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

[Foreign Language] Piotr Zabski, the CEO of the bank will summarize the most important elements; Deputy CEO, will talk about the finance area and Mr. Marcin Ciszewski, Deputy CEO will talk about risk. In the second part of the meeting, after we have finished with the presentation, we will have a Q&A session. Before I give the floor to Piotr, let me encourage everybody who's listening to us -- I would like to encourage you to ask questions during the first part already and that will be a good segue to the Q&A. Piotr, over to you.

Good morning. Let me welcome you to the first conference about the performance of our new strategy. As you remember, we announced the new strategy in late March. It was the very end of the first quarter, and the financial results of that first quarter, it will be commented on today. If I were to summarize everything with just a single sentence, I would say that we are pleased with what we've achieved in Q1. We announced the strategy, and there is a number of things remaining to do. Now the implementation of the changes and the impact of those changes will be seen in the next coming quarters. So Q1 still has some inertia in it. And I'm very happy that the performance we are going to be presented are good in spite of certain one-offs and certain changes to the volumes in our books. We basically achieved what we had planned for Q1, but let me now give you some more concrete details. Now for the first quarter, if we talk about our operating activities, there are a number of important elements here. First of all, the number of customers with a main relationship was over 1 million, which is 56,000 more. And importantly, it's not just the number of customers who -- that is growing, but it's also the number of people who do the banking with us through the mobile app, which is up 16%. So we are keeping abreast of the latest developments and our business is moving to the mobile area. The growth of the deposit portfolio is very important to us and we have grown by 5%, which is PLN 78.5 billion. This is very important to us because this is the sort of customer that we want to build our relationship-based banking in the future. That's part of our strategy. Now in Q1, mortgage loans were an important part of our strategy. This is -- to retail customers. And this has exceeded PLN 1 billion, which is a quarter-on-quarter increase of 32%. This is once we adjust the previous quarter for -- to remove the effect of the governmental support program. Now everything that I've been talking about has been happening in an environment of high interest rates. We remain ready to pay out the dividend at the level of 50%, and this has not changed compared to what we said when we were announcing the strategy. Now revenues in Q1 were PLN 1.47 billion. Our net interest income was PLN 1.28 billion, which is a growth of 1%. And our commission income was down 3%. Zdzislaw will comment on this in a moment. So our performance for Q1 was 100% lower than in the previous year at PLN 476 million. Now this net profit was also impacted by one-offs, comparing year-on-year. The previous first quarter was boosted by one-offs and the current Q1 was worse as a result of one-offs. So the actual performance would have been PLN 517 million, if not for the one-offs. Now the stabilization of the cost of risk is important to us. And again, we are following our strategic plan and we're improving our parameters. And our capital position remains very strong. We have a surplus, which gives us an opportunity for significant growth in the coming quarters when it comes to implementing our ambitious strategic plans. In this slide, we can see that our assets have grown by 6% year-on-year, performing loans by 1%, deposits by 5%. And the main parameters such as net interest margin or NIM at 5.88%, which is 8 basis points lower. And this is the result of a changing structure of assets. We have more fixed rate loans, which is different from floating. So this is the effect. ROE on the level of 16.8%, which is a very good result. Also cost to income at 42%, a very good result. And we had some one-offs here, the BFG, the Banking Guarantee Fund and the fact that we recognize our cost in a slightly different way. And that's something we promised in the previous quarter. We said we would be stabilizing this line a bit more. So being at or about 38% is the current level. The cost of risk is at 0.74%, which is slightly up, but that was because we recalibrated our models, and we're going to discuss it in a moment. And as for our non-performing loan portfolio, we have been consistently improving the situation here, and we're very happy about it because that's one of our key elements of our strategy. Let me now talk about how we do business in individual business lines. We've got retail, and we've got business clients as our main 2 lines. And the first business line for retail customers shows a growth of relational customers by 5% year-on-year. And the mobile app has gone up by 182,000. So our business is moving to the mobile sphere. This might not be as quick as we would have hoped for, but we are also addressing this in our strategy. And in the recent quarter, we tried to stabilize our solutions to make sure they are reliable, and we're happy to see the growth. The new app that we are working on will be ready later this year. So we'll be launching it in late 2025. Here, we can see what's happening on the side of our deposits with a 12% growth for deposit customers who are particularly important in our strategy. It is through deposits that we want to reach out to those customers to offer bank accounts and other products to them and hope to generate growth. In each of these positions, there has been a significant growth. Now for gross loans, we have been up 2% and is 1% up Q-on-Q. It's important to see what we are showing in the bottom left-hand corner, consumer loans at PLN 2.2 billion, PLN 600 million up. And loans are seasonal is also related to how we get in touch with our customers. So the 19% total growth year-on-year is what I believe to be a very solid result. And finally, we've got mortgage loans. The yellow part is the safe loan, the 2% safe loan program. If you look at the burgundy color, 0.4% and these growths are very significant from 0.4% to 1%. And this is, mind you, an environment of high interest rates. So some customers are postponing these decisions, waiting for the rates to go down. There are changes on the property market as well. And we are posting growth here. So even in the mortgage loans, we are growing faster than what could logically follow from our share in the sector. Now mortgage loans, just like deposits are another element of our strategic approach because we want to have long-term relationships with our customers. Now the second leg that we stand on, about 30% of our business is the second business line, namely the business customers. Our loan volume is stable. We are still trying to tidy up the portfolio. We're trying to get rid of the non-performing loans. And the growth we are hoping for in our strategy will surely come. But right now, the key element for us is to stabilize the portfolio in order to be able to say, from the risk point of view, that the time is ripe for growth. Now this is the last month. January and February were more stable, but March for small- and medium-sized companies has rebounded and there is some sales growth. This does not yet translate into the total volume of loans because we still have to deal with the non-performing loans. But the pace of growth is quite promising. And these customers also do digital banking with us. We're very happy about it because we are going to launch our business banking app. We're also active on the leasing market. Our leasing company has a portfolio that's grown by 4% year-on-year. And the sale of new leases is in line with what the market has been like recently. It has not been growing. Mind you, we are not present in all the segments of this market, and we don't have all the products. We need to specialize. And wherever we do specialize, we are very good. The third bullet point shows that when it comes to vehicles over 3.5 tonnes, we are #3 on the market. And we have seen a very significant share in this segment of 15%. So we're happy to see that wherever we put in the effort, the results come very soon. Now this is something I mentioned before, new business customer, online banking system, a new solution with a new technology. And it's a different paradigm when it comes to banking. Through this solution, we give our customers the opportunity to run the company with banking functions in the background. There's an upcoming change of the regulations and small and medium-sized companies in particular, which will have to adapt to the new technological requirements. We'll be getting our solution free of charge, and they will be -- they will be able to run their company with us and the banking function will be, in a way, in the background. We will be supporting warehousing accounts and all the other areas. We are now scaling up the solution and this is part of the strategy, as we said. And hopefully, in the coming periods, this will positively boost our sales. As we said, our brand is one of our competitive advantages. We are now refreshing the brand. There's a new positioning. We are trying to be more of a relational bank to make sure that our customer realizes that if they want to have a long-term relationship with a bank, then Alior is the right choice. No, we have not given up on the bowler hat, that is our distinguishing feature, but we don't talk about the products as much. We focus on other attributes. And the feedback after our first campaign has been very good. That is all from me. Now I'll hand over to Marcin Ciszewski, who will tell us about the risk side of the business.

Good morning. The capital and cash flow position is very good. The first quarter was closed with a very good ratio, both in Tier 1 and TCR at the level of 17.7% (sic) [ 17.37% ]. In terms of liquidity as far as the regulations are concerned, there was a change on the 1st of January 2025. CRR3 was introduced. And so our ratio went down by 120 points, out of which 40 points related to the advanced method change and 80 points, the net impact of CRR change vis-a-vis the credit portfolio. So in both aspects, we have very good capital reserves and also the MREL is a very safe level of 20.61%. In the current year, in the first half, we will be rolling out one of the issues. And at the end of the year, we want to place another issue. As far as the liquidity ratios are concerned, both the short and long term are above the regulatory minimums. 148% NSFR and 257% LCR. Moving on to the risk cost. The first quarter, we did not observe any one-off events like the sale in the portfolio or recalibration of the model. So we can assume that 0.74% of CoR reflects the current level of credit risk. We continue to work on the adequate level of the non-performing loans in our credit portfolio. We want to achieve a strategic goal, which would be to go below 5% in terms of the NPL ratio. If we look at how this breaks down into different segments of our business activities, in the corporate business, we noted a further drop to 13.11% as far as the impaired loans are concerned. And in the retail customers, it remains at a stable level. As far as the NPL provision coverage is concerned, it is also at a stable level for the whole of the portfolio, 51% and in retail, 60% and in corporate, 47.9%. As I mentioned, the first quarter is a lack of one-offs -- which is an important position in the fair value hedge because that is the nature of these instruments. We are well protected in terms of looking at the future, but there is some variability in different quarters. And we can hope that we will have a neutral result in this particular position. As far as the third item is concerned, we created additional reserve. And if we move on to further cost items, let's remember that the costs of Alior Bank in different quarters were quite low. Sometimes they went up considerably. There was a big variability. We will do our best to make these levels comparable. Now taking into account the one-offs, our net profit is PLN 476 million. That is the reported net profit. If we take into account the correction, we would have PLN 511 million (sic) [ PLN 517 million ], which is a very good result. Similarly, in the income part, it will be PLN 1.5 billion, which is again a very solid result and gives a good prognosis for subsequent quarters. In the next quarter (sic) [ slide], there is a detailed breakdown of our income statement. We've already discussed some of the items. I will discuss some others in next slides. What I would like to draw your attention to is the net profit, which allowed us to generate 16.8% ROE. However, the correction by the one-off gives us the level of 17.2% (sic) [ 18.2% ], which is again a very good result. The net interest margin, if we compare year-on-year results in the first quarter of 2024, we had 2.15%. Now we have 1.87%. So a very good improvement with some margin for further improvements. Cost-to-income ratio is definitely below 50% and we will go into greater detail at subsequent slides. Let us consider the financial result, a growth by 1% year-on-year. But if we take into account the PLN 9 million that I mentioned, which represented a shift in the positions between the interest rate and the commercial result because of the sale of the bonds, which were euro-denominated. We noticed a PLN 9 million loss in the interest rate result. So if we conclude that the general calculation, we would have a very solid result. The interest rate margin is under a lot of pressure. That is true for the whole of the sector, but we have very high values in the first quarter, 5.88%. What we are particularly happy about that if we consider the cost of risk level, which tend to go down, it is still very high. We have 5.15% there. As for the financing cost, it has grown as a result of good product policy in terms of deposits. We offer solutions which are taken up readily by customers. As we declared in our strategy, what we want to develop is a base of relationship customers for whom we will be an important lifelong partner or a multi-annual partner at least. If we offer good deposit conditions, this obviously impacts our financing costs. But the change is not very big. So if we take into account the drop in interest rates, which is upcoming, there is still an area for improvement. Our credit deposits ratio is at the 78.5% level. There's a dynamic increase in deposits in terms of the retail banking. Now commissions income, this is a weaker part of our general result. PLN 209 million. I am convinced that in the subsequent quarters, there will be improvements there. However, what I'd like to comment on further, and that is under the slide, PLN 4 million of the lower commission ratio resulted from the safe credit 2%, which gave us considerable commission income. Now we move on from the one-off settlements to monthly installments, which means that some of the income of the first quarter would be distributed in terms of its settlement. So that is the result of the correction. An important aspect of that is the year-on-year comparison in the corporate sector, doesn't show us the renewal or regeneration that is expected by the market. I think in April, we are seeing the first harbingers of positive changes. There is more intensity in the sales activity. However, there's been a slight decrease in the first quarter. That is why we have the PLN 6 million difference if we consider the year-on-year result. Now operating expenses. As I mentioned, if we look at the left side, we see variability in cost between the different quarters. What we want to achieve is a more flat line, which would be more correlated to our income, hence, the additional reserve that has been set up in different cost groups. In total, it is PLN 14 million, and it is within the PLN 16 million, PLN 14 million figure. Without it, the cost would grow to PLN 602 million. If we compare year-on-year, the cost -- the operating expenses grew PLN 23 million was the personnel cost in that and PLN 34 million was the BFG premium cost. There was also general and administrative costs, which grew. Also IT services expenses grew by 9% -- by PLN 9 million. If we look at the increases, the cost-to-income ratio was at the level of 92% if we consider that one of the BFG payments and is settled in January, but it concerns the whole of the year. So if we distribute it and if we take out of the income, all the elements related to the so-called credit vacation, the cost-to-income ratio would drop down to 38.8%, which is the expected result. If we look at the expenses increase, what I can suggest to you is that we draw a lot of attention to the discipline of expenses, and we believe the further increase will be related to inflation. And if we take BFG out, which is something that is not dependent on the Board activities, the other costs should grow within the bracket of 6% to 7%. That is all from me. I hand over to Piotr.

Thank you, gentlemen. We now move on to the summary. We are very happy from the results of the first quarter, which coincide with our strategy. We must remember that to repeat the previous year result will not be so obvious simply because this particular year is burdened with a number of events that did not take place last year. For instance, soon, we will be witnessing an interest rate drop. There is obviously a lot of pressure on costs. We have further payments, for instance, related to BFG. So we need to identify these issues considering our growth that we envisage in the strategy. There is investment that is required. There are technological solutions, which have to be developed. There are some marketing activities shifting us towards a relationship bank. This is obviously something that will bring a delayed result. What we are happy about is that we are on track as far as implementing our objective is concerned. We maintain a leadership position in consumer finance. We have a very distinctive brand, which has been refreshed and which is already bringing profits. And our business model is built on modern technologies and a variety of distribution channels. We want to raise it to an even higher level, addressing some technological changes, which again will bring a delayed result in the future. As regards the cost of risk, NPLs are going down according to the trend. The cost of risk, it is at a planned level and the NPL is on a decreasing trajectory. As regards to return on equity, it is at an expected level according to our strategy and the objectives. As for the surplus and the capital position, it gives us hope for further increases and our activities in relation with the PZU Group concerns on developing new insurance products and that will develop and will bring its results in the future. So this should also translate in good results. And we also maintain our declaration of paying out the dividend at the level of 50% of the bank's profit. So let this be the summary and the strategy, which we discussed with you quite recently. The strategy of an ambitious growth and stability in our results and the improvements in our structure will be implemented together with different solutions, but it will not happen suddenly. We are ready for a long-distance run. We are just taking the first steps. But the first quarter shows us that our position is in accordance with our expectations. I want to thank you very much for our presentation, and we will now be very happy to answer any questions that you might have.

Thank you. This takes us to Q&A. Question number one, did you change your sensitivity to reductions of interest rates compared to the late 2024 in Q1? If they go down by another percentage point, will your sensitivity to that be higher than when compared to the reduction of the first percentage point?

12 months, 100 basis points would mean the net interest result down by PLN 100 million. If this went down by another 100 basis points, that would mean PLN 150 million.

Assuming a reduced interest rate of 1%, what will be the interest margin in 2025?

It also depends on how fast the interest rates go down. Our assumption is that the growth for our business volume will be sufficient to compensate for the reduced interest rates. We will try to deliver the income performance at a similar level to last year. The pressure on net interest margin will mean that we'll be at about 5.7% or 5.8% at the end of the year.

What is the current level of long-term financing indicator?

47.13% at the end of Q1.

Do you have any plans to issue Tier 2 capital?

We have no such plans for this year, but it is possible in the future.

What is the level of reimbursement commission on the cash loans related to the consolidation of loans by the end of the year?

We don't disclose this level of detail. What we have presented has a significant impact in Q1, it was PLN 9 million. So what I can tell you is when we look at the situation in April, this is a significantly smaller scale.

What is the value of SOT-NII indicator as of end of March?

3.4%.

What is your opinion about the potential impacts of the American tariffs? What will be the impact on the Polish economy?

The Polish economy will be impacted indirectly. We live in a globalized world. 1/3 of our business is business clients rather than retail customers. So our business customers, especially the companies that export their products will feel the impact of the trade war and the increased tariffs. We are keeping track of the situation. We could be presenting different scenarios now. But what we have not seen so far and what the tariffs may do is impact the revenues of our business customers, the companies that export things, and that would reduce their performance. And hypothetically, this might impact their ability to repay loans. This is not happening now yet, but this is a potential path in the future.

Why is the bank moving towards monthly payments for insurance? Does this reduce the SKD risk?

Yes, we do that to reduce any legal risk. And also this is an attractive offer for the customers. They prefer to have a monthly payment rather than paying a single one-off payment. It's quite a bit to pay at the very beginning. So from the point of view of this offer being attractive to the customers, it makes sense.

What benefits is the bank expecting to have after the group structure changes?

This is a question to our shareholder is the shareholder that is changing their structure. You have heard about the plans, and we are definitely supporting those plans. It will result in PLN 5 billion in terms of equity not being left idle in the group.

When will the performance and the result from fees and commissions go up?

We are hoping to get a significant increase in commissions in 2026. As we said in the strategy, there are a number of projects that we want to implement, but they require time. We want to give the customers a new value that they will be willing to pay commission for, but that requires time.

Thank you very much. This is the end of the questions. I would like to thank everybody. Thanks to the members of the Board for participating, and we'll see you in a quarter. Thank you. Goodbye. [Statements in English on this transcript were spoken by an interpreter present on the live call.]