Alpha Bank A.E. (OTCPK:ALBKY) Q1 2020 Earnings Conference Call May 28, 2020 10:50 AM ET
Vassilios Psaltis – Chief Executive Officer
Lazaros Papagaryfallou – Chief Financial Officer
Panagiotis Kapopoulos – Chief Economist
Conference Call Participants
Sevim Mehmet – JP Morgan
Floriani Jonas – Axia Ventures
Bairaktari Angeliki – Autonomous Research
Memisoglu Osman – Ambrosia Capital
Abad José – Goldman Sachs
Ladies and gentlemen, thank you for standing by. I’m [indiscernible] your Chorus call operator. Welcome and thank you for joining the Alpha Bank Conference Call to present and discuss the First Quarter 2020 Financial Results.
All participants will be in a listen-only mode and the conference is being recorded. The presentation will be followed by a question-and-answer session. [Operator Instructions] At this time, I would like to turn the conference over to Alpha Bank management. Gentlemen, you may now proceed.
Good afternoon, everyone. Good morning to those dialing in from the U.S. and welcome to Alpha Bank’s first quarter earnings conference call. This is Vassilios Psaltis, Alpha Bank’s CEO, and I’m joined by Lazaros Papagaryfallou, our Chief Financial Officer; Panagiotis Kapopoulos, our Chief Economist; and Dimitrios Kostopoulos, the Head of Investor Relations.
Let’s go directly to start our presentation on Page 4. What I would like to highlight, our reaction to the COVID-19 pandemic. Right from the very start, we have put all our focus on being there for our colleagues and our customers on what is an unprecedented environment. Our Number 1 priority was to continue providing our services in an uninterrupted way, while also ensuring a safe work environment for our employees. We’re really proud of what our bank has been able to accomplish over the past three months.
Alpha Bank’s employees have been at the forefront of the national response to this pandemic. During the lockdown period, we kept our full branch network open across all our geographies, whilst practically all of our employees at the headquarters have been working remotely. Despite this very unique working circumstances, we have been able to keep a seamless dialogue with our customers, offering them moratorium solutions and liquidity products. Needless to say how much our digital capabilities played out nicely to the service of our customers.
Looking at our first quarter operational performance, we noticed very little negative impact from the pandemic. On the revenue side, we had a solid quarter of core operating income of EUR480 million with resilient net interest income when we take into account the expected calendar effects. Fees of EUR89 million, that was down EUR4 million versus the fourth quarter of 2019 where seasonally fee performance is strong.
On a yearly basis, our core operating income was up by 2%. Our cost containment measures lead to continued decrease of our cost base with our expenses down by 3% year-on-year to EUR251 million. As a result, our pre-provision income increased by 14%, compared to the last quarter. With reference to our commercial activity, we saw strong loan growth with new disbursements of EUR1.6 billion, and we witnessed an equally strong performance in deposits as our Greek balance had inflows of the same amount.
Following the issuance of EUR500 million of Tier 2 at 4.25%, our total capital ratio stands at 17.5%, which translates into almost EUR3 billion capital buffer. It is worth mentioning that there are relevant discussions for further regulatory capital easing to which we will refer later in the presentation.
The Group’s liquidity position has improved with our loan-to-deposit ratio down to 95%, compared to 103% a year ago. We want to point out that we have made use of the recent acceptance of Greek Government bonds as collateral for ECB financing operations. And as a result, we increased our ECB funding to EUR9.3 billion, out of which, EUR6.2 billion come from the LTRO activity.
Finally, as far as quality is concerned, we have not witnessed any tangible impact from the COVID-19 yet, which is related to the debt moratoria that we have put in place. However, as mentioned in my introduction, the level of uncertainty remains high. And in this environment, we have taken a decision to act conservatively and book 120 million of COVID-19 related provisions out of a total of 307 million for the period. This level translates to [indiscernible] 100 basis points of annualized cost of risk solely dedicated to the COVID impact, and this is booked in the first quarter.
Once it isn’t indeed difficult to predict how the rest of the year will evolve, we’re confident that we have been conservative when we benchmark our approach to what other European peers have provided for. And as an important final word, we have continued, in the first quarter, a good preparatory work on project Galaxy, which allows us to re-launch the relevant process in June, targeted signing of the transaction in the fourth quarter of 2020.
Let’s move now into Page 5. What I would like to stress, Alpha Bank’s commitment to its customers, employees and broader society demonstrated in recent months following the COVID outbreak.
For our customers, both corporates and individuals, we have offered various forms of credit moratoria. We have more details on those and their utilization later in the presentation. We have increased the contactless card transaction limit to EUR50, which have dramatically increased the share of contactless transactions to 75%. And we are also the first Greek bank to use Apple Pay where activations exceeded 20,000 already during this first month of operation, while we have also noticed a significant increase in our e-banking offering.
In terms of our workforce, we are proud to have kept 100% of [the world] branches fully operational with half of the branch employees on premises on a bi-weekly rotating basis. Due to remote working capabilities, over 90% of our staff in the headquarters were working remotely during the lockdown. With weekly calls, regularly updating our employees on the guidelines and policies, we have been looking to gradually bring people back to the office with a staggered approach.
Finally, we have kept our ongoing support for the Greek society, supporting the National Health System with equipment and supplies for intensive care units, delivering medical masks for the 6th Medical District in Greece, as well as helping vulnerable people with home delivery of medicines by our cooperation with Medecins du Monde.
Moving now to Page 6. Allow me to start by reminding you that Greece following close consultation with our regulator, we have decided to go down the path of private moratoria in making use of the regulatory flexibilities that banks were given to ease the pressure on the clients affected by the COVID crisis.
On this page, we’ll summarize the efforts that our bank is undertaking towards that end demonstrating how close it remains to its customers. This support has taken the form of specific products that were communicated very efficiently to our clients whilst in lockdown via all available channels.
For our performing individual and small business clients, the Bank has been offering to defer installments until September 2020 whereas an extension of revolving credit lines maturity for six months after December 2020 is also offered to small businesses. In addition, we’re offering to defer principal payments for SMEs and large corporates until September 2020 while we offer extension of term loans maturity up to nine months.
Obviously, in cases of particularly affected industry, like our tourism clients, the offering goes well into 2021. As of mid-May 2020, moratoria offered to our performing customers reached EUR3.7 billion, accounting for 15% of our total performing book in Greece.
On a segmental basis, most of the solutions offered were on mortgages, accounting to EUR1.8 billion, which represents 26% of the domestic performing mortgage book. Worth mentioning is also the high pickup of our small businesses [were the EUR900 million] so far and also on wholesale clients, which may increase.
With regards to implementations, as shown at the bottom end of the chart, the run rate has abated in May after reaching its peak in April. Moreover, our COVID-19 related solution has reached so far EUR400 million in Cyprus, as well as the same amount in our Romanian operation with a majority for both countries relating to moratoria mortgages, and please note, that both of these countries have introduced public moratoria.
Let’s turn now to Page 7. In the area of financing, the Bank is continuing to actively support its customers. In the first quarter, we have provided new disbursements of EUR1.6 billion, mainly to highly rated corporates. Out of this amount, approximately EUR700 million relates to business drawings from committed credit lines. Increased disbursements also benefited our deposits, as most of them remained with the bank.
Indeed, so far this year, new financing has already exceeded EUR2 billion and this is going to increase in the coming quarters on the back of our participation in the government’s liquidity support measures by the programs of the Hellenic Development Bank, mainly the new Entrepreneurship Fund II business for funding for SMEs, which commenced in March; and additionally, the Guarantee Fund for businesses that will be launched next week.
More specifically, our SME clients get 100% interest subsidy for the first year with a preferential stable interest rate fully funded by the Hellenic Development Bank and a 40% reduction in the interest rate for the remaining three years. Since March, we have received [circa 16,000] applications for financing, and we have approved more than EUR250 million of loans, a very strong achievement that came to the benefit of our customers at a difficult juncture. The program provides for total financing of EUR1.6 billion with Alpha Bank’s contribution anticipated to exceed its fair market share.
In addition, for companies not in trouble before the COVID crisis, but which are affected by the pandemic, the Government Guaranteed program provides for EUR2 billion guarantees, which can be levered up to circa EUR7 billion through bank’s financing. New loans will cover working capital needs on favorable terms and will reduce collateral. Given that the guarantee distribution is going to be according to the bank’s market share, Alpha Bank expects to mobilize liquidity of up to EUR1.5 billion by the Guarantee Fund.
Turning out on Page 8, Project Galaxy remains for the Bank, a very strategic project, and the Group is committed on the back of significant progress that we have been able to make so far to making this a successful transaction. Since we last spoke at the end of March, the Bank has continued its work on the various preparatory actions that are required for the implementation of this project.
Among others, we conclude to the securitization of the Galaxy portfolio, progress the rating work stream by prioritizing the retail secured portfolios and continue further with the preparation of the wholesale portfolios. The good progress from this preparatory element, along with the ongoing dialogues that we kept with investors allow us to happily report that we are re-launching our Galaxy transaction next week with a view to conclude it by the fourth quarter of this year.
Now looking at Page 9, Project Galaxy is structured in a modular manner allowing a [wide array] of flexibilities to the bank as result of its implementation. These flexibilities have allowed us to calibrate the overall timeline and sequence of events in a way that is commensurate to the current market conditions. So, whilst the lockdown period, we have continued our engagement with investors participating in the process, and have now better visibility and comfort on their priorities, outlook, and commitment to our transaction.
We’re working on the operationalization and subsequent sale of New Cepal, as this offers a solid investment opportunity to investors who are looking to acquire a market leader in the NPL servicing space that benefits from a strategic partnership with Alpha Bank and has clear upside potential.
At the same time, we are front-load in discussions from the retail secured portfolios, an asset class that in its nature is more resilient to COVID related stresses and further enjoys the support from recently announced government initiatives. In tandem, we’re continuing our preparation for the rating of the wholesale portfolio, allowing us to present it to investors as soon as visibility improves, and appetite is confirmed [of our investors] value levels.
Finally, we’ll remain confident that the capital envelope remains well within our initial plan, especially when one takes into account the modularity of our transaction structure.
And now, I give the floor to Panagiotis Kapopoulos who’ll give us a brief update on the macro before we turn into more details to our financial performance of the quarter. Pana the floor is yours.
Thank you. Good afternoon, ladies and gentlemen. Let me start with Slide 11. In March, the Greek government introduced strict containment measures to prevent the exponential spread of the virus. Compared to other countries in Europe, these measures were imposed at relatively early stages with the aim to flatten the curve of confirmed cases of COVID-19 infection in order to provide the health system to the [indiscernible] needed to successfully tackle the increased burden.
Greece has succeeded in containing the spread of the virus throughout March and April as depicted in the two graphs on the right hand side, and consequently, has entered to the face of the gradual lockdown relaxation since early May with the milestones presented in the left hand side graph.
Turning to the next slide, although Greece is today enormous COVID free country, significant uncertainty surrounds the short-term prospects of the economy. The alternative growth scenarios provided by the Ministry of Finance, IMF and European Commission, which are presented in the left hand side upper graph, vary considerably with respect to the size of the economic downturn in the current year, as well as the strength of the recovery in 2021.
However, all of them envision a broadly similar [indiscernible]. Increased uncertainty is already reflected in the recent European wide soft data releases. However, as indicated in the right hand side graph, Greece exhibited smaller drop in economic sentiments since the outbreak of the COVID-19 pandemic compared to the euro area evidence, reflecting the success of front-load and containment measures which flattened the epidemic curve, as well as fiscal policy interventions.
Despite that European Commission projects that the impact of the pandemic in Greece in terms of GDP losses will be among the heaviest in euro zone, the unemployment rate is expected by European Commission to decline cumulatively by 0.5 percentage points over 2020/2021 period, in contrast to the projected cumulative increases of other European countries, as depicted in the left hand side graph at the bottom.
This is because the rise in unemployment in 2020 is mainly associated with the increase in seasonal unemployment in the said quarters, mostly related to the tourism industry. The impact of non-seasonal unemployment is expected to be limited, allowing for a sharp decline in unemployment in 2021 by around 3 percentage points in line with the projected strong economic re-bounce.
In addition, as we can see in the next slide, the impact of the pandemic on the short-term domestic economic outlook is expected to be moderated by the size of the fiscal stimulus, which allows the [country] to emerge from the lockdown with a sense of growing optimism. The graph on the left side depicts taxonomy of a wide range of measures, subsidies, deferrals and guarantees, already implemented presented in the Stability program.
After the new government measures announced last week with additional EU funding, the total stimulus package reached EUR24 billion, which accounts for 13% of 2019 GDP, as it can be seen in the lower final graph – hand side graph. The set of liquidity and income support measures undertaken is in-line with other European countries and is expected to pushing the recessionary impact of COVID-19 in 2020, and pave the way for a strong recovery 2021.
It is worth noting that on top of that Greece will be allocated to EUR22.5 billion in the form of grants and EUR9.5 billion in the form of loans from the European Commission [proposed yesterday] recovery plan of [EUR750 billion and EUR50 billion]. The amount allocated to Greece is around 18% of its GDP. If approved, at the end, it will substantially improve the medium-term prospects of the Greek economy.
The first measures except for the [gap and suspension] of tax and Social Security liabilities place an emphasis on employment perfection, mainly financed by the few programs with European Union and provides special seasonal unemployment benefits to around 120,000 seasonal unemployed individuals until September, while also extending the current unemployment benefits ending in May by two months. These measures are of great significance.
Turning to the graph on the right, based on the last available date on the balance between hiring’s and firing’s, the number of net hiring’s should be at a much higher level according to the prevailing seasonal pattern observed in previous years. However, the rise of COVID enabled 2020 was smaller due to the generalized lockdown [indiscernible] food services capacitors.
So, and moving now to the next slide, the jobs protection schemes intend to counterbalance the negative shock of the purchasing power of seasonal employees as we estimate that the adverse effects on the touring sectors will be driven by demand side related to other restrictions and fears of contagion as well as by supply side effects on the back of reviews total capacity and increased cost structure deriving from the lockdown in the second quarter, and newly introduced protocols.
However, Greece is now planning to reopen touring season in June aiming to capture significant parts of tourism flows, which are usually observed in third quarter of the year as indicated in the graph at the bottom. Finally, the negative impact from exports of services on the current account balance is expected to be somewhat mitigated by the weaker inputs because over some huge domestic demand and lower oil prices as Greece is a net importer of petroleum products.
Let me now pass the floor to Mr. Papagaryfallou for the rest of our presentation.
Thank you, Panagiotis. I would like to start with a summary of key financial trends we have observed during the first quarter. To start with core to provision income, we note an increase of 9% year-on-year, driven by our continued delivery on cost containment and strong performance in fees. We have more details on this later in the presentation. We have also seen positive developments on the asset quality front with negative NPE formation and increased NPE coverage.
The bank recorded strong negative formation within the quarter with a reduction of balances by 400 million. When it comes to inflows, first quarter performance compares favorably towards the past five quarters as we have managed to contain the defaults, while exits remained at very good levels supported by tours, notwithstanding a marginal negative impact in March 2020, stemming from the lockdown.
It is noted that the gross negative formation was recorded in all segments with the repay reducing by 300 million and wholesale by 100 million, stemming mainly from more intensive initiatives on the retail segment and consistent performance in wholesale portfolios. As a result, our Group NPE ratio at the end of March 2020 was reduced to 43.5% from 44.8% as of December 2019. The NPE cast coverage during the respective periods increased to 44.1 from 43.8%.
Our underlying cost of risk decreased within the quarter to 150 basis points. On top, we have taken additional COVID-19 related provisions due to the deterioration of forward looking macro parameters. These added 100 basis points to the ratio, increasing the total cost of risk for the quarter to 250 basis points. Our business volumes showed strong growth both in terms of performing loans, which increased by 3% within the quarter, supported by higher new loan disbursements of 1.6 billion.
Customer deposits increased by 1.5 billion in the quarter, as a result of inflows from both individuals and businesses and state deposits. In Greece, deposit balances grew by 1.6 billion, reflecting reduced household spending redemptions from investment projects due to market volatility, and drawdown of tax credit lines deposited inside accounts. On the Greek inflow, 400 million is attributable to inflows from households and 1.2 billion from businesses and state deposits.
Our liquidity position has improved with a loan to deposit ratio is 95% as of the end of the first quarter, whereas our LCR has improved further, currently standing at 92%; our cash buffer, including money, the target account and ECB eligible on the coverage collateral amounts to 4.5 billion. Coming to wholesale funding, at the end of March, our reliance on Eurosystem funding stood at 3.9 billion comprised of TLTRO funding of EUR3.1 billion and 800 million participation in ECB’s LTRO facility, maturing June 2020, while our repo balance increased by 200 million Q-on-Q to 6.5 billion.
Our efforts to further reduce the funding cost have benefited significantly following ECB’s temporary collateral easing measures implemented on April 20, relating to the eligibility of securities issued by the Greek government and to improve haircuts of existing pool of accepted collaterals.
As the Bank’s pool of ECB eligible assets increased with the inclusion of Greek government securities, we reduced our repo portfolio and increased ECB financing from 3.1 billion to 9.3 billion benefiting from the negative 50 bips interest rate under LTRO operations. Lastly, as we will discuss later, our total capital ratio remains strong with 70.5% and almost 3 billion of excess capital. We expect further regulation [easing], which is expected to improve our ratios further.
On Slide 17. There we illustrate our P&L and balance sheet performance Q-on-Q and year-over-year. Here you can see again that our first quarter profit after tax has been impacted by the 120 million provisions we have taken due to COVID-19. You will also see that Q-on-Q our net interest margins falls from 2.45 in the fourth quarter 2019 to 2.34 in the first quarter of 2020, down by 11 bips or 8 bips when adjusted for calendar effect. The drop is attributed to the expansion of the balance sheet by 3.2 billion, mostly by increased deposits in the Tier 2 issuance in the first quarter, and the residing of the funds to cash in central bank balances until they get into work as interest generating assets during the year.
Let’s now turn to Page 18 to elaborate further of the quarterly contributions to the net interest income. As shown in the top chart, our net interest income amounted to 381.2 million down by 6 million quarter-on-quarter or 1.5%, mainly affected by the lower contribution from loans alongside the negative impact from the calendar effect. Here it is worth discussing each contributor explicitly in order to understand the quarterly movement.
On the asset side, as shown on the bottom left corner, average net loan balances decreased quarter-on-quarter by 200 million, and along with a marginal spread reduction, they had a combined negative effect of 4.4 million on the net interest income. We note here that average loan balances got reduced in the first quarter due to implementation of our NPE reduction plan and repayments from the performing perimeter, despite new loan disbursements for the period.
Here we should highlight that in the first quarter our performing loan book expanded by 3% versus the fourth quarter of the previous year following new loan disbursements of 16 billion, also supported by drawdown of credit lines by businesses. [Tapering] of the credit line is expected to continue to support net interest income in the second quarter.
Going forward, new disbursements will also be supported by the Bank’s participation in the upcoming Hellenic Development Bank scheme and the new Entrepreneurship Fund business funding for COVID scheme for SMEs providing further upside to net interest income.
On the liability side, deposits had a positive impact of EUR2.5 million while time deposit rates at 35 bips versus 44 bips in the previous quarter as shown in the chart on the bottom right corner, a trend that is expected to continue going forward.
Wholesale funding costs escalated in the first quarter on the back of the absorption of our Tier 2 issuance cost at 4.25% yield, which more than offset the reduction of the average cost of our repo transaction by 35 bips Q-on-Q. We should note however, that we expect this trend in wholesale funding costs to reverse in the coming quarters as a result of the Bank’s participation in ECB’s LTRO facility and minus 50 bips.
These follows ECB’s temporary collateral easing measures implemented on April 20 relating to the eligibility of securities issued by the Greek government, as well as improved haircuts on the existing pool of accepted collaterals.
Bonds and other posted a positive contribution of EUR1.5 million in the quarter supported by new placements, which more than offset the impact of a decrease in yields in Greek sovereign securities. Last but not least, we have the calendar effect, which translates to a reduction of EUR4.2 million of net interest income in the first quarter.
Overall, for the year, we expect net interest income to trend relatively well with the run rate increasing to 386 on average in the coming quarters, and overall net interest income being flattish relative to 2019. Higher net interest income from performing loans and funding will be counter balanced to some extent by lower income on GDPs and non-performing exposures.
Let’s turn to Page 19 and discuss the evolution of net fee and commission income. In the first quarter of 2020, net fee and commission income stood at EUR89.2 million, up by EUR19 million compared to the first quarter of 2019. Fee commission income was also supported by all remaining sources, such as other commercial banking, like assurance and investment banking and brokerage, as they all reported a positive result year-on-year.
Looking at the drivers in more detail, as portrayed on the left chart, the main contributor was revenue from commercial banking activity at EUR11 million as a result of the increased cards usage and high launch commissions stemming from the increased volume of new loan disbursements. Other asset management fees stood higher by EUR5 million on a yearly basis.
On the right, you can see the quarterly performance. The first quarter net fee and commission income was reduced by 4.2% to EUR4 million, mostly attributed to the seasonally driven lower fee income from cards as well as to the base effect from bonds and syndicated loans’ issuance in the fourth quarter of 2019, which have offset the increased contribution from asset management.
Looking at 2020, we expect fees to be impacted during the next three quarters, and hence, trend lower than 2019 by circa 5% to 7% due to lower transactional activity on the impact of the crisis, also in contained tourist arrivals, as well as from lower asset management fees.
Let’s now turn on Page 20 on costs. As you can see on the left chart, our recurring operating expenses for the first quarter of 2020 stood at EUR251 million versus EUR258 in the first quarter of 2019, reduced by 3% year-on-year or EUR8 million.
Looking at OpEx on a geographical basis on the top left corner, you may see that the improvement came from our Greek cost base by almost 7% as operations abroad posted an increase of EUR5 million mainly due to salary adjustments in Romania and the impact of the new collective labor agreement in [China].
Looking at each category separately, you may see that the general expenses declined by 3% year-on-year to 106 million, mainly reflecting lower NPL remedial management and third-party fees, as well as lower marketing expenses.
Staff costs were down by 6%, due to the headcount reduction as a result of the Voluntary Separation Scheme implemented in our Greek operations during 2019, leading to the gradual departure of 836 employees, with an estimated annual life benefit of EUR35 million. Headcount in Greece has reduced 7% year-on-year. Lastly, the depreciation charge was higher year-on-year by EUR2 million as a result of heightened IT investments.
With regards to 2020 full-year outlook, we expect that the carrying operating [expenses increased] to report a year-on-year decrease of circa 4% driven by lower marketing expenses, third-party fees, NPL remedial management, [captured] by postponing and freezing of spending due to COVID-19 crisis and other cost reduction initiatives.
Moving on to the next slide, Page 21, we depict the quarterly evolution of our corporate provision income and its drivers. We anticipate for 2020, resilient net interest income performance and along with a reduction in operating expenses and a negative impact on fees due to COVID-19, the corporate provision income this year is expected to be around the same levels as in 2019. Total pre-provision income for the year will further benefit by additional trading gains during 2020.
Now, moving on to Slide 22. As indicated earlier in our presentation, the prevailing level of uncertainty renders a forecasting process, a challenging exercise. Our starting point was the supervisory recommendations for the avoidance of excessive [indiscernible] assumptions in the IFRS 9 models. Based on forecasts provided by economic research revision, we have updated certain risk parameters embedded in our models using updated macros to take into account the impact of COVID-19.
We have used multiple scenarios as per IFRS. Our basic and V-shaped scenario provides for a cumulative delta in GDP for the period of 2020/2021 of minus 1.1%. On serving the adverse scenario, we try to capture the downside risks to GDP by employing an L-shaped type of shock.
As a result of such estimates, we have budgeted additional EUR120 million of specific COVID-19 related provisions already in the first quarter, which increased our cost of risk by almost 100 basis points. This compared with a wide range of outcomes observed among European banks [indiscernible] rather on the high side.
Lately, we have seen economic forecasts by third parties, including Bank of Greece, the Ministry of Finance and the European Commission. The shape of the shock and all these scenarios looks similar. You can call it V-shape and results in a cumulative delta in GDP ranging from minus 1.82% to plus 0.4%. This is important in order to look through a very volatile 2020.
On Page 23, you can see the evolution of our total capital adequacy [cap ratio], which now stands at EUR8.4 billion, with a total CAD reaching 17.5% as of the end of March 2020. These came in lower by 38 basis points Q-on-Q, positively affected by 104 bips from our successful Tier 2 issuance in February and negatively affected by the following factors. 77 bips from the anticipated phasing in of IFRS 9 and Basel III amortization, both recognized in the first quarter of every year and the impact from the regulatory treatment of the 10% DTA threshold; 53 bips from the low reserve of the investment securities portfolio measured at fair value through other comprehensive income following the crystallization of gains, as well as due to decreased valuation; and finally, the increase of credit risk, as well as the period loss.
The Bank’s total capital adequacy ratio of 17.5% stands well above the minimum ratio requirement of 11.5% relaxed due to the suspension of the capital conservation buffer providing a total buffer of EUR2.9 billion. Our core equity Tier 1 stands at 16.5% or EUR7.8 billion, well above the minimum core equity ratio requirement for 2020 of 6.7% as adjusted for the changes of CRD V. Our fully loaded core equity Tier 1 ratio stands at 14%.
Following Basel Committee recommendations, there are additional capital relief measures anticipated under the CRR, which in total, could bring almost 90 basis points of additional capital or higher in case the full spectrum of Basel Committee recommendation is adopted by the European Commission.
With this, we open the floor to questions.
Ladies and gentlemen, at this time, we’ll begin the question-and-answer session. [Operator Instructions] The first question is from the line of Sevim Mehmet with JP Morgan. Please go ahead.
Hi, good afternoon. And thank you very much for the presentation and congratulations on the results. My first question is on provisioning, please. What do you think about the evolution of cost of risk in the coming quarters now after you’ve taken the EUR120 million related to COVID-19? And more broadly, given you will do the hive-down as part of the Galaxy securitization this year, would you choose to maximize provisioning in the next quarters in order to front-load as much as possible also as part of the hive-down process?
Hello, Sevim. This is Lazaros. As I said, when it comes to macros, we’re going to update our risk parameters in the second quarter of the year following new data which is expected early June from the European Central Bank. We are also monitoring the market to get more credible data for informing our risk parameters in a more meaningful way. As far as cost of risk is concerned, you noted that the underlying cost of risk without COVID was about 1.5%.
That should trend lower in the coming quarters as the first quarter was intensive in terms of management actions. Because of COVID and the slow down, we expect lower cost of management actions in the coming quarters such as auctions or restructuring with haircuts. That should provide a buffer to take potentially additional losses from what matters that may come up in the coming weeks. And coming to asset quality trends that are related with cost of risk, we have noted very good performance in the first quarter of the year with negative formation of 400.
We expect negative formation also in the second quarter of the year. Whereas in the third and the fourth quarter, we may see an increase due to new defaults. Overall, we expect for the year no new formation because of the performance in the first half of the year. Having said that, you know, we will be updating our forecast quarter-by-quarter as we get more data about the performance of our portfolio. Overall, we expect cost of risk to trend this year between 180 bips to 190 bips over launch.
Great, thank you, Lazaros. And one follow-up on your comments earlier, you mentioned that you expect further easing in regulations for capital going forward. Could you please tell us what that could entail?
You have seen the Basel recommendation regarding the SME factor, intangibles, infrastructural projects and the dynamic approach for IFRS 9. That means that for additional provisions for stages one and two, there is a net back to the transitional core equity Tier 1. You know, having taken a conservative approach as to the potential impact of these drivers, we came up with almost 90 bips that could affect positively our transitional core equity Tier 1.
Now, we have not included in this forecast, the so called static approach for IFRS 9 that also includes the historical impact since 2018 of IFRS 9 impact. This has been recommended by the Basel Committee, but yet we have not seen the green light from the European Commission. That is the potential upside to the numbers, but we cannot currently represent that this is happening.
Great, that’s very useful. Thank you. And one last question, if I may, that’s on digitalization. Previously, you told us that the biggest drive that you’ve seen in terms of alternative channels was in 2015 when you saw record number of digital users, etcetera, who has turned out to be sticky. Are you seeing similar trends today? Or was the recovery of it too fast, so to say, to force such a forced penetration? And if you could share any data with us that will be very useful, thank you.
It’s Vassilios. I think they are completely different circumstances back then, and now in terms of the starting point. Back then, it was really the early stages of our digital journey. So practically, you hedge almost all of your customer base that were willing to venture into that and actually didn’t, as you correctly pointed out, it has proven sticky. Now, it is only a very small cohort of people that have not been making use of the available channels, mostly in the [indiscernible] category, which again for particular reasons, have opted or could not do it so far.
So we have seen a pickup in that particular cohort as well. However, in the initial days of the lockdown, and the [cram down] that we’ve all experienced in our call centers, it was very difficult for them to pick up and now as we’re moving out of the lockdown, we will make sure that we will take them by the hand and take them on the other – across the river and actually start using a digital offering as well, but it is a much, much smaller number that, you know, does not utilize our options.
Okay. Thanks very much.
The next question is from the line of Floriani Jonas with Axia Ventures. Please go ahead.
Hi, everybody. Thanks for the presentation. I have a few questions. The first one is related to asset quality. So looking at slides 8 and 9 when you updated the progress on the Galaxy and the securitizations, I was just wondering how should we think about the potential financial impact that you previously guided for when you launched the Galaxy project. And, you know, given the changes in macro, changes in assumption, and also the delay, I mean, how should we think about that initial estimate now going forward? Second, is still on NPEs and following on something you already mentioned, but in regards to the expectation for the NPE book for the year, I think it’s fair to assume that given the moratoria on the measures, the amount of in-flows is likely to be limited. But apart from that, how prepared is – do you think you are to push more on the outflow side of things? I mean, do you think that Alpha, during the year, will take the opportunity to accelerate some of the drivers on the outflows? I don’t know if on write-offs maybe some of the organic outflows like [indiscernible] collections could be difficult because of the crisis, but how do you see the outflow potential for the Bank and the measures that you have? And then finally on Slide 40, where you show your GDP book, just wondering what is the strategy there? I think Lazaros mentioned something about potential sort of trading gains in the year. Is there a kind of an optimal level of stock of GDPs you’re aiming for the moment? And, you know, anything on that will be helpful. Thanks.
Hello, Jonas. This is Lazaros. Starting with your first question on the Galaxy, which is the cornerstone in our NPE deleveraging strategy and we’re happily reporting the start the process. As you have seen in the relevant pages, we are prioritizing HAPS portfolios, the ones that can get government guarantee. And in particular, retail secured ones. This means that our focus for 2020 is a perimeter of anything between EUR7.5 billion and EUR10 billion. The modular way we have built up Galaxy allows us increased flexibility on how we structure any 2020 transaction, ensuring that we can get a deal done.
The transaction structure also gives us flexibility as to the timing of the sale or distribution of the notes, subject to market conditions of course. Coming to the financial impact, it’s again this transaction modularity which is key when it comes to the impact analysis. Prioritizing HAPS portfolios means that we can have a less capital intensive transaction even under stricter COVID scenarios.
Should we transact on the HAPS perimeter, we expect the capital impact below 300 bips, which is commensurate with our initial estimations, however, for a smaller perimeter. Recent pandemic related government measures to support housing loans are expected to provide a significant boost to the Galaxy portfolios while we have been proactive in coverage build up on all perimeters in the past quarters.
Now, with regards to your questions for asset quality trends and, you know, the flow – the potential flows in the year, I have explained in my previous answer how we estimate the coming quarters to behave. The first half will be negative in terms of NPE formation and we should expect some new formation in the third and mostly the fourth quarter of the year.
However, our attention and focus is on implementing mitigating measures, such as new financing, new restructuring projects, supported by very significant government initiatives from affected perimeters to really mitigate the risks for clients who face temporary liquidity problems and not solvency problems. With regards to outflows for NPEs, indeed, during this period it’s more difficult to achieve our initial target we had for almost EUR1 billion of core NPE deleveraging through organic means.
We have seen a halt of auctions and liquidations. Still auctions cannot happen until the end of July. Restructurings with deep haircuts that require engagement with the customer are more difficult in this respect. Cash collections also are lower. So, in terms of curing and organic exits from the NPE perimeter, you should expect lower numbers than the ones budgeted previously in the year. Having said that, the first and the second quarter of the year are satisfactory in terms of cures. That’s why you have seen exits in the first quarter and most probably you’re also going to see in the second quarter of the year.
Last, coming to GGBs, we have recorded to-date, almost EUR200 million of trading gains year-to-date and that supports our estimates for the corporate provision of the year. You may remember that we have given guidance for core PPI at levels identical to the ones we experienced back in 2019. We have been selling from the fair value through OCI portfolio, and we have been adding other bonds to the whole to collect portfolio for yield. Most probably this is going to be the strategy going forward, reducing volatility on the equity side, and adding bonds within our risk appetite framework onto the whole to collect portfolio.
Okay, thank you. If I can follow-up just on my first question and back to Galaxy, is there anything you can share in terms of recent interactions with potential buyers? And, you know, how do you feel the buy side has – you know has behaved over the – these last couple of months compared to previously?
Well, we have never stopped talking to this group of people that have shown interest and you may recall that actually the lockdown happened just a week before we had our initial date for non-binding offers. So, it was only natural, but, you know, after the first few days, where things weighted to settle, we have continued the dialogue and we’re checking up on them on their thoughts and how they feel. So, our decision to re-launch the transaction actually comes after taking into account also the interactions that we have been having with the group of interested investors as well.
The next question is from the line of Bairaktari Angeliki with Autonomous Research. Please go ahead.
Hello, good afternoon. Thanks for taking my question. With regards to cost of risk, you have shown us that non-COVID related cost of risk stood at 150 basis points in Q1, which is 50 basis points lower from the 2019 run rate. Can I ask what has driven these significant improvements? We were expecting an improvement to happen this year, but that was, I thought, on the back of Galaxy, which doesn’t look like it’s going to happen until the end of the year. So, I’m just wondering what were the underlying drivers of this non-COVID cost of risk? Then, you mentioned to a previous question from one of my colleagues that the cost of risk this year is expected to be at around 180 basis points to 190 basis points. Does that include the coronavirus provision? And then a question on Galaxy, what will be the impact from this transaction on the NII in 2021, especially, we’re talking about a smaller perimeter, but still quite heavy on mortgage loans? And last question for me, please. On TLTRO, could you please tell us what is your maximum capacity and whether you will be able to roll forward and actually top the minus 100 bips scheme from June onwards? Thank you very much.
Alright, Angeliki. Hi, this is Lazaros. The first quarter cost of risk did 150 bips excluding COVID. The improvement compared to last year run rate is a byproduct of several reasons. Last year, you know, we had significant costs for management actions, including significant NPE modification losses to a tune of EUR220 million, which we do not expect to hear as we have kind of shifted the mixture of products towards other characteristics. Then we have transaction costs related to portfolio transactions last year. This is not in the bill in the first quarter of the year, plus, we have seen significant curing from retail in the first quarter, which has helped the bottom line.
In the coming quarters, as I said, we expect an even lower cost of risk over loans from managing the portfolio. That is, to some extent, a function of less intense management actions as the situation does not allow for a very deep engagement with the customers with the kind of products we had last year, and that would leave some space for absorbing potentially higher macro losses from COVID-19.
The guidance that I had given, 180 basis points to 190 basis points, includes also some projections for additional macro related losses on the base of certain sensitivities were adding, but we need to have more data, tangible data in the second quarter of the year in order to book them. There was another question about TLTRO, where our maximum capacity is 11.9 billion, and we intend to [tap] it in its entirety just to take benefit of the lower funding costs and grow our books respectively.
Miss Bairaktari, have you finished with your questions?
No, just to follow-up on the TLTRO, do you expect – when you [tap] this EUR11.9 billion, do you expect these to receive 100 basis point negative rate from the ECB instead of the minus 50 currently? And also, is your strategy going to be reinvesting these into Greek government bonds? Or what type of securities? I understand part of that will be used for lending, but I imagine not all of it because it’s a very big amount. So, it would be interesting if you could give us an indication of what you expect the impact of that will be on the NII, not only from the ECB negative rates, but also from the reinvestment of these into government bonds, etcetera? And I also had a question on the impact on NII from the Galaxy transaction next year, if you could please answer that? Thank you.
There was a question about Galaxy. The impact from – the fully phased in impact from the sale of the secured retail portfolios, which is to the tune of EUR150 million, EUR160 million fully phased in, in 2021 assuming that this happens at the end of 2020. Now, with regards to TLTRO, we expect an additional benefit to the tune of EUR25 million to EUR30 million. We don’t intend to in order to acquire more GGB’s, in order to tap the line. We have eligible collateral to allow us get there with all sorts of eligible collateral for TLTRO operations.
The next question is from the line of Memisoglu Osman with Ambrosia Capital. Please go ahead.
Hi, thanks for the presentation. Coming back to the funding side from ECB, what kind of benefit should we expect for the TLTRO in Q2, for example, i.e., what kind – so versus negative 50, what should we compare with what’s the repo cots you will see? And, you know, how should we quantify that for Q2? Thank you.
You know, the full year is [EUR25 million to EUR30 million]. You should take one fourth of it for the second quarter.
Okay, that was a full year figure [indiscernible].
Okay. Okay. Thank you very much.
The next question is from the line of Abad José with Goldman Sachs. Please go ahead.
Yes. Hello, good afternoon. Thank you very much for the presentation. Two questions from my site. The first one is – was that you’re key assumption for cost of risk to essentially, correct me if I’m wrong, but is actually – you expect that negative cumulative contraction of around 110 bips over the next two years, 2020, 2021, this is the key input for your guidance. Could you give us some sensitivity around this? So is this actually a linear approach? So, actually, if this number were to be twice as big, so effectively, the negative cumulative contraction was going to be actually 220 bips, should we expect actually your cost of risk to be – so the COVID portion of your cost is to be actually twice as large as you guided? The second is or a sub-question here, if I may, which is whether we should expect so – I believe you’ve calculated expected loss for the two-year period, given that you are using inputs for two years, so do you expect actually similar dynamics in 2021 ex-Galaxy? And the second question is about whether you could give us an update on anything that you may be discussing with Greek or European authorities on any potential new systemic solutions, particularly potential Bank along the lines of what actually the Bank published or proposed actually a year and a half ago? Thank you very much.
Alright. I will take the first two questions then Vassilios will talk about the new potential systemic solutions. Coming to macros, we have tried to illustrate that more or less most of the stakeholders give economic forecasts provide for a V-shaped type of recovery with a delta on the cumulative GDP drop or growth between 2020 and 2021. This is a way to look through 2020, which is very volatile and have a perspective, which goes beyond the 12 months period. And you see in the respective graph the numbers ranging from minus 1.8 to plus 0.4.
In our first quarter IFRS 9 assumptions we have assumed a macro base scenario, which provides for a cumulative delta of 1.1% negative in the two years period. Now, based on the latest data we see, most probably this V-shape or mostly V-shape will we be confirmed. However, it may be a steeper decrease in 2020, and, you know steeper increase of GDP in 2021.
Unfortunately, this is not a linear exercise, and a rule of thumb is, is quite risky with respect to what happens for 1%, but coming to PDs, for stage one and stage two launch, if you want the rule of thumb, just for discussion purposes, it’s not necessarily very, very technical. That could mean that an additional 1% in GDP growth could result in additional 30 million to 40 million euro of impact in our ECL.
The second question was about cost of risk post galaxy. I mean, in 2020, you should assume that the 180 bips to 190 bips guidance does not relate to any galaxy losses, any galaxy losses will be addressed at the level of the holding company through the sale of the measurement equity notes after the completion of the highs down.
Now, moving on to the third question, we have been having this discussion roughly this period last year, and our – and principle position remains the same, but given the magnitude of the problem in Greece and in particular in a period of volatility and reduced visibility, the more instruments available to reduce the legacy issues the better it is. Now, currently, the only solution available is actually the Hellenic asset protection scheme.
As mentioned before, we do see currently opportunity to re-launch our project, which is going to be based as Lazaros mentioned before for the retail – for the security retail portfolios and so potential later on for the whole sale. This is going to be based on the Hellenic asset protection scheme, which means that with what we currently are able to see, it is functioning.
Mr. Abad, have you finished with your questions?
Yeah. Just to make sure, I mean, is there anything actually material that we should expect over the coming next three months based on your discussion with a supervisor to complement actually the APS scheme?
Is there any other systemic solution on the table that could become material over the coming quarters that could complement actually the APS scheme?
Well, we know that there is an exchange of use, but we’re not part of that discussion.
Okay. Thank you.
[Operator Instructions] Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to management for any closing comments. Thank you.
Well, thank you very much for participating in our first quarter results. Thank you all for not just for your participation, but also for your active engagement in the Q&A session. And we are indeed looking forward to speaking to you again with presenting our first half results in August. Thank you very much.
Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for calling. Have a pleasant evening.