Ladies and gentlemen, thank you for standing by. I'm Constantinos, your chorus call operator. Welcome, and thank you for joining the Eurobank Holdings Conference Call to present and discuss the Q3 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 the Eurobank 9 months 2021 Results Presentation. Together with me is our CFO, Harris Kokologiannis, and the investor relations team. We will start with some key recent developments, then present our results and answer your questions. Starting from the macro level, the full year 2021 GDP growth is expected to exceed 7%, despite the recent pandemic surge, which may have a small impact on the Q4. The tourism season was extended in late October, and the 2021 revenues may be close to 60% of the 2018 mark, while the prospects of 2022 are even better based on early bookings. Industrial production has fully recovered and reached 10% higher than pre-pandemic levels in the Q3.
At the same time, foreign direct investments are accelerating and have already topped EUR 10 billion in 2021. Greek corporates and banks have tapped the markets with debt and equity issues of EUR 7 billion and EUR 3.6 billion respectively. Combined with investments supported by the resilience and recovery EU funds, for the next year, we expect strong GDP growth close to 5%. For the five-year period, 2022-2026, around 3.5%-4% per annum on average. The Q3 of 2021 is an important milestone for the Greek banking system as Eurobank becomes the first Greek bank achieving a single-digit NPL ratio after a 10-year long crisis. We expect the whole sector to be at single-digit ratio within next year, thus laying the ground for the sovereign investment-grade rating.
Now, moving into our financial results for the nine months of the year. These are highlighted on slides 6-9. Our net profits in the nine months reached EUR 298 million, of which EUR 103 million in the Q3. Core provision income was up by 4.1% on a year-on-year basis, driven by strong fee growth. In the same period, the loan loss provisions are down by 25%, and as a result, the core operating profit is up by 6%. Our international operations continued a strong performance with net profits of EUR 111 million in the nine months of the year. Performing loan balances have increased by EUR 600 million. Deposits were up by EUR 3.8 billion in the same nine-month period, and the loan-to-deposit ratio declined to 74%.
Regarding debt issuance, our second benchmark size senior preferred bond was completed in September in order to meet the interim MREL target. Moving now on asset quality on slide eight, let me highlight the massive improvement achieved with a decrease by EUR 20 billion of NPAs since 2016. Following the next securitization, the NPA ratio reached 7.3% and is expected to remain at current levels in the Q4 of this year. The coverage ratio was at 73%. Moving on slide nine, our total capital ratio stands at 16.7%, while the fully loaded CET1 increased by 20 basis points last quarter, reaching 12.3%. Now, beyond Q3 financial results, our two capital activity transactions are in their final stages.
The strategic partnership in the merchant acquired business will be signed in the next few weeks and close in the H1 of the year. The synthetic securitization of EUR 2.21 billion performing corporate loans is on track to close before year-end. Outside Greece, the merger of Eurobank Serbia with Direktna Banka is also closing before year-end and will improve our footprint in the local market. In summary, as we approach year-end, it becomes evident that Eurobank is outperforming all key targets for this year. Profitability, capital, and NPA ratio.
Given a positive macro backdrop in all our core markets, we aim to deliver on our next targets, namely the double-digit return on equity as early as 2022. Furthermore, next year, after we announce the full year 2021 financial results and having submitted the 2022 budget and our three-year business plan, we aim to initiate the supervisory dialogue on dividend policy. At this point, I would like to ask our CFO, Harris Kokologiannis, to present our nine months results before opening the Q&A session.
Thank you, Karavias. Let me first comment on the accounting treatment of the Mexico securitization. In the Q3, EUR 3.2 billion Mexico loans have been reclassified as assets held for sale and will be deconsolidated in the Q4 upon the closing of the transaction with doValue. At that time, the Mexico senior notes of EUR 1.6 billion will be recognized as an asset on our balance sheet. In this presentation, for comparability purposes, Mexico senior notes have been included pro forma in the September-end asset figures. In addition, Q3 results include the impact from the Mexico loss of EUR 72 million.
Let's now provide some more insight on the Q3 results. Starting on page 17 on lending evolution. Performing loans increased organically year-to-date by EUR 600 million, of which EUR 400 million in the Q3, driven by Greek corporate and SME loans. During the last few months, loan demand has been accelerated, and considering the pipeline, we expect loan growth for the full year to reach approximately EUR 1 billion. Moving on to funding and liquidity on page 18. As shown at the right of the page, group deposits increased in the Q3 by EUR 1.4 billion and year-to-date by EUR 3.8 billion.
Out of this increase, EUR 2 billion are coming from Greece and EUR 1.8 billion from SEE. Net loans to deposits ratio receded in the Q3 to 74% and LCR ratio increased further to 168%, as shown at the left of the page. Moving to profitability on page 23. Net interest income decreased quarter-on-quarter by 1.5% to EUR 330 million due to the lower contribution from TLTRO and the cost of senior bond issues, which offset the higher performing loans margin. On a year-on-year basis, NII has grown by 2% in line with what we anticipated. On page 24, commission income continued its growth trajectory, showing an 18.4% year-on-year increase.
Quarter-over-quarter, commissions increased by 6.1% at EUR 117 million, mainly driven by network transactions and credit card income also boosted by tourists. On page 25, operating expenses are flat quarter-over-quarter and year-over-year, as higher IT and digital related expenses, including depreciation, are offset by lower staff costs. On page 27, we summarize the core operating performance for the first nine months of the year. Core PPI is up year-over-year by 4.1%, mainly driven by non-NPE related NII, high commission income and lower staff costs, which more than offset the lower income from NPEs by EUR 97 million.
Cost of risk amounted to 1.1% for the nine-month period, and loan loss provisions are lower year-over-year by 25%, reflecting the deleveraging of NPEs and the better asset quality trends. As a result, core operating profit is higher year-over-year by 61% at EUR 357 million. Moving on to asset quality on page 29. As shown at the top left of the page, NPE formation in the Q3 was negative by EUR 26 million, continuing the better-than-expected trend. NPE ratio post Mexico decreased to 7.3%, with the remaining NPEs at EUR 2.9 billion. Coverage in the Q3 increased to 73%. Considering the write-offs for the Q4, coverage is expected to be at the end of the year between 66% and 68%.
Overall, we are very pleased to note that we are outperforming all our profitability targets for the year as presented in the first investor call of 2021. More specifically, on core PPI, we expect to be higher than our initial estimate of EUR 875 million. Cost of risk is estimated for the full year lower by 20 basis points initial guidance at 1.1% of net loans. As a result, profit before tax is expected to be higher than EUR 540 million compared with the initial guidance of EUR 500 million.
A similar outperformance is expected on capital, as shown on page 34. More specifically, accounting for the announced capital investment initiatives which are at their final stage, the year-end outlook is for capital ratios higher by 50 basis points compared to the initial guidance. Therefore, we expect to close the year with a total CAP and a fully loaded CET1 above 16.5% and 13.3% respectively. 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, 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 Jonas Floriani with AXIA Ventures. Please go ahead.
Good afternoon, team. Thanks for the presentation, and well done on the results. I have a few questions. First of all, on asset quality. I remember that in the previous quarter, Mr. Karavias was expecting some inflows in the H2, materializing on July 30. Just wondering now how you're feeling for the next quarter, given that you're also keeping your cost of risk stable in terms of guidance. So just wondering what kind of magnitude of inflows you can expect in the year, in the last quarter of the year.
Then secondly, a question on margins and linked to your slide 22. I was just wondering if you could give us an indication of margins on new business that you're giving out right now in terms of loans, so we could compare to the numbers on slide 22. Finally, just a quick one on the other income, if you could give us a breakdown of the other components of the other income, that'd be great. Thanks.
Jonas, thank you for your questions. Let me take the first one, and Harris will comment on margins and other income. You are right that in the last conference call, we have said that we were expecting for the H2 of the year an NPE increase of about EUR 600 million. It appears that this estimate was already conservative. Let's take it from the beginning. Overall, what we have seen in the nine months of this year is that NPE formation has been substantially lower than initially anticipated. Flows from moratoria have been low and defaults less than 10%. As a result, as Harris mentioned, as you can see on slide 29, NPE formation in the Q3 was negative by EUR 26 million.
As you can see on page 13, this performance was uniform along all segments of loans. Now, based on what we have seen so far about the Q4, we expect formation to be positive around EUR 100 million, so quite lower than what we said last quarter. Taking into account the expected loan growth and the write-offs that we are planning to do in the Q4, the NPE ratios should remain broadly unchanged from the current level, so around 7.3%, and the coverage to be below 7% in December 2021. In terms of cost of risk, we keep the same guidance, which is 110 basis points for the full year 2021.
Now, obviously there are a number of factors that affect asset quality either positively or negatively. Starting from the negative factors, I think you would agree with me that one of them may be the recent surge of the pandemic. However, the economy still remains 100% open, and I think any such effect would be muted unless we see a serious deterioration. Now, a more important factor may be the elevating energy prices that we observe both for households and for businesses, and this affects the disposable income. On the positive side, retail sales have recovered from 2020 levels, and they are at levels similar to 2019.
For instance, in the Q3 of this year, retail sales were 12% higher than the respective quarter of 2019. Performance is quite strong. There is also a positive wealth effect as residential real estate prices in Greece are up 7.9%, year-on-year in the Q3 of this year based on a bundle of this data that came up a few days ago. This is where we stand with asset quality. Let me pass over to Harris about your next question.
As regards the first leg of your question, the other income almost exclusively is coming from sales of investment securities, mainly GGBs, recovery bonds. Now, as regards the spreads, we see a picture that is quite stable in the last few quarters, in the sense that we see some general decline on the corporate spreads as the new loans are coming in with a bit lower spreads. While on the retail, the spreads are broadly stable. This is a picture actually that we are going to face in the next year as well.
Already the acceleration of a new demand actually offsets this general decrease that we see on the spread. We should expect as of next year especially that the impact of the new volume to offset any decrease of any negative impact from margins, especially in the corporate.
Got it. Thanks. Could you please just remind us what is expectation for 2022 in terms of disbursements and increase in the net loan book or performing loan book?
Sure. Let me provide you an overview of where we stand on loan growth and the context in general before entering to the specific numbers. As we mentioned during the introduction, as Fokion mentioned, economic sentiment in Greece is becoming very strong. According to EU data, it's approaching a prior high that we had before the pandemic. Tourism had an above expectation seasons. Manufacturing hit a multi-decade high. Construction in all fronts is back. We see significant activity across all sectors, but it's also underlined by the high amounts of FDIs that we had year to date.
Specifically, the FDI exceeded for the nine months of this year EUR 10 billion and the more important actually, it extends to all sectors of the Greek economy. Now, going forward, the sectors of the economy that are expected to play a key and leading role are, of course, those of tourism, shipping, energy, infrastructure, real estate and industry including manufacturing. In this dimension, the RRF loans will act as an accelerator for the above. At the same time, demand from individuals is also accelerating.
The strong real estate market supports the demand for mortgages, while in consumer lending, we see strong demand on auto loans and durable goods loans. I also should not forget about the regional subsidiaries that showed, in the last quarter, a very strong loan growth. Coming to the numbers, year to date, we have seen an organic network growth of performing loans at EUR 600 million. Looking at the pipeline, this is expected to reach EUR 1 billion by the end of the year. Going forward for the next year, we should expect an average annual growth in the area between 6%-7%. I'm talking about Greece and SEE.
Jonas had also third question about other income.
I heard.
Yeah. Thanks very much.
The next question is from the line of Osman Memisoglu with Ambrosia Capital. Please go ahead.
I just wanted to follow up on the previous question regarding performing loans and what you have mentioned on loan disbursements. The EUR 37 billion we see, should we expect that to move to EUR 37.5 billion or something like that by the end of this year? Just to get a benchmark for next year. The second question is, there have been some news in the media over the last couple of months touching upon potential negative deposit rates for commercial deposits or maintenance fees. Is there any color you can share on this topic with us? Thank you.
Starting from the second question, we're exploring all different options at the moment, but we have not taken any sort of a decision yet.
Are you trying out anything yet or you're just considering?
We're just considering.
Okay.
Regarding your first question, if I got it right. At the end of the year, we expect the performing loans balance close to EUR 37.34 billion.
Okay. Versus 37.0,
Correct.
About 300-350 increase.
Close to EUR 400 million.
Perfect. Thank you.
Yes, EUR 400 million.
Great.
The next question is from the line of Mehmet Sevim with JP Morgan. Please go ahead.
Thank you. Good evening. I just have one technical question first of all, please. Can you remind me how I should think about the TLTRO roll-off contributions in the coming quarters, given it's been a little volatile this year? Is the current run rate what we should assume for what will come in the coming quarters?
The background is that in the H1 of the year we had a gross impact of close to EUR 60 million with EUR 33 million in the first and then EUR 28 million in the second. In the Q3 we had EUR 19 million, and in the Q4 we should expect something at the rate of EUR 12 million. Going above this, the total gross impact, this is quite important, of approximately EUR 90 million. For next year, we should expect a similar amount or slightly higher.
Okay. That's very clear. Thank you, Harris. Secondly, looking at your original 10% ROE guidance for next year with these EUR 0.15 of EPS, which levers are tracking ahead of your expectations so far? Are you able to provide any early guidance of what could go better next year than your initial expectation, which was presented late last year? What could go worse the same?
Okay, for next year, we should be able to provide you some more detailed guidance during the next presentation we have when we have the full year 2021 financial results. At the moment, we are finalizing the budget for next year. Let's wait a little bit more, and we will be able to provide you more detailed guidance. However, we stick on our commitment about this double-digit Return on Equity, this 10% Return on Equity for 2022.
This is something that it is going to be delivered based also on the first numbers that we have seen out of this budget. It is important that we are going to start 2022 from a solid base, given that this year we have outperformed, as Kai mentioned, in all the relevant KPIs, including pre-provision income, profit before tax, NPE ratio, and capital ratio.
Okay, that's very clear. Thank you. Finally on Bulgaria, how do you expect the competitive environment to shape up there with this ongoing consolidation that's happening? Obviously you do have a solid market share as the number four player, but the top three seems to be consolidating quite aggressively. Recently we've seen some M&A there as well. In the next two, three years, do you see any risk of increasing pressure there? We've also seen M&A at pretty good prices recently. How do you see Bulgaria as the franchise to your overall group in the next coming years? Would you see any M&A or sale potentially or an acquisition, et cetera? Any broad views would be very helpful.
You are right that we have seen a very interesting transaction out of this jurisdiction at a quite high multiple of tangible book value. I think this is positive news for the market because consolidation is moving forward. As you would appreciate, this is good news for all remaining participants. The pricing power of the remaining banks in theory should improve. Also the multiple that was paid for the bank that was sold shows also that market participants do believe in the growth potential of this market. This is a view that we share for quite some time now. This is the reason why we have strengthened our presence in this market during the last seven years.
Just to give you a figure for us, if it were to apply the same multiple to our Bulgarian subsidiary, the value would be close to EUR 1.5 billion, which is a very significant portion of our total current market cap. Now, from our side, as we have said, Bulgaria is one of our core markets. Therefore, we would like to grow our presence there, either organically or if there is any sort of opportunity through an acquisition, it is something that we are going to consider. Again, a valuation that would make sense for us. We see very good prospects in the market overall.
Okay. That's very helpful. Thank you very much, and have a nice evening.
The next question is from the line of Daniel David with Autonomous Research. Please go ahead. Mr. David, can you hear us?
Sorry, can you hear me now?
Yes, we can. Please go ahead.
Oh, great. Sorry about that. Thanks for the call. Just a couple of quick ones. Could you just give us an update on the moratoria balance you have outstanding and essentially the balances in step up and the bridge scheme? Secondly, just looking at your debt stack and where some of your bonds trade, would you ever consider refinancing the Tier 2 that you have outstanding, which is held by the government? Thanks.
Okay. The line was not so great. The first question was about moratoria and the step-up program that we have active as we speak. In terms of the moratoria, effectively, the balance that have remained under moratoria is very small. The last exposure under moratoria had to do with the tourism sector, the hotel and tourism sector, that anyway is doing very well, as we mentioned already. Therefore, effectively we have no outstanding balances in moratoria. Now, there is. We have these two step-up programs, Estia 1 and Estia 2. The first for residential real estate, the mortgages. The second for SMEs, which are going to be active until the end of 2021.
It is important to notice that these programs have been structured in a way that provides a strong incentives to borrowers to remain performing after the end of the programs. I think it is fair for someone to ask how we would expect these loans under these two programs to perform in the beginning of 2022, when the state support will not be there anymore. We are positive overall. One of the reasons we are positive is the way that these programs have been structured. The state support declines over time, and if at some point the customer misses a payment, then he loses the full state support that he has received. For any customer it would be very important to remain performing. A second issue.
Sorry, could I just ask on that? Could you just give us a feel for the size of the balance that you were just kind of talking about, heading into-
It is EUR 2.4 billion into the two programs.
Thank you. Yeah. The second was just on the Tier 2, whether you'd consider refinancing it given where it's trading at the moment.
Sure. We have a tier two outstanding of EUR 950 million that was issued back in 2018 and fully subscribed by Hellenic Republic. We have a call option as of January 2023, and this is at a cost of 6.4%. Considering the recent market dynamics, there may be an opportunity for cost optimization. However, this is something that we are going to explore more going closer to that date.
Thank you.
The next question is a follow-up question from the line of Jonas Floriani with AXIA Ventures Group. Please go ahead.
Yes. Hi, guys. A question on risk-weighted asset density. I was just wondering if you can give us a high level comment on how your risk weights are changing now that you see there's a significant change in your balance sheet. You know, any kind of indication on percentage points if I look at stock or reported numbers versus where you're seeing the risk weights right now or you'd expect them to be? That would be good. Thanks a lot.
To be quite quick on my answer, the new production that we expect on loans going forward should lead as regards the credit risk to an increase of RWAs with a density between 55%-60%.
That's for the blend of the disbursements, which I think the vast majority should be on the corporate side, right?
Mr. Floriani, have you finished with your questions?
No, I just asked, so this is for the total new disbursements, meaning that the vast majority of it is corporate 'cause the retail carries a much lower number anyway.
Going forward, we get a higher and higher contribution on that. Of course, up to now, our corporate had the main impact, but in the planning horizon, retail will have a significant contribution. Keeping in mind the budget figures, the percentage that I provided to you actually concern the blended mix of the growth going forward.
Got it. Thank you.
As a reminder, if you'd like to ask a question, please press star one on your telephone. The next question is from the line of Konstantinos Manolopoulos with Optima Bank. Please go ahead.
Yes, hello. From my side as well, thanks for your time and the presentation. I have a quick one on capital, please. You are arguing that you expect your capital ratios to increase by 100 basis points by year-end. You have planned for the synthetic swap securitization along with the sale of your merchant acquiring business which I think you said it's gonna happen in 2022 in the H1. The driver for the 100 basis points enhancement is the, say, 20-something basis points from your typical quarterly profitability and the rest 80 basis points is the synthetic swap. Is it something else? I mean, do I miss something?
Let me clarify the landscape on that. Let's get the total cap ratio of September end was at 15.7%. The outlook for the year end is for the total cap higher than 15.5%. This includes the impact of both transactions, i.e., synthetic securitization and the merchant acquiring disinvestment. For which our estimate is that their impact will be at least 100 basis points. However, we have some positives and some negatives. On the positive side is the impact of this total transaction. It's gonna be the quarterly profitability of course.
On the negative side, we have some negative markdown of recovery bonds. We should expect some further increase of RWAs due to growth. We are going to have a negative impact from the increase of expected loss shortfall due to write-offs that we are going to have at the end of the year. The mix of all these concludes to the estimate that we provide.
As far as the synthetic swap is concerned, you are targeting something like EUR 2.5 billion, right?
The loan perimeter, and it's about corporate and SMEs, is close to EUR 2.2 billion.
The saving of this perimeter in terms of RWA?
Given that we have not announced yet the other transaction, let me. I'm talking about the merchant acquiring disinvestment. Something that will be done in the H1 of December. Let me repeat our estimate that for both, from both transactions, i.e., synthetic securitization and merchant acquiring, we expect an impact of at least 100 basis points both.
Okay. Fair enough. Thank you.
Yeah.
Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Karavias for any closing comments. Thank you.
Thank you. We conclude our conference call. Thank you very much for participating. Also, thank you for your questions, and we would be available either Harris or myself or our Investor Relations team for any follow-up questions or for any follow-up conference call.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for calling and have a pleasant evening.