Standing by. I'm Constantinos, your conference call operator. Welcome and thank you for joining the Eurobank Ergasias Services and Holdings Conference Call to present and discuss the second quarter 2022 financial results. At this time, I would like to turn the conference over to Mr. Fokion Karavias, CEO. Mr. Karavias, you may now proceed.
Ladies and gentlemen, good afternoon, and welcome to Eurobank's First Half 2022 Results Presentation. Together with me is our CFO, Harris Kokologiannis , and the investor relations team. I will start from an overview of recent developments before we present our results. Two contrasting trends emerged in the first half of the year. First, although earlier today we had Eurozone's economic releases beating estimates on growth and inflation, overall, the global macroeconomic environment has deteriorated as geopolitics and supply chain bottlenecks led to high inflation, mainly through energy prices. Faced with such challenges and elevated uncertainty, major European economies are expected to slow down and may even go into recession. Against this backdrop, Greece enjoys a better outlook. GDP projections for 2022 point to 4% growth or even higher.
Growth is supported by a number of factors, such as strong investment flows and business credit demand, ample liquidity conditions and continued deposits inflows, lower unemployment and rising real estate prices, and last but not least, by a strong tourism season. Tourism revenues in 2022 may even exceed the 2019 figures. Despite the strong trajectory increase year to date, we follow closely the risks from the weak global macro environment, including asset quality trends. High energy and commodity prices and rising interest rates are a burden on the household income and small business profitability. To alleviate the impact, the government introduced this year close to EUR 10 billion one-off support measures on the back of strong fiscal performance. Let me now focus on our financial results for the first half of 2022, with highlights shown on slide 5.
In the first half of this year, we exceeded our targets in all lines and across almost every sector of activity. As a result, our tangible book value per share increased by EUR 0.18 to EUR 1.60 through organic profitability, exceptional net trading profits and the Merchant acquiring business sale. Our net profits in the first six months reached EUR 941 million, of which EUR 671 million in the second quarter. There was strong performance in all core operating lines. NII increased 4.5% on a year-on-year basis. Fee and commission income grew by 22.4%. Operating expenses were flat year-on-year in Greece, and higher by 3.9% at the group level. The above drove pre-provision income to EUR 506 million, up 13.5% year on year.
In the second quarter, in particular, core PPI was at EUR 265 million. On asset quality metrics, we had flat NPE formation in the first half of the year, which is clearly better than our initial expectations. The NPE ratio dropped below 6%, and the coverage exceeds 71%. The cost of risk was at 64 basis points. As a result of the above, core operating profit, that is core PPI minus provisions, increased to EUR 380 million. This is up 72% year-over-year. Our income stream remains well diversified, with profits from international operations reaching EUR 102 million, up by 39% year-over-year. We are also recording an impressive capital enhancement.
Our total capital ratio reached 17%, up 140 basis points in the last 12 months, while the fully loaded CET1 ratio increased by 190 basis points to 14%. Deposit gathering and loan underwriting accelerated significantly in the second quarter. As a result, in the first six months, deposits and performing loans increased by EUR 0.8 billion and EUR 1.6 billion, respectively. The increase in lending volumes was mainly driven by business loans. Overall, we cannot underestimate the adverse outlook for the EU economic growth and the challenges ahead of us. Europe is Greece's main trade counterparty. Therefore, some impact on the Greek economy should be expected, which is difficult to estimate at this point. On the other hand, the first half of the year results were a clear evidence of our strong franchise and business potential.
Accordingly, we are revising upwards our estimates, and we now expect core PPI to exceed EUR 1 billion for the full year 2022, and the recurring return on tangible book value to be higher than the initial target of 10%. The solid profitability should improve further the fully loaded CET1 ratio to 14.2% by year-end, despite the higher loan growth. In this context, we continue the constructive dialogue with the supervisor as the strong performance delivered so far increases our confidence on dividend distribution out of 2022 earnings. At this point, I would like to ask our CFO, Harris Kokologiannis , to present our results and the outlook before opening the Q&A session.
Thank you, Fokion. Let me start with two clarifications regarding the second quarter results.
First, net income includes EUR 230 million after-tax profit from the disposal of card acquiring business as the transaction closed at June end. Second, loans of EUR 274 million gross book value included in Solar securitization have been classified as assets held for sale. Let's now provide some more insight to the period's performance. Starting with page 19 on lending growth. Performing loans increased organically in the quarter by EUR 1.2 billion, driven by corporate sector in Greece and Southeastern Europe loans. For the first half of the year, performing loans grew by EUR 1.6 billion, out of which EUR 1.1 billion coming from Greek business loans, EUR 400 million from Bulgaria, and EUR 240 million from Cyprus.
Considering the first half performance and current loan demand, which maintains its momentum, we revised upwards our outlook for the full year net organic growth to EUR 2.9 billion. This is an increase of initial target by EUR 600 million and is mainly related with Greek corporate portfolio prospects. Moving on funding and liquidity on page 20. As shown at the right of the page, group deposits increased in the second quarter by EUR 1.5 billion, mainly related with retail, large corporate increase in Cyprus. For the first half of the year, group deposits are up by EUR 800 million. Net loans deposit ratio remains stable at 75%, while LCR ratio increased to 174%, as shown at the left of the page. Moving to MREL on page 21.
Despite the high market volatility, the bank completed successfully in May a EUR 500 million senior preferred issuance. In the last 12 months, we have tapped the market three times, raising in total EUR 1.5 billion. Considering the interim MREL target for January 1, 2023, the actual MREL ratio as at June end and the profitability outlook for the second half, we do not need to proceed to any further issuance this year. Moving to profitability on page 25. Net interest income increased quarter-on-quarter by 6.3% to EUR 361 million due to higher bonds and loans income, mainly related to volumes and better performance of Southeastern Europe. On a year-on-year basis, NII is higher by 4.5%, much better than initially anticipated.
On page 26, commission income increased quarter-on-quarter by 8%, reaching EUR 133 million, driven by higher lending, transactions related, and credit card fees, both in Greece and SE. On a year-on-year basis, commissions are higher by 22% and fees over asset ratio increased to 67 basis points. On page 27, group costs are higher year-on-year by 3.9% due to the Direktna merger in Serbia and higher staff costs in Bulgaria. In Greece, operating expenses are flat year-on-year as the higher IT and depreciation expenses, as well as electricity costs, were offset by lower staff costs and other admin. In the first half of the year, we successfully completed the VSS in Greece, exceeding 400 FTEs. Furthermore, we continue the rationalization of our network, closing another 25 branches, representing 8% of our footprint.
These initiatives are in line with our business plan and strategy to shift resources from run the bank to grow the bank, but also to address inflationary pressures on staff salaries, energy and premises related costs. On page 29, we summarize operating performance for the first half of 2022. Core PPI is higher year-on-year by 13.5% at EUR 506 million, driven by performing assets NII, mainly bonds and loans, high commissions and core income from Southeastern Europe, which more than offset lower income from NPEs. Cost of risk amounted to 64 basis points for the period, and loan loss provisions are lower year-on-year by more than 40%. Acting prudently, we maintain cost of risk in line with the initial guidance, although NPE flows were much lower than the budgeted figures for the first half of the year.
Core operating profit is higher year-on-year by 72% at EUR 380 million. Furthermore, profit before tax amounted to EUR 933 million for the first half of the year. This figure includes EUR 572 million other income for the period, of which EUR 332 million in the second quarter. This is mainly related with realized trading gains of hedging positions, which more than offset valuation losses of bonds recorded through OCI. Considering the core profitability of the first half of the year and the prospect for the second half, we revised upwards our guidance of core operating profit for the full year 2022 to circa EUR 750 million from EUR 610 million before.
This translates to a year-on-year increase of higher than 50% and a better performance versus our initial guidance by EUR 140 million. The above reading assumes a core PPI of about EUR 1.02 billion. It also assumes a cost of risk for the year of 65 basis points. Moving on to asset quality on page 31. As shown on the top left of the page, NPE formation in the second quarter was slightly positive by EUR 17 million, which leads to a flat reading for the first half of the year. NPE ratio decreased to 5.9%. This translates to EUR 2.5 billion gross NPEs for the group or EUR 700 million net of provision stock. Coverage in the second quarter increased to 71.5%, as shown at the bottom right of the page.
Finally, on capital and on page 36, our fully loaded CET1 ratio increased quarter-on-quarter by 130 basis points to 14% due to acquiring business disposal gain, the quarterly profitability and the excess of netting realized gains over bond valuation. The above figure also includes the impact of business growth related to new loans, loan commitments and letters of guarantee. Furthermore, on capital and on page 37, our total capital ratio increased by 120 basis points to 17%. Taking into account the first half results and the updated profitability outlook, and despite the high growth of loan balances, we revised our guidance for the year-end fully loaded CET1 ratio at 14.2%, and for the total capital ratio at 17%. These ratios are higher than the initial targets by 60 basis points.
This completes my presentation, and we may now open the floor for your questions.
The first question is from the line of Mehmet Sevim with JP Morgan. Please go ahead.
Good afternoon. Thanks very much for the presentation, and congratulations on the very, very strong performance. My first question will be on NII and loan growth, please. This was particularly strong this quarter, especially in business lending. Could you please provide some color on where new origination coming from? What kind of customers are these? Is it demand related? Do you see this continuing in the second half of the year, or were there any one-offs such as maybe, you know, syndications, et cetera, that you participated? Thank you.
Thank you for your question. This is true. The second quarter actually was characterized by a strong NII, much better than we anticipated. Actually, this was due to NII related with bonds, income due to both higher volumes and better yield. Higher loan relating NII mainly related to volume, and a small part is due to the base effect. Now, as regards the second half of the year, let me provide you guidance on the full year, 2022. You may recall that in our full year results, we provided for a year-on-year decrease of NII by almost 3%.
Now, for the full year 2022, our latest outlook is for an increase by about 7%-8% versus 2021. This is related to higher income from rising Euribor rates that we are going to see the effect in the second half of the year. Actually, for this outlook, we have incorporated the recent 50 basis points increase in ECB rates, increased bond position and higher credit expansion. Now, as regards the lending growth, let me provide you some insight. As of 2022, and especially as of the second quarter of 2022, loan demand is strongly picking up, driven by, to a very high extent, the business sector.
Such as, indicatively, energy, shipping, tourism, real estate, construction, large syndicated loans, and renewals. Now, on top of that, the RRF is acting and will act more in the next year as an accelerator for loan growth. At the same time, our subsidiaries in Southeastern Europe and especially, Bulgaria and Cyprus are producing a steady flow from retail. In the first six months of 2022, increased performing loans by EUR 1.6 billion, out of which EUR 1 billion from Greece and the rest from the SEE. As I said, this performance is leading us to increase our growth targets, considering also the pipeline that we have in our mind for the full year 2022 from EUR 2.3 billion-EUR 2.9 billion.
Out of which EUR 1.9 billion in Greece and EUR 1 billion in Southeastern Europe. The major part of this target revision is attributed to, I would say, to the Greek corporate portfolio.
Thanks very much, Panos. This is all very, very helpful and clear. My second question would be on asset quality. Taking into account the most recent developments, are you seeing any incremental pressure in any parts of the book? I understand the net new flows are flattish so far this year, and if I recall correctly, you were expecting about EUR 400 million of net new NPE formation for this year. How are you seeing the environment this year, but also probably even more crucially, going into next year? Any color will be very helpful.
Okay. Thanks for the question. Let me start with a summary of what we have seen in the first half of 2022 in terms of asset quality. As you can see on slide 31, in the first quarter, we had a slightly negative formation versus a slightly positive formation in the second quarter. Overall, for the first six months, effectively, we had the flattish formation, as I said before. It is also interesting to look at page 32 of our presentation, in which we present formation per loan segment. There you can see that during the last 3-4 quarters, there is a small positive formation from retail portfolios, mortgages, and small businesses, and negative formation coming out of corporates.
In July, based on the new data that we have, effectively this pattern continues. We have also a flattish formation in July, and which also is the same for retail versus corporate portfolios. Therefore, so far we have not seen any deterioration in the asset quality trends. However, we remain cautious because high energy, high food prices, rising interest rates are obviously a burden on households' available income. Let me say a few things about the effect, the potential effect of rising interest rates, because we have already the first 50 basis points and most likely more is going to follow. Based on our initial calculations, the impact from higher interest rates is going to be manageable in terms of asset quality. The most sensitive loan segment is obviously mortgage loans.
However, given that most of them were originated at least 10 years ago, the impact from the current increase of 50 basis points is less than 5% on the monthly installment. Even if we assume a cumulative rate increase of 150 basis points, which is the most likely scenario coming out of ECB, the impact also remains manageable at about 10%-12% on the monthly installment. It is also interesting that the mortgages originated during the last 3 years, so the most recent origination, almost all of them are coming with fixed rates. There are also a number of positive factors supporting the asset quality. We already mentioned some of them, but let me summarize.
First is the government support measures, mainly on the back of the hike in energy prices, which account for almost EUR 10 billion so far. Definitely this is something that is helping the household income. Also, growth is quite strong. We expect more than 4% for the year. Unemployment keeps dropping month after month, with the most recent reading at 12.5%. We had also a base salary increase for this year, which was quite generous. It is also worth noting that the deposits have remained relatively stable during the first six months of the year, around EUR 180 billion, despite the pressure on the household income.
Finally, a couple of days ago, we had some official statistics about the household growth on gross disposable income, which increased by 3.8% in the first quarter of 2022. Overall, we have a background which is create some concerns, but there are some factors, positive factors that mitigate some of the risks. In summary, we will continue monitoring very closely the asset quality trends. As we mentioned already, we are not changing our projection for EUR 450 million net inflow for the full year 2022. Although someone could argue that we could have adjusted downwards given the better than expected performance in the first half of the year. We feel it is better to be conservative and prudent at this time.
As a result of this inflow, cost of risk and NPE ratio maintain the same guidance that we had provided a few months ago. Cost of risk at the 65 basis points and the NPE ratio at the end of the year at 5.8%. Now, if you ask me how we maintain a lower NPE ratio versus the current one, despite this inflow of EUR 400 million, the answer is that we are planning for some write-offs in the second half of 2022. As a result, coverage may drop somehow from the current levels of 71. This is how we see asset quality for the second half of the year.
Now, for 2023 that you asked me, you could appreciate that it is quite difficult to make any sort of projection at the moment, given all the uncertainties with respect to the energy markets for this coming winter. Let me refrain from making any sort of estimates.
Okay. This is all very, very helpful. Thanks very much.
The next question is from the line of Alevizos Alevizakos. Alevizos Alevizakos with Axia Ventures. Please go ahead.
Hi, thank you very much for the presentation. A couple of quick questions from my side. You've done really, really well on increasing the NII, and you gave us nice detail on the lending balances. Can I ask regarding the investment securities portfolio, how much would you plan to grow the investment securities further from where you are right now? As a second part of that question, are you done now with the FX swap sales, or are we gonna be seeing anything in the second half? As a second question, if I may, I suppose now that the CET1 capital ratio increased further and with the 14% that you've got, will that be helpful in your SSM conversations when you go back to them and discuss the dividend? Thank you.
On the first couple of questions, we have grown quite substantially our total investment securities portfolio in the last, let's say three quarters. It is not envisaged to grow at least at the same pace going forward. It's already at close to EUR 12 billion. Now, as regards the trading gains from the hedging instruments, we had quite strong gains in the first and the second quarter. We don't expect in the third and the fourth quarter to have a repetition of this picture.
Trading gains are expected to be substantially lower. Now, in terms of your second question about the dividend distribution, it is needless to say that the dialogue with the supervisor is an ongoing process. It is a constructive dialogue. It is also true that the results of the first half of the year, but also the expected results for the full year 2022, that are going to be much better than our initial plan, makes this discussion even more constructive. Our base scenario is that we're going to pay dividends out of 2022 profits. However, at the prudent payout ratio, as we have also mentioned in our previous calls.
That's great. Thank you very much for the presentation.
The next question is from the line of Daniel David with Autonomous Research. Please go ahead.
Good afternoon. Thanks for the call. I think most of my questions have been answered. I've just got one quick one on the Tier 2 that's come up for call. I hear what you're saying about MREL. You've been very active and not to expect any further prints in MREL for the rest of the year. I just wanna check your thinking on the Tier 2. You've mentioned in the past that if it's not called, you'd look to issue in Tier 2 to mitigate the reduction in Tier 2 value. Is that still the thinking? Or just be interested to hear your thoughts given the current market volatility. Thanks.
Sure. Thank you for your question. Let me provide you an outline about yes. According to the agreement signed with the Greek state, call option kicks in as of February 2023. In parallel, the instrument is entering its sixth year of tenure. It starts a gradual phase out of regulatory contribution by about 20% per annum or by EUR 190 million. Now, regarding our plans, taking into account the market volatility, of course, we will explore all options at the time, including to proceed to smaller partial issuances commensurate to the yearly phase out of the current instrument.
Understood. Thanks a lot.
The next question is from the line of Gabor Kemeny with Morgan Stanley. Please go ahead.
Good afternoon. Thank you for the presentation and taking my question. In your introductory remarks, you mentioned, you highlighted Greece's strong economy as an outlier from Europe and as driven by one of the reasons, rising real estate prices. You also mentioned real estate lending being one of the drivers of your strong loan growth. Then looking at the slide 32, which you referred earlier, mortgage NPE formation has become positive for last four quarters after many quarters of negative trend. I understand your point about rising interest rates. At the same time, you mentioned strong disposable income growth, unemployment drops, and general rise in real wages. Where do you see the reasons behind the mortgage NPE formation trend reversal?
Can you repeat the question? Because it was not really clear. The last part of your question, please.
Given the strong real estate prices and the low unemployment, where do you see reasons behind mortgage NPE formation, which increased in last 4 quarters.
Answer you, yeah. That's clear. If you look at the page 32, you're going to see that the increases are really small numbers. Effectively this is not something really that worries us because overall the figures are very low. I cannot say that there is any sort of trend or something that would create some sort of concern out of that. You are right that the real estate market remains strong. However, there is some pressure on the household income despite the measures that the government has taken, despite some increase in the base salary. Overall, the household income feels pressure because of higher energy prices, because of higher food prices.
So far the figures that we have seen in terms of this, NPE positive flows for mortgages are small.
Okay. That's very clear. Thank you.
The next question is from the line of Luis Garrido with Bank of America Merrill Lynch. Please go ahead.
Yes, good afternoon. I have two connected questions, please. First, can you give some detail on what is driving these very large trading gains? You mentioned in the first quarter that you had short bond positions that contributed to these gains.
With the credit market rallying a little bit into July, should we now expect a net negative impact on the P&L from trading? That's number one. Number two, on capital, is there anything other than the trading gains that is driving your upgraded capital guidance by year-end? Thank you very much.
On the trading gains, we had explained also during the previous call that effectively these are positions which are hedging our bond portfolio that is the fair value through OCI. They are hedging some of our interest rate positions in the banking book. Most of these positions have been closed, and therefore the P&L has been realized as we speak. This is the reason why Harry has mentioned before that we don't expect any sort of additional trading gains or losses during the third quarter. The position that we had in the previous two quarters have been short the market and short the credit.
This have resulted in the gains that we have seen. On your second question, Harry, your second question was about our capital in the second half of the year, correct?
Yes, exactly, if there's anything other than these trading gains to explain the improved guidance.
In the second half of the year, actually in the fully loaded CET1, we expect this to be approximately 20 basis points better than the one recorded at June end. We don't expect this to be affected by any more trading gains. Actually, the drivers for this movement is on the positive side, the organic profitability by approximately 90 basis points, and on the negative side, the expected asset growth by minus 60 basis points, and another minus 10 basis points, other items, the major part is DTC amortization. For that reason, we have provided an outlook for the fully loaded CET1 at the end of the year, close to 14.2%.
Okay. Understood. Thank you.
The next question is from the line of Nida Iqbal with Morgan Stanley. Please go ahead.
Hi. Thank you for the call, and congratulations for the great set of results. Can I just get an update on how things are progressing in terms of the RRF funds coming into Greece and the projects related to these funds, please? Secondly, just confirming that the guidance assumes 50 basis points of ECB rate hikes, and if we can get updated sensitivity for you know, each 50 basis points or 25 basis points of rate hikes, please. Thank you.
Thank you for your question. I'll get the second part of your question, and then for Fokion will elaborate on the first one. Starting from the sensitivity, based on updated calculations, for negative rates, i.e., from -50 to 0, the impact has been estimated at approximately EUR 70 million per annum. Once the rates turn positive, of course the positive effect accelerates, and from 0 to +50 basis points, the additional impact is circa EUR 130 million. For rates higher than positive 50 basis points, the sensitivity starts decreasing because we assume that part of interest rate increases will be passing to depositors.
Overall, for rates ranging between -50 basis points to +100 basis points, the cumulative impact is approximately EUR 300 million. On your question as regards the outlook, the answer is yes. In the outlook that we have provided, we have incorporated just the recent 50 basis points increase of ECB rates that took place on 21st of this July, but no further increases. Now, on the question regarding the RRF, it is our understanding that the investment projects that have been already submitted to the RRF is close to EUR 3 billion. This is the total investments, so about 30%-40% of them, of this figure is going to be financed by the RRF.
It is my expectation that by year-end, this figure of EUR 3 billion may be between EUR 6 billion to EUR 8 billion.
Thank you.
The next question is from the line of Osman Memisoglu with Ambrosia Capital. Please go ahead.
Hello. Many thanks for taking my question. Just a detail one on the sensitivity with your floating book, is it-
Policy rate of ECB or the Euribor that impacts, NII more? Thank you.
The impact of Euribor.
Euribor. You've already seen some impact in Q2, I guess, positive, albeit small.
Correct. Absolutely. The impact in the NII from Euribor increases in the second quarter actually was immaterial. Why? Because the major movement took place in the 3-month and 6-month Euribor rates, where the majority of our loans are floored to zero. On the contrary, the majority of the unfloored loans are denominated in the 1-month Euribor that shows almost no movement in the second quarter.
Got it. If I could squeeze in one generic question on overall trends in your international business, which we sometimes usually forget about, particularly on asset quality front, you've given us detail on the Greek side. Any color on how things are going on that front? Thank you.
Our two other core markets, Bulgaria and Cyprus, are doing quite well in terms of loan origination. Harry has already elaborated on their performance. Now, in terms of asset quality, as you can see on page 16 for Bulgaria, first of all, there is a substantial improvement in terms of coverage of NPE coverage, reaching 80%. There is also a decline over the last few quarters in terms of the NPE ratio. At the moment, we don't really have any sort of alarming signs from there, quite the opposite. Wage increases in this country were very supportive for households and borrowers. In Cyprus, we don't have any sort of material exposure into retail business. It is mainly corporate business.
As you can see on page 16 of the presentation, the NPE ratio there is anyway very low, 2.2%. The coverage is close to 100%. Again, we don't really have any sort of signs that would make us worried. The tourism season, that was a point of concern in the beginning of the season because of the high reliance on Russian and Ukrainian tourists, is doing quite well and the country was able to replace these tourists with visitors coming from Western Europe.
Thank you.
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 call. Let me also thank you about your questions and the dialogue that we had. Our investor relations team, Harry and myself, will be available for any follow-up and clarifications. Thank you very much.