Alpha Bank's (ALBKF) Q3 2016 Results - Earnings Call Transcript

| About: Alpha Bank (ALBKF)

Alpha Bank S.A. (OTCPK:ALBKF) Q3 2016 Results Earnings Conference Call November 30, 2016 10:50 PM ET


Spyros Filaretos - General Manager and Chief Operating Officer

Vassilios Psaltis - General Manager and CFO

Panayotis Kapopoulos - Chief Economist

Lazaros Papagaryfallou - Executive General Managers

Theodoros Athanassopoulos - Head of NPL Division, Wholesale

Periklis Kitrilakis - Head of Non-Performing Loans, Retail

Georgios Michalopoulos - Group Treasurer

Dimitrios Kostopoulos - Head of Investor Relations


Nemes Mate - UBS

Pawel Dziedzic - Goldman Sachs

Domenico Santoro - Autonomous Research

Yafei Tian - Citigroup


Good afternoon, ladies and gentlemen. This is the Chorus Call conference operator. Welcome and thank you for joining the Alpha Bank Nine Months 2016 Financial Results. As a reminder, participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] At this time, I would like to turn the conference over to Alpha Bank management. Gentlemen, please go ahead.

Spyros Filaretos

Good evening, ladies and gentlemen, welcome to the Alpha Bank nine months 2016 results presentation. My name is Spyros Filaretos, I'm General Manager and Chief Operating Officer at Alpha Bank. And with me, to go through the results presentation is Vassilios Psaltis, General Manager and CFO; and Panayotis Kapopoulos, Chief Economist; and joining us for in the session of Q&A later on with us the Executive General Managers, Mr. Lazaros Papgaryfallou, Head of Strategy and Planning, Ms. Theodoros Athanassopoulos, Head of NPL Division, Wholesale; Mr. Periklis Kitrilakis, Head of Non-Performing Loans, Retail; and Mr. Georgios Michalopoulos, Group Treasurer; and Dimitrios Kostopoulos, Head of Investor Relations.

In the third quarter, the Greek economy showed signs of stabilization visible in both the improved confidence of businesses and households and in the resumption of positive GDP growth.

In this environment, the bank delivered a profitable third quarter and also profitable nine months period. Our focus remains on restoring our asset quality indicators and funding profile, improving our operating performance and enhancing our profitability potentials.

This quarter we submitted to the SSM our plan to reduce the stock of NP and NPLs within the three year period through the implementation of comprehensive strategies with specific performance targets.

We are committed on delivering the plan agreed by making the best use of our resources. The support of the macro along with the swift implementation of the changes related to this effort are essential for the plans to succeed.

Looking ahead, we are optimistic for the timing completion of the second review, a milestone that can unlock many positive developments to the Greek economy and the banking sector.

And now, I’d turn over to Panayotis Kapopoulos, our Chief Economist for an update on the macro economy.

Panayotis Kapopoulos

Thank you. Good evening, gentlemen. Let me begin with a few words about the current developments and future prospects of the economic activity in slide four of the presentation. After a mild recession in the first half of the year, the Greek economy is embarking on a recovery, rolled with a positive GDP growth rate of 1.8% year-on-year in the third quarter.

This performance was by and large expected, basically as a result of a strong base effects depicted in the stated area in the graph on top, this base effect are related to the large decline in real GDP by 2.2% year-on-year in the respective quarter of 2015 when capital controls has been imposed.

We now seek a good chance of overall 2016 growth rate coming in the positive territory, 0.1 something between 0.1, 0.3. This should translate in the positive carryover into next year to the tune of 0.7% of points, which is a good starting point for next year. So from 2017 onwards the recovery is about to seek into higher gear [ph] a more than 2% GDP growth.

Based on the statistical modeling we may straightforwardly conclude that the growth rate will certainly turn positive in the second half of 2016, and remain on such territory during 2017. How much? For 2017 as a whole, OECD and European Commission anticipated growth rate of 1.3% and 2.7% respectively.

Now, our projection for a growth rate of more than 2% is based on a base line scenario, which presumes the retail of confidence that can move upwards the economic fundamentals and the specially business investments.

As we can see in the graph at the bottom, we need two years of investment growth, higher than 10% so as net fixed capital formation that is gross investment minus depreciation to become positive again. However, the scenario is fairly dependent upon the realization of a cascade of events.

More specifically, the first milestone is around the conclusion of a secondary view. This is a necessary condition for i. the activation of the short-term debt relief measures along with specification and quantification of the foreseen medium term measures that will be implemented in 2018 to several DSA, Data Stability Analysis report, from IMF or ECB itself, three the inclusion of big government bonds in European Central Banks qualitative easing programs for the lift of capital control someday within 2017, five the access of the state to the markets in late 2017 enjoying affordable rates and finally the creation of a reasonable fiscal space from 2018 onwards with reasonable meaning more space than the one implied by the current targets for primary surpluses.

The main downside risk comes [ph] from the timely materialization of this cascade or the sequence of events. There are also significant risks related with the impact of the pre-election climate in Germany on debt relief negotiations and fiscal policies orientations, as well as the impact of possible no hold to the Italian referendum or the need for constitutional changes in our network countries.

Having described the necessary conditions for the baseline scenario we can say a few words about the formalities of the projected recovery. As I said, it is cognizant on a investment pickup, mainly equipment and construction, excluding residential properties. Also supported by ongoing structure reforms and privatizations. The other consumptions including performance are expected to remain resilient, not highly increasing but resilient.

As depicted in the right hand upper part of the graph is the growth rate of 2.7% and 3% in 2017 and 2018 respectively as predicted by European Commission would mainly support employment gains and at a lower spend labor productivity guidance. This proportion could be reversed from 2019 as a result of a higher capital stock of equipment, which will boost productivity of labor.

Let’s move to slide five, the question here is are there any signs of improvement in confidence indicator? Yes, there are signs of improvement, though not spectacular ones. As indicated by the general economic sentiments, this confidence has been positively affected by the completion of the first review; however the improvement of economic climate is not balanced. In particular the business confidence indicator in industry and the expected capacity utilization depicted in the graph on the bottom has bounced back since August 2015 [ph] and now stands at a level above the average of 2010, 2016 crisis period though it remains well below the long term average for the period 2000, 2016.

On the contrary, the downward trend in consumer confidence index and the decline of retail sales in August on an annual basis by minus 3.1 are mainly attributed to the tax burden increase as a result of a fiscal discipline.

Another indication showing that investor sentiment is gradually turning positive is a decline of a 10-year government bond spread in the after months of cabinet reshuffling despite the negative trend in EMU periphery markets. This decline recollects market expectations of the government is determined to speed up the negotiations for the second review.

Let me turn now on slide six, the swift conclusion of the second review is expected to unlock €6.1 billion also allowing further repayment of arrears that will in turn help alleviate liquidity constraints.

As can be seen in the right hand graph, the negative relationship between government arrears and GDP growth observed and reported many times during the 2011, 2014 period is visible again during the current year as GDP turns positive along with an even slow repayment of arrears.

Regarding public finance dynamics, depicted in the left hand graph on slide five, another performance of 2016 primary surplus due to higher revenue collection as a result of tax rates hikes and intensified tax collection efforts is expected to have a positive carryover effect into 2017 budget.

The main challenge here is a projected primary surplus for 2018, which is probably feasible. The need for a wider fiscal space is very clear. Ideally, the specification quantification of the foreseen debt relief measures, which will be implemented from 2018, could enhance the creditability of the policies pursued. These combined with a favorable business stability report may pave the way for a downward revision of primary surpluses for 2018 onwards, most probably along with a fresh conditionality. To put it simply the measure is already agreed between Greece and U.K. to lead the primary surpluses probably less than 3.5, this difference may be covered either through effective medium term measures for debt relief followed by additional measures corresponding to 1% or 1.5% of GDP and there are some examples like the elimination of personal difference for the old pensioners [ph] or the reduction of the top tax exemption threshold.

All the combination of both the relief measures and pension tax reforms. Let’s come now to the graph on the bottom. Despite the recessionary environment, some progress has been in managing the unemployment rate, which steadily declines although at a slow pace, standing according to the latest available data at 23.4% in August 2016. The good news is that employment increased by 2.5% on a yearly basis in the first eight months of 2016. Compared to an increase by only 1.6% in the corresponding year of 2015. The bad news comes from the observation that this employment gains are mainly attributed to the increasing share of part time employment as it is clearly depicted in the graph.

Thank you. Let me now pass the floor to Mr. Lazaros [ph] to continue our presentation.

Lazaros Papagaryfallou

Let us now have a look at the nine-month 2016 financial results on slide eight. Starting from the P&L to the left, our core pre-provisional income for the nine months increased by 4.2% year-on-year to €896 million as a result of increased operating profitability and efficiency improvements.

Looking at the quarterly P&L, group NII was slightly up by 1% quarter-on-quarter, up €487 million with net interest margin holding well at 2.9%. Fees and commissions income rose 3.1% quarter-on-quarter to €83 million continuing to be supported by the robust performance of our current business.

Operating expenses in the third quarter stood at €287 million, affected by seasonality but remaining on track to reach the target of €1.15 billion recurring cost base for 2016 as a whole. Our core operating income came in at just under €300 million in the third quarter with the cost to income ratios at 49%, which is the best in class among our peers.

Impairment losses for the quarter came to €257 million with the cost of risk at 168 bps, returning to its downward trajectory assets reconstruction in the second quarter of 2016. As a result, the bank reported a positive net income of €41 million for the third quarter turning nine month profitability positive to the tune of €22 million.

Moving on to the balance sheet on the right hand side, we still experienced de-leveraging on the asset base of €66.2 billion at the end of the quarter on the back of further disposals of €0.3 billion of EFSF bonds and a decrease in net loans.

Group deposits for the €32 billion in September up by €300 million quarter-on-quarter mainly driven by an increase in Greece, the trend which is continued until today was further deposited in-flows of €400 million.

Therefore, our Eurosystem funding decreased further to €20.8 billion, lower by almost €1 billion quarter-on-quarter. NPL ratio stood at 38.3% with strong cash coverage of 68% or 124% collaterals are included.

Moving onto slide nine, you can see the evolution of Core Equity Tier 1 ratio which stands now at 16.8% or €68.6 billion and this is up by 20 basis points quarter-on-quarter and was positively affected by quarterly results and the decrease on our credit and risk weighted assets and you can see that on the bottom left chart.

On the full loaded Basel III basis, our core equity Tier 1 ratio stands at 16.4%. In terms of quality of capital, we can see on the top right hand chart that Alpha Bank has the cleanest capital structure among Greek banks without pressure of [indiscernible] and incorporates the lowest amount of tax credits that is 40% of total in the core equity tier 1 capital.

Finally, on the bottom side of the page, €8.5 billion of tangible equity is highest among Greek banks standing at 13% of tangible assets and results and resulting in the best ratio in the Greek bank and systems.

If we move to slide 10, we can see here the impact of the potential inclusion of GDP of the QE program and the corresponding benefit for the bank. Alpha Bank at the end of September 2016 had in its books €1.9 billion of GDPs, of a nominal value of €2.6 billion. A successful and firm conclusion of the second review along with restructuring currently discussed of the short-term part of the government debt could lead to the GDP’s participation in the ECB’s QE program.

We believe the above development would result to a tightening of the yields from the current levels of around 7% to lower levels. And bear in mind that already reported each 10-year government bonds is currently trading at around 3.7%.

With regard to the sale of EFSF notes to ECB’s Public Sector Asset Purchase Program, the bank has reduced its holdings by €1.4 billion or a third of its initial position realizing year-to-date gains of €30 million. Currently the outstanding amount of EFSF notes stands at €2.9 billion face value.

On slide 11, we can have a more detailed look at the evolution of deposits in the bank. In the third quarter, group deposits recorded inflows of €0.3 billion out of which €200 million came from Greece, supported mostly by businesses.

This trend continued in Greece for October, November with further deposit inflows of €400 million. Despite the fact that we are in a period of substantial tax obligations both for households and businesses.

Business has especially have improved the positive balances due to a very good tourist season, the recycling into the system of cash held by households through consumption and an inflow from government arrears repayment. This highlights the improvement in the funding profile of the bank for several quarters now as we can see in the bottom left chart, deposits over assets and ratio has improved to 49%, whereas the Eurosystem reliance over assets is significantly down to 29%, driven by the increase in deposits inflows EFSF bond disposal and balance sheet de-leveraging.

The continuous reduction in the loan-to-deposit ratio leads to a more sustainable mix as deposits increase. In particular, the loan to deposit ratio fell in November to 138% for the group versus 164% in September 2015, that is 16 percentage points lower.

On slide 12, we can see the factors affecting our Eurosystem funding quarter-on-quarter and year-on-year, starting from the top left part of the page we see significant improvement in reducing our reliance on Central Bank funding. From a year-on-year perspective, our Eurosystem funding has been reduced by €6.3 billion or around 23%. This reduction has been achieved mainly through the use of sources of funds not related to repo transactions.

Up until September 2016, only €1 billion of repos was used to decrease ELA reliance. The above portrays our capacity to improve our funding structure with a variety of tools. On the top right hand chart, you can see our custom current Eurosystem funding position, which comprises of €14.2 billion yearly and €5.2 billion ECB funding with an adequate cash buffer of €3.4 billion.

Our aim is to continue exploiting all kinds of alternative funding sources, which will allow us to progressively disengage from Central Bank reliance. As you can see from the bottom chart, the bank retains a large chunk around 16.5 billion of non-collateral used for ELA funding, which upon the restoration of market transitions and pricing could be used in the future for the issuance of securitized paper eligible for interbank repo transactions.

And now I’ll pass the floor to Vassilios Psaltis to elaborate on the NPE business plan, asset quality and operating profitability of the group.

Vassilios Psaltis

Thank you lets now turn to page 15 to discuss the NPE reduction plan. As you may see on the top left part of the page, the NP business forecast of 48% reduction in NPLs and a 36% reduction in NPs by the end of 2019 in Greece. The reduction will be the result of intense workout activity, comprising of focused efforts on long-term sustainable restructuring offering to borrowers as well as liquidations in sales of assets.

We envisaged new long-term restructuring activity targeting a permanent curing of [indiscernible] that have so far been addressed only through short-term solutions. While we also cover part of the old stock, this will result in permanent net curing and prepayments in the periods.

Liquidations and sales will target those parts of the portfolio for which a reasonable long term restructuring solution would not be able to bring it back to their ability. Lastly, we should note here that our NP reduction plan is dependent on macro improvement and time to implementation of pending legal and judicial reforms.

Moving onto page 14 on the NPL trends to the Group NPL ratios stood at 38.3% in the third quarter with the NPL formation declining further to €77 million extending mainly from business loans as household NPLs seemed to have reached their peak.

From a segmental perspective, our business NPLs increased by €108 million in the third quarter due to a handful of cases of corporate customers or by the marginal formation in mortgages 35 million and the negative formation for a third consecutive quarter in consumer loans down €66 million confirm that household NPL formation is already on a negative trajectory.

Moving to page 15, the Groups NP ratio stood at 53.2% in the third quarter, with the NP formation of €0.1 billion quarter-on-quarter or of €0.6 billion year-to-date posting a remarkable decrease of 71% as during the last year the bank doubled its restructuring and collection efforts also depicted in the bottom left chart.

The assets quality trends and the efficiency of our restructuring efforts are better depicted from the Greek NPE flows as portrayed on the upper right hand chart. During the last quarter, we recorded NPE interest of €0.8 billion, which include re-defaults of previously restructured loans but also loans for which there was a trigger, there was an impairment trigger.

During the same periods, we have witnessed €0.5 trillion [ph] of exits from the NPE perimeter as a result of curings, repayments and liquidations. We aim to increase the way to a long term restructurings as we said earlier and we expect the shift in mix to lower our default rate going forward we expect a long term solutions offered to result to a much lower re-default rates.

On page 16 concluding on assets quality, our cost of risk year-on-year declined significantly by 24% from 247 basis points excluding the impact from last year’s AQR to 187 basis points.

Cost of risk was also reduced on a quarterly basis down 27% falling below the 170 basis points mark. Following a disruptive second quarter, which was negatively impacted from additional impairment to account for the default of a large corporate group.

On NPEs our cash coverage is at 49% or 106% including our collateral. On NPLs, the cash coverage is at 68% or 124%, again if collaterals are included.

Moving to page 17, let’s have a look at the main components that have contributed to the quarterly evolution of our corporate provision income that stands resilience on the quarterly basis. As you can see at the top left chart, our corporate provision income stood at €299 million stable quarter-on-quarter.

Positive contribution from net interest income in fees and commissions by €4 million and €2 million respectively was counter balanced and increase in operating expenses mainly due to seasonality in the general administrative expenses.

On the top right hand chart, you can see the annual corporate provision income run rate, which alludes to a full year performance of €1.2 billion on track to our target for the year. At break-even performance for the period implies a cost of risk of 2% over gross loans and other things being equal we are positioned above the breakeven level as suggested by our current cost of risk of 1.7%.

Going to the bottom left chart of the page we see that our net interest margin of evolution has further improved on a quarter-on-quarter basis having reached the 2.9% on the back of improved funding costs.

Turning to page 18, let’s elaborate on the key contribution to our net interest income evolution. As you can see on the top left chart, our net interest income stood at the same level as in the previous quarter as improved cost of funding was offset by the lower contribution from loans.

On the one hand, net interest income from loans decreased by €10 million quarter-on-quarter as a result of declining loan balances and some spreads compression. Increase in deposit volumes resulted in the decrease of €1 million contribution into NII. On the other hand, the reduction of Pillar II bonds and the effect of ECB reinstating the waiver contributed positively by €15 million to our net interest income.

Lastly, bonds and other contributed negatively by €5 million due to security disposals, while one more calendar day benefitted our net interest income by €5 million concluding the €487 million for the third quarter.

On the top right chart, you can see the evolution of the decrease in funding cost, both in the euro system and our time deposits. New time deposit rate continued to decline standing at 81 basis points in the third quarter and in October it reached 71 basis points.

On the wholesale funding front we continue our efforts to disengage from the costly Pillar II bonds as we have managed to successfully rebate €2.4 billion in nominal amount in the third quarter and another billion again in nominal amount in November.

For each one billion of nominal value of government guaranteed bonds the banks pays to the state €11.5 million annually. It’s worth mentioning that the already locked-in benefit in net interest income fully phased-in until September 2017 stands at €50 million. As a result, on the repayment of €7.9 billion of Pillar II bonds from September 15 to September 16.

Going forward, the potential benefit in net interest income on an annualized basis from not renewing the remaining nominal balance of €1.8 billion is estimated at €21 million.

Turning onto page 19, lets discuss the fees and commissions income which has enhanced year-on-year by 5% to €241 million essentially due to higher fees from increased cards and acquiring business, a positive side effect of capital controls being imposed since June 2015 as well as a pick up of effects commissions on the back of a strong tourist season.

In particular, cards turnover has increased 59% to €3.6 [ph] billion for the nine months of 2016 compared to the relevant period in 2015. Merchant acquiring sales have also increased by 49% year-on-year as a function of an accelerated uses of local cost by 78% in the nine months of 2016 compared to the relevant period of last year.

On the top right chart, we can see that income from cards and acquiring showed an impressive performance of 23% in the nine months compared to the same period of last year. Alpha Bank offers different choices in cars as it is the only Greek Bank accepting cards from all the major payment schemes and you can see the brands underneath.

Moving onto page 20 on cost, our core operating expenses stood at €287 million increased by 2.6% mainly driven by the increase in the general and administrative expenses due to seasonality recorded in the third quarter referring to property related taxes and remedial management initiatives.

However, this performance does not result in diverges from our target as you can see on the top right hand chart. In particular, operating expenses in the nine months of 2016 stood at €841.1 million down by 1.3% year-on-year which is in line with our target of €1.15 billion for the end of 2016. Our cost to income ratio stands at 48% in the nine months which brings us best-in-class in operating efficiency.

Finally on page 21, we can see a few things about Southeastern Europe. Our effort to focus our business on core countries has paid off resulting to an improved performance of our SEE operation. We remain inline with our restructuring plan commitment to further reduction our SEE presence putting on core businesses.

You can see from the table on the left that for the nine month periods of 2016 our SEE operation contributed €14.5 million to the core profits before tax for the group. And with that, let’s open the floor to questions.

Question-and-Answer Session


[Operator Instructions] The first question will come from the line of Nemes Mate with UBS. Please go ahead.

Nemes Mate

Yes, good evening. Thank you for the presentation. I have a few questions. Firstly, on page 15 you mentioned that you saw an increase of €0.8 billion in NPEs, would you mind breaking it down to new formation and re-defaults.

Also I would like to know how much of this is re-defaults and similarly of the exit of €0.5 billion, if you could just let us know how much of that is related to QX [ph]. And my second question is related to the NPE reduction plans on page 13. If you could just give us more detail on the timing and the means of reduction. So what I'm looking for here is what amount did you budget for a reduction in 2017, 2018, 2019 and what is the contribution from the three means, specifically restructuring, liquidation and sales? Thank you.

Spyros Filaretos

Thank you for your question. Let me start with the first one. The increase that we experienced over the quarter, they are predominantly stemming from [indiscernible] perimeter. They are I would say one thirds to you and two thirds form re-defaults. As far as the exit is concerned, they are evenly split between liquidations on the one hand and repayments and curing on the other.

On the NPE reduction plan, I would say as a general comment that you probably have seen by the results of our peers as well as the annocements by our Central Bank that essentially as far as target setting is concerned the Greek Banking system is pretty much aligned to achieve roughly the same ballpark targets both in terms of NPL and the NPE combination, sorry a reduction.

Also, as far as the means to achieve those curing is concerned, again, I would say it is a few percentage points up or down around the four categories that are mentioned. Therefore what’s really would make the difference is the ability of each and every bank to execute this plan and hopefully the whole industry would be able to execute upon that plan, so that the Greek banking system will be in its efforts to make bankable again a number of customers and with an improving macro revive the quick economy.

As a final point on that, I would say that the timing element obviously is much more skewed towards the outer years of 2018 and 2019 and in particular as far as the two curing effects of liquidations and sales is concerned this is almost exclusively done in the larger 18 months of that respective planning period.

Nemes Mate

Okay. Thank you.


The next question comes from the line of Dziedzic Pawel with Goldman Sachs. Please go ahead.

Pawel Dziedzic

Hey good afternoon and thank you for the presentation. I have a follow up questions on the remarks you just made on your NPL and NPE reduction plan. And my question is following, when would you expect the NPL formation to actually turn negative? And if you can give us some sense why there is an elevated level of re-defaults currently and what actions are you making to maybe lower this level, when can it be more manageable, is it fully dependent on the macro or there is anything that you can do now that some of the let's say, legal framework has been already put in place?

And then I have a second question, and it is on your net interest income. You mentioned that you've seen some pressure related to compression of asset spreads as well as deleveraging, and I was wondering if you can give us more details about that?

Would that pressure continue and how closely it is linked potentially to restructuring solutions and lower pricing that you offer to customers currently? Thank you.

Vassilios Psaltis

Let me start Pawel with the latter and then I’ll give to floor to our NPL experts to go more into the operational background to that. As far as net interest income is concerned, we are not speaking about the pressure. This is a trend that has started from when we reached the historical peak of the asset spreads towards the larger part of 2014 and ever since the increased restructuring activity and the significantly content disbursement activity has allowed for a soft or rather characterized [ph] of the asset spread.

This is something that we do expect to continue as the restructuring efforts especially taking into account also the very ambitious plan that we are putting forward would entail a significant amount of longer term solutions and thus they would have a new round of discussions with the customers which will certainly entail also repositioning as far as the interest, their interest rate is concerned.

Theodoros Athanassopoulos

This is Theodoros Athanassopoulos. In terms of your questions about NPLs, the first one when would you we see the peak of NPLs going forward. I have to state that if you look closely there is a different behavior between different portfolios. So you’ll see that in the consumer portfolio we have already seen the formation into negative firms or negative territory while in the mortgage portfolio we have a positive but various more formation in this quarter.

Now the business portfolio, we think that we will start witnessing the same performance over the next quarter or so, so we think we are closing the peak. In terms of your questions about re-defaults, I think what we were doing so far is that we were offering a lesser proportion of long term solutions through our clients now enter into the new phase of NPL management with the business plan in place. Gradually the proportion of longer term solutions will increase and we are pretty confident that the re-defaults will start to go down because our analysis indicate that longer term solutions indicate smaller re-defaults from the borrowers. So the mix of solutions offered in the business plan and the skewness long term solutions will gradually lead to a decrease of re-defaults rates.

Pawel Dziedzic

Thank you, that was very useful. Can I perhaps ask you -- I don't know if you can hear me fine, could I perhaps ask you just to quantify what is the proportion of short-term versus long-term solution offered in the last nine months and what is your target under the SSM agreed criteria going forward?

Theodoros Athanassopoulos

Around 60% is sort of solutions and the mix sort of solutions will remain as a internal measure going forward. Gradually the decrease will come from lets say reverse of this [indiscernible] long term solutions and even more.

Pawel Dziedzic

That’s very helpful. Thank you.

Periklis Kitrilakis

On an additional note, good evening this is Periklis Kitrilakis from Retail NPL. Going forward we also have significant enhancements on the legal framework and this also helps towards lower re-defaults.


The next question comes from the line of Santoro Domenico with Autonomous Research. Please go ahead.

Domenico Santoro

Hello, hi, good afternoon, thanks for the presentation. A number of questions from my side. I'll go one by one if you don't mind. First of all, on this slide page 13, where you show the NPE reduction. Can you give us a little bit of sense of how much of this decline in NPE will come for restructuring, liquidation, sales especially write off other banks that gave us some numbers on these or some color?

Then related to this, I just understand what could be the exit level in terms of coverage at the end of your plan, please?

Vassilios Psaltis

Domenico, hi. As far as your first question is concerned, the percentage in terms of sources of curing I think we are quite close to what the Central Bank discloses therefore the system. Essentially the net curing NEE [ph] net curing minus new defaults minus payments is around 16% for the system. Liquidations is around 29% sales up 18% and write-offs make 37%.

If you look at the two areas liquidations and sales, essentially they are running up for almost 20 billion which is probably what all market participants fell that is the maximum that the market could bear in the period of the second half of 2018 till the end of 2019.

Therefore, the remaining write-off is essentially, what is going to be used in order to achieve the rate performance of that part of the book. Those numbers are not materially different to what we have submitted. In our plan it’s a few percentage points in the one or the other category up or down.

Now as far as the exit level of coverage, there is a bit of a mechanic approach in all that. And I would expect that also the peers would have the same and this would imply an exit level of marginally higher coverage in terms of NPLs and a bit lower exit levels in terms of NPEs from the current level of cost coverage.

Domenico Santoro

Okay. To come back to today's mechanics that you are mentioning, can you give us a sense of what is going to be the loan loss provision level in terms of bps or net or gross loans at the end of 2019?

And then as a follow up of this, is it correct to say that going forward your level of provision will be mainly driven by a write-off and a liquidation given that presumably all the curing loans the provision related to this are going to be recycled in order to top up your coverage. Is it a correct way to look at this?

Vassilios Psaltis

Lets start from the first one. I think towards the end of the periods, I think the whole system should be hovering around the 100 basis point level probably a bit lower than that. In terms of the mechanics of the impairment going forward, clearly the re-defaults in my view is the one thing that is going to be driving things forward. Therefore if the switch to long term restructuring happens quickly and efficiently from the system then that means also that the re-default rate would improve and in such case that means that you are taking loans safely outside the perimeter. Obviously if we are talking about NPE, with a one year lag.

If you are re-defaulting then that means that you would need to increase your coverage. And that is in my view what will be on the re-performance basis will ultimately decide for the fate of this plan as far as the incremental impairment is concerned.

On liquidations and sales, I think there it is a matter for the banks to choose those portfolios and engage into such granularity of the impairment in their portfolios to minimize the additional burden that they will need to incur if they deconsolidate in the one or the other form loans from the balance sheet.

Domenico Santoro

And this loan loss provision level that you mentioned is a 100, is it a gross or net?

Vassilios Psaltis

It’s the gross.

Domenico Santoro

Gross. Okay So coming back to this mechanic, are basically write off completely relevant for your cause, because if you're going to write-off, I mean almost 40% of this €10 billion is €4 billion. I assume that the coverage will go significantly down and that would be the main moving part to look to get to a coverage, which is basically in line with the one that we have today.

Vassilios Psaltis

Well it depends on how fast you will be able also to drive down your book, isn’t it? That’s why I said these are – we are talking about the ratio therefore the synchrony or our synchrony between what you do in the numerator and the denominator and the numerator is going to be judging the plan. But clearly due to the lagging effects, it’s going to be the NPE plan, the one that would experience the reduction in the coverage compared to the one in the NPLs.

Domenico Santoro

Understand. Another question on page 30, where you show gross NPE, can you give us a sense of how much of the provisions stock is basically allocated on IFRS non-performing for both nonperforming and individual impact?

Vassilios Psaltis

That I don’t have readily available.

Domenico Santoro

Okay. This individual impact that you show here, this €2 billion how much is unlikely to pay?

Vassilios Psaltis

I would say the bulk is individual impact.

Domenico Santoro

Okay. So basically the portion you are likely to pay is irrelevant.

Vassilios Psaltis

If you recall the unlikely to pay for us it was something that we experienced mainly in the first and to a certain extent in the second quarter where we had a number of applications, late applications I would say to people that wanted to subscribe to the household bankruptcy regime and even they would do that until a certain date they would still qualify for a more lax frameword than it was before the yearend. So these people since they were still paying but they filed for bankruptcy, obviously this was an indication of UDP and apart from those cases, its mostly individual impact loans.

Just since we brought up the subject, may we say that 50% of those cases under the household bankruptcy regime that reached the court, 50% of the case is actually the judge deems that as not being eligible to be under the auspices of that law. Just giving you a bit of an idea of the further potential for restructuring work even on that category.

Domenico Santoro

All right. I have another couple, but I would be very quick. First of all on this page 15, where you show the entries and exit do you have the same numbers but on a gross base, and you have also the write-off. And then a very quick one on the NII, if you can give us a sense, how the NII is going to progress going forward, because I have seen that you have just a €1 billion exposure to Interbanking repos, where others banks have increased quite materially this exposure that it might be even cheap.

So the question is, what does prevent you basically to use collateral that is currently engaged with the ELA to increasing the repos? And whether this is going to have an impact, of course, of NII going forward and whether it's going to be the main driver for funding cost decline? Thank you.

Vassilios Psaltis

On your first question, the starting point are the net NPEs and this is consciously done, so in order to take the right of element out of that, so by starting essentially the numbers that you see from that point onwards are gross numbers. That's on point number one.

On point number two, we explained during the quarter mechanic and I would ask Georgios Michalopoulos to relay more detailed the thinking, because this was a very conscious strategy on our hand on how to work out the balance sheet in order to prospectively resolve for the best and cost efficient way of utilizing our collaterals?

Georgios Michalopoulos

Yes, good evening. I think we [indiscernible] and utilize in general if you want collateral from our balance sheet. We need to take the two dimensions of volume and interest rate. In terms of volume, we opted as you had seen on page 12 on the top hand side, which explains the drop of our Eurosystem throughout a year back. We have opted for funding coverage and funding needs coverage through mainly non-repos sources, which for us at that point covered efficiently if you want, and in a secured way. Our primary target, which was the reduction of Pillar II. Our primary target if you want to bring in the bank cash not utilizing in the first instance our balance sheet through collateral outside the ELA window.

The second thing as far as volume is concerned, obviously, when you compare Alpha Bank with the peers, most of the repo activity of the Greek Banking system in the last quarter’s has been exhibited through EFSF repos. In that respect, Alpha Bank are in the smallest throughout this period portion of EFSF bonds is always carrying let’s say the smallest repo of volume with it.

In terms of interest rates, it’s only been since actually we first disbursement of the third bailout program for Greece. So since May, that interest rates as far as repos as SME securitizations, cover bonds and everything else that you can potentially agree to outside from the ELA window that carried a funding rate in the markets lower or close to the ELA window.

Therefore the bank started the process at that point. We have firstly utilized our collateral which was unfunded at ECB i.e. treasury bills Pillar II bonds and gradually we speed up by using the rest of the collateral within the ELA window, been conscious as you rightly pointed on the NII burden by exploiting this collateral with the market. And that is the target as we go forward, now that we potentially say reached the point where we can view the exit from Pillar II we can also top our second dimension which is utilizing all other sources to decrease net, net ELA funding.

Domenico Santoro

Okay. And sense on the NII, please?

Vassilios Psaltis

Well on the NII, the guidance that we had given for 2016 and anticipating all those various trends it was that they would actually net each other and we were proven right. 2016 actually NII has been flat and this is the same thing that we expect for 2017.

We do expect that the further improvement in also funding would be actually counterbalanced by the continuous de-leveraging and spread erosion on the loan contribution, net interest income. Thus on an environment where we still have capital controls and thus the influx of deposits would be only margin.

Domenico Santoro

Understand. Thank you very much.


The next question comes from the line of Tian Yafei with Citigroup. Please go ahead.

Yafei Tian

Thank you for taking the questions. I have two broad questions. The first is the net interest income particularly given they are accrued NII from the non-performing loan, given the drastic reduction in the NPL expected in coming years. Would you see the impact to the net interest income from the NPL accrued?

And the second question is around the cost of risk out of until end of 2019. I think previously some banks have been guiding around 100 bps thereabout is the cost of risk would be expect by 2018. But given now there could be higher than expected write-offs in the restructuring process. Do you expect the loan losses the cost of risk to be higher, much higher than this level by end of 2019 in the exit year? Thank you.

Georgios Michalopoulos

Thank you for your questions. Starting on from the first one, I think with the current level of covers that we are having which is close to 70%, that means the recoverable amount is just 30 and that’s 30 only gets recovered. So, as we are progressing forward, it will be sort of we are coming out of the NPL perimeter back into the performing perimeter. If that happens in a viable and sustainable way they are going out of the NP perimeter and that obviously would support the NII of the Greek Banks. But it is something that it will be deemed as viable and thus shedding gradually the impairment of the occurring in order for reperforming perimeter to increase.

Now as far as the second question is concerned. In terms of outlook, I think we are all converging to this view of having a cost of risk at the end of the periods, of the planning periods around the 100 basis points, however I think all of the Greek banks through the plans they are stating risk areas which are in the tune of the level of re-defaults as the plan goes by, number one, number two that they choose very carefully the assets that they would want to deconsolidate and hence minimize any risk and finally that they are utilizing in the best possible way the loss budget what you see here as write-offs, it is the loss budget is the ammunition that you will be used in order to get into viable restructuring to our customers. This obviously, since we have a significant amount of accumulated impairment. It is a matter of granularity in order to use that accumulated impairment and not incremental impairment in order to take those solutions.

So take these three conditionalities if you are wanting to account as something that may qualify that 100 basis point cost of risk statement by the end of 2019.

Yafei Tian

Okay, thank you for that. Is it possible to give us a sense of what percentage of the current net interest income is from NPL accrued?

Georgios Michalopoulos

Well the NPL exposures, as you know I have reported as gross nominal amounts which means that impairment assessments on those exposures provides the recoverable amount as I said before. Only on that we accrue interest and as we expect to recover during the work out period of each loan.

Therefore for the 90 days last year the interest income recognized either in the form of unwinding or on a net book basis as we are doing essentially is in our case around a 100 million mark for the quarter.

Yafei Tian

Thank you.


[Operator Instructions]

We have a question coming in from the line of Mr. Linnane Nick with [indiscernible]. Please go ahead.

Unidentified Analyst

Hi, thanks for taking my question. You seem to be just a little bit behind the other Greek banks in terms of getting your restructuring efforts to the point where you are reducing NPLs and even in the case of one bank reducing NPEs.

To what do you attribute that? Is it due to different approach or speed with which you've ramped up restructuring efforts or do you think it's due to portfolio mix or do you think it's purely just a function of random events in the last couple of quarters and not something we would expect to see continue?

Georgios Michalopoulos

Well, I if you allow me I wouldn’t sort of accept your comment that we are somehow left behind quite a contrary I would say. There is a point which reflects the structure of the book and I will come to that in a minute, but there is a whole host of actions that are really the important elements of that unfolding of the NPE strategy on which the bank is completely focused and upto speed and to that my two colleagues from the NPL section will very quickly give you an update on where we stand.

So just however on the point of the structure inevitably in a country with the recession shock that Greece has endured, the first thing that actually, it feels the shock is the retail part of the business and then at the later stage it comes the corporate. So our bank having clearly a structure which is much more biased on the business side and the corporate side in particular feels if you would want that increase in the NPL only late in this recessionary environment and in particular since the beginning of the year. However, as my colleague from the NPL the wholesale NPL part mentioned before, this is also something that reaches gradually its peak as it has been the case with retail. So I would ask my two colleagues to go into a more operational focus on your question.

Periklis Kitrilakis

Well starting from the retailing side, I would say that looking at the last three quarters; our trend being on the negative side is what we have planned and what we have projected going forward. This is a result both of internal efforts but also as I said before of the regulatory environment being developed. We feel that the pace of decrease will take us where we have projected on our NP plan. And as our new long term solutions rolled out, we will also see a better re-default rates that will further decrease the household NPL book.

Theodoros Athanassopoulos

Well taking into your comment, I think we should see slide number 14, which indicates exact the different performance of different portfolios and if we decompose the Greek banking system performance in this year we will see that different portfolios in different banks behave in a different way. So wrapping that up, I would like to say that we see the households as Mr. Kitrilakis said, moving better and we see a negative formation in the household segments. On the business segments, we do face some defaults and I think this is in line with the picture of the market, but these defaults they are minimizing and we consider that as a privilege, but in the next quarter or so we would be getting on the pick of ambience.

So by analyzing the performance in the NPL formation, I think one should look at the different portfolios in a different manner and non reconsolidated figures. In that sense we feel comfortable at the submission of the business plan will be followed and the mix of solutions will lower re-default rates in line with the economic activity increase and the Greek economy in general.

Unidentified Analyst

Okay. Thank you.


Gentlemen, there are no further questions at this time. You may now proceed with your closing statements.

Spyros Filaretos

Thank you for being with us. I think it’s clear that the deciding factor going forward will be the macros and the conclusion of the review that is currently underway. And also that we at the bank and other systems of course have to focus on the handling of the NPL and the return of the deposits and the confidence in the system. It’s certainly a challenging, a very challenging order, but I am confident that given a stable and positive macro and political environment we will ultimately get the target that we have agreed with the Eurosystem on the NPL reduction or the internal targets we have set some on deposit gathering and long growth and NII. So thank you for being with us until next time. Good night.


Ladies and gentlemen, the conference is now over. You may disconnect your telephones. Thank you for calling. Goodbye.

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