Ladies and gentlemen, thank you for standing by. I'm Constantinos, your conference operator. Welcome and thank you for joining the Eurobank Holdings Conference Call to Present and Discuss the Full Year 2021 Financial Results. All participants will be in 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 our call. Together with me is our CFO, Harris Kokologiannis, and the investor relations team. I will start the call with a quick review of the 2021 performance, and then focus on our business plan update, financial targets for 2022 and the next three years. Harris will give you more insight and analysis on the business drivers for the plan period. Finally, we will answer your questions. 2021 was a milestone year for Eurobank, being the first in the sector to reach a single-digit NPE ratio of 6.8%. Furthermore, as you can see on pages 6 and 7, we outperformed all targets initially set for the year.
Our core pre-provision income reached EUR 900 million, 4% higher than in 2020, while the cost of risk declined to 1.1% from 1.5%. The main drivers of this performance were the high teens increase in fees, the resilience in net interest income, the operating cost discipline, and the substantially lower than initially anticipated NPE growth. Our high NPE coverage allowed us to execute the next NPE securitization with effectively no impact on capital. The capital ratio reached 16.8%, up 50 basis points following the execution of non-dilutive capital transactions and robust organic profitability. Before we move to our business plan and the financial targets, let me refer to the macroeconomic conditions.
In 2021, the economic activity posted a strong recovery increase, underpinned by the reopening of the economy and the COVID-19 related support measures. Real GDP increased sharply by 8.3% for the full year 2021, driven by the strong growth rates of exports of goods and services, gross fixed capital formation, and the rebound of private consumption. Moving now into the period 2022 to 2024, the macroeconomic assumptions used in our business plan are summarized on page 9. The economic growth outlook remains strong for Greece and our other core markets, namely Bulgaria and Cyprus, with average annual growth rate between 2.5% and 4% for the next three years.
Especially in Greece, growth is expected higher than 4.5% in 2022, supported by increased investment pipeline, record FDI flows, strong industrial production and export trends, the ongoing rebound in tourism, and the healthy demand for real estate assets. However, the recent geopolitical turmoil in Ukraine adds a new risk element, particularly through energy prices and inflation, with far-reaching and long-term consequences. As the events are still unfolding, any assessment of their impact is premature. From one side, geopolitical risk is going to weigh negatively for a protracted period of time, yet EU coordinated measures may mitigate some of the headwinds. Let me now turn to our 2022 budget and the three-year business plan. Back in late 2018, when we announced our transformation plan, we set three clear objectives.
A single-digit NPE ratio, enhancing our capital base through non-dilutive initiatives, and a double-digit return on tangible book value. Clearly, the capital strengthening and the balance sheet cleanup are behind us. In 2022, we expect stronger profitability to reach 10% return on tangible book value. As Greece exits a decade of deleveraging, the economic recovery will be investment driven. Banks have a crucial role to play. We are in pole position to capitalize on this growth cycle, and our profitability will be boosted by the following drivers. Loan growth by about 7% per annum for the period 2022 to 2024. Our leading position in fee businesses, with fees contribution over total income increasing from 24% to 29% in the three-year period.
Cost discipline with a clear shift from run the bank to grow the bank as we will invest in people and systems to leverage data and digital tools. Last but not least, normalization of the cost of risk at levels below 65 basis points. The financial goals of this strategy are summarized on page 11. For the three-year period, we expect EPS to grow at an average rate of around 30% per annum, front-loaded in 2022, in which we expect more than 20% EPS growth. Our return on tangible book value will be 10% on a sustainable and recurring basis over the same period. The strong organic capital generation of more than 100 basis points per annum out of profitability will finance asset growth, dividend distribution, and increase our capital ratio by circa 200 basis points over the next three years.
In this context, we have already initiated the dialogue with the supervisor on dividend distribution, and the base scenario is to pay dividends out of 2022 profits at a prudent initial payout ratio of around 20%. Overall, we are pleased that we have been able to deliver in a consistent way on the targets set in previous years and the 2021 achieved outperformance. Without underestimating the risks from the current crisis, we have the business model, the capital, the people, and the drive to capture the opportunities in the new growth phase, aiming to sustainable returns and creating value for our shareholders. At this point, I would like to ask Harris to present our business plan drivers in more detail.
Thank you, Panos. Starting on page 12 and on the 2022 profitability. Core operating profit is expected to increase by 25% year-on-year to circa EUR 610 million. Net interest income is anticipated to decrease by 3% as the lower income from NPEs and the MREL cost will be partly offset by new loans, high bonds income, and lower deposit costs. Commissions will continue to grow, albeit at a slower pace compared to 2021, driven by assets under management, capital markets, and transaction-related fees. Operating expenses are expected to increase by 2%, driven by international and the merger with Direktna Banka, while cost/income should remain flat. Finally, lower NPEs and high coverage lead to a significant cost of risk decrease from 1.1% to 0.65% in 2022.
The above point to an EPS of about EUR 0.14, which allows us to meet our commitment for a return on tangible book value of 10% this year. Moving on net interest income on page 13 and starting on the volumes at the left of the page. 2022 is expected to be the beginning of a multiyear trend to re-leverage. Performing loans are anticipated to grow by EUR 2.3 billion in 2022 and by EUR 7.4 billion in the three-year period, driven by business loans in Greece and the region. In addition, household lending will show a further acceleration, particularly in the last two years of the plan, increasing substantially the contribution of retailing to the group core PPI from 20% in 2021 to 30% in 2024.
Deposit growth after two very strong years is expected to slow down at an annual increase rate of circa 3%. On the right part of the page, we show the net NII evolution during the plan period. The decrease of income from NPEs, the gradual phase out of PCRO, and the increased MREL cost will be offset by higher income from performing loans, lower deposit costs, and higher bonds income. Furthermore, our balance sheet cleanup is aided by the reduction of net interest income from impaired loans from 9% in 2021 to 3% in 2024. On page 14, it is shown how the commission income will continue being the major driver of top-line growth. First, in wealth management, assets under management should double, reaching EUR 10 billion in 2024, driven by targeted business initiatives and further investments in technology.
In bancassurance, an average annual increase of more than 15% in premium is anticipated. Capital markets, which include investment banking, equities brokerage fees, custody and clearing services, will show a higher contribution driven by the high investment appetite in the country, also reflected in the recent M&A activity. Transaction and lending fees will continue to have a significant contribution, each accounting for circa 20% of total fee income. Finally, rental income generated from our EUR 1.4 billion investment property portfolio should contribute approximately EUR 100 million per annum. Commissions increase results in higher fees on the asset ratio from 64 to 80 basis points in 2024, and an increased participation total income from 24% to 29%.
As shown on pages 15 and 16, the revenue growth is to a large extent enabled and accelerated by a number of change initiatives focusing on promoting the physical client communication, selling, and transaction model, simplifying and streamlining our operating model with special emphasis on credit underwriting, leveraging on data analytics, transition to cloud, targeted initiatives to accelerate wealth management growth, high-value retail segments penetration, and business ecosystems development. The above initiatives, apart from the top-line assessment, aim at changing and streamlining our cost base so as to address the new challenges as shown on page 17.
Specifically, we target savings circa EUR 60 million per annum of run the bank costs through rationalizing staff, premises, and other CMA expenses, and turning these savings to grow the bank investments in information technology and digitization, but also in human capital through bringing on board, developing, and properly remunerating new skilled set people. Overall, including the non-organic saving from the completion of contribution to resolution fund by the end of 2023, we expect operating expense in Greece to decrease in 2024 to circa EUR 600 million. This drives cost to core income ratio to improve from 50% in 2021 to 43% in 2024. Moving on page 18 and on Southeastern Europe operations, core PPI is expected to increase by circa 16% over the planned period, driven by new loans, fee growth, and the merger with Direktna.
Combined with lower cost of risk, net profits should increase by circa 35%, approaching EUR 200 million in 2024. Summarizing group profitability on page 19. Core PPI is anticipated to reach EUR 1.1 billion in 2024, higher by 22% versus last year's mark. Incorporate also the decline of cost of risk to circa 50 basis points lead to an average net profit and EPS growth over the plan horizon of circa 13% per annum. As regards our NPL plan on page 20, we expect NPL ratio to further decrease below 6% in 2022 and below 5% in 2024. Coverage throughout the business plan period remains high at around 65%. Finally, on capital on page 21, fully loaded CET1 ratio is anticipated to increase by almost 200 basis points by 2024, reaching 14.6%.
The major driver of the increase is organic profitability, which adds circa 400 basis points in the three-year period. Furthermore, merchant acquiring divestment adds another 90 basis points. The above generated capital will comfortably finance our growth and pave the way for the initiation of a dividend payment based on 2022 profits at a circa 20% payout ratio. We are very pleased about our new three-year business plan and our targets for 2022. It is true that the recent geopolitical developments have produced some serious downside risks and uncertainties. As events are still unfolding, it is too early to quantify any impact. At the same time, our execution track record makes me optimistic that once more we will demonstrate a solid performance. This completes my presentation, and we may now open the floor for your questions.
Ladies and gentlemen, at this time, we'll 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 Sevim Mehmet with JP Morgan. Please go ahead.
Good afternoon. Thanks very much, and congratulations. Can I please ask just on your Ukraine and Russia exposure, are you able to give us a little more guidance on what you would expect to see in terms of sensitivities to your balance sheet or P&L? Do you have any exposure in Greece or international markets? I'd be particularly interested in your normalized cost of risk guidance for Greece. Have you done any pre-analysis to see what sensitivities lie there arising from this situation?
Okay. Thank you for your question. Let me start from the direct exposures, and let me state that the Eurobank's direct exposure to Russia or Ukraine related assets is material. Let me become more specific. In terms of loan exposure, this is below EUR 80 million, and the full amount is secured either with the cash collateral, which is for most of the amount, or with prime location real estate assets, mainly in London. There is also an exposure of less than EUR 50 million coming from securities related to legal entities from Russia. So this is a direct exposure, which is, as you can appreciate, immaterial. However, the main exposure comes from the economic impact of this situation to the economies of the countries in which we have a presence.
Thus, we have already said it is really early to make any assessment. Things are evolving on a daily basis. We can state some facts as we have them right now. Starting from Greece, the revenues that Greece has, either from exports to Ukraine and Russia or from tourism revenues are really very small. In terms of export of goods, the combined percentage of two countries is less than 1.5% of the total exports of the country. The same percentage, more or less, applies for tourism revenues from visitors coming from Russia or Ukraine. We are talking about very small figures. Since I mentioned tourism, let me confirm that we still expect a very strong tourism season for 2022.
An estimate would be that we should reach revenues of about 80% of 2019, if not higher, versus less than 60% of 2021. Direct impact for Greece is more. The impact on the economy is coming mainly through the mechanism of energy prices and inflation. A few days ago, the Minister of Finance presented some projections that for every EUR 10 sustained increase in the average price of natural gas, there is an effect of about EUR 600 million from the current account, and this is about 0.3% in terms of GDP. This effect may be mitigated if the Green Transition Fund is tapped or through other EU coordinated measures.
Now, moving into Cyprus, where the exposure is higher, the effect is coming from tourism and services business with Russian customers or residents. In terms of tourism revenues from Russians, this accounts for about 20% to 25% of the revenues. 2022 season had started very strong. Obviously to a great extent if all of these Russian revenues may be lost. Based on what we have now in terms of indications, a significant part of that may be recovered through guest flows from U.K., Israel and Germany and some other markets, more significant than the increase. Given that we operate a subsidiary bank in Cyprus, Eurobank Cyprus, we have run a big stress test to see the impact that we may have on our profitability there.
Based on our calculations, the impact is less than 10% of the profit before tax for our subsidiary. This is less than EUR 5 to 7 billion, which is a figure very small compared to the total group profitability. Overall, the combination of increased energy prices, inflation, increased market volatility and economic uncertainty may decelerate the pace of the expected growth. There are already, as you know, some analysts who project at the European level a decrease of the GDP between 1% to 1.5%. But again, we believe it is too early to make such an assessment.
It is also important to see if any of this effect can be mitigated from any sort of EU coordinated measures. Now, with respect to our business plan and any sort of effect that we may have there, let me pass over to Harris to give us some qualitative elements of how we can be affected. Harris?
Thank you, Fokion. As regards our business plan, first to note that our business plan was finalized at the end of 2021. The impact we could say may be located in the following areas. First on our growth. Considering an average for the planned period GDP annual growth rate of 3.5% for Greece and the region, this has been translated in our business plan to around almost double percentage annual net loan growth, meaning close to 7%.
In case of a lower GDP growth, there might be a negative effect for loan demand related to new investments. However, demand for working capital loans may increase, and that was the evidence that we see back in 2020, where we saw very high demand for working capital loans. One more, let's say, side effect is that the bond issuance by Greek corporate may also be affected negatively, which is in favor of bank loans. Furthermore, the current crisis may lead to a deceleration of the spread contraction that we observed during the last couple of years in corporate loans. Overall, the effect on net interest income, I would say is expected to be the more, if any.
We should also consider one more factor that we may also have an upside if we see interest rate increases. A scenario which is not unlikely for late 2022 onwards, taking it also into account today, ECB announcements. As you may have seen on page 9 in our business plan, this is based on the assumption of no interest rate increases. Now, going down to the P&L, inflationary pressures before turning to OpEx, as regards fee income, this may be more sensitive in NII, especially the one related with assets under management and capital markets, especially in the short term.
Inflationary pressures mostly coming from energy prices may have a negative impact through OpEx, primarily through G&A and the related expenses. Finally, if the high energy prices and the inflation persist for a longer time, we may have an impact on asset quality as they will affect the real income. So far in the first quarter of 2022, we haven't noticed such a deterioration as NPL formation is flat. Furthermore, we should not ignore the fact that in Greece in the last few years, we had a very substantial increase of deposits in the sector by about EUR 36 billion, which under the current circumstances is a significant buffer in view of inflationary pressures on real income.
Anyway, on the issue of asset quality, it is very early to make a quantified estimate. But we closely monitor any developments and the latest trends on this front, especially in the period Q2 and onwards. Now, as a conclusion, I would say that it is quite early to assess how the recent crisis will affect the economy and our business plan after we could say years of impressive recovery and be ready to embark on a cycle of sustained growth. However, the headwinds coming from the geopolitical upheaval, it is quite likely to be mitigated with coordinated measures, both at the local government, but more importantly, at the European level. When the landscape clears up, we are sure that the fundamentals for the positive scenario are still in place.
We should take into account the pro-business environment, the investment appetite, and the uplift source of funding. Not forgetting, of course, the role of RRF. Okay. Let me add one more thing, since you ask about our cost of risk of 65 basis points for 2022. As you can see on page 20, this is based on the assumption or the expectation of EUR 400 million net inflows for the year. Definitely, as Harry mentioned, there is a concern about the high energy prices and inflation put pressure on especially on households. At the same time, we should take into account that there is a very good decline in unemployment in 2021.
The market remains quite high, going into 2022, which means that we should see some increases in wages, which is another mitigating factor against inflation and high energy prices. Now, against these EUR 400 million expected NPE net flow, as Harry mentioned, in the first quarter, what we have observed is effectively zero. Therefore, this EUR 400 million effectively applies for the following three quarters.
That's all very helpful. Thanks very much for the detailed comments.
The next question is from Lana Floriani joining us with AXIA Ventures. Please go ahead.
Yes. Good evening, guys. Thanks for the presentation and well done on the results achieved in 2021. My first question is on dividends. I'm just wondering what is the process around that now going forward, and especially considering some of the geopolitical environments. I understand that the ECB has already asked the banks to kind of indicate some potential risks coming from Russia, Ukraine. Not only that, also what you discussed previously on the potential impacts of high inflation prices on local sectors in the economy and how that could affect the business plan. I'm just wondering if you already had this kind of conversations with them, and if you see this as a significant risk to the dividend story.
Also linked to that, when I look at your slide 21, these 50 basis points that you mentioned there as dividends for 2022, 2024, does that assume the same level of payout going forward or is there any change there? Secondly, I think just to confirm something that Harry said, if I understood correctly, that the NPE formation for Q1 2022 seems flattish. I understand that you are showing a decrease in stage two and stage three loans in Q4, and you also have that EUR 400 million expected inflows for 2022, in the absence of headwinds from inflation, energy, and geopolitical, right? I'm just confirming that the Q1 number is the flattish that I heard before. I misunderstood it.
My final question will just be on asset quality. Looking at your 2024 targets, I was just wondering if you could have gone for a more aggressive reduction in NPE ratio and why not? I mean, I understand that you're already very conservative on provisioning, but also seems like you have the coverage levels and capital and profitability to be more aggressive on that. Just wondering what's the rationale behind the current pace. Thank you.
Okay, Yannis. Thank you for your questions. Let me answer the one about dividends, and Harry will comment on the NPE plan and the targets that we have set for 2022, 2023 and 2024. Before that, let me confirm what both Harry and myself said that formation or net NPE flow for the first quarter is flat, it's close to zero. Now, in terms of the dividends, as you can see on page 11, dividend distribution is one of the pillars of our three-year plan. The bank has made, we believe, great progress in de-risking its balance sheet, enhancing its capital ratio and boosting profitability.
In this context, we have already presented our three-year plan to the supervisory, and we have already started a dialogue with him about the dividend distribution policy. I should say that this is a constructive dialogue. Although we have not decided on the most recent issues of the Ukrainian crisis because, in any case, it's very premature to discuss about it. I already mentioned that any direct exposure that we have is immaterial. Any sort of impact is going to come from the economy. We had a constructive so far discussion with the regulator and under the base scenario, we expect to pay dividends out of the 2022 profits at a prudent initial payout ratio of around 20%.
Answering your question, coming from page 21, we have assumed in the business plan, for both periods, the same payout ratio of 20%. Yes. Now, Harry, on the NPL.
As you rightly noted, we envisage a decrease of our NPLs below 6% in at the end of 2022, equivalent to EUR 2.4 billion NPLs, and below 5% by the end of 2024, implying an NPL population of EUR 2.2 billion. The major driver of the plan being organic decrease initiatives.
I would say that our target is in line with if you see the Greek NPL ratio before the financial crisis, and also you may note that Greece was never below 5%. These ratios are comparable with other countries in the periphery. Although as I said the plan was prepared at the end of 2021, and considering the current developments, we believe this is a realistic and prudent target taking into consideration the banking environment. Of course, we cannot ignore the high coverage ratio that we closed the year with 70% coverage ratio that gives us plenty of comfort as regards future initiatives on that front.
Okay, thanks. If I may just follow up quickly. I was just wondering if you have any kind of back of the envelope calculation for sensitivity of GDP slowdown impact on loan growth, cost of risk, and NPE inflows. I mean, now that the plan accounts for around 12% growth in 2022, assuming that let's say the figure is half of the 2.5, do you have any figures to share in terms of how much your loan book could grow? How much your cost of risk could change? And also inflows of NPEs?
Yannis, we don't have such sensitivity at the moment. What we usually use in terms of credit growth is that loans with credit expansion will be twice as high as the GDP rate. For the three-year period, with an average GDP of 3% to 3.5%, we have assumed 7% credit growth. Let me remind you that back in 2020, when GDP was negative, heavily negative, we had a very significant increase in corporate loans because most of the corporates have asked to get a working capital in anticipation of the unknown environment that they were facing. These sensitivities are not really very robust and depend on a number of other parameters.
If you remember, back in the last couple of years, in the COVID context, we assumed very high NPE formation figures which were never realized for a number of reasons. The context is so complicated and the stakes are so meaningful because of this, that it is, at least at this stage, quite risky to make any quantified projections.
That's clear. Thanks, guys.
The next question is from the line of Bordara Bertol with Bank of America Merrill Lynch. Please go ahead.
Good afternoon. First of all, congratulations for the good set of results and the very good plan. Just some questions about the plan. The first one is around the final capital level from equity fully loaded 14.6% in 2024. That seems to be a pretty high number. Just wanted to understand what is the rationale to aim for such a high number, and if you had a discussion with the regulator about this or not, and if this number can be maybe reduced so you could pay more dividends, if you end up being more successful in cutting down your non-performing exposures. Related to this question, with again, I think you should provide some clarity about this.
What could be the impact of Basel IV in the following year in 2025, which we don't see in these numbers? The other question that I have is one thing that I think on the cost of risk, I get on your point and on the NI, you know, you articulated your reasoning very well. The one thing that strikes me as a bit ambitious is the asset management part where you grow asset management by 30% CAGR. It seems to me that maybe, you know, this year is something to take into account. My question to you on this issue is what we should see in terms of AUM trend this year?
A bit early to say, but just a flavor about the flows that you're seeing. The second point is, given that there is a trend in growing your cost base by 2%, if there is any contingency plan that you can activate on the cost in order to offset maybe weaker revenues than the one that you have in the plan. Thank you.
Alberto, thank you very for your questions. In terms of capital, which is your first question, I think you refer to page 21. The increase we show is 14.6% fully loaded CET1 in 2024. It is correct?
Yes. It seems to be a high number. This is what I'm asking, why so high.
We don't think that this is a high number. We always want to be on the prudent side. Whether we could go with a more aggressive dividend distribution policy, I mean, to have higher payout. Let's remind ourselves that Eurobank does not distribute any dividend for more than 10 years now. Therefore, in the discussion that we have with the regulator, we should start from something which is prudent and relatively low, and then gradually to increase it. We believe that this is the right level to have starting this discussion with the regulator. Now, in terms of the asset management and your comment that we have aggressive cumulative growth over the 3-year period.
Let's remind ourselves that we start from a relatively low base because, during the 10-year long financial crisis, households in Greece have totally disinvested from any sort of investments, many mutual funds, and they had only deposits. Effectively through this growth rate, we aim to reach the levels of assets under management that we had before the crisis. Therefore, under a good macro scenario, we believe that this is feasible. Definitely for 2022, given the volatility that we see in the markets, this assignment becomes a little bit more challenging, and this is one of the risks that Harris mentioned before. Let's see how things will evolve over the next few weeks and months to reassess this rate.
For the three-year period, the objective is to reach levels that we have seen before. Therefore, we don't think that this is an over-aggressive level. Now on cost, let me pass over to Harris to give you a comment whether there is some buffer there to cut in case that we see some shortfall in terms of revenue.
Let me provide you with an overview regarding the cost line. As we show on page 17 of the presentation, our focus now becomes the overheads base in Greece to shift from run the bank to grow the bank. For the period 2021 up to 2024, we expect EUR 55 million savings from the resolution fund, as the contribution ends in 2024, and circa EUR 60 million from FTEs and other administrative expenses. Out of this saving, we could say that two-thirds of that is coming from staff. One-third coming from the rest of the G&A. In terms of FTEs, we will continue reducing the number through one of the exit scheme. For instance, in 2022, we announced a new VES scheme in February with an expected take up of higher than 300 FTEs and annual savings at the order of EUR 13 million per annum.
Concerning the branch network, it is the smallest increase, and we have already reduced it by 10% during the last few weeks at 275 branches. On the other hand, we turned part of the cost savings into investments in IT, digital, and human capital, as we said, to grow the bank and to digitize the bank, and this will increase related costs by around EUR 75 million by the end of 2024. Overall, we expect under the base scenario OpEx to be reduced by circa 6.5% from 2021 to 2024. The cost-to-income ratio [will] improve from 50% in 2021 to 43% in 2024.
In Southeastern Europe now, we have the one-off impact of Direktna Banka, and then we expect the cost to grow by approximately 2% per annum. However, the cost to core income ratio will decrease from 48% in 2021 to 46% in 2024. Now as regards to your question, of course, there are some lines in the OpEx where we have flexibility to cut, and this refers both to the staff expenses and to other G&A. However, following a very long period of continuous cost cutting and under the current inflationary pressure, you may appreciate that this is not as easy as it used to be some years ago.
Mr. Bordara, have you finished with your questions?
Yes. Thank you very much.
Alfredo, thank you. Thank you for your questions.
The next question is from Osman Memisoglu with Ambrosia Capital. Please go ahead.
Hello. Many thanks for taking my question. Just coming back to the asset quality side, I wonder if you could give us a bit more color on what kind of inflows, outflows are baked into that EUR 400 million. Would it be safe to assume given this was done at the end of the year and you see pretty much no formation that, you know, your EUR 400 million, putting aside all the craziness we're going through, is a bit conservative? Then, my second question is you kindly shared color on Greece and Cyprus, if you could share any color on potential impact on the Bulgarian business. Finally, just a technicality. On the 20% payout ratio, you will get quite a gain from the Triangle project. Will that gain be included? Those are my questions. Thank you.
Let's answer the first and the third leg of your question. As regards the net NP flow for 2022, it is decomposed to approximately EUR 770 million of gross inflows and close to EUR 350 million outflows. This comes up to close to EUR 400 million net flow. Out of that, the plan that we prepared was for about close to EUR 100 million net flow for the first quarter. However, as we still run through March, the first evidence is that net flow formation is flat-ish.
Regarding your third question, the answer is that this payout ratio is based on the normalized profit, i.e., before the significant one-off gain of merchant acquiring this investment. Now, in terms of Bulgaria, the reason why I didn't make any special reference to this country is because the business that it has with any sort of Russian or Ukrainian related accounts is very small, close to zero. Anyway, the figures I mentioned are at the group level and are anyway very small. So any impact that our subsidiaries there may have is from the impact in the Bulgarian economy that in our view is going to work in a similar way like Greece. So the lasting impact for the Bulgarian economy is going to be relatively small. Then any impact should be through the mechanism of energy prices and inflation.
Got it. If I can follow up on the NPE intro a bit, I'm guessing these were incorporating majority coming from the fallouts from GEFYRA 1 and 2. Was that the thinking?
That's a part of that. It's more part of that because both GEFYRA one and two have been structured in a way that provided strong incentives to borrowers to remain performing. This incentives being the decreasing subsidy quarter by quarter. The 18-month probation period during which the clients should remain performing. Based on the above and the overall good performance of this portfolio so far, we expect the default rate from GEFYRA to continue being low, i.e., between 5%-10% of the overall GEFYRA loans.
In order not to look around what it is, our GEFYRA take-up is EUR 2 billion, out of which EUR 1.2 billion is coming from mortgage loans and EUR 800 million from small business loans.
Okay. If I may just follow up on one more. You mentioned the net, flattish formation. Was it pretty much similar across the board? Like particularly in SMEs, are you seeing any deterioration, yet?
No, some expect as regards the specific sectors.
Perfect. Thank you.
Thank you.
The next question is from Alan Dominguez, and they are with Magellan Buying Investors. Please go ahead.
Hello. Thank you very much for taking my questions. I have three. The first one would be around the growth out of Greece. Do you think all this conflict that we are living right now is going to refrain you or limit you to grow outside Greece, or are you going to continue with your previous plans? My second question would be around the Greek investment property, Grivalia. If you could share with us what's the NAV of this business or the market value? Third question would be, did you think about doing some kind of share buyback instead of dividend or at least to propose this to the regulator? Thank you.
I will take the first and the third question, and Charis will comment on our real estate investment property. In terms of whether the recent unfortunate developments change our plan with respect to Greece, the answer is a clear no. We feel very comfortable with the business environment and the prospects for the Greek economy. Therefore, we're going to be fully committed to this business. Most of the loan growth in Greece was related with businesses, business loans, corporates and SMEs. A significant part of that was related to Greece 2.0, which is the RRF EU program.
This business has to do with the green transition of the economy, so investment in renewables, the digital transformation of the country, so investment in fiber optics and the internet, and also support for the export industry of the country. All these segments remain, I think, very valid even under the current environment. Therefore, we are fully committed in supporting them. Now, in terms of your third question, whether we consider any sort of buyback, I would say that one step at a time. As I mentioned before, we have not paid any sort of dividend for so many years. So we believe it is prudent to start with some sort of dividend policy.
Down the road, we can consider other options. At the moment, we are not considering any sort of share buyback. Regarding your second question, let's go on pages 30 and 31 of the presentation that are quite relevant. You may appreciate that investment property is part of the bank's balance sheet. It's not a separate entity so as to have a separate NAV. We can make only assumptions about what is the implied NAV. One assumption could be the following, that the RWAs of the assets of investment property are EUR 1.4 billion. The RWAs are equivalent. We are talking about the book value that is equal to the market value.
The implied NAV may be the minimum required capital to employ this business. But it is if you multiply by, let's say 16%, it comes up to an implied NAV yield for close to EUR 100 million. If you use this ratio, then the return on capital employed is huge. For that purpose, we have made, if you saw page 30 on the note 5. We have made an arbitrary assumption so as to avoid any beautification that this standard book value is based on an internal capital allocation assuming delta equity ratio 2.1. But one can make its own assumption in order to calculate this.
Okay.
As I said again, the book value of investment properties EUR 1.4 billion.
Mr. Dominguez, have you finished with your questions?
Yeah. Thank you.
Thank you. The next question is from the line of Iqbal Mirza with Morgan Stanley. Please go ahead.
Hi. Thank you for the presentation. I have a question on the sensitivity of your NII to potential rate hikes in Europe. Can you provide, like, a numeric sensitivity to that please?
Okay. First of all, let's say that most of our loan book is on a floating rate, so there is full sensitivity in the Euribor rates and a significant part of that also is floored to zero. That makes the analysis a little bit more complex. Let's explain what we mean with that. Currently the Euribor is way below zero. It's close to -50 basis points. For any movement of Euribor between, let's say, the current levels to zero, we have a sensitivity of about EUR 12 million per 10 basis points. Moving from -50 to zero for this 50 basis points, there is a sensitivity of EUR 60 million bottom line effect.
These changes at the time that Euribor moves at levels higher than 0. Let's say for levels of Euribor between 0 and 50 basis points, the sensitivity increases from EUR 12 million to EUR 13 million per 10 basis points. Because the reason is that more loans come at work at this level. Therefore on a cumulative basis, if Euribor moves from 0 to 50, the total effect in terms of bottom line is 150 basis points. Now if we move at higher levels, the sensitivity decreases below EUR 30 million per 10. The reason is that for higher Euribor rates, some of the increase should pass to depositors, and therefore the sensitivity becomes smaller. Hopefully, I described that quite clearly, but let me know if you have any sort of follow-up question about it.
Thank you. That's very clear.
The next question is from the line of Gabor Kemeny with Goldman Sachs. Please go ahead.
Good day. Thank you very much for the presentation. I have two clarifying questions. One is on the dividends. Maybe could you comment on some minimum targeted level of capital adequacy ratio by management, which would you like to see going forward, when you make the decisions on capital distributions or other investment projects? Another question is on sensitivity. You provided the sensitivity for the bottom line. Maybe you could add some color also on net interest income, if I could ask that. Thank you.
Regarding your second question, the answer is very easy. It's exactly the same. It's the sensitivity of NII directly flows down into the bottom line. Harry, in terms of the first question. We can say that we feel confident with a CET1 ratio between 13.5%-14%. We have already reached that level as of the end of the year. As we saw page 20, based on our three-year business plan, we're able to generate approximately 400 basis points of fully loaded CET1 to our capital at the end of 2024 out of profitability.
This will allow us to finance growth, address regulatory requirements, and resume dividend payments, maintaining at the same time a solid capital position.
Great. Thank you very much.
Okay.
The next question is from the line of David Daniel with Autonomous Research. Please go ahead.
Good afternoon. Thanks for the call and taking my questions. I've got two quick ones, hopefully. Just, we've seen a lot of volatility in rates markets. I'm just interested to hear of any volatility in your CET1 ratio to movement in Greek government bond yields. Any details you can provide there would be great. Secondly, just assuming that capital markets return to some sort of normalcy in maybe in Q2 or H2, can you just talk us through your issuance ambitions in credit markets this year? That'd be great. Thanks.
Thank you for your questions. Let's start from the GGB. It is our major holding. The majority of GGB bonds are classified in amortized costs, so there's no impact on the NIM. The remaining GGB are classified as investment securities as provided through OCI, and they are almost fully hedged against the interest rate risk.
The capital impact year-to-date is approximately 30 basis points, which includes the negative mark to market of total bond position, not only GGB but our total bonds position, due to spread widening, gains on hedging estimate and some impairments that we have performed on Russian FX in our position that Efthymios mentioned before marking them down substantially. If we add all this, we have an overall impact of approximately 30 basis points. Now, let's go to MREL that actually it is related with our issuance activity. Based on the official SRB decision, and this information is already known to the market.
The MREL requirement is 26.9% of RWAs, including 3.56% of CBR. The overall shortfall should be covered by the end of 2025. As regards this year, although the target is not binding, we plan to raise EUR 1 billion for MREL purposes. Of course, issuance has become more challenging under the current volatile conditions, but experience has shown that the high volatility is temporary, and we expect rates to come down in the next few quarters, which would open the window to tap the market at more reasonable rates.
Great. Just on top of that, MREL issuance, should we think about potentially Tier 2 refi in addition? I guess I'm talking about the Tier 2. I think the call dates are approaching in next year.
Sure. I remind to our audience that we have outstanding EUR 950 million Tier 2 at 6.4%, fully subscribed by the Greek state. The callability starts in February 2023, and we plan to exercise it most probably in two tranches. Of course, again, the market is very volatile, but we have in front of us one-year horizon from now, and we expect by then markets to normalize so as to tap them at a better rate.
Thank you. Very clear.
The next question is a follow-up question from the line of Osman Memisoglu with Ambrosia Capital. Please go ahead.
Just a quick clarification. You have 6% growth for fees. Is that excluding negative impact from merchant acquiring carve out, or how should I think about that? Thank you.
In this 6%, we have accounted for the negative impact from divesting the merchant acquiring. Otherwise, it would be higher.
How much roughly impact would you share to?
Close to EUR 15 million.
How much?
Close to EUR 15 million.
Fifteen.
15. 15.
Thank you.
The next question is from the line of Luis Garrido with Morgan Stanley. Please go ahead.
Hi, this is Luis Garrido from Credit Research at Morgan Stanley. Thank you very much for taking my call. My questions, and I have two questions. One is a follow-up from Daniel regarding your capital plans. Just to be clear, your assumption is that no AT1 issuance from now until 2024, and just refinancing the Tier 2 external with the market. If you can confirm that, it would be great. My second question is about Cyprus. What are your kind of plans in Cyprus given the recent purchase of participation in Hellenic Bank? Thank you.
Let me start from the first leg of your question. We confirm both your understandings, that we do not intend, and we haven't included in our plan an AT1 issuance. We intend to exercise the callability and refinance the Tier 2 from the market, once the market conditions allow it. Now, on Cyprus and our stake in Hellenic Bank, we have a very clear strategy, which is, we are interested in increasing our stake, but we are not in a rush in doing so. Obviously, this only can be done at levels as we believe are levels we feel comfortable to pay. Therefore, at the moment we are in a waiting mode, without rushing to do any next step.
Okay, that's very clear. Just a quick question. Why not issue AT1? Is it because of pricing or because? What is the rationale to be that clear that you are not planning to issue any AT1 in the next two years?
We have not just included that in our capital plan. It is obviously an option that at some point we could exercise, but as we speak, it's not part of our capital plan.
Okay. Thank you very much. It was very clear. Thank you for your presentation.
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 call, and especially thank you very much for your very interesting and constructive questions. We would be available, Harris, myself, and obviously our investor relations team, for any follow-up discussions. Thank you.
Ladies and gentlemen, the conference is now concluded. You may disconnect your telephone. Thank you for calling, and have a pleasant evening.