Alior Bank Sa Unsp/Adr

Good morning.

Welcome everyone to the presentation of Allure Bank results for quarter one 2022. We'll begin with a presentation to be delivered by Grzegorz Olszewski and Radovirgi Beła. Next, we are going to move on to Q&A.

Gregor, over to you.

Good morning.

Hello.

Presentation of the results for Q1 2022. Record revenues. This is what we need to stress. Very high level of innovation and improvement of the quality of portfolio of credits. This is what we need to stress. now moving on to our results of operational activities record level of revenues more than 1 billion plms 862 billion um and the provision 191 million police lot is seven percent year to year in terms of improvement net profit 226 million PLNs, adjusted net income for write-offs. Now, taking into consideration the proportions, we've always said historically that the portfolio of foreign FX credits in Alibaba is smaller compared to the offer of other banks. And that's why this reserve is 223 million police lotties. There is one novelty that we've seen that we saw last year, these non-financial assets write-offs. to the operations of the bank's Romanian branch. And this write-off is something that concludes the non-financial write-offs. And there won't be any new write-offs following. 7 million PLNs of the reserve for the refunds resulting from early loan repayments. This is so-called small CJEU. Now, let us look at other ratios. As said, the digit ROE was expected, nearing 12%. We've been very often asked about COR, how earlier it performs and fares. under dynamic circumstances, especially when it comes to foreign exchange rates rising. In this context, let me draw your attention to this incremental reduction of NPL, 1.31% year-to-year, percentage points smaller compared to the last year, and this is one of the strategic targets. Before, together with Wynanda, we kept stressing how important this particular ratio is for Euro and we keep improving the quality of the credit portfolio at Eurobank. In parallel to this, NIM is at the level of 4.58, stable capital position, and after having taken into consideration all the events of quarter one, cost of income is at the level of 45.1%. In the following quarters, we anticipate lowering of this ratio especially given the fact that one offs are going to be of smaller and important especially and when it comes to instruments for bfg now assets six percent increment uh quarter to quarter and the volume of credit year to year the volume of credits in the same tendency and the same applies also to deposits In terms of interest rates rising, this will have its ramifications. Still, there is the growing tendency, and we'd like to keep this trend going. This is one of the most essential factors for this factor NPR to be reduced. Now, in terms of COR, the COR is going to be under control. the rising interest rates is also coupled with the rising with the rising remuneration levels so this is also coupled with a very positive very sound economic standing which does not result in deterioration on the labor market and this is also something boosted by what we do internally in our structure we optimize our processes for credit and we also boost our quality. So, we go away from this more risky dimension vis-à-vis a better quality of credits. Innovation is good at Alierbank. It is illustrated by our performance in Q1, especially in terms of rollouts. And this is something coordinated on the part of our teams. Personalization is very high on our agenda. So automation is there for our customers and repositories of permissions is also being developed. And we cooperate here very strictly with our partners. Knowledge is well translated into what our customers get in the offer. So the offering is well adjusted to the actual customer's need. There is also an ongoing automation of processes. This is again very important. This is not visible in our mobile app. Nevertheless, this is something that we can see from the back office site. The automated decisions for SMEs for quarter one was at 37%. on the one hand and this means higher efficiency on the costs side at the same time and this also have ramifications over the quality of portfolio and this is also reflected in our customers portfolio quality and will be speeding up the automation of processes. Importantly, we keep implementing the voice bot on our hot desk. 30% of all transactions are now being managed from this level. In the present quarter, another voicebot is being implemented also for transaction decisions for customers. So we want to merge the development of our mobile app with the growth of the mobile app. So the customer may be serviced very swiftly, very fast from the hot desk of the mark. Essentially, we need to further develop AI-based tools. This quarter is also all about the role of the account for the youth, as well as the development of the centers for identity identification. How do we see it? How do we look at it? This is very much about being able to identify yourself in various ways. This is something that we will foster and we'll roll it out. regardless of who our customer is. We want them to be able to confirm their identities in a very convenient manner. This is something that we've already achieved via SMS. And this holds true for the installment processes. And again, the very area of customer service for people coming in to Poland from Ukraine. ESG will be largely about it. So speaking of which, in quarter one, we focused on social responsibility. And this goes beyond any doubt. It was of importance for us. Alibaba Bank was one of the most prominent figures in the area of refugee assistance Our support has been unprecedented in terms of our collaboration with local authorities. Education centre was developed within this framework and this is something that we want to replicate in other cities and towns too. Such an assistance centre is soon to be also started in Warsaw. We are hyperactive and so are our employees. They keep supporting the refugees. In terms of the offering, we've translated the app to accommodate for the needs of Ukrainian refugees. We've got the hot desk operating in Ukrainian. Cans are being opened also in Ukrainian. This process has been streamlined in maximum terms. To start one's account is also possible via tablet, especially in centers where a personal number is provided to Ukrainians. So as I said, we are very active in supporting and providing aid to those who've already come to Poland and are in search for assistance for their financial needs. And this is something that we also do free of charge. Now, mortgage loans, one of our most crucial products. Towards 2021, we said this had been a very important year for Allure Bank. We want our market share to grow. There are many turbulence and challenges. We managed to achieve just this 3%. This is our share, 4% in terms of new sales. This is what we need to be speaking about. Major factors. A dedicated offer has been enhanced, especially with view of Warsaw. In April, we've decided to copy this solution for Krakow, and we want this trend to be maintained. We are also looking forward to selling mortgage loans, especially via and within major markets. We are mindful of the fact that credit capacities on the part of clients has deteriorated because of the interest rates growing. So this reduced capacity will be also a factor for the decrease of the volumes of sales. Still, there is some buffer. There is some room for maneuver. This buffer historically was small, so it is not as important over volumes as it might be. Still, it is also decisive of the quality of the portfolio. Anyway, in the upcoming quarters, we'll try to boost the offer of our mortgage loans and we'll adjust. Of course, this trend of interest rates increasing is stable. Still, we want to streamline our processes in terms of credit capacity assessment. We'll be working on that so that it is ready as situation betters. Cash loans, ladies and gentlemen. As I said, we want to improve the quality of credit portfolio by and large. This is also associated with a number of challenges in this respect. Our margin has to be good. Our rating has to be good. And this may also be decisive of a smaller portfolio, 11.4% that's our market share. The pressure from our competitors is high, especially following the growth of interest rates. Still, the market is well reinvigorated, especially when we compare it to the situation in January and February. Now moods are better and there is still some appetite for cash loans to be taken. Remote channels are of essence for LarioBank and this is going to remain so. It's especially valid for cash loans and we want these channels to be well exploited, especially in terms of our offering for cash loans. In the area of consumer finance, we are the leader of installments, credits. There are competitors, of course. Still, we have our loyal customers. And we want this cooperation to go further. This is very much a seasonal trend of importance in this segment. Next period should be better than the current one. Still, there were many uncertainties. Of course, following the breakout of the war in Ukraine. Quarter one, like I said, is about relations, especially when we talk about clients with incoming cash. And this is the segment also to be developed. This will be very much an illustration if the bank keeps growing for individual customers. We want to have these relationships to be nurtured in a regular manner. The number of current accounts is growing and has grown by 25%. And we are now right before the peak of the season, especially, and this is something to be observed on motorways and how often they are used, people are now in a hybrid mode of working. And it is also connected with more tickets paid from the app. So there will be incoming money on the one hand. And there are other options generating added value. And now when it comes to the structure of how remote channels are used, we see that Alior Mobile is growing and the mobile app is precisely the venue of contact. This is where we are going to get in touch with our customers. The app is not only about reviewing the history of the account. This is also a very important tool to issue payments. Therefore, we are looking forward to see a further development here, also including BLEAK for our mobile app users. Quarter-to-quarter growth is satisfactory and better compared to the trends previously, and we'll keep activating this area further. As expected, we'll have further rules out that will improve how our relationships between us and customers are going to be in the future.

For the corporate client, Quality improvement has always been our priority. Please take a look at the NPL decrease, 3.6%. Asset balance. staying healthy year-on-year, which is an indicator of the good health of our portfolio. The automation of decisions is increasing and so is the efficiency, therefore we'd like to stay on that path. Now let's take a look at the number of active clients across services. Active banking cards, cashless translations, Bank Connect app, more than 33%. The increase of customers using it increased by 33%. The volume of transfers made via the mobile app has also increased. So this means that in Q1, we increased the portfolio quality. We improved our relations. our client and customer relations which will positively impact both our commission result and our risk rates. As you can see on this slide, more than 200% increase in automated decisions in small and medium enterprise sector. We shall increase to 36 months the period of crediting on the bank account and online applications for credit will be pre-approved. This means that our clients will be given a longer-term kind of product to increase the quality of our relation.

We can definitely see the positive trend for all remote channels.

In business clients, this is an increasing trend, no doubt. The development of credit tools that is quick financing, quick decision will have a positive impact on it and our appraisal of this segment. is positive and it will stay so, which will have a positive impact on risk costs as well.

So record revenue, improved relations, better innovations implemented, we shall definitely stay on this path. We'd like to remain the digital leader that Aliorbank is at this moment.

These are the tools that allow us to function internally as well. Our efficiency is increasing.

Now let's move on immediately to the financials.

Radek, the floor is yours.

Thank you very much indeed, Grzegorz.

A lot has been said already. We have demonstrated a lot of financial data. Already I'd like to present more details in this regard. Now the net income 169 or 226 million without the previous corrections.

The write-off for non-financial assets in Romania had an impact here. We said that already past Q4. The intention then was to reorganize the business model and this applied to our branch in Romania.

And this is the effect.

So far it's been negative for our balance sheet.

The 27 million write-off could be reversed, though.

It covers systems, applications, IT solutions that will prove useful in the future. And this should bring us back on the asset track, so to speak. As Grzegorz has mentioned already, we don't see

any further write-offs of non-financial assets incoming, so we shall continue the work on reorganizing the branch.

Now, regarding the large CGU, we have already announced that our NPL has received the new line, the legal risk costs. We have been informing you on how we act upon foreign currency mortgages and we are observing an increase. We've got more than 100 million in Swiss franc mortgages. The bank became operational post-2008, but we are still exposed to legal risk.

The quantitative increase in litigations is important,

we decided to make a provision of 23 million PLN to mitigate the possible financial consequences of these litigations. And the increase of Q1 payoffs made us

make the provision to fulfill our current standing.

More comments I'll make regarding further slides and this will apply to some of the components that you can see on this balance sheet. Let me just tell you that we're aiming at a double-digit capital increase year-on-year. Today it's about 12%.

This is assuming the environment doesn't change, but every quarter the economic environment is changing, it is fluctuating, but we do have the ambition to attain double-digit returns in this regard.

Let's move on to the interest rates and the net interest income.

The increase of interest rates was good to us.

But let me put your attention to the repricing of our portfolio and

the structure we have as many cash loans as we have mortgages which with Libor increasing does have an impact on the positive effect later on in

in case of the net interest income.

One needs to look at this in comparison with the interest margin and financing cost. The net interest margin is at 4.6% almost already.

It does make a difference in net calculations, but we can also see the increase of financing cost. Post Q3, we announced that we had seen the so-called COF.

We were among the pioneers with a better...

deposit offer, we simply anticipated the increasing the upward cycle for loans. And we have been increasing The interest rates, the percentage points along the way. The loan deposit ratio ticked up by about two percentage points. It shows that more of our deposits are working in favor of our credit. Having the market limitations in regard that is not an increasing trend, well, it only motivates us to increase the volumes and keep control over the risk. The increase of the commission result. It was more than 20% increase after Q4, as you may or may not remember. The increase of the basic numbers here is less favorable, but it's 7% year-on-year, so from Q1 to Q1, and this applies to all positions.

We do count on that transactability and on our business clients and individual clients.

We count on them paying for services, to speak freely. Also, we noted more than 20% increase in the foreign currency exchange services, which is understandable. Stock brokering results are also increasing, just as leasing costs.

We're not aiming at 20% here, but we are still developing this revenue line.

We are in the upward time of the cycle and now we're expecting some new developments in the monetary policy which will allow us to increase the revenue in general. Now, in terms of costs, if we subtract the contribution that everyone on the market needs to demonstrate in the first quarter, our revenue increased by 12% year-on-year. But you can't escape the environment. We need to stay competitive. We need to stay competitive on the labor market, which means that labor costs, employee costs are rather high, provision for

for downtime is maintained.

We see increased risk in marketing costs by 7 million. Grzegorz has mentioned a lot of effort on our side in the marketing department, which costs money. We'd like to see the returns on this, on the sales. part and in the volumes, so to speak. The so-called guidance for you, I think you can see that clearly.

We quantified about 250 million year-on-year. We should make it, we should make that result. We're working constantly on staying efficient, but these costs are to work for us in the future, to speak freely. Grzegorz has mentioned innovation.

We want to develop this bank, we want to bring you new products, so that's the cost. The cost to income ratio exceeded 40%.

The ratio is increasing, but the quantifier is increasing as well.

Therefore, we can stay within these barriers.

Now let us take a look at this table and let us take a look at the goals that we set after and the latest strategy update post-2021.

The difference you can see stemmed from the COVID-19 pandemic and all the consequences that it brought about.

Now we'd like to communicate our goals, our yearly goals.

We shall work on this new strategic perspective because, well, the 2022 will finish in three quarters and we'll be back here with a new strategic perspective.

However, as we're taking a look at the business volume, The assets are increasing 89 billion złoty.

This is within our reach, even though the credit market slows down a little. Our rentability is double digit.

Absolutely possible.

You need to take a look at this in comparison with the financing costs, which is exceeding our goals already. The 4% that I said in a different economic environment is now 4.6% and will keep growing. It depends on the entirety of the national economy and its actors.

We'll see about that in the future. But the external impact on our net margin is high. Cost to income? We feel comfortable here, we can stay significantly below 46%.

Cost of risk.

Let us move on to the next slide directly to speak about this particular matter.

Speaking of NPL, it is on a decreasing level.

That's something that is very satisfactory also for our employees.

11.31%.

Coverage ratio is not decreasing, so we are here very cautious. as we manage our risks let me also draw your attention to this bottom left corner there is a lot of going on when it comes to corporate portfolio below 20 percent decrease Compared to the average market value, this is not a benchmark whatsoever. Still, there is some work to be done, and this is a trend to be mindful of. Cost of risk. Here, it is discussed on a separate slide. 1.33% past Q1 to be communicated. now our macro environment. If it is taken into account for this to be communicated in Q1, there is no reason for that. Still, we need to be looking well ahead, and this is also something required by the international accounting standards. You can read more about it still. Many events are to be seen. This increase in interest rates has an impact over the costs of risk, clearly. Nevertheless, we are more about looking at the labor market, how remunerations keep growing. And this is still something that we keep registering and statistical data show as well. However, a slight growth is predicted in this respect. We want to tell you about it. increase is fully manageable, 1.6% increase for 2022 in general. And 2023 has also been ended up. But quarter to quarter, there is much volatility. Therefore, we need to stay cautious. Plus 1.6 is something that we can be talking about, that we can thereby declare. Of course, taking into consideration how the economy situation is evolving and interest rates, by the way, are very much about grow the increase for retail and for the corporate sites for business for corporate customers there is a decrease and there are by the way no signs to be able to have more reserves in this respect We improve it a bit quarter to quarter, but at quarter to all three 2021, this is a similar value.

There are still more reserves that we are speaking about. when we compare it against previous quarters, 1.33.

But this is going to be different for the whole year, 30 points, i.e. plus 1.6.

Now,

For capital and liquidity, let's begin with the right-hand side. NSFR, there is some decline for LCR. And this ratio is well above the minimum thresholds. And this is very much determined by the increase of interest rates, especially when it comes to obligatory reserve, which is also reflected in this ratio. Other graphs pertain to how we stand in financial terms. You may be following our current communications as others do. And we all got the requirement of the financial supervision authority to retain the buffer. And this curved line is here to mirror it. Even with this buffer, there is a significant surplus for this period of 30 points. For total capital ratio, we stand at 259 points. You see also the subsequent components of this ratio. TCR is about declining numbers quarterly. quarter for Q2 2021 is also decisive in this respect. And this is the kind of increase that I spoke beforehand quarter to quarter. It looks very similar for this base factor. So, as I said, we are well above the minimum threshold, including the buffer. Next, we'd like to draw your attention to some crucial points.

Our stories

what we are focused on, quarter to quarter. Grzegorz has been vocal about our innovation, about how we manage and improve efficiency and management, especially given this inflation pressure that we keep observing. Historically, and now, we've been working on the histories of credit portfolio. But let us not dwell on this issue too much. Let's stop here. And we'd like to hear your questions. Thank you.

Many thanks indeed. Now over to the Q&A.

Can you tell us what is the reason why the costs of The management of interest rates from derivatives has increased by 70%. This is something that we need to be expecting for the upcoming quarters as well. Thank you, Dominik, for this question. How is secure growth? There is a strategy for this, and we keep using it when it comes to our interest rates result, and others follow suit, of course. If there are declining interest rates, there is this mitigation effect for the bank. And this is something that you can read also in our financial reporting. We've got 20 billion years transactions. From this we have a fixed rate and there is another swap that we pay. The grace period is 2.5 years. Just to provide you with somewhat more details on this case, you can also have a look at the balance sheet and in the financial statement to read well into it. From the adjustments of capital, we read 1.6 billion below in capital. But if you look further on the grace period, on validity, how is this going to be through PLM for this 1.6? It will make out 600 million

Let me stress the following.

Speaking of the volatility of our interest rate result, in this respect, we've always taken account of the result of PLA and PLA over the result. And this is something that we've communicated. So this has been adjusted accordingly. What you can see here is, as mentioned in capital after adjustment, There is an insignificant part from bonds, but this is not a very important constituent of our portfolio. Thank you for this. Next question. What's the outlook for the growth of credit volume for 2022? I've already addressed this for individual clients. Of course, with interest rates growing, the volumes are going to be reduced, especially when it comes to mortgages. The interest rate for cash credits has its impact as the credit capacity is smaller on the part of individuals, but here it is going to be something somewhat smaller compared to the mortgages. And of course, this macroeconomic situation is going to be decisive on it. There are many variables that can play out for the Polish economy. So it's actually not to be predicted how it will play out for the credit volumes. Should economic stance be sound, as predicted, then towards the end of 2022, we'll be able to demonstrate a positive credit volume.

Thank you so much.

What's the level of reserves for AVENX credits?

This is something that we are telling you about in separate documents.

In the balance sheet, you've got a separate note on it. 9,000 FX mortgages have been given, including Swiss francs.

and credits in euro.

And here there is this litigation risk, so reserves have to be substantial. The reserves that we've developed, they take in count of 14 litigations for Swiss francs and that accounts for 2% of all litigations that we have. Just 0.4% of all litigations if we benchmark it against the whole portfolio.

And this is also the result of a negligible share of CHF.

And it was also important that those credits were given away at a slightly later stage. And bear in mind our history here in this respect. We were quite late to be given these CHF mortgages.

and it produced certain ramifications. So we can have less litigations than others here.

The FX credit coverage is something very similar to what we have for PLNs to 0.2% and 40% for the default credits.

Thank you.

Are you expecting for the net FX margin to be growing in the upcoming quarters? Our outlook is pretty much the same as the one communicated during the previous conference. And this growth to 3.5 is going to produce the growth in 800 million for interest rates.

And there is this increase of 100 million.

These calculations are also taken into consideration. Our strategy of securing ES transactions are going to be rolled out.

So our checks will be there. And let me reiterate on this occasion, reservations are out there.

This does not take account of the recent communications on the part of government. We'll look into it as it matures. So it's hard to model it and quantify it. and put it in quantitative terms. Nevertheless, we are showing it without taking this into consideration, so it will be slightly different to what we provided you with at previous quarter. Next question.

What are the initial appraisals of government proposals for loan payers, loan takers support and the so-called credit vacation in Aliorbank, especially in the context of the increasing mortgage market? First off, on our side, we don't see any deterioration of the credit portfolio, mortgage portfolio. It does have zero impact on our strategy. Our sales will be aimed at new real estate and possible refinancing, taking into account permanently the quality of mortgage portfolio, of course.

It's good that there is this new legislative proposal.

I understand that Alior will be part of this legislative process.

The risk has been decreased.

I feel that this is a good basis for creating an actual support scheme for the mortgage payers. Next question. What are the expectations regarding deposits and their interest rates?

Picking up on what Grzegorz has said a second ago, we need to take a look at the real environment, so the interest rates on deposits should increase in the future.

was one of the pioneers in increasing the interest rates on deposits. That's why we have managed to secure an increased number of these. As an active actor of this market we'll follow what our competitors do and react accordingly.

We've got one more question.

Was the ECR decrease impacted by the provision, by the obligatory provision? Yes. Well, the 12% decrease was the compulsory provision. Additionally, towards the end of the year, many corporate clients increased their deposit balance. And that was exactly what we saw in Q4 2021. That basis effect and the difference 1 versus 4, Q1 versus Q4 was perfectly noticeable and we had expected that. As for liquidity, it's safe. One more thing. There was no, so to speak, positive environment to amass deposits between February and March. Now it's being normalized, which gives us a good basis for further promotion of deposits among individual clients. The amount of cash is really high. as we can see post war outbreak in Ukraine, but we are expecting further stabilization, no panic, definitely. Next question, and that's definitely not the last one. What kind of buffer You had applied before the KNF, the Financial Supervision Authority, recommendation. Thank you for that. We went for 3.8%.

The minimum was 2.5%.

That was until 2021. Starting in January 2022, we went for 3.4%, and now we are applying the 5%, as the Financial Supervision Authority requires. Next up, why is the interest result increasing? slower than the market at 29% okay let me explain that I have told you a little already But let's take a look again. A comparison could be made to the banks that secure the decreasing interest rates mechanisms. And with increasing rates, they decrease the impact of rates. And we recognize that in our interest result, the 70 million zloty is the consequence.

But let me sum up the factors here, because there is a certain mix of factors that are to be taken into account.

The financing cost in the first place

From Q3, Q4, we were increasing the interest rates.

That's visible in mortgages, 24% a year ago, 27% this year.

That's the share of the mortgage portfolio.

And let us remember that mortgages and their interest rates are lower than the average interest of the bank. There is certain migration going on, also from investment loans for enterprises to turnover loans.

down to 57% today.

These operational loans have lower margins, but it's compensated by cross-sell and margin result later on. That's part of our strategy and tactics. We do want to stay within this safer segment of corporate business client. Yet another factor that impacts the interest result is the uh decreasing margins uh in response to the competitive situation we want to keep this and this revenue engine running but we need to stay competitive at all times another question gentlemen Any NPL sales in this Q1? Yes, and it's been revealed in our statement for Q1. We did not close the NPL sales in Q1, but we have closed the first batch of write-ins. In Q2, on the other hand, you can expect further decrease in the NPL ratio. Next question. What part of your credit portfolio is based on the fixed rate and which part is based on the 3M index?

Today, we've got about 6 billion zloty fixed rate credits.

These are consumer loans and three-year long credits, so short-term products. The rest of them are all adjustable, usually adjustable to the monthly VBOR index.

We have commented on the publications of results of other banks and their reaction.

That was a mix of factors, so I'll leave it at that.

Thank you.

Next up, do you still have any so-called COVID reserves, COVID provisions, and in what amount?

We've been replying to that question every quarter, really.

With the publication of our results for 2021, we turned down in Q4 the provisions for COVID-19. We do have provisions for macroeconomic scenarios and delinquency rates increasing due to increasing interest rates. That's what I've commented while I spoke of the cost-risk ratio. Next question. Is the Romanian branch, is it possible that it will bring about negative impacts, either financial or corporate? The non-financial assets of our branch in Romania were written off down to zero. We do not expect any other write-offs, and we're reorganizing the model, so that's about it.

Potentially, in the future, if the reorganization

turns out well, these write-offs can turn out really positive. Thank you very much, gentlemen. That was the last question. Thank you very much, ladies and gentlemen.