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Edited Transcript of ALR.WA earnings conference call or presentation 28-Feb-20 2:00pm GMT

Full Year 2019 Alior Bank SA Earnings Call

Warszawa Mar 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Alior Bank SA earnings conference call or presentation Friday, February 28, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Krzysztof Bachta

Alior Bank S.A. - CEO & President of the Management Board

* Marek Rafal Szczesniak

Alior Bank S.A. - VP of Management Board

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Conference Call Participants

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* Alan Ramsey Webborn

Societe Generale Cross Asset Research - Equity Analyst

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Presentation

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Operator [1]

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Dear, ladies and gentlemen, welcome to the conference call of Alior Bank S.A. At our customer's request, this conference will be recorded. (Operator Instructions)

I now hand you over to Krzysztof Bachta, CEO, who will lead you through this conference. Please go ahead, sir.

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Krzysztof Bachta, Alior Bank S.A. - CEO & President of the Management Board [2]

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Good afternoon. As we today presented our results for 2019 and our strategy for the years 2020, 2022, we will be very happy to answer all the questions that might arise after our presentation.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll proceed to the first question from Alan Webborn from Societe Generale.

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Alan Ramsey Webborn, Societe Generale Cross Asset Research - Equity Analyst [2]

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Thank you for taking the time after your long conference this morning.

Can I ask 1 or 2 questions about sort of Q4 and then a few more things on the strategy? Could you explain a little bit about the sort of the development of risk costs in the fourth quarter? I sort of felt that cost of risk was a little bit higher than expected. You talked about the sort of agroindustry, and sort of just to get a feeling of where you are on the sort of clearing up of the book. And then could you sort of link that into this sort of idea that risk cost in 2020 will be 200 bps, the sort of -- the new loan cost of risk is 1.5 and then you get down to 1.8 by to 2023 or whatever it is. Could you just talk us through how you feel about the sort of the development of risk? That would be -- then perhaps, we could deal with that first.

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Krzysztof Bachta, Alior Bank S.A. - CEO & President of the Management Board [3]

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Okay. So let me answer this question. Well, as we said, we've been analyzing our portfolio through the full year. I don't know whether you've had a chance to listen to our presentation. Our CRO, Marek Szczesniak, who was also mentioning this during presentation and then later during the Q&A session, we actually had 2, let's say, full runs of the revision of the portfolio under new rules last year. Therefore, until the last review in the fourth quarter, we were looking deeply into the active portfolio. Therefore, we have decided that certain items need maybe additional provisions, and this was specifically the Agro segment, and you could see that in the level of risk cost for the full year. We were expecting in the third quarter more like 2.3. Now it's 2.39. This -- the difference comes actually from this final revision of the Agro segment. And we believe that now we are properly covered, let's say, against the risk, of course, considering today's status and today's situation of our clients in the portfolio as a whole.

Now looking at the ratios, which Marek also was mentioning, of course, our new production under new rules, it has started just in the second half of 2019. So the implementation date for the new risk strategy was beginning of July. So we can claim that since then, all the new production is fully under new rules. And as it was presented, looking at the changes we have made, we see that it should have inherent, let's say, cost of risk of 1.5% overall on average. Therefore, taking this into consideration, within 3 years, we believe quite significant part, but not full portfolio will be renewed on the new regulations on the new risk approach. This should lead, together with the changes in the balance sheet structure, towards this 1.8% target that we included in our strategy.

I can say that we believe it is doable. Of course, we need to be very careful with the new production. We need to stick to our rules. However, I think we have confirmed that we will do that. You could see that in the behavior of the volumes in the corporate segment. This fourth quarter, we have somehow released like over PLN 1 billion of portfolio, which was above our new risk limits. And although, it hurts a little bit on the interest income side, we decided that we need to stick to the strategy and comply in order to get to finally 1.8% cost of risk and having the renewed portfolio under new rules behaving steadily, independently of the macroeconomic situation.

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Alan Ramsey Webborn, Societe Generale Cross Asset Research - Equity Analyst [4]

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So I mean the assumption to -- the sort of the cynical view would be that you've therefore got still parts of your existing portfolio that are not sufficiently well provisioned. And there is no...

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Krzysztof Bachta, Alior Bank S.A. - CEO & President of the Management Board [5]

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No, no, no.

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Alan Ramsey Webborn, Societe Generale Cross Asset Research - Equity Analyst [6]

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Is that -- why is that a wrong assumption?

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Krzysztof Bachta, Alior Bank S.A. - CEO & President of the Management Board [7]

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No, because we have done all the reviews of the portfolio when this -- within these 2 runs in 2019 that were mentioned. And as I said, we feel we are fully provisioned in the sense that under our new approach, we have revised the whole portfolio existing as of today, of course, as I said, having in mind the current situation of all our clients, which, of course, might change due to macroeconomic factors and so on in the future. However, for the moment, we believe this is the most proper reflection of the risk that we are having in our portfolio.

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Alan Ramsey Webborn, Societe Generale Cross Asset Research - Equity Analyst [8]

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Yes. So which parts of the portfolio are generating risk costs that are still well above 1.5%? Is it sort of in a unsecured consumer lending and now that's being done less risky? Is it legacy? What is it that's in the portfolio that's going to generate relatively high-risk costs in terms of the stuff that we've done before?

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Krzysztof Bachta, Alior Bank S.A. - CEO & President of the Management Board [9]

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You have to remember that when we have revised the portfolio, there are, I would say, 2 factors. One, of course, yes, consumer lending is riskier, on average, than this 2%. That's obvious and that's a fact. So this is, of course, driving the overall cost of risk slightly higher. However, as you could see also, this is improving over time, but still, of course, generating cost of risk on a higher level. But there is maybe additional technical factor that when we have done the review of the portfolios, we have adjusted also the ratios, like PDs, LGDs. So we have revised the models. Therefore, for a certain moment, for a certain time, they will be behaving in, you could say, on one hand side, in more safer way, so creating higher provision than -- slightly than needed for the portfolio because they are adjusted for the latest history, and that's how the model works. It is being tested each and every year. So even if we take out these big defaults, which we assume are one-offs, then the level of overall default was higher than expected in the model. So to some extent, this is influencing slightly higher than this 1.5% cost of risk on one hand side. And of course, there is the legacy portfolio, which has been revised, but will be still generating, in our opinion, slightly higher cost of risk in the future. This is, of course, to some extent, an assumption, but we believe it could have some additional impact on the average cost of risk for the next years.

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Alan Ramsey Webborn, Societe Generale Cross Asset Research - Equity Analyst [10]

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Okay, okay. That's very helpful. Can I ask you now about your -- the growth in cash loans? I think on Slide 23 of the strategy, I think you mentioned 3% compound annual growth. I was a bit confused as to how that fitted into the rest of the sort of loan growth view. Could you just sort of summarize what your thinking is on the different parts of consumer and corporate going forward, so I understand them properly?

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Krzysztof Bachta, Alior Bank S.A. - CEO & President of the Management Board [11]

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Give me a second. Slide number...

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Alan Ramsey Webborn, Societe Generale Cross Asset Research - Equity Analyst [12]

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23 of the strategy presentation. You talked about adjusting the cash loan offer, and you have an expected outcome. And I just didn't understand what that meant. Is that -- you said you think the cash loan portfolio will grow at 3% compound.

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Krzysztof Bachta, Alior Bank S.A. - CEO & President of the Management Board [13]

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Yes. So this is -- there are 2 factors. One, we assume that in the coming period of 3 years, the growth of consumer loans overall in the Polish banking sector will be lower than we -- than in the previous period. So this is one point.

And second, we assume that we will go in slower pace than our competitors because of 2 factors, 1 of them is that we are more, let's say, adjusting our scoring and looking for best customers. This is one point. And second is that we also very carefully look at our margins. So that's why we assume that, given those 2 factors, we'll be going to less than the overall market, especially assuming that we have quite significant portfolio at the starting point, while the others are still building their portfolio. So taking those into account, we do not assume going faster than the market in the period of the strategy.

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Alan Ramsey Webborn, Societe Generale Cross Asset Research - Equity Analyst [14]

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Okay. And then I think there is a slide somewhere that you talked about the overall market growth. I think it was Slide 6. And then -- so you're talking about -- now is that some strategy to be done, but is that you? Or is that the market? That's the market, is it?

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Krzysztof Bachta, Alior Bank S.A. - CEO & President of the Management Board [15]

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That's the market, we assume, yes. So this is whole sector from loan volumes and deposit volumes. And as you can see on the Slide #6, we assume that, actually, each and every line will be growing slower than in the previous period, except for the corporate deposits. But this is resulting from the fact that some of the corporate, we assume, given lower commercial activity of the whole economy, they will be increasing their deposits, while not performing investments and sustaining their capital investment. So they will build extra deposit cash and to be more safe in the coming environment. So that's why we see it this way. So we can see each and every line actually is slower than before.

The most impacted, as we see, consumer loans because of 2 factors, 1 of them being the effect of ECJ ruling. While we see that the price of the offer being higher, we'll need slightly lower demand of that very reason being the price. And second reason is that some of the consumer, seeing slowing economy, will postpone their consumer spending and will not be taking consumer loans to finance the consumption, right? So those 2 reasons.

And if we will look at the deposit side, on the other hand, we see that the overall liquidity will be even improving for the whole sector, right? So given the current environment, given that Poles have limited trust into investment products because of the history of the Polish capital market and investment products in Poland, so given those factors, actually, we assume there will be over liquidity on the market, both in the retail and also in the corporate segment.

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Alan Ramsey Webborn, Societe Generale Cross Asset Research - Equity Analyst [16]

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Okay. Super. And so in terms of your own outlook, then you'll be growing at half the rate of the consumer market. And in terms of corporate and mortgages, do you think you'll be closer to the market growth? Or will you again be lower than that or higher?

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Krzysztof Bachta, Alior Bank S.A. - CEO & President of the Management Board [17]

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Well, looking at the assumptions, we assume that for corporate loans, we'll be growing faster, but this is also due to the effect of 2019 date, where we significantly lowered and deleveraged our balance sheet. So this is partly base effect, but also the actions we have taken for the growth of the corporate segment being both micro and larger tickets, especially in the SME segment. So not the largest corporates but those in the small, medium segments that we've got. This will be growing faster than the market. And if you look at mortgages, we have seen more or less market average pace.

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Alan Ramsey Webborn, Societe Generale Cross Asset Research - Equity Analyst [18]

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Okay. That's super. I saw a few -- there are few statistics talking about the share of remote channels in terms of loan generation. I think one was 25%. I think that was for consumer loans. And have you benchmarked yourself to see where Alior is against the sort of competition in Poland and, perhaps, more broadly because you sort of feel in a way that the percentage of cash loans done digitally by sort of 2022 ought to be somewhat higher than that? So I just wondered where you feel that you are versus the competition in terms of being able to do things entirely remotely.

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Krzysztof Bachta, Alior Bank S.A. - CEO & President of the Management Board [19]

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Yes. So at the current moment, we have very good process for the contact center. So this time, it's generating fast pace of growth and is quite effective, I would say, both in terms of the sales, but also in terms of the quality and the time of the process. What we'll be improving is end-to-end process for online, both in the mobile application, but also on our online banking. So we assume we can derby with faster pace.

As regards the share, it also depends very highly on the production, yes? So it depends how big production you have. If you have a production like we -- that is close to PLN 2 billion per quarter, then it's harder to achieve numbers like 50% or 80% of the share. While if you are doing PLN 300 million, PLN 500 million or PLN 1 billion, the share, of course, of the remote channels will be bigger, yes? So we see ourselves as being, right now, behind the market in terms of the share. Maybe not overall market, but behind the leaders in this aspect, but you have to remember that the leaders in this aspect, they are not the biggest consumer lending banks in Poland, right?

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Marek Rafal Szczesniak, Alior Bank S.A. - VP of Management Board [20]

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And they have started from a different position because Alior has been building already this portfolio for sometime, whereas the biggest banks, so the lenders about which Krzysztof is mentioning, they have started a bit from scratch, and they have started directly from mobile channels. In fact, going there almost in full.

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Krzysztof Bachta, Alior Bank S.A. - CEO & President of the Management Board [21]

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Yes. So -- but one more factor is that we have very strong renters and agents, so they produce a large portfolio. And that's why, and we want to keep the momentum and volume. We do not transfer those volumes intentionally into remote channels, while we are going to remote channels on other groups of customers who want to be contacted in a direct way, yes? So we do not do like a strategic shift to shift the sales from channels that much, except for the fact that more and more firm campaigns because of the clients' needs will be transferred to remote channels.

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Alan Ramsey Webborn, Societe Generale Cross Asset Research - Equity Analyst [22]

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Okay. That's helpful. I know there's also a target to increase, I think, by 50%, the sort of bancassurance revenues, presumably coming from the sort of the cooperation with PZU. Is there -- what's the current base of those revenues? I mean are they material? Or are they still very much in their sort of infancy? Because I think 50% is a large number, but it does rather depend on what the starting point is.

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Krzysztof Bachta, Alior Bank S.A. - CEO & President of the Management Board [23]

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Yes. So we intentionally decided not to give this target in the nominal value, but I would say this is a significant part of the income, in general. As -- let's say -- you can say that -- but maybe more important comment for this is that the growth of the revenues is coming from a couple of sources. One of them is moving one of the significant products into cooperation with customers from others -- which we view from other suppliers. So this is one of the parts of the growth. But also the second is large numbers -- large number of initiatives where we are supported by the PZU, like this cash initiative, where we will see the income going quite fast in the strategic period, yes? So this is a mix of shifting, let's say, supplier of insurance products from other suppliers to PZU. And second, new initiatives generating the revenue like from scratch, like cash, yes? So we had very small revenue from this source in 2019. So that's why the dynamics is so good because of these 2 sources, right? So second source being that we start in some areas with new initiatives from scratch.

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Alan Ramsey Webborn, Societe Generale Cross Asset Research - Equity Analyst [24]

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Okay. Super. You also mentioned the sort of the sale of or delivery of nonbanking products. I just sort of wonder for you where the banking products stop and nonbanking products start. I mean, what's the limit? And presumably, you're not interested in selling televisions. So I just wondered where does the -- in your view of this sort of digital banking world does the nonbanking products sit in.

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Krzysztof Bachta, Alior Bank S.A. - CEO & President of the Management Board [25]

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Well, that's very good question. We assume that each and every banking product is a banking that's creating income from -- for us from the product being, itself, a banking product, so it would generate income, commissions or fees or dues paid by the customer. While the nonbanking products will be those who generate the commission-only income, but paid by the product owner, let's go to this way. But this -- in our strategy, this boundary is not that important, I would say.

More important is the fact that, for example, if you look, I don't know, the insurance product or if you look at the payment products, this means that we do not necessarily need to charge commissions for that because if we improve the transactional ID, so for example, if we sell the public transportation tickets via our application on your mobile, it generates additional traffic and generates additional income and -- on the current account fees and commission and also interest income on the balance, which is held on the current account, which is the more transaction you have, of course, the more balance customers on average keep. So this means that, from that perspective, we do not necessarily need to earn on the product itself from our -- we can earn -- we can improve the earnings from the banking product before -- because of going beyond banking and summaries.

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Alan Ramsey Webborn, Societe Generale Cross Asset Research - Equity Analyst [26]

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Okay. And is that a reality today in terms of the online, the mobile offering, so on? Can -- is that a reality today? Or does it become reality in 2021 or 2022?

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Krzysztof Bachta, Alior Bank S.A. - CEO & President of the Management Board [27]

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No, it's very tangible for today. So still, this year, we want to implement the public transportation tickets. We want to implement the payments for parkings, for example, or the payments for the highways. So those solutions are good enough to be implemented in our Alior mobile application. So they exist. It's as simple as that. So we can implement them quick and fast this year.

But also there are more and more solutions being developed. So for example, on our Accelerator, we have some of the solutions, which, for example, make it easier for customers to manage his monthly payments, like Netflix, Apple TV, whatever you have, by making this into, for example, banking app, yes, so you can control your spending. Or other aspects like, for example, all other billings from utility providers, there is a startup which we cooperate with, who is preparing the feasibility, the functionality of having all the bills in one place, but also managing the payments in a very automatic way. But as folks really like to have control over their billings, so that the customers accept the payments, even though this is like a monthly, sometimes fixed, sometimes not fixed, payment, so there are a lot of solutions available. So the question here is how fast you can implement them rather than they do not exist. And some of them, they are on very different level. And some of them are existing and working, and some of them are being developed, but we have seen prototypes that are really working very well.

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Alan Ramsey Webborn, Societe Generale Cross Asset Research - Equity Analyst [28]

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Okay. Super. Okay. So last question or 2, if I may, on costs. I mean the biggest impression I got from today was that there's a lot of investment, there's a lot of focus, there's a lot of retooling going on, plus investment presumably in the new brand structure. I appreciate that you're intending to close a number of branches. But is all of the cost of this investment is clearly within the efficiency guidelines that you're giving through for 2022? I mean are we going to see a bit of a spike in costs in the short term? Or do you think this is manageable within -- over the next 3 years without us seeing a deterioration of cost tools, for example?

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Krzysztof Bachta, Alior Bank S.A. - CEO & President of the Management Board [29]

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So this is a 2-part answer. First of all, as regards the CapEx, IT spending in the, let's say, 3 years of the strategy, we estimate at about PLN 400 million. But then you have to remember that the spending -- some of the spending, of course, is amortized over time, as this is CapEx spending. So we do not -- let's say, the IT cost are growing, but this is, I wouldn't say, the biggest challenge for us as we are really effective in terms of both development, but also, like, I would call it, IT efficiency. So the solutions, we use a lot of freeware or other, let's say, software that we do not pay licenses and is very, very effective in different areas. So we are quite open to the software solutions that are simply cheaper than bigger banks, I would say, this way in Poland. So this is one aspect.

Second, the branches. If you look at the branches, I would say, of course, this is quite significant CapEx, as you can see that the branches look really good. But the issue here is that we would need to invest in the branches, otherwise. And at the same time, we limit the number of branches or franchise branches quite significantly, which makes the overall cost of the branches and of the distribution more effective. Even though, we do not plan very significant reduction in the branches staff, but in the overall cost of the distribution, it would be significant improvement of the efficiency.

Yes, so -- and the second part of the answer on the question is that you can assume that 2019 costs are very effective. So you can see that we achieved, even though the remuneration, for example, base is growing, and we lowered the number of FTEs, which allows us to make up for the growth, you need to assume that some of the cost will grow in 2020. And given the fact that we are not, let's say, able to also achieve all the investment, all the income compensation, something to -- after -- if you're doing only -- starting from first quarter, it translates into keeping the cost-to-income ratio at the similar level as in 2019, yes? So even though, we take a lot of actions in 2019, even though, we assume some growth of the income in different areas, we do not -- at the same time, we have some cost base growth. And that's why the cost to income is stable. And then, it should be getting lower.

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Operator [30]

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There are currently no further questions. (Operator Instructions) We haven't received any further questions at this point, so I hand back to the speakers for closing remarks.

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Krzysztof Bachta, Alior Bank S.A. - CEO & President of the Management Board [31]

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Okay. So thank you very much for today's presentation and today's call, and we will see next time after Q1 results, and see you then. Thank you very much for today.

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Marek Rafal Szczesniak, Alior Bank S.A. - VP of Management Board [32]

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Thank you.

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Operator [33]

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Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.