Transcripts
Piraeus Financial Holdings S.A. (BPIRY) Q1 2023 Earnings Call Transcript
Operator
Ladies and gentlemen, thank you for standing by. I’m Poppy your Chorus Call operator. Welcome and thank you for joining, the Piraeus Financial Holdings Conference Call and Live Webcast to present and discuss Piraeus First Quarter 2023 Financial Results. All participants will be in a listen-only mode and the conference is being recorded. The presentation will be followed by a question-and-answer session. [Operator Instructions]
At this time, I would like to turn the conference over to Piraeus Financial Holding CEO, Mr. Christos Megalou. Mr. Megalou, you may now proceed.
Christos Megalou
Good afternoon. Ladies and gentlemen, and welcome to today’s conference call on our first quarter 2023 financial results. This is Christos Megalou, Chief Executive Officer and I’m joined today by our CFO, Theo Gnardellis, and by [Indiscernible].
2023 started on a strong foot for Piraeus Bank. The strength of our commercial franchise is releasing the bank’s potential and the successful management of our balance sheet is delivering solid results. In the first quarter, we continued to build sustainable and growing profitability. Our consistent progress across all operational KPIs is displayed on slide five. Profitability, efficiency, asset quality, capital adequacy, all showed improvement in the first quarter of the year.
On slide six, we report the highlights of our quarter one performance. We generated normalized earnings per share of EUR0.15. We produced a return on average tangible book of 13%. Both EPS and return on tangible book run ahead of full-year 2023 guidance provided in late January. We delivered 24% net revenue growth annually. On the back of a 56% net interest income increase and a 15% net fee income growth. We recorded best-in-class cost to core income ratio of 36%. We lowered our NPE ratio to 6.6%. We increased our NPE coverage to 55% and we further strengthened our capital position by 60 basis points in the quarter reaching a CET1 ratio of 12.2% and a total capital of 17%.
I am pleased that as of the first quarter of this year, we are in a position to accrue for a 10% distribution in our capital figures. This paves the way for our aspiration to distribute to our shareholders out of 2023 profits subject of course to the accomplishment of our targets and supervisory consent.
In the following slides, we present the progress recorded in fundamentals. Slides eight to 10 download all the information regarding net interest income intrinsics’. Our loan pass-throughs are trending at 70% to 75%, while our deposit beta is among the lowest in the European space at 10% at the end of March. Net interest margin stood at 2.4% Furthermore, our cost containment efforts continue unabated, despite the inflationary challenges. We are extracting any remaining inefficiencies from our organization, while investing in transforming and strengthening our bank for the future. The strength of our operational efficiency is shown in the best-in-class 36% cost-to-income ratio as shown on slide 12.
Slide 13 provides a summary of our asset quality indicators. This is the 7th consecutive quarter of negative NPE formation, and the sixth quarter of below a 100 basis points organic cost of risk. Our NPE ratio dropped to 6.6% from 13% a year ago, and our NPE coverage is now at 55% above the European average of 50%. Piraeus possesses strong liquidity profile. Our deposit base is granular, stable and of high quality. Our liquidity ratios are all solid as evidenced by the 220% liquidity coverage ratio and the 62% loan-to-deposit ratio both at the top percentile in the European space. These are presented on slides 14 and 15.
On slide 16, we present the quarterly movement of performing loans and deposits. Starting aside early year seasonality, the Group’s performing loan portfolio grew 8% annually and there is a strong pipeline of business projects for this year, including RRF sponsored plans where Piraeus has already undertaken the fourth tranche leveraging EUR1 billion financing. On top, we have had a very strong kick start in the newly launched program, My Home, co-sponsored by the Greek State and the Greek banks for which Piraeus Bank has currently received more than 40% or 10,000 out of total market applications.
Similarly, our deposits have grown by 4% or more than EUR2 billion annually. The first quarter of the year, we experienced both seasonality, as well as a very strong asset management products performance.
I’m closing our performance analysis with a capital base on slide 17. Organic capital build up, picked up pace with 60 basis points increase in quarter one, all organic. At end March, Piraeus was at 17% total capital ratio, comfortably above requirements and supervisory guidance. Our solid financial performance and the supportive macro environment positions us to outperform our 2023 targets. We therefore upgrade our 2023 guidance and we also provide updated 2025 financial ambitions along with key underlying assumptions. All the relevant details can be found on slides 20 to 22.
For 2023, we now target a 12% return on tangible book versus 10% previously or EUR0.55 earnings per share versus EUR0.45 previously. Net interest margin is expected to be above 2.2% this year. We also upgrade our NPE ratio target for the year to approximately 5% from below 6% previously. For 2025, we target above EUR0.65 earnings per share, 12% return, 3% NPE ratio and 14.5% CET1 ratio post-distribution to shareholders.
Finally, we are proud to be the only Greek company to be included for the third consecutive year in the Financial Times list of Europe’s climate leaders in 2023. Our energy transition business lines will be further expanded and I will be in a position to discuss more on this front in the following months.
And with that, let’s open the floor to take any questions you may have.
Question-and-Answer Session
Operator
Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Iqbal Nida with Morgan Stanley. Please go ahead.
Iqbal Nida
Hi, thank you very much for the press presentation and the strong set of results. My first question is on the NIM expansion, it’s continued quite nicely this quarter, deposit betas were low. Can you talk about your expectations going forward for deposit betas and also loan pass-through. I see that there hasn’t been much repricing on the unsecured portfolio?
Secondly, the asset quality, you know, clearly, the negative NPE formation is very impressive. But with interest rates rising, what are the risks that you see? Are there any certain sectors you’re monitoring or you know, any color on the asset quality side would be great. And then finally, on the 2025 RoTE guidance of 12%. Can we better understand what the interest rate assumptions are here, please? Thank you.
Theo Gnardellis
Hi, Nida. So you got three questions. First one, our net interest margin and how that’s planned to move forward. The fact is that we are enjoying right now a very low deposit beta of an average of 9%. The exit run rate of the quarter is around 10%. And the guidance that we’re giving is based on ‘17. So the current plan assumes that over the course of the year, we will continue to have a pass-through of about 50% on time table, it’s still 40% currently. And that the mix of TD is going to change from the current around 20%, 21% to close to 40% by the end of the year.
There is some upside risk there, because as the Q2 evolves this mix shift, which as per plan should already be happening is not happening as aggressively. So there is a bit of upside there, but I think we’ll be able to talk more after Q2 results. The loan pass-through again currently at 75%. The assumption on the NIM is that this will be around 55%. The — what you see there in terms of reduced pass-through on the unsecured front is intentional. The unsecured book is primarily non-durable based, is admin rate-based. And we have made the decision not to be increasing these admin rates, particularly to allow debtors to continue servicing their debt and to avoid inflows.
And hence this well observed reduced pass-through. But overall the pass-through is currently at 75% against the budget at 55%. So — but then on that more in Q2 as spread pressure, we do expect to be happening in the market.
Second question was around asset quality, I think in terms of inflow risk. Yes, so obviously, as you see right now from the influence of Q1, nothing particular going on. We are monitoring the book across big and smaller exposures, as well as monitoring forward-looking KPIs on the retail front. The flow rates on the early buckets are still — they do not speak of danger. But we do have — we have proactive moves done. You’re all aware of the cap rate imposed on mortgages, as well as other proactive instructions would be willing to do even if that created some Stage 2 inflation over the course of the year to avoid the inflow.
So I would say things again better than what the plan currently implies. To the RoTE 12% in 2025, that is based on a dropping NIM and which is again driven by a dropping the 5%, the assumption is 2% for the deposit facility rate of the euro. And generally the plan assumes a peak of 3.25%, which we’ve just seen happen and that to be sustained throughout 2023. And start seeing the accumulation as of early 2024 to reach a prevailing 2% in 2025.
Iqbal Nida
Thank you very much, [Indiscernible]
Operator
The next question comes from the line of Bhotkov Mahari with Goldman Sachs. Please go ahead.
Butkov Mikhail
Good day. Thank you very much for the presentation and congratulations on the strong results. My first question is on healthy on the funding and liquidity position. So you have quite good improvement in the funding over the last year and past quarters and your loan to deposit ratio had been decreased and now it stands at 62% ratio. So what is the optimal loan to deposit ratio? Do you see over the medium term? And also what’s your strategy to allocate the excess liquidity namely between the real estate fixed income and the other sources, so that’s the first question.
And the second question is on dividend. So you have a dividend accrual of 10%. Is this the level of payout you budget for earnings for the year 2023 or actually it is subject for some further changes and increases throughout the year? And when you think about the future years, what level of dividend payout do you budget in 2024, 2025? Thank you.
Theo Gnardellis
Hi, Mikhail. So in terms of liquidity, obviously because of its witness in deposits, Piraeus is now enjoying a very liquid position and they’re resulting strong NIM. Also by the fact that it’s a cash positive bank. Even post TLTRO right now by about EUR3 billion. Our expansive targets, given the fact that we are strategically positioned exclusively in Greece is to support the loan expansion of the country. So we are deploying the liquidity that we’ve got into expanding the credit pool.
There will be some expansion on securities as well, very, very targeted on a NIM play particularly. But I would say if one was to look at as to how the balance sheet is going to evolve, it is going to evolve expanding deposits from intrinsics and from securing the market share that we’ve got on deposits and then deploying, I would say two-thirds of that into loans for a stable, kind of, 65% LDR throughout the upcoming period.
Christos Megalou
And Mikhail, on the dividend question. First of all we have established the distribution policy, which was approved by our board for dividends 10% of the 2023 results is potentially being accrued and that’s our aspiration for 2023. This amounts to EUR18 million, the actual distribution either by way of dividend or by way of buyback, of course, is subject to supervisory approval post final 2023 financial results. As of the way we are looking at dividend distribution going forward, we are aiming to be at let’s say 10% as I said, subject to supervisory approval by 23% and then aiming to increase it by 15% and 25% in the years to come. This is what is embedded in our projections.
Butkov Mikhail
Okay. Thank you very much. And as a small follow-up and clarification here. The presentation states capital distributions and you also alluded to the buybacks. When you think about buybacks, can it be also potentially expanded to the buybacks from the strategic shareholders or it — you speak here about the distributions to the minority shareholders? Thank you.
Christos Megalou
We are talking about distribution to all shareholders, not specifically directed buyback.
Butkov Mikhail
Okay. Okay. Thank you very much. It’s very helpful.
Operator
The next question comes from the line of Memisoglu Osman with Ambrosia Capital. Please go ahead.
Memisoglu Osman
Hello, Manny, thanks for your time and congrats on the results. Couple on my side please, first one and more on a strategic basis with the ‘24 and ‘25 figures out there. How are you thinking about spread — loan spread progression? Are you budgeting any spread recovery in ‘24 and ‘25 given that yields are expected to decline, your budgeting declines. That’s the first one.
Second one, fee generation continues to be quite solid, impressive particularly card fees went up Q-on-Q, despite the seasonal slowdown loans coming down slightly. So I’m curious to hear your thoughts on that front?
And the third one on cost of risk given quite sizable negative formation and you’re seeing similar trend sounds like in Q2. Could you give us any color on quarterly progression? How you expect it to trend? And for ‘24, what does that rotate include in terms of cost of risk? Thank you.
Theo Gnardellis
Hi, Osman. Well, your first question is around spread recovery. Assuming of course, there’s spread compression or continued spread compression, I would say in 2023. Page 21 where we’re showing the guidance for the NII. You’re seeing their loan pass-through in ‘24 and ’25 of 90% and 100%. When the rates drop, that basically means that there is no recovery. That entire reduction is baked into the end yield. So there is no assumption on spread recovery. We believe that whatever spread compression occurs this year on the rising interest rates is there to stay also taking into account the delta that spreads in Greece have versus other European jurisdictions. And given the fact that the economy is headed to investment grade. So the industry is prudent to assume that the ending spreads the exit of 2023 is kind of a terminal situation when it comes to the Greek spreads.
To your question about fees. Yes, the fees are right now around 65 basis points over assets. And we are taking those to 80 basis points in the guidance for 2025. The fact is that there are particular moves that will make this change. In both the enhanced credit expansion that we are expecting in the country, as well as all the older initiatives that are happening on asset management, rental income growth, and other kind of fee generating initiatives that we are planning.
So, let’s just say, it’s a good 65 basis points close to the good practices of Europe. But still with room to go against, I would say, the best practices, which are primarily strong asset management houses across the continent. To the quarterly progression of cost of risk and to the expectation of 2024. Cost of risk right now is around 80 basis points and it has been 80 basis points for many quarters now. Not justified by the negative formation, but let’s just say we are using these current quarters to also take some more conservative approach on particular exposure, increasing our coverage, securing also our capital.
We — the guidance still holds for 1.2% for 2023. We will see — and in Q2 again things still look calm. It is an election quarter, not that this will implies anything in terms of asset quality or we expect it to. But let’s just say we will be able to see what will happen in 2023 after the Q2 result. In the Q2 result, we will see whether the run rate stays at 80 basis points. And if so, how we deploy this benefit, this capital benefit of 2023 into a further cleanup or enhanced CET1 or other initiatives.
And 2024 has pretty much the run rate that we’re seeing right now between 80 basis points and 90 basis points and as we are disclosing 25% or 70% on the back of the risk balance sheet.
Memisoglu Osman
Perfect. Thank you.
Operator
The next question comes from the line of David Daniel with Autonomous Research. Please go ahead.
David Daniel
Good afternoon and congratulations on the results and thanks for taking my questions. I’ve got two. The first one is just on capital, if I look at total capital and where you’re guiding to at the end of the year and also how much capital you’re accreting? I’m just interested to hear what the headwinds are in that flight path? If you just explain just what you think is to come to the year-end target, that would be interesting.
And then just on MREL, can you talk us through your thinking for transactions for this year? I know also that you’ve got Tier 2 call in June 24, could we see anything in the Tier 2 market this year or is up next year’s problem? Interest to hear your thoughts? Thanks.
Theo Gnardellis
Yes, so in terms of capital, what you’re basically asking, Dan, I think is you guys did a 60 basis point hike in one quarter and you’re telling us that you’re going to build something above 30 basis points in the remainder three, so what’s going on, it’s quite straightforward.
The organic capital the P&O will continue pretty much of the rates that we’re seeing right now. There is a little bit of slump, because of increased deposit cost in the last two quarters of the year, but more or less one can assume that the numerator of the capital is going to be organically enhanced at the same pace. That being said, we — there’s an RWA burden that will come from the expansion that will save off, let’s say, if the P&L contributes what we expected of around 200 basis points and 50 basis points of that is going to be growth, right, so RWA consumption. Which gets you to a 150 organic build, then we have one-offs of about 70 basis points that have to do with both voluntary exit programs that are planned for the continued FTE reduction of the bank, as well as some budgeted cleanup costs that have to do with further actions we are taking on the NPE front.
And then the remainder, I would say is for dividend and other capital deductions that we will be doing. So I would say, hence pretty much the reconciliation between the 12.2% and what we are saying to be above 12.5%, obviously, the model has a bigger number than 12.5%, we can currently also securely give these guidance.
On MREL, yes, there’s a single transaction planned for the year, we’re currently at 99%. We were going after a target of 21.8% for the end of this year. The capital that we build with the plan that we’ve got right now. We’re looking at the transaction up to EUR500 million to happen at some point within the year. At — I would say, current level costs, that’s what the NII assumes. On Tier 2, we all know the pros and cons of action in the Tier 2 market, but yes, we can say that this is next year’s activity.
David Daniel
Thank you very much.
Operator
The next question comes from the line of Gerstenkorn Maximilian with Jefferies. Please go ahead.
Gerstenkorn Maximilian
Two quick ones from me. One on capital, I think in your presentation you alluded to the possibility of an acceleration in the DTC amortization perhaps, you could just give us a few more details on that one? And then my second question, you’ve said you’ve been proactive there’s been the freeze on the mortgage rates for that program. I was wondering if you could quantify that impact a little bit? So perhaps just looking at the few backup of the envelope calculations, it looks like the NII foregoing at the Q1 2023 repricing could be looking something like a very high-single-digit million number, perhaps very low-double-digit number, perhaps you could give us a few more details on. NII foregoing because of those actions. Thank you.
Theo Gnardellis
Right, so starting with the impact of the mortgage cap. We have cap mortgages at the reference rate of the 31st of March minus-20 basis points. The entire book, well, the majority of the mortgage book of Piraeus Bank is pricing at one month Euribor. Just for you to understand that basically means an effective 2.72% cap, while we were pricing at around 2.5% lately. So there is a little bit of a lag time until we catch up to the cap. Obviously, the one month Euribor right now is higher than 2.72%. So there is an impact from the cap already there that we are quantifying this against our projected Euribor, not the current level, but the projected, which has a little bit of space to increase still, around EUR15 million, that EUR15 million is baked into our projection in our guidance for NII. And we can say that it is much lower to the potential upside that we are seeing from the evolution of the deposit front.
On capital, yes, we have taken an approach where given the fact that the capital was not the bank has massively recovered and continues to build very healthy buffers to at least potentially accelerate the DTC amortization beyond what the tax law would allow us to do. So therefore, we are now taking the approach where we’re doing a linear amortization on a prudential front of something more than EUR130 million for loans and another EUR55 million on [PSI] (ph) total of around EUR190 million in total.
So let’s just say whatever tax law would allow us to do, we’re going to do it in the P&L. But if there’s a residual charge to reach the EUR190 million we will be deducting from CET1, that way we can give a stable amortization profile on the DTC against CET1 with a target to reach a ratio DTC over CET1 of 50% by the end of 2025.
Gerstenkorn Maximilian
Alright, excellent. Thank you.
Theo Gnardellis
Good.
Operator
[Operator Instructions] Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Megalou for any closing comments. Thank you.
Christos Megalou
Thank you all for participating in our first quarter 2023 results conference call. We look forward to discussing with you all physically or virtually during our investor outreach program. Have all a restful weekend and for all the colleagues in the U.K., a great coronation weekend. Thank you very much.
Operator
Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for calling and have a good afternoon.