Ladies and gentlemen, thank you for standing by. I'm Myrto, your Chorus Call operator. Welcome, and thank you for joining the Banca Transilvania conference call to present and discuss the Q3 2021 financial results. At this time, I would like to turn the conference over to Mr. Ömer Tetik, CEO, Mrs. Mihaela Nadasan, Deputy CEO and Head of Financial Institutions Markets and Investor Relations, and Mr. George Călinescu, Deputy CEO and CFO. Mr. Tetik, you may now proceed.
Hello. Good morning or good afternoon. Thank you for joining us for the presentation of third quarter results of Banca Transilvania. I hope everyone is safe and preparing for the year-end celebrations. I would like to start with a brief overview of Romanian economy and the local developments. Most probably, as you know, since the first week of October, Romania is in a process of reestablishing the government coalition, and it seems that this week we might be having the coalition of National Liberals with Social Democrats so that can focus back on building the budget, the state budget for 2022 and preparing other plans. On the other hand, the Romanian economy has been faring fairly well since 2021.
We have accelerated growth, strong rebound in foreign direct investments, around EUR 4.5 billion in the first eight months. This figure will be much higher towards the end of the year. We have been seeing that the inflationary pressures started building up, coming from energy prices and lack of goods. National Bank of Romania, although I guess the most prudent in the whole Southern and Southeastern Europe, started the reversal of the monetary policy by increasing the rates twice consecutively by 25 basis points. The main increase in the monetary policy rate can be seen at the Lombard rate, which has been raised by 0.5% as per the market expectations.
Although the normal increase of reference rate didn't meet the market expectations. It shows clearly that also National Bank of Romania and most of the local economic analysts are thinking that the inflationary pressures are transitory. They are related to, I'd say, sudden shocks of changes in the prices with the energy prices and with the capping of energy prices for the households and the smaller companies. Most probably the impact will be fading out in the days, in the months to come. By the way, we have posted also our presentation at the investors relations page of our website, of Banca Transilvania's website, so that if you would like to follow the numbers from there now or later, please do not hesitate.
The consumer price inflation had been close to 5.2%. It actually hit 5.2% at the end of September and reaching 7% at the end of October, as per you have already been informed. On the other hand, Romania still enjoys, despite the increases, significant increases in the state debt of sovereign debt, still enjoys a lower indebtedness ratio, if you may say so. The budget deficit had been this year, in the first nine months, below 4%, compared to 6.4% a year ago. The debt to GDP ratio is slightly above 50% for Romania, which gives comfort both to economists, analysts and bank financial sector.
The yields had been increasing in anticipation of the monetary policy change. We see that market has stabilized since National Bank took the necessary steps. There is still we see that there are talks about the Euro loan exchange rate and depreciation pressures. On the other hand, considering the increase in foreign direct investments, high savings rate ratio, high disponibility of Euro savings in banking system, and also the upcoming European Resilience and Recovery Fund, the program, as the program had been approved, we are expecting the funds to be in cash once the government will be up and running. There will be also, let's say, some safety margins or measures to follow.
The banking sector has grown faster than our previous expectations, has grown faster than the GDP growth. The lei-denominated loans in the last 12 months to September 2021 grew almost 18.5%. Foreign exchange denominated loans grew by 2.3% in the last 12 months to September 2021. The main component was definitely the increase in household loans coming from mortgages or consumer loans, which grew in the first nine months of this year by 8.3%. On the other hand, corporate loans also had been advancing quite fairly, thanks to government-led, state-led programs like the second version of the IMM Invest, but also slightly higher appetite of different companies to invest or to further improve their businesses.
Romanian banking system is still offering a comfortable NPL ratio at 3.65%. This is a record low level for the last years. Despite all the talks of emerging markets, small companies, moratorium and so on, we see also a similar impact or trend in our numbers as well that we will see. The acceleration in the lending helped the loans deposit ratio to slightly improve towards 69.5% in September. A slight increase from August. While the household deposits was growing in the first nine months 6.5%, the corporate deposits grew by 9%, almost 9.5%.
Together with the recovery going out of the pandemic, we are expecting the loans to deposits ratio further to normalize towards maybe 75 basis points towards the end of the year. It depends on the utilization of the banking loans and co-financing packages. If you come to Banca Transilvania, we are happy once again to see that government-led programs like IMM Invest. Banca Transilvania had been the bank of choice for the applicants. So far for the second iteration of IMM Invest in 2021, we have credited almost 18,000 customers. The market credited 18,000 customers of which 25% chose BT. We have granted 2,300 loans as Banca Transilvania under IMM Invest and Agro program, an amount close to RON 1.5 billion.
Also, there were the state grants, through which we have offered RON 2.02 billion, with almost 20,000 payments. These are mostly working capital loan grants. In the HoReCa scheme also, 61% of the companies chose Banca Transilvania, and out of which 20% were new customers. If you look at the public moratoria and the impact of public moratoria in our numbers, the remaining amount is close to RON 50 million, 200 customers, which we don't see as a business significant risk, compared to our numbers. We had been investing further in digitalization and now 68% of our customers are using at least one of the bank's digital solutions, internet banking, mobile banking or smart banking applications.
BT Pay, our own wallet application, together with Apple Pay, Google Pay and other types of apps that we have Fitbit and Garmin Pay wallets. We are close to 2 million cards enrolled and over 1.5 million customers enrolled. We have seen a huge increase in the number of transactions online and with the card. This helps definitely onto our fee and commission income, but also to the fiscalization of the country. We have seen the mobile payments doubling in the last 12 months to 20 million transactions in one quarter. On the other hand, in the first nine months of this year, we have processed almost 1 billion transactions with debit and credit cards.
We have also BT Visual Help, which had close to 37% increase in the interactions with the customers. We are also on the company side, we are now switching to NEOcont, where the onboarding and interaction will be fully online. We have launched our new digital signatures solution, eSign, and we are also offering file exchange, file depositing, document depositing solutions to our customers through FileShare. We see also in the companies, more than doubling number of online and digital interactions.
If you look at the financial numbers, the result of our operational efforts, you will see that the net interest income of the bank has grown 3.5%, despite decreases in the interest rates in the first six months of the year. On the consolidated basis, we see a 4.2% growth of our net interest income. We are mentioning this in all our calls, and we pay a lot of attention to that. The net fee and commission income of the bank has grown almost 26%. The whole group's slightly over 25%. This is a couple of years ago when we started speaking more about the growth of our net fee and commission income and our focus on it.
We were saying that we will be pursuing double-digit growth in the years to come, and this is also, this will be also our target for the next year. The pre-provisioning operating profit of the bank was at RON 1.7 billion, and the net profit after tax RON 1.473 billion. Very much also definitely supported by the cost of risk, which is at zero. Cost of risk is coming mainly, actually cost of risk being zero is not a change in our provisioning policy. We have been provisioning almost EUR 100 million this year. But an amount equal to that we had been either reversed by reimbursements or sales of assets, so that it netted off our provisioning effort.
At the end, return on equity reached close to 20% with the net interest margin at 2.55, 255 basis points, which we think will be the last quarter of such a tight net interest margin. With the interest rate policy change and the market interest increasing, the reference rates are being adjusted. As 80% of our loan book is with variable interest rates, we will starting from next quarters see the impact on our numbers positively. Our loan book, gross loan book, is at the end of September 48.5 billion RON. Deposits from customers at RON 96.9 billion .
With again a comfortable loans-to-deposit ratio 50%, which gives us enough liquidity to grow our asset base further. Quite comfortable NPL below 2%. If you look at our let's say trends in the income structure, the net interest income, despite the stress of decreasing interest rates, has grown by 3.5%. Our net fee and commission income has grown by 25.7%. We have seen a growth in our net trading income, which the percentage is high, but the differences are not that significant for our bottom line. Also we have seen that our operating expenses growth had been in line with our expectations, which offered us a pre-provisioning operating profit 8% higher than last year.
I would not bore you with the numbers that you can definitely take out from the presentation and from our numbers. I would like to switch to Q&A to offer you the chance to clarify numbers as much as we can.
The first question comes from a line of Nellis Simon with Citibank. Please go ahead.
Oh, hi. Thanks very much for the call. I have two questions. First question is just on net interest income and margin. I see that you've grown nicely year-on-year, but quarter-on-quarter your growth, your net interest income fell by, I think 5%. Could you just explain what was going on there? It seems to be driven by lending interest income from loans going down. That would be my first question. My second question is my usual question, which is how are you generating such high trading, you know, FX income, insurance income, other revaluations? I mean, all other income other than net interest income and fees seems to be very robust. I think it was 18% of revenue. Yeah, what's the outlook going forward? I'm just worried that that could decline over time. Thank you.
Thank you very much. I will start with the second one and go to the first question. As regards to the second question, a couple of years ago, actually, we have put it as an ambition, because our starting point was low. As compared to our peers, our net fee and commission income was quite low. We were not the transaction bank of some of our customers, most of our customers. We spend a lot of effort to get their wallet, to get their portfolio of transactions and operations. We have signed also new bank insurance partnerships, changing the mode of offering these products. We have been bundling them with our existing products, not just trying to sell them as separate products.
We are also getting more revenues from the products we sell on behalf of our bank insurance partners. In terms of exchange rates, again, it was a strategic change. We have increased our sales team. We have been paying attention by special campaigns, actions, and through our network. We are assuming also couple of operational, let's say, burden in Romania. If you look at our market share in terms of total assets versus our market share in terms of number of payments, in terms of number of cards, cash operations. We are going the extra mile. We are assuming some burdens so that we can get other transactions of our customers from which we can earn some fees and commissions.
So far, this had been paying back. I would say that we are not still at the level that we should be or we could be. All the banks, all our sales channels and business lines are paying special attention to that. This had been, year to year, giving us a very solid revenue base. I don't know if it's enough of details, but we can also discuss it further. Coming back to net interest margin. Indeed, it had been squeezed because, especially on the retail loans, the reference rates, the IRCC, is coming with a gap of almost six months, between three to six months, because of the establishment procedure.
Now we see that the IRCC on a daily basis is increasing. When the repricing periods of our loans, be it in December or January come, they will be repriced at a slightly higher IRCC. Then in the quarters to come, it will be aligned to those times actual market rates. We also didn't change our borrowing or funding policy. Most of our funding is coming, or at least almost half of our funding is coming from current accounts with zero interest rates. We didn't charge negative rates or we didn't say no to the customers.
This is also quite positive sentiment in the first six months of the year, which pushed the treasury yields, bonds and fixed income instruments yields down, also made an impact, which we see now. As we have our portfolio average maturity rather short, we are replenishing our portfolio at current rates. Hopefully we will see an increasing net interest margin. When we were discussing about NIM, net interest margin in the last quarters, we were not aggressive on the upside. We were maybe more defensive. Now we see more, let's say, clear signs of an increase in our net interest margin and thus the incomes.
the decline over the quarter was driven mostly by repricing of consumer loans. Is that what you're saying? Yeah.
Hi, it's Mihaela now. In fact, on all the types of loans where repricing had to happen, considering that Romania was having the lowest reference rate for the first six months of the year, while during the third quarter, the entire loan book came to a repricing.
Okay. Going forward, you hope to see some margin expansion. That's the message, yeah?
Yes.
Exactly.
Just on the trading and other income, I guess a large portion of this is actually FX. How much of that is kind of trading around your own portfolio, and how much of it's client driven?
The majority of the FX part is clients driven.
It should be pretty sustainable.
Yeah.
Yeah.
Okay, that's all for me. Thank you. Thank you very much.
Thank you.
The next question comes from a line of Alex Boulougouris with Wood & Co. Please go ahead.
Yes, hello. Thank you for the presentation. On cost of risk, I have a question on cost of risk. I mean, given that we had another quarter of provision reversals in Q3 like in the first quarter, and I think in the previous conference call you mentioned on a cost of risk guidance of between 80-100 basis points, does this still hold for the full year? Or it still apply, still applicable for the full year, or how do you see the trends in the fourth quarter up to now? This is my first question. My second, again, if I can revert a bit on the NII that my colleague mentioned in the first question.
I mean, in the budget you were assuming an NII growth of about 7%-13% this year, and loan growth has been better than I think initial expectations, with a growth of more than 10%. I think during the budget we already were aware of the reduction in the reference rate. On the other hand, we see fees going significantly better than what you had in the budget. I mean, there is no declassification here or anything like that. This is a pure reference rate that you mentioned below that came in beyond what you were expecting or something like that. Thank you.
Thank you. I hope I will remember all the questions. If not, please remind me again. Coming back to fee and commission income growth also. We had been taking, as I said, a very condensed, very focused action. Last years, due to pandemic moratorium and the economic conditions, we have given up. We have either postponed or canceled several action points that we were supposed to start with. Which kicked in starting with this year at different quarters. We didn't also throw all the, let's say, ammunition that we have yet. The bigger change as compared to last year is maybe not fair to tell. It's kind of this year is partially smoothing out also what we didn't do in the last year.
This is indeed sustainable as we consider client-driven, client number driven, as we are opening over 1,200-1,300 accounts continuously as we speak every day. We think that obviously we have already proven ourselves as the transaction bank of Romania for retail and company customers. There had been, well, say recently, last week also, we have this Black Friday event. When we look at the numbers, I don't want to tell you now the numbers that we will also tell in this quarter's call later at the end of the year. We see a huge market share in terms of transaction merchant-related client driven, which are all revenue generating.
In terms of the net interest income, yes, it is a slight increase. It's lower than the loan growth because it was being squeezed by the, let's say, lower interest rates, reference rates in the market. We had been, as we've been growing our loan book, we didn't want to, let's say, stop the asset generation side. We are seeing already, but we will be seeing more of actualization of the recovery of the net interest margins in the next month. You had asked one more question. The first one I forgot.
Cost of risk.
Regarding cost of risk, sorry. The cost of risk, there had been quite good recoveries actually. Out of this almost EUR 100 million provision, around EUR 50 million we have recovered from off-balance asset sales, several of them. It was also especially in the first six months, the markets helped us to verify some of the assets that we were not putting necessarily a liquidation value. On the other hand, we have seen customers which we considered at bad rating or high risk. They had been paying their dues. They partially or fully closed their debt to the bank. Another almost EUR 50 million came from that. We have some recovery potential until the end of the year due to based on the ongoing discussions.
That's why I don't think that we will be reaching 80 or 100 basis points cost of risk. It is possible to see between 40-50 basis points cost of risk at the end of the year.
Thank you.
If I skipped anything, sorry, you ask me again.
Sorry?
If I skipped anything, please, ask again. Sorry.
No, no. That I was covered. Yes, thank you very much.
Thank you.
The next question comes from the line of Unger Thomas with Erste Group. Please go ahead.
Yes, hello. Good afternoon. Thank you also for taking my questions. I would stick with the same subject, cost of risk and also of the net interest margin. Maybe just on the net interest margin, beginning with that. If you could give us an estimate of how much in terms of improvement you expect in the coming two quarters on the margin itself. Then in cost of risk, you just mentioned 40-50 basis points for the full year 2021. Is there anything that you can tell us on 2022 already? Are we going back to a normal risk cost rate or around 80 basis points? What do you expect for next year?
Thank you.
I mean, it depends very much regarding the cost of risk on the market conditions, in which direction. If there will be new governmental programs or if there will be the forecasted injection of European funds in the economy, we might see a trend where we further have recoveries or improvement in the company's balance sheets or their businesses. That's why it is difficult to forecast now. We are always reiterating that considering that our business is retail, micro-lending, SMEs, 120-140 basis points cost of risk should be considered normal. We are usually budgeting like this.
I will not be able to give you too much of depth in terms of 2022 numbers or the quarters to come because now as we speak we are also working on the budget for next year. It hasn't been presented to our board of directors or to our shareholders yet. That's why I don't want to take a, let's say, wrong step here. On the other hand, considering that 85% of our loan book or close to 80% is in lei. 80% of those loans are with variable interest rate based on the market reference rate.
It's quite almost an arithmetic calculation that you could also run, how much could be the positive impact on the net interest income on the portfolio at the actual size. Plus definitely we will be growing our lending. I mean, we are, we will be promoting a high growth higher than GDP growth, as usual in terms of loan growth to our shareholders. This is what we will ask their approval for. This will come on top of it.
Yeah. As long as our loan to deposit ratio is as low as it is now, like around 50%, clearly there is no real pressure on the deposit side, on the liability side to have, let's say, any increases in terms of, interest rates there. Therefore, within six months the loan book is coming to a repricing, new production is done at higher rates. On the liability side, we are not expecting to see any kind of, pricing pressure in the first, period of, 2022. The positive impact should be visible in the net interest margin. That's our expectation.
Okay, thank you. Do you expect any impact on loan growth from rising rates? Any slowdown that you anticipate for the coming year? Lastly, if I can ask one more question, if that's okay. Inflationary pressures on your cost side, what do you see right now? What do you expect for the coming year?
I mean, this again, next year's budget, as possibly brief guidance, what I can tell is that there was automation and improvement in terms of technology help us to control part of the cost. On the other hand, wage inflation and the salary increases, we cannot fight against and we will be adjusting salaries as per the inflation plus the performance adjustments. Here I am comfortable to say that our team of 11,000 employees had been paying back to the shareholders each year regardless of the increases. They had been performing well because it's the loyalty is two-sided here. On the other hand, I'll say it's very difficult to estimate now some of the items including the impact on energy prices or different supply chain issues. We don't have any major investment or urgent investment needs or requirements, so it should be more controllable. The other question was related to?
To the growth of the loan book versus GDP.
The growth of loan book, maybe you are also following the banking system numbers. Already there is a slowing down of the demand. It's for different reasons. Either people want to understand where the markets are heading. We see that consumer demand is slowing down. It didn't disappear, it didn't shut down, but it is slowing down. On the other hand, the good thing for Romania, for economy itself is that next year we are expecting loan growth mainly from companies side. European funds, the Recovery and Resilience funds, once they start entering the economy, they will go to diversify projects from education, healthcare, infrastructure, digitalization of the economy, trainings and so on. All these will go through company balance sheets.
It will create co-financing or extra financing opportunities for us and for our competitors. I think we are comfortable to say that the slight slowing down of consumer demand will be more than matched by the company loan growth. If also the consumers will have the comfort that price increases or volatility will be sorted out, they will be coming back to market because compared to many other countries developed or emerging, Romania has housing needs. We had been always mentioning that the average age of housing stock in Romania is quite old. The possibly from isolation to quality.
There are several issues and, Romania in the last couple of years have been showing that once they manage to save, the first investment they do is to buy a house. We are a country, a nation very inclined to invest in residential real estate, and we think that it will continue.
Thank you very much.
We have a follow-up question from the line of Nellis Simon with Citibank. Please go ahead.
Oh, thanks. Yeah, just a few more from me. Yeah, just on the large increase in the stage two loans, is that all driven by migration, or is there something else going on there? That'd be my first one. Then also my usual question, can you give us an update on the Moldovan court case that is a risk? Thank you.
Yeah. With regards to the loans, it's similar as we were having also in the second quarter of the year. It has to do with the way in which we were trying to put aside additional provisions and everything what was under moratoria last year we were moving to the second stage, even though the repayment behavior is proper and in fact we are having releases once the loan exposures are coming to their agreed maturities. From this perspective, it's driven by our way of trying to be as conservative as possible with the reserves we are setting aside for potential credit risk. This is on your first question.
The increase.
Uh, with regard to-
is coming mostly from migration from stage three to stage two, or was it coming from
Uh-
Reclassification stage one loans too?
It was more from stage one to stage two during the observation period.
Okay. Sorry to interrupt.
No problem. As regards to Moldova, there is no development yet. If you have been following the news, there had been some changes in the prosecutor's office, some developments, which we are also following. The general prosecutor himself is being accused of different wrongdoings. We don't know. We don't want to comment on what we don't know. We are also willing to, I would say, the case to come to court and to be clarified as soon as possible. On the other hand, the bank is functioning under normal parameters, and it's a profitable institution contributing to our bottom line. They restarted their loan growth in the segments of our interest.
Unfortunately, retail and small companies is not a segment of high growth in Moldova yet. We don't want to enter into bigger tickets in Republic of Moldova, and we want to maintain our. We'd rather have comfortable market share in the segments of interest instead of trying to go for the general market share. So far our colleagues have been doing a good job there. We have done several. I'll say, new products and services. The level of digitalization, digital services of Victoriabank is almost at the level of Banca Transilvania. We have been renovating our network this year, the physical network, offering better access, better conditions to the customers. We see almost double-digit growth in our retail and micro-lending there.
Okay. Thank you.
Thank you.
Ladies and gentlemen.
Ladies and gentlemen-
There are no further questions at this time. I will now turn the conference over to management for any closing comments. Thank you.
Thank you very much. I mean, if there are further questions or need of clarification, please do not hesitate to contact our investor relations. Mihaela and her team will try to answer on time. I just received couple of emails now that some of the participants couldn't dial in, couldn't join. We will try to, let's say, improve the situation as well. I'm sorry for that. On the other hand, hopefully, after closing the year, we will come with more important news, both related to the 2021 numbers and maybe some guidance on the 2022 budget. Looking forward to meet with you again online and maybe, hopefully in person in an investors' conference. Until then, stay safe and, during Christmas, enjoy the holidays. Thank you.