Ladies and gentlemen, thank you for standing by. I'm Poppy, your course call operator. Welcome, and thank you for joining the Piraeus Financial Holdings conference call and live webcast to present and discuss Piraeus first quarter 2023 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 Piraeus Financial Holdings CEO, Mr. Christos Megalou. Mr. Megalou, you may now proceed.
Good afternoon, ladies and gentlemen. Welcome to today's conference call on our Q1 2023 financial results. This is Christos Megalou, Chief Executive Officer. I'm joined today by our CFO, Theo Gnardellis, and by Chris Berbati and Xenofon Damalas. 2023 started on a strong foot for Piraeus Bank. The strength of our commercial franchise is releasing the bank's potential, and the successful management of our balance sheet is delivering solid results. In the Q1 , we continued to build sustainable and growing profitability. Our consistent progress across all operational KPIs is displayed on slide five. Profitability, efficiency, asset quality, capital adequacy, all showed improvement in the Q1 of the year. On slide six, we report the highlights of our Q 1 performance. We generated normalized earnings per share of EUR 0.15. We produced return on average tangible book of 13%.
Both EPS and return on tangible book ran ahead of full year 2023 guidance provided in late January. We delivered 24% net revenue growth annually. On the back of a 56% net interest income increase and a 15% net fee income growth. We recorded best-in-class cost-to-core income ratio of 36%. We lowered our NPE ratio to 6.6%. We increased our NPE coverage to 55%. We further strengthened our capital position by 60 basis points in the quarter, reaching a CET1 ratio of 12.2% and a total capital of 17%. I am pleased that as of the first quarter of this year, we are in a position to accrue for a 10% distribution in our capital figures.
This paves the way for our aspiration to distribute to our shareholders out of 2023 profits, subject of course, to the accomplishment of our targets and supervisory consent. In the following slides, we present the progress recorded in fundamentals. Slides 8 to 10 download all the information regarding net interest income intrinsics. Our loan pass-throughs are trending at 70%-75%, while our deposit beta is among the lowest in the European space at 10% at the end of March. Net interest margin stood at 2.4%. Furthermore, our cost containment efforts continue unabated despite the inflationary challenges. We are extracting any remaining inefficiencies from our organization while investing in transforming and strengthening our bank for the future.
The strength of our operational efficiency is shown in the best-in-class 36% cost to income ratio, as shown on slide 12. Slide 13 provides a summary of our asset quality indicators. This is the seventh consecutive quarter of negative NPE formation and the sixth quarter of below 100 basis points organic cost of risk. Our NPE ratio dropped to 6.6% from 13% a year ago, and our NPE coverage is now at 55%, above the European average of 50%. Piraeus possesses strong liquidity profile. Our deposit base is granular, stable, and of high quality. Our liquidity ratios are all solid, as evidenced by the 220% Liquidity Coverage Ratio and the 62% loan-to-deposit ratio, both at the top percentile in the European space. These are presented on slides 14 and 15.
On slide 16, we present the quarterly movement of performing loans and deposits. Setting aside early year seasonality, the group's performing loan portfolio grew 8% annually, and there is a strong pipeline of business projects for this year, including RRF-sponsored plans, where Piraeus has already undertaken the fourth tranche, leveraging EUR 1 billion financing. On top, we have had a very strong kickstart in the newly launched program, My Home, co-sponsored by the Greek state and the Greek banks, for which Piraeus Bank has currently received more than 40% or 10,000 out of total market applications. Similarly, our deposits have grown by 4% or more than EUR 2 billion annually. The first quarter of the year, we experienced both seasonality as well as a very strong asset management products performance. I'm closing our performance analysis with a capital base on slide 17.
Organic capital buildup picked up pace with 60 basis points increase in quarter one, all organic. At end March, Piraeus was at 17% total capital ratio, comfortably above requirements and supervisory guidance. Our solid financial performance and the supportive macro environment positions us to outperform our 2023 targets. We therefore upgrade our 2023 guidance, and we also provide updated 2025 financial ambitions along with key underlying assumptions. All the relevant details can be found on slides 20-22. For 2023, we now target a 12% return on tangible book versus 10% previously, or EUR 0.55 earnings per share versus EUR 0.45 previously. Net interest margin is expected to be above 2.2% this year. We also upgrade our NPE ratio target for the year to approximately 5% from below 6% previously.
For 2025, we target above EUR 0.65 earnings per share, 12% return, 3% NPE ratio, and 14.5 CET1 ratio post distribution to shareholders. Finally, we are proud to be the only Greek company to be included for the third consecutive year in the Financial Times list of Europe's Climate Leaders in 2023.
Our energy transition business lines will be further expanded, and I will be in a position to discuss more on this front in the following months. With that, let's open the floor to take any questions you may have.
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, then you may press star and two. Those participating via the webcast, please review related information in the Q&A live session tab should you wish to ask a question. For those participating in the question and answer session, 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 Iqbal Khan with Morgan Stanley. Please go ahead.
Hi. Thank you very much for the presentation and the strong set of results. My first question is on the NIM expansion. It's continued quite nicely this quarter. Deposit betas were low. Can you talk about your expectations going forward for deposit betas and also loan pass-through? I see that there hasn't been much repricing on the unsecured portfolio. Secondly, the asset quality, you know, clearly the negative NPE formation is very impressive. With interest rates rising, what are the risks that you see? Are there any certain sectors you're monitoring or, you know, any color on the asset quality side would be great. Finally on the 2025 ROTE guidance of 12%, can we better understand what the interest rate assumptions are here, please? Thank you.
Hi, Nida. You got three questions. First one on net interest margin and how that's planned to move forward. The fact is that we are enjoying right now a very low deposit beta of an average of 9%. The exit run rate of the quarter is around 10, and the guidance that we're giving is based on 17. The current plan assumes that over the course of the year, we will continue to have a pass-through of about 50% on time depot. It's still 40 currently. That the mix of TDs is going to change from the current around 20%-21% to close to 40 by the end of the year.
There is some upside risk there because as the Q2 evolves, this mix shift, which as per plan should already be happening, is not happening as aggressively. There is a bit of upside there, but I think we'll be able to talk more after Q2 results. The loan pass-through, again currently at 75%, the assumption on the NIM is that this will be around 55%. What you see there in terms of reduced pass-through on the unsecured front is intentional. The unsecured book is primarily non-durable based, is administered rate based. We have made the decision not to be increasing these admin rates particularly to allow debtors to continue servicing their debt and to avoid inflows.
Hence this well observed reduced pass-through. Overall, the pass-through is currently at 75% against a budget at 55. On that more in Q2 as spread pressure, we do expect it to be happening in the market. Second question was around asset quality, I think, in terms of inflow risk. Yes. Obviously, as you see right now from the inflows of Q1, nothing particular going on. We are monitoring the book across big and smaller exposures, as well as monitoring forward-looking KPIs on the retail front. The flow rates on the early buckets are still... They do not speak of danger.
We do have proactive moves done. You're all aware of the cap rate imposed on mortgages as well as other proactive restructurings we'll be willing to do, even if that created some Stage two inflation over the course of the year to avoid the inflow. I would say things again better than what the plan currently implies. To the ROTBV 12% in 2025, that is based on a dropping NIM, and which is again driven by a dropping DFR. The assumption is 2% for the deposit facility rate of the euro.
Generally, the plan assumes a peak of 3.25%, which we've just seen happen, and that to be sustained throughout 2023 and start seeing the deaccumulation as of early 2024, to reach a prevailing 2% in 2025.
Thank you very much. That's very clear.
The next question comes from the line of Mikhail Butkov with Goldman Sachs. Please go ahead.
Good day. Thank you very much for the presentation, and congratulations on the strong results. My third question is on health on the funding and liquidity position. You have quite good improvement in the funding over the last year and past quarters, and your loan-to-deposit ratio had been decreasing. Now it stands at 62% ratio. What is the optimal loan-to-deposit ratio do you see over the medium term? Also what's your strategy to allocate the excess liquidity, namely between the real estate fixed income and the other sources? That's the first question. The second question is on dividends. You have a dividend accrual of 10%.
Is this the level of payout you budget for earnings for the year 2023, or actually it is subject for some further changes and increases, so throughout the year? When you think about the future years, what level of dividend payout do you budget in 2024, 2025? Thank you.
Hi, Mikhail. In terms of liquidity, obviously, because of its richness in deposits, Piraeus is now enjoying a very liquid position and the resulting strong NIM, also by the fact that it's a cash positive bank, even post TLTRO right now by about EUR 3 billion. Our expansive targets, given the fact that we are strategically positioned exclusively in Greece, is to support the loan expansion of the country. We are deploying the liquidity that we've got into expanding the credit pool. There will be some expansion on securities as well, very, very targeted, on an NIM play particularly.
I would say if one was to look at as to how the balance sheet is going to evolve, it is going to evolve expanding deposits from intrinsics and from securing the market share that we've got on deposits and then deploying, I would say 2/3 of that into loans for a stable kind of 65% LDR throughout the upcoming period.
Mikhail, on the dividend question, first of all, we have established a distribution policy, which was approved by our board for dividends. 10% of the 2023 results is potentially being accrued, and that's our aspiration for 2023. This amounts to 18 million EUR. The actual distribution, either by way of dividend or by way of buyback, of course, is subject to supervisory approval post final 2023 financial results.
As of the way we are looking at dividend distribution going forward, we are aiming to be at, let's say, 10%, as I said, subject to supervisory approval by 2023, and then aiming to increase it by 15% and 25% in the years to come. This is what is embedded in our projections.
Okay. Thank you very much. As a small follow-up and clarification here, the presentation states capital distributions, and you also alluded to the buybacks. When you think about buybacks, can it be also potentially expanded to the buybacks from the strategic shareholders? You speak here all about the distributions to the minority shareholders. Thank you.
We are talking about distribution to all shareholders, not specifically directed buyback.
Okay. Okay, thank you very much. It's very helpful.
The next question comes from the line of Osman Memisoglu with Ambrosia Capital. Please go ahead.
Hello, many thanks for your time, and congrats on the results. Couple on my side, please. First one are more on a strategic basis with the 2024 and 2025 figures out there. How are you thinking about spread, loan spread progression? Are you budgeting any spread recovery in 2024 and 2025, given that yields are expected to decline, you're budgeting declines? That's the first one. Second one, fee generation continues to be quite solid, impressive. Particularly card fees went up Q on Q despite the seasonal slowdown, loans coming down slightly. I'm curious to hear your thoughts on that front. The third one on cost of risk, given quite sizable negative formation. You're seeing similar trends, sounds like, in Q2.
Could you give us any color on quarterly progression, how you expect it to trend? For 2024, what does that ROTE include in terms of cost or risk? Thank you.
Hi, Osman. Well, your first question is around spread recovery. Assuming of course there's spread compression or continued spread compression, I would say, in 2023. Page 21, where we're showing the guidance for the NII, you're seeing there a loan pass-through in 2024 and 2025 of 90% and 100%. When the rates drop, that basically means that there's no recovery. That entire reduction is baked into the end yield. There is no assumption of spread recovery. We believe that whatever spread compression occurs this year on the rise in interest rates is there to stay. Also take into account the delta that spreads in Greece have versus other European jurisdictions, and given the fact that the economy is headed to investment grade.
The assumption it's prudent to assume that the ending spreads, the exit of 2023 is kind of a terminal situation when it comes to the Greek spreads. To your question about fees. Yes, the fees are right now around 65 basis points over assets. We are taking those to 80 basis points in the guidance for 2025.
The fact is that there are particular moves that will make this change in both the enhanced credit expansion that we are expecting in the country, as well as the all the initiatives that are happening on asset management, rental income growth and other kind of fee generating initiatives that we are planning. Let's just say it's a good 65 basis points close to the good practices of Europe, but still with room to go against I would say the best practices which are primarily strong asset management houses across the continent. To the quarterly progression of cost of risk and to the expectation of 2024.
Cost of risk right now is around 80 basis points, and it has been 80 basis points for many quarters now. Not justified by the negative formation, but let's just say we are using these calm quarters to also take some more conservative approach on particular exposure, increasing our coverage, securing also our capital. The guidance still holds for 1.2% for 2023. We will see. In Q2, again, things still look calm. It is an election quarter, not that this will implies anything in terms of asset quality, or we expect it to. Let's just say we will be able to see what will happen in 2023 after the Q2 result.
In the Q2 result, we will see whether the run rate stays at 80 basis points, and if so, how we deploy this benefit, this capital benefit of 2023 into further clean up or enhance CETone, or other initiatives. 2024 has pretty much the run rate that we're seeing right now between 80 and 90 basis points. As we are disclosing, 25 has certainty on the back of the de-risk balance sheet.
Perfect. Thank you.
The next question comes from the line of Gabor Kemeny with Autonomous Research. Please go ahead.
Good afternoon, congratulations on the results, and thanks for taking my questions. I've got two. The first one's just on capital. If I look at total capital and where you're guiding to at the end of the year, and also, how much capital you're accreting, I'm just interested to hear what the headwinds are in that flight path. If you could just explain what you think is to come to hit the year-end target, that would be interesting. Just on MREL, are you, could you just talk us through your thinking for transactions for this year? I know also that you've got a Tier two call in June 2024. Could we see anything in the Tier two market this year, or is that next year's problem? Interested to hear your thoughts. Thanks.
Right. In terms of capital, what you're basically asking, Dan, I think, is, you guys did a 60 basis points hike in one quarter, and you're telling us that, you're gonna build something above 30 basis points in the remainder three. What's going on? It's quite straightforward. It's quite straightforward. The organic capital, And the P&L will continue pretty much at the rate that we're seeing right now.
There is a little bit of a slump because of increased deposit costs in the last two quarters of the year, but more or less, one can assume that the numerator of the capital is going to be organically enhanced at the same pace. That being said, we, there's an RWA burden that will come from the expansion that will shave off, let's say, if the P&L contributes what we expected, of around 200 basis points, 50 basis points of that is gonna be growth, right? RWA consumption, which gets you to a 150 organic build.
We have one-offs of about 70 basis points that have to do with both voluntary exit programs that are planned for the continued FTE reduction of the bank, as well as some budgeted cleanup costs that have to do with further actions we are taking on the NPE front. The remainder I would say is for dividend and other capital deductions that we will be doing. I would say hence pretty much the reconciliation between the 12.2% and what we are saying to be above 12.5%. Obviously the model has a bigger number than 12.5%, we can currently, I would say, securely give this guidance. On MREL, yes there's a single transaction planned for the year. We're currently at 19.9%.
We were going after a target of 21.8% for the end of this year. The capital that we built with the plans that we've got right now, we're looking at a transaction up to EUR 500 million to happen at some point within the year at, I would say current level costs. That's what the NII assumes. On Tier two, we all know the pros and cons of action in the Tier two market, but yes, we can say that this is next year's activity.
Thank you very much.
The next question comes from the line of Gerster Corn Maximilian with Jefferies. Please go ahead.
Two quick ones from me. One on capital. I think in your presentation you alluded to the possibility of an acceleration in the DTC amortization. Perhaps you could just give us a few more details on that one. My second question, you've said you've been proactive. There's been the freeze on the mortgage rates, that program. I was wondering if you could quantify that impact a little bit. Perhaps, just looking at a few back of the envelope calculations, it looks like the NII foregone at the June 2023 repricing could be looking something like a very high single-digit EUR million number, perhaps very low double-digit EUR number. Perhaps you could just give us a few more details on NII foregone because of those actions. Thank you.
Right. Starting with the impact of the mortgage cap, we have capped mortgages at the reference rate of the 31st of March minus 20 basis points. The entire book, well, the majority of the mortgage book of Eurobank is pricing at one-month Euribor. Just for you to understand, that basically means an effective 2.72 cap, while we were pricing at around 2.05 lately. There is a little bit of a lag time until we catch up to the cap. Obviously the one-month Euribor right now is higher than 2.72, so there is an impact from the cap already there.
That is, we are quantifying this against our projected Euribor, not the current level, but the projected, which has a little bit of space to increase still of around EUR 15 million. That 15 is baked into our projection, our guidance on NII, and we can say that it is much lower to the potential upside that we are seeing from the evolution on the deposit front. On capital, yes, we have taken an approach where given the fact that the capital has massively recovered and continues to build very healthy buffers, to at least prudentially accelerate the DTC amortization beyond what the tax law would allow us to do.
Therefore we are now taking the approach where we're doing a linear amortization on a prudential front of something more than EUR 130 million for loans and another EUR 55 million on PSI, a total of around EUR 190 million in total. Let's just say whatever tax law would allow us to do, we're gonna do it in the P&L. If there's a residual charge to reach the EUR 190, we will be deducting from CET1. That way we can give a stable amortization profile on the DTC against CET1 with a target to reach a ratio of DTC over CET1 of 50% by the end of 2025.
All right. Excellent. Thank you.
Good.
As a reminder, if you would like to ask a question, please press star and one on your telephone. 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. Megalou for any closing comments. Thank you.
Thank you all for participating in our first quarter 2023 results conference call. We look forward to discussing with you all physically or virtually during our investor outreach program. Have all a restful weekend and, for all the colleagues in the U.K., a great coronation weekend. Thank you very much.
Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for calling and have a good afternoon.