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

Ladies and gentlemen, thank you for standing by. I am Danny, your Chorus Call operator. Welcome, and thank you for joining the Alpha Bank Conference Call to present and discuss the First Half 2020 Financial Results. [Operator Instructions] The conference is being recorded. [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, and good morning to those dialing in from the U.S. Welcome to Alpha Bank's First Half 2020 Earnings Conference Call. I'm Vassilios Psaltis, Alpha Bank's CEO; and I'm joined by Lazaros Papagaryfallou, our Chief Financial Officer; Panagiotis Kapopoulos, our Chief Economist; Georgios Michalopoulos, our Group Treasurer; and Dimitrios Kostopoulos, Head of IR. This has been an incredibly challenging year so far. However, our bank has swiftly adapted to the new reality, full of uncertainties. By doing so, we have been able to support our customers and our employees, while we have remained very focused in making significant progress on our strategic goals and, in particular, the implementation of our Galaxy Project. The pandemic has abruptly interrupted the recovery of the Greek economy. And in the first quarter of the year, we faced a contraction of the domestic economic activity, milder for when compared to other European economies. In addition, the economic sentiment indicator compressed due to the pandemic, but it held better than in other European countries. The shape of the recessionary shock will be determined not just by the structure of the economy and the relative contribution of tourism in our case, but also by the magnitude and the effectiveness of the fiscal policy measures that our government has introduced as well as the success in addressing the health crisis. European and Greek policymakers have acted swiftly by introducing fiscal measures that are counterbalancing the effects of the pandemic shock, but also supported the continuous flow of financing to the economy. The Greek government's fiscal support package to address the impact of COVID, including the leverage of state guarantees may reach 15% of the 2019 GDP by the end of the year, as the government is expected shortly to announce a new budget of supporting measures, which will also benefit from the new next-generation fund of EUR 750 billion, with the allocated amount for Greece estimated at around EUR 32 billion, out of which EUR 19.5 billion will take the form of grants and about EUR 12.5 billion will take the form of loans. This will substantially improve the medium-term prospects of the Greek economy. Over and above that, the country will claim an additional EUR 40 billion from the EU cohesion funds over the next 7 years. This will take the total support for Greece at EUR 72 billion, which would prove a solid ground for a strong upside as soon as the COVID situation normalizes. On the other hand, there are downside risks which are related with resurgence of the second pandemic wave in order as well as the fiscal risk related to significant increase in the primary deficit. Turning now to Page 4. We note the key highlights of our first half 2020 results. Our operational performance has been solid. Despite the adverse conditions on the economic activity due to COVID, we have seen a significant increase of 8% year-on-year in our core pre-provision income. Our core revenue generation has proven resilient. It's up by 1.2% year-on-year, and we have continued to deliver on our cost containment efforts with a reduction of operating expenses by circa 4% year-on-year. Our enhanced pre-provision income activity supported by gains from our Greek government bond portfolio and a strong capital position with total capital of 18.3% allow us to comfortably absorb impairments of EUR 568 million, of which over 40% is COVID related. In the first half of 2020, our profit after tax stood at EUR 87 million, stable versus last year. Supporting our customers has been at the top of our agenda as we consider restoration of normal economic activity a national priority. To this end, we have been actively implementing payment moratoria solutions and participate in state support financing programs towards our performing customers affected by COVID. In terms of new credits, we dispersed year-to-date new loans of EUR 3.5 billion. This amount includes our participation in the funding programs sponsored by the Greek government, the Greek Development Bank and the European Union. Moreover, payment moratoria extended to our performing corporate and retail customers in Greece reached EUR 4.7 billion at the end of the first half of 2020. On deposit gathering, the bank's domestic private sector deposits have expanded by EUR 1.4 billion in the first half and EUR 2.5 billion on a year-on-year basis. Our operational turnaround is moving ahead, compliant with the aspiration of our strategic plan announced in November 2019. During the lockdown, technology and digital banking have been instrumental in supporting our customers. To this end, Alpha Bank has been actively pursuing the migration of its customers to digital channels, resulting in improved customer satisfaction as we will illustrate in the following pages. Notably, within the last 3 years, the bank has posted a tremendous progress across all business leaders as we have both grown the performing part of our loan book, contained our costs and improved our asset quality. As we are right now just a step away from delivering a decisive cleanup of the balance sheet with the completion of our Project Galaxy, and this is anticipated before year-end, the focus is shifting to the operational turnaround of the bank, aiming to deliver value through sustainable performance uplift in the near term. We have made decisive progress in the implementation of our Galaxy securitization. Since its relaunch in June, we received nonbinding offers and selected the bidders submitted to the binding phase towards the end of July. We applied for the Hellenic Asset Protection Scheme in early August, increasing our confidence for closing our transaction by the end of this year. In addition, we have increased visibility on the economics of the transaction with the estimated capital impact on total capital ratio to range between 250 and 280 basis points. Post completion of Galaxy, Alpha Bank's NPL ratio in Greece has materially reduced to 13%, whereas the NPE ratio, it goes down to 24%. Let's now turn to Page 5 to discuss Alpha Bank's support to its customers during the COVID crisis. New disbursements in Greece stood at EUR 3.5 billion year-to-date to both businesses and individuals. More specifically, in the Entrepreneurial Fund II, what we call TEPIX, Alpha Bank managed to secure the largest volume of liquidity for its business customers among Greek banks. To this end, we have already distributed the bulk of our approved amount of EUR 0.4 billion. Moreover, the bank participated in the state guaranteed sponsored program for businesses by providing software financing of EUR 0.2 billion out of an approved total of EUR 800 million. In the second half of 2020, we expect the disbursement of already approved credits and the implementation of the second leg of the state guarantee program to reach circa EUR 2 billion. That should drive our disbursement for the year north of EUR 5 billion. Now let's move into Page 6 to look at the support we have been offering to our customers in the fourth move moratoria, deferring installments of both individual and business customers up until the end of December of this year. At the end of June, moratoria offered to our performing customers reached EUR 4.7 billion, and that accounted for circa 11% of our total loans in Greece. On a segmental basis, most of the solutions offered were on mortgages amounting to EUR 2.2 billion and that makes 16% of our total mortgage book. With regards to the pace of implementations, as shown at the bottom left chart, the run rate has been significantly reduced at low levels of EUR 100 million to EUR 200 million per week in June after having plateaued in April. Looking at our business customers, you can see the industry distribution of the moratoria granted at the top right part of the slide. The highest percentage comes from the hospitality sector, the majority of which consists of borrowers with rating classified as acceptable or better and are secured by high-value tangible assets. On the other hand, the moratoria to individuals are primarily to loans with primary residencies, where the majority of them were customers of good financial spending based on our client segmentation. From our contact with retail customers and relevant service we have conducted, there are some interesting observations. Firstly, more than 90% of individuals and small businesses estimate that they will be able to continue paying their installments after the end of moratoria, and they say they stand ready to engage with the bank to ensure they keep their payments current. Secondly, while both individuals and small businesses have experienced a temporary reduction in household income, more than 50% expect their income to revert to pre-COVID levels within a period of 12 to 18 months. And finally, there is high appreciation for Alpha Bank support to date, with circa 80% of individuals and 85% of small businesses' responses rate favorably the way the bank has supported them throughout the pandemic. Let's turn now to Page 7. During the COVID lockdown, we have been actively pursuing the migration of our customers to digital channels. At the same time, our customers have been highly responsive to conduct transactions electronically and engage remotely. As a result, the share of financial transactions performed through our digital network in the first half of 2020 increased to 91% versus 85% a year ago. Moreover, until June 2020, new e-banking subscribers stood at 183,000, while remote registration of new e-banking subscribers through mobile onboarding, that means without the physical presence of the bank, more than doubled versus the same period of last year. Usage of mobile banking continued to exhibit steady growth with active users reaching 687,000 and financial transactions that were up 66% versus last year. In addition, as contactless transactions become more important, I want to highlight that Alpha Bank is the only Greek bank currently offering Apple Pay to its customers. Notably, Apple Pay users reached more than 65,000 in less than 5 months of operations. The accelerated migration to digital banking is expected to facilitate our transformation to a more efficient and leaner operating model. The provision of high-quality products, along with our responsible customer service, led to increased customer satisfaction, according to our tracker survey, evidenced by a significant improvement of the bank's total Net Promoter Score in June 2020 versus 2019. Let's now go to Page 8. Alpha Bank's positive performance also during COVID crisis is a result of our proven ability to transform and improve our commercial performance. Over the years, we have been able to prove our execution capabilities as demonstrated by a series of tangible results across all building blocks of operational and commercial activity. As shown on this page, Alpha Bank has managed to transform into a more dynamic commercial player over the last 3 years by supporting the economy, exceeding internal targets for new loan disbursement year after year aspiring to provide more than EUR 5 billion for 2020, which is more than double versus 2017. At the same time, customer deposits have increased with EUR 6 billion inflows, improving overall the loan-to-deposit ratio. In terms of operational efficiency, Alpha Bank has a proven track record of reducing costs. On a recurring basis, annualized operating costs have decreased by 7% versus 2017 as a result of continued rationalization of our branch network in Greece, which has reduced -- has been reduced by 27% as well as the head count reduction by 18%. In terms of balance sheet derisking, we have decided to build upon our strong execution capacity, evidenced by our 5 successful NPE sales transactions and came forward with Project Galaxy, the largest NPE securitization in the Greek market. Pro forma for Galaxy, Alpha Bank's NPEs increase will come down to EUR 8.5 billion, while NPLs will get reduced to EUR 4.6 billion. Let's turn to Page 9. As a reminder, Galaxy consists of 3 NPE securitizations under the code name Orion, which is the SPV I, Galaxy II, that's a retail secured portfolio, and IV and that's a wholesale portfolio, with a total gross book value of EUR 10.8 billion. Post relaxation of the lockdown, we have achieved significant progress in the implementation of Galaxy. During lockdown, we continued diligently the preparation for our transaction and felt confident to relaunch it in June. In early July, we received nonbinding offers, receiving strong demand from very high-caliber international investors with significant experience in credit investing and servicing. A subset of these investors are now admitted into the binding phase of the process. Importantly, we have submitted in early August an application under the Hellenic Asset Protection Scheme for a guarantee by the Greek State on the senior notes relating to SPVs I & II for an amount of EUR 3 billion. A similar process for the fourth SPV that contains wholesale exposures is well underway. The regulatory process for achieving the significant risk transfer is also underway with applications having been filed in early August. Finally, as regards Cepal, we've now become sold shareholders, adding senior executives from the bank to its management team and consolidated control. We are on track to execute the carve out in the fourth quarter so that we can deliver the merged platform to the preferred bidder immediately thereafter. Moving on to Page 10, and as discussed just now, we present on the left part of the slide all the significant milestones that we have already achieved. Let's now focus on what lies ahead. On Galaxy, we are expecting binding bids in early in the fourth quarter and expect to sign with a preferred bidder within the year. The carve out is also proceeding well and should conclude within the fourth quarter. And finally, the hive down, which is a key enabler to this whole endeavor, has also been launched and we are speeding up the regulatory assessment process so as to conclude it towards the end of the year. So all in all, we expect a very busy quarter with significant milestones for our ambitious deleveraging plan. Let's turn now to Page 11. And there it is worth spending a few minutes to go over the envisaged transaction economics for the bank. Galaxy is structured in a way that the bank retains the senior notes, which are guaranteed by the Greek State. This means that more than 90% of the expected value is already locked in for the bank, as the size of the senior notes is a function of the pre-rating in the HAPS fee, which has been secured for the largest part of the transaction period. At the same time, the retained senior notes will be assigned at 0% risk rate on the back of the guarantee from the Greek State. Again, this is a relatively safe element of the transaction economics as we have already applied for HAPS on the retail SPV notes. Finally, our estimates for the residual element of the total value, namely the value of the mezz notes and the Cepal shares, are based on the range of the nonbinding bridge received today and our internal calculations. On the back of the above value building blocks, we feel we can now confidently define the capital impact range within 250 to 280 basis points as of end of June 2020. Let's turn now to Page 12. The completion of Project Galaxy will deliver a substantial improvement in the bank's asset quality position. The risk profile of the remaining NPEs is much better than the profile of the NPEs included in the Galaxy portfolio, as our securitization addresses predominantly the highest risk areas. In this respect, you will note on the left side of the page, some key metrics, which allude to the material derisking of our books as a lot of Galaxy. NPLs, i.e., exposures more than 90 days past due are reduced by 62%. Denounced loans exposures, they are reduced by 65%. And finally, retail exposures under bankruptcy loan protection, they are reduced by 75%. You will note on the central plank of the page that similar improvement is expected on both retail and wholesale portfolio. The remaining portfolio will consist of a high proportion of exposures already restructured and on the path to reperformance. But also of other core NPEs with a high modification and subsequent curing potential on which the bank will focus in the medium term. With Galaxy, Alpha Bank, as you can see on the right-hand part of the page, will run second among peers in terms of asset quality in Greece with NPEs at 24% and NPLs at 13%. And with that, I'll give the floor to Lazaros Papagaryfallou, who will give us an update of our financial performance for this quarter.

Good afternoon. We start on Page 14 with a summary of the key financial trends for the first half. We can see that despite the adverse conditions due to COVID-19 outbreak, our core operating profitability significantly improved in the first half of the year, up by 8%, driven by improved core revenue performance and operational efficiencies. As shown on the top part of the page, the first half core pre-provision income amounted to EUR 447 million, increased year-on-year by 8%. Our trading line of EUR 214 million leads to reported pre-provision income of EUR 646 million in the first half of the year or circa 9% higher compared to last year. Net interest income stood at EUR 391 million for the quarter increased by 2% Q-on-Q or EUR 772 million, reflecting the benefit from lower cost of deposits and wholesale funding, as shown on the top right corner. Going forward, in the coming quarters, we expect further support in the net interest income line on asset releveraging and slightly improving income from loan contribution as well as from better customer and wholesale funding costs due to increased use of ECB's TLTRO facility. Net commissions and fees income came lower in the second quarter at EUR 77 million as the market turmoil had an impact on asset management and lending fees. Still, looking in the first half of the year, fees increased year-on-year by 10%, mostly attributed to a higher contribution from cards, asset gathering and bancassurance. For the entire year, we expect fees to trend lower by 4% to 5% on the back of lower transactional activity, lower ATM, bancassurance and credit card fees because of subdued tourist arrivals. On the OpEx side, recurring operating expenses for the group continued to decline, down by 4% year-on-year or EUR 22 million to EUR 504.1 million, primarily as a result of lower staff costs, due to an 11% head count reduction in Greece achieved in 2019 through a voluntary separation scheme. General expenses are also down as we post less remedial management costs, third-party and professional fees, marketing, travel and property-related expenses. As a result, the corresponding cost-to-income ratio declined to 53% versus 56% a year ago, improving operational efficiency. All in, if we turn into Page 15 now, we see that our strong pre-provision generation allowed for the absorption of the increased provisions we have taken due to COVID-19 of circa EUR 234 million for the first half, resulting to a profit before tax of EUR 65 million. Income tax for the group came positive at EUR 22 million, including a reversal of deferred tax liability we had in the second quarter, following an amendment of the tax law in relation to profits for intra-group transactions. Post tax, we arrived at a net income of EUR 87 million for the first half, effectively fall out versus last year despite COVID-19 headwinds. It is worth noting that first half profit before tax adjusted for COVID-19-related impairments of EUR 234 million and excluding trading gains of EUR 214 million, it stands at EUR 85 million. On Page 16, you can see the evolution of our total capital in the quarter, which now stands at EUR 8.5 billion, with a total capital adequacy ratio reaching 18.3% as of end of June 2020. This came in higher by 73 basis points quarter-on-quarter, supported by CRR changes, lower risk-weighted assets and the period result. The bank's total CAD ratio of 18.3% stands well above the minimum requirement of 11.5%, providing a buffer of EUR 3.1 billion. I'll remind here that for increasing relaxation measures, we have the ability to further improve our total capital ratio with additional capacity for Tier 2 and additional Tier 1 by 165 and 205 basis points, respectively, as portrayed in the lower left part of the page. Let's now turn on Page 17 on liquidity. As you can see on the top chart on the left side, our liquidity profile continues to improve. Customer deposits expanded further by EUR 1.4 billion, more than offsetting a decrease of state deposits, leading our total deposits up by EUR 0.5 billion at EUR 40.9 billion at the end of June. The deposit mix is shifting towards core deposits, while new time deposits come now at a lower cost of circa 20 basis points, pushing further down our retail funding costs. Coming to wholesale funding, at the end of June 2020, our Eurosystem funding increased to EUR 11.9 billion from EUR 3.9 billion at the end of the first quarter, reflecting the full utilization of our TLTRO borrowing allowance, improving substantially its funding cost mix. Currently, 17% of our balance sheet is funded via the European Central Bank versus 6% in the first quarter, leading to a blended funding cost for our entire balance sheet at circa 0% and this is expected to trend lower in the third quarter. Moving on now to Page 18. NPE balances in Greece reduced by EUR 100 million during the second quarter of the year, breaking the stock down to EUR 18.3 billion at the end of June 2020. Looking more specifically at the gross formation in Greece, entries decreased at EUR 390 million, the lowest in the series we observed, reflecting intensified collection efforts, the application of payment moratoria and the impact of state support schemes. Exits stood at EUR 480 million as liquidations and curings were significantly lower, especially liquidations, which were down 70% compared to the first quarter, since all auctions were postponed with the temporary core suspension. On a year-on-year basis, first half 2020, overall NPE formation in Greece was slightly better than a year ago. Focusing on retail, in particular, the yearly reduction is 50% better than the first half in 2019 as the significant lower entires and stable curings more than offset the lower year-on-year volumes in debt forgiveness and closing procedures. Now moving on to our last slide, Page 19. We provide the evolution of cost of risk on a quarterly basis, along with a breakdown analysis of the COVID-related impairments for the period. In the second quarter, impairment losses on loans stood at EUR 261 million. During the quarter, the bank recognized incremental COVID-19-related impairments of EUR 114 million, on top of the preemptive relevant provisions booked in the first quarter of EUR 120 million. As a result, group impairment losses in the first half of the year amounted to EUR 568 million or 2.9% over net loans, out of which EUR 234 million or 1.1% is related to the COVID charges. COVID-related charges in the second quarter for our collective provisioning models include updated forward-looking macro parameters, including CRE and NRE prices as well as time to sale. For individually assessed loans, we have updated relevant inputs, such as time to sell, real estate prices for growing cases and we updated cash flows for growing cases. In the lower right part of the page, you will note a breakdown of our first half impairment losses between core and noncore loans. Noncore, our exposure sold or expected to be sold under securitization and portfolio transactions, so we're mainly talking about the Galaxy perimeter. Core loans relates to both performing and nonperforming exposures, excluding the Galaxy perimeter, of course. Two points to make here. The first point is that the bulk of our COVID charges are allocated to the core perimeter, including performing loans. The second point to make is that both in 2019 as well as in the first half of 2020, it is evident that the core perimeter has a lower underlying cost of risk, slightly over 1%, alluding to the recent normalization of our impairment line post completion of the Galaxy transaction. And now we open the floor to questions.

[Operator Instructions] The first question comes from the line of Floriani, Jonas with Axia Ventures.

I have a few questions. The first one is on the moratoria and especially on Slide 6. If you look at the EUR 4.7 billion number that you showed there, it's a bit higher than the last number you presented back in May, I think, it's higher by EUR 1 billion or so. Just wondering if there's an update you can share regarding the trends from June until today. Also, if there's any comment you can make in terms of a potential extension of the support measures. And then following on comment by Mr. Psaltis during the presentation in regards to the likelihood of some of the customers to start repaying their loans once the support measures are phased out, could you explain more on how did you get the data with a survey that you made? I mean do you subscribe to the findings that you see in the survey? Just trying to understand what is the health and cash flows of these clients trying to prepare for what is coming in 2021? So anything you could share there would be very helpful. Then my second question is on capital and on Slide 16. Just wondering if the total expectation for the CRR changes, I think you mentioned previously it was for 90 basis points. You're booking now 52 in this quarter. I mean are you still expecting to book another 40 in the coming quarters? And is it like Q3 and Q4? Or is it further down the road? And just a clarification on the COVID-related impairment charges. As far as I understand from what Lazaros has explained, it's more related to real estate and cash flows rather than macro assumptions. As far as I understand as well, the Q1 number was mostly driven by macro deterioration linked to also your expectation at that point in time. As I understand now, you haven't made changes to your GDP numbers, the cumulative GDP. So if there's anything else you could also explain on the drivers of the COVID-related charges and whether we should expect this to also continue in the coming quarters?

Well, Jonas, thanks for the questions. I'll take up your first question and then Lazaros will take the second and the third. On your first question, you addressed 2 points. The first -- starting on with your question about the trends as far as the moratoria is concerned. There, I think we need to distinguish between, on the one hand, what we have seen in retail, which has been abating. I mean we showed you that there is a significant -- there is no material significance on what we see from retail coming in. Now in terms of wholesale, this is increasing and will continue to increase for a technical reason. Because in wholesale customers, actually, when there is a payment coming due, that is what the moratoria gets recorded. So for that technical reason, there is -- there are some more wholesale-related moratoria volumes that you will see getting recorded in the next quarter. Now in terms of potential extension of the support measures that all Greek banks are providing, you may recall that we have seen this happening already once. We need to take it by the day and so always adhering to regulatory guidance. Therefore, so far, the idea is that we keep them mostly until the end of the year. And where the focus already has been shifting into is to prepare properly ahead of that. Because you appreciate there's going to be a whole world of moratoria coming to an end towards the year-end, and we need to very carefully plan ahead, not just in terms of properly segmenting the customers given the envisaged financial condition that they will have at the moment that they will be exiting the moratoria, but also customizing the respective products that we will need to offer them. So that requires quite a lot of incubation work, which has already started from our end and we are focusing very much on that. The second leg of your first question was how we are looking at what our customers are telling us in the interviews that we are conducting, mostly by telephone, but also through some focus service that we are running. Well, we are referring to that as a data point. In this situation where practically things are changing by the week and the conditions are evolving, I think it is very difficult to sort of get a hard picture of that. That's why we are rather looking at trends and at the confidence level that it is within our customer base. That has been conducted within a period from mid-June to mid-July, and this is something that, obviously, now that people are coming back from the vacation, we're going to be launching it back again and trying to see how this -- how they fare it in the interim period.

All right. Jonas, on your second question, regarding the evolution of capital in the quarter as well as the impact of CRR we have booked during the quarter, as you will see on Page 16, 52 basis points positive impact from CRR. There is a day of approximately 15 basis points coming out of the software factor when this is finalized. The remaining lines that bring a positive impact, as you know, is risk-weighted assets from SMEs and ECBs as well as infrastructure supporting factors. So there is an additional 50 basis points in timing in the following quarters. Coming to the third question regarding COVID-related charges. Indeed, in the first quarter, we have stressed our portfolios on the back of macroeconomic -- forward-looking macroeconomic factors, taking a charge of EUR 120 million. In the second quarter of the year, we have done further stresses updating our initial forward-looking macro estimates in order to take into account further projections for both GDP and unemployment, which leads to a cumulative delta under the base scenario of approximately 1% between -- in 2020 and 2021. So the delta view has not changed since the first quarter. However, both 2020 and 2021 have been revised on the back of our new macro forecasts. And I can tell you that it is more conservative than the numbers that we have seen for Greece coming out from ECB in June. We have also taken into account further data points coming out after this projection by ECB. But on top of this adjustment for macro factors, we have also updated certain parameters that relate to the LGD in our collective and individual impairment models. In particular, we have taken into account new prices for residential, collateral as well as CRE, and we have applied those stresses to all stages in the portfolio. That has affected mostly Stage 3 launch. And most importantly, we have updated the so-called time to sell, which reflects, in essence, a delay in liquidations. And that has been applied to both collective and individual impairment models. On top of that, we have stressed highly-affected sectors during a portfolio analysis on our corporate exposures, applying more stress on PDs on the back of the outlook for each and every sector as per our risk division. So that led to an incremental charge of EUR 114 million in the second quarter of the year.

Got it. Do you have by any chance the new expectation for our real estate prices that you're using? I'm not sure if I found here in your presentation.

The forward-looking macro parameters, they are based on various scenarios. There is a base in adverse and upside scenario. So you see different real estate prices for different scenarios weighted in our IFRS 9 models to procure the numbers.

The next question comes from the line of Sevim, Mehmet with JPMorgan.

Quite positive news on the Galaxy transaction, not only in terms of the time line, but also in terms of the new estimate for the capital impact at 250 to 280 basis points. Given you were guiding for around 300 basis points of capital impact last quarter, can you please tell us what component of the transaction is driving this lower capital hit? And also compared to the 350 basis points initially, is that because the perimeter is smaller than the initial EUR 12 billion expectation? Or have you overall seen a better interest in the transaction so far?

The range that we have given in our last call, Mehmet, related to varying range between EUR 7.5 billion and EUR 10.5 billion, you may recall at that point in time that we were more confident about the retail secured part of the transaction at EUR 7.5 billion. And we were also trying to get a rating for the wholesale, which is now much more advanced. That's why now the guidance we're giving relates to the entire perimeter, which is now finalized as opposed to what we announced a quarter back, which was a range. So now given the fact that we have secured already the rating on SPVs I & II that relates to the bulk of the Galaxy transaction, namely the retail secured, we are saying that we have high confidence on the economics of the transaction, given that the EUR 3.40 billion of senior trends for this particular part of portfolio transaction is already locked in. So we are expecting an additional rating, of course, for the wholesale part of Galaxy. That is expected most probably at the end of September, which will result in an additional senior of approximately EUR 700 million or shy of EUR 700 million, as presented on Page 11. So given the finalization of the transaction perimeters, given the progress that we have made with the rating of the portfolio, given the locking of the HAPS fee for the bulk of this transaction as well as on the back of nonbinding offers already received at the end of June by residential players, we have now much more visibility about the economics of the transaction and that we can represent to investors today.

Great. And just as a follow-up, is it fair to assume that the accounting hit on the book value on these numbers would be around EUR 1.6 billion, EUR 1.7 billion, maybe? I mean I've just done a back of the envelope calculation, but is there anything you can share with us on that point?

No, the accounting loss will be higher than that. We have guided for a EUR 2 billion accounting loss, which is still the case or it could be a little bit higher than that. But that's the level we're looking at.

Okay. Great. And my second question...

Sorry for that, you will appreciate that, that leads part of the impact in the capital position. A positive impact comes from the RWA release on the regulatory capital, which is presented again on Page 11.

Yes. Great. And my final question is on the underlying cost of risk, which continues to grind down. Again, obviously, we don't have any modification losses this year. But what is driving, again, the quarterly underlying cost of risk to come down? And do you have any new estimates or expectations for the full year?

As you correctly point out, in the second quarter, we have lower curings, lower liquidations and management actions that do not obviously result in cost of risk charges in the P&L. So that -- if you compare this performance with the last year, for example, the same period, you will note that last year because we had an intensive activity in terms of modifications and restructurings, the respective cost was higher. On the other hand, this quarter, we're having other charges for the core perimeter. For example, we have unlikely to pay cases in the wholesale portfolio on which we take more impairment. So you will note -- and that's what we present in the last page of the presentation that if you exclude COVID for a moment, the underlying cost of risk in the core perimeter is a little bit north of 1%, which is close to our guidance last year for the pro forma cost of risk after Galaxy. Now for the entire year, we expect the underlying cost of risk to trend a little bit higher in the second half of the year on the back of maybe more inflows in the NPE space as well as further charges on certain management actions. That should lead to a guidance of approximately 180 bps over debt loans, if you exclude COVID, or 240 basis points over net loans, if you include COVID. That is an impairment charge shy of EUR 1 billion, around EUR 950 million or so.

The next question comes from the line of Manolopoulos, Konstantinos with Optima Bank.

Actually, some of my questions have already been answered. So on the remaining on -- actually, I have one question on the mortgage portfolio on the moratoria. So out of the EUR 2.2 billion of mortgages under moratoria, how many are eligible for the EFRAH program?

We have approximately EUR 2.4 billion of mortgage loans eligible for the EFRAH program. A good number of those relate to mortgage loans under moratoria, which is a number mostly almost 50% or so.

So it's fair to argue that 50% of the EUR 2.2 billion next year will be included in the EFRAH program, so effectively will be performing loans, right?

They will get this credit mitigant, yes, on top of any other management actions required for this particular exposure.

Sure. Now on your guidance, given that, indeed, Q2 has been -- has proved a bit better than what you were previously guiding for, can you please update us on the guidance for this year for 2020, please?

When it comes to the top line, you see that net interest income is supported by lower wholesale funding cost and this is expected to continue in the coming quarters under the TLTRO. We are expecting a cumulative benefit for the 3 years period of almost EUR 200 million. That is going to phase in gradually over the next few years, including the P&L of 2020, a portion of it. You also have lower retail funding costs, as we know over time deposit is approximately 20 basis points. So this is going down. On the asset side loans, we have seen some pressure on loan spreads. It's going to be better in the second half because of the mix of new disbursements towards SMEs that have higher spreads. But overall, the contribution from loans NII is staying in the coming quarters. On the back of these main trends, we see the NII trending a little bit upwards of around 1% for the year. Coming to fees and commissions, you have seen a good performance on a yearly basis, first half 2020 versus last year. And of course, the coming quarters will not be that good. We expect a worse performance in fees and commissions. However, the guidance that I can give you now for the entire year is better than one I have given in the previous quarter, around a 4% to 5% decline for the entire year for fees and commissions. Coming to OpEx, you have seen the recurring OpEx line down by 4% in the first half of the year. And this is expected to be more or less the run rate for the entire year. On the back of significant cost increase in our Greek operations, which posted especially in staff costs, a double-digit year-on-year decrease. Reported OpEx most probably will be lower by 7% in 2020 vis-à-vis 2019. As in the last year, we also had retrenchment costs to fund the volume that is done in that scheme. Overall, when it comes to core pre-provision income, we expect it to trend higher by 4% to 5% in the year at approximately EUR 850 million. So if you add on top the trading gains that have already been locked in, you come up with a total pre-provision income to the tune of EUR 1.1 billion or thereabout.

Now on the cost of risk for next year, you have a very detailed slide on -- with the composition of provisions. Is it fair to assume that it could be as low as 100 bps, assuming that Galaxy securitization concludes by year-end and you start with a cleaner balance sheet next year? Or is it something that we should be looking for in 2023?

We have tried to give you a picture of how the bank looks like post Galaxy, showing 2019 and the first half of 2020, which is a very good indication of what is the underlying cost of risk for the core perimeter. You will appreciate that this is an uncertain period with volatility. So all other things being equal, when it comes to the core perimeter next year, you should expect to see the same trends continuing in 2021 and thereafter. Of course, the provider here is COVID, the evolution of this situation and potentially the impact on the Greek economy and our books. So keeping a note on COVID, all other things being equal, the trend that you see in the first half and in 2019 for the underlying cost of risk, I think -- we think are representative of the situation going forward.

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

I just wanted to ask something on your cost of funding side. You did mention TLTRO benefit. What about on the deposit side? I guess rates are coming down on time deposits, but there is also, not just for you, but I guess the other 2 banks have reported already, we're seeing quite a bit of shift away from time deposits. How should we think about this? How -- why is this happening? And how sustainable do you think this benefit will be?

Where the rates are declining, you see -- that is true, a shift of the mix towards savings and current accounts. We will have lower, most probably time depo rate. So it's reasonable to see customers keeping more liquidity at hand. So for the time being, I think this is representative of the negative rates environment that we are looking at, especially for retail clients. The thing to highlight here is that our entire balance sheet is funded currently at 0% and is trading negative territory in the third and fourth quarter of the year.

Okay. I was just curious if they're doing anything or is it just a thing way to just lowering return basically.

Our next question comes from the line of Poy, Gabriele with Goldman Sachs.

A couple of questions from my side. So the first one is on asset quality. You mentioned before that you expect the underlying cost of risk to trend higher over the coming quarters on the back of more NPEs. So if you can give us a little bit of color on what kind of impact do you expect on NPEs due to COVID? And then the second question is on NII. In particular, what is the portion of NII that comes from your NPEs? And what part of that should we expect to lose as a result of Galaxy?

Thank you for both questions. As I said, coming to cost of risk, rightly so, we expect a slight increase in the second half, mainly driven from projected flows and specifically lower curings in the retail portfolio, also due to the impact of moratoria and specific wholesale management actions. These are the 2 reasons leading to higher cost of risk in the second half of the year. Coming to formation, we expect a further negative formation of around EUR 100 million or so in the retail portfolios in Greece, whereas a flattish outlook for the wholesale portfolios. That is the outlook for retail and wholesale. And your second question was about, yes, the impact of Galaxy. You asked about the contribution of NII from NPEs. This stands about 1/3 of our total portfolio. Almost 50% of that comes from Galaxy. So what you should expect in net interest income, assuming that Galaxy is completed by year-end 2020 and it's out of the books from January 1, 2021, you should expect in 2021 a high single-digit decrease in our net interest income line, taking into consideration the impact of Galaxy as well as other impacts, which are mainly on the positive side, including the TLTRO, more volumes on lending on the back of disbursements effected in 2020 and lower retail funding costs.

[Operator Instructions] Our next question is from the line of Nagel, Alberto with Mediobanca.

Yes. Just one clarification on cost. What are the savings coming from the Galaxy Project as you are selling also the servicer so we should expect some savings from next year?

That is part of the announcement we made last year for the business plan. We expect a benefit of EUR 35 million to phase in 2021, 2022. That is the impact.

Our next question is from the line of Boulougouris, Alexandros with Wood & Co.

One clarification on my side as well. Sorry, I didn't -- I was unable to catch the numbers, as you were saying them faster. On the OpEx, the decline you expect on a year-on-year basis in 2020. And on your core PPI, you mentioned an increase of 4% to 5% year-over-year. If I wrote it down correctly? That is my first question. And secondly, just a small clarification on the quarterly numbers and the taxation, was there a recognition of PPI there and what that refers to?

I've given a guidance about OpEx of 4% in 2020 in core operating expenses or 7% in terms of reported operating expenses. As last year, we had the retrenchment cost in our numbers, which lead to this 7% delta. Coming to core pre-provision income, the guidance was a 5% increase year-on-year or a core PPI of approximately EUR 890 million on top of which you should take into account the trading gains that had already been locked in through sales, mainly of GGBs.

[Operator Instructions] 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 taking the time to participate at the presentation of our first half results. And we are looking forward to welcoming you again on our 9-month results presentation coming forward in November. Thank you very much.

Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for calling, and have a pleasant evening.