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ALPHA BANK Τοις Μετρητοίς

G.Sachs on Alpha bank

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Alpha Bank (ACBr.AT): 3Q19 First Look: €7bn NPE target in Greece brought forward by 1 year to 2020 through a large (up to €12bn) NPE

All in, Alpha Bank reported a good set of 3Q19  results P&L-wise,  with a +19%  beat       to Visible Alpha Consensus at the PPP level, mostly driven by stronger-than-expected fees (+9% vs Cons) and trading and other (€86mn reported vs Cons-implied for

€27mn) more than offsetting weaker-than-expected NII (-7% vs Cons) and higher costs (+7% vs Cons). The NPE ratio fell to 45.5% in 3Q19 (-2.6 pp. qoq) with the cash coverage also down to 44% in the quarter (-3 pp. qoq); this was mostly due to the reclassification to HFS of €1.8bn NPEs (Project Neptune). Finally, the bank reported a CET1 B3FL ratio of 15.1%, which was materially lower than expected

(-71bps vs Cons) despite strong sequential growth (+30bps qoq).

More importantly, however, the bank also released yesterday a new, 3-year Strategic Plan (2020-22), frontloading NPE reduction efforts (via a large NPE securitization of up to €12bn) and bringing their previous €7bn NPE target in Greece forward by 1 year to 2020; all in, the bank now targets a Group-level NPE ratio of c.13% (<10% in Greece), with cash coverage not materially different from now (44% as of 3Q19), a CET1 B3FL of c.15% (flat/marginally lower vs 3Q19), a cash pay-out of 10% (vs 0% now) and a ROE of c.9% (vs <1% in 2019E), all by 2022.

Our five key takeaways from the Plan (including key messages from the Q&A) are as follows:

Jose Abad

1.               Macro forecasts 2020-22E: Real GDP and RE prices are expected to grow c.2% and 3.5%-4% pa, respectively, over the bank’s new 3-year Strategic Plan; this is expected to drive the unemployment rate down to 14.5% by 2022, from 16.7% as of August 2019.

  • Accelerated NPE reduction…
    • New NPE reduction targets imply the bank will now reach their previous

€7bn NPE target (announced alongside the bank’s FY18 results) by 2020, which is a year earlier than originally planned.

  • The Group-level NPE ratio is expected to fall (from 46% as of 3Q19) to

<23% by 1H20 (pro-forma the Galaxy deal) and to c.13%  by  2022.  In Greece, the NPE ratio is expected to fall (from 44% in 3Q19) to c.20% in  1H20 (pro-forma the Galaxy deal) and to <10% by 2022. Importantly, NPE targets include the senior notes from the Galaxy deal (more on this below)

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

in the denominator.

  • As a result, the Group-level CoR is also expected  to  fall,  from  c.200bps  in 2019 to <100bps in 1H20 (pro-forma for the Galaxy deal) and <70bps in 2022.
    • NPE reduction plans frontloaded thanks to a large (up to €12bn) NPE securitization expected in 2020: (1) The bank plans  to  retain  100%  of  the senior tranche plus a 5% vertical slide across the  mezzanine  and  junior tranches, while selling the remaining 95% of the latter tranches to third-party investors; (2) the senior tranche (with a coupon in the 80-100bps range) is expected to benefit from guarantees from the  Hercules Asset  Protection Scheme (HAPS) worth €3.7bn; (3) the Galaxy portfolio is mixed, with 54% of  retail NPEs and 46% of corporate NPEs, across a number of sectors, and its     cash coverage has not been disclosed; (4) post the Galaxy deal, however, cash coverage is not expected to materially diverge from current levels (44% as of 3Q19 at the Group level).
    • The Galaxy deal will take place alongside two other deals: (1) A carve-out of   the NPE platform and its subsequent sale to a third party investor; and (2) the hive-down of the Group’s core banking operations to a new entity.
    • Post the Galaxy deal (which is expected to leave the bank’s pro-forma NPE level at c.€7bn, implying a c.20% ratio, in Greece) in 2020, the bank plans to further reduce this level down to €3.5bn (or a <10% ratio) by 2022 through both restructurings (€2bn) and “closing procedures” (€1.5bn), with the latter likely leading to the accumulation of REAs.
    • Including REAs (as it is normally the case in other countries as, e.g., Spain),      NPE reduction will be lower (and the 2022 NPE ratio higher) than targeted: In Greece, assuming a 9% NPE ratio by 2022 (given <10% target), a €3.5bn NPE target balance would imply gross loans worth c.€39bn; adding €2.3bn worth      of REAs (€0.8bn as of 3Q19 plus  €1.5bn  expected/likely  to  be  accumulated until 2022) to both the numerator and the denominator would lead to a   broader NPE ratio of c.14% in Greece (c.17% at the Group level) by 2022.
  • supported by higher efficiency gains…
    • The bank also disclosed plans to generate cost savings  worth  €120mn  by 2022 (vs the 2019  cost base): Group-level recurring costs are expected to fall  to €960mn in 2022 from €1,077mn in 2019E (-11%)
    • Even though €35mn have already been captured through the 2019 VSS, an additional €85mn worth of cost savings are expected from lower NPEs (€35mn) and higher productivity (€50mn); re the latter, the bank’s branch network is expected to fall by c.20% to 350 branches, from 430 currently.
  • and higher lending & fee income revenues
    • Lending: €14bn originations expected in 2019-22 at the Group level.

Pricing-wise, the bank expects spreads to compress (-40bps by 2020, -60bps by 2022) due to strong competition in the sector.

  • Fees expected to increase by €110mn by 2022, of which €90mn would be in Greece only, across lending (€20mn), payments (€7mn), trade finance

(€23mn), asset management (€30mn) and insurance (€10mn).

  • Overall P&L, capital and ROE impacts:
    • P&L: All in, PPI in 2021 is expected to be c.10% below the 2019 level.
    • B/S: Total assets are expected to grow by >€6bn to >€67bn in 2022 (vs €61bn in 2018), with higher securities (+€4.6bn) to comply with LCR requirements, the senior notes from the Galaxy deal (+€3bn) and other assets (+€0.4bn) more than offsetting the decline in net loans over the period (-€1.9bn).
    • Capital: All in, the net effect from the different positive and negative impacts associated with the accelerated NPE reduction plans announced yesterday is expected to be at c.3.5% of RWAs; as a result,  with  a  CET1  B3FL  ratio  of 15.4% (pro-forma for the deconsolidation of Neptune) as of 3Q19, this would  fall to 11.9% pro-forma for the Galaxy deal; with organic capital generation expected at c.2.4% until 2022, this would leave the bank’s CET1 B3FL ratio at 14.3% by 2022, below the c.15% target.
    • Tier2: The bank also announced plans to add c.2% of RWAs worth of Tier2 capital in order to reach an overall c.17% capital level by 2022.
    • Capital requirements are currently at 14.5% on a fully loaded basis; however, management expects a lower P2R (currently at 3%) post the successful execution of current de-risking/NPE reduction plans.
    • Dividends: The bank also disclosed plans for a cash pay-out of c.10% from 2021 onwards, subject to SSM approval.
    • ROE expected to reach c.9% by 2022, from <1% in 2019E,  driven by lower   NPEs (Δ 5-5.5 pp.), cost savings (Δ 1.5 pp.) and higher loan originations & fee income (Δ 2-2.5 pp.).

Exhibit 1: Alpha Bank 3Q19 Results Snapshot

€mn

Alpha Bank (ACBr.AT, Buy, last close €1.91): 3Q19 snapshot
  Actuals       3Q19   Overview  
  3Q18 4Q18 1Q19 2Q19 3Q19   Cons q/q y/y act/cons
NII 427 427 388 389 383   414 -1% -10% -7%
Fee income 78 86 70 81 96   88 18% 23% 9%
Other 144 87 75 135 86   -36% -40%
Total income 648 599 533 604 565   529 -6% -13% 7%
Operating costs -274 -335 -262 -282 -280   -261 -1% 2% 7%
Pre-provision-profits 374 264 271 323 285   240 -12% -24% 19%
Impairments -297 -704 -243 -246 -262   -216 6% -12% 21%
Other results -16 -14 22 -9 -3   -65% -81%
PBT 60 -453 51 68 21   122 -70% -66% -83%
Corporate taxes -19 452 -24 -9 -16   84% -17%
Net profit (continued) 41 -1 27 59 5   90 -92% -89% -95%
Attributable net profit 41 -1 27 59 5   39 -92% -88% -88%
Core Income (NII + Fees) 504 512 459 470 479 502 2% -5% -5%
Core PPP (Core Income – Costs) 230 177 197 188 199 241 6% -14% -17%

Capital and leverage

CT1 ratio (%) 18.3% 17.4% 17.0% 17.8% 18.0% 18.5% 20bps -30bps -52bps
CT1 ratio FL (%) 15.2% 14.0% 14.0% 14.8% 15.1% 15.8% 30bps -10bps -71bps
TA/TE 8x 8x 8x 8x 8x 8x 0x 0x 0x
Loan / deposits 105.6% 103.9% 102.6% 101.7% 99.6% 103.6% -2pp -6pp -4pp

Asset Quality – Group

NPL ratio (%) 34.1% 33.5% 33.3% 32.7% 30.0% 30.7% -2.7pp   -2.0pp   -12%   -2.6pp   -3.0pp   -9% -4.1pp   -2.0pp   -19%   -4.4pp   -3.0pp   -16% -0.7pp   -5.3pp   -8%   —   —   —
   
NPL coverage (%) 69.0% 70.0% 69.0% 69.0% 67.0% 72.3%
NPL balance (€bn) 18.2 17.6 17.3 16.8 14.7 16.1
NPE ratio (%) 49.9% 48.9% 48.9% 48.1% 45.5%
NPE coverage (%) 47.0% 48.0% 47.0% 47.0% 44.0%
NPE balance (€bn) 26.6 25.7 25.4 24.7 22.4

Returns and efficiency

ROE 2.0% 0.0% 1.4% 2.9% 0.2% 1.8% -2.7pp -1.8pp -1.6pp
ROTE 2.1% 0.0% 1.4% 3.0% 0.2% 1.9% -2.8pp -1.9pp -1.7pp
C/I 42.3% 55.9% 49.1% 46.6% 49.5% 49.3% 2.9pp 7.3pp 0.3pp
Credit costs -2.9% -7.0% -2.4% -2.5% -2.6% -2.1% -17bps 27bps -49bps

Source: Visible Alpha Consensus Data, Company data, Goldman Sachs Global Investment Research

Exhibit 2: Alpha Bank’s updated NPE reduction plan

Source: Company data, Goldman Sachs Global Investment Research

Our 12-month ROTE/COE-derived price target is €2.38. Key downside risks relate to asset quality and top-line trends, progress on the group’s restructuring, deleveraging as well as funding conditions. Further risks relate to political stability and macro recovery in Greece.

ACBr.AT 12m Price Target: €2.38 Price: €1.91 Upside: 24.9%
Buy GS Forecast
    12/17 12/18E 12/19E 12/20E
Market cap: €2.9bn / $3.2bn Net inc. (€ mn) 145.7 14.2 360.1 484.8
3m ADTV: €7.0mn / $7.7mn Tang. BVPS (€) 5.98 5.11 5.34 5.66
Greece EPS (€) 0.09 0.01 0.23 0.32
Europe Banks DPS (€) 0.00 0.00 0.00 0.00
Tang. equity/tang. assets (%): GS ROTE (%) 1.6 0.2 4.5 5.7
13.4 P/TBV (X) 0.3 0.2 0.4 0.3
M&A Rank: 3 P/E (X) 19.8 NM 8.1 6.0
  Dividend yield (%) 0.0 0.0 0.0 0.0
  CET1 ratio (%) 18.3 15.3 16.0 16.5
      6/18   9/18E   12/18E   3/19E
  EPS (€) (0.03) (0.00) 0.00 0.06

Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 19 Nov 2019 close.

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