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

Hello, and welcome to the Deutsche Bank Depositary Receipt Virtual Investor Conference, DbVIC. My name is Zaf Aziz from the DR team at Deutsche Bank. I'm pleased to announce that our next presentation will be from Alpha Services and Holdings from Greece. [Operator Instructions] On a final note, all of today's presentations are recorded and can be accessed via the Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome Dimitrios Kostopoulos, Head of Investor Relations at Alpha Services and Holdings, which trades on the Athens Stock Exchange under the symbol ALPHA and in the U.S., on the OTC markets, as ALBKY. Over to you, Dimitrios.

Thank you, thank you. Good morning, everyone. It is a pleasure from my side, I'm the Head of Investor Relations of ALPHA, to have today's presentation and also answer 20 questions from the audience. Let's please turn to Page 4. Where for those who are less familiar with our name, I would like to give you some color and a refresh on Alpha Bank. We have laid out some key figures of our banking group as of the end of December 2020. We are a Greek Bank. Our operations are predominantly focused on Greece, where our loan market share stands at around 26%, and we are also present in 3 Southeastern European countries, with our loan market share ranging from 4% to 5%. We have a total balance sheet of circa EUR 70 billion and a gross loan book amounting to circa EUR 50 billion; segmentally, broken down at around 54% as business loans, 35% as mortgages and 11% consumer loans. In terms of our shareholder structure, we are a privately managed bank, with our stock mostly held by foreign institutional investors. The Greek state holds around 11% -- circa 11% through the Hellenic Financial Stability Fund, with restricted voting rights a consequence of our successful recapitalization in 2015 with private funds. Now let us turn to Page 5, where we note the key highlights of our full year 2020 results. 2020 was a challenging year, but we managed to deliver significant milestones for Alpha Bank. Our efforts and continued focus throughout 2020 on Project Galaxy has allowed us to enter into a definitive agreement with Davidson Kempner, a U.S. firm, over our EUR 10.8 billion securitization portfolio, alongside the sale of 80% stake in CEPAL, our NPL servicer. This will allow the bank to tangibly reduce its NPEs and NPL ratios in Greece to 24% and 13%, respectively. Transaction closing, subject to customary regulatory approvals, is targeted within the second quarter of 2021. This transformational transaction, alongside our upcoming hive-down process, sets the scene for additional actions on the nonperforming exposures resolution front while allowing the deployment of management focus and resources to rebuilding our banking franchise. In business development terms, 2020 was also a positive year as in December, we entered into a long-term bancassurance partnership with Generali, which will be a key enabler for the acceleration of our 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 new mobile 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 on loan and deposit volume growth, pre-provision income generation and capital adequacy. We achieved a 3.4% year-on-year increase in our core pre-provision income, while also recorded 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 the impairments for loans of EUR 1.3 billion in 2020, out of which EUR 283 million or circa 82% are COVID-related, while another EUR 320 million related to our 2021 planned NPE transactions. As a result, our group's NPE cash coverage increased to 50% pro forma for Galaxy from 45% last quarter, while our total capital ratio stands strong at 18.4% at the end of December 2020 or pro forma for Galaxy and the bank's successful Tier 2 issuance of EUR 500 million in March 2021 at 16.9%. We are undoubtedly entering [ the '21 stretch ] this year with a very strong capital position, which allows us to take a balanced approach on further NPE deleveraging through a series of 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 front, whilst remaining within our stated management targets. Now let us move to Page 6. On Page 6, we have summarized key financial metrics of 2020 that show the 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 of revenues, which was driven by strong operating trends, but also by a positive trending 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 1.04 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%, 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 26% versus 45% last year. In parallel, we also reported a significant improvement in group NPE coverage to 50% versus 44% last year. Now let us move to Page 7, a quick recap on Project Galaxy. This is a landmark transaction for Alpha Bank in terms of asset quality improvement and testament to the success of the Hercules Asset Protection Scheme program, which is now in the process of being expanded by another EUR 12 billion of guarantees provided by the Hellenic Republic for NPL securitization transactions. In February 2021, we entered into definitive agreements with Davidson Kempner, an experienced U.S. investor, in respect to 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 of 2021. Davidson Kempner will acquire 51% of the mezzanine and junior notes, whilst 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 the balance sheet after Galaxy, closing as well as of any future NPE flows. CEPAL is also supporting the bank, informing its post-Galaxy NPE strategy, which will be subsequently submitted to the SSM, Single Supervisory Mechanism, our regulator in Frankfurt. The CEPAL platform, coupled with the hive-down we are currently concluding, will provide us with a large set of flexibilities to allow for an even more effective business plan execution. Let's now move to Page 8. Here, we can see our NPE reduction for 2021, focusing on Greece. We expect to fully absorb any organic formation for the year on the back of moratoria defaults, with planned NPE transactions 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 the Hercules Asset Protection Scheme securitizations and portfolio sales, namely projects 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 and around EUR 16 billion in total. Including our planned 2021 transactions, we will have delivered a 75% NPE decrease within 4 years, while also targeting the older vintages. This is another step forward towards our target of below 10% NPE 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 the Hercules Asset Protection Scheme costs. Let's please now turn to Page 9, where you can see on the top left that Alpha Bank has had a consistent track record of negative NPE formation for the last 3 years, including 2020. However, for year 2021, and given the adverse conditions stemming from a troublesome 2020, we expect that excluding the impact of the transactions and on an organic evolution basis, we will see a positive net NPE formation of around EUR 300 million in Greece. Increased new NPE inflows for '21 are partially driven by the expiration of moratoria 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 including debt forgiveness as we continue the restructuring effort on the remaining book. At the chart on the right-hand side of the page, we present a breakdown for the performing moratoria as of the end of 2020 in total of EUR 5.5 billion, which now they have almost all expired. We expect that by the end of '21, around 80% of these exposures will remain in performing status, partially helped by the EFRAH program as well as the new step-up products offered to customers facing temporary difficulties. However, we do expect that around 18% to 20% of these exposures will not be able to be saved and thus to default. Now let us move on Page 10, where we can see our capital position. On year 2020, at the -- at December -- onto December of 2020, our capital adequacy ratio stands at 18.4%, having already absorbed the greatest part of the cost of our planned 2021 NPE transactions. Pro forma for the Galaxy and the EUR 500 million Tier 2 issuance in March '21, our capital adequacy ratio stands at 16.9% and our common equity Tier 1 ratio at 14.3%, respectively. We anticipate this year's organic capital generation, mainly comprised of 2021 pretax profit and the synthetic securitization transaction planned for this year, for 2021, to fully offset IFRS 9 phasing and risk-weighted asset growth from business expansion. At the same time, we will absorb the residual cost of NPE transactions calculated at another 10 basis points and remain within the range of our stated management capital buffer -- targets, with an estimated year-end capital adequacy ratio of 16.8%. The total cost of our 2021 NPE transactions is expected to amount 65 to 70 basis points overall or circa 20 basis points per billion of deleverage. Now moving to our financial performance for 2020, let's move to Page 12. We can see on the top part of the page that despite the challenges brought by the COVID-19 outbreak, our 2020 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 efficiency. Reported pre-provision income in 2020 was up by 25% year-on-year and stood at EUR 1.43 billion, supported by higher 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 Greek government bonds portfolio and benefiting from a Greek government bonds swap arrangement [ which the Greek state ] completed in December 2020, which resulted in a gain of EUR 171 million. In total, for 2020, total trading income reached EUR 619 million versus EUR 410 million in 2019. Going forward, with the closing of Galaxy within the second quarter of 2020 -- of 2021, is expected to temporarily rebase the bank's core PPI towards the EUR 800 million level or a high single-digit decrease versus 2020. Coming back, in last year's performance, let's see in more detail the drivers of the improved profitability in -- during the fourth quarter. Net interest income in the fourth quarter of 2020 stood EUR 388 million, up by 1.6% quarter-on-quarter, mainly on the back of high contribution from the asset side by EUR 5.1 million driven by higher average balances due to increased business loan disbursements, alongside the improved lending spreads affected by the market rate movement. EUR 3 million -- we had a 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 the bonds portfolio of around EUR 4.1 million. Looking at year-on-year trends for the NII. NII was resilient, just slightly 0.4% down year-on-year at EUR 1.542 million. This was a result of improved funding costs, mainly stemming from the substitution of interbank repos with Eurosystem funding at lower rates, fully counterbalancing lower loan NII due to spread pressure. This is in line with our guidance for flat NII in -- for the year 2020 we had provided. Going forward, in '21, we expect an NII reduction of a high single-digit number versus 2020 due to the NII impact of our jumbo Galaxy securitization that will be recorded within the second quarter of the year. This will be partly counterbalanced by the positive contribution on the liability side stemming from the TLTRO benefit. Moving to fees. Net commission and fees income in the fourth quarter of 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 on the back of reduced 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 went down by 1.4% to EUR 335 million primarily reflecting decreased fee generation from commercial banking activities due to the reduced 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 a high single-digit number in '21, 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 tourists. On the OpEx side, the recurring operating expenses for the group continued to decline, down by 3.6% year-on-year to EUR 1.042 million, 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 54.8% versus 56.5% last year, improving operational efficiency. In Greece, recurring operating expenses declined by 3.7% year-on-year to EUR 834 million, whereas excluding expenses related to CEPAL, operating expenses in Greece declined by 6.1%. In the last 2 years, we focused on the optimization and reconfiguration of our platform so our branches in Greece, as at the end of December 2020, declined by 107 to 336, and our employees were reduced by 1,477 FTEs. 2021 is the first year of the NPE servicing agreements with CEPAL and doValue following the NPL units' carveout in Greece and Cyprus. In '21, we target further cost reduction of around 2%, bringing the group recurring cost base to around EUR 1 billion. Now let's move to Page 13. We see that our strong pre-provision income generation, including trading gains stemming from our GGB portfolio, allowed for the absorption of increased yearly provisions of around EUR 1.3 billion versus EUR 995 million in 2019, impacted by the impairments due to COVID-19 of EUR 283 million and impairments related to the noncore portfolio of EUR 320 million. That has resulted in a positive bottom line with profit after tax of EUR 104 million. Apart from the profitability, let us highlight here that the year ended with higher coverage and capital levels as shown on the right-hand side of the page. Let us move now at Page 14 on our capital. On Page 14, 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 ratio of 17.3%, up by circa 10 basis points quarter-on-quarter as the negative impact from quarterly profitability and the decrease in the fair value through OCI reserves were more than offset by a reduction in risk-weighted assets and the implementation of ECB's proposed CRR quick fix amendment. 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 EUR 2 billion over our overall capital requirement of 14%. Total CAD remained strong at 16.9% following the bank's successful Tier 1 -- Tier 2 issuance completed in March '21 and taking into account the Galaxy impact of 280 basis points. Now let's turn to Page 15 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 Q4, 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, that following similar trends in previous quarters of 2020, the rebalancing of the mix of deposits from term to core persisted in the fourth quarter as well. Our Eurosystem funding remained stable at EUR 11.9 billion at the end of December 2020, reflecting a full utilization of our TLTRO borrowing allowance. Now let's move to Page 16. The NPE balances in Greece reduced by EUR 28 million during the fourth quarter, bringing the stock down to EUR 18.3 billion at the end of 2020 before -- that is before the Galaxy transaction. 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. As shown on the right-hand side of the page, gross formation in wholesale posted a positive evolution, whereas retail continued to report a negative formation. Now let's move to Page 17. Here, we can 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 fourth quarter, impairment losses on loans stood at EUR 569 million, including EUR 320 million impairments related to the forthcoming NPE portfolio sales. This resulted to a significant increase of the group coverage levels as shown in the top right, with group cash coverage having increased to 50% for NPE and 85% for NPLs, pro forma for Galaxy, while the total NPL coverage, including collateral, stands at 127%. With that, I conclude my presentation, and let us go to the Q&A session.

The first question is a question [ which says ] significant branch reductions. Will you continue to reduce brick-and-mortar and focus on online banking? Yes, we are going to reduce, not much as in previous years, though, the branch footprint in Greece. Truly, customers are using more and more online banking, web banking mobile apps, to transact with the bank, to do their financial transactions. This provides quite a lot of efficiency for the bank. We are looking to start offering also credit products via the digital applications. So this will surely provide more efficiencies for Alpha Bank. What is -- another question, what is the rationale to distribute the notes to your equity shareholders? What type of interest rates and other conditions will [ these now carry ]? We are going to distribute to our shareholders by the end of the year, the mezzanine and the junior notes. The mezzanine notes, if I recall correctly, carry an interest rate of around 4%, but more details on that and more clarifications when the distribution will take place towards the end of the year. We expect, these notes we are going to distribute to our equity shareholders, they will be able to be traded in a trading platform. Great -- another question, great year progress, great year progress on operating expenses. What is the cost control for 2021? We are looking at the reduction of our recurring operating expenses for '21 at around 2% driven both from the staff cost reduction, but also from G&A., so from both areas. Any new product launches to counter the low interest rate environment? Yes, of course, the bank is actually focusing to expand the fee revenues of the bank. We are -- we do want to take advantage, let me put it this way, the low interest rate environment by focusing on our wealth management platform. We have a private banking platform. We have an affluent clientele platform for smaller portfolios. And we have an asset management company. So we do believe there is a lot of scope there for a structural shift of clients' money. We used to put them into time deposits, now they're [ earning 0; two ], our wealth management platform, this will provide more fee generation; and same also goes for the bancassurance platform, where we -- with the Generali, the Italian insurance firm. We also want to expand this product, which will provide much more fee generation for the bank as we expect clients to shift to life insurance products, which is more generative for us. How strategic is your non-Greece operations in Albania, Cyprus and Romania? I would start, the most important one is Romania, which is in a very good position, and the country is in a very good position. And we believe there, we can see a much better performance. Cyprus, we are proceeding with the cleanup of the country, but first, we have to proceed with the cleanup of NPEs. Albania is last in terms of importance. I see we have -- we're up to our 30 minutes time we have. I would like to thank you all for listening to our presentation. I would like to thank you very much, Deutsche Bank, for arranging the conference. I will wrap it up now. Thank you very much. [ Nick ], the floor is yours.