Piraeus Financial Holdings S.A.

Good afternoon, ladies and gentlemen, and thank you very much for attending our 9 months 2021 financial results conference call. I'm Christos Megalou, and I'm join today by Theo Gnardellis, Group Chief Financial Officer.

Before getting into our 9 months results of 2021 and performance, let me share my views on the developing macro backdrop. Beginning from Slide 4, the Greek macro outlook seems quite optimistic for the economic activity and sentiment versus the beginning of the year.

Real GDP recover to its pre-COVID levels in the previous quarter. Stronger than expected economic performance in the second quarter has part the full year GDP forecast to high-single-digit growth.

The positive outlook is also reflected in the economic sentiment in October, which came in at 112 points close to the pre-COVID recorded level in February 2020. The economic sentiment index is the key leading indicator of the Greek economy and shows that starting from extremely low levels of activity with extensive spare capacity, economic growth is expected to continue accelerating in the near future.

At the same time, employment is showing signs of recovery, while real estate growth dynamics continue unabated. A faster recovery is expected in the last part of 2021, with further acceleration in 2022, mainly driven by pent-up domestic demand, the launch of projects under Greece 2.0 and the significant lever stemming from very sizable foreign direct investments in the Greek economy.

Against this backdrop, Piraeus continuously delivers on its targets and in record time, demonstrating once again the inherent value of our franchise. We are able to execute on our strategic levers, laying the foundation that will save our future and bring us closer to delivering a return on tangible equity of more than 5% and a single-digit NPE ratio in the immediate forthcoming period.

The turnaround we have accomplished during the first 9 months of the year affirms our execution capabilities and our ability to deliver tangible results in critical areas like reducing nonperforming exposures, managing capital and enhancing revenues and profitability. As shown on Slide 5, both execution and performance were strong on all fronts resulting to a solid core operating profit line of €500 million.

We continued our cost discipline and managed to improve the cost-to-income ratio at 45%. The accelerated derisking resulted to a launch in the nonperforming exposures ratio to 16%, while maintaining the right level of capital at 16% on the back of well-synchronized capital enhancement actions.

The multi-project execution capacity and the high precision budget allocation has enabled our timely derisking effort and the ability to mitigate the impact. This continues unabated, bringing us to the last mile in the race to a single-digit NPE ratio.

At the same time, we focused on strengthening our commercial business, as shown on Slide 6. New loan generation reached €4.6 billion in the first 9 months of the year, on course for the full 2021 target of €5.7 billion.

What is encouraging is that the healthy demand for credit is widespread across all sectors of the economy. We have increased our clients' assets under management by €3.4 billion in the 9 months to 2021, mutual fund assets under management have surpassed the level of €3 billion at the end of September and display significant upside potential, while deposit flows continued are low cost.

Asset management is an important part of our business and will continue to be so over the years to come. New business and higher volumes contributed in our top line, especially in the net fee income streams that were up 21% year-on-year.

Our substantial derisking acceleration combined with a supportive macro environment, have resulted to a downward trend on our organic cost of risk which has fallen to 57 basis points over net loans in Q3 2021 for the very first time after many years. Touching upon our NPE cleanup plan and turning to Slide 7, we illustrate the record-breaking €16.4 billion NPE securitizations and sales that were carried out past -- the past few months.

This accelerated effort landed us at €5.9 billion NPEs in September 2021 compared to €22.5 billion just last September 2020. During the same period, we have managed neutral organic flow according to our plan mitigating all the COVID-19 effect.

We have covered in just 8 months more than 90% of the clean-up and the capital enhancement actions of our business plan, for which Theo Gnardellis can elaborate in detail during the Q&A session. Turning to capital.

Our primary focus is to maintain the level of capital that is necessary for our bank's risk appetite, and we believe that this level is around 16% of total capital ratio. This is our current status and where we aim to stand after the conclusion of the NPE cleanup plan.

This brings us to Slide 8, where one can see the steady evolution of our capital ratio along with the extended list of transactions that have already been accounted for and the remaining fall to be plugged in. Both components of the capital ratio, namely capital and risk-weighted assets, are carefully managed while our remaining €400 million nondilutive capital enhancement actions are fully on track.

Before closing the capital subject, I expect that this well-orchestrated execution of the Sunrise plan will soon be reflected in lower regulatory capital requirement for Piraeus via the reduction of our Pillar II requirement by 25 basis points from 2022 and onwards. This will enable us to capture greater capital buffers, as shown on Slide 9.

Turning on now to our core operating performance on Slide 10. We showcased the bank's operating performance on multiple fronts.

We leverage our competitive strength in all our business operations, achieving resilient and higher quality net interest income, while we have entered a new era in fees with consistent €100 million plus net fee income generating quarters. At the same time, we demonstrate clear discipline on costs as well as relentless focus on organic loan impairment on the back of the accelerated derisking and the improved macro conditions.

The €48 million of organic cost of risk, which we booked in Q3 '21 comes on the back of an already positive €60 million level in Q2 2021, clearly trending ahead of our initial estimates. On Slide 11, we present the operating performance in 9 months '21, which resulted in a core operating profit of €500 million.

One key component of our transformation program is the reduction of our operating expenses base, which continued its downward trajectory in the 9 months '21. This result has been achieved also by significant staff cost rationalization and branch optimization, noting that we are at 20% lower numbers in terms of NPEs and around 110 units lower in terms of branches since September 2020.

We aim to accelerate our effort also on the G&A front, and our first estimate for 2022 is for a more than 10% reduction in G&A expenses. On Slide 12 of our balance sheet, we illustrate where, apart from the NPE cleanup effort, this is evident and we note our enhanced securities portfolio and the ample liquidity profile we enjoy.

On the TLTRO III facility, we expect to be repaid gradually as of mid-2022. Moving on, I would like to present a brief and enhanced focus we are placing on exploring new commercial and strategic initiatives shown on Slide 13 to 21, which we are happy to discuss further in the second part of the call.

We are stepping up our implementation, namely stimulating credit demand, leveraging on the RRF structural funds, increasing our asset management and bancassurance business franchises, introducing new asset management and services initiatives. In that context, Intesa recently appointed Piraeus Bank as their local custodian in Greece for more than €1 billion of assets, and the custody business is another area of our business that we will be focusing on in the future.

In parallel to the above, we exploit the digital ecosystem commercial opportunities and enhanced our ESG offering and value proposition, we accelerated our transformation program. And at the heart of everything we do is digitalization.

It's what helps us enhance our service to clients and reinforces our business. Towards this direction, we have signed just a couple of days ago an MOU with Microsoft and Accenture in order to leverage a cloud-first approach with the aim to increase our overall operational efficiency and agility.

The last item I would like to touch upon before opening the floor to Q&A, is presented on Slide 33. And these are the drivers of our P&L and our aspirations.

We reiterate our more than 5% return on tangible equity target for next year, and we remain committed to achieve a double-digit return on equity shortly thereafter. Concluding, I'm confident that our work, track record and accomplishment throughout the 9 months enabled us to execute on our strategic levers, laying the foundation that will save our future.

And with that remark, let's open the floor to the Q&A, where Theo and myself, would be happy to answer any questions you might have.

Congratulations on another set of solid results. My first question will be on NII and loan growth, please.

So clearly, new disbursement levels are very solid, but you've also seen relatively high levels of repayments earlier in this year. Does this pose any risk to your overall net credit expansion targets for the next 4 years, which was a cumulative €10 billion figure?

And if so, would this have an impact on NII? Or can you offset it via other actions?

And my second question is just at your broader guidance. So when I look at the broader guidance that you provided with the Sunrise plan, it's very clear that some of the levers are tracking better than initial expectations.

For example, fees are indeed very strong and so are the operational expenses. Here, it looks like you could reach your guidance levels before 2024, maybe in 2023.

So would you be able to walk us through the main lines in your guidance and tell us where you potentially see an upside or what's tracking behind, if anything, overall?

Hi, Mehmet, and thanks for the questions. So overall, on the loan growth question, the dispersion that you said are right on track, right?

So we did €4.6 billion in the first 9 months, rather comfortably reaching the target for €5.7 that we set out for this year. and with good intrinsics also for the next year.

Repayments were higher than expected this year. So we had a €4.2 million run down for a net disbursement, minus repayment expansion of €300 million to €400 million.

What we have noticed and monitored and following on to this repayment is that €1.1 billion of that is really a handful of large corporate repayments, for large corporates that address the international debt capital markets over the course of the year. So overall, in terms of the -- if you take those out, and that €300 million becomes very close to the €1.5 billion we're talking about all along.

That, in combination with the evolution that we've seen in the debt markets, but primarily in view of the RIF kicking in as of early 2022, keeps us committed and we reiterate kind of the create expansion ambition that we've got. For next year, we're trending and targeting a €1.5 billion expansion consistent to the plan.

Overall, the NII impact of that is contained. It is rather temporary.

The guidance does include all of the trends that we've seen in the markets for €1.15 billion NII next year. And of course, there are mitigants to it, expansion in other asset classes we're looking at.

So all of those trends on the loan growth are baked into the 2022 guidance. Overall, now for the guidance, yes, indeed, much better performance in fees, much better performance on cost.

All the work that has been happening on the restructuring front of the OpEx is being harvested and the work continues. Also I have to say cost of risk is another element that is trending quite positively.

The guidance has not shifted because we still want to see a more sustained kind of cost of risk over the coming quarters. But you can figure out that from the guidance, it is not the 60 basis points that we have seen in Q3.

So there is room. There is upside risk across the lines.

It keeps us confident. I think it's the right thing for now is to reiterate the more than 5% return on tangible book for next year.

Tangible book is right now €4. 9 billion.

It will land around the €5 billion mark. So we reiterate the above 5% target for next year.

But a lot of these trends that we talked about keeps us confident for an accelerated double-digit achievement the years after that.

I have maybe a follow-up on the fee side of things. Again, it looks like things are progressing very well and ahead of plan, ahead of the targets.

I was wondering if there’s any visibility on the introduction of liquidity fees into 2022, which also could support that number. And additionally, and taking into account that your last 2 quarters have delivered fees and commissions above €100 million level.

Your guidance for 2022 is €400 million. So assuming that the macro continues to be supportive, I think it’s natural to expect that, that number will increase.

Now if that’s not the case, and if I look at your Slide 41 and you show the breakdown of fees, how do you – or where do you see areas where the activity could slow down a bit in 2022, meaning that you maintain the level of 100 that have been higher? I mean I know that in some parts of your fees, you have nonrecurring fees.

It could be on the brokerage side or IV. So any color on that will be helpful.

And then the second one on asset quality. I see there is a small pickup on your Stage 2 level.

I understand that this could be part of the loans out of moratoria. I also understand that given the positive progress on Stage 1 going up and Stage 3 going down, relatively, this could be minor.

But just trying to understand the drivers there on Stage 2. And if you have any outlook on what to expect for the coming quarters, that will be helpful.

And I’ll leave it that.

Jonas, right. So on fees, the guidance is for circa €400 million on the back of also the acquiring deal kicking in, where we will have a drop on the cards line.

About half of that, something less than half of that is acquiring revenue that will go away. On the other hand, we – the run rate for asset management fees and some other of the fee lines right now is higher to what you see on Page 41, the expansion of the AUM of the asset management has kicked in.

I think the run rate right now is around €21 million on an annualized basis from the €15 million that you see there kind of calendar clocked on asset management and a lot of other stuff on other lines. Nothing major, nothing one-off on liquidity fees, as you mentioned it, right?

So it’s really – we really are following the trends of economic activity and of the market as it is today, hence the guidance being what it is. Of course, if something changes to that front, we would revise and kind of come back to you.

On your Stage 2 question, it’s really a moratory treatment effect, where we have some step-ups – step-up restructurings that we’re doing. And as per EBA and overall sort supervisory guidance, these are Stage 2 conversions.

Then again, we’ve got a lot of other cases that will be flowing into Stage 1 over the coming quarters, but nothing other major than that. And the movement is quite small, actually.

And Jonas, just to reiterate, we are very happy with our performance on fees. A lot of recurring items there.

Asset management is going to be an important part of the future on fees for this bank as well as the brokerage, but even the investment banking is giving us a lot of hope that the economic activity that we see picking up in Greece is going to be reflected in permanent fees flowing over the next few years.

Clear. Maybe just a follow-up on asset quality, Slide 46.

So I was just wondering on your recent interactions with the guys from Intrum as well. I mean how you’re seeing the the collection and liquidation part of the outflows?

Anything to worry on there or any positive trends you’re seeing with auctions picking up? So any color on that will be helpful.

Overall, the trend is on the positive side. We had also a very good October.

The fact is – I think the overarching statement here is that the much dreaded, I would say, COVID-19 effect that we had last year, if you remember, we’re always talking about moratorias and conversion, et cetera, this has all been mitigated by outflows. So overall, we have neutrally come out of the storm and now looking forward to complete organically the plan to a single-digit overall positive trends.

I just had a quick follow-up question on NII. What are your assumptions for 2022 in terms of how much you'll be booking from TLTRO?

Do you assume that you meet the loan growth standards? Or do you wait and see?

Just wondered how you're treating that in your 2022 expectations.

We're currently accruing TLTRO at minus 50 basis points. So the 50 basis point kick is not in the P&L right now, as we have said before.

Therefore, there will be a one-off effect of €68 million is what we are calculating given the current TLTRO exposure that we've got on the assumption, a positive completion of the monitoring cycle up until the end of this year. Right now, the numbers in intrinsics are quite positive.

So we're confident, and that is included in the guidance for 2022.

I have 3 questions, please. One is a follow-up on NII.

So I do get the -- that you have a specific guidance on both 2022 and 2024. I'm not sure if I'm -- if I have the -- your understanding of your cost of deposits on the one hand and the extra cost coming from MREL.

So I would appreciate if you could share that with us. So this is question number one.

The other one has to do with your risk-weighted assets. So most of the Sunrise plant has been concluded already quite successfully, as you said.

So the only pending actions is Sunrise 3 and Dori. And -- so based on that and based on the €32.1 billion pro forma RWAs that you have in Q3, what should we expect going forward?

Taking also into account that there is one project not included in your guidance, which has to do with your real estate owned portfolio, which I guess you're trying to do something there similarly to one of your peers. And finally, on costs, you guided for an €800 million OpEx target for 2024.

Can you share with us your target for FTEs and branches by that year? And what is the extra cost that we should expect for you to reach this target?

I mean I've seen the the DVRS provisions you have booked in Q4 last year and this year as well. So what's the extra amount that you might need to get to reset to your new target?

That's all for me.

Okay. I think I've noted all of that down.

Cost of deposits overall right now around 5 bps, time depo is 12 bps; the mix of that, the whole deposit base, is in the 5 bp level. Overall, MREL bonds assumption is for 2.5% to 3%.

We've done a first ticket and there are some assumptions in the guidance for future issuances next year. On the RWAs, I mean, post the cleanup, we will be landing at the €30 billion mark more or less.

And the expectation is we will be loading about €1 billion for every year after that on the back of the credit expansion that we have talked about. We do have, on Page 19, an indication of our transformation plan key value drivers, where you can see kind of the aspiration for FTEs and branches.

The FTEs will be closing this year in the 9, 000 area, around 1,500 FTE drop year-on-year from all the effort that was done. We're trending and we're planning to do an equal amount of reduction over the coming years.

In the capital plan and in the P&L of this year, we have included the appropriate restructuring costs. No need to get into the detail of that right now.

Branches, currently at 437 mark. The plan right now is not to do a drastic drop of branches because one of the big competitive advantage of Piraeus Bank is its very strong sales-oriented network with very good footprint across multiple areas of the country.

The target is for 380 high street sales points, but with a much-renewed branch model that we will be coming out to the market with details around over the year of 2022.

Perfect. And I guess that the 2022 guidance relates to the underlying trends, not the ones with one-offs, right?

Absolutely. Yes.

A few on my side, please. On the NII side, I believe Slide 39, you show PE portion increasing nicely.

Just wanted to see if you could give a bit more color. Is that by any chance benefiting from senior note from Phoenix and Vega?

And also related to NII, if you could potentially give us the PE loan portion of that €1.3 billion in the medium term. That's my first question.

So the -- to your question about the PE kind of NII and interest income, it is multiple things. The mixture has also improved.

The focus of -- on small businesses is helping. It's increasing the overall revenue pools.

But what's important is what's going to be happening from now on. The expansion that -- the trends for expansion that we are seeing will be supporting the NII going forward.

We have said also before it will no longer be -- the NII improvement will no longer be about cost of deposits and kind of on the liability side of things, but will mostly be about the asset side. So the expansion of credit will be giving a big part of that NII boost, not only Greek loans also the other asset classes were going to be investing in.

The senior notes goes there or somewhere else?

It is a marginal impact around the €5 million mark, so it's not what will drive the overall number.

Perfect. And any color for the medium-term contribution for the PE book?

As we've said, it's really -- most of it has to do with the expansion that we're seeing on the business side of things, small business and SME is a big part of the story.

Perfect. And if I may, on the asset quality side, you have a slight positive formation before write-offs.

How do you see Q4 and maybe even early '22. Because there's been some changes the government side on the sport some extensions?

And if you could give us any color on that, that would be helpful.

We've actually seen quite an improvement in Q3 versus the first 2 quarters that took most of the wave of the moratoria expirations. So Q3 was overall a good number, where we saw the inflows drop.

October was also a great month. In terms of the Gefyra programs expiring, these are performing kind of paying customers.

They're present with reduced payment, but they are present every month with very good behavior. And actually, the incentives for them to keep on paying post the expiry are important as there's very clear rules about the consequences of default.

As a result, they would not only have to deal with a banking default but also have other repercussions. So overall, the trend of the Gefyra behavior are very positive.

We do not expect any deterioration, quite the opposite.

Perfect. And one final one on OpEx, if I may.

You mentioned the 10% guidance for reduction in ‘22. Just wondering if that includes benefits from the NPE reduction, i.e., service fees reduction or it’s more underlying?

It’s part of the detailed budget exercise we’ve done. There are economies across various cost lines, some of them having to do with NPE reduction.

But there’s also multiple other initiatives. The reduction of the staff cost line were quite important.

And also there’s a cost hunt exercise right now that’s looking across more than 200 lines of G&A cost that the bank is doing, where we’ve identified pockets of economy across. So it’s really sustainable kind of reduction from the 10% G&A drop, I would say more than half of it is organic effort not related to the NPE reduction that the bank is doing.

Just a couple. Just on the moratoria and cognizant of your comments.

Is the moratoria that are left specifically focused on an industry? And I know you just commented on the bridge schemes.

Just on the step-up and the bridge schemes provided, when do you expect them to fully expire? Are we going to be seeing them into 2022?

And then finally, just on Project Masa, if you could just provide a few more details on that, that would be great.

Daniel, yes, the moratoria that are left or rather – there are very few and there rather concentrated primarily in the hospitality industry, supporting kind of the industry over the years ‘20 and 2021. Of course, we had a very strong touristic season in 2021.

So quite positive on both the avoidance of default, but also the curings that are expected, that some of them also given at Stage 3 customers. Step-ups, they are in payment – in gradual rehabilitation of payment.

We will be phasing out the support over the coming quarters and within 2022, but monitoring very closely the customers that have received them. In terms of Mayfair, Mayfair is really quiet an innovative transaction for the Greek market, where what we basically do is we institutionalize a limited partner like entity, where we contribute all -- most of our nonfinancial sector equity participations.

And then hiring a GP to manage them. This creates multiple benefits, both in terms of the regulatory treatment and the capital burden that these equity positions hold, as well as obviously some SLA value that is recognized upfront.

As a result, and having researched the impact levels, this what has stepped up the Mayfair benefit to around €180 million, which we’re now disclosing in this presentation versus our original guidance for around €0.1 billion benefit.

It's Christos Megalou again here with your , sorry about the technical glitch. We're back on the call and Theo was just finishing off a question by on gross NPE formation.

I think your last point was not fair in the call.

I'm not sure where I was cut off, but feel you have two questions, one on the disbursement repayment front and the other one on overall organic formation. I'm not sure how much you got out of it, but the answer is new disbursements '22 pretty much what we're seeing on '21 on the back of RRF and other intrinsics that we're monitoring repayments lower than what we're seeing this year without having those one-off large corporates effect that we've seen.

And on organic formation, overall, we're going to see negative formation in 2022. The inflows are trending lower every month and just analyzing the remainder NPE book, one can figure out where we're going to be seeing cash collections that will help the overall NPE result.

Hope that's okay and you could hear me now.

Well, I wanted to thank you all for participating in our 9 months 2021 financial results conference call and Q&A. We look forward to discussing with you physically or virtually over the course of next few months.

And hopefully be able to meet all of you from Q1 of next year onwards on resuming our regular investor meetings outside of Greece. In the meantime, please stay all safe and healthy, and have a great weekend.

Thank you.