Piraeus Financial Holdings S.A.

Good afternoon, ladies and gentlemen, and thank you very much for attending our first half 2021 financial results conference call. I'm Christos Megalou, and I'm joined here today by Theo Gnardellis, Group Chief Financial Officer; and Chrys Berbati, Head of IR and Financial Planning.

Before deep diving into the key takeaways of the first half of 2021 performance, let me start with a few words on the macro backdrop. Beginning from Slide 4, the macro outlook seems quite supportive for the economic activity and business sentiment versus the beginning of the year.

Q1 GDP in Greece came at 4.4% quarter-on-quarter, above expectations, while the economic sentiment in July was at a 12-month high. At the same time, real estate prices have been resilient throughout the crisis and now we see further upside building up.

A faster recovery is anticipated in the second half of 2021 with further acceleration in '22, mainly driven by pent-up domestic demand, the launch of projects under the National Recovery and Resilience Fund and the improved tourism receipts compared to 2020. Greece is looking to reinvigorate its economy with the funds from the RRF along with Greece 2.0, totaling EUR 87 billion up to 2027, a significant lever to attract sizable investments in the Greek economy, transforming the industrial model.

Greece stands out as an investment hub for the following years, signifying upbeat investor expectations for the prospects of the country. We have been noticing an increased appetite for Greek assets, especially in the manufacturing and services sectors with significant investment interest for pharmaceuticals, food and beverages, financials and insurance business.

M&A activity is picking up and the transactions that we have seen taking place are at multiples of mid-20s of EBITDA, talking about the Pharmathen and Chipita deals as an example. Within this environment, we continuously deliver on our strategic targets.

And in many cases, we have been at the forefront of developments in the Greek financial sector with a testament of this being presented on Slide 5, where we list our 10 first in terms of execution capability. I can say that we are really proud of the work done until now at Piraeus, and we look forward to the forthcoming period of growth and business expansion.

On Slide 6, we outlined the key performance indicators that illustrate the turnaround we have accomplished during the first half of the year and affirm our ability to deliver tangible results in critical areas like resolving the NPE issue, managing capital and generating profitability. On our derisking effort, this continues unabated.

And this quarter, we have made sizable progress by fully deconsolidating Phoenix and Vega securitization perimeters, EUR 7 billion in total. In parallel, Sunrise 1, another EUR 7 billion perimeter, was classified as held for sale in Q2.

Our NPE ratio, therefore, fell to 23%, half compared to 6 months ago. Our transformation program aims at growing revenues and generating further cost efficiencies as implied by our cost-to-income ratio, which was at 41% level in first half of '21 versus 47% in 2020.

The recurring pretax line was profitable by EUR 358 million in first half, highlighting Piraeus core franchise strength and potential, once market conditions normalize. Piraeus' capital position is strong post the capital enhancement actions we took in the second quarter with our total capital ratio at 16% and the fully loaded ratio at 14%, providing the necessary buffers for the successful conclusion of the Sunrise plan.

On Slide 7, and with regards to new business, new loan generation reached EUR 3.4 billion in the first half of the year, running at a pace ahead of our full year target of EUR 5.7 billion. At the same time, we have increased our client assets under management by EUR 2.2 billion in first half.

Mutual funds under management have reached the level of EUR 3 billion at the end of June. Regarding our core pre-provision income, this came strong in Q2 '21 at EUR 282 million, 27% higher year-on-year on the back of very strong net fee income generation and decreased recurring costs.

One key consequence of the derisking strategy is evident on our organic cost of risk, which dropped to 1.1% over net loans already at par with our short-term aspiration. This brings us to Slide 8.

The Sunrise plan has been implemented by almost 80% in less than 6 months. To support this transformation, a number of capital enhancement actions have been already completed with total capital accumulation of around EUR 2.8 billion, including EUR 1.4 billion from the recent share capital increase and EUR 600 million from the AT1 issuance.

NPE reduction is a fundamental pillar of this strategic plan. Further to the EUR 14 billion Hercules NPE securitizations, Phoenix, Vega and Sunrise 1, we will dispose an additional EUR 5 billion of NPEs by early 2022 that will enable us to reach a single-digit NPE ratio incorporating also organic flow.

Turning now to Slide 9. Approximately 85% of the NPE reduction plan is now locked in within our loss budget range.

We are now focusing on the additional steps that are necessary to land us on a single NPE ratio by early 2022. These steps comprise 3 components.

The first one involves Sunrise 2 perimeter of EUR 2.6 billion for which rating has been received and HAPS application is imminent. For Sunrise 3, which is approximately EUR 1 billion NPE securitization, we are in the process of carefully finalizing the perimeter.

The third component scheduled to be concluded by the last quarter of this year includes the leasing NPE transaction, which is in advanced phase, and we are about to receive binding offers and the shipping NPE transaction for which we are in nonbinding offer phase. On Slide 10, and in first half '21 organic flows, the first 2 quarters of '21 were a milestone as month after month we gained the confidence for the organic effort with moratoria almost now expired in totality.

Performance is as we expected and we feel confident about the accomplishment of our yearly targets. Turning to capital.

Our efforts are focused on maintaining a strong capital ratio similar to caring status post the execution of the NPE cleanup plan. This brings us to Slide 11, both components of the capital ratio, namely capital and risk-weighted assets are carefully managed, while our remaining capital actions are fully on track.

The significant improvement in our fundamentals during the past year is also evident in the results by in the 2020 SSM stress test. As you can see on Slide 12, including the share capital increase of Q2 '21, our fully loaded CET ratio stood at 10% in 2023 under the adverse scenario at par with the EU Bank's average.

Overall, the second quarter P&L performance as depicted on Slide 13, presented positive trends linked to a core operating profit of EUR 267 million in Q2. This takes us towards achieving the short-term aspiration of 5% return on tangible equity that we have set.

We will have the opportunity to elaborate even further on the top line drivers, costs and impairments. Turning to Slide 14.

We are well ahead of our full year 2021 target for loan disbursements of EUR 5.7 billion, and it is encouraging that the healthy demand of credit is widespread across sectors of the economy, while we have also started seeing signs of the -- from the retail market. And as I mentioned earlier, we do anticipate a faster recovery in the second half of 2021 with further acceleration in 2022.

Now let's touch on the P&L drivers, and I'm sure that Theo will provide further color during the Q&A session. We are satisfied with the resilience that our net interest income line is displaying so far as we can see on Slide 15.

Despite the impact of the cleanup, we saw an increased contribution for our expanded fixed income portfolio and from deposit costs. Turning to net fee income on Slide 16.

Our focused strategy is paying off. Q2 2021 was the best ever quarter for Piraeus Bank in terms of fees with EUR 101 million in generation.

We are committed on expanding and diversifying our sources of income. The current run rate of fees is already at par with our 2022 aspiration.

At the same time, there is room for further cost efficiency improvements. A radical transformation of our cost base with focus on digitization will cumulatively result in a cost base of approximately EUR 800 million in the medium-term that we deem adequate to run a bank of our size.

The work we do on tackling the legacy issues bears fruit it, and that is also evident on the underlying cost of risk that is falling rapidly, and you can -- as you can see on Slide 18. This stands currently at 1.1% over net loans, better than the 2021 plan trajectory of circa 1.5%, including the NPE management success fees.

We remain focused on completing the NPE reduction plan in the next 2 to 3 quarters in order to pave the way for organic cost of risk at normalized levels of what we consider to be below 1% over net loans. Now changing gear, I would like to discuss in brief the enhanced focus we are placing on exploring new commercial and strategic initiatives shown on Slide 19.

Just to mention, the preparatory work already being produced in areas like leveraging the RRF funds, tapping opportunities on the re-performing loan market, the digital nexus and developing new asset strategies for our real estate assets. In the forthcoming period, we'll be discussing more of these initiatives along with detailed action plans.

Slides 20 and 21 present the summary of our transformation program, including almost 300 projects currently underway. The program is underpinned by the pillars of simplification and digitization, revenue growth and client centricity to deliver sustainable returns, our overriding objective is to manage the bank by optimizing the combination of 3 levers: Operating in a simple and efficient manner, accelerating revenue on capital-light growth and upgrading the customer value proposition.

Digitization is part of our DNA, incorporating technology and data into every decision we take. And this brings us to Slide 23.

Digitization enhances our service to clients and reinforces our business. It is the accelerator for the whole transformation and at the heart of everything we do.

It has been instrumental throughout the pandemic crisis. Our digital services enjoy high scores in customer satisfaction surveys, and this is reflected on the heightened usage that we have been witnessing so far.

Let us now turn on Slide 24. Last month, we announced the agreement as reflected in the relevant memorandum of understanding signed between Piraeus and Lamda Development regarding the acquisition of office space in Hellinikon, with a total area of 40,000 square meters.

This new location will become the new headquarters of our administrative functions in Attica, currently dispersed in 18 buildings. It is a multi-beneficial project with high sustainability standards and respect for the environment.

For us at Piraeus Bank, it will result into many synergies and operational efficiencies, enabling us to improve even further our environmental footprint and brings us closer to our net 0 emission aspiration. Upon completion of this transfer, the annual operating cost savings are estimated to exceed EUR 10 million.

Lastly, on our medium-term financial targets are summarized on Slide 25. New Piraeus Bank will be completely derisked with an NPE ratio of lower than 3%, enjoying capital levels that will exceed 17%, while our totally restored balance sheet will be generating returns in excess of 10% in 2024 and above 5% in the short-term.

And on this note, we move to Slides 26 and 27 of our presentation that illustrates some of our achievements and ongoing actions regarding the incorporation of ESG factors into our business. We are stepping up these actions on this very important and evolving topping of our overall strategic agenda.

We are reinforcing our success we saw for our ESG model to align even further with the societal priorities that we are witnessing. Concluding my introductory statement, I'm confident that our work execution track record and accomplishments during the first half of the year will be recognized by the investment community.

And with that remark, I would like to open up the floor to your questions.

Thanks for the presentation. I have one question on P&L items.

The second on balance sheet and then the third on off balance sheet. So the P&L relates to your fee line.

And as you mentioned in the call, you're well on track to meet your 2022 targets. So just wondering now, what does this mean to 2021?

Is this sending a message regarding how we should think about the second half? Or maybe you guys having room to deliver those targets this year and the next?

Then my second question is on Slide 10 and on your NPE inflows. So any color on the -- where the outflows -- sorry, where the inflows are coming from?

Any specific segment or part of the economy that you see that the inflow is coming? And also, I think that you mentioned in the presentation that your single-digit NPE ratio is for early 2022 once you conclude the other NPE transaction.

So is there still room for that to be achieved by the end of 2021, meaning that you could also move those assets into held for sale by the end of this year and show, let's say, a pro forma number 2021 and then close in 2022? And then my third question is on your AuM comment.

I see that increase. I just want to confirm that that is new money flowing into AuM, right?

It's not growth from market-related performance. And also, I mean, any more color on your AuM strategy, I mean, converting balance sheet into off balance sheet?

I mean, what shall we expect to see on that front and maybe the reflection to your fee line as well?

Hello, Jonas. So first question was on fees.

Look, I mean, the quarter 2 was a very strong quarter, right? And it was across all lines.

There were no one-off, there was just playing out sort of commercial effort, market being revived and across all lines we saw a bump up for various reasons. And we're already at the run rate half 1 for the year, right?

So the plan for this year has something around EUR 340 million, and we're already at that run rate. So what does that mean for the full year?

Obviously, we're hopeful for better. Q3 is a very important quarter and it looks like tourism is doing well or as well as was expected.

But what that means for the actual nominal amount for this year, I think we will understand more with the Q3 results. But generally, it's very nice to be already at the run rate for the year, hoping for better and capturing the run rate for the short-term aspiration already in sort of midyear '21.

Your question about inflows. Nothing in particular.

It was 50-50 retail business. Some of it ex-moratoria, some of it new.

What we observed is that with half the year done and with the first 2 quarters behind us, having endured all the moratoria expirations, we are below the inflow run rate for the year. And I think that's what's important.

We did an EUR 800 million inflow. The original expectation was for EUR 1.7 billion full year.

Next quarters, given the fact that all moratoria expirations are behind us, could speak for better. But that part of the NPE plan, the organic part seems like it's also striking results and fitting into the overall strategy for the single-digit ratio.

Now the timing of when that much talked about single-digit NPE ratios that we achieved, it really depends on the progress of the transactions. Yes, it could be that if Sunrise 3 is rated quickly and achieves the relevant progress, it could be held for sale as early as Q4.

And depending on other things as well, yes, we could see the single digit earlier. What we're currently saying is that the latest is early 2022.

So that's where this server within is coming from. Then one quarter before or after or rather before, it will depend on the actual sort of macro situation on each deal.

To your question about AuM, yes, this is mostly coming from net sales. It's part of the strategy and of the intrinsics of the market where the low yield on deposits is pushing people and we're also supporting that trend to move to sort of higher-yielding assets.

This is great for -- both for fees, but also for NII as cash moves into our balance sheet elements and then -- and that helps with NII as well. This effect that we have seen in the first half has made us think bigger about the AuM aspirations for '21 and '22.

So we're looking at an upside here versus what the Sunrise plan originally had.

And Jonas, just to stress here. Asset management is a top priority of this management team, and we are very much focusing in enhancing the proposition both in terms of products as well as in terms of reaching now to clients for distribution.

So a very strong focus on asset management is expected to be core of our strategy for the next few quarters and year.

Clearly, very strong trends in the underlying business, especially with the new disbursements at EUR 3.5 billion so far, and that's very close to the levels you were lending just 1, 2 years ago. So I'd like to understand better what is driving this momentum.

And especially in lending, is this pent-up demand coming out of COVID, would you say? Or is there a front-loading impact from the expected growth in the second half?

Or would you say that this is really the new run rate now? And secondly, and related to this, what can you share from the ground on the RRF related projects?

Is there already a pipeline building for the second half of the year? And if yes, at what stage are your discussions with the corporates currently?

And how much RRF related lending do you expect to see already this year?

Hello, Mehmet. So yes, indeed, the credit dispersals are picking up.

We saw a strong second quarter with EUR 1.8 billion in total first half, as you said, EUR 3.4 billion. We've got that break down on Page 14.

Again, no particular spikes, right? This is really on the ground, great demand that is -- that's being observed.

Obviously, it's a push and pull business. So we're also very present with all clients, financing projects where available.

It has started with corporate and SME, as it always does and was always expected. We are expecting this to continue and actually accelerate with the RRF, both on SB and SME front.

The part that has yet to pick up is the retail part where mortgages still have a lot of opportunity for growth. But the early trends are overall very promising.

Just to say 2 words on the RRF. We have a very healthy, very good ongoing dialogue across the board of the client spectrum, both in terms of large corporate as well as SMEs and some SBs.

There are some pretty good plans developing. We would expect that this will accelerate, and we do believe that the last quarter of this year, but more importantly, the first few quarters of 2022 will be critical in laying out the rollout of the usage of the plan.

There is a lot of interest from the private sector. And we are encouraged by the fact that the Greek government has moved swiftly and is included in the first European countries that have even got a down payment of EUR 4 billion, actually, for the RRF, which is going to be start rolling out.

So expect more on that front, but things are looking good as of now.

And maybe just follow up on this -- following up on this. You say in one of the slides that you're targeting 1/3 of the envelope.

What do you think will be the differentiating factors here among the 4 banks who are all targeting, I think, quite a significant loan growth from the RRF? Do you think it's just getting prepared early enough and willing to lend?

Or do you think there are specific factors that puts you in a favorable position compared to the others?

Look, we have been in the forefront of the disbursements of the funds that came up with the help of Europe and the Development Bank in 2020, and will continue into 2021, EUR 6 billion in total. And what we are putting here is a target as an aspiration is essentially our market share in that market.

So large corporate and SME and small business, this is what we expect that is going to be mirrored also in the RRF. So we have high aspirations and targets.

And we are very focused in delivering the results.

Many thanks for the presentation and congrats on the results. Just going back to the asset quality commentary so far in the call.

Can you give us any color on your cost of risk expectations. I heard something less than 100 bps.

Any color on what you see there in terms of this year and next year, maybe is trending better than previous guidance as the macro is picking up? That's first bit.

And then on the capital front, I saw in a slide, you're looking now to move north of 17%. I think this was 16% in previous end of 2020 guidance.

I was just wondering if that's just timing or if there's anything else, are you seeing anything particularly better? And then the third point is on your income tax on a quarterly pace.

Is this the pace we should consider for the rest of the year? And maybe with that, also if you could give us any color on the recent news on the DTA -- potential changes related to the DTA/DTCs?

Hello, Osman. So cost of risk, that's -- we illustrate that Page 18.

The fact is that the organic cost of risk did see a very substantial drop already in Q2, simply with the recognition of Phoenix and Vega, right? And this 1.1% that we're seeing in Q2, that EUR 94 million, that's fully inclusive of service fees that will eventually go away with the recognition of the deals done and the deals that will happen in the coming months.

So yes, it is trending for better. But again, as I mentioned to Jonas earlier on fees, its first quarter, right?

So we want to see a few more quarters to understand what's going on before we tell you guys what the new guidance is going to be, but it's looking really good. So that's on the cost of risk.

The 70% is a sort of mid-term 2024 guidance on capital, and it's actually building up post IFRS phasing with the organic capital generation of the coming years. So this was what was kind of always there.

I mean on the tax -- on the tax rate, the tax plan, obviously, with all of these sort of massive balance sheet movements, you can't really speak about the tax rate per se. You can speak about a plan.

There will be some movements on the nominal tax charge, depending also on how the law will evolve. But overall, a rather stable situation, similar to what you're seeing now on average.

But there will be some fluctuation sort of in the coming quarters. On -- to your point about -- to your question about the evolutions on the DTC, I mean, it's a law amendment that -- that's really going to come online quite soon.

Very helpful sort of evolution for the sector, great for the derisking that the -- that all banks are doing right now. The Sunrise plan was working with the tax law as it was.

So -- and it's a plan of strong profitability and sort of steady DTC amortization and tax charge on the back of that. But this is great to have also for the future just to have available.

Congratulations on the results and thanks for taking my questions. Just a couple of quick ones.

Just on CET1, where would you see -- where do you think your CET1 ratio gets to year-end? And would you say that this is the low point for fully loaded CET1?

And just secondly, on MREL, could you just remind us of your interim targets towards the end of the year? And are you still considering cutting senior markets in H2?

Well, hello, Daniel. CET1 fully loaded, most likely to stay pretty much at the level that it is right now, somewhere under 10%, between 9.5% and 10%.

The interim MREL target for us is at 16.1%. On the back of this, most likely there will be an issuance this year, which we have announced, most likely in early Q4 for green senior bond of EUR 300 million to EUR 500 million, the exact size, we'll decide depending on market conditions.

Can I just -- did you say green senior?

Yes, that is the plan right now.

So I have 3 quick questions. The first one related to the projects that you are led to carry out in the remaining part of the year.

I don't know if you can give us a guidance on your expectations regarding the capital use in connection with Sunrise 2, with and with and with the remaining part of the individual loan indeed that you're planning to sell. And at the same time, if you can remind us what is left in terms of extraordinary capital actions that can offset this negative impact?

Then I do apologize. You had a comment before on servicing fees that will go away, which I didn't fully understand.

If you don't mind, would kind of ask you if you can go back on this point. And then finally, I just wanted to understand a bit more how you deal with the TLTRO?

So if I understand correctly, in this quarter has been helped by the catch-up of the 0.5% on the TLTRO, which you didn't book previously. Now moving forward, so moving into Q3, are you going to book 1% of TLTRO or you're still going to retain 0.5% and then maybe next year in Q2, you're going to have a catch up again.

So sorry if I ask, but looking at the European banks, everybody is using a different way to deal with this 0.5%, 1% issue.

Hello, Alberto. So the loss budget pending for the completion of the cleanup, we illustrate that on Page 9, in its totality around EUR 1 billion, right?

EUR 0.6 billion of that was recently locked with the rating of Sunrise 2, and there's another EUR 0.4 billion, a bit over that, of available loss budget and expected loss budget for all the transactions combined, Sunrise 3, which is really the second SPV of Sunrise 2 that is following a quarter after Sunrise 2 now as well as leasing and shipping. The capital actions that are going to help this and what we've got in place still is, first of all, the deals themselves are releasing around EUR 4 billion of our double, right?

As well as we've got the merchant acquiring deal to be closed and from extra synthetics that we're doing. All of that in their totality, we'll retain the capital position around the area that it is right now, probably a little bit higher than it, but in the 16% sort of area.

On the comment on the service fees and very reasonable question. The cost of risk is always embedded with success fees that servicer collects for doing organically with the NPEs.

The entire quarter of Q2 as the recognition of Phoenix and Vega happened later in the quarter includes a lot of these billings, right? And it's a good number of bps in that 1.1% that post the recognition of the NPEs, these fees are then no longer paid by the bank, but obviously, they're paid by the securitizations that are running autonomously and independently.

Therefore, it is not the cost of risk only of the book of the bank that is illustrated at 1.1%. It's a gross number that will be netted down post the cleanup is completed.

On the TLTRO, yes, Q2 does have a one-off effect of EUR 47 million that we booked on the back of achieving the condition to actually get to 1% from the credit expansion of the previous year, right? And that we sort of locked it.

We did it. We -- it became a fact, and this is when we sort of took that extra benefit and that's how we do it, and that's how we will continue to do it.

So we are already accruing at minus 50 basis points this year's LTRO exposures. We will continue to do so once and it's looking good.

But once we achieve also the expansion of 2021, then we will do the same thing next year for the TLTRO exposure of now.

So sorry, if I understand correctly. So from next quarter, we are going back to 0.5%.

But I mean, for the full year, obviously, it doesn't matter because then you are going to make it up again next year at the same time, right?

Exactly.

A quick one. I'm still scratching my head, not quite following the numbers here.

Have you booked -- on Sunrise 2 and Sunrise 1, have the provisions actually been booked in Q2?

In Q2, we booked the remainder provisions for Phoenix and Vega. And all of the provisions for Sunrise 1.

We did not book any provisions for Sunrise 2. That will happen once the -- some conditions of the transaction, some are met.

But we have received a rating for Sunrise 2, which allows us to be confident on the projected loss budget, but nothing has been booked yet on the balance sheet.

Thank you all for participating in our first half 2021 financial results presentation conference call. Last note from our side, we are proceeding with the distribution in kind to our shareholders of the shares issued for the 65% of the mezzanine transfers of Phoenix and Vega NPE securitization.

This is scheduled to be carried out in the following days with details and time line to be soon made public. We look forward to discussing even further with you during our corporate outreach schedule in the next few weeks.

In the meantime, have a nice summer, stay all safe and healthy, and thank you very much for participating in our call.