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

Ladies and gentlemen, welcome to the conference that sums up the financial results of the second quarter of 2021. Ms. Iwona Duda, Mr. Maciej Brzozowski and Mr. Dariusz Szwed are with us, the CEO and Vice President of the Management Board for Sales and Risk. First, the presentation of results and then the Q&A session.

Welcome yet, once again, at Alior Bank. I'm pleased to announce that in the first half of 2021, the Alior Bank Group has had PLN 232 million net profit yet once again. This has been a great result for Alior Bank. This increasing trend has been going on since Q3 2020. PLN 82 million net profit, PLN 120 million of net profit in Q4 2020, PLN 108 million in Q1 this year, and 230 -- PLN 221 million, so PLN 124 million net profit. This is better than -- by 90% of the -- than the market forecast. This is a source of great satisfaction. I'd like to point your attention now to the ROE at 7.6% for Q2 2021. C/I for Q2 '21 was 42.5%. If you translate that to first half of this year, 7.1%, the equity would be at this point. The financial -- financing cost is low. It's at 0.17% in this Q2. We underline our both capital and liquidity position Tier 1 remains at 12.99% and TCR at 14.95%. The LCR liquidity is at 146%. As for CoR, it remains low, 1.71% in Q2 '21. Some highlights here that I'd like to mention next to our core activity. So the phenomena that are of particular interest to us, so very good sales, very strong sales in housing loans. PLN 901 million, that's a 21% increase Q-on-Q and 30% year-on-year. In new sales of housing loans, the banks saw achieving -- saw the market share in new sales at 4.1%. That's better than our previous figure as well. In terms of other areas of activity, we have record-breaking value of assets managed by Alior TFI. By the end of Q2 2021, their value was larger than PLN 1.5 billion. PLN 177 million in total sale -- net sales assets, and it's been 141% growth year-on-year. Here, let me explain that in this low interest rate environment, our clients look for alternative forms of saving and of making their money work. So we are very happy that Alior TFI and our investment funds company has been so strong. We've got very good lease sales at PLN 808 million, that's 94% increase year-on-year and 12% increase Q-on-Q. Yet another important component here are the corporate loans in Q2. The overall balance of corporate loans in this difficult market environment has increased, and we hope to maintain this growing trend. Our strategy assumptions are being put into work with consequence, so we're building relationships -- healthy relationships with our clients by increasing our participation in housing loans. We promote full digitization of client-bank relationship and diversified offer of products and services. We're also very much into cross-selling our products and services in bank and nonbank products. We've been adding these to more offer through the mobile ticket sales via toll payments, also motor insurance, TPL insurance. Here, we take full advantage of the synergies within our financial group. And we have increased actually our insurance offer portfolio this year. As for very basic numbers. Let's talk about assets, PLN 79 billion. That's 1.8% year-on-year. PLN 67.8 billion, a 3% increase year-on-year in deposits. Online customers, we've noted a huge increase by 23% year-on-year. This makes us very happy because we've been promoting this particular component and the effects are there. The results are there. The pandemic has obviously boosted some processes and has brought some clients to this segment. We've got -- we note 671,000 online customers. Business customers 245,000 and 4.14 million retail customers. The consumer finance area has been our great asset, also cash flows. We are developing them in this difficult economic environment, very well results -- very good results in housing loans and corporate loans that I have already mentioned that are being developed further and our market share is increasing. This first chart shows the dynamic of change in, among others, the first quarter of 2021. Thanks to this operational effectiveness and expansion of our offer, next to other actions that we have levered such as the increase in value of the credit portfolio, this is -- these are the results that we can probably present to you today. The bank's position is stable and secure. It's well above regulatory marks. 8.5% above Tier 1 and TCR 10.5% is the minimum in this case, and we're above that level by 445 basis points, 167% in the LCR department. I have also mentioned the main strategic directions. So let me say that with the update of our strategy that took place in March, we have added one more component to the development of green products. These are still being developed, but the results are already good. This offer is pretty wide. It's pretty -- it has a large diversity because it's both for retail and corporate customers. As for the main successes here, we have noted 5,700 new customers at the end of Q2 2021 in this category. Spot level at PLN 391.3 million balance -- in spot balance, and the financial result was at PLN 220.5 million new eco-purchases here in terms of volume. So let me remind you that we are one of the first banks that have entered into an agreement with the National Environment Protection Fund in order to implement green programs, green financing programs. And as one of the first 2 banks, we have enabled this banking possibility for this kind of initiatives. We have still working on the sustainable development strategy. We do want to raise awareness among our employees and clients in terms of environment protection. And while I'm at it, I'd like to mention the eco challenge. Over 40 branches of our bank participate in this awareness raising campaign. The green education of children and youth is another one of these activities as well as the CSR actions. We have entered in an agreement with the blood donorship organization, and we've got more than 100 donors among our ranks as well. Our modern products and high standards of service are due -- are really appreciated by the market. We have been awarded with the Best Bank Award in Small and Medium Commercial Banks category, that's Gazeta Bankowa awards. However, cash loan, credit card, personal account and bank safety, all these products have been awarded by third parties. There's been a -- also award -- and JPMorgan awarded us with yet another honor of this kind. I'm sure you're very much familiar with these charts if you follow our indexes. However, I'd like to make it well visible that our actions have increased the trust of investors. And between June 2020 and June 2021 our stock has increased in value by 104.7%. A couple of remarks that you may be familiar with already, but I'd like to point your attention to the 7.1% ROE in profitability. It's above the strategic goal for 2021. C/I at 44.7%. It's much better than the 2022 goal. And the COF at 0.2% at the end of the first half of 2021. I must say that we have achieved some very good results. Now let's move on to operational activities.

So now a few words about the business and sales, what we achieved during the second quarter of 2021. Let me start from thanks to our employees. They are with us now. We really appreciate your hard work in these difficult circumstances. Thanks to you, we are managing to arrive at our objectives and even surpasses in many aspects. Let me start from mortgage loans as for some time, this is something we've been focused on. Having a look at our graphs, we can see a plus 43% (sic) [ 34% ] growth. So in volume, it's over 10 -- 12% more mortgage loan customers. So this is a traditional segment. We always want to attract people who are rerouting their remuneration through our bank. We want to expand this segment and we want to stick to the sales level that we recorded recently. Second news is an increase in cash loans. Alior was always strong in that respect, plus 73% year-on-year in volume. It's over PLN 700 million more of cash loans offered. This is the fee -- fees and provisions are important for our sector and for our performance, for Alior especially, because we know how sensitive we are to the changes and fluctuations of the interest rate. So that's great that we are able to make up for it and to rebuild our volumes. Customer finance, despite a decrease by 4%, in fact, let me stress that the sales of the first quarter, it was almost PLN 2 billion. The last year was PLN 4 billion. In total, we want to surpass this result from the last year. This is an important source of acquisition of new customers to our bank. So you can be sure that it's truth the number of customers went up for cash loans. So this is an added value for us. So this market of mortgage loan as referred to numerous occasions in the media by regulators, and we are listening to and hearing voices that difficulties are coming. We are trying to yield the opportunity and the market cycle, the business cycle, plus 45% in sales. So in fact, our market share 4.1% in new sales. Last year, it was below 2%. So it been a long journey. However, it's worth stressing, we've been talking about it a lot. Our CEO mentioned that we had to undergo digital transformation. We have about 140,000 using our mobile app. The number of customers of our mobile app is greater than the number of our online customers. It is an effect of the hard work of all our employees. And on this -- I would like to use this opportunity to thank to all of you. It's your success. Moreover, the number of customers with systematic flows of cash to our bank accounts like old age pensions or remuneration, we're doing our best. We are rebuilding our CRM systems. We develop relationships with our customers which is visible. And we will continue in this direction. We believe that is the best way to improve our fee and commission income. So the number of customers in the bottom left corner, it is a slight drop by 2%. But I can justify that. As you know, we have merged the database of T-Mobile Financial Services and Alior. They had over 100,000 customers. But some of them, there were a lot of redundancies in the data. After clearing, that the total number is 4.14 million. So we are still reviewing the database through the -- in respect of the regulations applicable. But we will reverse -- we'll see this trend being reversed. In a few days, we will launch our new marketing campaign in the media, and I'm sure we will make up for it. Our share in remote channels, plus 1 percentage point cash loan in remote channels. We are doing our best and we will do even more. When it comes to this the product offer, I know you are analysts so -- and you're not interested in marketing stuff, but we are proud, particularly of some things. We entered into cooperation with Mastercard, the first one in Europe. We have implemented this product and we are able -- we are, again, proud to be a pioneer of this product. A lot of people joined us and this will continue that the journey, the vigor and the struggle. Insurance, as Iwona said, this is another product from the range of insurance product we treated very seriously. We treat this product like a snowball. So from a small premium per insurance, we arrive at great fee and provision income, and we'll continue that. Another thing I'd like to stress this is the flat rate in mortgage loan, which was proposed by regulator. Alior mix stands out of competitors. We have a 7-year flat rate. In our competitors, it's only 5 years. So we are convinced that people will choose us to bank with. When it comes the NPS distribution network, plus 8 percentage points. We owe it to our sales assistants and employees. This is an effect of -- the effect of NPS -- relationship NPS is just slightly below. But when we analyze the NPS service completed by our customers, this is the effect of low interest rates. So that means that our customers are not satisfied with low level of interest rates. They are not accustomed to such a low rate. So we have to survive. We are also complaining about that factor. We -- but it's out of our control. And when it comes to the corporate customers, it's worth mentioning and it's worth stopping here, a lot of positive things. The first half of the year as sales over PLN 14 million of new sales. As you know, our sales is dedicated to construction development companies. So this effect is long term. It's path went up and it's growing. This is a reverse trend. This is due to the fact that this postponed sales is being materialized. Now we're doing our best to make it happen. This quarterly increase by almost 50%, we owe to our customers. A few words about micro customers and loans and overdraft facilities. Quarter-on-quarter, this is a result of tightening of credit policies. The overall effect is positive. So we are highly conscious about it. This is just the effect of tightening credit policy restrictions. So we know that our business people are doing well, but we don't want to -- we still wait to the new events with the pandemic. We never know what would happen. But we are satisfied. And relationships, I'm talking a lot about this BankConnect. This is a system that interfaces the reporting and accounting systems of our customers, 12% growth year-on-year in volume, PLN 909 million. We are very glad about it, and we count on great cooperation of our customers and delivering -- we deliver new products and services and people appreciate us, and they decide to stay with us for longer. When it comes to general result with business customers, plus 6% year-on-year minus the closed accounts. The gross value is greater. In fact, we are glad -- happy about it. And a comment about people paying the [ physical ] and social contributions for our accounts. This level is incredible. We hope that we are going back to normal from before the pandemic. As you know, these customers are a kind of litmus paper. They are very sensitive to any changes in the business cycle. So we are very optimistic, maybe moderate optimist -- we are moderately optimistic about them. We hope to stick to these figures, and we hope that this would translate into SMEs as well. And this is our great slide. This is something that seemed unbelievable. BGK guarantees, we thought we arrived at our maximum but in the second quarter, we have beaten that result by 1%, it's almost 100% assets, 99% in Q2 2021, highly above our expectations. We want to have this portfolios. Like here, this is the litmus paper of the business cycle, the economic cycle. And I don't know what -- how the market will behave in the -- in Q3. So we want to stay on the safe side and to offer the collateral, which will be safer possible for the bank. So here, loans of higher value than in the micro segment, 14% -- percentage point growth year-on-year, a good result. And renewable energy sources to signal what would happen next. As Iwona said in March, we've been -- we have updated our strategy, but it's not only -- these are not empty words. We're doing our best in order to provide relevant technical solutions, and I highly appreciate the effort made by our employees. We have investment alone for renewable energy sources projects. We have a list of pipelines, so projects underway is getting longer and longer. And every corporate center, we have 2 people, 2 experts devoted to -- we have also hired 2 specialists from the market who are supposed to develop that segment. 13 ecological goals that we want to finance and decision even up to 20 minutes. The loan up to PLN 3 million with the guarantee of the Polish Development Bank, BGK. A new account business plan, a pioneer plan business, a pioneer account on the market. The effect is our -- extraordinary, the number of customers is growing day-on-day. We want to satisfy our customers, but this is the existing area -- customers, but it is also to attract new people and we have recruited over 500 new customers already and about companies -- related companies. Back to our CEO.

Yes, about our related companies, we have recorded some great results when it comes to earlier leasing. It's generated sales of PLN 808 million, it's 94% more than in Q2 2020. When it comes to the portfolio of leasing, we have exceeded by PLN 5.8 billion, and it was higher by PLN 0.7 billion as in Q2 2020. So now a number of customers in this segment is 73,800 and number of agreements is 102,000. Great results and performance of Alior TFI. The record breaking level of assets under management. Here you can see the development and the evolution of our open funds, which makes us really happy. And let me stress good results of brokerage health. Once again, let me thank to all employees of the brokerage house, it is highly visible in the total structure of our fees and commission income. It's worth stressing that the sales of open-ended TFI and other products in our portfolio after first quarter, it's over PLN 1 billion and was about [ PLN 600,000 ] last year. So we can see a progress. It's worth stressing an increase of assets under advisory. We are promoting this solution for private banking customers. And assets under management, this is also a paid service so we are generating fees and commissions. A great role of the brokerage house and its share in the total results of the bank. Now let me hand over to Maciej Brzozowski.

Ladies and gentlemen, a couple of remarks on credit risk. And I've got good news, lots of them. Let's start with -- traditionally, with the structure of portfolio. The share of the retail segment is growing, which is very good news for a couple of reasons. Here you can see the overall distribution across the quarters. The structure itself has not changed much. It's 59% to 41%. However, let us take look at the details. This is the structure of the loan portfolio. As our CEO and Mr. Dariusz have said, we've got a large share of housing loans here. This is coherent with what I already said at other conferences. Our goal is to improve the mix of products in our portfolio and shift towards more stable ones, those that provide stability. So this is what we have been doing so far. This is our policy. And we are increasing the share of mortgages in our portfolio so we can decrease the number of credits and loans that are more exposed to interest rate risk and so on. So this is the -- these are the charts that show you exactly that. In the lower part, you see the retail segment. Mortgage loans are increasing, a 1% increase quarter-on-quarter is good news. So we shall be implementing our policy, keep the stability on. As for the business customer, not much has changed. You've already heard that our leasing company has noted some increases, which is another good news. So all in all, our stable perseverance and implementing our policy is paying off. This slide should be a little bit more exciting because it shows how our operations and the risk area turn out. Let us take a look now at the reduction of bad loans, delinquency, the NPL that we have accumulated so far. So from quarter-to-quarter, we have decreased these impaired loans to 12.96%. That's a very good result. You can see it across the segments. 6.63%, that's retail loans and 22.12% in business loans. Given our history, these are very good results. We do want to do away with NPL. However, this must be done reasonably. You can't just submit everything to reducing your NPL, but this is a very good trend, without any doubt. In terms of positions (sic) [ provisions ] coverage, 54.87% in the second quarter is maintained. However, in terms of write-ins, this index can decrease as a result of the bank's activity. However, this level is very correct at this point. Below that chart, you can see the difference between the retail and business segments, we get 65.47% in the business segment -- I'm sorry, it's the other way around, 65.47% in retail segment and 50.27% in corporate segment. Next to that chart is the cost of risk. One -- these are very nice, 1.59% the first quarter. And as I've said before, the NPL write-offs are being included here, which must be reflected by the CoR, 1.71% in second quarter of 2021. This reflects our intention to increase the quality of assets in our portfolio. Now take a look at the cost of risk across segments. 0.81% in retail. In terms of corporate, the cost of risk is at 2.22%. However, this parameter does not acknowledge the reserve that we have already prepared for the future write-ins, that's a 3% at this point. You can see it now because this is a value that we take into account. If we don't acknowledge this, we would be at 2.22%, which means the cost of risk is flat, it's completely flat, which must be noted. So we're very stable. And we persevere in the implementation of the policy. Now what I've been saying so far is reflected here, the NPL write-off and sale that improve the quality of our loan portfolio. PLN 885 million, PLN 403 million in sales and PLN 483 million in write-offs, and that's for the first quarter 2021. You can see the reduction to the second quarter. This balance, this difference requires lots of planning. It can't be done overnight. We've got PLN 357 million in sales and PLN 215 million in write-offs in the second quarter 2021. These write-offs will be executed in the upcoming months as well. These numbers also reflect the cost of risk seen on the chart on your right, 1.59% in the first quarter and 1.71% in the second quarter. And I can say that these costs are very stable. I hope that they stay like this. One further remark, if you allow me. The macroeconomic situation is of importance. Let us remember that we're functioning in a COVID environment. It's summer, we go on vacation, everything is open, all public institutions, churches and so on, but COVID remains. We have already heard warnings against a fourth wave. We must take this into account. However, we could be cautiously optimistic here because we've already had the third wave. We've been in lockdown. We were in lockdown, but it's not reflected in the results, which are good. However, there's one more component that must be taken into account while we talk risk. It's the state relief that was injected into the markets, into the economy. So the -- and the impact of economic hardship here has been largely reduced. And I do hope that the negative COVID impacts are no longer going to hit us. But there is no simple answer to this doubt. There is no answer to what could happen if the state relief funds are no longer there for John Doe or for any company. So we must be really cautious in planning and we must be cautious in planning our risk costs, not only at Alior, but in any other bank. We, at Alior, we've been tightening also our processes, our application processes, our quality. The waste products are being released. So this is where CoR profits. So today, the situation is good. We're strong, and I hope that in the second half of the year, we'll state like this -- stay like this, I'm sorry, and that I'll be the messenger of bringing good news during future conferences like this one. Now let me tell you about the further increase in the quality of the loan portfolio at Alior Bank. The curve is flat here in case of individual customer. It's even better in business customer segment. The DPD brings us good news as well. And this is it for me.

Now let us return to the financial results. I'm saying that we're going back, like we're returning because these results have been already mentioned more than once. I'll just select some particular points for you. Year-on-year, we've noted a 2% increase in total income, which is good news for us. It may not be spectacular, however, in this low interest rate environment, COVID, the growth is definitely positive. We've noted 25% increase in commission income. This is a very good result of the entire Alior Group. We've reduced costs by 9% of the entire group. And we've reduced by 58% cost of risk. The net profit has amounted to almost PLN 232 million. As for the cost of risk, for the first half 2021, we've noted 1.64% and the ROE, 7.1%. So these are very good levels.

Let's move on to the further components. As for the interest income, it's no surprise here that these are low because of the low interest rate environment, lower for longer as they call it. This is the situation as you can see on these slides, the income and expenses relative to interest. However, this is the world we're living in at this point, the margin fluctuations have been small. Please take a look at the loan deposit ratio, which is increasing. I think this is worth mentioning here.

Now as for the commission income, this we're doing much better than last year, 20% half year, plus 3% in 1 quarter. The market for brokerage services has definitely -- very active. We've had good sales and leasing. In insurance, we have had a strong cooperation with [indiscernible], our main supplier. We had PLN 46 million last year. It's PLN 54 million this year. So the scales is working to our benefit here, even though the volume may not demonstrate this so clearly. The cards have allowed us to rip some profits off of -- to take some profits given that our compatriots have been spending money during their vacation. So we've been assisting them with that in micro credits for larger companies and for the smaller ones as well. This is all translating into the commission result being larger and larger. We will try to stay like this. We're cautiously optimistic and we hope that this trend will continue, maybe not along these lines and these numbers, but the forecast is rather positive. Assuming that no serious COVID event will take place, this result should be -- should continue improving.

And now when it comes to cost efficiency, as I've mentioned before, we can see a drop year-on-year by 9%. And in fact, as presented to you in all categories, we have recorded a decrease. When we take a look on the graph on the right, you may be surprised by the employee expenses, but it's not like we see them growing. This is just cost provision that we resolved in the second half of the year. So we are following our updated strategy. So that's all on our part when it comes to our presentation. And now the floor is yours. This is time for a Q&A session.

First question, what will be the effect of potential increase of interest rates by 100 basis points on the performance of the bank?

As you probably know, the bank's profile is like that, that each interest rate hike will boost our performance. So if it happened that the MPC will rise, the interest rate, even if it's 100 basis points, it will be about PLN 300 million year-on-year, but this is due to the specificity of our operations.

What is the share of mortgage loan of CFHF (sic) [ CHF ] mortgage loans in the total mix?

The home market is struggling with this situation, but we are in a good situation because the share of CHF mortgage loans is at the level of 0.2%. So it's a minor portfolio, which is insignificant to our operations.