30. 5. 2023

Exclusive interview with NBG CEO: Ready for further expansion

We are sharing the exclusive Q&A with Mr. Pavlos Mylonas, CEO of NBG published today on www.bloombergadria.com

Q: Across the world, we are facing an extraordinary situation that the world entered after the Russian invasion of Ukraine. In these conditions, inflation has become a major problem, so central banks are trying to stop the trend of rising living costs with monetary measures. From your point of view, how successful has this stance been so far (inflation in the Eurozone has slowed but less than expected)? What are the key needs now?

Mr. Mylonas: The major central banks have tried to stem the upsurge in inflation that began with the rapid recovery of the economy after the pandemic -- at a time of sluggish adjustment of supply worldwide -- and intensified with the invasion in Ukraine and its severe geopolitical and energy implications. Due to the uncertainty regarding the evolution of the pandemic, the beginning of interest rate hikes and the gradual withdrawal of exceptional liquidity support measures started later than warranted by prevailing economic conditions (robust GDP growth and unemployment at or close to all time lows in major economies since 2021) but accelerated sharply since Q2:2022.

The cooling off of tensions in energy markets and the easing of other supply-side pressures along with the ongoing tightening of financial conditions contributed to a slowing in headline inflation in 4M:2023 although the distance from medium-term inflation targets remains significant. Headline inflation is expected to decelerate further with the improvement trickling down to core inflation by mid-2023. Moreover despite the rapid policy tightening an outright recession has been avoided until today both in the US and the euro area with labor markets and the business sector remaining at a healthy state. However due to the transmission lags of monetary policy pressures on economic activity could intensify over the course of 2023. The recent turbulence in part of the US banking sector, developments in Credit Swiss and growing signs of a sharp slowdown in credit growth indicate that we are approaching the peak of the monetary policy tightening cycle in the US and the same will happen shortly afterwards in the Eurozone.

Q: European Central Bank President Christine Lagarde said that with inflation more than four times than the central bank's two percent target and a record core rate of price growth, another hike would be needed. What are your perceptions - when would this cycle end, when would the goal be achieved?

Mr. Mylonas: The ECB’s tightening cycle also appears to be nearing an end as inflation shows signs of slowing albeit another 25-50 bps of policy rate hikes should be expected until mid-2023. Labor market developments in the EU do not seem to pose a threat to price stability and the Fed’s decisions also factor into the ECB’s reaction function.
Obviously, significant areas of concern are still there, as the crisis in Ukraine unfolds, the revival of economic activity in China gains traction and the energy markets remain fragile against geopolitical and idiosyncratic factors. The above sources of uncertainty along with potential ripple effects from volatility in the US banking sector could weigh on economic growth and financial market conditions, thus complicating monetary policy decisions. The EU remains vulnerable on the energy front as its ambitious energy transition strategy will take significant time to bear fruit but exhibits healthy economic fundamentals along with a resilient and heavily regulated banking backbone.

Q: On the other hand, the restrictive policy affects growth, banks are already raising interest rates, and the tightening has a wider impact. Who are the losers in this sense?

Mr. Mylonas: Indeed, the estimated slowing of economic growth in the euro area from 3.5% in 2022 to c.1% in 2023 largely reflects the impact of monetary tightening in conjunction with the unwinding of fiscal support measures and the lagged effects of inflation and policy rebalancing on disposable income. However, the hit on growth would have been much larger had inflation remained out of control.
Policy rate increases are transmitted to the lending rates to a significant extent, leading to a repricing of bank loan portfolios. The effects are not the same for everyone, with borrowers increasingly trying to hedge interest rate risks whereas rising competition tends to compress the lending spreads for high-quality borrowers. I believe that the financial headwinds from the tightening will be more manageable for economies like Greece, with relatively low leverage of the private sector and a strong liquidity position of the banking system.

Q: In what range will the interest rates increase and do you therefore expect a decrease in the demand for loans, especially from the business community, of course, do you also expect an increase in their inability to repay the loans?

Mr. Mylonas: As mentioned above we are close to the peak of monetary tightening but its effect on financial and economic conditions will be seen to its full extent by the end of the year. As already mentioned, this is corroborated by subsiding inflation across Europe, which came in at 6.9% in the Euro area, while the ECB has also softened guidance with regards to further rate increases, leading market expectations currently for increases within a 25bps-50bps range from current levels.
As regards demand for credit, we haven’t seen yet any slowdown in the credit extended to Greek corporates for investment purposes, as the economy remains on a strong upward growth trajectory – far surpassing average growth in the Euro area. Furthermore, the flows from the European Recovery and Resilience Fund (RRF) are starting to gain traction, with a strong pipeline of private and public investments at all-time highs. Therefore, our expectations for loan growth for 2023 remain ambitious.
As regards NPE formation trends, we continue to target a stable NPE ratio at c. 5% for this year. Both our corporate and household clients in Greece maintain large cash buffers, while corporate turnover and profitability are at multi-year highs and employment trends remain positive.

Q: In the last period, we have witnessed some turbulence in the banking system as well - now I am primarily talking about USA, especially after the collapse of SVB. It is argued that part of the problems are due to interest rate hikes by the Fed. Can this crisis spill over to the banking sector in Europe, and even in this region?

Mr. Mylonas: Indeed, the reversal in the path of interest rates and the accelerated monetary tightening which followed a long period of negative rates, has created pressure in weak links of the financial sector both in the US and Europe. Nevertheless, each of these cases was distinct with pre-existing balance sheet and operational vulnerabilities which were accentuated by higher rates and negative investor sentiment.
In that light, given the robustness of financial institutions in Europe safeguarded by tight regulatory supervision, I consider it unlikely that there is any contagion from the isolated events we have witnessed.

Q: The previous year was good for banks in Europe, among others NBG, you have growth in profitability, but which turned out to be weaker sides in the balance sheets for that year. How do you create the plans for the next year in these conditions?

Mr. Mylonas: Our current expectation for growth in Greece for 2023 is nearly 2.5%, on the back of strong growth in investments supported by steadily rising exports and resilience in private consumption.
In this environment of investment-led economic growth, our NII will benefit from sustained expansion of our loan book complemented by higher base rates, while our fee income will capitalize high origination volumes, increased trade finance activity as well as cross selling of our cards, investment products and bancassurance, all facilitated by our swift digital transformation.
Strategic partnerships and JVs are expected to further boost growth in fees.
As regards costs, we will keep containing our OpEx despite inflationary pressure. Our credit risk costs are expected to remain broadly at similar to 2022 levels reflecting the aforementioned favorable asset-quality trends year to date.
All in all, we expect a positive impact on our core RoTE, which will be maintained at double-digit levels.

Q: Are you planning any acquisitions in the region, possibly?

Mr. Mylonas: The financial services landscape globally and in the SEE region is vastly different today compared to the past, and as a result there are different strategic options that a financial group such as NBG can pursue. The next wave of inorganic expansion for NBG may not be focused on “brick & mortar” bank acquisitions in the region, but may include acquisitions or partnerships with fintechs and technology companies in Greece or abroad.
Our strategy is to pursue strategic transactions or partnerships that are value accretive for our shareholders or add to our competitive advantages in the medium- to long-term. For example, we recently completed a joint venture with EVO Payments in the area of merchant acquiring (which may expand beyond the borders of Greece), as well as the acquisition of a minority stake in the Greek technology company EpsilonNet (which has presence also in the SEE region). Both transactions bring new capabilities to the NBG Group, allowing us to reach a broader client base, with innovative services and products.

Q: On the other hand, what are your strategic aspirations for our market?

Mr. Mylonas: NBG Group has maintained a leading role in the banking market of N. Macedonia for more than 20 years, through its subsidiary Stopanska Banka. We are proud of Stopanska’s performance and contribution to the local economy to-date, and we are very much committed to the market and to further strengthening ties between Greece and N. Macedonia in the future.
Indeed, our growth strategy for Stopanska focuses on capturing synergies between the two countries – through financing significant cross-border investments and regional projects, e.g., in the energy sector, as well as through transferring know-how and expertise in important topics such as digital transformation and ESG.

Our goal is for Stopanska to continue to create a more prosperous and sustainable future together with its customers, and the communities it serves across N. Macedonia, and we are confident that with the people of Stopanska and the NBG Group we will achieve it!