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Edited Transcript of TPEIR.AT earnings conference call or presentation 30-Aug-19 9:30am GMT

Q2 2019 Piraeus Bank SA Earnings Call

Athens Sep 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Piraeus Bank SA earnings conference call or presentation Friday, August 30, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Arvanitis Athanasios

Piraeus Bank S.A. - GM & Group Treasurer

* Christos Ioannis Megalou

Piraeus Bank S.A. - MD & Executive Director

* Efthymios Kyriakopoulos

Piraeus Bank S.A. - Executive GM & Chief Risk Officer

* Theodore Gnardellis

Piraeus Bank S.A. - GM & Group CFO

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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 Konstantinos, your Chorus Call operator. Welcome, and thank you for joining the Piraeus Bank conference call to present and discuss the first half 2019 financial results. (Operator Instructions)

At this time, I would like to turn the conference over to Piraeus Bank's CEO, Mr. Christos Megalou. Mr. Megalou, you may now proceed.

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Christos Ioannis Megalou, Piraeus Bank S.A. - MD & Executive Director [2]

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Good morning, ladies and gentlemen. I'm Christos Megalou, CEO of Piraeus Bank, and I'm here today with our senior management and IR team. I welcome in the team the Group CFO, Theodore Gnardellis, who is here with us.

Thank you for attending Piraeus Bank's First Half 2019 Results Presentation. During the call, we will be presenting our financial results and we'll focus on delivering the key messages and trends for the upcoming period. Of course, you can go through the full IR presentation. But I would like to highlight the core developments for Piraeus Bank before allowing time for questions.

Let's go to Slide 4. We summarize there our key achievements during the first half of 2019. Overall, our work and performance reflect continued delivery against our core objectives. During the second quarter of 2019, the bank proceeded with 2 landmark transactions: the issue of a Tier 2 instrument, the first by a Greek bank since 2008; the strategic partnership with Intrum for the management of nonperforming exposures in real estate owned assets, establishing a market-leading independent servicer in Greece. The completion of both the 2015 restructuring plan and the 2018 capital strengthening plan have laid out the foundation for the bank's return to profitability and the restoration of our balance sheet.

Moving on and briefly touching upon our first half 2019 performance, we can definitely say that we have delivered tangible improvement across a number of priorities.

Firstly, profitability. On Slide 5, this has been restored consistently for the past 4 quarters. Pretax profit at EUR 73 million in first half 2019 was enabled by improved net fee income, resilient net interest income, cost reduction and cost of risk within the guidance we have provided. Pre-provision income for the first half of 2019 was up 6% year-on-year on a like-for-like basis. Cost-to-income improved to 53% versus a 57% level the same period last year. As the environment in which we operate improves, we expect our financial performance to progress further.

On Slide 7., our balance sheet development signal the gradual restoration of business. The bank's performing loan book increased by EUR 500 million in the first half of 2019 with business lending driving the trend. New loan disbursements reached EUR 800 million in the second quarter of 2019, at par with the performance of the previous 2 quarters, driven by the economic recovery in the country. The group's net loan-to-deposit ratio further improved to 85% versus 94% a year earlier, signifying that the bank is in a position to respond to emerging credit demand and further support the recovery of the Greek economy. Our equity position here today has increased by about EUR 150 million, of which 1/3 stems from widening operating jaws and 2/3 from strengthened reserves following the tightening of Greek government bond yields, a trend that we see continuing in Q3.

On asset quality, as you can see on Slide 8, we reduced our NPE balances by EUR 800 million on the second quarter of 2019 organically. Q2 '19 was the 15th consecutive quarter of NPE reduction for Piraeus Bank. We are on course to achieve the EUR 3.5 billion NPE reduction budgeted for this year. We have EUR 1 billion NPE sales in the pipeline for the second half of the year, contributing to the achievement of the annual target.

On Slide 9, we provide color on NPE flows, where we witnessed positive trends in the entries of both defaults and redefaults in Q2, while the progress of outflows continues. Our upcoming NPE sales are presented on Slide 10, where we provide details on the scheduled sales and securitization projects for the following period. As you can see, we have more than EUR 4.5 billion projects in the pipeline set up for the second half of 2019 and 2020 while we expect to complete the sale of the Irish portfolio in the following weeks.

Moving on to Slide 11. We strongly believe that Intrum will help us go the extra mile as far as NPE derisking is concerned. The execution project is highly demanding yet it is on track. We have a track record on delivering timely as we are promising to the market, so this will be no exception.

Liquidity continues improving, as you can see on Slide 12, with more than EUR 1 billion deposit inflows in Q2, EUR 1 billion. We highlight that at the end of June 2019, Piraeus Bank was close to 100% in terms of liquidity coverage ratio.

All actions taken during the past few quarters and the recent Tier 2 issue led us to a solid capital position as presented on Slides 13 and 14. Our phased-in capital ratio stands at 14.9% and will be further enhanced with the completion of the NPE servicer transaction with an estimated contribution to capital of 75 basis points, thus taking our ratio to 15.7%. The expected fully loaded ratio stands at 13%. I would like to point out that our fully loaded ratio grew organically by 38 basis points in Q2. We remain vigilant to further enhance our capital via optimization initiatives and by growing our profitability, as you can see on Slide 15.

On Slide 17, we reiterate our guidance for the full year 2019. We expect new loans to be priced higher versus stock. On the funding cost side, deposit cost continued trending lower with renewed effort in Q3. Hence, we expect to have a broadly stable net interest income in 2019 at EUR 1.4 billion. We expect to see net fees at around EUR 340 million as they accelerate their upward trend in the second half of the year. Operating expenses are targeted below -- to drop below EUR 1 billion on a recurring basis. We plan to further reduce OpEx to about EUR 850 million by 2021. In all, we target to move north of about EUR 150 million pretax profit for 2019.

For Q3, I'm pleased to say that all our KPIs are well on track from healthy business volume generation to deposit cost containment and from NPE movement to the trends in revenue and OpEx. We are stepping up our actions and we are working hard in making our core bank better and stronger. This is a key focus of the management team. At this point, it produces 1.3% return on assets with very favorable prospects. At the same time, NPE reduction is accelerating with the help of inorganic initiatives and the establishment of systemic solutions that are imminent.

The macroeconomic environment in Greece presents significant opportunities, as displayed on Slide 18. The rebound of economic activity, real estate prices, the more favorable tax regime, the lifting of the capital controls are all expected to stimulate investment and employment. These positive prospects are going to be reflected on our budget for 2020 for which we have started preparing. We feel confident for our performance going forward, identifying areas in which we can outperform targets set.

We are very proud of our achievements we have made at Piraeus Bank in the first half of 2019. Since 2017, our relentless focus on rebuilding the capital base of the bank, reducing the cost base and managing our NPE exposures means we are building a better bank of lower risk and able to support the recovery of the Greek economy. We know there is more to do, but we know we have a clear road map for the bank. I'm confident we have the team, the strategy and we will be delivering for all our stakeholders.

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

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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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Thanks for the presentation. Also thanks for allowing us to have more time between the release of results and the call, which is very helpful. So I just want to start with capital. I was looking at your Slide 15, where you show the planned capital actions. Taking where you are at the moment in terms of the achievement so far and the guidance for the year, which is -- it gives, what, 40 basis points left until you reach the 200 basis points, right, of planned action. Just wondering if you can share any color on the split of the capital benefit you are aiming to get from each of those buckets. Also if there's any chance we can see the performance being better than the 200 basis points, given that as of now it's just the 10 basis points per action, if you do like even split.

And then secondly, I was just wondering, when can we expect the regulatory approvals and the HFSF okay for the interim agreement? Is it just after the closing in October? Is that when you expect to have the approvals? Or is it before that?

Also I was wondering, I don't know if I got it right or not, but I think that initially the expectation for the capital benefit from Intrum was around 85 basis points, then it went down to 80. And I think now you show a 75. So just wondering if there's any change in assumptions or change in amount, given that I assume that the group risk-weighted asset is coming down. So in theory, if the amount remains the same, the basis points should be increasing, right? I mean it'd be great if you can clarify that or correct me.

And then finally, on Slide 13, also on capital. Just wondering how likely would you say that your P2R for 2020 could be reduced by the same amount of the phasing of the O-SII for next year, that will be great.

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Christos Ioannis Megalou, Piraeus Bank S.A. - MD & Executive Director [3]

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Welcome, Jonas. Just covering Page 15, I think you should assume that this kind of 40 basis points, by and large, will be equally split between all those initiatives and we expect them to materialize over the next few quarters. This is an ongoing work that we have been doing. When some of them are being finalized, as we did for A and B, we will put forward their respective number. But this is an ongoing effort of this management team to work on that front. And it's going to be flowing over the next few quarters. On the regulatory approvals, of course, the transaction has to complete. First, we are focusing in completing the transaction within October as we have mentioned and then process will evolve for approvals and so on.

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Theodore Gnardellis, Piraeus Bank S.A. - GM & Group CFO [4]

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Jonas, this is Theodore Gnardellis. Regarding your question about the effect of the Intrum transaction on our capital, you rightly pointed out the difference between the 85 and the 75 bps. This is not a result of the change of the amount. It is actually a consideration adjustment that we have made, given the RWA effect of our 20% participation in the venture.

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Christos Ioannis Megalou, Piraeus Bank S.A. - MD & Executive Director [5]

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On the P2R, Jonas, your final questions -- your final question, we have not had any indications yet as to how this is going to evolve. So I guess we will have to wait. And of course, once we know, we will update in the market.

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Operator [6]

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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 [7]

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Two questions from my side. Could you please give us some color on the securities portfolio? So maybe some comments on the duration and all the yield you have on the securities you are purchasing or the geographies in which you are focusing in, within the year, so it might help us to get a flavor with regards to your risk appetite.

And then secondly, on the NPL framework that we have in Greece. We have all sorts of schemes currently in Greece with the out-of-court settlement mechanism, the e-Auctions platform, the first residence protection law.

But a lot of them are going to lapse by the end of the year, those that don't have had various degrees of success. There is persistent speculation about the government and the European Commission wanting to coming with a new NPL framework. Have you had any discussions with the new government with regards to that? Do you have any strong views on how NPLs should be dealt with from a legal perspective going forward? Or should we just revert back to the 2010 personal bankruptcy law and the corporate bankruptcy laws?

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Arvanitis Athanasios, Piraeus Bank S.A. - GM & Group Treasurer [8]

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Thank you. This is Tom Arvanitis. I'll try and pick up the first question in terms of securities portfolio. And I'm going to talk about fixed income securities portfolio, total face value, in the tune of EUR 3 billion, EUR 1.5 billion out of Greek state securities, which includes both GGBs and T-bills. And the rest of the EUR 1.5 billion as of June 30 basically relates to Eurozone sovereigns of Southern Europe, let's call it. In terms of risk analytics, I'll simply provide the PV01 figure for our Greek GGB portfolio, which as of June 30, stood at something like EUR 800,000 per basis point. I hope that covers the first question.

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Theodore Gnardellis, Piraeus Bank S.A. - GM & Group CFO [9]

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And Iason, this is Theodore Gnardellis. Regarding your second question on the NPL framework, the major evolution that we have had is the new primary residence protection. We -- as you have noticed, there is a lot of interest. And a few obligations have been completed yet. But we believe a good framework will be very helpful in the evolution of the portfolio going forward, given its eligibility criteria and the way -- and the speed through which it is implemented. This is the only change that we are monitoring right now.

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Operator [10]

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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 [11]

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I have 4 questions on my side, please. First of all, on the shipping partnership that you were contemplating that you announced a few weeks ago actually, could you please update everyone how that is progressing? And should we assume that, that is going to take -- to be part of those remaining 40 basis points of optimization actions for capital? And if yes, how much could it be? That's my first question.

And my second question. I noticed that your 90-day past due loans have actually remained flat quarter-on-quarter, even though NPEs have declined and despite the fact that you have booked EUR 400 million of write-offs. So could you please give us some color on what could justify these seemingly positive 90-day past due formation in the quarter?

Third question. Could you please give us an indication of what is the potential benefit from the Greek government bond yield compression quarter-to-date in the third quarter on your capital? And fourth question, you mentioned, if I understood correctly during the call, that you want to be north of EUR 150 million pretax result this year. Does that include the Intrum gain or no?

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Christos Ioannis Megalou, Piraeus Bank S.A. - MD & Executive Director [12]

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Angeliki, Christos Megalou again. On the shipping partnership, this is on track. It is part of those actions, yes, in Page 15. We have not disclosed the effect of how much it's going to be. But of course, once we announce the trade, this is going to be disclosed. And it is along the lines of what we have been discussing and what we have been communicating to the investment community up to now. So we are on track for this partnership.

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Theodore Gnardellis, Piraeus Bank S.A. - GM & Group CFO [13]

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Angeliki, this is Theodore Gnardellis. On your second question regarding what you have observed of the 90-plus, this is expected, given the mix of NPE treatments and the NPE plan. This is a curing plan. So as a result, what is happening is that the forborne NPEs, which are under 90 days past due are actually being cured, therefore reducing the NPEs, while the 90-plus actually evolves with the inflows versus liquidation. So that's an effect that is expected, given the NPE plan and the treatment that we're applying.

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Efthymios Kyriakopoulos, Piraeus Bank S.A. - Executive GM & Chief Risk Officer [14]

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And Angeliki, for the other question, this is Thymios Kyriakopoulos, the CRO. During the quarter, we've built up our GGB positions. We also have other securities positions that have traded very well. So the expectation is that we'll have a decent pickup in terms of our fully loaded capital ratio because of the P&L at these positions. Now we will wait until the end of the quarter to give direction on the exact amount.

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Theodore Gnardellis, Piraeus Bank S.A. - GM & Group CFO [15]

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Angeliki, again this is Theodore Gnardellis. Regarding your question on the guidance of EUR 150 million expected pretax profit for the end of the year, this does not include the Intrum transaction. This is actually aligned to our current run rate of EUR 73 million of pretax profit that we have seen in the first half of '19.

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Operator [16]

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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. Megalou for any closing comments. Thank you.

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Christos Ioannis Megalou, Piraeus Bank S.A. - MD & Executive Director [17]

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I would like to thank you all for participating in today's call. We have the opportunity to further elaborate on our results and all the latest developments in the following week either in Athens or London or New York. Have a very nice day ahead, and a great weekend, which is a long one for those listening from the States. Thank you very much.

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Operator [18]

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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 day.