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

Good day, and welcome to today's UniCredit and Alpha Bank conference call, which will be hosted by Andrea Orcel, CEO of UniCredit and Vassilios Psaltis, CEO of Alpha Bank. This meeting is being recorded. And at this time, I'd like to hand the call over to Andrea Orcel, CEO of UniCredit. Please go ahead.

Thank you. Good morning, everyone, and thank you very much for joining this call at rather short notice on a Monday morning. I and Vassilios Psaltis, the CEO of Alpha Bank, are cohosting this call today to briefly present to you the details of our strategic partnership in Greece and Romania and to answer any questions you may have.

Well, thank you, Andrea. Good morning from my side as well. It's a real pleasure [indiscernible] to announce this landmark transaction as it is the first investment by a strategic player in the Greek banking space since the onset of the sovereign crisis. Andrea knows the market very well and he has been by our side under a different capacity over the years. That's a fair bit to go through. So Andrea will give an overview of the Romanian labor agreements and I will then follow up with Greece. We'll talk about how this ties up into our respective strategic imperatives and take your questions, hopefully keeping it within an hour. So over to you, Andrea.

Thank you, Vassilios. So let's start with the Romanian leg. I have made it a key component of our regular financial updates when asked about expansion to strategy opportunities that I see in what I term bolt-on acquisition in our key markets with a particular focus on those countries in CEE. Today's announcement is a demonstration of that interest in our gross markets and natural extension of our strategy with the creation of the third largest bank in Romania by total assets. In practical terms, as you will have read, the merger combines 2 complementary franchises with UniCredit Romania and Alpha Bank Romania, both having solid footholds in the corporate and retail segments. The basis of this agreement brings together 2 exceptionally high-quality institution with a complementary focus on driving growth in Romania, providing enhanced benefit to their respective client bases. For Alpha, it is a route to Romania and UniCredit's other 12 markets. And for UniCredit, it is access to Greece for UniCredit's products and factories. The complementary nature of these client segments coupled with the strength of offering from UniCredit's best-in-class product factories means that as a result, the merger will grant the current customer of Alpha Bank Romania with access to an enlarged range of services and products provided by UniCredit. The transaction is expected to close in 2024, subject to the normal completion of a confirmatory due diligence process, corporate approval for the merger and all necessary regulatory approvals and consents, including an anti-trust. Once completed, Alpha Bank is expected to retain 9.9% of the combined entity share capital, and we see the cash consideration of EUR 300 million or a lower amount in the event of any post due diligence adjustment. For us, the impact on our CET1 ratio as a result of this acquisition will be around 15 basis points.

So let's move now on to the commercial partnership in Greece. There are actually several complementary aspects to this part of the transaction. Number one, UniCredit will purchase a majority 51 stake in Alpha Life, our pension and savings product focus subsidiary, benefiting from an exclusive long-term distribution agreement with Alpha Bank whilst then reaching the current product range through the addition of UniCredit [ products ]. Number two, we will enter into a distribution agreement for UniCredit's Asset Management products with UniCredit gaining access to our full distribution network whilst Alpha Bank's clients will benefit from an increased offering that will now encompass UniCredit one market mutual funds as well as the terms and conditions that UniCredit has been able to attain from their existing partners. The ability of UniCredit to extract better terms out of their partners for the benefit of our clients as they do for their existing clients is a clear differentiator and is now enhanced as they bring with them the increased weight of 16.5 million clients. And then lastly, through a cross-referral system, our respective client bases will gain access to an enhanced service offering across the product range in the UniCredit combined 15 countries of presence. That's together with Alpha Bank. This is a truly mutually beneficial commitment. UniCredit gains access to our universe of clients to distribute their products and our clients get access to a significantly enhanced offering at the best terms and conditions possible.

I would like to add that after significant reforms to aid the country's recovery from deep economic depression. The macro outlook for Greece has strengthened with the country now having a high growth potential and expected to post the third highest growth rate in the Eurozone in 2023 at 2.5% behind only Cyprus and Malta according to IMF forecast. Robust economic momentum and a legislative overhaul place the country in a favorable position in terms of attracting foreign investors. Rating agencies have already started to upgrade Greece to investment grade after 13 years. More recently, S&P this past Friday and more are expected to follow. Moving on to the next part. We have submitted today an offer to the Atlantic Financial Stability Fund to purchase in accordance with the HFSF that is strategy and procedure all the share of HFSF currently hold in Alpha, equal to circa 9%. The transaction will have a negligible impact on UniCredit's CET1 ratio. If the process with the HFSF is not completed, UniCredit has committed to purchase on market the lower of a 5% equity participation in Alpha for pre-agreed value if over a period of 24 months. In Romania, the decision to merge our Romanian subsidiary is primarily driven by doing what we believe is in the best interest of the best of the business over the long term and what creates maximum value for our shareholders. As those of you who follow us know, our objective for Romania has been to ensure that we maximize the value of our established franchise. The merger with a top player in the pan-European banking space, such as UniCredit is a testament to the quality and thus the value of our franchise there. Through the merger of our subsidiary in the country, we are able to attain critical size, solidifying the status of the combined entity. I'm sorry, but I seem to have jumped a page, I apologize. Linked to the UniCredit strategy, as mentioned at the outset, opportunities to grow our footprint and our presence in the CE market, and the opportunities that it presents as well as the expansion of our product factories and the cementing of partnership that enables that expansion are core tenets of our growth strategy. This project is a natural expansion of our strategy, and with it, we meet all our objectives. We grow our presence in an attractive growth markets such as Romania and are able to tap into a pipeline that provide access to 2 million clients to whom we can offer best-in-class products and services in a fee-driven capital-light way. It indicates for quality, competitiveness and success of our factories, how they can be scaled and leveraged for the benefit of not only our clients, but both of our partners, starting with Alpha. It becomes a primary -- in becoming a primary partner to Alpha in both asset management and unit-linked, we underscore the quality of one market and demonstrate the first step towards an internalization of life insurance. It also indicates the quality, competitiveness, and success of our factories, how they can be scaled and leveraged for the benefit of not only our clients, but also both of our partners starting again with Alpha. And finally, we underscore the strategic approach by UniCredit that Alpha has taken in expanding both geographically and product-wise, since we unveiled UniCredit unlocked leveraging on the attractiveness on our business at the pan-European level. Being able to fulfill this objective with a [ partner ] as complementary as Alpha, where the synergies from the geographic and client footprint are so evident ensures that these merchants will truly be to the benefit for all of our clients and to that of our shareholders. And I'll pass it back on to Vassilios.

For Alpha Bank, this transaction as well clearly promotes our strategic objectives. In Romania, the decision to merge a Romanian subsidiary is primarily driven by doing what we believe is in the best interest of the business over the long term and what creates maximum value for our shareholders. As those of you who follow us know, our objective for Romania has been to ensure that we maximize the value of our established [ branch ]. The merger with a top player in the European banking space such as UniCredit, is testament to the quality and [ has ] the value of our franchise there. Through the merger of our subsidiaries in the country, we're able to attain critical size, solidifying the status of the combined entity as a top 3 player in the market, thus improving the profitability potential. The additional net income allow us to benefit from an uplift in the value of our investment, whilst at the same time, the retention of a 10% stake means that we can still capitalize on the favorable outlook for Romania. And of course, we retain this presence in a capital-efficient way, further optimizing our capital allocation and seeing an uplift to group returns to the upfront realization of value. With regards to our partnership in Greece, we have in the past established commercial agreements that accelerate product development and transfer know-how, mainly in the payment and in the non-life space. However, the agreement we announced with UniCredit today is not simply an extension of that strategy as it comes with a much wider envelope of a holistic, long-term partnership and a large equity investment. UniCredit comes with strong know-how in the targeted areas and has wide expertise and a broad network that will improve the overall service we can provide to our customers. We believe this partnership cements our leading position in the respective segments domestically in Greece and thus further strengthens our franchise underpinning our ability to improve the value that we create for our shareholders going forward. Furthermore, we bring a strategic partner on to our registry that has significant know-how and a strong presence in Europe, and we welcome the option to participate in our Board. And importantly, we accelerate and derisk the pending transaction by the HFSF. And then lastly, in terms of the impact on our key financial targets, these transactions are positive. In June, we set out our 2025 targets. And based on those, overall, the transaction leaves net profit expectations unchanged. However, at the same time, we will be further enhancing our capital buffers by more than 100 basis points mainly due to the deconsolidation of the Romanian risk-weighted assets. And as a result, we now expect to improve our 2025 return on tangible equity by 50 basis points from above 12% to above 12.5% with upside potential from the commercial agreement. And Andrea, I think with that, we should open the floor to questions.

[Operator Instructions] And our first question comes from Antonio Reale from Bank of America.

It's Antonio from Bank of America. I have a couple of questions for Andrea, please. So it's clear what you're doing in Romania. I think it's clear also the financial rationale of the deal. It's a little less clear to me what your strategy is with respect to Greece. So you'll have a stake in Alpha Bank, have signed a commercial partnership, extended your product offering in Greece, which is a new market for you. What is your medium-term strategy in Greece? That's my first question. And secondly, you're guiding to a run rate of 100 million incremental net profit for UniCredit, which derives from the merger in Romania and the partnerships. Can you maybe break down the drivers of the incremental net profits? How much will come from Romania and how much will come from Greece?

Okay. So medium-term strategy, it is what it is today, meaning we -- in discussing with Alpha, the merger of our subsidiary in Romania, we actually came across the fact that there was significant value we could add for Alpha by plugging our factories, which will start with asset management and unit linked and shall continue across the board into their client franchise. And for us, it provides us with, let's say, the indication of the quality we have built in our factories plus an ability to expand the capital-light fee income and quality income into a parallel client franchise, i.e., the one of Alpha. So in looking at that, it also made sense to seal this partnership with the acquisition of a significant, but limited stake in the bank. Given the privatization, we have elected to make an offer to HFSF for their 8.9%. If that were to fail or not complete for any reason, it is a competitive process. We will -- we are committed to buy the lower of 5% or a capped amount over the next 2 years to support our partnership in factories. That is what it is, not more. Actually, I am very excited about it because we have discussed the pan-European advantages that UniCredit offers to its 13 banks and to all of the clients in the 13 countries. In this way, we will be able to stretch those advantages to Alpha and Alpha will stretch those advantages to our 13 banks without having to do a more traditional full acquisition of a bank. So it gives a lot more flexibility in my opinion, capital-light development potential to our model. With respect to where the value comes. I think the value comes primarily from Romania at this point in time. While we are very excited about what we can do with Alpha, what we have in those numbers are particularly related to unit-linked and asset management. And at the moment, Greece is still at the beginning of its cost phase in those areas, although Alpha has one of the best franchises in those products. So those at the beginning will be limited. Most of the value comes, as I said, from Romania. You just have to compare cost income ratio of the 2 banks and [ add ] some to see how much is cost synergies. There will be significant amount of, let's call it, liquidity or financial synergies as Alpha is quite liquid and tilts our franchise towards retail. Thirdly, there will be the cost of risk of the 2 subsidiaries is very much under control. Ours has always been, and Alpha has finalized its own clean up. And as we said in the due diligence, we will -- we have adjustments to make sure that, that will support the bank going forward. So I would say that these are in the -- in excess of 100 million number and to justify most of that number. What is not factoring in a meaningful way is a substantial growth we can both extract from the franchises as they can together. I would like to remind everybody that we were still rationalizing Romania and maintaining a check on our liquidity. And Alpha has been cleaning up and preparing Romania for a second phase of growth. So as they emerge, we will both be on the front foot to grow the franchise forward. So we're very excited about that.

Our next question comes from Andrea Filtri from Mediobanca.

Yes. Andrea, first for you, how do you convince the market that this is not the first step towards the traditional M&A between UniCredit and Alpha. Could you repeat this type of deal elsewhere and what does the investment agreement mean for your JV with Amundi in asset management, please? And finally, if you could give us the horizon of the 100 million plus synergies.

Okay. So -- let me start with the last one. It's not 100 million plus in synergies Andrea. It is 100 plus million of additional net profit. So I am factoring in there the earnings of Alpha that we are incorporating into the combined organization and then we have the synergies on top. So just to be clear, given that it is a cash transaction, we are -- we've always said 2 things. We will have generous distribution that are recurrent and that are sustainable. So those distributions are confirmed, 6.5 billion -- in excess of 6.5 billion this year. But we also said that we are still creating excess capital and that excess capital could be used either to increase our distribution going forward directly by distributing it or increasing the distribution going forward by buying earnings at multiple that we feel are compelling given where our share price is trading. This is exactly what we're doing now. So just to be clear on that. Timing, it depends the timing for approvals and everything else. I would say that run rate is, at the moment, if you're conservative on the timing that hits the second part of '24 for all of the approval and the execution, you're looking run rate of all of that number '26 or beyond. If we can do it earlier, we'll do it earlier. But I would say that we still have to do a lot of work to clarify a lot of things. As you can appreciate, we've worked on this transaction closely, but we have not entered into all the details because we wanted to keep confidentiality. So we will update you on the revised numbers as we close the transaction. The second thing that you asked is, how am I going to convince people that this is not the first step towards the full acquisition of Alpha. I would say, because by now, you should be very clear that I either don't say something or if I say I hold it. And for me, having a partnership on the, let's call it distribution or on the client side with Alpha, being able to capture from a not only asset management and unit-linked backed trade finance, payments, advisory, correspondent banking, locking in the equation between Greece and our 13 markets, I'd say, primarily the Balkans, but also Italy and to a lesser extent, Germany and Austria. And doing so, without consuming any capital and being able to bring in the quality revenues without everything else and not sacrificing for low synergies in a market where we're not and that we don't know is the way to go. So for the time being and for the foreseeable future, this is the best alliance we could think of. And I think it's the best use of capital without taking much risk that we don't want to take in execution of things we don't know how to execute. With respect to stretching it, sure. There could be a situation where if this is a success and I expect it to be and that it will become an example of what things can be done. It gives us strategic flexibility to add more banks to the network. So we will have our own banks, which we will continue to build upon and to do bolt-on acquisition about at these kind of terms. But also we have the option to stretch and bring in the network and in partnership other banks, but that will add not only to our Turkey markets, but respectively, to Greece to Alpha and to anybody who joins. So I do think it's a nice way to leverage our factories that we're the only ones who can build to that extent because we started with 15 million clients, now 17 to be and then use that advantage and bring it to third parties that connect to our network in a way that is profitable for both sides and respectful of both sides. I will add maybe half as a joke that I've known Vassilios for a long time and beyond committing to you, I've committed to him, and I'm not going to deviate. You -- I think that was it -- or was there another question in there?

If there are any implications for your JV with Amundi.

I don't think there are any specific implication on that. This is a new market and there are no implications.

And our next question comes from the line of Eleni Ismailou from Axia Ventures.

Just one question for Alpha. What do you plan to do with the excess capital? And also, does it accelerate your dividend policy and would you consider a buyback.