Alior Bank SA

WSE:ALR

Earnings Call Transcript 2018-Q4

[Operator]

Ladies and gentlemen, welcome to separate and consolidated annual report for 2018. I will now hand you over to your host, Mr. Krzysztof Bachta, CEO. Sir, the floor is yours.

[Krzysztof Bachta, executive]

Good morning and good afternoon. Very nice to see all of you and welcome to our conference call. And as we presented our results today morning, we are open to all questions you might have.

[Operator]

[Operator Instructions] Our first question comes from Alan Webborn, Société Générale.

[Alan Webborn, analyst]

Could you firstly, talk us through what happened in terms of the impairment charge in Q4? And I note that in the presentation, you mentioned an PLN 89 million cost of a -- of one business in -- 1 or 2 in 2018. And I just wanted to know where you were in terms of provisioning Ruch. And I guess related in a way to that, is whether or not, there is a provision for a fine against sort of W invest issue in Q4? And if Ruch isn't done because I understand that negotiations are still going on, and then should we expect that there will be something in the first quarter of '19? And I guess, do we assume that that's included in your cost of risk guidance for the year? So that was the first question. The second question, I guess, would be what do you see as the sort of risks to the margin guidance for 2019 in terms of how do you feel sort of funding costs are going? My impression has been that as you work hard to get more finery retail clients on board, that that's a relatively costly thing to be doing. And I wondered whether you feel that there will be slightly higher funding costs going forward? So that was the second question. And then -- and relating to that, can you just tell us what the progress has been in terms of the number of primary clients as a percentage of total, and what your forecast is to -- where you hope to get to yet by the end of 2019? That would also be helpful. And I guess sort of finally, I believe, you mentioned on the call this morning that you are intending to think about paying a dividend for the 2019 year. And I wondered if you could put that into the context, of where your capital ratios should be for you to be able to do that?

[Krzysztof Bachta, executive]

Okay. So maybe we'll have the questions one by one. As regards the provisioning, the large corporate exposure we mentioned that is close to PLN 90 million in total 2018 results. And this is quite a same use of leasing bond exposure, which is quite often mentioned in the press because this is a press distributor. And given that's -- its current exposure, what we did is we have right now very good coverage of this exposition. So we believe that given the current scenarios we are working on that is the factoring scenario. We believe that if it succeeds, it will be better off than right now and of course, if it's trade us, it will be slightly some new provisions, new provisioning in first or second quarter this year. But having said so, we believe that having all the knowledge that we have, this is let's say, this exposition is for the moment, very well covered. And so it was one of the reasons of provisioning on the risk side. Second reason would be also the fact that we have been looking to our top exposures and during this review of the top exposure, we have also found one customer, where we needed to increase provisioning and basically, this is something that happened in fourth quarter in terms of risk on the Business Customer segment. As regards the co-investments, the second question, we are in dialogue with our regulator. We are expecting the fine in second quarter. We, of course, do not know what would be the size. We are reserved for this -- we have provisioning down for this topic, but of course, it will depend on our discussions with our regulator and going forward, it should be clarified in second quarter of the year. This is it. As regards the second questions on the risk -- to the margin guidance. This is not exactly as you may imagine because looking at our deposit portfolio, we have some term deposits, which are slightly more expensive because we offer on average, close to 2% to new customers, or even higher depending on the term. And the amount we are working on is that if we acquired the customer to the savings account, we pay close to the amount we pay on term deposits in the first period, but after a couple of months, then we have higher retention with new lower rates for this customers than compared to the deposits.

And so at the end of the day, the acquisition cost is connected, first of all, with marketing, and we have pretty the same positives to last year in terms of marketing. And the second issue on the cost of funding, you will not see this acquisition is a major cost because it's very close to what we had in the previous periods in terms of the -- our offer for the coverage. So basically, we do not see the pressure on the cost of funding from -- coming from this side of this acquisition. And regarding the question on primary clients, right now, we have 500,000 primary relations with our clients. So this is less than we want it to be, and this is the area where we'll focus this and next year because we are very happy as we discussed in our presentation with current results and the progress, but still we need more progress. And for this year, we assume to get around -- this is net acquisition of customers, around 70,000 of customers with primary relations. And if you ask me I would be more happy for it to be higher, but we also understand that this is a process that takes time. So for example, we are working with our branches. We are explaining exactly how our segmentation works. We are explaining our 9 segments. Those customers have -- they have very different needs depending on the segment, and they want to hear very different things from our 5 groups at the branch level. So given the fact that we have right now in our offer, our current account, which has exactly, for the moment 10 value-added services where customers can pick and they can choose 2 out of them. It means that our advisers right now have very good tool to adjust the product exactly to the customer needs and so we have seen in the pilot, which was done in one of our region that actually they are able to improve the phase of current accounts and also of the value-added services of around 70% year-on-year basis. So this means that, and we're rolling out the segmentation and tools and whole network this year. So we believe that we have tools and a way to grow further on this development. And as regards paying dividend, if you look at Tier 1 capital ratio, for the moment, right now, the required minimum capital level to be able to pay dividend is 13.25%. And of course, this might change because of the regulator. Right now, we see environment as more stable. So it means that from our perspective, we do not see, let's say, possible changes in current guidance, but of course, this depends also on the macro environment and it asked for us to comment on what the regulator will exactly do. But from our perspective, it means that given our current capital plan, we aim to be able to achieve the level required for the moment, right, to be able to pay the dividend.

[Alan Webborn, analyst]

Okay. Can I just come back on -- so what you're saying about Ruch is that you took PLN 90 million in total provisions in 2018. And you -- there's a possibility if the negotiations that you're currently undergoing don't bear fruit, that there could be more provisions in 2019 but that depends on the results of those negotiations? And -- but is your risk cost guidance for 2019 including the risk of that not happening? Or is it including a good outlook for that particular issue?

[Krzysztof Bachta, executive]

No, if you look at the perspective because total exposure is right now about PLN 155 million including balance sheet and all balance sheet items. And if you look at -- from this perspective, we are right now given our balance sheet exposure, we are close to 100% in terms of provisioning. So our current strategy is that if we are able to restructure and given the fact that we have mortgage on some of the property -- we have property of the customers, we see it as a quite safe level of provisioning. And given the fact that it might increase in the worst-case scenario, this is not significant from our overall because -- overall, let's say, risk budgets because this is normal from time to time that if we get portfolio of corporate customers, they may default from time to time and that's why of course, you had customer win. And having said so, we see this large provisioning. We see it's -- like for 2 reasons. One is, this was quite special, I would say, exposure in terms of how it was managed before. And it means that we simply, given the fact what's the state and what's the profitabilities of the factors in this case that's why we needed to provide for more provisioning.

[Alan Webborn, analyst]

Okay. And as far as the guidance for 2019 goes, given the number of one-off elements that you had in 2018, as you've been restructuring the portfolio, you could make an argument to say that the 1.8% is quite conservative as a target for 2019. I mean where are the elements that you think will be -- perhaps cost you a bit more money this year?

[Krzysztof Bachta, executive]

Okay, I would pass this to Maciej Surdyk, our CRO.

[Maciej Surdyk, executive]

Okay, so the plan for this year is to stabilize the risk -- cost of risk and the level which is quite similar to the result of 2018. However, we would like to slightly reduce the cost of risk for business segment, and for individual clients segment because of high improvement that we noticed over last 2 years in terms of quality of new assets. Our plan is to keep this very good quality. At the same time, to increase our sales with good margins. So the prospects for further improvements in terms of quality of cash loans especially are not so high. That's why we -- our plan is rather to keep the 1.8% of this risk cost for this year than to look for significant improvements in this aspect.

[Alan Webborn, analyst]

Okay, that's very helpful. And one quick last question. The other operating expense line in 4Q was at somewhat higher than the normal run rate. Did that include some provisioning against the W invest fine or were there other one-offs there?

[Tomasz Bilous, executive]

Well, actually -- well, this is Tomasz Bilous, CFO. Actually, this position in the fourth quarter was primarily driven by our review that we made to, let's say, the position of other assets. So I would say, this is kind of clean up and in that position where we made some write-offs and this amounted to overall cost to PLN 25 million. So that's one thing. And majority of that, as far as I know, was included in the fourth quarter. There is also another aspect, which we see throughout the whole year. However, it's difficult right now for me to speculate how much of that was in the fourth quarter directly because we see that we have identified the vindication proceedings and in order to be able to recover more from both the retail clients and corporate clients. And there is also an increase overall, in the whole year of PLN 20 million related to that factor. So there are several items which increased this position.

[Krzysztof Bachta, executive]

We've invest -- we have some -- we recovered in quarter 3 in terms of the fine, we assume from KNF. And it was rather in quarter 3 and quarter 4 as regards this topic.

[Operator]

[Operator Instructions] Our next question from Jovan Sikimic, Raiffeisen.

[Jovan Sikimic, analyst]

I mean I have 2 questions. You mentioned them on your previous call. And it's about the outlook for BFG costs and fees. Can you just repeat what you said there?

[Krzysztof Bachta, executive]

Okay, as regards BFG costs, it's -- it will grow up -- it will grow by close to 25%. We are seeing 24% of the growth. And this translates into, I don't know, the exact number. About PLN 25 million, PLN 28 million.

[Tomasz Bilous, executive]

But this may be -- just to comment. It includes also both the effect of the change in the calculation as initially indicated by BFG, but also this includes some part already related to our increased share in capital deposits because as you can see, we are growing this part of the balance sheet quite dynamically. So of course, our share will be growing. So this includes both these effects, not only the change in calculation.

[Jovan Sikimic, analyst]

Okay. And on fee outlook, I mean, can we expect like fourth quarter kind of good run rate? Or is it kind of a bit elevated due to some seasonal effects?

[Krzysztof Bachta, executive]

No, it's -- to be honest, it depends on like say, 2 factors. There was indeed one one-off in fourth quarter, but we are very likely to grow our, let's say, fee accounts -- fees on accounts and also on other business items. So it means that basically, it's quite good. There is very large pressure on the income from distribution of mutual funds. And this is both on the, let's say, new sales when you changed the way of how it is, let's say, structured. So I suppose you have something which was called a kickback and basically, the market was working in a way that about 2/3 of the management fee income taken by mutual funds. So the management fee was then transferred to distributors. And right now, this model, even the MIFID II was questioned by our regulator. And it's -- right now, we are under transformation to different model of distribution where we will need to take the fees from the customers. So the salesman will not be getting significant kickbacks. They will be lowered. So it means that we are under transformation right now, and we will see the pressure from this part in the coming quarters. So it's very hard to comment exactly because we are under discussions with our mutual funds we were working with.

[Jovan Sikimic, analyst]

Okay. If I may -- last one on -- I think you mentioned something on mid-term guidance as well, which is kind of let's assume old guidance for 2020, right, in the morning? What's now your view on interest rate level in Poland, let's say, for -- I mean 2019 is more or less obvious but 2020, do you expect less rates or new hikes?

[Krzysztof Bachta, executive]

So it's quite, I would say, hard to comment right now because I would say, our basic scenario is that there will be no increases in the -- we do not expect any increases done by the National Bank of Poland. But recently, we have seen that there are let's say, governing party announced quite a significant given the size of the budget, so about PLN 20 billion even high -- higher than PLN 20 billion of the stimulus of asset transfer. So this could put a little pressure on the National Bank of Poland if we see CPI growing. It's very hard to comment at the moment because the previous effect of the stimulus were not transferred into CPI. So if you ask my private opinion, I would say, it will not translate into growing CPI and even though, if it grows, we do not assume increases given the, let's say, moment in the cycle we are right now.

[Jovan Sikimic, analyst]

And so this kind of ROE of I think 14% assumes also kind of flat rate environment, right?

[Krzysztof Bachta, executive]

Yes. For the moment, yes.

[Jovan Sikimic, analyst]

And small dividend payment I would mention, right?

[Krzysztof Bachta, executive]

I wouldn't comment on this specifically right now because this is something we will comment later on this year

[Operator]

[Operator Instructions] We have no other question at this moment. Dear speakers, back to you for the conclusion.

[Krzysztof Bachta, executive]

Well, okay. So thank you very much for the questions and we'll be happy to see you in the coming events and also with the next teleconference call, with next results in May. So thank you very much.

[Maciej Surdyk, executive]

Thank you.

[Tomasz Bilous, executive]

Thank you.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participating. You may now disconnect.