Addiko Bank : Webcast 3Q23 Transcript

WEBCAST TRANSCRIPTION

Vienna, 8 November 2023

Addiko Group 3Q23 Results:

Webcast Transcription

8 November 2023

14:00 CEST

Speakers:

Herbert Juranek (CEO)

Edgar Flaggl (CFO)

Tadej Krašovec (CRO)

Ganesh Krishnamoorthi (CMO & CIO)

Constantin Gussich (Investor Relations)

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Herbert Juranek	Good afternoon, ladies and gentlemen. Welcome to our
	presentation of the third quarter results 2023 of Addiko Bank on
	behalf of my colleagues, Ganesh, Tadej, Edgar and Constantin.
	Let me guide you through the agenda. I will start with the
	executive summary of the highlights of the third quarter and then
	pass on to Ganesh, who will inform you about our achievements on
	the business side.
	In the second chapter, Edgar will give you more insights on our
	financial performance, and Tadej will report about our progress in
	the risk area.
	At the end, I will do a short wrap-up based on our current outlook
	for 2023 and finally, we will move on to Q&A.
	So, let's begin with the highlights.
	The result of the third quarter were pretty positive. We were able
	to increase our net profit by 53% year-on-year from €19.6 million to
	€30.1 million. This leads to €1.55 earnings per share until the end
	of the third quarter. The return on average tangible equity
	increased to 5.5% after 3.4% in 3Q22. Our operating result jumped
	by 40% year-on-year to €78.1 million despite inflationary impacts
	on the expense side and increasing funding costs.
	This positive result is based on a double-digityear-on-year growth
	in our focus business and a solid cost management in the given
	environment. The net interest income development is an important
	pillar in this context as we were able to improve it by 29.5% year-
	on-year based on the progress made in our Consumer and SME
	business as well as on our liquidity management income. An
	important driver in this regard are our continuous repricing
	activities, which led to a substantial increase of our yields in new
	business. Our Acceleration Program is supporting these
	developments. I will come back to that on the next page.
	But before, let's talk about the risk aspects, funding and capital.
	Our cost of risk stayed at low 27 basis points or €9.5 million. The
	NPE volume went further down to €153 million and, consequently,
	results into an again reduced NPE ratio of on-balance loans of 3.1%.
	On top, our NPE coverage ratio also improved from 75.4% at the
	year-end to 79.2%.
	The funding situation is strong with €5.1 billion deposits and a loan
	to deposit ratio of 69%. Our liquidity coverage ratio stands at 331%
	at the end of Q3. And last but not least, our capital position
	remains also strong with 19.5% fully-loaded CET1 ratio.
	Unfortunately, the third quarter surprised us with a few unpleasant
	events. Slovenia is planning to introduce a windfall tax for all
	banks. Serbia imposed an interest rate cap for housing loans. And
	in Croatia, the number of court cases coming in after having
	reached the statute of limitations are elevated. However, the
	second two subjects are already reflected in our Q3 results.

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Overall, we do not expect an impact on our mid-term targets from these external factors. Edgar will give you more background on these topics in his part of the presentation.

Now, let me share our expectation concerning the Supervisory Review and Evaluation Process. We expect the P2G to decrease by 25 basis points to 3% and we expect no changes in P2R. The final results of the SREP 2023 are scheduled to be received before the end of this year to become valid as of 1 January 2024.

Let's continue with the status of the Acceleration Program. I am happy to share with you that we are making good progress in all three pillars of our Acceleration Program.

The business part of the program was strong. It was a strong enabler to achieve our growth rates in the third quarter. In this regard, I would like to mention two topics. First, we reached a double-digit focus book growth already in September and, at the same time, increased our customer deposit base. Second, we were able to further extend our partnership network to 520 partners. Ganesh will give you more background later on.

Moreover, the assessment of our expansion into Romania is well on the way according to the time plan. The same is true for our ESG action plan as all projects are on track. Tadej will provide you with more insights later and you will get a detailed report on all our ESG activities with the year-end information in March 2024.

Our initiatives of the second pillar also progressing quite well. The preparation of our end-to-end enabling initiatives is according to the plans as well as the other operational excellence measures based on the Kaizen methodology. Therefore, we expect to build limited restructuring provisions for the projected restructurings and platform improvements in the fourth quarter. In addition, together with our total customer base, our digital users grew by more than 10% year-on-year.

In our third area, namely risk management, we successfully launched a new risk reporting platform across the Group, which will further improve our capabilities to steer and manage our risks on a group-wide basis. Furthermore, we started a project on collection efficiency to explore additional enhancement potential in the collection area. And last but not least, our NPE reduction initiative brought our non-performing exposure to an all-time low.

So, all together, I believe that we are right on track with our Acceleration Program to get closer to our goal to become the best specialist bank for Consumers and SMEs in Southeast Europe.

Now let's have a look to our business development. As you can see on this page, we managed to grow our focus portfolio by 11% year- on-year. If we exclude the medium SME business, our growth rate was even plus 14% year-on-year.

The Consumer book increased by 9% year-on-year influenced by tightened risk criteria in the first half of the year and by lower demand. Nevertheless, we are confident that we will be able to meet our guidance to achieve a double-digit growth in our focus

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book in the full year 2023, especially as we are assertive that, based on our work, we will find sweet spots for profitable business activities.

Our confidence is also supported by the fact that we were successful in driving our new business generation up by 14% year- on-year and, at the same time, increased our focus yield to 6.2%. New business yields in Consumer reached 7.6% and in SME 5.6%.

Our total focus book increased to 86% of gross performing loans. This development is, inter alia, based on the continued strong growth of our SME book, which went up by 13% year-on-year, while the low-yielding larger tickets in medium SME were decreased by 16%. The Micro and Small SME business even grew by 23% year-on- year.

These growth rates were achieved, although our risk management is continuously calibrating the underwriting criteria to the given environment. In this context, I would like to mention that we will continue with our approach to strive for ambitious business growth while, at the same time, respecting our prudent risk criteria.

With that, I would like to hand over to Ganesh to give you a deeper insight into our business activities.

Ganesh Krishnamoorthi Thank you, Herbert. Good afternoon, everyone.

Moving to page six, I'm delighted to share that, despite the challenging landscape with rising deposit costs and persistent inflation, we consistently delivered strong results in the past three quarters. Our strategic approach and USPs have allowed us to navigate tough market conditions, resulting in an impressive 14% year-over-year new business lending growth and a premium increase of price over 120 basis points in both the segments. Unfortunately, our competition has not followed our price increase yet.

Going deeper and deeper into the Consumer segment, our whole focus has been on driving incremental growth by lower ticket loans to the emerging digital-savvy customer base and point-of-sale customer segments. Over the last nine months, we have concentrated our efforts on four main areas.

Firstly, we have extended our lending reach through strong partnerships totalling 523 and our presence in over 1,000 locations in our region. This move has allowed us to tap into a new customer segments that appreciate financing at point-of-sales transactions. As a result, our partnership lending business has more than doubled. Furthermore, our cross-selling team is well prepared to offer these customers a larger consumer loan after understanding the payment behaviour.

Secondly, we are upgrading our existing branch-based digital solution to offer an end-to-end digital customer experience that eliminates the need for customers to visit physical branches. This

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exciting upgrade has been launched already in Croatia and will soon be introduced into other countries.

Thirdly, we are working on growing non-lending product revenue streams with a particular focus on cards and insurance. In fact, our innovations in cards led to a remarkable 94% year-over-year increase in cards commission income. This, in turn, will help us to compensate the NCI loss that occurred due to the implementation of the euro in Croatia.

Finally, we have launched a pilot programme for Buy Now, Pay Later services in Romania. And this pilot not only serves as an opportunity to provide our customers with a new financial offering but it also allows us to gain valuable insights and risk dynamics associated with lending and aiding our assessment for larger expansion to various other products.

Overall, we have achieved a strong 51% growth in new customer acquisition, accompanied by a 124 basis points increase in yields and a 10% year-over-year development in gross disbursement along with increase in deposits.

Shifting our focus to the SME front. We focused on delivering lower ticket loans and mandatory account packages to underserved Micro and Small segments through our digital agent platform, where speed is a prominent USP.

Over the past nine months, we have focused on three key topics. Firstly, process enhancement. Through our relentless pursuit of improvement, we have successfully streamlined our loan application process resulting in a time-to-cash reduction, and also, a corresponding increase in USP. And this, in turn, has enabled us to implement price increases.

Secondly, the introduction of a new online channel. Our commitment to convenience has led us to introduce a new online channel, which empowers SME clients to apply for loans online eliminating the need for direct interaction with sales staff. This innovation sets us apart as the only bank offering the service in key countries in Croatia, Slovenia and most recently in Serbia.

Lastly, product expansion. As part of our Acceleration Program, we are diligently working on new products that will further enhance our SME ecosystem and revenue stream.

On to the results. Our Micro business segment has seen an impressive growth rate of 44% year-on-year underscoring the scale of our reach and our commitment to underserved segments. Additionally, across the Small and Micro landscape, we achieved 22% growth in new business. Most notably, we attained a substantial increase of 157 basis points in pricing year-over-year.

To summarise, we remain optimistic about the future as we forge ahead with innovation and strengthen our position in the Consumer and SME space, not only in lending, but also in other fee driven products. Our USPs are meticulously designed to resonate with

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	customer needs and have not only acted as a buffer against the
	challenging marketing dynamics but also fuelled growth.
	With that, please let me hand over to Edgar for financials.
Edgar Flaggl	Thank you, Ganesh and hi, everybody.
	Starting on page eight, where we printed the composition of our
	result for the first nine months of 2023. Net interest income
	continued to improve significantly and is up 6.1% compared to the
	previous quarter and almost up 30% year-over-year. The quarterly
	improvement is starting to slow down given the natural increasing
	deposit funding costs.
	Overall, our key revenue driver, the interest income - so excluding
	interest expenses - improved by 41% year-over-year. This is driven
	by higher yields from our premium loan pricing, repricing of the
	variable back book and the contribution from treasury and liquidity
	management. The steady progress on increasing the share in higher
	yielding focus loans to now 86% in our book supports this positive
	development.
	As in the previous quarter, the treasury and liquidity management
	income also significantly increased year-over-year and still
	overcompensated the steady increase in deposit costs.
	Interest expenses, as mentioned last time, continued to inch up. On
	the one hand, this is the natural increase we have been expecting.
	On the other hand, it's also driven by our planned shift from on-
	demand or a-vista to more term deposits. We have achieved a
	healthier composition with 63% a-vista share, compared to 68% at
	year-end 2022 while, at the same time, increasing deposit volumes.
	For 2024, we expect deposit costs to further increase to roughly 120
	basis points from approximately 80 basis points for the full year
	2023.
	The second main income driver, the net commission income,
	continued to be down year-over-year due to, as mentioned many
	times, the lost FX/DCC business in Croatia as a direct consequence
	of Croatia joining the euro. However, NCI came in strong once again
	also in the third quarter with another 4.1% quarter-over-quarter
	increase on top of the already strong Q2 this year.
	In summary, a continued improvement on net banking income with
	an increase of 5.6% compared to last quarter and almost 18% year-
	over-year.
	Now to the other income, which comprises the net result of
	financial instruments and the other operating result, and which is
	mainly driven by deposit guarantee costs and regulatory charges. If
	you compare the third quarter with Q2, please be reminded that we
	had positive one-offs amounting to altogether €1.6 million in the
	second quarter.

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Now, as Herbert has already pointed out, we are expecting a special banking tax in Slovenia. This tax would require a charge of roughly €3 million per year in this position. Based on the latest news from a few days ago, this new tax will likely not affect the fourth quarter 2023 but start with 2024. However, as of today it's also not certain if this will be changed back again to 2023. In any case, we do not expect a noteworthy impact on our mid-term guidance out of this.

Down to operating expenses, which have continued the upward trend in the given environment and are now up by almost 6% year- over-year due to significantly elevated inflation. The main driver is and remains high wage pressure and cost increases from service agreements that, by standard, are tied to an inflation index, such as for IT.

We stick to our challenging guidance on OPEX to land below €179 million in 2023 despite these increasing headwinds, and I'm confident we will achieve this. The next year will be more challenging on that front.

If you take it altogether, we have delivered very positive improvements of our earnings capabilities, which are reflected in a 40% year-over-year increase of the operating result.

The next item is the other result, which includes costs for legal claims as well as for operational banking risks following our prudent approach. As you can see, quite a large charge here with €16.1 million in the third quarter, which is mainly driven by two topics. First, Swiss franc legal claims in Croatia. During September, we have been getting more and more transparency on the potential final number of legal cases to be expected following the deadline for filing new claims expired on 14 June.

We are now expecting the final number of cases to be a couple of hundred cases above our previous estimates. On a positive note though, this now puts the lid on the topic in terms of number of cases that we can expect and provides us with the opportunity to launch a settlement strategy and work on resolving the cases.

The second main topic here is related to an interest rate cap of 4.08% that was introduced for housing loans in Serbia until the end of the year 2024, which led to a modification loss of €2 million.

Now the credit loss expenses, which continued to remain benign. Tadej we will provide insights on this very positive development in a moment.

So, altogether, a solid result on the back of a strong momentum in the top line, successful cost containment and sound risk management, which allowed us to achieve the unaudited net profit of €30.1 million, which is up more than 50% versus the €19.6 million the year before.

Just a quick summary on the right-hand side of the page. What you see here illustrated quite nicely, is our positive trend in NII continued despite higher funding costs, our NIM improved further

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	and the cost income ratio remained below the 60% mark also for the
	third quarter.
	To conclude, a solid result with improving operational performance
	while, at the same time, digesting quite a bit of legacy that
	originated more than a decade ago.
	Over to page nine, which illustrates our strong capital position. At
	the end of the first nine months of 2023, our capital ratio remained
	strong at 19.5% fully-loaded, and all of that in CET1. Just as a
	reminder, this excludes interim profit and accrued dividends. If you
	would add interim profit and deduct accrued dividend, based on our
	current guidance, our CET1 ratio would be flat in comparison to
	year end 2022 at 19.9% fully loaded.
	As you can see in the chart on that page, our OCI also continued the
	trend of recovery while the main change compared to the second
	quarter is an increase in RWAs as a consequence of strong growth
	in our focus book.
	Now briefly on SREP. As already mentioned by Herbert, based on
	the draft SREP for 2024 we're currently expecting no change in P2R
	and a reduction of P2G by 25 basis points.
	To summarise, continued strong capital position with substantial
	buffers.
	And now over to Tadej on risk management and our good progress
	on ESG.
Tadej Krašovec	Thank you, Edgar, and good afternoon, everyone.
	If we go to slide 10 first. In the third quarter of 2023, the quality of
	our credit portfolio continued to be as expected. We can observe a
	higher credit risk indications in one country, however, the overall
	situation remains stable. As you can see on the slide, we continue
	to decrease our non-performing portfolio reaching €153 million of
	NPEs, which represents an NPE ratio of 3.1%. An all-time low.
	The right-hand side chart also shows that NPE formation stagnates
	and is more than compensated by successful NPE decrease strategy.
	To keep the portfolio quality under control, we are diligently
	monitoring portfolio and new disbursements while implementing
	more stringent risk rules to exclude subsegments, where credit risk
	performance is not up to our expectations.
	We continue on the next slide. Credit loss expenses in the first three
	quarters of 2023 came in at €9.5 million resulting in a cost of risk
	of low minus 0.27% on a net loan basis. The quality of Consumer and
	SME behaviour that resulted in minus 0.48% and minus 0.43% cost of
	risk respectively was better than expected. Relatively low cost of
	risk was driven by lower than anticipated net migrations to Stage
	two and Stage three, migration to NPE, further supported by a few
	larger successfully resolved cases.

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The post-model adjustment recognised at the level of €18.5 million remained unchanged from mid-year 2023.

I can conclude that the current macroeconomic situation in our region supports the stable credit risk situation of the bank with indications of a slight negative trend in one country and some of their segments. Nevertheless, those trends were overcompensated with the generally very stable portfolio.

Let's go on to slide 12 to inform you regarding our development in the ESG area. We take ESG topic very seriously by defining an internal ESG strategy, creating governance around the topic and executing and regularly improving risk identification and materiality assessment.

These pillars led us to exit some highly impacted industries and set more strict limits for others. We have also introduced upgrades of the credit process to identify clients that could be more impacted by climate change and exit by limiting exposure or not financing some of them at all.

Some extraordinary events in our region, for example, the severe floods in Slovenia in August, prove that such approach is needed, even though our materiality assessment shows our business model and our clients would be less impacted overall. The minimal impact of the floods in Slovenia gives us some confirmation that we are on the right track.

However, we are not only focused on how climate changes can impact us or our clients, but also how we can have a positive impact from an inside-out perspective. On the next three slides, I would like to give you a taste of our approach while not going into the details of each slide.

Slide 13. Environmental impact is our first priority and first point. We want to become more climate neutral through replacing our car fleet, reducing office space after significant reductions that we have already had in previous years, and reducing consumption through digitalisation and operating paperless branches.

While Addiko Holding in Austria has already switched to 100% renewable energy, we have the same ambition for all other countries. However, we see that the transformation will take more time due to local specifics and lower focus of the local governments.

To promote green products and services, we have already established 14 partnerships, surpassing our initial goal for this year.

On the next slide on the social aspect of ESG, we are promoting diversity and inclusion. Throughout the Group, the share of women in executive and middle management positions is already at 48%.

We work extensively on improving the life-work balance of our employees, on creating a culture of open communication which, we

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	believe, will positively impact bank results in the long term and will
	actively support the communities in which we operate.
	In the last part on the next slide, we believe in a strong and
	transparent governance. While we constantly improve governance
	inside the bank, we have a specific focus on governance around ESG
	topics inside this programme.
	This year, we are focused on building ESG governance bodies,
	participating in PCAF association, this is the Partnership for Carbon
	Accounting Financials, to use the best practices and to educate also
	our clients. On top, we extended our impact to external partners
	to increase the supply chain ESG compliance.
	Due to our size, but especially our specialised business focus, we
	know our impact on the ESG topic is limited. However, we continue
	to improve in small steps and do our part, while using opportunities
	for ESG to have a positive impact on our business and governance.
	With that, I will hand back to Herbert.
Herbert Juranek	Thank you, Tadej. Let's go to the outlook and wrap-up.
	Unfortunately, in addition to the ongoing war in the Ukraine, a new
	war came up in the Middle East after the terrorist attack by Hamas,
	altogether increasing global uncertainty in an already stumbling
	economic environment.
	Inflation is already below its peak but still on an elevated level and,
	therefore, continues to exert pressure on our operating expenses.
	Therefore, we will strive to develop countermeasures to manage
	the consequences.
	Furthermore, we believe that we are already around the top of the
	central bank interest rate development. And finally, the deposit
	prices in our markets are also going up. In some countries, this trend
	is promoted and influenced by the respective government.
	Moreover, incumbent banks still continue to hesitate about
	increasing loan prices, and regulators keep up with their intentions
	to curb loan interest and fee increases. However, despite those
	challenging circumstances, we are assertive that we will find ways
	to counterbalance those negative influences and that we are able
	to keep our premium positioning in pricing.
	Therefore, I would like to state that the management board of
	Addiko confirms the outlook of 2023, which was upgraded together
	with the announcement of the half-year results. In order to provide
	you with full transparency, we have added the current status of
	achievements to the respective category.
	To sum it up: we, the management team of Addiko, are very
	confident in our business model and that we will use the
	opportunities in our markets to be able to achieve our goals. We
	are also positive for the remaining part of the year. Now, we will

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