Addiko Bank : Webcast YE23 Transcript

WEBCAST TRANSCRIPTION

Vienna, 6 March 2024

Addiko Group 2023 Results:

Webcast Transcription

6 March 2024

14:00 CET

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. Let me welcome you to the
	presentation of the Year-End Results 2023 of Addiko Bank on behalf
	of my colleagues, Ganesh, Tadej, Edgar and Constantin. We have
	prepared the following agenda for you.
	I will start with the executive summary, the key topics and our new
	mid-term guidance. After that, I will pass on to Ganesh, who will
	update you on our achievements on the business side. In the second
	chapter, Edgar will provide you with the details of our financial
	performance and Tadej will inform you about our progress in the
	risk area. At the end, I will do a short wrap-up and present to you
	the outlook on 2024, before we move on to Q&A.
	Now, let's begin with the highlights. I am pleased to be able to
	announce a 60% year-on-year increase of the net profit for the
	business year 2023 to €41.1 million. This corresponds to €2.12
	earnings per share. The return on average tangible equity went
	from 3.4% in the year before to 5.5% in 2023.
	Our operating result jumped up by more than 41%, year on year, to
	€103.9 million despite increased funding costs and inflationary
	impacts on the expense side. This positive result is based on a 6%
	increase of our customer base as well as a 6% increase of our focus
	area deposit volumes combined with a double-digityear-on-year
	growth in our focus business.
	In addition, driven by our Acceleration Program, we improved our
	sales and operating efficiency to keep our cost base under control.
	Moreover, we made progress to prepare our expansion into the
	Romanian market. I will come back to that later on.
	Now let's take a look at the risk side. We are proud that we have
	successfully managed our non-performing exposure down to a
	historic low of €138 million, which results in an NPE ratio of on-
	balance loans of 2.8%. At the same time, we were able to improve
	the coverage ratio from 75.4% at the end of 2022 to 80.9% at the
	end of 2023. Our cost of risk stayed at a low 34 basis points or €11.8
	million.
	Based on the overall positive performance of the business year
	2023, we will, according to our currently existing dividend guidance
	of 60% of the annual net profit, propose to the General Assembly in
	April to pay an ordinary dividend in the amount of €24.6 million.
	That's equivalent to €1.26 dividend per share. This dividend per
	share is 5% higher than the dividend paid out last year, which was,
	for good measure, based on the profit of two business years,
	namely, 2021 and 2022.
	Let's go to funding and capital. The funding situation remained
	strong with €5 billion deposits and a loan-to-deposit ratio of 69%.
	The liquidity coverage ratio went above 310% at year end.
	Furthermore, our capital position improved to a very strong TCR
	ratio of 20.4% fully loaded, all in CET1. The proposed dividend is
	already deducted in this calculation.

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Last but not least, we have published our ESG strategy and made substantial progress on our ESG action plan. All our projects and deliverables are according to the plan.

Now let's look at the attainment of our mid-term targets. As you can see, the positive message on this page is that almost all targets could be fully achieved. Only the sum of other result and expected credit loss expenses on financial assets is with said 1.7%, slightly above the guidance. The reason for this is based on two topics.

Number one, we, the management of Addiko, decided to keep a €6.5 million post-model adjustment for remaining uncertainties in the given economic environment. And number two is the additional provisioning for Swiss franc-related claims to enable faster resolution. As we already communicated, the statute of limitation to file new Swiss franc claims in Croatia expired in June 2023, providing clarity on the final number of cases in the fourth quarter of last year.

Now, consequently, we were able to prepare and to launch a strategy to resolve the unconverted Swiss franc cases in Croatia. Furthermore, we also undertook prudent provisioning for a limited number of Swiss franc related claims in Slovenia. If we would exclude these adaptations, the sum of other result and expected credit loss expenses on financial assets would be at 1.5% for the full year 2023. Next page, please.

Let's have a closer look at the regulatory and the governance front. As already announced, Slovenia will introduce a windfall tax for all banks in 2024 of 20 basis points based on the total assets for a period of five years. In addition, the countercyclical buffers in Slovenia and Croatia and the systemic risk buffer in Austria are becoming fully effective. Both the new tax and the higher capital requirements are already included in our planning assumptions and, respectively, in the mid-term guidance.

As of 1 January, the new SREP conditions are applied with no change in the Pillar 2 requirement and a decrease of 25 basis points in the Pillar 2 guidance.

Since we, as a management, are in charge, we always were transparent in our previous earnings calls when we informed about the intense discussions with our supervisory authorities about our dividend policy. As you know, the regulators expressed their concerns about our target pay-out ratio of 60%, calling it aggressive and urging us to reduce it. After severe discussions, we decided to stick to our guidance and, as mentioned before, to suggest to the General Assembly to pay out 60% of the 2023 net profit in 2024.

However, in order to address the request of the ECB, the forward- looking guidance for the pay-out ratio has been adjusted to approximately 50%. At the same time, the resulting new dividend guidance for 2024 and subsequent years will be changed to a dividend per share target, as I will show you in a minute.

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Nevertheless, at this point in time, it is important for me to mention that despite the reduction of the pay-out ratio, it is the clear ambition of us as a management team to be able to pay next year at least the same dividend in absolute terms as we pay this year. In addition to the changes of the dividend policy, we decided to overhaul our mid-term guidance in order to give you more insights into our plans.

This revision is based on the work which has been done within the Acceleration Program and it takes into account our plans based on the opportunities which will be established with the completion of the programme in the second half of this year. The further extension of our net interest margin is just one part of it. But let me show you the full picture.

We grouped the KPIs in three categories, income and business, risk and liquidity and profitability. Furthermore, we increased the outlook by adding the years 2025 and 2026 to the picture. We also included our previous guidance in the last column. An empty box indicates that we have not disclosed this KPI before.

Before I go through the list line by line, I would like to point out three general remarks. Number one, if you want to check the macroeconomic and interest rate assumptions behind these figures, please look at page 21 of this presentation.

Number two, concerning Romania, as we intend to undertake a careful ramp-up to ensure a successful progress, we did not include any notable impact on revenues. However, the estimated yearly OPEX run rate increasing to €3.5 billion and the cumulative CAPEX of below €2 million are included. The intention of this business expansion is to prepare a future growth engine, which will unfold its full potential starting from 2026 onwards.

And number three, we consider 2024, with the completion of our Acceleration Program, as the preparation year to enable a bigger step towards our mid-term goals in 2025 and 2026.

So, let's look at the individual KPIs. Instead of giving you an absolute target number of our loan book size for our yearly outlook, we decided to use a 6% compound average growth rate target for the period. This number is a blended rate and includes the intended further reductions in our non-focus portfolio while, at the same time, our focus business shall grow double-digit to achieve more than 95% share of the total loan book until 2026.

Based on this development, we see further potential to continuously increase our net interest margin up to more than 4.1% in 2026. On the same basis, we estimate a net banking income growth of more than 4.5% for 2024, and based on our efforts of the Acceleration Program, we expect the growth rate to go up to circa 9% in 2025 and 2026.

For operating expenses, we have set our target to stay below €191 million. This shall be achieved, also in the later years, through synergies coming from the Operational Excellence Program. Based

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on the experience we gained with the respective initiatives in 2023, we consider this aspiration as absolutely achievable.

Although we are currently on a very low cost-of-risk level, we took a prudent approach and assumed in our plans a cost of risk for 2024 of 1%, increasing to less than 1.1% in 2025 and less than 1.2% in 2026. While we continue to strive to further reduce our non- performing exposure also in the future, we carefully included an NPE ratio of less than 3% according to EBA definition in the guidance.

Subject to the yearly SREP result, we plan a total capital ratio of above 18.35% going forward. Due to the planned growth of our loan book, our loan to deposit ratio will increase from 69% in 2023 to below 80%.

Now, one of the most important mid-term goals is to achieve a return on the average tangible equity of more than 10%. We are confident that this target will be achieved latest in 2026 based on the results of our Acceleration Program.

The other very important target is the dividend per share. Here, our mid-term goal is to raise the dividend per share on a regular basis to an amount above €2 until the business year 2026.

Now, how to make that happen?

We consider our Acceleration Program as the key engine in order to achieve our mid-term guidance. Therefore, I want to give you more details of the achievements and the outlook for 2024 for each pillar of the programme.

Let's start with business. The initiatives of the programme enabled a double-digit growth in our focus book and a remarkable 23% growth rate in our lending customer base. Furthermore, we enlarged our partnership universe to more than 560 partners at more than 1,200 locations. This is a great basis to achieve significant, healthy growth rates, going forward.

Consequently, our focus loan book will hit 90% of the total loan book already this year combined with the continued positive impact on our net interest margin. This development will be also supported by broadening of our product offerings and further extensions of our network. At the same time, we will make the digital interactions with our clients even more convenient, while keeping our pricing on premium levels.

Our projects to expand into Romania is well on track and shall start with a soft launch in the second half of the year.

Now, what's going on in Operational Excellence and Digital? A lot. We gathered a team on artificial intelligence and started to work on a group-wide basis on several use cases, which will create substantial benefits in all three pillars of the programme. Ganesh will tell you more about it.

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Moreover, the Kaizen methodology has been rolled out within the organisation and is already used in the respective projects. Based on that, we were able to launch new end-to-end capabilities in three key countries. For example, in one country we achieved to reduce the onboarding time for new SME customers substantially to 20 minutes. This new onboarding process is currently rolled out to all countries. And overall, we accomplished to further grow the number of our digital customers by another 8.5% year on year.

So accordingly, we will continue with our efforts to finish the automation of our key processes in 2024. The completion of this exercise shall give us the opportunity to increase efficiency and to improve our cost base for 2025.

The initiatives in our third chapter, best-in-class risk management, were also quite successful in 2023. We optimised our collection processes and reduced the non-performing exposure again by 15% in 2023 to a historic low of 2.8%. Moreover, we implemented a new risk reporting platform across the group which enables us to better control and steer our exposures. On top of that, we increased the automation in the customer segment by 6%, year on year.

Of course, we will continue that path in 2024 to strive for excellence, to establish a scalable and automated leading-edge underwriting, monitoring and reporting environment. This shall lead to further improvements in terms of efficiency, effectiveness and, most important, also portfolio quality.

So, in summary, we believe that the Acceleration Program will bring us closer to our ambition to be the best specialist bank for Consumers and SME in South-East Europe.

With that, I would like to close here and pass on to Ganesh to tell you more about our achievements and our plans on the business side.

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

Moving to page eight. 2023 posed several challenges including rising interest rate, persistent inflation and muted loan demand. However, our strategic approach characterised by maintaining premium pricing supported by unique selling propositions and prudent underwriting enabled us to achieve an impressive 11% growth in our loan book.

With the premium focus yield of 6.3% our new business yields have reached 7.7% in Consumer and 5.7% in SME. Our primary focus remains on optimising our loan portfolio by reducing exposure of low- margin and high-exposurenon-focus and medium SME business loans. Instead, we aim to replace these with higher-margin Consumer and micro SME business loans.

Currently, our total book consists of 87% of gross performing loans reflecting a commendable 15% year-over-year growth in new business originations. On the liability side, while observing customer

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shifts towards term products, we still managed to expand our deposits to €5 billion.

Moving on to page nine. In our Consumer segment, we focus on driving growth by targeting digital-savvy customers and point-of-sale segments and lower-tickethigh-priced loans.

Last year, we concentrated on, firstly, expanding lending reach through 564 partnerships across 1,200 locations, doubling our partnership lending business and driving incremental growth.

Secondly, transition from branch-based digital solutions to a more cost-effective branchless end-to-end digital customer experience, eliminating the need of branch visits. Thirdly, we focused on increasing on non-lending product revenue, particularly in cards and insurance, resulting in an 82% increase in cards commission income.

Finally, we also launched a Buy Now, Pay Later programme in Romania offering a customer new financing options while providing valuable insights into lending risk dynamics. These insights will be instrumental as we prepare to launch our consumer lending services in Romania.

Overall, we have achieved a strong 46% growth in new customer acquisition accompanied by 121 basis points increase in yields and 16% year-over-year development in gross disbursement.

Shifting our focus to SME, we have prioritised delivering low-ticket sized loans and mandatory account packages to underserved micro and small segments through our digital agent platform, where speed is a prominent unique selling proposition.

Over the past year, we have concentrated on three key areas. Number one, process enhancement. By continuously improving our loan application process, we have reduced time to cash and increased our unique selling propositions allowing us to implement price increases.

Number two, introduction of new online channel. Our commitment to convenience led us to introduce a new online channel and a mobile app enabling SME clients to apply for loans online, distinguishing us as the only bank offering these services in key countries such as Croatia, Slovenia and Serbia.

Number three, product expansion. As part of our Acceleration Program, we were developing new products to enhancing our SME ecosystem and revenue stream. Results highlight a 41% year-over- year growth in our micro business segment and an 18% growth in new business across the small and micro landscape. Notably, we achieved a significant 153-basis-point increase in pricing year over year.

In 2024, we anticipate another strong year as we remain committed to executing our specialist strategy, prioritising customer value through premium pricing and disciplined risk management. Addressing the challenges from the previous year, we aim to turn around our net commission income performance by various factors

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	such as euro introduction in Croatia, fee increase protection in
	Serbia and conservative payment behaviour from customers.
	We believe this is temporary and anticipate a positive shift in the
	stabilisation of interest rates and a lower inflation, alongside
	initiatives to engage customers through new product launches
	complemented by fee adjustments to drive our net commission
	income up this year.
	Moreover, we're dedicated to leveraging technological
	advancements, particularly AI, to enhance productivity, elevate
	customer service, automate processes and identify risks. We
	recognise AI's pivotal role in banking and will actively explore and
	test various use cases to drive innovation and efficiency.
	Moving to page ten, we summarise key states to achieve not only our
	mid-term guidance but also our banking specialist vision which we
	outlined three years ago. Our Consumer vision is to enable an
	ecosystem that offers embedded financing through partners such as
	merchants, retailers and healthcare providers at the point of sale.
	We anticipate this channel to contribute more than 30% in the future
	years.
	Additionally, we believe that adding convenience through
	end-to-end digital lending channels will disrupt the entire region.
	Addiko, with our best-in-class customer experience, aims to lead this
	disruption by capturing 20% of the branch business allowing our
	branch employees to focus on advisory services. Finally, our mobile
	platform plays a key role in enhancing customer engagement by
	providing easy access to new products and services.
	In our SME vision, we aim to address SME's pain points by offering an
	integrated platform that minimises administration burdens, secures
	funding and manages cash flow. We will achieve this by building a
	comprehensive solution that not only provides fast loans and
	financing products to the underserved micro and small SME segment
	but also offers a convenient mobile banking solution, with superior
	customer experience complemented by good servicing.
	Furthermore, we will enable seamless connections to their
	accounting and other financial service providers.
	Finally, our vision hinges on our Acceleration Program, empowered
	by risk and operational excellence, previously outlined by Herbert.
	In summary, we are positioned well to deliver strong growth in future
	as we continue innovating and solidifying our specialist position in
	the Consumer and SME space. Please let me hand over to Edgar.
Edgar Flaggl	Thank you very much, Ganesh, and hi, everybody. Starting on page
	12, where we printed the composition of our audited result for the
	full year 2023.
	In summary, quite an exciting year. Net interest income improved
	significantly and was up 29.2% compared to the previous year. The
	quarterly improvement naturally slowed down given the increasing
	deposit funding cost, but was still visible in the fourth quarter at an

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increase of 2.1%. As a consequence, our NIM inched up steadily during the year and ended at almost 390 basis points in the fourth quarter and 375 basis points for the full year.

Overall, our key revenue driver, the interest income, so excluding interest expenses, improved by more than 40% year over year. This was driven by higher yields from our premium pricing of new business, repricing of the variable back book, which represents only roughly 20% of our total book, and the contribution from treasury and liquidity management.

We ended the year with 87% of our book in higher-yielding focus loans, which is an improvement of five percentage points in just one year, and we are expecting to reach 90% ahead of schedule within 2024. This was, of course, a key driver for the improving interest income.

As in the previous quarters, the treasury and liquidity management income also significantly increased year-over-year and overcompensated the steady increase in deposit costs. Interest expenses ramped up throughout the year. On one hand, this is a natural increase given the rate environment, and on the other hand, it's driven by our planned shift from on-demand or a-vista to more term deposits.

We have achieved a healthier composition with 62% a-vista share compared to 68% at year-end 2022 while at the same time increasing deposit volumes and recording a 6% year-over-year increase within our focus areas Consumer and SME, as Herbert mentioned already. For 2024, we expect deposit costs to land slightly north of 120 basis points from approximately 80 basis points for the full year 2023.

The second key income driver, the net commission income, continued to be down year over year due to lost FX/DCC business in Croatia and that as a direct consequence of Croatia joining the euro in January last year. As Ganesh mentioned already, we have a plan to get back to a positive NCI trend going forward. All this led to a solid improvement on net banking income with an increase of almost 19% year over year.

Now to the other income, which comprises the net result on financial instruments and the other operating result. The development in this position is mainly driven by higher deposit guarantee costs and regulatory charges. In the fourth quarter, we also booked a restructuring provision of €1.4 million in the context of our operational excellence initiatives.

Down to operating expenses, which have continued the upward trend in the given environment, as discussed in earlier calls, and are now up by 6.3% year over year due to significantly elevated inflation which ranges from 7.2% to 12.5% in our region.

The main driver remains high wage pressure and cost increases from service agreements that are tied to an inflation index. Our cost- income ratio landed at 60.3% during the fourth quarter and 60.5%

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for the full year, which is a year-over-year improvement of seven percentage points.

Despite the previously said inflation environment across our region and all related headwinds, we still managed to achieve our ambitious goal to contain expenses below €179 million for the full year 2023.

In aggregate, we have delivered very positive improvements of our earnings power, which is reflected in a 41% 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 for the full year 2023, most of which was already booked in the previous quarters and which is mainly driven by the following topics.

First, on Swiss franc legal claims. As a reminder, the group has not disbursed any Swiss franc loan after the year 2008. However, still, there are some dynamics here more than decade later. Most provisions are related to Croatia and reflect developments during the year 2023, specifically a higher inflow of new court cases.

On a positive note, the deadline for filing new claims in Croatia expired on 14 June last year, which means we have now more knowledge on the potential total number of cases and can initiate a strategy to resolve claims from customers with unconverted Swiss franc loans, as Herbert pointed out already.

For Slovenia, we also booked a low single-digit euro million provision for related legal matters.

Furthermore, this position includes impacts related to external factors that affected all banks, such as an interest rate cap introduced for housing loans in Serbia, a change in view from the tax authority on VAT for card business in Bosnia and Herzegovina and the pre-payment fee topic in Slovenia, often referred to as Lexitor.

Now to credit loss expenses which, in summary, came in benign in the year 2023. Tadej will provide insights on the very positive development in a moment.

To conclude, a strong result on the back of ongoing momentum in the topline, successful cost containment and sound risk management, which allowed us to achieve the audited net profit of €41.1 million, which is up 60% versus the €25.7 million we achieved the year before, and all that while digesting quite a bit of legacy that originated more than a decade ago.

Over to page 13, which illustrates our further strengthened capital position. At the end of the year 2023, our capital ratio landed at a strong 20.4% fully loaded, and all of that in CET1. This figure now includes the audited profit for the year with the proposed dividend of €1.26 per share already deducted. As you can also see in the

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