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Edited Transcript of ETE.AT earnings conference call or presentation 29-Aug-19 3:00pm GMT

Q2 2019 National Bank of Greece SA Earnings Call

Athens Sep 18, 2019 (Thomson StreetEvents) -- Edited Transcript of National Bank of Greece SA earnings conference call or presentation Thursday, August 29, 2019 at 3:00:00pm 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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* Alexandros Boulougouris

Wood & Company Financial Services, a.s., Research Division - Co-Head of Research & Head of Greek Research

* Angeliki Bairaktari

Autonomous Research LLP - Analyst

* Iason Kepaptsoglou

HSBC, Research Division - Analyst

* Jonas Scorza Floriani

Axia Ventures Group Ltd, Research Division - Director

* Panagiotis Kladis

Eurobank Equities Investment Firm S.A., Research Division - Research Analyst

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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 Mildred, your Chorus Call operator. Welcome and thank you for joining the National Bank of Greece conference call to present and discuss the second quarter 2019 financial results.

At this time, I would like to turn the conference over to Mr. Paul Mylonas, CEO of National Bank of Greece. Mr Mylonas, you may now proceed.

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

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Good afternoon, everyone, and good morning to those of you joining us from the U.S. Welcome to our 2Q '19 financial results call. I'm joined by Christos Christodoulou, Group CFO; George Angelides, Head of Finance; and Greg Papagrigoris, Head of IR. 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. Following the strong first quarter '19 results, the results in 2Q '19 reward our efforts to transform NBG into an efficient and profitable bank with a balance sheet clean of NPEs. As regards to profitability, in first half '19, we managed to grow our core income by 5% year-on-year, reflecting NII from securities, mainly the full quarter effect of the swap arrangement with the Hellenic Republic.

And 2 more points on the revenue side I would like to make. First, new production of loans to July accelerated to EUR 2.1 billion, well above the 2018 pace. Second, first half yields on performing loans are in line with our expectations, specifically, new corporate loan production in 2Q is coming in above 400 basis points, above the comparable level of the 2 previous quarters, which were affected by large corporate disbursements.

Operational expenses held by 7%, mainly reflecting a VES for 1,150 FTEs during the past year, circa 13% of the Greek headcount and helped by the closure of circa 80 branches. The VES will continue in the second half of '19. Significant cost-cutting was also achieved in G&A even after adjusting for the IFRS 16 impact. Indeed, NBG has experienced a third consecutive quarter of what is called positive jaws.

Despite rapid NPE reduction and in line with our guidance, second quarter credit risk charges remained at the first quarter levels of 136 basis points. They should be around these levels for the remainder of the year as we complete most of our planned NPE sales. Thus, core operating profit increased by circa 20% year-on-year in the first half of '19, a strong trading line added to this performance, pushing first half profit after tax from continued operations to EUR 253 million, more than 5x higher than the comparable period of 2018. Moreover, the second quarter performance reveals an acceleration in group core operating profits to Q1, increasing by about 50% Q-on-Q.

As regard to the balance sheet. NPE reduction in the second quarter has upsided quarter-on-quarter to EUR 1.4 billion, bringing the year-to-date change to a solid EUR 2.5 billion and reducing the NPE ratio from 40% at the end of 2018 to 36% at the end of June 2019. So far in 2019, we have concluded 2 transactions and plan to complete 4 more by end of year. Moreover, organic constructions are expected to pick up as a new mortgage restructuring product, the so-called Split & Settle, is proven to be quite successful.

The CET1 capital ratio reached 16% on the back of strong profitability, bond valuation gains in the fed value through the OCI portfolio and on securing agreements to sell certain STE operations, Southeast Europe operations. Including the impact of the Tier 2 bond issuance in July, the total capital ratio stands at 17%, providing a solid buffer over the SREP requirements not only for '19 but also for 2020. And it provides scope for faster NPE reductions going forward.

Capital would -- could be boosted by further unrealized capital gains in the held-to-collect GGB portfolios as well as the sale of National Insurance. First half results provide finance -- provide evidence of the rapid change ongoing at National Bank. There's a section in the IR presentation which outlines a few key achievements of the transformation program.

Clearly, the new management team is building up a strong performance track record. Going forward, the macroeconomic conditions will improve further, aided by the envisaged acceleration of reforms by the new government, putting all the pieces in place for a successful execution of the business plan, delivering on our announced objectives and financial targets.

With that, I would like to ask Christos to guide you through our financial results in more detail.

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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 increased by almost 4x to EUR 258 million in H1 '19 compared to EUR 70 million in H1 '18 driven by the increased in NII and net fees as well as through cost cutting, posting cost (sic) [core] pre-provision income by EUR 65 million year-on-year. The recovery in noncore income, aided by one-off gains of EUR 89 million related to the Greek government bond exchange in mid-February and asset disposal, contributed even more, pushing group operating profit to EUR 258 million as seen in the waterfall chart. The increase in provisions is due to a base effect from NPL sale recoveries booked in H1 '18. Adjusting for that, underlying provisions were up by a few million. As a result, group operating margin expanded to 171 basis points in H1 '19 compared to just 42 basis points in H1 '18, while Q2 margin stood at 154 basis points as seen in the right-hand side chart.

Going in a bit more detail on Slide 7. Domestic NII was up by 7% Q-on-Q for the second quarter in a row, reflecting strong securities interest income following the exchange of the Greek State IRS with Greek government bonds. Notably, lending interest income from performing exposures have stabilized, reflecting loan disbursements of EUR 1.6 billion year-to-date with pressure in lending income arising slowly from the reduction of NPEs as seen in the lower left-hand side chart. As a result, domestic NIM increased by 15 basis points Q-on-Q to 275 basis points.

On a risk-adjusted basis, with provisions left Q-on-Q at EUR 100 million, NII expands to EUR 193 million in Q2 from EUR 174 million the previous quarter.

Turning to Slide 8. Domestic deposits amounted to EUR 41.6 billion, 6% higher year-on-year with core deposits increasing their share to 71%. Blended deposit yield hedged low to 37 basis points, aided by our large share of saving deposits costing just 3 basis points. Time deposit yield was broadly flat Q-on-Q at approximately 80 basis points in Q2 with time deposit yield reverting to the 55 basis point level following a spike in Q1 mainly due to 1 key account.

On the other side of the balance sheet, in Slide 9, total lending yield on performing loans dropped to 368 basis points in Q2 '19, reflecting the pressure in SBL and corporate yields affected by some large transactions in late '18 and Q1 '19. That said, new production comes at higher rates across all lines of business as seen from the lower left-hand side chart. Notably, performing loans continued to expand in Q2, aided by EUR 0.8 billion of corporate and small business loan disbursements with corporate performing balances up for the fourth quarter in a row offsetting the retail book deleverage.

Moving on to fees on Slide 10. Domestic fee income in Q2 amounted to EUR 58 million compared to EUR 56 million in Q1 on the back of a stronger fund management and brokerage fees. On an annual basis, fees grew by 2.6% year-on-year to EUR 115 million with retail banking fees up by 8.7% year-on-year driven by digital channels, card fees and bancassurance.

Moving on to OpEx on Slide 11. Domestic costs declined by 6.8% year-on-year both on personnel cost deduction, 6.3% year-on-year, reflecting the impact from VESs and branch closures as well as strong nonstaff cost containment, which is down 8.7% (sic) [7.7%] year-on-year, also incorporating the impact from the introduction of IFRS 16. As a result, our domestic cost-to-income ratio further improved to 47% in H1 '19 from 66% in H1 '18. At the core operating level, domestic cost to core income ratio declined by more than 7 percentage points to 57% in H1 '19.

Now on asset quality on Slide 13. The achieved NPE reduction of EUR 2.5 billion year-to-date bode well for delivering the ambitious NPE reduction target of EUR 4.3 billion for 2019. The remaining effort to meet the year-end target stands at EUR 1.8 billion and will be achieved through the sale of secured corporate and SBL portfolio, sales of shipping and Cypriot loan portfolios as well as further restructurings and liquidations.

Notably, the NPE reduction achieved since 2015 amounts to EUR 8.6 billion bringing the remaining NPE reduction versus the '22 NPE target of EUR 1.6 billion to EUR 11.3 billion. Upon achieving this target, the NPE ratio will have been reduced to approximately 5% in 2022, supported by sales and securitizations as well as organic means as seen from the lower left-hand side chart.

Turning to Slide 14. Domestic -- total domestic NPE balance contraction accelerated EUR 1.4 billion this quarter from EUR 1 billion in Q1, mainly driven by sales of EUR 1 billion relating to the accrete NPE disposal of unsecured retail, SBLs and small SMEs increase as well as negative organic formation before write-offs of EUR 0.4 billion. Organic formation, excluding the above sales and accounting write-offs, remain in firmly negative grounds in both quarters coming in at approximately EUR 260 million in Q1 and EUR 390 million in Q2. The increase in negative organic formation in Q2 over Q1 was aided by increased mortgage restructurings involving debt forgiveness on our back book.

Domestic NPE ratio settled at 36.5%, down by 250 basis points Q-on-Q. Importantly, even if we adjust for sales, NPE outflows, including debt forgiveness, recoveries and liquidations, steadily outpaced inflows, resulting in a negative NPE movement as seen by the lower right-hand side chart.

Turning to Slide 15. As you can see, sizable NPE reduction can be witnessed across all lines of business, aided by Q2 portfolio sale, Project Mirror, which affected consumer, small business and SME portfolios and the accelerated debt forgiveness offerings in the mortgage NPE portfolio.

Turning to Slide 16. Domestic NPE ratio of 36.5% combines with a coverage of 56%. Domestic 90 days past due ratio declined by 190 basis points quarter-on-quarter to 26% with coverage of 78.1%, NBG's high-coverage facilities delivery of an ambitious and front-loaded NPE reduction plan. Furthermore, our below 90 days past due FNPEs stand at EUR 3.5 billion, of which EUR 2.7 billion are below 30 days past due.

On Slide 17, a favorable mix effect has begun as Stage 3 loans are increasingly being substituted by Stage 1 loans. Our exposure on Stage 3 loans have declined by EUR 1.4 billion quarter-on-quarter to EUR 15.6 billion combined with a coverage of 52%, whereas Stage 1 loans are up by EUR 0.3 billion quarter-on-quarter.

Turning to auctions on Slide 18. The negative impact of elections on the outcome of auctions moderated activity in the second quarter of '19. Out of the 1,251 assets scheduled to be auctioned in Q2, 48% was suspended or canceled as seen from the middle chart. The remaining 52% is depicted in the right-hand side chart with 652 auctions held in Q2 '19 compared to 757 (sic) [741] in the previous quarter. From the 652 auctions held in Q2, approximately 40% was successful. Overall, the number of scheduled auctions for the bank in the next 8 months is approximately 1,300 based on July date.

With regards to NPL project in the pipeline, as disclosed on Slide 19, following the accrete sales of Symbol and Mirror, 4 additional sales are scheduled in the second half of the year. The first concerns the portfolio of shipping loans of EUR 0.3 billion size. The second relates to EUR 0.9 billion secured corporate portfolio consisting of denounced, nonoperating corporate, SMEs and small business loans. Finally, we plan to proceed with another 2 NPL sales outside Greece of approximately EUR 0.6 billion total size, expected to be completed by year-end '19.

Now on deposit evolution on Slide 21. Group deposit increased by 6% year-on-year, reflecting the positive inflows of EUR 2.3 billion in Greece. Our Q2 '19 LCR and NSFR ratios stood at 171 and 113 percentage points, respectively, far exceeding the minimum regulatory requirement of 100%.

On Slide 22, Eurosystem funding remains at just EUR 2.2 billion, currently comprising only of TLTRO funding from ECB. Interbank exposure was reduced by EUR 2.7 billion year-to-date, reflecting further funding cost optimization.

Finally, on capital ratio on Slide 24. CET1 ratio in Q2 stands at 16%, including H1 profits and the impact of our Greek divestments. Pro forma for the EUR 400 million Tier 2 bond issuance in July, total capital ratio climbs at 17%. Both ratios are comfortably above our SREP capital requirements for 2019 and 2020, absorbing this reach from IRB to standardized approach in Q2 '19 on the back of strong H1 profitability and bond valuation gains. Moreover, the upcoming divestment with Ethniki Insurance will enhance capital ratios significantly.

And on this note, I would like to open the floor to questions.

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Questions and Answers

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Operator [1]

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

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Iason Kepaptsoglou, HSBC, Research Division - Analyst [2]

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Two questions from my side. The one is on the equity base for this quarter. We've seen a big jump of about EUR 470 million, so maybe if you can touch upon that and tell us what the underlying drivers are. The second one is on the increasing level of liquidity that you have on the balance sheet and if you can give us some color on how you expect to position that and what you expect in terms of yield.

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

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Okay. On the equity, I think the bulk of that is the gains in the held-to-collect and sell -- and the profits -- held-to-collect portfolio and the profits. And on the second question on the liquidity, the constraint on further acquisition of interest-bearing assets was capital. And now with a bit more room on capital, we will be able to be more aggressive on increasing the loan portfolio.

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Iason Kepaptsoglou, HSBC, Research Division - Analyst [4]

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Could you give us a bit more color on what kind of assets or what strategy you will have on those acquisitions? So what your risk appetite is, if you want.

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

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The priority in terms of the use of capital will be the NPE reduction. And we will look at opportunities on acquisition of assets, loan portfolio, whatever, as they come. It's a second priority though.

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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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Two questions on my side, please. First of all, could you please update us on the potential capital hit that you may have to book if the court decision on the auxiliary pension fund, the so-called LEPETE, is not in your favor? We have seen a few numbers in the press, but it's quite difficult to estimate that as an outsider. So if you have an estimate of what could be an adverse outcome for the bank if the court does not rule in your favor, that would be quite helpful. And also, if you could tell us whether you would have to book that by the end of the year. And then the second question, could you please tell us what is the fully loaded IFRS 9 CET1 ratio equivalent to the 15.5% transitional, i.e., including the profits for the first half but before the agreed disposals?

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

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So on the supplementary pension fund, we are -- have a court date, 2 court dates in December. One, on the issue of whether it's defined benefit, defined contribution where we have won the vast majority of the court cases in the lower courts. And the second court date, in the higher courts as well, is in terms of the legality of the law passed in the final hours of the previous government. And we also feel very comfortable that we'll win that court case.

In the event, we're in discussions with the government currently on revising the law passed in the last days of the previous government to make it a more fair way of dealing with the issue of the supplementary pensions. Fully loaded.

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

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Thank you. So the fully loaded CET1 ratio, taking into account only the H1 profit, stands at 12.3%.

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Angeliki Bairaktari, Autonomous Research LLP - Analyst [10]

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12.3%, yes?

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Christos Christodoulou, National Bank of Greece S.A. - GM & Group CFO [11]

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Yes. Yes.

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Angeliki Bairaktari, Autonomous Research LLP - Analyst [12]

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Okay. If I just may follow up on the pension fund, is it fair to assume then that if the court decisions are not in your favor, you would have to book the next 5 years of contributions, which I understand that this is a timing issue, but nonetheless, it could be quite substantial? Or is there a risk that it could be even higher because there is a question mark on the -- on a sort of study that would have to be conducted by the fund itself to see whether there would be any obligation arising after those initial 5 years? I'm just trying to get a sense of is it going to be -- the press has spoken of 70 basis points. Is there a risk that it could be higher? What is your view on that?

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Pavlos Konstantinos Mylonas, National Bank of Greece S.A. - CEO & Executive Director [13]

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The risk of it being high is extremely low to a point of almost nonexistence. Again, for 2 reasons: not because we're depending only on the court cases when we think we have an extremely good chance of winning, of having favorable decisions, but also because we are in dialogue with government to change the laws as there would not be a fixed amount being paid every year.

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Operator [14]

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The next 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 [15]

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A few questions from my side. First it's on, if you can put it this way, Q3 trends. Maybe it's a bit too early. But I'm just wondering if comparing the period when you release the business plan and the post-election period, I know we have summer and holiday break in between, but is there any trend that is significantly more positive than you're expecting back in May when you released the business plan that you can spot early signs right now? Second, on the VES, you mentioned that there's more to come now in the second half. I know you already expensed quite a bit for the year. Is there any chance that you may upsize the VES in the second half and that will come with additional charges as well on the P&L? And then finally, on your Slide 24, you show your dynamics of capital. I was just wondering if there's anything you can highlight on the IRB to standardized change. I remember that previously, you're guiding for something like 70 basis point hit. And on the slide, you show 112. So if there's anything you can highlight from that difference, it would be great.

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Pavlos Konstantinos Mylonas, National Bank of Greece S.A. - CEO & Executive Director [16]

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Okay. As you yourself pointed out, not much time has passed since the presentation in May. All I can say is that where we do see a significant improvement is on the macro outlook. And that, I think, will feed through into the numbers of the bank soon enough. But clearly, it's too early for that to happen.

And there as well, I would point out the spread compression on the GGBs. On the VES, we -- if we have to continue reduction, so if there's more take-up, we'll look at that. But at the moment, I don't foresee any further hit on provisions for further VES.

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Christos Christodoulou, National Bank of Greece S.A. - GM & Group CFO [17]

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But for the continuation of the current years, we have already provisioned for profitability, the whole amount. So there's no upside from what we have planned to do in the second half of the year.

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Pavlos Konstantinos Mylonas, National Bank of Greece S.A. - CEO & Executive Director [18]

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And then on the IRB, I think the gains we had given was including the subsidiaries. And I think that's the difference between the 2 numbers that you mentioned.

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Operator [19]

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The next question comes from the line of Boulougouris, Alex with Wood & Co.

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Alexandros Boulougouris, Wood & Company Financial Services, a.s., Research Division - Co-Head of Research & Head of Greek Research [20]

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Two questions from my side. We've seen a good trend in mortgages in the NPE outflows due to debt forgiveness, as you mentioned in the presentation. Should we see this trend continuing in the following quarters? And maybe if you'd give us an update on what is going on with this new platform regarding mortgages. This is my first question. And my second, in the second quarter, I see this positive other impairments of EUR 11 million. If you could give us more color on what that refers to.

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

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Okay. On the mortgage question, let me start that the Q2 numbers are flattered with some debt forgiveness on the back book. So you will not see that same amount in Q3. However, we are picking up on the number of restructurings under the Split & Settle. So that will be a -- if you compare it to the previous quarters, the Q1 and the Q4, you will see a significantly higher amount of reductions to the debt forgiveness, but not at the levels of Q2.

The platform is being constructed. It is still not where it should be. There are a lot of applications. They're not coming through yet. We need to keep working on it. We're supporting and we're coordinating with the government to make sure that the platform is working such that the mortgages to low-income households who qualify for the subsidy can get going because that suits a lot of the mortgages of NBG.

Now the other impairments business?

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Christos Christodoulou, National Bank of Greece S.A. - GM & Group CFO [22]

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The other impairments, positive effect in the P&L relates to GGPs. Specifically, it's a release relating to Greek government bonds, so recognizing our HTC portfolio in Q2.

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Operator [23]

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We have a follow-up question from the line of Ms. Bairaktari Angeliki with Autonomous Research.

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Angeliki Bairaktari, Autonomous Research LLP - Analyst [24]

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Two smaller questions. First of all, on the IRB, is it fair to assume that this is now fully approved by the ECB? So next time we look at your Pillar 3, you only have IRB for credit risk? And then on the shipping sale that you mentioned today, if I'm not mistaken, that was not part of your plan that you announced in May. So could you give us some color on sort of is that a portfolio that has now been identified for sale? Could there be any more sales like that, that have not been previously disclosed as part of the 2020, 2022 plan?

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Pavlos Konstantinos Mylonas, National Bank of Greece S.A. - CEO & Executive Director [25]

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On your first question, clearly, the switch to standardized was approved by the ECB. On shipping, we are constantly relooking at what we can do, and we decided that these are 8, I think, individual names, and it was just easier to back them up and sell them. I don't think there's much to change versus the strategy.

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Operator [26]

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The next question comes from the line of Kladis, Panagiotis with Eurobank Equities.

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Panagiotis Kladis, Eurobank Equities Investment Firm S.A., Research Division - Research Analyst [27]

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You said earlier in the call that you expect your cost of risk to remain flattish for the next of the year. So I was wondering if you can give us the outlook for the other key line of your P&L, NII, fee and commission income and operating expenses for the remainder of the year.

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Pavlos Konstantinos Mylonas, National Bank of Greece S.A. - CEO & Executive Director [28]

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Great. NII will be broadly at the levels of first half and the second half. These will improve dramatically, especially in the retail, which are doing very well. And on the operating costs for the full year, we should have a decline around 10% year-on-year.

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Panagiotis Kladis, Eurobank Equities Investment Firm S.A., Research Division - Research Analyst [29]

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That is for the full year, right?

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Pavlos Konstantinos Mylonas, National Bank of Greece S.A. - CEO & Executive Director [30]

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Yes, for the full year.

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Panagiotis Kladis, Eurobank Equities Investment Firm S.A., Research Division - Research Analyst [31]

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On operating expense. Okay.

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Operator [32]

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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 [33]

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I just want to thank you all for joining us. And any questions you have, please contact us, the CFO, Chris Christodoulou; myself; Greg at IR, and we hope to see you soon in the road shows that are coming up in the next few months. Thank you very much. Have a good day.