Ladies and gentlemen, thank you for standing by. I am Maria, your Chorus Call Operator. Welcome, and thank you for joining the Eurobank Holdings conference call to present and discuss the second quarter 2021 financial results. All participants will be in a listen-only mode, and the conference is being recorded. The presentation will be followed by a question-and-answer session. Should anyone need assistance during the conference call, you may signal an operator by pressing star and zero on your telephone. At this time, I would like to turn the conference over to Mr. Fokion Karavias, CEO. Mr. Karavias, you may now proceed.
Hi, ladies and gentlemen. Good afternoon, and welcome to the Eurobank first half 2021 results presentation. Together with me is our CFO, Harris Kokologiannis, and the investor relations team. Let us present our results and key recent developments before we answer your questions. Starting with the macroeconomic front, despite the spread out of the Delta variant, sentiment remains positive, as shown by domestic economic activity indicators. Deposits keep increasing in the banking system. Real estate prices are moving upward, and the asset quality trends remain resilient and better than even revised estimates. At the same time, foreign direct investments are accelerating across different sectors, and economic activity recovers, as seen in the tax revenue turnover moving higher than the 2019 level in the second quarter. The tourism season seems stronger than initially expected, and current estimates point to revenues of at least 50% of 2019 season.
Greece recently gained approval for its plan for the resilience and recovery EU funds and expects EUR 7.5 billion disbursements this year, of which EUR 4 billion was already received. It appears that the strong growth will extend into the 2021-2026 period, for which we expect annual GDP growth of 3.5%-4% on average, underpinned by the RRF. The above trends, together with the Greek banking system delivering the balance sheet clean up from legacy NPEs, make a sovereign credit rating upgrade to investment grade likely in the next 16-18 months. Let's see our financial results for the first half of the year, as highlighted on slide four. Our profits in the first half of the year reached EUR 195 million, of which EUR 123 million in the second quarter. Core provision income was up 2.4% on a year-over-year basis and 4.5% from the previous quarter.
In line with our guidance, net interest income was lower by 2.8% in the first half of the year and stable compared to the previous quarter. Commissions increased strongly by 16% year-over-year and 12% on the previous quarter, while operating expenses were slightly lower. On asset quality now, the better-than-expected trend continued into the second quarter, with organic NPE formation being negative by EUR 43 million. The cost of risk ratio reached 1.2% in the first half of the year. Our total capital ratio stands at 16.6%, while the fully loaded CET1 increased by 20 basis points last quarter and reached 12.1%. New loan disbursements, mainly business loans, reached EUR 3.4 billion in Greece in the first half of the year. Deposits were up by EUR 2.4 billion in the same period, and the loan-to-deposit ratio declined to 75%. Finally, in our international operations, we recently announced two initiatives.
One in Serbia, the merger with Direktna Banka, and the second in Cyprus, a minority participation with Hellenic Bank. This is in line with our strategy to further diversify and strengthen our business in these countries. The existing operations continue delivering in the meantime, with net profits of EUR 73 million in the first half of the year. Moving beyond the second quarter financial results, we successfully completed the 2021 SSM stress test, as shown on slide five. Eurobank ranks among top European banks, based on the fully loaded CET1 depletion of 433 basis points under the adverse scenario in the period 2020 to 2023. This is the best performance among local banking peers and reflects the NPE reduction already achieved, as the capital depletion under the adverse scenario regulatory capital requirements in the future.
Let me now continue with an update on the Mexico securitization, highlights of which are on slide six. On Mexico, we have a binding offer from doValue. We intend to reclassify the securitized portfolio as held for sale in the third quarter and deconsolidate it in the fourth quarter. Our NPE ratio pro forma for Mexico stands at 7.3% in June 2021. The updated capital impact for the transaction is estimated at -10 basis points only. As a result of the better-than-initially expected capital impact of Mexico, our full-year 2021 total CAP is estimated now at 16.4%. That is 40 basis points higher than the previous estimate. Regarding the other two capital enhancement transactions, our plan for a strategic partnership in the merchant acquiring business, we received competitive binding offers.
We aim to decide on the preferred bidder in the next few weeks and sign the agreement in the 4th quarter. The synthetic securitization of performing loans is also on track to close before year-end. In summary, Eurobank delivers on all its priorities, namely profitability, asset quality, capital, and regional expansion. The operating performance is in line with our expectations for 2021, and the outlook for 2022 is even better as macro trends in Greece improve. In a strong economic environment and having already the best support metrics and the most diversified business model in the sector, Eurobank is in the pole position to expand its profitability in the coming years and deliver double-digit return on equity as early as next year.
Finally, importantly, as legacy NPEs are behind us and the bank has started generating strong organic capital, all necessary preconditions are in place to initiate the supervisory dialogue on dividends distribution. At this point, I'd like to ask our CFO, Harris Kokologiannis, to present you our first half results in detail before opening the Q&A session.
Thank you, Fokion. Let's now provide some more insight on the second quarter results. We start from the capital position on page 10. In the second quarter, our fully loaded CET1 ratio increased by 20 basis points, amounting to 12.1%. The phased-in total capital ratio reached 15.6%. The drivers of the year-to-date capital movement had been fully anticipated in the 2021 capital plan presented in March. Accounting for the updated impact of Mexico and the announced capital enhancement initiatives that are in progress, the year-end outlook is revised higher with total CAP and fully loaded CET1 ratios at 16.4% and 13.2%, respectively. Moving on page 19 on lending evolution. Loan disbursements increase continued to be strong at EUR 3.4 billion in the first half of the year. Performing loans increased by EUR 1 billion year-on-year, driven by corporate and southeastern Europe.
We expect loan growth for the group in the second half of the year to reach EUR 1 billion, with July already being higher by EUR 300 million. On pages 20 and 21, we present an overview of the RRF pillars and the linked investments, the program size, and the split between grants and loans. As shown on page 21, the loans part may lever up to EUR 30 billion investments to be funded at very attractive lending costs. Eurobank is well-positioned to take the most out of this opportunity, and to this extent, a dedicated team is offering the appropriate advisory support to its clients as regards RRF project assessment.
Participation in RRF, combined with the underlying credit expansion driven by the solid growth of the economy for the next three years, are expected to accelerate loan growth for the group to circa EUR 2 billion per annum for the period 2022 to 2024. Moving on funding and liquidity on page 22. As shown on the right of the page, group deposits increased in the first half of the year by EUR 2.4 billion, largely driven by the extensive state support measures to the economy, lower consumption, and the increased 2020 loan disbursements. Net loans deposit ratio is sitting in the second quarter, 75%. NPL ratio increased further to 166%, as shown at the left of the page. We are addressing the increasing servicing, which was challenged through two main categories.
First, compressing deposit cost, which is approaching the zero level as shown on page 24, and second, by intensifying our efforts to offer mutual funds and bancassurance products, as will be shown shortly. Moving to profitability on page 25, net interest income was stable quarter-on-quarter at EUR 335 million. As the lower contribution from TLTRO and the lower lending margin, mainly related with corporate portfolio spreads are offset by higher bond yields and revenues from Southeastern Europe. As regards deposits margin, the impact of increasing volumes has been fully offset by the continued decrease of client base. On a year-on-year basis, net interest income is lower by 2.8%, in line with what was anticipated. Furthermore, still on page 25, on the upper right part, we focus on the qualitative composition of interest income.
Specifically, we show that contribution of NPE to total NII decreased from high of 30% before cleanup to 9% currently, and eventually is estimated at around 3% in 2023. On page 26, commission income rebounded strongly in tandem with the resumption of economic activity, showing a quarter-on-quarter increase of 11.8% and reaching EUR 110 billion. The increase is mainly driven by revenues from credit cards and network transactions, bancassurance and mutual funds. Focusing more on wealth management on page 27, the bank maintains a leading position in a fast-growing market. Serving its clients through four private banking centers in Greece, Cyprus, Luxembourg and London, and investing heavily in technology and a new platform, the group secures a competitive advantage versus its peers and is positioned well to become a significant regional player in wealth management. On page 28, operating expenses are flat year-on-year.
In Greece, costs are slightly lower by 0.4%, as higher IT services expenses are offset by staff cost, which is lower by 7.5% year-over-year due to a reduced headcount. Moving to the asset quality on page eight. As shown on the top left of the page, NPE formation in the second quarter was negative at EUR 43 million, continuing the better-than-expected trend. NPE ratio decreased to 14%, and pro forma with Mexico is reduced to 7.3%. Cost of risk for the quarter declined to 1% of net loans, and for the first half of the year to 1.2%. Coverage in the second quarter increased by 140 basis points, reaching 63.3%. On next page, 29, we summarize the core operating performance for the first half of the year.
Core PPI is higher year-on-year by 2.4%, mainly driven by non-NPE related NII, higher commission income and lower staff cost, which more than offset the lower income from NPEs by EUR 82 million. Loan loss provisions are lower by 17%, reflecting the delevering of NPEs and the better asset quality trends. As a result, core operating profit is higher year-on-year by 35% at EUR 221 million. Finally, let me close with an update on the full year 2021 profitability guidance provided in March. On core PPI, we expect to be in line with our unique estimate of EUR 875 million. cost of risk, taking into account the latest asset quality trends, is estimated for the full year at 1.1% of net loans. The above point to a full year cost before tax over EUR 500 million.
This completes my presentation, and we may now open the floor for your questions.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star, followed by one on their telephone. If you wish to remove yourself from the question queue, you may press star two. Please mute your handset when asking your question for better quality. Anyone who has a question may press star one at this time. One moment for the first question, please. The first question comes from the line of Floriani, Jonas with AXIA Ventures. Please go ahead.
Hey. Hi, guys. [Non-English content]. Thanks for the presentation and well done on the results. I have a few questions. First of all, at group level, just wondering how you see the early indications of asset quality for the second half. I remember that in previous calls you were taking a more cautious approach in regards to the inflows. That was also reflected on your guidance for the cost of risk, which now I see that it's at the lower end of the range you gave before, the EUR 110 billion- EUR 120 billion. Just wondering, now in this first couple of months, how are you seeing that developing? Yes, that would be interesting to hear from you.
Second also, on the real estate side, any views on the resumption of auctions and how can that change your real estate portfolio and if that also is linked to the investment pipeline that you have? I remember that your number for 2021, 2022 in terms of real estate investments was in the range of EUR 300 million. Just wondering if this number still holds at that level. Then finally, on Cyprus, I've seen that this quarter you booked quite a low provisioning rate in the country, meaning that your bottom line was relatively higher than the previous quarters. Just wondering what drove that and if you expect the provisioning level to remain in line with second quarter or maybe to reverse to the, let's say, to the average we've seen in the previous quarters. Thanks.
Okay. Thank you very much for your questions. Let me take the first one, and then Harris will take the other two. As you correctly pointed out, the first half of the year asset quality events were better than expected. For instance, out of the EUR 4.9 billion of moratoria in 2020, circa 5% only have defaulted, while 85% have returned to normal payments, either on own means or through the two bridge programs. There is a 10% of moratoria which is expiring in the second half of the year, these are related entirely with the hotel sector. I already mentioned that tourism has done very well above expectations. I was just reading that in the international airport of Athens, tourist arrivals have reached, in the end of August, 70% of the 2019 figure.
Therefore, we are not concerned at all about the performance of these customers, for which moratoria are ending in a few months. Now, in the second quarter, we recorded a negative NPE formation. On slide 30, we present the formation for loan segment. As you can see there, the trends are very similar in all four loan segments. For the third quarter, based on the formation we have so far, we expect a slightly positive formation, an amount, let's say, below EUR 100 million. In the previous analyst call, we projected for the full year 2021, an organic increase in the stock of NPEs of about EUR 600 million. Based on what we have seen so far and what we expect for the third quarter, this figure appears to be on the high side.
However, as state support measures are gradually lifting, we prefer to remain cautious and continue monitoring the asset quality trends. Let me clarify that although we recognize that this EUR 600 million is on the high side, at the moment, we don't revise this figure lower. Based on all this, we expect that in the end of the year, the NPE ratio will be close to 8%, including the effect of Mexico. As Harris mentioned, the cost of risk for the full year will be at 1.1% versus 1.2% that was in the first half of the year. This should bring the NPE coverage more or less at the same levels as we are today.
We believe that this high mark would allow us to support a lower cost of risk in 2022 as going forward, and further decrease NPEs towards the 5% area as early as next year in a very cost optimal way. This is how we see things in the area of asset quality. Let me now pass over to Harris for the other two questions.
Coming to the auction question, it looks that as of 1st of September, auctions are well resuming.
In all categories apart from the vendor households for which there are very strict income, wealth, and level of deposits preconditions, which are for the moment on hold, as well as some auctions in bank-specific areas in Greece that were hit by recent wildfires. All other auctions have started to progress quite well, and we should expect for the sector close to 3,000 auctions to take place by year-end. Actually, this is what has been scheduled. Not only that, but the continued upward trend on the real estate prices, both for residential and commercial is one more encouraging signal as regards profits from foreclosures. In tandem with the good level of collections as of the fourth quarter, we expect good assumptions of auction proceeds. Apart from that, we had also some recent changes in the bankruptcy codes, accelerating auction processes as well.
In parallel, we are executing a schedule, our program on investment property expansion, and the outlook that we had provided in the previous course for investment plan, a view of EUR 100 million for the next couple of years still holds. Now, as regards the provision charge in Cyprus, in the first half of the year, we had provisions of EUR 3 million. That was quite lower from our budget that was close to EUR 5 million. For the second half of the year, the outlook is for close to EUR 5 million. However, if the underlying credit quality trend continues to be better, maybe a bit lower, but should be a small delta, EUR 4 billion-EUR 5 billion.
Got it. Thank you.
The next question comes from the line of Memisoglu, Osman with Ambrosia Capital. Please go ahead.
Hello, many thanks for your time and presentation. I have two questions. One on the spread trends you're seeing lately, particularly as we approach potentially more volumes related to Recovery Fund. If you could give us any more color on that front, what are you seeing lately and what are you expecting before and beyond? The other thing is on your international business thinking. Obviously, you've made some transactions, particularly one in Cyprus with a minority stake. If you could give us a bit more color on your strategy in Cyprus and maybe in other geographies, what we should expect on that front. Thank you.
Starting from the spread side. I assume your question is about loans, but let me elaborate on both sides of the balance sheet. On the lending side, in the last quarter, we see some gentle decline of the corporate lending spreads. This was related to, of course, market competition, but also to some high yield, large ticket corporate loan repayments that we had during the second quarter. Going forward, we should not be surprised if we see some mild slide of the corporate lending spreads in view of the competition, but also as you correctly pointed, the increasing volume that is expected, the increasing demand going forward. On the retail business, especially on the household mortgages and the consumer, we don't expect any material movement from the level we stand today.
We should also raise a point as well on the deposit side, where we have made a very good progress on decreasing deposit client rates at levels approaching the zero axis. As we speak, the stock of time deposits is at 15 basis points. The new production is at 6 basis points. There is a positive, let's say, pipeline to be incorporated in our P&L going forward, and therefore is continuing both in Greece and our subsidiaries, mainly in Greek area and Cyprus.
Now, as regard our strategy on international, if asked to for Fokion.
Sure. Let me elaborate a little bit on the Hellenic Bank transaction. We bought a minority stake. We believed in a very attractive valuation. However, we have already a very successful operation in Cyprus.
Eurobank Cyprus, and our plan is to expand our business there in an organic way, first of all, through Eurobank Cyprus. Now, with respect to Hellenic, we don't intend to increase further our stake, at least in the near term. In the meantime, we will support the Hellenic Bank management in all the initiatives and all the priorities that it may have, including the cleanup of the balance sheet, which is underway, but also in the effort to improve materially the cost-to-income ratio, which is on the high side in this bank.
Thank you.
The next question comes from the line of Sevim, Mehmet with JP Morgan. Please go ahead.
Good afternoon. Thanks very much for the presentation. Just two quick questions from me. First of all, you mentioned on the call that you'd like to start exploratory talks with the supervisor on dividend distribution. Could you please give us any additional color on this? For example, in terms of timing, et cetera. Second question, you also told us that the new capital impact expectation from Mexico is just 10 basis points now. If I recall correctly, that was 50 basis points initially. Could you please tell us what the reasons are leading to the smaller expected capital impact versus the initial expectations, which is obviously very positive? Thanks very much.
Sure. Let me start on the dividend side. As I mentioned during my introduction, we have a number of positive developments with respect to our capital position. One is the result of the stress test, that given that the capital depletion to the adverse scenario is one of the critical inputs of stress. We expect this performance, the good performance, to be reflected positively in the minimum capital requirements of the bank, and we should have some more concrete feedback from the regulator on this front before year-end. A second positive development was that we have revised upwards our estimate for the year-end capital ratio from 16% - 16.4%, and for the fully loaded CET1 at 17.2%, which brings us forward in terms of our capital plan. Last but not least, even this year, the bank will be able to generate organic capital in a material way.
This could accelerate further in 2022. Taking into account all these facts, together with the fact that the NPE cleanup is behind us, we feel that all the necessary preconditions are in place to initiate this supervisory dialogue with dividends. On your question on when we should do it, I think the most appropriate time is when we announce our full year 2021 financial results in the beginning of next year, when we should be able to show in place and in our numbers everything that I have just mentioned. That would be the best timing for us to start this dialogue with the regulator. In the beginning of 2022. On your second question, what different then? We moved from an estimate, an initial estimate of - 50 basis points to - 10.
I think this is a combination of a number of different factors. One of them is the timing of the transaction that was better than initially anticipated as a result of improved real estate prices that have helped the value of the portfolio on others. Another factor is that the secondary market increased the capital deeper, and that has been reflected on the price that we received on the Mexico. These are two important factors that have driven the valuation and the capital impact on a better level than initially anticipated.
Great. That's very helpful. Thank you very much, Fokion. Just one follow-up to my colleague, Osman's earlier question on the international franchise. It does sound like the Hellenic Bank was a valuation opportunity, you've also then direct named Serbia, which sounds a lot more strategic, that was one market you previously didn't consider as a core market, as far as I remember correctly. Now it sounds like that you want to grow there, which is obviously a very interesting and attractive market top-down. Is it reasonable to assume that you may explore further or in organic opportunities in those markets, for example now you're in Serbia, Bulgaria as well, maybe even beyond. Do you have any specific targets for international contribution to the group figures, in the longer term?
I remember there was, for example, at some point you were saying 40% of NII would come from international over the longer term. Is there a thinking like that you still have today?
As we speak, in terms of the corporate provision income, the contribution of international is about 30%. In particular about Serbia, we have not included before Serbia in our core markets. We were saying that the core markets for us were Greece, obviously, we get in Cyprus. Now, in Serbia, the reason that we have not put it as a core market was that our presence there was rather suboptimal. Our subsidiary there was a rather small bank. Definitely through the transaction with Direktna Banka will increase our size. Still the size remains suboptimal. Therefore, we may use any other opportunity that we may have, to further increase our size there or even exit if there is any such opportunity. In order to consider Serbia a core market, definitely our presence there should increase quite substantially from the current levels, even after the Direktna acquisition.
Increase either organically or through another sort of acquisition. The market there is in a consolidation mode. There are still a lot of banks, a lot of small banks, and therefore we will keep monitoring the market, to see about the right opportunity. Now, on your question, what is the optimal contribution of international in our profitability or income? I think that over the next few years, and given that Greece has entered a growth phase, we would expect that the income coming from Greece should increase quite nicely and therefore, I would not expect, even if we move with other transactions, that the international would be materially more than the 30% level, which is today.
In other words, I would expect both international and the Greek operations to grow at the same pace, maybe Greece would grow faster than the other markets, because, we have entered, as I mentioned during my introductory note, to a period of five or six years with a growth of about 3.5%-4% on average.
Okay. That's all very helpful and clear. Thank you very much.
As a reminder, if you would like to ask a question, please press star and one on your telephone. We have a follow-up question from Memisoglu, Osman with Ambrosia Capital. Please go ahead.
Yes. Hi. Just on the fee performance, along with your peers, it was impressive quarter. What's driving it? Any more color you can provide, obviously, economic activity and so on, but, how should we think about this for the next couple of quarters? Any color on this would be appreciated. Thank you.
Sure. It is true that we had a second quarter of the year after following the one of lockdown with fee and commission reaching an annualized level of 63 basis points over assets. This is an area where we believe is a major driver for income growth in the coming years. I would say that the growth drivers of fee and commission is four-fold. Starting from the increasing lending and investment activity in the country. We should mention not only the level of investments in lending, but also the very high level of FDI and the very high impact of FDI that took place during 2021. All this create high levels of lending and capital market-related fees. Investment banking, capital markets is an area where Eurobank has a leading position.
The second pillar is the network transactions and credit cards, which are very closely related with the economic activity and the tourism level. There we had a very strong increase as regards expectation of tourism this year.
Already exceeding the levels of 50% compared to 2019, looking forward 2022 and onwards, are much more creating expectations, are reaching or exceeding 2019. The third pillar is bancassurance and the wealth management. On page 27, we show that we have a leading market share on mutual funds at a very fast growing market. Whereas on private banking, we have a privileged position to being able to serve our clients from four private banking centers in Greece, in Athens, actually, Cyprus, Luxembourg, and London. Here, this is an area that we have increased substantially our investment amounts, mainly on implementing and bringing forward a new platform for asset management. The fourth pillar that is completely dedicated to Eurobank, it may come from investment property.
As I said before, apart from the EUR 1.3 billion investment property portfolio, there is close to EUR 300 million- EUR 400 million for the next three years in the pipeline to be invested. All these four pillars create a very good mix for which to expect a quite substantial growth for the next two to three years. I repeat that most probably this is going to be the major driver of corporate guide growth going forward.
Perfect. Thank you for the color. Much appreciated.
Once again, to register for a question, please press star and one on your telephone. As a final reminder, to register for a question, please press star and one on your telephone. 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 for participating in this call. Let me also thank you for your questions that gave us the opportunity to elaborate further on our results. Our investor relations team will be available for any follow-up questions. Thank you again.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephones. Thank you for calling, and have a pleasant evening.