Alpha Bank — Full steam ahead

Alpha Bank had a strong year, delivering €2.1bn in operating income, CiR of 39.5%, normalised RoTE of 12.9% and EPS of €0.32 (see Exhibit 1). The bank exceeded the 12% profitability target that it had set to achieve in 2025 and, including the UniCredit deal, delivered c 60% of the three-year capital generation target.

Q423 was affected by NPE transactions, which resulted in lower NPEs and better capital than expected. Before NPE transactions, Q423 PBT was 8% ahead of consensus at €276m. Additionally, normalised profit after tax in Q423 was 30% ahead of consensus at €216m. As a result of the NPE transactions, FY23 results fell slightly short of consensus expectations, with net profit of €611m against consensus estimates of €639m.

NII growth slowed in Q423, increasing only 1% q-o-q, but climbed 41% y-o-y to €1.65bn as the bank benefited from higher interest rates, larger loan volumes and a significant contribution from its securities portfolio. Hence, its net interest margin increased 60bp y-o-y to 2.2%.

The benefits of higher interest rates were somewhat offset by an increase in deposit costs. These appreciated ninefold to €573m (FY22: €64m) on deposit balances of €48bn, slightly lower than €51bn in FY22 (due to disposals). The average cost of deposits rose from 0.1% in FY22 to 1.2% in FY23.

Staff costs rose 2% to €333m, primarily due higher salaries and the implementation of the bank’s Collective Labour Agreement, which came into effect on 1 December 2022, as well as the cost of new stock awards. General and administrative costs fell 15% to €327m (FY22: €386m), mainly attributable to the disposal of the merchant acquiring business in Q222 and lower contributions to the Single Resolution Fund. Depreciation and amortisation rose 10% to €157m, as software was capitalised at the beginning of the year and new leases were recognised as right of use assets. Thus, total operating expenses dropped 5% to €817m.

Consequently, pre-provision income was €1.29bn, rising 42% from €907m in FY22. Impairments increased 6% to €308m, in line with guidance, but we note that in Q423 cost of risk jumped to 96bp compared to the Q1–Q423 average of 75bp. This was due to the cost of some securitisations and management action that saw the coverage ratio rise to 45% from 41% in Q3. Alpha improved its NPE ratio by 180bp y-o-y to 6%, helped by the reclassification of Project Gaia, a €0.5bn mortgage NPA portfolio, to held-for-sale and other transactions that helped offload the NPEs from the bank’s balance sheet.

As a result, PBT was €976.5m, up 55% from FY22. Income taxes of €279m (FY22: €207m) drew profits after tax down to €698m, a 64% increase from FY22. Accounting for the impact of NPA transactions, from discontinued operations and other adjustments, of negative €86m (FY22: negative €57m), profit attributable to shareholders was €611m, a 66% uplift from €368m in FY22.

Normalised EPS was €0.32. Basic EPS was €0.25, up 61% on FY22. On the back of the strong results, the bank also announced a dividend of €0.05 a share, subject to regulatory approval, resuming its dividend payment for the first time since 15 April 2008. The bank expects to hear from the regulator by Q224.

Alpha Bank has four key commercial drivers: Retail, Wealth, Wholesale and International.

Retail: Alpha aims to completely digitise its everyday banking requirements, allowing employees to focus on more important, higher-value tasks. In FY23, Alpha launched a new service model to over 80% of its branch network and launched its Priority Relationship Manager service to both the Emerging Affluent Personal and Retail Business Banking segments, serving over 500k clients. Concurrently, it launched the MyAlpha Advisor platform for its Business Relationship Managers. Additionally, in 2023, the bank enhanced its digital offering, including payroll account opening and digital credit card sales, and introduced its subscription bundle offering.

Higher interest rates, supported by the initiatives above, increased Retail revenues by 41% y-o-y to €770m, while concurrently reducing its CiR by 26pp to 51%.

Wealth: Revenues appreciated 16% y-o-y to €106m as the division benefited from higher asset management balances, growing 49% y-oy to €16bn. Key to driving growth was the focus on cross-selling into its retail client business. In FY23, retail clients accounted for 25% of total inflows into Alpha Bank’s Greek non-money market mutual funds.

The bank expanded its offering during the year, launching eight new investment products that attracted €1.3bn in AUM into its mutual funds (capturing 30% of market share). It also added two ESG mutual funds via a third-party and secured regulatory approval for its Alternative Investment Fund Management licence extension. It also launched its e-Wealth services to Private and most Gold clients, automating the acceptance of investment orders and online orders of mutual funds.

Alpha Bank intends to introduce new, competitive offerings through its partnership with UniCredit. Management is confident the wealth business is adequately positioned to capture fees as clients reposition their savings once rates begin to decline.

Wholesale: Wholesale delivered strong year-on-year revenue growth of 19% to €880m, benefiting from a slightly higher net loan balance (€19bn in FY23 compared to €18bn in FY22) and the launch of new digital products. Alpha Bank is also working in close partnership with UniCredit’s Trade Finance team and in wholesale issuance to deliver a more competitive offering. The bank continues to leverage its position within the Greek market with the aim of procuring more business and improving profitability.

International: Revenues catapulted 83% to €152m, while CiR fell 33pp to 45% as the bank benefited from elevated rates and loan book growth of 7.5% y-o-y. The transaction with UniCredit elevated its Romanian subsidiary from the 13th largest bank in the nation to the third largest. Alpha’s 9.9% retention in the new entity will allow it to benefit from the scale of the bank, realising the value of the bank upfront while limiting risk associated with the investment. This will allow the bank to significantly improve its return on capital due to the impact on capital ratios.

Meanwhile, in Cyprus, a new leadership team has taken the helm and the bank has provided additional resourcing to grow the wholesale loan book, establish a presence with high-net-worth individuals, institutional and private clients, and achieve growth in mortgages in the teens.

In its investor day presentation in June 2023, Alpha Bank targeted an RoTE above 12% by 2025 (see Exhibit 2). A strong performance in FY23, underpinned by an improving economy and a balance sheet overhaul, has enabled the bank to upgrade its target to c 13.5% in FY25 and it aims to deliver above 14% in FY26 (see Exhibit 3).

Alpha Bank did well to reduce its CiR to 39.5% in FY23 and plans to reduce the metric to c 37% by 2026, down from its previous target of c 40%. In FY23, it reduced contributions to the Single Resolution Fund and completed the Project Sky and Skyline transactions. The bank continues to drive towards network digitalisation and lower its legacy capital expenditure costs. However, Alpha will face some headwinds, including c €460m of planned investments into IT and business development in Cyprus, alongside general wage inflation and performance rewards.

The bank also slightly raised its FL CET1 ratio by 50bp to c 16.5bp, as the group focuses on generating capital. The bank’s growing capital base gives it the opportunity to return capital to shareholders. In the earnings call, management stated that it wants to pay out 25% of its current market capitalisation, either in buybacks or dividends, by 2025, contingent on the bank meeting specific shareholder value targets alongside regulatory approvals. Increased capital would also allow the bank to explore inorganic opportunities.

Growing its revenue, alongside managing costs, is the key determinant of Alpha increasing its profitability and achieving its targets. Alpha projects interest rates to descend from current levels, subsequently expecting its NII to drop 5% in FY24. However, it expects to grow its NII in FY25 and FY26 beyond FY24 levels despite a lower rate environment.

In FY24, the bank assumes an average Euribor of 3.5% and a gradually increasing deposit beta. Alpha expects the deposit beta to appreciate from 15% in 2023 to 27% by 2025. It expects deposits to grow 4% y-o-y in FY24. It also anticipates more of these deposits to be in the form of time deposits. Hence, with older deposits repricing to higher rates, and new deposits earning interest at those same rates, the bank expects NII to decline by 5%. This will be partially offset by higher loan balances and securities book growth.

Moving into FY25, the bank expects to recoup the shortfall and go beyond FY24 NII by 5% as deposits eventually reprice lower as rates fall, and simultaneously, its loan volume and average balances increase. Additionally, Alpha expects positive contributions from its structural hedge (see below), coming in the form of securities, loans or receivable swaps. The bank expects a similar scenario to prevail in FY26, where Euribor will stabilise, and the bank will depend on increasing loan volumes and its structural hedge to offset a higher deposit beta and growing deposits.