National Bank of Greece S.A. (OTCPK:NBGIF) Q3 2018 Earnings Conference Call November 29, 2018 11:00 AM ET
Pavlos Mylonas - Chief Executive Officer and Executive Director
Ioannis Kyriakopoulos - Chief Financial Officer
George Angelides - Head of Finance
Greg Papagrigoris - Head of Investor Relations
Jonas Floriani - AXIA Ventures Group
Angeliki Bairaktari - Autonomous Research LLP
Panagiotis Kladis - Eurobank Equities Investment Firm S.A.
Ladies and gentlemen, thank you for standing by. I am Gale, your Chorus Call operator. Welcome, and thank you for joining the National Bank of Greece Conference Call to present and discuss the Third Quarter 2018 Financial Results.
At this time, I would like to turn the conference over to Mr. Paul Mylonas, CEO of National Bank of Greece. Mr. Mylonas, you may now proceed.
Good afternoon, everyone, and good morning to those of you joining from the U.S. Welcome to our third quarter financial results call. I'm joined by Ioannis Kyriakopoulos, Group CFO; George Angelides, Head of Finance; Greg Papagrigoris, Head of IR, and several others. After my introductory remarks, the CFO will go into more detail on our financial performance, and then we'll turn to Q&A. So let's begin.
Economic conditions in Greece record a further improvement in the third quarter, employment trends have continued to improve and most importantly, residential real estate prices are recovering across segments and regions driven by tourism-related demand.
Capitalizing on the country's improving economic fundamentals, NBG has been strengthening its balance sheet, specifically reducing NPEs, preserving capital and boosting liquidity buffers. Rising demand for corporate credit will allow us to utilize our liquidity advantage towards improving revenue generation.
The NPE stock has declined by €2.4 billion year-on-year versus the third quarter of 2017, on the back of negative organic formation and closure actions, including sales. Clearly, the third quarter performance was marked by August seasonality, which reversed in October and September.
Building on this performance and the ongoing recovery in the economy, we recently submitted a new NPE strategy to the SSM. The new numbers commit NBG to a faster pace of reduction. It delivers an ambitious yet realistic target of a €10 billion NPE reduction by the end of 2021. This plan will reduce NBG's gross NPE exposure to just €6 billion, of which about half will be covered by cash provisions.
The planned reduction will take place through both organic and inorganic actions, mostly allowed us to achieve speedy results. Such a strategy can be implemented by taking advantage of NBG's high cash coverage levels around 60% and a growing momentum in auctions and sales.
As regards to auctions, October results almost equals of those the entire third quarter, reflecting the accelerating pace. As auction activity continued to pick up, the payment culture should improve.
Turning to liquidity, our position has strengthened further in the third quarter as domestic deposits increase for six consecutive quarters. Following the elimination of ELA in November 2017 and in view of the successful tapping of the wholesale and into back funding markets, both our LCR and our NSFR ratios are now above 100%. The former at 124% and the latter at 103%. More importantly, our liquidity position provides us with a unique position to keep pursuing corporate credit opportunities with attractive NIMs at least compared to retail.
In fourth quarter 2018, we expect to disperse well in excess of €1 billion in new credit in corporate, predominantly in the energy, tourism, shipping and transportation sectors. These are full credits awaiting disbursement. This development should also boost lead generation.
Regarding our capital position, our CET1 ratio stands at 16.4%, up by 20 basis points Q-on-Q. While if we factor in the nine-month 2018 possibility and the SABA sales, South African Bank of Athens, completed in October, the CET1 ratio stands at 16.6%.
Moving on to NBG's profitability performance, our group operating profit stood at €84 million in nine-month 2018, contrasting sharply with the loss of €75 million a year ago, that is €150 million. This performance is attributable to a reduction of our cost of risk to a much lower yet sustainable level, which reflects our high coverage in organic formation trends.
Our group cost of risk over net loans stands at just over 100 basis points. Even though our NII has been hit by the first time adoption of IFRS 9, restructurings and deleveraging, its quality is higher as it improves little NPE interest.
On a risk-adjusted basis, both NII and NIM have picked up in the nine months 2018 versus nine months 2017. Moreover, both NII and NIM are held back by the buildup of a cash buffer that amounted to €5 billion in September, and help us meet our liquidity regulatory ratios.
Going forward, in the short term, our profitability was driven by sustaining cost of risk near current levels, gradually recovering core income and lowering our cost to the ongoing Voluntary Exit Scheme that currently exceeds 500 employees in 2018 as well as through the closure of 75 branches by the second quarter of 2019, around 40 by the end of this year.
We view these and upcoming cost initiatives as key to improving our efficiency significantly. In the medium term, the bank is working on a deep transformation with its operating model, which aims to deliver a bank clear of a large MP overhang, driving profitability to substantially higher levels. More on that will be unveiled to the investor community in the first quarter of 2019.
With that, I would now like to ask Ioannis to comment on our financial results. Ioannis?
Yes. Thank you, Paul. Starting with profitability on Slide 7, Group operating profit rebounded to €84 million in the nine months against loss of €75 million a year ago, driven by the sharp decline cost of risk that fully offset the NII pressure. That's at the upper left-hand side, waterfall chart.
On a quarterly basis, NBG produced a core operating profit of €16 million at the group level translating into a core operating margin of 21 basis points in the third quarter versus practically zero levels of the second quarter. These reflects improvement in the PPI with credit risk charges adjusting for runoffs remaining broadly stable Q-on-Q at the 107 basis points as seen in the lower right-hand side chart.
In particular, PPI amounted to €97 million this quarter from €81 million in the second quarter, supported by normalized in trading gains of €16 million versus lost of €8 million in the previous quarter.
Going a bit more detail in Slide 8. Domestic NII amounted to €253 million in the third quarter from €255 million in the previous quarter with unwind comprising only €22 million or 9% of the NII.
Net loan balances were down by €200 million Q-on-Q, which relates exclusively to retail book deleveraging as seen in the lower left-hand side chart. As a result, domestic third quarter NIM dropped by 8 basis points Q-on-Q to 270 basis points. However, on a risk-adjusted basis, NIM has recovered sharply in the past two quarters to levels in excess of 160 basis points as stands from the upper left-hand side chart. Going forward, we expect NII to begin to recover, aided by accelerating corporate disbursements that we expect to exceed €1 billion in the fourth quarter.
Turning to Slide 9, Domestic deposits continued their upward turn in the third quarter, driving 8% year-on-year growth with core deposits obtaining their high sales of 68%. Time deposit yields improved marginally to 83 basis points, with the front book yield hovering at 75 basis points. The bank retains a leading market share of 36% in ultra-low cost and sticky savings deposit.
On the other side of the balance sheet, on Slide 10, the total lending yield dropped further by 10 basis points to 3.6%, negatively affected by restructurings of lower yields as seen from the upper left-hand side chart.
In the lending yields in the forborne books have gradually dropped 2.9% in the third quarter from 3.1% in the first quarter of this year, whereas yields on non-forborne loans are flat at 4.1% throughout the year. However, new production comes in a significantly higher rate as seen from the lower left-hand side chart.
Moving on to Slide 11, and adjusting for ELA fees, domestic fee income decreased by 2% year-on-year to €164 million mainly due to the 14% decline in fund management, brokerage and other fees.
Moving on to Slide 12. Domestic gross rose by 3% Q-on-Q, driven by the 7% Q-on-Q rise in G&As, on increased consulting fees, with personnel costs relatively stable over the same period. On an annual basis, domestic operating expenses increased by 3% to €658 million, driven by the pickup in G&As, a gain on increased expenses led to professional services.
Personnel expenses were also up by 2%, incorporating €6.7 million arising from one of performance-based states, the special action units, and in prospective salary-related payment. Personnel expenses are expected to return to negative growth rates upon completion of the ongoing Voluntary Exit Scheme that has achieved its 500 employees as of November.
Turning to asset qualities, Slide 14. The NPE reduction came in at €200 million this quarter, coming out as a solid reduction of the [indiscernible] NPEs by €5.6 billion since the end of 2015. Moreover, the bank has immediately to the SSM a new operational target or until the reduction of NPEs by €10 billion until 2021.
Upon achieving these targets, and NPE ratio would have been reduced to a level below 10%. The [indiscernible] NPE reduction is evenly split within the three-year horizon and will arise partly from sales and liquidations, but also from organic means, as seen from the lower left-hand side chart. In particular, out of the €10 billion reduction, €4.6 billion will come from sales and securitizations; €2.5 billion from liquidation, €2 billion from negative formation and recoveries and therefore given us €0.5 billion from write-offs.
On Slide 15, total domestic NPE balance contraction was around €0.2 billion. This quarter was driven by write-offs as seen from the upper right-hand side of the waterfall chart. The domestic NPE ratio settled at 42.5% down by 10 basis points Q-on-Q. NPL flows include the recoveries and liquidations fully offset inflows as seen by the lower right-hand side chart.
Looking at the NPE formation a bit more detail on Slide 16. NPE formation was close to zero compared to minus €264 million the previous quarter, which, however, incorporated the positive impact from the €2 billion sale of NPLs. The total formation mainly reflected peers in retail books due to seasonality, which was offset by negative corporate NPE formation.
With regards to 90-plus formation on Slide 17, total domestic 90 days of formation remain in negative territory in the third quarter driven by the corporate and SB book.
Moving on to Slide 18, domestic NPE ratio is up by 10 basis points to 42.5%, with coverage of 59.8%. For domestic, the 90 days of ratio remained flat at 30.4%, which combines with a coverage of 83.5%. Furthermore, our below 90 days as Forborne NPEs stand at €4.2 billion, of which €3.1 billion are below 30 days. NBG remains the bank with the highest NPE and NPL coverage levels of around 6% and 84%, respectively. At the same time, we have the lowest 90 days [indiscernible] in the sector.
On Slide 19, we highlight that our exposure on stage three group loans has declined by €0.2 billion currently to €16.7 billion combined with a sector high coverage of 56%.
Turning to Slide 20. NBG's auction activity gathers pace with 1,960 assets being auctioned up to now, out of which 39% suspended or canceled. From the 1,200 auction assets that we held, 32% were successful and 29% not successful. Overall, the number of schedule options for the next eight months spans at 1,300 for NBG, based on September data, which is the second highest among the peers.
Turning to Slide 21. We presented NBG's sales, NPLs sales, which have been completed or planned. With regard with our pipeline, we have already launched the process for disposal of a secured single business loan and SMEs portfolio of approximately €1 billion, which expect to conclude in the first quarter of next year and we planned also to sell an unsecured retail NPL portfolio, the volume of approximately €700 million, both in the second quarter of next year.
Turning to liquidity on Slide 23, Eurosystem remains at just €2.3 billion currently, comprising only of TLTRO funding from ECB. Following elimination of ELA, our LCR and our NSFR ratios are now above minimum regulatory requirement of 100%. The removal of ECB's waiver leaves NBG's funding cost unaffected as the Greek sovereign paper was replaced by investment-grade covered bonds.
With regards to deposit evolution on Slide 24, group deposits increased by 2% Q-on-Q, reflecting the positive trends in domestic market. On an annual basis, group deposits increased by 9% year-on-year, reflecting deposit inflows of €3.3 billion in Greece. As a result, our loan deposit ratio improved further to 71% in Greece.
Finally, on capital adequacy on Slide 26, our CET1 ratio stood at 16.4%, 20 basis points higher than the previous quarter, and compares favorably to the state requirement for 2018. Pro forma for the nine months 2018 PAT and the reduction in risk-weighted assets as a result of the completion of the sale of South African Bank of Athens, our CET1 ratio stands at 16.6% and 13.1%, taking into account the IFRS 9 full impact.
And on this note, I would like to open the floor to questions.
The first question is from the line of Floriani Jonas with AXIA Ventures. Please go ahead.
Good afternoon guys. Thanks for the presentation. A few questions from my side, first, naturally having seen all your new NPE plan going to 2021, just asking, how valuable would be for you or how feasible for you to do an acceleration of the plan. Not necessary similar to what your bank have been in terms of size, but seem a bit similar, but not necessary the same, so what is your view on that and how can you benefit from a similar structure? And if you will be willing to participate maybe on the structure proposed at the Bank of Greece?
Second, on your NPE flows, I've noted that on the NPE side, the markets continued to be a bit sticky and on the 90 days, on the consumer side, also I think we don't have the clear trend on what's going on right now. So is there anything you can share in terms of your attitudes towards the formation on those two specific segments going forward?
And thirdly, I suspect as you mentioned that you're going to come up with a business plan in the first quarter of 2019, but is there anything you kind of anticipate going into 2019, the next couple of months, in terms of opportunities for revenue generation into 2019 as well? Thank you.
Okay. Thank you very much. You’re touching a delicate point on the acceleration, a lot of different NPE schemes have been put on the table recently and are being evaluated. We will do so as well. There are certain details that – first of all, very positive, more of the tools, the merrier, the where we look at them, somehow very promise.
As in all cases, it delves in the details, but we'll definitely look at them and seeing what we can do. There's both the [indiscernible] and the ones with the DTA, okay. On the NPE flows, well one pointed out, I guess, on the consumer, it is slightly overhanging and perhaps, taking a bit the eye off the ball due to the sale. I think people were focusing on other things, and I think we skipped a bit on the consumers on the mortgages.
We are focusing on a product, which has more debt forgiveness than in the past, but it does have a slightly higher installment payment than the other products, requiring a payment of capital to be consistent without the guidelines and therefore, that is leading I think, in its initial day who – till we fine-tune its characteristics, it's leading to higher flows there.
On the business plan, again, if I can ask your patience to wait till it's fully fleshed out and can be presented in one piece in the beginning of 2019. All I can tell you is that we are looking for some quick wins on the cost side, and I've mentioned those that we already hit by over 500 in the VRS, and we are doing a last push till the end of 2018, hopefully getting – pushing that number up more.
We're also closing branches, as I said, about 40 by the end of this year and another 30 in the beginning most in the first quarter of 2019. So that's sort of why we put together the plan to present to you. And hope that answered all three of your questions.
The next question is from the line of Bairaktari Angeliki with Autonomous Research. Please go ahead.
Hello, thank you for the presentation. I have two questions on my side, please. First of all, could you please provide us with an update on the sale process for the insurance business? And what would be the expected capital benefit today on the current outside of U.S. that you have? And also, the sale process of Banca Romaneasca and the associated expected capital benefit? And as well as – you do mention in your CET1 slide that you expect to further benefit or cost from that Cypriot business, could you please elaborate on that. Is that business now up for sale? Is there going to be any benefit or cost with regards to that disposal?
And my last question. It regards – I hear you on the [indiscernible] proposal, [regarding debt] and on the Bank of Greece proposal, but the press has also mentioned that the government is considering a scheme where borrowers protected under the Katseli Law could be partly subsidized by the state. And how do you view this proposal given that you have a quite significant mortgage book?
I understand that the previous law or the Katseli Law, the existing law that has already been mandated, included such a provision, but this has never taken place until now. I mean, could you please explain what this new proposal would bring and whether you are looking at that positively? Thank you.
Okay. Insurance. Insurance, right now, we've had a second failed or a – failed process, a continuation of the first, whichever way you want to describe it, and we are seeking in discussions, in collaboration with the DG comp, an extension to run a dual pact process IPO M&A, starting after the end of the political cycle in 2019. So that's it for insurance. The RWAs are about a bit over €1 billion, and the price to book is for the market to decide, the process to decide when it's run. The book is around 800, 850.
On BROM, Banca Romaneasca, we took the capital hit from our previously unsuccessful process with the OTP. We're doing the process again, we're expecting binding offers before the end of the year in December. We will just have the benefit from the RWA, which is €500 million, and I don't expect a significant deviation from the capital hit that would take an absolute, maybe a small improvement, but nothing of significance.
The Cypriot business, we are in the process of selling. We have binding offers and we are in discussions with the finalist to close. It will be an accretive final solution. And then on the rumored development on subsidized mortgage loans, here this is a copy of both of the American – if I remember the initials correctly or the separate law, which in both cases, the government for special categories of restructured lending provided up to a certain amount of subsidy to the monthly installment and for a period of time.
Again, this has been used a broad, in other cases, successfully. Clearly, some was going to subsidize the installments, the banks would look at it very favorably. And therefore, we are waiting to see more details. But this would clearly be a positive development if installment payments can be subsidized by the government for a short period of time as households get back on their legs. So again, very positive, if it's to occur, and I understand the government is contemplating this quite seriously. I hope that answers your question. Thank you.
Ms. Bairaktari, are you finished with your questions?
Yes. If I may just follow-up on the last question, on the Katseli Law, these under a provision currently, under the current law that allows the government to subsidize the borrowers after a court decision? And has that ever been implemented? Have you ever received any payment, which is a subsidy by the government for some borrowers after they have gone through the court process? Or has this never been done before despite the fact that it is written in the current law?
You're right. It is in the current law, and it has not been utilized.
The next question is from the line of [indiscernible] with UBS. Please go ahead.
Hi, thank you for the presentation. I have several questions. First one, with the current renewed targets, where do you see your coverage in capital position post one completion? And just follow-up in the first question, given one of the highest capital [indiscernible] and high coverage ratio have been this year, what prevents you from being more aggressive than fee reduction, for example, lower to 15% or even lower, like 10 basis points quarterly reduction, it seems quite small at current levels of NPE problem, and appears to be of the smallest reduction in last several quarters, if I'm not mistaken.
And the second question is regarding NPE ratio development in mortgage segments, which continues to pick up for at least, the last six quarters, is it open nearly driven by the protection schemes? And when do we see the trends resulting in the segment? Should we expect it to be next year already? So these are some of my questions. Thank you.
Okay, thank you very much. I guess, I need to ask you to indulge us till we announce our early 2019, our transformation plan where we will be more aggressive on the NPE reduction. But we can do it, we're planning on it and we'll announce specifics at a later date, okay. But you're right, we do have compared to peers, the coverage ratio, which allows us to do so, okay. And developments are urging us, pushing us to do so.
Now on the NPE, in mortgages, I mentioned earlier that the new product split in threes does have higher installments and it is still being fine-tuned and is leading to some redefaults, and as well, the Katseli Law is also leading to people, avoiding auctions by jumping from the auction queue into the Katseli Law. So it goes beyond our goal. So yes, on mortgages, it's a bit bumpier road given all these conditions, but we're working on fine-tuning the strategy, both on the product side and which is carrot as I call it as well as having our – a bit more of an effective stick. So hopefully, we'll get better results down the road.
Okay. Thank you.
The next question is a follow-up question from Mr. Floriani Jonas with AXIA Ventures. Please go ahead.
Hi guys. I just have one follow-up. What is the latest on the auxiliary pension repayment? Is that about to resume? And what is the amount of income? I've read something, and different amount that you will be repaying in the coming quarters. So if you can give us an update on that? Is there any retroactive charge you have to pay on that? It will be great. Thank you.
Okay. Thank you for that question. This has been hanging over us for a while. We had talks with the government on finding a solution, which it would effectively shift the supplementary pensions to the state fund. And we are discussing the details, the details of what that will entail for us. Given that we're in these negotiations, I don't want to get into sort of guessing what the final solution will be, but it will be a shift of all the pensioners to the supplementary pension fund of the state.
We have another follow-up question from Ms. Bairaktari with Autonomous Research. Please go ahead.
Thanks for taking my follow-up. Could you please tell us, what do you expect to be the impact on your cost of risk from the NPE reduction plan that you presented today? And also if you expect any impact from the derisking on your net interest income? And just another question as well. We have read some press articles earlier in the quarter that you have been involved in an investigation with regards to the breach of Chinese capital controls. Is there any litigation that could come your way from this investigation? Thank you very much.
Okay. In terms of the new SSM plan, the cost of risk is expected to remain at the current level, including, more or less, the lost budget, okay. So the cost of risk going down, a bit of a loss budget, netting out, so flat at around 100 basis points. Now the unfortunate incident of the POS' is put behind us. I think we have acted decisively on this. I do not foresee litigation in view of how to handle it.
The next question is from Mr. Kladis Panagiotis with Eurobank Equities. Please go ahead.
Hello, good afternoon. Could you please give us some sense about the large disbursements during Q4 that you mentioned in your presentation? And also again, if you could give us some sense about what do you expect for next year, for 2019? Thank you.
Okay. These are some three or four big ticket items, and I’m trying to remember which ones they are? They are the…
The natural gas.
The natural gas in [indiscernible], the airport, a couple of energy deal transactions. I don't think it's the airport increase. I don't think it's [indiscernible] and the rest is probably some other infrastructure. If you going to ask the IR people off-line, they can give you the names. There are three or four big tickets that we want the competition to get, okay.
Okay. So in terms of size and versus the previous communications, about €1 disbursements, if I recall correctly for this year, are you in line with his target?
In terms of disbursements, I think we're going to meet the disbursement target of €3 billion. Now clearly our repayment, so the net is not €3 billion, okay.
Yes. No, I’m talking about…
Disbursements, yes, I think we’re going to hit the target.
Okay. And then for next year, can you share growth rate, I guess it would be more than €3 billion disbursement. Bu can you give us a sense of what should we expect? Or maybe, if you can comment on the demand for loans, I mean in the past, most of the big banks were saying that there's no significant demand, has this changed? Or you still see subdued demand for healthy credits?
I think demand is definitely picking up. It is, as I said, in the past, and that has sampling this call, it starts with the firms that have an export orientation, including in the main service sectors. It's with energy, where there's a huge increase in interest. And now, it's trickling down to smaller size firms. So demand is definitely picking up, and I think that we'll definitely have something like a 10% to 15% increase on the disbursements level of 2018. So from €3 million to say €3.5 million.
Great. Thank you very much.
End of Q&A
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.
Thank you all for joining us for the call. We will be on the road at the end of next week in London, and Monday, Tuesday of the week after in New York. And this will be my sort of first trip as CEO, so I hope to see you, and get to meet you in my role, and we can talk a bit more about the transformation plan that we're designing and get your feedback. So thank you very much.
Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for calling, and have a pleasant evening.