Ladies and gentlemen, thank you for standing by. I am Mina, your core call operator. Welcome, and thank you for joining the Eurobank Holdings conference call to present and discuss the second quarter 2023 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. Fokion Karavias, CEO. Mr. Karavias, you may now proceed.
Thank you. Ladies and gentlemen, good afternoon, and welcome to the Eurobank first half 2023 results presentation. Together with me is our CFO, Harris Kokologiannis, and the investor relations team. We will start with some key developments, then present our results and answer your questions. Our three core markets, Greece, Bulgaria, and Cyprus, stand out in terms of growth outlook, despite the weakening EU macro environment. Greece, in particular, is expected to outperform in the next three years, given the stable political background and the strong investment momentum. The sovereign rating upgrade seems to be only a matter of time, and the market is already discounting it, as evidenced by the Greek government bond spreads. Economic sentiment remains strong, labor market developments are positive, with unemployment declining further, and the real estate market appears robust.
Furthermore, the investment pipeline is building up, as evidenced with projects already submitted to the RRF in excess of EUR 15 billion. The banking sector in Greece experienced a mild credit contraction in the first half of the year, as corporates used excess liquidity to repay loans in reaction to high interest rates, a trend also seen in other European countries. We expect the loan demand to accelerate in the second half of the year. Private sector deposits have also been affected by corporates utilizing their liquidity to reduce loans, while household deposits have increased. Let's see our financial results for the first half of the year, as highlighted on slides 5 to 9. Eurobank had a strong performance across all areas in the first half, with net profit, excluding one-off gains, reaching EUR 600 million.
As a result, tangible book value per share increased by 19% year-on-year to EUR 1.90, while the return on tangible book value reached 18% in the first half of the year. In more detail, net interest income remains in a very strong trend, increasing further in the second quarter and rising 56% year-on-year. This was driven by higher Euribor rates, while the deposit beta increase was moderate and below our initial expectations. Fees increased by 10% year-on-year, beating our projections. The cost-to-income ratio reached a new low at 33%. As a result, core pre-provision income was up by 76% year-on-year. Moving now to asset quality. In the second quarter, despite a single corporate NP inflow, the underlying asset quality remained stable. The NPE ratio stood at 5.2%, and coverage at 73.
The cost of risk reached 81 basis points in the first half of the year. Core operating profit, that is, Core PPI minus provisions, jumped to EUR 705 million, up by 89% and 10% year-on-year and quarter-on-quarter, respectively. Our net profits in the first half of the year reached EUR 684 million. Our regional operations continued with their strong performance. More specifically, year-on-year, Core PPI increased by 40% in Bulgaria and in excess of 100% in Cyprus. In total, net profits reached EUR 205 million in the first half, more than double on an annual basis. Moving now into capital. In the second quarter, our capital ratios boosted by circa 80 basis points of organic performance. Total capital ratio reached at 19%, while the fully loaded CET1 at 16.3%.
Overall, our performance in the first half was above our expectations. As such, we revised upwards most of our financial goals for the full year 2023, as presented in detail on slide 10. We now expect return on tangible book value to be well above 15% in 2023, with earnings per share at circa €0.28. The recent AGM approved the share buyback, and we are planning to bid for the HFSF stake in early September. As I also mentioned during our AGM, shareholder reward is a top priority, with dividend distribution targeted at 25% out of 2023 profits. At this point, I would like to ask our CFO, Harris Kokologiannis, to present our first half results before opening the Q&A session.
Thank you, Fokion. Let's now provide more insight on the second quarter results. Starting on page 19, on lending growth. Performing loans increased organically in the first half of the year by EUR 500 million, driven by Southeastern Europe operations, with Greece remaining slow in the same period. In addition to the organic growth, performing loans increased in the second quarter by EUR 450 million, related with the BNP consumer business consolidation in Bulgaria. In the second half of the year, SCE will continue its strong momentum, while in Greece, we expect an acceleration of corporate lending growth. Overall, for the full year 2023, we expect performing loans to increase by circa EUR 2 billion, compared with an initial target of EUR 2.8 billion. Moving on deposits and liquidity on page 20 and 21.
As shown at the left of page 20, group deposits increased in the second quarter by EUR 800 million, driven by Greek retail, Luxembourg, and Cyprus. Net loans to deposit ratio remained broadly stable at 72.6%, while LCR ratio reached 174%, as shown at the left of page 21. As regards assets under management on page 23, wealth sector continued its strong performance, showing a year-to-date increase by EUR 0.7 billion and to EUR 1.5 billion in managed funds and private banking customers assets and liabilities, respectively. Moving to profitability on page 27, net interest income increased quarter-on-quarter by 7.5% to EUR 540 million. NII has been affected positively by the Euribor increase and new lending, and negatively by the full quarter effect of late SMRA issuance.
On a year-on-year basis, NII is higher by 56%. On page 28, commission income increased quarter-on-quarter by 8.7% and year-on-year by 10%, despite the disinvestment of Merchant Acquiring business in June 2022. The strong performance is driven by the lending, network related, and credit card issue increase. On page 29, operating costs increased year-on-year, increased by 0.8%. On a group basis, costs are higher by 5.7%, driven by the inflationary pressures and the BNP consolidation in Bulgaria, as well as by the go-live of the new core IT system in Cyprus. Finally, on this page, cost to core income ratio has been improved year-on-year by more than 12 percentage points, decreasing to 33%. On page 31, we summarize operating performance for the first half of the year.
Core PPI is higher year-on-year by 76%, at EUR 869 million, driven by the Euribor effect, higher loan and bond volumes, better commissions, and higher core income outside Greece, offsetting higher MREL costs. Loan loss provisions for the period amounted to EUR 164 million or 81 basis points. As a result, core operating profit is higher year-on-year by 89% at EUR 705 million. Moving on to asset quality on page 33. As shown at the top left of the page, underlying NPE formation in the second quarter was slightly positive at EUR 13 billion, well below the guidance that we had provided. However, we classified as UTP, a single corporate exposure with idiosyncratic characteristics amounting to EUR 119 million.
As a result, NPE ratio increased slightly to 5.2% from 5.1 last quarter, while coverage reached 73%. Moving on capital and on page 38, our fully loaded CET1 ratio enhanced quarter-on-quarter by 40 basis points to 16.1%. This is driven by circa 80 basis points organic growth, partly offset by M&A activity, specifically by the acquisition of an additional 13.4% at Hellenic Bank and of BNP in Bulgaria. Taking into account the upcoming synthetic securitization and the share buyback by HFSF, the pro forma fully loaded CET1 ratio amounts to 16.3%. On capital and on page 39, our total capital ratio stands at 18.8% or pro forma at 19%.
The overall first half performance points to an upward revision of our full year 2023 financial targets, as shown on page 10. Core PPI is now expected to reach EUR 1.7 billion versus an initial target of EUR 1.4 billion. This mainly relates with high Euribor rates, measured increase of deposit beta, high commissions, and lower OpEx. Core profit is expected to be above EUR 1.3 billion versus EUR 1.1 billion before, with cost of risk target remaining at 85 basis points. NPL ratio will be slightly lower at 5% or below. Fully loaded CET1, CET1 updated outlook is now at 17% and total cuts at 20%, 100 basis points higher than initial target. Finally, return on tangible book value is now estimated to be higher than 15% and EPS at circa EUR 0.28.
This completes my presentation, and we may now open the floor for your 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 is from the line of Alevizos Alevizakos with Axia Ventures. Please go ahead.
Hi, thank you very much for the presentation. Congratulations on another good set of results. I've got a couple of questions and a follow-up after that. First question, I feel like the tax expense this quarter is a bit lower. Is that correct? If so, what is the reason? Then, the second question is, can you confirm whether what is the dividend accrual for this year, for 2023, that you're taking in terms of a % of the earnings?
Sure. As regards your first question, in the second quarter, the group recognized circa EUR 51 million DTA that relates with the tax loss from the sale of an REO portfolio in Bulgaria. This is the reason why the ETR in the second quarter is circa 10% versus a regular one of 22%-23%. Now, as regards dividend accrual, according to IFRS, we do not and we cannot approve for a dividend. What we have included on page 38 on capital, we present pro forma the impact of share buyback, that is an indirect dividend, on the terminal pro forma second quarter CET1 ratio.
Okay. Since, since you are on page 38, the other question is for Hellenic Bank. I'm, I'm not sure I understand why it actually reduces the CET1 capital ratio, because there is also an income statement positive amount of about EUR 110 million. What is the reason for that, even though you recognize some negative goodwill?
The reason is that with, the 13%, we exceed the 20% threshold, and we change accounting treatment. In the past, we used to account that as a fair value through OCI. Now, we, we treat that as an associate. Associate, associate has a, a different risk weighting, so that differentiates the is, is causing the impact, the impact.
Okay, thank you. The last one about which was the follow-up is, do you have some actual timing details about the HFSF buyback?
I said before in my introductory note that we're going to submit a bid for the HFSF, HFSF stake in early September. This is the timing, and the process should be quite quick from the side of the HFSF. This is the feedback that we have received. Therefore, the transaction should be completed within the month of September.
Great. Thank you very much.
The next question is from the line of Mehmet Sevim with JP Morgan. Please go ahead.
Good afternoon. Thank you very much for the presentation. I have two questions, please. Firstly, on your growth guidance downgrade, I'd like to better understand it. Firstly, how much of that comes from Greece, and how much from the international franchise? Assuming this is partly a result of higher interest rates in the country now, do you see a risk to your longer term growth prospects? Maybe can you put a number to it, let's say, for 2024? I appreciate it's quite early, but, in terms of percentage, et cetera, that would be very helpful. Secondly, on deposit betas, if I'm not mistaken, you're guiding for an average deposit beta of 35% by year-end 2023. Where do you see them now in your revised guidance?
Maybe beyond 2023, I do appreciate the structural underpinnings of Greek banks, but assuming rates now at 4%, how sustainable do you think is the current low deposit beta momentum? Where, where would you see them, let's say, in 2024 and 2025? Thank you.
Let's start from the, from the loan growth, and then we pass to deposit beta. It is true that there has been a slowdown in the growth of performing loans in first half of 2023 in the Greek market. This was mostly due to the high repayments from corporates and drawing current liquidity, and in general, due to high interest rates. Eurobank performing loans have expanded by EUR 500 million in the first 6 months of the year, and this was driven by the SEE business.
Going forward for the rest of the year, we expect loan growth in Greece to accelerate considering the pipeline that we have in the projects in which we are involved, and they relate primarily to energy, but also to tourism, shipping, construction, renewables, and manufacturing. As regards SEE, we expect a similar strong momentum in the second half of the year, similar as the first one. At any case, for the full year 2023, we revise downwards our growth target for EUR 2 billion versus EUR 2.8 billion initially.
Now, as regards to the composition of this remaining EUR 1.5 billion, close to EUR 500 million or one third is expected to come from SEE, the rest EUR 1 billion from the Greek corporate sector. As regards retail, we don't expect any material contribution. Now, as regards deposit beta, it is true that our first half, we set a mark quite better than what we initially expected in our budget. Just to remind you, the marks for the full year 2023, we expected an average, a beta of 35%. In the first half, the beta is at 16%.
The estimate for the second half is close to 25%, and the revised beta for the full year 2023, is slightly above 20%. This is the, the estimates, the latest estimate that we have, we have done in order to produce the updated outlook. Now, as regards 2024 and 2025, we haven't updated the, the beta. Of course, we expect to be better than what we had provided in the business plan. Most probably, we are going to provide and now an outlook as we do every year in the full year results.
Okay, that's all very helpful. Thanks very much.
The next 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 two questions. One is on the capital. Your capital adequacy level guided at 17% this year and further improvement like in the next years. It's already quite high number by any standard, by European and emerging markets. What capital allocation opportunities do you see except for dividend in the near or medium term? The second question is with regards to your international exposures, which are quite sizable, and among them, you also have exposure to the Central Eastern Europe. In the Central Eastern Europe, we can hear that inflation is coming down and some central banks are guiding for earlier than expected reduction in rates.
What outlook on rates do you expect in Bulgaria, and what contribution or impact it can have on your NII? Basically, do you have a positive or neutralish NII sensitivity in your international businesses? Thank you very much.
Thank you for your questions. Let me start from the second question. Outside Greece, our two main markets are Bulgaria and Cyprus. Cyprus is in the Eurozone, therefore there is no different outlook. In terms of Bulgaria.
... you know that there is a currency peg in Bulgaria, and therefore, the monetary policy follows very closely ECB rates. There is already a plan by the country to join the euro by January 1, 2025. Therefore, we don't expect any sort of deviations from the euro monetary policy, and therefore, we don't expect any sort of effect from our NII in this country. Now, in terms of our capital position, you stated very correctly that, at the 70%, we are quite higher than the European average, and definitely we are quite higher than our target, CET1, which is in the area of 14.5%. Now, how we can use this excess capital?
We have already stated that excess capital will be used to fund the loan growth, that has been sluggish in the first half of the year, but we expect an acceleration through in the second half of 2023, but also in 2024. I mentioned before that there are already EUR 15 billion of investment projects submitted in the RRF. Only a portion of them have been dispersed so far. There is a strong pipeline for further disbursements. One use of the excess capital is to fund our loan growth, both in Greece as well as in Cyprus and Bulgaria. The second is to finance any sort of M&A opportunities that we may identify in any of the three core markets in which we are active.
Obviously, the third is shareholder reward. I mentioned also in my introduction that we are targeting 25% payout ratio for 2024, out of the profits of 2023. Anyway, the excess capital will not run down by any sort of big extraordinary distribution or any sort of big transaction, but is going to be a gradual process through which is going to be reduced and partially returned to shareholders. All right. Thank you very much for these comments.
As a reminder, if you would like to ask a question, please press star and 1 on your telephone. The next question is from the line of Osman Memisoglu with Ambrosia Capital. Please go ahead.
Hello, many thanks for the presentation. Just wanted to get back to deposits and specifically shift to time deposits. I see it relatively growing less in Greece as, as from your Excel sheet, only 2% up or so in this quarter. The international side, though, continues to go up quite at a rapid pace. Where do you see that, particularly on the international side? Then going to the loan growth side, just following up on your comments, the corporate side seems like will pick up, is picking up. Any color on retail lending? I know it's not really anything happening there now, but what's the outlook there, if, if, if there are any signals, if, if you think there's a turnaround sometime in 2024? Thank you.
Let me start with the deposit mix, and then Fokion may elaborate on the retail dynamics. In the initial, in our business plan, we had assumed a time contribution to total deposits on a group basis of 40%. In the first half of the year, the mix, the average mix was at 25%. Our updated estimate for the full 2023, the revised estimate is for a time contribution to total of close to 30%. This assumes a second half estimate of close to 35%. This is on a group basis, and we don't see any, let's say, material deviation between the Greek and the international dynamics. Now let's pass to Fotio. Okay.
With respect to retail lending, you are right that so far has been sluggish. Looking forward, if I could run the different segments in terms of their potential, I would say that we are most active in consumer lending, both in Greece as well as in Bulgaria. In, in, in Greece, in a number of different sub-segments of consumer lending, this is something that we expect to pick up further in the coming months.
... in Bulgaria through the acquisition of the BNP consumer lending franchise in this country. Second, in terms of potentially the small business lending that especially in Greece, is expected to gain some momentum. Third would be mortgages, with the main reason that we have quite significant amortization of the portfolio every quarter, which reduces the potential for balances increase. In summary, retail should play a more important role in terms of the lending contribution and composition, 2024 onwards.
Thank you for that. Maybe, more of a technical, question? On the tax side, you mentioned some DTA support for Q2. For the rest of the year, and maybe 2024, any color on, on has anything changed on the Effective Tax Rate output?
No, we don't expect any, at least I cannot imagine something that going forward may change materially the ETR that is expected to move at 22%-25%. Of course, you should, at any point of time, weigh the contribution between international and Greek operations. I don't see any, let's say, divergence, material divergence, going forward.
Great, thank you.
The next question is from the line of Daniel David with Autonomous Research. Please go ahead.
Hi, congratulations on the results. Just a quick one on your issuance plans, just whether there's potentially any more MREL or, or you'll look at Tier 2? Thanks.
Sure. Let me provide you an update regarding MREL and Tier 2 and all this. Regarding as regards the second quarter of 2023, MREL ratio stood at 23.2%, and it is already above the 1st January 2024 non-binding MREL target of 22.9%. The final MREL target is set at 27.5% of RWAs, with a horizon, as you know, until the end of 2025. In terms of new issuances, we think 2023, obviously, we don't need, as we have covered the target for the year, but also anyway, the MREL ratio will go higher due to organic profitability.
As regards Tier 2, depending on market conditions, we may proceed to issuance towards the end of the year or during the first months of next year, to compensate for the amortization of the existing Tier 2 instrument, that it is something at the scale of EUR 200-300 million.
Thank you.
The next question is from the line of Luis Garrido with Bank of America Merrill Lynch. Please go ahead.
Yes, hello. Thank you for taking my questions. I have two, please. The first one on the use of MRO. Can you tell us why you chose to use that facility over other alternatives to, to manage TLTRO repayments, and do you expect to continue using it? The second question on your capital guidance update, are you assuming any increases in risk weights later this year from negative credit migration? Thank you.
Taking first your question about capital, no, we don't expect capital to RWAs to be affected by something different than loan growth. The major driver is loan growth. We don't expect any negative, let's say, development of RWAs due to migration of credit towards worse buckets or ratings. We may have the opposite, on the contrary. As regards MRO, as it stands, it stands at very low levels, a few hundred million EUR, as actually we have make, we have made use of the repo market in order to substitute the TLTRO repayment.
Sorry, just, just to clarify, the, the balances have gone down since the, the end of the second quarter number, is what you're saying on the MRO?
Yes, correct. Correct, as we speak.
Okay. Thank you very much.
The next question is from the line of Jonas Gnaegi with Jefferies. Please go ahead.
Hi, good afternoon. One from me on capital. I do appreciate the comments that have been made on shareholder distributions. I was just wondering if we should read this as a pretty strong message of caution on any potential extraordinary distributions. Should we think that the 25% payout of 2023 profits, that should be it? Or should we still expect perhaps a little bit more above the 25% dividend, and then perhaps a little bit of extraordinary shareholder distributions? Thank you.
If I have understood well your question, at the moment, we are not planning any sort of extraordinary distribution.
Okay. Could that mean that, 'cause I, I believe the 25% dividend payout, as has been suggested before, really, probably doesn't make too much of a dent into your capital, and I do appreciate the answer, but, in general, it. Would we, should we be expecting, perhaps a little bit of scope for something that might be go above, or would that be a decision that would then just be made towards the end of the year, perhaps?
Anyway, this is something that we will review again within the context of 2024 budget and the new three-year plan. As I said, at the moment, we don't have any such plans. I explained before I elaborated the three ways that we may use the excess capital, which is a faster loan growth, M&A opportunities, and as well as the shareholder reward. Obviously, this strategy will be updated on a regular basis, and especially, during the budget process that will start in early October.
Okay. Thank you very much.
As a final reminder, to register for a question, please press star and one on your telephone. The next question is from Elena Koufaki with Alpha Finance Investment Services. Please go ahead.
Hello, good afternoon to everyone. Just a quick one on your discussion about M&A. We recently read in the press that you are considering offering wealth management services in Middle East and India. So, I would, I would like a comment on that and whether is it likely to see some activity there in terms of acquisitions? Thank you.
At the moment, we review different options that we may have to expand our business, in a way that would preserve the return on capital for the group. However, we have not reached any sort of final decisions yet on that.
Okay. It's still at the you're still examining this scenario?
A number of options, yes.
Okay. Could you, could you maybe share other, other options, or is it too early?
When it is time, we will.
Okay.
fully update you about our plans.
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.
Let me thank you all for attending this conference call. Thank you for your very interesting questions. We will be available for any sort of follow-up clarifications. 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.