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Edited Transcript of ETE.AT earnings conference call or presentation 21-Nov-19 4:45pm GMT

Q3 2019 National Bank of Greece SA Earnings Call

Athens Dec 10, 2019 (Thomson StreetEvents) -- Edited Transcript of National Bank of Greece SA earnings conference call or presentation Thursday, November 21, 2019 at 4:45:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christos Christodoulou

National Bank of Greece S.A. - GM & Group CFO

* Pavlos Konstantinos Mylonas

National Bank of Greece S.A. - CEO & Executive Director

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Conference Call Participants

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* Angeliki Bairaktari

Autonomous Research LLP - Analyst

* Iason Kepaptsoglou

HSBC, Research Division - Analyst

* Jonas Scorza Floriani

Axia Ventures Group Ltd, Research Division - Director

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. I'm Constantinos, your Chorus Call operator. Welcome, and thank you for joining the National Bank of Greece Conference call to present and discuss the third quarter 2019 financial results. (Operator Instructions) And the conference is being recorded. (Operator Instructions) At this time, I would like to turn the conference over to Mr. Pavlos Mylonas, CEO of National Bank of Greece. Mr. Mylonas, you may proceed.

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Pavlos Konstantinos Mylonas, National Bank of Greece S.A. - CEO & Executive Director [2]

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Thank you. Good afternoon, everyone, and good morning to those of you joining us from the U.S. Welcome to our Q3 '19 financial results call. I'm joined by Christos Christodoulou, Group CFO; and Greg Papagrigoris, Head of IR and the rest of the team. After my introductory remarks, the CFO will go into more detail on our financial performance, and then we will turn to Q&A. So let's begin.

Through the implementation of our ambitious and comprehensive transformation plan, we continue to address our challenges and capitalize on our competitive strengths. NBG's Q3 financial results constitute one more step in the direction of normalizing the balance sheet and improving profitability. Indeed, our performance in the 9 months revealed strongly improved profitability, including on a core basis as well as more comfortable liquidity and capital positions. At the same time, we have accelerate the pace of NPE reduction, so our credit risk charges have been kept at relatively low levels, underlining our appropriate level of provisioning.

Let's look at these developments in turn. As regard to revenues, in the 9 months, we have managed to grow our core income by 7% year-on-year, reflecting stronger NII from securities. Perhaps more importantly, for the first time in many quarters, NII from loan interest shows resilience and helped absorb part of the cost of the Tier 2 facility issued in July. Despite the summer seasonality, corporate disbursements in Q3 reached EUR 0.5 billion and a cumulative amount of almost EUR 2 billion in the 9 months. At the same time, household credit has been posting early signs of a pickup with new production in the 9 months, up 32% to EUR 370 million. It is important to note that both corporate and retail credit front-book yields are holding up well, despite lower interest rates, remaining substantially above back book deals. On fees, results have been equally encouraging as they were up by 5% year-on-year driven by retail banking fees increasing by 12% year-on-year. This has been the result of high-teen growth rates across digital channels, credit cards, lending-related fees and bancassurance. Our cost reduction efforts are also producing good results. Specifically, domestic personnel expenses declined by 8.4% year-on-year as a result of the circa 600 FTE departures in 2018. On the back of rigorous demand management and adjusting for the impact of IFRS 16 on Pangaea and on the Pangaea deconsolidation. G&A in the 9 months we reduced by a solid 13% year-on-year. Further operational cost containment will arise as the 2019 VES continues. More than 700 additional employees have accepted it. Combining the cost reduction with the expansion of our core income and excluding trading gains, group [core] cost income dropped by 8 percentage points year-on-year to 57%, despite the adverse impact from the implementation of IFRS 16 and the Pangaea deconsolidation will increase the core cost income by about 1 percentage point. Despite rapid NPE reduction, credit risk charges remained unchanged at 136 base (sic) [basis] points for 9 months. Despite the fact that they include the impact of additional provisions required ahead of the sale of international -- the international portfolios, which have been booked in Q3. As a result, 9-month core operating profits reached EUR 158 million, up by 41% year-on-year. Factoring in a strong trading line, aided by the sale of sovereign bonds and noncore assets, 9-month PAT from continuing operations accelerated to EUR 423 million relative to EUR 61 million a year ago.

As we got NPEs, a reduction in Q3 has accelerated to EUR 1.5 billion, bringing the year-to-date NPE decline to a sizable EUR 4 billion, approximately, 25% of the amount at the beginning of the year. The domestic NPE ratio now stands at 34.1%, down by 240 basis points Q-on-Q and 700 basis points year-to-date. This result arises from a concerted effort across both nonorganic as well as organic channels. On the sales front, we have undertaken 4 domestic transactions, reducing the NPE sale by almost EUR 3 billion, and I repeat, without the need for extra provisions. On the organic side, our efforts have resulted in an accelerated reduction, which exceeds EUR 1 billion year-to-date. Organic efforts reflect viable restructurings involving significant debt forgiveness as well as liquidations applied to noncorporate borrowers as a last resort and a signaling tool. Indeed, restructurings have been picking up, driven by the new mortgage restructuring product, Split & Settle, which proven to be very successful, comprising more than 3/4 of our mortgage restructurings. The success of this product changes on our front, aiming borrowers, the incentive and the capacity to service and mortgages through LTVs below 100% and lower PTIs. The CET1 capital ratio continued to increase in Q3, up by 80 basis points Q-on-Q, reaching 16.8%. This increase is reflective of strong profitability, bond valuation gains and the securing of agreements to sell part of our remaining [Ethniki] operations. Similarly, the total capital ratio is now close to 18%, aided by the Tier 2 of 400 million issued in July. Both ratios stand well above regulatory thresholds for 2019 and 2020.

Six months ago, NBG announced a set of ambitious NPE reduction targets, leading the bank to an NPE ratio of circa 5% in 2022. As mentioned earlier, we are ahead of our target. Since that announcement, a series of positive developments for systemic and bank specific make an acceleration in our NPE strategy feasible. These comprise the following: a CET1 ratio of circa 200 basis points above our 2019 business plan targets; substantial realized and unrealized gains in our bond positions; continuously improving core PPI from the current EUR 150 million per quarter. The improved macro environment, including real estate collateral values. Improved attractiveness of securitizations due to the Hercules. Progress on the sale of our insurance subsidiary, which will be capital accretive. Thus we are currently preparing and examining various options. Let me reiterate my commitment that NBG's NPE reduction will be achieved without dilution to shareholders. To conclude, the results of the transformation program are very encouraging, and we will continue to build, allowing NBG to be a bank with a clean balance sheet, ahead of schedule, earning healthy profits as NBG completes its objective to be Greece's bank of first choice.

And now I'll turn it to the CFO.

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Christos Christodoulou, National Bank of Greece S.A. - GM & Group CFO [3]

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Thank you, Paul. Starting with profitability on Slide 6. Group operating profit reached EUR 416 million for the 9 months of 2019 compared to EUR 88 million in 2018, driven by the increase in NII and net sales as well as rigorous cost cutting efforts, boosting core pre-provision income by EUR 111 million or 32% year-on-year. The recovery in noncore income was aided by one-off gains of EUR 215 million related to the Greek government bond exchange in mid-February as well as nonrecurring sovereign bonds and asset disposals. The observed increase in provisions is due to the base effect from NPL sale recoveries of EUR 42 million booked back in 2018. Adjusting for that, underlying provisions were up by just EUR 23 million year-on-year, despite incurring additional provisions in light of the upcoming sales of Cyprus and Romania loan portfolios. As a result, group operating margin expanded to 186 basis points for the 9 months of 2019 compared to just 41 basis points in 2018, while Q3 margin stood higher at 214 basis points as seen in the right-hand side chart.

Going in more detail on Slide 7. Domestic NII in Q3 remains strong, despite the effect from the Tier 2 issuance held in the quarter and the impact from the bond sales during Q3. Notably, the lending interest income has shown resilience quarter-on-quarter. At the same time, the quality of lending interest income has improved with circa 3/4 of the 9 months NPE interest income in net of cash were fully provided for. Domestic NIM decreased by 6 basis points Q-on-Q, remaining at healthy levels of 269 basis points. Factoring in lower provisions, which stood at EUR 23 million this quarter, driven by the positive house price index movement. Risk-adjusted NII expands to EUR 261 million in Q3 from EUR 193 million the previous quarter. All in all, at the 9-month level, domestic NII grew by a solid 7.6% year-on-year, reaching EUR 852 million.

Turning to Slide 8. Domestic deposits amounted to EUR 41.4 billion, 3.5% higher year-on-year despite state deposit outflows of EUR 1.8 billion year-to-date. Low-cost core deposits increased their share to 73% of total deposits from 68% a year ago, allowing our blended deposit yield to edge lower to 37 basis points. Time deposit yield was totally flat Q-on-Q at about 79 basis points in Q3. However, with new production standing at 42 basis points, we are expecting our funding cost to edge even lower in the short term, aiding NII and net interest margin. On the other side of the balance sheet, on Slide 9, the total lending yield on performing loans remain totally flat Q-on-Q at 366 basis points, with offsetting movement in back book yields across all lines of business. New production comes in at higher rates across most books, holding its ground in corporate despite higher volumes and increased competition. Despite seasonality, corporate performing loans got expanded by EUR 1.4 billion year-on-year in Q3, driven by EUR 3 billion of corporate investments over the same period, offsetting retail book leverage. Moving on to fees on Slide 10. Domestic fee income in Q3 increased by 5% Q-on-Q to EUR 60 million on the back of stronger retail fees. For an annual basis, this also grew by 5% year-on-year to EUR 174 million, with retail banking fees up by 12% year-on-year, driven by cards, digital channels, bancassurance and lending-related fees.

Moving on to OpEx on Slide 11. Domestic costs declined by 6.3% year-on-year, driven by personnel cost reduction of 8.4%, reflecting the impact from the VES's and branch closures. Year-to-date, more than 700 employees have accepted our VES offering, putting us closer to the full year target, while the number of branches was reduced by 70. In the 9 month, general and administrative expenses came down by 21% year-on-year, following tight control -- tight cost control efforts. This includes the impact from the IFRS 16 adoption, specifically, the replacement of rental expense with depreciation. Adjusting for that, G&A reduction on a like-for-like basis expands with an impressive 13% year-on-year. As a result, our domestic cost-to-income ratio further improved to 46% in the 9 months of 2019 from 68% last year. At the core operating level, domestic cost-to-core income ratio declined by more than 8 percentage points to 57% for the 9 months of 2019. Now on asset quality on Slide 15, we achieved NPE reduction of EUR 4 billion year-to-date. It's almost matching the ambitious NPE reduction target of EUR 4.3 billion for the full year, which we comfortably expect to exceed, factoring in the sales of the Cyprus and Romanian portfolios as well as further restructurings, liquidations and major write-offs all planned for Q4. Notably, the NPE reduction achieved since 2015 exceeds EUR 10 billion. Tipping the scale for the remaining planned NPE reduction, which stands at EUR 9.8 billion. As our CEO said, the (inaudible) NPE reduction is now being contemplated, given the positive systemic development such as in the APS securitization scheme, the real estate and debt capital markets as well as bank specific relating to strong profitability and capital generation. As stated, we are considering expediting our efforts to deliver a clean bank sooner than promised, utilizing all available tools and opportunities in a noncapital dilutive way.

Turning to Slide 14. The domestic NPE balance contraction reached EUR 1.5 billion this quarter from $1.4 billion in Q2, driven by sales of EUR 1.2 billion relating to the disposal of secured corporate and SBLs, and the sale of a small (inaudible) portfolio in Greece. For confirmation, excluding accounting write-offs, remained in firmly negative grounds coming in at EUR 250 million, despite the negative base effect created from lower restructurings in Q3 2018. Negative formation in Q3 '19 was also aided by liquidations for noncorporate borrowers. Domestic NPE ratio settled at 34.1%, down by 240 basis points Q-on-Q and 700 basis points year-to-date.

Turning to Slide 15. NPE reduction can be witnessed across all lines of business, aided by the portfolio sales that mostly affected small business, SME and corporate portfolios as well as the debt forgiveness offerings in the mortgage NPE portfolio. Very quickly on Slide 16, NBG's high cash coverage of 54%, along with our strong profitability, facilitates the front-loading of our NPE reduction plan. Within R&D exposure, a total of EUR 2.6 billion represent below 30 days FNPEs, which are likely to queue up. Moreover, as you can see on Slide 17, our exposure on Stage 3 loans has been declining and is gradually being replaced by higher-quality Stage 1 loans. Turning to options on Slide 18. Despite seasonality, with 0 auctions in August, auction passage in Q3 recovered post the elections reaching Q1 levels. Out of the 1500 assets scheduled for auction in Q3, about half were suspended, and of the remaining half that were tailed, approximately 40% were successful. Overall, the number of scheduled auctions for the bank's about 1,500 based on September data. With regards to NPE projects as disclosed on Slide 19, following the sales of Project Symbol and Mirror, we have received binding offers for the portfolio of shipping loans of EUR 0.3 billion in size, with the SBA expected in the coming days. For the EUR 0.9 billion corporate portfolio for sitting of announced nonoperating corporates, SME and small business loans, we have received nonbinding offers. Finally, we are moving fast to complete 2 NPL sales outside Greece of approximately EUR 0.5 billion total size by year-end '19. Very quickly on liquidity, on Slide 21. Group deposits increased by 3.6% year-on-year, reflecting deposit inflows of EUR 1.4 billion in Greece. Our Q3 '19 LCR and NSFR ratios continue to improve, standing at 198% and 116%, respectively, far exceeding the minimum regulatory requirements. On Slide 22, you will see [comprising] stats at EUR 2.3 billion, comprising only of TLTRO funding, and interbank exposure was reduced by EUR 3.4 billion year-to-date, and we have 0 leverage of EUR 0.2 billion, reflecting funding cost optimization. Finally, on capital adequacy, on Slide 24, CET1 ratio in Q3 stands at 16.8%, up by 80 basis points quarter-on-quarter, including the 9-month 2019 profit and the impact from (inaudible) investments, with a total capital ratio climbing at 17.7%. Both ratios are comfortably above our SREP capital requirements for both 2019 and 2020, including PPG, aided by strong profitability and bond valuation gains year-to-date. Adding to that, the divestment of Ethniki Insurance is expected to further enhance capital ratios significantly. And on this note, I would like to open the floor to questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Floriani, Jonas with Axia Ventures.

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Jonas Scorza Floriani, Axia Ventures Group Ltd, Research Division - Director [2]

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So my first question is on NII and your securities portfolio. I've seen that in Q3. Now you had like a EUR 1 billion reduction [in] the securities book. And looking at the components of NII, that means that you have the EUR 10 million reduction on the securities part of it. So I'm just trying to understand what is your strategy around the security book? And especially given the size of your stock in GGB, also having in mind the effects on the NII as you bring the stock down. So just wondering how you're thinking about that? Second, I've seen that you have the -- you have another cause of [maintaining] in the quarter or actually EUR 36 million, which is basically in line with the guidance that we had before. Just wondering what is the status of this going forward? I remember that in the last conference call, you mentioned that you had at least -- you had 2 court dates to happen in December around (inaudible). So yes. If you can give an update on that, it would be great. And then my following question is on your NPE strategy. I see that the bulk of your reduction now, looking at the years ahead, will happen in 2020, when you have the EUR 4.6 billion reduction, and I assume that, that's the year that you'll be using securitization at some of the APS, right? So if you can give any details on this on potential size in securitization versus the EUR 4.6 billion reduction? And what kind of assets you'd be thinking about including [in the] mix assets or more specific area?

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Pavlos Konstantinos Mylonas, National Bank of Greece S.A. - CEO & Executive Director [3]

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Okay. The first question on Security NII. Clearly, the use of the capital gains would require a loss of security NII. You cannot have your cake and eat it too. So if there is a deal on NPE reduction, which requires the use of those capital gains, we'll use it. And therefore, there will be consequences on NII from securities. (inaudible) The current law passed by the previous government required NBG to pay approximately EUR 40 million, not approximately, exactly EUR 40 million per year. We are discussing with the new government a form of that law, which eliminates some uncertainties as to liabilities. But my guess is it will remain at EUR 40 million per year for us. But it will be eliminating any potential claims against us. On -- that should be something that happens in the next few months, I hope. On the NPE, I think you've concluded the EUR 4.6 billion, I think, is a 2021 reduction, while in 2020, we had a bit of a pause. I know we had about EUR 2.5 billion. And in my introductory remarks, what I said was that we will bring the securitization plan for 2021 into 2020. And given the additional buffers and advantages that exist in the institutional framework to increase the size of that securitization. But more on that when we have all the pins lined up.

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Jonas Scorza Floriani, Axia Ventures Group Ltd, Research Division - Director [4]

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Okay. Clear. So basically, the profile is likely to shift us, all right? So yes, I got it wrong on the timing, but the EUR 4.6 billion should be moving then [towards] the EUR 2.2 billion you have on the slide, right?

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Pavlos Konstantinos Mylonas, National Bank of Greece S.A. - CEO & Executive Director [5]

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Correct.

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Operator [6]

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The next question comes from the line of Bairaktari, Angeliki with Autonomous Research.

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Angeliki Bairaktari, Autonomous Research LLP - Analyst [7]

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On LEPETE, do I understand correctly that you expect that you will not have to recognize up front, effectively, these annual costs of EUR 40 million, which you will have to pay over the next 5 years? Because if I remember correctly, this could be potentially a capital hit by the end of the year. Then could you please give us an update on the sale of your insurance business? How is that progressing? Within the plan, I think we expected that to close. And we expect it to have the impact on capital in 2020. Is that still an expectation for next year? Or could that be delayed into 2021? And also, the initial guidance for that was around 110 basis points, but I imagine that the book value of the insurance business has grown since then. So if you could give us an updated figure. I would expect this capital -- out of the [UAE] and capital impact to be higher effectively than the initial 110 bps, if you could confirm that? And then 2 more questions on NII. Firstly, your repo funding has come down significantly quarter-on-quarter. Should we now expect these very low level going forward? Or should we expect you to increase it over the coming quarters? And could you give us an indication whether you will be capping TLTRO III? And what could be a potential benefit to NII from TLTRO III and the deposit tiering introduced by the ECB?

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Pavlos Konstantinos Mylonas, National Bank of Greece S.A. - CEO & Executive Director [8]

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Okay. Let me start with LEPETE. Yes, you're correct that we are -- the reform to the law that I'm discussing with the government would turn that EUR 40 million into an annual charge by turning it into a contribution -- [a social security] contribution of the bank. So there would be no upfront hit. On insurance, we are in the nonbinding phase. People have signed nondisclosure agreements, have received the info memo, and we should get nonbinding offers this side of 2019 and binding offers in the first month and a few weeks of 2020. So the -- all expectations are that there would be a signing of an agreement early 2020. And then closing clearly will depend on the regulators. So I don't think that 2021 is at all an [currency]. I don't like commenting on pricing, but I think that you're right that the 100 basis points is on the low side. NII repo funding, as you will see from all our liquidity indicators, there is excess transactional -- we're meeting all the regulatory indices by a good margin and deposits' coming up continuously. So there will be no need for repo funding. And I see time deposit costs coming down significantly over the next few months. And then the TLTRO -- Hey, Chris, do you want to take that drop?

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Christos Christodoulou, National Bank of Greece S.A. - GM & Group CFO [9]

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We will be practicable in the TLTRO III program. We will be benefiting in interest income from that. We expect the benefit to be something above EUR 10 million for the year.

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Angeliki Bairaktari, Autonomous Research LLP - Analyst [10]

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If I may follow up on the liquidity ratios that you mentioned. And also considering that I expect all banks now to be having their SREP 2020 discussions with the regulator, is there any chance that your SREP requirements might be lower on the back of the better liquidity ratios? Or is it too early for that to happen?

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Pavlos Konstantinos Mylonas, National Bank of Greece S.A. - CEO & Executive Director [11]

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Yes, SREP comes from a combination of 4 items, and one of them dominates and that's the NPE ratio. So until the NPE ratio comes down to more normal levels, no matter what we do on the other 3 components of SREP, one of which isn't necessarily not going to help us on [the overall].

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Operator [12]

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The next question comes from the line of Kepaptsoglou, Iason with HSBC.

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Iason Kepaptsoglou, HSBC, Research Division - Analyst [13]

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Sticking with the topic of liquidity, you now have an LCR of 200%. You've met the net stable funding ratio with clearly, practically no wholesale funding issuance. Your cost balances are up by EUR 1 billion this quarter. You've dropped a lot of securities in the market, so you seemingly should have some room against the cap that exists from the ECB. So what's stopping you from growing your securities book further? Why is that not a strategy you're considering to protect maybe the NII going forward?

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Pavlos Konstantinos Mylonas, National Bank of Greece S.A. - CEO & Executive Director [14]

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Good point. I think that we had used the strategy on securities, and you saw the capital gains that, that led to. We perhaps should have done more. But now where yields are, I don't think it's the appropriate time to be increasing our securities. But we're going to be looking at this opportunistically. And clearly, non-Greek sovereigns are something that we will look at, at an appropriate time. (inaudible) to the Greek GGBs, I think we are not that far off. We have a bit of room, but it's not a lot.

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Operator [15]

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(Operator Instructions) We have a follow-up question from the line of Bairaktari, Angeliki with Autonomous Research.

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Angeliki Bairaktari, Autonomous Research LLP - Analyst [16]

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Two more questions from me. First of all, your domestic loan impairment of EUR 23 million is quite low. And you mentioned that this sort of reflects the better collateral prices. I was wondering, have you adjusted the macro parameters in the IFRS 9 model now to reflect better macro conditions, including the real estate market recovery? Because if I understand correctly, this is an exercise that all banks will now be doing once a year or so. So if you could give us some color on that, that would be helpful to understand the dynamics there with IFRS 9 and the ongoing provisioning charges.

And the second question is you have a core income target for 2022 of EUR 1.7 billion, and the 9-month annualized core income is EUR 1.44 billion. So clearly, there's a bit of a gap there. Considering the Euribor has declined since the presentation of your plan in terms of going up as you had hoped for, and considering also some government scrutiny on the repricing of certain banking transactions which you were hoping, if I remember correctly, in your plan to increase fees, could you give us an update on how confident are you that this EUR 1.7 billion can be achieved? And sort of what kind of levers can you pull to get closer to that level?

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Pavlos Konstantinos Mylonas, National Bank of Greece S.A. - CEO & Executive Director [17]

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Okay. On the first question of the loan impairments, I'll give you the brief answer, and then Christos will give you perhaps more color. It is indeed due to the macro assumptions. It is the inclusion of the revised projections for the household, residential household price index, which is much better than expected, that led to the relatively better-than-trend cost risk in -- domestic cost of risk.

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Christos Christodoulou, National Bank of Greece S.A. - GM & Group CFO [18]

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Yes. There's nothing much more to say, but we actually do update our IFRS 9 model on a quarterly basis. So we'll pick up the effect from the HPI upside in Q3.

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Pavlos Konstantinos Mylonas, National Bank of Greece S.A. - CEO & Executive Director [19]

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Okay. Then the second question refers to how comfortable we feel with the -- increasing our core income by EUR 300 million over the next 3 years and taking into account the more negative interbank rates. And here -- I think we've said in other calls, but on most of our loans, which are floaters, there's a 0 interest rate floor. So further drops in interbank rates do not cause a loss in NII. Now whether in 2022, the interbank rates will be below what we expect, that is, I think, a bit premature to say.

On fees, I don't -- I think we are -- you can see it from the results in the quarter. And I can tell you from the results I see, we're going to do quite well on the retail side. So no impact from -- as you mentioned. And then we have some positives, which come from the fact, as I mentioned, a bit early in the [quarter]. Time deposits repricing, they're going to be 40 to 50 basis points below what we expected based on about EUR 10 billion of time deposits. The TLTRO benefit wasn't included in the initial plan. So I think there's some positives. I could also mention that the low interest rate environment, the Tier 2 we issued, and if we're going to issue again, will be at much lower spread in the business plan. So [they're] positives as well. So overall, given the distance between the number currently and the number in 2022, I don't have any, at this moment, concerns.

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Operator [20]

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

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Pavlos Konstantinos Mylonas, National Bank of Greece S.A. - CEO & Executive Director [21]

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Thank you very much, everyone, for joining us for the Q3 results call. As always, we are available for further clarifications either at IR level, CFO level or my level. So thank you very much, and we'll be hoping to talk to you soon.

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Operator [22]

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Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for calling, and have a pleasant evening.