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Edited Transcript of ALPHA.AT earnings conference call or presentation 30-Mar-17 2:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Alpha Bank SA Earnings Call

Athens Apr 21, 2017 (Thomson StreetEvents) -- Edited Transcript of Alpha Bank SA earnings conference call or presentation Thursday, March 30, 2017 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Georgios Michalopoulos

* Panayotis Kapopoulos

* Periklis Kitrilakis

* Spyros N. Filaretos

Alpha Bank A.E. - Deputy CEO, COO, General Manager and Executive Director

* Theodoros Athanassopoulos

* Vassilios E. Psaltis

Alpha Bank A.E. - CFO and General Manager

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Conference Call Participants

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* M??t?? Nemes

UBS Investment Bank, Research Division - Associate Director and Analyst - European Banks Research

* Olga Veselova

BofA Merrill Lynch, Research Division - Equity Banking Analyst

* Pawel Dziedzic

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Yafei Tian

Citigroup Inc, Research Division - Assistant VP and Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. This is the chorus call conference operator. Welcome, and thank you for joining the Alpha Bank Full Year 2016 Financial Results. (Operator Instructions) And the conference is being recorded. (Operator Instructions) At this time, I would like to turn the conference over to Alpha Bank management. Gentlemen, please go ahead.

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Spyros N. Filaretos, Alpha Bank A.E. - Deputy CEO, COO, General Manager and Executive Director [2]

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Thank you. Good afternoon, ladies and gentlemen. Welcome to the Alpha Bank Fiscal Year 2016 Results Presentation. My name is Spyros Filaretos, Deputy CEO and Chief Operating Officer. And with me to go through the presentation, Mr. Vassilios Psaltis, General Manager and CFO; and Mr. Panayotis Kapopoulos, Group Chief Economist. And later on, for the Q&A session, we will be joined by the executive general managers, Lazaros Papagaryfallou, Strategy and Planning; Theodoros Athanassopoulos, Non-performing Loans, Wholesale; Periklis M. Kitrilakis, Non-performing Loans, Retail; and Georgios Michalopoulos, Group Treasurer.

In 2016, we have delivered a profitable performance despite the significant provisions of EUR 1.2 billion and the asset deleveraging of EUR 4.4 billion in the year. The higher net interest margin and the improving cost to income ratio supported our operational performance, while we preserved our strong capital base and effective further balance sheet restructuring. We have reduced our Eurosystem funding exposure by 25% and further diversified our funding sources. In Southeastern Europe, we exited another noncore country with a capital-accretive transaction.

As for Greece, the economy's performance in 2016 was underpinned by increased private consumption despite the higher tax burden, and this was due to employment gains and falling oil prices. Unfortunately though, investment, which is a prerequisite for growth, remain unchanged.

And on that note, I turn over to Panayotis Kapopoulos, our Chief Economist, to take us through the economic performance of the country. Panayotis?

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Panayotis Kapopoulos, [3]

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Good afternoon, ladies and gentlemen. The market economic outcomes in Greece remain weak, reflecting the lingering uncertainty. The economy contracted from October to December after 2 straight quarters of growth, with each performance in the last quarter of 2016 turning out worse than projected in February's last estimate, registering after all a 1.2% decline.

As we can see in the left-hand graph in Slide 3, for the year as a whole, the economy stalled in 2016 for a second consecutive year, yet showing signs of resilience despite the position of capital controls. Private consumption represented, with the blue-colored bar in the graph, once again contributed positively to GDP by 1 percentage point. Its growth rate was a solid 1.4 in 2016 despite the tax-related austerity and the sharp drop in consumer confidence as seen in the right-hand side graph, indicated with the red line.

In particular, the recovery of consumption in 2016 was supported, one, by employment gains, depicted with a green line in the left-hand graph; and falling oil prices in the first 9 months that brought some respite to households' disposable income; two, by households' negative propensity to save in an attempt, not only to meet tax obligations, but also to protect their standard of living; and three, by the increase in electronic transactions which caused an output shift from the shadow to the official economy. On the other hand, business investment remains unchanged, while net exports subtracted 0.5 percentage points from GDP growth as exports fell faster than imports.

Regarding Greece's 2017 growth outlook, we know that it is surrounded by an unusually high degree of uncertainty because of the delays in reaching a staff level agreement on the second review. Additionally, we are growing increasingly concerned about the fact that Q4 2016 result translates into a negative carryover effect into 2017 to the tune of 0.6 percentage points. Our statistical modeling suggests that the continuation of uncertainty has already started to take its toll on the domestic economy. However, growth dynamics are about to turn positive and shift into a higher year when uncertainty dissipates.

Our baseline scenario, which takes into account only the expected impact of developments and measures announced so far, envisages an output expansion at pace between 1.5% and 1.7% in 2017. This recovery is projected to strengthen in 2018 and beyond, predicated on an overarching assumption of a confidence reinforcement which could strengthen economic fundamentals, particularly business investment.

Growth momentum, however, might be halted by uncertainties related to domestic and external environment. The projected pick-up in growth may fall short of expectations in case of persistent bottlenecks in structural reforms and privatizations. Furthermore, prolonged negotiations of the second review may further delay, i, the inclusion of Greek government bonds to the QE program; the lift of capital controls; and third, the specification and clarification of medium and long-term debt relief measures, and therefore, the return of the state to the markets.

Reflecting the aforementioned trends, conditions in the labor market continued to improve throughout last year, with employment growth averaging around 1.7% and the jobless rate hitting a 57-month low of 23.1% in December 2016. As we can see in the graph on the bottom, the increase in employment reflects mainly, i, the higher increase of part-time employment, which is depicted with a red line in the graph, compared to full employment, the blue line; two, the positive contribution of industry and tourism; and finally, the [ speedy ] gap of employment in public administration, indicated with an orange-colored bar, compared to 2015, which was the first year with job creation in this sector of public administration since 2007.

Let me turn now to Slide 4 -- 5. 5, sorry. On the fiscal front, as depicted in the lower panel graph, the most recent budget execution data point to a general government primary surplus close to 2% of GDP for the full year 2016, well in excess of the respective program target set for 0.5% surplus, as indicated with a triangle -- the red triangle in the graph.

The fiscal outcome is better than targeted on the back of, firstly, tax hikes -- tax rate hikes applied upon an almost stable economic activity. As I said, it was 0% growth in 2016. As we can see, the upper panel graph, this overperformance, measured as a deviation from the target, comes mainly from the upward shift of the scale in income taxation and VAT revenues as well as the reduction of the public investment expenditure. Secondly, the clearance of government arrears to the private sector, which restarted after the completion of the first review in September, had gradually slowed down and, in fact, started to accumulate once again in the beginning of 2017. Thirdly, the use of electronic transactions widened, to some extent, the narrow tax base.

For the current year, we believe that the primary surplus target of 2% of GDP penciled in the new budget is well within reach, conditional on the further improvement of domestic economic activity, the swift elimination of uncertainties as well as the smooth implementation of the agreed structural measures aiming to curb tax evasion. However, a very interesting feature of the execution of fiscal policy is the fact that, despite the overperformance in terms of tax revenues, the tax debt of households and enterprises is also increasing at a rapid pace, as we can see in the right-hand side graph, indicating a collection inefficiency related to the payment [ culture ] as well as the difficulty of households and firms to meet their tax obligations due to the fact that high tax rates applied on a narrow -- very narrow base. Since the onset of the crisis, the tax debt has more than doubled, growing at a rate of about EUR 1 billion per month in recent years. This bulk is not so easy to be managed. As to its composition, around 40% is due to penalties and fines, with less than half to account for direct and indirect taxes.

Let me now pass the floor to Mr. Filaretos for the rest of the presentation.

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Spyros N. Filaretos, Alpha Bank A.E. - Deputy CEO, COO, General Manager and Executive Director [4]

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Thank you. If we move to Slide 8, there we lay out the key highlights of 2016. Looking at the full year P&L figures on the left, group NII increased by 1.4% year-on-year at -- to EUR 1.9 billion. Of course, the funding was reduced, while NI -- net interest margin improved by 20 basis points to 2.9% year-on-year. Fees and commissions income generation was strengthened by 3% year-on-year to EUR 318 million, mainly due to increased card usage and the high contribution from bancassurance, advisory and foreign exchange transactions. Our recurring operating expense base dropped to EUR 1.1 billion on the back of the ongoing platform rationalization. Cost to income ratio was reduced to 48.2% from 50.2% a year ago.

As a result, our core pre-provision income for the full year increased by 6% year-on-year to EUR 1.19 billion, driven by an improved core revenue performance and operating efficiencies. This performance was in line with our yearly guidance for EUR 1.2 billion core PPI. Impairment losses for the year reduced significantly by 61% year-on-year to EUR 1.1 billion, with cost of risk standing at 191 basis points. Overall, the bank reported a profit after tax of EUR 42 million for 2016, supported by deferred income tax on tax-deductible losses and the gains from discontinued operations.

On a quarterly basis, core pre-provision income was up by 1.5% to EUR 300 million, on the back of an increase in NII by 1.8% to EUR 490 million. Fees and commissions income showed resilience in the fourth quarter at EUR 81 million compared to a seasonally strong Q3 performance due to the holiday period. Our recurring operating expense base in Q4 stood at EUR 285 million. Quarterly impairment losses stood at EUR 304 million, while net income was around EUR 20 million.

Moving on now to the right-hand of the slide, the balance sheet. Assets reduced further to EUR 64.9 billion at the end of 2016. And this was mainly driven by a securities disposal amounting to EUR 2.2 billion and a net loan reduction of EUR 1.8 billion. Our group deposits stood at EUR 32.9 billion in December, up by EUR 1.9 billion, mainly driven by the EUR 1.3 billion increase in deposits in Greece, most of which was achieved in the last quarter of the year and also from a EUR 600 million increase from abroad, driven by strong performance -- deposit performance of our Cyprus and Romanian operations.

As a result, our Eurosystem funding decreased further to EUR 18.3 billion, which figure is lower by EUR 6.1 billion compared to the one of the previous year. Our NPL ratio stood at 38.1%, with a strong cash coverage of 69%, or 125% if collaterals are included. Finally on this slide, our common equity Tier 1 ratio further strengthened to 17.1%.

If we move to Slide 9, you can see how our capital position was further strengthened with the common equity Tier 1 ratio increasing to 17.1% in December or 17.3% if one includes the positive impact of 20 basis points from the sale of our Serbian operations, as you can see on the top chart of the page.

The quarterly constituents of this increase were our quarterly results, which contributed 6 basis points, improving prices for -- in our available-for-sale securities, that was 11 basis points contribution; and another 5 basis points due to the increase -- decrease, sorry, of our risk-weighted assets.

On a fully loaded Basel III basis, our core Tier 1 ratio stands at 17%, if we include the positive income -- impacts from the sale of the Serbian operations. It should also be noted here that our capital adequacy ratio is comfortably above the 12.75% minimum SREP requirement as set by the regulators, standing at 17.3%.

In terms of quality of capital, we can see on the bottom left chart that Alpha Bank's fully loaded ratio, excluding the effect of the tax credit law, stands at 11.3%. We remind you also that our capital base has neither [ preference ] shares nor (inaudible).

On page -- Slide 10, we take a more thorough look at the evolution of the deposits. Looking at the right-hand side, and after we adjust for the sale of Serbia, in the last quarter of 2016, group deposits recorded inflows of EUR 1.4 billion, out of which EUR 1.5 billion came from Greece, and that amount was evenly split between individuals and businesses, in line with the system-wide inflows; and EUR 0.2 billion coming from our international operations. However, as you can see at the end of the right-hand chart, at the beginning of 2017, Greek deposit inflows were partially reversed as a result of both seasonal effects observed in the first quarter and rising uncertainty over the delay of the second review completion. The inflows from our Southeastern Europe operations at the beginning of the year are mostly attributed to Cyprus.

Moving to the bottom-left hand of the slide, we see the improvement in the funding profile of the bank over several quarters now. Our Eurosystem reliance over assets is in a consistently declining trend, standing at 27% at the end of February 2017, from around 40% in September 2015. This decrease is driven by the gradual increase in deposit balances, EFSF bond disposal and increased usage of further funding sources like repo funding and securitization transactions.

On Slide 11, we take a deeper look in Eurosystem reliance. On the top left of the graph of the slide, we can see that our Eurosystem funding has been reduced by 25% year-on-year to EUR 6.1 billion. This was achieved by deposit inflows, as I said, of 1.9%; security disposal of EUR 2.2 billion, mainly EFSF bonds; increase of our wholesale funding, following the issuance of EUR 300 million SME securitization in December 2016; loan deleveraging and other balance sheet items, EUR 1.4 billion; and an increase in repo transactions of EUR 0.3 billion.

In February of 2017, our reliance on central bank's funding was further reduced by EUR 0.5 billion despite the deposit outflows. And this was mainly driven by the continued deleveraging in our securities portfolio as well as an increase in interbank repos. This is also portrayed in the chart below as the bank doubled its interbank repos to transactions versus the beginning of the year, reaching EUR 1.2 billion in its attempt to gradually diversify its funding profile away from Central Bank funding.

Last, if we look on the bottom-left chart. We continued our efforts to reduce costly Pillar II bonds as we have managed to repay successfully, in 2016, an amount of EUR 8.2 billion of nominal bond amount and a further EUR 0.7 billion by March 2017, reducing our current exposure in Pillar II bonds to just EUR 300 million nominal value.

And on that note, I pass to Vassilios Psaltis to take us through the rest of the presentation.

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Vassilios E. Psaltis, Alpha Bank A.E. - CFO and General Manager [5]

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Thank you. Turning to Page 12 on the top-left chart, in 2016 the bank achieved a solid corporate provision income performance, in line with the target we have set for the year. And this was a result of an improved core revenue performance as well as operating efficiencies.

Looking at the top-right chart, we can see the main components that contribute to the quarterly evolution of our corporate provision income, leading to EUR 302 million in the fourth quarter of 2016. The improvement, quarter-on-quarter, was a result of the positive contribution of net interest income by EUR 9 million, driven by the continued reduction in wholesale funding costs, which more than counterbalanced the lower contribution from the loan portfolio; stable quarter-on-quarter fees and commission income, while operating expenses and other income had a negative impact of EUR 4 million. The reported pre-provision income was adversely affected by EUR 71 million of integration and extraordinary costs, out of which, EUR 54 million related to impairment of fixed and intangible assets.

Moving to the bottom left chart of the page, we see that our net interest margin evolution is further improved on a quarterly basis, having reached essentially 3% on the back of improved funding costs. The performance has been achieved despite the fact that our balance sheet continues to contract year-on-year, as one can depict from the bottom right chart of the page.

Moving now to Page 13, let's elaborate on the key contributors to our net interest income evolution. As you can see on the top left chart, our net interest income increased to EUR 490 million, up by EUR 9 million quarter-on-quarter, mainly on the back of lower funding costs. Lower loan balances and spreads continue to negatively affect net interest income by EUR 6 million quarter-on-quarter. In deposits, the negative impact from the increase of deposit volumes was neutralized by the repricing in time deposits, reflecting to a 0 effect on net interest income for the fourth quarter. Wholesale funding costs, on the other hand, improved by EUR 11 million on the back of Pillar II bond reduction and lower reliance on ELA. Lastly, bonds and other balance sheet items contributed additional EUR 4 million.

On the top right chart, you can see the improvement in net interest income by EUR 28 million on a yearly basis. The drivers are similar, namely lower contributions of loan, almost fully counterbalanced by lower retail and wholesale funding costs.

In the bottom left-hand chart, we can see the evolution of decreasing costs for both retail and wholesale funding. New time deposit rates continued to decline, standing at 75 basis points in the fourth quarter and at 68 basis points as of February this year. On wholesale funding, we continue our efforts to reduce reliance on costly ELA funding, and in particular through Pillar II collateral, which we have almost repaid in full. As a result, wholesale funding costs has decreased to 1.21% at the end of 2016 from 1.67% a year ago.

In the bottom right-hand chart, one can witness the evolution of the funding mix year-on-year, whereby costly ELA funding contribution has been reduced by 10 percentage points as a result of the increased contribution by 7 percentage points of deposits and an increasing ECB funding and interbank repos.

Let us now turn to Page 14 and discuss the fees and commission income, which was enhanced year-on-year by 3% to EUR 318 million, essentially due to higher fees from increased cards and acquiring business. In particular, cards turnover has increased by 49% to EUR 4.6 billion for the full year of 2016, with a significant increase in debit card users. Merchant acquired sales have also increased by 42% year-on-year as a result of an accelerated usage of local accounts by 58% in the full year of 2016 compared to the relevant periods in 2015.

In the top-right chart, we can see that income from cards and acquiring posted an improvement in performance of 12% in the full year relatively to the same period last year. In addition to this, we remind that Alpha Bank offers the widest choice of cards in the market, as it is the only bank issuing and accepting cards from all major payment schemes.

Now on Page 15, we can look at the operating expenses. And as you can see on the top-left chart, our full year operating expenses, excluding extraordinary items and integration costs, beat our target of EUR 1.12 billion for 2016.

Moving on to the top-right chart, we can see that operating expenses came lower by 2.3% year-on-year, amounting to EUR 1.108 billion, with improvements stemming mainly from the decrease in staff costs, which were down 3.5% year-on-year. This was a result of the ongoing platform rationalization.

More specifically, looking at the bottom of the page, headcount for the group was reduced by 14% year-on-year, from 13,856 in December 2015 to 11,863 employees at the end of the fourth quarter in 2016, on the back of the sale of our subsidiary in Serbia as well as the Ionian Hotel Enterprises, the Hilton Hotel, as well as the completion of a Voluntary Separation Scheme in Cyprus during the first quarter of 2016.

Also, the group network at the end of December 2016 declined to 721 branches, down by 20% year-on-year. And this was mainly the result of an ongoing platform rationalization in Greece as well as the sale of a subsidiary in Serbia, with a reduction of total network by 93 and 76 branches, respectively. Plus, our cost to income ratio continued to improve, standing at 48% in 2016 from 50% a year ago, which shows the continuous development in terms of operating efficiency.

Now on Page 16, let's analyze the evolution of certain cost drivers. On the top left-hand chart, you can see that the bank has achieved to lower its cost base in Greece since 2012, mainly as a result of merger cost synergies following the acquisition of Emporiki Bank and Citibank's retail presence in Greece. At the end of 2016, the Greek cost base, excluding remedial management costs, stood at circa 30% lower compared to 2012 on the back of employee reduction as well as branch reduction by 22% and 28%, respectively.

At our international presence, we focused on divesting units with marginal or negative contribution to profitability. This has allowed to decrease our cost base abroad by 32% since 2014. However, our cost base will continue to be burdened by elevated remedial management costs as we embark on the NPE reduction plans and intensify our restructuring efforts, employing both internal and external resources. Our focus going forward will be on increasing retail network efficiency, further streamlining central functions and optimizing third-party spend, especially for remedial management of nonperforming loans. In addition, looking at the bottom chart, we can see the components that contributed to the reduction of operating expenses, more than counterbalancing the incremental increase in the remedial management costs.

From a segmental perspective, we are reporting a -- sorry. First, we need to turn to Page 17. And there, we have the NPL trends, where you can see that the NPLs declined across all segments following the bank's successful restructuring efforts, with the group's NPL ratio standing at 38.1% in the fourth quarter. And the NPLs declined by EUR 225 million versus a positive formation of EUR 77 million in the previous quarter.

On the next page, on Page 18, there we have the trends and the drivers for the nonperforming exposures. The respective ratio stood at 53.7% in the fourth quarter, whereas we posted a quarterly formation of new NPEs of EUR 97 million, which was pretty much at the levels of the past couple of quarters. The restructuring activity in Greece, you can see in the bottom left-hand side, that it increased to EUR 2 billion in the fourth quarter, which is more than 50% higher than a year ago. That led the NPE formation on a yearly basis down by 77% versus last year.

On the top right-hand chart, there you can see that, within the fourth quarter of 2016, gross NPE interest in Greece stood at EUR 0.8 billion, including redefaults of previously restructured loans, but also loans for which there was a trigger event for impairment.

During the same period, we have witnessed EUR 0.4 billion exits from the NPE perimeter as a result of curings, repayments and liquidations. The resulting formation of net NPEs in Greece was EUR 0.2 billion in the quarter after taking an impairment of EUR 0.2 billion. Please note that in the first quarter of this year, due to the prolongation of the uncertainty pertaining to the completion of the second review, the resulting tightening of liquidity conditions in the market and the decline of customer confidence, we have witnessed less engagement of our customers in restructuring discussions and, therefore, an increase of redefaults. The worsening of asset quality trends experienced in the first quarter of 2017 may put at risk certain parts of our budget for the year. However, we feel that we still have the levers to deliver targets as planned.

Finally, on Page 19, there you can see that our cost of risk year-on-year declined by 11% to 191 basis points from 215 basis points in 2015 on a like-to-like basis, if we exclude last year's impact of the AQR. In the last quarter of the year, the group's impairment charge stood at EUR 304 million, higher than last quarter, as we have increased the cost coverage of certain portfolios, in line with our respective business plan for remedial management. On NPEs, our cash coverage remains at 49% or 106% including collateral. On NPLs, cash coverage remains at 69% or 125% if we include the collaterals.

And on that, we should open the floor to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Dziedzic, Pawel with Goldman Sachs.

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Pawel Dziedzic, Goldman Sachs Group Inc., Research Division - Equity Analyst [2]

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I have 3 questions. The first one is just on the asset quality trends that you mentioned. You essentially pointed out that the trends, both when it comes to NPL reduction and NPE -- reduced NPE inflows in fourth quarter were positive, but you mentioned that these trends have reversed in the first months of 2017. So firstly, would you be able to quantify and give us a sense of a scale of the deterioration that you're seeing currently?

And then a follow-up to that. Can you remind us what is your NPE reduction target for 2017? And again, what type of risk to this number you see? You mentioned that you perhaps might see it more difficult to achieve it. And also, on asset quality, I was hoping that maybe you can tell us a little bit more as to what methods you are primarily targeting in bringing the NPEs down in 2017. Will it be to write off sales or other measures?

Then my second question is on your pre-provision income and cost targets. Again, in your opening remarks, you mentioned that you managed to deliver on the target set for 2016, this is EUR 1.2 billion core PPI and I think cost base, around EUR 1.1 billion. So firstly, can you give us a sense of what level for those 2 metrics would you target for 2017? And I guess I'm interested also, how do you see the trends developing both when it comes to top line and cost? You made the point that your cost initiatives are -- were successful. I think on Slide 16 you show a 30% reduction in operating costs in Greece over last 2 years, but how much is left? And what reduction, if any, we can expect to see going forward?

And the same on the top line. You mentioned that it benefited from falling funding cost, but how much scope to improve there is going forward; in particular, if deposit trends and funding trends perhaps are a little bit more shaky at the start of the year? And at the same time, would you expect NII to come under pressure if you intensify NPE restructurings?

And I think the last question and last follow-up to the remarks that you made in your presentation is on deposits. Again, you helpfully quantify the outflows in the first 2 months of the year at around EUR 0.6 billion, but can you give us an update as to what you are seeing in perhaps in March? Are those trends now stabilizing or reversing? And perhaps, what do you expect for the rest of the year? And do you see loan-to-deposit ratio now at just below 140% as a relevant metric that you would like to see lower going forward?

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Spyros N. Filaretos, Alpha Bank A.E. - Deputy CEO, COO, General Manager and Executive Director [3]

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Well, Pawel, I think after elaborating on these 3 very modular questions that you put, I doubt that there will be further questions on the call. So let's try to do our best in order to have the best usage of your and the rest of the participants on the call, given the fact also that we have one peer waiting for their call. I think we should start from the balance sheet question on deposits. Our treasurer will give you an update on March as well as how we feel that, following a successful completion of the second review within the second quarter, we may see the trends evolving for the rest of the year. George?

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Georgios Michalopoulos, [4]

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Good afternoon. Well, as you rightly said, in the first 2 months of this year, we had this EUR 400 million net of deposit outflows from the group. In March, the situation has slightly reversed in the sense that we are -- with unfinished numbers, if you want, for the month, but we have virtually no material outflows. It could be in the order of less than 100 -- less than EUR 100 million. At the same time, with the speed we are hovering on the repos and the deleveraging, as we said, of the balance sheet. That means, eventually, that we will cut down on our ELA exposure in March vis-a-vis February. So with that in mind, and as you already saw also in interest rates, the new term deposits are also priced still lower than the 2 months, let's say the first 2 months of this year. So from an NII perspective, deposits are costing less. ELA is getting diminished. The replacement of ELA is from repos and deleveraging that the opportunity cost there is less than 1.5%, which is the cost of ELA. So from an NII perspective, still the first quarter, with all the events, let's say, till virtually the end of March, we have not seen any deterioration.

In terms of volumes for the remainder of the year, I will start with the wholesale funding part first. We expect that we will continue using our capacity to repo certain asset classes from our balance sheet. Most of which are now discounted at the ELA window, which means that ELA is meant to go down. At the end of the day, the entire schedule and the funding plan of the bank talks for a drop of ELA, again, in 2017. That should be also helped by the fact that, as you rightly mentioned, with the conclusion of the steps into coming back to normality, and that includes a second review and the discussion around that and the seasonal effect being over, the second quarter is always much better than the first and the following -- the last 2 quarters of the year, we always do much better in deposits. We believe that looking back in 2016, whereby we managed to, again, with a very negative start, we managed at the end to accumulate EUR 1.4 billion of new deposits. That should be the number or slightly higher that we should aim for in this year, at the end of it.

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Spyros N. Filaretos, Alpha Bank A.E. - Deputy CEO, COO, General Manager and Executive Director [5]

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Well, thank you, George. Now moving to your question on the pre-provision income. I think this year reported pre-provision income of EUR 1.28 billion, it would be very difficult to beat for 2017. The main reason for that is that it includes some handsome trading gains, which were one-off, as in the case of the Visa International transaction as well also the ability to participate through the EFSF bonds at the buyback program of the ECB. Those things will not be repeated next year. Therefore, if one looks at the various component on net interest income basis, I think the trends that we have seen this year will continue also in 2017, which means that the erosion in the loan contribution into net interest income would be counterbalanced by the improvement in the wholesale funding cost as we're going to be able to reap the full benefits of the elimination of the Pillar II bonds.

And we do believe that in the latter part of the year, following the second review, the path of substitution of costly ELA through cheaper deposits will continue as the system will normalize. We may have a delay as far as the first quarter is concerned, and potentially also for part of the second quarter, but we are confident that this will continue and thus will allow for net interest for a positive, even marginally, net interest income development. This speaks also for fees and commissions, as we also expect this year for a strong tourist season will, by itself, support fees and commission development and the trend to using the POSes in the purchases in the Greek market, i.e. what Panayotis mentioned before as moving things from the gray economy into the normal economy. This capturing will continue and will support the fee creation.

Now moving on to the operating expenses. There, we do -- we will see further development as far as the HR cost is concerned, as we not only are going to be reaping the benefits of the VSS that was conducted in Greece, and people essentially left at the end of the year. But there may also be further initiatives during the year. Even the benefit from what I just mentioned is EUR 20 million on an annual basis and that will be seen. Having said that, we've already indicated the trend of increased remedial costs that we've experienced in 2016, and given the fact that we're going to be moving towards more longer-term solutions, and therefore more costly in their implementation, the remedial management costs will further increase as of this year. So putting all those things together, I think the 2 areas where you would want to focus is that on the net interest income, we do expect flat net interest income for 2017. And as far as pre-provision income, we do expect marginally lower compared to last year.

Now as far as the impairment cost is concerned, we believe that the impairment costs for 2017 will be lower than last year, than 2016. And that allows us to be very confident in having -- in looking into 2017 for another profitable year for us.

Finally, on the asset quality front, the plan -- indeed, our plan is no different to what is already public as far as the 4 significant banks is concerned, something that our Central Bank has put out, where you can depict that, essentially, for the target for 2017 is a reduction in NPA -- in NPEs by 7%, and that is roughly also where our plan is. As far as strategies is concerned as well as also to give you much more color on the developments in the first quarter, we'll pass the floor first to Periklis to run you through retail, which has been the one hurting most by the recent development, and then to Theodore to run you through the wholesale.

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Periklis Kitrilakis, [6]

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Thank you. Well, our efforts during the first quarter of the year remain unchanged. And that is trying to push hard on cash collections on the restructured borrowers, while expanding our restructuring base on the non-restructured ones, as per our plan. However, the initial 2 months of the year haven't helped us in keeping the pace that you've seen on the last quarter of the year, mainly because of the delay of the second review, the increased burden that tax charges have put especially on households, and the fact that a number of very important legal reforms haven't taken place yet. However, initial signs of March saw a better trend compared to what we have been experiencing since January and February, leaving us room to speed up in the remaining of the year if the second review closes in a timely manner. With respect to wholesale...

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Theodoros Athanassopoulos, [7]

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Well, in terms of wholesale, we think that the market seems to be, in the first quarter, is a little bit different. Of course, we do think that the [ propagation ] of the second review and the status in the market affects especially lower corporates. It's a behavioral thing. The sooner the second review closes, we consider that we will be back on track. There's a different performance in corporate, in large corporates, and a different performance in small SMEs. But overall, the trends, they are not -- they are such that allows us to keep the full year budget and for [ filling ] the business plan as long as the trends -- the asset quality trends start to rise after the second review close.

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Operator [8]

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The next question comes from the line of Nemes, M??t?? with UBS Investment Bank.

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M??t?? Nemes, UBS Investment Bank, Research Division - Associate Director and Analyst - European Banks Research [9]

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I have 2 questions, please. Firstly, just to follow up on NPE formation. If you could just clarify how much of the EUR 0.8 billion of entries were attributable to redefaults? And also, now that you have close to 4 quarters of experience with restructuring efforts, more specifically longer-term restructuring measures, if you could just comment on the cure rate that you are seeing in the business, that would be helpful. And my second question is on fee income outlook. If you could just be a bit more specific here, what is your expectation here? What should drive actually a further increase in fee income? And what do you see in the first quarter so far?

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Spyros N. Filaretos, Alpha Bank A.E. - Deputy CEO, COO, General Manager and Executive Director [10]

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Well, as far as the NPE formation is concerned, out of those 8 point -- EUR 0.8 billion of entries, I think you should look at a split of roughly 2/3 coming from redefaults and about 1/3 of new entries. On the redefaults, obviously there you have mostly things that have been not able to pass the curing period, i.e. they have failed during the probation period. But also on that one, I would include also those that have failed the 'unlikely to pay' challenge. Now as far as to the cure rate?

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Panayotis Kapopoulos, [11]

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Well, the cure rate on the households, the latest vintages, they stand at 40% being cured 1 year after the modification of the loan. As you can appreciate, this is highly related to how things evolve going forward, as the redefault rates are very much dependent on the future payments of the borrower. And based on the latest definitions, you need to miss just one payment in order to be categorized as redefaulted.

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Spyros N. Filaretos, Alpha Bank A.E. - Deputy CEO, COO, General Manager and Executive Director [12]

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Now as far as fees and commissions is concerned, I think we mentioned also during the initial part of our presentation that the key focus will be on the credit card business. And auxiliary to that, there will be Wealth Management related initiatives, which we're going to be unfolding this year. However, fees related to new disbursement is something that will be coming indeed from some larger disbursements that we have for this year. And you may have picked up that Alpha Bank is in the consortium of funding [ for board ] in its investment for the peripheral [ efforts ], something that was purchased for EUR 1.2 billion, and there are several hundreds of millions of investment that they are about to conduct. So similar projects we are going to participate, and that will create a fee income commensurately.

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Operator [13]

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The next question comes from the line of Veselova, Olga with Bank of America Merrill Lynch.

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Olga Veselova, BofA Merrill Lynch, Research Division - Equity Banking Analyst [14]

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My first question is about NPE reduction targets for this year. I'm trying to understand why you believe that your NPE target will be delivered this year, despite the fact that the first quarter was not as expected. And I think the recently approved DTC law shouldn't be announced this year because that was already incorporated in your assumptions about NPE reduction this year. So I'm trying to understand how you think this to match the deterioration of environment which was not expected and NPE reduction target, which was set in October, November last year. So this is my first question.

My second question, are you in a position to disclose your SREP requirements? And how much higher, in your view, could it be if the bank does not meet SSM NPE target? And also, given your comfortable CET 1 ratio, even if we exclude DTC, do you think that SSM can use any other tools to motivate banks to follow NPE targets, other tools other than SREP requirement? So this is my second question. And my third question is about your Slide 18. On the bottom-left chart, you show NPE restructuring effort, EUR 2 billion in the first quarter. Can you help us understand what exactly is this? Are these loans which were already in restructuring category or they were in NPL category and they were restructured and became NPEs? So what exactly this EUR 2 billion are?

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Spyros N. Filaretos, Alpha Bank A.E. - Deputy CEO, COO, General Manager and Executive Director [15]

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Well, thank you, Olga. Let's start addressing one by one. So your first question was, why we are confident about the NPE reduction for this year. Well, I think that was not exactly the tone we struck when we did the presentation. What we have said is that the delays that we're experiencing and the -- and thus, the different macro environment that we are confronted with, they make meeting those targets quite challenging. So in order to still meet them, given the fact that we've already said that we're going to be off track for the first quarter, means that the levers that we have available would be used more compared to the budgeted element in order to address that. This is all what it is. Now what the exact mix of that is and which one we will be able actually to deliver, this is something that we don't have the answer yet as we obviously do not know how exactly the environment will fare. All we're saying is that we have good levers available and we may be able still to make it happen. Another element, obviously, may be the fact that we start from a better position than what was in the plan, i.e. a bit of overperformance in the fourth quarter.

On your second question on the SREP, our SREP, we mentioned that in the presentation, is 12.25% for 2017. Now what may happen if we're not meeting the target -- this is not something that the banks have discussed with the SSM, more than the actual SREP process, there's nothing more that may happen that we are aware of. Now in order of motivation, I think this is also part of the SREP. I mean, if you are going to be meeting such an important element, clearly that gives quite the leverage in your self-assessment and thus in the discussion of the right level of capital with the regulator.

Finally, on your question on Page 18. What we have here is the restructuring of NPEs, which means that it has not just of NPLs, but also for [ own ] loans that are below the 90 days. So they are more than 1 day, therefore they are in the NPE perimeter, but they are below the 90 days, which means they are in the NPE and not in the NPL perimeter.

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Olga Veselova, BofA Merrill Lynch, Research Division - Equity Banking Analyst [16]

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This is clear. Can I just double check? You said your SREP requirement is 12.25%?

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Spyros N. Filaretos, Alpha Bank A.E. - Deputy CEO, COO, General Manager and Executive Director [17]

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Correct.

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Olga Veselova, BofA Merrill Lynch, Research Division - Equity Banking Analyst [18]

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And why do you think it is so much higher than your peer, which reported SREP numbers yesterday?

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Spyros N. Filaretos, Alpha Bank A.E. - Deputy CEO, COO, General Manager and Executive Director [19]

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It is exactly the same.

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Operator [20]

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The next question comes from the line of Tian, Yafei with Citigroup.

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Yafei Tian, Citigroup Inc, Research Division - Assistant VP and Analyst [21]

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It's Yafei from Citi. I have one question regarding the NPE. If I were to compare the fourth quarter progression when it comes to NPE formation in the figure that you displayed on Page 18 of the presentation, there's EUR 0.8 billion of entries, and this has been around the similar number in the past third quarter as well, and the exit number is also similar. So what we are seeing so far is a very stable trend when it comes to the restructuring efforts and as well as the impact of the restructuring. You did mention that 2/3 comes from redefaults; and to bridge where you are when it comes to NPE today and the 7% reduction target, how should we be thinking about moving from the current NPE level to 7% lower? Is that going to come from more aggressive write-offs or is that going to come from improved macro environment? So I do appreciate if you could help us to bridge that gap.

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Spyros N. Filaretos, Alpha Bank A.E. - Deputy CEO, COO, General Manager and Executive Director [22]

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Thank you, Yafei. Well, I think the answer to that is a bit of everything. And what do I mean by that? Number one, we do indeed need the macro environment as we had forecasted that when we were doing the plan and we did not expect that prolonged discussion around the second review. And the impact of that, I think we will soon witness also in the GDP figures for the first quarter.

Number two is that we have -- within that environment, the key impact that it has in our plan [ is in ] the reception that we have in the restructuring efforts that we're having. In an environment where there is a problem with confidence and there is a lot of volatility, people have the natural tendency, both in terms of individuals and corporates, to hoard cash, which means that they are not engaging as they would have engaged in the restructuring activities. Thus, the restructuring efforts that we have been able to push through to our borrowers is lower by roughly 1/3 compared to what we had anticipated for this quarter, which was according to our plan. So immediately, you see how the macro environment is having an impact on the execution of the plan. Having said that, that means also that your effort to move into more longer-term restructuring, including write-downs, certainly is not facilitated by this environment. Because when you are approaching your customer, you need to make sure that the ability actually to drive them through is going to be the highest possible. And that, as I said in the first quarter was not there. Therefore, apart from the improvement in the macro environment, we have also some levers. You mentioned one example. It may be an acceleration from write-off on our part. That may be an option that we may be able to use.

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Yafei Tian, Citigroup Inc, Research Division - Assistant VP and Analyst [23]

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So if I were to do a 'back of the envelope' calculation, the target is roughly EUR 2.2 billion of gross NPE reduction over 1 year time. And given that the first quarter and second quarter, and more likely second quarter as well...

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Spyros N. Filaretos, Alpha Bank A.E. - Deputy CEO, COO, General Manager and Executive Director [24]

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May I interrupt you? This is not -- this is a bit more than what we have implied previously, which we said that we are more or less to the plan it's actually lower than the EUR 2 billion mark.

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Yafei Tian, Citigroup Inc, Research Division - Assistant VP and Analyst [25]

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Okay. Okay. That's clear then. I was thinking of how to reach a EUR 2 billion reduction target. That's clear.

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Operator [26]

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

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Spyros N. Filaretos, Alpha Bank A.E. - Deputy CEO, COO, General Manager and Executive Director [27]

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Thank you for being with us, ladies and gentlemen. We hope we'll see you in the next quarter as well. As I guess you can realize, the challenges are still out there and I think they're mostly defensive challenges rather than challenges centering around new business creation. We would like it not to be that way, but still it is what it is. We are doing our best and we hope we'll strike a more positive note in our next meeting. Thank you for being with us.

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Operator [28]

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