What analysts asked about the economy, businesses, households and Alpha Bank’s new goals

By Leonidas Stergiou

The connection of the macroeconomic environment with Alpha Bank’s strong results and the upward revision of its annual targets were the focus of questions from international analysts during the presentation of the Group’s results for the second quarter and first half of the year.

The surge in lending put Alpha Bank back in top spot in business credit, boosted interest income, leading to a new higher target for the year at €1.2bn. Non-performing loans fell to 8% from 12% in the first quarter, significantly reducing risks and related costs, which as a whole will fall by 20%, while organics, on a recurring basis, by 5%. The three-year target for profitability growth, as a return on equity, remains above 10% per annum, with the capital adequacy ratio above 15%. These goals are being achieved, as Alpha Bank’s management reported to analysts, which allows for the in-principle provision for a dividend distribution of 20%-30% of 2023 profits to shareholders.

Wider environment and Alpha Bank

Analysts admitted that the second-quarter and first-half results are impressive, but their interest focused on the outlook for the macroeconomic environment and the real economy, due to inflationary pressures, the energy crisis and geopolitical uncertainty.

Greek economy

The management of Alpha Bank noted that the main catalysts of the Greek economy are private consumption, tourism and the investments of the Recovery Fund. In addition, Greek businesses are less energy-intensive, the country faces a milder winter and has less exposure to Russian natural gas than other major European countries.

Positives include GDP growth of 7% in the first quarter, indicating that the economy continued to grow at a rate of more than 2% year-on-year. Gross disposable income rose by 3.8%, retail sales by 7.1% in the five months, and the manufacturing expectations index -PMI- by 3.6%, with construction activity increasing by 8% year-on-year.

At the same time, fixed capital investment increased by 12.7% on an annual basis, contributing 1.6 percentage points to the real growth rate.

On the other hand, however, he avoided, as the managements of Eurobank and National Bank did in the presentations of the results of the first half of the year that preceded, to make estimates for 2023, due to the high uncertainty. Risks to the domestic economy are mainly linked to the tightening of monetary policy and the adverse effects of persistent inflationary pressures on households’ disposable income.

Real estate market

According to Alpha Bank’s presentation, annual net investments in the Greek real estate market increased by 18.6%, while investments in residences by 8.6%, on an annual basis. From the start of the recovery in 2018 to 2021, house prices have risen by 20%, almost halving the losses of 2009-2017.

However, the rise in prices in commercial real estate has continued over the last two years, albeit at a slower pace than the outbreak of the pandemic. In 2021, office (quality) and residential prices increased by 1.8% (from 3.9% in 2019) and 2.1% (from 7%), respectively.

The questions

The main questions focused on the following issues:

Sectors of the economy with the strongest demand for loans-investments

The catalysts of the growth of the Greek economy are reflected in Alpha Bank’s net disbursements of 1.8 billion euros, where the majority concerned loans to commercial enterprises (21%), infrastructure (17%), manufacturing (15%), transport (14 ) and tourism (13%). The picture is similar in the new disbursements of 4 billion euros in the first half: 17% trade, 14% manufacturing, 14% transport and shipping, 13% utilities, 12% hotels/tourism and 11% infrastructure.

The part of the income that comes from the increase in ECB interest rates

Of the new annual interest income target of €1.2 billion, just €68 million comes from the ECB’s rate hike, and this portion could reach a total of €183 million to €279 million if the base rate rise to 0.5% to 1.5%, respectively, from zero today. Therefore, the upward revision of interest income comes from the net increase in serviced loans by 3% on a quarterly basis. Already, 70% of the annual target for disbursements has been achieved. Net interest income in the second quarter of 2022 was 203 million euros with the part related to accounted income from non-performing loans decreasing. About the same behavior applies to the rest of the banks, as most loans are variable interest and interest-free. On the side of liabilities and deposits, a small part is affected by the increase in interest rates and this after the rise of the key interest rate by the ECB above 0.5%. Approximately the same behavior applies to the rest of the banks based on the presentations to analysts to date.

Rising interest rates, the spread and competition

Due to higher NPLs (in total balance), Alpha Bank maintained the margin on new loans at 380 basis points. The contribution of serviced loans to the interest income of 303 million euros was 262 million euros.

Risks to investment earnings due to uncertainty and falling bond prices.

Rising bond yields (thus falling prices) didn’t hurt earnings because they weren’t sold. Instead, banks profit from increasing yields through interest rate swaps. For exactly the same reason, an increase in profits from bonds etc. was observed from the other banks that published their results (Eurobank and National Bank). Alpha Bank’s transaction revenue increased year-on-year by 24%, amounting to 113 million euros. As noted in the presentation, the total value of Alpha Bank’s investment portfolio increased to 12.1 billion euros from 10.6 billion in March. The returns on new investments in the first half were 1.6% and consist mainly of bonds (Greek and other ECB-eligible securities).

Risks of bad loans

The red loans of Alpha Bank move in the same pattern of Eurobank and the estimates of the National Bank that preceded it. In particular, as in Eurobank, so in Alpha Bank there is a small (relative to their loan portfolio) organic decrease in business loans and a small organic increase in retail loans. However, the figures are small and include repayments, haircuts, adjustments, etc. For example, at Alpha Bank, in large business loans bad loans decreased by 29 million euros and in small ones they remained unchanged, while in retail they increased by 44 million. euros, but in a total balance in the order of 40 billion euros. As noted by Eurobank and Ethniki, the forecasts for Alpha Bank are also on the downside, but conservatively due to risks, although there are no indications of a new generation of bad loans. Alpha Bank reduced its NPE cash coverage to 40% from 47% in March and 48% in December. Thus, the cost of risk also fell below 1% where it was a year ago due to the reduction of bad loans and the now single-digit rate of non-performing exposures.

Real estate disinvestment plan

In the first half of the year, it brought back its real estate portfolio, which has fallen to 0.7 billion euros, of which 0.5 billion euros are included in Alpha Bank’s Skyline project with Dimand-Premia. Alpha Bank’s current property portfolio (0.7 billion) includes 4,200 properties.

During the first half of the year, Alpha Bank continued its divestment strategy with property sales of 26.5 million euros in Greece and 9.7 million euros in SE Europe and Cyprus. In the same period, 30 million euros of real estate came into its possession. The sales involved commercial properties and residential properties. In the first half, 60% of the successful auctions were acquired by Alpha Bank.

See Alpha Bank’s Q2 results in the right column “Related Files”.