Alpha Bank Sa

Ladies and gentlemen, thank you for standing by. I am Jota, your chorus call operator. Welcome and thank you for joining the AlphaBank 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. 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 Alphabank management. Gentlemen, you may now proceed.

Good afternoon, everyone, and good morning to those dialing in from the U.S. Welcome to Alphabank's full year 2020 earnings conference call. This is Vassilios Psaltis, Alphabank CEO, and I'm joined by Lazaros Papagarythalou, our Chief Financial Officer, Panagiotis Kapopoulos, our Chief Economist, and Dimitris Kostopoulos, Head of IR. Before starting with our full year 2020 results, a short personal note for a figure that has made Alpha Bank what it is today. March 9th marked the passing of Yannis Kostopoulos, our honorary chairman and grandson of the founder of our bank, arguably the greatest banker in Greece from the mid-1970s onward. He was an exemplary and inspiring leader as well as a lifelong mentor for all of us who were blessed to know him and work with him. A true visionary when conceiving ideas and daring in their implementation. An optimist by nature and a pioneer in constant improvement and change. Human and accessible towards his associates, Yanis Kostopoulos was a role model in the fullest sense. All of us at Alphabank will miss him dearly and will honor his legacy for a bank that will continue to evolve and play a leading role in Greece. Starting now with our results presentation, we should recall that this has been an incredibly challenging year, full of uncertainties and unprecedented situations. However, our bank has swiftly adapted to this new reality, and we have been able to support both our customers and our employees while remaining very focused on making significant progress on our strategic goals, and in particular, on the implementation of our Project Galaxy. Due to the pandemic, and the containment measures it has necessitated, the Greek economy experienced a historic recession, driven by a negative external demand shock, mainly because of the relatively high dependence on inbound tourism. This has been partially compensated by a fiscal policy stimulus of 27 billion so far. The policy measures taken by the government support employment, disposable income, and liquidity of businesses, offering much-needed briefing space to firms. This is already reflected in the sizable increase of private sector deposits of $20 billion during 2020, compared to only $8.8 billion in 2019, which means that the Greek private sector has the ability to gradually restore and serve its obligations. 2021 is expected to be a challenging year. We expect GDP growth in Greece of around 4%, driven by, firstly, the base effects in accommodation, food services and retail trade from the second quarter onwards, subject to the speed and efficiency of the vaccinations, not just in Greece, but also in the countries of origin of inbound tourist flows. Secondly, the recovery and resilience facility, which may prove a solid foundation for strong upside, as Greece is expected to receive around 5.5 billion from the next generation during 2021. according to the government's budget, whereby it is expected that the RRF will be activated in the second half of this year. Turning to page four, we note the key highlights of our full year 2020 results. Despite the challenges, we managed to deliver significant milestones for AlphaTAC. The continued focus throughout 2020 on our efforts to deliver Project Galaxy has allowed us to enter into a definitive agreement with Davidson Kempner over our 10.8 billion securitization portfolio, alongside the sale of an 80% stake in Cepalo. This will allow the bank to massively reduce its NPE and NPN ratios increase to 24% and 13% respectively. Transaction closing is targeted within the second quarter of this year. This transformational transaction, alongside our upcoming hive down process, set the scene for additional actions on the NPE resolution fund, while allowing redeployment of management focus and resources to continue rebuilding our banking franchise. In business development terms, 2020 was also an important year, as in December, we entered into a long-term bank assurance partnership with Generali, which will be a key enabler for the acceleration of bank assurance ambitions going forward. In parallel, we capitalized on the pandemic to push ahead with our digital transformation, minimizing physical financial transactions and launching a series of innovative products, including a retail customer onboarding process. 2020 was also a record year in terms of new disbursements to our customers on the back of government-sponsored programs and our commitment to support the Greek economy. Notwithstanding the pandemic, our financial performance was solid in 2020 with positive trends observed in loan and deposit volume growth, PPI generation, and capital adequacy. We achieved a 3.4% year-on-year increase in our corporate provision income generation while also recording trading gains of $690 million for the year, which has allowed flexibility to increase improvements to account for further NPE initiatives. Total pre-provision income of $1.4 billion allowed us to comfortably absorb impairments for loans of $1.3 billion, of which $283 million, which makes circa 22%, are COVID-related, while another $320 million related to our planned MPE transactions in 2021. As a result, group MPE cash coverage increased to 50% for Formula for Galaxy from 45% last quarter whilst our total capital ratio stands strong at 18.4% at the end of December 2020, or 16.9% for Formula 4 Galaxy and the bank's successful tier 2 issuance of $500 million in March this year. We are undoubtedly entering 2021, which is a stressed year, with a very strong capital position, which allows us to take a balanced approach on further NPD leveraging through a series of transactions amounting to 3.3 billion in Greece and Cyprus. Our capital advantage, even after the delivery of Galaxy, provides us with additional flexibilities on the NPE resolution fund, whilst remaining within our stated management targets. Moving on to page five. Here we're summarizing the key financial metrics for 2020 that show the strong financial performance as mentioned before. Despite the challenging environment, we reported an increase in operating income of 12% year-on-year, reaching $2.6 billion in 2020, which was driven by strong operating trends but also by a positive trading line of $690 million. We continue to deliver on our commitment to optimize operating expenses by reducing costs by 4% year-on-year, reaching $1.42 billion, while also improving our cost-to-income ratio from 57% in 2019 to 55% in 2020. On capital adequacy, our total capital ratio stood at 18.4% in December 2020, which is 50 basis points higher than last year. Project Galaxy allowed us to report a significant improvement in the group's MPEs ratio, which is now down to 26% versus 45% last year. In parallel, we also reported a significant improvement in the group's MPE coverage to 50% versus 44% in the year before. Let's now move to page 6, and here we draw your attention to our improved commercial performance within the year. where we supported the economy by fueling liquidity through 5.6 billion of new disbursements primarily to businesses, including government-sponsored programs of 1.4 billion, which carry a higher return on allocated capital due to their lower risk-weighted asset density. As a result, our performing loans, post-repayments and amortization have increased in the year by 1.3 billion, contributing positively to our net banking income. On the deposit side, we recorded strong inflows of 3.5 billion deposits on a group basis, with a notable shift from term to core deposits. Our digital transformation has continued and was further accelerated due to the pandemic, allowing for greater efficiency gains going forward. Currently, 92% of financial transactions are taking place through digital channels, while mobile users and digital wallets reported very significant increases within the year. We have also launched a simple and intuitive mobile-only retail customer onboarding process, allowing new customers to open an account, get a debit card, and subscribe to eBanking in a matter of minutes through my AlphaBank mobile, the bank's mobile banking app, without requiring physical presence. Furthermore, in 2020, we forged a new long-term relationship with Generali, whereby Alphabank will earn significant bank assurance fees over the next 20 years. Alphabank is targeting a significant increase in annual premiums and corresponding commissions in the lifetime of the new partnerships, also creating further value for performance earners agreed with Generali. Now, on page seven, let's have a quick recap on Project Galaxy. a landmark transaction for Alphabank in terms of asset quality improvement and testament to the success of the Hellenic Asset Protection Scheme program, which is now in the process of being expanded by another $12 billion of guarantees. In February this year, we entered into definitive agreements with Davidson Kempner in respect of the $10.8 billion Galaxy portfolio and the sale of 80% in Sepal Holdings with a transaction expected to close in the second quarter. Davidson Kempner, will acquire 51% of mezzanine and junior nodes, whilst we will retain 49% of those before subsequently distributing 44% to our shareholders in the second half of 2021, subject to corporate and regulatory approvals. We have also entered into a long-term servicing agreement with New Sepal with a 13-year term for the management of our existing retail and wholesale NPEs that will remain on our balance sheet after Galaxy closing, as well as as any future MPE flows. CEPAL is also supporting the bank in forming its post-Galaxy MPE strategy, which will be submitted subsequently to the SSM. The CEPAL platform, coupled with the Hive Down we are currently concluding, will provide us with an enlarged set of flexibilities to allow for an even more effective business plan execution. Let's move on now to page 9 and go over an NPE reduction in 2021 focusing on Greece. We expect to fully absorb any organic formation for the year on the back of moratoria defaults with planned NPE transaction of circa 3 billion. As already discussed in our introduction, we have taken up front more than 85% of the capital impact of these transactions, which comprise of both securitization under the Atlantic Asset Protection Scheme, and portfolio sales, naming projects Cosmos and Orbit. We have come a long way since 2017, having delivered nearly 5.5 billion average NPE reduction per year, or more than 16 billion in total. Including our planned transaction for this year, we will have delivered 75% NPE decrease within four years, while also targeting the older vintages. This is another step forward towards our target of a single-digit NPE percent increase. At the same time, we'll retain our flexibility to potentially upsize the ambition for inorganic NPE reduction on the back of our superior capital position and continuously declining costs for the asset protection scheme. On the next page, page 10, let us go through the expected evolution of our capital position. Our full year 2020 total capital ratio stands at 18.4%, having already absorbed the greatest part of the cost of our planned 2021 NPE transactions. Performa for Galaxy ended 500 million tier 2 issuance in March this year, our total capital ratio stands at 16.9% and our core equity tier 1 ratio at 14.3% respectively. We anticipate this year's organic capital generation mainly comprised of the pre-tax profit and a synthetic securitization transaction planned for the second quarter to fully offset the FRS 9 phasing and the RWA growth from business expansion. At the same time, We will absorb the residual cost of the MPE transactions, calculate at incrementally another 10 basis points, and remain within the range of our stated management capital targets with an estimated year-end cut ratio of circa 16.8%. The total costs for our 2021 MPE transactions is expected to amount to 65 to 70 basis points overall, or circa 20 basis points for every billion of the leveraging. On page 11 now, a brief overview of the NPE transactions we're planning on executing this year. Project Cosmos is a 2 billion granular multi-asset hub secure utilization in Greece to be launched in the first half of this year. It is mainly secured with a strong mortgage presence. Project Orbit is a 900 million consumer unsecured portfolio in Greece to be executed within this year as a straight Unitrans securitization sale. And then finally, Project Sky is a 400 million mixed secured portfolio in Cyprus, equally represented by mortgages and SME exposures to be sold as a whole long portfolio sale. Turning to page 12, you can see that Alphabank has had a consistent track record of negative NP formation for the last three years, including 2020. However, for 2021, and given the pressure stemming from a troublesome last year, we expect to see a positive net NP formation of 300 billion increase, excluding the impact of the transactions. Increased new NP inflows for this year are particularly driven by the expiration of moratoria that were in effect during 2020. We do, however, expect a significant part of this inflow to be offset by organic outflows, mainly driven by curings and repayments, but also solutions that will be including debt forgiveness as we continue the restructuring effort on the remaining book. At the chart on the right-hand side of the page, we present a breakdown for the performing moratorium of $5.5 billion, which we granted within last year. We expect that by the end of 2021, circa 80% of these exposures will remain in performing stages, partially supported by the EFEA program, as well as new step-up products offered to customers facing temporary difficulties. However, we expect nearly 20% of these exposures to ultimately default.

Let's now move on the financial performance analysis. This is Lazarus. Good afternoon. Let's start on page 15 with a summary of the key financial trends. We can see the top part of the page that despite the challenges brought by the COVID-19 outbreak in 2020, our co-operating profitability improved. with core pre-provision income up by 3.4% year-on-year to $859 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 $1.434 billion, supported by high trading gains. More specifically, Within the last quarter of the year, Alphabank recorded a strong trading line of $430 million, driven by realized gains from the GGB's portfolio and benefiting from a GGB swap with a grid state completed in December 2020, which resulted in a gain of $171 million. In 2020, total trading income reached $690 million. versus 410 in 2019. Going forward, the closing of Galaxy within the second quarter of 2020 is expected to temporarily rebase the bank's core pre-provision income towards the 800 million level, or a high single-digit decrease versus 2020. Coming back to 2020 performance, let's see in more detail the drivers of improved profitability during the fourth quarter. Net interest income stood at $388 million, up by 1.6% quarter-on-quarter, mainly on the back of the following barriers. First, we had a higher contribution from the asset side by $5.1 million, driven by higher average balances on the back of increased business loan disbursements, alongside improved lending spreads affected by the market rate movement. Second, We had 3 million negative impact from the liability side as increased deposit balances and more negative market rates were only partially offset by lower deposit rates. And finally, we had a positive effect on bonds and other items of 4.1 million. Looking at year-on-year trends, net interest income was resilient, almost flattest, at 1,542,000,000. This was a result of improved funding costs, mainly stemming from the substitution of interbank repos with Euro system funding at lower rates, which fully counterbalanced loan NII erosion due to spread pressure. This is in line with our guidance given earlier in 2020 for a flattest NII in the year. Net commission and fees in the fourth quarter 2020 stood at $83.8 million, down by 1.2% compared to the third quarter, primarily as a result of weaker performance in the card business with lower transactions due to the lockdown. This was partially offset by higher loan commissions following increased disbursements and increased fee generation from asset management. Fees on a yearly basis went down by 1.4% to $355 million, primarily reflecting decreased regeneration from commercial banking activities due to lower volume of transactions amid the pandemic and partially offset by an enhanced contribution of asset management and bank assurance. This was an even better performance than the minus 2% we guided back in November 2019. We expect fees and commissions to significantly increase by a high single-digit number in 2021, reversing the 2020 trend as COVID-19 eases. The increase will be fueled by work management fees, the insurance, as well as car fee income from the revival of tourism. Going forward in 2021, we expect net banking income to trend lower by circa 5% to 6%, driven by lower NII and higher fees. In the net interest income line, we expect a high single-digit reduction as a result of the Galaxy securitization to be recorded within the second quarter of the year. This will be partially counterbalanced by the positive contribution of the liability side stemming from the TRTRO benefit. Higher fees and other income are targeted to compensate for circa 30% of the NII loss while recurring cost savings will also offset an extra 15% of NII loss in the year. On the OPEC side, in 2020 year, recurring operating expenses for the group continue to decline, down by 3.6% year-on-year to $1.42 billion within our guidance and primarily because of lower staff costs. due to headcount reduction and reduced general expenses. As a result, the corresponding cost-to-income ratio declined to 55% versus 57%. Last year, we have recorded improving operational efficiency. In Greece, recurring operating expenses declined by almost 4% to 834 million, Whereas excluding expenses related to CEPAL acquisition during the summer, operating expenses in Greece declined by 6%. In the last two years, we have focused on the optimization and the configuration of our platform. So our branches in Greece, at the end of December 2020, declined by 107 units to 336, and our employees were reduced by 1,477 to 6,316 employees in Greece. 2021 is the first year of the new MPE servicing agreement with Cefal and Duval in Cyprus, following the MPL units carve-outs in Greece and Cyprus. In 2021, we target further cost reduction of approximately 2%, bringing the group recurring cost base to approximately 1 billion euros. If we turn now to page 16, we see that our strong pre-provision income generation, including trading gains of 690 million, stemming mainly from our GGB portfolio, allowed for the absorption of increased yearly provisions of 1.3 billion versus 995 million in 2019. Impacted by impairments due to COVID-19, of $283 million and impairments related to anticipated portfolio transactions of $320 million, as we will see later on, resulting in a positive bottom line with profit after tax at $104 million for the year. Apart from the profitability line, let us highlight here that the year ended with higher coverage in capital levels, as shown on the right-hand side. providing us with a good head start to pursue further NP reduction initiatives in 2021 as described earlier. Now, moving on to page 16 for the capital ratios, you can see that our common equity tier 1 stood at $7.8 billion as of December 2020. resulting in a common equity tier 1 of 17.3%, up by 10 basis points quarter-on-quarter, as a negative impact from quarterly profitability and the decrease of fair value for OCI reserves, were more than offset by a reduction in risk-weighted assets and implementation of the ACB's proposed CRR quick-fix amendments. The groups fully loaded Basel III Common Equity Tier 1 was up quarter-on-quarter by 18 basis points to 14.8%. Total capital ratio came to 18.4% at the end of 2020, providing a buffer of more than €2 billion over our overall capital requirement of 14%. Total capital adequacy remained strong at 16.9%, following the bank's successful Tier 2 issuance completed in March 2021 and taking into account the Galaxy impact of 280 basis points. Our strong capital position provides flexibility to execute further NP reduction initiatives while still maintaining comfortable buffers as the balance sheet of the bank normalized. The group's fully loaded Basel III total capital ratio stood at 16% at the end of December. Lastly, let me note that our GGV's portfolio currently stands at 4.8 billion euros, with the majority now being booked in amortized costs rather than fair value for OCI, as used to be the case. Greek government bonds and realized gains came to 200 million at the pre-tax level. You can also see at the bottom right part of the page that the yearly trading gains of 690 million are mostly comprised from gains from our GGB's portfolio. Moving on to page 17 on liquidity and funding. As you can see on the top left chart, private sector deposits increased by $2.1 billion to $43.8 in the fourth quarter, with core deposits from corporates accounting for the majority of inflows. The total deposit inflows for the year on a group basis were $3.5 billion. It is worth adding, as depicted in the chart below, that following similar trends in previous quarters of 2020, the rebalancing in the mix of deposits from time to core deposits persisted in the fourth quarter as well. Our Euro system funding remained stable at 11.9 billion at the end of December 2020, reflecting full utilization of our PNPRO borrowing allowance. Currently, 17% of the balance sheet is funded via the European Central Bank, resulting in a blended funding cost of minus 14 basis points for the entire balance sheet. As far as the liquidity ratios are concerned, a notable improvement has occurred in the past 12 months with our LCR standing at 151% as of December, whilst the loan-to-deposit ratio decreased further to 90% for the group. Moving on to page 18. Non-performing exporter balances in Greece reduced by 28 million during the fourth quarter of the year, bringing the total stock down to 18.3 at the end of 2020. Looking more specifically at growth formation in Greece, entries slightly increased in the fourth quarter to about 440 million euro due to imposed restrictions and moratorium offerings following EBA guidelines while exit stood at $470 million, mainly on the back of higher curings and repayments coming from the portfolio not included in the moratorium perimeter. As shown on the right-hand side of the slide, gross formation in wholesale posted a positive evolution, whereas retail continued to report a negative formation. Non-performing exposure formation in 2021 is expected to turn positive by $300 million, on inflows to moratoria, partly counterbalanced by curings and remedial management actions. Now moving on to our last slide, page 19. We provide the evolution of cost of risk on a quarterly basis, along with a breakdown analysis of the COVID-related impairments for the period. In the fourth quarter, impairment losses on loans stood at $569 million. including 320 million impairments related to forthcoming NPE portfolio sales. This resulted to a significant increase of the group coverage levels, shown on the top right, with group cash coverage having increased to 50% for NPEs and 85% for NPLs for Forma for Galaxy, while total NPL coverage, including collateral, stood at 127%. In the lower part of the page, you will note the breakdown of our full year impairment losses between core and non-core loans. With non-core, we refer to our exposures sold or expected to be sold under securitization and portfolio transactions, whereas core loans relate to both performing and non-performing exposures, excluding, of course, the transactions. You will note that the underlying cost of risk for the core portfolio is circa 100 basis points. COVID-related impairments further increased cost of risk by 70 basis points, and the remaining provisions of 170 basis points for the year were allocated to portfolio sale perimeters, out of which almost half in the fourth quarter of the year. Now, let's open the floor to questions.