just €0.4 billion net of provisions NPE 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% NPE ratio guidance for the year-end 2022. Despite the measure of cost of risk normalization our domestic cost currently is up by 300 basis points year-to-date standing at 81% by far the highest in sector.
Our robust capital position was maintained fiscal ‘22 as shown on Slide 12, with fully-loaded CET1 and total capital ratios standing at 15% and 16.1% respectively. In terms of quarterly trends, we continued capital trajectory has strong profitability in the quarter comfortably absorbed credit as well as other expansion in the quarter. Both CET1 and total capital ratios aligned with the year-end 2022 guidance already before factoring-in H2 ‘22 profitability, as well as the additional 50 basis points of capital to be accounted for later in the year upon completion of the mentioned acquired in JV.
Now, let me walk you through the key drivers of our profitability on Slides 13 to 19. The impressive domestic NII recovery by 9% quarter-on-quarter was mostly driven by the expansion of our performing loan book, resulting from the acceleration in loans especially in the corporate segment, driving interest income from performing balances higher for the fourth consecutive quarter.
At the same time, lending yields [indiscernible] of 307 basis points. Moreover, the model is rebalancing our fixed income portfolio, interest income from securities, providing sustainable support to core to income. As a result, NII is higher in H1 ‘22 absorbing fully the significant lower contribution from NPEs following Frontier I to consolidation in late 2021.
Moving on fee income on Slide 18, the impressive domestic fee growth of Q1 ‘22, was sustained in the second quarter, putting fees up by plus 24% year-on-year in H1 ‘22 supported by both retail and corporate fees up by 31% and 21% respectively. Key drivers to this strong performance were card fees, payments, trade finance and loan origination.
Our digital transformation continues to produce impressive results with the e-banking transactions up by 23% year-on-year in Q2, reflecting the ongoing migration of our customers to digital channels. This solid performance are positively revised guidance for fee growth in 2022 in the mid-teens area relative to 10% guided for 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 including personnel cost reduction of 3% year-on-year reflecting of lower headcount, along with tight demand management absorb the pressure on G&A due to inflation and increase depreciation driven the investment plan.
The [indiscernible] includes the ongoing replacement of our core banking system, which will constitute a step change in NBGs competitive position, both in terms of improving our service offerings, as well as increasing productivity and efficiency. Going forward, further headcount and production network rationalization will allow us to continue weathering inflation headwinds, keeping costs update.
Moving on to asset quality on Slide 20 to 23. Consistently negative organic flows is 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 restructuring.
[indiscernible] and value chains this year to present a natural consequence of the reduce of NPE portfolio, especially in the after-market of the Frontier transactions. Nevertheless, new defaulted defaults are maintained at low levels, while starting the debt forgiveness supported by the highest level provisions who have built over time support and feedback. As a result our domestic NPE ratio came down by a solid 40 basis points quarter-on-quarter at 6.1%, while coverage stood above 80%. Encouragingly for quarter and so far in July, we see no sign of pickup in NPEs from clients previously understate for past --
Turning to liquidity on Slides 24 to 26. Fiscal support measures to high and still rise in domestic deposits will settle 3% higher quarter-on-quarter at €52.7 billion. Even though our stock of deposit is large and almost two times of our performing loan book, the increase in deposits is welcome, as it ensures the private cash buffers remain at very high levels, thus cushioning the pressure on household disposable income from inflation. And the positives 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 searching inflation, NBG delivered a very strong financial performance in Q2, ‘22. Our balance sheet has been rendered near clean, our capital profit maintained 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 exceeded our targets continuing on the strong track record of credibility.
And on this note, I would like to open the floor to questions.
Question-and-Answer Session
Operator
Ladies and gentlemen, at this time, we will begin the question and answer session. [Operator Instructions] One moment for the first question please.
The first question comes from the line of Alevizakos Alevizos with AXIA Ventures. Please go ahead.
Alevizakos Alevizos
Hi, Thank you very much, gentlemen for a very good presentation. Got questions, if I may. So I realized that you've changed the guidance for the NII from going down, maybe single-digit to going flat right now. But you steered clear of upgrading [indiscernible] expectation for the year. When you think about doing that now, you will wait for another quarter?
And secondly, do you plan also, the guidance for the cost of risk given that the NPE formation remains at basically negative low and I've got another one.
Christos Christodoulou
Hi, Alevizos. So I will start with the second question. It's a bit early and too much you have to change our cost of risk for the year-end. So we reiterated our guidance for about 70 basis points we are currently at 68 basis points. And as far as the return on tangible equity is concerned, as you rightly said, it’s a bit early to revise that figure. So we're going to the development we'll see how the income comes in the third and fourth quarters and we'll see that. And second question?
Alevizakos Alevizos
And the second question was regarding some of the NII sensitivity scenarios now that we got a bit of better clarity with ECB, well first ECB. 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.
Christos Christodoulou
So, the interest rate sensitivity is more or less in the lines that we shared with you guys in the previous results calls, so I will talk about additional interest income subject to chance of 50 basis points increases. So if the first 50 basis points that we've seen gives about €70 million of NII, the second 50 basis points an additional €120 million and if we talk about 150 basis points [indiscernible] increase in another €100 million and then it goes down to around €50 million to €60 million to report 50 basis points chance.
Now with regards to the Emerald plan that we have and what we have assumed going forward. The plan assumes for probably depending on market conditions, an issuance towards the year-end, we are exploring other Emerald eligible instruments at the same time. But you know given current market conditions, what we have put, something over 5% with regards to the cost.
Operator
The next question comes from the line of Butkov Mikhail with Goldman Sachs. Please go ahead.
Butkov Mikhail
Good day. Thank you very much for the presentation. The first one question is on NII in the second quarter. So you mentioned that you had quite strong performance in -- of the performing loans and also flat yields but to 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 then the second question is a broader one. So you started the presentation with the discussion of the macro outlook is that and that the Greece is coming out of them in a different economic cycle, then the Europe which was very, very useful comments under 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 translated into asset quality or some capital metrics if discussing the stress test scenarios? Thank you.
Christos Christodoulou
I'll take the first one. And then the CEO will address the second one. So with regards to our NII growth, yes, as you rightly said, this is mostly driven by a loan, our performing loan based so as we disclose on Slide 13, our presentation, about €10 million of the increase is driven quarter-on-quarter it’s 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. The fact that we were trying to rebalance our portfolio, an increase of about €7 million to €8 million. This was the first quarter with regards to NII.
Pavlos Mylonas
A 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 macro environmental then. Now December the winter and ‘23 less clear, very hard to judge, I mentioned in my opening remarks that for ‘23, we have a lower bound on growth will be around 1.5%.
So it's still a growth scenario even with that scenario, comprising energy prices slightly higher than current levels have expanded close to ‘23 at that level. Now, depending on the scenario, you can get a different result, you can say the price will go up 30% from current levels and we can stay there for a year and a half, that will 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 into negative territory and almost any scenario, unless you have something really to put on you.
Operator
The next question comes from the line of David Daniel with Autonomous. Please go ahead.
David Daniel
Hi, good afternoon and congratulations on the results. I've just got a couple of quick ones. In your capital slide opening, you've got the pro forma benefit of Frontier II, because I just checked was it 25 bps boost to [indiscernible] on that would happen upon the completion of Frontier II?
And then just second picking up on the comments on Emerald, you mentioned you're looking at other instruments. Just wondering if you could disclose just a few more details on what they might be is that private issuance, such as some of your peers look back towards in the last year or anything else? Thanks.
Pavlos Mylonas
Now with regards to Frontier, yes, we just came out today announcing the signing. Based on today's risk weighted assets, we say that we expect an update 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 pro forma the only additional to the actual numbers so far on the presentation has to do with the completion of the merchant acquiring, which is expected to materialize towards the end of the year the fourth quarter and then you will see that number.
With regards to Emerald, eligible instruments other than just going out with an issuance as we investigate has to do with structure deposits that fulfill the criteria for Emerald eligibility. We're also exploring possibility of our securitization. So we're not putting all eggs in one basket and in fact to be ready to be compliant with our non-binding targets for the 1 of January 2023 if my customer now [indiscernible].
David Daniel
Thanks, good. Just double check on Frontier II, is there any kind of date you think that might be completed?
Pavlos Mylonas
Well the expectation is by the end of the year subject to approvals.
Operator
[Operator Instructions] The next question comes from the line of Sevim Mehmet with JPMorgan. Please go ahead.
Sevim Mehmet
Good evening. Thanks very much for the presentation and congratulations on the results. I have two quick ones, please. The first one on the very strong loan growth momentum, clearly the environment is quite supportive. But the momentum in the second quarter is above and beyond the issue. 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-off 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, the some of the non-core lines so trading and other income would come to about zero euro, 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, et cetera. Thank you.
Christos Christodoulou
Let me start with the loan growth momentum, clearly loan growth 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, so there is some choppiness in there, I wouldn't call it one-off. The factors that are seeing the disbursements are clearly hospitality, energy, shipping is their infrastructure.
What you'd expect for the Greek economy, as well as manufacturing. So, but there is a little bit of choppiness. So I will just move a little bit what you've seen, rather than saying there's a one-off of any one size.
Pavlos Mylonas
And the second question was on the trading gains, indeed, in the first half of the year we had gains from deliveries 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 you've recognized in the first half of the year.
Sevim Mehmet
Thanks very much. Just on the loan 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?
Christos Christodoulou
The pipeline that we're discussing with clients is stronger than the second half and 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.
Operator
The next question comes from the line of [indiscernible] Alberto with Mediobanca. Please go ahead.
Unidentified Analyst
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.
Pavlos Mylonas
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're trying to rationalize our footprints across network and FTP. 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 it of loans or debt securities. 95% of it is classified to collect. So we don't have any volatility in equity on that. And the rest is here 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 at the moment. So you shouldn't expect any great movements in the next quarter.
Operator
The next question comes from the line of Memisoglu Osman with Ambrosia Capital. Please go ahead.
Memisoglu Osman
Hi, many thanks for taking my question. Just follow up on the previous question issuance. You were mentioning in the past, maybe appetite for Q1, but under these conditions of the market share, we assume it's just going to be a senior issuance for the end of the year? Thanks.
Christos Christodoulou
Yes, most probably yes. If we decide to come out, it looks like it's going to be more lavishing.
Operator
[Operator Instructions] 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 for joining us on a Friday afternoon in late July. I hope you all have a relaxing vacation. Don't turn on the air condition too high. It consumes electricity and hopefully we'll see you in September. Thank you.
Operator
Ladies and gentlemen, the conference is now concluded. And you may disconnect your telephone. Thank you for calling and have a pleasant evening.
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National Bank of Greece SA (NBGIF) CEO Pavlos Mylonas on Q2 2022 Results - Earnings Call Transcript