Alpha Bank Sa

Ladies and gentlemen, thank you for standing by. I am Mina, your chorus call operator. Welcome and thank you for joining the Alpha Services and Holdings Conference call to present and discuss the first half 2023 financial results. At this time, I would like to turn the conference over to Alpha Services and Holdings Management. Gentlemen, you may now proceed.

Welcome, everyone, to AlphaBank's results call for the second quarter. Of this year, this is Vassilios Psaltris, Alfa Bank CEO. I'm joined today by Lazaros Papagaryphalos, CFO, and Yasson Kipapjoglou, the head of investor relations. And let's go straight to slide five, please. Profitability in the first half of the year exceeded 12%, with circa 360 million of normalized earnings. Revenues are up 20% year-on-year, and this is driven by higher rates, volume growth, and an increase in recurring fees. Operating leverage and strict cost discipline have driven the cost-to-income ratio to the low 40s, while asset quality remains relatively benign, with cost of risk having largely normalized and coming in better than the four-year guidance. As a result, we have generated 50 cents of recurring earnings per share in the first half of the year, and this is up 75% on a year-on-year basis. And as Lazaros will detail later, it is important to highlight that we have grown on earnings and profitability in a disciplined manner. We have maintained our sustainable commercial pricing policies, aligning with our peers on the liability side while defending loan pricing, and we have built our capital and liquidity buffers further. We are at the start of our three-year journey, but as we highlight in our recent investor day, our plan is front-loaded. Our progress thus far clearly demonstrates that we are well on track to meet our financial targets of increasing profitability and generating capital to support growth and distribute value to our shareholders. As you can see on slide six, this is a reminder of our six strategic priorities that leverage our strengths and work on areas where we want to improve our performance, enabled by our investments in people and digital. These six strategic priorities are the operational leaders we're using to achieve our financial ambition. We aim to selectively update you on the progress we're making with every quarterly result. This time, we will focus on retail and balance sheet resilience. And let's start with retail on slide seven, please. Following on from the investor day in early June, we have announced our new branch structure. We have also rolled out a new access model for circa 20% of the network. while we provide an all-access model for the first three hours of operations with appointment-only service for the rest of the day. As you can appreciate, this necessitates that client interactions are predominantly advisory in nature, which is only possible when most of the transactional and everyday banking services have been digitized. For example, following the launch of an initiative to migrate know-your-customer activity to digital channels, we have seen a jump in adoption rates, leading to significant FTE savings. the equivalent of one employee per 10 branches in the space of just six months. This has allowed us to deploy more capacity towards advisory services, with 40% of branch staff now being relationship managers from only 34% last year and 21% in 2021. As a result of our hard work, our retail network has been able to capture more than one-third of the total market flows in the relevant wealth segments. We have also operationalized our strategy with regards to capturing the emerging affluent client segments, with more than 300 relationship managers dedicated to the segment now having client books. The emerging affluent segment now accounts for more than 10% of the total alpha bank sales of world products, having increased its contribution sixfold versus last year. Let's now look at another of our focus areas on slide A, and this is the resilience of our balance sheet. we have made strong progress in the first half of the year. At 13.6%, our fully loaded core equity of one ratio is now clearly above our management target of 13%. This improvement is driven by organic capital generation of 116 basis points in the first half of the year. Combined with the timely issuance of 81, this has allowed us to create the equivalent of one billion of total regulatory capital year to date. This has also been assisted by the conclusion of a series of transactions that have simultaneously reduced risk-weighted assets and de-risked our NPE plan, as we now have significantly fewer health for sale assets. Our most recent senior preferred issuance allowed us to build a $600 million buffer to the non-binding emerald targets of 2024. None of this has been taken into account in the most recent pan-European stress test due to methodological constraints. Yet despite that, we have seen a 330 basis points improvement in our capital depletion versus the last iteration of the test, paving the way for potentially lower capital requirements. Please also note that we have performed better than our European peers by 152 basis points versus the average. Last but not least, our liquidity position has been further strengthened. Our liquidity and stable funding ratios are ahead of our target, whilst we have as much as 30% of our deposit base in cash and cash equivalent instruments. To conclude on my side, let's now turn to slide nine, please. The improvement we are seeing in profitability is coming from two sources. Firstly, we are seeing a structural improvement in the profitability of our business units as the leaders were operationalizing combined with macro tailwinds to produce sustainably high returns. Our operations in Greece are showing better momentum while the profitability of our international business has been has seen a step change. Secondly, we continue to reallocate capital away from problematic assets to fund the growth of our performing business. We have seen returns on regulatory capital based on our 13% target for Core Equity Tier 1 grow from 9.5% last year to 16.5% in the first half of the year. Group returns on the regulatory capital that we need to carry are reduced by the regulatory treatment of our deferred tax assets. leading us to deliver a return on tangible equity of 12.2% in the first half of the year. Now, Lazaros will give you more detail on our guidance for the year, but Lazaros, if you allow me to steal the punchline and allow me to say that we have upgraded our guidance for profitability for this year from the 10% we promised with our investor day to well in excess of 11%. Now, Lazaros, the floor is yours.

Thank you, Vassilis. I suspect it's the CEO's privilege to steal all the good bits from the CFO section. Let's now take a quick look at this quarter's numbers, turning to slide 11. This quarter, we're reporting a positive bottom line of €191 million versus €111 million for the previous quarter. Excluding run-offs, normalized profits came in at €195 million, up 20% versus the previous quarter, and up close to 180% versus the second quarter of last year. As you can tell from the small difference between reported and normalized profit, there is not a great deal of one-offs to discuss this quarter. Our performance in the first half has been equally impressive with reported profits up 27% and normalized profits up 78%. versus the equivalent period of last year. Slide 12 on our balances. Our tangible book value grew at 7% year-on-year, while our regulatory capital is up 10% over last year's levels. Our TLTRO balance is down by $8 billion year-to-date, as we have repaid a further $4 billion this quarter. Our cash balances are down by less, as we have seen growth in our deposit base, which combined with issuance and liquidity released from our investment of assets previously held for sale, has allowed us to comfortably fund the growth of our remaining assets. Now turning to slide 13, to look at the main profit and loss components. Net interest income continued to grow in the quarter, up by 4%, on the back of higher rates. On a yearly basis, NII grew by 46% versus the second quarter of last year. Currently, 10% of NII comes from NPEs, but as we have said, these will trend significantly lower starting from this coming quarter, following the deconsolidation of two large NPE portfolios at the end of June. Fees and commissions grew to a more sustainable level of $97 million, up 10% quarter-on-quarter. Requiring operating expenses were up by 3% Q&Q, driven by higher property taxes and insurance costs, as well as a higher depreciation charge, while costs in the first half are down 3% year-on-year. Finally, cost of risk came in at 76 basis points excluding transactions in line with last year's run rate and below our full year guidance of 85 basis points reflecting the de-risk portfolio and benign asset quality trends. And with that, let's look at the drivers of our top line performance during the second quarter in more detail on slide 14. Net interest income continues to grow and stood at 440 million in the second quarter, up a further 4% versus the first quarter, and up 49% versus the second quarter of last year. Interest rates and the pace of increase in the overall deposit data continue to evolve better than expected. As a result, we are today upgrading our target for the year to above 1.7 billion, and we expect the evolution of our top line to be relatively flattish in the coming quarters. The assumptions underpinning our target are a deposit facility rate reaching 3.75%, with average three-month Euribor for the year at 3.3%, and an average deposit pass-through of 15%. So it is clear that these assumptions are conservatively struck. The commercial policies we employ in this period of changing interest rates are of paramount importance. On the asset side, the focus is squarely on the growing corporate book. We have been seeing the expected soft landing in spreads, but have been cautious not to pass on the temporary benefits of a low deposit funding cost to the long-term loan facilities that we underwrite. Our franchise is built upon long-lasting relationships of trust, and we want to avoid locking in levels of profitability that are below our thresholds and that would not be sustainable for us or would force us to have difficult conversations with our corporate customers once deposits reprice higher or rates fall. As you can see, we have been consistent on the need to be thoughtful on corporate loan spreads, and are encouraged to see some rational behavior in part of the market. On the liability side, we've had a very successful quarter, gathering 1.6 billion of deposits while being able to maintain our deposit data in line with the average of our peers. Slide 15 on fees. As mentioned, we've seen a solid improvement this quarter returning to more sustainable levels of activity, and we are confident we will be able to make our target for the year. Lending and transaction activity have driven growth this quarter, and this is reflected in the performance of our retail and wholesale operations. On asset management, higher assets under management have driven up management fees. However, this has been offset by lower volumes of sales and redemptions, leading to lower transaction fees, as well as a different mix of sales in favor of CCAPs. On to costs now, slide 16. This quarter, we have seen an impact from higher taxes and insurance costs. Our cost income ratios stood at 44.7% in the quarter, and just 37% in our domestic business. Despite inflationary headwinds, our performance remains well on track to meet our full-year guidance, and this is reflected in the revised guidance for the cost-to-income ratio that implies a lower cost base on an absolute level compared to last year. Moving on to slide 17 and loans. Our performing loans book has grown by 3% over the past year, driven predominantly by growth in our Greek corporate franchise, as well as through growth in our international business. As you can see on the right-hand side, the second quarter saw a notable pickup in disbursements as we exited the seasonally low first quarter, while political certainty re-established confidence in the market. At the same time, We have witnessed clear signs of normalization in repayment levels this quarter, as we saw a level of 1.6 billion of repayments if we exclude a large ticket that we syndicated in the quarter. We expect a number of large projects to be given the green light towards the latter part of the year, which, combined with a strong pipeline of disbursements in the corporate sector, make us confident in meeting the target of a mid-single-digit growth in our performing loan book this year. As you can see on slide 18, we have seen very strong growth in customer funds. Our deposits have grown by $1.6 billion this quarter, clearly the best amongst our peers. The shift to time deposits, as can be seen on the right-hand side, continues, with a level reaching 23% in June, similar to peers. The same is true of the cost of deposits, and overall, deposit beta making the inflows this quarter even more impressive. On assets under management, we have had notable valuation tailwinds this quarter, while net additions are running at an annualized rate of over 7%, driven by mutual funds and fixed income products. And with that, Let's now briefly look at our segmental performance. Slide 19 on retail. Unsurprisingly, being on the limelight, given the comments from Vasilis earlier, as well as the pivotal role it currently plays in deposit pricing. The change in the rate environment has clearly transformed profitability, with returns on allocated FOMO next year one at 24%, up 21% at points versus the equivalent period last year. Revenue growth has been the driver of the reduction in the cost income ratio, but the business has also seen a notable reduction in its cost base as it continues to optimize its footprint. In our wholesale division on slide 20, as you can see, revenues have grown 10%, half on half, as high rates and higher loan balances have counterbalanced the subdued level of disbursements. Becaring costs were again down meaningfully as the transformation program continues to bear fruit, and as a result, we have seen an improvement in profitability by one percentage point. RWA optimization, including the recently completed synthetic securitization, are likely to optimize capital allocation further for wholesaling leading to a further boost in its profitability. Slide 21 on our wealth and treasury operations. Revenues are flat versus the first half of last year, but of much higher quality as one of trading gains have been replaced by recurring net interest income from our securities portfolio, as well as slightly higher fees. This is reflected in the cost to income ratio which excludes trading profits and has come down from 55% in the first half of 2022 to 30% this year. Normalized profits that exclude one of trading gains have thus nearly doubled. Finally, on our international operations on slide 22, we have seen a near tripling of normalized profits as revenues have benefited from excess liquidity and volume growth. with returns on allocated capital up 22% at points versus the first half of last year. Our international business has posted 17% of the group's recurring profits during the first half of the year and is clearly showing tangible progress towards being a true contributor to value creation for the group. As Vasilis mentioned, much of our targeted improved profitability out to 2025 will come from reducing the capital consumption and hence drug from our NPAs and other operations. As you can see on slide 23, the loan book and balance sheet has fallen sharply year on year and we continue to target this division being responsible for circa 10% of group RWAs compared to nearer 20% at the end of last year. And with that, let's move to asset quality on slide 24. NPE formation in Greece was again zero this quarter, with inflows affected mainly by single corporate exposure. Robust carrying activity and repayments effectively drove total formation to zero. On the right-hand side of the slide, you can see further information on our cost of risk evolution. The underlying cost of risk came in at 55 basis points in the second quarter with an additional 13 basis points for servicing fees and eight basis points for securitization expenses. That brings the overall cost of risk excluding transactions to 76 basis points for the quarter versus 75 basis points in the previous quarter and 76 basis points for the whole of 2022. As asset quality trends remain benign, we now believe that cost of risk will likely come in better than our full year guidance of below 85 basis points and would expect a number closer to or even below 80 basis points for the year with the NPE ratio closer to 6.5%. Let's now briefly look at the quarterly evolution of our fully loaded capital position on slide 25. As already mentioned, our strong capital generation here today has significantly strengthened our capital ratios that now stand above our management target of 13%. As you can see on the top graph, our fully loaded common equity tier one has increased by 109 basis points in the quarter. our organic capital generation was strong at 71 basis points. We continue to find growth through internal means, whilst our capital generation capacity is further levered through the recovery of deferred tax assets. Our capital ratios are also proving resilient, as there was effectively one basis point positive impact from fair value through other comprehensive income this quarter, due to the low sensitivity of our book to shifts in the yield curve. And then lastly on transactions, there was a positive impact of 56 basis points this quarter from the conclusion of two NP transactions, namely Project Sky and Hermes and a synthetic securitization. This means that our reported and pro forma capital ratios are now fairly aligned. Our reported fully loaded common equity tier one stood at 13.5% at the end of the second quarter, or 13.4% post-dividend accrual, while pro forma for the anticipated RWA relief from transactions, our fully loaded common equity tier 1 stands at 13.6%, well above our management target of 13%. It is important to note that we expect a further benefit of 20 basis points to our capital ratios following the conclusion of another performing loan securitization envisaged to be concluded within 2023 and reducing RWAs by circa 0.7 billion. As previously communicated, we aspire to reinstate dividend payments out of 2023 profits and we aim to secure regulatory approval in early 2024. On the next slide, you can see that our capital ratios are well ahead of regulatory requirements, while the 400 million Euro 81 issuance that was completed earlier this year further built our capital buffers. And then lastly, on slide 27, we present our financial targets. We are today upgrading our 2023 guidance, and at this stage have not reviewed our 2025 targets, which are simply presented here as a reminder of what we shared at our investor day. While our guidance for 2023 was only shared on our investor day in early June, the trends that have materialized in the last couple of months have further strengthened the case for even better levels of stability this year. I have briefly mentioned the main components throughout the presentation, but since we have everything in one place here, the main changes relate to the following items. We now expect net interest income to lag above €1.7 billion from €1.6 billion previously, with rates higher than expected and deposit beta evolving better than expected. We don't expect any notable deviations in our expectations for fees or costs, but off this high revenue base means that the cost income ratio will now be below 45%. Our cost of risk will likely end up somewhat lower than originally expected as asset quality remains relatively benign and we now target circa 80 basis points for the year. effectively implying 85 basis points for the second half of the year. Better trends also mean that our NP ratio should get to 6.5% by the end of the year. As a result of the above, profitability will come in well in excess of 11%, adjusting for excess capital. Earnings will grow to above 29 cents per share. Our tangible book value will land above 6.2 billion euro. And our fully loaded common equity R1 ratio will likely land closer to 14%. And with that, let's now open the floor to questions.