Alpha Services and Holdings S.A.
Q4 2020 Earnings Call Transcript

Published: 24 Mar 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. I am Yotek, 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. All participants will be in a listen-only mode and the conference is being recorded. The presentation will be followed by a question-and-answer session. . At this time, I would like to turn the conference over to Alpha Bank management. Gentlemen, you may now proceed.

[Vassilios Psaltis:]

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 am joined today by Lazaros Papagaryfallou, our Chief Financial Officer and Panagiotis Kapopoulos, our Chief Economist and Dimitrios Kostopoulos, Head of IR.

[Lazaros Papagaryfallou:]

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 on 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 Є859 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 Є1.434 billion supported by high trading gains. More specifically, within the last quarter of the year, Alpha Bank recorded a strong trading line of Є430 million driven by realized gains from the GGB portfolio and benefiting from a GGB swap with the Greek State completed in December 2020, which resulted in a gain of Є171 million. In 2020, total trading income reached Є690 million versus Є410 in 2019. Going forward, the closing of Galaxy within the second quarter of 2020 is expected to temporarily rebase bank's core pre-provision income towards the Є800 million level or a high single digit decrease versus 2020.

[Operator:]

. The first question comes from the line of Floriani Jonas with Axia Ventures. Please go ahead.

[Floriani Jonas:]

Hi team. Good evening everyone. Thanks for the presentation. And 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 II as well. There is not much mentioned to the AT1. So I am just wondering how are you planning to play that card? Would you 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 are planning anything for this year and if you have any projected impacts to NII now for the next one or two years, you also could share? Then my second question is on your trading gains you show on slide 16. I take that €300 million is the number you have in December. So I am just wondering if you have an up-to-date figure to share? I assume that you would have booked part of those gains already in Q1. So just confirming 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 other Greek transactions we have seen so far. So I am just wondering if you could just talk a bit about the characteristics? I take that is a lot maybe to do with the mix of the portfolios given that the biggest one is a majority of mortgages, but also I suspect that it kind of reflects what you have been mentioning before that your portfolio and your exposures after Galaxy 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 is any color you can shed on those future securitizations would be helpful. Thanks.

[Lazaros Papagaryfallou:]

Hi Jonas. This is Lazaros. With regards to AT1, which was your question, indeed, the bank has room to issue up to €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 a total capital adequacy ratio of 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 our overall capital requirement. So there is no need really to consider any further capital issuance. Moreover, going forward, the plan 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 a view to increase return on equity and with further leverage on the capital structure when the market conditions for us will more opportune for issuance of AT1 at much more reasonable cost that we could have these days. So currently, 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 that benchmark issue in similar sizes in the coming years. The guidance I have given for net interest income for the year includes both the Tier II, of course, that we have issued earlier 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 for OCI, currently stands lower than €200 million pretax around the €150 million level.

[Vassilios Psaltis:]

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

[Floriani Jonas:]

Thank you.

[Operator:]

The next question comes from the line of Sevim Mehmet with JPMorgan. Please go ahead.

[Sevim Mehmet:]

Hi. Good evening. And thanks very much for the presentation. I will have a few questions, please. I will start with NPEs in 2021. So when I look at your guidance for net NPE formation, I see that is at around €300 million which. to me, sounds like a positive, quite a positive statement. And I see on slide 12 that this assumes €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 you maybe just talk a little bit more 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 we have 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 $6 billion balance in Greece that you expect in 2021, which as a headline number looks higher than some of your other peers. So I was just trying to understand your thinking here in terms of upsizing the securitizations that you have using your very comfortable capital position? How is your thinking? And is there something that you are 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 will be very helpful, I think. Thanks very much.

[Lazaros Papagaryfallou:]

Hi Mehmet. This is Lazaros. On your first question regarding our projections for a net organic formation, indeed the bank projects inflows to the tune of €1.7 billion, our of which we project €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%, it's our current estimate for such defaults. You will note that additional remedial actions and strategies are applied for this perimeter, on page 21, on the right part of the page, that if we successfully applied this perimeter, they will result to lower than 10% defaults on loans under moratoria. And then we have an additional €0.7 billion of defaults the non-moratoria perimeter with default rates comparable to the numbers that we have seen in previous years. On the sizing and the comparison with the previous years, you have to note that we are talking about a deterioration mainly coming from both loans which have been under moratoria and are currently accounted for, to a large extent, under stage two. 67% of those loans in moratoria are already in stage two and inflows into the stage three, mainly will come almost by 90% or more than 90% of those loans that have been accounted for in stage two. 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 that ones we have in our fourth quarter accounts. Then these inflows will not have any material impact on the provision line in 2021 because we have already built buffers. Then, if you want to see how 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 for loans that have been previously restructured. In this case, 2020 is going to be a particular year because we are going to face curings, not just from restructurings that have happened in 2021, but also from the 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 continuing with CEPAL modifications and long term restructurings with haircut. So we expect a significant amount also to come from loan restructurings with haircut and at much more level, obviously, volume from liquidations. As we have currently suspension of auctions, so the numbers there are not sizeable. Whereas the €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.

[Vassilios Psaltis:]

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 single digit NPE ratio at the end of 2022, which means that from the envisaged level at the end of 2021, that will be incrementally a deleveraging of €2.5 billion. Now, in April, we are having submission for the next three years for the NPE plan to our regulator. That's why we are currently contemplating how we are going to be faring over and above 2021. But the point I want to make is that even if we decide to grow fully inorganically. this given our capital position and the costs estimate that as said currently are prevailing in the market, we are talking about an operation. Given that our capital allows for flexibility, both in terms of sizing and timing of inorganic NPE deleveraging.

[Sevim Mehmet:]

That's very clear and very helpful. Thanks very much.

[Operator:]

The next question comes from the line of Singh Vijay with Fiera Capital. Please go ahead.

[Singh Vijay:]

Hi. Thanks for taking the questions. 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 €2.3 billion or so with a very large mezz. And what this would imply is that you are looking at probably getting rid of a tiny provision of those NPEs and the subsequent portfolio could be probably a lot better in quality. Is that a fair assumption? I mean what sort of a portfolio would remain, what kind of an NPE portfolio remain, post the Galaxy transaction versus what you get rid of in Galaxy?

[Lazaros Papagaryfallou:]

I am not sure I got the full question. The latter part was about quality of the portfolio post-Galaxy, which is depicted on page nine of the presentation at €8.8 billion in Greece with a good part of representing forborne NPEs, namely below 90 days past due and the remaining almost 50% on NPLs. The transaction activity that we 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 2017, out of €16.6 billion of nonperforming loans above 90 days past due, we are ending up at €4.7 pro forma for Galaxy and then we are taking more €3 billion from the NPL space to drive the NPL ratio in Greece at around the 10% level.

[Singh Vijay:]

Okay. And does the €3.5 billion NPE expectation for the December 2022 include the COVID overflows?

[Lazaros Papagaryfallou:]

Yes, it does.

[Singh Vijay:]

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

[Lazaros Papagaryfallou:]

The Generali transaction is not a capital measure for the bank. It's a very important commercial agreement to penetrate the insurance market in Greece which is underpenetrated. There has not been an upfront consideration worth mentioning affecting our capital numbers. However, there have been arrangements for fees and as announced 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.

[Singh Vijay:]

Okay. And then you could possibly be looking at any frontloaded payments at all? Or is it not a part of scope as you mentioned? You are not looking at it as a capital improvement measure?

[Lazaros Papagaryfallou:]

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

[Singh Vijay:]

Sure. Could you be looking at any advance payments at all, any upfront payments? Is that something that you have considered, considering that you are going through a major cleanup exercise? Or you think it's probably not required, you are still comfortable with your capital buffers?

[Lazaros Papagaryfallou:]

No advance payments.

[Singh Vijay:]

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

[Lazaros Papagaryfallou:]

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

[Singh Vijay:]

No. I am talking about post-securitizations. Can you get to your targeted levels? What would be the provision cover on those that remain?

[Lazaros Papagaryfallou:]

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

[Singh Vijay:]

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

[Lazaros Papagaryfallou:]

There is no instructed cash coverage levels.

[Singh Vijay:]

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

[Lazaros Papagaryfallou:]

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

[Singh Vijay:]

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

[Lazaros Papagaryfallou:]

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

[Singh Vijay:]

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

[Vassilios Psaltis:]

Well, typically we do 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 improvements 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 been ready.

[Singh Vijay:]

Okay. Thank you. That's all for me.

[Operator:]

.,The next question comes from the line of Boulougouris Alexandros with Wood & Co. Please go ahead.

[Boulougouris Alexandros:]

Yes. Hello. Many thanks for the presentation. Just two very quick questions. Regarding the Є320 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 Є400 million. Is there a plan for the remaining NPE stock in 2022 for the target to reduce the NPE ratio to below 10% by end of 2023, implies for the Group as well, I assume? Thanks.

[Vassilios Psaltis:]

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 the Є320 million, i.e. 60 basis points that have been affecting our capital at the end of this year. And then 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 capital. That's point number one. Point number two, on the group target, this is something that we are still contemplating. And this is part and parcel of the exercise that we are currently moving. So on that front, yet we can't say more but conceivably this is the direction of travel that you have described.

[Boulougouris Alexandros:]

Thank you.

[Operator:]

The next question comes from the line of Nagel Alberto with Mediobanca. Please go ahead.

[Nagel Alberto:]

Yes. Thank you for taking my questions. The first one is on TLTRO. Are you planning to increase the amount of TLRO or if you have already done it? And can you repeat the guidance on NII. I just missed it. And if these 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? Thank you so much.

[Lazaros Papagaryfallou:]

As far as the TLTRO III is concerned, indeed we have space for maybe Є1 billion more. I am not sure we are going to use in full. The guidance I had given for a high single digit reduction of NII, assuming Galaxy to be consolidated towards May from our portfolios. It includes also the benefit that we are going to book in 2021 out of TLTRO and the benefit we are going to include in 2021 includes both a retroactive amount that corresponds to the second half of 2020, approximately €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 €100 million for 2021. And coming to MREL, we cannot disclose both the interim binding as the final targets. We are expecting to have the official communication from SRB in the coming weeks. You should expect to see that the phasing of our obligations to issue MREL goes up to 2026. And we are 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 market 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 that require restructuring cost and we are making also investments in IT and technology. Plus, we have enveloped for voluntary exit schemes that have been used extensively in last few years. So you may see additional restructuring costs already employed in 2021 to facilitate our business plan.

[Nagel Alberto:]

Thank you so much.

[Lazaros Papagaryfallou:]

Depending on whether we will proceed to further options on the Greek franchise, we may see additional restructuring costs to the tune of the levels we have recorded in 2020. But this is not something to give guidance. It really depends on whether and when will kick start further actions.

[Nagel Alberto:]

Yes. Thank you.

[Operator:]

The next question comes from the line of Memisoglu Osman with Ambrosia Capital. Please go ahead.

[Memisoglu Osman:]

Hello. Given your plans on the 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? Thank you.

[Lazaros Papagaryfallou:]

When we announced last year our business plan, it was November 2019, we had the trajectory of getting to at 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 a cost of risk to the tune of 1.6% over net loans. And thereafter the trajectory, we go down 1% and lower than 1% in the coming couple of years.

[Memisoglu Osman:]

Thank you.

[Operator:]

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

[Singh Vijay:]

Thanks and just one follow-up. In the last presentation, you did talk about an Є8.8 billion NPE had Є3 billion haircut. And I am just wondering, does it mean that the exit prices for these NPEs could be higher than in the past transaction? Are you seeing a better market overall? If you could just given any market color, please?

[Lazaros Papagaryfallou:]

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

[Singh Vijay:]

Yes.

[Lazaros Papagaryfallou:]

And there was a reference by Vassilios on the new transactions. Overall almost 70 basis points for the €3.3 billion that we are going to transact in 2021 or 20 bips for €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 BIPS that we have presented here for the three transaction would have been lower if it was just a HAPS transaction. But here, out of the three transactions, two are going to be outright sales.

[Singh Vijay:]

Perfect. Understood. That's very helpful. Thank you. That's all.

[Operator:]

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.

[Vassilios Psaltis:]

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

[Operator:]

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