Alior Bank SA

WSE:ALR

Earnings Call Transcript 2018-Q3

[Krzysztof Bachta, executive]

Good morning, ladies and gentlemen. I'm very happy to present the Alior Bank's performance wearing a new hat. As I'm a new in this position, I would like to get to know you better. So I'm going to talk not only about financial performance but also about strategy. And I've known the strategy much longer, whereas in a new role I'm been only in this position for 1 week. So I would like also you to get to know better so that you could also get familiar with my line of thinking especially about the banking sector.

Regarding the key issues, very briefly, the key highlights will be discussed in more detail later on. First of all, we are very happy with the good financial -- good interest income. And we are growing much faster than the overall banking sector. And then when it comes to the net interest income, our performance is much better and also our net interest margin, we have been improving it quarter-by-quarter and there is still room to grow. There is a growth potential.

And then the net profit, net income after the 9 months, we are ahead of other competitors in the banking sectors and this is after the merger with BPH and also because of the synergies we realized. So the financial income -- net financial income is as in line with our consensus. So the growth areas are in line with the strategy and regarding -- when it comes the 5.5 million of the lending activity. And then in this quarter, in the first quarter, you can see that growth, which was in line with the annual growth. So after the 3 months -- 3 quarters of this year, we are in line with the assumptions, and later on I will give you more details.

Now regarding the major issues, which are also crucial. That's our portfolio in the micro business segment. And we have cooperation BGK and also we have secured mortgage lending. And in the third quarter, with regard to operations, it is better than standard. It is a natural effect that in the third quarter, the utilization of [ lifts ] was smaller and also one-off costs were lower. So we want to curtail the cost the level of PLN 135 million. So there are many pressures and there are many initiatives. And we are going to redistribute the cost among cost items. So that's why you should expect stable cost level in the months to come.

Then regarding capital ratios, every month -- quarter-by-quarter, we are building our capital position. Equity position is better and better. So this year, the capital ratios -- so there was a stable position. We'll explain why it was stable, why it was not growing. And there is now a reason to be proud of that list of awards, the first places that we were granted. So these are the most renowned awards in the banking sector. No doubt it confirms the high quality of our offer, banking offer and also high customer care, high quality of customer care.

And I must tell you that EFMA and Accenture, it was very prestigious awards and we received -- we were placed #1 in the offering innovation category. And you should know that this award is granted by other banks, which is even another reason to be happy. And then as you look at the key financial ratios, you can see that with regard to net income margin, there we have improved our position in the third quarter. And then cost income ratio is also -- was also improved. And then the further improvement will be through the denominator.

And then with regard to the cost of risk, it was in line with expectations. So 2020, which is 14%, we also maintained this, which is the ROE.

Now regarding the loan structure, loan portfolio structure. We have been building the portfolio through the development of lease, as planned. Then cash loans will be less dominating. So generally speaking, the loan portfolio mix will be more stable, more sustainable. And we are very keen on that.

Now regarding to sales. In the consecutive 3 quarters, the sales has been stable and we've been growing in the segments of our interest. We are growing in the micro business segment, then in the lease segment and also cash loans.

Now regarding the securitization of the micro business lending. As you can see, we have almost reached in this month the level of 80%, which is 80% of the BGK secured loans in the micro loan portfolio. So our portfolio is more covered, as you can see that the currency level is much higher and no doubt that this is very -- the new size is very well secured compared to the history. And then 38% of the total portfolio is secured by BGK. And from the beginning of the BGK programs we are -- we are the runner-up distributor in the Polish market. And we are very proud of it because we are supporting the growth of entrepreneurship in Poland, and also our capital burden is smaller because the portfolio is secured.

Now briefly about strategy. I fully support this strategy. When the strategy was being developed, I already supported it and the supervision over banking sector in the PZU Group. And I would like to make some preliminary observations. And as I said, I want you to get a feel for my thinking about the banking business. First of all, the relationship with the customers, I believe a lot has to be done in terms of the deepening relations with the customers and there are the first signs that we've been successful in doing that. But I believe we need at least 2 more years to achieve the deepening of relations. Then the second thought is the -- on digitalization. No doubt that we want to lead our customers through the technological revolution in banking. So no doubt that in the coming 2 years, we will focus strongly on digitalization. And then innovations, they are part of our DNA, we want to be creative, we want to be effective. So on the one hand, we have to research, look for new solutions to serve the customers better. And then the second major thought, major aspect we have to know, where the whole banking business, where it is growing and we want to be very close to the market. And on the one hand, we have one of the best IT solutions in the financial market. And then on the other hand, we are quite flexible to shape our project portfolio and to match the operational realities. And I believe that we are moving much faster than any other institution in the Polish financial market.

Now regarding other issues. I would like to mention some positive signs in our financial performance. And first of all, the growing customer base. If you look at the number of customers, it is still growing, which is very positive. But most importantly, the number of customers we have acquired is not only for consumer finance or cash loans, but we have acquired much more customers placing deposits with us and also using our savings account and also our personal account. And the personal account help us to acquire a lot of new customers that our personal account is really appreciated by the customers. So no doubt that this is a new growth engine.

Now regarding the efficiencies of individual channels. They are important. The sales have been growing in each quarter. And then when you say remote channels, we mean all kind of remote processes where you don't need face-to-face contact with the customer. And then we have been -- our growth has been fueled by the development of remote channels and then also it is very handy and comfortable for the customer because we are able to close the sales -- sale deals on the phone or online. So no doubt that the remote channels will continue to develop.

And now regard to the volume growth in digital channels. As you can see, there is high growth rate, but the starting level, the customer base is still quite small. So there is big growth potential.

Now with regards to corporate business segment. I'm not going to discuss each item on this slide, but I want to emphasize it, both in the retail and corporate banking sectors, we have been constantly developing our offer. In each quarter you can see growth. So as you can see, our attention has been -- we have focused on both corporate and retail segments. And when we look at the corporate banking, it is crucial for us. The corporate banking segment, thanks to the growing automation of lending processes, it translated into fast growth rate of the corporate banking segment. And when we digitalize our business and we acquire more and more online customers it fuels our growth. So many things that we have -- many initiatives we have taken like linking the customers to the customer base. So it's -- these days, it is enough to enter just key terms and then the rest is prompted by the system. So the customers are very happy with our offers and the customers are more than willing to use our options.

And now with regard to other projects we implemented in the third quarter. We, as a matter of fact, the BGK guarantee for loans, we have managed to offer it through every channel that we use and we are continuing the automation project, the process automation project. It's a follow-up. And this process is implemented exactly how it was programmed, how it was designed.

Now regard to the next slide. If we want to be digital, we must -- our back office must be very digital. So because the customer who comes to the front office must see very a straightforward process that will end up very quickly. And then the role is taken over by the back office, that will act swiftly and efficiently. And then we have taken an initiative, which is called the factory of robots, we are no doubt in the lead in the avant-garde in the banking sector. We have implemented many processes, and each process allows us to save 1 to 2 full-time equivalents. And then next year, we expect make savings in the range of PLN 20 million. So we have an idea how to keep our costs under a certain limit.

And now very pleasant path for me. So happens that wearing my previous hat, I was involved with this event. So I can now make this transition as a partner of this program. And from my earlier perspective, when I could see that program from very close, however wearing a different hat, we had developed a very good accelerator which attracted customers from all over the world. So we have managed to attract a lot of startups. And this is very positive signal for us.

And what is the future of this startup program? As you can see, a lot of startups, they will finish their acceleration phase under our program. And with regard to our collaboration with the startups, we have already launched the Sandbox with the API platform and this API platform operates under the relevant EU directive. And now we are already undergoing the testing phase.

And then on the one hand, there is interface, which is the API platform; on the other hand, there is a testing data set. And then there is our team who helps out the start-ups to test their data. So one of the accelerators, growth accelerators, is the company which was highly successful in the Czech Republic, building the access to the bank accounts and analyzing the customer expenses. So it was highly successful implementation project in the Czech Republic. Hopefully, in Poland, we can also duplicate the success or the success can be even bigger.

And secondly, big revolution and concerning the payments, very interesting topic. We strongly believe in that because there is a high degree of relationship involved. So if we find the interesting solution of payment initiation, so we'll see how it will go when we will try to gather some mass, when we will do the rollout and we would like also to team up with some banking sector partners. And hopefully, it will also be cheaper process.

And the last 2 slides, with regards to this project, which is the BANCOVO loan platform. So we have the -- so generally, we -- our bank has expanded its offer consistently, and we started cooperation with 3 further partners in the third quarter. Currently, there are 9 financial institutions cooperating with the BANCOVO loan platform. And now we are going to implement the free check your score service in cooperation with the credit information bureau. And finally, very nice piece of information. And also, our philosophy of working with innovations is such that when we see a very interesting company in the accelerator and we can see that the team, the management team is very reliable, which is as good as its worth. And then we can achieve synergy with the bank. Then we will invest our capital in such company to have them grow.

And there is a first classical conventional investment that meets all of these 3 criteria. Yesterday, we had pleasure to sign with them an investment agreement. And if you look at the concept, the concept is in the e-commerce segment, which is growing rapidly. And what is meant here is to offer a substitute of the credit cards. So probably you heard about the business company that we are financing a trade shopping, 21 days is for free. And then after 21 days, we extend a loan, so we can generate a return on investment, but these are really micro loans.

So using our traditional conventional methods, we wouldn't be able to acquire such customers because these micro loans are in the range of EUR 20 to maybe EUR 100. So this is -- these micro loans are embedded in trade transactions. So this is fully digital product, very convenient for the end users. And we are jointly with this company. And we know our scoring systems. We know how to extend viable micro loans to -- in compliance with the business case requirements. And we can, on the other hand, we can acquire these customers through micro loans and then move them to other banking products. And the investment is approximately EUR 1 million, which is PLN 4 million. This minority shareholding 20% of the shareholders' equity. It is not a strategic acquisition. It is just a minority shareholding.

And now we are going to proceed to our operations.

[Filip Gorczyca, executive]

So as Krzysztof mentioned, the net interest income grew very nicely. Fee and commissions income, I am going to discuss in a minute on a separate slide. And now regarding the trading margin, the trading income and also the bonds, corporate bonds and treasury bonds, it is lower. I mean the previous quarter was exceptional. And most importantly, we have important high-level one-offs. There are 2 items, altogether more than PLN 20 million. One-off item is the legal analysis concerning the solution of the pending process, pending litigation process. And the second is about the write downs of some receivables -- or write-offs of some receivables. And this is really outdated issues inherited from BPH Bank. So as I said, one-off items. And now regarding the operating costs. We have a positive one-off, which is due to the fact that each year in the third quarter that leave provision is -- this is released, which is in the range of PLN 10 million.

And then some of the cost items were lower than in the previous months, it is because of the marketing campaigns. So no doubt that we are driving at the cost level, no doubt that you might inquire what will be the representative cost level. We believe that it will be PLN 430 million, PLN 435 million of upside potential in short term. However, the cost base shouldn't grow substantially. It will be -- if it is growing, it will be at a much lower rate than our income.

And then when you look at other items, then the impairment losses and provisions, so it was one write-off worth PLN 28 million in the trade business. And we set up a provision for the renewable energy sector, but still we had in the third quarter PLN 80 million write-offs for the renewable energy segment.

And then this PLN 18.5 million provision should be released, if the situation improves. Okay. Next slide, please.

And now with regard to the deposit structure, then it is already another quarter in a row where the positive change has been recorded. So the deposit mix in retail banking, there was an increase of the current deposits from 60% to 66% on regarding the total deposits and including corporate customers, grow from 55% to 60% in the same period. So this is a positive trend, and it also enables us to reduce the cost of financing consistently, despite the fact that the volume of liquid assets also rose since 30th of June. So we managed to -- despite that, we managed to reduce the cost of financing. And hopefully, the liquidity will be kept at the same level or maybe slightly lower level than as of the 30th of September, which should make this improvement of the cost of financing, this trend will become steady, stable. But the question is how quickly we manage to reduce the cost of financing, depending on how in the previous quarters we managed to attract the deposits through deposit campaigns. And then capital ratios, as mentioned by Krzysztof. As we said, as of the 30th of September, these are the levels that we had. But on the 8th of October, we received consent, the permission of the Polish financial supervision authority that all the management share programs could be posted into equity. So this can be adjusted on a pro forma basis. So then no doubt that these capital ratios will be higher.

Well, of course, the second and third quarters have not yet been in these indicators. As regards the income rate, there is no much change. Now the fees and commissions were typical -- fees and commissions are growing. So that there is a positive trend. Wherever it is negative, it's also negative in all the sector. But these are fees and commissions related to the situation on the capital market. So we can see some declines here. The costs of fees and commissions have been a little bit increased, but in the previous quarter, you may remember we had a high provision on bank assurance, higher by PLN 5 million, which increased our income side. So but this does not support the whole trend and there is no decline. So this is a good news, of course, especially when you compare the rest of the sector.

We can skip this, I think. As regards the credit risk rate indicators, you may have questions about that later on. But as regards to the coverage rate, it's important what Krzysztof said and we've been mentioning before is the expanding and growing cooperation with the BGK Bank which is very rewarding and we find it very beneficial. It also has the effect -- an effect on the coverage rate, which is not as high here, shown here, as it is -- really is. But all these exposures in -- the micro exposures, where the PD is usually higher than the whole portfolio, that all these secured -- BGK secured exposures it's usually 60% or 80%, not much more than that. So all that amount is secured with a BGK guarantee, so we are very close to the sector here in terms of the coverage. But when adjusted by these effects, we would perhaps be even higher than the rest of the sector.

So regarding prospects, we are not changing anything. We will continue all these levels, including the cost of risk, after which was adjusted as 1.8% after the quarter. We just can add some more precision to the gross volume growth. Now we can see it is not PLN 6.5 billion, but it's going to be between PLN 5.5 billion and PLN 6 billion according to our most latest estimations. Also this is November now. There's quite a lot of variability may occur. But PLN 5.5 billion, we expect can be reached.

These are the other slides. Well, let me just stress that throughout the year we have managed to increase our number of our customers. It's 344,000. Now employment. The number of branches, as you can see, it steadily goes down. That generates some savings on the cost side.

So that's it from us. Now we all are happy to answer your questions.

[Mateusz Krupa, analyst]

Mateusz Krupa, Erste. Let's start -- a few questions. I would call them quarterly and strategic. Mr. President, what kind of changes you would like to introduce in your organization? And what about the merger with the Pekao Bank?

[Krzysztof Bachta, executive]

Well, I've been here three weeks only. So I'm very open to cooperate with anyone willing. People are just excellent here in this bank, very creative, very innovative people, very eager to do the work. Now organizational change, it's a bit premature for me to make any binding comments. I'm watching the whole structure and just after just 3 weeks, I will not say I want to change something here.

Now the second question, well, I took part in that process but I was on the other side of the whole thing. And the decisions of the banks dictated by the dialogue with the shareholders caused a number of analyses, caused the rejection of that idea, which was found not too promising for both sides.

[Mateusz Krupa, analyst]

Excuse me, as I remember these benefits were diagnosed both sides.

[Krzysztof Bachta, executive]

Yes, but I'm talking about the scenario, proposed scenario, which was not feasible eventually. And that's why it was rejected because it was not convincing enough or perhaps not quite possible to be implemented. So the question is closed. The studies and analysis did not confirm it being beneficial and justified. Therefore, from my point of view, the matter is closed. What I can say now is that I would not try such a merger right now, so this matter is over.

[Mateusz Krupa, analyst]

One more question. The cost of risk, I understand that we need to adjust these to events for future, right, of the investments. But as the other situation is improving, when are any potential solutions to be expected, how soon?

[Krzysztof Bachta, executive]

Well, I'll try to answer this. We want to be very, very careful here and any potential selections. I think the situation is as such, the certificate prices, energy prices are growing. So the economics of our customers is improving, but as results -- solutions where this is the long range business, a long-term business. So we can only speak about main directions and lines to follow. We are not going to generate anything that would reduce this reserve because this is a long-term thing. So we're going to be careful here.

[Mateusz Krupa, analyst]

And my last question was about the other operating results. Do you have any provisions for the anti-monopoly?

[Krzysztof Bachta, executive]

Well, we have a provision for that, but it was done long time ago, before the end of the last year. So nothing has changed so far.

[Unknown Analyst]

A few questions more about the quarterly performance. Let's start with the results on fees and commissions. Can you be more precise on the reason why the cost of issuing cards in the third quarter was so much higher and are these costs permanent? Why are the other fees and commissions costs dropped? So is that the matter of accounting? Or both these things are one-offs? What is it?

[Krzysztof Bachta, executive]

I would say this, the smooth level would be PLN 5 million cost less. The settlements of the cards in this quarter were a bit higher because after a longer time, we saw that this amount is a bit higher, PLN 5 million higher than expected. In the -- during the year, there were some fluctuations too, but that's -- there is no major one-offs that would push the figure and change the expectations for the next quarter.

[Unknown Analyst]

Now the quality of assets. Your coverage ratio in Stage 3 is clearly lower than in the rest of the sector. I understand the micro companies, micro businesses, but what are the coverage of irregular or purely cash loans, because I understand that the retail segment includes the micro business too, right?

[Krzysztof Bachta, executive]

Well, I can say -- please remember the all -- I'm not just talking about retail customers, but as the whole portfolio, it includes OZE, right. So these are very well secured exposures and they are not certain, but they are still in Stage 3. That's one.

Now as regards to the situations by the segments, we were not releasing such data, but please allow us to think twice what we can release because these are pretty sensitive numbers and information. So we -- so far we have not been very eager on disclosing that. The business -- retail customer segment is -- does not include business customers.

[Unknown Analyst]

Okay. Can we then look at -- have a look at coverage slide showing the coverage? Because as far as I remember it's about 68% this coverage of the non-mortgage segment. And that's consumer finance covered up to 68%, while the market average, I would guess is -- should be closer to 80% and more, right?

[Krzysztof Bachta, executive]

Well, we -- okay, let's do it this way. We were think what actually can be disclosed to you and we will release it to you.

[Unknown Analyst]

Now we will appreciate that. We should know some of these data. Now the irregular receivables have grown by several hundred million quarter-to-quarter and that rate keeps growing, being high already. We understand your risk profile, et cetera, but why has it grown so much? Was it mainly corporates?

[Krzysztof Bachta, executive]

Yes, it went up because there were some exposures were qualified as irregular, but the situations has not changed, too much. We just decided together with the auditor just to move it to the irregulars. But these are sometimes very well secured exposures. And one of the major exposures have already been -- one has already being paid back in last October. So we should not expect a similar growth in the coming quarters. This was rather exceptionally high.

[Unknown Analyst]

And perhaps the last question because I don't want to speak too long. What about the audit after the third quarter?

[Krzysztof Bachta, executive]

No, we are doing audits in different quarters. In the first quarter and the third quarter, we have the agreement signed with the auditor long time ago. And our capital position has improved enough to drop that but since the buffers planned, such as it were, rather low, so we wanted to be able to identify them in the capitals every quarter. And that, of course, requires a review of the financial statement by the auditor.

[Unknown Analyst]

Just some follow up on the cost of risk. Why did it decline in the retail segment to balance the corporate growth?

[Krzysztof Bachta, executive]

Like in the previous quarter, the quality of the cash loan has dramatically improved because the PD dropped by 16% during the 2 previous quarters. And that was much more than we expected in our strategy. As you remember we tried to reach, we planned to reach the cost of risk of some 2.54% and we have reached this rate right now. And that is how our portfolio, especially PD rate, performs. And that is the result of many, many activities we've introduced, we had a change of intermediates and we said goodbye to some of them. So a lot of measures have been undertaken from vindication to portfolio selection.

[Unknown Analyst]

So that was kind of a review of the portfolio, right?

[Krzysztof Bachta, executive]

Well, a review of the processes rather than the portfolio, okay. And this -- the results are cumulative. Not now, it's cumulative in the second quarter. And that's why the second quarter was 14 bps lower than in this quarter. Three months ago, we were saying that right at that time, a majority of cash loans were given to the customers we know, the old customers. So the quality of them was better.

[Unknown Analyst]

And just one more question on the costs. The level of tax, why was it so high? Can you explain that?

[Krzysztof Bachta, executive]

Income tax, you mean?

[Unknown Analyst]

Yes. The effective rate was pretty high.

[Krzysztof Bachta, executive]

No, it was just as expected. Of course, it was higher than 19%, but it's always more between 25% and 35%, as usual.

[Unknown Analyst]

Okay. Maybe just one more question about the interest margin. You have said that it is still possible to reduce the financing cost, but the guidance on the interest margin has not been changed. So what about the asset side? Because during the quarter, we can see that on the asset side the margin is going down. But are we going to expect it's going down on the other side too, and why?

[Krzysztof Bachta, executive]

The margin on the credit portfolio has been growing from quarter-to-quarter and liquidity has grown a little bit too. So if you look at all assets for the portfolio -- the credit portfolio, it's growing, because of the increasing share of the micro segment. This trend is going to continue. Our guidance is 4.6% after 9 months. If it's going to be 4.7% or not, well, we are now sticking to 4.6%. We do not expect the margin to go any lower than during the 9 months so far. And the guidance for the next year, well, it is not finished yet -- not done yet. But the net interest margin will be definitely higher than in this year, next year it will be higher than this year.

[Unknown Analyst]

And a question about the latest issuance, what was the purpose of that?

[Krzysztof Bachta, executive]

This bond issue was done to check the market. It was kind of a substitute of investing in the business segment, just several months' investment addressed the financial institutions in order to -- a tactical purpose it was. We'll see if it's possible to again -- beneficial to continue such type of issuances. It's -- I would call it an experimental measure. If it works out, fine. We will - it will help us to cut the financing cost a little bit and to improve the mechanics.

[Unknown Analyst]

I would like to hear your comment on selling investment products because, well, are you also expecting any negative consequences to your bank?

[Krzysztof Bachta, executive]

As you know, we cooperate with the KNF on this. We provide all the explanations and we find it difficult to comment very precisely because the decision now belongs to the KNF, financial supervision authority. And we very actively support our customers and the law office who we work with support the customer who suffered. So the compensation shown in the operating costs do not include that, no.

[Unknown Analyst]

And what about the Pekao because -- and a larger company was bought for a clearly lower price, just EUR 300,000, you are paying EUR 1 million. There was a manager who did a good job in the Czech Republic. The -- and here, it would be kind of a habitual start-upers. Why that high price of this Pekao?

[Krzysztof Bachta, executive]

I would have to provide you an analysis of these 2 cases, but there are a number of reasons here, like the current assets, our belief in the team. Yes, they are a habitual start-upers and there are more shareholders involved than just us. So I would need to do an analysis of this again for you to show -- to prove that our decision was correct to explain the benchmarks and expected performances.

Looks like there are no more questions, so we thank you very much for your attention. Thank you.