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Edited Transcript of ALR.WA earnings conference call or presentation 6-Aug-19 10:45am GMT

Half Year 2019 Alior Bank SA Earnings Call

Warszawa Aug 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Alior Bank SA earnings conference call or presentation Tuesday, August 6, 2019 at 10:45:00am 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

* Tomasz Bilous

Alior Bank S.A. - Deputy CEO & 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

* Jovan Sikimic

Raiffeisen CENTROBANK AG, Research Division - Financial Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Alior Bank Consolidated Quarterly Conference Call for the Second Quarter 2019. I will now hand you over to Krzysztof Bachta, CEO; and Tomasz Bilous, CFO. Please, speakers, please go ahead.

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

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Good afternoon. We are very happy to have you on our call, and we are open to all questions you might have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question.

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

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It's Alan Webborn from SocGen. Could we talk a little bit about how you see your volume strategy going forward? I think we understand that following the February sort of review that what seems to be happening now is that you're looking to some extent reduce exposure, certainly on non-collateralized lending in the sort of larger, which, I guess, we tend to call legacy portfolio. But it does also seem to be, from what you said, affecting most of the sectors above the micro sector because you suggested that growth in the sort of mid-corporates could be a little bit lower as we go forward. So does this mean we're going to see, in order to keep the PLN 5 billion to PLN 6 billion target, we're going to see even stronger growth in micro?

And clearly, that sort of -- is changing the structure of the bank more, and does that sit happily with the idea that you need to pull NPLs down and you need to take a little bit less risk because the regulator wants you to do that? So is it really compatible to maybe doing that when you clearly would seem to be having to bulk up on the sort of on the micro side? So that's the sort of -- I'd like to get an understanding about how you see the volume dynamics going forward, and how that fits with reducing the risk in the portfolio because like it or not, I know micro clients are going to be a higher risk than large corporate clients, if they're priced properly. So that was the first question, if I may.

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

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Yes. Of course. So maybe it's good to look at the Slide #34. So right in our presentation, when you can see our structure of retail and business segments, and give a short logic of our thinking on it. So if you look at the portfolio, you can see that the leasing is the fastest going part, and we expect it to be higher even than our original 2020 target because we have reached it already, and we are still in the build-up phase, and it's possible to grow this segment, which is definitely very low-risk compared to all other business segments, in our case, including even large, right?

So the cost of risk, in this case, because you have this asset, is lower and we will grow the segment, especially as we can produce quite a good margin on sales on it right now.

And then, of course, you can see that there is a micro segment, which is also growing. And you will see that the large segment, we expect -- this is our original 2020 strategy target, so it will be probably different than it is right now. But looking on the overall logic, you can see that we have a balance sheet, which we need to grow a little bit faster in order to be able to keep the share of the things we do the best.

So if you look at the cash flow, if you look at the micro, if you look at the leasing, we need to grow the overall size of the balance sheet in order not to grow in volumes, for example, in cash loans, but not to increase their share in the overall balance sheet, right? So this is a basic logic, we think.

So it means that we will open ourself a little bit more into mortgage loans, which definitely have less cost of risk. We'll look at large customers and then this lower cost of risk is due to 2 parts. One is this -- how we choose the client, but second is how we can -- let's say, how well we structure our financing, right? So if we have better collateral, then the end result of cost of risk is lower even with the same profile -- risk profile of the customer, right?

So what we noticed in the -- what we called legacy portfolio is the fact that some parts of the portfolio were not adequately collateralized. And especially, if you can see, we have seen some exposures, maybe not that big but some of them, which had kind of marginal collateral, so nonexistent in reality. So -- and not being micro, which means that we are changing our policy into making it to the overall ratio of how we collateralize our portfolio overall better, right? So this is our basic logic.

So if you look, of course, micro has longer-term higher cost of risk than other segment -- business segments. But at the same time, we will have less cost of risk in large, medium and small. And at the same time, we will move into having more mortgages in the portfolio in order to have less risky of the balance sheet construction, right?

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

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So in the -- yes. And so in this sort of revised strategy that you're putting together, would it be reasonable to assume that what you're showing here for 2020, in terms of the breakdown, is going to look slightly different in terms of will there be probably more mortgage loans and less large and medium is -- or is that not correct?

I mean, is this -- I'm trying to understand what is the new strategy because in theory you presented this some time ago. So what is changing? Is it just going to be now a more of a shift than you were expecting here? I appreciate you're not finished yet but just in terms of that trend.

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

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Yes. As I said on the conference, we just -- we have just started our works on the strategy. So it's a little bit too early to comment on definite because we need also to do some calculations and choose the options -- balance sheet options we might have.

But generally, if you look on this purpose, our strategic perspective is that it should be growing faster than it used to be before, right? But more secured construction leading us at the end of the day to probably the same net interest margin we had but a little bit different construction, right?

So of course, we need to see the market take it’s exactly before we communicate our target, so it's a little bit too early. But if you compare it to what we said in 2020, in the new strategy, you can expect some more mortgage loans. And this is due to 2 reasons. One of them being that we used to work in the niche with very high profitability of this segment and it's growing. So we can see that it's growing quite a lot [beneath] we used to be, but we are opening ourselves up also to the segments, which are less, let's say, with better price on our side, but still low risk. And as we are a niche player, it's very easy for us to construct our offer in a way that would peak specific cities -- specific micro markets, where we have special offer. And given our size, we can compete this way, right?

So you will see some more mortgages. And as regards the corporate book, we'll comment it later on because there are a lot of factors, which are working in different directions. So one of them being restructuring our book we have right now, which will have impact on the volume. So some of the volumes we have right now will divest to other banks and to try to reduce our exposure. And then at the same time looking for new customers which, of course, may take some time before we move all the bank, change the direction. It's not something you can do in one quarter basically.

So the all exact effects of the balance sheet change, we need to recalculate to take us a couple of months right now.

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

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Okay. And I think on the call earlier this morning, you talked about maybe from the translation anyway, I've got the impression that you were saying that 4.5% NIM was fairly easily achievable in 2020. And there was some upside risk to that because of the shift in the portfolio mix. Is that what you were saying?

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

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Basically, I was saying that the 4.5% target, which is our [original] strategy target, is basically from today's perspective, too low, right? This is so. We believe that 4.6% is more the quick number in, at least, medium term, right, because the longer-term depends on manufacturers, also external ones. But in the medium term, it seems that 4.6% is achievable, even maybe a little bit higher. It depends on the production we have and well, it's hard exactly to say the exact numbers because also the ratio calculated based on the how much volume we have, right?

So looking at it, I said that 4.5% would be too easy if we set it to our current target, so our current target is higher. It's more than -- it's at least 4.6%. And at the same time, I said that right now, we have 4.66%, but we assume that we will open up our balance sheet to the sum of the parts, which are less risky, but at the same time with lower margin, which will drive it a little bit lower, at least on this new part, right?

So it largely depends on the overall, let's say, factor of the portfolio more because the new sales in each and every segments right now are very good in terms of the margin.

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

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Yes. Okay. The other thing I wanted to sort of touch on, I mean, obviously, you -- I appreciate your honesty in basically saying that the collateral you had to the meat producer was meat and, therefore, useless. And clearly, you've dealt with that. But you were making quite a strong statement in terms of the management of your collateral and the management of your risk was clearly inadequate in that particular part of your portfolio. You said that you've completed the review of the larger corporate portfolio, but there clearly are presumably still some other things to come through. Is that something that is now going to affect the portfolio over the next sort of 6 to 8 quarters, as you continue to go through presumably quite a long and arduous task of reviewing quite a lot of portfolios and talking to companies and talking about more collateral and when the loan is going to be up and so on?

I mean can you give us a feeling of how much more of this there is because obviously, your exposure to Henryk Kania was relatively big in the context of value. And I guess, what people will worry about is that there's another 10 of those. And since you've said you don't really know quite yet where the cost of risk is going to be next year, that's quite a big question mark. And are you able, at this stage, to just at least give us some reassurance about where you think things are going?

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

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Yes. So first of all, if you look at the exposure, we had problems in second quarter. It was by far the biggest exposure in the Agilor segment, right? So the biggest customer. And we have looked through each and every exposure above PLN 20 million, which resulted in some additional charges. So this is basically done. Of course, the future will depend on the success of some processes in the future, structure, processes on the customer side and how good we are at the execution of collaterals.

And if you look from the overall portfolio, then you'll see that we do not have 10 other Henryk Kanias in our portfolio. Of course, there are some customers, which are right now very good, and we need to work with them being prudent and knowing that in some years to come. I don't know, 1 year, probably not even a year or 2, but even some more years to come, that they post kind of, to be brief, but they're looking at top 50 customers. There are only a couple of them where we need to reduce our exposure. And some of them are really well collateralized with like property, right, real estate.

So in terms of exposure, which is open, this case on second quarter is quite unique, I would say. I can't say it's the worst case on the portfolio, but probably, yes, it could be the case, right? So it's -- and looking in the future, we are not -- we don't want to say to you that the cost of the risk next year will be exactly the number because it's -- depends on a couple of reasons. One of them, of course, being overall micro. Second, how effective we are on the (inaudible) portfolio. And the third one, you need to look also at some changes in the model.

So what we observe right now is that we need also to, let's say, update our models, incorporate book [ECO] so that it reflects also the -- let's say, when we back tested to the current PD and current [OTD], we'll see that we'll probably need some additional charges, right? And this is something we need to do in the second half of the year.

So basically, if you look at this, it means that we'll have some higher targets. And we are more prudent in terms of saying how our corporate book was created, and we have better understanding of it right now. But it's very hard to say the exact numbers with the horizon longer than 6 months coming.

But also, we do not expect it to be higher than right now. So to say, we believe that this year, cost of risk will be probably the highest in our, let's say, medium term or even longer-term perspective. (inaudible)

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

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Okay. Super. And just one little -- to this point of detail. Could you talk a little bit about what's going on in terms of the cost of card fees? I think you mentioned that, that had gone up. And clearly, on a like-for-like basis, taking into account the changes in fee income last year, I mean, you have some actual reasonable fee numbers quarter-on-quarter, but it's rather been spoiled by that rather large increase in the cost of cards. And could you just maybe explain to me what that was? And is it going to continue?

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

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Sure, sure. Well, answering first to your second question, is it going to continue? No. The reason is quite, I would say, simple. We have been going through a revision of our, let's say, accounting policies with respect to all the income and cost lines. And after a review, we decided that we need to adjust a little bit better the moments when we recognize both income and expense together. So actually, this -- the second quarter was charged additionally with something around PLN 10 million of additional cost with that respect.

So basically in the coming quarters, we should see here more regular, so similar to prior periods development.

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

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Okay. I mean your view overall on fee income, do you think it's -- is flattish reasonable? I mean clearly, the shift in terms of digitalization and so on isn't positive. And it doesn't seem to me that sort of the asset management type fees are coming back, particularly quickly. Maybe a bit better next year, but for the moment, do you think sort of flattish is possible for this year?

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

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That's what we will aim for. Of course, we still will see next quarter some lower income on brokerage fees due to the same reasons as the first and the second quarter. So it will still be there but as you can see in other positions, so more the daily fees we are trying and bancassurance, we are trying to catch up.

However, these amounts -- these figures last year on brokerage fees were quite high. So we expect this to be maybe slightly better than the second quarter in the second half of the year, but something like flattish, maybe.

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

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Okay. And correct me, if I'm wrong. Are we -- where are we in terms of the sort of the -- is the regulator still looking at these elements of misselling and so on? Where are we on that now? Or is it all finished?

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

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So we have this dialogue with our regulator on misselling WI investment funds from a couple of years ago. And right now, it's hard to really say when the decision will come in terms of when it will be taken with a fine. But well, I believe that we are -- well, we had a provision, which is good enough in terms of being adequate to the situation and that we know that it was -- we have this provision for, it was booked in, I believe, Q3 last year or Q4, I don't remember exactly. But we have it right now, and it's still adequate.

And on the timings, it depends because we are taking some (inaudible) actions in terms that when we have seen the real [reselling], which was less than 2% of the population, then we try to contact our customers and negotiate with them, in order to minimize the risk for the future of [things] on the one hand, and then the second to also have -- thanks to that, we have a quite a good dialogue with our regulator on this topic.

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

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Okay. Good. And final, final question. What was the tax adjustment on -- from Q1 that you made? What was it related to?

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

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The effect on the Q1 was around PLN 90 million. It's also in the presentation on Slide 46. So you can see on Slides 45 and 46 how those are priced at into prior quarters for comparability reasons. And of course, for the second quarter, it was already the adopted approach. So there is no additional information in that respect. Yes, so that basically...

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

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Okay. And that was -- so that was just the -- I'm just -- was wondering what it was? Is this --

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

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This is a change in the approach, which is now also, I think quite widely approached by all other banks in Polish banking sector. So under IFRS, there is a possibility to spread the tax over the year based on the final year-end estimated effective tax rate. And this is due to the fact that, as you know, the charges in Polish banking sector are very much (inaudible). So first quarter is very heavily charged with nondeductible cost of BFG. So in order to have comparability among periods, all -- majority of the banks as far as I know, have decided to go for this change.

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Alan Ramsey Webborn, Societe Generale Cross Asset Research - Equity Analyst [20]

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Okay. Got it. Sorry, I wasn't -- I didn't -- that's fine, I've got that now. Super.

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Operator [21]

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(Operator Instructions) We have a question.

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Jovan Sikimic, Raiffeisen CENTROBANK AG, Research Division - Financial Analyst [22]

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Jovan from Raiffeisen. I would like just to ask on, I think you announced in the morning some capital plan or capital measures to be updated at some point in time. Can you maybe tell us a bit more about the timing? Or is it going to happen together with your midterm strategy next year?

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

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To be very honest, I'm not sure what your question is about because in terms of the capital in the coming quarters, basically, what we plan to do -- of course, we are still working on the use or effectiveness of capital use. And of course, we are -- we have some ideas like working on the advanced model in terms of operational reach. Basically, what we are doing will be adding each and every quarter -- maybe not each and every quarter but basically, will up our quarterly results or half year depending on the year, into our capital, because in Poland (inaudible) in a way that need approval from regulator, in order to up the result you have into your own funds, which you use to calculate capital ratio.

So it means that for the moment right now, our half -- first half year result is not added to the capital ratio as we need approval from our regulator in order to do so. And it takes 2, 3 or 4 months depending on the exact month. It seems like something which is easy. And so when the result is audited, then you get it approved, but it takes simply time and this is how it works.

And if you look on the Slide #35, because we had some questions on the capital of the cost and whether our capital is good enough to further growth. We wanted to show you a little bit both are the main issues affecting our main task we've had or our main issues, which affect our capital ratios. And you will see that if we up quarterly results, for example, for fourth quarter 2018, when we add it in second quarter this year, because it took some time to approve it, then you will see that it's 35 bps on the PCR ratio, right?

So from that perspective, our capital ratios will grow when we will up our current profits.

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Jovan Sikimic, Raiffeisen CENTROBANK AG, Research Division - Financial Analyst [24]

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Okay. And then the securitization like you did it now for the first time since, I don't know, several quarters. And is it something that we should expect more going forward? Or was it just this one transaction?

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

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Well, in terms of using some effective measures to, let's say, improve our capital efficiency, of course, we will be looking into it. In terms of the securitization of the corporate business loan portfolio, we do not have such a plan at the moment. So the one we did and we can increase it a little bit after some time when the new portfolio will be eligible. But for the moment, we do not have such a plan.

And on the other hand, we are working also on securitization, our leasing company, but this is not a capital measure. It's more of the liquidity nature. So it does not impact the capital [deposit]. So for the moment, we have some plans working with guarantees, but still we'll communicate them once they are done, not right now, when we are working on them.

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Jovan Sikimic, Raiffeisen CENTROBANK AG, Research Division - Financial Analyst [26]

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Okay, okay. And I would have one on cost of risk, yes? As many of us, just I think you mentioned it on the first call, cost of risk in the retail. So as far as I calculated like, I don't know, 120 basis points in the last 12 months, so is this something that you see it stable or going up towards, let's say, 2020?

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

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Well, for the moment, we basically believe it should be similar to the levels we note right now. So if you look at our presentation, this is Slide 27, you will see that this close to 1.5% in terms of CAR. And if you look at the previous quarters, then we had some effects on the better portfolio. Overall, the portfolio is getting better and better.

So last year, in 2 quarters of last -- 2 last quarters of last year and the first quarter of this year, we recognized some improvements in the overall portfolio, which translated into the model and resulted in reducing the provisions we had, right?

But looking for the future, not -- of course, it's hard to say because the portfolio is getting better and better, but we do not expect it in the, let's say, at least, to the 2 quarters to improve the cost of risk in retail part. Of course, it might help but we do not assume it for the month.

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Jovan Sikimic, Raiffeisen CENTROBANK AG, Research Division - Financial Analyst [28]

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Okay. So current 1.55%, it's fine, okay?

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

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Yes.

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Operator [30]

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(Operator Instructions) We have no other questions at the moment. Dear speakers, back to you for the conclusion.

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

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Well, so thank you very much for the attendance today. We are really sorry for the delay of the starting of the call, which was due to some technical problems. And we will be happy to meet you on the conferences or meetings or hear you again next time. Thank you very much.

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Tomasz Bilous, Alior Bank S.A. - Deputy CEO & VP of Management Board [32]

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Thank you.

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Operator [33]

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Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.