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

Ladies and gentlemen, thank you for standing by. I am your Chorus Call operator. Welcome, and thank you for joining the Alpha Bank conference call and live webcast to present and discuss the full year 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, and good morning to those dialing in from the U.S. Welcome to Alpha Bank's Full Year 2020 Earnings Conference Call. This is 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, Head of IR. Before starting with our full year 2020 results, a short personal note for a figure that has made Alpha Bank what it is today. March 9 marked the passing of Giannis Costopoulos, our Honorary Chairman and grandson of the founder of our bank, arguably the greatest banker in Greece from the mid of 1917s onward. He was an exemplary and inspiring leader as well as a lifelong mentor for all of us who were blessed to know him and work with him. A true visionary when conceiving ideas and daring in their implementation and optimist by nature and a pioneer in constant improvement and change. Human and accessible towards his associates, Giannis Costopoulo was a role model in the fullest sense. All of us at Alpha Bank will miss him dearly and will work on his legacy for a bank that will continue to evolve and play a leading role in Greece. Starting now with our results presentation, we should recall that this has been an incredibly challenging year, full of uncertainties and unprecedented situations. However, our bank has swiftly adapted to this new reality, and we have been able to support both our customers and our employees, while remaining very focused on making significant progress on our strategic goals, and in particular, on the implementation of our Project Galaxy. Due to the pandemic and the containment measures that has necessitated, the Greek economy experienced a historic recession, driven by a negative external demand shock, mainly because of the relatively high dependence on inbound tourism. This has been partially compensated by fiscal policy stimulus of EUR 27 billion so far. The policy measures taken by the government, supported employment, disposable income and liquidity of businesses, offering much needed breathing space to firms. This is already reflected in the sizable increase of private sector deposits of EUR 20 billion during 2020 compared to only EUR 8.8 billion in 2019, which means that the Greek private sector has the ability to gradually restore and serve its service obligations. 2021 is expected to be a challenging year. We expected a big growth in Greece of around 4% driven by, firstly, the base effect in accommodation, food services and retail trade from the second quarter onwards, subject to the speed and efficiency of the vaccinations, not just in Greece, but also in the countries of origin of inbound tourist flows. Secondly, the recovery and resilience facility, which may prove a solid foundation for strong upside as Greece is expected to receive around EUR 5.5 billion from the Next Generation EU 2021 according to the government budget, whereby it is expected that the other half will be activated in the second half of this year. Turning to Page 4. We note the key highlights of our full year 2020 results. Despite the challenges, we managed to deliver significant milestones for Alpha Bank. The continued focus throughout 2020 on our efforts to deliver Project Galaxy has allowed us to enter into a definitive agreement with Davidson Kempner over our EUR 10.8 billion securitization portfolio alongside the sale of an 80% stake in CEPAL. This will allow the bank to massively reduce its NPE and NPL ratios in Greece to 24% and 13%, respectively. Transaction closing is targeted within the second quarter of this year. This transformational transaction, alongside our upcoming hive-down process, set the scene for additional actions on the NPE resolution fund, while allowing redeployment of management focus and resources to continue rebuilding our banking franchise. In business development terms, 2020 was also an important year. As in December, we entered into a long-term bancassurance partnership with Generali, which will be a key enabler for the acceleration of bancassurance ambitions going forward. In parallel, we capitalized on the pandemic to push ahead with our digital transformation, minimizing physical financial transactions and launching a series of innovative products, including a retail customer onboarding process. 2020 was also a record year in terms of new disbursements to our customers on the back of government-sponsored programs and our commitment to support the Greek economy. Notwithstanding the pandemic, our financial performance was solid in 2020 with positive trends observed in loan and deposit volume growth, PPI generation and capital adequacy. We achieved a 3.4% year-on-year increase in our corporate provision income generation, while also recording trading gains of EUR 690 million for the year, which has allowed flexibility to increase impairments to account for further NPE initiatives. Total pre-provision income of EUR 1.4 billion allowed us to comfortably absorb impairments for loans of EUR 1.3 billion, of which EUR 283 million which makes circa 22% are COVID related, while another EUR 320 million related to our planned NPE transactions in 2021. As a result, group NPE cost coverage increased to 50% pro forma for Galaxy from 45% last quarter whilst our total capital ratio stands strong at 18.4% at the end of December 2020 or 16.9% pro forma for Galaxy and the bank's successful Tier 2 issuance of EUR 500 million in March this year. We are undoubtedly entering 2021, which is a stress test year with a very strong capital position, which allows us to take a balanced approach on further NPE deleveraging through transactions amounting to EUR 3.3 billion in Greece and Cyprus. Our capital advantage, even after the delivery of Galaxy provides us with additional flexibilities on the NPE resolution fund, whilst remaining within our stated management targets. Moving on to Page 5. Here, we are summarizing the key financial metrics for 2020 that showed a strong financial performance, as mentioned before. Despite the challenging environment, we reported an increase in operating income of 12% year-on-year, reaching EUR 2.6 billion in 2020, which was driven by strong operating trends, but also by a positive trading line of EUR 690 million. We continue to deliver on our commitment to optimize operating expenses by reducing costs by 4% year-on-year, reaching EUR 1.042 billion, while also improving our cost-to-income ratio from 57% in 2019 to 55% in 2020. On capital adequacy, our total capital ratio stood at 18.4% in December 2020, which is 50 basis points higher than last year. Project Galaxy allowed us to report a significant improvement in the group's NPE ratio, which is now down to 60 -- to 26% versus 45% next year. In parallel, we also reported a significant improvement in the group's NPE coverage to 50% versus 44% in the year before. Let's now move to Page 6. And here, we draw your attention to our improved commercial performance within the year, where we supported the economy by fueling liquidity through EUR 5.6 billion of new disbursements, primarily to businesses, including government-sponsored programs of EUR 1.4 billion, which carry a higher return on allocated capital due to a lower risk-weighted asset density. As a result, our performing loans, post repayments and amortization, had increased in the year by EUR 1.3 billion, contributing positively to our net banking income. On the deposit side, we recorded strong inflows of EUR 3.5 billion deposits on a group basis, with a notable shift from term to core deposits. Our digital transformation has continued and will further accelerate due to the pandemic, allowing for greater efficiency gains going forward. Currently, 92% of financial transactions are taking place through digital channels, while mobile users and digital wallets reported very significant increases within the year. We have also launched a simple and intuitive mobile-only retail customer onboarding process, allowing new customers to open an account, get a debit card and subscribe to banking in a matter of minutes through my Alpha Bank mobile, the bank's mobile banking app, without requiring physical presence. Furthermore, in 2020, we forged a new long-term relationship with Generali, whereby Alpha Bank will earn significant bancassurance fees over the next 20 years. Alpha Bank is targeting a significant increase in annual premiums and corresponding commissions in the lifetime of the new partnerships, also creating further value for performance earn-outs agreed with Generali. Now on Page 7, let's have a quick recap on Project Galaxy, a landmark transaction for Alpha Bank in terms of asset quality improvement and testament to the success of the Hellenic Asset Protection Scheme program, which is now in the process of being expanded by another EUR 12 billion of guarantees. In February this year, we entered into definitive agreements with Davidson Kempner in respect of the EUR 10.8 billion Galaxy portfolio and the sale of 80% in CEPAL holdings with the transaction expected to close in the second quarter. Davidson Kempner will acquire 51% of mezzanine and junior notes, whist we will retain 49% of those before subsequently distributing 44% to our shareholders in the second half of 2021, subject to corporate and regulatory approvals. We have also entered into a long-term servicing agreement with new CEPAL with a 13-year term for the management of our existing retail and wholesale NPEs that will remain on our balance sheet after Galaxy closing as well as any future NPE flows. CEPAL is also supporting the bank in forming its post-Galaxy NPE strategy, which will be submitted subsequently to the SSM. The CEPAL platform, coupled with the hive-down we're currently concluding will provide us with an enlarged set of flexibilities to allow for an even more effective business plan execution. Let's move on now to Page 9 and go over an NPE reduction in 2021, focusing on Greece. We expect to fully absorb any organic formation for the year on the back of moratoria defaults with planned NPE transaction of circa EUR 3 billion. As already discussed in our introduction, we have taken upfront more than 85% of the capital impact of these transactions, which comprise of both securitization under the Hellenic Asset Protection Scheme and portfolio sales, naming Project Cosmos and Orbit. We have come a long way since 2017, having delivered nearly EUR 5.5 billion average NPE reduction per year or more than EUR 16 billion in total. Including our planned transaction for this year, we will have delivered 75% NPE decrease within 4 years, while also targeting the older vintages. This is another step forward towards our target of a single-digit NPE percent in Greece. At the same time, we retain our flexibility to potentially upsize the ambition for inorganic NPE reduction on the back of our superior capital position and continuously declining cost for the asset protection scheme. On the next page, Page 10, let us go through the expected evolution of our capital position. Our full year 2020 total capital ratio stands at 18.4%, having already absorbed the greatest part of the cost of our planned 2021 NPE transactions. Pro forma for Galaxy and the EUR 500 million Tier 2 issuance in March this year, our total capital ratio stands at 16.9%, and our core equity Tier 1 ratio at 14.3%, respectively. We anticipate this year's organic capital generation, mainly comprise of the pretax profit and Synthetic Securitization transaction planned for the second quarter to fully offset the IFRS 9 phasing and the RWA growth from business expansion. At the same time, we will absorb the residual cost of NPE transactions calculate at incrementally another 10 basis points and remain within the range of our stated management capital targets with an estimated year-end cap ratio of circa 16.8%. The total costs for our 2021 NPE transactions is expected to amount to 65 to 70 basis points overall or circa 20 basis points for EUR 1 billion -- for every EUR 1 billion of deleveraging. On Page 11 now, a brief overview of the NPE transactions we're planning on executing this year. Project Cosmos is a EUR 2 billion granular multi-asset hub securitization in Greece to be launched in the first half of this year. It is mainly secured with a strong mortgage presence. Project Orbit is a $900 million consumer unsecured portfolio in Greece to be executed within this year as a straight unit tranche securitization sale. And then finally, Project Sky is a EUR 400 million mix secured portfolio in Cyprus, equally represented by mortgages and SME exposures to be sold as a whole loan portfolio sale. Turning to Page 12. You can see that Alpha Bank has had a consistent track record of negative NPE formation for the last 3 years, including 2020. However, for 2021 and given the pressure stemming from a troublesome last year, we expect to see a positive net NPE formation of EUR 300 million in Greece, excluding the impact of the transactions. Increased new NPE inflows for this year are particularly driven by the expiration of moratoria and were in effect -- that were in effect during 2020. We do, however, expect a significant part of this inflow to be offset by organic outflows, mainly driven by curings and repayments, but also solutions that will be including debt forgiveness as we continue the restructuring efforts on the remaining book. At the chart on the right-hand side of the page, we present a breakdown for the performing moratoria of EUR 5.5 billion, which we granted within last year. We expect that by the end of 2021, circa 80% of these exposures will remain in performing stages, partially supported by the [ industrial ] program as well as the new step-up products offered to customers facing temporary difficulties. However, we expect only 20% of these exposures to ultimately default.

Let's now move on the financial performance analysis. This is Lazaros. Good afternoon. And let's start on Page 15 with a summary of the key financial trends. We can see the top part of the page that despite the challenges brought by the COVID-19 outbreak in 2020, our core operating profitability improved with core pre-provision income up by 3.4% year-on-year to EUR 859 million, driven by resilient core revenues and improved operational efficiencies. Reported pre-provision income in 2020 was up by 25% year-on-year and stood at EUR 1.434 billion, supported by high trading gains. More specifically, within the last quarter of the year, Alpha Bank recorded a strong trading line of EUR 430 million, driven by realized gains from the GGB portfolio and benefiting from a GGB swap with a Greek state completed in December 2020, which resulted in a gain of EUR 171 million. In 2020, total trading income reached EUR 690 million versus EUR 410 million in 2019. Going forward, the closing of Galaxy within the second quarter of 2020 is expected to temporarily rebase the bank's core pre-provision income towards the EUR 800 million level or a high single-digit decrease versus 2020. Coming back to 2020 performance, let's see in more detail the drivers of the improved profitability during the fourth quarter. Net interest income stood at EUR 388 million, up by 1.6% quarter-on-quarter, mainly on the back of the following drivers. First, we had a higher contribution from the asset side by EUR 5.1 million, driven by higher average balances on the back of increased business loan disbursements, alongside improved lending spreads, affected by the market rate movement. Second, we had EUR 3 million negative impact from the liability side as increased deposit balances and more negative market rates were only partially offset by lower deposit rates. And finally, we had a positive effect from bonds and other items of EUR 4.1 million. Looking at year-on-year trends, net interest income was resilient, almost flattish at EUR 1.542 billion. This was a result of improved funding costs, mainly stemming from the substitution of interbank repos with Eurosystem funding at lower rates, which fully counterbalanced loan NII erosion due to spread pressure. This is in line with our guidance given earlier in 2020 for a flattish NII in the year. Net commission and fees in the fourth quarter 2020 stood at EUR 83.8 million, down by 1.2% compared to the third quarter, primarily as a result of weaker performance in the card business with lower transactions due to the lockdown. This was partially offset by higher loan commissions following increased disbursements and increased fee generation from asset management. Fees on a yearly basis were down by 1.4% to EUR 355 million, primarily reflecting decreased fee generation from commercial banking activities due to lower volume of transactions amid the pandemic and partially offset by an enhanced contribution of asset management and bancassurance. This was an even better performance than the minus 2% we guided back in November 2019. We expect fees and commissions to significantly increase by high single-digit number in 2021, reversing the 2020 trend as COVID-19 eases. The increase will be fueled by wealth management fees, bancassurance as well as card fee income from the revival of tourism. Going forward, in 2021 we expect net banking income to trend lower by circa 5% to 6%, driven by lower NII and higher fees. In the net interest income line, we expect a high single-digit reduction as a result of the Galaxy securitization to be recorded within the second quarter of the year. This will be partially counterbalanced by the positive contribution of the liability side, steming from the TLTRO benefit. Higher fees and other income are targeted to compensate for circa 30% of the NII loss, while recurring cost savings will also offset an extra 15% of NII loss in the year. On the OpEx side, in 2020 year, recurring operating expenses for the group continued to decline, down by 3.6% year-on-year to EUR 1.042 billion, within our guidance and primarily because of lower staff costs due to headcount reduction and reduced general expenses. As a result, the corresponding cost-to-income ratio declined to 55% versus 57%. Last year, we have recorded improving operational efficiency. In Greece, recurring operating expenses declined by almost 4% to EUR 834 million, whereas excluding expenses related to CEPAL acquisition during the summer, operating expenses in Greece declined by 6%. In the last 2 years, we have focused on the optimization and reconfiguration of our platform. So our branches in Greece at the end of December 2020 declined by 107 units to 336 and our employees were reduced by 1,477 to 6,316 employees in Greece. 2021 is the first year of the new NPE servicing agreement with CEPAL [indiscernible] Cyprus following the NPL unit carve-outs in Greece and Cyprus. In 2021, we target further cost reduction of approximately 2%, bringing the group recurring cost base to approximately EUR 1 billion. All in, if we turn now to Page 15, we see that our strong pre-provision income generation, including trading gains of EUR 690 million, stemming mainly from our GGB portfolio, allow for the absorption of increased yearly provisions of EUR 1.3 billion versus EUR 995 million in 2019, impacted by impairments due to COVID-19 of EUR 283 million and impairments related to anticipated portfolio transactions of EUR 320 million as we will see later on, resulting in a positive bottom line, with profit after tax at EUR 104 million for the year. Apart from the profitability line, let us highlight here that the year ended with higher coverage and capital levels as shown on the right-hand side, providing us with a good head start to pursue further NPE reduction initiatives in 2021 as described earlier. Now moving on to Page 16 for the capital ratios. You can see that our common equity Tier 1 stood at EUR 7.8 billion as of December 2020, resulting in a common equity Tier 1 of 17.3%, up by 10 basis points quarter-on-quarter as the negative impact from quarterly profitability and the decrease of fair value for OCI reserves were more than offset by a reduction in risk-weighted assets and the implementation of the ECB proposed CRR quick-fix amendments. The group's fully loaded Basel III common equity Tier 1 was up quarter-on-quarter by 18 basis points to 14.8%. Total capital ratio came to 18.4% at the end of 2020, providing a buffer of more than EUR 2 billion over our overall capital requirement of 14%. Total capital adequacy remained strong at 16.9% following the bank's successful Tier 2 issuance completed in March 2021 and taking into account the Galaxy impact of 280 basis points. Our strong capital position provides flexibility to execute further NPE reduction initiatives, while still maintaining comfortable buffers as the balance sheet of the bank normalized. The group's fully loaded Basel III total capital ratio stood at 16% at the end of December. Lastly, let me note that our GGB portfolio currently stands at EUR 4.8 billion, with the majority now being booked in amortized costs rather than fair value for OCI, as used to be the case. The government bonds and realized gains came to EUR 200 million at the pretax level. You can also see at the bottom right part of the page, that the yearly trading gains of EUR 690 million are mostly comprised from gains from our GGB portfolio. Moving on to Page 17, on liquidity and funding. As you can see on the top left chart, private sector deposits increased by EUR 2.1 billion to EUR 43.8 billion in the fourth quarter, with core deposits from corporates accounting for the majority of inflows. The total deposit inflows for the year on a group basis were EUR 3.5 billion. It is worth adding, as depicted in the chart below, but following similar trends in previous quarters of 2020, the rebalancing in the mix of deposits from time to core deposits persisted in the fourth quarter as well. Our Eurosystem funding remained stable at EUR 11.9 billion at the end of December 2020, reflecting full utilization of our TLTRO borrowing allowance. Currently, 17% of the balance sheet is funded via the European Central Bank, resulting in a blended funding cost of minus 14 basis points for the entire balance sheet. As far as the liquidity ratios are concerned, a notable improvement has occurred in the past 12 months with our LCR standing at 151% as of December, whilst the loan-to-deposit ratio decreased further to 90% for the group. Moving on to Page 18. Nonperforming exposure balances in Greece reduced by EUR 28 million during the fourth quarter of the year, bringing the total stock down to EUR 18.3 billion at the end of 2020. Looking more specifically at gross formation in Greece, entries slightly increased in the fourth quarter to about EUR 440 million due to imposed restrictions in moratoria offerings following EBA guidelines, while exits stood at EUR 470 million, mainly on the back of higher curings and repayments coming from the portfolio, not included in the moratoria perimeter. As shown on the right-hand side of the slide, gross formation in wholesale posted a positive evolution, whereas retail continued to report a negative formation. Nonperforming exposure formation in 2021 is expected to turn positive by EUR 300 million on inflows from moratoria, partly counterbalanced by curings and remedial management actions. Now moving on to our last slide, Page 19. We provide the evolution of cost of risk on a quarterly basis, along with the breakdown analysis of the COVID related impairments for the period. In the fourth quarter, impairment losses on loans stood at EUR 569 million, including EUR 320 million impairments related to forthcoming NPE portfolio sales. This resulted in a significant increase of the group coverage levels as shown on the top right, with group cash coverage having increased to 50% for NPEs and 85% for NPLs pro forma for Galaxy, while total NPL coverage, including collateral, stood at 127%. In the lower part of the page, you will note the breakdown of our full year impairment losses between core and noncore loans. With noncore, we refer to our exposure sold or expected to be sold under securitization and portfolio transactions, whereas core loans relate to both performing and nonperforming exposures, excluding the proposed transactions. You will note that the underlying cost of risk for the core portfolio is circa 100 basis points. COVID-related impairments further increased cost of risk by 70 basis points and the remaining provisions of [ 170 ] basis points for the year were allocated to portfolio sale perimeters, out of which almost half in the fourth quarter of the year. Now let's open the floor for questions.

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

Well done on the progress achieved in 2020. My first question is on capital and issuances going forward. As you show on Slide 10, it looks like your capital position looks still very solid even after the new announced securitization and already including the recent Tier 2 as well. There is not much mention to AT1. So I'm just wondering how you're planning to play that card that you'll be able to improve your total capital as well going forward? What is the strategy around the AT1 part? And also linked to the issuances, I was just wondering what is the plan on the MREL issuances if you're planning anything for this year? And if you have any projected impact to NII now for the next 1 or 2 years, you also could share? Then my second question is on your trading gains. You show on Slide 16, I take that, that EUR 300 million is the number you had in December. So I'm just wondering if you have an up-to-date figure to share. I assume that you'd have booked part of those gains already in Q1. So just confirm if that's the case or not. And then finally on the new securitization, I think that the numbers you present kind of suggest that the cost of the equity and the capital from the new disposals, they are much lower even on a relative basis compared to Galaxy or to the other Greek transactions we've seen so far. So I'm just wondering if you could just talk a bit about the characteristics. I think there is a lot maybe to do with the mix of the portfolios, given that the biggest one, it's a majority of mortgages. But also, I suspect that it kind of reflects what you've been mentioning before that your portfolio and your exposures after Galaxy, you would have a much improved profile in terms of restructuring, but also in terms of cost to clean, let's put it this way. So if there's any color you can shed on those future securitizations would be helpful.

Jonas, this is Lazaros. With regards to AT1, which was your question, indeed, the bank has room to issue up to EUR 800 million of AT1 post Galaxy. Currently, we have no plans to issue AT1. You can see from the capital evolution, particularly in 2021, that we can comfortably absorb the Galaxy impact as well as the impact of further transactions and still maintain the total capital adequacy ratio at 16.7%, which is above the management buffers that we want to have over the capital requirement of 14%. So we have at the end of 2021 a buffer to the tune of 2.8% of overall capital requirements. So there's no need really to consider any further capital issuance. Moreover, going forward, the plant provides for the maintenance of adequate capital buffers within internal capital generation means. So again, AT1 is not in the cards. Having said that, we could consider, in the medium term, in the future, a further optimization of the capital structure with view to increased return on equity and put further leverage on the capital structure when the market conditions for us will be more opportune for issuance of AT1 at much more reasonable cost that we could have these days. So currently, it's not in the cards, an option for the future, yes. Coming to MREL issuance, indeed, we will be planning for senior preferred issuance in the coming years, starting in 2021. You should have in mind for 2021, a benchmark issue and similar sizes in the coming years. The guidance I have given for net interest income for the year includes both the Tier 2, of course, that we have issued earlier this year as well as a further issuance of senior preferred, inaugural one. On your second question, with regards to trading gains, mark-to-market of our portfolio and the fair value through OCI, currently it stands lower than EUR 200 million pretax, around the EUR 150 million level.

On the -- on your remarks on the securitization, indeed, the costs of -- the reason this transaction comes in lower than Galaxy. The reason for that is twofold. Number one is that the HAPS fee currently as you well know, which has been taken up from the market, gives us more favorable fee structure, which gets embedded into the respective costs. And secondly, it is also the mix of the portfolio as well as the increased experience that we're having with using this instrument. Now on a relative basis with other transactions, I would say that there is a rebasing towards the 20 basis points cost per EUR 1 billion. We have seen announced transactions which are a bit lower than that. But we do believe that for the HAPS too, overall, we would be converging around these levels. So this is what I think the market should be expecting seeing us cost for these type of transactions over the next 12 to 18 months.

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

I'll have a few questions, please, and I'll start with NPEs in 2021. So when I look at your guidance for net NPE formation, I see that it's at around EUR 300 million, which to me sounds like a positive -- quite a positive statement. And I see on Slide 12 that this assumes a EUR 1.7 billion of gross inflows in 2021. And it's a pretty similar figure to what we saw in 2020 to be honest and despite all the moratoria, et cetera, that we had last year. So if you could maybe just talk a little more in detail about the dynamics here of where you would see those inflows? And basically, what part of it for moratoria and the underlying, that will be very helpful for me. And in terms of the remaining NPEs, now you've come a long way, obviously, since 2017 and also executed Galaxy without a delay. And I totally understand that the quality of the remaining book will improve meaningfully post Galaxy. But when we look at the balance, it's still a EUR 6 billion balance in Greece that you expect in 2021, which as a headline number, still looks higher than some of the other peers. So I was just trying to understand your thinking here in terms of upsizing the securitization that you have using your very comfortable capital position. How is your thinking? And is there something that you're basing? Let's say, would you expect the 2020 environment to be better than now, et cetera? So if you could tell us any color, that would be very helpful, I think.

Mehmet, this is Lazaros. On your first question, regarding our projections for net organic formation. Indeed, the bank projects inflows to the tune of EUR 1.7 billion, out of which we project EUR 1 billion to come out of those loans that have received moratoria in 2020. And this default rate approximately at 20% or slightly less than 20% is our current estimate for such defaults. You will note that additional remedial actions and strategies are applied for this perimeter on Page 12 on the right part of the page that if successfully applied on this perimeter, they will result lower than 20% defaults on loans under moratoria. And then we have an additional EUR 0.7 billion of defaults from the nonmoratoria perimeter with default rates comparable to the numbers that we have seen in previous year. On the sizing and the comparison with the previous years, you have to note that we're talking about a deterioration, mainly coming from those loans, which have been under moratoria and are currently accounted for, to a large extent, under Stage 2. 67% of those loans in moratoria are already in Stage 2. And inflows into Stage 3, mainly will come almost by 90% or more than 90% from all those loans that have been accounted for in Stage 3 -- in Stage 2, sorry. And to the extent that our macro scenarios and risk stresses that we have applied already in 2020 booking in 2020 cost of risk for COVID are confirmed. And it seems that the base case macro scenarios that we are facing here are better than ones we have used in our fourth quarter accounts, then these inflows will not have any material impact on the provision in line in 2021 because we have already built buffers. Then if you want to see how the net formation will trend, you need to take into consideration the fact that we have a consistent trend of exits from NPEs on the back of restructuring activity and a large pool of forborne entries that we have in our portfolio. This large pool of forborne entries procure curings of loans that have been previously restructured. In this case, 2021 is going to be a particular year because we're going to face curings, not just from restructurings that have happened in 2021, but all from restructurings that have happened in 2019. As in 2020, we have frozen curings to a good part of these loans. So some of these curings will take place in 2021. Also, we are convenient with CEPAL modifications and long-term restructurings with haircut, so we expect a significant amount also to come from loan restructurings with haircut and a much smaller, obviously, volume from liquidations as we have currently suspension of auctions, so the numbers there are not sizable. Whereas the EUR 300 million net formation seems to be a positive number under the circumstances. On the other hand, it's a markable deterioration of the plans that we had in mind pre-COVID as we were expecting a much higher organic deleveraging out of our restructuring efforts for both 2020 and 2021.

As far as your second question is concerned -- this is Vassilios, on the remaining NPEs, our stated targets for NPE deleveraging in Greece continues to be to achieve a single-digit NPE ratio at the end of 2022, which means that from the envisage level at the end of 2021, that would be incrementally a deleveraging of roughly EUR 2.5 billion. Now in April, we're having the annual -- the submission for the next 3 years for the NPE plan to a regulator. Therefore, we're currently contemplating how we're going to be faring over and above 2021. But the point I want to make is that even if we decide to go fully inorganically, this, given our capital position, and the cost estimates that, as we said, currently are prevailing in the market, we're talking about an operation, given that our capital allows for flexibility, both in terms of sizing and timing of inorganic NPE deleveraging.

Our next question comes from the line of Singh, Vijay with Fiera Capital.

First question I had was looking at Galaxy and the senior tranche size as you have described, it does seem like the junior tranche could come around to EUR 0.3 billion or so with a very large mezz. And what this would imply is that you're looking at probably getting rid of a tiny provision out of NPEs and subsequent portfolio could be probably a lot better in quality. Is that a fair assumption? I mean what sort of a portfolio would remain -- I mean, what sort of an NPE portfolio remains post the Galaxy transaction versus what you get it off in Galaxy?

I'm not sure I got the full question. The latter part was about the quality of the portfolio, post Galaxy, which is depicted on Page 9 of the presentation at EUR 8.8 billion in Greece, with a good part of it representing forborne NPEs, mainly below 90 days past due and the remaining almost 50% on NPLs. The transaction activity that you see for Cosmos and Orbit mainly comes out of the NPL space that stays back after Galaxy. This has been our focus so far on our deleveraging efforts. You will note that since December '17 out of EUR 16.6 billion of nonperforming loans above 90 days past due, we are ending up at EUR 4.7 billion pro forma for Galaxy. And then we are taking more EUR 3 billion from the NPL space to drive the NPL ratio in Greece at around the 10% level.

Okay. And does the EUR 3.5 billion NPE expectation for December '22 include the COVID overflows?

Yes. It does.

Okay. And then in regards to the agreement with Generali, I mean, in a lot of cases, banks do tend to get some advanced fees with these agreements? And I'm wondering, is there a capacity or buffer available to cushion any expected capital hit for the future securitizations with advanced repayments from Generali. Is that something that is possible or something you've considered?

The Generali transaction is not a capital measure for the bank. It's a very important commercial agreement to penetrate the insurance market increase, which is underpenetrated. There has not been an upfront consideration worth mentioning affecting our capital numbers. However, there have been arrangements for fees and earn-outs throughout the 20 years period in order, not just to align interest between the parties, but also to incentivize further sales and penetration. It's going to be an important income stream for the bank in the coming years, and we have optionality and flexibility to use this stream to boost our financial position.

Okay. And then, I mean, is it -- you could possibly looking at any front-loaded payments at all? Or is it not a part of scope as you mentioned it's -- you're not looking at it as a capital improvement measure.

Can you repeat the question? I didn't get it.

Sure. Could you be looking at any advanced payments or any upfront payments? Is that something that you've considered, considering that you're going through a major cleanup exercise or you think it's probably not required, you're so comfortable with the capital buffers?

No advanced payments.

Okay. And in terms of the NPE portfolio that remains of EUR 3.5 billion, what would be the expected provision cover on these at the end of December 2022?

We have, at the end of December 2020, a 50% cash coverage.

No. I'm talking about post securitizations. When you get to your targeted level, what would be the provision cover on those that remain?

We expect cash coverage to remain at these levels by the end of the reporting period, the planning period.

Okay. And in terms of the NPE reduction plan that you're planning to submit, are there any regulatory restrictions on certain level of cover that you need to maintain? Is that a part of scope? Or you would have pretty much fulfill the requirements at going below 10%?

There is no instructed cash coverage levels.

Okay. And I see a significant difference. I mean in terms of the NPE and NPL, you're talking about the inclusion of senior notes. But these are state guaranteed, right? So I'm just wondering what is causing the significant divergence between. Is it just the duration? Or is there something else at play?

I'm not quite sure why you are referring to the difference between the NPEs and NPLs that we're having to the thickness of the senior or to the duration of the transaction that we couldn't understand. Therefore, please rephrase your question.

Sure. For example, let me just go back to your earlier slide, this is slide number -- one second. Yes, you're talking about, for example, slide, I can't see the number here, but you're talking about an NPE ratio increase of about 52%. And I mean, this was 2017, and the NPL ratio was around 34%. And the explanation given is that the basis for ratio includes the senior notes of the securitization. But I'm wondering if these are state guaranteed instruments, then why is there such a significant divergence between the NPE ratio versus the NPL?

The divergence between the NPE and the NPL ratio has to do with the fact that NPEs include also restructured loans for nonperforming exposures below 90 days past due. And that's a pool from which we expect curings to happen because we're talking about paying customers who are in the corridor of getting cured. And that is the delta between NPEs and NPLs.

Okay. Perfect. One last question for me. In the context of what's going on in the sector, I mean, how do you see the current equity valuation of the bank? And I'm just wondering, do you see any sort of circumstances under which you raise equity capital in the next 2 years? And is it possible that we get nonpreemptive kind of a capital raise rather than a typical rights issue. Could you comment on that, please?

Well, typically, we do not comment on valuation. The only comment that we could make is with reference to the market reaction following the signing of our Galaxy transaction, where we see that actually, the market is indeed appreciating the significant improvement in our portfolio and also the fact that we are fully implementing our plan. As we have said before, we are continuing on working on the plan as far as potentially further accelerating our NPE plan, and along with that, we have also our transformation program. So all that may be further things that we may want to communicate as soon as we have them ready.

[Operator Instructions] The next question comes from Boulougouris, Alexandros with Wood & Co.

Just 2 very quick questions. Regarding the EUR 320 million that was set aside in Q4 for portfolio sales. So the Cosmos and Orbit are fully covered by this amount? That's my first question. And my second question is regarding the Cyprus business. I saw you announced an NPL sale of EUR 400 million. Is there a plan for the remaining NPE stock in 2022? I mean, the target to reduce the NPE ratio to below 10% by end of '23 implies for the group as well, I assume?

Alex, it's Vassilios. As far as your first question is concerned, we have put on Page 10, the respective impact on our capital position. There you can see this EUR 320 million, i.e., 60 basis points, that have been affecting our capital at the end of this year. And then there are another 10 basis points in 2021 capital impact in order to have the completed cost, as we said, of roughly 70 basis points in terms of capital. That's point number one. Point number two, your -- on the group target, this is something that we are still contemplating. And so this is part and parcel of the exercise that we're currently moving. So on that front, yet, we can't say more, but conceivably this is the direction of trouble that you have described.

The next question comes from the line of Nagel, Alberto with Mediobanca.

The first one is on TLTRO. Are you planning to increase the amount of TLTRO or if you have already done it? And can you repeat the guidance on NII, I just missed it? And if this includes also the positive contribution coming from the TLTRO taken in 2019. And then can you share with us the MREL requirement? And if you need to be complied with by 2026. And then if you can give us a guidance also on the trading income for 2021 or you are booking some extra gains in the first quarter of 2021? And the last one is on restructuring cost. If you expect to book a further restructuring cost in 2021 to fund the cost cutting?

As far as the TLTRO 3 is concerned, indeed, we have spaced for maybe EUR 1 billion more. I'm not sure we're going to use in full. The guidance I have given for a high single-digit reduction of NII assuming Galaxy is consolidated towards May from our portfolios, includes also the benefit that we're going to book in 2021, out of TLTRO and the benefit we're going to include in 2021 includes both an retroactive amount that corresponds to the second half of 2020, approximately EUR 25 million, plus an additional amount that corresponds to the entire 2021 year. So in total, we are expecting only out of TLTRO, a boost of our NII by approximately EUR 100 million for 2021. And coming to MREL, we cannot disclose both the interim binding as the final targets. We're expecting to have the official communication from ECB in the coming weeks. You should expect to see that the phasing of our obligations to issue MREL goes up to 2026. And we have provided adequate time to tap the markets for benchmark issues, of course, after many years of absence from the senior market. However, we see opportunities to start tapping the markets for senior preferred already in 2021. Now with regards to trading income, there have been additional crystallization of gains in the first quarter of the year. I cannot give guidance for the entire year on trading gains. But already in the first quarter, we are doing more. As far as restructuring costs are concerned, indeed, the bank is under transformation. We are implementing ambitious restructuring effort on both the Greek and international operations, so that require restructuring costs, and we are making also investments on IT and technology. Plus, we have enveloped for voluntary exit schemes that have been used extensively in the last few years. So you may see additional restructuring costs already employed in 2021 to facilitate our business plan. Depending on whether we will proceed to further actions on the Greek franchise, we may see additional restructuring costs to the tunes of -- the levels we had recorded in 2020. But this is not something to give guidance. It really depends on whether and when we will kick start further actions.

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

Given your plans on -- or amended plans on the NPE reduction, is it possible for you to give us an update on the evolution of cost of risk and return on tangible book over the next couple of years?

When we announced last year a business plan, it was 2019, we have the trajectory of getting to a cost of risk lower than 1%, and this is still the target following a very significant deleveraging of NPEs. Obviously, this is not for 2021, maybe not even for 2022. As far as 2021 is concerned, we will be guiding towards the cost of risk to the tune of 1.6% over net loans. And thereafter, the trajectory will go down 1% and lower than 1% in the coming couple of years.

We have a follow-up question from the line of Singh, Vijay with Fiera Capital.

Just one follow-up. In the last presentation, you did talk about an EUR 8.8 billion NPE had, had EUR 3 billion haircut. And I'm just wondering, does it mean that the exit prices for those NPEs could be higher than -- so these NPEs could be higher than in the past transaction? Are you seeing a better market overall? If you could just give any market color, please?

If I understood well your question, you're referring to the cost of doing more transactions, right?

Yes.

I think this was referenced by Vassilios on the new transactions. Overall, almost 70 basis points for EUR 3.3 billion that we're going to transact in 2021 or 20 bps for a EUR 1 billion of portfolio sales. You have to appreciate that securitization under the asset protection scheme is a more capital-efficient way to dispose nonperforming exposure as against outright sales. And the cost of 70 bps that we have presented here for the 3 transactions would have been lower if it was just a HAPS transaction. But here, the -- out of the 3 transactions, 2 are going to be outright sales.

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.

Thank you very much for taking the time to participate at our full year results presentation. We're looking forward to welcome you on our first quarter results to be announced in May. Thank you very much.

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