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

Ladies and gentlemen, this is Dominik Prokop from Alior Bank. Let me welcome everyone to this conference where we summarize the very good 2024 for Alior. As every quarter, we will begin by a presentation of our financial performance by members of the Board. Piotr Zabski will present the main trends, and our results in terms of the volumes and operations; Zdzislaw Wojtera, the Deputy CEO will talk about finance; Marcin Ciszewski will talk of the risk. In the second part of the meeting right after the end of the presentations, we will have a Q&A session. Before I give the floor to Piotr, let me remind everyone that you can ask questions during the first part and we'll collect those questions and that will be a good segue for the second part. Piotr, over to you.

Good morning. My name is Piotr Zabski and since November, I have the privilege of working at Alior Group and I'm the CEO at the bank. Yesterday, the Supervisory Board has approved our financial statements. The auditors opinion gave us the go ahead, there were no comments. So it's a great pleasure to be able to host this meeting today and to present our financial performance to you. If I were to summarize what happened at Alior last year in 1 sentence, I would have to mention a record performance. This was the best year in the history of the bank, and in order to show you some more details, let me say that last year, the bank exceeded a revenue of PLN 6 billion. This is a growth of 8% year-on-year. The net interest income grew by 9% and our net commission -- now our net income was 20% more than in the previous year with net profit being PLN 2.445 million. And that's the best performance that Alior has ever had in its history. Our capital position is safe and stable. We have a significant surplus over the regulatory minimum, and that means that we can think about a future strategy and the potential growth in the future. An important point I would like to draw your attention to, is the fact that our cost of risk has gone down significantly. This was yet another year where the bank did some important work in this area. And as you can see, the CoR at 0.62% was down by 0.37% compared to the previous year. Now for the NPL, it was down to 6.81%, and this as far as I'm concerned, is one of the most spectacular cases of NPL going down on the Polish banking market. I will come back to the NPL in a moment. But right now, let me draw your attention to another aspect that has to do with our customers. The number of customers who have a main relationship with us, which means their salaries are transferred to our bank over 1 million, which is 65,000 more than at the end of 2023. It's also worth emphasizing that we have a growing share of customers who are using the mobile app. This is a very good tool for us to do more banking business with our customers and to introduce our customers to more products that we offer and to develop a relationship with them. A significant part of our growth came from the growth of our mortgages. As you realize, the [ split on the ] credit safe loan program was ended last year. We did participate in the program and the share of those loans was about 1/3 of the complete portfolio. Last year, we gave 11% more of the loans than in the previous year. When we talk about the NPL ratio, what is important is what you can see on the screen now. To the best of our current knowledge, about the conditions, prerequisites to the payment of a dividend. It is our intent for the dividend for 2024 amounting to 50% of the profit we paid out, this is our intent. It's the financial supervisory committee that has to agree and express its individual opinion about it. We're still waiting for that opinion, but according to all the conditions, we know we have met all the prerequisites, and it seems safe that we will be able to pay out 50% of the profit in the form of a dividend. Let's now move on to other parts of the presentation. We had a 4% growth in assets year-on-year. The volume of the deposits went up by 5%. And our gross performing loans were up by 3%. In terms of our efficiency, we have our performance for the whole year in the top line and then the last quarter of 2024 in the bottom line. Cost-to-income is below 35%, NIM, net interest margin, about 6%, which is an improvement year-on-year. And the same goes for return on equity at nearly 24%, it's slightly lower on a year-to-year basis because half of this position last year was under capital. And then we have cost of risk, 0.62%. Like I said, this is an improvement on the previous year. And as for TCR, it's at 18.27%, which is also a clear improvement on the previous year. And the same goes in terms of the trend and improvement in the last quarter. Now let me move on to a business part of this presentation. As you know, we have 2 business lines. We have retail customers, corporate business customers. So let's start with retail. I would like to emphasize that we have a large number of customers with -- whose main banking relationship is with Alior, we always have some customers in this group and other customers we only have a weaker relationship through consumer finance for example. In this main area grew by 7% at 65,000 new customers. That's a growth of 17% of the users of the mobile app, plus 189,000. Our business is going digital. When looking at the digital sales of loans, we're at 31%. Now moving on. This is a bird's eye view on the deposits from our customers and the structure hasn't changed much from one quarter to another. If we compare that to the previous period, 28% and the deposits are going up. There is also [ 80% ] growth in our investment funnel. This is the first positive result last year. Now for gross loans to retail customers is nearly half-on-half, and a growth of 3%, and see new volume generated. As far as consumer loans are concerned, and we're a clear leader of this market, 8% growth year-on-year. And for cash loans, installment loans, both these items have gone up. In the bottom of the right-hand side, we can see mortgages, the 2 -- the yellow bar is the so-called Safe Mortgage program, at 2%. And that went down maybe to 0 in the last quarter, but we are very happy to see that there has been a rebound and the natural sale of mortgage loans without governmental support has gone up is very clear, and we have seen many more mortgage applications from customers in the last quarter. And this will also spill over to the first quarter of this year. Moving on. This is the business customer segment, that's our second business line. Here, there was a growth of 1.4% in terms of revenues year-on-year and 3.8% in terms of revenue after as a cost of risk. And there was a very significant improvements in the NPL. Last year, we worked very hard on improving this particular parameter, and our market share in terms of sales is at 4% -- 4.3%, and we can see the total committed loan limits. We have new sales tools and there are very clear growth that we are very happy to see. Well, as far as business customers are concerned, we focused on improving our risk parameters. That's why the loan volume as such has gone down a little bit. But the non-performing portfolio has gone down as well as you can see in the bottom left-hand corner. So this is a very clear focus on improving the quality of the lending portfolio. We're preparing for a stable growth in the coming quarters. The growth in the business customer segment are presented on this slide too, we've got the micro segment with a growth of 18%. Now this is a very important segment for us. We want to do a lot of business in this segment. SMEs, small, medium enterprises and also large segments, the number of orders executed remotely is growing. We have a new online application with latest solutions that are already giving us good results. So in recent quarters, all these online parameters are very good. We also have our activity with Alior Leasing, which is our daughter company, and it's at PLN 6.6 billion in terms of its portfolio, which is a growth of 6% year-on-year. Now Alior Leasing focused on those segments in its operations that grew much faster than the average for the market, the machines and devices grew at 25%, whereas the remaining market in this segment grew by 5%. Also financing for vehicles below 3.5 net tonnes. Again, we had a very good performance, which was much better than the rest of the market, we were at 21%. So these are very significant elements of our offer for the business customer, and that's why we will keep developing our Leasing business in the coming quarters. Alior Kids, we mentioned we wanted app for kids between this -- the age of 7 to 12. This app is under full parental control, you can pay with a card, you can pay with BLIK. So the parents have full control over their child's financial situation. And this is also a bit of a public service mission, if you will, in educating children about finance. We also have integration with the Shoper platform, this is embedded finance, which is basically a plug-in for an online store. So whoever wants to use Shoper will be able to use this plug-in and use Alior products to finance his or her sales online. This is it for me. It was just a brief discussion of what happened in the bank last year. And we are now moving to risk. Over to Marcin.

Good morning. Firstly, let me tell you that the capital position for the end of last year. In the fourth quarter, there were 2 events, which impacted the position. The first one was classifying 50% profit into own funds after the first 3 quarters after the agreement from the Financial Commission. And the second event is the redemption of bonds to PLN 70 million, which resulted in both ratios, TCR and CET1 to equalize, and reached a level of 18.27%, a very safe capital position above the requirements, which gives us a large margin for development PLN 5 billion and PLN 4 billion, respectively, depending on the ratio. As far as MREL TREA is concerned, a safe result of 21.78%. On the right, you see the liquidity ratios, both the short term and long term. They are both above the regulatory minimum, which are 100%. LCR was at the level of 202% and NSFR 147%. In the next slide, we want to present the risk cost and the NPL ratio. In the previous year, as Piotr mentioned, we continued our policy of managing the credit risk, which translated into a stable position. The cost of risk stayed at the level of 0.62%, and the NPL ratio dropped to 6.81%. As far as the cost of risk is concerned, we took into account the non-cyclical events like the sale of non-performing portfolios, excluding the normalized cost of risk, and then we would have 0.8%. We assume that in the next periods, CoR should not be divergent from that level. As concerns our credit portfolio broken down into retail and our corporate sector, the loss of value in the retail sector section dropped to 2.81% (sic) [ 2.91%. ] So we are below 3%. And in the corporate sector, it remains at a similar level as in the third quarter. However, compared to the end of the previous year, we dropped from 15% to 13.65% as far as the impaired loans are concerned. As for the provision coverage in the retail portfolio, we have 59.3%. And in the corporate segment, 47.2%. The main elements here are the structure of the loan portfolios and the guarantee levels. As far as the cost of risk is concerned, you can see that in the fourth quarter, there were one-off events, which were the calibration of our indexes, which we use for the calculation of write-offs both PD and LGD in terms of the retail customers, this brought about the decrease of write-offs in terms of the business customer, it resulted in a rise in the write-off level. Thank you. That is all from me.

Good morning. Now we move on to the financial part. As you have heard in the first part, the revenues grew quite impressively by PLN 428 million over 224 (sic) [ 2024 ] and reached PLN 6 billion in assets. As we look at the net profit, PLN 415 million, which is 20% and allowed us the net profit of PLN 2.4 billion. If you look at spread into quarters, the third quarter seemed to be better than the fourth one. But this is illusory and let me correct it, the quarters, all of them in the previous year were comparable. If you look at the fourth -- at the third quarter, it should really be corrected by PLN 24 million of the reserves because of the unused credit holidays. And if we deduct that, then the 2 figures, the third and fourth quarter are comparable. If you look at net profit, the differences are slightly greater, but let me address this in a different slide, how it looked like broken down into the third and the fourth quarter. There was simply no linear breakdowns in the context of setting up the reserves. Most of the costs were accounted in the fourth quarter, but we will explain this further in the fourth slide. In this table, you have the income statement. Let me draw your attention to 2 periods, the fourth quarter of 2024 and the whole of the 2024. As we mentioned, we have a very good income result, a great net profit result. But let us look at the more interesting positions. For instance, the interest margin in the fourth quarter was 6% and in the whole of the year, 5.98%, which is an impressive level. We managed to bring down the cost of financing, which in the fourth quarter was 1.82%, which is a drop by 0.35 pp where we had 2.6 (sic) [ 0.62% ] in the cost of risk. A very good value cost-to-income ratio around 26% (sic) [ 34.9% ] and ROE net, almost 24% very good results summing up 2024. Now if we look at the breakdown into different lines of business, if we look at the interest income, you can see an increase in the left bottom corner, 9% increase year-on-year. And as for the structure of income and cost, the biggest progress is noted in the decrease in the interest income because of the over liquidity of the market and the greater level of financing. Because of the decrease in interest rates in previous year, also a lower level of hedging and guarantee, which gave us the result of [ PLN 320 million. ] Looking at the parameters here in the slides, we are very well developing net margin, which is at the level of 6%. Congratulations to risk department because for the profile of activity, the 60 basis points, which brought down net margin to 5.41% is an impressive result. If you look at the financing cost from 2.16% to 1.82%, which is great progress taking into account the financing cost, which we had at the previous period. As far as the loan-to-deposit ratio, it is characterized around 80% throughout the year. Coming back to the interest result, you could have an impression looking at the third and the fourth quarter that there is a drop of 3%. But if you take into account the correction in the third quarter, which I mentioned, namely the dissolution of the credit holiday, and a one-off event in the fourth quarter as well because of some technical accounting were those sale of the government euro bonds. As a result of that, we had to correct our interest results by a figure of PLN 20 million from the point of view of the income, it is neutral because it became part of the trading profit, but it brought down the interest level by 3%. And so the -- if you discount that, then there will be comparable results in the third and fourth quarter. As for the commission income, it grew by 1%, we will make a lot of effort to have this at a stronger growth. If you compare the third and the fourth quarter, there was a 4% increase because of the payment cards servicing, which was better by PLN 4 million in the fourth quarter. And if we look at the fourth quarter of 2023 and the fourth quarter of 2024, you can also have an impression that these quarters -- that the subsequent quarter is worse. But in 2023, there was a change in the currency exchange where the result was increased by PLN 20 million, and it should be broken down into all the quarter of 2023, but we did as a one-off event at 2023. So it slightly distorted with the commission result in the fourth quarter of 2023. As from the current year, there will be a correction where the brokerage provision is added to the commission results. As far as the costs are concerned, the most crucial information is what you see on the right-hand side, namely the rise in cost, which is 7%. But the quarter distribution is not too good. We will make our best to have comparable results between the quarters to have a clear trend visible. But it so happened in the third quarter that for the cost to be low they had to be put in the fourth quarter. What were these items? Well, an increase in the salaries, which was accounted in the fourth quarter because of a good result of the bank. We stayed here PLN 44 million. But in the third quarter, we dissolved PLN 14 million of the holiday reserve fund, there's a correction. So in fact, it was PLN 30 million is the actual increase and the personnel costs because of the marketing activities in the last quarter is usually higher IT costs, and the advisory costs higher in the fourth quarter. We also set up a reserve and the value of [ PLN 80 million ] in depreciation for projects that should be settled by the end of the year. So that's the distribution of the cost. Now I hand over back to Piotr.

Thank you. A brief summary. What we should remember from the conference is a record level of the income result, PLN 6 billion, PLN 2.4 billion, a record result. Since this is the past already, let me now focus on the future of the bank. As you can see here, has a very stable position to continue growing. The first signs of the growth were identified in the fourth quarter 2024 capital position, a lot of surpluses, we can consider considerable growth, quality of the portfolio has been improved. And in terms of the business customer, slight corrections will be made where we will be able to grow as we do in the retail sector, both in terms of mortgages and in deposit accounts. We have a 2-digit growth. The interest margin at a level of 6%, which is very high. And the growth of the relation customers is another important aspect. Our high performance due to an increase in revenue and financing cost optimization. We need to consider this parameter very closely so that we remain effective. We are a consumer finance market leader, and we want to maintain this position in a sustainable manner. So a lot of work is put into it, especially in terms of e-commerce. This is the door through which about 500 customers walk into our bank, and we want to leverage these customers and transform into transaction customers, the ones who leave their salaries with us who use our deposit accounts. I mentioned the mortgages, strong growth in the housing loans in the portfolio. And another aspect which differentiates us is that there is a negligible share of French franc's housing loans in the portfolio, and this is a very low level of the portfolio. And the final statement that we want to leave you with is that the bank for the second year running is ready to meet the conditions to pay out the dividend to its shareholders in the level of 50% of its income. Thank you very much for listening to the presentation. And now it's over to you. We'll be happy to answer your questions.

Thank you. Let's now move to the Q&A, question for the bank. What level of lending does the bank expected in mortgage segment, given that the governmental subsidy program will not be ready before quarter 4 2025.

We have already seen a lot of growth in sales last quarter. There are even -- there is an even better growth in terms of the applications for mortgage. It is our intent to grow in mortgages faster than the market. We are working on some processes to make sure that this happens. It will take some time. So this year might not be as spectacular as we might want. But this is definitely one of the 3 foundations that we want to build our relationships with our customers on. So this will definitely grow faster than the market average.

Question number two, has the bank completed the approaches of cleaning its business customer portfolio and we have a similar level of NPL in the coming year as in the last year?

We are still working on the quality of the portfolio. We are considering different options, including selling it to an external buyer, but it will depend on the conditions we might get. Now looking at what we have achieved so far and the effect -- the basis effect means that any sudden or large reduction will be difficult to achieve, but we will continue working on reaching it gradually.

How will you improve your commission performance? What sort of growth can we expect?

Now in terms of retail, we have a very strong consumer lending foundation. We are now working on the relationship and transactional-based banking where we want to ensure a stable level of commission. The growth in micro and in SME segment should make it possible for us to achieve these goals. And we would like to have a significant growth. Hopefully, there will be a double-digit share of commissions in the total net profit.

Will the larger number of requests for restructuring in the micro segment, can they be construed to be a symptom of a wider situation in economy or is that a one-off?

This has been reflected in the parameters we have shown. You are correct in how you read this, [ PD and LGD ] were significantly impacted by this in the business customer segment. But we do not expect any negative changes in how the complete portfolio behaves in the future.

The next question is, what was the level of WFD at the end of 2024?

48.5%.

Next question, in Q4 last year, the profitability of assets in loans and securities were down. Does this include one-offs or is this a new basis or new starting point for 2025?

As I said when I commented on the interest profit, there was the one-off of the so-called credit holiday, which impacted Q3 and then Q4, that a correction of bonds of PLN 21 million. If we remove the one-offs, the margin would be 6.2% in Q3 and 6.1% in Q4. So this is a reduction of the sort. It's very big. We are selling a lot of those instruments based on fixed rates. And this anticipates a reduction of the interest rates in the future as a result of which these margins are lower already when we sell them. However, the growth that we want to achieve in 2025 will be dynamic enough to cover these reduced values and to make sure that our interest income remains at the same level.

What is the reason for the lower tax rates in last year and we have a lower effective tax rate in the coming years, will it be better than the previous years?

In Q4, we received a positive tax interpretation for some of our costs, which meant we were able to enter them in the books as a cost items. And hence this effect. In 2025, this will be closer to the values we reported in 2023.

Is it possible for the NPL to go below 5%? And when will it happen?

Yes, this is our goal, and we would like to achieve this by the end of 2026.

What are the prospects for the coming year for the key elements that is your interest margin, your net interest income and so forth.

And as for the NII, the net interest income, as we increased the value of our assets and generate growth, we want to maintain a similar net interest income to the values from 2024 or hopefully improve it a little bit. In terms of commissions, we will -- we forecast growth. We are slightly different from the sector. So we certainly must pay a lot of attention to this. And as for the costs, they track inflation. Again, we have to keep an eye on them, but we are not predicting any significant growth of costs other than marketing costs, the BFG, which is going back to the original values. So it was PLN 40 million last year, it will be about PLN 140 million, PLN 150 million in the coming years.

Next question. What is the bank planning to do with the surplus of CET1 capital, especially in light of Basel IV and the new anti-cyclic buffer?

The impact of the changes introduced on the 1st of January this year, on our capital requirement is 100 basis points. So we are still at a safe level. As we said before, we are planning to use this to grow the bank. As far as dividend policy is concerned, my assumption is that if the expectations of the Supervisory body are the same, we will maintain it.

When are you planning to recreate your Tier 2 capital?

At this point, we don't believe that to be necessary. If this need comes up, we will consider it.

Another question. Q4 2024, the pace of growth of your lending portfolio has slowed down, why?

I assume this is where we present the liabilities of the receivables from net customers. The composition also includes the record transactions with the customers, and there is a lot of variability there. If we exclude that, then the growth was nearly PLN 1 billion in Q4. Post the [indiscernible] of the NII reduction of the interest rate by 100 basis points. This would be PLN 100 million in the time frame of 1 year.

What is the bank doing to reduce the risk of litigation on the free loan?

We were very cautious about this, and we modified our lending offer to make sure that the new volume -- newly sold volume is free of this risk. Right now, the law firms are liable for that and they bear the risk.

What level of operating costs can we expect in 2025 and how stable will they be?

We expect for the cost levels to be close to those from 2024, plus some inflation growth, plus the BFG fund, where the contribution is back to the old values, which is about PLN 100 million a year.

Does the bank meet the WFD requirements? Or are you planning any issues to cover it?

Like we said before, we are above 40% and in the coming quarters, the bank is forecasting for the capital to go up. The issue of bonds, again we -- rolling 1 package and issuing another package.

What is your assessments of the risk of the further increase in litigation regarding the free loan?

Comparing this to the other risk as we have had in the past, this is nowhere close to the Swiss franc backhaul. But we're very cautious about it. We have been winning more cases than losing. And that's why we reflect that adequately in our provisions. We are talking to the rest of the sector and the supervisory institution, we are keeping track with the situation.

This is it. Thank you very much for listening. Thanks to the Management Board. And we hope to see you in the coming quarter. Thank you. Goodbye. [Statements in English on this transcript were spoken by an interpreter present on the live call.]