Alpha Services and Holdings S.A. (ALBKY) Q4 2023 Earnings Call Transcript

Alpha Services and Holdings S.A. (OTCPK:ALBKY) Q4 2023 Results Conference Call March 7, 2024 7:00 AM ET

Company Participants

Iason Kepaptsoglou – Head of IR

Vassilios Psaltis – Chief Executive Officer

Lazaros Papagaryfallou – Chief Financial Officer

Marios Kalotychos – Chief Investment Officer

Conference Call Participants

Eleni Ismailou – Axia Ventures

Mehmet Sevim – JPMorgan

Alex Demetriou – Jefferies

Olga Veselova – Bank of America

Alexandros Boulougouris – Euroxx Securities

Osman Memisoglu – Ambrosia Capital

Operator

Ladies and gentlemen, thank you for standing by. I am Yoda, your Chorus Call operator. Welcome, and thank you for joining the Alpha Services and Holdings conference call to present and discuss the Full Year 2023 Financial Results. All participants will be in a listen-only mode and the conference is being recorded. The presentation will be followed by question-and-answer session [Operator Instructions]

At this time, I would like to turn the conference over to Alpha Services and Holdings’ management. Gentlemen, you may now proceed.

Iason Kepaptsoglou

Hello, everyone. This is Iason Kepaptsoglou, Alpha Bank’s Head of IR. Thank you for joining us. A slightly different format this time as we have a lot of ground to cover. Vassilios Psaltis, our CEO, will lead the call, focusing on the main elements of the strategic and financial progress made during 2023. Lazaros Papagaryfallou, our CFO, will then update us on the financial performance over the coming three years. Q&A will follow, and we aim to finish within the hour.

Vassilios, over to you.

Vassilios Psaltis

Thank you, Iason, and good morning, everyone. Thank you very much for joining. Let’s go straight to Slide 5, please, to look at last year’s performance. 2023 has been, by all accounts, a strong year. Like others, we too have benefited from higher interest rates and a benign retail funding environment.

We have used this opportunity to ensure two things: one, that we accelerate the delivery of our strategic objectives; and two, that we continue to position the business and our balance sheet to maximize the recurring value we can create for our shareholders. Our actions have translated into tangible results. Our profitability exceeded the 12% target for 2025 that we set in our Investor Day, and as Lazaros will highlight, we aim to drive it higher.

The same is true for EPS. And on capital, if we include the impact of the deal we closed with UniCredit last October, we have delivered in one year close to 60% of the 3-year target for capital generation. Top line growth has been coupled with the repositioning of our balance sheet to ensure that we can shield our profitability in a falling rate environment. We continue to expand our fee generation capacity through internal actions as well as by extending collaborations.

We reduced our cost base for yet another year, extracting further efficiencies from the business, and helped by a smaller resolution fund contribution. Our cost of risk has remained stable despite the challenging environment and whilst ensuring that we continue to deliver on the convergence of our asset quality with the European average. And last but not least, beyond organic capital generation, we have expanded our total capital MREL buffers on the back of a solid issuance plan to ensure that we are at the forefront of optimizing our capital stack.

We are proud of the progress we have made during 2023 and of the solid foundations we have set to increase the value we can create and deliver to our shareholders. Strong 2023 delivery, the normalization in profitability, capital generation and accelerated convergence to European asset quality levels make us confident of our recommencement of dividend payments, rewarding our shareholders for their patients.

We have accrued to equivalent of €0.05 per share out of 2020 fee profits, payment of which will need, as usual, the approval of the AGM and the regulator. Our results for 2023 have exceeded even our own expectations, as you can see on next slide, on Slide 6. We present here a like-for-like comparison between the guidance we originally gave you alongside our full year results last March and then our updated guidance last November, as well as a much better result that we have delivered.

We have every intention to continue to build upon this track record of delivering on our promises. Let’s now look at the progress we have been able to make on the strategic pillars of our plan, starting with a summary on Slide 7. Our four commercial engines have delivered on the strategic mandates, bringing benefits from a structural improvement in efficiency and through recurring profitable growth as necessary.

At the same time, we have enhanced the resilience of our balance sheet and have seen tangible results on our ESG agenda. Let’s start now with retail on Page 8, please. Our aim is to fully digitize everyday banking needs, which should free up our people to further increase the time that is allocated to addressing more complex customer needs.

During 2023, we rolled out a new service model to more than 80% of our branch network, limiting transaction hours, operating branches by appointment only, training our clients to use digital channels, and thus, allowing our relationship managers to focus more on higher-value advisory work. We launched our priority relationship manager services for both the emerging affluent and personal and retail business banking, with more than 400 RMs and over 500,000 clients.

At the same time, we launched the myAlpha Advisor tool for our business relationship managers. We have extended the daily banking functionalities that are offered via digital channels, including payroll account opening and fully digital credit card sales, and have also completed the first wave of our subscription bundles offering. Our heightened focus on the retail segment of the Wealth business has translated into tangible results, with retail accounting for more than 25% of the total inflows into Alpha Bank’s Greek nonmoney market mutual funds during 2023, while life bancassurance premium production captured more than 25% of the total market.

While retail profitability on allocated capital improved in 2023 mainly due to higher rates, the actions we have taken will deliver tangible results in the coming years, helping us maintain client servicing and revenue momentum notwithstanding lower rates. Cross-selling into our retail client base has been an important contributor to the growth of our Wealth business. While at the same time, we have been scaling our wealth engine and customizing our investment proposition to all segments, as we can see on Slide 9.

We have initiated the homogenization of our operational model by implementing a new organizational structure, strengthening our infrastructure within an integrated wealth management ecosystem. We have expanded training for our relationship managers on new investment product categories, introducing advanced training for the affluent distribution networks.

E-Wealth services are already available to private and most gold clients, with automated acceptance of investment orders, dynamic portfolio appraisal and online orders for mutual funds. Our clients are increasingly interacting with us through digital channels, allowing us to grow our assets under management for private banking by 15% during last year and increasing the penetration of the affluent segment by 6 percentage points, which is on track to meet our ambition on both counts.

We have expanded our offering, be it by introducing alternative investment funds for our private banking clients or through enhancing thematic, liquid anthologies and ESG offerings of third-party mutual funds. And at the same time, we have also upgraded our in-house product suite. We have launched new investment products, resulting in a substantial increase of circa €1.3 billion in assets under management, representing a growth of close to 44% and greatly exceeding our target for the year, thus securing the top position in terms of net inflows into mutual funds. That means capturing a 30% market share.

The operationalization of our agreement with UniCredit is ongoing, and we are launching a new structured market-linked deposit targeted to our bond customers. Our strong position in wealth is a key differentiator for our franchise. As rates decline, we are strategically very well positioned to capture capital-light fees as clients reposition their savings pool.

Moving on to wholesale. That is on Slide 10. Our strategic objective is to leverage our leadership position to capture the potential of the Greek market and do so while maintaining a robust profitability by focusing on sectoral know-how, innovative products and client service. We continue to invest in industry knowledge and have redesigned our teams to ensure we bring specialized advisory and financing knowledge through industry group experts.

We are revamping our transaction banking, upgrading the sales process and adding more experienced and focused sales personnel, instituting a customer support team and enhancing collaboration with other business units to improve product penetration through shared targets.

We also continued to expand and market our digital product pallet, introducing new modules, including on payments and trade finance, whilst conducting client workshops focused on transaction banking products and services. As a result, we have increased our net loan additions with disbursement, reaching €6.6 billion in 2023. And of course, we have started working more closely with UniCredit in trade finance as well as in open issuance for the time being, and that’s on DCM products.

Let’s now move to Slide 11 and speak about international, where our aim was to improve the return on the capital that we deploy on our international business. Operationally, 2023 has been an excellent year. Loans grew by 7.5%, while deposits grew by 15%, and the profitability of the segment has vastly improved.

Undoubtedly, however, the year was dominated by the strategic moves that we have decided. In Romania, the transaction with UniCredit through the merger of our respective subsidiaries vastly improves the return on the capital that we deploy. The merger unlocks the profitability benefits of having critical scale whilst allowing us to retain our presence in a capital-efficient way. The transaction has allowed us to realize the value of our franchise in Romania in an accelerated manner, whilst limiting the risk from the investment that would have been required otherwise.

In Cyprus, we have put a new management team in place and added resourcing to implement an ambitious plan, leveraging on our core strengths. 2023 has been a strong year for Cyprus delivering good returns on allocated capital and a bottom line at 10% of our group profit.

Now on to Slide 12. Throughout the year, we have continued to grow our loans selectively by focusing on our diversified and prudently priced performing book. We have strengthened our liquidity, expanding our diversified, granular and sticky deposit base and focusing on high-quality liquid assets when it came to expanding our noncommercial book in order to rebalance the interest rate profile of our balance sheet.

We have further improved our asset quality profile, reducing our NPE ratio and improving coverage. We have expanded our capital buffers and have worked to release risk-weighted assets through two synthetic securitizations and through the introduction of external ratings for our corporate loan book. Overall, we have enhanced the resilience of our balance sheet to ensure we can create and deliver value to our shareholders.

Finally, a few words on sustainability on the next slide, on Slide 13. We have started the journey in 2019 to progressively integrate ESG in our business strategy and operating model. In 2023, we became the first Greek bank to join the Net-Zero Banking Alliance.

We have completed the full measurement of finance emissions and defined science-based targets for operations and portfolio. We have reduced our environmental footprint further and have made €800 million of sustainable disbursements. We continue to support diversity and inclusion both internally and in society and have expanded the female representation at Board level.

And now let’s turn to Slide 15, please. Lazaros will walk you through the financial building blocks of our updated 3-year plan, but allow me to provide you with a few key takeaways. Our revenues, our earnings, our profitability and our capital will all be on an upward trajectory throughout the business plan horizon.

Sure enough, we will need to work hard to expand our fee income to widen our operating jaws and to deliver improvements in asset quality. These are fundamental outputs of our strategic operating pillars.

Importantly, the expansion of our key metrics is predicated on the evolution of our top line, and the expected trends there are mostly an outcome of our positioning, and that should be in light of the expected normalization of the interest rate environment. Our profitability should converge towards a return on tangible equity of around 14% whilst we continue building solid capital buffers throughout the plan, allowing us to maximize the value we can deliver to our shareholders.

And with that, Lazaros, the floor is yours.

Lazaros Papagaryfallou

Thank you, Vassili. And since you’ve mentioned it, let’s go straight into the outlook for net interest income on Slide 16. I do not need to tell you since you will have heard it from others that as a bank, declining rates will be a headwind, with a circa 5% decline expected for 2024. However, we expect our net interest income to be on a slightly better trajectory thereafter, growing at an annual pace of circa 5% for a few idiosyncratic reasons and despite our conservative assumptions on rates.

First, we continue to run close to our targets for excess liquidity, meaning that our cash base will be a lower drag on our top line as rates are cut. Second, we have strategically built our securities book over the past 12 to 18 months during the cycle of increasing interest rates to expand our structural hedge with receiver swaps, a recent addition to our artillery. Third, we have a significant amount of low-yielding securities maturing over the coming years that will be priced at least 1 percentage point higher, providing with some welcome yield pickup.

And finally, we have front-loaded debt issuance, meaning that we have already borne the brunt of the cost of meeting MREL targets. As rates normalize, the focus ought to shift to the value generating capacity of our client franchise. Naturally, that rests in part of the ability to generate profitable lending growth, but it will also depend on the client demand for a wider range of banking services that should allow us to increase our levels of activity and boost earning streams that will diversify our revenue base.

But let’s first get into the details of what this all means for our net interest income. Our assumptions on rates are relatively in line with current market expectations, whilst our sensitivity to shifts in the yield curve is relatively low at €18 million for every 25 basis points. We expect our performing loan balances to grow at a CAGR of circa 5% over the period. The growth in our deposit base is funding a commensurate credit expansion, allowing us to retain our strong liquidity profile without recourse to market funding.

Spreads on corporate loans are expected to see a further mild decline over the plan on the back of heightened competition. And as mentioned before, even though we have incorporated market expectations of a falling rate environment, we have conservatively assumed that the cost and size of time deposits will increase substantially over the plan, with the deposit beta climbing from 15% in 2023 to 27% in the outer years of the plan. A lower deposit beta, be it through a smaller transition to time deposits or a lower time deposit cost would be beneficial for our top line, with every circa 3 percentage points of lower beta adding approximately €40 million to our top line.

Slide 17, please. Assuming an average Euribor of 3.5% and a deposit beta significantly higher than the one we have today, we expect in 2024 a modest pressure on our top line to the tune of 5%. In this context, the key driver will be the repricing of our deposit book. We expect the overall volume of deposits to grow with a further shift towards time deposits. Hence, we expect that time deposits will grow faster and be up 30% year-on-year versus the fourth quarter.

The cost of time deposits, however, will increase disproportionately as older time deposits reprice for higher rates. The rest of the drivers are relatively straightforward. Higher average loan balances supported by base effects and some repricing for higher rates given the lag should be a tailwind. The 2023 exit rate for the contribution of the securities book suggests a higher contribution to NII, with growth and reinvestment adding further. The reverse, albeit to a smaller extent, is true for wholesale funding, whilst near term our hedging and lower net interbank position will curtail NII.

The asynchrony between the shorter repricing of loans and the longer repricing of deposits means that we bear the pain of loan repricing earlier, whilst deposit costs will only begin to fall materially from 2025 despite increasing balances for time deposits.

Loan growth alongside the increasing contribution from our structural hedges being in the form of securities, loans or receiver swaps will also bear fruit during this period. As all of these trends play out, so we expect net interest income to start growing again in 2025 and then further on to 2026.

Turning to Slide 18. I’d like to point out the specificities of our securities portfolio. We have been fortunate to have had the room to grow this book substantially during a period of increasing rates, allowing us to preemptively increase our structural hedges and locking part of the benefits from higher rates. This has resulted in a significant pickup in the yield of this portfolio.

We have some further room to grow and expect to add close to €2 billion in securities. Importantly, we also have €4.5 billion of reinvestments coming up over the plan horizon from low-yielding securities, where we expect a pickup in yield of at least 1 percentage point despite the falling rate environment. A higher size and an increasing yield should lead to continuous increase in the contribution of the securities book.

Let’s now look at the other building blocks of our plan, starting with fees on Slide 19. We target close to 10% annual growth in fees. As Vassilios pointed out, during 2023, we have paved the road to ensure that we can sustainably grow our balances and have taken actions to ensure that we can expand product penetration, both in retail as well as wholesale. Combined with the strategic partnerships that we have established, we are highly confident that we will continue to deliver on our targets.

In practice, higher asset management balances supported by base effects and the further improvement of investment penetration, especially in the retail segment, should allow relevant revenues to record double-digit growth every year. The same applies for bancassurance, where the strategic partnerships with Generali and UniCredit will allow us to further upgrade our offering and better address client needs. Finally, new product developments and digital investments will allow us to expand our service offering in cards, payments and other transaction banking products, both for businesses and individuals leading to growth in the relevant revenue line.

Slide 20 on costs. Here, we have made solid progress during 2023 organically, as we have delivered benefits from transactions and through our transformation program, but also due to the welcomed reduction of contributions to the Single Resolution fund, with a large part coming one year earlier than previously expected. As we roll our plan forward by a year to 2026 and have updated for current industry dynamics, the main premise for cost shifts from an absolute reduction to the achievement of positive jaws.

We face pressure, both in terms of increasing investment to deliver the operational tools that will yield growth in our revenue streams as well as from wage and other inflation. Rest assured that we will continue to fine-tune our operations to ensure that we extract further efficiencies, and this is how we will deliver cost growth below inflation over the coming years. Overall, we are expecting our cost to income ratio to be around 37% in 2026.

Turning to asset quality on Slide 21 now. In 2023, we have delivered another improvement in our NPE ratio. We have done so by delivering on the organic reduction that we planned at the beginning of the year and using our robust capital generation to selectively add transactions to the mix. We are cognizant of the fact that we have more work to do in order to align with industry average, and our plan is built with this target in mind.

The macro environment should remain conducive. Alongside lower starting NPE balances and the significant operational improvements we have seen leading to lower default flows, we see formation over the period coming in below 2023 levels.

As part of the work is already done, we have also prudently assumed that outflows in the form of cures and collections will be running at a lower pace. Debt forgiveness and write-offs should come in at circa 1/3 of the 2023 run rate, which means that a good portion of the reduction will come through a high pace of liquidation and other closing procedures. As a result, we expect our NPE ratio to go below 5% in 2024 and below 4% in 2025.

And then finally, on the all-important issue of capital on Slide 22. In 2023, we have been growing our buffer substantially, predominantly on the back of 220 basis points of organic capital generation. We have accrued the equivalent of 38 basis points or €0.05 per share as we aim to reinstate dividend payments subject to regulatory approval in Q2 2024. Over the plan period, we expect to generate over €2.3 billion in profits that will add close to 8 percentage points of capital over the period.

Pending transactions will curtail growth in risk-weighted assets to mid-single digits in total over the period, meaning that capital used to fund the net balance growth will amount to circa €0.5 billion, even though we have incorporated the expected circa 20 basis points day one impact from the finalization of Basel IV. This leaves close to €2.2 billion of capital available. For the purposes of our planning, we have assumed potential cumulative distributions of circa €1 billion or circa 3 percentage points of common equity Tier 1 that still leave us with close to €1.6 billion of excess capital over and above our management targets at the end of the period.

To summarize on Slide 23, please. We remain focused on maximizing the value that we add to our stakeholders. Our earnings are sustainable and should be on an upwards trajectory. We have anticipated the reduction of interest rates and have positioned our balance sheet accordingly. Our franchises’ strengths are well aligned with the evolving environment, making us confident on the growth prospects of our business. And we will continue to show strong discipline on maintaining our efficiency and improving our asset quality profile. The output is that our recurring profitability should grow towards the 14% level.

Increased profitability and capital discipline are expected to lead to significant capital creation, which will be used to support the expansion of our balance sheet and to remunerate our shareholders.

And with that, let’s now open the floor for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Ismailou Eleni with Axia Ventures.

Eleni Ismailou

Congratulations for the strong set of results. I’ve got a few questions from my side. So you have been less descriptive on your payout ratio than some of your peers. Can you help us understand exactly what you expect to deliver in the coming years? And has the conversation with the SSM and DTCs or state guaranteed loans been a factor in your conservative view?

Because you seem to be building capital during the planning period. So is potential M&A a factor there? And a second question, if I may. Can you please help us understand what will drive loan growth going forward? And what is — what the interplay is with pricing in terms of spreads?

Iason Kepaptsoglou

Okay. Vassilios, maybe you should address the question on distributions mindful of the fact that Lazaros might want to add on DTCs and the state guarantees. And then maybe go back to you on loan growth and spreads.

Vassilios Psaltis

Yes. Let’s perhaps try to put all of this into context because it’s quite interlinked. As you have seen, we have been able to accrue in our capital 38 basis points towards paying a dividend out of the 2023 profits. And that practically equates to €0.05 per share. I mean we always say it is subject to regulatory approval, but as you would appreciate, this is something we have been discussing with our regulator already for some time.

Now, we’re going to be filing officially for that within our regulatory cadence, and we expect to hear back in the second quarter. So that’s as far as this year is concerned.

Now, looking forward — I mean, we all appreciate that it would be much easier for everyone to come out and say, “Well, you know what? Our plan is for ’24, ’25, ’26 year in, year out, this exact ratio or euro amount in terms of distribution.” But we need to be realistic and recognize a couple of things that we need to balance. And allow me to be a bit firm on that.

The first is that we are fully committed to remunerating our shareholders appropriately. There has to be no doubt about that. And at the same time, it has to be no doubt that we have no intention whatsoever in holding capital, and we have every intention to pay out as much as we can to our shareholders.

However, at the same time, we need to be cognizant of the fact that there are uncertainties out there. And whilst we have plenty of capital buffers to absorb them, allow us to take our commitments to our shareholders and to the Street very seriously. And that’s why we do not want to preempt developments that are outside of our control.

So clearly, distribution should rise from where we are given that we deliver sustainable profitability and we will further grow our capital buffers. And that’s why we have baked in into our plan and we are quite candid about it cumulative distributions equivalent to 25% of our existing market cap. Such distributions could take the form of cash, could take the form potentially of buybacks. But as said, always this has to be subject to regulatory approval.

And mind you that our projected capital position supports this outlook for distribution as it implies also a quite chunky capital buffer over and above our management targets for both core equity Tier 1 and total capital that can enable further management actions to the benefit of franchise and shareholders. So whilst we need indeed to remain prudent in the near term, I think our dividend policy shouldn’t have anything against it to converge with what you see in other places in Europe in management.

So Lazaros, you may want to take up the DTC part.

Lazaros Papagaryfallou

Yes. Eleni, on your question with regards to the role of DTCs, let me first make reference to the current level of DTCs in our common equity Tier 1. They stand at 56%. And as per the capital projections that we have presented, this ratio goes down to 34% by 2026. And if you go on by 2029, it goes below 20%.

So that means that as we grow our capital through internal capital generation, time and our balance sheet takes care of this DTC issue in the sense that its contribution to capital is significantly reduced over time. And I think that when it comes to regulatory expectations, they would want to see us having a lower DTC as a proportion of our common equity Tier 1. And that is the direction of travel in our capital plan.

There is no straightforward structural solution that someone can contemplate at this particular point in time. There is a significant change as our counterparty, that is the Hellenic Republic, has moved into investment grade. So if DTC was an issue a few years ago, now it is less of an issue given the profile of the counterparty. But still, we’re fully cognizant of the fact that this needs to go down as a percentage of common equity Tier 1. And we will be obviously working towards that direction.

As far as your second question for government-guaranteed loans, the volume for Alpha is relatively small at €0.1 billion. And in the capital projections that you have seen playing out in the coming years, we have fully taken into account the calendar provisioning impact under the worst-case scenario. So this is fully embedded in our capital projections.

Now Eleni, allow me to address your second point about the utilization of the excess capital. So I think I should start by saying that indeed even after executing on the targets that we have set, which is to pay 1/4 of our market cap in dividends, yet we would be left with €1.5 billion in excess capital by the end of our planning horizon.

And this is not by coincidence. I mean, we are definitely in a growth phase. We are seeing demand for capital in Greece and in Cyprus. And this is what we’re focused on. So at the end of the day, we are combining that with our strategic initiative, and that is driving our earnings growth. And in our mind, this is a virtuous cycle.

Earnings growth means better capital generation for a business like ours. And this makes us confident on distributions. And we have placed, as I have said before, a very high priority of reinitiating the distribution of dividends to our shareholders, and we place a high priority in having a healthy level of such distribution going forward.

Obviously, on the back of healthy capital buffers, the bank would have at that point optionality in assessing also inorganic opportunities. But particularly, this bank and this management team has always been very disciplined, and we will — and we are having very strict criteria to meet for EPS accretion and shareholder value if those cases may emerge.

Now turning to your third question, which was about loan growth. During last year, during 2023, we have faced indeed elevated levels of repayment as the corporates have been rightsizing their liquidity position given the significant steepening of the yield curve. This has been counterbalanced by consistently high disbursement and in particular in the fourth quarter.

Now, I appreciate that the net effect has been patchy, which means that this volatility has created some uneasiness as far as to what the underlying trend may ultimately be. But at the end of the day, we have been able to meet our guidance for the year and have indeed delivered a 5% growth in our loan book, something that we have been saying all along.

Now looking forward, I don’t mean to suggest that this would be sort of a plain sailing. But in my view, this is going to be part and parcel on the one hand of the growth prospects for our country, and secondly, about the adjustment period for this new era of interest rate environment. And within all that, we do indeed expect that repayments may continue to be a challenge going forward. And we will — we may see further volatility, not much, but there may be a tail of that. What is important is that — our view is that the rate situation should start to normalize.

And that by itself when it kicks in will be reducing the repayment pressure. So, lower rates fundamentally may spell credit demand on the other side. So from that point of view, we see that we’re going to be experiencing a strong demand locally here in Greece, and that growing demand will, in its core, come for the demand for capital, for investment products. And as you well know, we have the RRF in order to sustain that.

Now a final word also because you asked on spreads. And so far, we have seen indeed a spread erosion within the market, which is primarily driven by wholesale loans.

In our plan, we look forward to having some further spread erosion in the corporate book in 2024, which is going to be about 20 basis points. And this comes out of the fact that certain older lines may get repaid, and I think that will adjust the overall spread of the corporate book.

Now admittedly, competition in new originations remain high. For our taste, it’s too high. And we have been witnessing in the market that the lower cost of funding is passed on to corporate customers for — from certain corners in order to secure specific deals. Now, on our side, we have been relatively cautious in this regard, and this has been reflected in our disbursements that have been generated with RoRAC above our internal threshold of 15%. We continue being very disciplined on that point.

Now obviously, we do care deeply about the sustainability of both our customer relationship as well as the value that they create for our shareholders. And we’re talking here predominantly for long-term loans. As I said before, the bulk what we see in the market are bid for investments.

Now in line with market expectations, we should see rates decrease from the second half of this year. And at the same time, we expect the cost of retail funding to continue to rise still below the levels in previous cycles. So that should fundamentally drive — be the driving force of the spread reduction, which relate to specific funding policies and should become less relevant, alleviating the pressure on spreads.

Eleni Ismailou

And again, congratulations for the strong set of results.

Operator

The next question comes from the line of Sevim Mehmet with JPMorgan.

MehmetSevim

One question on NII, if I may ask. I’m just trying to understand the trajectory for ’24 and ’25 better taking into account your underlying rate assumptions. Thanks for the detailed breakdown in the presentation. But more specifically, if you look at your rate assumptions in ’24, you see average Euribor at 3.5%, but NII declined by 5% this year. And then next year, Euribor goes down to 2.6%, but in that same year, NII seems to grow by 5%.

So I’m just trying to understand what leads to this timing essentially, when rates come down, NII start to grow. It seems like you have this front-loaded impact from rates on — maybe even different sensitivity next year. So if you could just talk about the moving parts here, that will be very helpful.

And then my second question would be on the NPE ratio. You’ve done this transaction now, you’re below 6% in Greece. But as you also mentioned during the presentation, there’s still some work to do. So I’m just wondering if you could think about front-loading the expected improvement in your NPE ratio with more transactions like this given the capital loss wouldn’t be huge and the market would welcome this catch up with your peers?And my final one, what assumptions do you have for associate income contribution coming from Romania in ’25 and ’26.

If you could quantify that in euro amount, that would be very helpful.

Vassilios Psaltis

I’ll take the final question and I’ll leave Lazaros to deal with the first and the second. If you remember, when we announced the deal with UniCredit, we said that we expect to recover about half of the profitability that we previously had in our business plan by 2025 through the contribution of the 10% stake we create. And we have said that equates to about €35 million to €40 million. So that is the amount you should be expecting in associate income in 2025 and 2026. Obviously, it’s going to be growing eventually, but that’s kind of the guidance we’re giving.

And with that, over to Lazaros for NII and NPEs and potential transactions.

Lazaros Papagaryfallou

Yes. To start with the NPE question, indeed, we have used some of the accelerated capital accretion that we have seen in 2023. That significantly exceeded our target for the year to front-load a transaction, as we have also seen in the last quarter of the year, the opening up of a window for structuring and transaction under the Greek Asset Protection Scheme, leg #3 of the Hercules program. So since we are including mortgage loans in this portfolio, we thought it’s a capital-efficient way to accelerate this deleveraging. And we grasped the opportunity to progress another one transaction.

So what you have just described as a scenario has already happened in the fourth quarter. And we have taken obviously some hit in the profit and loss account, but we have fully absorbed this in our capital position by this over performance that you have seen in the capital position.

Going forward, in 2024, there may be an opportunity to top up this particular transaction. And I have budgeted for such an eventuality. And if we see a window, we will definitely grasp the opportunity in order to get to an NPE ratio below 5% already as soon as the end of 2024. So that is the NPE outlook.

And the NII trajectory, which includes many parts that are moving, including rates, volumes and deposit betas. And I appreciate the complex nature of these movements. We have tried to give some granularity by analyzing this in its building blocks. I would argue that in 2024, you have some further tailwinds on the loan side on the back of higher average balances and the loan book repricing higher as the average Euribor of the year will be higher than the one we have seen in 2023. And that trajectory will — of launch, will make them contribute further to our interest income even if spreads go a little bit down compared to last year.

On the other hand, in the banking book you have deposits. Deposits will experience, if our assumptions on deposit betas materialize, a further increase in their costs as they will reprice upwards, the older stock of time deposits will reprice upwards. And we have assumed at the same time that the deposit beta will go up given that there will be a further shift of time deposits in the total mix.

So you have in essence the deposit base which is repricing considerably in 2024, and that is mainly giving this outlook for the minus 5%. On top, you should have higher wholesale funding costs. But at the same time, you should have in 2024 a significant contribution from securities, a positive contribution from securities.

Now what happens in 2025 is that you have the opposite trends in the banking book. You see rates going down. So our loan book is going to reprice downwards. But at the same time, you will have deposits repricing down fastly given where the average Euribor stands in 2025 in our assumption at 2.6%.

At the same time, in 2025, you have even higher contribution from securities given, a, the investment of older securities in the planning horizon with a yield of at least 1% higher. And you also have new purchases that will happen in 2024. We said that we are adding €2 billion on top of what we have already purchased.

Wholesale funding will continue to be sort of negative as we are issuing. And when it comes to net interbank, which is our excess cash — net excess cash in the interbank market, there you should not expect to see a drag in our NII in 2025.

On the contrary, you should see an uptick given where we stand in terms of core deposits versus the — at least some of the peer average, let’s say, on core deposits. So placing this excess liquidity with ECB will be less of a drag for Alpha. Plus, the structural hedges that we have put in our balance sheet will contribute towards a higher NII when rates go down to 2.5%.

So I hope I have managed to give you the outlook for 2024 and 2025 and show you the trajectory, with a minus 5% and plus 5% in those two years.

Operator

The next question comes from the line of Demetriou Alex with Jefferies.

Alex Demetriou

Just two for me. So now you’ve had a bit more time to kind of digest the commercial partnership with UniCredit. Could you provide just some more color on how you see the opportunities progressing? And how you are going to leverage their expertise to grow your fee income maybe just in like kind of the asset management advisory space? And then just secondly, on capital. So you commented that you expect to see kind of a circa 20 basis point impact from kind of the Basel reforms.

This is quite low if we compare it to one of your peers and as well as kind of other European banks. Could you just provide color-wise a minimal — why you guys are seeing such a minimal impact? And just to confirm. So the 450 basis points of excess capital, that’s mainly there for optionality around kind of inorganic growth opportunities. And just wanted to see, does that also include potential for further shareholder returns?

Iason Kepaptsoglou

Okay. Vassilios will obviously lead on the update of where we stand with regards to UniCredit. And then, hopefully, Lazaros can answer the question on capital.

Vassilios Psaltis

Well, starting on with UniCredit. I think the premise is quite straightforward. The first and foremost is that this transaction improves the return on capital that we deploy in our international business. It unlocks the profitability benefits of having critical scale in Romania, which is a country where scale is indeed very important. And we’re able to retain our presence in a capital-efficient way, where we can enjoy the uplift in value from the synergies whilst participating in the favorable growth outlook.

So it allows us really to realize the value of our franchise in Romania in an accelerated manner whilst limiting the risk from the investment that we would have otherwise needed to commit. So that’s the first bit.

The second bit on the commercial partnership. There, in our view, it’s a real differentiator for our franchise as it will cement our relationship with Greek corporates because we de facto become the port of call for their international ambitions alongside our leadership position here in the country. We are in the process of enriching the product range that we’re able to offer to affluent customers whilst also bringing in expertise that will in itself derisk our effort to expand our reach to this emerging affluent class.

And last but not least, it makes us a true part of the pan-European network, and that is increasing our negotiating power with counterparties and elevates our access to various European markets as well as to leading expertise that our partners are having.

Now in terms of a project — of a progress update, on the Romanian side, where Andre and myself were last week having our second town hall, speaking to our people in Romania — and I can assure you that there is quite an enthusiasm for this venture. And there we’re going currently through the motions of the regulatory approvals and the like. And as far as we are concerned, we believe that we will be able to deliver the plan as of this year.

On the commercial partnership, this is getting operationalized this year. Currently, there are various areas that we are looking at across businesses, and there is a lot of interaction between the two parties in order to design, test and operationalize. Some of them are more advanced and some others are still in its infancies. But for example, certain issues have started already to get executed. We have worked more closely on DCM promulgations.

And we are working currently for the launch of, as I said before, the structured deposits to our affluent clients. We’re also collaborating on trade finance on LGs and LCs. But also on the other two parts that we have previously announced, which is bancassurance and asset management, we’re working vividly on them. And hopefully, as far as asset management is concerned, already in the second quarter, we will be able to have a proper launch on bancassurance. We’re going through the motions of the transaction. So you will be hearing more and more on us.

But the one important thing is that on both sides, there is not just focus, I should say, there is enthusiasm about this venture.

Lazaros Papagaryfallou

I take the other questions. I think there was a question on Basel IV impact. Our plan, RWA increase or 20 basis points of capital due to Basel IV, and this is a phased impact. While we estimate that the fully-loaded impact at around €1 billion RWA increase or 60 basis points of capital that will be accrued post 2026. It is noted, however, that Alpha is a standardized bank.

So there is no impact from the output floor and the significant part of the fully-loaded impact will take place after 2029 due to the contribution in this impact of the noncommitted undrawn lines. And this impact that I have referred to, phased in or fully loaded, assumes no mitigating actions in terms of RWA optimization or working out uncommitted lines.

So I hope that answers your question on Basel IV. And there was also a different question about a potential usage of the excess capital buffer after distribution for inorganic, which may — Vassilios may want to comment on this one.

Vassilios Psaltis

Well, I think I will have to repeat myself what I said before, which was that in our plan, even after the significant distribution that we are planning, we’re still left with $1.5 billion of excess capital. And as I said, we are witnessing already strong growth. We may witness more than what we’re having. We may be able to distribute more. But if we are also to see the optionality in assessing inorganic opportunity, what I said is that we’re going to be adhered to strict criteria for EPS accretion and shareholder value creation.

Once again, just to be absolutely clear, the real priority is to remunerate our shareholders.

Operator

The next question comes from the line of Veselova Olga with Bank of America.

Olga Veselova

A couple of questions. One is, again, a question on your net interest income forecast. And thank you for this explanation on Slide 16. It’s really very comprehensive. Can we translate your forecast in terms of net interest margin terms?

So when I look at 2025, 2026, you assume that NII will go up by 5% per annum, and this is rightly what you assume for loan growth. So does this mean that you expect flattish net interest margin in 2025, 2026? So this is my first question.

And my second question is about cost of risk. So I see that you expect cost of risk to keep improving further in the next three years. Can you maybe help us to understand the rationale why do you think cost of risk will be going down next year — sorry, this year, despite the slowdown of GDP growth and still a pretty elevated Euribor?

Vassilios Psaltis

I’ll take the first question, and I’ll leave the harder question on cost of risk for Lazaros. Net interest margin effectively because we’re not looking at it as a percentage of interest-earning assets in reality and just looking at it as a percentage of the total balance. It is affected by other factors. It’s affected by how much you run in terms of excess liquidity, the divestment of certain positions that are held for sale. So technically, practically, if you look at our business plan, net interest margin will be going up in the period.

I think that the more fundamental question is, how do we expect customer margins to evolve? So, the difference between loan spreads and the cost of retail funding. Obviously, we find ourselves on the retail side in a relatively benign environment, and we’ve given you the assumptions there. And we told you how we expect loan spreads to evolve. So I think you can draw some very clear conclusions.

Lazaros, on the cost of risk?

Lazaros Papagaryfallou

Yes. I remind you that cost of risk comprises of underlying cost of risk for loans. Then you have the cost of synthetic securitizations. And you also have servicing fees paid to services to manage the NPEs.

So coming to each one block on NPE formation trends, we have already seen in 2023 an improving trend on default and in default rates. And that is the outcome not just of a relatively benign environment, even better than what we had expected, but also a significant improvement of the various operational levers we have deployed with our service of Cepal to sustain default flows as well as the proactive actions that have taken place by the various units in the bank on the performing side of things.

And we have been happy to report lower defaults in 2023. That is expected to continue in 2024. At the same time, we continue to carry in our books a good part of mortgages which are performing and are still classified in Stage 3. We are talking about paying customers who are classified as Stage 3 until the time lapses and they then migrate to Stage 2. So, we do expect some further curings to see from that stock. Obviously, as I said before, as we de-lever and reduce the overall stock, the absolute level of curings is expected to drop year-on-year given our trajectory for NPE deleveraging.

On top, we are implementing strategies for older NPL loans with debt modifications and debt restructurings in order to accelerate loan reduction, and that comes at a cost. If you bake in those trends on loans, you see that the amount attributed for loan impairment will get to the levels aspired in the plan. On top, as far as servicing fees are concerned, given the reduction of the stock, we incur lower servicing fees. And when it comes to securitization expenses, given that we’re doing more there, the bill goes up. So it is amalgamation of these three trends that lead to the guidance we’re giving on cost of risk.

Operator

The next question comes from the line of Boulougouris Alexandros with Euroxx Securities.

Alexandros Boulougouris

A quick question on my end about the deposit mix. I understand the increase in 2024 to 32% that you mentioned on Slide 16. But maybe the increases further in 2025 and ’26 to 37%, 38% given the decline in rates, isn’t that a bit of a conservative assumption? That is my first question. And another one very quickly on OpEx. Is the CAGR of 1.4% that you mentioned granular every year around 1.4% growth?

Or should we see that — what would be the trend on a year-on-year basis, for example, in 2024 and thereafter?

Vassilios Psaltis

I’ll take the easier second question and leave Lazaros to answer the first. No, actually, it’s not a smooth trend across the three years predominantly because you have another leg down for the Single Resolution fund contribution in 2024. But I suspect that moving forward the key achievement for us will be maintaining positive jaws. And thankfully, during this period, we’re also going to be running the cost base below inflation.

Lazaros, on the first one.

Lazaros Papagaryfallou

On your question about the deposit mix, currently, we stand at 26% time deposits over total deposits. And saying currently, I mean in March, as things have not moved since year-end 2023. So there is no material transition to time deposits. Still we need to budget more conservatively assuming that the average Euribor will be higher in 2024. We need to assume that more deposits will shift in time deposits. And we feel that this time around in this cycle we may not see time depos going up to 50% of total deposits, especially given the trajectory of rates.

If there has not been an accelerated pace so far, I cannot really see how likely a scenario is to see an acceleration gap happening from now on. Still we feel that what we have in the plan with the time depos reaching 32% in 2024 and going up to 38% in 2026 is a conservative but credible assumption on deposit mix, and therefore, deposit beta. Having said that, we have provided also a sensitivity. What that means, if we prove to be conservative — and for 2 percentage points of deposit beta, you have a sensitivity of €24 million. So you can make your numbers and understand what will happen in our NII if deposit beta turns out to be lower.

Vassilios Psaltis

Alex, this is Vassilios. One additional point to underpin what just Lazaros has said. Let’s not forget that the deposit cost assumptions, they do filter into the pricing of loans. So this is another reason why we want to be conservative.

Alexandros Boulougouris

Very clear. Iason, one more. If you could clear how much is the cost of the Single Resolution fund? Can you remind us?

Iason Kepaptsoglou

The remaining contribution of the Single Resolution fund is about €15 million. And maybe we can take one last. I think we’ve overrun. So one final question, please.

Operator

The next question comes from the line of Memisoglu Osman with Ambrosia Capital.

Osman Memisoglu

One last question on my side. Just a small detail one on receiver swaps. Would you give any color on how much of a burden it was in Q4 and the nominal amount?

Iason Kepaptsoglou

We actually have our CIO with us, Mr. Kalotychos here. So, he can take that question.

Marios Kalotychos

In Q4, we added €1 billion and we add another €2.5 billion in the first few months of this year. It is because we want to avoid the lower rates that we had seen in November and December and save three to four months of carrying the amount of receiver swaps that we’re putting in the balance sheet, is a function of the natural hedges that we do have from securities — fixed rate securities and fixed rate loans as well as the evolution of the deposits.

The important thing to mention here that we have been starting shielding the balance sheet with regards to interest rates from the beginning of 2023, bringing the ratio of fixed rate assets to demand deposits from 40% to 70%. And we’ll continue to manage that dynamically given balance sheet evolutions and market developments.

Iason Kepaptsoglou

Okay. Thank you very much, operator. Unfortunately, we don’t have time for any more questions. I would like to thank everyone for joining. And we will be seeing at least some of you next week in London and hopefully the rest of you in the coming days.

Any questions the IR department is available. Thank you very much.

Operator

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for calling, and have a pleasant evening.