Ladies and gentlemen, thank you for standing by. I am Yota, your call's operator. Welcome, and thank you for joining the National Bank of Greece Conference Call to present and discuss the third quarter 2023 financial results. At this time, I would like to turn the conference over to Mr. Pavlos Mylonas, CEO of National Bank of Greece. Mr. Mylonas, you may now proceed.
Good morning, everyone. Welcome to our third quarter financial results call. I'm joined by Christos Christodoulou, the Group CFO, Greg Papagrigoris, Group Head of Investor Relations. After my introductory remarks, Christos will go into more detail on our financial performance, and then we will turn to Q&A. I will begin with a brief overview of Greece's positive economic environment, which has been facilitating our robust financial performance. Then I will turn to our third quarter results. So let's begin. Economic recovery in Greece remains on a solid footing, despite international headwinds, rising interest rates, and the recent floods. Greek GDP has accelerated to 2.7% in the second quarter of 2023, and has been consistently outperforming the Euro area for nine consecutive quarters, and by a sizable margin recently.
Additionally, leading indicators confirm Greece's continued growth momentum with a full year GDP projected at 2.5%, despite the weaker outlook for the Euro area. This overperformance is driven by the strong labor market conditions, with supportive increases in real wages and employment, solid corporate profitability at an 11-year high, a recovery in the real estate sector, with prices in the residential sector up by 15% year-on-year. Very positive economic sentiment and a stable, reform-oriented political background, setting the stage for substantial pickup in investment, both domestic and foreign. Only a small impact on output from the floods in the plains of Thessaly, about 0.5 % of GDP in 2023, with a full payback in 2024.
The recent upgrade of the Greek economy by S&P to investment grade status is a testament to the remarkable fiscal rebalancing of the country, as well as the hard-won gains in competitiveness achieved over a multi-year reform effort. In this positive economic environment, combined with our ongoing four-year transformation project and our inherent comparative advantages, the bank's performance has excelled. We have demonstrated notable P&L strength for yet another quarter, capitalizing on our solid balance sheet. A few key points regarding the balance sheet and the P&L. Let me start with the balance sheet, and in particular, our asset quality. In the third quarter, we experienced near zero net NPE inflows, which have been slowing since April. In fact, since the beginning of the year, the cumulative net NPE formation is about EUR 150 million, comprising around one-third of our initial full year expectations.
This positive development reflects a solid economic backdrop, combined with the defensive nature of our loan book, including an old vintage mortgage book. With reference to our legacy NPE exposure, developments have been equally positive. We pushed forward faster, undertaking another transaction. This has led our domestic NPE ratio down to 3.6% in September, close to the NPE ratio target we had set for 2025, putting ourselves two years ahead of schedule. Our gross NPE exposure has been reduced to about EUR 1 billion, nearly all of which is covered by cash provisions. The other critical component of our balance sheet is our liquidity position. It comprises a large and stable demand deposit base, which provides a critical structural competitive advantage in the current interest rate environment, especially when combined with our mostly floating rate assets.
Moreover, it comprises a large net cash position of EUR 7.4 billion, net of TLTRO repayments, which rose further in the third quarter. Moving on to our profitability performance, our nine-month results, core PAT is EUR 0.9 billion, and it nearly fulfills our full-year core PAT target of EUR 1 billion. This development reflects strong core income growth, up 60% year-on-year in the nine months. Tightly controlled costs, up 3% year-on-year, despite the inflationary environment and the implementation of our ambitious IT and digital transformation, which has already been paying large dividends to NBG in the form of improvements in efficiency as well as customer service. Near zero net formation that has allowed a normalization of the cost of risk to 65 basis points. Our NII momentum has been benefiting from the ECB base rate repricing to deliver the highest NII in the domestic market.
Importantly, the impacts of rates has been complemented by accelerating corporate, corporate disbursements, driving our domestic PE loans up by EUR 0.6 billion quarter-on-quarter. These developments allow us to confirm our PE expansion guidance of EUR 1 billion-EUR 1.5 billion for this year. And finally, fee activity was also robust, up 15% on a like-for-like basis, with promising results in the wealth management business, which has been an area of focus, for management focus. The good results in all key lines of the P&L has led our core return on tangible equity higher to nearly 18% in the nine-month period on an annual basis, and 20.8% just in the third quarter. Considerably higher than our guidance for over 15% for the full year 2023. Impressive profitability results have sustained core capital generation at very high levels.
In the nine months, we have generated 220 basis points of core capital, pushing our CET1 ratio to nearly 18%, and to the total capital ratio to over 20%. In view of our overperformance versus guidance, we will provide new guidance at the time of the full year results in early 2024. These will factor in the better than expected achievements and the improved outlook for NII, among other things, including ECB remaining higher for longer. Furthermore, the solid results, including in the stress test, where our performance was at par with the top banks across Europe, have led to lower regulatory capital requirements. Our capital strength and resilience, acknowledged by the regulator and our high capital generation, increase our strategic flexibility, including with regards to returning capital to our shareholders.
Going forward, we intend to keep leveraging, one, a supportive macro and banking environment, two, our inherent and distinguishing comparative advantages, and three, our transformation program, which altogether will keep distinguishing NBG to a widening degree. As additional evidence of the bank's rapid change, I would like to draw your attention to our work on ESG, where we plan to be the market leader in driving the economy's response to climate change and already lead the market in financing the renewables. Another important step we are proud of is to be the first bank in Greece to publish our CO2 reduction target for our financed emissions by sector for 2030. And with that, I would like to pass the floor to our group CFO, Christos, who will provide additional insight to our financial performance, and then we will turn to Q&A. Christos?
Thanks, Pavlos. Let's start with our performance highlights on slide 16. The strong momentum of our profitability continued, with group core profit after tax reaching EUR 346 million in the third quarter of the year, up by a solid 20% quarter-on-quarter, reflecting sustained NII growth, combining with cost discipline and a reassuring asset quality performance. As a result, the nine-month 2023 group core profit after tax reached EUR 0.9 billion, up 3 times year-on-year, nearly matching our full year 2023 implied target, while the nine-month core return on tangible equity of 18% compares favorably to our full year target of over 15%. Turning to our balance sheet on slide 17, disbursements gathered pace in the third quarter, driven by corporates, nearly reaching EUR 2 billion, driving domestic performing loans EUR 0.6 billion higher quarter-on-quarter to EUR 28 billion.
Encouragingly, momentum continues into Q4, supporting our full year 2023 net loan expansion target of EUR 1 billion-EUR 1.5 billion. Domestic deposits continue to grow, rising by EUR 1.1 billion year to date, driven by retail, while after netting off the residual TLTRO position and factoring in our position in the interbank market as a net lender, net cash increased by EUR 0.5 billion quarter-on-quarter to EUR 7.4 billion in Q3, supporting our NII and underlining our liquidity advantage. On asset quality, we are pushing forward with our NPE stock reduction strategy with a clean-up transaction. As a result, our domestic NPE stock now stands at EUR 1.1 billion, EUR 0.6 billion lower in Q3, translating into a domestic NPE ratio of 3.6%, already nearing our 2025 target.
Organic NPE flows settled at near zero level this quarter, at a bit over EUR 100 million year to date, significantly better than the full year 2023 expectation of approximately EUR 350 million, allowing for a cost of risk of 66 basis points for the nine-month period, and with our coverage, our cash coverage reaching 94%. Moving to capital on slide 18, our strong organic profitability keeps pushing our capital ratio significantly higher every quarter throughout 2023. CET1 ratio stood at 17.9% in Q3, up by another 60 basis points quarter on quarter, and up by 220 basis points year to date, with total capital ratio reaching 20.3%, factoring in our EUR 500 million Tier 2 issuance in September.
On slide 19, we present the structure of our fortress balance sheet, highlighting our superior liquidity, best-in-class capital levels, and our conservative asset-based profile. Notably, the increases in ECB base rates have not affected our deposit mix materially, with the small substitution effect fading away. Price inelastic transactional demand deposits still comprise nearly 80% of our domestic deposit stock. Our liquidity profile continues to grow stronger, with EUR 7.4 billion of excess cash, a 57% loan-to-deposit ratio, and a 252% liquidity coverage ratio, comparing favorably against top European peers. Now, let me provide some further insight to the key drivers of our profitability. Net interest income remained on an upward trend, as shown on slide 21, with group NII increasing by 6% quarter-on-quarter, at EUR 588 million in Q3, steadily at the highest level of the sector.
The sustained NII momentum mainly reflects base rate-driven loan repricing, as well as our leading net cash position, part of setting high deposit and wholesale funding costs. Lending yield was up by 30 basis points quarter on quarter, to circa 6% in Q3, implying a pass-through of over 70%. Prime deposit costs reached 156 basis points in Q3, with new production coming in at circa 175 basis points in September, implying a beta of circa 45%, while total deposit beta remains low at 10%. All in all, our domestic net interest margin was up by 26 basis points quarter on quarter, to circa 320 basis points in Q3, aligning with our full year guidance. The increasing rate environment has evidently benefited our balance sheet significantly.
Despite the expectation of a high for longer rate environment, we have been proactive examining structural hedging strategies going forward, to lock to some extent, the current high yielding capacity of our balance sheet, and contain NIM erosion in the longer term after entering the interest rate downward cycle. Turning to slide 26, domestic fees increased by 17% year-over-year on a like for like basis, adjusting for the mentioned acquiring consolidation on the back of retail and corporate banking businesses, driven by cards, deposit bundles, trade finance, and the successful introduction of new investment products in Q3. At the same time, the switch of our customers to digital channels continues, with e-banking transactions up by 16% year-over-year in Q3, and total transactions 9% higher year-over-year, underlying the quality of our digital offering and the successful ongoing digital transformation of the bank.
Moving on to the next slide, cost discipline continues, with personnel and general expenses up by just 1% year-on-year, despite inflationary pressures and collectively agreed wage increases. The increase in depreciation charges, as previously discussed, reflects our unique, by domestic standards, IT strategy, which entails our digital transformation and the ongoing replacement of our core banking systems. The core system replacement has already started to bear fruit, gradually allowing us to offer better customer service, improve time to market, and reduce maintenance costs at the same time. All in all, operating expenses were up by just 3% year-on-year, in line with guidance, driving our group cost-to-core-income ratio for the nine months of 2023, down to 31% from 48% a year ago.
Turning to asset quality on slides 28-30, our accelerated inorganic efforts were complemented by near zero organic formation, pushing NPS down to EUR 1.1 billion, or just EUR 0.1 billion net of provisions. Importantly, since the beginning of the year, the cumulative organic NP formation is contained to about a third of our full year expectation. As a result, the domestic NP ratio declined to 3.6% in Q3 2023, with NP coverage reaching 94%, and coverages across all stages maintained at best-in-class levels, as shown on slide 30. On slides 32-34, we provide a snapshot of key ESG priorities. We are incorporating ESG in our business strategy and risk management, leading the market in terms of renewable energy sources financing, and supporting the green transition of businesses and households.
We are also market leaders in disclosing our emission targets for 2030 by sector, in line with the Net-Zero Banking Alliance. We have delivered a strong set of results for yet another quarter, driven by superior performance across all core lines, as we continue to capitalize on our distinct balance sheet and our ongoing transformation. Core profitability has kept improving, translating into a core return on tangible equity of 18%, well above our full year guidance, while our NP ratio has dropped to levels envisaged two years down the road. Our superior capital position continues to grow, with the nine month delta already fulfilling half of the 3-year capital generation guidance of over 450 basis points. This solid performance underlines our strategic flexibility with regards to sustaining profitability, and most importantly, supports our commitment to return capital to our shareholders.
With that, let's now open the floor for questions.
The first question comes from the line of Sevim Mehmet with J.P. Morgan. Please go ahead.
Good morning. Thanks very much for the presentation, and congratulations on the strong results. I'll have a couple questions on NII, please. So firstly, just wanted to ask about the pace of growth. I think this is a question that we're now asking almost every quarter, but it's still very strong. And, just wanted to hear your views now, from the third quarter onwards, how you see the development from here, in the next few quarters, and were you expected to peak as you had, I think signaled previously, that you would have expected NII to peak in the third quarter?
And, I think you mentioned on the securities, but I just wanted to also ask about the structural hedges that you are thinking about now, considering 2025, maybe when rates come down, and how you're willing to protect the NII base in the medium term. And, finally, just on the income statement, can I ask what the difference between the operating profit after taxes and the attributable part mainly comes from, given it's quite a large difference this time. Is this related to the NPE transaction that you did, or are there any other one-offs this quarter that we should be taking into account? Thanks very much.
Okay, thank you for the questions. Pace of growth of NII, it is going to be peaking soon, whether it's Q4 or early 2024, it is to be seen. There is still the what I call the carry from the last rate hikes, which haven't yet fed through for a full quarter, which is a positive. We have increase in the balance sheet, loans as well as deposits, which are another positive. Then you have a few negatives. We have the MREL that we added, the Tier 2, which will have a full quarter effect. We have the impact of the MRR, which is all European banks implemented, the zero-zero remuneration on required reserves.
And you may have a little bit further shift on the spreads, though that seems to be weakening. Both the loan spread compression will continue to as much slower degree as we have seen, as well as the slight movement of the beta on deposits. Though that seems to be also waning. So those are the moving parts. I think it's fair to say that NII growth will be slowing and peaking probably in the first quarter of 2024. Now, on structural hedges, I think most European banks due to the interest rate environment are implementing such structural hedges. We are as well.
It depends on what you're hedging, and I think most banks are moving to their deposits, and I think our deposit base allows us to do more than others. Now, we haven't yet formulated it, and I think the what we will do will be clarified at the time of the full year results when we give new guidance. And then on the last point you had, I will turn to Christos to answer.
Hi, Renat. So, effectively, there are two items that bridge our group core profit with Group PAT. The first one has to do with one of accreta that we had in Q3 for flats, about EUR 12-15 million. And, as you rightly pointed out, the other element is, we took—we've taken some loss provisions for the cleanup transactions that we implemented in this quarter. We started to implement at least. So it's about EUR 60 million, so that's the biggest chunk of the two one-offs that we had. The portfolio is in the area, in terms of GBV, of about EUR 0.6 billion. It's mostly resis. 60% resis, 30% SMEs and corporate, and about 10% consumer.
Obviously, once this transaction is completed, we expect to have some release, some gain in capital from the release of the risk-weighted assets, but let's wait and see. So that, that's the two items that tie the two numbers.
Okay. That's very clear. Thanks very much.
The next question comes from the line of Nida Iqbal with Morgan Stanley. Please go ahead.
Hi, thank you for the presentation, and congratulations on a great set of results. My first question is about loan growth. Given the high interest rate environment that we are in currently, do you see a risk of a slowdown in loan growth in 2024? And secondly, my second question is about the deployment of excess capital. If you could please shed some more light on the different options that management is considering. Is M&A or international expansion on the cards? And then on the dividend side, could payout be much higher than the 20%-30% that's currently expected by the market? Thank you.
Okay. On the loan growth, I think the short answer is we don't expect to slow down. I think the reason is the strength of the economy and the profitability of the corporate sector. That's the key driver for loan growth. As I mentioned in my introductory remarks, profitability on the corporate side is extremely high. They have a large set of projects in the pipeline. We are discussing with them financing of these projects, so the corporate side of the bank is quite confident about a large and maybe even accelerating pipeline of projects. Also, I'm a bit more confident than I used to be on the retail side. You're seeing the high increase in residential resi prices.
There is a disequilibrium there. I think you're going to see far more investment and increase in supply of residential investments, of residential residencies, and therefore more loan growth on the retail side. So I'm relatively confident on loan growth going into 2024. Now, excess capital, clearly it's there. We are very confident about expanding in Greece, credit expansion, organic growth in Greece, also including the assets and the services which will be coming back to the bank slowly. We are clearly intending to increase shareholder remuneration. We will start with a payout ratio 20-30, I think, for next year, based on the 2023 profits, but we would like to increase that gradually. We're also looking positively at share buybacks.
So those are two forms of returning capital to shareholders that we're looking at quite seriously. So those are the two ways of using the excess capital.
Thank you very much. Very clear. The next question comes from the line of Robert Brzoza , with PKO BP Securities. Please go ahead.
Hello, everyone. Thanks for the presentation, and congrats on the results. I have two quick questions. First, a follow-up on the negative one-off you incurred in the quarter. Did I understand correctly that this part of the EUR 60 million could be released again in the future? And second, on your 2025 outlook, in your presentation you state that this could be updated upon the release of annual results. May I ask where potentially this update would be coming from? Is it different interest rate expectations, or better outlook for volumes, or is it another factor that you need to consider now? Thank you.
Okay, I'll take the first one, and then Paul will address the second question. Now, let me, let me clarify that again. The EUR 60 million has to do with the acceleration that we've done in the cleanup and the provisions that we've undertook, considering that we are running this portfolio under the transaction. What I said is that going forward, we'll get the relief in capital from the recognition of the risk-weighted assets. That's the two elements, the two drivers of this transaction that will end up being, I would say, capital neutral at the end of the day. Pavlos?
Okay, the new guidance would involve. Clearly, ECB is higher for longer. That's one main driver. We have no plans to change our guidance along on asset growth. I think that stays where it is. We have the better than expected pass-through for interest rates, the beta, the well-known beta and the pass-through loans are better than expected. So I think those are the... Oh, and the final point, I guess, is the better asset quality. We had expected the increase in rates to lead to some deterioration in asset quality, and clearly that is going to be significantly better than expected.
So I think those are the three main drivers, along with the hedging that will impact our guidance.
Understood. Many thanks.
The next question comes from the line of Osman Memisoglu with Ambrosia Capital. Please go ahead.
Morning. Many thanks for your time and presentation. Just wanted to go back to the NII discussion, and in particular, the shift to time deposits. It's been quite impressive for you guys with only very gradual shift to time. Just wondering how you're thinking about this these days, with the latest developments on ECB side. Do you expect any pickup or slowdown, or where, where do you expect this time deposit mix for you, at the terminal rate and when? Thank you.
Okay. I think we're discussing this every quarter. So we are now still at the, let's say, 28 mark. Our forecasts, we have to plan to about 25% of time deposits by the end of the year. It could come slightly better. We've seen that there hasn't been any further change in the mix, let's say, by end of October, so slightly better than originally expected. Now, 2024 is a long time away. Let's see how this year concludes, and we will be changing our view and guidance on the end of 2024 deposit mix, when we give overall guidance on the business plan numbers at the end of, with the end of the year results in early March.
But so far, it still looks very strong and even stronger than we expected, even in the summer.
Understood. Thank you.
The next question comes from the line of David Daniel with Autonomous Research. Please go ahead.
Good morning, all. Congrats on the results. I've just got a quick couple on the debt side. You're in a really strong MREL position. Just wondering if you've got any ambitions to bring forward the date at which you hit the end state target, so could the 2026 target come forward by a year, just to show your strength in that position? And then also, noting your recent Tier 2, just thinking about issuance next year, is AT1 potentially on the cards? I guess, just thinking as you distribute some of the excess capital that you have and look to normalize that capital structure, could we think about AT1 next year? Or should we just believe it's kind of senior preferred to come? Thanks.
Okay. So, as you can see in our presentation, currently our MREL ratio stands very strong. It's at 24.5%. The target for January 2024 is at 22.7, so we're nearly two percentage points up compared to this year target actually. We are almost meeting the target for January 2025. Now, we want to be always proactive and be, let's say, ahead of what we have to do. And organic capital generation has given us and will be giving us a lot of flexibility. So, maybe one, some years, maybe two years going forward to completion, to meeting the final target of about 27%.
Currently, what we have in the pipeline is our Tier 2 that is coming to maturity in 2024. That's the priority. To be specific to my answer to your question on AT1s, currently, it is not part of our plans. Obviously, we are quite rich in terms of CET1 capital, so it's not a priority for us to go with an AT1, at least based on the current plans that we have.
Thanks a lot.
The next question comes from the line of Mikhail Butkov with Goldman Sachs. Please go ahead.
Good day. Thank you very much for the presentation. I have three questions. Firstly, on NII, they were already provided comments on that, but, feels like that in previous calls, the outlook was that quarter number three can be, the quarter of the peak in NII, but now it seems that we speak about the quarter number four or the beginning of next year. What's changed since that time? And the second question is on the recent S&P upgrade. Do you see any positive implications from that for the risk-weighted assets? And maybe you could quantify that.
And finally, on as a follow-up on excess capital, could you consider an accelerated DTC depreciation, given that you have high levels of capital, as also an opportunity for capital deployment? Thank you.
I'll start with the S&P. I think the most important implication of the upgrade is the the signal about the strength of the economy. Two, there's a technical aspect where lots of capital that, by their statutes could not invest in something that was non-investment grade, now is free to do so. So I think that's the second important thing. And then we go to the direct impact on the bank, which there could be some release on risk-weighted assets from the upgrade of corporates or loans, and then maybe some lower funding costs on the on the MREL. So I think the more important are the indirect impacts rather than direct. Now, Chris, do you want to take the other?
Yeah, of course. Now, on NII, indeed, the previous call we said that we expected the peak in our NII somewhere between 2023 and 2024. What has changed, and our bias now, even for a marginal increase, let's say, is towards 2024, has to do with the fact that two elements, actually. First of all, it's the fact that ECB rates came up by 25 basis points higher than what we have guided previously in our forecast results presentation. And obviously, the high for longer also plays a key part on the liquidity curves, let's say, affecting also NII going forward. That's on the NII. With regards to DTC, as you very well know, we have a linear approach towards amortizing DTCs.
We are quite comfortable with the way DTC unfolds year after year as a share of our capital. Now, if there is a systemic initiative for a change in the way that the banks are approaching DTC, we'll be more than happy to enter into such discussions, but currently there is no plan to change in the way that we treat DTCs.
Okay. Okay, thank you. Thank you very much for the answers.
The next question comes from the line of Alberto Nigro with Mediobanca. Please go ahead.
Yes, thanks for taking my questions. The first one is a technical one on risk-weighted assets evolution in the quarter. If I look at total risk-weighted assets, they are flat Q and Q, while in the slide you are pointing to a 20 basis point lower capital from higher credit risk-weighted assets. The second one is on NP cleanup, if you expect any other transaction in the near future, and what could be the impact to PNL? Final one on Digital Euro. What do you see as a risk opportunities for Digital Euro implementation? Have you budget the impact to your business model, and can you share it with us? Thank you so much.
... Okay, thanks for the questions. I'll take the first two. So with regard to risk-weighted assets, indeed, despite the, you know, the, the growth and the credit risk-weighted assets increase, we had a kind of neutral, risk-weighted asset position. That's driven by, market risk-weighted assets into three, which decreased by about EUR 0.5 billion, and that's due to the reduction, on our- on NBG's relative, VaR, which is driven by the increase of the 12 month market volatility. So it's, it's, market, risk-weighted asset driven. Now, to, to your second question, whether we expect any additional cleanup transactions, I would say not at this point in time, as you, as you very well, have seen, NPS are now down to just EUR 1 billion.
We only, you know, would go to bilateral deals going forward, restructurings going forward, and that's about it. We've reached to the level that, it might not be worth it to go to, a big transaction. And for the digital euro, I will, I will turn the, turn to Pavlos.
It is something that is coming. We're not sure when; I don't think it's gonna be very quick. It will clearly present challenges, but it will also present opportunities. I think for a country like Greece, the opportunities may be higher than elsewhere, given the predominance of cash, and this is clearly an incentive to use. The digital currency will be less cash, and that means more official economy, more economy, more of the economy goes to the banks. So that's the opportunity. Clearly, what will be the sticky wicket will be what happens to fees, okay? There, I think, there is at this stage not clear the view on what the impact on our fees will be.
So those are the, I think, the two sides to it. I think that it's an opportunity, but we need to see what would happen to deposit fees and transaction fees from this, which at this stage, I certainly don't have a clear view.
Thank you.
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.
Thank you all for joining us on this call. We're available for any further questions you may have on the results, on the presentations. We'll be traveling to various scheduled conferences during the month. Hope to see you in person there, or if not, in video conferences. So thank you all.