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

Good morning, ladies and gentlemen. My name is Dominik Prokop, and I'm the Head of the Investor Relationship and Ownership Supervision Department. Welcome to this press conference presenting results after Q2 of 2022. The conference will be divided into two parts. In the first part, our speakers will present the financial results and presentation. In the second part, we shall have a Q&A session. Let me introduce to you -- together with us, we have Grzegorz Olszewski, the President of Management Board of the bank; and Mr. Radomir Gibala, our CFO. Sir, over to you. [Operator Instructions].

Good morning and welcome at the press conference to present our results for the first half of 2022, including Q2. I shall focus on the areas that we haven't discussed so far. Rather, we have teased about them, and we went to live up to our promises. As said, the first half of 2022 was a very good time for us in terms of interest year-on-year, it went up by 46%. However, I would like to pay your attention -- draw attention to fee income, plus 20% year-on-year. That is a source of stable income for the future. With our portfolio of products with good quality of our services, we are set to succeed. That's what we are going to focus on. Coming back to our results. What you see here is PLN 216 million of profit. That's indeed a very good result, including the Protection Scheme of -- premium in the amount of PLN 195 million, and also the fact that we did not pay the contribution to the BFG. That's PLN 30 million. The total impact of these events was approximately PLN 128 million. It was a record year for the bank, meaning that the increased interest rates and the good loan portfolio paid off. As I said before, we shouldn't forget about the improved interest income. Now let me move on to our indicators. They were the topics that we have announced previously during our presentations. Let me first start with a brief summary. As we said, I -- we promised to you to be really disciplined in terms of cost. The environment, the surroundings are unique. The inflation rate is really high. Cost pressure is extreme on every level. However, if we look at C.I, that's around 49%. However, in the model that we presented to you for Q1, i.e., we assume that we paid the contribution for BFG but not for the Protection Scheme. The result would be 36.9%. That's a very good one, one of the better ones in the sector. As for the remaining cost items, our results are still very good, better than what was assumed. That's noteworthy. We will be intending to go along the same trajectory. However, we are also aware of the cost pressure in areas such as development, for instance. We wouldn't like to over-limit our spending, not to impede our development. ROE, 15.9% and NIM 5.11%, going upwards. We are constantly under pressure. We see greater competitiveness in terms of deposits. However, from the very beginning of the year, our strategy was to present our offers, which were highly competitive in different periods of time. This pays off now. Our deposit base is safe and sound. That's a very big advantage for us. However, in terms of acquisitions, that's also a serious advantage. I will come back to it later on in my presentation. We have taken advantage of this fact very wisely. And two further items that we wanted to focus on like we did during the previous presentation, cost of risk. CoR stays on a moderate level. That's better than what we assumed. And 1.46% is indeed a good result. We are, however, expecting this parameter to worsen slightly. Looking at our portfolio, we would assume that this worsening will not be a major one. However, it will still be below the levels that might be considered threatening, that might make our alarm light go on. Now for the time being, we are on safe level. NPL, 10.7%. Indeed, we paid a lot of attention to that element in our previous presentations. We said that in order to enter the economic deceleration process with higher interest rate, our cost of handling not only in the segment of companies but also individual customers, we need to improve the quality of our business customers' portfolio. That's the plan that we are implementing. We are on a level of 10.70% now. I cannot tell you whether we will go below 10% or not. It's much harder to do that. However, in the longer time frame, it is our strategic objective to reduce our NPL to a single-digit level. Now let me move on to our key products. I would like to start with the mortgage loans' result. The market decelerated heavily, much more heavily than we did. Our offer is focused on major cities such as Warsaw and Kraków. It is very popular. And thanks to that, we were able to increase our share in new sales and market share. Our portfolio increased as well even though the market is tough. Up until now, we've been systematically emphasizing that despite the negative outlook because of the credit vacation introduced by the Polish government, we are of the opinion that from the perspective of credit -- of loan portfolio, it's very important to develop that line. In the longer time frame, I think that mortgage loans have a huge potential. Yes, fair enough. Right now, we are experiencing a slight -- serious deceleration. However, we have the additional buffer. And once certain barriers related to creditworthiness are overcome, we have to be ready. That's what we are working on. That's why we have implemented the housing without contribution program. At the same time, with the credit vacation, we are the only bank to offer such a product on the market. Now let me move on to cash loans. The Polish market is very saturated in comparison with other European markets. The growth potential, hence, is limited. We will, however, be trying to concentrate on profitability of the portfolio and on its quality. We want the portfolio to generate positive return. However, the quality of the portfolio cannot diminish percentage-wise. We are almost 100% doing it in the automatic mode. That means that we have a good overview of the process and the cost of risk is low. We are an absolute leader when it comes to consumer finance loans, and this position is safe. Our main competitive advantage is the technological advancement of our processes. Our competitors focus on the price. We focus on the process. Thanks to our key partners who appreciate our technological advancement, we are able to continuously improve the process, including verification. It's a topic that I spoke about during the previous conference. Our share is going up, and our results are not deteriorating either. Therefore, this segment is still an apple in the eye of our company. We will be focusing on the development of e-commerce, especially. I've already mentioned our deposits. We said that it can be a tool to improve our quality, our acquisitions. We want to build lasting relationships with customers. So that's the key point. We want to have loyal and lasting relationships with customers. That's what we are going to focus on. Please note the graph in the left bottom corner. Quarter-on-quarter and year-on-year, the difference speaks for itself. Let's see the number of customers with systematic incomes. We are working. However, we are not resting on our laurels. We want to be a strong player not only when it comes to deposits but also when it comes to additional services. The number of customers using via toll payment for highways and those who are paying for public transportation tickets is increasing. As for digital channels, year-on-year, the number of customers using our mobile app is growing. This is a constant trend observed throughout the quarters. We have more and more customers using our mobile applications. And also, in terms of our development, we want to focus on that segment particularly. That is why we are working heavily on improving our effectiveness of the app. The offer for our customers is presented differently currently. We are also working on making sure that at the beginning of 2023, we will be able to show you the new face of our mobile app. Hopefully, it will be even better rated by our customers than the current one. It will increase our NPS even higher. Now to summarize the results, I would like to focus on the business customer segment. You see the results. The results speak for themselves. NPL year-on-year is minus 3.7 percentage point. We've promised to you that by working on our processes, we will be aiming at increasing our portfolio. This worked out quarter-on-quarter. We are going up when it comes to the loan portfolio. That's our absolute priority to keep that trend. Let's look at the results. The results in Q2 are better than in Q2 2021. And bear in mind, back then, interest rates were much lower and the willingness and the demand for such loans was much higher. This is a clear sign that we've improved our processes, our loan and sales processes. But what remains to be done still, we see huge potential. We need to tap into it. We know where we are going. And we want -- we know what effort is necessary. The market is not easy. The sentiment not only among individual customers but also in the business sector is rather negative, but that can be a chance for us. We know that there are banks that will be limiting the loan activity in the companies sector. We, however, want to focus on the quality of our business portfolio. The results are best exemplified by what you see. Here, this is the balance of assets in regular service going up year-on-year and quarter-on-quarter. The sign is very visible. There's clear improvement. As I have announced at the beginning of the year, we wanted to work hard on it. Today, we see that we are reaping the fruit. Also, the share of new sales to preferred industries is going up for us. That means that we are implementing the goals of our strategy. The share of assets in collection also went up. Again, we see a huge potential in this respect. The same applies to share of factoring in new sales. The growth is 7% -- 7 percentage points. With the new economic environment, this trend is here to stay. And last but not least, to best show you that we are working hard on improving the quality of the portfolio, of making sure that Alior is a good investment asset, our balance of assets in collection went down significantly. Now let me move on to the next topic. We see a greater automation of credit and remote services processes. We have a more remote services offer. So 55% is the current share of automated decisions in new sales. This is the area where individual customers have grown accustomed to automated decisions. The share is growing when it comes to businesses, business customers. In the longer time frame, I'm sure it will never be as high as among individual customers. Individual approach among businesses, especially big businesses, is more important. However, when it comes to SMEs and micro companies, we are able to have a very good share of automated decisions. This is a trajectory that we would like to pursue. We want to be better and better at providing it. The number of active cards growth as well as noncash transactions. You can see that what has been improved is the transaction activity, and this refers to the improvement of fee results. So without this relational banking transaction activity, there will be no improvement for us. This is an absolute priority that has been addressed and will be addressed as a part of our strategy that is going to be presented at the end of the year. Let's move on to the conclusion when it comes to our technological transformation. Please note our special hotline that we took pride in during the last conference. It is already operating. I'm talking about outcoming calls. Close to 40% of the entire traffic when it comes to incoming calls. Right now also, outcoming calls are being serviced. This is one of the projects that has been awarded on the European stage, and we are so happy about it. When it comes to mortgage loans, we also offer a very modern simulator. It is available on the Internet website for our customers so that we are able to improve the quality service. We try to streamline, optimize all the offers when it comes to mobile banking also, including deposits, but this is going to be developed even stronger during the next months so that the entire mobile offer is available in a beneficial manner. When it comes to development, generally, I'm talking about people who came to us from Ukraine, we are able to deliver services in the Ukrainian language. Close to 95% of them use our mobile application. We, as a bank, have been appreciated as the bank providing best services for Ukrainian citizens both when it comes to mobile as well as brick-and-mortar sector. So this is the best conclusion of the entire effort of our team that was provided in the first half of the year. Now payments. When it comes to fast payments, tactile payments without using your phone, using just a watch, we believe that it is going to be developed even further. Right now, you can use [indiscernible] mobile pay services. And for us, this is just the very next chapter when it comes to ameliorating transactional activity and relations when it comes to both individual customers and generally. And I would like to conclude our corporate social responsibility area. Here, I have to acknowledge all the employees of the bank and the entire institution of Alior Bank. And thanks to this, people who came here to Poland were able to be offered long-term help. Two major projects implemented in [indiscernible] in Warsaw. In Warsaw, it's a comprehensive project in the building in Towarowa in cooperation with the city council and UNICEF and other institutions. This is one of the major aid centers here in Warsaw for refugees where a very comprehensive kind of help can be provided. Both parents as well as children are taken care of. And as of September, they will be provided e-learning. Yesterday, we had the Ambassador visiting Poland, the ambassador from UNICEF. And Alior Bank was really acknowledged for all the effort. This is the very best example of the cooperation between private sector, corporate social responsibility area and the city representatives. So to conclude, the very first 6 months, very positive. Those areas where it was possible, we proved to be really prepared when it comes to credit risk as well as growth, generally. We are going to continue active efforts when it comes to individual customers. When it comes to mortgages as well as cash loans as well as acquisition and transactional activity, I'm talking about our main relations for us, this is going to be a top priority. As regards business customers, we will aim at ameliorating the quality of portfolio and increase transactional activity. We will try to improve the quality of the portfolio, and we'll try to attach an even greater importance to transactional activity. Thank you very much. And right now, I'd like to give the floor over to Radomir Gibala.

Ladies and gentlemen, welcome. We heard a lot from Grzegorz about the financial results. Now I'll try to guide you through the slides in the area of finances as well as risk in general. So let's start from our profits and losses. It is going to be illustrated in the slide, the fee result as well as the general results, interest income. But we have to see the big picture. Please note, when it comes to -- excluding one singular event, that is contributions to ABS, the result would be close to PLN 1.5 billion when it comes to the first half of the year. I know that you don't always enjoy generalizations of this kind, but it only indicates that we are able to generate on a sustainable basis profitable business on the part of the bank. Once the contribution for the system of protection of commercial banks, the Protection Scheme, the result came to PLN 216 million for the first -- for the second quarter. And moreover, what seems to be significant is the dynamics of the revenue as compared with the dynamics of the cost. Because the second quarter, and I'm talking about the contribution for the Protection Scheme, I believe that we are still viable and we are able to operate. And the trend seems to be positive. So revenue is growing more dynamically as compared with our costs. And also, please note, the return on capital, if it hadn't been for the adjustment, it would account for close to 20% or so. We have to consider the conditions pertaining to very high interest rates in which the bank has to operate. Now the result -- the interest income keeps growing quarter-on-quarter or year-on-year, and there is a clear-cut, growing trend. The assets, as mentioned, are not that overestimated, but it is clearly visible that year-on-year, that when it comes to the interest income, it seems to be growing. Net interest margin, it is above 5%. This is one of the highest benchmarks in the sector. And this is a perfect reflection of our -- the so-called asset mix, as Grzegorz mentioned on numerous occasions. We are a genuine leader when it comes to unsecured positions. I'm talking about cash loans or installment loans. And we wish to continue to remain the leader. At the same time, we would like to increase the share of mortgage loans. Of course, when it comes to the so-called net interest margin, it has to be compared with the cost of funding. You can see the line here at the top-right corner. As you know, it keeps growing. I'm sure you are observing the marketplace very carefully, so I'm not going to give you too many details. However, please note that we, as the bank, as of the third quarter, we try to focus on transactional activity and relations. We try to offer the best possible offers. Nevertheless, we don't want to differ too much from our competition. We don't want to lag behind our competition. We did our homework. As a sizable bank, we try to make sure that the cost of funding are controlled. And looking further, obviously we have to consider what's going on next. I'm talking about the competition in the marketplace. And we also have to consider the entire macroeconomic situation. Let's move on. Our fee income, as we heard from the CEO, our growth continues to be 2-digit year-on-year. It's close to 20%. This is not an easy task. It's a strenuous job, but we try to continue our efforts. When it comes to the transactional activity and relations, it is all appreciated by our customers. You can see it here in the graph in all those lines. Some events in the marketplace seem to be helpful, especially during the first and the second quarter. And also, especially in the second quarter, I'm talking about the exchange of foreign currencies, FX. You can see the position here as well as other positions to be considered. It is all very positive apart from insurances. Here, the volume was slightly lower year-on-year when it comes to loans. So obviously, we hope to continue further growth so that this income -- commission income is continued. But it depends on the growth of our balance as well as the general market-related situation. Now costs in general. We heard a lot today about the costs and our budgetary discipline. Let me remind you that this is not an easy task because we continue to operate under the raging inflation that influences each and every category. You can see year-on-year, especially if you consider specific quarters, if you take a look at employee expenses, there has been a growth as well as general cost. You can see this orange line here when it comes to steady cost of renting out premises, marketing. This is not just the inflation but just very informed activities on the part of the market so that we can offer products that are as attractive as possible. But if you take a look at the general picture, big picture, I can risk a statement that we are able to keep a tight rein of our -- on our costs, PLN 426 million per quarter. That's an isolated incident. But apart from that, costs are being controlled by us. If it hadn't been for that, probably I could say that it's 37%, one of the best results in the marketplace. So including this event, this is close to 49%. And just to finish discussing this slide, you can see in the bullet point that we took the liberty of adjusting it slightly. If we were to consider, though, excluding the contribution for the support scheme, Protection Scheme, as well as the Borrower Support Fund scheme, it would be close to PLN 190 million. That's the threshold when it comes to the year 2021. It should be slightly higher, but our ambition is to keep a tight rein on our costs. And we seem to be moving in the right direction in this respect. Now let's talk about strategy as we heard from Grzegorz. Very soon, so at the turn of 2022 and 2023, we would like to bring you closer to our brand-new strategy of the bank. Nevertheless, we try to compare our -- the key indicators. And our projections were as follows: that already, 6 months ago, we had some numbers projected, but the situation seems to be changing dynamically. Nevertheless, the changes seem to be mainly positive. So let's talk about business volume, PLN 89 billion. That seems to be quite a challenge. That's the goal for 2022. But as we heard from our CEO, we should try to grow in each and every sector even when it comes to mortgage loans, where the market dynamics is very slow, as you know, especially, I mean, both when it comes to corporate customers as well as unsecured positions. Let's move on, profitability. Here, the ambition of the management of the bank is the same. We want to be above the cost of the capital, and this is being implemented. Let's move on to the NIM. As I mentioned before, this margin seems to be higher. The projections from 18 months ago were lower. And the cost of income, as mentioned before, we believe that we should be able to generate a much better indicator as compared with our projections. Now risk and capital, I don't want to repeat myself. We will move on to more slides in this respect. But let's start with the cost of risk. Each and every quarter, we've been commenting on their shape and some possible future projections. But before I talk about that, let's talk about impaired loans. Impaired loans, you can see that's 10.7% on the entire portfolio. So we can see that we try to use each and every method possible to support this trend, and we try to generate 1-digit values depending on the market-related situation, either write-offs or sales of receivables or diluting but in a positive manner, increasing our portfolio. We try to make sure that it is being optimized and streamlined. At the bottom of the slide, you can see the information related to the corporate and retail segment. The key word is relative. Let me underscore that. We are relating it to the bank as a whole. 3.7% is the accumulated integrator. It's above the market rate and still we are not resting on our laurels. We continue to be active in this respect. Now let me move on the cost -- to the cost of risk. If you look at the bottom part of the slide, you see that we are slightly going up when it comes to the cost of risk Q1 compared to Q2, and that was what we had assumed actually. We haven't noticed any default or delays as of the 30th of June. We can present to you the updated [ FAE ] moment with -- scenario, I'm sorry, with different scenarios. Looking at the current situation on the market, we are following the guidance, 1.6% (sic) [ 1.9% ] in 2022. The second half of the year will definitely be a greater challenge for us. But that's what we have braced for. That's what's in our plan. We just want to keep you up to speed of what the situation should be like. For the time being, it's 1.4%. At the end of the year, that should be 1.6% (sic) [ 1.9% ]. Moving on to capital and liquidity. As I mentioned before, looking at Tier 1 or TCR, we see the same picture. We have a surplus, a buffer of sorts in Tier 1. That's 266 bps versus the minimum level set by the Polish regulator. When it comes to TCR, it's over 200 bps in both cases. We are in the black. It's a significant surplus, as my colleague announced, that puts us in a good position to get ready for a harder period that our Polish economy is going to enter soon. Let me comment on the bottom right-hand corner, the composition of change in TCR. Well, there are 3 factors behind the fall. The bonds, the valuation of the bonds. We don't own many bonds in absolute terms in our balance sheet, but that has an impact. On top of that, depreciation and a slightly different approach to weighted -- risk-weighted average. Nevertheless, we are still well above the regulatory limits. Now let me draw attention to liquidity ratios. That's the upper-hand right corner, LCR and NSFR. And again, as you can clearly see, we are well above the limits assumed by the bank and demanded by the regulator. To conclude my part, let me underscore the bullet points that are our guiding motive of the presentation. We keep repeating them to you. And now we will be more than happy to take your questions.

First question, will Alior be able to avoid the loss in Q3 2022?

Well, let's look at the results of the Q1. The only event that will impact Q3, as we have announced, is the burden related to credit vacation scheme introduced by the Polish government, full stop. There is no further information that I could share with you impacting our results in Q3. No other news. And the rest, well, we could make some forecasts and projections for Q3, fair enough, but these would only be forecasts. We are doing our best to ensure that the results after Q3 and the whole year is as best as possible.

Well, to complement my colleague's words, this is a very specific question. Q3 or after 3 quarters? Well, if we keep the current shares when it comes to our loan customers, it should be a positive result. But of course, there are factors that we cannot control, such as interest rates.

Question number two. Alior -- Tier 2 capital is depreciated in Alior. Very quickly, what's your plan?

Thank you very much for the question. Well, somehow, anticipating the question, we spoke about the decomposition of TCR. I can only echo my own words. It's still on a level well above the requirements of the Polish Financial Security Authority (sic) [ Polish Financial Supervision Authority ], and all the other indicators are also in the black. There is no risk to our surpluses. Of course, we are planning to renew subordinated bonds. The change is somehow due to the depreciation of the subordinated bonds, but we cannot disregard the market situation, especially on the debt market.

Thank you. Next question, in which customer segments is the increase of the cost of risk most likely as for the second half of 2022?

Well, in terms of individual customers, it will not come as a new thing, cash loans at a higher risk. They are not covered with the vacation scheme unlike mortgages. The so-called credit vacation will also support cash loans because if there is a person who has a mortgage and a cash loan, this person will have more at his or her disposal in the wallet. In our opinion, segments that are at the highest risk are micro customers. And you should know that we have a very high level of BGK guarantees coverage, which mitigates the risk. Apart from the macro segment -- apart from that, the micro segment, as I mentioned, is at the highest risk. It's very much susceptible to increase of the cost of labor, cost of raw materials. The general economic sentiment is worsening. That's why it is here that we would expect some higher risk. However, with the economic slowdown, the labor market will remain strong in our view. As a result, the sector of individual customers will still be doing really well.

Thank you very much. Fourth question, what was the impact of cash flow hedge on the interest result in Q2 2022? What is the current valuation of cash flow hedge?

Well, and we have spoken about it after Q1, the impact of our cash flow hedge is minus PLN 179 million, PLN 249 million on cumulative basis from the beginning of the year. That's also in the report. In the interest, note the current valuation of our cash flow hedge is over PLN 2 billion rose. that is PLN 1.7 billion around net. That is, however, data as of the 30th of June. Now looking at the profitability curve, we see that the situation is volatile. Right now, it is going in the right direction. It is going north.

Thank you very much. Next question, what lies behind the fact that for the third quarter in a row, there was a drop in credit -- consumer loans and a drop in investment loans for the fourth quarter in the row?

As for consumer loans and individual customers, share-wise, compared to the size of the bank and its tenure on the market, we are a leader. We are a leader in cash loans. Growth-wise, we see a very strong pressure from our competitors mostly in terms of profitability of loans. That is why we have been systematically concentrating on making sure that our portfolio is profitable and is characterized by good quality of risk. The period of aggressive growth of our cash loans portfolio is reflected in the current situation. Let's look at our portfolio of and nonserviced loans. Our strategy does not allow us to dynamically grow in that segment and, at the same time, to be limiting the portfolio of loans. We are focusing on quality and profitability. Let me repeat that again. That is our main objective. Of course, we are working on it. That's a work in progress. We want to put a halt to this tendency. We're improving our digital processes, especially mobile banking, Internet banking. We're sparing no effort here. We're also focusing on telephone banking. There is a strong focus within the bank to improve the quality of our processes in this area. And we also want to increase the availability of loans, so-called ready-to-go loans that do not require one's creditworthiness check. The objectives are defined. However, we need some time to work on it to reverse the trend. On top of that, we are also working on projects that I cannot announce yet, but they will be launched this year, and they will be highly competitive, bringing us not only profitability but also increasing our market share. Let me now turn to investment loans. First, we are now in a totally different economic situation. Up until now, the bank has not been focusing on the construction area. However, it is our strategy now to improve the quality of our portfolio, i.e., improve the quality not only risk-wise but also relationship-wise, i.e., our customer has factoring services, investment loan, FX -- foreign exchange services. That is our main goal right now We don't want to focus on one specific type of loan only. The question related to investment loans, well, let me say that we want to be an all-stop shop. We want to include a comprehensive portfolio of services, including, for instance, leasing finances. Up until now, this has our focus only for individual customers and financing of passenger vehicles. Now we want to expand that. We want to focus on the portfolio -- on the entire portfolio to strengthen our relationships with our customers.

Thank you very much. We have a plethora of questions related to growth of interest income in the quarters to come. What's your take on that?

Well, thank you very much. Well, let's look at the current economic conditions. My answer would be, yes, without the one-off impact of the credit vacation, the bank is bracing for the interest margin to grow, but the growth will be dependent on three factors. First of all, the interest on loans for a couple of months to come, it will be going up in the aftermath of the decisions of the Monetary Policy Council. As I already mentioned, on top of that, we have the cost of deposit. This cost is going up. It will be going up. But the decisive element will definitely be the market forces. And on top of that, we have the third factor, the decreasing impact of cash flow hedge. I've spoken about the data as of the 30th of June. We still see the impact of our transactions. So the negative impact of hedge accounting on our interest result will be decreasing with time. Looking at the current level, PLN 180 million per quarter, we will be going towards 0 level within a time frame of 2.5 year. That's the average maturity of our hedging portfolio. With all that in mind, we are expecting a positive result.