Alpha Bank S.A. (ALPHA) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Constantinos, your Chorus Call operator. Welcome, and thank you for joining the Alpha Bank Conference Call to present and discuss the First Quarter 2020 Financial Results. [Operator Instructions] At this time, I would like to turn the conference over to Alpha Bank management. Gentlemen, you may now proceed.

Good afternoon, everyone. Good morning to those dialing in from the U.S., and welcome to Alpha Bank's first quarter Earnings conference call. It's Vassilios Psaltis, Alpha Bank's CEO; and I'm joined by Lazaros Papagaryfallou, our Chief Financial Officer; Panagiotis Kapopoulos, our Chief Economist; and Dimitrios Kostopoulos, the Head of Investor Relations. Let's go directly to start our presentation on Page 4. What I would like to highlight our reaction to the COVID-19 pandemic. Right from the very start, we have put all our focus on being there for our colleagues and our customers on what is an unprecedented environment. Our #1 priority was to continue providing our services in an uninterrupted way, while also ensuring a safe work environment for our employees. We're really proud of what our bank has been able to accomplish over the past 3 months. Alpha Bank's employees have been at the forefront of the national response to this pandemic. During the lockdown period, we kept our full branch network open across all our geographies, whilst practically all of our employees of the headquarters have been working remotely. Despite this very unique working circumstances, we have been able to keep a seamless dialogue with our customers, offering them moratoria solutions and liquidity products. Needless to say how much our digital capabilities played out nicely to the service of our customers. Looking at our first quarter operational performance, we noticed very little negative impact from the pandemic. On the revenue side, we had a solid quarter of core operating income of EUR 480 million with resilient net interest income when we take into account the expected calendar effect. Fees of EUR 89 million that was down EUR 4 million versus the fourth quarter of 2019, where seasonally fee performance is strong. On a yearly basis, our core operating income was up by 2%. Our cost containment measures lead to continued decrease at our cost base, with our expenses down by 3% year-on-year to EUR 251 million. As a result, our pre-provision income increased by 14% compared to the last quarter. With reference to our commercial activity, we saw a strong loan growth with new disbursements of EUR 1.6 billion, and we witnessed an equally strong performance in deposits as our Greek balance had inflows of the same amount. Following the issuance of EUR 500 million of Tier 2 at 4.25%, our total capital ratio stands at 17.5%, which translates into almost a EUR 3 billion capital buffer. It is worth mentioning that there are relevant discussions for further regulatory capital leasing to which we will refer later in the presentation. The group's liquidity position has improved with our loan-to-deposit ratio down to 95% compared to 103% a year ago. We want to point out that we have made use of the recent acceptance of Greek government bonds as collateral for ECB financing operations. And as a result, we increased our ECB funding to EUR 9.3 billion, out of which EUR 6.2 billion come from the LTRO activity. Finally, as far as asset quality is concerned, we have not witnessed any tangible impact from the COVID-19 yet. Which is related to the debt moratoria that we have put in place. However, as mentioned in the introduction, the level of uncertainty remains high. And in this environment, we have taken a decision to act conservatively and booked EUR 120 million of COVID-19 related provisions out of a total of EUR 307 million for the period. This level translates to circa 100 basis points of annualized cost of risk, solely dedicated to the COVID impact. And this is booked in the first quarter. Whilst it is indeed difficult to predict how the rest of the year will evolve, we're confident that we have been conservative when we benchmark our approach to what other European peers have provided for. And as an important final word, we have continued in the first quarter, a good preparatory work on Project Galaxy, which allows us to relaunch the relevant process in June, targeted signing of the transaction in the fourth quarter of 2020. Let's move now into Page 5, what I would like to stress, Alpha Bank's commitment to its customers, employees and broader society, demonstrated in recent months following the COVID outbreak. For our customers, both corporates and individuals, we have offered various forms of credit moratoria. We have more details on those and their utilization later in the presentation. We have increased the contactless card transaction limit to EUR 50, which automatically increased the share of contactless transactions to 75%. And we are also the first Greek bank to use Apple Pay with activations exceeded 20,000 already during this first month of operation. We also noticed a significant increase in our [ impacting ] offering. In terms of our workforce, we are proud to have kept 100% of our branches fully operational, with half of the branch employees on-premises on a biweekly rotating basis. Due to remote working capabilities, over 90% of our staff in the headquarters were working remotely during the lockdown with weekly costs, regularly updating our employees on the guidelines and policies. We have been looking to gradually bring people back to the office with a [steady] approach. Finally, we have kept our ongoing support for the Greek society, supporting the national health system with equipment and supplies for intensive care units, delivering medical mask for the 6 medical district in Greece as well as helping vulnerable people with home delivery of medicines by our cooperation with Medicines du Monde. Moving on to Page 6. Allow me to start by reminding you that Greece, following close consultation with our regulator we have decided to go down the path of private moratoria in making use of the regulatory flexibility that banks were given to ease the pressure on the clients affected by the COVID crisis. On this page, we summarize the efforts that our bank has undertaken towards that end, demonstrating how close it remains to its customers. This support has taken the form of specific programs that were communicated very efficiently to our clients whilst in locked down via all available channels. For our performing individual and small business clients, the bank has been offering to defer installments until September 2020, whereas an extension of revolving credit lines maturity for 6 months after December 2020 is also offered to small businesses. In addition, we are offering to defer principal payments for SMEs and large corporates until September 2020, while we offer extension of term loans maturity up to 9 months. Obviously, in cases of particularly affected industry like our tourism clients, the offering goes out into 2021. As of mid-May 2020, moratoria offered to outperforming customers reached EUR 3.7 billion, accounting for 15% of our total performing book in Greece. On a segmental basis, most of the solutions offered were on mortgages, accounting to EUR 1.8 billion, which represents 26% of the domestic performing mortgage book. Worth mentioning is also the high tick up by Small Businesses, more than the EUR 900 million so far and also on wholesale clients, which may increase. With regards to implementations, as shown at the bottom end of the chart, the run rate has abated in May after reaching its peak in April. Moreover, our COVID-19 related Solutions reached so far EUR 400 million in Cyprus as well as the same amount in our Romanian operation, with the majority of -- for both countries relating to moratoria mortgages. And please note that both of these countries have introduced public moratoria. Let's turn now to Page 7. In the area of financing, the bank is continuing to actively support its customers. In the first quarter, we have provided new disbursements of EUR 1.6 billion, mainly to highly rated corporates. Out of this amount, approximately EUR 700 million relates to business joins from committed credit lines. Increased disbursements also benefited our deposits as most of them remain with the bank. Indeed, so far this year, new financing has already exceeded EUR 2 billion, and this is going to increase in the coming quarters. On the back of our participation in the government's liquidity support measures via the programs of the Hellenic Development bank namely the new Entrepreneurship Fund II business for funding for SMEs, which commenced in March, and additionally, the guarantee fund for businesses that will be launched next week. More specifically, our SME clients get 100% interest subsidy for the first 2 year with a preferential stable interest rate, fully funded by the Hellenic Development Bank and a 40% reduction in interest rate for the remaining 3 years. Since March, we have received circa 16,000 applications for financing, and we have approved more than EUR250 million of loans, a very strong achievement that came to the benefit of our customers at a difficult junction. The program provides for total financing of EUR 1.6 billion with Alpha Bank's contribution anticipated to exceed its fair market share. In addition, for companies not in trouble before the COVID crisis, but which are affected by the pandemic, the government-guaranteed program provides for EUR 2 billion of guarantees, which can levered up to circa EUR 7 billion through bank's financing. New loans will cover working capital needs on favorable terms and will reduced collateral. Given that the guarantee distribution is going to be according to the bank's market share, Alpha Bank expects to mobilize liquidity of up to EUR 1.5 billion by the guarantee fund. Turning up on Page 8. Project Galaxy remains for the bank a very strategic project. And the group is committed on the back of significant progress that we have been able to make so far to making this a successful transaction. Since we last spoke at the end of March, the bank has continued its work on the various preparatory actions that are required for the implementation of this project. Among others, we concluded the securitization of the Galaxy portfolio, progress the rating workstream by prioritizing the retail secured portfolios, and continue further with the preparation of the wholesale portfolios. The good progress on these preparatory elements, along with the ongoing dialogue that we kept with investors, allow us to happily report that we are relaunching our Galaxy transaction next week with a view to conclude it by the fourth quarter of this year. Now looking at Page 9. Project Galaxy is structured in a modular manner, allowing a wide area of flexibilities to the bank as regards to implementation. These flexibilities have allowed us to calibrate the overall time line and sequence of events in a way that is commensurate to the current market conditions. Throughout the lockdown period, we have continued our engagement with investors participating in the process and have now better visibility and comfort on their priorities, outlook and commitment to our transaction. We're working on the operationalization and subsequent sale of New Cepal. As this, offers a solid investment opportunity to investors who are looking to acquire a market leader in the NPL servicing space that benefits from a strategic partnership with Alpha Bank and has clear upside potential. At the same time, we are front-loading discussions on the retail secured portfolios, an asset class that -- due to its nature, is more resilient to coverage related stresses and further enjoys the support from recently announced government initiatives. In tandem, we are continuing our preparation for the rating of the wholesale portfolio, allowing us to present it to investors as soon as visibility improves, and appetite is confirmed at our visit value levels. Finally, we remain confident that the capital envelope remains well within our initial plan, especially when one takes into account the modularity of our transaction structure. And now I give the floor to Panagiotis Kapopoulos, who will give us a brief update on the macro before we turn into more details to our financial performance over the quarter. Panagiotis, the floor is yours.

Thank you. Good afternoon, ladies and gentlemen. Let me start with Slide 11. In March, the Greek government is produced 3 containment measures to prevent the exponential spread of the virus. Compared to other countries in Europe, these measures were imposed at relatively early stages with the aim to flatten the curve of confirmed cases COVID-19 infection. And in order to provide the health system with the breathing room needed to successfully tackle the increased burden. Greek has succeeded in containing the spread of the virus throughout March and April as it is depicted in the 2 graphs on the right-hand side, and consequently, has entered to the phase of the gradual lockdown relaxation since early May with the milestones presented in the left-hand side graph. Turning to the next slide. Although Greece is today an almost COVID free country, significant uncertainties around the short-term prospects of the economy. The alternative growth scenarios provided by the Ministry of finance, IMF and European Commission, which are presented in the left-hand side upper graph. Very considerably with respect to the size of economic downturn in the current year as well as the strength of the recovery in 2021. However, all of them envisions a broadly similar shape. Increased uncertainty is already reflected in recent European-wide soft data releases. However, as indicated in the right-hand side graph, Greece exhibited smaller drop in economic sentiment since the outbreak of COVID-19 pandemic compared to the euro area average, reflecting the success of front-loaded containment measures, which flattened the epidemic curve as well as fiscal policy interventions. Despite that European Commission projected the impact of the pandemic increase in terms of GDP losses will be among the heaviest in euro zone, the unemployment rate is expected by European Commission to decline cumulatively by 0.5 percentage points over 2020, 2021 period. In contrast to the projected cumulative increases of other European countries as depicted in the left-hand side graph at the bottom. This is because the rise in unemployment in 2020 is mainly associated with the increase in seasonal unemployment in third quarter, mostly related to the tourist industry. The impact of non seasonal unemployment is expected to be limited. Allowing for a sharp decline in employment in 2021 by around 3 percentage points, in line with the projected strong economic rebound. In addition, as we can see in the next slide, the impact of the pandemic of -- in the short-term domestic economic outlook is expected to be moderate by the sizable fiscal stimulus, which allows the country to emerge from the lockdown with a sense of growing optimism. The graph on the left side, depicts the taxonomy of the wide range of measures, subsidies, deferrals and guarantees already implemented presented in the stability program. After the new government measures announced last week with additional EU funding, the total stimulus package reached EUR 24 billion, which accounts for 13% of 2019 GDP. As it can be seen in the lower panel graph -- hand side glass, the set of liquidity and income support measures undertaken is in line with other European countries. And is expected to push in the recessionary impact of COVID-19 in 2020. It pave the way for a strong recovery in 2021. It is worth noting that on top of that, Greece will be allocated [ EUR 22.5 billion ] in the form of grants and EUR 9.5 billion in the form of loans from the European Commission proposed yesterday as a recovery plan of [ EUR 750 billion ]. The amount allocated to Greece is around [ 18% ] of its GDP, if approved, at the end, it will substantially improve the medium-term prospects of the Greek economy. The France measures, except for capital suspension of tax and social security liabilities place an emphasis on employment protection, mainly financed by the fee program in the European Union and provides special seasonal unemployment benefits to around 120,000 seasonal unemployed individuals until September, while also extending the current unemployment benefits ending in May by 2 months. These measures are of great significance. See the graph on the right. Based on the last available date on the balance between hirings and firings, the number of net hirings in April should be at a much higher level according to the prevailing seasonal pattern observed in previous years. However, the rise recorded in April 2020 was smaller due to the generalized lockdowns in hotels, food services, capacity hotels. So -- and moving now to the next slide. The jobs protection schemes intend to counterbalance the negative stock of the purchasing power of seasonal employees, as we estimate that the adverse effects of the tourist sector will be driven by demand side related to travel restrictions and fears of contagion as well as by supply side effects on the back of reduced hotel capacity and increased cost structure, deriving from the lockdown in the second quarter and newly introduced health protocols. However, Greece is now planning to reopen in tourist season in June, aiming to capture a significant part of tourist inflows, which are usually observed in third quarter of the year, as indicated in the graph at the bottom. Finally, the negative impact from [ maximum ] services on the current account balance is expected to be somewhat mitigated by the weaker imports because of the subdued domestic demand and lower oil prices, as Greece is a major importer of petroleum product. Let me now pass the floor to Mr. Lazaros Papagaryfallou for the rest of our presentation.

Thank you, Panagiotis. I would like to start with a summary of key financial trends we have observed during the first quarter. To start with core pre-provision income, we note an increase of 9% year-on-year, driven by our continued delivery on cost containment and strong performance in fees. We have more details on this later in the presentation. We have also seen positive developments on the asset quality front with negative NPE formation and increased NT coverage. The bank recorded strong negative formation within the quarter with a reduction of balances by EUR 400 million. When it comes to inflows, first quarter performance compares favorably to all the past 5 quarters as we have managed to contain the defaults, while aggregates reminded at very good levels, supported by [ cures ], notwithstanding a marginal negative impact in March 2020, stemming from the lockdown. It is noted that the gross negative formation was recorded in all segments with retail reducing by EUR 300 million and wholesale by EUR 100 million, stemming mainly from more intensive initiatives on the retail segment and consistent performance in wholesale portfolios. As a result, our group NPE ratio at the end of March 2020 was reduced to 43.5% from 44.8% as of December 2019. The NPE cash coverage during the respective periods increased to 44.1% from 43.8%. Our underlying cost of risk decreased within the quarter to 150 basis points. On top, we have taken additional COVID-19 related provisions due to the deterioration of forward-looking macro parameters. This added 100 basis points to the ratio, increasing the total cost of risk for the quarter to 250 basis points. Our business volumes showed strong growth, both in terms of performing loans, which increased by 3% within the quarter, supported by higher new loan disbursements of EUR 1.6 billion. Customer deposits increased by EUR 1.5 billion in the quarter. As a result of inflows from both individuals and businesses and state deposits. In Greece, deposit balances grew by EUR 1.6 billion, reflecting reduced household spending redemptions from investment products due to market volatility and drawdown of untapped credit lines deposited in site accounts. On the Greek inflow, EUR 400 million is attributable to inflows from households and EUR 1.2 billion from businesses and state deposits. Our liquidity position has improved with a loan-to-deposit ratio of 95% as of the end of first quarter, whereas our LCR has improved further, currently standing at 92%. Our cash buffer, including money in the target account and ECB eligible encumbered collateral amounts to EUR 4.5 billion. Coming to wholesale funding. At the end of March, our reliance on Eurosystem funding stood at EUR 3.9 billion, comprised of LTRO funding of EUR 3.1 billion and EUR 800 million participation in ECB's LTRO facility. Maturing June 2020 while our repo balance increased by EUR 200 million Q-on-Q to EUR 6.5 billion. Our efforts to further reduce the funding costs have benefited significantly following ECB's temporary collateral leasing measures, implemented on April 20, relating to the eligibility of securities issued by the Greek government and to improve haircuts on the existing pool of accepted collaterals. As the bank's pool of ECB eligible assets increased with the inclusion of Greek government securities, we reduced our repo portfolio and increased ECB financing from EUR 3.1 billion to EUR 9.3 billion, benefiting from the negative 50 bps interest rate under LTR0 operations. Lastly, as we will discuss later, our total capital ratio remains strong with 17.5% and almost EUR 3 billion of excess capital. We expect further regulation easing, which is expect to improve our ratios further. On Slide 17, there, we illustrate our P&L and balance sheet performance Q-on-Q and year-on-year. Here, you can see again that our first quarter profit after tax has been impacted by the EUR 120 million provisions we have taken you to COVID 19. You will also see that Q-on-Q, our net interest margins falls from 2.45% in the fourth quarter 2019 to 2.34% in the first quarter of 2020, down by 11 bps or 8 bps when adjusted for calendar effect. The drop is attributed to the expansion of the balance sheet by EUR 3.2 billion, mostly by increased deposits in the Tier 2 issuance in the first quarter. And the residing of the funds to cash and central bank balances until they get into work as interest generating assets during the year. Let's now turn to Page 18 to elaborate further over quarterly contributions to the net interest income. As shown in the top chart, our net interest income amounted to EUR 381.2 million, down by EUR 6 million quarter-on-quarter or 1.5%, mainly affected by the lower contribution from loans alongside the negative impact from the calendar effect. Here, it is worth discussing each contributor explicitly in order to understand the quarterly movement. On the asset side, as shown on the bottom left corner, average net loan balances decreased quarter-on-quarter by EUR 200 million, and along with the marginal spread reduction, they had a combined negative effect of EUR 4.4 million on the net interest income. We now share that average loan balances got reduced in the first quarter due to the implementation of our NPE reduction plan and repayments from the performing perimeter, despite new loan disbursements for the period. Here, we should highlight that in the first quarter, our performing loan book expanded by 3% versus the fourth quarter of the previous year, following new loan disbursements of EUR 1.6 billion. Also supported by drawdown of credit lines by businesses. Tapping of the credit line is expected to continue to support net interest income in the second quarter. Going forward, new disbursements will also be supported by the bank's participation in the upcoming Hellenic Development Bank scheme, and the new Entrepreneurship Fund business funding for COVID scheme for SMEs providing further upside net interest income. On the liability side, deposits had a positive impact of EUR 2.5 million, while time deposit rates at 35 bps versus 44 bps in the previous quarter, as shown in the chart on the bottom right corner, a trend that is expected to continue going forward. Wholesale funding cost escalated in the first quarter on the back of the absorption of our Tier 2 issuance cost at 4.25% yield, which more than offset the reduction of the average cost of our repo transaction by 35 bps Q-on-Q. We should note, however, that we expect this trend in wholesale funding costs to reverse in the coming quarters. As a result of the bank's participation in ECB's LTRO facility at minus 50 bps. Greece follows ECB's temporary collateralizing measures implemented on April '20, relating to the eligibility of securities issued by the Greek government as well as the improved share cuts from the existing pool of accepted collaterals. Bonds and other posted a positive contribution of EUR 1.5 million in the quarter, supported by new placements, which more than offset the impact of a decrease in yields in Greek sovereign securities. Last, but not least, we have the calendar effect, which translates to a reduction of EUR 4.2 million to net interest income in the first quarter. Overall, for the year, we expect net interest income to trend relatively well with a run rate increasing to EUR 386 million on average in the coming quarters. And overall, net interest income being flattish relative to 2019. The higher net interest income from performing loans and funding will be counterbalanced to some extent by lower income on GDPs and nonperforming exposures. Let's turn to Page 19. And discuss the evolution of net fee and commission income. In the first quarter of 2020, net fee and commission income stood at EUR 89.2 million, up by EUR 19 million compared to the first quarter of 2019. Fee commission income was also supported by all remaining sources, such as other commercial banking, like assurance and investment banking and brokerage, as they all recorded a positive result year-on-year. Looking at the drivers in more detail, as portrayed on the left chart, the main contributor of the revenue from commercial banking activity at EUR 11 million, as a result of increased card usage and higher loans commissions, stemming from the increased volume of new loan disbursements. Other asset management fees stood higher by EUR 5 million on a yearly basis. On the right, you can see the quarterly performance. In the first quarter, net fee and commission income was reduced by 4.2% or EUR 4 million, mostly attributed to seasonally driven lower fee income from cards as well as to the base effect from bond and syndicated loans issuance in the fourth quarter of 2019, which have offset the increased contribution from asset management. Looking at 2020, we expect fees to be impacted during the next 3 quarters and hence, trend lower than 2019 by circa 5% to 7% due to lower transactional activity, on the impact of the crisis also in contained tourist arrivals as well as some lower asset management fees. Let's now turn on Page 20 on costs. As you can see on the left chart, our recurring operations expenses for the first quarter of 2020 stood at EUR 251 million versus EUR 258 million in the first quarter of 2019, reduced by 3% year-on-year or EUR 8 million. Looking at OpEx, on a geographical basis, on the top left corner, you may see that the improvement came from our Greek cost base by almost 7%. As operations have growth posted an increase of EUR 5 million, mainly due to salary adjustments in Romania and the impact of the new collective labor agreement in Cyprus. Looking at each category separately, you may see that the general expenses declined by 3% year-on-year to EUR 106 million, mainly reflecting lower NPL remedial management and third-party fees as well as lower marketing expenses. Staff costs were down by 6% due to the headcount reduction as a result of the voluntary separation scheme implemented in our Greek operations during 2019, leading to the gradual departure of 836 employees with an estimated annualized benefit of EUR 35 million. Headcount in Greece is reduced 7% year-on-year. Lastly, the depreciation charge was higher year-on-year by EUR 2 million as a result of heightened IT investments. With regards to 2020 full year outlook, we expect recurring operating expenses in Greece to record a year-on-year decrease of circa 4%, driven by lower marketing expenses, third party fees, NPL remedial management captured by postponing and freezing of spending due to COVID-19 crisis and other cost reduction initiatives. Moving on to the next slide, Page 21. We depict the quarterly evolution of our corporate provision income and its drivers. We anticipate for 2020 resilient net interest income performance and along with the reduction in operating expenses and the negative impact on fees due to COVID-19, the corporate provision income this year is expected to be around the same levels as in 2019. Total preprovision income for the year will further benefit by additional trading gains during 2020. Now moving on to Slide 22. As indicated earlier in our presentation, the prevailing level of uncertainty, rendered the forecasting process a challenging exercise. Our starting point was the supervisory recommendations for the avoidance of excessive procyclical assumptions in the IFRS 9 models. Based on forecasts provided by our Economic Research division, we have updated certain risk parameters embedded in our models using updated macros to take into account the impact of COVID-19. We have used multiple scenarios as per IFRS, our basic, a V-shape scenario provides for a cumulative delta in GDP for the period 2020, 2021, of minus 1.1%. Concerning that were scenario, we try to capture the downside risks to GDP by employing an L shaped type of shock. As a result of such estimates, we have budgeted additional EUR 120 million of specific COVID-19 related provisions already in the first quarter, which increased our cost of risk by almost 100 basis points. This compares with a wide range of outcomes observed among European banks, I think, is rather on the high side. Lately, we have seen economic forecasts by third parties, including Bank of Greece, the Ministry of Finance and the European Commission. The shape of the shock and that all these scenarios look similar. You can call it a V-shape and results in a cumulative delta and GDP, ranging from minus 1.8% to plus 0.4%. This is important in order to look through a very volatile 2020. On Page 23, you can see the evolution of our total capital adequacy cap ratio, which now stands at EUR 8.4 billion, with a total cap reaching 17.5% as of the end of March 2020. These came in lower by 38 basis points Q-on-Q, positively affected by 104 bps from our successful Tier 2 issuance in February, and negatively affected by the following factors: 77 bps from the anticipated phasing in of IFRS 9 and Basel III amortization, both recognized in the first quarter of every year, and the impact from the regulatory treatment of the 10% DTA threshold. 53 bps from the lower reserve of the investment securities portfolio measured at fair value through other comprehensive income, following the crystallization of gains as well as due to decreased valuation. And finally, the increase of credit risk as well as the period loss. The bank's total capital adequacy ratio of 17.5% stands well above the minimum ratio requirement of 11.5%, relaxed due to the suspension of the capital conservation buffer, providing a total buffer of EUR 2.9 billion. Our core equity Tier 1 stands at 16.5% or EUR 7.8 billion, well above the minimum core equity ratio requirement for 2020 of 6.7% as adjusted for the changes of CRD 5. Our fully loaded core equity Tier 1 ratio stands at 14%. Following Basel Committee recommendations, there are additional capital relief measures anticipated under the CRR, which in total, could bring almost 90 basis points of additional capital or higher in case the full spectrum of Basel Committee recommendation is adopted by the European Commission. With this, we open the floor to questions.

[Operator Instructions] The first question is from the line of Sevim, Mehmet with JPMorgan.

Congratulations on the results. My first question is on provisioning, please. What do you think about the evolution of cost of risk in the coming quarters now after you've taken the EUR 120 million related to COVID-19? And more broadly, given you will do a hive down as part of the Galaxy securitization this year, would you choose to maximize provisioning in the next quarters in order to front-load as much as possible also as part of the hive down process.

Hello, Sevim, this is Lazaros. As I said, when it comes to macros, we're going to update our risk parameters in the second quarter of the year, following the data, which is expected early June from the European Central Bank. We are also monitoring the market to get more credible data for informing our risk parameters in a more meaningful way. As far as cost of risk is concerned, you noted that the underlying cost of risk without COVID was about 1.5%. That should trend lower in the coming quarters as the first quarter was intensive in terms of management actions, because of COVID and the slowdown, we expect lower cost of management actions in the coming quarters, such as auctions or restructuring with haircuts, that should provide a buffer to take potentially additional losses from -- was macros that may come up in the coming weeks and coming to asset quality trends that are related with cost of risk, we have noted a very good performance in the first quarter of the year with negative formation of 400. We expect negative formation also in the second quarter of the year, whereas in the third and the fourth quarter, we may see an increase due to new defaults. Overall, we expect for the year, no new formation because of the performance in the first half of the year. Having said that, we would be updating our forecast quarter-by-quarter as we get more data about the performance of our portfolio. Overall, we expect cost of risk to trend this year between 180 to 190 bps over launch.

Great. And 1 follow-up on your comments earlier. You mentioned that you expect further easing in regulations for capital going forward. Could you please tell us what that could entail?

You have seen the Basel recommendation regarding the SME factor, intangibles, infrastructure projects and the dynamic approach for IFRS 9. That means that for additional provisions for stages 1 and 2, there is an add-back to the transitional core equity Tier 1. Having taken a conservative approach as to the potential impact of these drivers, we came up with almost 90 bps that could affect positively our transitional core equity Tier 1. Now we have not included in this forecast, the so-called static approach for IFRS 9 that also includes the historical impact since 2018 of IFRS 9 impact. This has been recommended by the Basel Committee, but yet we have not seen the green light from the European Commission. That is the potential upside to the numbers, but we cannot currently represent that this is happening.

Great. That's very useful. And 1 last question, if I may. That's on digitalization. Previously, you told us that the biggest drive that you've seen in terms of alternative channels was in 2015 when you saw record number of digital users, et cetera, who turned out to be sticky. Are you seeing similar trends today? Or was the recovery of it too fast, so to say, to enforce such a force penetration? And if you could share any data with us, that will be very useful.

It's Vassilios. I think there are completely different circumstances back then and now in terms of the starting point. Back then, it was really in early stages of our digital journey. So practically, you had almost all of your customer base that were willing to venture into that. And actually, it didn't, as you correctly pointed out, it has proven sticky. Now it is only -- a very small cohort of people that have not been making use of the alternative channels mostly in the silver hair category, which, again, for particular reasons, have opted or could not do it so far. So we have seen a pickup indeed in that particular cohort as well. However, in the initial days of the lockdown and the cram down that we've all experienced in our call centers, it was very difficult for them to pick up. And now as we're moving out of the lockdown, we will make sure that we will take them by the hand and take them on the others -- that they cross the river and actually start using our digital offering as well. But it is a much, much smaller number that does not utilize our options.

The next question is from the line of Floriani, Jonas with Axia Ventures.

I have a few questions. The first one is related to asset quality. So looking at Slides 8 and 9 when you update the progress on the Galaxy and the securitizations, I was just wondering how should we think about the potential financial impact that you previously guided for when you launched the Galaxy Project. And given the changes in macro, changes in assumption and also the delay, I mean, how should we think about that initial estimate now going forward? Second, is still on NPEs and following on something you already mentioned. But in regards to the expectation for the NPE book for the year, I think it's fair to assume that given the moratoria and the measures, the amount of inflows is likely to be limited. But apart from that, how prepared do you think you are to push more on the outflow side of things? I mean, do you think that Alpha during the year will take the opportunity to accelerate some of the drivers on the outflows. I don't know if on write offs, maybe some of the organic outflows like crews and collections could be difficult because of the crisis, but how do you see the outflow potential for the bank and the measures that you have? And then finally, on Slide 40, where you show your GGB book, just wondering what is the strategy there? I think Lazaros mentioned something about potential further trading gains in the year. Is there kind of an optimal level of stock of GGB you're aiming for at the moment? And anything on that would be helpful.

Jonas, this is Lazaros. Starting with your first question on Galaxy. Which is the cornerstone in our NPE deleveraging strategy, and we're happily reporting the restart of the process. As you have seen in the relevant front pages, we are prioritizing HAPS portfolios, the ones that can get the government guarantee. And in particular, retail secured ones. This means that our focus for 2020 is a perimeter of anything between EUR 7.5 billion and EUR 10 billion. The modular way we have built up Galaxy allows us increased flexibility on how we structure any 2020 transaction, ensuring that we can get a deal done. The transaction structure also gives us flexibility as to the timing of the sale or distribution of the notes, subject to market conditions, of course. Coming to the financial impact. It's again, this transaction modularity, which is key when it comes to the impact analysis. Prioritizing HAPS portfolios means that we can have a less capital-intensive transaction even under stricter COVID scenarios. Should we transact on the HAPS perimeter, we expect the capital impact below 300 bps, which is commensurate with our initial estimations, however, for a smaller perimeter. Recent pandemic related government measures to support housing loans are expected to provide a significant boost to the Galaxy portfolios. While we have been proactive in coverage buildup on all perimeters in the past quarters. Now with regards to your questions for asset quality trends and the flows, the potential flows in the year, I have explained in my previous answer, how we estimate the coming quarters to behave. The first half will be negative in terms of NPE formation, but we should expect some new formation in the third and mostly the fourth quarter of the year. However, our attention and focus is on implementing mitigating measures, such as new financing, new restructuring products supported by very significant government initiatives on affected perimeters to really mitigate the risks for clients who face temporary liquidity problems and not solvency problems. With regards to outflows for NPEs, indeed, during this period, it's more difficult to achieve our initial target we had for almost EUR 1 billion of core NPEs deleveraging through organic means. We have seen a halt of auctions and liquidations. Still auctions cannot happen until the end of July, restructurings with deep haircuts that require engagement with the customer are more difficult in this respect. Cash collections also are lower. So in terms of curing and organic exits from the NPE perimeter, you should expect a lower number than the ones budgeted previously in the year. Having said that, the first and the second quarter of the year are satisfactory in terms of cures. That's why you have seen exits in the first quarter and most probably you also going to see in the second quarter of the year. Last, coming to GGBs. We have recorded to date almost EUR 200 million of trading gains year-to-date, and that supports our estimates for the corporate provision of the year. You may remember that we have given guidance for core PPI at levels identical to the ones we experienced back in 2019. We have been selling from the fair value through OCI portfolio, and we have been adding other bonds to the whole to collect portfolio for yield. Most probably, this is going to be the strategy going forward. Reducing volatility on the equity side and adding bonds within our risk appetite framework onto the whole to collect portfolio.

Okay. If I can follow-up just on my first question and back to Galaxy. Is there anything you can share in terms of recent interactions with potential buyers? And how do you feel the buy side has behaved over the last couple of months compared to previously?

Well, we have never stopped talking to this group of people that have shown interest. And you may recall that actually the lockdown happened just a week before we had our initial date for the nonbinding offers. So it was only natural but after the first few days, where things waited to settle, we have continued the dialogue and we're checking upon them, on their thoughts and how they feel. So our decision to relaunch the transaction actually comes after taking into account also the interactions that we have been having with a group of interested investors as well.

The next question is from the line of Bairaktari, Angeliki with Autonomous Research.

With regards to cost of risk, you have shown us that non COVID related cost of risk stood at 150 basis points in Q1, which is 50 basis points lower than the 2019 run rate. Can I ask what has driven the significant improvement? We were expecting an improvement to happen this year, but that was, I thought, on the back of Galaxy, which doesn't look like is going to happen until the end of the year. So I'm just wondering what were the underlying drivers of this non COVID cost of risk. Then you mentioned to a previous question of -- from one of my colleagues that the cost of risk this year is expected to be at around 180 to 190 basis points. Does that include the coronavirus provisions? Then a question on Galaxy. What will be the impact from this transaction on the NII in 2021? Especially, we're talking about a smaller perimeter, but still quite heavy on mortgage loans. And last question for me, please. On TLTRO, could you please tell us what is your maximum capacity? And whether you will be able to roll forward and actually top the minus 100 bps scheme from June onwards.

All right. Angeliki. This is Lazaros. The first quarter cost of risk, indeed, 150 bps, excluding COVID. The improvement compared to last year run rate is a byproduct of several reasons. Last year, we had significant costs from management actions, including significant NPE modification losses to the tune of EUR 220 million, which we do not expect this year as we have kind of shifted the mix of products towards other characteristics. Then we have transaction costs related to portfolio transactions last year. This is not in the bill in the first quarter of the year, plus, we have seen significant curings from retail in the first quarter, which has helped the bottom line. In the coming quarters, as I said, we expect an even lower cost of risk over loans from managing the portfolio. That is, to some extent, a function of less intense management actions as the situation does not allow for a very deep engagement with the customers with the kind of products we had last year. And that will leave some space for absorbing potentially higher macro losses from COVID-19. The guidance that I have given, 180 to 190 basis points, includes also some projections for additional macro-related losses on the base of certain sensitivities we're running, but we need to have more data, tangible data in the second quarter of the year in order to book them. There was another question about TLTRO, where our maximum capacity is EUR 11.9 billion and we intend to tap it in its entirety, so as to take benefit of the lower funding costs and grow our books, respectively.

Ms. Bairaktari, have you finished with your questions?

No. Just to follow-up on the TLTRO, do you expect when you tap the EUR 11.9 billion, do you expect these to receive a 100 basis point negative rate from the ECB instead of the minus 50 currently? And also, is your strategy going to be reinvesting these into Greek Government Bonds or what type of securities? I understand part of that will be used for lending, but I imagine not all of it, because it's a very big amount. So it would be interesting if you could give us an indication of what you expect the impact of that will be on NII, not only from the ECB negative rate, but also from the reinvestment of these into government bonds, et cetera? And I also had a question on the impact on NII from the Galaxy transaction next year, if you could please answer that.

There was a question about Galaxy. The impact from -- the fully phased impact from the sale of the secured retail portfolios. Which is to the tune of EUR 150 million, EUR 160 million fully phased- in 2021, assuming that this happens in -- at the end 2020. Now with regards to TLTRO, we expect an additional benefit to the tune of EUR 25 million to EUR 30 million. We don't intend to acquire more GGBs in order to tap the line. We have eligible collateral to allow us to get that with all sorts of -- a little bit collateral for TLTRO operations.

The next question is from the line of Memisoglu, Osman with Ambrosia Capital.

Coming back to the funding side from ECB. What kind of benefit should we expect for the LTRO bit in Q2, for example, i.e., what kind of -- so versus with negative EUR 50 million, what should we compare with? What's the repo costs you were seeing? And how should we quantify that for Q2?

The full year, it's EUR 25 million to EUR 30 million. You should take 1/4 of it for the second quarter.

Okay. That was a full year figure that…

Yes.

The next question is from the line of Abad, José with Goldman Sachs.

Yes. 2 questions from my side. The first one is, I was looking at your key assumption for cost of risk to essentially, correct me if I'm wrong, but essentially, you expect a negative cumulative contraction of around 110 bps over the next 2 years, 2020, '21, and this is the key input for your guidance. Could you give us some sensitivity around this? So is this actually a linear approach? So actually, if the number were to be twice as big, so if actually, the negative cumulative contraction was going to be actually 220 bps, should we expect actually your cost of risk to be -- so the COVID portion of your cost of risk to be actually twice as much as you've guided? The second is a sub-question here, if I may, which is whether we should expect -- so I believe you've calculated the expected loss for the 2-year period, given that you are using inputs for 2 years. So should we expect actually similar dynamics in 2021, ex Galaxy? And the second question is about whether you could give us an update on anything that you may be discussing with Greek or European authorities on any potential new systemic solutions, particularly potential but bank along the lines of what the actually Bank of Greece published or proposed actually 1.5 years ago.

All right. I will take the first 2 questions, and then Vassilios talk about the new potential systemic solutions. Coming to macros. We have tried to illustrate that more or less -- most of the stakeholders that give economic forecasts provide for a V-shaped type of recovery with a delta on the cumulative GDP drop or growth between 2020 and 2021. This is a way to look through 2020, which is very volatile and have a perspective, which goes beyond the 12 months period. And you're seeing the respective graph, the numbers ranging from minus 1.8% to plus 0.4%. In our first quarter IFRS 9 assumptions, we have assumed a macro base scenario, which provides for a cumulative delta of 1.1% negative in the 2 years period. Now based on the latest data we see, most probably this V-shaped or mostly, V-shaped, will be confirmed. However, it may be a steeper decrease in 2020. And steeper increase of GDP in 2021. Unfortunately, this is not a linear exercise and a rule of thumb is quite risky with respect to what happens for 1%. But coming to PDs for stage 1 and stage 2 loans, if you want the rule of thumb, just for discussion purposes, it's not necessarily very, very technical. That could mean that an additional 1% in GDP growth could result in additional EUR 30 million to EUR 40 million of impact in our ECL. The second question was about cost of risk post Galaxy. I mean in 2020, you should assume that the 180 to 190 bps guidance does not relate to any Galaxy losses. Any Galaxy losses will be addressed at the level of the holding company through the sale of the major equity notes after the completion of the hive down.

Now moving on to your third question. We have been having this discussion roughly this period last year. And our -- In principle, position remains the same that given the magnitude of the problem in Greece and in particular, in a period of volatility and reduced visibility, the more instruments available to reduce the legacy issues, the better it is. Now currently, the only solution available is actually the Hellenic Asset Protection Scheme. As mentioned before, we do see currently opportunity to relaunch our project, which is going to be based, as Lazaros mentioned, before for retail -- for the secured retail portfolios and potentially later on for the wholesale. This is going to be based on the Hellenic Asset Protection Scheme, which means that with what we currently are able to see, it is functioning.

Mr. Abad, have you finished with your questions?

Yes, yes, just to make sure, I mean, is there anything actually material that we should expect over the coming 3 months based on your discussion with the supervisor to complement actually the APS scheme?

Sorry, to?

Is there any other systemic solution on the table that could become material over the coming quarters that could complement actually the APS scheme?

Well, we know that there is an exchange of use, but we're not part of that discussion.

Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to management for any closing comments. Thank you.

Well, thank you very much for participating in our first quarter results. Thank you for -- not just for your participation but also for your active engagement in the Q&A session. And we are indeed looking forward to speaking to you again with presenting our first half results in August. Thank you very much.