Alior Bank SA

WSE:ALR

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the first quarter financial performance conference of Alior Bank. Today's conference will be chaired by Krzysztof Bachta, CEO; and Tomasz Bilous, who is CFO at the bank.

[Krzysztof Bachta, executive]

Morning, ladies and gentlemen. Welcome, everybody. We will browse through the slide presentation and then leave more time for Q&A session.

Okay. Let's start. Now first, key highlights. Net profit, PLN 103 million, as you we expected. So you were really highly predictive. And of course, the major driver was the contribution to the industrial restructuring fund. So we informed you about this contribution earlier, so it was already accounted for. Now regarding the group net profit excluding banking guarantee fund contributions. So it would grow up by 6% up to PLN 225 million, which I believe is a handsome growth. And we are especially happy with the growth of interest income. I will tell you in a minute about the fee income. And then the PLN 251 million (sic) [ PLN 275 million ] is the cost of risk. The CoR ratio was 1.86% and we maintained 1.8% at the end of the year.

Now regarding capital position. Very good ratios. And most importantly, a part of the events that will have major impact on the ratios, they will happen, these events, in the second half of the year, namely the business portfolio ratio. And there will be 2 of them, as a matter of fact, and they will have impact on the capital position of the bank in the second quarter.

So now looking at the first quarter financial performance. As I said, PLN 103 million. And also, you can see the impact of the contributions to bank guarantee fund. And we are happy with the growth of the interest income. And then regarding the fee income, it is under the same pressure, namely the fee income from investment products and also the impact of kickbacks due to regulatory reasons, and they will continue to have some impact for some time in the future. And we changed the accounting of the fee income slightly, but I will discuss this issue later.

Now regarding the general and administrative expenses. They are under control. And regarding the level, we assume that in the first quarter, the recognized costs are lower. And then what you can expect is that the costs will be higher in the second quarter compared to the first quarter.

And then regarding other ratios. The first quarter showed slightly lower performance. But the cost of risk are at a similar level to that in 2018.

Regarding the key ratios. NIM, at very high level at 4.68%. We are very happy with that. But when I will be talking about the prospects, I will provide more comments. And then the regarding that C/I ratio, also, if you exclude contributions to bank guarantee fund, very good. And there was the growth on a year-to-year basis, but it was also due to the -- accounting for the -- posting into the fund of forced restructuring. And then compared to the fourth quarter, well, the business customer will have more impact on the cost of risk than the retail customer.

And then regarding the ROE, return on equity ratio. If you exclude the contribution to bank guarantee fund, it slightly goes down. So as you can see, the capital ratios are much better -- much higher than last year. So the non-denominator increased.

Now regarding prizes and awards, very briefly. So on the one hand, they confirmed innovativeness of Alior Bank, so we received the -- an award for BANCOVO, which is the digital platform for financial agency services. And then on the other hand, we have a lot of prizes and awards for products. So we have very good products for retail customers and also for business customers. So in all kind of rankings and lists, our products are priced very high and then a very high level of customer care and also the call center services. So we received also a number of awards and distinctions here. So this quarter was also very good as the previous quarters.

Now regarding the volume growth. So from left to right. So the cash loan, a record-high level. The highest-ever volume of sales -- sales volume. We exceeded PLN 2 billion in terms of the new sales. And then new lease sales, it's in the middle column; and new cash loan sales, the last column. And also, at the very left, new loan sales in micro, it's much better secured with BGK. 88% of micro loans were secured with BGK guarantees. As a matter of fact, we don't want to grow these guarantees any further.

Now regarding the change of structure. It has been in line with the strategy, continued to be in line with strategy. Now regarding this loan portfolio structure. As you can see -- you can see the breakdown in the slide. And there was -- the reality was slightly different. The very handsome growth in micro loans, in lease loans -- in lease products and other segments slightly declined, but they are under control.

Now a few slides about business update both in the retail customer segment and in the business customer segment. We are talking about 2 issues: acquisition of new customers and building relationships with them. So the performance on a quarter-to-quarter basis are improving, so we are more capable of building relationships.

Regarding retail customers, that's a consecutive quarter when the personal account is the most vibrant product and attracts the highest number of customers. This is a very handsome product offer, and we are also able to tailor this account to the customer individual needs. So up by 45%, I believe, is a very good performance than other products such as cash loan. This is a really conscious activities. We do not want to acquire more customers because if you are lending cash loans to the customers that we know, of course, we do need new customers and acquire them to the portfolio so that the portfolio could grow. And then the third source of customer acquisition, we are actively working on this, namely, the customers who are moving from consumer finance, which means that they were using higher-purchase loans, buying products in stores. Sometimes they were not aware of the fact that the this higher-purchase loan was really offered by Alior Bank. So this is another source, consumer finance customers.

Now regarding relationship banking. Slightly -- there is a slight change. We are still working on the graphical representation. We are wondering what should be the best way of presenting this relationship and building primary relationship. So we are -- we have recorded a very high growth in the current account sales. But at the same time, we are building relationship with the new customers. So we are putting emphasis -- we focus on making the customers active. So if you look at the figures now, you can see the priority customers are growing very nicely, in long term, the most profitable customers for the bank. They enjoy -- they use higher number of products, both in terms of deposit products and credit products. And of course, we can segment these customers very quickly. And we are talking about the quality of sales in the fourth quarter, and we need this qualitative data to make judgments -- valuable judgments on the customers.

And regarding the new transactions, there is an indicator that the customers are using this account for making transactions. And then the last indicator, number of new current accounts with recurring inflows, this is also a very good news for us because the recurring inflows are going up.

Now regarding digital channels, which are remote channels. That's the fastest-growing channel in the cash loan: 55% on a year-to-year and quarter-to-quarter, very handsome growth rate. And then online account sales, the bottom graph. 71% growth rate, very impressive. And also, the share in the total account size is growing.

And now regarding the e-commerce. We are also highly praised by the customers, so we are very happy with that because there was a drastic improvement of the assessment of our application over the span of last year. So the development of functionality of the application doesn't make it a complicated product to use, which is a very good news for us, a very good piece of news for us because this is a very good forecast or prediction for the future growth in mobile banking.

Now regarding the customer service. In the previous quarter, the level was very high. And now we have another quarter, and we tell you, it is even higher. And if you look at the partner outlets, we are still monitoring. And then recently, there was a question -- the comparison between the NP indicator between the branch offices and the partner outlets. So because of the very high transaction rate at our own branches, sometimes you have lines. There are queues. But -- so today when the customers have high expectations, so if someone enters the branches, then the customers will give you a bad grade. However, if you go to a partnership outlet, the line waiting for the service is not considered to be the fault of the outlet.

And now transfer -- the automation and motorization of transfers. This is considered to be a positive feature by the customers. And then regarding the mobile banking, and here second item, the iKiosks in own branches, and then the account managers can show the customers how to log into the iKiosk. And then the -- after some time, we can see that the utilization rates of mobile banking and iKiosks are drastically growing. So we want to increase the transaction numbers and also to be more effective in relationship building with the customers.

And further on, we are developing Mastercard program. And what is important, that our contractors in the consumer finance, they are developing their e-commerce activities, and we integrate it with our major partners regarding the e-stores. And in longer term, this segment will play a vital role, will grow at much quicker pace than other consumer finance segments. And this is really crucial that we are fully integrated already in the e-commerce.

And then a very big success in the first quarter is the completion of migration to new electronic banking platform. As you know, we ran 2 parallel systems: for retail customers and for micro SME customers. So now the new system is more intuitive, more user-friendly. It does not mean that the analytics is missing. So we are very happy with the effect of customers. And then it turns out that 85% is already using the new internet banking system. If we look even at Facebook, at other internet fora or media -- social media, then you can that there are a lot of positive comments. So we forced the customers to migrate into the new Internet banking platform, but there was no -- the customers were not dissatisfied. So I believe this is a big success, that we managed to complete this project by the end of first quarter, and we are not going any longer to run 2 Internet banking systems. Now we are going only to develop one platform.

And now briefly about the business customer. And the customer acquisition at the level of plus 14%, 1-4 percent, on a year-to-year basis. And we are measuring slightly different relationship, whether the customer makes mandatory transfers to social insurance institution and also to the tax office, and there was a handsome growth of such customers. And then in the SME segment, the customers are using debit bank, which means that Alior Bank is the first bank for them because they make major transactions through Alior Bank.

Now with regard to the changes in the revenue structure. This is management financing perspective, and we -- it is -- everything is going in the strategic direction that we set. So an increase from micro segment, which is due to the increase of the loan credit margin; and then on the right-hand side, the yellow color shows that the transaction banking is also growing. So there's the also important development or growth direction. We are building permanent relationship and this translates into higher transactional banking revenues. And at the end of the day, the share of these transactional banking revenues is higher in the total. And then at the end of the day, the financial results is more stable and more profitable.

Now regarding the product growth in the business customer segment. We are very happy with the multi-currency card. This supports 23 currencies. Already today, we can say that the customers are very happy with this feature of the card. The customers have already used 21 currencies out of 23. So as you can see, this offer enjoys very high interest. So historically, we have been very strong in currency exchange.

Okay. I skipped one slide, so maybe I will now finish it off and probably go back to the BGK guarantees. Okay. I started talking about this slide, in minute I will go back, sorry. Now this offer enjoyed very high popularity. And the launch of new innovative products, so as you can see, this is a much more effective product, more attractive to the customer. And then at the end of the day, it translates into luring more customers and building permanent relationships with them.

Now going back to the new micro sales and then coverage with BGK guarantees. They were covered in 83%, very high level. We do not want it to grow any further. So in the consecutive quarter, we are going to develop new products that will be covered by guarantees. We are planning to launch the consolidated loan for the business customers, so the sales will be potentially higher.

Now regarding digitization in the business customer segment. The major metrics for the automation and digitization, on the left-hand side, you have online customers -- online acquisitions of new customers; so on the right-hand side, you have automated loan processes. So you have a share in the sale of micro and small, but we are -- continue to working on the digitization in the second quarter. We are going to implement the new customer scoring system for both micro and small customer segments. And then the end-to-end automation will be visible, so from the moment of filing a loan application until the moment of loan disbursements.

Now that's the business part, and now I pass the floor to CFO, who will talk in more detail about financial performance.

[Tomasz Bilous, executive]

As CEO mentioned before, very high, very handsome interest income growth, 9% on a year-to-year. The fees and charges, there was a slight decline mainly due to the brokerage fees and kickbacks. And other items, other categories were more or less stable.

And then we changed the presentation method -- the FX spot presentation method. But I believe this is in line with the mainstream of the market, and I believe that it portrays better our performance. This is not a trading result and it should be presented in this fee part. And then other categories, other items, very stable.

And of course the financial performance was -- of the bank was distorted by the contribution to the BGK fund. And cost of risk, at the level of 1.86%. And then the profit was at the level of PLN 103 million. However, if we compare apples-to-apples, they grew by 13.6% on a year-to-year basis.

Furthermore, I believe that this is also a piece of good news. Like after the end of fourth quarter, the sales volumes growth, stable on the credit side -- or lending side, PLN 4 billion; and then on the deposit site, deposits went up by PLN 3 billion. So as you can see, there is a structural change of the sources of our financing. So as you can see, the higher volumes are on the retail side and slightly declining on the business side. So the gross production, gross output, PLN 5 billion. After the first quarter, the performance actual figure was PLN 1.3 billion.

And then the regarding the interest income, it was already commented.

And then growing margin, which has been improving from one quarter to another, just one comment here. In the first quarter, the interest income, we had some one-offs by 4 percentage points. So if you discount these one-off items, then the margin would be at the level of 1.4%. And then as we have said, we will take our best efforts to reduce this figure slightly.

Now regarding the fees and charges income or the fee income. Here you have the -- on the right-hand side, the fee income in the second, third and fourth quarter. So after our transformations, you have the pro forma transformation, and compared to the first quarter of the first year, PLN 13 million decline because of the brokerage fees. And then other slightly growing categories, they offset a decline in brokerage fees -- sorry, P&L. So this is a comparison before and after the change of the transaction margin. So it was converted on a pro forma basis to show you the change of the result. And the vast majority, it was the interest income; and then the trading income slight -- declined significantly. And also, its share in the total income also declined.

Our credit portfolio and the part regarding the credit risk. The increase in the gross portfolio grew only PLN 5 billion. The structure is not changing too much in the retail customer and business customer segments. As you can see, the share of import credit grows a little bit in the business segment, but also, provisioning is growing. The retail segment is at a very good level, very stable in the first quarter. As you can see, the risk -- cost of risk grows in the KB segment caused by some one-off events.

Now looking at our production in the 2 key segments: the cash loan and micro segment, which are responsible for PLN 28 billion volume. It keeps improving and stabilizes at a very good level. So as you can see, in the long term, this is a highly positive trend.

And the last slide, the capital rates (sic) [ ratios ]. Very safe. And these do not include the result of the fourth quarter end securitization because that will be done in the second quarter, and then these rates (sic) [ ratios ] will improve further on. I confirm what we have announced before that the operating risk, despite the grown portfolio, only the PLN 60 million growth in the requirement. This is a good result, indeed.

And the last slide, Krzysztof?

[Krzysztof Bachta, executive]

Prospects. Prospects, well, the net interest margin, as you can see, we continue the 4.6% this first quarter. We find it very good. It's -- there's no more one-off events, so that opens a better prospect for us. But we will wait 1 more quarter to check this positive result on the deposits and credits. And here, some time will have to pass until we can increase it. But now we stick to 3.6% -- 4.6%.

Now income to cost rate (sic) [ ratio ] is 1% point up because of the BFG premium. These premiums -- in a way, these premiums were much higher than we had expected. That's why it's 1%t point up. So -- but this is an external factor, beyond our control. And it is important to say that the method of calculating this premium, we were surprised by the amount of the premium. We exchanged correspondence with BFG fund, and they explained how they calculated that amount, how they came up to that amount and why. So among the important factors affecting this amount is the capital requirements, capital rates (sic) [ ratios ] and liquidity rates (sic) [ ratios ]. So looking at these results, well, BFG were calculating the premium based on the numbers from 2017, which were much different than they are today. So looking ahead, I can say that this premium will be less surprising to us in the future even if it stays at the same -- it's as high as it is now.

Much will depend on other developments, of course, but we expect that there is hope that this premium will be experienced as lower, 1.8% at the end of the year. This is more or less in line with our plans for the first quarter, so there is no surprises. A little bit less than you expected, but I believe that 1.8% will continue to be possible in the future. But every quarter, it makes as a serious challenge. We will work on it, and we will keep you informed all the time.

As regards to growth of the credit volume. The first quarter, PLN 1.3 billion, is good news. And some things are still in their launching phase. I expect that this result of PLN 5 billion per year will be reached. So the prospects are quite all right. Apart from the net interest margin, where we over performed higher than the plan, all the other items will be continued as planned.

So I believe this is it about the main part, and now we open the questions from the room.

[Unknown Executive]

It seems that microphone does not work. Can we have another one?

[Mateusz Krupa, analyst]

Mateusz Krupa, Erste. My question is about the quality of the portfolio. Could we have a look at Slide 26, in segment business? The question is about the coverage and the value -- and credit impairment. Does the bank expect a further decline -- further deterioration on the NPL rate (sic) [ ratio ] in the business segment?

[Unknown Executive]

Well, to answer the first question, as you know, there is a debate in Europe these days about these NPL and its use. And we as a bank are obliged to present some strategy of reducing the NPLs. And looking at our numbers, this is a very justified policy to introduce, so we are now working on a strategy of reducing these rates.

And to answer your questions, whether we are happy with, of course we are not because we want them to be much lower. But that requires a lot of measures to be taken in underwriting and all other cycles and stages, including debt recovery. But the portfolio mix has to be modified too so that the NPLs get lower. Leasing is one of the elements involved here. And we also see very good trends in cash loans so -- and in micro segment, so these should also be reflected on the NPL levels. We will get -- see it improving.

As regards coverage, well, I don't want to go segment by segment, but overall, we want to increase the coverage level. I don't want to, well, go into details because many factors are playing a role here. But the trend in the coverage rate (sic) [ ratio ] should be growing later this year.

As regards the own funds, well, this is a next tranche of depreciation, but the effect of securitization on the result, it will be more than 50 bps. Very slightly within 1 bps, negligible with our interest margin operating costs.

[Mateusz Krupa, analyst]

Is the growth in the further quarter, will that be the personnel costs or administrative costs?

[Unknown Executive]

Well, we have to expect that, that will involve all the categories. You understand that this cycle -- life cycle of the organization is that some projects start in the first quarter. We'd increased the IT under the costs, and we expect some pay rises, too. So you can see increases in all categories, perhaps.

As regards the payroll, well, we entered the first quarter with more vacancies than we expected. So our employment has to grow a little bit now, and as a result, that will increase the payroll costs.

[Mateusz Krupa, analyst]

And what about their cost of risk? Because there's one huge meat producer, a public company, who published a report after, which was not signed by the auditor. So what about the quality of the result? And they had a very high debt. What's the bank's position on that exposure? Is that significantly increasing the risk? And will that risk continue through -- for the quarters?

[Unknown Executive]

Well, in the first quarter, there has been no effects caused by that exposure. But we are very intensively negotiating and explaining the situation with that customer, who collaborates very nicely with us. We know that customers contacts with the big networks in the country. So it's a bit too early to say if that will have an impact on the potential write-downs, et cetera. But judging by the attitude of the customer and his core business, because the auditors sometimes refuse to sign it, it’s a bit -- a negative fact, so we have to explain it.

[Unknown Analyst]

I would have a few questions. When you announced your resolution charge, the comment was that this is a charge for 2019 and part of 2018. That was not precisely explained. What is the split more exactly? Because we would like to know how much it was for 2019 and how much for the other year.

[Unknown Executive]

Let me say this. All banks, I think, have received the letter -- the same letter from the BFG, and it does not say anything about the split for the current and previous year. The premium is defined as a single amount, and that is a standard information. But of course, there are some factors that might influence that calculation of that premium. But that's the -- the basis is the end of 2017. Later on, we got quite a lot of liquidity in the business customer segment, and our share in the market grew since that time by 1% point. And right now -- well, in 2018, that went down a little bit, and this will simply show in the amount of the premium -- BFG premium.

[Unknown Analyst]

Now another question. In your comprehensive income, the pricing of the securities is quite high. Which part of the portfolio that makes? Did you buy or sell? What happened? Because there used to be a positive pricing and now we are negative on it.

[Unknown Executive]

This may not be the question of a single quarter because if you watched our performance in the last year, some sales were done during the year. But we -- I compare the end of 2018, yes. But in each quarter of the past year, we did sell some securities with positive pricing. So that is largely the effect of the fact that we were selling those securities. Portfolio is always mixed. Portfolio includes different profit rates (sic) [ ratios ], right? Maybe there is some change in the curve at the very end, and -- which affects this valuation, but I cannot say what it is exactly. I can't remember.

[Unknown Analyst]

And the last question. The fees and commissions, could we have that slide, please? Apart from a decline on the performance on this -- on capital markets, if you look at the slide showing all the increases of activity, of the customers, the volumes, et cetera, they have based this result on the payment cards. And credit cards dropped. And if it grows, it's very little against the previous quarters. So did you have some promotions introduced? Because the costs have also grown a little bit. So if you split these costs, well, we would like to see the actual number.

[Unknown Executive]

In the fourth quarter, we had a one-off result of -- or settlement of the transaction -- of support transactions related to the turnovers with Mastercard cards. So that probably is the effect of this.

[Unknown Analyst]

The fourth quarter, yes. But I have an impression that it slows down your increase. Did you reduce some fees or introduced some promotions on cards?

[Unknown Executive]

Well, these costs -- the incomes on the credits will keep growing, of course. But this quarter is a bit shorter than -- so the number of transactions is lower a little bit comparing to the fourth quarter of the year. So it's an exceptional one. So if we look at the deposits of our customers, you've got the peak weekends with the highest number of transactions, the shopping on some days, et cetera. So I would rather call it seasonal fluctuations caused by retail sales, et cetera, because this is what shapes the results. I don't think this is something unusual.

[Unknown Analyst]

What's your approach to kickback now? Do you calculate that or not? What's the value of sold funds?

[Unknown Executive]

Kickbacks, as we have said earlier, this line is under a strong pressure, and now there a few factors affecting the value. The model of distribution that we used to have, historically, it was scattered by many independent TFIs. This has been hit by the developments. So we can see 2 effects now: termination of contracts with the TFIs, and that, in fact, reduces the base on which the kickback is calculated. And that's quite a significant effect caused by the changes in our market model because we are no longer providing so much sales to TFI because we -- so this is kind of we've got the 2: TFI and annuity. That changes a little bit -- this is the change of our business model, and that's what you can see here.

And the second effect is related to a reduction of the nominal -- reduction of the kickback. Having received information from the KNF supervisory authority, we are very careful. So we keep the kickback at a level at which we can justify the costs of that kickback on our side. So these declines are very important even when you compare it to what we had in our planned budget. So 2 facts, in fact: one, portfolio, that reduced the kickback; and the second one is the percent share is lower in the past.

[Unknown Analyst]

Could we go back to NPLs for a while? If you look at the other banks, PKO, other banks, et cetera, they all are lower than 5% or very close to 5%. And here it’s more than 11%. So I think that if you want to address that with just leasing, you will have to double it. So the question is what is the schedule of the adjustments here? And will the 5% limit will be binding in this country?

[Unknown Executive]

Well the 5% imposed on NP, not on NPL, this is in fact a level -- a reference level, which is monitored, but it will not be binding. It will not be binding on every bank to keep this. It's just a kind of benchmark rather than a law. So there is of course a debate whether this reference point should be required or not and whether it should be 5% or not.

Right now, to accommodate with that, we would need to change our business model by doubling our mortgage loans, et cetera. Huge changes would be required to be done, but that is impossible, of course, so -- in a short time, of course. So if that trend continues, we will not consider it a requirement -- obligatory requirement. But from the viewpoint of the strategy, we will -- we really want to demonstrate the way in which we reduce the NPLs.

Here, apart from quality new sales, new portfolio and the mix of the portfolio, what will be important will also be the sales of NPLs. And if in the fourth quarter, we did see some stagnation of the market, the offers made to us were not very impressive. But now in the first quarter, we see that things changed. Some sections have become possible this time. And we can see that our provisioning on these portfolios are quite good, and we can make some good result on it. So this part of the strategy of reducing NPLs is probably moved on, and that will weaken -- there's some mix of different factors that is involved here and NPL sales, et cetera. So there is lot of factors that will probably keep us in the good line.

[Unknown Analyst]

You said -- I think you said that you are working on the NPL strategy. So did you already define some specific goals or not?

[Unknown Executive]

Well, this strategy is required. It's got to be written. The regulator wants it. So right now we are at the stage of defining some challenging goal, but I don't want to comment on them now because we don't know how feasible these are. So we've got some challenging goal, and now we are checking how well we can reach it. Because if you want to cut the NPLs too dramatically, that might spoil our profit rates. So we have to go carefully about it.

[Unknown Executive]

No questions? Oh, one more.

[Unknown Analyst]

[ Marta Jezewska ]. My question is about adjustments of the result of the first quarter last year. Today, we've shown PLN 106 billion. This was PLN 171 billion last year. Somebody said that the adjustment would be higher than PLN 4 billion. So what was it apart from that PLN 4 billion? And what is the estimated effect of it on the result of the quarter? Because it needs to be adjusted, too.

[Unknown Executive]

Well frankly speaking, I don't know of any changes. Apart from the change in the cost of risk, other changes were just neutral. Maybe this is some mistake in the description. We have not yet estimated its effect for the quarters because it's a difficult task to do. You need to adjust every single transaction, every single credit. So you have to use new models. We do it one by one. So we're not ready yet to answer that.

[Unknown Executive]

I can't see any further questions from the floor, so thank you very much for your attendance, for coming. Thank you. Bye-bye.

[ Statements in English on this transcript were spoken by an interpreter present on the live call. ]