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Edited Transcript of EUROB.AT earnings conference call or presentation 21-Nov-19 4:00pm GMT

Q3 2019 Eurobank Ergasias SA Earnings Call

Athens Nov 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Eurobank Ergasias SA earnings conference call or presentation Thursday, November 21, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charalambos Harris V. Kokologiannis

Eurobank Ergasias S.A. - GM of Group Finance, Group CFO & Member of Executive Board

* Fokion C. Karavias

Eurobank Ergasias S.A. - CEO, Chairman of Executive Board & 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

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. I am Gelli, your Chorus Call operator. Welcome, and thank you for joining Eurobank Ergasias conference call to present and discuss the 9 month 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. Fokion Karavias, CEO. Mr. Karavias, you may now proceed.

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Fokion C. Karavias, Eurobank Ergasias S.A. - CEO, Chairman of Executive Board & Director [2]

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Ladies and gentlemen, good afternoon, and welcome to the Eurobank 9-months results presentation. After an overview of the highlights, our Chief Financial Officer, Mr. Harris Kokologiannis, will give you a more detailed presentation of our results, and then we will answer your questions.

The macroeconomic conditions in Greece remain steady, and the growth expectations are for 1.8% and 2.3% for this year and 2020, respectively. This is supported by a strong touring season for this year and stronger economic sentiment since the election. The new government implements reforms and tax cuts to boost economic growth and attract investments while the fiscal performance remains above targets as seen in the primary balance figures.

In the banking sector, we expect approval of the APS law for NPL securitizations is another step to the right direction. Interest for investments and privatizations in a number of sectors is quite a bit, and Eurobank aims to play a key role in advisory and financing such projects. Real estate prices are recovering faster than anticipated as seen in the residential price index, which was up 7.7% year-on-year in the second quarter of 2019. Furthermore, funding conditions continue to improve as seen in the post-gathering and interbank markets, we didn't engage offering a supported backdrop.

Let me now update you on our transformational plan and the progress we're achieving. Following the government's initiatives and the European authority's approval of the asset protection scheme, Eurobank aims to obtain the scheme for the Cairo securitization once the law is voted in early December and the note credit rating is obtained. There is significant progress in the negotiations for the EUR 7.5 billion multi-asset securitization and our loan servicer transactions as binding offers have been received. We are now targeting to sign the binding agreements before year-end. Given that the adoption of the APS implies some changes in the current securitization structure, the closing of all transactions should be delayed by roughly 2 months from the initially anticipated year-end 2019.

Now let's see our financial results for the 9 months 2019 as highlighted on Slide 5. Our net profit reached EUR 149 million, of which EUR 59 million in the third quarter. On a year-on-year basis, core pre-provision income was down 2.9% driven by net interest income. Commissions increased by 16.2% year-on-year mainly as a result of the merger with Grivalia, but also organically as evidenced by the 4.9% quarter-on-quarter increase. Operating expenses on a comparable basis were flat year-on-year with Greece 2% lower.

Now on asset quality. Our stock of NPEs decreased by EUR 2.8 billion in the first 9 months of the year and EUR 0.5 billion in the quarter. (inaudible), driven by the quarterly organic negative NPE formation of circa EUR 200 million. The NPE ratio improved by almost 8 percentage points year-on-year, dropping to 31%. At the same period, the coverage of NPEs by making late provisions increased by 140 basis points to 55.1%, which is the highest in the Greek market. Our fully loaded CET1 ratio reached 14.1%, improved by 40 basis points quarter-on-quarter, mainly on gains in our GGB portfolio. Our total capital ratio stands at 18.6%, the highest also among peers.

Loan demand increased enough, a gradual increase. So our performing loans increased by EUR 0.9 billion year-on-year on a comparable basis. Demand is stronger outside Greece. So our total increase in performing loans was EUR 1.5 billion year-on-year on a comparable basis. Deposits increased by EUR 2.4 billion in Greece and EUR 4.8 billion for the group year-on-year. As a result, the group loan-to-deposit ratio reached 87%.

Our international operations remained strongly positive throughout the year and across the countries with our profits reaching EUR 139 million in the first 9 months. So overall, we see that key operational and risk metrics are improving while we are approaching the completion of our NPE reduction plan. Given clear signs that economic activity increase is accelerated and growth remains robust in the countries of presence outside Greece, we are quite optimistic that the bank would be in a strong position to enter a new growth phase. With the balance of cleanup near completion, we are returning to normalized profitability, in line with a return on equity close to 10% as of next year.

At this point, I would like to ask our CFO, Mr. Harris Kokologiannis, to present our results in Q3 before opening the Q&A session.

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Charalambos Harris V. Kokologiannis, Eurobank Ergasias S.A. - GM of Group Finance, Group CFO & Member of Executive Board [3]

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Thank you, Fokion. Let's now provide some more insight on the third quarter results. Moving on the capital position and on Page 8. In the third quarter, the fully loaded CET1 ratio increased by 40 basis points, up 14.1% as a result of the Greek government bonds and on the quarterly profitability, which more than offset an increase of RWAs mainly related with market risks, the portfolio of investment securities and the investment in associates. As of the beginning of the year, fully loaded CET1 has increased by 70 basis points. Total capital ratio amounted to 18.6%, which is almost 5 percentage points higher than in 2018 overall capital requirement.

Moving on Slide 9 and the liquidity. As shown at the right part of the page, in the third quarter, the increase of group deposits amounted to EUR 1 billion, EUR 600 million of which coming from the international operations and the rest from Greece. Net loan-to-deposit ratio receded further in the second quarter to 87%. On the funding side, the banks envisages to obtain the TLTRO offer in December. The digital funding ranges between EUR 3.5 billion to EUR 4 billion. The potential benefit on NII upon achieving the loans growth target amounts to approximately EUR 20 million per annum.

Moving on Page 12 and on lending growth. On a year-on-year basis, performing loans decreased by EUR 2.9 billion to EUR 30.4 billion. Excluding the nonrecurring drivers, which are mainly the acquisition of Piraeus Bank Bulgaria and the impact of the Pillar transaction, the organic growth in the last 12 months amounted to EUR 1.5 billion, out of which EUR 900 million coming from the Greek operations and the rest from international.

On Page 15, net interest income for the group increased quarter-on-quarter by 1.1% to EUR 346 million as a result of higher lending margin from performance loans, including days effects, lower travel costs and higher income from international related with incorporation of Piraeus Bulgaria for a full quarter. These drivers more than offset the decrease of deposit margin due to a further decline in Euribor and the absence this quarter of interest on tax (inaudible). On a year-on-year basis, net interest income is lowered by 3%.

On Page 16, net commission income increased in the third quarter by 4.9% to EUR 94 million as a result of network fees related with credit transactions, namely issuing, acquiring and (inaudible). On a year-on-year basis, fee income is higher by 15.2%.

On Page 17, operating expenses year-on-year and on a like-for-like basis are stable for the group and lower by 2% in Greece as a result of lower staff costs. For the full year 2019, the outlook is for an organic decrease of staff in Greece by 400 employees, while the rationalization of headcount and branch network shall continue in 2020.

Further on pre-provision income on Page 6. On the top left of the page, core PPI increased in the third quarter to EUR 210 million mainly driven by the Piraeus Bulgaria's contribution for the full quarter this time and higher commissions in Greece. On a year-on-year basis, core PPI is lower by 2.9%. Pre-provision income decreased to EUR 223 million as the previous quarter took advantage of the negative goodwill related with Piraeus Bulgaria and higher gains from the sale of sovereign bonds.

Moving on asset quality and on Page 7. As shown on the top left of the page, negative NPE formation amounted this quarter to EUR 195 million, similar to the previous one and substantially better than the third quarter of 2018, mainly due to continuously decreasing inflows. NPE stock decreased quarter-on-quarter by EUR 460 million, driven by the negative formation and drivers. As a result, the NPE ratio receded at the end of June to 31.1%, which is lower by 790 basis points compared to 1 year ago. Cost of risk over net loans amounted, in the third quarter, to 1.6% and loan provisions to EUR 145 million. For the full year 2019, the outlook remains for a cost of risk of 1.7%, implying a ratio of 1.4% for the fourth quarter.

Finally, on this page, provision coverage at the end of September amounted to 55.1%, increased by 190 basis points as of the beginning of the year as a result of negative formation and the lower-than-average coverage of the Pillar portfolio.

As regards to our NPE reduction plan and on Page 19, the decrease for the first 9 months amounts to EUR 2.9 billion, including the Pillar securitization that closed successfully in September. This is leaving us for the last quarter of the year to achieve EUR 0.6 billion for credit decrease for which we are confident to fulfill. Furthermore, as regards to the Cairo's authorization, due to the loss of APS and the intention of the bank to obtain, the completion of the transaction and the respective decrease of NPEs is expected to delay for about 2 months and take place in the first quarter of 2020. Consequently, the related impact on our capital will be postponed for the same period as well.

This completes my presentation, and we may now open the floor for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is 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 starting with Cairo, is the guidance for the loss still maintained at EUR 1.2 billion, EUR 1.4 billion as before? Then my second question is still on Cairo. As you mentioned that the final decisions will be taken after the legislation is passed, but you have received already the binding offers. Now given that the voting at the parliament is expected for December, and I assumed as well that ACB might issue an opinion at a later stage, I mean what can change from now until then? I mean what -- given fact that you have the binding and the perimeter, I don't think it's going to change from now on. I mean logistically, what's going to be the next steps once the voting in the parliament goes ahead? And then still on the securitization, do you have a clear visibility on the risk rating on the senior tranche for Cairo as well? Are you comfortable that this will be confirmed at that 0%? I'll leave it here, and then I can ask more questions later.

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Fokion C. Karavias, Eurobank Ergasias S.A. - CEO, Chairman of Executive Board & Director [3]

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Okay. Thank you very much for your questions, and I will try to to answer them one by one. Now in terms of this EUR 1.2 billion to EUR 1.4 billion impact on CET1 from the Cairo transaction, this is going to increase. It's going to increase by the present value of the fees paid to the state for the guarantees. However, at the same time, we're going to have a relief of the risk-weighted assets related to Cairo, which is EUR 1.8 billion. And therefore, this release is going to counterbalance a slightly higher cost. And the net effect of the APS, in terms of the CET1 ratio, is going to be neutral. We make the assumption that following the APS we're going to enjoy a 0% risk weighting on the senior notes. We know that this is an issue that is discussed as we speak between the Greek government and the European authorities, but we are quite confident based on the feedback that we have received that 0% risk-weighting will be agreed. Now in terms of your second question. As I mentioned, following the binding offers that we received, we want to make sure that the law is going to remain as the draft that we have seen so far. And based on that, we're going to move into signing binding agreement, therefore, negotiating documents and signing binding agreements before year-end.

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Operator [4]

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

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Angeliki Bairaktari, Autonomous Research LLP - Analyst [5]

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Just to come back to the Cairo transaction, please. One question is, is there going to be any change in the distribution of the mezzanine and the junior tranche to your shareholders? Because the way the initial approval by DG Comp was phrased was that there has to be a consideration paid for at least 50 -- 51% of those riskier tranches to receive the government guarantee. So if you could give us some color on that, that would be helpful. Also, from your previous answer, do I understand correctly that the senior tranche remains around EUR 1.8 billion, which will be receiving now the guarantee? And third question, is there any plan to also apply the Hercules scheme on the Pillar securitization? Or has that now been completed and there is no such plan?

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Fokion C. Karavias, Eurobank Ergasias S.A. - CEO, Chairman of Executive Board & Director [6]

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Okay. Thank you, Angeliki, for the questions. Now in terms of -- and let me start from the Pillar. Pillar is a transaction that has been closed. We have received all the formal approvals from the SSM about it. So it is a deal done. And at the moment, we don't have any plans to opt-in for the APS. In terms of the senior note, you mentioned another EUR 1.8 billion, EUR 1.8 billion is the risk-weighted assets related to Cairo. The size of the senior notes is EUR 2.6 billion. This may be revised slightly lower in order to take into account the cost of the guarantee that should be paid to the state. And in terms of the distribution of the mezzanine, let me clarify that what the law provides. Based on what we have seen so far, the law says that in order transaction to qualify for the APS, 51% of the junior note should be shown for a consideration and an amount of the junior note and the mezzanine note show that the controlling base on it is achieved. Therefore, the 51% refers only to the junior note and not the mezzanine. Therefore, based on this understanding, we're going to distribute 80% of the mezzanine note to our shareholders, 20% will be sold to the counterparty that will get Cairo and FPS. And this would be fine because through these conditions we achieve the consolidation.

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Angeliki Bairaktari, Autonomous Research LLP - Analyst [7]

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If I may follow-up on that. So the junior terms will also be fully given as a dividend in kind to the shareholders, the way I understand it? And also could you give us an indication of the size of those 2 riskier tranches?

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Fokion C. Karavias, Eurobank Ergasias S.A. - CEO, Chairman of Executive Board & Director [8]

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Yes. Let me clarify that 51% of the junior will be sold to the investor and 49% will be distributed. So the transaction tranching is as follows: the junior is EUR 3.6 billion; the mezzanine is going to be EUR 1.2 billion to EUR 1.4 billion, maybe it could increase slightly because of the amount of fees that should be paid for the APS; and the rest is the senior we have indicated, EUR 2.6 billion, before. It may be slightly less.

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Operator [9]

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

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Iason Kepaptsoglou, HSBC, Research Division - Analyst [10]

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So just a clarification on that point. So the EUR 3.6 billion is treated as a junior note according to the legal text? It's not treated as over-collateralization in the securitization, right? It's treated as a separate note?

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Fokion C. Karavias, Eurobank Ergasias S.A. - CEO, Chairman of Executive Board & Director [11]

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This is correct.

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Operator [12]

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

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Angeliki Bairaktari, Autonomous Research LLP - Analyst [13]

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Just a question on fees. We have seen recently that the Greek government intervened with regards to some increases -- some initiatives taken by all Greek banks to increase ATM -- seasoned ATM withdrawals, et cetera. Could you give us -- could you tell us, is that going to have any impact with regards to sort of your targets or the current fee level that we see going forward? And how should we interpret it? Do you see any risk that any future sort of repricing actions, also considering the very low interest rates, might be blocked by the Greek government?

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Fokion C. Karavias, Eurobank Ergasias S.A. - CEO, Chairman of Executive Board & Director [14]

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We don't have such indications. As a bank, we are going to proceed with the commercial policy. But we have decided, we believe that this is a reasonable commercial policy in terms of fees, in line with the practices of most European banks. Therefore, we don't really envisage any change.

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Operator [15]

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We have another follow-up question from Mr. Kepaptsoglou, Iason with HSBC.

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Iason Kepaptsoglou, HSBC, Research Division - Analyst [16]

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Just one question. We know how your 3 main peers domestically have, to varying extents, fleshed out their business plans for the core business, the performing business in terms of costs, in terms of fees, in terms of the top line. Should we expect something similar from you? And if so, do you have any idea on potential timing?

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Fokion C. Karavias, Eurobank Ergasias S.A. - CEO, Chairman of Executive Board & Director [17]

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I mean in terms of the guidance that we are providing to the market, let me repeat that we have said that as soon as we complete the NPE reduction plan, the one that we execute as we speak, the bank should be able to deliver profitability, which is going to be in line with a return on equity close to 10%, and this will take place as early as in 2020. Now in terms of providing further details, usually, when we have the full year financial results, we provide some guidance about the financials of next year. And we may also consider providing guidance for a longer period than just 1 year, but this may happen in the second half of 2020.

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Operator [18]

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Your next question is from the line of Boulougouris, Alexandros 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 [19]

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Would it be possible to give us a color on the fees for the APS? You mentioned that this could increase the EUR 1.2 million to EUR 1.4 million (sic) [EUR 1.2 billion to EUR 1.4 billion] mezz, I mean, maybe a range if not, because this will be an upfront cost in my understanding for the SPV. Please state the way the fees will be formulated?

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Fokion C. Karavias, Eurobank Ergasias S.A. - CEO, Chairman of Executive Board & Director [20]

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Your understanding is correct. On average, the fees are linked to the CDSs of the Hellenic Republic, and a rough number is about 2% per annum or slightly more. In our case, an estimate of the fee is in the area of EUR 250 million upfront cost.

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Operator [21]

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

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Angeliki Bairaktari, Autonomous Research LLP - Analyst [22]

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May I ask a question on costs, just drawing up on the question of my colleague earlier? We have seen 2 of your peers effectively announcing quite significant cost-cutting targets now. Is that something you could contemplate as well?

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Charalambos Harris V. Kokologiannis, Eurobank Ergasias S.A. - GM of Group Finance, Group CFO & Member of Executive Board [23]

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First of all, on costs, let me provide you where it stands. For 2019, we expect the decrease of cost in Greece on a like-for-like basis by approximately 2% driven by lower staff costs. Specifically, staff in Greece should show an iconic decrease in 2019 by approximately 400 people from 9,000 to approximately 8,600. Of course, the incorporation of Bulgaria -- Piraeus Bulgaria within the year are leading headline number for the group year-on-year increase of about 2.5%. For 2020, the group costs are expected to decrease by approximately 1% mainly as a result of further decrease of staff cost increase by 5% or more, which will offset the increase of IT and digital-related costs and some increase related with international business growth. Specifically in Greece, following the liaise of 400 people in 2019, we should expect a similar decrease absolutely in the area of 350 to 400 people next year and further rationalization of branch network from 350 branches in Greece to close to -- 25 branches lower, close to 325. This is regarding the outlook of 2020.

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Angeliki Bairaktari, Autonomous Research LLP - Analyst [24]

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Excuse me, I didn't hear right, if you could just repeat how much is the OpEx guidance for next year for 2020?

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Charalambos Harris V. Kokologiannis, Eurobank Ergasias S.A. - GM of Group Finance, Group CFO & Member of Executive Board [25]

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Let me repeat that we should expect a decrease by approximately 1% mainly as a result of a decrease of staff cost increase by approximately 5% on the back of a further liaise of between 350 to 400 people.

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Operator [26]

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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. Karavias for any closing comments.

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Fokion C. Karavias, Eurobank Ergasias S.A. - CEO, Chairman of Executive Board & Director [27]

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Let me thank you all for your participation in this conference call. Let me also thank you for your questions, and we are looking forward to seeing you in our next road shows in London or New York or in Athens. Thank you.

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Operator [28]

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