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)
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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.
- 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.