Piraeus Bank S.A. (OTCPK:BPIRY) Q2 2020 Earnings Conference Call August 4, 2020 11:00 AM ET
Christos Megalou – Chief Executive Officer
Conference Call Participants
Jonas Floriani – Axia Ventures
Manolopoulos Konstantinos – Optima bank
Cordara Alberto – Bank of America
Sevim Mehmet – JPMorgan
Memisoglu Osman – Ambrosia Capital
Ladies and gentlemen, thank you for standing by. I am Galley, your Chorus Call operator. Welcome and thank you for joining the Piraeus Bank Conference Call to present and discuss the Second Quarter 2020 Financial Results.
At this time, I would like to turn the conference over to Piraeus Bank CEO, Mr. Christos Megalou. Mr. Megalou, you may now proceed.
Good afternoon, ladies and gentlemen, and good morning to those joining us from the U.S. I’m Christos Megalou, CEO of Piraeus Bank and I am here today with Theodore Gnardellis, Group CFO; and Chrys Berbati, Head of Investor Relations. Thank you for attending our second quarter 2020 results presentation.
Our results for Q2 have been solid. The bank has posted continuous progress on all fronts. But before we present our results, let’s touch upon the latest macroeconomic developments.
The COVID-19 crisis has proved to be a huge challenge for economies around the world. As lockdown and travel measures have gradually eased in Greece and across other euro area countries, a cautious recovery in activity is currently taking place. The adverse effects on both household and business income can be expected to persist for some time and definitely for this year.
Our outlook for the Greek economy is illustrated on slide 2 of the presentation. It is important to note that the impact of our revised macroeconomic estimates for the year has been fully incorporated in the expected credit loss of Piraeus Bank during the first half of 2020. The substantial support that has been quickly and decisively provided by the European Central Bank and the Greek administration is expected to partially reduce the effects of the pandemic shock.
Now it is of utmost importance to accelerate the speed of the recovery through the timely execution of the financing support programs and the common actions taken by euro area member states. To that extent, the recently announced EU recovery fund comes on top of the substantial investment funding programs already allocated to the Greek state as shown on slide 3.
All these funding programs worth €80 billion or 40% of Greek GDP will become gradually available to Greece in the next seven years. It is not just the unprecedented magnitude of this support mechanism that makes us optimistic, but also their scope and determination.
The importance of the EU recovery fund for the future of the Greek economy cannot be overstated. It will allow Greece to cover not only the ground lost due to the COVID-19 crisis, but also it will enable the necessary structural reforms and the targeted productivity enhancing investments.
Equally, we are aware of the key role our bank has to play to complement the effort by financing investment and the economy in general. It remains my deepest conviction that it is the first time since 2007 and 2008 that Greece stands a good chance for a sustained and above-trend period of economic expansion.
Throughout this health crisis, we have prioritized keeping our people safe and healthy while at the same time providing all the support our clients need in order to weather any related consequences.
Illustrating the actions of our responsiveness on slide 4, we would like to share that currently we have implemented debt moratoria of circa €4 billion to performing borrowers until end of June. At the same time, a total amount of €3.5 billion of new loans have been disbursed to date end of July covering more than two-thirds of our 2020 target of €5 billion. This amount includes €600 million disbursements from state-sponsored schemes out of a total of €1.5 billion that our bank has been already allocated.
During the lockdown, technology and digital banking have been instrumental in changing customer behavior. We managed a fourfold increase of weekly registrations to our e-banking platform compared to the same period last year, while 94% of total bank payments are now executed electronically as opposed 89% last year.
On slide 5, we present the progress made in the first half of 2020 in eight key performance areas. This improvement is the result of the effort made and paves the way for better performance going forward.
On slide 6, we highlight the key takeaways of our financials for the first half of the year, all fundamentals mainly net interest income, net fee income, operating costs, liquidity; and capital position have improved notably.
Slide 7 presents the improvement in Q2 2020 P&L compared to Q1. We have managed to improve the topline and contain our operating expenses. On the other hand, impairments as you can see reversed to normality after the one-off COVID-19 charges of Q1. Overall, Q2 produced a recurring pretax profit of €125 million.
For the whole of first half 2020 as you can see on slide 8, we increased our core banking income by 2% year-on-year, while we cut our expenses by 10% on a comparable year basis. Thus our like-for-like PPI was up 18% year-on-year. The underlying cost of risk stood approximately at 160 basis points in first half 2020, which is within our guided range. During first half, we have also booked approximately 75 basis points of COVID-19-related loan impairments. And with that, we have fully incorporated the impact of the revised macroeconomic estimates to our P&L.
Moving to asset quality in slide 9. Our effort remains on the management of NPE inflows, maintaining the momentum that we have recorded in the past. Inorganic initiatives continue with the Iris unsecured NPE portfolio having received a binding offer and entering into final stage to conclude the transaction in the coming period.
More color on the debt moratoria due to COVID-19 is provided on slide 10. We have €4.8 billion implemented debt moratoria, which represents around 15% of the total respective exposure both performing and FNPE. Recently, demand is flattening out, given the financing facilities that are becoming available and we do not expect this amount to grow sizably going forward.
It is very important to note that the experience to date indicates that any difficulty faced at this time is concentrated at specific recognized parts of the portfolio and is not spread throughout our book. Payment culture hasn’t deteriorated. Payment rates remained broadly resilient especially post-lockdown relaxation, while the state support schemes for financing will prove to be a catalyst in the forthcoming period. It is characteristic to say, that post-June approximately €1 billion of debt moratoria have expired, out of which 80% has returned to currently payment status.
Piraeus Bank is utilizing all the available tools to support its most affected customers. Out of the two billion corporate clients under moratoria as of late July, 1.5 billion relates to corporate clients operating in the sectors, most affected by the pandemic. An analysis of the affected sectors can be found, on slide 11.
On slide 12, it is worth mentioning, that approximately €1 billion additional funding will become available, to our large corporate and SME clients, from the new guarantee scheme. Another €400 million funding is available to our SME clients, under the new working capital scheme, the TEPIX II.
In addition, the new instalment subsidy program called Gefyra, denoting bridge in Greek which was launched yesterday. And is addressed to primary residence mortgage borrowers is expected to offer further support to impacted individuals and professionals, for a period of nine months.
It is very impressive to mention, that during the first day of applications in the electronic platform of the program, approximately 4,000 borrowers have submitted application for subsidy of which, 99% satisfied the criteria and have been approved. For Piraeus Bank, the eligible impacted portfolio of mortgages stands at around €1.2 billion to €1.4 billion, out of the €1.6 billion implemented moratoria, for mortgages.
Moving on to liquidity, on slide 13, where you can see that our private sector deposits grew 5% year-on-year in June. And that we have topped the ECB TLTRO funding facility for €7 billion. Our LCR now stands at, 169% from 131%, at the end of March 2020.
We continue to manage our capital base, in an efficient way. And we have managed to reduce the risk-weighted density of our assets by 11 percentage points over the past year. Our pro forma total capital ratio as displayed on slide 14 stands at, 16.1%. On slide 15, we present, the evolution of our total regulatory capital ratio, in first half 2020 and is characteristic that through organic capital generation and debt issuance, we have absorbed the COVID-19 impact and managed to increase our fully loaded ratio.
Changing gear and turning to our derisking effort, we work full speed to prepare for the €7 billion NPE securitization as well as the hive-down process. Both work streams are very complex and demanding, yet we are confident, that they will be concluded before the end of the year.
We continue our work on Phoenix and Vega. In parallel in late July, we received a binding offer, for the Iris unsecured portfolio. Piraeus Bank is stepping up its effort on the back of its transformation plan, the summary of which is depicted on slide, 19 and 20. The plan is paving the way for a fully de-risked lean and profitable bank, enjoying all the competitive advantages and strengths that our strong footprint in Greece provides. Slide 20 presents some of the key aspirations of our transformation plan.
Concluding this opening statement, I would like to reiterate our commitment to our clients and the society at large and our conviction that this period can be an opportunity to capitalize on. The support measures and the policy response are sizable and can mitigate any difficulties. For us year 2020 is a year of intense work to clean up the balance sheet and proceed with the transformation of the bank paving the way for a strong rebound in 2021.
And with that I would like to open the floor for your questions.
[Operator Instructions] The first question is from the line of Floriani Jonas with Axia Ventures. Please go ahead
Hi, guys. Hello, everybody. Thanks for the presentation. I have my first question on NPEs and the NPE progress. Just wondering if there’s any comment you can make around dynamics of the inflows and the outflows especially on your capacity as well to keep up with the outflows now in the coming quarters. And then how do you see this progressing in Q3 and Q4? I think the Q2 number seems to be quite good versus the expectation.
Secondly, I take your comments Christos on the loans and the moratoria and also the customers that have been already exiting and moving into paying states again. Is there any more comments you can make regarding the quality of the other loans under the moratoria? I mean I am aware that you guys are probably also looking to the businesses and the cash flows. Is there any areas of concern in that perimeter? And also, if there’s any expectation that some parts of the moratoria offer some clients this could get extended way into 2021? And then finally just to confirm your guidance from previous quarters. I remember you gave us guidance on your cost of risk also on NII, PPI and fees. I mean especially on fees I think that now in the second quarter I think it’s quite a good and strong number even on the first half versus first half 2019 that leads to your mid-single-digit decline which I remember was your guidance for the year. So just wondering how you’re seeing these dynamics are now going into the second half? Thanks
A – Christos Megalou
Hi, Jonas. Okay let’s — first question was on NPE progress. Yes, inflows was at its lowest kind of expected given the availability of the moratoria too. But also given the very hard work that we’re also doing to sort of proactively manage customers both on the retail franchise with the support of Intrum our servicer and on the corporate side. On outflows, we have been seeing a surprisingly good performance on payments from forborne exposures and therefore curings performed quite well. Hence the outflow number that you’re seeing. This is again a result of a lot of good work that our servicer putting into managing the portfolio and producing those cures. Liquidations, obviously was very much below expectations since there are no foreclosures happening at this time. And we are expecting and we are working on sustaining this positive effect of outflows particularly focusing on cash recoveries and continued cures. And hopefully, we will see also step-up of liquidations with potential opening of the courts as of September.
On the inflows. As long as we have moratoria in place, we do not expect any upward surge. As we all understand the big question is upon moratoria expiry what will that mean for marginal NPE generation out of this. However, as you rightly are asking we do have some first indications of – in this situation in this macro situation, what would that mean? Because we have had a first wave of moratoria in – particularly in retail that expired and actually were not renewed. A big percentage of those customers returned to paying status and they’re currently – and they have made let’s just say one or two installments. It’s still early to judge, but seeing that moratoria do not get automatically renewed, let’s say and there is still a strong payment culture in the system that gives us depending on the market evolution a good positive indication about managing those exposures.
Your third question was about the performance of the performing customers and how the moratoria will evolve in terms of debt leveraging, et cetera. It’s something that, we are proactively managing. We are disbursing and supporting the customers always on the back of credit assessments that, we are doing on the ground. We are getting a lot of support from the government schemes from a liquidity but also mitigation perspective with – especially with the government-guaranteed program that has been launched. But also with the mortgage program that’s coming online.
It looks like, there is room on average, let’s say in the leveraging of the clients for them to step up their leverage. But it is a case-by-case sort of a discussion that we’re doing. And the Gefyra program on mortgages is going to play also a very big part, to understand was launched a few days ago. Again, very active management with Intrum our servicer in on-boarding as many of our customers on this program as possible.
Your last question on guidance, the PPI intrinsic as you saw are very strong. There are no one-offs in this with the exception of the trading line of course, which is for any situation an ad hoc result, but when it comes to NII the cost of funding and the TLTRO introduction with – together with strong performing disbursals have defended this line as you saw.
On fees very strong performance from loan origination fees, again, I would say our target now is to overall keep stable the run rate and always keeping in mind that Q3 is kind of a sensitive quarter given, how the touristic contribution of these in the overall result. On cost of risk very similar, very proportional to the NPE story. As long, as we have this organic result cost of risk should remain within the overall guidance that we have given over 180 basis points for the year.
The next question comes from the line of Manolopoulos Konstantinos with Optima bank. Please go ahead.
Yes. Hello. Thank you for the presentation and the call. I have a question on capital. And if there’s more time, I have other questions as well. So on capital, with respect to the SSM latest recommendations, can you please clarify, if you will be allowed to operate with a renew OCR of 11.25% until 2022. And also, does this mean that the new guidance from the Bank of Greece on Pillar II will be further delayed? Again, on the SSM I have a question on your NPE reduction plan. So if I understand correctly, your new plan will be submitted in March instead of September. Is that correct? And if there’s more time, I have other questions as well.
All right. Let’s start with this first two. Yes, you are correct. But just to be technically accurate the SREP requirement is as it was. However, it has been given to all banks the flexibility to operate within the capital conservation and the O-SII buffers. As a result, the floor is now 11.25%. And that will remain the case as we have seen until the end of 2022. So the comparison of 16.1% which the capital position of the bank now for capital resiliency reasons is one that wants to do versus the 11.25%. Now what that means? I think you’re mentioning the evolution of the O-SII buffer next year. Well, it is now suspended anyway. So 0.50% was to stay 0.50% next year. In any case, since it is suspended, it’s not of that big importance.
And what about Pillar II, I think — sorry Pillar II guidance? That was supposed to come out this year correct for Greek banks?
It’s part of the same flexibility.
Okay. And on the NPE plan, are you supposed to submit your plan by March or by September?
So the requirement for NPE business plan as well as capital plans et cetera is now for March. But that being said that’s a long time away. We will be doing interim exercises and making sort of new forecast and we will come on the Q3 result with more information to give you better flavor.
Okay. Going back to the Iris and Trinity NPE portfolio sales, you said that you have already received binding offers for Iris. Can you give us any color as to the pricing you are achieving at least on Iris? I mean, should we expect more losses, or the current coverage ratios are sufficient?
We will not be giving you any flavor on the consideration right now. But what we can tell you is that the value of the transaction is already reflected in the books of the bank. Therefore, it will be a P&L-neutral transaction.
Okay. Great. Thank you.
The next question is from the line of Cordara Alberto with Bank of America. Please go ahead.
Hi. From my end a couple of questions on capital. In previous call, I think you mentioned about 180 bps erosion expected from the planned NPE reduction. Just wanted to see if this broad guidance is still standing, or we should expect something better or something worse? Also as I recall from Q1 I think you were mentioning some 70 bps in relation to measures of support on SME and the SME supporting factor and the software intangible. So again, if you can give us bit of an update on what’s happening on this front?
And then my second question regards the asset quality. I can see that there has been a very good trend in NPE in the quarter. However, at the other end, there has been a small uptick in Stage 2 performing loans. So when I look at the appendix of your presentation now they are standing at €5.7 billion versus €5.4 billion in the previous quarter. Still this is an uptick, but it seems to be very contained. So you don’t have Stage 2 loans increasing materially. I would expect it to worsen that to be honest. So the question to you is, is this Stage 2 situation can be maintained in terms of pace? And how do you see in the evolution of Stage 2 loans over the next quarters? Thank you.
So on the capital impact of the deals it will depend a lot on the — obviously the placement strategy of the mezz and junior notes, but our guidance for an approximately total cost of 2% on capital currently stays. When we are able to disclose more on the advancement of the deals, we will also illustrate the details of that. In terms of supervisory report, yes, you are correct. It was a draft estimate at the time of 70 basis points after the finalization of the measures. This is now something above 50 basis points of which 40 have already been voted in and they are part of the result that we’re presenting now. So there’s still something over 10 basis points that we’re expecting for the capital to be supported with on this.
Now, on the — on your Stage 2 question. This is very much driven by the forborne performing loans that are coming out of curings. So, it is part of the cycle that you will see loans jumping out of Stage 3 into Stage 2, and then eventually once the F-flag gets lifted to go back into Stage 1.
So it is a cycle, we are expecting and we are welcoming, obviously, because as you’re seeing from the coverage below the provision requirements for Stage 2 are much lower than Stage 3. So, this is also a big part of the good performance on cost of risk and the capital resilience of the bank.
Okay. That’s very good. And my surprise is, I understand that Stage 3, are going back to Stage 2 then eventually to Stage 1. But looking at some other banks, I saw that in Europe, I saw that the Stage 2 picked up quite materially quarter-on-quarter because of the COVID in anticipation of potentially moving into Stage 3. So I haven’t seen this is your result. But from your answer I take that the Stage 2 evolution will continue to be relatively positive. I mean Stage 3 moving to Stage 2 rather than Stage 1 moving up to Stage 2. Correct me if I’m wrong.
You are correct in your assessment, Alberto. As long as we are, — as the touring plan is still in play, which it is and this is the core part of our organic NPE reduction that will continue to be the case. Also the case as long as we have moratoria, this also defends the Stage 1 to Stage 2 rolling as you can understand. That is something that we will have to deal with in the post-moratoria era i.e. next year.
Okay. Thanks all. Thank you very much.
The next question is from the line of Sevim Mehmet with JPMorgan. Please go ahead.
Hi. Good afternoon and thank you very much for the presentation. Just as a follow-up to a previous question, and coming back to the €1 billion or so that moratoria that have expired so far. Are you able to share any more information on this 20% that are currently not in payment status? What types of clients are these predominantly?
And I would be interested to know, why were the moratoria for these cases not renewed? And finally, I understand these are so far largely retail exposures. But do you think, based on your initial analysis, is that kind of 20% rate representative for the remaining moratoria portfolio?
Hi, Mehmet. We are looking at the expiration of the moratoria, as a test on the payment resilience of these customers. That is why, strategically, we have not proactively renewed any moratoria, but rather allow and reach out to customers to see whether they can reengage in their full payment status condition.
The 20% that has not made it, are really customers that are in the very early bucket i.e. they are customers that they had an installment then they missed it. They’re currently sitting on bucket one very few cases sitting on bucket two, and obviously the work that Intrum is doing for us who is controlling our retail inflows is to renew the moratoria or make use of the Gefyra program when it comes to mortgages.
So, I would say it’s a very good sounding test, which we are, I would say, proactively using to test what’s going on. And as you say, create some sort of benchmark, as to what would that mean for terminal NPE inflows out of the moratoria. I would say 15% to 20% is our, sort of, the high range of our target of our estimates right now. It looks like that this is working on the ground. And there’s more stuff coming that will help contain this number.
That’s great. Thanks. Thanks very much, Theodore
The next question is from the line of Memisoglu Osman with Ambrosia Capital. Please go ahead.
Hello. Thank you for your time and the presentation. I wanted to check in with you on the hive-down process. If you could give us any update. There were some news that it has started any kind of update on the process a time line would be helpful? Thank you.
Page 18. Hi, Osman. Yes, indeed the initiation of the hive-down process has been approved by the Board of Directors. We will be issuing a transformation balance sheet with the July 31 numbers. This is expected to be approved and finalized at the end of August. And then on continue the process for completion of the hive-down at the end of November.
In the process, we have also incorporated as the hive-down process requires the four SPVs that are carrying the securitizations three of them for our €4 billion deal with Vega and one of them for Phoenix. These have been set up. And all the relevant work has been done with the support of Intrum in completing this transformation.
And the first securitization that will be — that is more mature for placement and the recognition is Phoenix as we have discussed for which we intend to apply for the HAPS over the coming weeks, I would say. So everything is on plan as you can see on Page 18 for the completion for November end.
Okay. Thank you.
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.
Ladies and gentlemen, thank you all for participating in our second quarter 2020 results conference call. We face challenging times, but the effective management of the crisis until now along with our work to improve our balance sheet allow us to be optimistic that we have the ability to successfully weather the current situation. Looking forward to discuss further with you in the following weeks. Stay safe and healthy until we meet up close again. Thank you all.
Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for calling and have a pleasant evening.