Alior Bank S.A. (ALR) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of Alior Bank S.A. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Krzysztof Bachta, CEO, who will lead you through this conference. Please go ahead, sir.

Good afternoon. Thank you very much for attending our conference. We wanted to describe a couple of topics connected with coronavirus after we published the information yesterday. So maybe as we have a lot of interest also from abroad, we will start with the COVID situation in Poland, in general, to give a short introduction about it, then how we see the macro evolving, of course, given the circumstances, what we have right now in mind, business continuity topics, and then we'll move on to the most important financial topics, so impact of coronavirus on Alior Bank in terms of financial -- at least what we can see and what we can say right now. So maybe starting with the first topic. In Poland, right now, we have over 1,200 coronavirus cases confirmed. And the pace of growth is about 150 per day right now. And the government introduced very, I would say, strict social distancing rules. So all the gatherings above 2 people are forbidden. And restaurants, pubs, shopping malls are closed. So everything that -- and borders are closed basically, and there is a border check and people who return from abroad are required for quarantine for 14 days. And let's say, the government is taking the social distancing procedures very strictly, so we see that a lot of business activity, of course, is stalled. And also the movement of people is very limited in Poland. So let's hope this will give the effects we wanted. Later on, it's very important to say that even as of today, the Polish government is taking the measures, and there's parliament working today on special measures supporting Polish economy. PLN 212 billion stimulus package was announced by the government and probably is being or will be voted today. From the most important topics for banking sector, actually, there are a couple of topics that are of interest. One -- two of them are the ones we described in our information. So first of them is cut off interest rates, which translates directly into our results, and we'll come back to this later. And second is impact on the buffer. So systemic buffer being released, which translates directly into our capital requirements. And as we said in the statement yesterday, right now -- I mean at the end of February, we have PLN 2.7 billion surplus of capital. PLN 1.5 billion of this is made because of the systemic buffer being released. Going further, the most important topic for us will be credit vacations and we will elaborate on this later on. What is also important, especially for Alior Bank is that the [ Bank Gospodarstwa Krajowego ], which is Polish state-funded, state-owned bank, introduced a lot of measures, which we normally use when financing micro and small company segments. Right now, those guarantees are without fees, are extended to 80% of the principal loan and are easier to be granted. So the documentation process is easier also for us and for the customers to be applied. As regards the macroeconomic situation, we believe, right now, at least for the moment in reshape recover scenario, so the economy is actually, we can say, stopped right now in many industries. But we believe that after pandemia outbreak normalizes, the situation will come back to more or less normal, so we'll have a rapid recovery after current [ shot ]. This -- assuming for the moment, our basic scenario is that the overall GDP growth in Poland will be close to 0 so -- like 0.1%. After this, let's say, stop of the economy in second quarter, we will see faster rate of growth in third and fourth quarter, which will allow the economy to recover. And as regards business continuity issues, we can say that until half of March, the business was very good. So I mean we almost -- all the plans we had, we were able to achieve them or exceed them in terms of sales or in terms of client acquisition. Of course, after the coronavirus measures taken by the government, we have seen, let's say, collapse in the economic activity, and we can say that this is about, let's say, 30% to 40% in different segment lines. So the new production of new sales or client acquisition is about 30% slower than it used to be before. And as regards business continuity, 90% of our branches are open. So it's quite a good result, we can say. And all the functions, including the key functions, crucial functions for the business continuity are working properly, and we did not see any issues connected with business continuity, except, of course, for the fact that we need to manage it very carefully. The bank right now is operating and also using remote working mode, especially for the staff that is managing the bank, right. And all the back-office functions and so on, most of the people, except for the frontline, is working remotely right now. And maybe to pass on the credit vacation. The credit vacation is the facility provided by Polish Association of Banks. So we, as a sector, being asked by the government and the President of Poland. We provided the sector solutions for the customers who suffer for some coronavirus outbreak in terms of the income or turnover being affected. And we, as a bank, offered to 2 solutions. One of them is a 3-month payment or installment loan suspension, so the client is not paying anything in 3 months. And the second option is 6 months, but only working for principals. So the clients do not need to pay -- does not need to pay the principal, while the interest rate -- interests are being paid. Of course, for all the period of credit vacation, the interests are accurate, and the basic solution for us is that the date of the contract, so the economic life of the assets is being -- is getting longer because of the fact that we have given the credit vacation. As we can see because customers -- in our process, customers can choose whether they pick 3 months option or 6 months option, we see that majority of clients, like 90% for retail, is choosing the 3 months option. And what we see, what is also interesting, a lot of people who apply for the credit vacation, they resign after they are informed that this is not free of charge, let's say, facility. So we see that the customers, from time to time, they are misinformed of the nature of this credit vacation. And what is important, we believe that for future cost of risk and the results, the important factor is that we believe that the credit vacation, by itself, saying that if the customer is regular before end of February, let's call it this way, and if we see that customers did not have any problems in payments before or any other aspects of the creditworthiness is not -- did not suffer before 1st of March, then we assume that the credit vacation for itself is not the reason to move the exposition either to stage 2 or stage 3. Of course, the crucial fact will be whether the customers who picked the vacation, especially those 3 months, so where they do not pay for 3 months, the crucial fact for the future cost of risk will be whether they will pick up on paying after the period and maybe later on. On impact of rate cuts and risk cost, I will pass to Tomasz Bilous, CFO.

Okay. So as we informed yesterday, of course, the first visible impact of coronavirus changes in macroeconomic environment is the rate cut, which was announced. As yesterday, we informed we estimated the impact between PLN 27 million and PLN 35 million quarterly, this means the full quarter. So not the 2 big -- not the 2 initial quarters, but the full quarter when the full impact will be visible. For this year, our estimation is that it should be around PLN 100 million impact on net profit, maybe plus/minus PLN 10 million. But this is, of course, still an estimation. This will depend, of course, to some extent on how the market overall will react to the changes in interest rates, especially on the deposit side. We have revised our offer already. We've been doing this also for the last year. So in certain segments, like corporates, this revision has been done and finalized as of the end of the year. So right now, we just wait for the effect to come. In terms of retail part, we have revised already the deposit schemes, deposit pricing. There will be some automatic repricing of the core rates in certain pieces of our offer. And we will wait for the sector, we shall see what happens next with the promotional offers on saving accounts. So far, we see that the majority of the market reacted to that, especially the bigger players. They all need to slightly working the other way are -- they are and getting only between [ mBank ]. At least that's what comes from the press releases. So that's our, let's say, base assumption for the moment. Maybe before I jump to risk cost, one more information, which has been also provided yesterday. As regards our capital ratios, we have done some recalculation based on end of February data. And as we informed on the bank [ solo level ], this means today, for us, a capital buffer of PLN 2.7 billion after the change of the systemic buffer. So decrease of systemic buffer from 3% to 0%. Additionally, this will mean in line with yesterday's communication from BFG that also the MREL requirement will be much lower. We estimated this could be around PLN 1.3 billion, given today's status quo, so after also changes in the capital buffers. Whether it will last for longer, difficult to say for the moment. It will be PLN 1.3 billion, down from PLN 3.3 billion, which we assumed earlier. There will also be no requirement to get to these levels on a linear basis as it was assumed before. Of course, the most difficult part today to assess will be the risk cost. So for the moment, maybe just few information that we can share. First of all, definitely, this first phase of credit vacation, we do not intend to treat it as a rule as part of forbearance. There are discussions with KNF, and there will be discussions with auditors on a bank-wide level how to approach this. As we see initial signals from European regulators, it seems that a lot of flexibility is provided by them to the banks to treat the credit vacation in a slightly different manner than it would have been done still a year ago before the crisis. So I suppose also we can be trying to use this. In the longer run, of course, it's difficult to say. But we will be still in the discussions with the regulators, so maybe there will be also some further changes to the approach. In our credit -- if we look at our -- the structure of our credit risk portfolio, maybe starting from the retail piece. In consumer finance, the last year was the best in the history in terms of risk costs. So there we do not expect a major drop down in quality. Even if something happens, this should not have significant effects. As to the mortgage, in our credit, we do not have significant FX portfolios, which also today, due to FX rate changes, could be a problem. So far, of course, we will be treating these clients the same as the other, so credit vacation are available. However, we believe having really good quality there, that it should not dramatically worsen. As to the cash flow, this is, of course, the most difficult part. This will actually be most difficult to assess today as we need to see how long the current situation last and what would be the level of unemployment going forward after the crisis ends. Today, it's a bit too early to estimate any impact. As to the corporate book, we have there several portfolios. I'll try to go through them one by one. Micro segment. In our opinion, our micro segment is quite well prepared for the situation. Over 50% of the portfolio is covered already with BGK guarantees. Over 93% of the new sales were covered also with the BGK guarantees. We were the most heavy user in Poland of this facility. So we have very good processes, and we will, of course, want to use the program established by BGK to support our clients going further. The same comes for small and medium enterprises. They are also covered with the PLN 100 billion guarantee program from BGK. In terms of large corporates, as you remember, we have decreased significantly this portfolio last year in the third and fourth quarter. We have deleveraged it and got rid of some big exposures that were above our new risk appetite. So I think we are, in this year, a bit better -- in a bit better position, not having expensively huge exposures on our book. Then the last -- the 2 last portfolios is the green energy, where we do not expect anything to happen as it has been improving significantly throughout the whole last year, and the situation of the borrowers was very good and improving. And the last was the Agro segment, so the agricultural, where we booked a lot of provisions last year. So far, up to date, this segment, together with food production, is still operational and working. So in a nutshell, I think we have covered everything on our side. So I'll give the floor to Krzysztof, maybe for to...

So maybe right now, we can -- because I forgot to touch on about liquidity, I suppose. So as regards liquidity, actually, we entered the beginning of March with very high liquidity on the historical high levels of the bank. So we have seen some, let's say, cash withdrawals, which was the case for the banking sector. I would say that -- actually, the situation right now normalized. So we see that each and every day, the cash withdrawals are getting smaller. So from the liquidity perspective, we can say that we are, right now, on a very safe level. So for today, we can say that [ our share ] is above 140%. So we do not see any risks connected with liquidity in the short term. Of course, we need to remember that the situation is vulnerable. But in our case, I believe that we are well prepared. And all the procedures and mechanisms are in place. So we do not see, let's say, right now, any risk from the liquidity perspective.

We are monitoring daily the liquidity in all streams actually, also what happens in the cash withdrawals and we see it's normalized to the levels that we observed before the crisis.

So maybe it's a good time to pass on to questions as we'll try to tackle them as much as we can today.

[Operator Instructions] The first question is from [ Kamil Stolarski for Santander ]. Okay. Then we go to the next one, Alan Webborn from Societe Generale.

Does your -- sort of your macro view, does it include interest rates staying at 1%? Or is the view that it gets -- there are other cuts -- some funded way or where your feeling was on that? And when you talk about probably growth around sort of 0, how sharp do you think the downturn is going to be in the second quarter, clearly, with the economy currently in lockdown? Because sort of there seems to be quite a different view as to when the economy starts to pick up, whether it picks up again in Q3 or whether it's very much back-ended in Q4? I wonder whether -- how you feel about that? And then also, I guess, I know it's hard to look out to next year, but do you expect that there will be a catch-up? Or do you think that the economy will be sort of wounded for a little bit longer as a result of this short-term issue? So I just -- that would be interesting to hear what your planning is behind that? And I guess the second question would be, you spent a lot of time last year cleaning up your legacy issues. I mean does this environment make that more problematic? Or do you think really in terms of risk costs maybe the unknown for you today is purely focused on the cash loan side because that, in essence, as I think is what you're saying that it's cash loans, which is tricky. But in terms of micro, you're pretty well protected because of the guarantees and the legacy portfolios have been talked about. Is there anything else that we should be worrying about whether it's sort of tourism, airlines, transport, whatever, if you could give us a little bit more on that, that would also be helpful.

Okay. Topping with questions one after another. As regards the rate cuts, our base assumption is that they will stay flat throughout the period, so until the year-end. Of course, there is a possibility of further cuts, and we assume as a more pessimistic, of course, for a scenario of further cut of 0.25. But our base case is for the rates to remain stable until the year-end. As regards GDP contraction, we assume that we will see already some of the contraction in Q1. So actually, Poland had a very good momentum in February. So if you look on all the data for Polish GDP after February, it was really good in terms of export consumption, production. So all the data -- and record low unemployment. So all the data in end of February were really good, but we will see in March -- in second half of the March, we see a lot of contraction, which probably will translate into -- even though the 2 months were really good, it will translate into negative effect on Q1, and -- which will depend on Q2 according to our assumptions. But then we assume very fast recovery in Q3 and Q4. Of course, this is something which is based on the, let's say, how long will pandemia outbreak take. So if it ends like somewhere in mid-May, this scenario is possible. Of course, the longer it takes, the longer businesses will be stalled, the harder it will be to recover, and reshape will be harder to achieve. Nevertheless, given that the economy is, let's say, really stalled in many areas, it will simply because of the fact that the activity will regain. It will simply, of course, be reshaped anyway. The question is on how fast and effective it will be. And as regarding next year, we did not do the exact modeling for next year. We assume that, generally, the economy should be growing fast next year after this year, yes. But of course, it will depend mostly on what will happen this year as this will be the base and also the question is on, let's say, vulnerability of some of the companies to the crisis and also on the employment market whether -- because we have seen some problems. We saw the unemployment rates going clearly up, even to 10% in Poland. But at the same time, it's -- let's say, right now, future is really unknown in this area in terms of that data or the models do not provide for such events as coronavirus. So it's really hard to conclude on that. As regards to our portfolio, we do not have many businesses as we can see that are connected with first-round effects of the coronavirus. So for example, [ for authorities ], the portfolio is negligible in our case. So among the businesses where we can see that they will be affected, of course, there is the transportation business. But there also we do not see -- it's a couple percent of our portfolio. So looking, in general, we do not see, at least for now, the business, which is affected by first-round effects very much a high share of the portfolio in the business segment. But we do not have any airlines also, I can say so. So this is important, but then we need to remember that there will be second- and third-round effects. And actually, for the second round, we believe that, for example, commercial real estate or other businesses may be also affected. But for the moment, it's really hard to predict what will be the impact. At the very beginning, those businesses will gain from lower interest rate and lower financial costs. So this will help them to amortize the future losses in case of tenants going bankrupt or any other similar cases. So from our perspective, what we did is deleveraging in second half of the year. Especially, as we see it today, it was a good exercise, helping the bank to be more resilient in today's times. And because we -- for example, what we deleveraged was also hotels, for example, or some, let's say, businesses which are affected the most today. But looking forward, of course, at least at the moment, we believe that actually, each and every line of business will be somehow affected by cost of risk, while the most risk is probably in small and medium enterprises, in our case. So the places where we do not have the BGK guarantees, like in the micro segment and so and where we can see the effects of economic slowdown. So this is -- at least for the moment, this is the places where we will be monitoring very carefully and looking at the customers. Also, the question here is that actually, we need to be, let's say, also very careful because if someone suffers some turnover drop, it could be really very short-term periodic and very temporary. So we also need to be able to adjust ourselves for such a situation.

Your next question is from Michal Konarski of mBank.

I have just one technical question, actually. With the BGK portfolio, is it also provisioned or the guarantee is just the BGK guarantee?

So in case we have a default in this portfolio, which is secured by the BGK guarantees was, let's say, in this way. First of all, we have some principal which is above the guarantee, which is normally provisioned. And second, the guarantee itself, in our case, is efficient in 90%. So we treat it simply as collateral. We know based on the historic because we had quite a big portfolio of those guarantees before. So we have a lot of processes, and we do it daily in terms -- even before this coronavirus outbreak, we did it like every day in terms of using those guarantees. So then we assume 90% recovery of this collateral, in case of default, right? So this is the way how it works. So up to the level of guarantee and then the guarantee itself, 90% effectiveness which is the highest effectiveness possible from the collateral we can see. Given the other example, real estate is efficient in 50% as we assume it. So -- and at the end of the road, when we collect money from real estate, it's sufficient in like 50% if via the comparison.

Okay. And actually, I've got the second question regarding the lending volumes. You are expecting the GDP growth of 0 plus this year. And actually, I was wondering if you do have any estimate regarding where Alior's lending volumes this year, given such a low growth, which is a major recession?

Yes. This is a tough question, to be honest, not from the fact that -- because we have 2 months of good key starting, let's call it this way. Probably the March will be, at the end of the day, quite good in terms of net volume growth. But the question going further is in 3 areas: first of all, we see a drop in activity for cash loan, for example. Also from the fact that the branches' activity -- of course, 90% of the branches are operating, but customer activity and customers taking loans is 60% of normal, let's call it this way, in branches, for example. Yes, in Internet and call center, it's higher than normal because of the shift also to more direct channels. So given that -- this example, there's an impact of less customer activity and this will translate probably also into investment loans in corporate. As in Poland, in the last year, you can see that the most of the loan volume growth in businesses was driven by the large corporates taking investment loans. It will probably somehow slow down, but of course, it's very hard to predict the exact numbers for the moment. So right now, we wouldn't be able to give you the exact number, what will be the volume growth on the loan side. And there is also the third impact. The third impact is our own changes in risk procedures, which are basically affecting 2 issues: one is acceptability or credit limits, and second is also the fact that the process is more smooth, more online and easier for the customers because of the very fact that we need to be more online right now. So we have a lot of different effects. And to be very honest, I believe that we will see slowdown in Q2. And the question is on how fast we'll be able to recover in Q3 and Q4? If it is normal, then the growth could be close to what we said is PLN 5 billion in -- assuming full year. But if not, then it will be lower.

[Operator Instructions] If there are no further questions, I hand back to the speakers.

So thank you much for attendance today, and we'll come back to you somewhere in end of April with our Q1 results. For the moment, we assume that Q1 results should not be that affected by coronavirus. But of course, we have a couple of -- still couple of days before we close the books, so we will see it later on. And thank you very much for the attendance, and keep healthy and enjoy this afternoon. Thank you.

Thank you.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.