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National Bank Greece SA (NYSE:NBG)

Q3 2012 Earnings Call

December 21, 2011 10:45 pm ET


Paul Mylonas – General Manager of Strategy and & International Activities, Chief Economist of the Group and Member of the Executive Committee

Petros Christodoulou – Deputy CEO and Member of the Executive Committee


Stefan Nedialkov – Citigroup Inc.


Good afternoon, ladies and gentlemen. This is the Chorus Call conference operator. Welcome and thank you for joining National Bank of Greece Nine Months 2012 Financial Results Conference Call.

At this time, I'd like to turn the conference over to Mr. Paul Mylonas, General Manager, Head of Strategy and International Operations. Please go ahead sir.

Paul Mylonas

Hello, everyone. Thanks for joining us for the call of the nine month results. Sorry to be making this call on the Friday before the holiday, so we appreciate your attendance. As usual, we'll start with some opening remarks. Petros Christodoulou, Deputy CEO will start. I will take over a little bit and then we’ll up to Q&A, and we have among us also Panagiotis Chatziantoniou, who is the Head of Finance for the Q&A session. Petros?

Petros Christodoulou

Thank you, Paul. Good afternoon, everybody. Good morning to those of you dialing in from the U.S. Let's proceed with the key highlights of the third quarter.

Let me first start by updating everyone on the key developments regarding the macro situation in Greece. Following the latest batch of fiscal consolidation measures that passed through the Greek Parliament, totally no less than €13.6 billion for the next two years, euro group has approved the disbursement of €49 billion tranche from the EU financial assistance package and as you know, we're also expecting the IMF's tranche as well.

After three years of unprecedented fiscal retrenchment, Greece is expected to record a primary budget surplus in 2013. The banking sector will now be able to replenish its capital base following the severe losses stemming from the PSI+, as well as credit losses associated with a deep and protracted recession in the economy. The sovereign debt buyback plan that was recently completed with success is a further step towards improving Greece's debt sustainability.

In addition, the ECB has reopened its window for collaterals from Greek banks. Greek bank recapitalization will take place in the first half of 2013 mainly through the issuance of new common shares plus contingent convertibles and warrants attached to these new shares.

As you know, the Greek banking sector is in the midst of a major consolidation. In this context I would like to say a few words with regard to our voluntary tender offer for 100% of the shares of Eurobank.

Our AGM approved the VTO and associated capital increase on November 23. The Greek Capital Markets Commission is reviewing the offering documents following the announcement of results by NBG and Eurobank. Upon approval by the Capital Markets Commission Eurobanks Board will convene within 10 days to opine on the offer, which of course is subject to the customary regulatory approvals by central banks and competition authorities in various jurisdictions where we operate in, as well as the Greek competition authorities.

Before proceeding with the main highlights of our nine month results, I’d like to update everybody on NBG's participation, the sovereign debt buyback. NBG participated in full tendering €4.4 billion of new GGBs, that's notional value, that were accepted at the maximum price. The P&L impact of the sovereign buyback before taxes is a positive EUR314 million to be booked in Q4.

Now, moving to the nine month results highlights. After the top-up of €2.3 billion that followed the disbursement of €7.4 billion from the Hellenic Financial Stability Fund in Q1, on a pro forma basis and including the PSI plus related deferred tax asset of €1.7 billion, our capital base would be replenished with EBA Core Tier 1 ratio reaching 10.3%. This number includes the aforementioned gains from the GGB buyback and the announced sale of our insurance business in Turkey. Please note that we are also on track to place Astir Palace in the market in early January.

With regard to liquidity, Group loan deposit ratio improved 2 percentage points to 114%, as deposit stabilized in Greece and we delevered the balance sheet. However, to include the TRY2 billion retail bond issues completed in September for Finance Bank, the group loan to deposit falls to 112%.

In Turkey, our loan deposit stands at 113% including the aforementioned retail bond issues. In Southeast Europe, loan deposit is down 18 percentage points year-on-year and stands at 120%. Still our reliance on euro system funding at the end of Q3 remained significant at just over €33 billion.

The silver lining is alongside the disbursement of the recap money, we have regained access to ECB funding and thus we're able to substitute a portion of ELA funding for lower costing funding from the ECB. This would gradually help our domestic NII in the coming quarters.

Pre-provision profits excluding trading came in at positive €401 million, down 1% quarter-on-quarter, while the nine months profit after-tax comes at negative €2.4 billion that was impacted by a negative trading result in Greece of about €633 million and €1.8 billion of provision expenses and €1.2 billion of other impairments. The negative results from the trading is predominantly due to credit valuation adjustment on derivative positions with Hellenic Republic and has been very volatile from quarter-to-quarter, in fact the impact was positive in Q2.

Turkey continues to fire on all cylinders, helping the Group's bottom line to the tune of 400 million for the first nine months of the year and on the back of a very strong showing in net interest income, while the Southeast Europe operations were marginally in the red deleveraging and increased funding cost in the region impacted the top line. We continue to focus on streamlining our cost base. In fact, operating expenses were down 3% year-on-year in Greece, as Greece saw operating expenses decrease by 7% year-on-year, that's down 17% from their peak.

Please note that in 2013, we should begin to see the effects of the new collective agreement signed in September, instituting wage reductions for Greek staff of [circa] about 11%.

On the asset quality front, delinquency flows deteriorated significantly in the quarter, as a result of the continued steep contraction in the domestic economy. However, delinquency flows were better than in Q2, a period of elevated turmoil associated with electoral uncertainty.

Overall the Group 90 days plus ratio climbed to 18% at the end of the quarter with cash coverage at the best in class, 53% and cost of risk at 416 base points, underlining the Group's conservative provisioning policy.

Let me now hand it over to Paul and he will walk you through the details of our results. Paul?

Paul Mylonas

Thank you, Petros. Okay, let's start with Page 3 of the presentation. You see that Group income is €2.4 billion for the quarter and this was adversely affected by the aforementioned negative trading results.

Core revenues, i.e. NII, net fees and insurance were down 10% mainly due to the significant drop in Greek NII. Nevertheless, the decline in Group NIM remains – sorry, the Group NIM nevertheless remains at a solid 360 basis points.

In Greece, NII was down €67 million in the quarter to €394 million, impacted by, first, linear 30 base points in Euribor and this was fully absorbed by our deposit spread; second, the shift in the funding mixed away from ECB funding towards the costlier ELA funding; third, the decrease in interest earning assets that has resulted from deleveraging. We have about a 19% decline in the net loans since 2010, the duration in asset quality and the PSI plus.

Stripping away just the effect of the transitory shift to the costlier ELA, all our funding had gone to ELA. The decrease in NIM q-on-q in Greece would have been a more moderate 12 basis points to 303 basis points. That's on the bottom left of the slide.

In Turkey, NII increased by TRY26 million in just one quarter to TRY752 million. As Finansbank continues to reprise the asset side, grow strongly in the high yielding segments. It has also been supported by the drop in the cost of funding in Turkey as a whole, due to the easing of monetary policy. In the event, NIM is at 662 basis points at Finansbank, the highest among private sector peers.

In SEE, both NII and NIM declined in the quarter to €60 million and 306 basis points, respectively, primarily because of the continuing deleveraging of the loan book in the region and the higher cost of funding as we strive to make our SEE subsidiaries completely self-funded. NII was also adversely affected by the asset yield declines on our floating rate book without comparable relief on the funding side.

Let’s turn to Page 4 now, and OpEx. Our sustained focus on cutting our expenses is reflected in the continued sharp decline in the operating cost base, especially, in Greece. Personnel expenses and G&As in Greece were down 6% and 9% year-on-year respectively, in fact, a cumulative drop in personnel expenses.

For the first nine months of the year compared with three years ago 17% and the comparable number for G&As is 19%. In addition, we have yet to see the effect as Petros mentioned earlier of the 11% wage reduction anticipated in 2013 as a result of a new collective agreement signed with our employees.

In Southeast Europe, we also continue to cut expenses aggressively, and as a result, we’ve managed to reduce operating expenses by 9% year-on-year. In Turkey, at Finansbank, in contrast, operating expenses are up 8% year-on-year in euro terms and 10% in TRY terms, which is not unreasonable if you take into effect that the fact that business is expanding rapidly and the inflation levels in the country are relatively high 6% to 7%. All said, on a Group basis, operating expenses are down 3% year-on-year.

Let’s turn to Page 5 – Slide 5, on asset quality. Delinquencies, delinquency flows were €1 billion in the quarter and is stem mostly from our Greek loan book. As a result, the Group 90-day past due ratio rose by 270 basis points to 18%. Sufficient provisions were taken however, so that the cash coverage for the Group remained at a relatively high level of 53%. As Petros mentioned, among the best of Greek banks.

In Greece, the 90-day past due flows accelerated, against a dramatic GDP contraction and the fact that the economies liquidity started. They increased by about 270 basis points q-on-q. As a result, the 90-day past due ratio in Greece stood at 21.9% with coverage of 51% and the cost of risk upwards of 470 basis points.

Adjusting for the impact of deleveraging, the ratio would be about 200 basis points lower. These extraordinarily poor results must be judged in the context of the highly uncertain climate in Greece at the time which we hope is past us.

In Turkey, at the end of Q3, 90-day past due delinquencies stood at 5.2%, our cost of risk increased to 160 basis points. The increase partly reflects an increase in the cash coverage to 80%, a recent high, and reflects a more conservative provision policy at this stage of the cycle, as well as the drop in activity in 2012 from the strong levels in 2011.

Finally, in Southeast Europe, the 90-day past due ratio stood at 21.4%. Delinquency generation has tapered off and this gives us cause for cautious optimism, particularly, in Bulgaria. Indeed, 90-day past due duration is the lowest since the beginning of the crisis.

Cash coverage is at 50% and the run rate for charge offs is 400 basis points with a lot reflecting the reassessment of the recoveries from all delinquencies. Excluding these specific charge-offs, our cost of risk would have been about a third less.

Let’s turn to Page 6. And liquidity, Group wide loan to deposits stood at 114% in Q3 as the outflow of deposits in Greece appears to have come to an end following large capital outflows associated with the electoral uncertainty in Greece in the second quarter of the year.

Specifically in Greece, loan to deposits is at 108% despite the large decline in deposits since the beginning of the crisis about 25%. We continue to defend our market share in the core deposit franchise while playing our systemic role in pricing well within the market. The overall consumer deposits declined by 12% year-to-date. Deposits flat in the third quarter.

In Turkey, total deposits were up 11% year-on-year bringing our market share in local currency and total deposits to 4.5% and 4.4% respectively closer to our branch market share. It is important to note that the domestic bond market is growing strongly in Turkey as Finansbank has taken bandwidth to issue TRY denominated bonds, mostly to its retail customers. From hardly any such issues in 2011, now they’re currently 2 billion TRY outstanding today as we speak and this will increase going forward.

In Southeast Europe, our deposits increased by 2% year-on-year and the significance of this number should be taken in the context of a period of significant loan deleverage. Importantly, in Southeast Europe, the commercial funding gap has for the first time turned negative at about €200 million from around a positive €600 million two years ago.

In other words, equity and deposits do business more than match net loans. Let me point out that the peak in 2008, the commercial funding gap was about 2.5 billion. So there's about almost 3 billion change in Southeast Europe in terms of funding.

As a group, reliance on the U.S. system funding is at €33 billion at the end of the quarter, and two important points to note. First, total year's European system funding is broadly stable at the levels of Q1, so no more increases. Secondly, as mentioned by Petros upfront, we're now able to subset ELA by ECB funding and this should gradually have a positive effect on our domestic NII.

Let's turn to slide 7, on the capital; again, this repeats some of what Petros said. The CAD on a pro forma basis from the capital advanced from the Hellenic Financial Stability Fund stands at 11.9%, Tier 1 11.2%, and EBA Core Tier 1 is at 10.3%. The latter should be compared with the target set by the Troika of 9%. As Petros has mentioned, these figures include DTAs arising from the PSI about €1.7 billion, capital gains from the buyback and the sale of our Turkish issuance business.

Page 9, we look at, turning to Greece, some of the details of Greek results. The key takeaways, I would like to underline on Greece are the following; PSI+ asset quality deterioration and funding cost pressures had negative effects on NII in Greece, which was down 26%. The key drivers were mentioned earlier, but it's worth mentioning again, was the weak performance of, one of the key things to understand about the performance of NII is that some of the drivers are transitory.

NII was down due to the fact that we absorbed the full decrease in Euribor in our core deposit spread, the cost to switch to ELA funding. In fact, these two account for 90% of the drop in NII, and you can see that in a table on Page 11, which is quite revealing. We hope that some of these will be reversed quickly, ELA funding more quickly than the rise in Euribor rates.

We're quite proud of the cost containment. We'll mention the numbers again; Payroll bill down 6% and G&A is down 9% year-on-year. You will wonder about the other impairments; €1.3 billion in nine months. These reflect further PSI losses as the new GGBs were marked down to about just below €0.25 and additional impairments were taken on Titlos reflecting the Bank's more conservative stance on that item.

Let's now turn to page 14 of the presentation. Let me start by mentioning the sale of our life and health insurance business in Turkey in Q4, which will add yet to be recorded upfront pre-tax benefit of about €137 million to our bottom line and will add more than 50 basis points to the local CAD ratio.

NII was up an impressive 34%, 4% Q-on-Q as the National Bank continued to reprice higher-yielding segments and refrained from aggressively competing for expensive deposits, [expenditure] of the rapidly developing domestic bond market as was mentioned earlier. It is important to note that fee growth was up 33% year-on-year, by far the best in the market, and it now represents a sizable 24% of total income.

The growth in deposits surpassed loan expansion as total deposits, including the retail bonds were up 11%, while loans were up only 8%. We feel that our liquid position is appropriate with loans to deposits at 113%, those were in euro terms.

We continued to place importance on cost containment in Turkey as well despite the strong growth performance. Thus despite inflation pressures and the addition of 10 branches year-on-year, operating expenses increased by just 10% year-on-year, among the best performance in the top-tier banks.

It's important to note, by the end of the year more than 50 additional branches would have been opened in line with Finance Bank strategy to move up the league tables. On the asset quality front, our pre-provision margin is still over 3.5 times cost of risk underlying the strong risk-adjusted performance.

Finally, though we continue to expand our balance sheet, the capital base is strong with the capital adequacy ratio close to 18%. It will increase further from the aforementioned sale of the life insurance business. Recall that in 2012, Finansbank signed two 15-year bancassurance distribution agreements, one with Cigna for life and one with Sampo for non-life. These partnerships are expected to provide the basis for strong position in the insurance business going forward.

On SEE, let's jump to page 21. The business in Southeast Europe produced a marginally negative quarter as we delevered our balance sheet in the region and faced adverse funding conditions. This has resulted in a clear improvement in our funding profile, as mentioned earlier, but it has also clearly hurt our top line.

Specifically, NII was also negatively impacted by floating rate assets yields, particularly in Romania; profits were also adversely affected as mentioned earlier by the assessment of the recoverability of certain loans on the corporate side and taking of additional provisions.

At the end of the third quarter, our loan book stood at 6.5 billion, down at 9% year-on-year and 1% Q-on-Q, customer deposits were up 3% Q-on-Q, 2% year-on-year, as we continue to make steady progress towards parent funding independence in the region.

How to balance the top line weakness, we have sharply reduced our cost base, 10% year-on-year, personnel costs are down 14%, and G&A is 5%. The tough decisions on cost and funding have not put the business in Southeast Europe in a position to take part of the envisaged recovery.

Now, let me conclude with the following closing remarks before opening up to Q&A. Our four areas of focus remain unchanged. First, restoring our capital base to levels to allow NBG to support the Greek economy as it returns to growth; second, improving our liquidity profile and most importantly, minimizing ELA reliance is an immediate goal; third, we continue to aggressively manage our delinquent portfolios through more effective collection mechanism and restructuring programs to support our customers at times of extraordinary stress.

Finally, we continue to cut our expense base across the Group, taking advantage of the unique opportunities that current conditions present to completely rebase our operating model. The results of the first nine months of 2012 provide encouraging signs of success in our view on all these fronts. We will now take questions.

Question-and-Answer Session


The first question is from Mr. Nedialkov, Stefan of Citigroup. Please go ahead sir.

Stefan Nedialkov – Citigroup Inc.

It’s Stefan from Citigroup. Well, first of all, congratulations in order for making it at least 24 working hours before Christmas. so thank you very much and hi, guys. And now, in terms of the actual question, it’s really on capital. Your capital needs of 9.7 as assessed by the Bank of Greece/HFSF. could you just remind us what the breakdown is in terms of proper equity versus BlackRock CoCos, and then how much have you received, how much commitments do you have rather than cash and when would you expect to receive the remaining cash from the HFSF? Thank you.

Petros Christodoulou

Yeah. Hi, it’s Petros. First of all, we have received the whole amount, and as you know in this re-CapEx assize, there is no cash; it’s all bonds for us and everybody else. And what was last part of your question, the breakdown of this 9.7, this is not something we would make public at the moment.

Stefan Nedialkov – Citigroup Inc.

Okay. Just one follow-up, when you say, it’s not cash, it’s HFSF bonds right, which are pretty close to cash, one would hope and you can use those for collateral purposes with the ECB right?

Petros Christodoulou

That is correct. Just been exact, it’s not cash. It’s bonds that we intend to and since we’re able to as well to represent with ECB and that’s what we intend to do.

Stefan Nedialkov – Citigroup Inc.

If you just allow me, one last question. In terms of the 10% private investor participation, are you able to give us an update on how that’s looking?

Petros Christodoulou

Look, the only thing I can tell you is that this is pretty close to the trough of the Greek economy and the Greek banking sector, valuations wise. And given that the recap is going to take place at a serious discount to the then market prices. you appreciate that people are looking into it, accepting that we are close to the bottom, if not at a trough. It is too early to have solid interest. This is something that we will start on working on in Q1. Don’t forget, we have a bigger fish to fry for us. We have a tender offer that will be announced, will go live, the acceptance period if you like by the middle of January. For us, the completion of the tender offer is something that will complement our equity story, and we will have much more, along with EFG, if everything goes well. we’ll be having a common line and a common vision if you like going forward. So we’re taking first thing first and this is what we have ahead of us.

Stefan Nedialkov – Citigroup Inc.

Okay. thank you, Petros.

Petros Christodoulou

Well, this is Petros again, unless there’s no other questions, myself and Paul Mylonas and the whole team here are available, as you know, we’re only an e-mail away or a phone call. So should questions come up, during holidays that you want to share with us and you want to bounce of us, we are here to answer them. We want to thank you for listening, and attending this conference call. We want to wish you the best for this Christmas and holiday season, and wish you all the best and relaxation, have fun and we’re here to talk to you again whenever you want to call us, I don’t think many of us will be taking any holidays, as we have so many things on the hotplate here, but we’re here available to if anybody wants to dial-in. Thank you.


(Operator Instructions) Ladies and gentlemen, the conference is now over. You may disconnect your telephone. Thank you for calling. Goodbye.

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