Alpha Bank Sa

Ladies and gentlemen, thank you for standing by. I am Gail, your chorus call operator. Welcome and thank you for joining the Alpha Services and Holdings conference call to present and discuss the full year 2021 financial results. All participants will be in 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 Alfa Services and Holdings Management. Gentlemen, you may now proceed.

Good afternoon, everyone, and good morning to those dialing in from the U.S. Welcome to Alfa Bank's fourth quarter 2021 Earnings Conference Call. This is Vassilios Psaltis, Alfa Bank's CEO, and I'm joined today by Lazar Fopadai-Fallou, our CFO, our Chief Economist, Panagiotis Kapopoulos, and Yassine Kepapjoglou, our Head of IR. Let's start directly on slide four, please. Real GDP recorded a near V-shaped rebound in 2021, underpinned by strong growth in private consumption, supported by a sharp increase in savings accumulated during the pandemic. The better-than-expected performance of exports and services, thanks to the remarkable recovery of tourism, while its investment recorded significant gains, increasing its share of GDP to 29%. Real GDP increased by 8.3% in 2021, almost recovering to its pre-pandemic levels with a recession actually lasting only one year, as it was minus 9% in 2020. Labor market conditions continue to improve, with the unemployment rate falling to 12.8% in December 2021, and this is almost 3% of points below December 2020, where it averaged 15.5%. And this is obviously supported by the significant employment gains. Economic activity in the current year is expected to remain on an upward trajectory, but likely to be moderated somewhat by the heightened geopolitical uncertainty. More specifically, growth in 2022 is expected to be underpinned by several fundamentals, which will remain in place, such as the expected second round rebound of tourism, The investment injection of RRF funds are combined by a reliable government plan and the acceleration of structural reforms. However, this scenario is subject to the economic fallout of the full-scale Russian invasion in the Ukraine and the related sanctions, which are expected to moderate the growth dynamics in 2022. The uncertainty stemming from the suddenness of the recent geopolitical developments make accurate quantification of the economic impact difficult at this stage. The main uncertainties regarding the course of Greek economic development in 2022 derive from the following impacts. Firstly, the impact of soaring energy prices on businesses' production costs, profitability, and investment planning. Secondly, the combined effect of energy and food price inflation and the corresponding import energy dependence of our country on the real disposable income and purchasing power of Greek households. Inflation is now following a steeper upward trajectory, reaching 6.3% in February 2022, fueled by soaring energy prices. Thirdly, the impact on Greek tourism due to the weakening of European households' disposable income, which are the main origin of tourist arrival in Greece. The heightened uncertainty has adverse effect on borrowing costs, especially for a country that has not yet achieved investment rates. And finally, the extension of fiscal flexibility that is expected in Europe. Moving on to slide five. As you can see, the direct impact on our business from our exposure to the countries involved in the conflict is minimal. Note that the loan and deposit figures presented here relate to ultimate beneficial owners, with links to the relevant countries, and thus a portion actually have residency in the country in which we operate. Our indirect exposure, i.e. via suppliers and borrowers without themselves directly exposed to the relevant countries, is also limited, with no supplier-side dependency and relatively contained exposure for our corporate clients, which we have stress-tested and expect no impact. Our business is thus relatively shielded from the first-order impact of the war in Ukraine. Undoubtedly, it is the impact on the bigger picture that matters. On slide six, you can see that we face the current uncertainty from a vastly improved position. As you can see, 2021 has been a year of profound activity for our business as we have delivered no less than 11 transactions, including 16 billion of NPE disposals and securitizations, business development deals, capital market placements, and balance sheet optimization measures. This clearly demonstrates the bank's determination and capacity to execute on a large pipeline of projects well within the timeline and economic parameters that were presented in our business plan. Our actions in 2021 have also prepared us to capture the opportunities that lie ahead. Having largely completed the restructuring work, The franchise is already demonstrating tangible progress towards achieving the plan objectives in terms of loan growth and fee and commission income. Given the importance of business banking in achieving our strategic objectives, let's turn to the next slide to zoom in on the dynamics we are experiencing. Overall, for 2021, net credit expansion for business banking has amounted to €1.6 billion, with clear evidence of an acceleration during the year. There are two separate drivers behind this trend. Number one, unexpected prepayments came mainly in the earlier part of the year, as a wider audience of corporate clients was able to get direct access to the markets. Number two, on the back of the strength of our franchise, we have been able to secure a dominant position in landmark transactions, as demand for credit increased during the year. On both accounts, the outlook for 2022 overall points to further strengthening of credit expansion. The needs of our customer might adjust to the current environment, but the requirement for bank financing will likely be greater. It is important to note that we have very good visibility on a large portion of the disbursements for 2022, with a meaningful number already secured. Focusing solely on major transactions, we have already dispersed circa 1 billion and signed or agreed a further 1 billion. It is also important to touch upon pricing in this segment. As can be seen on the bottom left of this slide, we have experienced a notable contraction in spread and expect some further pressure this year. Looking back to 2021, this has mainly come as a result of the repayment of some expensive facilities that we had provided at the of the Greek sovereign crisis. The remaining stock of such facilities on our books is small and should not lead to a notable impact on spreads going forward. Additionally, there has been a de-escalation of pricing alongside the normalization of the economic environment. This process should continue in 2022 with an additional impact coming from the mix of loans that we expect to disperse during this year. It is, however, important to note that the overall profitability of the business we're underwriting is well above our threshold levels. Turning to slide 8, this year we have leaped forward in terms of balance sheet cleanup. Including the Galaxy transaction, we have reduced the stock of NPEs by more than 75%, reaching a 13% NPE ratio ahead of our original plan. The main driver of the acceleration was the conclusion of Project Sky ahead of plan. It is important to remember that Project Sky was an outright sale of effectively the sum total of our problematic exposures in Cyprus. Given the complexity of the project and the investment ticket required by the buyer, the accelerated delivery of the project within the original loss budget showcases the execution capacity we have. Preparatory actions for the remaining perimeter that will complete our NPE journey within 2022 are progressing well, and we expect to show solid progress with our first half results for the majority of this envelope. Turning now to slide 9, you can see that we have made further progress in our business development and capital generation transactions. The joint venture with Nexi on the payment space is nearing completion. The synthetic securitization, which we codename Project Aurora, is now complete, while we now also have a definitive agreement in place with OTP for the sale of our subsidiary in Albania, with no impact on visits from the recent geopolitical developments. The development of our real estate joint venture, Project Skyline, has progressed further and is attracting high levels of interest. Throughout these past three quarters, we have demonstrated our ability to comfortably deliver on a large pipeline of projects well within the timeframe and economics that we presented during our business plan, thus decisively reducing execution risk. Let's now shift to the next slide to look at the outlook for 2022. The invasion of Russia to Ukraine and the accompanying geopolitical tensions and inflationary pressures cloud visibility and growth dynamics with as yet intermediate responses from a fiscal and monetary policy standpoint. Our focus remained on ensuring that our franchise is best placed to support the financing needs of our customers whilst delivering on the planned improvement in structural profitability. As you can appreciate, however, our targets for 2022 that were approved earlier this year do not incorporate an impact from the current situation. Now, with that in mind, we believe net credit expansion could double, with business banking in Greece accounting for circa 90% of the total. Revenues are expected to be positively impacted by growth in performing loans, alongside further gains in fees. The transitory impact from increased levels of liquidity, alongside the value-accredited front-loading of NTE transactions and the loss of merchant acquiring fees, will, however, more than outweigh the aforementioned benefits. Our reported cost base should see a meaningful improvement with a double-digit decline in cost year-on-year as we reap the benefits from the completed voluntary exit scheme, non-performing and other transactions. The ongoing cost rationalization should easily offset inflationary pressures. NPEs should fall below the Euro 3 billion mark on the back of the tail end of NPE transactions and a back-loaded organic reduction driving underlying cost of risk down to 70 basis points. The NTE ratio is expected to reach 7% by the end of the year, with single-digit levels at the end of the first half. Our organic capital generation should surface in 2022, as will re-establish bottom-line profitability. Progress on the transaction front, alongside further optimization measures, should allow us to exceed our capital targets in 2023, and reinstate dividend payments. Last but not least, I would like to stress that despite the current uncertainty, we remain squarely focused on delivering the main pillars of our business plan for 2024 in terms of profitability, tangible book value, and regulatory capital. And with that, I would like to pass the floor to Lazaros to present our financial performance in Q4 and the outlook for 2022.

Good afternoon, everyone. This is Lazar Papagalifan, Welfare Bank CFO. Let's start by taking a closer look at the financial performance in the fourth quarter. Turning to slide 12, this quarter has seen the transfer of the Sky and Orbit portfolios to Help for Sale, as well as the discontinuation of our Albanian operations following the agreement with OTP. The aforementioned actions have progressed our restructuring and have delivered the promised reduction in problematic assets with NP ratio down to 13.1% and the associated impact driving a fourth quarter bottom line into negative territory. Note that we have also completed the COSMOS securitization and as a result have recognized the 1.7 billion senior node. The underlying Q and Q performance was affected by seasonality in costs and a higher underlying cost of risk. On an annual basis, we have delivered 330 million in normalized profits after tax, up from 87 million in 2020, and fully in line with our targets. On capital adequacy, our total capital ratio stood at 16.1% at the end of the year of 16.7%, accounting for the RWA relief of projects Orbiskyte and Riviera, all of which are accounted in the Health for Sale account. Now turning to slide 13. In terms of new credit, we continue to steadfastly support our customers as we disperse the further 1.6 billion of new loans in Greece this quarter, bringing the total to 5.4 billion, addressing credit demand mainly from businesses. Net credit expansion, i.e. disbursements minus repayments, stood at 1.3 billion for the year, driven by 1.6 billion expansion of credit towards businesses, still being partly offset by repayments on the retail book. Net credit expansion accelerated in the quarter, reaching 0.5 billion. Following a 10-year deleveraging process, AlphaBank witnessed in the fourth quarter the first meaningful expansion of its domestic performing loan portfolio. As highlighted in the bottom right chart, at the group level, our performing book, excluding the Galaxy and Cosmos Senior notes, has turned a corner this year and expanded by 2%, 4.6 billion on an annual basis to 28.6 billion. Looking ahead, Net credit expansion should more than double in 2022, and we expect the group performing loan book to grow by circa 9%, with business banking in Greece accounting for more than 90% of the total. Lending spreads of performing exposures continue to witness some expected pressure but are still evolving, mildly better than initially feared. Spreads of our new production remain resilient and at very satisfactory levels, which, together with a positive mix of net credit expansion, should support the profitability of our loan book. Credit demand is expected to further accelerate in the coming quarters on the back of a significant pipeline of projects. In 2022, we expect to underwrite a number of significant projects on a standalone basis outside the RRF perimeter. The current short-term pipeline includes financing of projects, mostly in energy, services, real estate and manufacturing sectors, aimed at creating the conditions for Greece's long-term sustainable growth. As Vasilis mentioned, in 2022, we have already disbursed circa 1 billion and signed or agreed for a further 1 billion. Turning now to deposit gathering on slide 14. The group's deposit base expanded by 1 billion in the quarter, comprising 70% of the bank's total funding sources. At the end of the fourth quarter, domestic deposits reached another record high since the onset of the crisis, reflecting inflows from core deposits that now account for more than 80% of the domestic book. The continued shift of the product mix produces an overall positive impact on the bank's interest expense. On a year-on-year basis, our group deposit base has expanded by 3.7 billion. Liquidity drawn from the ECB's TLTRO facility stood flat at 13 billion, reflecting the full utilization of our TLTRO-3 borrowing allowance, or circa 18% of our total assets. Benefiting from the low-cost liquidity drawn from the ECB The bank's blended funding cost remained in negative territory in the fourth quarter at minus five basis points and continued to support net interest income. Finally, the group's robust liquidity position is evident by the strong liquidity coverage ratio, which stood at 183% at the end of the fourth quarter, far exceeding the regulatory threshold, with a material improvement in the loan-to-deposit ratio to 78% versus 90% the year prior. Let's now see the drivers of our net interest income performance during the fourth quarter in more detail on the next slide. Net interest income in the fourth quarter stood at 298 million, down by 5.3% Q and Q, negatively affected by the acceleration of NP cleanup and funding costs. Last quarter's reported net interest income has been restated for the sale of other Albanian operations, while the headline performance should also be adjusted for the one-off income of 6.8 million recorded in the third quarter on the back of a restructuring of a large corporate loan in Cyprus, as well as a penalty on the reprofiling of TLTRO-3 maturities that we will recover via their extension. On an underlying basis, net interest income declined by 2% in the quarter, mainly due to the NP cleanup and increased funding costs. More specifically, on performing exposures, higher volumes were partially offset by continued spread pressure, leading to an increase of 0.7 million in net interest income. On non-performing exposures, lower volumes, mainly on the back of the recognition of the COSMO securitization, were partially offset by higher spreads, thus leading to a reduction of net interest income from NPs by 4.2 million in the quarter. The contribution from deposits was flat quarter on quarter as the positive impact from repricing in Greece and rubber movement was fully offset by higher balances. Funding came in 4.7 million lower mainly due to the cost incurred from the two senior preferred board issuances of 0.5 billion and 0.4 billion in September and December respectively. And lastly, bonds and other saw a positive effect of 1 million, reflecting increased income from securities. On the bottom of this page, we portray an indicative sensitivity analysis of our net interest income to higher interest rates, starting from the current level of policy rates at minus 50 basis points, according to which an increase of 200 basis points of the base rate from current levels leads to a 12% increase of our top line. Turning to slide 16, we show the main drivers of our fee income generation. On a quarterly basis, net fee and commission income was down by 4.1 million to 104.3 million on the back of the seasonally weaker performance of the card business, down by 8.2 million Q&Q, and reflecting a decreased contribution from loan commissions, stemming from lower syndicated loans. while it was supported by increased fee generation from asset management. On a yearly basis, net fee and commission income witnessed a solid recovery in 2021, up by 20.6%. The main contributors to this performance were growth across cards, asset management, back assurance, and loan fees. The headline yearly performance was positively impacted by an extraordinary fee of 10 million booked in the second quarter related to an early termination of a previous agreement with AXA, whereas a non-recurring benefit booked in the first half of 2020 of 11.8 million related to the modification of collateral agreements negatively affected the year-on-year comparison. On a recurring basis, net fee and commissions posted an increase of 21.3% year-on-year. Looking ahead in 2022, the observed pickup in commercial activity, the growth in asset management, along with our business development initiatives that strengthen our franchise positioning, should allow us to offset the negative impact from the sale of our merchant acquiring business, leading to a flat fee income generation target of circa 0.4 billion for the year. On the OPEX side, On slide 17, we show that in the fourth quarter, recurring operating expenses increased by 9.7% Q&Q, or 23.1 million, reflecting mostly a rise in general expenses due to higher taxes and marketing expenses, as well as seasonally higher staff costs and an increased depreciation charge, primarily due to the faster amortization of intangible assets. On a yearly basis, Recurring operating expenses decreased by 15.6 million, or 1.5% year-on-year, to 1 billion in line with our target. This performance is underpinned by a decrease in staff costs, partially offset by an increase in general expenses, as well as a higher depreciation charge, primarily on intangible assets. Adjusting for the deconsolidation of CEPAL Recurring operating expenses amounted to $979 million, as we show on the bottom left of the following slide, where you can also see the breakdown per line. It is important to highlight here that the bank has already secured $132 million of cost savings, with circa 80% of the benefit materializing within 2022. allowing it to target a double-digit improvement in costs year-on-year, stemming from the following. First, the deconsolidation of CEPAL, where we will see the full benefit in 2022. Second, the VSS program, completed in early October in our domestic operations, which has driven our FTE base in Greece to circa 5,500 and rebased our local cost base to the lowest level seen in 15 years. driving the productivity and efficiency of our Greek operations to the top of the market. Third, the savings from the deconsolidation of the merchant acquiring business targeted for the second quarter. And last but not least, the cost benefits post the completion of NPE and other transactions, namely Sky, Skyline, Riviera, circa 30% of which will flow through the P&L already in 2022. These drivers will allow the bank to target a cost base of approximately 920 million for the group in 2022. We also present here on the right hand side a detailed breakdown of the one-off items that we have incurred in 2021. We would like to stress that inherently the VSS charge transaction costs and the SCI-REO impairment will not repeat. Following years of cleanup, we also see limited room for further impairment of fixed and tangible assets. Our budget for 2022, thus, incorporates only a minimum charge for exceptional items. Moving on to asset quality on the next page. With regards to asset quality trends in the quarter, NPE formation in Greece remains largely flat quarter on quarter, as lowering flows from expired moratoria were counterbalanced from lower curings and repayments. As you can see in the flow chart, the overall NPE formation in Greece for the year was better than originally anticipated, as we reported an almost flatish organic formation for the year versus an initial forecast of 600 million new non-performing exposures. For 2022, we expect a negative gross NPE formation of 0.5 billion leading our cost of risk below 70 basis points for the group. On the right-hand side of our slide, you can see further information on our cost of risk evolution. The vast majority stemmed from NPA transactions, associated mostly with projects SKY, ORBIT, and COSMOS. Moreover, servicing fees paid to CEPAL, which were reclassified in the third quarter to the impairment line, amounted to 25 million. adding another 30 basis points to the total cost of risk charge. On average, servicing fees in 2022 should be at half the levels seen in the fourth quarter. The underlying cost of risk came in at circa 1.1% over net loans in the fourth quarter versus 0.6% in the previous quarter, while overall for 2021, the underlying cost of risk stood at 0.85% over net loans. better than our initial target of 120 basis points for the year, paving the way for the full normalization of the impairment line. Finally, in the bottom right graph, you will see that our group NP ratio has contracted from 43% a year ago to 13% at the end of 2021, ahead of the original business plan targets. As a result of the completion of the aforementioned transactions, Our group NPE cash coverage decreased to 47% from 56% in the previous quarter, reaching the same level as a year ago, with total coverage, including collateral, at 108%. Moving on to slide 20, and continuing on the same topic. Of the €5.1 billion of NPEs that remain following the recent transactions, circa 80% is secured exposures. And as you can see on the right-hand side, the stock of remaining NPEs, excluding the planned transactions, amounts to 3.7 billion, split relatively equally between foreborn performing loans and non-performing loans. Overall, we expect to reduce our NPE volume by more than 40% this year at group level, from 5.1 billion in December 2021 to below the 3 billion mark by year-end, on the back of 1.5 billion of NPE transactions and a back-loaded organic reduction of 0.7 billion. Thus, the NPE ratio is expected to reach 7% by year-end with single-digit levels expected already from the first half in 2022. This will effectively be driven by our transactions with a gross book value of 1.5 billion, for most of which the bank is fairly advanced in terms of preparation. As previously mentioned, cost of risk is expected to come in below 70 basis points in 2022. We reiterate our guidance with regards to the remaining loss budget of 0.3 billion for 2022, but note that this will be fully offset by the gain we will record on the sale of the merchant acquiring business. With that, let's turn to capital on slide 21. At the end of December 2021, the group's total capital base stood at 5.7 billion, resulting in a total capital ratio of 16.1%, down by 106 basis points Q on Q. This was mainly attributable to a circa 91 basis points impact from transactions, namely Orbit Sky in Albania, and an 18 basis point impact from the lower reserve of the investment securities portfolio measure that survived through other comprehensive income. Pro forma for the risk-weighted asset relief from projects Orbit Sky and Riviera, which will be realized in the coming quarters, the group's total capital ratio stands at 16.7%. Reported fully loaded has reached through the quarter its drafts As per our business plan targets, pro forma for the anticipated RWA relief from transactions, it stands at 11.32%. Once we also incorporate the impact from the sale of our merchant acquiring business, where we have a definitive agreement with NEXE, the common equity tier one level we have secured stands at 11.8%. We are also providing you here with a roadmap for our capital position. The total impact from the VCH transactions and capital optimization measures in 2022 should be a positive circa 10 basis points. At the same time, we expect to deliver circa 60 basis points in organic capital generation, including recurring profitability, DTC amortization, and RWA growth. As a result, We aim to finish 2022 with a fully loaded Common Equity Tier 1 ratio of circa 12.5%. Based on the expected underlying profitability during 2022, we have already secured two-thirds of the expected capital generation capacity for 2023 and 2024. Given the expected enhancement of our profitability, Our organic capital generation capacity should grow to 100 basis points in 2023 and 160 basis points in 2024. In the following slide, we are providing you with detailed guidance for 2022. Here, I'd like to highlight three things. Firstly, it is evident that we are operating in times of heightened uncertainty. Exogenous factors will have an as of yet indeterminate impact on their microeconomic environment. We believe that there are risks and opportunities in the environment that will transpire, but our outlook for 2022 has not incorporated any impact from the current situation. We are of course monitoring the situation closely and start ready to adjust our planning as necessary. The second important point is that our bottom line targets for 2022 are largely unchanged compared to the business plan. However, the profit and loss mix is different to what we originally expected, mainly to the acceleration of the NPE reduction. The contribution from NPEs to our top line will be smaller, our cost base will be better, and provisions will be lower. And as a result, the quality of our earnings will be stronger following the improvement to our balance sheet. Third, as mentioned, we are committed to delivering a sizable improvement in our capital ratios. This will enable us to surpass our 13% target for fully loaded common equity Tier 1 in 2023, in line with our business plan, thus clearly laying the ground for the reinstatement of dividends. And with that, let's now open the floor for questions.