Alpha Bank (ACBr.AT): 3Q19
First Look: €7bn
NPE target in Greece
forward by 1 year to 2020 through
a large (up to €12bn)
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:
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)
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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.
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).
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
Alpha Bank (ACBr.AT, Buy, last close €1.91): 3Q19 snapshot
|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|
|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
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%|
|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|
|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|
|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|
Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 19 Nov 2019 close.