Alpha Services and Holdings S.A.

Ladies and gentlemen, thank you for standing by. I am Mina, your chorus call operator. Welcome and thank you for joining the Alpha Services and Holdings conference call to present and discuss the first quarter 2023 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. Should anyone need assistance during the conference call, you may signal an operator by pressing star and zero on your telephone. At this time, I would like to turn the conference over to Alpha Services and Holdings Management. Gentlemen, you may now proceed.

Welcome, everyone, to AlphaBank's results call for the first quarter of 2023. I'm Vassilios Psaltis, AlphaBank's CEO, and I'm joined today by Lazaros Papagalifalou, our CFO, and Yashon Tipovzoglou, our head of IR. Let's start with a brief update on the macro on slide four, please. The strong economic growth recorded in the past couple of years paved the way for a better than expected performance of public finances in 2022, despite the sizable policy interventions adopted by the Greek government to support disposable income. As depicted in the left-hand side graph, the general government primary balance returned to positive territory, exceeding earlier estimates. The better than initially expected performance of public finances in 2022 is mainly attributed to the overperformance of tax revenues combined with a strong economic activity. Greece is expected to remain committed to fiscal discipline, with a plant increase of primary surplus in 2023 and a further de-escalation of the debt-to-GDP ratio. Debt-to-GDP should continue on a downward trend in the medium term, underpinned by factors that lead to a combined decrease in the numerator and an increase in the denominator. More specifically, the achievement of primary surpluses from 2023 onwards, combined with relatively low interest rate debt payments, are expected to lower the numerator. On the other hand, strong economic growth, together with persistent inflationary pressures, albeit to a milder extent, are expected to further increase nominal GDP. Although real GDP growth is expected to moderate, several factors spark optimism for a better than earlier foreseen growth performance in 2023. The main factors are, firstly, the continuous improvement in the labor market conditions. Secondly, the economic sentiment indicator that exceeds the respective Euro area average since May 22. Thirdly, the ongoing improvement of exports of services on the back of strong tourism performance. And finally, than strengthening investment dynamics in the last three years, which are expected to be maintained in 2023. Indeed, the output expansion in the coming years is expected to be investment-driven, as Greece is one of the largest beneficiaries of the RRF program. In a similar vein, foreign direct investment, depicted in the right-hand side graph, remains on a steep upward trajectory, as it recorded in 2022 the highest performance of the last two decades. These developments, combined with an accumulated trust buffer of the government, are expected to lead to the regaining of the investment rating. Ratings upgrade would also likely hinge on the next government maintaining the pace of structural reforms, thereby boosting Greek economic competitiveness. Now, let us turn to slide five to look at the financial performance for the year. In the first quarter, we have made further improvement towards strengthening our standing, continuing to make substantial progress towards our key objectives. The starting point for any bank is a strong balance sheet, and on key metrics of strength, capital ratios, and non-performing exposures, the first quarter of 2023 showed significant progress against the prior year. The quarter also saw further expansion in net interest margin and net interest income, while our cost-to-income ratio was sharply down on the corresponding period last year. This has all been achieved with a cost of risk that is currently tracking below the level we got it at the start of the year. It is important to recognize that this isn't an accident or just luck. It reflects the deliberate decision we have taken as a management team when it comes to risk underwriting over recent years. Our franchise continues to deliver with steady deposit growth, while the slowdown in loan growth, in part driven by continued elevated levels of repayment, reflects industry trends. As a result, our profitability levels continue to improve. Our earnings were up, and we continue to swiftly increase the value we create for our shareholders. Keeping with the same theme and turning now to slide six, with the first quarter results, we're reporting a return on tangible equity of 7.6 percent or 11.1 percent, excluding one loss related to the last leg of our balance sheet cleanup, as well as the successful completion of a voluntary separation scheme. Both items within our four-year guidance. We are benefiting from the current interest rate dynamics. but we retain our focus in enhancing profitability through our own actions, both in terms of commercial policies, as well as by continuing our effort to streamline the business. Balances have this quarter been affected by seasonality, with corporates additionally displaying an expected reaction to higher rates and our affluent clientele increasing their affinity to capital accumulation products. In the current context, we should make a note of the strength of our liquidity position, as evidenced by the €4 billion repayment of the ECB's facilities, while improving our liquidity stands and ratios. On capital, this quarter we have added close to 120 basis points to our total regulatory capital through the inaugural issuance of 81, allowing the Group to fully benefit from future balance sheet growth, whilst proactively supporting our engagement with the regulator in delivering our plans towards our shareholders. The latter is, of course, also supported by our strong organic capital generation that reached 50 basis points in the quarter post the accrual of dividends on a 20% payout assumption. Let's now zoom in to loan growth on slide seven. 2022 was a fantastic year for us. and the preparatory effort we had put in over the last few years culminated in the materialization of a strong pipeline of large deals in the early part of the year. Towards the end of the year, the slowdown in GDP growth, higher rates, the electorate calendar, and meaningful repayments from cash rates corporates weighed on long growth. This was expected to continue in the early part of 2023, and this thesis has indeed materialized. amplified at the turn of the year by the customer's decisionality. The headwinds should dissipate as we progress through the year and the strong macro underpinnings should re-emerge and reinvigorate loan growth. We are already seeing that reflected in our pipeline. Throughout this period, we have consciously ensured that our loan book is built with defensive characteristics, underpinning sustainable levels of profitability. Our leadership position has been regained whilst ensuring that disbursements are above our thresholds for risk-adjusted returns, retaining our discipline when it comes to pricing. Let me stress that our priority is and will continue to be on profitability. Turning now to deposits on slide 8, and if you allow me to start with a conclusion. The evolution and cost of our deposit base remains well-behaved. As of the first quarter, the total stock of deposits had a beta of 8%, a par, if not slightly better than the sector average. The changing mix of our deposits and the rate of pass-through to time deposits are progressing within expectations. We are near the end point of pass-through to time deposits in business accounts, whilst for individuals in April, the pass-through rate for time deposits reached around 30%. As a reminder, at the start of the year, we guided to pass-through rates on time deposits above 50%, with time deposits making up circa 45% of our total deposits, compared to 20% at the end of March. In terms of lows, there is a multiplicity of forces behind the moves we have seen on deposits. To begin with, the first quarter tends to see a seasonal reduction in balances, especially for corporates, that has, to a degree, been accentuated this time around by loan repayments. At the same time, corporate customers are more active in cash management, which is translated in a step-up of their time deposit balances. Households on the other side have been less active. Our affluent clientele has opted for capital accumulation products, trusting us with the management of their savings, which is free-earning. Given the events in the U.S. regional banking sector over the last couple of months, there is today an even greater focus on deposit franchises. Our deposit base is the bedrock of our solid liquidity profile. As you can see on slide 9, close to 70% of our deposit base is within the insurance threshold with a diversified and sticky deposit base. Our deposit base is very granular with an average ticket size of 5.8,000 euros, and no particular concentration in terms of client segments, industries, or cohorts. Our loan-to-deposit ratio stands at just 76%, with our liquidity coverage ratio above 164%, and our net stable funding ratio above 124%, at par or better than our European peers. The sum of our cash and cash equivalents i.e. unencumbered high-quality liquid assets, stands at more than a quarter of our deposit base. And, as mentioned earlier, despite the repayment of €4 billion of TLTRO, our liquidity profile has improved in the quarter, and our commercial surplus, i.e. the difference between deposits and loans, has increased. On slide 10 now, allow me to touch upon our segmental performance. In Greece, wholesale continues to be the main engine of growth and profits, delivering 98 million euros to group normalized profits. Our retail business has seen a meaningful uptick in profitability, as higher rates, cost control, and a benign asset quality environment have led to improving returns. And, last but not least, Our wealth management and treasury unit has delivered 36 million euros of profit whilst consuming just 12% of group risk-weighted assets. Overall, our segments in Greece have delivered a return on tangible equity of 22%, while taking up close to three-quarters of the risk-weighted assets of the group. Our international business continues to see solid level of growth, especially in Romania. Revenues were up 44% year-on-year, compared to 4% growth in expenses, and these positive jaws should continue to lead to an improvement in operating efficiency, with return of tangible equity reaching 17% this quarter. Lastly, we continue to experience a drag from the stock of non-performing assets. However, that stock continues to fall. In our upcoming Investor Day on the 7th of June, we will update you on our strategic direction and delve deeper into our business and the various segments, as well as provide you with our financial projections for the coming years. And with that, Lazare, the floor is now yours to shed more light to our quarterly financial performance.

Good afternoon, everyone. This is Lazare Papadere-Farlou, Alpha Bank CFO. Let's now take a closer look at this quarter's numbers. Turning to slide 12. This quarter we are reporting a positive bottom line of 111 million euro versus 63 million for the previous quarter. There are two notable items this quarter. First, we've taken 38 million of extraordinary costs, almost entirely related to the cost of the voluntary separation scheme completed in our Greek operations in February. Second, this quarter, We have had a 23 million post-tax impact from transactions, mainly related to Sky, taking up most of the 30 million guidance. Excluding the impact from transactions and the various one-offs, profits on a normalized basis stood at 162 million, up 54% quarter-on-quarter. Court pre-provision income was up by 16% versus the fourth quarter, on the back of a stronger top line, which continued to rise a bit at a slower pace than in the previous quarter, as well as continued efficiency gains. Pre-provision income increased by 11%, less than core pre-provision income, and despite higher trading gains due to the one-off voluntary separation scheme cost. On the next slide, you can see that euro system funding was reduced to 9 billion, as the bank has opted to smoothen its TLTRO payment profile through the prepayment of 2 billion in February and a further 2 billion in March, reducing the cash balance it held with the target account, thus commensurately deflating our asset base. These repayments are enabled by our strong cash buffers. Deposits have also declined in the quarter by 0.5 billion, But as Vassilio said, that is commensurate to the reduction we have witnessed in our loan book, meaning that our commercial surplus and liquidity profile has actually improved. Our NP ratio has fallen by 20 basis points in this quarter to 7.6%, reflecting lower organic formation, while the group's NP coverage stood at 40% at the end of the first quarter, with a quarterly move affected by lower inflows and write-offs related to management actions on the stock. Our tangible book value continued its upward trajectory, up by 4.4% year-on-year to 5.9 billion, while on capital adequacy, our fully loaded common equity tier 1 stood at the end of the period at 12.8%, accounting for the pending risk-weighted asset relief from transactions. Now turning to slide 14 to look at the underlying P&L trends. Net interest income continued to grow in the quarter up by 6% on the back of higher rates. On a yearly basis, NII grew by 51%, but that was driven by a 24% increase in lower quality accruals from non-performing exposures, meaning that our core recurring net interest income was actually up by 54%. Currently, 10% of net interest income is attributed to non-performing exposures, but as we have said, this is anticipated to trend towards 5% in the coming quarters post the consolidation of sale portfolios. Fees and commissions subsided to 88 million, with a yearly progression related to the loss of merchant acquiring business and high comps as significant fees were earned last year from large deals related to structured financing. Recurring operating expenses, excluding the sale of the merchant acquiring, were down by 5% year-on-year, despite the inflationary pressures, demonstrating the improvement in efficiency. And finally, the cost of risk came in at 75 basis points, excluding transactions, in line with last year's run rate and within our guidance. Performing loans, on the next slide, have dropped in the quarter with negative net credit expansion. On an annual basis, the performing book was up by 5%, lower than the growth levels in 2022, with business loans in Greece being the driving force and a meaningful uptick in the contribution of our international business. The first quarter continued to witness high level of repayments from businesses, with the entire market losing ground. Disbursements have also deflated at 1.7 billion in the quarter, given the pre-electoral slowdown, whereas repayments have remained persistently high as cash-rich corporates close certain facilities, given improving sentiment on the outlook and higher rates. Whilst the downwards adjustment in energy prices has led to repayments of working capital facilities for this segment. So all in, performing loans landed at 31.1 billion. I would like to note that the first quarter slowdown is in line with our expectations and earlier guidance. while we do expect to see a more meaningful pickup of net credit expansion towards the second half of the year on the back of the continuing investment drive that the country is experiencing and reflected in the strong pipeline that we have on disbursements. Turning now to deposit gathering on slide 16. The group's deposit base increased by 3.4 billion year-on-year or 7% to $50.2 billion. In the first quarter, group deposits were down by $0.5 billion in line with system-wide outflows on both households and on businesses, reflecting seasonality as well as the sustained level of loan repayments witnessed in the first quarter. Moreover, as you can see in the bottom left, individuals have seen a commensurate increase of 0.4 billion in mutual funds with an increase in newly introduced mutual fund projects echoing the outflows from individuals. It is important to note that assets under custody grew further exemplifying the strong relationships we possess with affluent customers. We also continue to witness a change in our mix of deposits with time deposits trending up by 6% at points in the quarter, as depicted on the right-hand chart, now representing 20% of the most domestic base. This upward trend in mix is anticipated to continue in the coming quarters. Recall that our current guidance assumed an end state by year end of more than 45%, with a growth year to date somewhat slower than our initial expectations. And with that, let's look at the drivers of our NII performance during the first quarter in more detail on the next slide. Net interest income continued to debase in the first quarter, albeit at a lower pace, reaching 424 million, up by 6.4% versus the fourth quarter. The quarter is seasonally weaker, as there is two less calendar days, thus on a recurring base, NII increased by 9%. More specifically, interest income from performing loans increased by 70 million and on non-performing exposures by 5 million due to higher interest rates, whereas high rates and bond balances had a positive impact of 13 million in the first quarter. On the other hand, depository pricing along with lower volumes had a negative impact of $17 million, while funding costs increased interest expense following the change in ECB modalities and MREL issuances. On an annual base, NII increased by 51%, driven by higher rates and increased income from securities, partly offsetting higher deposit and funding costs. On slide. you can see a breakdown of our NII in some more detail on the left. Performing Loans NII has seen an impressive movement on the back of volumes and our high sensitivity to higher rates. On the right-hand side, we show the evolution of loan yields and deposit costs. Given that our loan book is predominantly floating rate, we have been enjoying a meaningful pickup in yields. Note that, as we have highlighted before, there is a circa three-month lag in repricing. As we have anticipated, spreads are experiencing a soft landing. This is evolving according to plan, and pricing dynamics for our book are fully aligned with our policy to exceed certain risk-adjusted thresholds in order to ensure sustainable levels of profitability. As a result of our commercial policy, and despite the pressure, we have been able to outperform market trends. On the deposit side, the pick-up in costs, which began in late quarter, continued in the first quarter, although we have not been leading the race and is evolving quite well. Time deposits have shifted to 20% this quarter. The cost of Euro time deposits has gone up 36 basis points in the quarter, reflecting the slow pace of repricing of the book. For the total book of deposits, the overall beta stands at 8%. Moving on to fees, on slide 19, this quarter's headline net fee and commission income was down by 9.6% to 87.9 million. Excluding the impact from the deconsolidation of the merchant acquiring business, fees decreased by 5.7%, driven by lower business credit related fees, alongside the lower contribution from asset management, which was positively affected by a performance fee in the fourth quarter. On a yearly basis, the headline number was down by 16.9%, while excluding the deconsolidation of merchant acquiring business and other one-offs, fees were down by 9.5% on lower contribution from loan fees. as in the first quarter of 2022, we earned significant fees from large deals related to structural financing, as depicted on the bar chart on the right. On to costs now, slide 20. Our recurring operating expenses were down this quarter by 9.7%, or €25 million, due to lower general expenses, which had witnessed a seasonal uptick in the previous quarter as a result of higher marketing, IT and third-party expenses. However, our total OPEX base was just 1.1% down in the quarter, affected by the cost of the VSS program we completed this February. On a yearly basis, continued focus on cost efficiency resulted in a 4.5% reduction in recurring costs, despite inflationary pressures. partly benefiting from the deconsolidation of the merchant acquiring business, or a 1.5% reduction adjusting for the aforementioned impact. Our headline cost-income ratio stood at 44.7% in the quarter and 37% for the domestic business. This quarter, we have also concluded the Voluntary Separation Scheme, leading to the departure of circa 500 employees, predominantly from the network, that will result in a 20 million benefit for the group or a 2.7 years payback. We expect to see circa 60% of that in 2023, with the full impact reflected in 2024 numbers. Our best-in-class productivity metrics per FTE and per branch in the Greek market are now further improved, with an FTE release corresponding to a further 8% of our Greek headcount. Moving on to asset quality on slide 21. On the right-hand side of the slide, you can see further information on our cost of risk evolution. The underlying cost of risk came in at 56 basis points in the first quarter, with 14 basis points for servicing fees, and five basis points for securitization expenses. That brings the overall cost of risk, excluding transactions, to 75 basis points for the quarter versus 93 basis points in the previous quarter, and 76 basis points for 2022. I should also note that, in line with our guidance for the year, we have taken in the first quarter incremental provisions related to our NPE transactions associated mainly with Project Sky, which is expected to close in May. Our NP ratio was down 20 basis points in the quarter to 7.6%, while our coverage ratio stands at 40%. With regards to asset quality trends, NP formation in Greece was negative in the quarter. Targeted campaigns launched during 2022 to contain inflows alongside intensified collection efforts and new modification products bear fruits during 2023. not least in a strong pipeline of cures. And we expect to see a further organic NP reduction in 2023. And with that, we can move to the next slide. On slide 22, following the quantum leap of the previous years, our NP ratio has fallen further by 20 basis points to 7.6% on account of negative organic formation. While our NPL ratio for loans above 90 days past due stands at 3.9%. Let's now briefly look at the quarterly evolution of our fully loaded capital position on slide 23. As you can see on the top graph, we've made further progress towards our regulatory capital targets as our fully loaded common equity tier one has increased by 35 basis points in the quarter. As before, it is probably best to look at the movements in capital in three separate buckets. Our organic capital generation was strong at 50 basis points, allowing us to build our capital base. We continue to fund growth through internal capital means, whilst our capital generation capacity is sufficient to offset the linear reduction of deferred tax credits after the unchanged regulatory expectations. Our capital ratios are also proving resilient, as there was effective no impact from fair value through other comprehensive income this quarter, due to the low sensitivity of our book to shifts in the yield curve, while there was a 16 basis point positive impact from other capital elements. And then, lastly, on MPE transactions and our voluntary separation scheme, there was a negative impact this quarter of 21 basis points. Our reported fully loaded common equity tier 1 stood at 12.4% at the end of the first quarter, or 12.3% post-dividend accrual. While pro forma for the anticipated RWA relief from transactions, our fully loaded common equity tier 1 ratio stands at 12.8%, 33 basis points versus the comparable fourth quarter number. It is important to note that we expect to add circa 60 basis points to our capital ratios following the conclusion of two performing loan securitizations. We note that during the first quarter we have started accruing dividends in our regulatory capital ratio at a 20% payout, or seven basis points in common equity or one terms for the quarter, consistent with our capital planning submitted to the ECB. As previously communicated, we aspire to reinstate dividend payments out of 2023 profits, and we will pursue to secure regulatory approval early 2024. Dividend payment and each quantum will be finally assessed by the regulator during this period. On the next slide, you can see that our capital ratios are well ahead of regulatory requirements, whilst the 400,081 issuance that was completed earlier this year enhanced the strength of our balance sheet, further aligning us with our better-rated European peers. And then lastly, on slide 25, please, at the start of this year, we set out detailed guidance for 2023. While most lines are developing in line with our expectations and guidance provided for 2023, the rate environment has obviously seen more aggressive rate hikes that we had budgeted for. We will be updating our guidance in June, but clearly the short-term NII momentum is supportive. Clearly, we have had a strong first quarter, which is a good down payment on our full year commitments. But as I said, we will provide a full update of our 2023 guidance at our investor's day on the 7th of June. And with that, let's now open the floor for questions.