Ladies and gentlemen, thank you for standing by. I'm Constantinos, your call, call operator. Welcome, and thank you for joining the Eurobank Holdings 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. Fokion Karavias, CEO. Mr. Karavias, you may now proceed.
Thank you. Ladies and gentlemen, good afternoon, and welcome to the Eurobank nine-month 2023 results presentation. Together with me is our CFO, Harris Kokologiannis, and the investor relations team. We will start with some key recent developments, then present our results and answer your questions. In an environment of weak European growth and geopolitical turmoil, the macroeconomic outlook of our three core markets stand out. Economic growth in Greece is expected around 2.5% for this year and the next, a multiple of the EU average. The government is committed to fiscal discipline, with primary balance increasing from 1% this year to 2% of GDP in 2024. Growth prospects, solid public finances, together with the strengthening of the banking sector balance sheets, were the primary drivers for the sovereign's return to investment grade. Economic sentiment remains positive.
Tourism had a record year, unemployment ratio further decreases, and real estate prices remain resilient. Investments play a key role in the growth of performance, and Greece aims to close the gap in gross capital formation as a percentage of GDP with the European average. Accelerated investments will be one of the catalysts for faster loan growth in the next years, as also confirmed by the number of projects already submitted to the RRF scheme, now in excess of EUR 20 billion. Now, let's hear our financial results for the nine-month period, as highlighted on slides five to nine. Eurobank had a strong performance across segments and geographies, with net profit excluding one-off gains, reaching EUR 916 million.
As a result, tangible book value per share increased by 21% year-over-year to EUR 1.97, while the return on tangible book value reached 18% in the nine-month period. In more detail, net interest income remained on a strong trend, increasing further by 3% on a quarter-over-quarter basis and 55% year-over-year. This was driven by higher Euribor rates, while the deposits base increase remains moderate. Fees, despite a weaker third quarter, increased by 6% year-over-year, which is in line with the trend expected for the full year. The cost-to-income ratio remains low at 33%. As a result, corporate provision income was up by 72% year-over-year. Core operating profit reached EUR 1.1 billion, up by 85% year-over-year.
Our regional operations continued their strong performance, with net profits of EUR 342 million in the nine-month period, more than double on an annual basis. Bulgaria's contribution increased EUR 150 million, and Cyprus, EUR 170 million. The Cyprus figure also includes the Hellenic Bank quarter contribution of EUR 30 million. Asset quality remains resilient in the third quarter. More specifically, we reached an NPA ratio at 4.9%, while coverage remains at 75. The cost of risk ratio was 84 basis points in the nine-month period, in line with our full-year guidance. Our fully loaded CET1 ratio rose to 16.8% in the 9-month period, up by 260 basis points year-on-year, while the total capital ratio to 19.5%.
With our capital ratios well above the internal targets, we aim to utilize excess capital along three pillars. First, to finance loan growth. Although the credit expansion this year is below our initial expectations, this is due to loan repayments and high interest rates, we expect that it will recover in 2024 onwards. Second, to fund M&A opportunities, enhancing our business franchise. In this context, we have signed agreements to increase our stake in Hellenic Bank of Cyprus to 55% from 29% currently, subject to regulatory approvals. This transaction should consume roughly 80 basis points of our capital, and it is EPS accretive. Third, to reward shareholders. In this respect, the share buyback of the HFSF shares was completed, leading to EPS accretion for shareholders. Furthermore, as previously discussed, we plan a dividend payout ratio of at least 25% out of 2023 profits.
Overall, the bank is in a solid trajectory, and the nine-month results point to upgrading our full year estimates, as shown on slide 10, to achieve a return on tangible book value of 17% for the full year 2023. At this point, I would like to ask our CFO, Harris Kokologiannis, to present our nine-month results before opening the Q&A session.
Thank you, Fokion. Let me now provide more insight on the third quarter results. Starting on page 19 on lending growth. Performing loans increased during the nine-month period by EUR 700 million, still below our expectations. In terms of investments, fourth quarter appears to be the focus of the year, driving the full year net credit growth to more than EUR 1 billion. Group deposits recorded a solid third quarter, increasing by EUR 600 million , as shown on page 20.
As a result, net loans deposit ratio decreased to 72%, while LCR ratio reached 171%, as shown at the left of page 21. As regards managed funds on page 23, in parallel with the positive trajectory, the sector continued its strong performance. Year to date, managed funds increased by EUR 800 million, and private banking assets and liabilities by EUR 1.6 billion. Moving to profitability on page 27, net interest income increased quarter-over-quarter by 3.4% to EUR 558 million. NII has been boosted by the further Euribor increase and the [audio distortion] . On the other hand, it has been affected by the cost of all deposits interest rate hedging. This initiative aims at reducing significantly our NII sensitivity in the downward side of interest rates. On a year-on-year basis, NII is higher by 55%.
On page 28, commission income is higher year-on-year by 6.2%. In the third quarter, in particular, all the lines are up, with the exception of lending fees, mainly due to seasonally lower disbursements. Full-year outlook points to a mid-single-digit growth, which is better than our projections. Operating costs are almost flat increased, despite inflationary pressures. On a group basis, costs are higher by 5.9%. The increase is driven by Hellenic operations, namely salary adjustments and the incorporation of Bank of Cyprus, as well as the go-live on the new ecosystem in Cyprus. Finally, on this page, cost-to-income ratio has been improved year-on-year by 10 percentage points, decreasing to 33%. On page 31, we summarize operating performance for the nine-month period.
Core PPI is higher year-on-year by 72%, at EUR 1.33 billion, driven by the bond effect, high loan and bond volumes, better conditions, and higher core income from SEE, offsetting lower TRO income and higher M&A costs. Loans produced for the period amounted to EUR 255 million, or 84 basis points. As a result, core operating profit is higher year-on-year by 85% at EUR 1.08 billion. Furthermore, there is a EUR 30 million additional income, which is recorded for the moment as income from associates. This corresponds to the quarterly performance of Hellenic Bank for up 29% participation. The above constitutes a 10% accretion to our quarterly EPS. Upon reception of regulatory approvals, Hellenic Bank results will be consolidated line by line.
Moving on to asset quality on page 33, NPA ratio fell below the 5% mark at 4.9%, while coverage increased to 75%. This is the result of accelerated write-offs and the containment reformation of EUR 27 million. Moving on capital and on page 38, our fully loaded CET1 ratio increased quarter on quarter by 30 basis points to 16.4%. This is driven by circa 50 basis points organic growth, while the impact of HFSF shares buyback is also included. Furthermore, taking into account the upcoming synthetic securitization, the pro forma fully loaded CET1 ratio amounts to 16.8%.... Finally, on capital and on page 39, our total capital ratio stands at 19.5%. The overall performance points to a further upward revision of our full year 2023 financial targets, as shown on page 10.
Core PPI is now expected to be at circa EUR 1.8 billion, and core profit at EUR 1.4 billion. NPE ratio is anticipated at circa 4.5%. Fully loaded CET1 academic outlook is above 17%. Finally, return on tangible book value is now estimated at circa 17% and EPS higher than EUR 0.30. This completes my presentation, and we may now open the floor for your questions.
The first question is from the line of Mikhail Butkov with Goldman Sachs. Please go ahead.
Good day. Thank you very much for the presentation. I have a couple of questions. Firstly, on your NII outlook, do you expect NII to peak, considering recent trends? And also, do you use any structural hedges to extend higher net interest margins after the rate cutting cycle begins? So that's the first question. The second question relates to the Hellenic Bank. How do you see this entity operating together with your existing Eurobank operations in Cyprus, following the transaction? Do you plan to merge the operations and balance sheets somehow? And also, when do you expect this deal to close? And the last question is on your inorganic expansionary plans.
Earlier, you mentioned that you explore opportunities for international wealth management expansion in some geographies. Can you please provide any update on that front? Thank you very much.
Thank you for your question. Let's let me start with NII, and then I hope you will address the couple of questions. In the third quarter, NII was up by EUR 8 million quarter-on-quarter, driven by Euribor rates and asset growth, but it has been affected by more or less EUR 16 million with interest rate hedging. And the purpose, as I said in my speech, is to reduce significantly the NII sensitivity quite significantly. So, to be a bit more precise, assuming no change to our current hedging position and the deposit beta, the sensitivity for a 100 basis point decrease of rates is circa -5% from the run rate of the third quarter NII.
Now, of course, in the third quarter, NII increase was decelerated due to interest rate hedges, initiation. Assuming current level of hedging, we may see the peak in Q4, but I would say not substantially different levels than the third quarter.
Okay. Now, in terms of the Hellenic Bank, as we have already announced last August, we signed PSAs with PIMCO, Senvest, and Wargaming to increase our participation from 29% to 55%. This, the completion of these transactions are subject to regulatory approvals, and as we speak, we are in this process. We seek approvals from the ECB and Bank of Cyprus, the Superintendent of Insurance Companies in Cyprus, and the Cyprus Competition Commission. We should have the approvals sometime between the second quarter of 2024 or early third quarter.
So far the process goes forward according to the plan. As soon as we receive the approvals, we will close the transactions that I just mentioned, and we are going also to launch a mandatory tender offer according to the laws of Cyprus. At that point, we will fully consolidate the financial figures of Hellenic Bank to our figures. Hellenic Bank will become a subsidiary of the Eurobank Group. In terms of capital, the effect is going to be about eight basis points. In terms of EPS accretion, we should be able to provide you exact figures about EPS accretion, about synergies, as well as about our plan to potentially merge Eurobank Cyprus with Hellenic Bank as soon as we receive the regulatory approvals.
However, as mentioned, already in the third quarter, without consolidation, we got earnings accretion of about EUR 30 million out of the bottom line of EUR 300 million, or about 10%. This corresponds only to the 29% of our current participation. For the full- year, 2023, the Hellenic Bank management projects that, profits before tax should be of the order of EUR 300 million. Taking into account the Eurobank, 2023 estimated profit before tax, let's say circa EUR 1.5 billion. You could make your own estimate, about the size of the accretion, not only in terms of EPS, but also in terms of the core PPI upon full consolidation.
Now, on your last question, regarding international expansion, we have stated a number of times that our group operates in three core markets, which is Greece, Bulgaria, and Cyprus. We operate in these three core markets as a universal bank, offering services across all segments of our clients. And at the moment, we don't have any plans to expand the universal banking model to any other country. However, in terms of wealth management, we may seek the opportunity to expand our reach in countries on top of the three that I mentioned. And this may be countries in Southeastern Europe and Eastern Mediterranean. Now, we are in the early stages of designing this strategy, and we will update you accordingly when we have more concrete plans.
Thank you very much. Just small clarification on NII. So you mentioned that your sensitivity currently for 100 basis points cut is 5% negative impact on NII, and that you initiate... And this is because you initiated hedges?
Correct.
Correct.
That is absolutely correct.
Good. Thank you. Thank you very much for the answers.
The next question comes from the line of Sevim Mehmet with JP Morgan. Please go ahead.
Good evening. Thanks very much for the presentation. Just one more follow-up on the Hellenic Bank acquisition, if I may. You mentioned the 80 basis points expected capital impact. Would you be able to break this down into the individual components? I know the RWA impact, obviously we can calculate, but just the negative goodwill from there. But also, would there be any difference in timing when it comes to the recognition of RWAs and the negative goodwill from a regulatory perspective? And can I just check if there could be any implications therefore on, you know, dividend payments, et cetera, for next year stemming from that?
Finally, would you be able to share? I appreciate maybe not, but anything at this point on your final potential stake, and basically, yeah, where we'll get to following the tender process? Thanks so much.
Now, the 80 basis points include both the effect of the negative goodwill as well as the effect of the risk-weighted assets that will come on our balance sheet. And the two steps will come together in at the same moment. Therefore, the effect of the 80 basis points, given the buffer that we have in terms of capital above the, let's say, management targets of CET1, are not going to affect at all our strategy in terms of dividend payments. Our buffers are in excess of these 80 basis points, well in excess of these 80 basis points. So this is about the capital effect. What was the rest of your question, please?
Thank you. It was just the tender offer and the final, take.
Okay, now, as we said, we, with the transaction that we have already signed, we're going to reach 55%. Then a mandatory tender offer will follow. We cannot make an estimate of what the participation would be. But in terms of our strategy, the higher the participation, the more desirable it would be from our side.
That applies by one more leg of the question. There is not going to be a time discrepancy between the accounting consolidation and the regulatory impact. This, the timing of it will be the same, exactly the same. Nor we are going to change that [audio distortion] condition and T plus one, the negative goodwill. Both of them will be at the same point of time.
That's great, and all very clear. Thanks very much.
... The next question comes from the line of Ismailou Eleni with Axia Ventures. Please go ahead.
Hello, and congratulations for this set of results. Just a couple of questions from my side. One is, how do you see the evolution of credit spreads and your lending expansion, and how can this affect your stability throughout the years when rates will flatten and then start going down? And secondly, I just another follow-up on the Hellenic Bank, how do you envision using the bank's liquidity going forward? Thank you.
Let me start from the second question, and then Harris will follow up with the credit spreads. We expect to have a number of synergies through Hellenic Bank, both in terms of cost as well as in terms of revenue. And one source of synergies from the revenue side comes from the more efficient use of the liquidity of Hellenic Bank. We have already some plans about it, but as I mentioned before, I should be able to expand on that as soon as we receive the regulatory approvals.
On lending spreads, we show the picture on page 25 of the presentation. So there is a number of observations out of this page.
First, on corporate, this quarter, there is a quite gentle decline of by 7 basis points on corporate spreads. In our budget, we had assumed a quite steeper, I would say, decline. But the situation appears to be quite more manageable, although there is a quite strong corporate competition on corporate lending. For the moment, it appears that any decline on corporate spread is very measurable. On the retail, you may notice the effect on mortgage portfolio of the interest rate cap that we have implemented as of end of the second quarter of this year. So for this reason, you may observe a 30 basis points decrease on mortgage spreads.
While in consumer, it's actually the, it's a technical impact as Euribor goes up, while consumer, in its vast majority, the products are fixed rates. And what we are quite careful in repricing upwards such products take into account any potential asset quality implications. In general, and setting aside the issue of cap on mortgage loans, I would say that the trajectory in spreads is a bit better than what we initially expected.
That's very clear. Thank you very much.
The next question is from the line of Osman Memisoglu with Ambrosia Capital. Please go ahead.
Hello, many thanks for your time and presentation. Just a few on my side, please. First one, just a clarification on the hedging process. Are you currently where you would like to be, or are you planning to increase further the hedging activities? That's the first one. Then, on asset quality, if you could give us any color on how Q4 is trending, that would be helpful. Any color into 2024, if possible. And finally, on the PE loan growth, I noticed a very slight decrease in your retail consumer loans in Greece. And having heard some encouraging news earlier this day from a peer of yours, I was wondering how you are seeing retail lending, especially for 2024. Thank you.
Okay, let me start from the asset quality, but let me make a general statement about 2024. We would provide you a full outlook about the year, including financials, asset quality trends, and loan growth, when we present our full year 2023 financial results early next year. Now, in terms of asset quality, as you have noticed, and we present that on page 33, the third quarter dynamics were rather stable. Formation was very, very close to zero, EUR 27 billion. And also you should notice that also Stage Two loans have further decreased during the quarter, as we present on page 36.
Furthermore, asset quality remains resilient also in Bulgaria and Cyprus, as we saw on pages 14 and 16 respectively, with the NPL ratios in both countries declining. We expect fourth quarter formation to be more or less at the same levels of Q3, and the NPL ratio to be further reduced to circa 4.5% at the end of 2023, taking also into account further write-offs. The NPL ratio could decline further below 4% over the next two quarters, not only through inbound workouts and accelerated write-offs, but also through the outright sale of a medium size, small to medium size NPL portfolio.
Last but not least, in terms of cost, cost of risk for the full year 2023, as I said also during my introduction, it's going to remain at our recent guidance of 85 basis points.
About, I'm sorry, about, [audio distortion], I think that my answer is gonna be very short. Actually, we constantly reassess education based on the interest rate trajectory and to reassess that on a dynamic basis.
Thank you, and on retail lending, any changes in the environment?
I would say that there are two phases on retail lending. There is mortgage that are continues to be quite weak. Not the real estate transactions, but the lending side. We have a lot of transactions taking place with surplus cash. On the other side, we see a quite noticeable revitalization of consumer lending, especially some mixed products and credit cards. Quarter by quarter, we see that the volume, the figures are quite small for the moment, but in the detail, we see a revamping of consumer lending, and it is one of the areas that we expect more to come in in 2020, 2024.
As you may have seen, the big figures are coming and will continue to come for the next quarters from the corporate book portfolio.
Understood. Thank you.
The next question is from the line of Daniel David with Autonomous Research. Please go ahead.
Good afternoon. Congratulations on the results. Just a quick one on the issuance. Noting your activity last year in Tier 2 markets, just interested to hear your thoughts on issuance plans, whether we could see anything in Q4 or what next year looks like. And also could there be an AT1 in the plan? Thanks.
Okay, so, third quarter MREL ratio stood at 23.7%, and it's already above the January 1, 2024, non-binding MREL target of 23.19%. The final MREL target, as so, as we saw, we said that 27.8% of RWA, and the compliance horizon leads until end 2025. In terms of initiatives in within 2023, as you may see, we have no need, as we have covered the target for the year, and the MREL ratio will increase further in the rest of the year due to organic profitability. However, the definitive decision on whether we'll be proactive as regards the 2024 issuing plan will be taken in the coming weeks, I would say.
As regards Tier 2, depending on market conditions, we may proceed to a Tier 2 issuance sometime in the coming quarters to compensate for the amortization of the existing Tier 2 instruments by the Hellenic Republic. However, this is not probable for at least 2023. As regards AT1, there is no any plan for AT1 issuance.
Mr. David, have you finished with your questions?
Oh, okay. Thank you.
The next question is a follow-up question from the line of Mikhail Butkov with Goldman Sachs. Please go ahead.
Yeah, thank you very much. Just one more question. Do you see any implications from the recent S&P upgrade for your risk weight and densities, if any? Thank you.
You mean the sovereign upgrade, right?
Yeah, the sovereign upgrade-
Ah.
Yeah.
This will definitely help us on the banking sector overall, and definitely Eurobank, in terms of the cost of our MREL issuance. This is definitely something positive. However, what is going to be even more important is the flow of investments that we expect in the country. Definitely, the returning to investment grade should improve investment flow, and, as I mentioned in my introduction, this is one of the main objectives of the economic policy at the moment.
... Okay, and I assume for the risk-weighted assets you do not expect big changes from this upgrade then?
Anything material at the moment.
Okay. Okay, thank you very much.
The next question is from the line of Alexandros Boulougouris. Alexandros with Euroxx Securities, please go ahead.
Yes, hello. Congratulations and very well. So a quick question on lending growth and, especially in the corporate space in, in the local market. We've seen, balances, performing balances relatively flat as in the past quarter. And on your guidance, you, you gave a bit of guidance for full year in terms of performing. How do you see the outlook for, for Q4? And maybe if you can give a, a color on 2024, if possible. Thank you.
So, as you may have seen, performing loans have been expanded by EUR 700 million in the first nine months of the year. This coming primarily from Bulgaria and Cyprus. The loan growth, we have to accept that although below our expectations, was still positive, which is better than in other parts of Europe. We expect performing loans to grow overall by something more than EUR 1 billion for the full year 2023. So we should expect something more than EUR 300 million in the last quarter of the year. And this growth may be coming by both Greece and our Southeastern Europe subsidiary.
We feel confident that the growth will resume in 2024 as the pace of the payments has been faded out gradually, and a number of projects which were delayed in 2023 are expected to be launched next year. As a first hint, although we are still in the budget preparation phase, I will say that in 2024, SCE is anticipated to grow by high single digit rates, while Greece is expected to grow by a mid single digit rate. These are some first estimates. We are going to be more precise during the business conference presentation early 2024.
Okay. Thank you very much.
Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Karavias for any closing comments. Thank you.
Thank you. Let me thank you all for participating and attending this call. Thank you also for your questions. Our investor relations, Harris, and myself will be available for any follow-up. 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.