Eurobank Ergasias' (EGFEY) CEO Fokion Karavias on Preliminary Full Year 2019 Results - Earnings Call Transcript

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About: Eurobank Ergasias S.A. (EGFEY)
by: SA Transcripts
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Earning Call Audio

Eurobank Ergasias SA ADR (OTCPK:EGFEY) Full Year 2019 Earnings Conference Call March 7, 2019 11:00 AM ET

Company Participants

Fokion Karavias – Chief Executive Officer

Harris Kokologiannis – Chief Financial Officer

Conference Call Participants

Floriani Jonas – Axia Ventures

Kepaptsoglou Iason – HSBC

Bairaktari Angeliki – Autonomous Research

Solonitsyna Anastasia – UBS

Adurno Cristobal – Goldman Sachs

Galvin Daisy – Tokio Marine

Manolopoulos Konstantinos – IBG

Operator

Ladies and gentlemen, thank you for standing by. I am Constantinos, your Chorus Call operator. Welcome and thank you for joining Eurobank Ergasias Conference Call to present and discuss the Full Year 2018 Financial Results. At this time, I would like to turn the conference over to Mr. Fokion Karavias, CEO. Mr. Karavias, you may proceed.

Fokion Karavias

Thank you. Ladies and gentlemen, good afternoon, and welcome to the Eurobank full year 2019 results presentation. I will start with an overview. Then our Chief Financial Officer, Harris Kokologiannis, will give you a more detailed presentation. And finally, we will answer your questions.

Let me start with the macroeconomic conditions, which are improving. In 2018, GDP growth was 1.9%, as announced earlier today and is expected higher by 2% for 2019 according to the official projections. This is based on expectations for stronger consumption and investments, while a weaker eurozone growth environment point to a stabilization year for the tourism revenues and stable exports. Raising interest of rates paved the way for the sovereign to adapt the debt capital markets with a 5-year note a month ago and 10-year bond 2 days ago. The latter being the first substituents since 2010.

The property market is getting stronger, as evidenced by the first quarter year of higher residential properties index and the increased transaction volume, while unemployment, although, still high is declining. In this environment, client sentiment is stronger. The post gathering is big enough and low demand at least from corporates is improving.

Let me now highlight our financial results for the full year 2018. It was a year in which the bank met all its strategic and operational targets, while at the same time, we embarked into a holistic transformational planning. More specifically, starting on Slide 4, the full year 2018 profitability remained resilient, despite the effect of leverage and the interest expense of the Tier 2 securities. Net profits were higher by 8% year-on-year at EUR 200 million, with core pre-provision income increasing by 1.4% year-on-year. On an annual basis, net interest income was down by 3.3%, but fees and commissions increased by 16.4% and operating expenses were down 1.7%, with Greece actually 3.5% lower.

Turning now on assets quality metrics on Slide 5. For the second consecutive year, the respective NPE reduction targets were outperformed. I would highlight that the NPE stock was reduced by EUR 3.5 billion last year, with NPE ratio down 550 basis points at 37%, the lowest and more global peers. The negative NPE formation accelerated last year, reaching EUR 920 million, while Q4 was a new record quarter.

On liquidity, Page 6. 2018 was a good year as deposits gathering continued at an accelerated pace. More specifically, deposits increased last year by EUR 4.2 billion and EUR 5.2 billion in Greece and at group level, respectively, while ELA funding was eliminated. On the other hand, loan disbursements accelerated and loan balances excluding the write-offs and sales increased by EUR 600 million last year.

On Capital, Page 7. Pro forma for the merger with Grivalia, our total capital ratio will reach 18.7%, the highest in the Greece market. This level of capital brings us in a comfortable position to execute the NPE acceleration plan as announced last November. For international operations, on Page 8, we continue pursuing our strategy to strengthen our franchise in the countries of presence. In this context, the merger with Piraeus Bank Bulgaria is expected to be completed in the first half of 2019. We remain highly profitable across all countries, while profits increased by 12% last year to reach EUR 145 million.

Let me now update you on the progress of our transformation plan, which is presented on Page 9. Starting from the merger with Grivalia, we are getting all the necessary approvals as planned. EGMs are scheduled for early April and the new shares should commence trading as of May. On the EUR 2 billion mortgage NPE securitization with a code name Pillar, we had a strong market participation in the nonbinding big sales of the process. We are now proceeding in the binding beat offers phase.

On the multi-asset securitization with a code name Cairo, we have finalized the portfolio perimeter at EUR 7.5 billion, submitting data files to SSM and applying for significant risk transfer. On our loan service transaction, the FPS, we have finalized the business plan, which will be shared with potential investors quite soon. For the last two transactions, we are launching the nonbinding offers phase shortly. Overall, we are pleased both with the inbound investor interest and the plan execution, which is on track.

Turning now on Page 11. Based on the new NPE reduction target to be submitted to SSM by the end of the month, Eurobank will have a significantly derisked balance sheet, with NPE ratio at 16% at the end of 2019 and 8.8% by the end of 2021. This paves the way for a normalized cost of risk, which should drive strong sustainable earnings per share and 10% return on tangible equity as of 2020.

So with solid performance delivered in 2018 in terms of resilient profitability, asset quality improvements and deposits gathering, we are focusing on the executional transformation plan and we are working throughout 2019 to deliver it. All the above make me very optimistic about the prospects of Eurobank.

At this point, I would like to ask our CFO, Harris Kokologiannis, to present our results in detail before opening the Q&A session.

Harris Kokologiannis

Thank you, Fokion. Let’s now provide some more insight on the fourth quarter results. Moving on Slide 16 at the liquidity. As shown on the top left of the page, funding from ELA has been zero during 2019, mainly driven by strong deposit inflows in Greece and the EUR 0.6 billion securitization concluded in December.

As regards, the capital position on Page 17, in the fourth quarter, the fully loaded CET1 ratios decreased by 40 basis points was the result of higher RWAs, largely due to significant lending growth, but mainly of Greek government bonds negative mark-to-market, which has been reversed in the first quarter today.

Pro forma, including the impact of merger with Grivalia, fully loaded CET1 ratio amounts to 13.4% and the total capital ratio to 18.7%, almost 500 basis points higher than the overall capital requirement.

Moving on Page 20, and the loans and deposits. In the last quarter of the year, gross loans, excluding write-offs and FX effect, increased by EUR 520 million, driven by the Corporate segment, largely in Greece, but also in Bulgaria. Group deposits increased by EUR 1.5 billion quarter-on-quarter, out of which EUR 1.3 billion coming from Greece.

On Page 23, net interest income for the group increased slightly to EUR 353 million, as the lower ELA drive, of course, and the high loans margin mainly due to corporate recoveries, offset the EUR 11 million one-off income of the previous quarter relating with our lateness interest on tax receivables awarded from the court.

On Page 24, net commission income increased in the fourth quarter by 19% to EUR 94 million. This is mainly attributed to the lending and network commissions, while all three categories showed high ratings.

On Page 25, operating expenses. Despite the fourth quarter seasonality, decrease on a yearly basis by 1.7% for the group and by 3.5% increase from the result of lower personnel cost. More specifically, as shown on the bottom of the page, during 2018, the number of employees increase – decreased by more than 400 at levels below 9,000.

Favorable pre-provision income and on Page 14. On the top left of the page, core PPI increased by approximately 3% on a quarterly basis due to strong fee income, while pre-provision income decreased to EUR 235 million, driven lower other income.

Moving on asset quality and on Page 15. As shown on the top left of the page, negative NPE formation amounted this quarter to EUR 400 million, mainly due to the performance of the mortgage and corporate portfolios. NPE decreased quarter-on-quarter by EUR 1 billion, driven by the high negative formation, increased liquidation collaterals. As a result, the NPE ratio receded by 200 basis points to 37%.

Provisions in the fourth quarter amounted to EUR 167 million and cost of risk over net loans to 1.9% for the quarter and the full year. Overall, as on shown on Page 15, the group recorded in the fourth quarter carrying net profit of EUR 29 million and for the full year EUR 201 million, higher by 8% versus 2017. This completes my presentation.

And we may now open the floor for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] First question comes the line of Floriani Jonas with Axia Ventures. Please go ahead.

Floriani Jonas

Good afternoon everyone. Thanks for the presentation. My first question is on Slide 11. I just noted that I think that you made an adjustment to the organic part of the NPE reduction. As far as I remember, you had the EUR 2 billion plus EUR 7 billion plus EUR 2 billion, so now I see EUR 1.1 billion. Can you, please, just confirm that’s the case and the reason for the change?

And then my second, I’ll just go with the usual comments on guidance for 2019, especially now having in mind the transformation plan, but what has been the initial thinking about NII, especially when you look at the low-margin side of things and also on the commission and OpEx for 2019, will be great? Also, if there is any comment you can also share on pace of deposits inflows into 2019, expectation that will also will be helpful? Thank you.

Fokion Karavias

Okay. Thank you very much for your question. I will take the first one and then Harris will answer the other two questions. Now in this, you’re correct on your note that the organic was at EUR 1.1 billion on Page 11, which is lower compared to the initial figure we had in the September submission. You could have seen that there is some sort of overlap between what we had as an organic reduction before and the Cairo securitization. And this explains the difference as well as some further fine-tuning that we have done in our numbers.

So overall, we’re going to reduce the stock of NPEs during the course of 2019 from EUR 16.7 billion to EUR 6.6 billion, which corresponds to an NPE ratio at the group level at 16%.

Harris Kokologiannis

Regarding your second question, regarding – as regards to 2019, overall, we don’t expect any major variations from the core PPI level, specifically NII with the commissions are expected broadly flattish. Group operating expense close to flat as well, while Greece will be, again, up negative growth phase, close to minus 3%. So overall, we should expect a flattish core PPI. On that, we should add on also the second half of the year close to EUR 30 million PPI lending with the Grivalia operations that will be merged in the following months. Regarding cost of risk of the year, we should expect something lower than 2018, so at the area of 1.7%. So organic net profit should be expected slightly better than 2018.

Now regarding volumes, the quarter started broadly as expected, I would say, with deposits at plus EUR 0.5 billion so far today, mainly coming from Greece and loan growths, I would say, flat. So overall, we should expect a deposit growth similar to last year, while we expect a shy, I would say, lengthy growth at the area of 1% up to 2% overall for the group, mainly coming from international operations, but also Greece, we expect to be, again, on the positive territory.

Floriani Jonas

Thank you.

Operator

Next question comes from the line of Kepaptsoglou Iason with HSBC. Please go ahead.

Kepaptsoglou Iason

Hi, a couple of questions from my side, first of all, on capital, given the movement we’ve seen for sovereign bond yields, is it fair to assume that as of today, you would expect most of the AFS impact to be reversed in Q1? And we’ll probably be looking at Q3 and Q4 AFS impact you have on capital.

Second question, I see you’ve done that EUR 500 million of write-offs this quarter. Is it something that we should be expecting in the coming quarters, may be in light of the upcoming securitizations or based on the plan you have for 2019 for organic reduction in NPEs? Or is it something that possibly we should not be expecting any meaningful write-offs going forward?

And then, if I may a third question as well. Fee performance this quarter was, at least as far as I’m concerned, fantastic. It was way better than any previous quarter. Is it something that you expect to be carrying? Or is there some one-off elements to the performance in Q4?

Harris Kokologiannis

So I’ll start with the first and the third question and then I’ll pass to Fokion for the second one. Regarding Greek government bonds yield movement, so far we have reversed the negative movement of the fourth quarter of last year, but not of the full 2018. Overall, in 2018, we had minus EUR 200 million – almost EUR 250 million coming from increase of DTC yield that cost us close to 65 basis points on our capital that it is expected to reverse at least to a great extent as the outlook is, as we speak.

Regarding your third question on fees, the development of fee-related business is one of the group’s basic priorities, I would say. In the last year, we put into implementation and plan to enhance fee income, along all categories and segments. So addressing better client needs and to optimize pricing where possible, of course. These together with the improvement of the economic climate, it resulted year-on-year increase of commissions by 16%.

For the year, we have strong increase. I would say that in 2019, our plan in this is stabilization, a consolidation at the area of approximately 55 basis points over assets. But these are level slightly high around EUR 600 million in absolute terms, looking, of course, for further growth opportunities.

Now regarding seasonality, the fourth quarter is traditionally the strongest one, and the first, a weak quarter, I would say that we have the weakest one. At any case, outlook for the first quarter of 2019 is expected to be better from the respective quarter of last year. And now, Fokion.

Fokion Karavias

Okay, so let me comment on the performance of the fourth quarter in terms of the NPE reduction. As you pointed out on Page 27, we show the contribution of all the different drivers. And you would agree with me that, actually the contribution of all three of them, NPE net flow, collateral liquidation and write-offs was quite higher versus the previous quarters.

Actually in terms of the NPE formation, it was a record quarter at EUR 400 million. Still on Page 27, you could see that the NPE inflows one point lower than the figure of the third quarter. The fourth quarter was EUR 272 million versus EUR 366 million. And we had also a much better performance in terms of the NPE outflows of EUR 401 million versus EUR 326 million.

So the NPE net flow has done quite well. Equally, it was a good quarter in terms of collateral liquidation. And given that in the previous quarters, the write-offs were rather small. We decided to add some more NPE in the fourth quarter. Now, whether this is a projection for the next year? The answer is, no. We’re going to have a balanced deduction of the NPE stock by using all four drivers, actually all three drivers, and the net flow collateral liquidation and write-offs. And obviously, sales are going to have a major contribution further to securitizations.

Kepaptsoglou Iason

Very clear, fantastic.

Operator

The next question comes from the line of Bairaktari Angeliki with Autonomous Research. Please go ahead.

Bairaktari Angeliki

Hello, thank you for taking my questions. A few questions on my side. First of all, we have seen some recent developments on the Katseli law, the household insolvency law. And could you give us an indication on firstly, what is the potential perimeter of protected NPLs that you have today?

And then, when I look at the NPE plan that you have presented today, could you explain to us, the Cairo securitization and the EUR 2 billion securitization, how many of these NPLs that are now under your protected perimeter will include, if any? And how does this perimeter is expected to evolve over time?

And the reason why I’m asking this is, is there any risk that depending on the changes of the law, you will actually be – you will actually not be able to either restructure these loans, cure them, sell them, et cetera. And do you see the changes proposed as an impediment to your NPE reduction plan? And that’s my first question.

My second question related to that, and formation has been really good in Q4, could you, please, give us some color on Q1 to-date, in terms of formation and liquidations, because there have been some negative press articles, sort of indicating that more borrowers have applied for protection and this could create a problem in the first quarter of 2019 with liquidations and NPE formation.

And thirdly, other European banks, as part of their SREP communication have said that they have received guidelines by the ECB with regards to calendar provisioning on the stock of NPLs. And could you, please, give us an indication, have you received the same guidelines? And by what date do you have to be at what coverage? And do you expect an impact either on your cost of risk or on your CET1 ratio from that? Thank you very much.

Fokion Karavias

Okay. Thank you for your questions. Let me start from the new law about residential real estate. And as you may know, the government is still in discussions with institutions about the details of the law, which have not been finalized yet. Provided that the concerns of all stakeholders are taken into account, the new law may be another tool to effectively manage the small mortgage NPLs. And they may help banks to address the backlog of the existing Katseli law.

More specifically, in our view, the new law provides incentives to borrowers and especially with all that are already under the Katseli law, to pursue the out-of-court settlement of the new framework. We believe that banks will proactively contact such borrowers, which may result in material reduction of the Katseli law backlog, and as such, it is positive.

Furthermore, the combination of three factors, number one, the state subsidy. Number two, the pre-agreed restructuring solution, which, as you may know, it entails a haircut for loan to buy much higher than 120%. And third, which may be one of the most important, the fact that the new law explicitly provides for foreclosures in case of the borrower misses three monthly payments of the restructured loan.

The combination of these three factors are expected to decrease materially in our view, there is default rate. The impact on banks overall in our assessment should be positive. First, because the loan-to-value – for loan-to-value higher than 120% provisions already exist to support the – despite these cuts. Second, you would appreciate that they may decrease in the default rate should have a positive impact on the banks. On the other hand, we have the moral hazard issue, which definitely it is serious, but we feel it is manageable.

Now in terms of the perimeter of the new law, according to our estimates for the system, there are about EUR 11 billion, EUR 9 billion of mortgages and $2 billion of small businesses, that would be under the perimeter of the law. Out of the EUR 9 billion mortgages, above 50% are already under the Katseli law. And for Eurobank in particular, the respective figure is EUR 2 billion out of the EUR 11 billion. And in terms of the dealer transaction that you mentioned, about one-third of the loans are either under the Katseli law or under the new framework.

Overall, our assessment about the law is on the positive side. As I said that, it could be another tool for dealing with more NPEs and more important, dealing with the backlog of the Katseli law. Now moving into your second question about the performance over the first quarter in terms of the NPE reduction plan. As I mentioned already, the organic figure for the reduction is – after the figure for the organic reduction is EUR 1.1 billion for 2019. So on average would be something like EUR 250 million, which is lower than the respective figures that we had in 2018. The first quarter is going to be a weaker quarter than the fourth quarter. That was anyway a record quarter, but in line with our plans.

Now regarding your question on whether we have seen any sort of deceleration in liquidations or applications for protection? We have not seen anything in particular. However, it is true that the headlines about the new law has made some customers more hesitant to enter into restructuring solution with the banks. Therefore, we believe the sooner this discussion is concluded, and the law is final, the better it is for the banks.

Harris Kokologiannis

Now regarding your question about provisioning calendar. In the context of recent discussions with SSM, in the context of the direct dialogue, we were communicated that the starting point for the stock of NPEs regarding the provision calendar will be end of December 2020. For us, a total PE portfolios with a win that’s older than two years. The coverage should be at 50%, as of the end of 2020 and increasing by 10% per annum to reach 100% by 2025.

For securities with – in terms of older than five – than seven years, as of that date, i.e. the end of 2020, it starts with the coverage of 40% increase by 10% per annum and reaching 100% by 2026. It should be noted that provisioning calendar will not affect accounting provisions, but will be part of the overall threat assessment process, which monitors among other things, the progress achieved in NPE. Given our NPE acceleration plan and we’re anticipating a reduction of NPEs to a single digit ratio at the rate of 9%. In 2021, we don’t expect any material impact.

Bairaktari Angeliki

If I may just follow-up on that, how many of these EUR 3.5 billion NPEs in 2021 do you expect to have a vintage above five years or so?

Harris Kokologiannis

We are – at this stage, we are, let’s say, fine-tuning our plan in order to be able to submit them to SSM. So we have focused on that. And we’ll be able to provide – to do more work and provide more details regarding such an analysis thereafter. However, intuitively, I don’t expect to be something higher than 20%, 30%.

Bairaktari Angeliki

Thank you. Thank you very much.

Operator

The next question comes from the line of Solonitsyna Anastasia with UBS. Please go ahead.

Solonitsyna Anastasia

Hello. Thank you for the presentation. I’ve got several questions. But, first of all, on securitizations. So previously you guided combined like capital input of transformational plan of around EUR 1.1 billion to EUR 1.4 billion. Now I see from your presentation, the new range of EUR 1.2 billion to EUR 1.4 billion. This is only for the securitization of EUR 7 billion, as I understand.

And could you, please, guide us, what is the combined capital impact of these two securitization transactions? And why we see in your presentation EUR 7.5 billion marked to assets instead of EUR 7 billion? What this additional EUR 500 million come from? And what – could you, please, also provide details on the coverage impact of the securitizations? And I will ask my second question after this? Thank you.

Harris Kokologiannis

Okay. Thank you for your question. Let me guide you regarding – first of all, the answer, the difference between EUR 7 billion and EUR 7.5 billion in the securitization, we have included apart from NPEs close to EUR 500 million performing for bond loans with high probability to become defaulted – to a default within this year. So the EUR 7.5 billion includes EUR 7 billion NPEs, plus another EUR 500 million performing for bond loans.

Now regarding our capital position, post the completion of our transformation plan, as we have said, the expected CET1 impact from the EUR 7 billion NPE and the kind of securitization, should be expected between EUR 1.2 billion and EUR 1.4 billion. And this will be covered by the capital boost from the merger with Grivalia and the sale of FPS. So by the end of 2019, we should expect a fully loaded CET1 ratio at levels similar to the end of 2018. And furthermore, as of January 1, 2020, we’ll be strongly capital accretive due to the increased profitability on the back of substantially lower cost of risk coming from a significantly reduced NPE level. So overall, we expect to end 2020 with a fully loaded CET1 ratio higher than 12% and total capital ratio higher than 16%.

Solonitsyna Anastasia

Okay. Got it. Thank you. But you indicated this range of EUR 1.2 billion to EUR 1.4 billion only for this EUR 7.5 billion multi-asset transaction, or does it also include this EUR 2 billion mortgage securitization?

Harris Kokologiannis

The Pillar – the EUR 2 billion securitization, it is included in the guidance that we have given in the cost of risk, in the annual cost of risk, that it is included in the guidance that I gave before of 1.7% on net loans cost of risk for 2019. We think this figure we have included also the impact from the Pillar securitization.

Solonitsyna Anastasia

So this securitization – Pillar securitization goes through P&L and normal securitization is for capital, right? And, sorry...

Harris Kokologiannis

No. Actually, the Pillar securitization will be in full to P&L. Regarding the Cairo securitization, the major part will be through P&L, again. And another part, that it is a fair value of the part of Cairo that will be distributed as a dividend to shareholders, will pass directly through equity.

Solonitsyna Anastasia

Okay. Could you, please, also remind me once again, so we have $1.7 billion estimate for cost of risk for next year, and how do you see it in 2020?

Harris Kokologiannis

Sure. In 2020, given that we start the year with a level of NPEs at more or less one-third of the level that we closed 2018, we expect a very material, the escalation of cost of risk at the area of 1%. And this will be, let’s say, the major driver for the boost of our profitability in 2020.

Solonitsyna Anastasia

Understand. And the second question is what is your stance on Bank of Greece plan with nationalized SPV with DTC usage? Do you see, if you can benefit from merging your plan in that framework, if it is finalized? So would you rather wait for their decision? Or you don’t consider at all this opportunity and you will pursue it with your own initiative on SPVs? Thank you.

Fokion Karavias

Sure. Let me take this question, please. Overall, as I have said a number of times, the more tools we have, the better it is. And to this extent, the discussion about the APS, the Bank of Greece plan, but also the most recent one, about the new law for mortgage loans are all of them on the positive side. Now with respect to our plan, or the APS or the Bank of Greece plan, all of them rely on the securitizations. And as such, they are complementary to each other.

In particular, the Bank of Greece plan has the innovative feature that address at the same time the NPE issue and improves the quality of capital. As such, it would be very positive, if it moves forward in a timely manner so that we can consider adopting this plan in our structure for Cairo.

With respect to the APS, it is our understanding that this is a more advanced plan, given that it has already been submitted to DG Comp for approval. And once approved, we may also consider it because it could provide some risk weighted assets relief for our two securitizations. More specifically, in terms of Alpha eligible consumption Pillar is going to be at EUR 500 million, and Cairo is going to be close to EUR 2 billion, so in total EUR 2.5 billion.

So if we could have a tool to get the automatic relief, this could correspond to 75 basis points boost in terms of CET1 capital, provided that the economics for the [indiscernible] would make sense. So we’re looking forward to the approval of both plans, both the APS as well as the Bank of Greece plan.

Solonitsyna Anastasia

Okay. So 75% – 75 basis points on CET1, if this APS framework comes through, right?

Fokion Karavias

That’s right. Yes.

Solonitsyna Anastasia

And one very small question, could you, please, clarify, you have around EUR 70 million non-loan impairment in first quarter. What was it attributed for? Was it a one-off? Or should we expect something similar next quarter, non-loan impairment on P&L?

Harris Kokologiannis

As we have said, overall, we should expect – first of all, fourth quarter didn’t include any one-off impact. And as far as 2019 is concerned, as the outlook is for 1.7% cost of risk on net loans.

Solonitsyna Anastasia

Yes. I understand on cost of risk and loan impairment, but you also recorded the additional provisions like non-loan impairment in your P&L, if I look through your statements?

Harris Kokologiannis

Yes, yes, yes. I got it. I got it.

Solonitsyna Anastasia

Of the impairment and losses?

Harris Kokologiannis

Yes, actually this is – this relates to the process assets impairments. This, for 2019, should be as similar or close to similar amount.

Solonitsyna Anastasia

Okay. Also in fourth quarter, right, we shouldn’t expect nothing like in the third quarter this year, right?

Harris Kokologiannis

It is correct. It is correct.

Solonitsyna Anastasia

Okay. Thank you very much.

Operator

The next question comes from the line of Adurno Cristobal with Goldman Sachs. Please go ahead.

Adurno Cristobal

Hi, thank you very much for the presentation. Just a couple of very quick question in my end. So the first one is regarding the company transformation. So I just wondered if you could confirm whether the down hiding of the DTCs will require any sort of approvals? And then my second question is just if you could give us some guidance regarding the evolution of cash coverage in 2019 and 2020? Thank you very much.

Harris Kokologiannis

Sure. Regarding DTC, actually we’re expecting a law legislating the universal succession for the envisaged corporate transformation that we plan to execute. This law was voted one-week, 10 days ago. So this actually paves the way to proceed. For confirmatory reasons, we are going to ask for a ruling. Actually we have applied for – in revenue to provide a ruling for that. But apart from it no other legislative initiative is expected. Regarding the coverage for – I would say throughout the horizon of our transformation plan, we don’t expect at any point the coverage to drop below 50%. The same applies as well, of course, for 2019, end of 2019.

Adurno Cristobal

Thank you very much. No further question.

Operator

Next question comes from the line of Galvin Daisy with Tokio Marine.

Galvin Daisy

Hi, thank you for your presentation. I just wanted to know more about the Cairo securitization and whether that will be serviced by the finance planning services? And whether these tranches securitization will be guaranteed by the government? And also, who are the main investors will be of this securitization? Thank you.

Fokion Karavias

I’m not quite sure about your question. I mean, you ask whether there’s any sort of guarantee from the government?

Galvin Daisy

Yes. In terms of any default in any payments?

Fokion Karavias

Okay. The – both securitizations that we’re doing, the EUR 2 billion and the EUR 7.5 billion, do not rely on any sort of external support or government support. The securitization would proceed only based on the internal cash flows. As we have explained in previous communications, the senior tranche will be kept 100% by the bank. The mezzanine tranche in Pillar is going to be sold to the market. As the mezzanine tranche in Cairo is going to be shown to the market at a percentage of above 20%, and the rest would be distributed to the shareholders of Eurobank.

So, I confirm that in order to proceed with the transaction, we require no external support, including no government support. Now if the APS is approved in the meantime or after the launching of the securitizations, we’re going to review the economics of the APS. And if they make sense, we may attach a state rapid on the senior tranches that we’re going to retain. And this may result in a capital relief for the bank, as I mentioned before. But this is not a must for the transaction to proceed.

Operator

The next question comes from the line of Kepaptsoglou Iason with HSBC. Please go ahead.

Kepaptsoglou Iason

Hi. A couple of follow-up questions for me. If we think about SREP requirements going forward and the potential interplay between these provisioning calendar by the ECB and the potential reduction in Pillar 2 requirements, as your NPE book comes down, would it be fair to assume that the overall requirement is not going to change much going forward? Is that how you would be viewing it for the next couple of years?

And then the second question on the items below the line, in 2018, we had about just over EUR 100 million from discontinued operations and restructuring costs, and then et cetera, how do you expect the line to move forward? When should we expect it to go to zero?

Harris Kokologiannis

Sure. Regarding the capital requirements, first of all, we have further phasing of 25 basis points as of next year, that relates to the other OSII. So on the back of our transformation plan, execution and successful implementation, of course, we have to see it again with SSM in order to reapproximate the SREP requirements. But it is very early to provide any specific guidance on that. Now regarding one-offs overall for 2018, on a pretax level, we shed EUR 133 million, relating with voluntary exit scheme restructuring cost by EUR 62 million. While another EUR 76 million that related with disinvestment of Romania, out of which EUR 76 million, it is – it was EUR 35 million recyclement to P&L from equity. And to hit a small positive EUR 5 million coming from our subholder agreement on the back of sale of insurance.

Now regarding 2019, we expect to have a pretax impact of close to EUR 45 million restructuring cost mainly related with voluntary scheme, another EUR 5 million from completion of Romania transaction, plus, some additional cost related with implementation of our transformation plan.

Kepaptsoglou Iason

Okay. Thank you.

Operator

The next question comes from the line of Bairaktari Angeliki with Autonomous Research. Please go ahead.

Bairaktari Angeliki

Hello, thank you for taking my follow-up questions. Two questions, please. First of all, is there any possibility that the ECB could allow you to increase your Greek government bond exposure? And would you – if that is a possibility for you, would you consider it in order to boost your NII? And the second question on TLTRO, could you remind me, please, how much of your ECB exposure is currently TLTRO 2? And given today’s announcements, do you expect to participate in the upcoming TLTRO 3, let’s call it this way. And do you see any benefits from that for the P&L? Thank you.

Harris Kokologiannis

Thank you, Angeliki for your questions. First of all, we have no visibility whether and when ECB is going to fully store gradually relax this cap on ECB investments. If at any point, ECB leaves this cap, as of then, will depend on our internal risk appetite to invest on Greek government bonds. And risk appetite – current risk appetite allow for some further investments on the government bonds. But again, I repeat that we have no visibility whether and when ECB is going to proceed on that. Now regarding TLTRO 2, we have outstanding EUR 1.25 billion of zero cost funding from ECB. Now regarding TLTRO 3, as I also read from the ECB’s announcement, a new series of quarterly targeted longer-term refinance corporations will be launched, starting in September 2019 and ending in March 2021.

This is with a maturity of two years, so all the TLTRO 3 government bonds will be entitled to borrow up to 30% of their stock of eligible loans as of February 2019. At the rate index to the interest rate on the major finance corporations over the life of its operation, plus some built-in incentive for credit conditions to remain favorable. So out of this announcement, but it is still to be clarified. It is what they define as eligible loans. And second, what are the sort of building incentives? So once these are clarified, we’ll be in a better position to see how we can get benefit out of that. But, of course, it’s a very favorable development for a chit funding for next two years.

Bairaktari Angeliki

And if I just may follow-up on the last question, on your fees that was previously in Q4. Network fees, I mean, they have gone up quite markedly. Could you, please, explain to us, if there is nothing of nonrecurring nature in Q4, what has driven exactly network fees up so high? Is it the volume of activities in Q4? Or is it that you have repriced effectively all the transactions that customers does with the network?

Harris Kokologiannis

Sure. On the network, so actually the major part is coming from platform fees. I wouldn’t say that it is very subsequent apart from a couple of million. On the lending on the contrary we had some syndicated loans and some arrangement fees, but for sure create a momentum, but it’s not certain that they will be repeated in the first quarter of 2019. As I said, it will be better to see the overall yearly picture, where we envisage with commissions at an area of 55 basis points over net assets, could translate at a level of EUR 300 million or higher. Of course, there is a seasonality, and there is quite significant seasonality with the commissions fourth quarter is traditionally strong. But overall, our plan is for that level of fees for next year. So more in consolidation and, let’s say, stabilizing this relating level.

Bairaktari Angeliki

Thank you.

Operator

We have a follow-up question from the line of Solonitsyna Anastasia with UBS. Please go ahead.

Solonitsyna Anastasia

Again thank you for taking my follow-up questions. First of all, I would like to clarify, what are your cost optimization initiatives for 2019? Do you see any room to cut staff cost and administrative cost further? And particularly, what should be the input from relief of NPE-related costs, like, by 2022?

Fokion Karavias

Okay. In terms of the operating expenses, I will say that for the full year, 2019, we expect a flattish situation with Greece remaining in the negative territory. During 2018, we had the reduction of staff of 421 SPEs. The – this effort is ongoing. Therefore, you should expect a further reduction during the course of 2019, maybe at slightly lower level than 2018. Now in terms of the cost related with the people involved on the remedial section on the management of the NPLs, as you know, we are moving forward with the transaction of FPS. And as a result of that, some of the operating cost will transform into fees paid to FPS. The overall effect on the bank is going to be very close to zero.

Solonitsyna Anastasia

Okay. Got it. And one more question on options activity, could you, please, give us some color how is it developing. I still see you acquire around 86% of total properties, given that property prices rising? So how do you see it going forward? Would you expect more third-parties participation? And how do you deal with real estate on your books? Thank you.

Fokion Karavias

As I mentioned in my introductory remarks, it is positive that the real estate market is getting a boost, 2018 was the first year that the respective index for residential real estate was positive. The same was the case for commercial real estate, which also increased in transaction volume. So the more this trend continues, the better is going to be for third parties to participate in auctions. And as a result, the percent of the properties acquired by Eurobank to be reduced. Now given our strategy about the accelerated NPE reduction plan and given that, in 2019, we’re going to reduce the outstanding NPEs quite drastically. You could appreciate that 2021 onwards, the amount of properties that we may have to acquire should be quite lower than the levels of 2018 or 2019.

Solonitsyna Anastasia

Okay got it. Thank you very much.

Operator

We have a follow-up question from the line of Floriani Jonas with Axia Ventures. Please go ahead.

Floriani Jonas

Hi guys. Just a follow-up on your comments on coverage. When you said that you expect coverage in the coming years to not to drop below 50%, is this your kind of internal management kind of lever expecting? And how the SSM is looking to it? I mean, how is the supervisory approach from their side on overall coverage levels? Do you think there is a pressure for that 50% to be kind of an official benchmark?

Fokion Karavias

No. There is no such benchmark. However, 50% is the outcome of the calculations that we have made to see what is the projection of coverage by implementing the current provision and policy of the bank. We remain north of 50% in all years ahead of us. With respect to the SSM, and the feedback that we have received so far from it is that it feels comfortable seeing recovery levels higher than 50%. But there is no, let’s say, soft or hard benchmark from the side of the SSM.

Floriani Jonas

Got it. Thank you.

Operator

The next question comes from the line of Manolopoulos Konstantinos with IBG. Please go ahead.

Manolopoulos Konstantinos

Yes hello and thank you for the presentation. Actually it’s a follow-up on your guidance. With respect to [indiscernible] OpEx, you’ve referred to flattish evolution for 2019. And I was wondering, whether this includes the impact of Grivalia, because there should be an elevated boost on your fees coming from the merger? So I guess that this excludes the EUR 200 million guidance over – excludes the impact of Grivalia, right?

Harris Kokologiannis

As I said, the outlook, the guidance, let’s say, concerns Eurobank stand-alone. Grivalia, will add – is adding a PPI on an annual basis of EUR 50 million to EUR 60 million. So for the half-year 2019, it will add the PPI close to EUR 30 million. Of course, this is broken down into the income and the expense. So my guidance excludes Grivalia, yes.

Manolopoulos Konstantinos

Okay. And as far as the APS is concerned, you’ve referred to EUR 2.5 billion RWA relief, should that happen? I mean, so if you were to use the state guarantee for the APS, you would have EUR 2.5 billion RWA relief, is that correct?

Fokion Karavias

This is correct. This is our estimate, our initial estimate, provided that the economics of the APS makes sense for us.

Manolopoulos Konstantinos

Okay thank you very much.

Operator

Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Karavias for any closing comments. Thank you.

Fokion Karavias

Okay. Let me thank you all for your participation, and let me also thank you for your very interesting questions. Hopefully, we were able to elaborate on our plan. We’re looking forward to seeing you in our next roadshows event in London or in New York, or whenever you visit us in Athens. Thank you for your participation once more.