National Bank of Greece SA (NBG) Q1 2012 Earnings Conference Call May 30, 2012 11:00 AM ET
Paul Mylonas – Chief Economist
Anthimos Thomopoulos – Deputy Chief Executive Officer
Babis Mazarakis – Group Chief Financial Officer
Alex Atienza – Citigroup
Welcome to the NBG's Quarter One 2012 Results Conference Call. My name is (Sara) and I will be your coordinator for today’s conference. For the duration of the call, you will be on listen-only. However, at the end of the call, you will have the opportunity to ask questions. (Operator Instructions)
I am now handing you over to Mr. Paul Mylonas to begin today's conference. Thank you.
Hello, everyone. Thank you for joining us for the Q1 results call. As usual, we’ll start off with Anthimos Thomopoulos going through the company remarks and then we'll have Q&A. I am joined here also by Babis Mazarakis, Group CFO who will be also available for financial questions afterwards. Anthimos?
Thank you, Paul. Good afternoon everyone. Let's proceed with the key highlights of the first quarter. I'd like to start with a quick reference to the recapitalization. As you know, we have received yesterday the first installment of €7.4 billion from the Hellenic Financial Stability Fund. And as a result, our capital base has been replenished with post-PSI with a capital adequacy ratio now standing at just over 8% on a pro forma basis of course, taking into account the disbursement that took place last night.
The result for the quarter came in at a loss of €537 million, primarily because of the negative trading results of €270 odd million in Greece. The trading results was to a large extent the impact of credit valuation adjustments, the counterparty risk we have with the Hellenic Republic on derivative transactions that carry with the Republic, including Titlos. And as the credit standing of the – credit rating of Republic was deteriorating, we booked a significant markdown on those positions as well. Turkey turned a good quarter contributed €125 million to the group's bottom line, on the back of a very strong showing in net interest income, while businesses in Southeastern Europe were marginally in the red as the leverage in the region impacts the top line.
Stripping away the negative trading result, the group continues to generate significant pre-provision earnings at the tune of €500 million a quarter. We continue to focus on streamlining the cost base and we are pleased with the results. OpEx are down 7% year-on-year and 10% on the quarter. On the asset quality front though, deterioration is accelerating. The 90 days ratio climbed to 15% for the group. Clearly, Greece has been driving this very difficult situation. Consistent provisioning kept the cost coverage of 56%; cost of risk at a high of 344 basis. The – on the liquidity front, key concern these days, deposit drain has somewhat slowed, slowed down post-PSI. However, the political stalemate after the May 6 elections has one again stoked anxiety. In such an environment, beset by uncertainty, NBG has defended its deposit franchise with loans and deposit in Greece and 105% despite Q1 outflows.
We continue to experience a drain in the second quarter. We have seen as NBG at – just over €1100 million of outflows, which is again as I said stoked by the renewed uncertainty, but important to note that this is way before any panicky type of background. Yes, there is a lot of uncertainty. There is a lot of anxiety. The good news of the PSI have evaporated in terms of consumer and customer psyche and behavior, but the press reports for a slow or a fast background in Greece are exaggerating the deplete that we are experiencing in the high strength. The situation in the liquidity position boils down to our Eurosystem funding which as we speak remains at the first quarter levels, €32 billion. Post recap, as expected we have regained access to ECB funding and thus will be substitute – will be able to substitute ELA with ECB, which is obviously a positive development.
Finally, as you know as of the end of the quarter, we exchanged the majority of our PSI eligible sovereign exposure into new GGBs and EFSF one and two-year notes after taking the well-known haircuts. These new bonds have been categorized as available-for-sale. The exact accounted reason that we undertook was to obviously fair value the loans – those positions as of the date of the exchange that resulted in an additional €214 million worth of markdowns beyond those that we had recognized in the first quarter. Effectively, we brought the – we markdown the average mark from €0.34 to €0.29 as of the date of the inception increasing the discount yield by two percentage points in recognition of the market conditions prevailing at the relevant date. Furthermore, having classified these bonds as available-for-sale, we mark those positions to market, i.e., from €0.29 down to €0.19 as of the end of the quarter. So, our account in equity carries the full burden of a markdown of positions to €0.19 as opposed to €0.34 at the end of last year.
Turning to page three, group income for the quarter was – came close to €800 million. Core banking is down, is down because of down 8% year-on-year and 3% for the quarter, as massive deleverage of, i.e., of interest-earned assets predominantly, because of the PSI, but also bona fide loan deleverage and obviously the impact of non-accruing non-performing loans has its bearing on our top line. Margin, strong at 400 basis plus mainly due to the resilient top line in Turkey, where NIM topped 586 basis. And Greece NII, as I said in terms of millions was down €58 million, as the deposit spreads absorbed most of the Euribor decrease, but as I just mentioned, interest-earned assets was last, i.e., the combined effect of PSI and loan deleverage.
In Southeastern Europe, both income and margin declined primarily because of the continuing deleveraging of our loan book in the region. Our key objective is to make the region self funded. So, asset yield declined on our floating rate book, we did not enjoy a comparable relief on the funding side, clearly staying the course of self funding books in the region.
Turning to page four on OpEx, as I mentioned, operating expenses down 7% year-on-year and personnel expenses in Greece are down 8% and G&A’s an impressive 10%. This is clearly our own take on our effort to make the most out of this crisis in regards the basing the cost base of our operations in Greece. In Turkey on the other hand, the OpEx were down 3% year-on-year somewhat obviously flatted by the depreciation in the lira. And however, at anyway you try to look at this performance clearly positive, bear in mind that we are talking about the business that registered double-digit growth of nearly 20% year-on-year. Finally, SEE continues to streamline expenses. As a result, we managed to slash the operation – the operating expenses line by a good 10% year-on-year.
Turning to the asset quality in page five, delinquency flows hit a new high about 1 billion of new NPL generation in the quarter stemming obviously mostly from our Greek loan books. In Greece, we had another GDP contraction in the quarter. The economy is turning to halt and obviously against this backdrop, 90 days flows have accelerated increasing by about 250 basis in the quarter. The 90 days past due have reached 15.5% on the portfolio with cost of risk upwards of 430 basis.
In Turkey at the end of quarter one, 90 days delinquencies stood at just 5%. Cost of risk decreased 210 basis and consistently our provisioning levels gravitate towards our guidance of around 100 basis. Cash coverage is at fairly decent 77%, unchanged from Q4 of last year. Finally, in Southeastern Europe, if one takes into account the effect of deleveraging, the 90 days delinquency stood at 17% of the portfolio, up just 68 basis quarter-on-quarter. Clearly a performance that seems to point to a serious moderation on NPL flows. Generation of NPLs is at its lowest level since the beginning of 2009 down 20% from last quarter admittedly a good pointer towards an improving asset quality or stabilizing asset quality in the region, cash coverage at 50%, run-rate totals just over 250 basis. Hopefully, we will get a better picture in the coming quarters.
On page six, on the critical aspect of liquidity, loans and deposit for the group at 111% I just mentioned at the beginning in Greece despite the heightened uncertainty and the continuing slow bleed of deposits, loan-to-deposit 105%. I think it is worth mention that despite this turbulence we continue to maintain our market shares in key deposit segments.
However, overall deposit – customer deposits have declined 17% year-on-year and 6% year-to-date for the first quarter and as you have noticed we have lost another 3% quarter – second quarter. Positive spreads on core deposits. They track Euribor dollar-to-dollar, basis-to-basis which is obviously important in terms of pricing dynamics in that segment. In Turkey, total deposits were up by pretty significant 19% year-on-year. We are tad below €30 billion worth of deposits that makes our total market share close to 4.4%, increasingly getting closer to our natural branch market share, so which is a pretty positive and continuous consistent trend.
In Southeastern Europe, deposits have gone – are down 5% year-on-year were flat in the quarter. We have experienced a small rebound of €200 million as of the end of May that below €4 billion, €5 billion worth of deposits against a net loan book of just over €6 billion. Loan-to-debt has improved and this is a key as I said goal for the banks in the region. We are down 12 percentage points year-on-year to 129%. It’s getting closer and closer to our self funding goal. The commercial funding gap for the group in the region has reached a new historical low of less than €250 million – €200 million that is from a base of €1 billion a year ago. Obviously, the price to be paid and this price reflected in the small negative result that for the first time we experienced in the region. On the Eurosystem funding, I think we have covered it €32 billion, which is going to be switched off to ECB pretty soon after the – after yesterday’s recap.
I would like to turn to page seven on the recap we’ve covered more of the slide. As I said, we received €7.4 billion that pushed our total equity to total CAD 8.1%, which obviously ensures the continued support of the Bank by the Eurosystem, core Tier 1 of 6.4% temporarily before the impact of the anticipated second round of recap and obviously the impact of the capital transactions that are included in our recapitalization plan which obviously will rollout in the next few months. Accounting equity on a pro forma basis for the €7.4 billion stood at €6.2 billion at the end of the quarter positively impacted by the liability exercise that we completed earlier in the year and the FX translation affects, but obviously having absorbed – after absorbing the full impact of €537 million worth of losses in the quarter. I think we have covered most of the asset quality in Greece on page 9.
Let me very quickly turn to page 14 for a more insight on Turkey. If you take out ways, which I worth mentioning here, NII impressively up by 20% year-on-year, 12% on the quarter, as we continue to re-price the high yielding segments and we are doing a pretty solid job on competing for expensive deposits. Fee growth up 4% quarter-on-quarter, and massive 60% on year-on-year, but this two points about our NII and fee growth point to the structurally superior top line, which is collaborated by the fact that NII and fees account for almost 100% of income and the ratio of loan over assets is the highest among our peers over to – or close to 70%. So, this is a franchise which is very defensive against the vagaries of monetary policies that have taken the sparkle out of treasury banking in the country.
Growth in deposits, our outstripped loan expansion as total deposits were up 19%, while loans were up 90% year-on-year. Clearly, our liquidity position is stronger than ever with loan-to-deposits at 114% at the end of the first quarter, down a full eight percentage point year-on-year. We continue to pursue an operational excellence initiative with a focus on cost containment and in this context. Our picture is being managed more aggressively. Headcount is down 7% from the year ago, despite adding 17 branches, therefore despite inflationary pressures, operating expenses increased by plus 6% year-on-year.
We have covered on the asset quality, cost of risk at 110 as expected on track to get at 100 basis. Pre-provision margins covering cost of risk comfortably five times our cost of risk. Finally, though we will continue to expand our balance sheet and the capital base remained strong. The core Tier 1 in Turkey is 13.5% total CAR are at industry highs of 7.5%.
On the liquidity front, I have to note that after the end of the quarter in May, we completed a 400 million worth of Turkish lira in retail bond issuance with pretty decent of a subscription, which is again telling about the support that the franchise is getting from its loyal customer base.
While Southeastern Europe on page 21, I just repeat the point that I made earlier, business turned in a marginally negative territory as we continue to deliver our balance sheet to deliver a more balanced funding picture. As accounted point to the top line weakness, we have paired our cost base by 11% year-on-year and 12% on the quarter, personnel costs have down 12%, G&A is down 10% year-on-year so, that basically gives you a flavor of what is happening in this industry and how things will develop in the next few quarters.
Before opening up to Q&A, let me summarize that – the situation that we are facing. We – although the last month has brought about a renewed amount of stress and tension emanating mostly from the political uncertainty in our domestic market, we are hopeful that this will be resolved sooner than the later possibly through the next round of elections on the 17 of June. Against this backdrop of continued renewed uncertainty, we continue to emphasize our focus on the four pillars of our strategy. First, restoring our capital base to levels that will allows us to support the economy as it attempts or will attempt return to growth. The first step has taken place already €7.4 billion, as I mentioned, capital ejection took place last night. That said, our goal is to minimize state support to the extent possible, reduce our reliance on state support as swiftly as possible, and hence, we continue to execute on our capital initiatives as market conditions allow.
Secondly, defending our liquidity profile remains a top priority. And in this regard eliminating ELA reliance is our immediate goal. Thirdly, aggressively managing our delinquent portfolios through more effective collection mechanism and restructuring offers to provide relief to customers, while customers at times of extraordinary hardship and stress. Finally, continue the marginal expense base across the group, taking advantage of the unique opportunity that current conditions present to completely rebase our operating model in Greece and Southeastern Europe.
We are now ready to take your questions.
Thank you. (Operator Instructions) Our first question from – comes from the line of (Shan Shah) from Morgan Stanley. Please go ahead.
Thank you gentlemen for the call. I just wanted a bit more information on the nature of the recapitalization. So, firstly what exactly where the bonds that you have given in terms of maturity coupon etcetera? How much more are you expecting from the Finance Stability Fund? Have you made any expectations on that? And what will the Financial Stability Fund exactly be getting in return for the bonds that were delivered? And finally, do you expect there to be any impact on your ability to pay coupons on any of the subordinated debt securities? Thank you.
Okay. As you know, the capital contribution was made in the form of EFSF bonds, with maturities varying from 2018 to 2022 with an average mark-to-market of around 98.5% or 99%. So, this is – that was a total of €7.4 billion worth of nominal value of EFSF bonds, which were booked at around €98.8 something like that in our accounts. Now, how much more? I think we get into a point, where the Bank of Greece is finalizing the – its calculations for the recapitalization – the total recapitalization needs. We haven’t finalized the number, but you can get a feeling of what is – what we are up for if you just take into account that by Q3 this year, the banks should have a core equity ratio of over 10%.
So, basically, we will be allotted the necessary amount to reach 10% core equity by 2012. And this is more or less – this is near certain, it’s only depending upon the second tranche of bank recap money coming into Greece. Sorry, I just said 10%, I meant 9% core equity. So, the securities of the – that will be given to HFSF to the Greek financial fund in consideration of the contribution case in place have yet to be decided. You know that the whole recapitalization framework will be debated and agreed upon post elections. So, it will be a mix of common equity and mandatory convertible of contingent capital. We understand from the broad branch framework that has already been enacted in Greek law, but details will be decided as I said post-elections.
On the coupons, coupons on – on our subordinated to hybrid transactions, on subordinated transaction to Tier 2 transactions, there has been no issue whatsoever. These coupons will be paid as they come due. On the hybrid transactions, we have made a clear statement during our liability management exercise that, that will be paid based on the economic merit of paying these coupons. So, that’s a pretty standard language to – that points to a one-way street basically. That’s it.
Thank you. (Operator Instructions) Our next question comes from the line of Alex Atienza from Citigroup. Please go ahead.
Alex Atienza – Citigroup
Yes, hello, thank you for the call. I just have two quick questions actually. The first one is if you could give me color on why customer loans at group level has decreased quarter-on-quarter quite a bit? And second one if you could give the breakdown on ECB funding, what’s ECB (and what’s) from the ELA? Thank you.
As I said, there are two regions in Greece and Southeastern Europe. There is top line gross loan deleverage, so that explains and this is more on the increase of loan book more than makes up the difference, the positive contribution of Turkey. On the ECB, the financing as you know is temporarily the full €32 billion were shifted from ECB-cum-ELA to ELA. We expect to reverse today. Following the recap, we don’t know the precise numbers. But we believe that we should be able to draw a good €25 billion to €26 billion from the ECB refinancing operations with the balance being drawn from Emergency Liquidity Assistance.
Now, the situation we have been in much better. We would have been able to reduce ELA by an additional €6 billion had we hadn’t the recent downgrade of Greece post May 6th elections, which disqualified the entirety of our covered bond program that is being used to access the ECB refinancing operation. In plain English, if we see the causes of this downgrade to reverse in the new future as a result of a more stable political environment, we have a fighting chance that this may impact or may qualify our covered bond program again in which case our ELA exposure will be more or less eliminated. But as we stand, we will be drawing anything between €6 billion to €7 billion from ELA if we were to do that tomorrow.
Alex Atienza – Citigroup
Okay, thank you.
Thank you. (Operator Instructions) And our next question comes from the line of (Shan Shah) from Morgan Stanley. Please go ahead.
Hi gents. I just had a follow-up. On the funding side, what is the residual free cash flow you now currently have? And then I also wanted to know in terms of your Greek exposure at the moment, what is now the book value of new GDP exposure, the value of key bills and then the value of other state exposure through loan derivatives?
If you include the new HFSF bonds we received, approximately the ex-collateral we have is around €10 billion.
Yes, the nominal value of the bonds or the PSI bonds is just below €4.5 billion. Of which, we have exchanged €3.7 billion and we expect another €0.7 billion to be exchanged in April. In addition to that, we have exposures of the tune of €6 billion from the state mainly derivative position, which is mainly – mostly in the derivative position, which is mostly been derivative position through Titlos.
Okay. And so that was €4.5 billion notional of PSI bonds and also…
Yes, and then the T-bills?
That’s another €2 billion.
Thank you. (Operator Instructions) And we have no further questions coming through. So, I’ll hand the call back over to our host for any concluding comments. Thank you.
Thank you very much for joining us for the Q1 call. The IR team will be standing by for further questions. Thank you once again and good night.
Ladies and gentlemen, thank you for attending today’s conference. You may now replace your handsets.
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