Addiko Bank : Webcast 1H23 Transcript

WEBCAST TRANSCRIPTION

Vienna, 17 August 2023

Addiko Group 1H23 Results:

Webcast Transcription

17 August 2023

14:00 CEST

Speakers:

Herbert Juranek (CEO)

Edgar Flaggl (CFO)

Tadej Krašovec (CRO)

Ganesh Krishnamoorthi (CMO & CIO)

Constantin Gussich (Investor Relations)

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WEBCAST TRANSCRIPTION

Vienna, 17 August 2023

Herbert Juranek	Good afternoon, ladies and gentlemen. I would like to welcome you
	to the presentation of the half-year results 2023 of Addiko Bank,
	together with my colleagues, Ganesh, Tadej, Edgar and Constantin.
	Let me show you the today's agenda.
	In the beginning, I will focus on the key highlights of our results and
	report on the progress we made in the first half of 2023. Ganesh
	will continue and present to you our achievements on the business
	side. After that, Edgar will give you more insight on our financial
	performance and Tadej will inform you about the improvements in
	the risk area. Finally, I will do a quick wrap-up and reveal to you
	our upgraded outlook on 2023, before we move on to our Q&A.
	So, let's start with a positive note. We are happy that we were
	successful in improving our results in the first half of 2023. Our net
	profit went up by 55% year-on-year, from €12.6 million to €19.5
	million. This was possible due to another strong quarter with a net
	result of €9.8 million. Consequently, our earnings per share are at
	€1 for the first six months.
	The cost of risk remained benign at 27 basis points or minus €9.2
	million. The Return on average Tangible Equity increased from 3.4%
	to 5.4% year-to-date. Our operating result jumped up by 54% year-
	on-year to €49.6 million driven by strong double-digit growth in our
	focus business, assisted by positive development on the asset
	liability management side, altogether combined with effective cost
	management despite continued inflationary pressure.
	An important factor in this context was our ability to increase our
	interest income by 28% year-on-year by expanding our consumer
	and SME business, while keeping our new loan business pricing at
	premium levels with further rate hikes. Moreover, these efforts
	were supported by favourable development in treasury and
	liquidity management. At the same time, we reduced our
	non-performing loans from €163 million to €159 million. Hence, our
	NPE ratio ended up at 3.3% and our NPE coverage ratio improved
	from 75.4% at the end of 2022 to 78%.
	Our funding situation remains solid and stable at 4.9 billion
	customer deposits and a liquidity coverage ratio above 330%. Our
	total capital ratio stands at strong 19.9%, fully loaded, all in CET1.
	Let me give you three additional infos on important topics which
	happened in the second quarter.
	First, in order to ensure continuity and the successful execution of
	the bank's strategy, the supervisory board extended the contract of
	Ganesh until July 2026 and the contracts of Tadej and Edgar until
	December 2025.
	Second, as announced by the ECB, the stress test exercise is
	completed and the results of Addiko were better than the results of
	the last year's stress test, despite the fact that this time the ECB
	has chosen much tougher assumptions in their adverse scenario.
	And third, based on the development of the first half-year, the
	management board of Addiko decided to upgrade the outlook for

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2023. I will give you more details on that at the end of the presentation. Now let's have a look at the macroeconomic picture.

On the upper side of this page, you see the current economic forecast of the Vienna Institute for International Economic Studies for our region. The main message here is that while the economic growth in the European Union member states slowed down, Southeast Europe is still doing better. Of course, the war in Ukraine with Russia continues to be a cause for uncertainty, which impacts the global economy. Nevertheless, even in this environment we see enough room for further sustainable growth in our region.

As you can see on the lower half of this page, we were able to gain traction in growing our new focus business in the second quarter of this year. And we will continue to exploit our business model based on our prudent risk approach going forward to continuously generate healthy business growth. Now, what did we do in the first half-year to enable this development? Let's go on the next page.

On this slide I want to give you a summary on the main topics of our Acceleration Program in the first half 2023. Let's start with business. We were successful to continue the extension of our partnership universe to 470 partners. This achievement, along a series of other innovations, which will be explained by Ganesh later, enabled us to pursue a double-digit growth rate year-on-year in our focus book. In addition, we launched at the end of the second quarter a Buy Now, Pay Later programme cooperation with a FinTech partner in Romania. On top, we concluded the initial feasibility assessment for our intended digital market expansion into a new geography, namely also Romania. Now we are moving on into a detailed analysis and preparation works, which are planned to last until Q1 2024, for the final decision.

Let's go to the second pillar of the stream called operational excellence. We were very active in all corresponding projects, from process improvements to data and business intelligence. In order to support our initiatives with an appropriate toolset, we started to implement the Kaizen methodology on a group-wide basis. Furthermore, we enhanced our digital capabilities to improve our product range, service quality and our customers' experience. In the area of risk management, which is the third part of the programme, we proceeded in fine-tuning of our underwriting criteria and of our decision engine based on subsequent analytics.

Moreover, we introduced a new infrastructure for risk metrics analysis and reporting, and we continued our efforts to reduce our non-performing loans. As already mentioned in our Q1 earnings call, the overall goal of this programme is to get closer to our ambition to become the best specialist bank for Consumers and SMEs in Southeast Europe.

Now let's look a bit deeper into the details of our growth rates in the first quarter. The main message of this page is despite the slowdown in the economy, we still managed a 10% year-on-year growth rate in our focus book while we kept our prudent risk approach. If we exclude the medium SME business where we intentionally reduced the less profitable and higher-risk large

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tickets, the growth rate would even be 14%. The year-on-year growth rate for our Consumer book are at 9%, for SME in total 11% and for Micros and Small SMEs 24%.

Consequently, our focus book reached a share of 85% of gross performing loans, after 83% at the end of the first quarter. If we look forward, we are well on track to reach a double-digit growth for the whole focus book also in the full year 2023. Nonetheless, we will continue our efforts to calibrate the underwriting criteria to the given environment to keep our strict levels of prudence. With that, I would like to hand over to Ganesh to give you more insights on our business activities.

Ganesh Krishnamoorthi Many thanks, Herbert. Good afternoon, everyone. Moving on to page seven, I'm delighted to share that despite navigating a challenging landscape characterised by a high interest rate environment and persistent inflationary pressures, we have achieved robust business results during the first half of this year.

Our strategic approach and key USPs have enabled us to weather these headwinds and deliver an impressive year-over-year new business lending growth of 9%. Additionally, we have seen a premium increase of well above 100 basis points in both the segments, compared to the first half of last year.

Going deeper into Consumer segment, our strategic focus has been on driving incremental growth by offering lower ticket size loans to emerging digital-savvy customer base and point of sales customer services. Over the last six months we concentrated our efforts on three main areas. Firstly, we extended our reach through strong partnerships, totalling 470, and have expanded into new markets, such as Romania. This move has allowed us to tap into new customer segments that appreciate the ease of point of sale transactions. As a result, our partnership lending business have more than doubled.

Secondly, we enhanced our end-to-end digital lending and process simplification capabilities. This has positioned us to cater to the evolving needs of emerging digital-savvy customers who value convenience and speed that our digital platform offers.

Thirdly, we're actively working on new revenue segments, focusing on non-lending products as part of our Acceleration Program, which you will hear more about in the next slide.

Now on to the results. Overall, we achieved a strong 34% growth in new customer acquisition accompanied by 112 basis point increase in yield and stable development in gross disbursement. As a pioneer in the industry, we hope that our competition will begin to follow or lead in increasing their loan prices. We will continue to increase prices going forward as we create more value to our customers through our USPs.

Shifting our focus to SME front, our strategic focus has centred on delivering lower ticket sized loans, coupled with mandatory account packages to the underserved Micro and Small segment. We

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achieved this through our digital agent platform, where speed is a prominent unique selling proposition.

Over the past six months we achieved significant milestones. Firstly, process enhancement. Through relentless improvement in processes, we managed to reduce our time to cash by an impressive 14%. This has resulted in enhanced customer experience for our SME clients, which is a key pillar of our business strategy.

Secondly, we introduced a new online channel. Our commitment to convenience has led to introduce a new online channel. This encourages our SME clients to apply for loans online, eliminating the need of direct interaction with sales staff. This innovation sets us apart as the only bank offering these services in the key countries.

Thirdly, product expansion. We're not stopping there. As part of our Acceleration Program, we are diligently working on new products that will further enhance our SME ecosystem and revenue stream.

Now on to the results. Our Micro business segment has seen an impressive growth of 48% year-over-year with small ticket sized loans, underscoring the scale of our reach and our commitment to underserved segments. Additionally, across the SME landscape we have achieved 11% growth in new business. Most notably, we attained a substantial increase of 151 basis points in pricing year- over-year. This growth has been primarily driven by our Micro and Small business operation. Needless to say, we will continue to increase prices, as we create more value to our customers.

Moving to page eight. We would like to provide you with an overview of the business segment within the Acceleration Program. As Herbert mentioned, the Acceleration Program is not solely focused on continuous improvement, but also our improvement in existing business areas but it also spearheads incremental revenue growth through innovation.

Let's begin with the Consumer side. As an integral part of the programme, we are upgrading our existing branch-based digital solutions to offer an end-to-end digital customer experience that eliminates the need of customers to visit physical branches where legally possible. This exciting upgrade has already been launched in Croatia and we are witnessing good customer interest. We're actively working towards expanding this offering to other countries in the near future.

On the partnership front, we are working on introducing a new partnership programme in the markets of Croatia and Bosnia in the near term. This strategic move will further enhance our collaborative efforts and leverage established partnerships to drive sustainable growth. And, certainly not the least, we are dedicated to enhancing our non-lending product revenue streams with a particular focus on cards and insurance. In fact, we have recently introduced a new functionality to our cards, where customers can conveniently pay their transaction in instalments. This innovative

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