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

Welcome to the Deutsche Bank Depository Receipts Virtual Investor Conference, dbVIC. My name is Zaf Aziz from the Deutsche Bank team. I'm pleased to announce our next presentation will be conducted by Alpha Bank from Greece. Before I introduce our speaker, note that all of today's presentations will be recorded and can be accessed by the Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome Iason Kepaptsoglou, Head of Investor Relations of Alpha Bank, which trades on the Athens Stock Exchange of the symbol ALPHA and in the U.S. on the OTC market as ALBKY. Welcome. Over to you.

Hello, everyone. I'm Iason Kepaptsoglou, I'm Alpha Bank's Head of IR. Thank you very much for joining in our presentation today. Unfortunately, we had a small technical last minute glitch. So that's the reason why you can't see me. And unfortunately, that also means we won't be able to take live Q&A, but we're more than happy to answer your questions via our e-mail address, [email protected]. And with that, let's dive straight in on Slide 3, please. We are the trusted relationship bank of Greece. This is our DNA. And in the eyes of our customers, we are reliable, resilient and humane. We are the leading bank for trusted advice, expertise and professionalism and this gets reflected in our market positioning as the #1 in wholesale lending, in mutual funds, in credit cards, and we have the best private banking offering in the country. The trust that our customers have in our bank is also reflected in the customer satisfaction scores and is evidenced by the tenure of our client relationships. We have a unique heritage built on nearly 140 years of history as the oldest privately owned bank in Greece with a mindset to deliver shareholder value. We are the only company listed in the Athens Stock Exchange to consistently distribute dividends to shareholders for nearly 60 years from the end of World War II until the onset of the Greek crisis. Even during the years of the crisis, our entrepreneurial mentality led us to minimize any support from the states. We work as one team, and the culture and quality of our brands are reflected in our people. We are an inclusive company whose employee relationships are based on mutual respect. This has led over the years to high levels of employee engagement and, especially in recent years, the ability to attract and retain talent on the back of a fully revamped HR proposition. Slide 4, a few numbers. Our total balance sheet is closing into EUR 75 billion with circa EUR 40 billion in loans and just over EUR 50 billion in deposits. Our tangible book value is just over EUR 6.2 billion and our market capitalization is about EUR 3.4 billion. In 2023, we expect to generate over EUR 700 million in profits. On to Slide 5. Creating superior value for our shareholders and empowering our customers for growth is our foremost mission. We have a solid track record on this. We are the market leader in wholesale banking, and we are the bank of choice for the affluent customers. Trust is our most valuable currency, and we enjoy strong customer relationships and partnerships that fuel our growth. We are fortunate to operate in a favorable macroeconomic context, especially considering the current political and economic dynamics for Greece. We have an ambitious plan for the next 3 years, aiming to grow our earnings at an annual pace of 20%, delivering a return on tangible equity above 12% by 2025 while generating nearly EUR 2.3 billion of capital throughout the period. Let us now take a quick look at the context in which we operate on Slide 6. The Greek economy has demonstrated remarkable resilience in the last 3 years, overcoming two crisis and transforming rapidly on the back of a program of structural reforms. The ongoing transformation is accelerated by the large inflow of European Union funds that provide a unique opportunity for revitalizing the Greek economy and transforming its productive model towards investment-led growth. Furthermore, the country has robust public finances. Greece reduced the debt-to-GDP ratio by almost 18 percentage points since 2019, the largest decline in Europe. And it holds one of the most sustainable debt profiles in Europe. Investors and businesses have regained confidence in the Greek economy. Greece gained 16 positions in business environment ranking, the largest jump among 81 countries. And the spread against the German 10-year bond has compressed by nearly 50%. This was all accompanied by one of the most significant banking transformations in recent history. The combination of favorable debt dynamics, gains in confidence, a sound banking system and political stability have put Greece back on the investment credit grade map in 2023. Slide 7 now. We see strong fundamentals that drive banking demand in the market. Employment and individuals' disposable income have been improving at a steady pace, driving an increase of savings that manifested in household deposit balance growth, while the real estate market has proven to be resilient. Digital awareness is increasing on the back of the acceleration imposed by COVID, supporting the digitization of banking services. Foreign direct investments have been growing at about 17% per annum since 2019, and we expect investment to continue growing. The Greek economy has been posting convincing signs of competitiveness improvements in the global trade with exports growing significantly faster than GDP. All of the above set the theme for sustained, robust macroeconomic growth in Greece, as you can see on Slide 8. Real GDP is expected to go up nearly 3% per year, a faster pace than the European Union average. The labor market is expected to continue improving with the unemployment rate dropping to approximately 10% in 2025. Median disposable incomes and house prices are expected to continue their steady growth between 3% and 4% per year. We are confident in the outlook for the Greek economy. The growth is driven by structural trends that affect profoundly the demand for banking services. This is more pronounced in segments where we are traditionally strong, such as business and individual investments. We believe we are uniquely positioned to capture these trends. We have structured our strategic priorities accordingly. With that in mind, let us move to our strategic plan and allow me to give you some perspective on how our priorities have evolved over time. The past few years were marked by a period of restructuring. The focus was on restoring the balance sheet and fixing the fundamentals of our operating model, deleveraging problematic assets and exiting noncore businesses. Strengthening our balance sheet has drastically impacted our revenues. Hence, our attention shifted to top line growth, which was supported by favorable macro environment. Cost rationalization and the normalization of the cost of risk resulting from the first phase of our work allowed us to reap the benefits and contributed to increased recurring profitability. By the end of this year, we will have overachieved our targets of 10% return on tangible equity, and we will be looking forward for better financial performance and increased sustainable returns to our shareholders. The whole management team is focused on swiftly improving the structural profitability of our business units. To that effect, we will continue to invest in our people and our digital capabilities. Increased profitability and capital discipline is expected to lead to significant capital creation, which will be used to support expansion of our balance sheet and to distribute value to shareholders, subject to regulatory approval. In terms of financial targets, we aim to deliver a return on tangible equity above 12% by 2025. Earnings will be on an upwards trajectory with EPS growing by more than 20% on an annualized basis for the period between 2022 and 2025. We plan to generate EUR 2.3 billion of capital throughout these periods, thanks to a faster-than-market earnings growth and conversion of our DTA stock. This will allow us to gradually resume dividend payments starting from 2023 profits following the relevant dialogue with our regulators. On Slide 10, we see here our six strategic priorities, the operational levers we are using to achieve our financial ambitions. In retail, we plan to more than double our profitability. We will fully digitize everyday banking needs, which should free up time for our people to allocate more time on commercial matters. In wealth, we aim to address a wider customer base, scaling our wealth engine and customizing our investment propositions to all segments, increasing investments penetration. For wholesale, our plan is straightforward: To leverage our leadership position to capture the potential of the markets while maintaining our robust profitability. On our international business, the objective is to improve the return on deployed capital. Additionally, we aim to maintain the resilience of our balance sheet, focusing on a diversified and prudently priced performing book, reducing our exposure to problematic assets whilst maintaining strong levels of liquidity. Finally, we will leverage sustainability as a value creation lever. This plan will be enabled by our investments in people and digital. Moving to Slide 11 to look at more recent trends. Last Friday, we posted another strong set of results, continuing on the path to produce sustainable value for our stakeholders. Our profitability in the first 9 months has exceeded 12%, with well over EUR 0.5 billion of normalized earnings. Revenues are up by close to 20% year-on-year, driven by higher rates, but also higher bond and loan volumes and higher recurring fees. Operating leverage and strict cost discipline have driven our cost-to-income ratio down to the low 40s, while asset quality remains relatively benign with our cost of risk having largely normalized. As a result, we have generated EUR 0.24 of recurring earnings per share in the 9 months of the year, up 92% year-over-year. With this quarter's results, we continue to demonstrate that we are making quick work of meeting our financial targets, of increasing profitability and generating capital to support growth and create value for our shareholders. And with that, let's move to Slide 12, please. On the 23rd of October, we announced a groundbreaking agreement with UniCredit. The agreement consists of three distinct components. First, we are combining our respective banks in Romania, creating the #3 player in the market. Our local bank will merge with UniCredit Romania with Alpha Bank receiving EUR 300 million in cash as well as a 9.9% stake in the combined entity. Second, we are forming a commercial partnership in asset management, bancassurance and other banking services. UniCredit will acquire 51% of our life insurance subsidiary, Alpha Life, whilst Alpha Bank will distribute UniCredit's mutual funds. Additionally, the two banks will operate a cross-border referral system. And third, to underpin its commitment to the partnership, UniCredit will acquire a stake in our bank. The various facets of this transaction are fully aligned with our strategic objectives, as you can see on Slide 13. The transaction vastly improves the return on the capital that we deploy in our international business. The merger will unlock the profitability benefits of having critical scale in a country where subscale is important. Hence, we are able to retain our presence in a capital-efficient way, allowing us to enjoy the uplift in value from the synergies whilst participating in the favorable growth outlook. The transaction has allowed us to realize the value of our franchise in Romania in an accelerated manner whilst limiting the risk from the investment that would have been required otherwise. The commercial partnership we have formed with UniCredit is similarly very important. It is a real differentiator for the Alpha Bank franchise. It will cement our franchise with Greek corporates as we become the de facto [ part of goal ] for their international ambitions, alongside our leadership position domestically. It enriches the product range that we are able to offer to our affluent customers, whilst also bringing expertise that will derisk our efforts to expand our reach to the emerging affluent class. And last, but not least, it makes us part of the pan-European network, increasing on negotiating power with counterparties and elevating our access to various European markets as well as to leading expertise. And then on Slide 14, we outlined the financial impact from the deal. These transactions are clearly positive. We set our 2025 targets with our Investor Day back in June. Overall, the transaction leaves net profit expectations unchanged. We will, of course, use the contribution of our Romanian subsidiary from the P&L. However, we will be able to make up about half of that from our 10% stake in the more profitable combined entity. The remainder will come from lower funding needs and the reinvestment of the cash proceeds. At the same time, we will be further enhancing our capital ratio by more than 100 basis points, out of which 90 basis points is due to the deconsolidation of the EUR 2 billion of Romanian risk-weighted assets. We expect to achieve the same profits, but with lower capital consumption, thus achieving 50 basis points higher profitability. Importantly, these estimates do not include the potential upsides from the commercial agreement. Let's turn to Slide 15 now. Improved profitability for Alpha Bank is coming from two sources. First, we are seeing a structural improvement in the profitability of it and every one of our business units. As the levers, we are operationalizing combined with macro tailwinds to produce sustainably higher returns. And second, we ensure that we allocate capital in the most value-accretive way. We have seen returns on regulatory capital based on our 13% target for common equity Tier 1 grow from 9.5% last year to over 17% in the first 9 months of the year. Group returns on the regulatory capital that we need to carry are reduced by the regulatory treatment of our deferred tax assets, leading us to deliver a return on tangible equity of 12.8% in the first 9 months of the year. Maximizing returns for our shareholders is our utmost priority. Before wrapping up, let me summarize what I think you should keep as Alpha Bank's differentiating position on Slide 16. Our starting point is based on our identity, our execution track records, the quality of our platform and the positive outlook for Greece. We have ambitious targets to reach at least 12% return on tangible equity by 2025, a performance that is even more impressive if one considers the unutilized DTAs we still carry on our balance sheet. We expect to generate more than EUR 2.3 billion of capital to fund our plans and create value for our shareholders. And finally, we have set ourselves very transparent strategic priorities, enabled by robust investments and solid plan for people and digital to deliver superior value to our shareholders. Thank you very much for your attention. We will be more than happy to take your questions over e-mail at ir.alpha.gr. Thank you very much.