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Edited Transcript of ALRR.WA earnings conference call or presentation 19-Aug-20 9:00am GMT

Half Year 2020 Alior Bank SA Earnings Presentation

Warszawa Sep 25, 2020 (Thomson StreetEvents) -- Edited Transcript of Alior Bank SA earnings conference call or presentation Wednesday, August 19, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Agnieszka Nogajczyk-Simeonow

Alior Bank S.A. - VP of the Management Board

* Dariusz Szwed

Alior Bank S.A. - Vice Chairman of Management Board & Deputy CEO

* Dominik Prokop

Alior Bank S.A. - Head of IR Department

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Presentation

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Unidentified Company Representative, [1]

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Good morning, ladies and gentlemen. I'm speaking from Alior Bank, which is headquartered at ul. Lopuszanska Street in Warsaw. Today, we have beautiful sunshine. There might be some seasonal showers later on. But apart from that, the weather is going to be lovely. Enjoy your day. Thank you.

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Dominik Prokop, Alior Bank S.A. - Head of IR Department [2]

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Good morning, ladies and gentlemen, I'm Prokop, the Investment Relations Department Director. Welcome to the H1 2020 presentation.

Now the speakers: Dariusz Szwed, CRO; then Maciej Brzozowski, CRO; and CFO, Agnieszka Nogajczyk-Simeonow. And on the top of that, we have Kamil Niescior, who is the Director for Risk Strategy Department.

I pass the floor to the speakers.

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Dariusz Szwed, Alior Bank S.A. - Vice Chairman of Management Board & Deputy CEO [3]

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Hello. I'm Dariusz Szwed. To put things straight, I'm not responsible for risk, but for business. But of course, I can tell you a few things about risk as well. Thank you for coming for -- for being with us.

And to begin with, let me just address the key points on the agenda. Despite the negative results, we have very stable position and also liquidity -- safe liquidity position. We exceeded the capital requirements a great deal. And just to begin with, 188%. Now it is still above 170%. So there are no negative actions. We have been running the bank in a safe manner. There are no nervousness on the part of the customers. Of course, we'll focus on the financial performance. And as we have communicated before, we discussed the provisions. But today, after the first half of the year, it is minus PLN 513 million, and this was due to the one-off provisions and of course, led by the COVID-19 provisions because we have set up provisions worth almost PLN 0.5 billion. So in the -- previously, we did not set up the COVID provisions and that's why we had accumulated COVID effect. That was the decision of the management Board, to estimate COVID risk in a very conservative manner so that this provision is more than sufficient.

And nevertheless, in the COVID-hit world, we have observed visible sales trends. And we are very happy that the key Alior Bank products, namely mortgage loans or -- in the corporate banking, also loans, the performance is very good. And this is a very positive impact. We have noticed -- we are now the beneficiary of the changes we implemented earlier. For example, the COVID also forced us to accelerate the development of the digital banking and the digitalization process. And I will talk about this more in a minute. And the cost of risk, 4%, very interesting for market analysts. And this is for -- due to the PLN 418 million COVID provision. And then if you deduct that, then the COR would be at the level of 2.4%, excluding the COVID provision.

Now let me tell you briefly about the bank's position concerning equity. So let me repeat what my colleague has just said, as it was mentioned, the capital position of the bank is -- equity position is very good. The Tier 1, we are exceeding the regulatory minimum by 400 points, 464. That's the upper graph in the slide. And then TCR -- total TCR, 522 basis points, which is PLN 2.5 billion. And then the bank's liquidity on the left-hand side, also very high level. The bank has been very cautious concerning liquidity level. Now it's 187%. So the safe -- the bank, in terms of equity -- in terms of liquidity is at a very high level.

On the top of that, in relation to what the CEO has just said, I would like to tell you our net profit loss in the first half, the loss was minus PLN 513 million. And as a matter of fact, it was contributed by one-off events and repetitive events -- I mean recurrent events. And if the one-off events such as COVID-19, which accounted for PLN 339 million, it was the provision for COVID, and then PLN 12 million repayment holidays. And then we also made a provision for the Court of Justice of European Union. And then we -- the write-off for goodwill also due to the deterioration of the macro environment. All these, the total is PLN 495 million minus, so on the top of the slide. This really contributed to the loss. And that's why when we compare our performance to the first half of the last year, where we recorded a profit of plus PLN 95 million, now we have minus PLN 513 million. And it was heavily hit by also -- by the interest rate cuts. The net impact, we estimate, minus PLN 90 million. And also, the judgment of the Court of Justice of the European Union. If not for COVID-19, then our profit would be up to the level of PLN 146 million. And that's the current situation. And as I said, I'm just going to signal what we'll discuss in detail later on.

So we will focus now on the 4 key products, the cash loan, plus the corporate loan for businessmen, also micro loan. And we have noticed for these 4 key products very good trends. And here, you can see there is a loss because during -- we introduced some constraints in the times of COVID-19. So we carried out a classification of high-risk industries, medium-risk industries and low-risk industries. And the new portfolio classified according to this criteria, it performs very well. And this is not constrained by the acquisition of new customers. And I will tell you more about the mortgage loans. And in the times when Alior has to find new ways out to reduce its negative result, so we have focused on the mortgage loan from the beginning of this year. And in the second quarter, we recorded sales at the level of PLN 600 million, and now it exceeds already PLN 1 billion. And then the performance in August shouldn't be worse. And then I believe that, in consecutive months, there will be a growing trend. So we believe that mortgage loan stabilizes Alior's portfolio. And also, it gives us power to acquire new customers in transactional banking.

So originally, the Alior was the lending bank, and the transactional banking was lagging behind just a bit. So now we are -- we rolled up our sleeves, and we are working very hard on boosting the mortgage lending activities. So that's why we value -- we treasure such customers, and we would like to acquire more such customers.

And now record sales in the business segment. So in the second quarter, more than PLN 2 billion. And this is the best performance in the business segment in the last 6 quarters. But when we look at the trend in July, it was also very promising in July, more than PLN 800 million of new sales. And these are secured mortgage loans and also with guarantees -- backed up with the guarantees of Bank of the National Economy, BGF (sic) [BFG]. And we were a bit taken aback by the COVID-19. But despite the coronavirus, we managed to do a lot of things. So a couple of months ago, we were able to verify the customers remotely.

Now we have a new product since April, which is the selfie loan, which is a verification method using the selfie in a smartphone. And then another method of verification is the Autenti, more than -- a lot of customers are using this method of authentication. And please note the boosting of -- boosting effect felt thanks to the COVID. And then we opened up a new customer segment, namely CASH, which is an innovative lending platform. And this platform can be enjoyed by more than 10,000 employees of the PZU Group, the largest insurer in Poland, and also other entities. So the innovative solution is that the employer can verify and process employee data and also the repayment of the loan installments is done automatically.

And then I mentioned that we have also the 2 new initiatives that we have implemented, fully implemented. So first innovation is the Booksy application, which is the automatic queue management. And then the second one is the eDO App application for verification of the customers -- authentification of the customers without a need to pay a visit to a branch office.

And then the last innovation, we implemented a new credit card for the LOL, which is League of Legends fans. And we have made an observation from -- which is interesting from sociological perspective. A lot of players of the League of Legend games are in the age bracket from 30 to 40. So that's why this League of Legends credit card is a magnet which attracts them to our bank.

And now briefly, how we are perceived by others. We are very happy with the performance in this quarter in the first half of the year. We were given 4 awards. First is the Golden Banker. We were given this prize, not for the first time in the history. It's a very good trend. That's a cash loan, which is our flagship product, and the Puls Biznesu daily gave us another prize, consecutive prize in a row. They appreciated the services offered by our brokerage house. And 2 awards, which, especially in the times of COVID coronavirus, are important. I would like to express appreciation to our employees. The customers had to stay at home because of the quarantine, because of the lockdown. And still, the bank personnel worked very hard, and we were given the Golden Receiver Award and also Telemarketer of the Year. So we are very proud, and I would like to thank all the employees and their contribution.

And now let me pass to the section and to explain how we estimated the portfolio impairment in the times of COVID-19. Of course, we applied a very conservative approach and when estimating the impairment write-downs. And from the portfolio perspective, we assumed several development scenarios for the Polish economy. And also, we try to estimate the depth of the recession that could emerge.

So we adopted 3 scenarios for our analysis. First is the base scenario, which is a V recession. The second is pessimistic scenario, where there will be more infected people with coronavirus. But what is crucial for the economy, after the first hit of the COVID-19, there will be a V-W recession. And then the V recession will have a small amplitude, which means that we will recover quickly and that, that won't be very high. In our opinion, the most probable is the baseline scenario, the base scenario. So we had -- we focus on the base scenario. And then under this base scenario, we analyzed a number of options and then we evaluated, estimated the risk components. So the first option is the probability of default, how it would translate -- how it would impact our portfolio. And then the second is the collective recoverability of portfolios, which is the BDG (sic) [LGD]. Because in the deep recession, the recoverability of the securities collaterals would drop significantly. And then PLD (sic) [EAD], which was assumed that as a result of the recession -- of a recession, the customers will require increased funding. However, it was not confirmed by reality. So that's why this component has small impact on the whole picture. So -- but I believe that it was a very cautious and reasonable approach.

And the fourth component is the TOP customers, the largest customers, and you need to look at them on a one-to-one basis. And then we recalculated the value of the probability of default, which went up to 5.53. And as a result, after a recalculation of all the parameters, we received the value of the write-down for the portfolio worth PLN 418 million, just to account for the COVID-19 impact.

At the same time, in this slide, you have the deliverables of our analysis, namely the PD, 26% share; LGD 37%; then small percentage share, which is EAD. And then the top transactions, also a lot of impact, 35%.

Then another point which I wanted to make, especially when considering the COVID-19 impact on the bank performance and also the portfolio performance. We extended 46,500 for retail customers -- I mean the repayment holidays. Then 3,800 for the business customers. And interestingly enough, those -- the customers who were granted repayment holidays already, out of them, the total amount of PLN 692 million already been completed. And out of this PLN 329 million, there are people that we are -- for whom we already know that they are not going to continue repayment holidays. And please note that only 10% are in default. And they are -- they have passed due liabilities above 30 days, 10% of customers. And that's the number of the customers.

And then the next point I wanted to make, we have not -- we are not watching high number of applications for repayment holidays. This is a marginal number. And to sum up this section briefly, the Alior Bank's activities to support its clientele to provide security, financial security, which is our common goal, so the repayment holidays were granted in the 46,500 cases in retail customer segment, 3,800 for business customers. And also, you have the figure for the lease customers, which is 21,897 customers, lease customers.

And then the loans with BGK guarantees, we extended 2,400 de minimis guarantees under the new terms and conditions for the total amount of almost PLN 940 million.

And then regarding the subsidies under the financial shield, we paid that amount of money, which is given in the Slide #13.

And then next slide, #14, is the impact of the interest rate decline on the financial performance. And this is true not only for the Alior Bank, but all the banks in the sector, in the banking sector. And as we mentioned before, the bank estimates the interest rate cuts to be worth PLN 116 million, PLN 133 million. And this, of course, had a major impact on the decline of interest income.

And now the measures taken to minimize the impact of COVID-19, there are a number of measures taken. But on the revenue side, first of all, the change in the fee and charges table, the enhancement of the margin on the new cash loan fee, then we boosted cross-selling of products. Also, we restructured the deposit interest rates. And also, we developed the banking services through remote channels on a big scale. And this, of course, allows us to safeguard the customers from direct contacts. And this is due to the epidemic regions.

And then on the cost side, of course, the cost optimization regarding all the businesses active in the Polish economy. For example, the reduction of the office rental expenses, also the reduction of the Alior Bank's brick-and-mortar infrastructure, namely the branch offices. The number of branch offices was reduced. And also, digitalization of the selling process and also presale process.

And of course, we are a part of the PZU Group, and we seek synergies with the PZU Group, for example, through joint procurement initiatives. And we are still striving at the reduction of the infrastructural costs.

Next part, operations. And that's the picture in the first and the second quarter during the times of pandemic. So the number of retail customers, more than 120,000 up, and we are very happy with that. And then we acquired these customers through traditional channels. But more and more, we acquire customers using the online method. And I'm going to emphasize, reiterate that again and again. We focus on the relationship banking, and then we noticed that the number of customers with permanent inflows to the bank is going up on a year-by-year basis. The increase this year is up by 4%. And this is very needed by the bank to generate interest income. And we were taken by surprise, not only us, but also other banking sector players.

So now we are reengineering our sales forces in order to take bigger advantage of the interest income, so -- and increase of the number of customers using our credit cards, up by 24%. So we will enjoy -- in the consecutive periods, we'll enjoy the snowball effect.

And now the sales of the cash loan through remote channels, that's in the upper left-hand side corner. And then we cut out a few branches, a few industries, like financing of the retail customers. So in order to remain reliable, we are showing you the picture as it is. We are selling more and more current accounts through the remote channels.

And also the savings accounts, which is KO online, in the left-hand side corner at the bottom, sales of [ROR] and KO online.

And furthermore, we saw our evaluation in the Google portal is 4.6. The score is 4.6 out of 5. And so the customer satisfaction is very high, but it was not easy to achieve such performance. So in the times of COVID, where the tellers at the branches, they had to work shorter, then we had to also increase our personnel at the call center. And then also, we are boosting the -- our activities in the non-relational banking. It is 36% already. And then relationship NPS, it's going up as you can see on the subsequent consecutive bars. And then in the -- our partnership outlets, the NPS is very high. Now in the second quarter of 2020, it reached 87%. And we also remember that the -- we also make sure that we simplify the communication with the customer. In the second quarter, we simplified 240 bank documents.

And now micro business segment, I mean the micro businesses. So the number of customers on a year-to-year basis, up by 15%. And then if you look at the graph on the right-hand side, on the top of the slide, new business customers. Unfortunately, the value is negative, minus 13%. And you know why? Because in this micro business segment, we have one-man shows, which means sole proprietorships that were the most severely hit by the COVID-19. And in this quarter, already we are halfway through, although we have noticed reversal of this trend. So the customers will feel now eager to inject new life into their one-man shows. And then if you look at new customers in the micro segment acquired online, you can see it's up by 38.8%. And the number of the customers who are willing to pay social insurance contributions and also to pay taxes using our account, the number is growing. So despite the half times the customer -- our customers are active, and they are coping very well in difficult -- in financial dire straits.

And then -- and the last slide is the share of new micro accounts with the debit card.

We want security. I will keep stressing that. We wanted to show to you that new sales to the micro segment is secured with BGK guarantees. These guarantees, as you know, allow us to get the refund from that fund in case of customer default because we want this portfolio to be secure, and it is secure.

Let me say that we keep observing growth of the micro portfolio, and it is being covered more and more with the BGK fund guarantees. So we also were able to extend this coverage period for our customers. We want this cost of risk rate to improve, of course. You would probably ask about that many times, but our forecasts here are quite optimistic. But of course, we don't want to have any more new write-downs.

Now the medium-sized large customers, we see them to behave more actively. The number keeps growing and they connected the BankConnect service, it's customers who connect the operations to the bank system, which means, for us, that the customer is banking with us on the daily basis, making all payments to the tax offices and social insurance. So we promote this service. We want the customers to stay with us for good. And the fact that the customers who use their payment accounts, the population is quite stable. Also, we want it to grow. That's what we work on all the time.

Now sales. Let me come back to sales. The second quarter is more than PLN 2.3 billion of new sales to business, except for the micro businesses. In this second quarter, the medium-sized large companies prevailed, dominated, because we are building up this portfolio quite deliberately. All these transactions are well secured with mortgage or BGK, so we do not expect any negative events here. We will continue this trend, of course, in the future.

The new quarter has started very nicely. August is not as good because it's summer holidays and many people are away, but the pipeline that we have built for September suggests that we will probably reach the second quarter's performance. If not, we will be close to it anyway.

And now these automatic decisions. This is a subject that we work on for some time now. The number of decisions issued automatically is growing. We will continue developing this area because that cuts the costs of our operations. So we will stay doing that, keep doing that.

Maciej mentioned how we were helping our customers doing the COVID time. Well, what has not been said so far, the liquidity guarantee funds gave us PLN 0.5 billion support to generate a large lending action. We expect to be able to support our customers very strongly and nicely. This -- now the number of applications is growing. So with this good collateral and so on, we will be able to make -- to build a portfolio that will generate incomes for us in the further months and quarters.

But photovoltaics and these products have generated the first transactions already. We will do it more and more actively in the future. We have a special team in Alior Bank that will work on the strategy, the bank strategy of using the industry of renewable energy. We will cover with this strategy the retail segment. We want to finance the individual customers who use photovoltaics. We will also work with the suppliers and manufacturers of those systems. And we will also finance innovations in small- and medium-sized businesses as well as the big photovoltaic firms. We have already some credit applications from those. And of course, we will have it well secured shield.

Maciej mentioned something about it. Now 28 (sic) [28,000] applications, 17,000 customers received a subsidy. It was PLN 2.7 billion in total. So in percent terms, I think we will go for not less than 5% of the market. We have reached this target. And in terms of the subsidy, we have now 5% of the market, which makes us quite, quite happy.

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Agnieszka Nogajczyk-Simeonow, Alior Bank S.A. - VP of the Management Board [4]

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Now ladies and gentlemen, the financial performance and numbers. As Dariusz has said when he spoke about the income side, I will repeat that. As you can see, the incomes on interest income and that these figures were lower in the first half of the year than in the previous year, but we are optimistic about the fact that we can consider it a starting point. And in the second half of the year, the results, the performance will improve largely.

We have made some provisions for COVID. And this is the cost -- here, in the cost of bank operation, we are quite optimistic. Because these costs, when compared to the first half of the last year, are lower. We have come up with a number of cost-related initiatives. We are studying the individual lines here, the cost items. And we have -- then the restart, that PLN 513 million loss, which has been mentioned before.

Now interest income. This is a comparison of what is actually and what the situation would look like without the European Court. If you compare the first half of the last year to the first half of this year, you will see that we would have -- this year, we would have a result, not PLN 1.5 billion, but PLN 1.77 billion (sic) [PLN 1.717 billion]. The structure of incomes, interest income, it's the credit income and other income is PLN 222 million. That's the numbers for this year.

Indicators, as you can notice, the margins are a little bit down because of the lower interest rates into -- just in 2020. Apart from that European Court effect, this is another impact.

Now the fees and commissions -- in this year, in this half of -- first half of the year of this year, we have done better than last year. These are mainly the fees and commissions on credits, on accounts, on transactions, payments and also fixed transactions. And of course, the payment cards handling plays a role in this structure and commissions for insurance sales. I hope here, when COVID is over, the customers will become more active and we will see a better performance here in quarters. This number -- these numbers were changing, but they were quite satisfactory.

Costs of the bank's operation. As I mentioned in the first half of this year, the costs were lower despite the fact that the bank -- the main cost of bank is the payroll. And in the first half of the year, these costs were higher than in the first half of the last year. Nevertheless, the -- this was because we took over a group of RUCH chain manpower, but I think that's temporary. And by the end of the year, it will be over. Material costs are lower because of those initiatives I mentioned, lower marketing costs, and other costs related to the COVID were also lower. Well, in fact, is that the national economy slowed down quite significantly that the other items are quite stable. I think this indicator will improve after our interventions.

I want to show you the impact of the European Court of Justice verdict on the bank because on the side of the interest income, this is the other operating costs. It's the provisions, the provisions that we've made since the verdict was issued on September 11 last year. So we made provisions in the third and fourth quarter, altogether PLN 233 million. In the first quarter, we did not make provisions, but at the end of that quarter, we decided to add a PLN 99 million provision to it. And that provision is, of course, part of the impact on our performance.

Now a few words about the structure of the credit portfolio that we have. The credit portfolio, the total, despite the COVID situation and the economic slowdown, in fact, we are at PLN 61.710 billion, which is more than in the fourth quarter last year. So it's good to notice it. Despite that bad situation, we are growing. Individual loans, we have grown to PLN 35.213 billion. Our business portfolio, this is -- has declined a little bit, which is no surprise, of course. But in relation to the micro loan, this has grown quite clearly up to the number of PLN 6.715 billion.

Now impairment and the provision coverage, and we are gradually and steadily increasing the provisioning, especially in the business segment, as well as the individual customer segment, which is about 67%. So -- but we -- of course, we are going very carefully here in managing this portfolio.

Now cost of risk. As I said, it's 3.96%. And altogether, the cost of risk here is shown a little bit higher than that, but that is because of the last quarter, and it was affected by the COVID situation and the additional provisions. None of the banks could have predicted that a few months ago. Nobody knew what would happen during the COVID situation.

This slide shows the way in which the bank handles the quality of new sales of the cash loans, which is a very important product of ours. In 2016, the default rate was about 2%. Now we are staying at 0.5%. A similar situation was in the small customer segment, close to 1.3%. And we've reached -- from that, we went down to 0.8%. And that trend continues, as you can see. So the bank is doing well here.

At the same time, I want to mention the change in the turnovers that were changed after the COVID outbreak. We have divided the low-risk, medium-risk and high-risk industries. So for the low-risk industries, the turnovers grew. The medium-risk segment grew, too. But the high-risk industries were different because their turnovers dropped quite significantly.

Another analysis is the division of our portfolios according to the COVID situation. The low-risk industries in our studies make 42%, the medium risk is 80%.

And the next circle shows the biggest customers, 80% are not sensitive to the situation, 5% well aware. So no matter whether they are in the regular -- regularly banking customers or not.

And the next slide shows the sensitivity of our flagship product to the epidemic and to what happens in the economy during this time. More than 60% of them are not very sensitive to the COVID impact and 20%, well, so-so. It's quite safe, and we do not see any bad events here.

I mentioned before the actions that the bank took against the COVID consequences, so we should not forget that we also have to work on our lending policy. So we did. And we have introduced extra studies and analyses for the industries which are, first of all, affected by the COVID situation. It's not any segregation of customers. We just pay more attention to the situation in which a particular customer is working so that we can tailor our products better for their needs.

The higher-risk segments. Well, in that segment, quite naturally, we would need to limit the financing level not to do any harm to them with a loan. Also, the access to some credits was limited in some cases. We also changed the criteria of measuring the creditworthiness. We added to this analysis, we added the subsidies, which the guarantees offered by the BGK fund. And of course, we had to take into consideration such things as the potential impossibility to repay the loan.

We also extended the availability of guarantees for the small businesses, and the liquidity loan was again secured with the fund. And we also continue the repayment holidays for some customers.

So that seems to be it for -- from us. Now I think we will have questions and answers. Dominik?

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Questions and Answers

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Dominik Prokop, Alior Bank S.A. - Head of IR Department [1]

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There was a lot of questions. So I'll try to sort them out into groups, perhaps. So number one, some questions are about the bank's expectations regarding the cost of risk in the second half of the year, where we believe there will be no growth of this type and no COVID-related provisions. Do you expect to introduce them?

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Unidentified Company Representative, [2]

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Well, we will have to look at it in this way. We have a few scenarios. And most probable, most likely scenario is that this recession will be a V-shaped one and it will -- and of course, we have some more scenarios. But for this one, we have made respective provisions. This means that, in the second half of the year, we do not expect the necessity to make more extra write-downs if the macroeconomic situation does not dramatically change. We believe that the write-offs that we've done are quite right, and they should not change significantly in the latter half of the year. But of course, the environment is not stable and nobody can be 100% sure. But as a rule, we do not expect -- we believe that the provisions cover what they should cover in the proper way.

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Dominik Prokop, Alior Bank S.A. - Head of IR Department [3]

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Another question. Does the bank plan to increase the fees and commissions?

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Unidentified Company Representative, [4]

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We are studying this subject. We understand what is the position of the bank sector in Poland and what our rivals are doing. We have already made some adjustments in the recent past, so we might perhaps increase some fees and commissions in the third and fourth quarter -- in the fourth quarter. And right now I think we are studying what other banks do and where we could increase -- which fees and commissions could be increased.

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Dominik Prokop, Alior Bank S.A. - Head of IR Department [5]

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Thank you. And our next question is about provisions for the corporate loans in the second quarter this year. Could you explain that? What happened?

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Unidentified Company Representative, [6]

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Provisioning is quite an obvious thing the bank does for different situations, which happen in the life of the loans. So the bank makes provisions or write-downs according to what happens in the economy. And something happened in the economy and that's why you had to make these moves.

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Dominik Prokop, Alior Bank S.A. - Head of IR Department [7]

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The next question is about the, what was the repeatable cost of risk in the second quarter? And what are the prospects for the same indicator in the rest later this year?

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Unidentified Company Representative, [8]

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In the second quarter, the repeatable cost of risk was lower than previously, so we expect it to go down below the value of the first quarter. But of course, the provisions that we have to make for COVID, it increased our cost of risks, so it will be a bit higher than we would like it to be.

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Dominik Prokop, Alior Bank S.A. - Head of IR Department [9]

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The next question, does the bank management, is it going to apply for the -- this is about the -- what the bank is going to -- what is it going to do about the contribution?

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Unidentified Company Representative, [10]

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No, we do not.

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Dominik Prokop, Alior Bank S.A. - Head of IR Department [11]

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Can we know the reason why the fees and commissions on the payment card grew quite significantly? And can you continue this trend for further quarters from now on?

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Unidentified Company Representative, [12]

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As regards the income on cards, they come together with the cost of the card, so this is a stable value.

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Dominik Prokop, Alior Bank S.A. - Head of IR Department [13]

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You have said that you've made PLN 418 million for provision. Why does it change the third basket volume? And are you going to reduce the NPL to reduce it?

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Unidentified Company Representative, [14]

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As regards this PLN 418 million provision, it includes the model changes and some individual changes that happened. As regards to coverage, some of the model -- LGD model changes, which are about pricing with the statistical method, and the individual cases that are in the third basket. But this model, of course, right now, is important for the bank. And it will be verified every quarter against the economic situation. And the parameters of the model will probably change. But so long as they are higher, the defaults will be also covered in a higher way according to the payments that we get from those customers. We need to follow the macroeconomic situation.

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Dominik Prokop, Alior Bank S.A. - Head of IR Department [15]

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And now the provision for the European Court verdict. Are you going to -- can you explain why you added this provision? And are you going to do more of such provisions?

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Unidentified Company Representative, [16]

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As I said, we have made the European Court provision at the end of the year. It was PLN 243 million. In the first quarter, this provision wasn't -- nothing was added to it because there was no such need. We are a bank that wants to go about it quite conservatively. And so considering the complaints and the type of portfolio, and we estimated the prospective potential complaints, and the conclusion was that we should be rather careful and perhaps add a new provision. And we believe that some PLN 98 million of additional provision would be just right for the needs.

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Dominik Prokop, Alior Bank S.A. - Head of IR Department [17]

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And the interest margin in the second quarter of this year, the question is, what is the forecast? When is it going to low the -- to reach the lowest level?

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Unidentified Company Representative, [18]

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On a quarterly basis, it was about 4%. Now we expect it to be a little bit less, but that depends on the repayment holidays granted to the customers. So in the further quarters, it will grow over this level.

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Dominik Prokop, Alior Bank S.A. - Head of IR Department [19]

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And one general question. Do you believe that the present market environment will support for the consolidation of the bank market?

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Unidentified Company Representative, [20]

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I guess this question is about something between the lines, but we are not going to comment on that. As regards the market trends, it's always been a lot of discussions and speculations on COVID and the related situation and new ideas that will emerge. It will mushroom, of course. But we do not expect any dramatic events soon to happen.

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Dominik Prokop, Alior Bank S.A. - Head of IR Department [21]

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And the next question, what was the sales in the second quarter of this year?

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Unidentified Company Representative, [22]

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Consumer finance sales were PLN 946 million in the second quarter. In the first quarter, it was PLN 940 million. So we consider the -- we believe that the COVID did not hit on this segment. So it's stable. Now we see the current sales are growing, so our opinion is quite optimistic about it.

The cash loan, cash loan is -- in the quarter was about PLN 2.5 billion. So these 2 loans and new sales is about PLN 4.5 billion.

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Dominik Prokop, Alior Bank S.A. - Head of IR Department [23]

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Next question. Despite big loss -- net loss and the Tier 1 was up, why the MSR 9 was up by PLN 200 million quarter-to-quarter basis.

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Unidentified Company Representative, [24]

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Well, probably you are monitoring -- you are watching the market, and then there were regulatory changes. And then the regulator helped us when it comes to the preferential multiplayer. I'm talking about the RWA. And then there are also COVID-19 related to the basket 1 and basket 2. And these -- they do not burden the coefficients.

And then the MSR 9, it was spread in time. MSR in English is International Accounting Standard #9.

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Dominik Prokop, Alior Bank S.A. - Head of IR Department [25]

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There are a lot of questions. However, we are already -- the time is running out. Could you please comment the cost initiatives? Is there any potential for reduction? If so, what size and in what area, especially when it comes to the branch network?

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Unidentified Company Representative, [26]

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As I have already told you, we are going to now analyze, scrutinize all cost items. We are going to look for synergies between the bank and our subsidiaries. And we are also going to verify all the contracts and renegotiate contracts, if possible. So we are going to find savings. And certainly, we are going to look at the operating costs of the branch offices and also location of branch offices, and then we will do our best to utilize our funds in an optimum manner.

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Dominik Prokop, Alior Bank S.A. - Head of IR Department [27]

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And I would now finish off the round of questions, time is out. Thank you. I would like to thank the management Board for providing the answers, and I would like everybody for participation.

And now we would like to invite you to -- already for the next conference. Hopefully, it will be held live. We would like also to thank you. It was our debut. It was very nice to communicate with you, though, in not a very friendly manner. We cannot see you. We cannot be your host, but hopefully, next conference will be different. And of course, those questions, which were post, well, the answers will be provided by our Investors Relations office. So once again, thank you very much for being with us. Bye.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]