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

Ladies and gentlemen, Dominik Prokop of Investor Relations. I would like to welcome everyone to our conference, Alior Bank results conference after the first half 2023. Traditionally, in the first part of our conference, you'll hear about the results and some major trends and some comments regarding our results, and this will be presented by Grzegorz Olszewski, CEO at Alior Bank; Tomasz Miklas, VP CRO; Radomir Gibala, VP for Finance. Then in the second part of our meeting, after the presentation is over, we will move on to Q&A. Before I give the floor to the CEO, Grzegorz, I would like to encourage you to think of questions, ask questions already during the first part, because once you've asked them, we will then be able to move smoothly to Q&A.

Dominik, everyone, Good morning. I would like to welcome you to our results conference after the first half 2023, in the second quarter 2023. Let's move on to discussing the results. You've already seen, I guess, very good results for the second quarter. Let me just point out to our commission related results year-on-year, and this results from increasing interest rates. So interest income is growing. But also let me tell you that in the second quarter, we optimized our financing costs, which also had a positive impact on our results. So let me move on to some of the key indicators to sum up the first half of 2023 for you, and this was very good in terms of risk. NPL was lower by a 1 percentage point. So our risk profile has been improved. And S&P, for example, noticed it, and they've increased our rating. We are a strong bank capital wise. When it comes to our risk profile, we have been trying to improve it, of course, and we have been doing this, but of course, not at the expense of our margins. Non-interest margin over 6%. And well, we do want to lower our risk profile, but of course, maintaining high profitability, this is what we've been trying to do. This exercise is hardly easy to build better quality of assets, maintaining high margins and high profitability. Difficult exercise, but nonetheless, we've been succeeding so far, and this does make us proud that Alior has been transforming so quickly. When it comes to performing loans, it has grown. Even though we have high interest rates, even though we have creditworthiness issues for retail customers, some macro outlooks are also deteriorating. Maybe it's not as bad as the forecast has indicated, but still. So ROE pretty high, and Tomasz will tell you more about it. When it comes to -- sorry, Radomir will tell you about it. When it comes to cost of risk, this will be discussed by Tomasz, very low level, I would have to say. And of course, it was influenced by some one-off events. But I would say the outlook for the second half of the year is better than we initially assumed. And in the second part of our presentation we will explain our expectations for the coming quarters. When it comes to retail customers, our cash loans are growing year-on-year 20%. And you will see that how this translated into our loan balance. Mortgage loan sales, at quite a low level, but it pertains to the whole market. Definitely something that you noticed. We see a little bit of a rebound. I'm not talking about the third quarter, because the third quarter will be very much influenced by the so-called 2% loan. But definitely, wages are growing, so this might lead to a rebound. And well, people have gotten used to high interest rates already, I would say, and they might have gotten used to the fact that their monthly payments are getting higher. But still, they cannot postpone their residential needs or housing needs forever. But still, the market is a little bit is going up, but still is at a very low level. We've gotten back to consumer finance loans. We're selling them again. And I told you during the previous conference that the first quarter was a deliberate decision. I'll tell you more. When it comes to mortgage loans in the second quarter, we got back to the level of the second quarter of '22. And then quarter-to-quarter, it's improved. So we see a revival, let's say, but we're not taking into account the so-called 2% loan. We assume that in the third and the fourth quarter, the sales of mortgage loans will increase, thanks to this 2% mortgage loan. So, cash loans quarter-to-quarter 6%, year-to-year around 20%. A lot has been sold online. And when you look at the balance quarter-to-quarter, this decreasing trend was reversed. So actually high sales is making up for loss of balance, let's say. Of course, it's critical for us to stabilize the balance of these loans. Of course, we want to develop them and so on and so on. But being the leader in this area, it's always difficult to defend your position, especially that we're trying to lower customer risk profile and maintain high profitability from this portfolio, which is a balancing act, which is a difficult exercise, and we have to invest a lot in credit risk systems and online sales systems. And we have been doing so, of course, it's part of our strategy. And you can see the results. So now let's talk about consumer finance. First quarter, we just decided to let it go because our competitors decided to sell these loans at very low prices, so we decided not to get into that. We didn't want to do this. And come second quarter, we got back, let's say. But this kind of pricing policy is unsustainable. So right now, in the second half or come the second half, we are at the right place. And this will, of course, have a good impact on cash loans because those who go for CF loans very often go for cash loans. So what we've built in the second quarter, the base that we've built in the second quarter should help us in Q3 and Q4 when it comes to consumer finance. Definitely, customer relations. This is very important for us. We are revamping our mobile app, and we're delivering services that will improve customer relations. We are bank of first choice for more and more customers. And when you look at the number of motorway journeys or tickets bought through our mobile app, its growing by 30%, even 40%. The personal accounts growth by -- sales growth by over 20%. And of course, our mobile culture, already many customers are using us only through the mobile app, and we've revamped it. As I said, so customers often like to go back to it and there's over 1 million of customers who are active users of our app. Year-on-year, this has grown by 20%, and it's one of the fastest paces of digitalization in the sector. So let me tell you about the number of transfers that were initiated in the Alior Mobile app, nearly 20% up. So people don't just log on, they really -- and stop using it or register and stop using it, but they really initiate transactions, handle operations through the mobile app. The number of BLIK transactions has been growing, well, nearly 40%. When it comes to retail customers, as I told you, the first half of this year, business-wise was very successful, but it's also very successful from the point of view of implementation. When we implement a new solution, usually, we are the first mover, first-to-market with the solution or we are, let's say, one of a few pioneers. We have introduced the 2% safe mortgage loan, and we're hoping for a good business outcome. And I think that it will be a moment for us to recap and it will happen after the fourth quarter. Right now, we're just collecting applications. It's -- so we cannot give you any specific numbers in terms of volumes. But after Q3, we'll already have some initial results. And after Q4, we'll be able to present to you a bigger picture. We have also introduced a home savings account, which is a nice project that promotes long-term saving habits. And I think it's good to promote this habit among children and should be one of our priorities. It's the S in your ESG building, a culture and educating young people about long-term savings, because in Poland, we don't have that all that much. And banks are not funding it so much. So any project to raise awareness around the topic, any projects like this are good ones and will in turn lead to a better, healthier GDP in Poland. Business customers. I think this is something that should be of great interest to you. In this segment, we've been communicating that you don't have a good, versatile -- strong, versatile bank without a strong business customer segment. So we're investing in credit risk for example, to make sure that the funding we grant is happening at, say, low cost of risk. We want to attract high-quality assets, and we want to grow in segments in which we are building new competencies or segments in which we already have solid competencies. And we want to capture the whole relationship. We want to be the relationship bank. It may not be the top segment, but we want to grow together with our customers. So whenever we acquire customers, we want to acquire the relationships, and we're talking about commitments up to EUR 20 million -- PLN 20 million, and we're growing 3x faster than the market. We would like to maintain it. It's not going to be easy, but this is the way we are executing our strategy, because this is where we want to be people's bank of first choice. And up to PLN 5 million -- over 9% market share and commitments up to PLN 5 million. We have been building these competencies. We know how to assess the risk profile of those customers and we have over 4% market share in higher ranges, so we're talking about commitments over PLN 20 million. We've been focused on construction as well, but we're growing in processing as well and we want to diversify our assets. So in terms of margins and in terms of risk, we want to have good results and something that can be noticed in our results in the quarters to come. New credit limits increased by 30% -- over 30%. This is a very good result. And of course, the conversion of those limits is going to progress in the next quarter so that we build our working assets. This is possible, thanks to the fact that we're building big customer service, which is supposed to unburden our employees from their everyday duties, so that close to 50% of orders are executed remotely within the business customer. This effectiveness that is inscribed in the strategy is already being tangible results. This is -- BankConnect, the best -- as a best example. This is an internet banking. BankConnect increases year-on-year, that's plus 41%. And quarter-on-quarter, is plus 18%, and that shows high dynamics of this sector, and we want to build this relation of online banking solutions. And it will translate into our customers growing with us, and it also translate into the positive commission results. We are also developing and automating processes of decisions in new sales. This again translates into clients' satisfaction and improvement of the quality of the assets. In the small and the medium segment, we are growing year-on-year, and we are growing quarter-on-quarter. And we want to maintain this trend, even it is -- one is quite demanding so that we want to be ready in case when economy speeds up and maybe part of our competitors are also thinking about optimizing those areas due to the challenges that we are facing. We have a very strong asset and capital position, and we want to use this like and build on it. And the balance of assets in the sharp execution is actually here in the high dynamics, strong dynamics that only proves that this transformation of the bank when we are reducing the cost of risk with -- at the same time, maintaining high profitability, shows that it's a good direction. We, of course, want to maintain that as well. We would like to maintain this effectiveness. I believe it's going to be quite a challenge, but we are determined to maintain that. When we talk about new implementation, we had a very good first half of the year. According to the strategy, we have been very consistent with implementing new online banking services and thanks to that, we have a growing number of our online consumers. Thanks to that we have a growing number of customers who perceive us as their first choice bank. And we have the system Alior Online, Alior Mobile, and it has been proven to be very successful. We have had some challenges. We've already verified it and we're going to have it adopted for the whole market and its needs. When we talk about social responsibility that has been a very successful half year in many dimensions when we -- whether we supported new talents, whether we cooperated with universities, whether helping those who suffered the most as a result of the war in Ukraine, these are regions such as ChodzMY and this can also be very interesting aspects of promoting new talents and find new talents. But we also had health programs or women appreciation program. So not only do we appreciate our female clients, but also our female employees. So here for, as an example, Pink boxes project. So it's important to put our words into actions and be consistent in implementing them. And we just want to put an emphasis that those initiatives are very diverse and they want to support any social group in Poland and each social group in Poland. And we want to be an attractive bank for our customers. So we implemented a lot of innovative and attractive products, and that has been appreciated. The first half of the year brought us a lot of awards, both home and abroad. And we have to say that we are especially proud of those that are about technology and innovation, because we believe that this -- the main stage, the main step that we can have here, we can make here, this is in the technological area. This is something that's not maybe that visible to you, ladies and gentlemen, I believe it's going to be more noticeable in many other areas and also in the mortgage policy. To sum up. The first half, very successful one, both when we talk about the risk results, Tomasz is going to talk about it in a second. But also when we talk about optimizing cost of financing, Radomir will say a bit more. And also Tomasz, this is a part of his presentation and the implementation of initiatives that will have a positive translation in the results of the bank. Tomasz, the floor is yours.

Thank you very much one more time, and warm welcome to all of you. The last quarter and the past half was very good results on the cost of risk. Tier 1 over 14%, TCR over 15%, and that is 551 base points and 446 base points, which is -- which translates at currently to PLN 2.6 billion and PLN 2.1 billion. If we already summed up all those capitals and the results that would already be a 220 base points. That would be TCR around that. When we talk about TCR, we had already admission that -- LCR also and NSFR, those tools already satisfied our needs for 2023. When we talk about our LCR and NSFR liquidity ratios, they are both satisfactory. This is 169% and 179% with the regulations 100%. When we talk to the cost of risk, another quarter here with the improvement of the results. NPL of the bank -- on the historic -- of the group really on the -- reduction is on the historic level of 9 -- 39. When we take a broader perspective this is improved from 14.5% to 9.5%. So this 1/3 reduction. When we talk about this cost of risk itself in 2020, that was 2.8% and 2021 that was also within the low aspect, that was 1.6%. And in 2023, that was 1.28%, that was the lowest historical result again. It is important to mention that we had 2 instances that improved this result, that was the sale of the portfolio NPL with profit, but also 2 very nice unexpected -- 2 business customers negotiations and their results. I would like to tell -- we were telling you that the current situation does not have an impact on the increase of cost of risk of Alior Bank. And we can see that our long-term efforts on improving our assets have given results, and we are ready right now to activate our guidance for the second half and we're not expecting our cost of risk to exceed 1.4% with the strategic goal of 1.6%. When we get deeper into the cost of risk in the last quarter's impaired loans, when we had quarter-on-quarter, as I mentioned, we finished 9.45% the second quarter in 2033. When we talk about our business line, we have NPL with a very nice level of 53%. And then NPL for our customer -- for our business customer, this is a huge increase here and -- versus last year. And we are continuing our efforts to reduce this risk still. When we talk about our impaired loans that was 16.10%. When we take into our segments, we have a smaller reduction in the retail individual customers. And -- but for the business customer, this NPL is very stable, around 50%. What is important, more than 1/4 part of our portfolio KB is guaranteed by BGK. That means that in the future, we'll be able to use those guarantees to reduce costs of NPL. And right now, it is enough to have the provision coverage. And those when we don't have it, this is the level of 62.8%. In terms of risk. After a delicate peak, we have a reduction again and we can see these really good results in the second quarter, both in the books and with -- including those negative one-off trends and events. And you can see the trends that our business customer has a consistent improvement when we had the situation when the interest rates were peaking then we had a slight of a peak. And then after the interest rates were slower, then we had a better result here as well. To sum up, a very nice situation, very good credit portfolio management with tangible results in the loans segment, impaired loans segments and quite low NPL and COR indicators. And that is all for me. Thank you very much. And Radomir the floor is yours.

Good morning, ladies and gentlemen. So income statement. One more time, we take a look at that. Grzegorz already mentioned the key indicators. I would like to sum it up a little bit. As we mentioned in the previous quarters, if the quarter is going to be good without any events then this is good. Everything is going well, then we definitely want to use this opportunity, and this is the situation that we are actually facing. And since that, we have this profit of PLN 506 million, which is supported additionally with what Tomasz just mentioned with lower decreased cost of risk. We hope that these costs will gradually improve with time. When we take a look at different ingredients here, we have more detailed slides when we have more graphics. Here, we have a table. And what we can see here, it was total profit increasing mainly to the interest rates, that 15% in total in profit. But when we talk about the quarter itself, then we have 19% of costs. Well, cost when we talk what we forecasted, that was the average inflation with the clearing of the one-off events. We -- so -- and here we going to the lower part of the table, maybe a word of comment, maybe our margin. It's on a very nice level, over 6% now. But what we've communicated earlier on, we are still using this moment, using those costs of financing. However, we are expecting it to be around 6%. So we here, believe this is one of the -- if not the highest then one of the highest NIMs in this sector. Then when we talk about return on equity, it's on a very good level to almost 28%. It's calculated on the average equity calculated from the first half. So when we go back to the next slide. To illustrate for you some key lines of our P&L. So let us begin with interest income. So let me start from the graph that's top center. So take a look. Income has been stabilizing or interest income has stabilizing for the last 3 months at the level of PLN 1.8 billion. And just like Grzegorz said, we're working on the cost of funding. And you see that below the dotted lines in the first quarter is lower compared to -- in terms of interest cost PLN 673 million versus PLN 707 million. So we're talking about -- well, there are 3 main reasons why the situation is the way it is. First of all, migration is happening at a similar level. So customers migrate to deposits and it's plus -- well, more or less 30%. When you see the credit market and the loan market and it's sort of plateaued, so we decided that we need to do something about the interest cost, and we can optimize things. For example, for savings accounts or for deposits, we can optimize the costs that we bear. And there is the third factor, namely our portfolio of IRS is -- well, impact us less or impacts the interest cost less -- PLN 14 million less and you will find that in one of our notes about interest income. So again, our margin over 6%, which is super satisfying. Cost of funding for the first time in many quarters has been decreasing, which I think is very much in line with the trends that we see out there, and it's something that we're trying to take advantage of. So on this slide, let me just tell you a little bit about loan to deposit. Loan/deposit ratio is at a high level, and we want to have as many of our deposits to also work just like our loan portfolio. That's why our loan-to-deposit ratio it's over 82%. So let's move to commissions income, 4% growth year-on-year. And you can see that we are very transparent about some of our observations. So you can see the bullet points below. So for example, in our -- there are some foreign currencies factors, there are some accounting factors. So some -- so things have been moving from quarter-to-quarter due to certain factors. So the results you can see on the slide is at the satisfactory level and it's maintaining at a 2-digit level. And we're growing in the insurance segment. As we said, our ambition is to maintain the quarterly result over PLN 200 million. And if we are to choose between shifting costs on to customers in this line and protecting our relationship with them, we're focusing on the foundation on which our strategy is built, namely, customer relations. And we really want to take care of everyone relationship-wise, who is coming to our bank. So, our operating costs have been growing at 2-digit pace. It's more or less in line with average annual inflation rate, 14%. This is what we see when we exclude one-off events. Last year, there was a contribution. We had to make a contribution to the whole system for protecting and assisting commercial banks. But when you look at different business lines, definitely, wages are growing, and this is what's happening in the whole economy. It's happening across the sector. We're doing benchmarking all the time. Therefore, 16% is something that's like the industry average, I would say. So this is the yellow part of the graph -- the yellow bar, general and administrative cost. But there are -- well, we see more amounts going to the borrower support -- sorry, the guarantee fund, we have higher IT expenses and we have higher cost of rents, property, utility bills and so on and so on. We'll be optimizing these costs. And Grzegorz mentioned that we will use photovoltaics in our data centers, which will help us optimize cost a little bit. When we look at cost to income, it is right now at a very good level of 35%, 36% depending on how you look at it. But of course, this is -- well, this is to be expected, so to speak, in terms of cost, but in terms of income, again, we also have a comfortable situation due to our interest income. So now let us take a look at our strategy from the point of view of key metrics and key indicators. So, this is something that's really nice, but it's just 1/4 of our strategy. So, ROE it's at a very good level, of course. But this is annualized, right, but very good. Cost to income again, from the point of view of our strategy very comfortable. And I think -- well, we still have some distance to cover before we hit 45%, but we're comfortable. Tomasz mentioned our equity, Tier 1 and TCR, very safe and our profit for the first half year has not yet been included. And when it comes to credit risk, again, a very decent, very solid situation. So now let's tell you about some of our -- let me give the floor to all those of you who want to ask questions. These are our main let's say, messages.

So the first question is about guidance for COR for the second half. So in your guidance, are you looking at some one-off events? Or are you being conservative?

For now we can't see any special risk for our results in the second half. But whenever we think about the future, we think in terms of scenarios. So we include some negative scenarios as well. And probably, you have got news to the fact that we are a little bit conservative in our guidance. There's always a dose of healthy conservatism.

Are your current administrative costs like the base for the rest of the year?

Thank you for this question. Yes. If we exclude the PLN 25 million that are sort of committed to other costs like litigation. And yes, you can assume that after excluding the PLN 25 million. I've mentioned you -- I mentioned the mid-double-digit, because this is what we're assuming for the rest of the year.

The following question. What kind of -- how much can you decrease your cost of funding given the fact that your hedging comes to maturity in the second half?

Well, you've seen it already. So there is a certain effect already between Q1 and Q2, we're talking about PLN 14 million better. So one could have assumed around PLN 14 million less in interest costs. But just like Tomasz mentioned, we issued some bonds and -- to make sure that we are MREL compliant, and we will have to, of course, take that cost into account. We'll have to recognize that. It's around PLN 20 million to service these bonds.

The following question. What about the appeal of mortgage loans, apart from the 2% safe mortgage loan. What is the interest in it? To what extent it's becoming popular? Maybe your sales in Q2 was like a bump in demand because people were afraid that the 2% loan is not going to come back. So what do you expect for the second half of 2023?

Well, of course, in the second quarter, there was some rebound in terms of demand because many people wanted to buy residential unit knowing that they would not be eligible for the 2% safe mortgage loan. But it was not the only factor at play. First of all, the regulator has changed their approach to the buffer amounts. And again, people's creditworthiness has increased. And again, many people have been postponing their housing residential needs for over a year. At the same time, their wages have been growing, so they might be more eligible to go and take out mortgage loans. We do see higher demand in mortgage loans, not at a large scale, but still. I would say, availability of residential units will become a challenge because, well, for the mortgage loan market to be able to go back to a high scale of the supply side we'll have to move. But when we're looking at the construction sector, we do have exposure, and we see that the toughest periods are already behind us. And actually, we've survived the toughest period in good shape. And you can see that reflected in cost of risk and in NPL.

The following question. What was the impact of additional provisions for disputes and litigation? What was the impact on operating costs.

Well, it's PLN 27 million, you can find that. And the PLN 25 million is sort of over of what we expected initially.

The following question. How are you going to use your capital surplus? So -- well, now there might be a possibility to acquire another bank. Are you considering it and where -- when can dividends be paid?

Well, this question has been sort of reverberating and going back. Our strategy talks about organic growth, of course. But I've already mentioned that in public, on the record that, well, if we could afford it. Well, I don't think it's not the right -- I don't think it's the right time, not now, but if we had additional funds, we have to think about alternative scenarios. But we always have to look at scenarios that will have a positive impact on our bank. So we need scenarios that will increase shareholder value. That's our key concern. First of all, we're focusing on organic growth. We're building equity surplus, but minimum requirements in terms of liabilities are growing. So capital or funding is still expensive. So, the situation has improve compared to last year, but still capital is expensive. Getting funding is expensive, and it could still be a challenge for the years to come. So we do have to maintain balance. We do have to stay safe because we don't want to curb or hinder our organic growth.

The following question. What's your sensitivity to 100 bps of a decrease in interest rates? So what would happen? How would you be impacted?

Indeed we -- well, we are stating our sensitivities in our annual statements. But when we're looking at what the situation is bringing we're making some assumptions, of course, so we can re-estimate our loan portfolio. And we do have some flexibility on the deposit side, but we're talking about, let's say, PLN 200 million for the first 100 bps.

The following question. Additional costs, what kind of provisions for settlement have been established? Are we talking about the Swiss Franc portfolio? Are you -- are these costs going to recur in the coming quarters?

No, we're not talking about legal risk costs. Maybe you remember there was a statement from the ombudsman. And we have -- when we're looking at the number of litigation just for Swiss francs, the provisions that we have established are enough.

Next question. Were the NPL transaction sales transactions in the second quarter, was that about the retail portfolio or not? If not, then why do we see the decrease of NPL.

That was from both segments, however majority -- definitely majority of that was retail, that was PLN 280 million and the retail customer -- individual customer was definitely dominant part, and that was the main reason for the reduction.

How is the project by NPL growing?

Well, it's growing fast enough so that according to our forecast, we're going to offer for the home markets so that each -- everyone, potential clients as well can use it. It is on the path to be developed. We also are planning an implementation of new functionalities that we had communicated in our strategy. That is the remuneration on the go, which means this is an additional possibility of financing, and it's going to be implemented in the second half of the year, you will be communicated and informed about it.

Next question. What is the balance net value of the mortgage loans in the individual clients and CFFH? What is it?

It's PLN 140 million of the denominated mortgage loan in the Swiss Franc.

Next question. We had an article about the whole wave of legal applications on the credits and does that concern Alior Bank as well or not?

Well, everything that may touch our bank is always quantified in the risk and evaluated as a risk. And all the legal issues are included here. So, we are taking our advises of our in-house and outside external lawyers. And this is how we adjust this. However, this does not change the fact that this article -- well, it's yet another dangerous attempt to find some business through the legal offices. And I believe this is -- in the future, this is going to be quite a big challenge to regulate the market of loans, especially that to make sure that clients are going to be able to pay back the loans. Otherwise, we'll have to consider having such products.

Thank you very much. I believe that, that would be all from -- as far as the questions are concerned. If -- should we have anything, of course, we'll answer them. I definitely encourage all of you to send your questions to our inbox. Thank you very much for the presentation. Thank you for your attention and stay tuned for the next results. [Statements in English on this transcript were spoken by an interpreter present on the live call.]