Ladies and gentlemen, thank you for standing by. I'm Poppy, your Chorus Call operator. Welcome, thank you for joining the Eurobank Holdings conference call to present and discuss the first 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 quarter 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 of course, answer your questions. The economic environment remains benign in Greece, as well as in our two other core markets, Bulgaria and Cyprus. The Greek economy shows higher growth and lower inflation than the European average. We expect GDP growth to exceed 2.5% for 2023 as economic sentiment remains strong, support from RRF implementation and FDI influx continues, unemployment keeps dropping, and real estate prices are resilient. Furthermore, Greece's 2023 stability program highlights the strong commitment in solid public finances and outlines a substantial further reduction in the debt to GDP ratio.
As such, it appears highly likely that the sovereign will return to investment grade in the second half of 2023, something that markets have already started pricing in. Despite the positive macro background, loan balances were lower in the first quarter for the banking sector in Greece, mainly driven by corporates using excess liquidity to repay loans in reaction to higher interest rates. However, Eurobank showed performing loan balances increasing by EUR 300 million from the first quarter, supported by operations outside Greece. We expect the loan demand to accelerate in the second half of the year. Let's see our financial results for the first quarter of the year, as highlighted on slides five to nine. Eurobank reported strong figures across all areas in the first quarter.
Tangible book value per share increased by 23% and 5% year-on-year and quarter-on-quarter respectively to EUR 1.78. In more detail, net interest income remains in a strong trend, rising 56% year-on-year and 12% from the previous quarter. This was driven by higher Euribor rates, while the deposit beta remains below our initial expectations. Fees increased by 10% year-on-year, as a result, core pre-provision income was up by 75% and 11% on a year-on-year and on a quarterly basis, respectively. On slide six now, asset quality remains resilient, with NPE ratio reaching at 5.1% and coverage to 76. The cost of risk ratio was 75 basis points in the first quarter.
Back on slide five, core operating profit jumped by 91% and 17% year-on-year and quarter-on-quarter, respectively. Our net profits in the first quarter reached EUR 255 million. Our regional operations had net profits of EUR 79 million, up 80% year-on-year, continuing their strong performance. Spending now on capital, on slide nine, our total capital ratio reached at 18.4%, while the fully loaded CET1 at 16.5%, which includes the full effect of all announced M&A actions and that of the 1.4% share buyback. Our performance in the first quarter was above our expectations. Without changing the specifics of our guidance for the full year 2023, it appears that the 13% target for return on tangible book value will be exceeded to approach 14%.
Finally, I would like to update you that we received the SSM formal approval for the 1.4% share buyback. We are now proceeding with the next steps. This is the first initiative of our announced shareholder rewards program, a key strategic priority for us. At this point, I would like to ask our CFO, Harris Kokologiannis, to present our first quarter results before opening the Q&A session.
Thank you, Fokion. Before starting, let me note that in the first quarter, and following the binding agreement signed on the 2nd of March, we have reclassified Serbia operations as held for sale. This implies that Serbia's contribution to P&L and balance sheet lines has been removed from the presented figures of the current and previous periods. Let's now provide more insight on the first quarter results. Starting on page 18 on lending growth. Performing loans increased organically in the quarter by EUR 300 million, driven by Southeastern Europe operations. In Greece, growth was affected by corporates using excess liquidity to repay loans in reaction to high interest rates. Moving on deposits and liquidity on page 19 and 20. As shown at the left of the page, group deposits decreased in the first quarter by EUR 0.5 billion, mirroring the effect of Greek corporate loans repayment.
Retail deposits were flat in Greece, while Southeastern Europe showed a EUR 200 million increase. Net loans to deposit ratio remained broadly stable at 72.9%, while LCR ratio reached 168%, as shown at the left of page 20. Moving on page 22 and assets under management. As some of our deposits were channeled to mutual funds, wealth management rebounded in the first quarter of 2023 with a EUR 400 million and EUR 700 million increase of assets under management and private banking assets and liabilities respectively. This is a promising performance in an area where the group is investing a lot, expecting significant contribution to its fee-based growth. Moving to profitability on page 26. Net interest income increased quarter-on-quarter by 11.9% to EUR 503 million.
NII has been affected positively by the Euribor increase and negatively by the recent MREL and Tier 2 issuances. On a year-on-year basis, net interest income is higher by 55.6%. On page 27, commission income increased year-on-year by 9.5% and by 15.2% on a like-to-like basis. Quarter-on-quarter, fee income is lower by 9.2% due to seasonality and lending growth deceleration. On page 28, operating costs increased year-on-year in Greece by 2.6%. On a group basis, costs are stable quarter-on-quarter and higher by EUR 16 million year-on-year. The increase is to the largest extent related with South-Southeastern Europe and the inflationary pressures in Bulgaria.
The target set in our business plan refer to 2023 year-on-year cost increase of 5.5% or close to 4% on a like-to-like basis. This target is reiterated considering the Q1 mark and the outlook for the rest of the year. Finally, on this page, cost to core income ratio has been improved substantially year-on-year by more than 11 percentage points, decreasing to 35%. On page 30, we summarize operating performance for the first quarter of the year. Core PPI is higher year-on-year by 75% at EUR 410 million, driven by the bore effect, higher loan and bond volumes, better commissions, and higher core income from Southeastern Europe. Loan loss provisions for the quarter amounted EUR 75 million or 75 basis points.
As a result, core operating profit is higher year-on-year by 91% at EUR 335 million. Moving on to asset quality on page 32. As shown on the top left of the page, NPE formation in the first quarter was almost flat at EUR 7 million, reflecting the resilient asset quality conditions. NPE stock decreased by circa EUR 50 million at NPE ratio to 5.1%. This translates to EUR 2.1 billion gross NPE for the group or EUR 500 million net of provision stock. Finally, on this page, coverage in the first quarter increased to 76%.
Moving on capital and on page 37, our fully loaded CET1 ratio increased quarter-on-quarter by 50 basis points to 15.7%. This is due to the quarterly profitability and the disinvestment of Serbia, which more than offset the impact of transition to standardized and of asset growth on RWAs. In addition, taking into account the rest of transactions either completed after 31st of March or expected to be completed in the coming weeks or months, the pro forma fully loaded CET1 ratio amounts to 15.5%. Furthermore, on capital and on page 38, our total capital ratio stands at 18.6%, also incorporating the remaining impact of IFRS 9.
Considering the outperformance versus our plan of key core profitability drivers and without still proceeding to a revision of full year guidance specifics, it appears that our 2023 return on tangible book value will be closer to 14% versus 13% that was our initial target. This completes my presentation. 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 a better quality. Anyone who has question may press star and one at this time. One moment for the first question, please. The first question comes from the line of Alevizakos Alevizos with AXIA Ventures. Please go ahead.
Hi. Thank you very much for the presentation and congratulations on this very strong set of results. I've got a couple of questions, if I may. The first question has to do with the lending expansion. I just wondered, and I hear you when you say that the RoTE now is probably gonna reach 14%. I wanted to know how you're thinking about the original target of the EUR 2.8 billion lending expansion that you previously gave for the year, given that the first quarter was a seasonally weak quarter. I wanted to hear a little bit more about the pipeline, both in Greece but also in the foreign market. That's question number one.
Question number two is I can see that you have provided the 20 basis points for the share buyback for the HFSF, but I was wondering whether in your numbers you include any accrual for dividend for the year 2023. Thank you very much.
Alevizos, thank you for the questions. Let me start from the loan growth and then elaborate on your second leg. It is true that there has been a slowdown in the growth of performing loans in the first quarter of this year in the Greek market. This was mostly due, I would say, to high repayments from big corporates enjoying ample liquidity. This is, of course, an effect of high interest rates and has also mirrored to corporate deposits. Eurobank, contrary to other big banks, expanded its book by EUR 300 million in the first three months of the year. This was driven by Southeastern Europe business, mainly Bulgaria, this quarter.
The situation in the second quarter so far is quite similar. We expect a loan growth to accelerate as of the second half of the year, taking into account the pipeline that we have, which is quite strong for projects, I would say related to field of energy, tourism, infrastructure, real estate, construction, renewal, but also the traditional manufacturing. Regarding your question whether there is a downside risk and whether we could quantify that, I would say that compared to the annual target of EUR 2.7 billion-EUR 2.8 billion, the downside risk is estimated at this stage at the area of 10%-15%.
Now, regarding the buyback impact, as you may see, this has been deducted from the end capital ratio that we provide accounting-wise. Of course, we can do nothing more than that because accounting-wise we should have certainty provided first by the AGM approval and then from the acceptance of our offer from HFSF. For that moment, in order to be prudent, we have deducted this buyback from our capital ratio. As a market, we have the full clean roadmap as regards our capital ratios are concerned.
Apologies. About the second question, I meant, I wasn't referring to the 1.4% buyback. I was mainly referring about this year's earnings, whether you accrue something that's gonna be paid effectively in 2024 after that AGM.
Yes. The answer is, the answer is not. The answer is that, we accrue dividend according to our accounting policy, when there is AGM approval of the respective dividend.
Okay. That's clear. Thank you very much. Again, congratulations.
Yeah. No problem. Thank you.
Congratulations. Bye.
The next question comes from the line of Mehmet Sevim with JP Morgan. Please go ahead.
Good afternoon. Thanks very much for the presentation. I just had a follow-up question on your guidance for the year. Is it reasonable to assume that the upgraded RoTE guidance to of 14%, that the drivers are simply higher NII with everything else equal? Do you see any upside to other lines? For example, I think you had about EUR 400 million of new NPE formation expectation for the year, things still look much better so far. My second question was just on the buyback. Could you tell us what the next steps are from here? As you've now received the approval, in terms of the basically, you know, what would be the timeline and how does it look with the HFSF, et cetera? That would be very helpful. Thank you.
Let me start from the, from the outlook and then pass the stage to Fokion Karavias to elaborate on NPE formation in general, about asset quality in the HFSF. The major driver of revised outlook on return on tangible book value is, of course, NII. Considering first that, as you know, our plan was based on base rates of 2.5%. We are already 75 basis points higher, and the horizon is for another 50-75 basis points, still increases are expected until the end of the year. Second, again, on NII, it appears that we are moving at better levels, better than our budget.
These are good drivers leading NII at levels higher than 20%. That was the initial assumption of year-on-year growth. Apart from that, fees and commission income, the first quarter was quite better than our expectation for a very weak, seasonally quarter. Fees and commission, again, is a positive driver. On OPEX, as I said, we reiterate our annual target of 5.5% year-on-year, or 4% like-to-like, excluding the BNP acquisition. On cost of risk, we don't expect any material deviation, any deviation from the 85 basis points cost of risk that we have provided.
Summarizing, the upgrade of our estimate for return on tangible book value is basically based on the core income lines, namely NII, by far the most important one, and perhaps fees and commissions, we may have a positive trajectory as well.
Let me add a few things about asset quality and the estimate of EUR 400 million regarding formation in 2023. The short answer to your question is that we are not revising this estimate. It is true that in the first quarter we have seen effectively a zero NPE formation. Actually, this reading was well below the running rate seen in the previous three quarters, but mainly due to technical reasons. For the second quarter, we expect a higher NPE formation around EUR 60 million. We want to remain prudent, taking into account the external environment of high inflation and increasing interest rates. We are not changing the projection of EUR 400 million for the 2023 formation.
As such, the guidance for cost of risk also remains at 85 basis points versus 75 in the first quarter. Now, moving into your last question about next steps in terms of the buyback. First, I would like to say a few things about the green light that we received from the SSM, the formal green light that we received from the SSM for this 1.4% share buyback. Let me remind you that this is going to be financed by the amount earmarked for dividend distribution out of the 2022 financial results. This amount corresponds to a payout ratio roughly of 15% based on the core profits of 2022.
As we have stated, we believe that this is the optimal use of these funds for our shareholders and the bank. I think it is also important to note that this is the first approval related to shareholder reward granted to a Greek bank after the 10-year-long financial crisis. It is an important step or another step with respect to the return of the banking system to regular business. In terms of next steps, over the next couple of weeks.
The board of directors will proceed with the approval of the plan, and the proposal, the formal proposal to the AGM. The AGM will take place in July, post the approval of the AGM, we will choose the best timing for submitting the official bid to the HFSF. Obviously, the HFSF has to follow its own process, which is going to last based on what we have seen so far, in terms of the policy that the HFSF will have. It would be a process of about six to eight weeks. As I mentioned during my introductory speech, this buyback is the first step towards our shareholder reward program that we have already announced. Next year we envisage a dividend distribution with a payout ratio of at least 25%.
Of course, eventually we are aiming, and but this is going to be a gradual process, we are aiming, to reach the European average payout ratio.
That's very helpful. Thanks very much.
The next question comes from the line of Creelan- Sanford Benji with Jefferies. Please go ahead.
Yeah. Hi, it's Benji here. Thanks for taking the questions. Two for me, please. The first one was just looking at this quarter's P&L trading and other revenue lines were a little bit weaker. I just wondered if there was anything specific to call out on that and how you expect that to trend through the year. The second question was just a follow-up on net interest income. I get you know, you're pointing to upgrade of the initial expectations. There's more of a tailwind coming through from rates. We still have headwinds coming through from rising deposit costs, et cetera. I was just wondering, do you still see sequential Q- on- Q growth on NII from here? Or when do you expect to...
we'll see the kind of the peak in quarterly NII? Thank you.
Okay, thank you for the question. Actually, as regards the non-core income, following a crazy year, 2022, we have come back to some more regular core income. The negative result does not represent nothing more than the one leg of our hedging instrument that we have done. The one leg goes to the P&L. The positive impact is coming to our NAV for that reason. You are going to see that our NAV movement is quite positive. Now going forward, the outlook for the year included also in our business plan.
It is for a non-core income for the full year at the end of EUR 20 million-EUR 30 million, and this has been included in our all our guidance ratio. We still stick to this figure for the full year. As regards the NII dynamics, I would say that we would expect NII to peak somewhere between the second and the third quarter of 2023. However, we should put a number of disclaimers on that. If we see a strong acceleration of loan volumes in the second half of the year, or if we see the deposit beta to hover at lower than budgeted levels, and we see...
If we see a prolongation of increases of base rates until, let's say, the end of Q3 of 2023, then this peak may be somewhat later towards the fourth quarter or even later.
That's very helpful. Thank you.
The next question comes from the line of Memisoglu Osman with Ambrosia Capital. Please go ahead.
Hello, many thanks for your time and presentation as usual. Just a couple of things going back to the NII, if you can provide a bit more detail. Time deposits as expectedly did pick up in terms of share. Just wondering what have you been seeing in April and May? Has the pace quickened or pretty much the same? That's the first one. Just maybe a bit more color on beta of the loans, beta of the deposits, and maybe a bit more color if possible on this very impressive performance of the international business. You know, that NII is growing actually at 15% Q-on-Q above the Greek business performance. Any color there? Obviously, at least I am not following the details as closely on that front.
Those are the key bits. Maybe, we had discussed this in the previous results call, the securities income has gone up quite impressively. Is that close to flattening out or how are you seeing that part of the NII? Thank you.
Let me start from your question about the Bulgarian and Cyprus business and then Harris will answer the rest of your questions. Indeed, our non-Greek operations have an impressive increase in terms of NII, but this can be explained by the structure of the balance sheet, where the proportion of deposits versus loans is higher in these countries, especially in Cyprus. Therefore, they have taken the big benefit of the higher Euribor rates. This is what explains the growth, the very strong growth of NII in these two countries. Harris, for the rest.
Providing more insight on the deposits, or the deposit beta. In the first quarter, the total beta amounted to 14% versus a target, full year target of 35%. We are still lagging behind that. You may refer to that on page 25 of our presentation, where we present the bottom right part, the betas of deposits. This is a split between 3% beta on core deposits, whereby you may appreciate that it is still at very, very low levels, close to zero. The target for that was 13% for the full year. We are materially lagging versus the target.
On the time, we are close to 50% compared to a target of 65% beta. As regards the second quarter so far, we haven't seen any, let's say, material fluctuation. The trend is very smooth. No material movement in the second quarter so far. As regards the income from securities, actually, it is affected also from the pace of base rates increase. We expect some peak in the following quarters. As regards the beta on loans, let me mention that our floating rate portfolio amounts to close to 82% of total.
Fixed and base rate is the rest 18%. Actually this reflects the beta of our lending portfolio. I don't know whether I have missed some leg of your question.
No, no, Harris. That's very helpful. Just to clarify, that 82%, does that include the mortgages?
Yes. This is the total portfolio, including the retail and the corporate one. Retailing, retail includes mortgage as well.
Thank you.
The next question comes from the line of Gary de Luis with Bank of America Merrill Lynch. Please go ahead.
Yes, good afternoon. Two questions on the TLTRO, please. The first, is it fair to assume that you will simply repay the EUR 8 billion remaining just with cash, which is well in excess of that? Two, where do you expect your liquidity coverage ratio will land after those repayments? Thank you very much.
Okay. Let's refer to page 20. You may see on the, on the upper right part of the presentation, that we have the net cash position versus central bank. We have a TLTRO balance of EUR 8 billion, EUR 8.3 billion. On the other hand, we have cash at central bank of EUR 14 billion. We have a net positive deposit balance of EUR 6 billion. Actually this 8.3 are gonna be paid out of the cash at the central banks, leaving a positive balance of close to EUR 6 billion. As regards LCR, our medium-term target is to be higher than 150%.
I would say higher than 155 to 160.
Okay. Thank you very much.
The next question comes from the line of David Daniel with Autonomous Research. Please go ahead.
Hi. Good afternoon. Thanks for taking my question. I've just got a quick one. Just in terms of MREL, can you just give us an update of your issuance plans after your senior preferred earlier in the year? Thanks.
Okay. The outlook, the picture regarding MREL is that, in the first quarter stood at, 23%.
Already above the January 1st, 2024 non-banking target of 22.9%. The ultimate MREL target at the end of 2025 is at 25%-27.5%. In terms of new resources in 2023, as you see, we have no need, as we have covered the target for the year. The actual figure will increase further due to organic profitability in the next three quarters. Depending on market conditions, we may assess to proceed to a Tier 2 issue. This a decision to be taken closer to the end of 2023 or in the first half of 2024 to compensate for the amortization of the existing Tier 2 instrument held by the Hellenic Republic.
This is let's say, the outlook for MREL issues, going forward.
Thank you.
The next question comes from the line of Butkov Mikhail with Goldman Sachs. Please go ahead.
Good day. Thank you very much for the presentation. Just one question on the commercial real estate assets. Do you have any international exposure through this portfolio? So far, did you see any changes, let's say, over the past three months in any trends related to the pricing or the underlying trends around this portfolio? More broadly, can you also maybe give few comments on the sales of the repossessed real estate assets and how the things go in in-depth type of assets? Thank you.
Okay. Let me start from the last part of your question about REOs. Overall, the real estate market in Greece, where we have the vast majority of REOs, remains quite strong. Actually, we have the real estate prices, residential real estate prices increasing by 12.2% in the last quarter of 2022. We see this trend to continue maybe at a slower pace, but we see this pace to continue. It is, in terms of timing, it is good for banks to dispose more actively their REOs, and this is something that we're going to pursue in our case as well. Now with respect to our CRE exposure, overall, it is a small figure.
It's EUR 1.7 billion at the group level, or 4% of our group gross loans. Let me clarify that the figure we shows on the EBA transparency exercise report shows a number of EUR 6.4 billion, but these are the total amount of loans that have as collateral commercial real estate property. The actual number of loans, the actual amount of loans with purpose of acquiring commercial real estate is the figures I mentioned before, the EUR 1.7 billion. The rest, the EUR 4.7 billion out of the EUR 6.4 billion, are loans in the sectors of tourism, retail, manufacturing, health, et cetera, with collateral their commercial real estate.
Now, in terms of exposure, beyond Greece, we have some exposure in Bulgaria and Cyprus, obviously. Out of this EUR 1.7, we have some amounts in Bulgaria and Cyprus. We have also a small portfolio of about EUR 300 million-EUR 400 million in prime real estate in the London market. This is part of our wealth management business. This is how we have got this exposure.
Looking into the investment real estate portfolio, it is this London real estate, and that's the main part of the international exposure on the commercial real estate?
No, no.
Correct?
What I mentioned before about international exposure was on the loan market, CRE loan market. In terms of the investment portfolio that we have, this is entirely in Greece.
Okay. Okay, thank you. 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 participating in this conference call for our first quarter 2023 financial results. Let me also thank you for your very interesting questions. We are looking forward to continuing the dialogue with you. Our Investor Relations, our CFO, and myself will be available for any follow-up questions. Thank you very much.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for calling, and have a pleasant evening.