Eurobank Holdings (EBKDY (OTC:EBKDY)) has reported a robust performance for the Full Year 2023, with significant growth in core operating profit and an improved asset quality. The bank's CEO, Fokion Karavias, outlined an ambitious business plan for 2024-2026, focusing on capitalizing on the Greek economic growth cycle and diversifying income through strategic acquisitions, including the full integration of Hellenic Bank.
The bank aims to maintain a strong capital position and reward shareholders with increasing dividends, while also exploring international opportunities, such as making Greece and Cyprus gateways for Indian investments in Europe.
Key Takeaways
- Eurobank Holdings' core operating profit surged by nearly 70% to €1.5 billion in 2023.
- The return on tangible book value reached 18%, with expectations of 15% in 2024 and around 13% from 2025 onwards.
- Asset quality improved, with the NPS ratio declining to 3.5% and coverage increasing to 86%.
- Strategic actions included exiting Serbia, acquiring BNP Personal Finance in Bulgaria, and increasing equity stake in Hellenic Bank.
- The bank plans to reward shareholders with a payout ratio of at least 25% in 2024, aiming towards 50%.
- Eurobank Holdings anticipates a 6% organic increase in 2024 and a 5% average yearly increase for the business plan period.
- The bank's fully loaded CET1 ratio is expected to remain above 17%, with a surplus of internal capital over targets.
Company Outlook
- The bank aims to capitalize on the Greek growth cycle and diversify income sources through acquisitions.
- A return on tangible book value of around 13% on a recurring basis from 2025 onwards is anticipated.
- Eurobank Holdings aims for a core profit of over €1.5 billion in 2024.
- The bank is exploring a wealth and asset management strategy to increase customer assets and liabilities to over €20 billion in the next five years.
Bearish Highlights
- The bank plans to address challenges in growth with cost initiatives and a transformation program.
- It assumes a decrease in corporate spreads of close to 30 basis points in 2024 and a further 20 basis points by 2026 due to a competitive market.
Bullish Highlights
- The bank has surplus capital for further M&A opportunities and potential upside from the Hellenic Bank integration.
- Eurobank Holdings is confident in delivering sustainable mid-teens returns.
- The bank is exploring opportunities in India to expand its international presence.
Misses
- There are no mentions of specific challenges or misses in the provided summary.
Q&A Highlights
- CEO Fokion Karavias discussed NII growth, attributing it to higher average asset and deposit volumes with no one-off elements.
- The bank's excess liquidity could support the Cypriot economy or other international projects.
- Eurobank Holdings has a countercyclical approach to asset quality and cost of risk.
- Opportunities in asset management and private banking are being considered, particularly as a monoliner in other markets.
Eurobank Holdings has positioned itself for sustained growth and shareholder value creation in the coming years. With a clear strategy and strong financial performance, the bank is poised to leverage its surplus capital and strategic initiatives to navigate the competitive landscape and continue its upward trajectory.
InvestingPro Insights
Eurobank Holdings' recent financial performance and strategic direction demonstrate a commitment to capitalizing on growth opportunities and enhancing shareholder value. To provide a more detailed perspective on the financial health and potential of Eurobank Holdings, here are some insights from InvestingPro:
InvestingPro Data:
- The company has a market capitalization of approximately $7.77 billion, which indicates its significant presence in the banking sector.
- With a P/E Ratio (Adjusted) of 6.67 for the last twelve months as of Q3 2023, Eurobank Holdings is trading at a low earnings multiple, potentially signaling an undervaluation compared to industry peers.
- The bank's revenue growth for the last quarter of Q3 2023 is 31.05%, showcasing a notable increase that could be indicative of its strategic initiatives and market expansion efforts.
InvestingPro Tips:
- Eurobank Holdings is currently trading near its 52-week high, with the price at 97.49% of this peak, reflecting investor confidence and a strong return over the last three months of 23.07%.
- Analysts predict that the company will be profitable this year, which aligns with the bank's own outlook for a core profit of over €1.5 billion in 2024.
For investors seeking a deeper analysis, InvestingPro offers additional insights, including 12 more InvestingPro Tips for Eurobank Holdings that can guide investment decisions. By using the coupon code PRONEWS24, readers can get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, providing access to a comprehensive suite of investment tools and data.
Full transcript - EFG Eurobank Ergasias PK (EGFEY) Q4 2023:
Operator: Ladies and gentlemen, thank you for standing by. I'm Poppy, your Chorus Call operator. Welcome, and thank you for joining the Eurobank Holdings Conference Call to present and discuss the Full Year 2023 Financial Results. All participants will be in a listen-only mode and the conference is being recorded. The presentation will be followed by a question-and-answer session. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Fokion Karavias, CEO. Mr. Karavias, you may now proceed.
Fokion Karavias: Thank you. Ladies and gentlemen, good afternoon, and welcome to our call. Together with me is our CFO, Harris Kokologiannis, and the Investor Relations team. I'm starting the call with a quick review of the 2023 performance and then focus on our business plan and the financial targets for the years 2024 to 2026. Harris will give you more details on the business drivers for the three-year period. Finally, we will answer your questions. In 2023, Eurobank outperformed all targets set for the year with record core profit as shown on Pages 5 to 8. Core operating profit increased by close to 70% to €1.5 billion and return on tangible book value reached 18%. The Tangible book value per share increased by 21% to €2.07. In the last two years, tangible book value has grown by almost 50% cumulatively. Asset quality improved further with the NPS ratio declining to 3.5%, while coverage increased to 86%. On regulatory capital, CET1 stood at 17%, increased by 180 basis points and CAD exceeded 20%. We had a strong last quarter with significant loan growth acceleration, while NII reached a new quarterly high. In addition, last year, we advanced several strategic actions such as the exit from Serbia, the acquisition of BNP Personal Finance in Bulgaria, and most importantly, the increase of our equity stake to a majority level in Hellenic Bank. These results were delivered amid a favorable economic background, with all our core markets outperforming the EU average. In 2023, GDP was up by 2% to 2.5% in Greece, SinusoBugaria. Economic expansion was driven by private consumption, a record tourism season, and investments underpinned by the RF. Moving now to our 2024 26 business plan. On Page 11, we summarize key assumptions. Economic growth remains strong for our core markets and well above the European average. In Greece, real estate price recovery continues, although at a slower pace. Furthermore, in 2024, growth in Greece should be mainly driven by investments, which could also feed into a solid loan growth in the corporate sector. For interest rates, we assume a declining cycle with three rate cuts by CB in 2024, starting in the second quarter of the year, and two more cuts in 2025. A key driver of the business plan is the integration of Hellenic Bank, which is subject to regulatory approvals. In this context, in February, we received the local competition authority approval, while those of the Central Bank and the superintended of insurance companies are expected in the second quarter. Hellenic Bank, which sold a record profitability of €365 million for full year 2023, has a leading retail franchise and strong liquidity, capital, and asset quality metrics. Furthermore, its business model is fully complementary to Eurobank Cyprus. The key goals for the three-year business plan are summarized on Page 12. We aim to capitalize on the Greek growth cycle through our strong franchise, driven by all our business units, including corporate loans and wealth management activities. With the acquisition of Hellenic Bank in Cyprus and BNP in Bulgaria, we are becoming a bank with even more diversified sources of income, enhancing our systemic presence in a region of high growth. The business plan assumes a partial integration of Hellenic Bank that is line-by-line consolidation only for six months in 2024. Furthermore, throughout the three-year period, no balance sheet growth has been assumed, no synergies and equity participation remains constant at 55%. Our key objective is to keep delivering resilient returns despite the lower interest rate environment. As such, on Page 15, the business plan confirms that our top line will continue to grow. As shown on Page 18, we expect a return on tangible book value at 15% in 2024 and around 13% on a recurring basis, 2025 onwards. The 2023 performance and the three-year business plan solid projections allow us to reward shareholders, starting with a payout ratio of at least 25% in 2024 and gradually increasing towards 50%. Our capital ratios remain substantially above internal targets. So surplus capital offers additional room for further M&A, obviously, should such opportunities arise. Furthermore, there is upside potential to this business plan from the full integration of Hellenic Bank. Equity participation quite higher than 55%. Second, cost and revenue synergies; and finally, the potential merger of Galandi Bank with Eurobank Cyprus. Capturing this upside potential could further enhance our return on tangible book value at a level higher than 13%, 2025 onwards. Overall, we are excited about our group's prospects. The consistent outperformance of our targets, the diversified business model, and our strategic plan regarding our recent acquisitions make us confident that we can capture the growth potential in our region, deliver sustainable mid-teens terms, and reward our shareholders for years to come. At this point, I would like to ask Harris to present our business plan drivers in more detail.
Harris Kokologiannis: Thank you, Fokion. Let me start with elaborating further on how we are accounting for Hellenic Bank in our business plan, as shown on Page 14. We have assumed switching to line-by-line consolidation as of the third quarter of 2024, with our stake remaining at 55.3% throughout the business plan period. Furthermore, as we are still at the beginning of exploring the growth potential of Hellenic Bank, we have taken a static view of its balance sheet, i.e., no loan and deposit growth assumed. Finally, this business plan does not include any cost and revenue synergies deriving from Hellenic Bank's operational consolidation to the group's universe. Let's now move to the evolution of volumes and NII drivers, starting from Page 20. Group loans are expected to grow faster by 6.5% and 7% for 2024 and the three-year period, respectively. Specifically, performing loans are anticipated to increase by circa €2.3 billion in 2024 and by €8.5 billion in the three-year period, mainly driven by business loans in Greece and by both retail and corporate portfolio in Bulgaria. In Greece, business lending growth will be mainly powered by investments in infrastructure and concessions, energy production and storage, manufacturing, and tourists. On the retail, mortgage book amortization is expected to be offset by accelerated consumer loan growth, mainly through our digital channels, higher mortgage disbursements, driven by lower rates, and enhanced footprint in small business lending. Still on the same page at the right part, group deposits are anticipated to increase in 2024 by €2 billion and for the three-year period by €6.8 billion, which translates to an annual average growth rate of circa 3.5%. Moving on spreads on Page 21. Lending spreads in Greece are expected to decrease by circa 30 basis points in 2024, mainly driven by the competition for corporate loans and the capital mortgage base rates. As regards to deposit cost, we expect average time-to-total ratio to reach 38% in 2024 and 44% in 2026. Total deposit EBITDA is anticipated to increase by 10 percentage points to 28% this year and reach 32% in 2026. Finally, on this page, net interest margin should decrease to circa 260 basis points in 2024 and 235 basis points in 2026, mainly reflecting loan and deposit spreads and base rate trajectory. Furthermore, on NII and on Page 22. Net interest income is expected to increase by circa 7% in 2024 as the loan and deposit growth and the consolidation of Hellenic Bank for six months offset the increase of deposit EBITDA, the contraction of lending spreads, and the cost of Maisons. In the following years, NII will increase further as the full consolidation of Hellenic Bank and volume growth offset the negative impact of base rates, spreads, and MREL. Moving on fee commissions on Page 23. Following a 7% fee income increase in 2023, we anticipate growth rate to double in 2024, reaching circa €630 million. A major driver for this increase is golf management, which is key to our strategy. In this context, we invest further in technology and people, and we are exploring the opportunity to expand in new markets. Capitalizing on the above, we envisage an average annual increase of 20% for managed funds and of 12% for private banking customers' assets and liabilities over the business of Horizon. Lending-related activities will continue to be one of the largest income contributors, driven by new disbursements, RRF, LPs as well as transaction banking and liquidity management. In retail banking, the major initiative includes the launch and the gradual migration of individual legal entities to monthly fee packages. This converted related to variable income fixed. It provides high predictability and the opportunity to scale up to higher-value packages going forward. As regards rental income, we maintain our investment property portfolio at the current size, capitalizing on the premium locations, the full occupancy and the high tenant quality as well as on the attractive gross yields, which exceeds 7% on average. Overall, as regards the three-year business plan period, group fees are expected to reach €750 million by 2026. This translates to 75 basis points of our assets, circa 25% of core income. Greece points the way with 85 basis points and 30%, respectively. Moving on to operating expenses on Page 24. In Greece, we target keeping our OpEx flat in 2024 and obtain an average yearly increase below 2% for the three-year period. This performance should be achieved through savings from around the bank expenses, mainly premises and maintenance, the recently completed VS as a contribution to the Resolution Fund. These savings will be channeled to accelerate IT and digital investments, higher fixed and variable staff remuneration, and new hires. In Southeastern Europe, cost base will be adjusted this next year due to the consolidation of CalenicBank and Banan Bulgaria. Furthermore, costs are anticipated to increase organically by circa 6% in 2024 and by a yearly average 5% for the business plan period. The organic increase mainly reflects the rollout of a ecosystem in Cyprus and Luxeburg as well as salary adjustments to address inflationary pressures and contain the high attrition rate, especially in Bulgaria. Concluding this page, we're undertaking cost initiatives, combined with the deployment of our transformation program will enable the bank to address the growth challenges with rightsized and better remunerated resources, keeping the cost-to-core income ratio at 36% in '24 and below 40% throughout the business plan period. On asset quality, and on Page 25, our NPE ratio is anticipated to be lower than 3.5% at the end of 2024 and circa 3% in the following years. In line with our countercyclical approach, cost of risk slightly decreases in 2024, below 80 basis points, and further at circa 65 basis points in 2026. This is also reflected in our NP coverage, which is expected to fluctuate around 80% throughout the business plan period. Finally, on capital and on Page 16 in 2024, strong organic capital generation fully offset the impact of Hellenic Bank consolidation, asset growth, and dividend distribution. For 2025 and 2026, fully now C2 ratio should be maintained at levels of 17% or higher despite the accelerated dividend distributions and Basel IV implementation. This translates to a surplus of internal capital over internal capital targets between 250 and 300 basis points over the three-year period. Concluding this presentation, we are very confident about our budget for 2024 and our new three-year business plan goals. These are summarized on Page 19. For this year, we target a core profit of higher than €1.5 billion, which drives TBV per share to circa €2.25 and return on tangible book value to 15%. In 2025 and 2026, return on tangible book value remains resilient and in conjunction with the forecasted capital buffers set the stage for accelerated shareholder rewards in the coming years. This completes my presentation, and we may now open the floor for your questions.
Operator: [Operator Instructions] The first question comes from the line of Ismailou Eleni with Axia Ventures.
Eleni Ismailou: Congratulations for the strong set of results. I got a couple of questions from my end. So the first one would be as a tension shift to net fee and commission income. Could you give us some more color on your wealth and asset management strategy and how you're planning to keep increasing in unit AUM and your reach? The second question would be on the CET1 trajectory that we see that it remains flat between years, 2024 and 2026. So given the profitability outlook and the dividend guidance, how does this facilitate discussions with Verlater and the overall outlook of the bank? And the third question, if I may with regards to the Hellenic Bank. So I was wondering if there are any upside risks associated with the synergies that will be created following the acquisition. And if you could give us some more color on how you envision you will be using Hellenic Bank liquidity in the other quarters and years?
Fokion Karavias: Okay. Thank you very much for your questions. I will answer the first and third of your questions, and then Harris will comment on the second. In terms of the wealth management strategy, as Hans mentioned, this is one of the growth pillars of our business plan for the next three years. And in this context, we invest in terms of systems, people, and also new markets. Let me become more specific. Last year, we installed the Temenos core system [indiscernible], and we have already started working on rolling out the same system in Eurobank, Luxembourg, which is our wealth management center. The new system will provide us with advanced digital capabilities, and we should be able to serve our customers in a better way. Second, we invest in terms of people by trying to attract RMs with international experience in the area of wealth management. And third, further to the traditional client base, client segment of Greek and Cypriot customers, we are planning to expand in nearby jurisdictions, namely Southeastern Europe and Eastern Mediterranean. So over the next five years, this would allow us to increase the customer assets and liabilities from the current level to more than €20 billion, which should boost quite materially the income that we have from this activity. Now in terms of the Hellenic Bank, you asked about potential synergies that exist. And as we already mentioned, we have not included them in the current business plan. Actually, we have not included neither an increase of our self-holding beyond the 55% nor the synergies. Let me elaborate on that. And let me elaborate by starting by the shareholding participation. Once we receive the regulatory approvals in the second quarter, we will close the three outstanding trades that will drive our share participation to 15%. Immediately after, we will launch a mandatory tender offer, and you could appreciate that it is not appropriate to anticipate the outcome of this mandatory tender offer before its launch. And this is the reason why we have not included any other number in the business plan besides this 55.3%. In any case, however, it is our target to increase our stake to Hellenic Bank at levels substantially above the 55% and ultimately merged the two banks -- our two banks in Cyprus. Now in terms of synergies, once the mandatory tender offer is completed, and the new management of Hellenic Bank undertakes its duties, we will be in a better position to update the market about synergies. Let me clarify here that synergies are meaningful, are quite material, and they are both in the area of cost and revenues and also in terms of the MREL issuance cost, which is also will be affected at lower levels. So these factors, both the potentially higher equity participation in Hellenic Bank as well as the cost and revenue synergies are part of what we call the full Hellenic Bank integration. And this could further enhance return on tangible book value at a level higher than the one that we have in the business plan, and we discussed so far, that is at a level higher than 13%, which is the return 2025 onwards. So let me pass over to Harris for the second question.
Harris Kokologiannis: So let me provide an overview as regards our capital plan that it is portrayed on Page 16. I think that for the trajectory between 2023 and 2024, I think the waterfall is explicit. Now as regards the way forward, what we say is that our fully loaded CT1 will stay at levels higher than 17%. And the drivers of that is first profitability that will be at levels higher than 200 basis points. Let me open a parenthesis here, given the significant increase of our RWA due to Hellenic Bank, you should take into attention the rebased RWA, so as to be correcting your calculations, especially for the year 2025 onwards. So I repeat that profitability will be at levels higher than 100 basis points. Then we are going to have an asset growth at the area of 70 basis points per annum. For Basel IV, we are going to have an impact in 2025 of circa 60 basis points. And then last but not least, we are going to have the impact of dividends at the area of close to 90 basis points in 2025 and 100 basis points in 2026. So if you make the cuts, you conclude to the full CET1 at levels higher than 17% for the business plan period. This leaves us with a surplus capital of between 250 and 300 basis points over the business plan period. This is compared to the internal capital target of 14.5%. And in all these universes, we have not included any AT1 issuance.
Operator: The next question comes from the line of Osman Memisoglu with Ambrosia Capital.
Osman Memisoglu: Just on the dividend outlook, I wanted to clarify, you're going to pay 25% or more from your 2023 earnings or out of 2024 earnings? That's my main question, at least at the moment.
Fokion Karavias: Yes, it's 14%. I wasn't really sure. Yes, it is 25% plus out of the 2023 financial results. We estimate that this figure should be something like $0.09. Understood.
Osman Memisoglu: And the 14% in '23, is that the buyback? What is this 14%?
Fokion Karavias: In Slide 18, which I think is making some people nervous, you have a 14% dividend payout for full-year '23. But this is the payout -- the implied payout that we had last year when we did the share buyback, the amount that we spent for this share buyback in 2023 was an implied payout ratio of 14%. So effectively, the bank had a shareholder reward already last year with an implied payout ratio of 14%. This year, we are moving higher to 25% plus of the financial results of 2023. And gradually, we want to move this payout ratio towards 50%. Is this clear now?
Osman Memisoglu: Yes. And the 25-plus figure, when do you think we can get the final on the -- I mean maybe it's 30%, 35%, but when would we know.
Fokion Karavias: Over the next couple of months, based on the process that the supervisory has, we should submit the -- we should announce the official results of 2023, the financial accounts. We have to submit also the ICAP (LON:NXGN) for this year. And then the SSM will approve the final dividend payment. So I would say around May, we should have the final figure.
Osman Memisoglu: Perfect. And if I can squeeze in a question on the strategic level and mainly specifically on India, from the new -- from the media followed I guess we also allowed some developments on that front. If you could give us any color on any impact or either quantitatively or qualitatively would be helpful.
Fokion Karavias: Okay. This is something that we explore as we speak. Obviously, we have not included any effect from that in our business plan because we are just in the very beginning of this effort. As you may have seen, we have signed an MOU with the national payment system of India to enable UPI in Greece. This is something that was welcomed by the Indian government. But our main objective is to make Greece and Cyprus, one of the gateways for Indian companies who want to invest in Europe, especially in Cyprus has a number of advantages and a number of similarities that Indian corporates could appreciate. But as I said, this -- we are in the very early stages of this journey. And when we have more concrete things to update you, we will let you know.
Operator: The next question comes from the line of Sevim Mehmet with JPMorgan.
Mehmet Sevim: I have a couple of questions, please. Firstly, maybe on NII. The fourth quarter number was still quite strong with the 3% quarterly growth. Can I ask if there were any one-offs in this, maybe derivatives income or anything like that? Or is that simply the continuation of the recent momentum? And then going forward, just one question on Hellenic. Thanks for providing all the details here. But looking at the NII sensitivity, how does it differ from the dynamics in Greece given, obviously, they have huge levels of excess liquidity, but a lot of that cash is also sitting at the ECB. So what kind of assumptions do you have for Hellenic profitability and particularly NII metrics going forward? And maybe if I can also ask the same question as my colleague asked earlier, and I apologize if I missed it in your answer, but would you have any possibility to use some of that excess liquidity elsewhere in the group? And what are your early level may be thinking here on that? And finally, just longer term, turning to asset quality and cost of risk. You are now at 3.5% NPE ratio, which is obviously a huge development and new formation looks really low. So I'm wondering what keeps cost of risk still at these arguably a relatively high level of 80 basis points or lower than '18 as in your guidance for '24. But also looking at 2026, the guidance looks relatively high. You also have very high levels of NPE coverage. So if I may ask, what is needed really to bring that down to more European average levels? Is that very conservative? Any color would be appreciated.
Fokion Karavias: So I'll start from the fourth -- the results regarding the fourth quarter NII and then I pass to portion for the rest of the question. The short answer to your question is no, there is not any one-off element in fourth quarter NII. Actually, if you recall our previous results call, we said that we expect the third quarter to be the peak. And actually, you see the fourth quarter to be a new high. And the driver is a bit higher average arrival by close to 20 basis points quarter-on-quarter. On the other hand, deposit mix remained absolutely stable quarter-on-quarter with a bit higher pass-through. But I would say a major driver is the significant new loan production that we had in the fourth and deposit, a new loan and deposit production that we had in fourth quarter and actually drove higher NII. But there is no any, let's say, one-off element on that trajectory of that figure. Okay. Let me come to your second question, which is about sensitivity to interest rates.
Harris Kokologiannis: Starting from Eurobank on Page 22, we saw that for every 25 basis points of Euribor chains, there is a €30 million effect on NII. Let me clarify that this 25 basis points you riochange is on top of the interest rate trajectory that we have assumed in our business plan. As I said before, for 2024, we have assumed three rate cuts. If we have a fourth one in the sense of three, the effect is going to be this €30 million that we have on Page 22. Further to that, this is a dynamic number. This is a number that may go up or may go lower. For instance, in the mid of the third quarter, this number was quite lower, but we decided to close some of the hedges that we had. Because in our view, the market at that point of time was overpricing the rate cuts. And because we closed the profit, some of the hedges in the fourth quarter, we recorded a good other income. So this number, as I said, is a dynamic exercise. Now going to Hellenic Bank, we have not included on this sensitivity any sort of sensitivity that comes from Hellenic Bank's balance sheet because we don't have all the details to make a calculation. We don't know if there is any sort of hedging there or not. Back-of-the-envelope calculation would result into an additional sensitivity from the balance sheet of Hellenic Bank of about €12 million to €13 million for every 25 basis points change in the Euribor. With respect to the liquidity, the excess liquidity of the lending bank, I said before that we envision both cost and revenue synergies. One of the revenue synergies would be a better use of the excess liquidity of Hellenic. We are not planning to use this liquidity to other parts of the group because simply we don't need this liquidity. Both Greece and Bulgaria are also in excess liquidity, but we could deploy more liquidity by supporting the Cypriot economy or other international projects of the area in which also Cyprus is involved for every €1 billion of the excess liquidity that we may use, this would boost the NII of Hellenic by about €20 million, €25 million. I'm coming out to your last question about the asset quality and the cost of risk. Before I answer your question about the 2024 guidance in terms of cost of risk, let me make a short comment about 2023 asset quality, which actually tend to be quite resilient and definitely better than initially expected. As a result, the group NPE ratio decreased to 3.5% versus 5.2% that was the initial guidance. And further to that, as you can see on Page 57, Stage 2 loans also declined by about €0.5 billion during the course of 2023. Asset quality in our other core markets also is very resilient. As you can see on Page 35 NPEs in Bulgaria are about 2.5% with coverage more than 10 -- and in the next page, Page 36. In SA improves the NPE ratio is also up 2.5% with coverage at 80%, 8-0. Last but not least, Hellenic Bank also saw a good asset quality outlook based on the 2023 results presentation, the NPE ratio is at 2.5%, although at the caverns, which is lower than our group at 41%. So based on that, your question makes sense. However, we have decided to adopt a countercyclical approach, which is reflected both on the NP coverage, which is north of 80% -- and it should remain north of 80% throughout the three-year period. And this countercyclical approach is also reflected in the cost of risk, which is expected to decline only marginally during 2024. We say below 80 basis points, let's say, it's going to be between 75 to 80 basis points versus 85 that was in 2023 to further decline at 65 basis points in 2026. Now as you say correctly, this compares relatively higher to other European markets. I'm not quite sure if we compare fully apples with apples. -- because as we have explained other times, in our cost of risk also we include some servicing fees that make this number a little bit higher.
Mehmet Sevim: That's very helpful. Maybe just on the servicing fees. Would it be potentially a strategic idea in the future if they come back to the market to purchase those. And obviously, there is a discussion of purchasing the reperforming loans. But are there any discussions with the services themselves coming back to market at some point in the future?
Fokion Karavias: Okay. First, with respect to the RPLs, re-performing loans on purpose, we have not included any of them in our three-year plan, although this may be an upside potential for us, not so much in 2024, but maybe in '25 and '26. And the reason why we have not included RPLs here is because there is a sensitivity by the supervisor regarding this asset class. It appears that it wants to see more data points before banks become more active in terms of RPLs. I think the same applies also to the servicing companies. Therefore, definitely, this is not going to be a business in 2024.
Operator: [Operator Instructions] The next question comes from the line of Dimitri Alex with Jefferies.
Dimitri Alex: Just some three from me. So if you could just kind of give us a bit more color on the NII hedges you currently have in place, how you're continuing to reduce your rate sensitivity to the downside? Just the second one. So following on from a previous question on the transaction you did in India. Could we just get your thoughts on any further business opportunities abroad? And just finally, on the -- what are your thoughts on the kind of potential uses for about the 250 basis points of excess capital you're going to have in 2026?
Fokion Karavias: In terms of the hedging, I'm not quite sure what additional information you would like to have. Since I provided a quite thorough analysis of our strategy regarding hedging and the current exposure. Let me reiterate that this is a dynamic exercise had this increase increases or decrease depending on the pricing that exists in the market. And this is a strategy that we're going to follow over the next quarters. As I mentioned before, if in 2024, there are four, for instance, cut instead of the three that we have included in our business plan. The effect on NII, the negative effect on NII is going to be according to the current level of hedges of about €30 million. Now hopefully, this answers your question, but I would be more than happy to follow up if you need more clarification. Now regarding other opportunities in markets beyond the three core markets. We have said also in the past that we believe that nowadays banking needs size. Therefore, it is rather unlikely that we will try to go to any other European jurisdiction as a universal bank with a rather small market share. So most likely, we're going to remain in the three core markets as a universal bank, and we will try to grow both organically as well as through any sort of M&A, if there is such opportunity, and we have demonstrated that both in Bulgaria as well as in Cyprus. However, we could potentially explore opportunities in other markets as a monoliner, not as a universal bank. And as I mentioned before, one of these opportunities is through asset management and private banking, and we are planning to explore jurisdictions and customer segments beyond the Greek and Cypriot customers that we have currently. Finally, your last question was about use of server capital. Okay. As you have noticed during the three-year period, we maintained a surplus capital of about 200 basis points over the internal capital target of 14.5%. Let me clarify that this 14.5% covers the OCR the P2G plus what we have said internally as an additional buffer. Now this excess capital offers us capacity for further M&A. Obviously, if there is such an opportunity and if this opportunity makes sense in terms of return on capital, but also this sarcs capital and certainty in terms of the shareholders reward. So exactly because we have this excess capital, we feel confident about what we said already in terms of dividend payments and payout ratios in 2024 and 2025 going forward.
Operator: We have a follow-up question from the line of Osman Memisoglu with Ambrosia Capital.
Osman Memisoglu: Two on my side, please. One on corporate spreads, you seem to be expecting lower spreads a bit more than your peers seem to expect. So I was wondering if you could give us some color on what's driving your thinking there. And on the net profit line, before one-off figure is quite strong, but there's a big gap to the reported figure. I was wondering if you could give us some color on the main drivers of what the gap was for.
Fokion Karavias: Sure. Let's start from your last question. The total amount of below-the-line adjustment is €100 million. Out of them, the major amount is €125 million relates to the recycling through P&L of FX reserves as a result of the completion of the sale of our Serbian operations. I have to underline that this has no tangible book value or regulatory capital impact. So it is just a recyclement to P&L. Another €48 million net of tax related to mainly to a new transaction that we have classified as held for sale and NPE transaction that we have classified as held for sale. And it is a €400 million multi-asset NPE disposal. So actually, this brings the book value to fair value to possibly provide of this transaction. Now as regards corporate spreads, we have assumed a decrease, as you may see on Page 21 of close to 30 basis points in 2024 and the further 20 by 2026, overall 50 basis points. It is a competitive market, so we prefer to be conservative on that front than the reverse.
Osman Memisoglu: I know it's early in the year, but are you seeing signs of a high level of competition so far?
Fokion Karavias: May you repeat your question?
Osman Memisoglu: You see -- I know -- I appreciate it's early in the year, but are you seeing signs of higher or much higher, much more intense level of competition on spreads?
Fokion Karavias: So far, no, we have not observed that in the market. Let me come to the first leg of the question as my colleagues from IR at right. The total amount is €18 million that we have as below-the-line adjustments. Out of that, the €130 million relates to the recycling through the P&L effect of Serbian-related FX reserves.
Operator: [Operator Instructions] Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Karavias for any closing comments. Thank you.
Fokion Karavias: Let me thank you all for participating in this investor call. Your questions are really appreciated because they gave us the opportunity to clarify some issues out of our business plan. We would be available for any sort of follow-up questions. And hopefully, we may see some of you next week in London. Thank you very much.
Operator: Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for calling, and have a pleasant evening.
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