Alior Bank SA

WSE:ALR

Earnings Call Transcript 2018-Q1

[Operator]

Good morning. Welcome, everybody to today's presentation of our results. As you have noticed, we've changed our formula. And we want to be available to more people, especially that we've got a lot of things to tell you, we will have to watch the time.

Net profit in the quarter -- first quarter, PLN 171 million higher than in the same quarter a year before. And we reached this result thanks to higher incomes, including the interest income 10% and 11% more. We closed the quarter with a good cost of the risk result. The planned cost of risk was based on the estimations, IFRS 9 estimations, but also based on estimations on the improvement of our portfolio. Both these things were actually less costly and the risk cost us about 1.8% less than planned. So we also noticed a higher profitability by 11.5%. Interest margin was also higher. This is not a surprise -- it was lower. It was a surprise because of the decisions that were made in the fourth quarter last year. The good capital position, good and efficient distribution channels allowed us to keep the sales dynamics, which gave us PLN 1.4 billion more in credits.

Important, this growth is achieved according to our plans, as you can see here, where we were an active player in the micro segment and our sales -- and our share in these sales was quite significant owing to our tactical activities by the team of Maciej Surdyk. We increased our sales of loans by nearly 30%. The leasing is also contributing very nicely to our results, especially in the micro segment. What you cannot see on the screen is that the margins that we are reaching improved our profitability very much. The margin on the micro portfolio is 7.6% and the newer sales, 9.8%. So everything is going as planned.

This is just briefly the composition of the net profit. This is nothing special here, nothing -- no surprises. We expect the fair value depreciation further on in the nearest future. And its share in the result will be seen -- will be declining in the future.

Now the progress in operationalization of our digital and our Digital Disruptor. The tactics have defined a number of changes that were -- are now being implemented. In the first quarter, we had a lot of such implementations. But let's just focus on those whose results can be seen now on the income side and in the part to be discussed later on by Filip, which includes the increase of the number of customers and other features -- business customers. So we are continuing the zafirmowani.pl platform; more and more customers are using it. Our online accounting is used -- more used now up to 55%. This is also about our customers up to 1 million and it is about secured products. As you have seen, the dynamic growth we've seen in the first quarter is largely generated by this process. And last but not least, you have heard about our Dronn. It has supported us for some time already. Maciej Surdyk decided to use it in the sales process. We have got 180 active customers who are using this distribution channel.

Now retail customers. We have also increased the use of this channel over the quarter. You may remember that we won an award for the mobiRATY. But this application -- we are the second largest player in the market in this -- in terms of this. And this application allows working and banking on any type of device whether it's a smartphone, tablet or whatever. It does not require any paperwork. In this quarter, we have hopes of many more customers using this application, and we have already sold some first loans over this channel. At the end of the quarter, there was a -- we put a change in our Internet banking because apart from our usual functionalities, apart from selling and opening accounts, we have improved our credit process. We have improved our algorithms.

We have improved our full credit process. And we have added a solution for our external customers, which has already shown in the volumes of our sales. All these changes, the big and small modifications, were possible owing to our new operating model. We want to cut short the implementation process. We want to improve the quality. And we are now finding our results very good. We have always been an IT bank, but when you look at the numbers, you realize that we did need these changes which we have just implemented. And our next meeting here with you will allow us to give even more good news.

[Filip Gorczyca, executive]

As Katarzyna has said, we've changed the formula, and apart from the reasons she explained to you, we responded to our feedback from -- the feedback we got from the -- our U.S. investors who wanted to take part in the meeting in their working hours. So we will have another meeting at 7 -- at 5:00 in the afternoon. So I will just run through a few topics and whoever is interested in more detailed results, you will be invited to the afternoon session.

Now just have a look here at the -- because these data may not be 100% comparable because of the International Standards number 9. Write-offs are growing between December and the first -- January this year by more than PLN 900 million. But ROE is doing well according to these standards because it's gross. While comparability is not so easy now, but while in the past year, we were already seeing that problem because we were right -- we were shortly after the merger with the BPH. This time, we will be more -- we will become more comparable to the rest of the sector but no sooner than after the quarter number 2 this year.

Very briefly, net interest margin. We've discussed that when we talked about our annual results, but now I want to add that during the first quarter, we were successfully going on with our deposit campaigns, which grew this liquidity growth, which was gigantic from 88% to 130% of the LCR. And at the same time, a very quick growth of the credit volumes, which is a spectacular success, much higher than our original plans. Please note that we have -- during the recent 3 quarters, we have gained billions of zloties to our deposit account, whose marketing is done over the Internet, first of all, and which is part of our strategy, which is to modify the profile of our customers. We are going -- because what we want to do is to introduce some changes here. And as we've been mentioning before, this has increased the volume of our liquid assets.

So from the -- in terms of the profitability, this does not change much, but it's neutral. But the net interest margin seems to suffer a negative effect. But during that period, the net interest margin dropped by 17 basis points, which seems to be a lot. This is nothing wrong, in fact, but the financing costs have grown from 1.15% to 1.26% over the 3 recent quarters. It's not really much, but -- and we consider it to be something that will not stay with us permanently. It will disappear soon. And we will probably give you some guidance on that -- on the financing costs and on the interest margin after the next quarter probably. Well, these are the only reasons, and those which were mentioned by Katarzyna, these are the only reasons why we changed the portfolio structure, and this also has some small effect on the NIM. We do have more capital available than we had planned.

Profitability of the loans is here. It's quite stable and rather high, so there's nothing here to exert a negative pressure on the net interest margin.

[Katarzyna Sulkowska, executive]

For the first time in years, this slide is not very attractive. You have asked when NPL will stop growing, and I think you can see that -- you will see that later this year. We do not still have comparable information because the financial supervision authority has not yet published its report. So as soon as we get the information, we will release it to you. There will be not much comment on this, just about this small improvement on the portfolio is not the result of selling any claims or something. It's just occurred because of the standard things.

[Filip Gorczyca, executive]

We can skip that. This seems to be the pretty important slide because it is the structure of our portfolio, which is changing very quickly towards coming close to the target defined in our strategy, especially the 2 positions at the bottom, growth from 8% to 10% and the growth of leasing from 1% to 4%. These are very dynamic growths. At the same time, the segment which keeps staying at the higher level, higher than planned, is the segment of large corporates, but that is because of the extra increase in the fourth quarter, which was much higher than the previously communicated guidance.

So we do have a flexible ability to control and still these segments because they are -- in the micro segment, we are developing as quickly as it is possible and very quickly. We have some capital surpluses over there, and we can allocate that especially in the large corporates and the medium-sized companies. So any potential surplus can be quickly used in a very efficient way. And that has -- it's actually happening. This is the area in which we are -- have not yet reached the strategic goal, but that is because of the -- of having a -- more capital than we had planned. The structure of deposits. This -- it shows this liquidity growth generated by the deposit campaigns we had. The share of current accounts in the deposits jumped from 41% to 51% during the year, which is a lot. And this is mainly because of the change of the structure in the retail segment where we managed to reach more than PLN 6 billion.

Our capital position is still very stable despite those surpluses. We are planning its gradual growth up to the potential level that would allow us to pay out dividend in the 2020 and liquidity position, which has improved very much, as I mentioned before.

An important thing is that the prospects for 2018 are as follows. As we move on during -- into the year, these prospects will be perhaps modified and revised, I hope into better. There have been some changes already. As you remember, after our annual results, we were announcing our risk cost of 1.9%. Now we see it's going to be 1.8%. The cost income rate is not changing, 44% will perhaps be reached after 6 months of the year, and then we will communicate our views on it at that time, and we are -- we still believe we should reach 4.6% on the net interest margin. And as we got the growth of the credit volumes, we hope to do the plan and reach the gross -- the credit volume growth as planned. So that's our prospects. And after the next quarter, we will see if we need any new adjustments.

We can skip this. Now customer base, things look very nice. 2.3% growth against the last year's end of the year. So all is according to the strategy. Employment, the number of branches, which I will show you in the next slide. So this after merger effect, the reduction of employment is still seen. The target structure, I mean the number of branches is [ 200 and 600 ]. We are now already quite close to the target number of net branches.

So that's all from us. And now we would love to answer questions from the room.

[Unknown Executive]

Please raise your hand if you want to ask a question.

[Unknown Analyst]

I would like to ask you for reminding me the interest rate on the promotion deposits and give some details on that.

[Katarzyna Sulkowska, executive]

There were 2 products communicated. One was the savings account, which was 2.5% in the promotion and -- around 2.5%. And as you have noticed, we used to have some tactics of attracting deposits. The competition have their own tactics, and they change the prices too. But anyway, we did not have to make a price increase anymore. So we ended up similar to the competition.

[Unknown Analyst]

Are you planning anymore such promotion deposits?

[Katarzyna Sulkowska, executive]

Yes. Our transformation strategy -- liquidity transformation strategy includes more promotion deposits until the end of the year. Our strategy here is that first, we would increase the number of individual customers in all this liquidity structure. We want to increase the residue on the accounts and you could notice that in the slide which showed structure. Of course, it's easier to do it on the corporate customers rather than on the deposit [indiscernible]. Credit transformation process is on, it has not been finished yet, and we will certainly continue to be an active player. As Filip said, it is important for us to be aware who actually is our priority customer, who -- because we want to reach them. And those promotions have to be tailored to reach those segments that we want. Alior Bank has been seen so far as an accessible and inexpensive bank, but -- well, we want to do more than that with our new products.

[Filip Gorczyca, executive]

As I've said before, we are not planning to increase our liquidity over the current level. It does not mean that we are going to phase out our deposit campaigns because we do want to continue them. We just want deposits in other segments, of course.

[Katarzyna Sulkowska, executive]

On the savings account, we have very short observation period, but it's about 55%. Retention is higher than we had planned.

[Michal Konarski, analyst]

Michal Konarski, mBanku. My question is that while you are upkeeping your guidance for the interest margin later this year, how are you going to restore this margin later in the year to reach the target?

[Filip Gorczyca, executive]

First, as regards to the structure -- change of the structure of our portfolio and moving towards the micro, this is something that gives a positive effect on it. And on the cost side, the financing cost will be gradually reduced, and it will certainly increase the net interest margin.

[Michal Konarski, analyst]

So can we expect a high margin in the second quarter or not?

[Filip Gorczyca, executive]

Well, maybe, it would be too early, but perhaps in the second half of the year. But the guidance for the whole year includes it, of course. We are careful -- we want to be careful not to communicate that.

[Michal Konarski, analyst]

Well, of course, but if you go lower than that level, it would mean that in the latter half of the year, you would need to reach more than 4.6%. So I'm asking about the breakpoint, when will that time come?

[Filip Gorczyca, executive]

Probably in the second half of the year.

[Unknown Analyst]

Between quarter 4 and 1, you are reducing the guidance again. Was it on the side of corporates or retail segment?

[Katarzyna Sulkowska, executive]

Originally, we estimated our cost of risk based on the analysis that we had from last September, and -- which included this switching of the international reporting standards. But we also expect an important improvement of our portfolio quality. We have already seen a major increase. So you may remember the share of cash loan is shrinking in our structure, so the quality of the portfolio is improving faster than we expected. So we -- our cost of risk is lower than estimated on the -- quarter-to-quarter. So any further modifications for our prospects are possible, of course.

[Unknown Analyst]

And what about the operating costs? If you look at the quarterly costs from the first quarter and you deduct BFG, will you reach the level that could be repeatable? Or there was some shift in the costs caused by the BFG, which was higher than you expected.

[Filip Gorczyca, executive]

Well, after deducting the BFG, we definitely reached, something I would call, a base. But of course, these costs will grow slower than income some -- well BFG, that base is quite good.

[Katarzyna Sulkowska, executive]

Please remember that this year is not very typical because we were first after the merger and in this year, the communication of our brand has changed. So we spent more on the marketing, which can show on the numbers on the results. And this is also a high transformative year. So it, of course, comes together with some additional extra costs. We assume, and we will sort it out by the end of the year in percent rates, of course. Because in numbers, we may not, but in percent rates, we will sort it out.

[Unknown Analyst]

What would be the cost of risk -- what were the costs of risk in the first quarter? What was its effect on the cost of risk?

[Filip Gorczyca, executive]

I did not check that. Sorry, I don't have. In the afternoon, I will get that. It was definitely a marginal change. We should not fear that the cost of risk would be much different under the standards of number 9 than number 8.

[Unknown Analyst]

There have been quite a lot of changes in the -- on the bank management recently. Can you see any impact of that on the business and on the continuity of business, et cetera?

[Katarzyna Sulkowska, executive]

I think, you looking at the results cannot see any impact and so don't we. The organization and the improvement -- and the progress in our transformation is going on. You know that we have that project of corporation with Pekao. So all that is around, it must have some influence on the way people are thinking but not on the business.

[Unknown Analyst]

Any update on when the decision may be published? Any effects on the employment?

[Katarzyna Sulkowska, executive]

No, no, no. No rotation. You would perhaps expect that, but we kept being sold or bought by somebody. We are all the time in some of kind of such process. But that does not destabilize our employment. All parties involved do want to close those projects as soon as possible.

[Unknown Analyst]

What would be your comment on the sale of bonds, [ P2A ] bonds? What was the size of that sale? And how long it took and what was its potential effect on the recent commissions results? And what would be the provisions associated with that? Could you comment on that?

[Katarzyna Sulkowska, executive]

I would not link these 2 situations. We've analyzed it very quickly. It's easy to evaluate and there is no major risk here that could change the risk of -- or our financial results. The bank used to be the distributor of products sold as part of the consortium. These were bonds, actually. And these bonds are not at -- exposed to any, any risk at all. These are 2 separate things. And for us, the type and the role of our distribution process -- well, these should not -- these things should not be combined.

[Unknown Analyst]

Could you quantify the value of the decisions done by your customers?

[Katarzyna Sulkowska, executive]

We do have a depreciating credit position for some -- a dozen or so months so far.

[Unknown Analyst]

So it's not a communication problem?

[Filip Gorczyca, executive]

85. Do you know it, right? The number of bonds. So I confirm that number. As it goes to all the bonds offered, it's a insignificant number.

[Unknown Analyst]

85, did you say?

[Katarzyna Sulkowska, executive]

I can say that this type of financing is always secure in Alior Bank. We've got some financings and the structure is based on the depreciation of the portfolio. Any more questions from the room? If not, I thank you very much.