Ladies and gentlemen, thank you for standing by. I am Emma, your Chorus call operator. Welcome, thank you for joining the Eurobank Holdings conference call to present and discuss the first 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.
Thank you. Ladies and gentlemen, good afternoon, and welcome to Eurobank's first quarter 2021 results presentation. Together with me is our CFO, Harris Kokologiannis, and the investor relations team. I will start from an overview of recent developments before we present our results. Looking first at the macroeconomic background, sentiment is positive, as shown by all indicators of domestic economic activity. The vaccination rate has recently accelerated. The economy is opening up. In spite of the anticipated significant contraction in the first quarter, economic growth is expected above 4% and 6% for this year and 2022, respectively, according to the latest EU estimates. Strong state support measures have been extended in 2021. This is reflected in our liquidity conditions and continued inflow of deposits to contain unemployment and increase in real estate prices.
Last but not least, investment asset quality trends, as evidenced by lower than initially anticipated NPE inflows from loans under moratoria. However, we will keep monitoring asset quality evolution as state support schemes are eventually removed in the second half of the year. Early signs for the tourism season are encouraging, and the estimates currently point to 50% revenues of the 2019 season versus 20% last year. Greece, together with Portugal, were the first countries to submit a robust plan for the resilience and recovery EU funds, and approval is expected until the end of June. Additionally, the Greek banking system has accelerated the NPE reduction and tapped the markets to strengthen its balance sheet. Such initiatives are reflected in recent upgrades by credit rating agencies for the sovereign and the banking system.
Eurobank was the most proactive in enhancing its capital base through the measure of [audio distortion] and executing an accelerated NPE reduction plan, which is driving our NPE ratio to significantly decrease. The organic capital generation of 100 basis points per annum will be more than adequate to support the expansion of the loan portfolio. As such, our focus now is shifting towards business development in all our core markets and profitability. Let me now focus on our financial results for the first quarter with highlights shown on slide five. Our net profits in the first quarter reached EUR 72 million. On a year-on-year basis, corporate provision income was up 30%, as lower NII was offset by higher fees and commissions. Operating expenses were down 2.2% year-on-year, with Greece 3.1% lower. Our income stream remains well diversified, with profits from international operations reaching EUR 32 million in the first quarter.
Now, on asset quality, we had positive NPE formation of EUR 72 million, which is substantially lower than initially expected. The cost of risk was at 1.4%, resulting in stable NPE coverage at 62%. Our total capital ratio, incorporating the full year 2021 regulatory transitions and adjustments, reached 15.5%. The CET1 ratio was 13% and 11.9% on a transitional and fully loaded basis, respectively. Deposit recovery continued to the first quarter with EUR 1 billion in deposits, while the loan disbursements exceeded EUR 1 billion and are expected to accelerate further in the second half of the year. The loan-to-deposit ratio declined to 78%. Finally, as you know, we successfully tapped the debt capital markets with a five-year senior note in April. This is our first MREL issuance. There was strong demand, especially among international investors.
Let's now continue with an update on the net positive [audio distortion] and our capital enhancement analysis. On Mexico, the discussions with stakeholders regarding the tranching are well advanced. The pre-rating has been received, Relevant economics are better than initial estimates. We intend to apply for Hercules II and SRT in the next few weeks, then declassify the securitized portfolio as held for sale in the third quarter and securitize NPEs in the fourth. As a result, our NPE ratio will decline close to 8% by the end of the year. Regarding the capital [accession] transactions, namely the synthetic securitization of performing loans and the strategic partnership for the leasing and acquiring business, we are also on track to close both transactions before year-end. Based on the above update and the third quarter results, we remain very constructive as the certainty of achieving our 2021 business plan has increased.
In this context, we reiterate our outlook for this year of stability, NPE ratio decline, and capital plan as presented in the previous analyst call. We keep delivering in a consistent way on our business plan. At this point, I would like to ask our CFO, Harris Kokologiannis , to present our third quarter results and the outlook before opening the Q&A session.
Thank you, Fokion. Let's now provide some more insight on the first quarter results. Starting from the capital position and on page seven, in the first quarter, our fully loaded CET1 ratio remained stable, close to 12%. The phased total capital ratio amounted to 15.5%. The main drivers of this movement were the full-year transitions, the new definition of default, and an increase in RWAs due to investment security expenses. The above were mitigated by the organic profitability of the quarter. The regulatory transitions and adjustments have been fully reflected in the capital plan presented in our previous call. Accounting for the impact of Mexico and the announced capital enhancement initiatives, the outlook remains for a total capital ratio and the fully loaded CET1 at 16% and 12.8%, respectively, at the end of the year. Moving on funding and liquidity on page eight.
As shown on the right half of the page, group deposits increased in the first quarter by EUR 1 billion, and in the last 12 months by EUR 3 billion. The increase is largely associated with extensive state support measures for the economy and the increased lending loan disbursements. Net loan to deposit ratio receded in the first quarter to 78%, and LCR ratio increased to 141%, as shown on the left of the page. Furthermore, the group is making use of EUR 8.8 billion TLTRO III at a rate of minus 100 basis points. In combination with deposit increase, this has led to a substantial decrease in the borrowings of other funding instruments and to a commensurate reduction of funding costs.
Finally, in April, and in the context of meeting our MREL transitional target, the bank tapped successfully the debt markets with a EUR 500 million senior preferred issuance at a cost of two and one-eighth. Moving on page 16 on lending growth. During the first quarter of the year, performing loans increased slightly to EUR 35.3 billion, which is mainly associated with the strong liquidity conditions as explained above. However, the reopening of the economy following the notable progress of vaccinations, the pickup of several high-ticket investment projects that are in the pipeline, and the expected leverage from RRF, point to an acceleration of new lending as of the second half of this year. Moving to profitability on page 18. Net interest income increased quarter-on-quarter by 1.6% at EUR 375 million.
This is due to the higher contribution from [HPRO] and a further decrease of wholesale funding costs, which offset the impact of base effects and the recycling of [DTCs]. As regards deposit margins, the impact of increasing volumes has been offset by the continued decrease of client rates. On a year-on-year basis, net interest income is lower by 1.4%. On page 19, commission income decreased quarter-on-quarter by 9.3% at EUR 99 million. The decrease is mainly attributed to the record capital markets fee in the previous quarter, while all other fee drivers stayed at par with the still very strongest period of the year. On a year-on-year basis, commission income is higher by almost 7%. On page 20, operating expenses are lower year-on-year by 2.2%.
In Greece, costs are lowered by 3.1% as higher IT and digital-related expenses is lower by 11.2% year-on-year due to reduced headcount. Turn to pre-provision income on page five. On the top left of the page, core PPI increased quarter-on-quarter by EUR 2 million or by 0.7% up to EUR 28 million as a result of higher net interest income and lower operating expenses, which offset commission decrease. On a year-on-year basis, core PPI is higher by 3%. Pre-provision income amounted to EUR 271 million, including EUR 13 million of trading and other income. Moving on asset quality and on page six. As shown on the top left of the page, NPE formation in the first quarter amounted to EUR 72 million, significantly better than our initial estimates.
NPE ratio increased slightly to 14.2% and cover with Mexico securitization amounts to 7.4%. Despite better than expected formation, we remain conservative on provisioning with cost of risk at 1.4%. Going forward, although we should keep monitoring the behavior of our clients as the government measures are gradually lifted, the evidence we have from the first month of the year, together with the expectations for a strong economic recovery in the second half, show that the decrease of NPEs for 2021 may be at least 30% lower than initially expected. In this context, it is envisaged that the cost of risk for the year should be at the area of 1.1%-1.2%, lower than the 1.3% provided in our guidance.
Overall, as regards the profitability guidance provided in year-end 2020 results, we reiterate our core PPI guidance, despite the risk related with deposits growing faster than certain loans. However, it is mitigated by a better outlook on asset quality. As a result, our profit before tax guidance remains intact. 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 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 comes from the line of Jonas Floriani with AXIA Ventures . Please go ahead.
Hi, guys. Good afternoon. Thanks for the presentation. I have a few questions. The first is regarding Fokion's comments on the Mexico securitization, now that you've got the pre-rating received. If I'm not mistaken, I've heard something about a better economics for the deal. I remember that the guidance was for a 50 basis points impact to capital. I was just wondering if we should expect that this guidance will be changed, or maybe it's less than 50 basis points impact. The second question is on your real estate portfolio, slide 19. I was just wondering if there's any outlook you can give us in terms of how this picture could look by year-end. Just wondering about specific number of assets or if there's any area of this portfolio you're focusing or preferring over the others.
Also maybe some thoughts on the outlook for the yield of the real estate assets. Finally is on the NPE formation. I see, as you mentioned, it was better than expected, but I couldn't see anything on the outflow. If you could explain a bit how was the Q1 performance on the outflow side, that would be helpful. Thanks.
Jonas, thank you very much for your questions. I will answer the first with the third, Harris will discuss about the loan portfolio and the outlook for it. In terms of the Mexico transaction, as I mentioned already, discussions about the transaction is very advanced. We received the pre-rating letter, the economics appear to be better than initially estimated. We had, as you said very correctly, a cap impact of 50 basis points, it appears that the impact is going to be well below this figure. The next steps are to apply for Hercules II and the SRT in the next few weeks. The mezzanine non-binding offers should be received in late July, the binding offers for the mezzanine by the end of September.
As I mentioned, the assets will be classified as held for sale in the third quarter, and we're going to have full recognition and closing by year end. Following the completion of Mexico, and taking into account the net which we are about to expect for this year.
Further about it shortly. The NPE ratio is expected to decline from the current levels to close to 8% by year end. In terms of asset quality, which was your third question, the trends we have seen so far are better than initially anticipated, and this holds both for the first quarter, in which NPE formation was at EUR 72 million. If you also look at page 22, in which we provide the segmental analysis, you can see that this good performance is across all segments. Also in the second quarter, we observe a similar pattern, and based on the current data, most likely formation in the second quarter is going to be lower than the one in the first quarter.
However, as I also mentioned during my introduction, we should keep monitoring the asset quality evolution, especially for the second half of the year, which is the time at which the state support measures will be lifted. Overall, I can say that we are optimistic about the asset quality patterns, but we just remain also cautious at the same time. Now, during the last analyst call, we had projected about EUR 0.9 billion increase in the stock of NPEs. Based on the data we have today, we should revise downwards this increase by, let's say, 30%, so to go from EUR 0.9 billion to EUR 0.6 billion, a revision that drives also lower the cost of risk for 2021. In the first quarter, it was 1.4%. Our guidance for full year 2021 was at 1.3%, which is what we mentioned during the previous analyst call. We revised that downwards to 1.1%-1.2%.
This is about the asset quality, and let me pass over to Harris about your second question.
Your second leg of the question was about real estate, correct?
Yes. I think I mentioned the wrong slide. It's slide 11.
Let me provide the general outlook of real estate prices, first is shown on page 43 of the presentation. There, we may underline that despite the COVID outbreak, the growth of real estate prices, both in apartments and in office, continued at a slower pace, but continued. We see a very resilient market there, something that continues in the first half of 2021, as evidenced by the latest data of MacroPolis. The real estate market is very resilient, something that has and continues to have positive impact both on our investment portfolio as well as on the collateral values of our loan portfolio, as it affects positively the NPE ratio.
Now, on page 11, we can comment that the gross yield remains above 7%, and the mix of the portfolio has passed very successfully through the crisis, as the sectors on which this portfolio has been invested actually have not been affected in the majority by the COVID outbreak. The return on book value of this segment is again expected to reach or exceed 10% for 2021. Overall, we are, I would say, very optimistic on the developments of the real estate. On that front, we continue deploying our medium-term strategy for a EUR 500 million investment property, main investment, out of which by the end of 2020, close to EUR 200 million has already been invested, more or less the sectors presented in page 11, while the rest EUR 100 million will be invested in the years 2021 and 2022 at their maturity.
Thank you.
The next question comes from Alexandros Boulougouris with WOOD & Co . Please go ahead.
Yes, hello. Two questions on my end. First is on the guidance on core PPI. In your last presentation in March, you had a guidance for EUR 875 million, if I remember correctly. You mentioned that this should be slightly lower because of the negative impact on NII. I think that was EUR - 3 million in the previous presentation. What is your new guidance on this, if you could clarify? A second question regarding NII, if you could provide a bit of color on TLTRO, I see it's EUR 33 million in Q1 from EUR 10 million in Q4. What is the level that we should expect in the following quarters, maybe in Q2 and Q3, just to get a color for the full year TLTRO impact? One more question on this, on NII, just to get a bit better understanding.
I see the loan margin that is a bit down Q o Q, although spreads are quite stable. If you could explain the reason for that would be useful. Thank you.
Alexandros, the last part of your question was about bonds margin?
Sorry?
The last part of your question was about bonds margin?
Loan margin, which on page 18 of the presentation, which is down, I think, EUR 8 million per quarter-on-quarter. I was trying to see, because spreads are quite stable. I was wondering what is causing this decline.
Sure. Let me start from the core PPI and the profitability outlook in general. We'll go to specific matters. The outlook that we provided in the year-end results call was about core PPI of EUR 575 million. As regards net interest income, we provided for a slight decrease, low single digits decrease versus 2020, coming from a positive contribution from LTRO, wholesale positive contribution from wholesale funding, lower cost, and higher NII from international. On the negative, we have the lower bonds margin and the impact from the NPE cleanup of portfolio. On commission income, we provided for another strong year with low double digits increase, with the main driver being the asset and development of mutual funds, acquiring rental income and lending commissions.
From operating expenses, we expect staff and the digital cost to continue declining in 2021, channeling a significant part of the savings in accelerating the digital transformation of the bank and the upgrade of core value system in some of our subsidiaries. We expect it and continue to expect in 2021 total OpEx to be flat versus 2020. As regards the picture in the first month of the year, despite the lockdown that repeated in first quarter 2021, the effect on households and business has been mitigated by the very strong government measures. As a result, deposits continued growing further, and the real estate prices, as I mentioned before, continue increasing. In terms of operating performance, first quarter results are fully in line with full year 2021 earnings guidance.
As I said before today, some risk associated with a higher than anticipated increase of deposit growth, especially compared with the respective growth of loans. As regards the latter, it is expected to accelerate in the second half of 2021, together with the economy rebound. At any case, any low risk for core PPI will be offset by a better cost of risk. From 1.3% to the area of 1.1%-1.2%, which will be the result of lower than initially anticipated NP flows from our portfolio. Overall, the profitability target remains intact, as I said before. Profitability at the area of approximately close to EUR 500 million before tax. Coming to the TLTRO, first quarter includes EUR 13 million benefit not accrued in the second half of 2020, and overall amounts to EUR 33 million.
For the full year, we expect close to EUR 90 million impact from TLTRO and another similar amount in 2022. As regards loan margin on page 18, here we have the data set that is not shown separately, but it is included in the loan margin. Here we have an impact of EUR 4 million. We have a rate impact by EUR 2 million coming mainly from small business portfolio. We have another EUR 2 million that it is one-off recovery interest in the fourth quarter of the year. To this one-off create another EUR 2 million. The major part of the data set that is included in the lending margin of EUR 4 million.
Okay, thank you. Thanks for the detail. Thank you.
The next question comes from the line of Mehmet Sevim with JP Morgan. Please go ahead.
Good evening. Thanks very much for the presentation. I have three questions, please. First of all, on loan growth, you disbursed about EUR 1 billion in the first quarter, and you mentioned that you expected to pick up in the second half. Based on the latest trends, what kind of a figure would you expect for the full year? Secondly, many of your peers are also talking about significant loan growth opportunities in Greece with the flow of the EU funds, et cetera. Against that backdrop, how would you see the competitive environment going forward, so let's say in 2022, 2023? My second question is on capital. You've taken a 30 basis points regulatory adjustment. Will there be any further adjustments that you would expect given you've been guiding for approximately 50 basis points, or should that be the full amount?
Finally, just if you could comment more broadly on your international strategy, please. At one point, if I remember correctly, your ambition was that 40% of NII would come from international operations. Where do you stand today against that? Strategically, what are your thoughts, given you have a very meaningful franchise in Bulgaria, more subsidiary in Serbia, et cetera? Thanks very much.
Thank you for your question. Starting from the lending growth evolution. Overall for the year, we should expect a net increase of performing loan balances, a data of EUR 1 billion- EUR 1.5 billion net increase of performing loan balances. For the following year, this is expected to accelerate, reaching EUR 2 billion per annum, for each of the next three years, as a result of economic recovery and the impact and leveraging of RRF. As regards the regulatory adjustments of 30 basis points, this is fully in line with the capital plan that we presented in year-end results call. It is about the impact of the new definition of default. As we have said, at that call, the overall impact from new DOD amounting to 50 basis points. This is still our guidance for the full impact, and there is no change on that.
Actually, in all of the drivers that we presented in the capital plan, we are still there, and we reiterate our guidance. Apart from Mexico, that we should expect a better than initially estimated impact. Now, I pass to Fokion to talk about the competitive environment of loans in Greece and about the strategic perspectives on international.
Okay. More specifically about the RRF and the boost that this would provide to loan growth, should be expected mainly in late 2021 and 2022 onwards. These funds will be directed to investment projects and not the working capital. I think each of the banks will get its fair market share, in terms of the allocation of these funds. You know that we are very active as a bank in the finance of big projects. For instance, we are one of the main banks financing the Hellinikon project, this big real estate project in Athens. We are very active in green renewables, and therefore, we expect that we're going to have a significant participation in the RRF. If we should quantify that, we expect a net delta increase in loans 2022 onwards, about EUR 2 billion per annum-EUR 2.5 billion per annum for the next three years or so.
Definitely RRF is going to be a good contributor to this delta. Let me come to our strategy about our international subsidiaries. We have mentioned a number of times that Eurobank operates in three core markets. One is Greece, the second is Bulgaria, the third is Cyprus. In these markets, we want to grow both organically, but also through any potential acquisition if there is a good opportunity for that. You may recall that when there was such opportunity in Bulgaria, we took advantage of that twice in the past. In terms of the contribution of the international segment in our profitability, as we speak, in terms of core PPI, the international subsidiaries contributes about 30%, and we expect this to continue going forward because both the business in Greece and the business in the other core markets will grow proportionally.
This ratio will remain more or less unchanged.
Great. That's very helpful. Thanks very much for your comments.
The next question comes in from Osman Memişoğlu with Ambrosia Capital. Please go ahead.
Hi, thank you very much for your time and presentation. Just two on my side. One is just a clarification on TLTRO, the EUR 90 million that you mentioned. I assume it includes the EUR 13 million that was accrued for last year. That's the first one. The second one, given that you're lowering your cost of risk guidance for 2021, should we assume if this trend continues, some level of reduction for your cost of risk guidance for the future years, particularly 2022? Thank you.
Sure. The answer is yes, EUR 13 million is part of the EUR 90 million that is the expected overall impact for TLTRO for this year.
In terms of cost of risk in the previous earnings call, we had indicated cost of risk of 60 basis points for 2022. I think it would be premature to revise this figure. As I mentioned before, we are optimistic, but we should remain a bit cautious about the asset quality in the second half of the year as the state support measures are lifted. We revise the full year 2021 from 1.3% to 1.1%-1.2%, and we keep the 60 basis points for 2022 at the moment unchanged.
Okay, thank you.
Ladies and gentlemen, as a reminder, if you would like to ask 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.
Thank you. Let me thank all for participating in this call. Let me also thank you for your questions. We would be available for any sort of clarifications that you may give, and we may meet some of you in some video calls that we're arranging for the next couple of weeks. Bye-bye.
Ladies and gentlemen, the conference is now concluded. You may disconnect your telephone. Thank you for joining, and have a pleasant evening.