Alior Bank SA

WSE:ALR

Earnings Call Transcript 2017-Q4

[Maciej Surdyk, executive]

Thank you, thank you very much, Piotr. Great pleasure as always to welcome you at the conference. This is a special conference today, as this is about the yearly results. And as it's already casting, then we've got pretty good news for you.

So first of all, I would like to stress that our net profit for 2017 as well as other important financial indicators are just in line with the market consensus, which we are very satisfied.

[Audio Gap]

Is 15% above the market consensus term June 2017, and this is what we've observed in the second half of the year. The market consensus was moving up. And our current results followed this. So this shows clearly that we achieved a pretty high level of efficiency regarding communicating with the investors and allies community.

ROE turned out to be at 8% for the whole year. But what is important, that the fully loaded ROE, that would exclude integration costs with Bank BPH and would include the BPH target synergies would be at 11.1% versus 14%, the strategic target, which positions Alior Bank already in the group of the most profitable banks on the Polish market.

It's important to understand, we've been stressing this after Q3 that those target synergies are definitely certain and will be achieved as in -- these major synergy projects close. And this is a very precise number that is ahead of us at the level of PLN 381 million of additional gross synergies to be achieved in 2018. So we may say we have the net results for 2017 PLN 515 million, but on top of this we have PLN 381 million of additional gross -- these important gross synergies coming in 2018. And that would bring the ROE to the level of 11.1%, if we include this data into the results for 2017.

There's one important target indicator that we managed to go about significantly, which was long-term growth, and we gave the guidance on this -- in the market update with it in January. So we achieved for the whole year PLN 6.9 billion gross loan of growth versus the target at the level of PLN 5 billion, PLN 6 billion. And this is very important because as you know the capital position of the bank improved significantly in the second half of the year as well as the liquidity position, and the bank made good use of this improved situation and took benefits of a very good market situation by speeding up the growth in Q4. And that happened mostly on the side of our corporate business.

Furthermore it's important to mention improving liquidity, liquidity position of the bank that, in Q4 2017, we managed to increase the deposit base by PLN 2.9 billion. And that came mostly from the sections for return deposit campaign in the new savings account. And this savings account was marketed to our strategic target group of clients, and that was a market that's fully online with -- online onboarding. So that was an important step in terms of implementation of the Digital Disruptor Strategy in the retail segment of the market.

And what is important now that the banking in 2018, with a very strong capital and liquidity position, so ready to go on with high pace of growth in Q1 and the coming quarters of this year.

The cost of risk was at 1.7% and net interest rate margin stabilized at 4.6%, that's still at the top of the market's range. Nevertheless, we need to remember that this came along improving liquidity position and building liquidity cash and -- that would fuel the future growth. So additional liquidity buffers put some pressure on net interest rate margin in Q4.

Then I mentioned already, the successful implementation of the restructuring projects related to the acquisition of Bank BPH. What is important in 2017, the merger synergies exceeded the original plan by PLN 28 million, and the target synergies went up to the level of PLN 381 million gross and will be achieved already in 2019, so faster than the bank assumed initially.

What is significant and important to mention in terms of the summary for 2017 is, of course, the adoption and implementation of Digital Disruptor Strategy, and let me recall, that the bank adopted the strategy in March 2017 and then, in October 2017, we presented the implementation plans to the market.

Then significant event was the opening of the branch in Romania. So that's the first step in terms of the international expansion of Alior Bank. And what we perceive as a great achievement is the change in loan portfolio structure, which shows very clearly that the bank is very effective in implementing the strategy and, especially, the increase of the micro segment in the balance sheet. And we will elaborate more on this in the next parts of the presentation. Then we are very much focused on implementing the new Innovation Management Model in the bank and the new model of IT management based on a high level of agility. And we will discuss the details of those -- of this transformation in the later parts of the presentation.

In 2017, Alior Bank was awarded a couple of times. I would like to mention two important awards. So first is the Retail Banker International in terms of the innovations. And that was for the partnership with HAIZ, fintech company, then the Bank of the Year in Poland. That's very important. That's granted by The Banker, a very prestigious magazine. And on top of this, we received the title of the Company of the Year of the Economic Forum in Krynica. So the achievements of the bank's well recognized in both locally and internationally.

And last but not least, we strengthened the corporation within PZU Group. And there are multiple projects going on in terms of achieving synergies from cooperating with PZU and the group companies. Of course, an important event was deciding of the letter of intent with Bank Pekao on commencement of preliminary discussions on cooperation. This discussion is still going on, and we will be informing the market about the results as soon as the conclusions are reached.

Then if you look at our indicators and the guidance we were giving throughout the year, then we are very much in line with the guidance, in terms of the net interest margin; the guidance was 4.5%, 4.7% throughout the year. We finished the year with 4.6%. Our cost income was 54%, 60%, we finished with 49.7%. Cost income excluding integration cost was 45%, 49%, and we were at 46.9% at the end of the year. Cost of risk slightly below our indication, so here we improved with the final results at 1.7%. And what we perceive as a big achievement, gross loan book growth for 12 months at the level of PLN 6.9 billion versus PLN 5.0 billion, PLN 6.5 billion indicated throughout the year.

And we give you the guidance for 2018. So as you may see, we target the same level of net interest margin. We will improve significantly throughout this year on cost income. Regarding the cost of risk, we expect the cost of risk to go up slightly, and this is what we will be explaining in the further parts of the presentation. So this results from the implementation of the whole strategic programs, so we expect the cost of risk to fall. We think the strategy implementation is all right, and nevertheless, not everything would happen at the same time. So the measures we are taking at this moment, related mostly to the transformation of the portfolio which result in a slight increase of cost of risk. But things that are phased out for -- then for 2019 and 2020 would lead to significant decrease of the cost of risk.

So this is in terms of the summary. Pretty much in line with the market expectations. Now in terms of the organization of the presentation, I would like to give floor to Filip Gorczyca to discuss the key financial matters related to the strategy.

Then we go to the update on the SMEs and how we implement our strategy in the SME business. And I will hand over to Maciej Surdyk, the Executive Director and the Head of the Corporate Business.

Then we would like to tell you about the new Innovation Management Model and the initiatives related to the implementation of the strategy in this area. This is extremely important, and we attach really high hopes to this part of the strategy. So this is something that is expected to generate a unique competitive advantage for Alior Bank in the market, in terms of the product offering. And then this part will be presented by Bruno Ferreira, who is the Executive Director of the Head of Corporate Development Division.

And then we'll jump to the operational performance. So then again, I would ask Filip to discuss this part, and in terms of risk, [ Katarzyna ], who is the head of the -- the director of this capital strategy department, who will be ready to answer your questions on various technical aspects related to the risk management of the bank.

So, Filip, the floor is yours, please.

[Filip Gorczyca, executive]

Thank you very much, Michal. Okay, so first of all 2017 bottom line decomposition. And so apart from the effects of the merger with core BPH, which are presented on the right-hand side, we believe there were no very significant one of factors that would be worth isolating to explain our 12-month result. The only thing maybe worth mentioning is on the income tax. Because this might raise some questions.

As some of you might have noted, the effective tax rate was a bit higher this year than the, let's say, sector average. It was also significantly higher than last year, but this is because, in 2017, income tax was PLN 73 million versus PLN 221 million in 2017 -- no, 2016. This because of the one of gain on the bargain purchase of Bank BPH, which was PLN 465 million, which is obviously not a tax gain. So this is why last year the effective tax rate was so low obviously.

But even looking in -- at 2017 in isolation, it is quite clear that the effective tax rate is a bit high. And this is related mainly to 2 reasons: First is on the NPL sale, which -- some of which we have actually achieved quite significant profits on which we communicated up until Q3. And some of those NPL sales, in tax terms, were not really tax effective, yes.

So this is, for example, why, if some of you might remember, if you looked at the financial statement and the gross results on the sale of NPL, it was significantly higher than the net results that we presented in the presentation after our Q3 results. So because of how the tax system works, it simply created an additional tax charge in annual terms.

And secondly, there were some, one of tax write-downs, especially related to deferred tax, but this related to a number of, let's say, small items, so nothing really worth now explaining. So for those reasons, the effective tax rate was above 30% when, normally, you might expect it to be closer to probably 25% or so. And because it's always far from the, let say, theoretical 19% in the banking sector especially due to the bank tax, which is not a tax-deductible expense.

Okay, in terms of the items on the right-hand side, we will explain that in detail later on.

So now let's move on to the next slide, which is the BPH Core merger summary. So we provided the summary after Q3, now we want to present some additional details, which might be interesting. So we now separated the cost synergy -- the pure cost synergies from the revenue dissynergies. So what's interesting is that on the cost synergies, we outperformed our original plan by an even higher number than looking at the, let's say, net synergies. But the revenue dissynergies turned out to be slightly higher. And this is nothing, which would be surprising, because this is strictly related to the -- to our strategy implementation plan, namely the radical shift, the even more radical shift and quick and faster shift from the large corporate exposures to micro companies and those large exposures, especially the ex BPH exposures, which were not really that profitable. So we -- especially in Q2 and Q3, we limited those exposures, and this turned out to be -- to create a higher revenue dissynergy than we assumed a year ago.

So overall then in terms of the integration cost. So they turned out to be much lower than originally planned, so as we communicated. So they were -- they -- in 2017, we assumed PLN 195 million, they turned out to be PLN 105 million. And then actually, adjusting even for the -- even further for the release of the restructuring provision, it was 77%. So then the total effect -- the total gross effect, so that's gross of tax, but total effect is -- was supposed to be negative PLN 28 million in 2017, turned out to be PLN 118 million of a positive effect. And then, obviously, next year, the total effect will be PLN 381 million as we already communicated after Q3, so which is also better than originally planned. And those are all figures, which are 100% certain already, have been already for 2 or 3 months, at least 2 or 3 months or even more because those are simply effects of actions that have already been completed long ago -- long time ago, yes, still in 2017.

Okay, now so the effect of the BPH Core merger on the ROE that was in 2016, that was a positive effect because of the gain on bargain purchase. And so the ROE in nominal terms last year was 11.9%. However, adjusted for BPH -- for the effects of BPH Core Merger, it would be 7.5%. This year our pure ROE is 8.0% adjusted, again, for the integration cost and the -- taking into account already the full synergies, it's actually over 11%. And this doesn't reflect the -- also the negative effect of the fair value adjustment of the fair value amortization, which is still -- which is less than [ planned ]. 2020, actually, predominantly, it will be gone and because that's related to the loan book that we acquired with Bank BPH.

And then in the table on the right-hand side, we also thought it would be interesting to present the effect on the net results. So those are all amounts net of tax or some other factors affecting comparability of the results 2016, 2017 and 2018. So the total effect in 2016 was positive PLN 240 million. Now this year is positive to the PLN 92 million, and then next year it will be PLN 299 million positive effect on the net result. So again those are already -- those figures are 100% certain. So that's a very positive message in terms of our outlook for 2018, but again that's already, I guess, all of you are aware of that because we communicated that already number of times.

Okay. In terms of quarterly growth, we already communicated that on the 10th of January, on preliminary growth figures. So the cost of the significant improvement in our capital position, which occurred in Q4 -- during Q4 and also the, let's say, additional potential buffers secured by the PZU guarantee line, which we have at our disposal. We currently are not utilizing that -- don't envisage at the moment. We actually will utilize that, but still this creates an additional, let's say, security buffer. So this -- we executed this agreement in early November, and along with a number of other positive items, this allows us to very quickly accelerate growth, which we did than in the later part of -- mostly in the later part of Q4. And much you can see steam, we're really working very hard and very successful in delivering on that, and this is why the growth in Q4 accelerated, especially in December.

So we -- in total, we outperformed and significantly exceeded the -- our strategic growth target and, also, the guidance we even communicated after our Q3 results.

Then in terms of liquidity. So what happened is that we managed to increase liquidity very significantly despite of the significant loan book growth. So the LCR ratio increased from the -- from 104% at the end of September to 124% at the end of the year despite this significant loan book growth. And this is because of a very successful retail deposit campaign, which clicked then and somehow started to work very well in Q4, and we were able to attract an incredible amount of deposit especially in the strategically important retail segment, which was PLN 2.9 billion in Q4 alone, which resulted in also a significant increase in our trading portfolio, so in the bonds that we are holding on our book. And that's -- that was a growth in Q4 alone from PLN 8.9 billion to PLN 12.1 billion.

And this in effect, this -- from an ROE perspective and from a profitability perspective, this was neutral because, the deposit, we are investing that in bonds, so it's basically a neutral, doesn't have any technical profitability. But it actually affected slightly our net interest margin. And because -- so this is why this caused -- actually, this effect of this increased liquidity was a negative 14 bps on the net interest margin. So this is why it turned out to be 4.6% versus 4.7% in -- after Q3. But again, let's say, the core net interest margin, so not -- excluding this increase in liquidity, was -- is growing consistently and still to achieve the level that we expect it to achieve as we communicated in our strategy implementation plan. So 5.1% in 2019.

Then IFRS 9 impacts. That's probably a very interesting note in the financial statement also to some of you because the impact was quite significant at Alior Bank. So the fact is, it's obviously related almost basically purely to the expected credit losses, so the change in the perspective in the model from IAS 39. And the total effect is over PLN 1 billion gross, and that is over PLN 800 million, so the effect on equity.

Then in -- as we already communicated on the 10th of January, we obviously will be adopting the phase in options, so phasing in the effects, the impact of IFRS 9 over a 5-year period as allowed by the EU regulations. So this year it will be on the, in theory, 5%. So the figures in terms of the impact on the Tier 1 ratio is 20 bps in 2018, then 26 bps, 45 bps, 67 bps, 93bps up to 115 bps in 2023. That's all cumulative, of course. And obviously, that's worth mentioning this 20 bps in 2018, this is not the 5% as per the phase-in scheme allowed by the regulations. That's much more because of, let's say, an indirect deferred tax effect because of the Polish tax -- how the Polish tax regulations work. So actually, the effects on the opening balance sheet date on the 1st of January 2018 is actually greater because of this indirect effect. So this is why it is 20 bps, and that's -- yes.

Okay, that's -- so those figures actually in the bps, in bps terms and the effect on the Tier 1 ratio are slightly, but very slightly, different to the figures communicated on the 10th of January, because now we have the actuals for -- as of 31st December, 2017, the numbers on the 10th of January were on preliminary figures. Those are estimates.

Okay, then in terms of explaining the -- where the effect comes from in terms of the staging as per IFRS 9. So in terms of the non-deposit portfolio, 89% is stage 1, stage 2 is 11%. So the reasons for -- so what's driving the impact at Alior Bank is, first of all, our business profile and our portfolio structure. So we are oriented, as all of you know, on the high-risk, high-return product, in particular, cash loans. So this is why in a nominal amount, it's not surprising that the effect of IFRS 9 is much higher than the -- let's say, at some other banks.

Then also, the vast majority of the expected credit loss impact, so 71%, this covers the nearest 12-month horizon, and this is because the -- under IAS 39, the loss identification period at Alior were quite short because -- again, because of our business profile, we need to have very efficient monitoring processes. So this is why the loss identification period were shorter at some other banks, which have a different business profile.

Then in terms of -- also, what's important in terms of this stage 2 effect, that's PLN 295 million related to the lifetime effect. That's also driven by the long -- relatively long maturity of our core product versus the market average, so in particular cash loans, where our cash loans have on average a higher -- a longer maturity than the industry average. So now let me maybe move -- pass on to Maciej for the SME update.

[Maciej Surdyk, executive]

I would like to present to you the update on the SME segment. Our driven strategy within the segment resulted with significant performance increase. I'll present 4 metrics.

First, the new bank client acquisition, we increased about 17% year-over-year. This is mainly due to start acquiring new 2 customers via online channel. And then the lending portfolio, the assets also, growth, we grew around 11% and resulted some more down PLN 22 billion loss, strongly focusing on the most efficient segment like micro and small with the highest ROI results.

In terms of total revenues within the segments, also, growth around 9% and is down PLN 1,200 million -- more than PLN 1,200 million loss. Also the most significant growth within the micro and small segment, in micro about 24% growth revenues within the segment. The new lending performance action also resulted with 15% higher ROE than the existing portfolio and resulted with 23%. This is the ROE after risk cost before operating costs.

Coming to the strategy, we identified 6 most important pillars of developing the segment. The first one is the marketing. In 2017, we created new marketing concepts of the bank, Alior Bank for entrepreneurs. And in 2018, we started regular multichannel agenda of the communication for business products and presenting the also [ the few more value pair ], our platform from value-added services.

The [ other complement ], this is the multichannel distribution. We find it crucial to develop the segment, where in 2017, we focused on developing the sales across branches, franchise branches, selectively, brokers and call center. In 2018, we want to start complete wing-to-wing online sales of the new channel to provide and, also, to provide mobile devices for branches for relationship managers just to have complete the paper, let's process within -- on the desk of branch managers.

The third pillar. This is automated lending process. This provides us with the safe process for the bank and, on at the same time, with fast bank to market for the customer, which is a crucial factor in terms of lending for micro.

In 2017, we developed a market product that decisions and CRM to get approved. Into 2018, we want to develop and provide in Q2 the unified tax files as financial data input to shorten the credit process. As of February this year, all of entrepreneurs have to provide the unified tax file on the monthly basis. So this is the source of reliable financials for the bank to take a correct decision.

And in terms of new client acquisition. We started in 2017, complete online process to set up the new business client accounts and to integrate the central evidence of business activity. This is shortening the time for the customers and, on the same time, provides reliable data on registered sites.

In 2018, in January, we started automatically communicate each new startup registered in central evidence of business activity to communicate the product offer. We want to become the bank of first choice for newly registered customers. And on this model we want to incubate on the most efficient way deposit customers then to preapprove them with trending products.

The fifth module. This is the value-added services and non-lending products. We want to increase the revenues from -- on the fees and on the lending side and, on the same time, to provide additional value for the customers. We started marketing event on our platform zafirmowani.pl. The core product of this platform, this is -- the tax module, enabling a running accountancy for simplified accountancy.

We also implemented a unified tax file generator for the customer, each customer running the accountancy and invoicing in the module is able to prepare a unified tax file. We also set the cash debit cards with fewer discount for the customers up to PLN 100 on the monthly basis. We set up Android Pay for Sodexo and linked the business current accounts and product offer with past terminals, with [indiscernible].

In 2018, we want to still develop the zafirmowani.pl as a one-stop-shop and provide much more nonbanking service and to generate on the site non-lending revenues. And the sixth most important pillar for us, probably, this is still developing the European Union and public programs. In 2017, we implemented the cost in the guarantee from EIF funding that enables to grow micro-lending from the safe side tends to create new customers. We still -- we're developing the safe zones of the newest guarantee. And 2018 is the year of -- still of farther automatization, the process and linking the -- our product offer with those guarantee programs. So considering the strategy and the market opportunities, we find 2018 as better link year for the micro and SME segment. Thank you.

[Michal Chyczewski, executive]

Thank you, Maciej. This shows clearly high level of effectiveness in implementation of the strategy, so the bank managed not only to increase the ROE over each segment of the corporate business in 2017, but it really changed the structure, increased share of micro companies, the higher -- the highest ROE segment and implemented a number of the initiatives for the automation of the SME offering on the customer experience on the value-added services, and there's a big pipeline for 2018. And we are very much convinced Alior Bank has a very unique model in terms of the SME, most likely the most efficient and effective model on the market. And that's where we managed to leverage the technology competence strongly in terms of approaching the corporate business.

Now I would like to move to the update on the innovations. And as we had very unique model of SME, we are implementing now a very unique model of innovations management. It will be, by far, the most advanced model on the Polish market, that I truly believe one the most advanced in Europe. And the details will be explained by Bruno. So Bruno, please go ahead. The floor is yours.

[Bruno Ferreira, executive]

Thank you, Michal. So innovation at Alior is at the core of our Digital Disruptor Strategy. It's important to tell why we do it, and it's not do innovation for innovation sake, but we do it with a clear purpose. It's what allow us to disrupt and to push the market for evolution. It's also what allow us to better serve our clients and, of course, to add value to our shareholders by making our offer different and also more automated, as Maciej also pointed out, in terms of SME.

So it's a pleasure to tell you that the implementation of our innovation strategy that we announced in October is well underway. We have the key team in place. The key projects are also started or expected to start during the first half of this year. And also, the necessary funding is budgeted.

So I would like to highlight the 5 points on this strategy that are important and to give you update on how we are with those. So the first one, the -- in terms of leadership of the innovation functions, we have the key people in place, and I'll tell you a little bit more in detail about their profile. So that is done.

The innovation model, as Michal pointed out, is one of the most advanced in Europe, and it's under implementation. We are going through pilots and training the people. A cornerstone of that model is also our customer-centric iLab that is focused on the customer experience and puts the customer in the center of our innovation. And that is also underway.

The third point is the new focus on fintechs. And we are starting a new accelerator program in the first half of this year, and we have almost installed open API platform that we announced recently in cooperation with IBM and TUATARA.

The fourth point is also to fulfill our mission as a disruptor. We have several fintech internal projects that we incubated and we are now putting online in the market. And even this week, I had the pleasure, together with Michal, to launch the BANCOVO project. That is now live and already started. And that's one of several internal projects that we have in the pipeline. So that is also done.

The last but not least is our IT resource management model that we branded AGILOR. It's also under implementation. We have 4 tribes already at work, and we will roll out the full model until we cover the full IT function.

So let me go into detail in one of -- in each of these 5 points. So in terms of leadership, we have 2 departments that are the key responsibles for innovation at the bank. The Innovation Center department, which is led by Andrzej Dominiak and the Fintech Department lead by Daniel Daskiewicz.

So Andrzej have extreme experience in terms of innovation. He was EMEA Regional Development Head at Citi. Previously also, he had the roles of technology director at Nordea and also led the Citi Innovation Lab here. As for Daniel, he was the FinTech and Corporate Innovation Global Lead in New York for Citibank and, also, has experience as a Head of Mobile and Global Product Manager. Also, he has experience in terms of startup plans, which is very key to have that background as dealing with the fintechs. So also, the team that is behind them is already either in place, newly hired to the bank or assembled from different areas of the bank.

In terms of the innovation model, I said it's deployed. It's being deployed across the organization, and I would like to highlight to you the key advantages, why this is important to us, why is it important also for investors. The new model fosters innovation. So it delivers a framework for everyone at the bank for all employees to develop themselves and to bring innovation forward to the bank. And it places innovation at the core of Alior strategy. So it's not something at the side that we do it. It is really one of the key, most important functions that we have at the bank. But also provides flexibility to the strategy implementations. It provides a mechanism that we can constantly monitor our strategy and steer according to what -- to how the market evolves, how the competition also evolves. So it provides tools for the bank, for the board to regularly monitor and steer the strategy implementation. And it does that by standardizing comparison between the -- our projects. So it facilitates the evaluation of the projects according to strategic KPIs, and it simplifies also that project preparation. So it makes all the model, all the process of bringing forward projects to innovate more straightforward and simple for the whole organization.

And lastly, but not least, also it's a model that leverages cooperation between everybody at the bank. I said that we have 2 departments responsible for innovation, but it's not only those 2 departments that will innovate. All the bank will become innovated, and everyone will be invited to participate and to bring forward through this model, because it provides the tools to everyone at the bank to innovate in a centralized way. It allows people to get together and to develop new ideas and solutions.

And the new customer research lab, also it's a key element. And let me tell you a little bit more about that, because it places the customer at the core of all of this innovation. So it's a state-of-the-art iLab. We'll open it in Warsaw Spire in -- still in the first half of the year. It's state of the art. We went and we saw several iLabs throughout Europe and in the States as well, and this is really going to be one of the best. And the customer will be central to it, will be central to the product development and will be with us through the whole cycle of development and of creation.

Starting with the diagnosing trends and assessing the customer experience, we do that through NPS, but also looking at other sources of client satisfaction with the bank. And also we will do the discovery of the product, the co-creation together with our clients. And here, we will need a lot of engagement as shown here in the graph. We'll develop the proof of concept; testing also these concepts with the clients; and also creating -- interacting in a very agile way together with clients to develop the new products; and then, of course, supporting the product going forward always evaluating how that impacts the customer.

Regarding the new approach to fintechs, there's 2 points that I like to focus. Firstly, in terms of our accelerated program, starting the first half of this year. Overall, in terms of the accelerator until 2020, we have a budget of PLN 30 million. The first edition to be launched this year of the accelerator will focus on open banking. That's core to us. It's something that is changing the banking market, and that's why we will focus on that. And as said, it is going to start in June 2018 with 6 to 8 start-up fintechs. We will support these companies through financing, through mentoring workshops, by providing the co-working space in our iLab to allow us to develop the proof of concepts with us and provide us a platform, a lab where they can connect to us through APIs and develop their solutions. We're also developing together with other partners, technology companies, other benefits for the start-ups that will be part of the project.

We are starting already now the selection, the start-up the selection, and we'll have the hello day in June. So we'll provide you more informations on the exact day of that. During July to October, we will do the accelerator so with workshops, mentoring, developing the proof of concept. And then we'll have in November the demo day, which will officially will end the first edition of the program.

It's not just this. We also have the Open API platform. We announced that still last year, so it's something together -- that we're doing together with IBM and with TUATARA. IBM is providing the technology, and TUATARA is implementing it in us. This is a key element to our fintech strategy, not just because it makes us PSD2 ready. So all the account information services and payment information services that we have on the left-hand side of these slides will be possible through this platform. But also, it will allow us to develop additional business models with fintechs, with other banks that we want to explore. So we want to go beyond PSD2, and to embrace -- do what PSD2 is demanding. But go far beyond that and explore all the possibilities that PSD2 is giving us, and we'll do that with this platform that is going to finish installation now during the first quarter of this year.

The fourth point that I mention is that we are also delivering in terms of putting in the market new fintech projects. BANCOVO, it's the first one. It's an example of this. So this is an area where we saw potential in the market. We saw that we could add value to clients. We could add them a tool where they could compare cash loans through various banks, and we go -- this is the first product that we are launching. We want to go beyond that. And so this is something that it's happening. This type of platforms are happening in other type of markets in lodging, in hotels, in traveling. And it hasn't been still present in financial services in Poland. So we want to disrupt that, and we want to bring this service to clients. It's something that's to provide choice to clients, something that we cannot do it alone and, therefore, we created a platform where we invite other banks and cash loan companies to participate, to plug into it and to then give this option, this choice to clients. The goals for BANCOVO in 2020 is to have PLN 2 billion to PLN 3 billion sales, to be the #1 online broker. And this also will allow to significantly increase the commission income for Alior.

Lastly, the fifth point that I would like to mention is Agilor, our resource management model that will allow to deliver all of this and allows to our IT force to work in a more agile way, in a more seamless way to connect with business through tribes. We have already 4 tribes in place. 150 FTEs are working already in this model. And so far the results are very positive in terms of NPS, in terms of time to market, in terms of efficiency of the model. So we want to roll out until the end of next year, 2019.

The target plan is not to have the full Agile model, but to have a hybrid model, where we have Agilor for fast development but also the traditional approach for more complex and multi-system implementation. So again, innovation is at the core of our strategy, and we are deliver -- we are in the program that we announced in October.

[Michal Chyczewski, executive]

Thank you, Bruno. I think, I would like to share one, I guess, important comment related to the implementation of the innovation model. So that's a really big transformation inside of the bank. And until the middle of the year, we will be in the implementation phase, then we need some ramp-up period for this. I guess, the second half of the year will be the ramp-up. And we expect the tangible results in terms of the contribution, mostly to the nonfinancial indicators that we follow. So those that we announce in the Strategy Implementation Plan related to digitalization, to NPS, the contribution of this model will be visible next year in 2020. So we do not expect the effects of the implementation to be linear. We expect to be nonlinear, and we expect those unique things to be brought to the market in terms of the customer experience, in terms of the unique and innovative product offering to materialize through 2019 and 2020. And this year will be about more implementation and stabilizing the process. It's important to understand that this is about engaging both employees and customers in developing innovation. It's about opening the banking in -- within the framework of the Open API and that we are implementing, so building the whole ecosystem around the bank. It requires a bit of time. But definitely, we'll be the most advanced bank in Poland and one of the most advanced banks in Europe, to the best of our knowledge, when this implementation is finished, and when we are successful with the ramp-up.

And we'll be happy to invite you to the opening of our iLab in Spire in -- expected in -- still in the first half of the year, most likely in June. This is under arrangement now, and that would be a very unique place for both internal and external innovators connected to Alior Bank.

So now let's move back to the numbers. So Filip, the floor is yours again. As the conference is getting quite long, then that's why I would suggest we are very brief on this point, and then we jump to the Q&A session.

[Filip Gorczyca, executive]

Sure. Thank you. Okay, so then in terms of the key financials, just maybe 2 comments on the long-term deposits. So on the loans -- overall PLN 5 billion growth and PLN 2.3 billion related to retail and PLN 2.7 billion to corporate, or as we like to call it, the business client segment. In terms of the deposits, PLN 4.5 billion was related to the growth of -- in retail deposits. And of this PLN 4.5 billion, in annual terms, PLN 3 billion is attributable to Konto Lokacyjne, of which PLN 1.7 billion was in Q4 alone.

Then in terms of the loan book, maybe let's skip this slide. And here, quite an important slide. Unfortunately we don't see decimal places here in those figures, because that would be actually more impressive. So what's quite clear is that our Strategy Implementation Plan is already underway, and we already, throughout 2017, successfully changed the portfolio structure. And we're able to grow in the strategic client segment already in line with what we expected and are fully on track to achieve the growth and the target portfolio structure in 2020. So this relates in particular to the small, micro, and also leasing segment. So in terms of the small segment, it's actually grow from 6.6% to 7.1% in the total loan book. Then in terms of the micro companies, it actually grow from 8.1% to 9.4%, and looking at the exact figures. And then in terms of leasing, it's from 0.7% to 3.0% at the end of 2017.

Okay, in terms of deposits, that I already comment on that, so -- commented on that. So the main growth came from retail deposits, especially Konto Lokacyjne. Also, primarily those are current deposits, so changing the mix of current accounts versus term deposit to an even more favorable ratio.

Now in terms of the credit risk ratios, so in terms of the NPL total, so the share in corporate, it's higher than the sector average primarily because of the renewable energy sector. We will -- I will comment on that on the next slide, so maybe let's skip this for now.

In terms of retail, we are pretty much in line with market average, likewise in terms of mortgages. Here we are slightly -- have slightly lower NPL total, and that's primarily, because we don't have any Swiss franc portfolio.

In terms of the coverage ratio, then in terms of the corporate segment, that's again, that's purely an effect of the -- of all the -- so the renewable energy sector. However, that's because those renewable energy sector exposures, all of them are serviced on time so far. So none of them are in an actual default. And also, they are highly collateralized, so this is why the coverage is lower there.

Now in terms of retail, that's actually even higher than the market average. In terms of mortgages, the mortgages that's lower, but that's because of mainly 3 reasons why. It's because the portfolio is quite young, so there is a significantly lower share of exposures that are in this space, so NPLs that are [ invading ] space, so this is one reason for the coverage being lower. Secondly, we have a full default propagation policy. So if we have a default, for example, on the credit card exposure, that propagates to -- it affects also the, let's say, cash flow lower mortgage exposure with the same client, which is not some -- not exactly that same as some of the other banks.

And then last but not least, of course again, the Swiss franc portfolio. So at some -- the banks that have the Swiss franc portfolio, the LTV ratios were -- because of the change in the exchange ratio of the Swiss franc have been -- has skyrocketed or soared significantly upwards. So this is also what causes this -- the coverage ratio to be lower in our case.

In terms of the wind farm exposure, so that's just a summary because there is actually no -- nothing to update you on, nothing significant, well, basically since the communication of our Q2 results. So again, those are 19 wind farm exposures. Around half of them are NPLs. And in total, the loan book -- the loan book that's PLN 1.1 billion gross, and that's roughly 2% of our total loan book. The provisioning at the end of the year, that's PLN 62 million; and along with the IBNR provision, that's around PLN 85 million. And again -- so all exposures are serviced on time, and actually the prices of the green certificates have increased since summer, when we also calculated the provisioning headway when we had this biggest hit in Q2 in terms of the department allowance related to OZE. And also, actually, the farms turned out -- are proving to be more efficient, so they have higher productivity than what's envisaged in the original financial models.

And now as you -- some of you might know, there is actually possible legislation being discussed in the Polish parliament that would have a positive impact on the sector. So that's also worth mentioning.

Okay, maybe let's skip ahead. In terms of the share price, that's -- you are well familiar with that. So the target price in the analyst reports has been lifted quite significantly over the last 6 months. And that's probably mainly attributable to the communication of our Strategy Implementation Plan. And the share price has followed along the same path.

Okay, now maybe the my -- the last comment may be related to the number of -- so our customer base. So as we communicated in Q2, after our Q3 results and Q3 results announcements, we did some housecleaning throughout the year. So we, first of all, changed the definition of what's an active client. Secondly, we actually closed over 150,000 of inactive accounts in Q2, Q3. Now in the housecleaning is done, so it's -- the growth in the number of clients is now fully visible.

In terms of FTE, so we are at over 8.100 at the end of the year, so significantly down. And that's related to the synergy implementation plan throughout the year after the BPH Core merger. Similarly, in terms of the number of branches, so we already completed the branch network optimization after BPH Core merger. We are actually not that far from the levels, which we target for in 2020. So just to remind you, we are assuming around 200 of owned branches in 2020 and 600 of franchise branches, so in total 800 in 2020. So the further decline in the number of branches to 2020 should -- is probably in line with the general change in the number of branches in the entire banking sector.

Okay, so thank you very much. That's all on my side. And...

[Michal Chyczewski, executive]

Thank you, Filip. Still, I would like to come back for a moment to the share price performance. So that was an excellent year for the stock market and for the banks. On the stock market, the index -- the bank index went up by more than 33% year-on-year. Alior's share price went up by 46.7%, and the market consensus on Alior's share price went up by more than 60%. So this is excellent performance, and we are happy to bring this value to our investors.

There were a number of reasons behind this. So first of all, a very successful, highly effective and highly efficient integration with Bank BPH and completion of the synergy implementation project. So actually, that went much better than expected. And very strong current results, and the bank benefited from excellent market conditions in the Polish economy.

Third, improvement of the capital position, I think, and the improvement of the liquidity position. Fourth, for implementation of the new strategy. So these are, I think, 4 most important factors behind the spectacular growth of Alior's share price in 2017 and the increase of the market consensus on Alior's share price.

So this is the end of our presentation. I would propose we move to the Q&A session. So [indiscernible] the floor is yours to manage the Q&A.

[Unknown Executive]

We will take the questions from the physical audience first.

[Unknown Analyst]

[indiscernible] Securities. I would have a question regarding IFRS 9. Because in your financial statement on Page 25, you show that the fully loaded TCR ratio would go down to 13.2% versus 15.2% right now. That would mean 200 basis point drop, while in the presentation, you are showing 115 negative impact. And I'm wondering what is the correct value here.

[Maciej Surdyk, executive]

The financial statement shows the value as here, at the end of 2017. The presentation shows the value in the next years in accordance with the growth of the bank. So both values are correct, but there is the different presentation. Because at the moment, I because the -- according to the new regulation, we will put in the time. So we showed how it influenced these level of this entire run ratio in time.

[Unknown Analyst]

Maybe another question on your 2018 guidance. When I look at it and compare it to the market consensus for 2018, net profit of PLN 800 million. I'm under the impression that the consensus may be a little bit too bullish, and I was wondering what are your thoughts on this.

[Filip Gorczyca, executive]

I guess, obviously, we cannot comment on -- in terms of any profit forecast. So I'm just wondering who -- why would assume that it's too bullish based on our guidance.

[Unknown Analyst]

I mean, the market reaction could also suggest that the market census was afraid of your 2018 forecast so...

[Filip Gorczyca, executive]

No, I mean, nothing has changed in terms of the guidance that we are communicating now compared to the, let's say, plans that we -- were underlying and the financial models that were underlying our Strategy Implementation Plan in October. What changed was actually for deposit in terms of our capital position that -- which we already communicated. But nothing has [indiscernible].

[Michal Chyczewski, executive]

Maybe one thing to point your attention to is -- are the synergies that would materialize this year, and the level of the net profit for 2017. So this is where the focus should go in terms of analyzing the guidance for 2019. But truly, I just look at the market reaction. Now it's surprisingly negative. I -- it would need further analysis to understand why the market reacted negatively today.

[Unknown Analyst]

Okay. [ Mijo, Komercijalna ] bank. I've got some follow-up question on 2018 guidance. I just wanted to ask about net interest margin? From one hand, we are seeing that implementation of the strategy will increase cost of risk. But from the other hand, we see some stable net interest margin. But in my opinion, I don't know, it should be growing due to the sale of the high-yielding products sales. Do you see any potential for the net interest margin still to increase in 2018? Or is it your -- is this guidance conservative one? Or if you could tell us what is behind it? And my second question is actually about -- a bit connected. It is about the deposit growth in the fourth quarter and this pretty significant campaign -- deposit campaign. And I just wanted to ask what triggered it? Do you expect that the cost of funding will arise in 2018, and you just wanted to go ahead of it?

[Filip Gorczyca, executive]

Sure. So first of all as we explained, in terms of ROE, the liquidity does not have any negative effect. So it's only technical effect on the net interest margin, of course. So the first thing. Secondly, we've -- of course, I mean, that might be higher than 4.6%. But currently, the guidance stands at 4.6%. That's the level we feel comfortable with. Now in terms of the growth of retail deposits, please remember that it's much -- it's more expensive to attract the deposits than to -- than keep them, yes. Because then actually, you keep them, you are able to maintain them at a lower cost of finance in -- going forward. So that's also something, which negatively affected the cost of funding in Q4. Because to recover such a huge increase, that -- you simply need to pay for that, yes. So that -- but to keep that, it's much easier, and cost much less. So we now have, let's say, bit of over liquidity. But we are not planning to decrease that, because again, we don't see any reason to do that. The only reason might be to improve net interest margin, but that's obviously not the goal in itself. It would be just a technical improvement because, from the profitability perspective, that's positive. And again, the growth was in our strategically important client segment within retail. So we are actually very happy we -- because we were able to win a large number of new clients, because of the deposit campaign. So that's fully in line with our strategy, so we are happy to continue that actually in 2018 as well.

[Marta Czajkowska-Baldyga, analyst]

Marta Czajkowska, Haitong. I would like to ask about the cost of risk. The fourth quarter, we saw some significant in terms of the quarterly results release of IBNR provisioning. And the first question is, what was it related to? And the second question is, basically we saw here an increase in the level of provisioning that you are guiding for 2018. I just wonder whether this is a conservative guidance. Or we could see some further increase in the provisioning level in 2019?

[Maciej Surdyk, executive]

Okay. So as far as the level of guidance is concerned. This level of guidance is actually in accordance with our strategy. In our provision, we assume that in 2017, we were expected to have 1.8, then 1.9, 1.8, and 1.6 at the 2020. This guidance is guidance, which we, I think, feel comfortable with, what I can say. And we see being fully in line with our strategy, and what we expected. Maybe even this is...

[Marta Czajkowska-Baldyga, analyst]

Okay. And there will soft IBNR provisioning.

[Maciej Surdyk, executive]

Maybe we could follow it after the session, okay, because I have to check.

[Unknown Analyst]

I would like to ask about Slide #10, and cost synergies less revenue dissynergies in 2018 versus 2017. You assumed that in 2018, it'll be almost PLN 300 million, while in 2017, it was PLN 150 million. I should assume that it is PLN 300 million extra, or is the delta of PLN 150 million more in 2018? If I should forecast 2018, how much will they.

[Filip Gorczyca, executive]

Yes, so in terms of the figures in the table you mean, yes?

[Unknown Analyst]

Yes.

[Filip Gorczyca, executive]

Yes. No, so this is just portraying the effects of the items that are shown in the table, yes. So the impact to the [ net income ].

[Unknown Analyst]

But it's cumulative, PLN 300 million is cumulative, so it include the PLN 450 million in 2017, [indiscernible]

[Filip Gorczyca, executive]

No, no, no. That's only the impact for 2018, yes, stand alone, so that's the full impact for 2018. There's nothing cumulated here.

[Unknown Analyst]

Yes, so if you made in the 2017, PLN 500 million net profit, and we should assume cost synergies to go up about PLN 300 million. So we should assume at least about PLN 800 million in 2019?

[Filip Gorczyca, executive]

No, I mean, you should assume that the difference between PLN 299 million, and PLN 92 million, so that's PLN 207 million. If you would like to adjust the net profit in 2017 for the effects of the BPH Core merger, so let say, provide a base for 2018, so you would need to add PLN 207 million to the net profit. And that's, again, excluding the effects of the fair value amortization, which would be -- make the number even higher, yes.

[Kamil Stolarski, analyst]

The next question from my side -- Kamil Stolarski, Pekao Investment Banking, about IFRS 9, because I think you are quite lucky to be able to have this phased-in model. Because otherwise, I think you would not be meeting the minimum requirements. If we include this 203 bps into the capital -- the impact of IFRS 9 of 203 bps into the end-of-the-year capital ratio, that would just a bit above 10%. And my question is, do you have any signs or any comments from KNF that you should do something with the capital? Or are they perfectly fine with this phased-in and it just -- you discuss [indiscernible] [ used ] to.

[Filip Gorczyca, executive]

Well, we're perfectly fine because of -- we are not paying dividends this year or next year. So -- and are not planning to. So because of that, our capital base will actually continue to grow quite significantly despite our high growth. And that's also what we communicated on the 10th of January. So this will more than mitigate, fully offset and much more actually, the effects of IFRS 9. So we don't see a threat -- any threats here, and we have not received any comments from the regulator in this respect.

[Kamil Stolarski, analyst]

My second question would be about this PLN 800 million of cash loan -- of credit cuts and all that stuff that you mentioned in the report that used amortized cost. I wonder what is the sensitivity of capital ratio or the impact of IFRS 9 on -- if you need to change the way you look at those exposures of PLN 800 million?

[Maciej Surdyk, executive]

Actually, it could be positive impact, because in a fair value calculation, we would also take into account the amount of earnings on that portfolio, profitability. And calculation we've done show the -- calculation which has shown that it's slightly positive impact.

[Kamil Stolarski, analyst]

Just a few bps or...

[Maciej Surdyk, executive]

Few bps. Nothing important but very slight.

[Unknown Executive]

Do you have any more questions? Okay.

[Mateusz Krupa, analyst]

Mateusz Krupa, Erste. I've got a question on the fee results, because the structure of it was quite, let's say, variable. [indiscernible] that some positions increased significantly, while others dropped. So my question is about the particular -- the downturn in the particular lines. And I would like you to comment on the sustainability of these changes or of one-off nature of them.

[Filip Gorczyca, executive]

So there was actually a few items were added in terms of the fee and commission income note. So this is what's changed. So some of the -- if you compare that to Q3, so some of the -- so part of certain items have been moved to those, let's say, new line items that were added. So those -- that's the main factor, let's say, explaining those changes. Other than that, there was nothing apart from this one-off that we communicated in -- after Q3, which related to the fee and commission expenses, which related to a settlement with one of the global card operators. But this was on -- in general, apart from that, there were no significant one-offs or nothing that would be worth explaining now after Q4, looking at Q4 alone, yes, compared to Q3.

[Mateusz Krupa, analyst]

Okay. So for example, a change in the bancassurance fees from 21 to almost 30, and a drop in brokerage commissions from 32 to 21, is it only a change due to the change in the presentation?

[Filip Gorczyca, executive]

Yes, mostly so. I would need to look at the exact figure. Those are really small amount. But yes, because if you look at the note, there are actually -- you can compare it to the -- with the one in our Q3 financial statement, some new line items are added. So this is what's changed. And unfortunately, we have not presented because, yes, that's the -- so you won't see the effect on Q3 alone of that, because we have now only 12-month figures. But yes, I mean, we would be happy to provide you these figures, let's say, offline, so no problem, yes, if you're interested. So what would be the effect of this -- addition of those new line items on the Q3 -- in terms of Q3 numbers.

[Mateusz Krupa, analyst]

Sorry for the details, but I'm particularly interested because your bancassurance income increased by almost 50% quarter-on-quarter, and you said that you'll increase your cooperation with [ PZU ]. So I wonder whether this is a sustainable or a new trend or more of a one-off and change in presentation.

[Filip Gorczyca, executive]

Yes, I mean that actually, on the bancassurance side, that is actually partly related to our leasing business, yes.

[Michal Chyczewski, executive]

So maybe to be clear on that, so the insurance is cross-sell with leasing. And that's a rapidly growing part of Alior's portfolio.

[Lukasz Janczak, analyst]

Lukasz Janczak, IPOPEMA Securities. Just wanted to ask whether you see any major risk related to the funds that you sold historically, this doubling investment and recently announced transaction suit. Do you see any major reason to this item?

[Michal Chyczewski, executive]

Well, we -- the bank did a small provision for potential filings related to this case. And that's the part of the already 2017 results, and we are monitoring the risks related to this matter, and we'll be reacting according to the market -- the legal and market developments related to the...

[Unknown Executive]

Operator, do we have any questions from the remote audience.

[Operator]

[Operator Instructions] Our first question is from Anna Marshall, JPMorgan.

[Anna Marshall, analyst]

[Technical Difficulty]

I have a couple of follow-up questions specifically on margins. So can you please walk us through how the impact [indiscernible] development [indiscernible] and also how much of it is related to rate hikes in Poland. And the second question on costs, please. Could you please discuss the drivers behind the expected improvement in the cost income ratio to 44% in 2018. Is it mostly synergies related? And also, regarding synergies, so just to double check, is PLN 381 million definitely the final target or there could be upside?

[Filip Gorczyca, executive]

I'm afraid, I didn't get all of that. But maybe -- so let's start with the end of the question, if I heard that correctly about the synergies. So yes, those are -- as I said, those are final amounts, so there is -- we don't see any upside because that's -- or downside. Those are simply figures that are 100% certain at this stage, basically. Now in terms of the previous questions, I'm afraid I didn't get all of the questions.

[Unknown Executive]

Could you repeat the question? Sorry, we have a bad connection here.

[Anna Marshall, analyst]

Okay, I'll repeat it. Yes, the first time there was an echo. So with the first question on a margin, so could you walk us through in detail, basically, how you expect to get from 4.6% in 2018 to 5.3% by 2020. Are you kind of -- what kind of expectation do you have for 2019? And also, with the 5.3% by 2020, what proportion of that would be attributable to rate hikes? And what exactly, kind of, the measures would be to improve the margin quite dramatically? And the -- my -- the first part of the question on the costs was, basically, what are the drivers behind the decrease in the cost-to-income ratio to 44% in 2018 that you expect? Is this mostly synergies?

[Filip Gorczyca, executive]

So in terms of the net interest margin, so that is actually not 5.3% but 5.1%. This is the level, which we communicated we expect to achieve in 2019.

[Anna Marshall, analyst]

[Technical Difficulty]

I think it was 5.3% in the January announcement.

[Filip Gorczyca, executive]

Yes, but in January what we announced is simply -- we presented the impact of certain factors, the potential impact. But we, rather than in nominal terms, we simply presented the potential impact on the -- in terms of their impact on the KPIs, yes. But we haven't changed the level, which we -- which is in our Strategy Implementation plan, which we expect to achieve in 2019, and that 5.1%, just to be fully clear. In terms of the drivers, so what drives that, that must be the shift towards those micro and SME exposures, where we have a much higher profitability and much higher interest margin. And then this is already occurring and has occurred throughout 2017 in terms of our, let's say, core net interest margin. And we will continue to improve our net interest margin. Now in terms of the cost/income ratio, so there is no one answer to that. So there are a number of reasons why the cost-to-income ratio will continue to decrease. That's a fair sense, for most, that's the growth of our business. So the -- we expect our revenue, our top line to grow simply faster than our cost base. And that's also related to a number of initiatives, for example, related also to automation of certain processes, robotization and so on. So there are a number of reasons. But in terms of the cost base, that's very well planned in our Strategy Implementation Plan. So we are actually quite comfortable with achieving that target.

[Michal Chyczewski, executive]

Maybe a comment because it's about strategy implementation. So the January communication showed the elasticity of our KPIs for certain market developments like interest rate hikes. And the interest rate hikes will be supportive in terms of delivering on the targets. Then in terms of the strategy implementations, then I can say that around 80% of the expected fulfillment of the targets is planned and is under implementation. So altogether, there are around 680 various small and bigger initiatives that the bank has planned. From that 600, around 680, 1/3 is currently under implementation, and the rest is planned to be implemented in the coming quarters. So that's very much under control. And if the interest rate hikes happen like the marketing spikes, then that would be very positive for the levels that would be delivered. And this is what we showed in January.

[Operator]

[Operator Instructions] Dear speakers, you have no audio question for now.

[Unknown Executive]

Questions here. So thank you very much for today's meeting. Thank you.

[Michal Chyczewski, executive]

Thank you. Thank you very much.

[Filip Gorczyca, executive]

Thank you.

[Operator]

Ladies and gentlemen, this concludes our conference call. You may now disconnect.