Ladies and gentlemen, thank you for standing by. I'm Poppy, your conference call operator. Welcome, and thank you for joining the National Bank of Greece conference call to present and discuss the Q2 2022 financial results. All participants will be in a listen-only mode, and the conference is being recorded. The presentation will be followed by a question-and-answer session. Should anyone need assistance during the conference call, you may signal an operator by pressing star and zero on your telephone. 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 afternoon, everyone, and good morning to those of you joining from the US. Welcome to our Q2 financial results call. I'm joined by Christos Christodoulou, the Group CFO, and Grigoris Papagrigoris, Group Head of IR. After my introductory remarks, Christos will go into more detail on our financial performance, and then we will go to Q&A. I will begin with a slightly longer than usual description of Greece's economic developments and prospects in view of the high uncertainty created by the current turbulent environment, and then I will turn to the financial performance. Despite the gloom, I am cautiously optimistic that the Greek economy will outperform most of its European peers. Let me explain why. First, the energy dependence of the Greek economy in Russia is relatively low and will be replaced by alternative sources.
Specifically, natural gas comprises less than 20% of final energy consumption, of which 35% is from Russia. The rest is sourced from LNG, 45%, and the TAP pipeline from Azerbaijan, 20%. The amount coming from Russia, around 8% of final energy consumption, is mainly used for electricity production. Greece plans to replace Russian gas by, one, an increase in the contribution of lignite-powered power plants from 5% to 10% of total energy consumption. A switch of a number of electricity generation plants from using gas to oil. And three, lower gas use in industry as committed to the EC, European Commission. Second, while energy access risk appears to be minimized, energy price risk remains high but manageable. Specifically, the reduction in real disposable income from higher inflation is being, to a large extent, offset by fiscal measures.
Specifically, any energy-related fiscal measures targeting mostly low-income households are expected to exceed EUR 6.5 billion in FY 2022, out of a total package of fiscal measures equivalent to greater than EUR 8 billion, which would address the impact of inflation. This amount could rise further still. Our estimates are that these will offset approximately two-thirds of the direct energy hit to these households, thus dampening the impact on consumption. Further support to real disposable income will come from surprisingly strong employment growth, estimated to be 4.5% in FY 2022. It is 10% in five months, 2022. Combined with wage increases of around 3% on average for the private sector, including nearly a 10% increase in the minimum wage.
These should offset higher food costs and residual energy costs not covered by the fiscal measures previously described. In fact, real disposable income may not suffer a meaningful decline in fiscal year 2022, although some downside risks exist for 2023 if the energy crisis is prolonged and greater than expected. The strong economic background includes an outstanding tourist season. It is called revenge tourism. We are experiencing near peak levels of arrivals, combined with a strong, positive terms of trade impact from much higher spend per head, estimated about 15%-20% year-on-year. Indeed, the tourism sector will enjoy its best year ever. In addition, enterprise profitability was up 15% year-on-year in the Q1 and is at a ten-year high, suggesting a large capacity to absorb higher input costs.
In fact, the nominal increase in profits over 2019 level exceeds the estimated hit from higher energy costs. In addition, business turnover continues to outpace 2019 levels by significant margins, 26% higher in 2022 versus the first five months of 2019, and this excludes energy-related activities. All in all, GDP is expected to increase by 4%-5% in 2022, while the projections for 2023 have a wider range around the midpoint of 3%, between 1.5% and 4%. This greater resilience versus European peers also reflects the fact that, one, the Greek economy is at a very different phase of the economic cycle, coming off an extensive period of restructuring which eliminated weak players. Second, collateral values, mainly real estate, are still undervalued.
Following the 60% drop in prices during the economic crisis, they are at a steady growth path, increasing by almost 9% year-on-year in the Q1. Third, the leverage of corporate households is quite low compared with European peers. Indeed, the expected tightening of monetary policy by the ECB of the order of 150-200 basis points, mostly over the next 12 months, is not expected to lead to difficulties in debt servicing capabilities. Do not forget that performing loans represent only 55% of GDP, two-thirds of which to corporates who have relatively strong balance sheets and can handle the approximately 1% of GDP higher debt service payments in view of their strong profitability, as described previously.
The strong normal GDP growth around 10%-11% in fiscal year 2022 is leading to high tax buoyancy, with tax revenues significantly above budget, helping to offset the cost of the extra measures. While the debt to GDP ratio should decline by more than 15 percentage points of GDP in 2022 to levels below the pre-COVID-19. This is clearly far from a scenario in which a new wave of NPEs will be created or new loan demand flows. Indeed, to date, early delinquencies show no increase through July, including those loans previously under state and bank-sponsored programs, despite the several months of high inflation. Credit demand remains strong in the corporate sector, running at nearly 10% per year pace through June, and for NBG continues at these rates into July.
Not surprisingly, in view of the buoyant activity, our first half financial results show a continuation of last year's strong performance, with positive trends in both our balance sheet and especially our profitability. Starting with asset quality. The reduction in NPEs continues, with Q2 organic flows remaining negative as our successful restructuring products continue to produce solid cure rates despite a shrinking FNP pool. As a result, our domestic NPE ratio dropped further in the Q2 by 40 basis points to 6.1%, practically meeting the end year target. Net of provisions, NPE stands at just EUR 400 million, equivalent to about 1% of our loan book. Turning to capital. Our CET1 and total capital ratios stood at 15% and 16.1% on a fully loaded basis.
The positive impact of the completion of the merchant acquiring transaction with EVO Payments should add approximately 60 basis points to this ratio in Q4. The Frontier II transaction signed today would add another 25 basis points upon closing. In view of the soundness of the balance sheet, our efforts have been increasingly focused on improvements in core profitability. In the Q2, core operating profit, which includes trading gains and other one-off items, increased by 24% quarter-on-quarter to EUR 155 million, and by 40% year-on-year in the first half to EUR 280 million, reflecting strong upward momentum for the fifth quarter in a row.
Looking at composition, NII in the first half of 2022 edged higher despite the loss of meaningful NII from Frontier One, as the performing loan book increased by EUR 2.3 billion on a year-over-year basis. Indeed, NII recovered sharply by 8% quarter-over-quarter in Q2 as the domestic PE loan book increased by more than EUR 1 billion in a single quarter. In view of the improved performance and outlook, our full year guidance for NII is revised upwards to broadly flat from a high single digit decline that we had provided a few months ago. On the fee income side, our efforts continue to deliver strong results, with the first half fees up by 23% year-over-year, driven by both the retail and corporate segments.
In view of the performance in the first seven months of the year, our guidance on this line is also being revised up to mid-teen growth from approximately 10% that we had guided previously. Turning to operating costs. As Christos will explain shortly in more detail, despite spiking inflation and the rollout of our strategic IT investment plan, we managed to maintain operating costs broadly flat. In the second half of the year, we anticipate being near this trend. Combined with core income growth, our cost to core income ratio remains on a declining trend, dropping below 49% in the Q2 and was 50% in the first half of the year 2022.
Finally, our cost of risk continued to normalize, dropping just below 70 basis points in the first half of the year, in line with our full year guidance, supported by the above described favorable asset quality trends. All in all, our attributable PAT reached EUR 550 million in the first half of the year. Our strong core operating profit growth was aided by trading income, which benefited from the volatile fixed income interest rate environment. Looking forward, we are well on our way to meet, if not exceed, our full year 2022 guidance for core operating profit of EUR half a billion, despite the fact that the substantial upside to NII from rising rates mostly affects post-2022 results.
Guidance for 2023 at this stage is difficult to articulate in view of the uncertainty surrounding mainly, but not only, energy developments in Europe and the degree to which they will impact the positive momentum in domestic trends, including the boost to NII from the envisaged tightening of monetary policy by the ECB.
With that, I would like to pass the floor to our Group CFO, Christos, who will provide additional insight to our financial performance before we turn to Q&A. Christos?
Thank you, Pavlos. Let's now talk, looking at financial performance in more detail. Starting with the profitability on slide 10, our group profit after tax from continuing operations amounts to EUR 490 million in H1 2022, driven by core operating profit growth, which comes in at an impressive 40% year-on-year to EUR 280 million, driven by solid core income growth and supported by cost containment. Domestic loan disbursements accelerated in Q2 2022, reaching EUR 1.9 billion, up by 80% quarter-on-quarter, driving performing loans higher by an impressive EUR 1.1 billion, helping NII to record a sharp recovery by +8% quarter-on-quarter.
This puts H1 2022 NII back to a growth trajectory, with increasing interest income from performing loans as well as higher bond income already fully absorbing the impact of Frontier One consolidation. Positive NII trends, coupled with sustained income growth of 23% year-on-year, drives our core income higher by 5% year-on-year. Costs were kept near flat despite soaring inflation throughout H1 2022, while cost of risk normalized to just over 70 basis points in line with guidance. All in all, including a strong trading line, our attributable profit after tax for the first half of the year reached EUR 546 million. Turning to balance sheet and asset quality, as depicted on slide 11, negative organic NPE flows led our domestic NPE exposure lower to EUR 1.9 billion, just EUR 0.4 billion net of provisions.
NPE ratio in Greece dropped to 6.1%, 40 basis points lower in the quarter, and nearly seven percentage points on a year-on-year basis, already fulfilling our 6% NPE ratio guidance for the year-end 2022 half a year earlier. Despite measured cost of risk normalization, our domestic cash coverage is up by 300 basis points year-to-date, standing at 81%, by far the highest in the sector. Our solid capital position was maintained in Q2 2022, as shown on slide 12, with fully loaded CET1 and total capital ratios standing at 15% and 16.1% respectively. In terms of quarterly trends, we continued on a capital accretive trajectory as strong profitability in the quarter comfortably absorbed credit risk with asset expansion in the quarter.
All CET1 and total capital ratios align with the year-end 2022 guidance already before factoring in H2 2022 profitability, as well as the additional 60 basis points of capital to be accounted for later in the year upon completion of the merchant acquiring JV. Now, let me walk you through the key drivers of our profitability on slides 13-19. The impressive domestic NII recovery by 9% quarter-on-quarter was mostly driven by the expansion of our performing loan book, resulting from the acceleration in loan disbursements in the corporate segment, driving interest income from performing balances higher for the fourth consecutive quarter. At the same time, lending yield was sustained at a healthy level of 307 basis points. Moreover, the moderate rebalancing of our fixed income portfolio has aided interest income from securities, providing sustainable support to core income.
As a result, NII aged higher in H1 2022, absorbing fully the significant lower contribution from NPEs following Frontier One consolidation in late 2021. Moving on fee income on slide 18, the impressive domestic fee growth of Q1 2022 was sustained in the Q2, pushing fees up by +24% year-on-year in H1 2022, supported by both retail and corporate fees, up by 31% and 21% respectively. Key drivers to this strong performance were card fees, payments, trade finance, and loan origination. Our digital transformation continues to produce impressive results with e-banking transactions up by 23% year-on-year in Q2, reflecting the ongoing migration of our customers to digital channels.
This solid performance comfortably supports our positively revised guidance for fee growth in 2022 in the mid-teens area relative to 7%-10% guided for at the beginning of the year. Turning to costs on slide 19, operating expenses were kept near flat year-on-year, driving our cost to core income ratio further down to 50%, leveraging recovery in core income. Personnel cost reduction of 3% year-on-year, reflective of lower headcount, along with tight demand management, absorbed the pressure on G&A due to inflation and increased depreciation driven by strategic IT investment plan. The latter includes the ongoing replacement of our core banking system, which will constitute a step change in NBG's competitive position, both in terms of improving our service offering as well as increasing productivity and efficiency.
Going forward, further headcount and branch network rationalization will allow us to continue weathering inflation headwinds, keeping costs at bay. Moving on to asset quality on slides 20-23. Consistently negative organic flows keep pushing domestic NPEs lower, reaching EUR 1.9 billion in June, or more importantly, just EUR 0.4 billion net of provisions. Organic NPE flows reflect our strong and continuing track record of successful restructuring. Lower cures in value terms this year represent a natural consequence of the reduced NPE portfolio, especially in the aftermath of Frontier transactions. Nevertheless, new defaults and redefaults are maintained at low levels, while targeted debt forgiveness, supported by the high stock provisions we have built over time, supports NPE reduction.
As a result, our domestic NPE ratio came down by a solid 40 basis points quarter-on-quarter at 6.1%, while coverage stood above 80%. Encouragingly, for yet another quarter, and so far in July, we see no sign of pickup in NPEs from clients previously under state or bank sponsored programs. Turning to liquidity on slides 24-26, fiscal support measures have protected the high and still rising stock of domestic deposits, which settled 3% higher quarter-on-quarter at EUR 52.7 billion. Even though our stock of deposits is large and almost two times that of our performing loan book, the increase in deposits is welcome as it ensures the private cash buffers remain at very high levels, thus cushioning the pressure on household disposable income from inflation.
Time deposit yields have remained at close to zero levels, while the same applies to the bank's blended funding cost, aided by ECB's monetary policy. Summing up, despite headwinds from geopolitical uncertainty and surging inflation, NBG delivered a very strong financial performance in Q2 2022. Our balance sheet has been rendered near clean. Our capital buffers maintained at best in class levels, and our core operating profitability keeps on a positive trajectory, increasing strongly and sustainably. These results demonstrate both our capacity as well as our commitment to deliver or even exceed our targets, continuing on the strong track record of credibility we have built. On this note, I would like to open the floor to questions.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their telephone. If you wish to remove yourself from the question queue, then you may press star and two. Please use your handset when asking your question for better quality. Anyone who has a question may press star and one at this time. One moment for the first question, please. The first question comes from the line of Alevizos Alevizakos with Axia Ventures. Please go ahead.
Hi. Thank you very much, gentlemen, for a very good presentation. I've got a couple of questions, if I may. I realize that you've changed the guidance for the NII from going down maybe single-digit to going flat right now, but you still clearly are actually upgrading your ROTE expectation for the year. Will you think about doing that now, or you will wait for another quarter? Secondly, do you plan also to change the guidance for the cost of risk given that the NPE formation remains at basically negative levels at this stage? I've got another one after those.
Okay. Hi, Alevizos. I will start with the second question. It's a bit early and premature to change our cost of risk guidance for the year end. We reiterate our guidance for about 70 basis points. We're currently at 68 basis points. As far as the return on the tangible equity is concerned, as you rightly said, it's a bit early to revise our figures. We'll monitor the developments. We'll see how the income comes in in the third and fourth quarters, and we'll see about it then. The second question?
The second question was, regarding some of the NII sensitivity scenarios now that we've got a bit of better clarity with the ECB with the first 50 basis points. First of all, could you update us a bit, like, on the numbers going forward? As a second part of that question, what are you using your model as the incremental MREL cost? Thank you.
Okay. The interest rate sensitivity is more or less in the lines that we shared with you guys in the previous results call. I will talk about additional interest income subject to a chunk of 50 basis points increases. If the first 50 basis points that we've seen gives about EUR 70 million of NII. The second 50 basis points are an additional EUR 120 million. If we talk about the 150 basis points cumulative increase, then another EUR 100 million. Then it goes down to around EUR 50-60 million for the fourth 50 basis points chunk.
Now, with regards to the MREL plan that we have and what we have assumed going forward, the plan assumes, probably depending on market conditions, an issuance towards the year end. We are exploring other MREL eligible instruments at the same time. You know, given even current market conditions, what we have put in the price is something over 5% with regards to the cost of such an issuance.
All right. Thank you very much.
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. The first question is on NII in the Q2. You mentioned that you had quite strong performance in the performing loans and also flat yields. Looking at the quarter increase, it was 7% which is still quite higher than the expansion of the performing book. Were there any other factors which contributed to this expansion in the Q2? The second question is a broader one.
You started the presentation with the discussion of the macro outlook, and that Greece is coming out in a different economic cycle than Europe, which was very useful comments and the outlook, but still discussing some of the adverse and stress test scenarios. What scenarios maybe do you see and how do you see this translating into asset quality or some capital metrics if discussing the stress test scenarios? Thank you.
Okay, I'll take the first one, and then the CEO will address the second one. With regards to our NII growth, yeah, as you rightly said, this is mostly driven by our performing loan base. As we disclose on slide 14 of our presentation, about EUR 10 million of the increase is driven quarter on quarter by the increasing performing loan base we have. We also, as I said in my remarks, have had support in the NII growth from securities. That's down to the fact that we're trying to rebalance our portfolio to optimize on it. We've achieved an increase of about seventy million versus the Q1 with regards to NII.
A tough question on 2023. Clearly for 2022, we seem to be doing well through the first half, and the tourist season, which will extend through October, will more or less take us to the end of the year with little uncertainty that we will have a solid macro environment till then. Now, December, the winter and 2023, less clear, very hard to judge. I mentioned in my opening remarks that for 2023 we have the lower bound on growth will be around 1.5%. It's still a growth scenario, even with that scenario comprising energy prices slightly higher than current levels and extending also 2023 at that level. Now, depending on the scenario, you can get a different result.
You can say the price can go up 30%, from the current levels and stay there for a year and a half. That would be a different scenario. I think that almost any scenario you can think of, A, the Greek economy will outperform the European, and two, it's gonna be very hard to see us going to negative territory under almost any scenario, unless you have something really tough on you.
Okay, thank you.
The next question comes from the line of Daniel David with Autonomous. Please go ahead.
Hi, good afternoon, and congratulations on the results. I've just got a couple of quick ones. In your capital slide, I don't think you've got the pro forma benefit of Frontier II. Could I just check, was it 25 basis points boost to CET1 that would happen upon the completion of Frontier II? Then just secondly, picking up on your comments on MREL, you mentioned you're looking at other instruments. Just wondering if you could disclose just a few more details on what they might be, if it is that private issuance such as some of your peers looked at towards the end of last year or anything else. Thanks.
Okay. Now with regard to Frontier, yeah, we just came out today announcing the signing. Based on today's risk-weighted assets, we say that we expect an upside of about 25 basis points. It's a capital activity transaction. Yes, this number is not in the numbers that we disclosed in the presentation, neither in the actual nor in the pro forma. The only additional to the actual numbers so far in the presentation has to do with the completion of the mentioned acquisition, which is expected to materialize towards the end of the year, the Q4 , and then you will see that number. With regards to MREL, eligible instruments other than you know just going out with an issuance that we investigate have to do with structured deposits that fulfill the criteria for MREL eligibility.
We're also exploring a possibility of synthetic securitizations. We are not putting all eggs in one basket and try to be ready to be compliant with our non-binding targets for the first of January 2023, if markets don't allow for an issuance.
Thanks. Could I just double check on Frontier too, is there any kind of date that you think that one might be completed?
Well, the expectation is by end of the year, subject to approvals of the ECB.
Thanks.
As a reminder, if you would like to ask a question, please press star and one on your telephone. The next question comes from the line of Mehmet Sevim with JP Morgan. Please go ahead.
Good evening. Thanks very much for the presentation and congratulations on the results. Quick ones, please. The first one on the very strong loan growth momentum. Clearly, the environment is quite supportive, but the momentum in the Q2 is above and beyond, if I may say so, any expectations from just a few months ago. Can you please give us some color on what's driving this specifically? Are there any corporate segments where you're seeing more growth than you expected previously? Or, is there any one-offs in those numbers that we should be aware of? And secondly, on the trading income, clearly again, a very strong quarter, and if I assume correctly, this will be related to your hedging-related instruments. How should we think about this line in the medium term?
Previously, the sum of the non-core lines, so trading and other income, which comes to about EUR 0, so about flat levels. Going forward, is there any structural change here that we should be taking into account? Would trading income specifically be higher, let's say, come 2023, given the new rate environment, et cetera? Thank you.
Okay, let me start with the loan growth momentum. Clearly, the loan growth is coming from the corporate side. The corporates are a bit choppy. If you go and see in the slide, the disbursements, you see that there are strong quarters and weaker quarters. There is some choppiness in there. I wouldn't call it one-off. The sectors that are seeing the disbursements are clearly hospitality, energy, shipping, infrastructure, what you would expect for the Greek economy as well as manufacturing. There is a little bit of choppiness. I would just smooth a little bit what you're seeing rather than saying there's a one-off with only one size.
Okay, on the second question with regard to trading gains, indeed, in the first half of the year, we had gains from derivatives that were included in hedging relationships. Obviously, the rising interest rate environment gave an opportunity for that. As you rightly say, we wouldn't expect the trading line going forward to be at zero. But certainly, you shouldn't expect, you know, the level of trading gains that we've recognized in the first half of the year.
Okay, thanks very much. Just on the loan growth then, would you say that the momentum so far is higher than what you were expecting, let's say in the first half, or is there some front-loading that we saw, so that we would see some slowdown in the second half?
The pipeline that we're discussing with clients is stronger in the second half than the first half. Now that being said, will there be any delays, some people wanting to, hold back a bit because of, the environment? I don't know. The pipeline is much stronger in the second half than the first half.
Okay. That, that's very clear. Thanks very much.
The next question comes from the line of Alberto Nagel with Mediobanca. Please go ahead.
Yes. Thank you for taking my question. It's a very quick one. On discontinued operation, if you can give us what is included in the quarter and if these restructuring costs should lead to some cost savings in the coming quarters. The second one is on the bond portfolio, if you can elaborate more and give us maybe a guidance on the level that you can reach on the bond portfolio. Thank you.
On the discontinued operations, we do have taken some provisions that would lead to some cost savings in the future. As we said in the remarks, we are trying to rationalize our footprints across network and FTE footprints. Work is being done in that respect. With regards to our bond portfolio, currently we have about EUR 14 billion of bonds. 95% of it is classified under held to collect. We don't have any volatility in equity from that. The rest is held to collect and sell, which is fully hedged, so we don't have any volatility overall in equity from that. We don't have an appetite to significantly increase the position.
We think we're well where we are at the moment. You shouldn't expect any great movements in the next quarters.
Thank you.
The next question comes from the line of Osman Memisoglu with Ambrosia Capital. Please go ahead.
Hi, many thanks for taking my question. Just to follow up on the previous question on issuance then. You were mentioning in the past maybe appetite for tier two or tier one, but under these conditions of the market, shall we assume it's just going to be a senior issuance for the end of the year? Thanks.
Yeah, most probably, yes. If we decide to come out, it looks like it's going to be more of a legacy.
Okay. Thank you.
Once again, to register for a question, please press star and one on your telephone. As a final reminder, to register for a question, please press star and one on your telephone. Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Pavlos Mylonas for any closing comments. Thank you.
Thank you for joining us on a Friday afternoon in late July. I hope you all have a relaxing vacation. Don't turn on the air conditioning too high. It consumes electricity. Hopefully we'll see you in September. Thank you.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for calling, and have a pleasant evening.