Alpha Bank A.E. ADR (OTCPK:ALBKY) Q2 2014 Earnings Conference Call August 28, 2014 11:00 AM ET
Demetrios Mantzounis - CEO
Michael Massourakis - Chief Economist
Vassilios Psaltis - CFO
Rohit Nigam - JPMorgan
Olga Veselova – Bank of America Merrill Lynch
Kiri Vijayarajah - Barclays
Marta Romero - KBW
Cyril Meilland - Kepler Cheuvreux
Kalim Aziz - Armajaro Asset Management
Welcome and thank you for joining Alpha Bank’s first half 2014 financial results. (Operator Instructions). At this time I will turn the conference over to Alpha Bank management. Gentlemen please go ahead.
Good evening ladies and gentlemen, welcome to the Alpha Bank’s first half 2014 results presentation. One is General Managers, our Chief Operating Officer with me and Mr. Vassilios Psaltis, General Manager and CFO and Mr. Michael Massourakis, our Chief Economist. We will begin with some key highlights of the second quarter which you can find on page four, in the Greek economy the positive momentum is maintained. We expect the growth to be positive between 1.5% and 2% in the second half of ’14. While at the same time over performance in fiscal targets will further support the confidence in the recovery story in the Greek economy. These trends are fully supported of our efforts to improve asset quality and contain non-performing loans and this is already reflected in our numbers.
Our operating performance continues to build up towards the restructuring of our profitability. Our pre-provision income for the first half of the year has more than doubled compared to the previous year to €517 million driven by the rapid de-escalation of the funding cost and high cost efficiency. Our cost income ratio for the respected period has improved by almost 20 percentage points.
CET-1 ratio increased to 16.3% strengthening further our capital position in view of the ongoing comprehensive assessment and likewise our tangible equities through the €8.6 billion, was 1.8 billion higher year-on-year. In the second quarter we have seen a number of significant developments which have improved our financial and competitive position. The bank look first --- recapitalize markets and rate capital aligning also through the repayment of the state aid through the redemption of preference shares. Alpha Bank after many years return to the debt market with a successful issuance of €500 million three year bond, more than yielded 3.5% which was tied among peers.
Our improved funding position resulted in a further reduction of Eurosystem Funding alliance and the elimination of ELA funding. And in April we were the first bank to repay state aid with the redemption of Hellenic Republic’s preference shares to a total amount of 940 million.
On the commercial front we have sent through an agreement with Citibank to acquire it's Greek retail banking business which includes Bank of Greece. Through this transaction Alpha Bank is looking forward to capitalizing on Citi’s expertise in wealth management and to further complement the strong asset gathering position especially with affluent customers.
Last point on July 9th, the European Commission approved of our bank’s restructuring plan, we see this approval as a positive step towards the full restoration of Alpha Bank’s privately owned status.
And we now move on with the presentation, starting with the economic developments and Michael Massourakis, our Chief Economist will take us through that.
Good afternoon everybody and good morning especially to the people from the states. The key message that I want to convey this time around is that the recovery of economic activities is in a sustainable path with GDP growth reaching 1.5% to 2% in the second half of this year from minus 0.6% in the first half. Actually what is very important to keep in mind is that according to our own seasonally adjusted figures the second quarter is the first one after a very long time to register quarter-on-quarter positive growth. The recovery process as you know is confident and independent with an increase in primary budget surplus acting as an anchor. Indeed confidence has been strengthened substantially.
In the beginning of the year we have witnessed an inflow of household deposits into the banking sector. A redemption of inflows shipping through the balance of payments and a surge in foreign direct investments reaching almost 1 billion in the first half of the year from around 256 million last year in the same period supported as well by rise influence for real estate investment.
At better than expected primary budget surplus of more than 2 percentage points of GDP is now in the cards afforded by a surge in income tax revenue and better than planned reduction in primary current spending. Since that persistent consolidation efforts in the past few years are now generating substantial dividend in terms of further fiscal consolidation. The other positive element I want to comment is of course export performance. Export performance seems to be improving. In the first half of the year tourism revenue speared ahead with an increase of 13.4%.
Shipping revenue grew by about 7.8%, other export services beyond tourism and shipping which is mainly construction and software companies doing business abroad increased by 28.5% and finally exports of non-oil goods by 4.3%.
At the same times imports of ships is taking place with imports excluding oil and ships remain stagnant. Actually with respect to the imports of ships I’ve to make a comment because we have seen import of ships sky rocketing to 1.9 billion in the first half of 2014 from around half that amount last year in the same period subtracting 0.6 percentage points from GDP growth. Actually with this surge in imports of ships growth would be positive from the first half of the year. Of course import of ships is very important because it bodes well for shipping revenue down the road as this will be put into our business.
The key constraining factor also that if you like is of certain concern is that residential investments continue to be strongly negative. We had a decline of 42% in the first quarter of this year and this 42% reduction subtracted about 1.3 percentage points from GDP growth.
So, I’m saying that you can understand that it's very important for the recovery of the Greek economy to see a recovery in the residential investments area.
The recovery of the center remarks key for future growth. Real estate prices are expected to stabilize over 2015 - 2016 before starting to rise again and after having dropped by almost 40% since their peak in 2008. We recently adopted system for property taxation seems to be counterproductive for the health of the sector and we believe that it needs urgently to be revised for growth projects to materialize in the future. Finally I want to close my comments by reference to political risk. Although political risk has been less than following European election results. It continues to be conditioned by the prospect of falling national election in the event that the current parliament will not be able to elect a new President of the Republic. However most political analyst discount at this point any delay of the current economic policy due to the lack of absolute majority government formed by the main opposition party in the event that we have a winning streak of the opposition. So basically things are moving in the right direction in France and we’re confident that this process will continue as long as the government maintains the course and we have no doubt that this will be the case.
Thank you. Now I will pass the floor to Demetrios.
We can now turn to page 6, we can go through some highlights of our balance sheet and P&L of this year. As you can see on the left total assets stood at €71.7 billion, loans reached €50.1 billion net of cumulated provisions of €12.1 billion.
Customer deposits stood at 42.2 billion and our net loans to deposits ratio further improved 119% which recomposes to a 114% for Greece or 112% for Greece which will be for the acquisition for Citi’s Greek operations.
Regarding the Eurosystem Funding, it further decreased as a percentage of assets 14% from 20% of the beginning of the year indicating net reliance Eurosystem and expensive sources of funding such as the ELA was. Shareholder equity reached €8.8 billion and our tangible equity 8.6 billion increased by €1.8 billion year-on-year which translates to a tangible book value per share from $0.06 to $0.07. The common equity CET-I ratio now stand at 16.3% taking us into account of repayment of preference shares in April. In regards to our operating performance on the right hand of the slide you can see that our pre-provision income excluding trading and extra-ordinary costs stood at 517 million having increased more than 100% compared to the same period in ’14.
This substantial improved is attributed mainly to our core revenues which was boasted by declining funding costs and also by further efficiency gains on the cost side.
In the asset quality front our group NPL ratios stood at 33.6%, well our coverage increased further to 58% and accumulated provisions stood at 19% of total gross loans at the end of the quarter and with this overall summary I pass it Vassilios Psaltis, our CFO to guide us into more details through the second quarter results.
Now turning to page 7, you can see an overview of our capital position. On the upper left chart you can see the common equity Tier 1 ratio folding up. Following our capital increase, the repayment of the Hellenic Republic preference shares, our core equity Tier 1 ratios stands at 8.8 billion or 16.3%. During the second quarter of 2014 the Euro amount of capital increased by more than 300 million mainly due to the recognition of certain additional deferred assets of 422 million on the back of an improved recoverability outlook as per our improved restructuring plan.
Our Tier 1 was marginally affected by the operational results for the quarter. The leverage ratio of the 11.8% according to CRD IV based on the Tier 1 capital dividend by the sum of total assets and among other things also of balance sheet events. This highlights the strong potential to leverage Alpha Bank’s balance sheet once the Greek economy stabilizes.
Our risk weighted assets amounted to 54.1 billion at the end of June which is down 4.1% or effectively 4.1 billion quarter-on-quarter representing 108% of net loans. In the bottom left towards the fall [ph] you can see the bridge between the ordinary equity and our total regulatory capital. Here it is worth highlighting, the bank’s tangible equity of 8.6 billion that translates on almost one on one basis to core equity Tier 1 given the absence of any minorities.
Moving on to page 8, you can see that the recurring pre-provision income continues to build up increasing 7% q-o-q due to higher net interest income and fees.
On an annual basis we have seen our core income increasing by 24% and the recurring expenses coming down by more than 5%. On fee and commission income line there is good diversity and strong performance decreased by 11% year-over-year as a result of increased transactions and a pickup fees from asset management. In the second quarter fees were down by 4.7% q-o-q to €99.7 million primarily due to rise in fees from credit costs as well as higher fees on the restructured syndicated loans. These positive development in operating profitability is mentioned in the lower part of the slides. There you can see that we have succeeded in improving our cost to income ratio significantly and on the other hand we’re firmly in a breakeven point trajectory as cost of risk is deescalating and our pre-provision income continues improving.
Let’s now move on to the next phase where we can see details of the building blocks of our core revenues on an annualized basis. I think here on the top left hand side of the page you can see net interest income it has mainly been positively affected by the depository pricing and the wholesale lending cost.
This constitutes overcome the balance of pressure from the loan deleveraging on the one hand and the lower income from bonds on the other hand. On the deposits front we’re now entering a fresh phase of repricing until time deposit rates converge to average rate in the Eurozone area.
We do continue the pricing deposits with a delta of 50 basis points between maturing and renewed balances. If we manage to continue at the same pace we estimate that the average yield of the book increase will fall below the 2% threshold in the first quarter of 2015 which effectively will front load our restructuring income targets.
In another report maintained [ph] for the quarter is the substantial bond funding cost which has been decreasing gradually throughout 2013 and the first half of 2014 on about a lower volumes, lower refinancing rates and different mix between ECB and ELA funding. This cost includes the cost of obtaining government guarantees of 1%.
Turning now to page 10, you can see that regarding the funding cost components the net interest expense relating to the deposits constantly decreasing from quarter-to-quarter reaching 110 million compared to as much as 188 million one year back or 137 million in Q4, 2013.
This improvement in net interest income which has followed prevailing trends of previous quarter comes mainly from the continued reprising of time deposits resulting in an improved all in deposits of 101 basis points versus a 169 basis points one year back. In addition to the improvement in time deposits, there has also been improvement on savings deposits which now posed a positive contribution.
Moving on to page 11, here you can have a look at how loan volumes at first year-on-year. We see that there has been a decrease in our net loan balances of more than 3 billion year-on-year or more than €4.6 billion quarter-on-quarter on a net basis. Deleveraging has continued but at the lower base. Consequently the net interest margin from loans have been reduced by 8 million not taking into account the positive challenging effect to €575 million while the reduction in the second quarter is at the lower base compared to the previous one.
The net interest income from loans is mainly affected by lower volumes as well as to a lower expenses from spreads which have now reached the levels of 448 basis points. All-in-all the ongoing repricing of new time deposit rates and the anticipated releveraging of the balance sheet towards the end of the year will further benefit our net interest income and our net interest margin which currently stands at 2.7%.
Flipping to page 12, you can see that operating expenses have decreased 5.3% year-on-year on a comparable basis and this has been mainly driven from the reduction in staff expenses by 8.8% year-over-year attributed to the phasing in of the new collective labor agreement further initiatives on the remuneration policies as well as by head count attrition.
General expenses excluding remedial management expenses were down 6% year-on-year due to the synergy realization in IT and telecoms, products and property related expenses.
Ahead of us we still have the loans of our voluntary retirement scheme which will further enhance the realization of cost synergies and also contributes to the headcount reduction. This will have a marginally positive contribution in 2014 operating expenses with the full phased effect to come in 2015. Downsizing of the platform continues in both Greece and South Eastern Europe with a total number of branches now reaching 1042 branches which is down 14% on a year-over-year basis.
Now moving on to assets quality on page 13, you can see that the based on the data from the last 12 months we see a decelerating NPL formation with the peak of the NPLs coming the next few quarters. Indeed the last 12 quarter formation on the group level declined by impressive 84% compared to the last 12 months formation one year ago. In mortgages loans we experienced the third consecutive quarter of negative formation. Business loans, NPLs on the other hand have continued to add but a reduced base turning the group level to an NPL increase.
The ratio stands at 33.6% of the group level with non-performing business loan on a similar level and while the ratio for consumer loans is at 44% and the ratio for mortgages is lower at 29.7% as of end of the second quarter.
Turning on to page 14, there you can see that we have continued building up coverage of our NPLs. Despite the decrease in the quarterly charge since last year the level of impairment has increased coverage from 64% to 66% and at the end of this quarter 58%.
Total coverage remains well over 100%, this is one collaterals of taking into account. From segment point of view you can see that we have 67% of business loan of 33% for mortgages and 75% on consumers. On a regional basis we have a slightly higher cash coverage on our international operations.
Turning to the funding points on page 15, market conditions in the second quarter have significantly improved for the Group banks and this has allowed us to continue diversifying our liquidity profile which we will present on page 16. Firstly on the deposit fund, Alpha Bank managed to increase it's customer deposit increase by 0.8 billion quarter-on-quarter and that excludes the deposits which makes a third of the additions in the Greek market in the respected periods.
We have also had positive deposit trends in our operations in Cyprus but also elsewhere in the Balkans. As a result our loan to deposit ratio decreased further reaching our 119% for the group and 114% for Greece. The acquisition of Citi Retail operations will have a positive impact of another 2 percentage points in the loan to deposit ratio in Greece and bring it down to 112%.
All in all our funding mix continues to strengthen, with about 2/3rd of our liabilities being funded by deposits while Eurosystem reliance is steadily decreasing and accounting for 14% of our total assets. On page 16, you can see the evolution of Eurosystem funding which has dropped to €13.2 billion in the second quarter or if you exclude the ECB [ph] funds to 9.4 billion.
Since May 2014 we have no more reliance on the emergence and liquidity of systems facility line. As mentioned before Alpha Bank has successful profited market issuing a 500 million tickets which was 3 year and with all-in year of 3.5%, the tightest among peer growth. Moreover Alpha Bank has placed repo transaction with it's covered bond providing diversification in funding structure.
Looking forward we continue to diversify our sources of funding or shipping securitization transaction which we have already announced and expect to close before year-end.
Finally with regards to the TLTRO, Alpha Bank is eligible to participate for an amount of upto €1.8 billion. We feel that the end of the year where the demand for credit should start to pick up together with a positive signs in the GDP. It would be more appropriate to explore this option. Therefore there is no rush at this point in time to participate since the new disposals are only few.
And with these comments I will pass the floor to Demetrios Mantzounis to continue talking us through the strategic national of the Citi transaction and the implications around our restructuring plan.
Thank you Vassilios. In June, again we went through an agreement with Citibank for the acquisition of their Retail Banking business operations which includes Diners Club of Greece. The acquired operation comprises of wealth management unit with customers assets under management of 2.1 billion including deposits of 1 billion and net loans of 0.4 billion as well as the retail net worth of 20 branches serving 480,000 customers. This further enhances Alpha Bank’s status as a leading financial institution in Greece and indeed the bank of choice for Greek affluent customers well it also marks another important milestone in the implementation of it's growth.
The transaction will improve the bank’s liquidity position while it's contributes from year one to our pre-provision income. We expect this net income contribution for Synergies in two years will amount to €50 million. Finally on that we expect the completion of the transaction within the first quarter this year following the receipt applicable regulatory approvals.
A brief comment on restructuring plans which was approved by the European Commission on the 9th of July. We may remind everybody at this point that all Greek’s standard banks being receipt on state aid had to submit and get approvals from CG Comp on the restructuring plans and then under these plans banks commit to the profitability levels and undertake certain shares and measures which should be commensurate with the level of state aid received.
Alpha Bank has been restructuring it's balance sheet well ahead of any regulatory commitments since 2010. Our focus was on many fronts, such reducing cost through the right sizing of our platform in Greece in South Eastern Europe. Reducing reliance on Eurosystem Funding. Optimizing the balance sheet of South East European subsidiaries. Disposing of non-core assets and of course managing asset quality. This add for the balance has been really acknowledging the approved discussion of plan which effectively reflects it's continuation which is now validated by a European authority. Under the five year plan we commit to bring further cost efficiencies and improve net interest margin on the back of reduced consolidated funding and balance sheet leveraging in Greece.
The plan provided for the normalization of cost that are the pre-crisis levels and targets capital returns well beyond the cost of capital.
As well as the burden share is concerned, this centers around the disposal of a couple of non-core assets in Greece and some selective deleveraging of assets.
The latter [ph] amounts to around 5% of group assets during the respective period focusing on portfolios and geographies with a marginal contribution to our profitability. We have been shipping to the least amount of state aid among Greek banks. We have been well positioned in the discussions with Brussels to support our restructuring proposal which are now fully embedded in the plan. And we will close this presentation by a few words on the ongoing AQR test.
Let us highlight some common characteristics of both exercises that we have recently gone through either one run on behalf of our central bank and the one currently run by the ECB. And the common characteristics the magnitude of both exercises were by a large portion of retail and wholesale portfolio were under review. They have both decent areas, the base and the adverse case, it's same target ratios and similar macro-economic consumptions and time horizon. However with a much better starting position for Alpha Bank under the comprehensive assessment that we’re undergoing currently from ECB in terms both of capital and on balance sheet positions. Under the Bank of Greece Stress Test our capital is under the base and adverse scenario, we’re the lowest among the peer groups and we have been fully covered by the 1.2 billion capital increase.
Also the difference between the base and adverse scenario amounted to an additional 300 million capital charge which now is the evidence of the level of stress that we have endured in the base case of the scenario.
On the bottom section we calculate the implied capital buffer or excess capital compared to the minimum requirements that by the AQR’s test under both scenarios. The resulting capital buffer ranges between 4.4 billion and 5.8 billion under the base and adverse case respectively which put us into a confident position to face the ECB diagnostic exercise.
On page 23, just a reminder of the strict criteria that were used by the bank of Greece which resulted in Alpha Bank fairing exceptionally well ahead of it's group peers just five months ago. The credit loss projections under which the capital needs were derived were estimated after the application of Bank of Greece prudential centers and for the case of Alpha Bank actually as you can see on the relevant page we are the only bank out of the four which ultimately Bank of Greece numbers were effectively based on it's most restrictive scenario which resembles the life-time adverse scenario of BlackRock.
We remind that BlackRock to exercise and entail a very large credit file review, conservative assumptions on PDs, LGDs including significant haircuts applied on real estate collaterals and with that I would like to close our presentation and open up the floor for questions.
(Operator Instructions). The first question comes from the line of Mr. Nigam Rohit of JPMorgan. Please go ahead.
Rohit Nigam – JPMorgan
Just a few questions from my side, the first one on the margins just wanted to get your view as to how do you see the evolution going from or what do you think are the driving factors from the current margin levels to 3.3% you sort of illustrate in your restructuring plans. Have you factored some increase in interest rates in that -- while coming to those figures? And just on the NII front, we’re seeing that on the loan front in particular you’re facing some pressure both on the leveraging and due to declining loan spreads. So just your views on that front would be helpful.
And second question on the restructuring plan, just in the context of the upcoming stress test. So would it be included in the stress test or would it be more sort of mostly used as an sort of offsetting capital measures after the stress test have been done on a static balance sheet on December 2013, that’s the second question.
And just one last question on what are your views on -- the IMF recommends that additional capital might be required under the adverse scenario for the Greek banks. These are the three questions. Thank you.
One by one to your question starting on with your question about the key drivers around the expansion and net interest income as it's depicted in the relevant point around the restructuring plans. Clearly what we see in coming over the next few quarters and years, it is a continuation of existing trends with an addition of one important one which is that releveraging effect.
So releveraging effect which we expect to start towards fourth quarter this year and the first quarter of next year in the form of stopping the deleveraging. We expect that it will be over the years to come a key contributor especially having endured six years of recession increase and a liquidity position in both the corporate and the individual sector that has been quite harsh during the Europe’s and subsequently as I said the recession. So these are the key drivers. Rationalization of the cost on the deposit sides, the releveraging on the asset side, these are the things that will drive net interest margin going forward.
In particular on the short term you point out about the developments around the loan contribution into net interest income and in particular about the asset spreads. Our view is that the asset spreads as we have repeatedly said this has been the one key achievement for the Greek banks during the crisis that we have managed to reprice the whole asset size much higher during the crisis not just by expanding the asset spreads but also -- as Alpha Bank is concerned waiting on more collateral.
So we’re starting now going into the next phase really from a historical high point of view therefore what we do expect to happen as the portfolio [ph] gradually deleverage is its going to be a normalization in the assets spreads. The current trends that we’re experiencing which isn't that you know about a dozen basis points over the last 3 to 4 quarters are all being -- is merely the fact of restructuring that are taking place and not really new disbursements. The new disbursements we don’t expect to start as a significantly different point where the back book if anything the first wave it's potentially going to be also marginally higher.
As far as the releveraging is concerned that is going to be on the one hand through new disbursements but a bit later on during the process hand in hand with the development in the economy and our efforts to restructure our book. We’re looking forward to seeing also the NPLs coming also back into performing status which again will help out expanding the parameter where we can accrue interest, so that itself will be a further contributor towards the net interest income.
Your second question around the restructuring plan and how this maybe used in the comprehensive assessment and in the stress test in particular. Our understanding is the following, the calculation of the capital needs is indeed going to happen only on the basis of the static balance sheet, something that the Greek banks have voiced this agreement with that because effectively they are taking the picture in a point in time which is the worse possible one and not taking into account the proper dynamics of the Greek economy which the Directorate of General of Competition itself has taken into account by improving the restructuring plan.
The reason that the restructuring plans could not be taken at a sole base of calculating the capital needs was a ruling that allowed only for restructuring plans that were approved at the end of 2013 and not for those that were approved as in the case of the Greek banks after that.
However acknowledging our arguments, the ECB has allowed us to do effectively submission also of a dynamic model which is based on our restructuring plan. Our restructuring plan will be stress tested and the outcome of that will be disclosed therefore you will get disclosed two numbers, one under the static balance sheet approach and one under the dynamic balance sheet approach where our restructuring plan is going to be taken on board. What we don’t know yet and this is something that the Greek banks still pushing ahead because we feel that this is fair for us is that the outcome of the dynamic and in order to be more precise it's different than the individual -- static is going to be taken on board in the form of a mitigating action, therefore, acknowledging the fact that the Greek banks will have a different revenue profile comparing to the average European banks which is a mere factor of the markets that we’re operating.
Finally on your point about the IMF, the IMF if we understood it correctly it made a point that at that point in time a previous Bank of Greece instigated this, they wanted to see another 6 billion whereby the claims that the 4 billion was because we were assessed under the base case scenario whilst the another 2 billion on the basis that the Q rates, the BlackRock took into account were mild in that view.
I think the Bank of Greece has already answered the first point that the 4 billion should not be looked at in the sense that it has embarked from the BlackRock numbers and it has put additional regulatory filters which effectively resemble the BlackRock lifetime, not 3.5 year but lifetime losses whereby Alpha Bank was on the adverse case and the rest of the bank on the base case but clearly it is much, much different to have the 3.5 and -- of the lifetime and that’s why we feel the first point is not legitimate one.
The second point around the Q rates, what we can tell you is that the BlackRock, the methodology it has used in order to assess the Q rate is that it has looked at a wider point in time. It has looked over five years of performance that we had therefore not just the worst part in the cycle between 2012 and 2013 but rather expanding the scope and also it has used the CFR, the credit file reviews in order to underpin, in order to validate it's statistical model. It's not just simple number that they have provided there was quite some work on that. Now if the IMF is of a different view, obviously, that is something only time will tell.
Rohit Nigam – JPMorgan
So the stress test, results will be based on the static balance sheet -- for you both on static and dynamic but whatever capital let’s say if you’ve a capital shortfall on the static model you would be allowed to show measures coming up from your restructuring plan as capital measures against that shortfall right?
No, what I said is that the number -- any capital GAAP number will be calculated solely on the static. On the dynamic there will be a disclosure but we have not yet confirmed that it will be taken also into account as a mitigating measure.
The next question comes from the line of Ms. Veselova Olga of Bank of America. Please go ahead.
Olga Veselova - Bank of America Merrill Lynch
I’ve several questions, one question is about your restructured loans. I see that the volume of restructured loans has increased slightly quarter-over-quarter, can you possibly give us an update what is the coverage of this restructured loan and what usually portion of loans fall NPL and what becomes good working loans in future?
And also as a part of this question I see in ECB stress test assumptions that they will take into account forbearance loan. So for Alpha Bank, how should we forbearance versus the reported restructured number? Are these similar numbers or not?
I think you hit it on the nail because the ECB one of the key things that it wants to achieve is that out of this diagnostic and in particular the AQR there will be a common methodology in assessing the loans. Currently apart from the NPL definition which are the 90 days past due which is an IFRS definition therefore banks have common grounds across Europe. All the other terms that you see and in particularly the impaired loans is not common.
Therefore, the AQR exercise will come and together with measures and the definition that EBA has given starting with a simplified EBA definition. You will see that in the results presentation effectively you will start having common grounds and until the banks report sure EBA compliant NPE numbers by the end of the year over the next couple of quarters that will significantly clear the air. And I’m making that in particular because not all banks are including the same thing. I mean we have seen analysis that various of you – that you’ve have presented and it was very evident that the starting point of any of the Greek banks was completely different.
Therefore we pretty much appreciate that we will have that clarity. Now I think coming that from an Alpha Bank which you’ve seen it's much more conservative in taking impairment in the wider part of the book. You appreciate that we’re telling that with confidence. Now moving onto the restructured loans, for example in our restructured loans we are including loans that are fully performing. So the bulk of within that number are fully performing loans which you can argue that these are high risk, IBNRs [ph] for example and as far as that performance is concerned the fact that they are slightly up shouldn’t really be something of concern or really to point out in the sense that there is quite a bit of movement within that portfolio as we have said that our key goal is to restructure as much as we can because of this is the way to furnish our customers with some terms that are compliant with the new economic environment that they are in and hopefully turn them conclusively into a status that is going to be solvent. Therefore, the Q rate that we see within the book is roughly 50% or 50% to make it and they do come into fold the performing status and another 50% may go over 90 days past due and there may need to be restructured if that is possible from our assessment.
Olga Veselova - Bank of America Merrill Lynch
And do you’ve in front of you what is the coverage of restructured loans by provisions and possibly by collateral if --
Well the overall coverage that we have is close to a 100% where the cash coverage of that is in the tune of 14%.
Olga Veselova - Bank of America Merrill Lynch
14? 14. Thank you. My other question is about the disclosure of your restructuring plan and of course thank you very much for this slide. Can you give us more understanding what happens if you miss the target which you mentioned on this slide, ROE, net interest margin, loan to deposit ratio. How will it happen? How will you follow this plan?
Thank you for asking that question because it really begged some clarification. The restructuring plan is effectively the framework within which the Directorate of General of Competition depicts specific points which are the so called commitments. Therefore the -- we are legally bound to follow not the restructuring plan per say which is a wide framework but rather the specific commitments that we’re undertaking. And it's not going to be too long before there will be a former disclosure from the Directorate of General of Competition where this 12 commitment that we have undertaken will be stated. There you will see that these are specific points. A lot of them are of financial background but it does not mean that we will have repercussions if we miss the net interest margin, but we will have repercussions if we don’t comply with the specific commitments that we have undertaken.
Olga Veselova - Bank of America Merrill Lynch
And my last question is about potential swap of DTA into DTC. What do you think is likelihood of this scenario? Do you see your discussions in the corridors of the government or ministries or it is at this stage only speculations in media? And if you see a likelihood that this may happen, have you made estimates what part of DTA can be swapped into DTC?
Well first of turning a deferred tax asset into a deferred tax credit is something that we’ve seen happening elsewhere in the southern part of Europe. And this is something that it has properly gone through the relevant of all this in order to be assessed and approved. In order to get also from a regulatory point of view for capital treatment.
In the case of Greece, this is a discussion that it has happened also a couple of years back and now it has gained some new impetus. The Ministry of Finance is obviously the one driving the discussions and not the banks. From a banking point of view obviously we can only hope that this would materialize and we feel that in case this happens it's not going to be just a decision of the Greek government, a lot of stakeholders would need to sign it off including the EBA. So, in case we have a positive development there, essentially what will happen it's going to be a two-fold positive boast for the capital position of the Greek banks.
The first is that we feel that from an investor point of view there wouldn’t be any question around the amortization and therefore you will have the DTA in the form of DTC as a solid block and the second point is also that we may have some marginal boast in as a mitigating measure in the stress test in the form that two of the amortization periods may lapse and that could count as a mitigating measure.
Olga Veselova - Bank of America Merrill Lynch
And do you think that all DTA can be part of this non-amortization and the increase of the capital for the purpose of ECB or only PSI related DTA?
Well let’s look at this way, we see no reason why it shouldn’t be in full but at the same time we don’t have an insight to the developments in order to make an insightful comment.
The next question comes from the line of Kiri Vijayarajah of Barclays. Please go ahead.
Kiri Vijayarajah - Barclays
Just a question on your ECB collateral, particularly those pillar two bonds. What are your plans for replacing that next year when they're not longer eligible? Because I note it doesn't seem to be falling very fast, so I think you outlined a few things on the right, in the gray box, but just what are your plans for next year on the collateral pool? And related to that, I'm just curious why the restructuring plan isn't pushing you to improve your loan-to-deposit ratio, because from what I can see you're already at the target there. And I guess, implicitly, why isn't the restructuring plan pushing you to reduce your ECB reliance faster? Because you do seem to be relying on it more than some of your peers. Thanks.
Let me come to both your question starting on with probably the second one, I think on the restructuring plan as a key point one needs to acknowledge that Alpha Bank is coming to this discussion with a significant distance in terms of proportionality as we have taken significantly less state aid compared to the rest of the pack. Therefore that has been reflected in the way that the commitments have been structured. In terms of the loan-to-deposit ratio, Alpha Bank given the structure of it's asset size has always worked with a loan-to-deposit ratio around a 120% and given our role in order to promote credit to the corporate sector in the Greek economy, this is something that wasn’t question by the commission if anything they have given us as you can see in the respected commitment. They have given us leeway to manage to have enough time to manage our balance sheet.
Now we have been as you appreciate -- as appreciate by your comment fast enough, you know to get to a point where we already have gone a long way below that and we maintain the flexibility to significantly releverage the balance sheet.
On the ECB, it's exactly the same. It's not an idea to push us or any of the Greek banks out of the ECB faster. It is rather to have enough time to adjust the balance sheet that has gone through a significant stress through the deposits flowing out of the country because that is the key problem as well as the deposits being eaten up by recession, that is what the caused the problem and in acknowledge for that a longer period of adjustment has been taken into account in the respective restructuring plan.
Now about your comments that we may draw currently more ECBs enhancing as other Greek banks, this is a bit off fix in the sense that we all have the same nature of collateral, indeed other banks that have taken much more state aid, they have more EFSF bonds but we were lucky not to get that much. So if you want -- it will actually be problem for us.
On the pillar two, you’re right in pointing out that there is a specific time frame work where the Greek banks have been asked to exit that particular collateral instrument and replenish it with something else. As you appreciate their from an ECB funding point of view eligible collaterals found [ph] any other. So there isn't too much we can do, each of the situation remains like that. On the other hand we see or actually we don’t see but we understand that there maybe be additional initiatives around the asset backed space from the ECB, and there the Greek banks having more than 10 billion in covered bond amongst them and also other securitized paper, we could only hope that the glass ceiling of the sovereign would be breached and we were allowed to use that in order to continue drawing ECB funding through a different means. If nothing changes then we will continue down the path that we have already instigate which effectively comprises of number one diversifying the counter parts in terms of repo activity.
Number two, in tapping further the senior markets with targeted issues and finally we do expect that the dynamics of our commercial books for another couple of quarters will be such that it will be allow for a reduction on the ECB drawing space.
The next question comes from the line of Marta Romero of KBW. Please go ahead.
Marta Romero - KBW
Following up on the previous question, could you be a little bit more specific on your commitment to reduce ECB exposure in terms of total percentage of your balance sheet? That would be my first question. And then, regarding capital, could you help us with the fully loaded definition regarding to Tier 1 as of this quarter? Yes, and then I'll follow-up with a few more, if you don't mind.
Well in terms of the commitment towards the ECB, let me be clear on that, it is a commitment that we need to deliver in the outer space of the restructuring plan which is in 2018. So I think it shouldn’t be really worry about that. Obviously we will be working towards reducing our reliance but it's not really the commitment that will drive our commercial decisions. As far as our fully loaded Basel III capital is at 12%
Marta Romero - KBW
And on BPAs [ph], I understand that following the recognition this quarter of roughly €400 million, you don't have any off-balance sheet BPAs [ph] as of today. Is that correct?
That is correct.
Marta Romero - KBW
And finally, also following up on NPEs, could you help us with the outstanding amount as of June, based on the feedback you have and the information you have from the ECB, what you consider to be NPEs as of today?
There you would allow me not to step into the shoes of ECB and start speculating on that point. I think we’re as long as the markets would need to wait for a few more weeks until the results come out and if you would want “the correct version” of the NPE definition will be revealed.
The next question comes from the line of Cyril Meilland of Kepler Cheuvreux. Please go ahead.
Cyril Meilland - Kepler Cheuvreux
Yes, I have a couple of questions regarding the targeted LTRO. So, you said that you would be entitled for the first 24 months to €1.8 billion. I was wondering whether you could provide us with the figure for your reference period between March 2013 and March 2014. I made a very rough calculation and it seems that your loan book -- eligible loan book has come down by €0.5 billion to €1 billion. So, is this correct? And furthermore on this, do you expect the Bank of Greece to further loosen its collateral criteria to allow you to take maybe a bit more of targeted LTRO than you would be entitled to given your -- the collateral you have available now?
Well on the first one allow our IR team to provide you offline figures. On the second one it's not really Bank of Greece decision, but it is rather an ECB eligibility criteria decision. So they are holding the pen if you want on that decision and we don’t see them as far as LTRO is concerned to change between the two date, one in September and one in December.
The next question comes from the line of Kalim Aziz of Armajaro Asset Management. Please go ahead.
Kalim Aziz - Armajaro Asset Management
It looks like things are moving in the right direction. I just wanted to get an update out of you on your -- on the collateral of the loans that you have at the moment. I understand a large part of the collateral is real estate. So, would you be kind of enough to let me know what do you think has happened to the values of collateral? Are they deteriorating still further, or are they stabilizing? That's the first question, if I may. And another question which I would like to understand is there was this whole discussion or I guess, efforts on your part to come up with a plan to -- for the recovery phase of NPL and work hard at NPLs, and you were planning to deliver some update in the fourth quarter I guess, to the market. Can you give us some color on where that coverage is and how it looks based on current economic scenario?
On your first question I will pass on the floor to Michael to give us an update on the real estate market increase which obviously is been ultimately distilled into the proper index that all big banks are using to measure in an updated form their collateral but I’m afraid that I will need to ask you to repeat, please, your second question because I’m not sure we were able to get it acoustically.
Kalim Aziz - Armajaro Asset Management
Yes, sorry. Just a second question I'll emphasize. There is a non-performing part of the loan book which requires some work or was a workout that is some regulatory changes which are in the offering or we heard that there is a regulatory proposal put forward by the Bank of Greece. So, in the light of the new or upcoming regulations on how to deal with the non-performing clients and your plan to look at the balance sheet of your clients to see how you can work out the non-performing part of the book, do we have any progress on how do you see it work out?
Well thank you then. We got the second question. I will leave to leave to comment a bit on the first one and then I will answer the second one.
Well collateral is valued at current prices as provided by the relevant index calculated by the Bank of Greece and if we look at developments there we have seen that the real estate prices have come down by almost 35% and there is another probably 5 to 7 percentage points decline to be factored in before prices stabilize. The big question of course is how loan prices will remain at that level before start rising again. Our own assumption looking at the market and developments with respect to economic activity as well as developments in the property tax form, it seems that prices probably will remain subdued and we will see probably a recovery starting somewhere in the middle of 2016 most probably.
And to your second question, currently there are a number of initiatives as you pointed out underway. Initiatives were not necessarily -- the banks are in the driving seat. Therefore please consider the answer that I will give you something is a mixture of what we do know and what we do understand between the lines. The initiatives that are currently underway, the first is the code of conduct by the Bank of Greece is an official initiative which actually yesterday become also public. There effectively the key ask for the Bank of Greece was to ensure that there is a framework where consumers mostly will be able to if you would want to feel comfortable in building up the relationship, their workout relationship with the bank. That you will find is not too different from what you’ve seen in other European places going through.
The second initiative is around amendments on the individual -- on the bankruptcy law for individuals, where the memorandum also has put forward that by the end of October there should be further progress to that. In a nutshell, what we will see there are changes on very operational matters that would allow the framework to be dealt with much more experience than significant bottlenecks that we have seen in the judicial process so far.
Finally in the corporate space, the idea there is to accelerate decision making in the workouts on the corporate front and essentially there are two blocks of issues that are being debated. The first one is how to facilitate and speed up the process on those factors in order to reach a decision. And the second is how in cases where there are significant viability issues of companies. For example if there is negative equity -- debtors will have the ability in a short period of time to move on and if you want force changes in the shareholder structure in order to test the viability of the company. So these are all things that are currently underway. We feel that gradually we will listen more and more around that debate and the time horizon that we would expect is by November these things should be in place.
Gentlemen there are no more questions registered at this time. You may now proceed with your closing statements.
Well thank you very much for joining our first half call and we’re really looking forward to updating you on our third quarter results in November this year. Thank you very much.