MOODYS: Hellenic’s early retirement plan good for business

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Hellenic Bank’s voluntary early retirement plan to streamline operations will decrease capital and weigh on its profitability this year but reduce its workforce by 17% and lower operating costs, a credit-positive move, said Moody’s.

The plan will cost the bank around €70 million, which it will book in its fourth-quarter results.

This compares with pre-provision income of €76.2 million for the first nine months of 2022, or €76.4 on a bottom-line basis that also incorporates the reversal of loan loss provisions and other one-off items.

“However, the bank will generate annual cost savings of around €30 million from 2023 onward, equivalent to around 20%-22% of its staffing costs, which comprised more than 50% of total operating expenses in the first nine months of 2022,” said Moody’s analysis.

“Hellenic Bank’s high capital buffers, with a Common Equity Tier 1 (CET1) ratio of 19.1% as of September, can comfortably absorb the immediate 120 basis point pre-tax hit to capital,” it added.

Pro forma for the scheme and the bank’s sale of nonperforming exposures (NPEs) announced in April this year; its CET1 ratio fell only slightly to 18.7%.

“Cost rationalisation efforts have intensified as the bank seeks to generate sustainable profitability following its balance sheet derisking and reduction of legacy NPEs to 3.8% of gross loans, pro forma for the recent sale as of September this year, from a peak of around 60% at the end of 2015.”

With around 90% of transactions executed digitally, Hellenic Bank has steadily reduced its number of branches, closing 25% so far this year and 50% since the end of 2019.

While it has reduced its workforce by 12%, mainly through fewer temporary staff, since the end of 2019, it was forced to resort to this costly early retirement plan to reduce its more expensive permanent employee base, which increased over the same period.

“Combined, these efforts will reduce the bank’s structurally high cost base and improve its weak efficiency, with a cost-to-income ratio of 74% for the first nine months of 2022.

“However, structural rigidities will continue to constrain its cost reduction efforts.

“Such rigidities include a bank employee union that contributes to inflexibility in the labour environment and high fixed annual cost increases for all employees, as well as inflation-linked salary adjustments in the context of collective employee agreements,” said the rating agency.

Collective agreement

Hellenic Bank is currently negotiating the renewal of a collective agreement with its employees. It has also booked a provision this year relating to the reinstatement of salaries of former Cooperative Central Bank employees to 2013 levels, effective from 1 January 2019.

“Both these developments are likely to contribute to higher salary expenses in future.

“As a result, we expect the improvements in the bank’s cost-to-income ratio to come mainly from the revenue side.

“Hellenic Bank will benefit significantly from recent and expected further hikes in the European Central Bank (ECB) ‘s policy rate, closing the profitability gap with European banks.

“Higher rates will allow it to unlock the value of its large liquid assets portfolio, mainly cash and balances with central banks equivalent to 27% of assets, complemented by a significant amount of debt securities equivalent to 24% of assets, which it will reinvest in higher-yielding bonds of similar credit quality on maturity.”

But Moody’s said higher interest rates would not fully feed through to deposit rates given excess liquidity in the system.

Hellenic Bank estimates that its net interest income will increase by more than €150 million annually in 2023 and 2024, equivalent to 0.8% of assets before tax, compared to its prior projections for these years under its current strategic plan.

“The positive impact of higher policy rates on net interest income will be partly countered by higher provisioning costs in the next 12 months, as higher inflation and interest rates weigh on borrowers’ repayment capacity.

“A leaner operating cost base enhances resiliency in times of stress, supporting higher pre-provision income buffers to absorb possibly higher potential loan losses.”