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

Dear, ladies and gentlemen, Dominik Prokop, Investor relations. I would like to welcome, everyone, on this wonderful day for Alior. Let us present our results for 2022. The results conference comes in 2 parts. The first section will present or it was announced yesterday comes back to the WIG 20 Index. We talked about it last year, we were preparing for this last year. We were working on it last year, and now we have achieved it. We -- we're not talking very loudly about trying to get back to WIG 20, but we did it and apart from some one-off events that impacted our results, we indeed made it. So let us move on to the presentation so that we'll leave enough time for your questions.

Q4 PLN 360 million. That was our result. A very good quarter that goes to show how much potential Alior Bank has if you exclude extra ordinary increasing interest rates, we didn't expect that people would be able to suspend their loans, that they'll get a credit vacation. As I said, we changed a lot in our bank in the retail division, and we are trying to get back to higher volume in enterprise and business customers. Our NPL is less than 10%. That was the goal that we set, and that's something that we managed to achieve because we expect that the economic situation will deteriorate and cost of risk will grow. Maybe not drastically, but still. So this NPL being below 10%, this is something that we want to maintain -- when interest rates come down. We want to have more space to activate lending. This is very important for us. We've been concentrating on building a strong foundation. So we were working both on the numerator and denominator of this whole equation. So let me talk about our efficiency. We are one of the most efficient banks in the sector, ROE over 11%. And take a look at NIM, that's something that's -- well, it's one of the higher results that I've seen out there, 5.92%; for the whole year, 4.64%. Sometimes you tend to ask whether that's the peak, of course. Well, we are under pressure, probably or potential for growth is sort of pittering out, but we are a leader. So the level that we got to, this is something that really makes us stand out in the whole sector. On this slide also, let me point out - look at the graph on the right-hand side, gross performing loans and how people overpay their mortgage. And right now, the volume of performing loans is at a stable level, which really is relevant from the point of view of high interest rates. And well, our asset mix can really work in our favor, and it does, and you can see that on our interest results. So let me start by talking about business customers because I want to show you how much work and how much effort we put into the small, medium and large segments. Look at our asset balance, it's grown by 6%. We have been saying all along that we wanted to increase or get back to the path of growth with business customers. Our NPL grew by -- our NPL fell by 4.1 percentage points, which really matters from the point of view of the future from the point of view of credit risk. Sometimes you ask whether we open up to business customers, do we know how to do it so that it doesn't come back and bite us in terms of cost of risk. We can, we know how to do it. We have certain preferred industries. Preferred industries, meaning ones that we understand, meaning ones that we have figured out and meaning ones that we understand the customers that we are going to fund. So the share of sales to preferred industries grew by -- grew to 20%. So we are developing the culture of risk in business, so that our customer managers, not only process applications in a way that's knowledgeable and reliable, but also later, the way they work with customers should also be very competent to build this culture of risk. So we will continue to do this. 20% -- nearly 20% growth of our asset balance -- the asset balance that we serve. And also, I wanted to show you the direction that we're going because, well, the share of factoring in new sales also changes. So we are dynamically improving, enhancing the quality of our portfolio in business customers. It's a very, very deliberate policy. We have some preferred industries that we want to work with. So it may -- of course, it will not be effective unless we build a strong relationship with customers. BankConnect is one of the services that helps us do this. So we're building a strong relationship, but not only through offline branches. And we increased the share of automated decision-making processes. This all goes to show that we understand customers better and that's why we can automate credit processes. When it comes to technology and projects that we've been implementing, it's been a very good year. We signed with Comarch to introduce new online banking -- the online banking concept. It's one of the pillars in our strategy. And this contract has been signed, as I said, so we are now entering the implementation phase. We've also implemented a process for opening a new bank account with us. We estimated it at the level of 2 minutes, that this would be the time to -- that it would take to open a new account. Right now, the shortest time, the fastest one we recorded was 5 minutes, 40 seconds, but it's still fast enough. In this area, we will focus on acquisition. We will focus on transactions, on building relationships, and this would be our starting point to start building volumes. Knowing our customers better, we will be able to build better quality assets. So now let me move on to retail customers. Mortgage loans, sales of mortgage loans, well, you all know how the market has been falling. We fell a little bit less than the market, which is not much comfort because the volume these days is simply quite low. But still, our market share in new sales, it's over 6% and market share overall is around 3%. So there's 2 reasons why we want to build on what we already have. We want to increase our portfolio, diversify it, and of course, again, build relationships. But at the end of the day, I believe that this product or mortgage loans, well, that's an important starting point when you want to build relationships with customers and, of course, profitability of other products, because that's the relationship we want. We want customers using many products staying for many years with our bank. When it comes to cash loans, that was a year of strong pressure. We are getting to the level of what we have -- I mean, nearly half of sales of cash loans is happening via online channels. This is really important. And in this strategy, we are going to focus very strongly on building omnichannel capabilities so that we can generate our offering and quickly wrap up the process, pay out the cash loans, to make it all very efficient and quick. Consumer finance. Well, in 2022, we have clearly shown -- we showed that we were the leader of consumer finance. We are trying to anticipate trends. We have started working with RentUp and Komputronik retail chain. Komputronik, you can go there, to their stores, and you can lease their equipment, computer equipment and then replace it with new equipment in 12 months' time. So that a service that's developing. It's developing all around the world. So probably -- actually, apart from Buy Now Pay Later, leasing of computer equipment will become something very popular, especially that we are very strong with younger demographics, with younger clients. So now let's talk about our relations and relationship with our customers. We have a growing number of customers who treat this bank as their #1 bank, and this is where they receive regular credit. So we're using BLIK transactions. We're using value-added services to build this relationship. And of course, we want customers to not only download our apps, but to be active and actively use them. And we have 1 million customers already. So we see this trend, that customers tend to get redirected from online banking to the applications. And it is a trend. It, of course, is reflected by our CapEx and it's one of the dominant channels -- or we want the mobile app to be our dominant channel when we're talking about remote channels. As we go back and think about 2022, we need to mention one important project. We are developing what we call InfoNina, which is a bot that helps serve our hotline, which really allows us to cut down the time of serving our customers. If a customer use mobile app and they have a question, they have a concern, a lot of these customers really want to contact InfoNina, they do, and they get their issues solved. InfoNina is really special in terms of InfoNina and in terms of the quality of its app. If these 2 processes continue working together well, then the NPS we're going to get among mobile customers is going to be even higher than it is right now. And one of the main drivers of the quality of service and the time duration of service is automation. InfoNina has been serving the nontransactional processes. But this year, it will also start serving the transactional processes that are right now still served by human beings. Alior Pay, that's another of our implementations, Buy Now Pay Later. That was a response to this trend. And according to the Polish Economic Institute, the value of this is -- this market is PLN 2.5 billion, and it could grow at the level of several hundred percent annually. Over 60% people who have already used that capability. That's the highest rate in the entire European Union. Some of you are asking where do we see the potential in that? I told you about the BNPL market. it's a big one and it's growing. We've introduced this service for some of our customers, and we can see that NPS is really high with this one. We're very happy about it. We're working on this product. We have some initial applications coming in already. We have some feedback from customers, so we are planning to roll out somewhere in the middle of this year, so that it's available for all customers. Our customer base is growing and our model actually covered the whole market. 80% of the transactions are outside of e-commerce and 20% of these transactions happen in e-commerce. So there was a niche that we decided to use. We told you about it when we presented our strategy. It turned out really successful. And this product is very much in line with what customers want and need from the point of view of ESG, from the point of view of inclusion, from the point of view of -- well, if over 60% of customers in Poland have used this service and if they were to stay outside of the banking system, that wouldn't be so good. We actually report our data to BIK, the Polish Credit Information Bureau. We do this absolutely responsibly. So now let's move on to ESG. 2022, this was a year that saw us working with NGOs, working with the government to help and assist and support those who came to Poland over from Ukraine. That's a very big step in developing the S in the ESG mix. After we presented our strategy, some of you were asking us what was our ESG concept. First of all, supporting micro and small businesses in the energy transformation. Actually, a lot -- some of our customers are right now using our eco products. So I would say, green products, developing the S in the ESG mix, which will help us, of course, build good relationships with our customers and which will create an image of us as a responsible bank as well as a good employer. We've introduced reskilling services. We have a very good health care offer. There was a study done among employees of the Polish financial sector and Alior was #22 in the whole country. So maybe we sometimes don't do a lot of things with fanfare, but we certainly do things and we certainly get things done. It's also a year of initiatives which support a healthy lifestyle among our customers, supporting people in need, for instance, those with cancer. It's also various actions to prevent those diseases, health prevention. We have good outcomes when it comes to our employees and we would also like to promote these things among our customers. At gaming, we're also a sponsor of one of the teams in the gaming league. This is where the young customers these days. We are not the #2 bank for the young generation including -- thanks to our TikTok and Instagram campaigns. It's a strategy not just to acquire young clients, but also to educate them so that they do their banking responsibly with us. They learn about financial services and tighten their relationship with us, which would later translate into better results for the bank. That's it for me when it comes to selling up our business and CSR for last year. We'll now go to credit risk with Tomasz.

Thank you very much. Hello. As Grzegorz said, the most recent period for the whole capital group involved working on our loan portfolio. And despite the fact that the economic and macroeconomic situation last year was much more difficult than in 2021, we can still post very good outcomes. The NPL level dropped below 10%, 9.8% at the end of 2022. It's an improvement by 2 percentage points over the course of the year and almost 5% over the last 2 years. CoR itself is at 1.51%. This is below the expectations, which we conveyed to you a while ago, 1.6%. So PLN 57 million less than in 2021. The economic situation itself has limited impact on Alior's loan portfolio. At the same time, in the coming quarters, we are expecting a downturn. However, we don't think that cost of risk will be over 1.9% next year. Looking in more detail on NPL, we see dynamic -- a dynamic drop. The NPL provision coverage was stable last year with some -- with a small drop in the quarter 4. CoR was stable over the quarters 1.57% over Q4, quite close to the year average. The different business lines. Retail customers here, the NPL was just over 5%, a very good score. Very good levels for various products. However, for business clients, we have a strong strategy of reducing NPL over -- 4% less over the year, stopping at 16% liquidity ratios. Stable over time, and cost of risk for business clients as a consequence of what we did. This is dropping just over 1.1% by the end of the year. More of its portfolio is quite resilient within the current macroeconomic circumstances. We have some rise of CoR in retail customers due to rising interest rates and different burdens on our clients. However, as you can see, the last 2 quarters saw stable results with quite a good level. In other areas, tier 1 at 13% at the end of the year. TCR 14.2, this is much below the regulatory limits. Over PLN 2 billion of reserve. As a capital group in 2022, we did not add profits to our capital. If we were to add it, then TCR would rise by an additional 142 points for it. As for important information in that area, in Q4, the financial commission lowered the capital requirements from 1.47 to 0.15. It's one of the lowest rates in the sector, which tells us that the bank is in a good situation and we are prepared for any potential risks or should crisis come. Unlike capital, liquidity has been very stable. LCR, 166%. NSFR, 133%. So summing up the risk area, we see improvements. NPL lower than 10%. Stable capital situation, very good liquidity. With full awareness, with full certainty, I can say that we are prepared for the year to come.

Thank you, Tomasz. Good morning. Maybe very briefly about the outcomes for Q4 and the last -- the previous year. So maybe starting with profits and losses, PLN 360 million, like Grzegorz said, in Q4. That's over PLN 2.5 billion more than in Q4 '21. As for the whole year, PLN 683 million. That's plus 42% versus 2021. So this quarterly results is somewhat lower than the market consensus would have it, largely due to the points that you see at the bottom of the slide. So number one, creating additional reserves for foreign currency mortgages. So the first PLN 22 million, and for the second one, an additional PLN 44 million. This is the opinion of the ombudsman, which is not binding yet because we're waiting for the ruling. However, in our opinion, looking conservatively at our portfolio, we can expect a bigger share of cases, of court cases, I'm thinking of our CHF portfolio, which is currently worth PLN 134 million, and half of it reserve based. So looking at our Swiss franc loans, this is quite a conservative level. Other factors which have had a bearing on Q4 results was the so-called little Tier 3, plus accounting for the PLN 4 million contribution. One more key piece of information on this slide is the capital return ratio, it's one of our key metrics within our strategic perspective. Over the course of the entire quarter, it was quite high. The 24% is the annualized figure and over 12% across all of 2022, which, again, had various on burdens, was burdened by certain events on that were not foreseeable, such as mortgage vacations or the cost of supporting the system to protect commercial banks or the EWK contribution. The next slide, the interest profits. The bottom of the slide shows that this figure is growing. In both cases, it's around 15%. And we see that this portfolio is slowing down in terms of repricing. And on the profit side, the interest is doing better and better, which bodes well at the interest margin. It's the yellow line in the upper right-hand corner at 5.92%. 2.2% was the financing cost in Q4. So we always have to look at these in parallel. Here we're using -- we're talking about a plateau. We've climbed up to a certain level, which will now depend on the shape of the dark red line. So as the reference rates and VIBOR go up, this has also gone up. Competition on the market, competition for savings accounts, deposit accounts, what we see in the last 2 months is a sort of stopping of the market or slowing down with the market. Looking at credit and the need to get deposits, we've lowered certain requirements. So for that indicator, it currently looks -- the outlook is currently positive. But there is another factor, customer migration from our current savings accounts to long-term accounts. It's somewhat slower than the level that we saw before the pandemic in terms of deposit structure, but it will also be a decisive factor for CoR. Loan/deposit ratio, still around 80%. A very good figure given the economic environment because we want our assets to be working as a loan portfolio. Moving on the fees and commissions income. So this title tells you all there is to know. On the left, year-on-year, it's risen somewhat, which is good news. And we've said many times that our ambition is around PLN 200 million per quarter, and this remains our minimum aim. However, we see a slight quarterly drop, single digit Q-on-Q. Like the title says, it's not easy on the retail side to offer paid services to customers. Although we do, do that. We have a number of initiatives, including strategies. Similarly on the business side here, we're counting on higher transaction volume, more transactions, which should produce a higher figure in the future. Here, we saw the biggest drop in the quarterly results for currency exchange. This is more than accounting results and accounting phenomenon and it looks a bit better in terms of the economic outlook. We're also glad to see more of the currency exchange transactions, more credit cards, and these are products which are growing. Operating costs. So here, starting with the key indicator cost-to-income ratio. It's doing very well in Q4. Same for the whole year, it's quite close to our target. It was also impacted by the numerator and denominator, like the mortgage vacations, the EWK contribution and other factors. So we should look at this both within the context of inflationary pressure, which definitely exists and will be around this year and next year. And our strategic ambitions, which we talked about at length a month ago, we see developments on -- tech development, which is costly. So moving on to quarterly costs, what you see here is the salary costs, which is over what we had declared, 10% year-on-year. However, in quarterly terms, it's 19%. But it contains both the time-off reserve and reserve premiums and benefits. As for the results for management costs, it's as anticipated. Marketing, training, development costs, largely ITVs are growing. And as we said, they will be higher due to the implementation of our strategy and for prices on the market. If we were to sum up costs, we are on a par with the inflationary levels looking both at pressure and the fact that this pressure exists on the cost side plus strategic pressures. So looking at our targets for the end of 2024, again, we are on our way to plus 13%, which is very good news despite the events in 2022. The rise of ROE, 11.3%. So we consider this a solid and satisfactory result given the events. Cost to income, slightly higher. However, again, I think that we're able to effectively manage on the process of -- both our changes and our operational activities to bring you that results, a result below 45% by the end of 2024. Tomasz talked quite a bit about capital. These are also good results, which bring us closer to our goals, including requirements. Cost of risk, and, that's also at a very good level. And NPL as well, we want to get it below 10%. So just to conclude why Alior. Just like Grzegorz said, we have come back to a WIG 20, which is very good news.

Thank you very much for that. And let's move on to our Q&A.

So the first question, what about the Alior Pay service, how popular is it? And how much is it -- our customers able to pay?

Well, when it comes to Alior Pay, definitely, I have to be very careful because, well, our competitors don't sit and wait. But we are happy with the initial phase of implementation. We have offered this product to a preselected group. Of course, we offer it to more and more new customers. Around 80% of people successfully paid their outstanding balance within the 30-day period. So the free-of-charge period. 20% of the portfolio is paid in installment and is being serviced on a regular basis. But these are not large amounts. So when it comes to what we planned and what we expected, we are positively surprised by a high share of non e-commerce transactions. So many customers use this balance to defer bills or POS purchases. So actually, we're seeing that maybe, probably, somewhere midyear, we should try and offer a complete, comprehensive product for everyone, and we see it's a good direction. Well, 20% of payments in installments, is it something that we expected from the point of view of our results and how it impacts our results? Yes, it's something that we expected. It's something that's very much in line with what we anticipated. When it comes to the results, we are above our initial expectations and assumptions. So we're really looking forward to full comprehensive rollout.

Thank you so much. The following question, the level of administrative and overhead costs, should it -- from Q4, should it be treated as the baseline for 2023? Or are there some seasonal effects or some extraordinary occurrences that's inflated?

Well, Q4, as I said -- I've mentioned it briefly, in Q4, we usually observed certain effects that tend to inflate these costs. Like, for example, last year, higher intensity of marketing campaigns. We have also accounted for some of our R&D efforts. So we look at it at an average. We will look at it as an average, so it would be a lower number, somewhere closer to PLN 430 million, including inflation.

And the following question, what about cost of risk this year? What will it be in different products and segments like cash loans, business customers, mortgage loans?

Thank you for this question. As I said before, for the entire Alior Group, we expect that cost of risk will not be higher than 1.10%. In terms of business customers, we for now haven't observed any negative impact of the current economic situation. This segment seems to be quite resilient. When it comes to mortgage loans and retail customers, we do expect a certain worsening because the mortgage/credit vacations are petering out. Last year, people could take 2 months off their mortgage payments. This year, 1 month. But I don't think it will have a huge impact on the results.

Thank you. The following question, it's about hedging. Negative impact of hedging on interest cost has increased marginally in Q4 2022. So can you believe or can we say that the impact of hedging will not change all that much if interest rates don't change much?

Well, let me go back because at the beginning of last year, we were saying that the impact of hedging is significant. And as you can -- as you know, it's becoming less and less significant. And well, you were asking what should happen, assuming that interest rates don't change. We've presented it when we presented our strategy. Definitely, I would say our portfolio is amortizing, there is a certain attrition. So I would say in the half -- in the second half of this year, we are expecting a significant reduction of this cost. But again, let me stress in its entirety and in the entirety of our hedging strategy, we, of course, run a systematic policy to reduce the sensitivity of our interest costs. So we are involved in hedging. So both in 2022, 2023, these transactions are with higher interest rates. So in the future, situation should improve or this particular line of our results should improve.

Thank you so much. And the following one about MREL. Is how you're planning to issue MREL? What amounts are we talking about?

Sure, of course. We do have some needs that amount to around PLN 1 billion, so we will issue gradually throughout 2023.

Now what's the balance sheet value of mortgage loans, CHF-denominated mortgage loans, gross value?

Well, balance sheet value gross, PLN 134 million. I think it was not -- yes, Note 14. This is where you'll find more about it.

Thank you. Well, does the bank believe that the reserve for the cost of credit vacation is sufficient? Is there any adjustments in the plans?

PLN 502 million as the total cost of credit mortgage vacation. And in Q4, we did not establish any new reserves. And we do not see any special threats that would call for creating a new reserve, PLN 502 million with 67% participation.

Thank you so much. We are done with questions for now. Of course, please contact Investor Relations at any point if you have any questions, we will be happy to oblige. Thank you, gentlemen, for your presentation. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call].