Start Time: 11:00 January 1, 0000 11:43 AM ET
Piraeus Bank S.A. (OTCPK:BPIRY)
Q1 2020 Earnings Conference Call
June 01, 2020, 11:00 AM ET
Christos Megalou – CEO
Theodore Gnardellis – CFO
Conference Call Participants
Jonas Floriani – Axia Ventures
Osman Memisoglu – Ambrosia Capital
Angeliki Bairaktari – Autonomous Research
Mehmet Sevim – JPMorgan
Manos Chatzidakis – Beta Securities
Jose Abad – Goldman Sachs
Mazahir Mammadli – Morgan Stanley
Panagiotis Kladis – Eurobank Equities
Ladies and gentlemen, thank you for standing by. I am Galley, your chorus call operator. Welcome and thank you for joining the Piraeus Bank Conference Call to present and discuss the First Quarter 2020 Financial Results. All participants will be in 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 Bank CEO, Mr. Christos Megalou. Mr. Megalou, you may now proceed.
Good afternoon, ladies and gentlemen, and good morning to those joining us from the U.S. I’m Christos Megalou, CEO of Piraeus Bank and I am here today with Theodore Gnardellis, Group CFO; and Chrys Berbati, Head of Corporate Development and IR. Thank you for attending our first quarter 2020 results presentation.
This was a quarter of extraordinary developments. The COVID-19 crisis has proven to be an unprecedented emergency for societies around the world in both health and economic terms. Greece has avoided the worst of the pandemic so far. As of the 30th of May, we had only 2,900 confirmed cases and 175 fatalities, 16 fatalities per 1 million, one of the lowest counts in the European Union.
The Greek administration adopted an immediate response to the coronavirus pandemic by taking early containment measures. Today, state officials and medical experts are optimistic for the new day as we gradually return to normality. Importantly, the Greek economy has restarted as of early May and the persistently good progress post the lockdown to date is very encouraging.
On the other hand, the impact on the economy is expected to be severe, although it’s still difficult to measure precisely. Tourism in Greece is a bellwether for the economy and we will need to see during the following months how this will play out and what the impact in the economy will be.
As we have seen, a series of downward revisions of the Greek GDP by both the official and the private sector. At Piraeus, we have revised the key macroeconomic assumptions as you can see Slide 2 of our presentation. So we anticipate the Greek GDP to contract by 8% this year and rebound by 7% in 2021.
On real estate, our revised estimates for 2021 prices point to approximately 9 percentage points lower than previous estimates trend in the commercial real estate and 10 percentage points in the residential real estate, and this has been reflected in our numbers.
Undoubtedly there has been a massive support for the Greek economy with both domestic and new EU wide measures helping to mitigate the COVID-19 impact. The recently announced EU Recovery Fund translates to expected inflows for the Greek economy to the tune of 32 billion or 17% of the GDP which comes on top of the 20 billion to 24 billion measures already announced by the Greek state.
The magnitude of this support mechanism allows us to be constructively optimistic that any damage to the economy can be mended in the near end and in 2021 Greece will return to sustainable growth. It is my deepest conviction that it is the first time since 2007-2008 that Greece stands a good chance for a sustained and above trend period of economic expansion from 2021 onwards.
Piraeus Bank has been a pioneer in terms of responding rapidly to the challenges posed by COVID-19. We prioritized keeping our people safe and healthy while at the same time provided to all our clients all the support they needed from us to weather any consequences.
Illustrating the actions of our responsiveness on Slide 4, we would like to share that currently we have offered debt moratoria to around 4 billion of non-NPL borrowers and amount of around 20% of eligible corporate and household clients are opting in the moratoria offered.
A total amount of 2.2 billion have been disbursed to date that is new disbursements in 2020 having covered close to half of our 2020 target of 4.9 billion. Very important to note that for the first time in Q1 2020, the Bank’s overall gross loans have experienced an increase while the performing loans were up by 400 million.
During the lockdown, technology and digital banking have been instrumental on changing customer behavior. We managed an eightfold increase of registration to our e-banking platform compared to the same period of last year, while 95% of total bank payments was executed electronically via 88% last year. The work that we have done at Piraeus over the past three years has prepared us well thus entering in the current crisis with much stronger and adjusting swiftly to the new conditions.
Moving on to Slide 5, our net interest income was stable year-on-year. Net fee income was up 3% while operating costs decreased by 7%. New loan generation yields came at the healthy level of 4.2% average yield while net interest margin was in the tune of 2.4% also helped by the improving funding costs. Our like-for-like PPI was up 14% in Q1.
The update of forward-looking information within the IFRS framework to incorporate the revised macroeconomic outlook led to incremental impairments of 300 million in Q1 2020 for Piraeus Bank. The impact has been incorporated in our Q1 financials subject to information available as of March 2020. Our effort is now focusing on executing our 2020 budget as initially planned.
As you can see on Slide 6, the COVID-19 impact came on top of an otherwise resilient PPI. The underlying cost of risk stood approximately at 190 basis points in Q1, which is within our guided range. However, the IFRS 9 model change burdened our P&L. We expect though that the following quarters will revert to the underlying run rates.
Moving on to asset quality in Slide 7, our effort remains on managing NPE inflows and maintaining the momentum that we have recorded in the past. Inorganic initiatives continue with Iris portfolio, just jumping to Page 15, having received a confirmed offer and entering into final stage of negotiations to conclude the transaction in the following period.
The first tranche of Trinity has been signed while the second tranche is at the non-binding offer stage with interest coming from investors. Finally, the Forthnet loan sale was completed last week and it is capital accretive.
We provide more color on the debt moratoria offered to non-NPL clients on Slide 8. 27% of eligible retail exposures and 16% of eligible business exposures are under moratorium at the moment. In the business segments, more than 70% of the cases stem from the severely impacted sectors; hospitality, trade, manufacturing and transport.
Our total exposure to these business sectors amounts to 5.2 billion as displayed on Slide 9. It is very important to note that the experience to date indicates that any difficulty faced at the moment is concentrated at specific recognized parts of the portfolio and is not disbursed throughout our performing book.
Importantly, payment culture hasn’t deteriorated. Payment rates remain broadly resilient especially post lockdown relaxation while the state supports schemes for financing will prove to be a catalyst in the forthcoming period.
Out of the 2.2 billion corporate clients under moratoria, we expect the vast majority of them to participate in the government’s support schemes. It is worth mentioning that approximately 1.1 billion additional funding will become available to our large corporate and SME clients from the new guarantee scheme which is launching this week. Another 500 million is expected to become available to our SME clients under the new working capital scheme called ΤΕPΙΧ ΙΙ.
Especially with regards to ΤΕPΙΧ ΙΙ business financing, we are proud to say that the Bank has received 37% of total submitted applications. Also in the program sponsored by the Ministry of Development for interest rate subsidy to existing financing to medium size and small enterprises affected by the measures to mitigate the pandemic, the Bank is contributing with a market share of 52% of total submitted applications until now, an overview of this is presented on Slide 10.
We continue improving our liquidity, as you can see on Slide 11. Deposits were up by 7% year-on-year in March while we have tapped the ECB funding facilities now at 4.3 billion also helping our top line. We have also used some of our liquidity to increase our securities booked year-to-date.
Our LCR now stands at 131% from 117% at the end of the year in 2019 and 67% a year earlier. We continue to manage our capital base in an efficient way and we have managed to reduce risk weighted asset density by 8 percentage points over the past year.
Our capital is displayed on Slide 12 and stands at 15.2%. We need to stress that the amendments introduced by the European Commission in late April with regards to the current capital regime provide an additionally 70 basis points of capital benefit.
Changing gears and turning to our derisking effort, we’ve worked full speed to prepare for the 7 billion securitizations as well as the hive-down process. Both work streams are very complex and demanding, yet we are confident that we will be concluding the hive-down before the end of the year. Details of the NPE securitizations as well as the hive-down process are provided on slides 14 to 16.
In parallel, Piraeus Bank is stepping up its efforts on the back of a new transformation plan the summary of which is depicted on Slide 17 and 18 that is now in the design phase. The plan is paving the way for a fully derisk, lean and profitable Bank enjoying all the strategic competitive advantages and strengths that our strong footprint in Greece provides.
Concluding these opening statements, I would like to reiterate our commitment to our clients and the society at large and our conviction that this period can be a huge opportunity to capitalize on. The support measures and the policy response are sizable and can mitigate any difficulties. For us, year 2020 is a year of intense work to clean up the balance sheet and proceed with a transformation of the Bank securing maximum visibility paving the way for a strong rebound in 2021.
And with that, I would like to open the floor to your questions.
Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions]. The first question comes from the line of Floriani, Jonas with Axia Ventures. Please go ahead.
Yes. Hi. Good afternoon. Thanks for the presentation. A few questions here. The first one is on the hive-down process and the details that you’ve shared. It seems like everything now is on track for the completion at the end of the year. And I was just wondering especially given some press articles around discussions between banks on the postponing of the DTC law for 2020 or even 2021, if you can comment on that especially because I was thinking that if your hive-down gets done before the end of the year, then you shouldn’t be worried about the DTC dilution, right? Then secondly is on asset quality and the information you show on Slide 7, I’m just wondering if you can share a bit more color on the inflows you experienced in the quarter, where was this coming from and timing, et cetera, et cetera? And then finally, maybe it would be interesting if you could expand more on the new transformational plan. I was just wondering on these proposed changes and the new plan that you have here from Slide 17 and 18, if there’s any kind of restructuring charges that you anticipate as well to have these things in place? Thank you.
Hi, Jonas. Good afternoon. Thank you for your questions. I’ll take the first question and then Theodore Gnardellis will cover the other two. Now as far as we are concerned, we are focusing in the hive-down process, work streams are all in place. We are moving ahead as part of the plan and this is what our focus is. We are not aware of any other discussions on other ideas that may have been printed in the press. And our focus is to execute the hive-down as part of our plan. I’m handing over to Theo for the inflows in the quarter and the new transformation plan.
Hi, Jonas. On the inflows and as we have illustrated, we have approximately something under 400 million of inflows in Q1. This is pretty much the run rate we had also evidence for most of 2019. And I would say it is rather split between retail and corporate on the business as usual basis. On the new transformation plan, it is an ambitious journey that the Bank is embarking on. The cost reductions that are currently planned might be subject to restructuring costs that we have done also in the past, the timing of which will be determined at the end of the design phase.
One word, Jonas, on the restructuring plan. This is a plan that we have been designing and I’m very focused in making sure that we will be implementing and executing as soon as possible. We will be in a position to give you a lot more details in the September presentation of ours, late August early September in Q2. By that time, the whole plan will be fully up and running.
Okay. Thanks, guys. Just to follow up on the NPE question, do you guys have already any color on the flows for the second quarter or maybe if you could share your expectation for the rest of the year in terms of inflows, outflows in light of the measures we’ve seen being able for the banks to make use of?
We can say that so far the Q2 inflows with recovering economy in May have been what we have expected them to be also using moratoria that are available. And for the overall trajectory I would mostly refer to our September new plan that we plan on submitting.
Okay. Thank you.
The next question is from the line of Memisoglu, Osman with Ambrosia Capital. Please go ahead.
Hello. Many thanks for the presentation and your time. I just wanted to see if you can give us a bit more color on the NII trends you’re seeing shaping up for Q2? Thank you.
As we said, stable NII year-on-year on Q1. Q2, we have tailwinds that are coming our way. Upside is coming both from new credit expansion including the disbursals of new government schemes, GGB contribution as well as funding cost support from new TLTRO facility. So overall I would say a robust NII is expected also for Q2.
Got it. Thank you.
The next question is from the line of Bairaktari, Angeliki with Autonomous Research. Please go ahead.
Hello. Thanks for taking my questions. Three on my side please. First of all, is there any risk that you may be asked to skip that coupon on the CoCo this year in order to prepare capital also considering that the SSM has recommended no payment of dividends to European banks? Second question, could you detail the 70 bps benefit that you expect to see from the EC amendment on Slide 12, if you could break those down for us by proposal, that would be very useful? And a sub question on this one. How should we think about your RWA trajectory this year? And you do mention that your response [ph] has improved a lot year-on-year. However, this year we have loans which are supported by the government, which should be 0% risk weighted, if I it understand correctly. But on the other hand there might be some credit migration to sort of riskier exposures as they currently deteriorate. So I would be interested to hear your take with regards to risk-weighted asset inflation for this year? And then one last question, more of a clarification. What is the other impairment charge that you have? So not impairment on loans, but the 72 million of other impairments. Thank you very much.
Angeliki, just to take your first question, just to remind everybody that CoCo is a bilateral instrument which is held by the HFSF and is not a public instrument. Not to be let’s say confused with any restrictions on dividends that may or may not apply. As far as we are concerned, the CoCo coupon, we are estimating that we will pay in cash and this is our current planning for 2020. So paying in cash is what we expect that it will take place for this year. I’d like to ask Theo to talk about the risk-weighted asset trajectory and your other questions.
Hi, Angeliki. On your question on the 70 bps, we’ve got the breakdown available on Page 26 where you see the three main levers that are currently in the working paper of the commission. It’s approximately 30 basis points from the software lever, the SME and infrastructure lending, another 30 and the 10 basis points from the transitional measures on the S1 and S2 dynamic provisions. On your RWA question, we’re not expecting any RWA inflation. I would say overall stable RWAs given the trajectory of the portfolio. And notwithstanding of course the leveraging that will happen from the securitization assuming those are concluded within the year. On your question on other impairments, it has to do with non-lending assets, other types of assets that have been impaired as a result of the assessment that was done.
Thank you very much.
Your next question is from the line of Sevim, Mehmet with JPMorgan. Please go ahead.
Good afternoon and thank you very much for the presentation. My first question is on cost of risk please. I understand the worse is now behind us in terms of macro revisions after the frontloading that you’ve done in the first quarter. But are you able to share with us the sensitivity of provisions to your GDP growth assumptions? So I understand you expect a 1% contraction between 2021. Is there a broad linear relationship here? So if it’s for example 2%, can we expect double going forward potentially? And my second question is just a quick follow up on the RWAs. It actually looks like you’ve managed to decrease the density by another percentage point during the quarter. Just wanted to ask about the initiatives that are happening right now and where do you expect this density to settle in the medium term post the securitizations? And finally, on the securitizations, is there any color that you can share from your discussions with NPE investors? Are you continuing to communicate with them? And I understand that you expect the recognition in the last quarter or the first quarter of ’21, when can we expect the signing then within that timeline? Thank you very much.
Hi, Mehmet. On your question on the cost of risk, rightly said, the adjustment that was done fully incorporates the new macro assumptions, so therefore going forward the underlying is expected to be at the current range of 180 to 190 basis points. On your question on sensitivity, a better proxy of sensitivity as far as the Piraeus book is concerned is real estate rather than GDP, especially given the two-year rebound scenario that we are advocating. And each real estate percentage point on a cumulative base in the full year is 20 million to 30 million of impact. On the RWA, the drop is really connected to the evolution of the portfolio. New credit is running at much lower density than legacy. As a result, the overall RWA drops and also the GGB increase that running at 0 RWA also helps with that. To your question about investors, very active discussions going on across portfolios. We have mentioned Iris and Trinity on securitizations we can disclose, but we are already on discussions and investigating value benchmarks with interested investors already.
Is there any guidance on the potential signing within the timeline of their recognition in the last quarter or the first quarter of ’21?
We have announced on Page 15, we are determined to complete both transactions by year end and beginning of the next.
Great. Thanks very much for the color.
The next question is from the line of Chatzidakis, Manos with Beta Securities. Please go ahead.
Good afternoon. Thank you for the presentation. I have just one question from my side. With regards to MIG loans, should we expect a transaction taking place in June? Can you give us some color on this? Thank you.
Yes, we have not disclosed any information on MIG loans as we don’t disclose information on specific clients. So we will not be in a position to share any color in this issue. Thank you.
The next question is from the line of Abad, Jose with Goldman Sachs. Please go ahead.
Hello. Good afternoon. Thank you guys for the presentation. I just have one question. When looking at the stress test – the last stress test from EBA for the European Banking sector, your results were released actually a few months earlier. I see that you have big cost of risk of north of actually 500 bps in the adverse scenario. With the provision you book today, you’re going to be well below that this year and yet the macro outlook is probably much worse now than under the par scenario with GDP contraction of 8% this year. So what actually makes you think that your provision will be way lower than that’s committed in the stress test given that the macro situation is worse? Thank you.
Hi, Jose. And it is a very different macroeconomic situation this scenario advocates. This is a full rebound of the economy in 2021 actually supported by recent evolutions also from the EU side. So I would not parallelize this with the stress test assumptions, which was more of systemic of longer term recession. On Page 2 where we have the macroeconomic assumptions, you’re seeing that we are talking practically a 0 sum between 2020 and 2021.
So just repeat your guidance because I can have it a bit later, so your guidance is that you will revert back to underlying cost of risk of around 180 bps more or less starting in Q2?
Yes. But for the rest of the year we will continue with our current underlying cost of risk range.
Okay. Thank you.
[Operator Instructions]. The next question is from the line of Mammadli, Mazahir with Morgan Stanley. Please go ahead.
Hello. I’d like to ask a question about your outlook on the fees and commission income for the rest of the year and maybe to 2021? Thank you.
Overall Q1 fees have been resilient with a 3% increase. In Q2, we are expecting an impact. Overall for the year I would say a mid single digit to stable situation for the fiscal year.
The next question is from the line of Kladis, Panagiotis with Eurobank Equities. Please go ahead.
Hello, gentlemen. If I may follow up on the previous question what’s your outlook on NII for the year and operating expenses and so what is your estimate for your pre-provision income for the year? Thank you very much.
As we discussed before, NII I would say overall flat with some tailwinds there but we’re currently investigating. And fees, I would say the same. On cost, a mid single digit reduction similar to what we also saw in 2019.
So just to clarify, NII flat year-on-year; fee and commission income also flat year-on-year or you said that it will be down by mid single digit?
On the fees we are aspiring for a flat result with a potential downside of a few percent points. And overall NII flat, yes.
Okay. So on that basis, PI should be better year-on-year, right, at least the corporate PI?
Given the cost guidance that we have just given and depending of course on the trading result.
Yes, that’s why I’m discussing both. Okay. Thank you very much.
On the trading result just to supplement, we have already seen in Q2 a reversal of a trend that we are now registering in Q1 given recent values of the bond market and we are currently on a positive territory.
Okay, great. And if I may follow up, what is your maximum capacity to tap the ECB funding through all these programs; LTRO, TLTRO? Are you already there or we expect some more to grow from these programs?
We are currently at 4 billion LTRO. And in the upcoming TLTRO, the initial assessment is that we will increase to 5 billion. However, our eligible collateral would allow us if we so wanted to double our current 4 billion ECB exposure depending on funding and investment strategies.
Okay, that’s very clear. Thank you very much.
We have a follow-up question from the line of Bairaktari, Angeliki with Autonomous Research. Please go ahead.
Hi, again. Thanks for taking my follow-up questions. Just with regard to the capital trajectory. Your guidance on the two securitizations was – for a CET of around 180 basis points. So I was just wondering, firstly, if you can confirm this CET or if you consider changing the perimeter, for example, so as to have a lower hit? And secondly, could you walk us through a breach with regards to your capital? Because when I look especially at your fully loaded guided [ph] level, which I appreciate is not the one that the regulator is immediately looking at but that’s what the investors are looking at, it is currently at 10.8%. So if I just take the pro forma CET1 figure, fully loaded from the transaction, that would be 9% today. So could you walk us through a bridge on how you plan to improve this ratio in the next few quarters to be in a better position to do the securitization? Thank you.
Hi, Angeliki, again. Yes, on the securitizations, the expectation for the cost is approximately the range that we have discussed. As far to your question on CET, it assumes a static organic result for the coming years of the IFRS phasing, which is not our base of function. Organic capital generation is the one that’s going to be stepping up the fully loaded capital result much like it has done for the past five quarters of almost 200 basis points on a full capital basis. So CET1 assessment is only on the one side where you’re looking at the downside of the securitizations, but organic capital generation on top of the IFRS phasing in the one that will be stepping up that result over the coming period of IFRS phasing.
Thank you. That’s very clear. If I can just follow up on that. In your discussion with the regulator, do you get the sense that they prefer your annual peers to move ahead with the securitization as soon as possible because the most pressing issue is effectively NPE reduction for the Greek banks, or do they prefer in the current environment of COVID-19 crisis, capital preservation? I’m just wondering what is the preference at the moment with everything that is going on. Thank you.
In the course of outlining and designing our derisking strategy, we have a very healthy and constructive dialogue with the regulator. Derisking the balance sheet is the number one objective right now and completing the transactions in the coming year is of utmost priority and this is the focus of the Bank right now.
That’s very clear. Thank you and thanks for the healthy color.
[Operator Instructions]. Ladies and gentlemen, there are no further questions at this time. I would now turn the conference over to Mr. Megalou for any closing comments. Thank you.
Ladies and gentlemen, thank you all for participating in our first quarter 2020 results conference call. We faced challenging times but the improvement in the economy over the past couple of years along with our work in Piraeus Bank to improve our balance sheet allow us to be constructively optimistic that we have the ability to effectively weather the current situation. Looking forward to discuss further with you in the following weeks. Stay safe and healthy until we meet up close again. Thank you.
Ladies and gentlemen, the conference has now concluded and you may disconnect your telephone. Thank you for calling and have a pleasant evening.