Alior Bank Sa Unsp/Adr

My name is Dominik Prokop of the Allure Bank's Investor Relations. Welcome to this conference that will summarize the results of Allure Bank for Q1 2024. Just like the last time, in the first part of this meeting, we will talk about the bank's results and trends. Grzegorz Olszewski, CEO, will be the speaker, together with Tomasz Miklas, Vice President CIO, the CFO, Mr. Gibała. In the second part after the presentation, we will have time for Q&As. Before I hand over to Grzegorz, I would encourage everyone online to ask questions in the first part so that we can move smoothly to the Q&A. Thank you. Grzegorz, over to you. Thank you, Dominik, and good morning. Welcome to this presentation of our results for Q1 2020 for We will go through the presentation and I will try to discuss what is behind the figures. You can see the figures on the slide. Very good results in Q1. Our results were charged with a contribution to the BFG resolution fund of 40 mil. Adjusted by the BFG contribution, the result would be better than in Q4. But of course, in our business, we do have to take into account all the expenses, so we are reporting the result as was, 578 mil. NII and NFC grew year-on-year by 15.1% respectively. We are not being overly aggressive with NFC, especially in acquisition of retail as well as micro firm clients online. And these efforts have paid off as you will see in the presentation. Moving on now to the slide which gives you a snapshot of our position and the trends in our core business that is lending. The bank's assets were over 91 billion, grew 8% year-on-year. The performing loans volume was more than 61 billion, up by more than 9% year on year. In addition to our business operations, we are making efforts to change our risk profile, pursuing the strategy as designed. The NPL was record low at 1.65, COR 0.68%. Tomasz will speak more about COR later on and he will discuss our guidance for the coming months. ROE of 24%. Radek will describe the cost side as well as the NIM, which is lower but still very strong. You will recall that we are rearranging our loan portfolio mix by adding mortgages, which has a positive impact on risk. regarding

It remains very low.

In addition to the cost of risk and the reduction of the NPL, the decrease in COF is probably the biggest revolution we have gone through. We are a young bank and still we are reporting a lower ratio than most of our peers with a bigger customer base of relationship-based customers. Moving on to our retail customers. Following our strategy, we have been migrating our clients to mobile banking. upgrading our mobile app and our customers are acknowledging this trend and using mobile banking more and more. We were selling mortgage loans actively last quarter 1.6 billion zlotys and consumer finance sales remain stable year on year 1.3 billion.

The first quarter of the year underperformed due to price wars.

Speaking of the sale of mortgages, The sales remained affected by the program supporting the sale of mortgage loans, safe loans 2%. Our total portfolio is record high as to 20 billion, 3.8% market share, quite strong. Moving on to cash loan sales. Our assets decreased around 3% in terms of cash loans year on year. And there were two drivers behind that. Cost of risk, the customer risk profile. we cannot change the risk profile without changing our credit policies in relation to the customers we are lending to which is why we are moving on with this transition in respect of the customer's risk profile. Second, driver price. Certainly, digitalization of our processes and the availability of loans remotely makes the price pressures strong, which is why we need to strike a balance between two important drivers trying to grow the sales of the cash loans in relation to risks while keeping it attractive price-wise. Moving on to the consumer finance loans, this was a good quarter, less good than Q4, but that's only natural due to seasonality, yet it was much better than Q1 2023. We doubled the numbers, which is a very good result. The portfolio has been growing as we've been selling consumer loans. And we see an increase in the number of consumers using those loans thanks to our acquisition efforts. Moving on to acquisition, very good sales of savings and checking accounts. The sales grew by nearly 20% year on year.

Number of customers

with regular payments into the accounts up 5%. These numbers demonstrate that we are becoming a bank of first choice for our customers who are increasingly using value-added services. Nearly 22% is the growth of the number of motorway journeys and tickets paid through the Allure mobile application, 20% growth year-on-year when it comes to the transfers ordered in the app, 36% increase in the number of Blick transactions. These are very good numbers. which represent or reflect the growth of relationships and transactions handled by the bank, which reduces our service costs and has a positive impact on our NFC. Of course, these changes are not yet revolutionary, but yet they are quite strong. And another strong trend that has become quite stable in the last few quarters, especially in the last quarter, acquisition of retail customers growing very fast. Moving on to business customers. This segment, business customers, remains under strong market pressures. Demand remains low, looking at loans. We are prepared with a strong capital base. We are prepared to contribute to an improvement in lending, but economic numbers do not bode too well. demand from businesses is low private investments may be the lowest this year in a long time according to some surveys only one business in three is considering to invest using bank loans but at the bank we have seen some important developments that i'd like to stress we are focusing on digitization of our processes and customer service to make our relationships with customers stronger.

And this implies that our

processes for micro firms have been automated up to 70% and a lot of instructions or orders of customers are handled automatically year-on-year 50% more so the vast majority of orders are handled remotely which reduces the workload of our sales forces and lets them focus on acquisition and sales of loans sale of accounts online grew by more than 100 percent in the micro segment the sale of bank connect service which links the bank closely with customers grew the sales grew by more than 60 percent year on year Let's look at the assets. The assets have remained stable, yet in Q1 the share of consortia decreased significantly in new sales, 600 million less sold through consortia. which means that our margin after the cost of risk increased across all segments by double-digit figures. So, on the one hand, we have lower cost of risk, better quality of sales of corporate loans. On the other hand, we have seen a reduction in the big tickets as we are focusing more on selling to the segments where we can earn a better margin. which is quite significant. And then our share in the portfolio of performing loans grew modestly for a second quarter in a row, net, however, of the construction and real estate development segment, which was our strong focus historically. Outside these segments, we are moving more boldly to build up our market share, which gives us more space to handle end-to-end customer relationships and to focus on cross-selling to customers and to earn bigger margins on those relationships. And we have a better understanding of our customers, which significantly reduces potential future risks. The balance of assets in collection dropped significantly by close to 18% year-on-year. Customer acquisition would not have been possible without automation of our processes, opening of accounts within a record short time of three minutes handled remotely. That's a very short lead time for a public account. corporate segment. We were the first bank in Poland to implement the BLEK functionality for business customers. We have a new application to support our customer relationships, which of course implies better understanding of clients and a lower cost of risk. Regarding retail customers, two implementations were key. involves the development of the all your pay functionality and top up your accounts where you can transfer cash into your all your pay account and the funds can be used for 30 days for free without interest and then interest can be paid by installment. In the mobile app we implemented some educational content to support and educate our customers and to build relationships. The Alior Bank application aspires to do more than provide banking functionalities in the traditional way. This is our main channel which we want to develop to communicate actively with our customers. Corporate social responsibility. Allure University has operated for a year now. It's an educational platform for our employees. We were very active educating our branch employees. reduced the work time on the front end with customers by two hours and we are focusing on improving the quality of customer service the golden banker ranking shows that we moved from number four to number two and we believe the branches are important to remain in the top three this year so we are really focusing on education to improve the competences of our bankers over the coming months we were rated ESG rated by Sustainalytics. This was an important journey for us. As we were preparing to be rated, we improved our corporate governance practices. we are at medium risk level and of course we want to reduce the risk level according to our plans we will go step by step to reduce our risk profile at the bank and to reduce the risk profile in sustainability terms and we do believe this will be a major driver to ensure that Allure Bank gets an investment grade in the future to reduce the cost of funding and to make us even more credible as a bank. So these were our business or operational results. That's all from me at this point. Tomasz will now discuss risk. Thank you, Grzegorz. In risk, like across the bank, we've had a very good quarter, starting with our capital position. Tier 1 was nearly 17%. The TCR was nearly 17.5%. 4.2 and 3.4 billion above the regulatory requirements. Slight drop quarter on quarter because our loan book is growing, but as you remember, Q4 results were not included in our equity because the management board decided to recommend that the shareholders pay out a dividend. Tomorrow, the shareholders meeting will discuss that. Liquidity ratios. LCR short-term liquidity 177% long-term and SFR 141% both ratios well above the regulatory requirements at 100% for both. Moving on to cost of risk. as grzegorz said npr npl is record low 7.65 improving strongly quarter on quarter from 8.6 thanks to among others the project we have mentioned on other occasions sale of non-performing corporate loans on the european market This project was partly settled in Q4 2023, partly in Q1 2024. And there were other initiatives we took over the past quarter to improve the NPL. Cost of risk in Q1 was 0.68%, a very good figure. better than the annual average of 2023, improved by positive developments, including debt enforcement and collection of corporate customers, helping us or adding 20 million to reduce the ratio. But even net of those one-offs, the cost of risk was 0.85, which is very good. Now, to give you a picture of the long-term transition we have gone through, in 2020, cost of risk was 2.8. That was 1.7 billion of cost of risk per year. In 2023, cost of risk was 0.98. slightly above 600 million. So over the years, we have reduced our cost of risk by nearly 1 billion zloty, as you can see reflected in the financials of the group. Looking forward.

As regards the future, the cost of risk this year should not be above 1%. We do not see any serious elements that could disturb this improvement. trend which we have demonstrated for some time as for the risk of credit you can see the npl cost after quarters and two quarters a very strong improvement by one point a percentage point. As for the post-segment NBL for retail customers, a very good result, a very good market result. And as for the business customer, we have a lot to do, but you can see that quarter on quarter definitely improved and the last quarter has seen a dynamic change. As concerns the NPL provision coverage, the result will drop in the first quarter because of the reduction in the first quarter, especially in the business customer at the mid-level. Reducing NPL, we begin with the oldest transactions. And the cost of risk segments, the top right-hand corner, in the last four quarters, as you can see, in each quarter the cost of risk has been below 1%. And we expect that in 2024 this level will not go above 1%. As for the cost of risk in different segments, in retail and in corporate segments, in both we observe an improvement quarter on quarter, which allies to what we have been communicating to you for some time. Summing up the risk issues, we have very good capital and very good liquidity results and a consistent improvement in our assets situation, which you can observe both in the result because of the improvement in the cost of risk and the improvements in the NPL, which has received the best historic results of 765. Thank you very much. I hand over to Rafał. Good morning, everyone. Let us begin with a simplified balance and loss account. And let me draw your attention again to the net profit 578 million in the first quarter, which is almost 60% better year on year. which is transposed into annualized return on capital of 24%. If we relate that to the balance sheet values, you can find it in slide 40. This ROE index has been received on the value of average capital of the past two quarters, which is about 40% higher year on year. So, we are improving our capital base and the ROE index is also getting improved. And let me focus on some items in this particular slide in the year-on-year aspects, and then we will look at quarter-on-quarter. If you look at year-on-year results and our percentage results, you will observe an improvement of 15%, which is 166 million in nominal terms. And there are three aspects influencing this result. On the interest cost, there has been a positive impact of our hedging strategy. And the year-on-year result, of course, which is above 120 million and plus. and then the other positive impact is the balance sheet improvement mostly in interest assets which is 130 million and if we reduce that by the overvaluation effect of our portfolio after the interest rates reductions which took place in the fourth quarter of the previous year, you will see a simplified explanation why there is this improvement in the interest assets. We have been observing the drop from the peak in net interest margin, but in nominal terms, in year-on-year dimension, we keep growing. And if we look at quarter on quarter, You can observe that in the next slide, in the top left-hand side, we have the interest cost which is decreasing. The result is better. on the papers and lower on the portfolio why is the difference the 60 million plus which translates into improvements from one of events in the fourth quarter you may remember and the previous credit holiday would have to be improved and also over evaluating of other reserves and the remaining 30 refers to another tour of the evaluation of the portfolio and a shorter quarter a slightly short quarter a slightly shorter slightly shorter first quarter now if we look at that in the quarter on quarter results as jagos already mentioned 5.95, we compare that to 6.08, which is the normalized value in the fourth quarter after the one of occurrences deducted. which demonstrates that we have observed the peak and you can see that in this particular graph it is quite noticeable compared to the financial course and come in connection with the financial course which keeps going down not as strongly as it used to but it is going down So, let me say a few comments about the offer to the retail customers. For the past two months, which you may have noticed, we maintained the 7% interest on the savings account. And that is the result, the trade-off that we want to maintain. On the one hand, a very attractive offer of savings for our customers. And we also encourage the customers to keep banking with us. So that's the way how the offer is set up and you can already see that in the number of current accounts which the customers are opening. So we are making all the efforts to retain these customers and keep banking with us. Looking at the graph below in the conditions in which we function right now, we keep maintaining our efforts to have a good index of the loan-to-deposit ratio. It is a relatively high it is a relatively high ratio compared to the market and this is our strategy to maintain this strong ratio level we want to be active and we want to grow stronger than the market and the previous year there was a five percent growth now we have seven percent quarter on quarter we do not have full results as yet but we assume that the growth will be stronger than the market As for the commission result, fees and commissions, picking up on what Grzegorz mentioned and our activities in the retail aspects, we want to keep the transactional, the relations nature, and we maintain the level above 2 million per quarter, and that's how it transpires year on year. As for quarter on quarter, There has been a change in the currency exchange results, but if you look at the total commission, table of payments fees and commissions should be encouraging and that and that is the idea to keep growing it with the customers so that the customers keep transacting as much as possible in the macro economic conditions in which we find ourselves Now, operating costs, 8% growth year on year. We can see that in the whole picture here, you can see a certain slowing down of the inflation trends. But if you look at employee costs, we still have a 2% growth. What we observe in the sector, We have a certain average ratio of growth for the sector, but we observe that also in the economy as a whole. It seems that the inflation target seems to be feasible. but as for pay it keeps growing by two digits and we experience that aspect in the banking sector as well in our banks uh wanting to maintain a competitive position in the labor market and to develop our strategic initiatives the growth is still quite noticeable whether subsequent growth will take place it will depend very much on the labor market situation also that trends which shape inflation But what we find encouraging is that the work that we carry out in the general and administrative costs, there is a certain stability and a drop quarter on quarter. We keep working in the area of rents and payments, possibilities of improvement. As for cost-to-income ratio, it is at a good level. whether normalized or reported these are quite quite good results slightly above 30 percent As regards the strategy, when we look at the fourth quarter, we have obtained the ratios envisaged for the year, which includes the recommendation of the payment of dividend as well earlier by one year.

We can see that

programs are carrying on and we are implementing this strategy but we are also starting a new perspective which will be announced at the end of this year

We will show the directions of development and the initiatives for the next strategic period.

We end this presentation with this general slide which shows the assets and improvements in the bank. And we would like to ask you questions. Thank you very much. We move on to the question and answer session. We have the first question. could be reduced in 2024. Thank you very much. Let me develop the comments which I already offered in the description of this slide related to costs. Let's go step by step. It seems that our costs compared to assets And let's put an asterisk to that. It would be better to compare that to the portfolio because a large part of the sector is the securities. So we might make a correction there. The asset mix that we have right now compared to the sector produces one of the highest commission and markup rates. and we have about 30% cash loans which have a very short redemption period. retain the customer we have to recover the balance we grow in the mortgage loans which should improve the ratio ultimately but as far as see our ratio is concerned whether we compare to the previous financial years or to the banks which function in europe that the ratio of 34 36 is still very attractive However, as for the employee costs, we see that the costs grow, but we also grow both in terms of the portfolio and in terms of the assets and in terms of the core activities.

So, answering the responses in the labour market, we have to

take our decisions but we also grow in the most important part of the assets so it seems that our strategy in this regard is bearing fruit and it focuses on growth And as Grzegorz mentioned, there is a certain shift from the traditional to mobile channels or remote channels generally. This is a very good question. I'm happy that it appeared because mostly we talked about the costs of risk so far. Now you're getting more and more convinced that the cost of risk is at a stable level and we have gone through a good transformation. As for the business model, we should explain a certain issue. The fact that we conduct the transformation in the risk area doesn't mean that it will be done by itself. The reduction of NPL, the transformation of the credit risk processes will not be done by themselves. It has to be done by the people. And so the human element is still very important at the stage of the development. and our base and the business model is focused on retail very much so we have the structure of training one third of the channels are loans one third are the mobile the remote channel and one third are the partner branches In cash loans, the branch channel is still very important, especially that the sale in branches is higher still than in the remote mode. A historical aspect is important. A large part of the clients in the accounts without fees have developed a base of customers that still use branches and this channel is still important in our servicing model we're not able to give it up so that's why the relation of remote customers to the total group of customers is And the third area is the support of business. We are improving the digitization of that channel. Eighty percent of orders takes place remotely, so that shows the result of our efforts. Do we want to keep reducing our costs? to be quite responsible not yet because the freed up resources we want to use for growth and hence the assumption of our strategy we keep analyzing all the cost items to make the model as effective as possible and we can see that the number of branches is going down year by year but we do it slowly so that it doesn't take place at the cost of a decrease of the risk level or an increase of NPL or the lower dynamics of loans or the asset books resulting from the growth of assets in the bonds section. We are therefore following this strategy quite consistently. The next question. Alia Bank has noticed a spectacular quarterly drop in the NPL loans in the HP sector. What is the reason for that? Thank you very much for that question. There are three reasons. We mentioned the Marco Polo project, which is the sale of a package of NPL properties in the European market. Some of that was done in the previous year, some in the first quarter. But now we see the result in our ratios. The second reason, there was an internal project which helped us write off a large part of the corporate loans. And the third reason, in the recent quarters, we are communicating we have a good result in the cost of risk because of the ongoing restructuring processes and debt collection processes in the corporate sector. And that was very much in evidence in this quarter as well. The processes are faster, it goes more strongly, and so the NPL keeps going down. So these are the three reasons for the drop.

Thank you, Tomasz.

And the next question. What ROA and what cost of financing are you expecting to report in the future? Considering the consensus around the interest rates in 2024, assuming there'll be no change, we are not expecting any significant difference or change in cost of financing or in roa but importantly as we can already see in the nim we have been growing where we want to grow that is in mortgages and fixed rate loans this was actually the design of the previous program two percent safe loans Here, we rely on five-year contracts, which are lower than the current WIBA. So, if another program is offered with a similar design, we'll probably see a modest decrease in margins at this point in time, which is good for the coming quarters because we will definitely see some rate cuts in future.

Thank you, Radek.

The next question is, to what extent did the drop in NIM in Q1 2024 by 26 BPS result from a bigger volume of mortgages in the portfolio? What is the expected NIM in 2024 annually? Thank you, Dominik. Let me go back to the slide with our NII, which presents Q4 as well. Let me remind you, the provisions were released against the credit holidays, as well as provisions against bank assurance and the big CJEU judgment. Another major driver unrelated to monetary policy was the reset of interest on our assets in Q4. Continuing into Q1. So, going back to your question, the current figure, slightly below 6%, is our target, as we've been saying over the past quarters, with the footnote regarding the mortgage sales. And I go back to the previous question. If we produce more mortgages and more fixed-rate loans, our NIM should be affected to a small extent.

Thank you, Radek. Next question.

In the context of litigation due to the so-called sanction of free credit or loans, how many customers have sued Allure Bank today? Regarding the number of actions regarding these loans, There are not many in relation both to a loan book and the volumes at the bank. You've been asking this question a lot, so let me reply. Last quarter, we said that we are winning in most court cases, and this has continued. The scale is still low, but... Ourselves and the sector consider this very seriously. We have learned the lesson across the industry with respect to the Swiss franc loans. As the sector, we are changing our offering actively, mitigating potential claims relating to the different aspects of loan contracts. For instance, six months ago, We eliminated the reference to type from our contracts, which was a potential source of claims. We are actively amending contracts in response to the new court cases. filed by mostly law firms. After the termination of a loan, customers have 12 months to file a claim regarding the so-called sanction of free credit. So, this mitigates the risk over time. Second point. The sector, the industry, the Polish Bank Association is very active in this field. They are talking to the regulator regarding potential amendments to the Consumer Credit Act to improve the situation and to keep things in check to mitigate the risk at a very low level. If I may follow up on that.

We tried not to succumb to the propaganda of those companies

Let's not fall into the trap of propaganda spread by companies that want to make a lot of money, law firms. They are trying to take advantage of some legal loopholes to challenge long-term contracts with banks. Weiber has been used for this purpose. The courts, however, have not. have not consented to that. Now customers in Poland know how much money they will be paying in installments, what is the cost of credit. They have information available through all channels. They have the support of the Financial Ombudsman and the Competition and Consumer Protection Office. So the whole system in Poland gives the customers a safety net to make sure that they accept their liabilities in full knowledge of what they are and that they can perform the contract as drafted. The attempts to challenge the contracts have been made but the outcome of such attempts has not been yet very, very obvious for clients and I hope this continues. Why did the lending income drop by 65 million zlotys quarter-on-quarter while Weiber gained 9 BPS.

Thank you.

It's the third time somebody is asking a very similar question, so let's look at maths. The difference is 65 mil.

30 is a one-off impact of Q4.

The remainder includes 15 mil which we think is due to a lower number of days in q1 and then interest on loans decreased after the october and september decisions 75 million

in Q1. Add it up and you get 120 million.

Now deduct 55 million attributable to growth in our portfolio. That yields the 65 million Q on Q difference. As I said when discussing the NII, we have seen a positive impact from hedging, 122 million year-on-year, so increase year-on-year driven mainly by growth of the portfolio, 7% year-on-year.

Thank you, Radek.

Next question. Have you made your deposit offering more attractive in Q1? Yes, I've mentioned that, but let me expand. How is our offering attractive? We are offering 7% within the term of the promotion. This is an offer for new clients subject to certain transaction-related criteria. This is why we have seen an increase in checking and savings accounts supported by an attractive price mix and What are the bank's expectations regarding the interest rates over the next two years?

Well, once again, this year it seems the consensus is the rates will remain unchanged.

Follow up on what our macroeconomic experts are saying. Next year, we are expecting the rates to be around 5%. Thank you. And the follow-up question. How will you explain the still small growth in demand for bank loans other than mortgages? Well, as I said at the beginning, investments remain record low. if you look at the contribution to GDP. And consultancies have been surveying businesses. Apparently, a small proportion of customers are considering to invest using bank loans. due to the growing costs. For instance, the minimum wages and in general the payroll have grown across the corporate sector. Hence, businesses are not considering to invest as they have to manage their growing cost base, their operating expenses in the absence of stability or predictability of the future mix of expenses. First, the legal environment has to stabilize as well as the economic environment. It's not helpful that there's still war waged across the border to the east and there's a lot of uncertainty about the future of the war. That's another factor. Regarding consumer loans, The share of consumer loans or the proportionate rate of consumer loans to GDP in Poland is among the highest as a percentage. The delta, the gap to the European average, however, is obvious in corporate loans for two reasons. First, low investments, that's the structural reason and the other driver is that businesses show a stronger aversion towards lending than in many other european markets due to the environment if the environment stabilizes there'll be more appetite for loans And the National Recovery and Resilience Plan is expected to drive investments, both government's investments, PPPs, public-private partnerships, as well as purely private investments. As companies are more interested to invest, there'll be more demand for lending. Thank you, Grzegorz.

Next question goes to Tomek.

what was mrl term in at the end of q1 10 to 0.75 and the other mrl was more than 22 way above the regulatory requirements that was our last question thank you so much for speaking and thank you for being with us today all the best and see you soon