Alior Bank SA

WSE:ALR

Earnings Call Transcript 2022-Q3

[Dominik Prokop, executive]

Good morning. I'm Dominik Prokop, Head of Investor Relations Department. Welcome to our results conference for Q3 2022. Let me introduce our speakers; Grzegorz Olszewski, the President of the Board, Alior Bank; Radomir Gibala, CFO; Tomasz Miklas, CRO.

The first part will present our results for Q3, and in the second part of the presentation, we will hold a Q&A session. Very often, you pose many questions. So please ask your questions beforehand -- submit your questions beforehand so that we can answer as many as possible. Grzegorz, over to you.

[Grzegorz Olszewski, executive]

Thank you so much. Good morning, ladies and gentlemen. Welcome to the results conference for Q3 2022. It is no secret that we have -- that the results for Q3 have dominated loan payment moratoria and the impact of this event as well as the return of additional margin that was due to regulatory changes.

All in all, PLN 525 million of additional reserve that impacted our revenue and these adjusted results still record breaking. When you look at it year-on-year, it's historically high. Looking at our bank's history -- and again, these events are of one-off character. We haven't had any influence on these, and participation was at the level of -- participation in the moratoria is at the level of 69%.

And we have adjusted our model. So right now -- well, this result was achieved through all sorts of business lines. We're never happy with any loss, but still this result is better than what we expected, and loss is at the level of PLN 63 million. If not for this impact, our results would have been really great, PLN 431 million would have been record-breaking indeed. So going to indicators, we will -- showing you indicators adjusted with these one-off events.

These events did happen. Indeed, they did materialize. So we do have to take them into account, but we believe that similar one-off events should not be happening in the future. So -- when it comes to cost to income, very good level, 31%, adjusted ROE 30%. When we look at net interest margin, 5.81%, very good results.

And well, maybe to get ahead to some of the questions, we're assuming that net interest margin will be -- will not be increasing because we're not expecting a significant hike in interest rates. And actually a significant hike in interest rates would influence our cost of risk, for example.

And when it comes to the pressure on cost of financing, well, it may occur in the coming quarters. When it comes to the performance of our assets, it's typical for a high interest rate period. We have deposits growing, loans not as much, given limited availability of loans, especially the banks so far have been acquiring in consumer finance and retail customers.

But right now, it's difficult to grow the volume of loans. We are growing our volume of loans because we are slowly but surely trying to rebuild our assets also in the area of business clients. For mortgage loans, well, our market share in new sales, 6.2%, thanks to our active work out there on the market.

We are #1 with Light start, we are also #1 when it comes to BGK guarantee, 0% margin in the first year of the loan. Well, we believe that building a strong position currently in this situation in those circumstances, will allow us to take advantage of the fact that this trend will reverse because on the long run, mortgage loans have a very good perspective.

For example, when you look at the share of mortgage loans to GDP compared to the European Union, housing needs, of course, all these things will change. But of course, whenever interest rates are high, availability of loans is lower, but the perspective for the future should be changing given some of the factors that I've just mentioned.

When it comes to cash loans, well, this market is not as much impacted as mortgage loans, but still given our market share and given the challenges that we are facing, especially given the fact that we need to improve the quality of our portfolio, well, we are working on it, we are doing it. At the certain points, given the fact that the labor market has cooled down, there is cost of risk, of course, that we have to look at. Maybe, we are facing a peak in the coming year. And then this would be a good moment to start our strategy to rebuild the growth of these assets. It will be one of the pillars of our new strategy that we'll be presenting at the beginning of the new year.

When it comes to consumer finance loans, we are a leader, both in terms of what we offer and the quality of what we offer, and the quality of what we offer to our partners. And this allows us to build a strong position, record-breaking volumes. This is what we have achieved. And we believe that when you look at things from a consumers' perspective, we believe that, well, lower disposable income -- well, if there is lower disposable income, consumer finance loans are the first source of assistance and support that consumers turn to.

But of course, competition is growing. So definitely, this area in the coming year will be under even more pressure. We're developing new products. We're improving our processes to make sure that our competitive position is as strong as it has been.

When it comes to relationships with customers, we're improving our customer base. We're improving our relationships, and customers are using value-added services more and more like motorway payments. And we have more and more customers who have regular deposits to their accounts.

Strong growth of online payments, strong growth of the number of users of our mobile app, and we are converting customers from traditional channels from online banking to strictly mobile banking. So this conversion is ongoing.

We will continue to improve the quality of our mobile app. And of course, we are implementing new mobile services that haven't been available so far from other banks. And they are pioneering services, I can tell you. And this month and in the previous month, we have already made significant steps that we are very proud of. And towards the end of my presentation, I will tell you about our steps -- our new steps for retail customers.

When it comes to business and enterprise customers, we have lowered our NPL by 3.7 percentage points. We have helped our SME base portfolio improve. The quality of the portfolio is improving, and we have gone back to the growth path. We are reducing the number of nonperforming loans, and our healthy portfolio is growing, is getting better and definitely, we want to take advantage of this trend.

Given our current situation, the micro business segment is really, really important for us, and we will definitely monitor the situation, we will definitely follow economic development, and we will try to focus on growing our assets in small -- in large, small and medium enterprises.

When we look at the way we have been improving our portfolio, I have to say that the assets in the regular service are growing and the share of factoring is lowering. Even though the situation -- the economic situation in the country is deteriorating, we are assuming that we will be able to maintain our efforts. And my colleague will tell you later how we are trying -- they get prepared from the point of view of our cost of risk.

But I think that the current positive trend for us is something that we can maintain. Our database of enterprise and business customers is growing. We introduced new fast and improved processes. The number of documents and the amount of paperwork is being cut down, customers tend to appreciate this.

And thanks to our new products and processes, we are beginning to rebuild our assets in the area of business customers. Another important area when we're talking about business customers is automated credit decisions. And we are going to continue working on this.

Loan automation is really important in larger segments. Our decision-making process involves more human factor. But of course, maybe in smaller segments, we may automate more. Generally, we will try to make sure that we have as many automated loan decisions as possible.

As I said before, our customer relations are getting better. So hopefully, we'll improve our income from -- and our results from commissions. This will be important, especially when interest rates start going down. So we want to offer additional services so that we can cross-sell to our customer base.

When it comes to our implementations, we've implemented Fast Track. And this has been well appreciated among our customers, and we will try to offer more products that will meet the demands of business customers as well as this one.

Also for weeks, we have already been implementing new solutions. For example, My Bills, it's a service that's absolutely special when it comes to mobile apps. And it's not just banking. It's one of the greatest -- one of the greatest services that help them integrate several functionalities or several applications so they can -- they'll be able to pay all their or as many invoices or as many bills as they want using one click.

It's a very, very special, novel product that goes to show that Alior Bank is the organization that looks to be the first, looks to be the leader and the pioneer of next level services. When it comes to ESG, we are one of a not many employers offering an additional day off to their employees under the condition that an employee will have a health check and have examination.

Within the corporate governance, we have created a new area for development together with [indiscernible] responsible. And we will implement relevant sustainable growth policy based on corporate governance principles. Over the last few weeks, we were especially active in the field when it comes to promoting a healthy lifestyle and responsible use of finance among young people.

We deeply believe that education at a very young age is important, and we will continue. Gaming is also important for us from the business perspective and it's a very attractive area. And we are a pioneer. We want to build our competitive edge based on that. Let me move over and hand over to Radomir who will tackle the financial results.

[Radomir Gibala, executive]

Thank you very much, ladies and gentlemen. Traditionally, we are starting from our PLN. So the most important lines which are perfectly illustrated on the slides, but taking a look at our income statement after the 3 quarters of 2022, let me point out our way of thinking about the future part of this year.

And so for that reason, we have stated all these comments below after the adjustment by one-off events like credit moratoria and provision for the reimbursement for additional mortgage loan margins charged to customers as in the period until collateral was established. So it's PLN 502 million and PLN 23 million, respectively.

And 2 other events, which was the additional contribution to the commercial bank protection system which was PLN 597 million. So if we add up all that, it's almost PLN 600 million. So if we boil down it to and if we introduce it to net profit, this will be higher by PLN 500 million.

So we want -- we are telling all that in order to tell you how this quarter would look like without all these one-off events. And what is the outlook for rest of this year and further quarters. And we think that the last line, so the last comment from our side, it says about high ROE.

We -- through all these comments, we want to let you know that we have a strong base to expect return on equity equal or higher than the cost of equity, the cost of capital, which is applied now in the banking sector in Poland through digit return on equity. So this is our approach at the moment when taking a look at our income statement.

We -- of course, we will tell about fees and charges and about interest -- fees and commissions and interest. But as we communicated before, we have created an additional line for cost of legal risk. And here -- being aware of the influx of litigations, especially with regards to this most discutable part of our FX portfolio in CHF, we have a relatively low PLN 140 million.

But the influx is visible, and we are creating PLN 50 million of additional provision, which will be raised in order to cover this CJEU decisions. The most important messages are well illustrated. The upper corner, the right upper corner is illustrating our interest margin in our portfolio after adjustment and before adjustment, it was above 3% before adjustment and 5.8% after the adjustment.

So as Grzegorz has said before, in our opinion, we are reaching the plateau and the further growth will be dependent on the cost of financing. This is the next line presented on this slide. Of course, we're observing bonds and term deposits. It's not the level in our structure as the one before the pandemic, but it's growing in a stable manner.

We are still an active player. We anticipated such a situation and for the reasons of solvency and for relationship, the prices for our deposit holders are kept stable. But in our opinion, this ratio is under control at present. Tomasz, for sure, will tell a bit about NCR, which is at a stable and high level at the moment. So we will reactively act depending on the central bank policy and the situation among our competitors.

But if we were to provide you with any guidance, we are reaching the higher level, and we will see throughout all quarters, how much can be generated and plus for our investors in net margin. Maybe let me point out the middle down -- the middle bottom graph illustrating our interest income -- net interest income, it's growing by 14%.

This is the effect that we mentioned before that our portfolio is revaluated in a stable manner. So quarter-on-quarter, year-on-year, I think we have said a lot about that, that it's much higher, but what we are observing now and which allows us to and gives us some premises to believe that we can generate even higher growth, of course, despite rising cost of financing.

So for the time being, this is the perception of the situation for the quarters to come. Bottom right corner, loan to deposits ratio, we want to base it on our loan portfolio despite the situation, which was sketched by Grzegorz before. It is still above 80%. And this is the level -- of course, we -- our intention is to increase it, but everything will depend on the situation on the market.

Net fees and commission income is still going up. You can see the structure of this -- of the commission income, the dynamics is 11% and we want to keep it as that. That requires a lot of effort and consistency and the quality of service we offer to our customers. We want to deliver them value.

Quarter-on-quarter, we are observing a delicate drop still above PLN 200, but that's a result of difference or maybe settlement of our commission income for cards between individual quarters and a bit decreased commission income with regard to our bank accounts, especially on the corporate side.

But still, we want to see together with the growing number of transactions, we want to build on this income -- on the commission income because we are perfectly aware that the commission income is not cyclical as the economic cycles. It is not given once at the time it is being shaped, but we want to deliver the quality and encourage our customers to pay for it and to see the value in our collaboration.

When it comes to costs, a lot has been said about our operating costs. When discussing our previous results, we have illustrated some kind of cash on buffer that we assume in this respect. Still, this is a 2-digit ratio, which is quoted here at the level of 12%, but we're doing our best to manage our cost base effectively after Q3.

It looks great if we subtract one-off events and aggregated quarter, and we will take aggregate quarter-by-quarter approach, it is over PLN 300 million. So we leave this margin for this year, but we will stick to our cost discipline for sure. A natural event, we increased expenditure on personnel costs and marketing or IT.

But in the perspective -- and having on mind works on our strategy and implementations, which will be held next year, when announcing our strategy, we will say something more about it. And we will talk about development costs. Some development costs will be transferred to the next year.

When it comes to C/I, cost/income, depending on the option that we choose, it looks great. And we don't think that during next quarters, it will be about 30%. We will opt more for 40% level, especially assuming the events that we have in mind while thinking or while constructing our future strategy.

So what is our position versus the current strategy versus KPIs that we fixed? So in a few months, we are going to present our new strategy, but we are obliged to present you to delivery on the previous strategy without any adjustments versus what were our predictions and forecasts. Of course, in totally different macroeconomic landscape or different assumptions.

Grzegorz has said a lot about assets already. And here, the challenge in the current market conditions is to arrive at this PLN 89 billion. But based on our portfolio, we're building our asset base. Taking a look at our mortgage loans, we are increasing our -- and expand our share on this narrow market. When it comes to loans and installment loans, we are quite cautious, but we keep a relevant level of margins, and we benefit from this increase in the area of corporate loans, especially operating and working capital loans.

When it comes to other parameters. Our ambition is to arrive at 2-digit return on equity at the level of the cost of capital. So this part is safe. I said a bit about net interest margin. Our intention will be to boost it a bit or to -- but it's still a challenge. And for the third time, I will repeat that we can expect some plateau in this respect.

When it comes to cost/income, the level is safe in our understanding. And I said a bit about the cost of risk. We are still competitive, and we will wait for the next decisions taken and the situation. When it comes to the risk of -- and the access, [indiscernible] let me welcome once again.

[Tomasz Miklas, executive]

I represent the Risk Division. Very often, we have stressed that we are working on improvement of our risk portfolio. We're focused on high relation customers with whom we have a great relationship. We are enhancing the situation, and we have improved our risk policy quarter-on-quarter, and we wanted to reduce our NPL to nonperforming loans portfolio.

So we can both -- and be proud of the good effects of the strategy. When it comes to nonperforming loan portfolio, it went down by 2%. So in the perspective of 3 years, it's improved by 4 percentage points, 1/3 in the perspective of only 2 years. So when it comes to the cost of risk only, thanks to [indiscernible] cost of risk, and we try to strike a balance in that respect.

And as you can say in 2020 and 2021, it was at the level of 2.8% and 1.6%. And in aggregated terms, 147 after 3 quarters of 2022. At the same time, we're upholding that despite the bad economic cycle, we should end up this year at the level of 1.6% of COR. In short-term perspective, in the context of NPL quarter-on-quarter, we're trying to improve the level for the last quarter.

We have recorded a slight growth by 988. We didn't plan any steps to reduce our NPL. But as the entire market, we can observe a higher risk related to hiking interest rates. But 2 percentage points less year-on-year. When it comes to the coverage with provisions, we can see some positive signals from the point of view of security of the banks.

So we expect it for future events. When it comes to cost of risk, in Q3 went up a slight increase to 1.64% from 1.46%, but we will end up at a similar level as last year. When we analyze segments at our banks, so the business and corporate customers, we decreased this level ended the last period at the level of slightly above 18%.

And 4 percentage points improvement year-on-year. And retail customer, the level is quite stable and flat. Of course, we're observing a slight increase in the last quarter, but they are not far away from the levels that we observed during previous quarters. So the situation is stable and under control.

When we're talking about the provisions coverage of the NPL portfolio, when we're talking about retail customers, very stable, very safe for business customers. In the previous quarter, there was an increase, and I talked about it when I commented on this indicator for the whole bank.

When we're talking about business customers, we have a very sustainable policy. We're improving relations with our best customers. So that indicator fell when it comes to retail customers, it's increasing, but all banks have been seeing that. But this year should be finished at the level of 1.6% for the whole bank.

When it comes to our capital position, very stable, very secure -- we have some liquidity surplus, both in terms of Tier 1 and TCR, PLN 1.2 million, PLN 900 million. So our capital position is really -- looks very good. When it comes to liquidity, short term, when we're talking about LCR 168%, very high, very safe indeed. When it comes to NSFR [indiscernible] 130%, again, very safe. Both these ratios have this regulatory minimum at 100. So we have a very large surplus. Thank you so much. This is it from me. Over to Grzegorz.

[Grzegorz Olszewski, executive]

Thank you so much, Tomasz. To sum up, why it makes sense to invest in Alior Bank. Given this economic situation, Alior Bank, to me, is one of the banks with a very good capital position, safe, stable shareholding structure. Very important, I would say, for our investors because this leads to the fact that we can still land sustainably, both the business and retail customers.

Additionally, we are an innovator, especially in the retail segment, but we also are a big innovator in the area of business customers. We're working very hard on optimizing credit processes. This brings us results already and will continue to bring us positive results in the future.

It is our pleasure to announce today that at the end of the year and at the beginning of the new year, we will introduce a new payment system called Alior Pay. And this will allow us to -- this will allow our customers to manage their purchases and shopping better, manage their finances better. It's part of our new strategy for retail customers.

[Dominik Prokop, executive]

Thank you so much, and we're waiting for questions from you. Thank you so much. The first question, does your bank see -- pay additional payments or faster payments of mortgage loans?

[Grzegorz Olszewski, executive]

No. When it comes to this phenomenon, well, before we launched our moratoria, yes, customer standard to repay their mortgage loans faster just like across the entire banking sector. But now we have introduced this new loan payment moratoria. This phenomenon is weakening.

[Dominik Prokop, executive]

Additional question. The value of your portfolio in mortgage loans denominated in foreign currencies at the end of Q3 '22.

[Grzegorz Olszewski, executive]

So the entire portfolio of mortgage loans in foreign currencies, PLN 3.3 billion, but the value of Swiss franc-denominated mortgage loans, when we commented on our P&L, let me just say, it's only, we can say only PLN 140 million. And let me remind you that -- well, those loans were generated at a certain point in time after 2008 and the loans that are given out in euro right now, they are given -- granted to customers that have income in the same currency according to our regulations.

[Dominik Prokop, executive]

The following question. Your projection of operating costs for 2023? And will your new strategy will be more about saving costs? Or will it be more about high CapEx?

[Grzegorz Olszewski, executive]

Well, as I mentioned, we are going to introduce a new strategy. And -- well, there is this inflationary pressure, and it's going to continue. So we're expecting this growth, of course, excluding one-off developments. And -- well, when we present our new strategy, it will be a good moment to tell you more about this subject.

But definitely, in our basic business lines, well, we will assume that growth in 2023. It's tough to -- well, given our current circumstances and given our current competitive environment, it's very difficult not to take -- not to assume some CapEx, some investments, but it's not either/or. We want to both save and invest.

Without investing, there will be no development, no growth. We have very ambitious coworkers, and we want to be ahead of the market in terms of our implementations. And we have rebuilt some of the areas of our results. So we are looking into the future with optimism, and we're undertaking some efforts that will require investments. But of course, we see room to optimize processes and we see room for cost curbing as we have so far.

[Dominik Prokop, executive]

Thank you so much for this question. Let's take a look at the next one. It's a complicated question. Please comment on the decision of the Moody's agency that changed the outlook for the Polish banking sector.

It's changed from stable to negative. And Moody's have pointed out a few problems that the sector was facing according to them. So how long will this crisis [indiscernible] in the banking sector?

[Grzegorz Olszewski, executive]

Let me just comment that the Moody's decision, well, came in a little bit of a broader context. It was not just for the Polish market. It involves Czech and Germany and Slovakia, Italy and Hungary. So it's a global change of outlook caused by the macroeconomic situation in a host of countries.

Well, the situation of the banking sector in Poland as we're looking at the way it functions and the conditions in which it functions, well, we have higher interest rates. So we can build better results and better capital position. But of course, it's all accompanied with a big risk coming from the Swiss franc, and it's a noticeable risk.

And it's a risk that's still remains unresolved, and it can have a big impact on the way things shape up for the banking sector in Poland. When it comes to credit risk, at least for the coming year, I don't think it's going to be as significant as to have a negative impact on us. Interest rates in Poland may be increased according to the Monetary Policy Council, but not significantly.

So we will continue to have a good proportion between the interest rates and our interest-related revenues. And of course, there will be some write-offs due to some loans. If I were to answer about this crisis and how long it will last, it's very difficult to answer this question because, well, acquiring capital for the banking sector, this is difficult.

There is less and less to go around. It's more expensive to get funds. So -- well, when the banking sector -- so when the banking sector gets better at acquiring funds, the situation will be better all around. The following year may be still a little bit difficult, but we're hoping for a good result for the entire banking sector so it can still increase its lending in the future.

[Dominik Prokop, executive]

Thank you so much. Next question. What's MREL results you're projecting? Is there going to be any shortages when it comes to minimum requirements? What are you going -- what efforts are you going to undertake to make sure that you fulfill the minimum requirements?

[Grzegorz Olszewski, executive]

When we're talking about 2024, we're talking about PLN 1.5 billion. So we want to retain accumulated profits. I mean, this year, we're not -- we haven't done this, but we assume -- we are planning to do this in the future in the following year, and we're going to issue more instruments that will count for minimum requirements. And of course, we want to fulfill all these requirements according to deadlines.

[Dominik Prokop, executive]

Thank you so much. And there is one question about the future. If you can maybe share a little bit what are going to be the pillars of your new strategy that you have mentioned?

[Grzegorz Olszewski, executive]

We want to be a bank that's profitable for its shareholders. It's one of the key to be stable from the point of our capital, and we have a chance of making it a distinguishing factor for us in the banking sector, but we want to be also a high-quality bank for our customers, retail and business ones, and we want to rebuild our position in the small and medium enterprise segment.

When it comes to our retail segments, we have already announced our new payment system, Alior Pay. And based on it, we will build a whole ecosystem of services that will help improve our customer relations. And hopefully, in the end, we believe that both in the business and retail segments, we will improve our commissions.

We're looking at a 2-year perspective, it's going to be an open strategy to prepare our bank well for the period when interest rates will start to go down.

[Dominik Prokop, executive]

There is one question about guidance related to cost of risk. So what about cost of risk in the coming year?

[Tomasz Miklas, executive]

Thank you. As I mentioned, this year -- well, we're planning to finish it at the level of 1.6% cost of risk. And in the following year, if there is a moderate crisis or downturn, we're not expecting to exceed 2% in terms of cost of risk.

[Dominik Prokop, executive]

And for now, I don't see any more questions. Ladies and gentlemen, if there are any questions after this conference, please send them to our Investor Relations e-mail. Thank you so much for the presentation. I would like to thank everyone for your attention. And of course, we will see you in the next quarter. Thank you so much.

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