Alior Bank SA

WSE:ALR

Earnings Call Analysis

Alior Bank Achieves Record Profit and Growth in Q3 2024

In Q3 2024, Alior Bank reported a record net profit of PLN 666 million, boosting cumulative profit for the year to PLN 1.83 billion. The bank's Tier 1 capital ratio stood strong at 16.78%. Growth was notable in the mortgage portfolio, which reached PLN 12 billion and made up over 30% of credit offerings. Mobile app users increased 20% to 1.24 million, and the cost of risk dropped significantly to 72 basis points. Revenues surpassed PLN 4.5 billion, a PLN 415 million rise year-on-year. Guidance indicates continued focus on cost controls and a targeted cost-to-income ratio of 30%.

Strong Financial Performance

In Q3 of 2024, Alior Bank reported a robust net profit of PLN 666 million, marking the highest profit ever recorded for this quarter. Cumulatively, the bank's net profit for the first three quarters reached PLN 1.830 billion, reflecting a year-on-year improvement of PLN 386 million. Revenues exceeded PLN 4.5 billion, an increase of PLN 415 million compared to the same period in the previous year. This solid performance has allowed the bank to maintain a strong capital position, with a Tier 1 ratio of 16.78% and a Total Capital Ratio (TCR) of 17.11%. These figures highlight the bank's status as one of the top performers in the sector.

Mortgage and Loan Portfolio Growth

An important area of growth for Alior Bank has been the mortgage loan portfolio, which surged to PLN 12 billion, accounting for over 30% of the bank's overall credit portfolio. Additionally, the bank experienced a 5% increase in working credits and noted that gross performing loans are on an upward trajectory. The bank has also successfully expanded its customer base, with the number of mobile app users growing to 1.24 million, reflecting a 20% year-on-year increase.

Improved Risk Metrics

Alior Bank has significantly reduced the cost of risk, which stood at PLN 305 million for the first three quarters, translating to a cost of risk ratio of just 72 basis points. This performance contributed to a reduction in the Non-Performing Loan (NPL) ratio to 7.1%, a decrease of 2.23 percentage points over 12 months. Looking ahead, the bank is guiding a stable cost of risk outlook of around 60 basis points for the upcoming quarter, with a medium-term expectation of 80 basis points.

Revenue Streams and Operating Costs

Revenue growth was accompanied by a notable improvement in commission income, which increased by 11% year-on-year, reaching PLN 3.8 billion over three quarters. The bank reported a cost-to-income ratio of an impressive 30% in Q3, and for the cumulative three quarters, it stood at 33.9%. In light of the operating environment, Alior's commitment to managing costs will be crucial, especially as marketing and personnel costs are expected to increase in the coming quarters.

Strategic Initiatives and Future Outlook

As Alior Bank moves forward, it is focused on maintaining a strong capital position and driving revenue growth through innovation and digitization. The bank aims to solidify its leadership in the consumer finance market and continue improving customer service quality. With expectations for continued sales growth, particularly in Q4—the typically strongest quarter for loan sales—the bank's strategy will be finalized and announced early in the upcoming year.

Emphasis on Corporate Solutions

Alior has also expressed its focus on enhancing service quality in the corporate sector. The bank has seen a year-on-year revenue growth of nearly 3% in this sector, despite some overall challenges. Notably, their market share in the self-employed segment remains robust at about 9%.

Commitment to Social Responsibility

In addition to financial performance, the bank is actively participating in initiatives to support flood victims in Poland. Such social responsibility efforts not only reflect the bank's commitment to its community but also help develop customer relationships and strengthen its image in the market.

Earnings Call Transcript 2024-Q3

[Dominik Prokop, executive]

[Call Starts Abruptly] Director of Communications at Alior Bank. Welcome to today's results conference in which our Board will summarize the results of Q3 2024. And as usual, the trends and results will be discussed by Zdzislaw Wojtera, acting CEO; Jacek Iljin, Vice President; and Tomasz Miklas, Vice President of the Board.

In the second part of the meeting right after the presentations, we will move on traditionally to our Q&A. Before I give the floor to Zdzisław, let me invite everybody who's watching and listening to us to ask questions during the first part of our conference, thanks to which we'll smoothly transition to the Q&A session.

Thank you. And Zdzisław, over to you.

[Zdzislaw Wojtera, executive]

Hello, ladies and gentlemen. Thank you, Dominik. I'll have the pleasure to present the results for Q3, and we'll start by net profit, which amounted to PLN 666 million. This is possibly the highest profit reported. Cumulated net profit for 3 quarters amounts to PLN 1.830 billion, which are very good results, and we are very happy to communicate them to you. All the previous quarters in the previous years were also solid when it comes to net profit, which results -- which allowed us to build safe capital position of the bank.

As you can see, the Tier 1 ratio is at 16.78% and TCR is at 17.11%. These are solid foundations, and we are proud to have this one of the top performers in the business. When we look at the business, we would like to be proud of growth of the mortgage loan portfolio, which we're able to build over the last 12 months, in particular. And we are able to go there to over PLN 12 billion, which ensures over 30% of share in our credit portfolio.

We would also like to share the number of mobile app users, which grew to 1.24 million, which is nearly 20% more than at the end of September 2023. The same goes for the number of customers with regular inflows, which amounted to 1.143 million, which is 71,000 more than at the end of September 2023. Something we would like to underline is the significant decrease in the cost of risk. The cost of risk after first 3 quarters amounted to PLN 305 million. This means that the cost of risk factor reduced to 72 basis points, which is a very good result. The reduction of NPL ratio went to 7.1%, which is 2.23 percentage points in the last 12 months.

If we look at other parameters and dynamics, I'd like to underline that we reached very high revenues that are higher than PLN 4.5 billion, which is better by PLN 415 million than in the last year. When we compare quarter-to-quarter, it's PLN 163 million better. The net profit also grew because if you compare the accumulated profit from last year and this year, it's -- we are PLN 386 million better. If you compare quarter-to-quarter, we are PLN 94 million better.

Now a few factors. If we look at the most important information, I'd like to underline that the volume of working credits, we are -- it grew by 5%, gross performing loans, which translates to our profits now and the future. When we look at other important parameters such as cost/income ratio in Q3, it's 30%. And incrementally for 3 quarters, it's 33.9%. If we -- another good performing parameter is net interest margin. It is at 6.32%, which is 16 percentage points better year-on-year and incrementally after 3 quarters, 6.08%.

The net results allowed us to achieve ROE at 25.7% in Q3 and 24.4% after 3 quarters cumulatively. The information about risk will be discussed by my colleague, Tomasz Miklas. And to finish this part of the presentation, I would also like to mention that in Q3, what was important was providing support to the victims of flooding. We participated in all campaigns, and I'd like to thank all our staff for their involvement.

Our support for Wielka Orkiestra Swiatecznej Pomocy that coordinated support for people affected by flooding was significant. We also organized support for our staff that was affected by flooding. When it comes to external initiatives, we participate in a sectoral initiative, which consists of a temporary deferral of the payment of loan installments. We can also provide support to borrowers through Borrowers Support Fund, and we also took other initiatives to help those affected with this crisis.

Let me give now the floor to my colleague, who will talk about business aspects of Q3.

[Jacek Iljin, executive]

Let us move on to more details on -- what happened in Q3 for individual client segment and business client segments. Let's start with individual clients. I'll discuss some issues that were discussed by Zdzislaw, the building of the relation clients, especially those that use mobile banking in Q3 and entire year when it comes to mortgage loans, cash loans and loan sales, starting with build -- establishing lasting relationships with customers when it comes to the total number of customers, in Q3, it grew by 3% year-on-year.

The number you can see on the -- in the top left corner, 4 million clients. This includes clients with strong relations and as well as installment clients. This is why we have some variability, but we expect growth in Q4, which traditionally for loan -- for installment loans is the most important. But the most important piece of information here is the increase in the number of customers with regular inflows. We can see 7% increase year-on-year. So it's customers that have current account, but also have regular inflows. We have 71,000 more of such customers and the number of accounts of our flagship product, Konto Jakze Osobiste grew by 70%. It's an account with a structure that encourages customers to perform both transactions and to have regular inflows.

The increase in the number of our mobile app users is supported by our focus on systematic growth of this channel. In Q3, we saw several improvements of this app, including post-sales service and contact with our contact center, something we call [Foreign Language] My Cases. And we also allowed our customers to manage payment limits via the mobile app. The mobile app is becoming more and more a standalone channel responding to the needs of modern mobile banking clients. Via the development of the mobile app and thanks to the efforts to educate customers and to promote this form of finance management at Alias, we can see a systematic growth practically in all quarters.

Over the last 5 quarters, we can see the steady growth of the number of users. Year-on-year, we are talking about 19% increase. We are talking not only about users who log on to this channel, but also use it for transactions. And the number of wire transfers initiated is 21%. We are also happy to see the increasing number of users who use BLIK transactions. We can see an impressive growth by 56%.

Moving on to mortgage loan portfolio. As you have noted in the first slide, the sales in Q3 was worth PLN 600 million. Of course, it's less than in Q3 2023 and in other quarters of that year. But we -- what we can see here is the end of sales under the PK2 program. Alior took this opportunity to a great extent in 2024. Sales there reached PLN 1.3 billion. Sales under this program ended and now we are selling our standard products. And I'd say that the level is fairly conservative. And it's focusing on products at good price, good collaterals. But at the same time, we are gaining customers for our main relationship.

In the future quarters, we'll be trying to increase sales. What's important is that we keep on growing in current sales when it comes to the share of loans, 79% -- periodically fixed interest rate was about 79% was nearly 3 percentage point higher compared to 2024. When it comes to cash loans, we saw a 3% decrease quarter-on-quarter, but the sales of loans is 10% higher year-on-year. To comment on it, the bank in Q3 was relatively conservative -- had a relatively conservative policy when it comes to pricing, but it also provided collaterals on high amount loans. It protected those loans against loss of employment and reduced its share in high-risk loans. What's important, we are performing better in remote sales in Q3 2024. This share was 55%.

In installment loans, the -- this portfolio increased by 7%. So we are the leader in this competitive market, mainly thanks to competitive advanced technology. And when it comes to results of this quarter, just a bit of a comment. You can see a change in 2023 and '24 in installment loans. And in Q3, sales is slightly less in 2024 compared to 2023, but from the beginning of the year, we saw a 10% increase. An explanation here would be that the sales distributed differently, and we have a different model of cooperation with our partners. But I'm assured that we expect high results in traditionally best quarter of the year, which is the last quarter.

And we use our know-how and technology. We keep connecting with other online sales platforms, e-commerce platforms. E-commerce is the main axis for the development of this business. We have very good experience there and good achievements, which will be difficult -- which will make it difficult for our competitors to catch up with us. And this also provides a good starting point for us to develop further in this business.

Moving on to our business customers. A general comment would be that this year has not been the best across the board. We increased our revenues year-on-year by nearly 3%. Revenue after cost of risk increased and NPL also increased -- decreased, so we are improving our portfolio. We maintained our share in sales at about 4%, but there are some unique achievements there that should be underlined. In Q3, in the company's system, our sales increased by 22%. In the market, it's increased by 13%. Sales in the market increased by 13%. We have very -- we maintain a high 9% market share in the portfolio of self-employed segment.

In this slide, we are showing the change in the portfolio of our loans and the quality is improving, which is connected with high volume. The volume admittedly decreased by 7% year-on-year. But as you can see in the chart below, it's strongly related with 25% decrease in collection business customers. The balance of assets in regular servicing business customers decreased by 3% only. Also in the business customers area, we try to ensure the increase of effectiveness. In Q3, we were able to acquire 5,000 new micro companies.

Also, we keep on increasing the number of clients -- customers online. Every quarter, we've noted an increase. And in Q3, we increased by nearly 70% new accounts in micro segment. In MSPs, we are trying to ensure our performance, we've achieved 80% increase year-on-year. We are talking about 17% of orders executed remotely. This is our asset. We are focusing the time of bankers on acquisition of new customers and improving relationships with existing customers.

To finish, let me mention how Alior is being appreciated by the external parties. Alior joined the prestigious MSCI Poland Global Standard Index. We are among 13 best companies. In financial -- among financial institutions, we are very happy to be part of this group. Q3 was also a quarter where we were very active and where we provided to our customers interesting offers, which, as you saw, translated into the number of our customers and the growth of business.

[Tomasz Miklas, executive]

Thank you, Jacek. May I welcome everyone cordially. As concerns the risk area, we have a fairly safe, very safe, in fact, quarter. Let's look at the capital outlook. Tier 1, almost 17% TCR 171% and MREL over 20%. So these are all very good results. As concerns liquidity, the short-term liquidity index, LCR 187%, long-term 1.43, both with regulation minimum levels at the level of 100%. Both these indexes give us a very safe position, but also good buffers as regards to the growth of the bank in the future.

As concerns the credit risk and a long-term view. On the left, you see the cost of risk in the yearly outlook, very good results, 0.62 points versus almost 100 points the previous year, 150 or 28 in 2020. So this improvement over the past few years translates into PLN 1 billion of the cost of risk. As for the guidance of the cost of risk, we communicated 60 basis points. But right now, we expect about 60 basis points. But in the medium term, we have the same outlook, which we assess at the level of 80 points.

Similarly, with NPL, there's a considerable improvement ever since the end of 2023. We ended the third quarter at the level of 11%. And in the long-term perspective, ever since 2020, the improvement translates into 14.5% to 7%, so a very good improvement there.

As concerns some details regarding both the quarters and business lines, let's start the NPL. As you can see in the recent quarters, we had dynamic improvements. And the last quarter, the AP level has been slightly on the way up, 711, which resulted from reclassifying our major client to the Stage 3 default. But this is just one case. And in the next quarters, we intend to continue the improvements, which you saw in recent quarters and in recent years.

As concerns different segments and the individual customers, we represent one of the best results in the market, 3.5%. But we concentrate on the corporate sector where we are not still happy with the level at the end of the third quarter, 12.7%, but with a good improvement a year ago, it was 15.7%. NPL provision coverage, it's quite stable with a certain decreasing trend, but that results from our NPL position because when we reduce NPL, we start with the biggest coverage loans.

Moving on to the cost of risk results. In the third quarter, there was a slightly raised level 92 basis points, but it stems from the fact that we decided at the end of September to have PLN 25 million of reserves for potential results of the floods in the south of Poland, the results, which could bring some difficulties in credit payments. Without that, we would have 77 basis points, which would be the regular level at which the portfolio performs.

Following the corporate and the business sectors, the levels are quite good and the long-term trend are improving. Summing up the risk situation, one of the better situations in the sector, very good liquidity, which give a potential for considerable growth and the cost of risk in the long-term perspective are improving.

Thank you very much. I hand over to Zdzislaw.

[Zdzislaw Wojtera, executive]

Thank you, Tomasz. We now come back to financial results. In this slide, you can see a more detailed breakdown into the profit and loss results. And let me focus on 3 items that would be crucial, the interest result, the commission results and the cost of operations.

As regards the commission result, there is a considerable improvement year-on-year. The bottom left bar demonstrates that if you compare the 3 quarters of '23 and 3 quarters of '24, we have 11% growth. The cumulative result is PLN 3 billion, PLN 3.8 billion. And if you look at that from the perspective of quarters, we have a 9% increase, which is slightly lower because you have to take into account that in the second quarter, we had to set aside PLN 86 million reserve for the so-called credit holidays, which had an impact on that result.

We would like to note that the interest margin, which for this type of bank is a relatively high level. If you look at the yellow line, it is at the level of 6.2%. What is important is at these business models, there are fairly high levels of risk. Alior Bank has in its DNA the proper management of the cost of risk. And you can see that our margin corrected by the cost of risk is quite high because it is now at the level of 5.58% for the previous quarter and 5.40% for this quarter. We try to impact the decrease of financing costs, which are going down from 2.31% in the third quarter to the current level of 1.88%. Loan-to-deposit ratio is steady. It is around 82%.

The next slide is the commission income. In the case of our bank, it is a stable situation. It is perhaps slightly less than we would expect because it is at around PLN 210 million per quarter. Our ambition would be to have a better result in subsequent quarters and years. It will be part of our strategy to do that. If you look at the left side of the graph, there is one diversion. And I think that was explained in previous presentations, and that relates to the fourth quarter 2023 and results from a different presentation of commission transactions. This has been corrected as a one-off event in the fourth quarter. That is why there is this slight disturbance. However, in general, as concerns this year, the commission result is EUR 210 million plus.

Costs of operations, operating costs in the third quarter, we've had a fairly low level of these. It resulted from a number of aspects. If you look at personnel costs, we ended the holiday reserve, employees should use the holidays from the previous years. Our employees did meet that requirement, so we could correct that reserve. It's a problem of all institutions, which include hybrid work. This sort of disturbs the regular work-life balance. So we do struggle with that. But in this case, it impacted positively our personnel costs.

The material costs are lower because of the marketing activities, as we've heard already from the President in our business model, the marketing cost will be more in the fourth quarter. So the costs will be higher. However, in the third quarter, they stayed at a lower level. As far as expectations are concerned for the fourth quarter, we would like to draw your attention to the difference between the third and the fourth quarter of 2023. And this might be repeated this year. The cost might go up, certainly in terms of marketing costs and also in terms of personnel costs. For instance, because of the pay rises, which have been implemented and will translate into the personnel costs for the fourth quarter. Cost-to-income ratio stays at a good level of 30% after the 3 quarters.

In the next slide, we have a look at the strategy, which was adopted by the previous Board for the years '23, '24. In the previous quarter, you already saw that those aims were achieved. So we could say that from the point of view of this year, all the elements of the strategy have been implemented. Now having a look at the future, let me draw your attention to a number of items. What we are looking for is a safe and stable capital position, a high level of NIM, innovation, digitization, high quality of services for customers. We want to see high performance due to an increase in the revenue and cost optimization. We want to be a leader in the consumer finance market. These are the pillars on which we will build our new strategy.

The new strategy will be drafted by the end of this year, and we hope in January or February at the latest to have the presentation of this new strategy, and then we wish to publish it. We want to be a strong company in terms of dividends. We want to provide the best digital services to our retail customers, and we want to focus on that. We certainly want to have the return on equity remaining at a high level to provide satisfaction to our shareholders. And we want to address the corporate sector as well to the extent which has been observed so far, which would be a follow-up to our competencies in this bank.

So these are the general items regarding the strategy, but it will be finalized and published at the beginning of next year. Thank you very much.

[Dominik Prokop, executive]

The first part of our conference is therefore over. We've already had a question and that regarded the publication of the strategy. So thank you, Zdzislaw, for preempting the answer to that particular question.

There's also a question regarding risk. What level of NPL is forecast for the next quarter? And what is the final NPL level in the corporate sector?

[Tomasz Miklas, executive]

As concerns NPL for the next quarter, it is very difficult to assess the level because we are in the middle of a number of initiatives, which we don't know whether it will be completed this quarter. But our ambition is to have the NPL level going down as it has been going down over the past quarters. As for the target in corporate sector, well, considering the quality of new sales activities, we want to have the loans similar to the market level. So it will be a market level. Currently, you have between 5% to 7%, and we will want to remain at the market level.

[Dominik Prokop, executive]

Thank you, Tomasz. The next question regarding risk. What was the MREL index at the end of third quarter 2024?

[Tomasz Miklas, executive]

11.7%.

[Dominik Prokop, executive]

The next question our WA rose quarter-on-quarter in spite of the drop in the portfolio of loans quarter-on-quarter. What is the reason for that?

[Tomasz Miklas, executive]

There has been modification of methodology in WA, which are the non-balance sheet requirements, and that is the result of that.

[Dominik Prokop, executive]

We carry on with the risk-oriented questions. This part of the result for the first quarter of 2024. And has it been reflected in the regulated capitals?

[Tomasz Miklas, executive]

No, we did not add the profits in this year.

[Dominik Prokop, executive]

The next question, does the bank meet the SOT NII requirement?

[Tomasz Miklas, executive]

Yes, we do meet that requirement. At the end of September, it was 4.7%. So the level designated for Europe has been met.

[Dominik Prokop, executive]

A question about the long-term financing index. According to -- what is the current level of WFD?

[Tomasz Miklas, executive]

Zdzislaw, can you answer that?

[Zdzislaw Wojtera, executive]

According to the KNF methodology as is required of us, it is 44%.

[Dominik Prokop, executive]

The next question, which is often repeated, the sanction for the free loan. How does the Board view the sanction on the free loan? The number of court cases is growing. What is the size that is in danger?

[Tomasz Miklas, executive]

Well, the number of claims is going up. We see a lot of activity in law firms, which want to see a new business after finishing with the frank loans. They're exploring this legal area. I think in the future, there will be 3 key elements. The first one is the issue of how banks will adjust to the new production types. The law firms point at some irregularities, but the banks are reacting to that and the sector is reacting. And so the problems raised by the law firms are nonexistent, especially vis-a-vis the larger amounts, which the law firms are interested in.

The other aspect, which is crucial is the European Court of Justice decision. There have been a number of questions and the key area that I want to draw your attention to is the implementation of the directive regarding the consumer loans in Poland is quite different in one area from all the other markets which have been implementing the directive, namely the proportionality principle was not introduced.

As a sector, we hope that the ECJ will take into account this aspect in its decisions, which would mean that the profitability of objecting to certain provisions in the contracts will go down and it will not be an attractive business for the law firms anymore. And the third aspect is legislative changes. The sector changes ZPP and we are involved with the talks with the Ministry of Justice so that before ECG decides we're going to change the Polish legislation to adjust it to the implementation of that European legislation.

[Dominik Prokop, executive]

The next question about the updating of the sensitivity of the bank to the interest rate changes by 100 bps.

[Zdzislaw Wojtera, executive]

Well, the sensitivity, which you mentioned at the end of 2023 was PLN 200 million. But taking into account the current situation in the market and our current analysis, there would be a drop, which we could evaluate at the level of PLN 150 million, PLN 160 million in a 12-month time span. We consider that activities that we could take in terms of our business development and in terms of our hedging activities, we would be able to properly amortize this drop in interest rate levels, and it would not seriously impact our financial result over the 12-month period.

[Dominik Prokop, executive]

We move on to the next question. What would be the impact of the capital regulation, CRR on the capital indexes?

[Zdzislaw Wojtera, executive]

Tomasz, can you answer that?

[Tomasz Miklas, executive]

Work still goes on as far as the implementation of this regulation, both in our bank and the sector as a whole, but we believe the impact will be between 1 to 2 percentage points.

[Dominik Prokop, executive]

Thank you, Tomasz, for this answer. That concludes the list of questions. Thank you very much for taking part in the conference. We want to thank everyone. We encourage everyone to be in touch in the bank, and we invite everyone to the next presentation of the next results.