Alpha Bank A.E. (OTCPK:ALBKY) Nine Months 2020 Earnings Conference Call November 26, 2020 10:50 AM ET
Vassilios Psaltis – CEO
Lazaros Papagaryfallou – CFO
Conference Call Participants
Floriani Jonas – Axia Ventures
Sevim Mehmet – JPMorgan
Alex Boulougouris – Wood & Co
Osman Memisoglu – Ambrosia Capital
Ladies and gentlemen, thank you for standing by. I am Gaily, your Chorus Call operator. Welcome and thank you for joining the Alpha Bank Conference Call to present and discuss the Nine Months 2020 Financial Results. At this time, I would like to turn the conference over to Alpha Bank management. Gentlemen, you may now proceed.
Good afternoon, everyone, and good morning to those dialing in from the U.S. Welcome to Alpha Bank’s nine-month 2020 earnings conference call. This is Vassilios Psaltis, Alpha Bank’s CEO. And I’m joined today by Lazaros Papagaryfallou, Chief Financial Officer; George Michalopoulos, Group Treasurer; Panagiotis Kapopoulos, Chief Economist; and Dimitrios Kostopoulos, Head of IR.
This has been an incredibly challenging year, full of uncertainties and unprecedented situations. However, our bank has swiftly adapted to this new reality, and we have been able to support both our customers and our employees, while remaining very much focused on making significant progress on our strategic goals, and in particular on the implementation of our Project Galaxy.
Due to the pandemic and the containment measures it has necessitated, the Greek economy experienced a historic recession in the second quarter because of its large services sector and the high dependence on inbound tourism. The upturn in economic activity during the summer was abruptly interrupted due to the resurgence of COVID and nationwide general lockdown in early November. In such an environment, we envisaged a double-digit recession in 2020 as a whole and a milder than initially expected rebound for next year.
On the upside, as findings on the vaccine front seem very encouraging, this should improve the outlook and bring confidence with it. That’s why we may hope for a virtuous cycle that will take effect next year. Additionally, the recovery and resilience facility may prove a solid ground for a strong upside. Despite the increase in household expectations about future unemployment recording the sharpest rise over time, the actual unemployment rate has so far recorded a relatively more modest increase, reaching 17.1% on average in the second quarter from 15.4% in the first quarter.
The swift policy response has certainly cushioned the impact on employment so far. This large fiscal policy stimulus is expected to remain in place and should help avoid massive job losses and insolvencies. The budgetary cost of the crisis will continue accumulating, but the fiscal deficit is expected to narrow in 2021 and 2022.
Turning now to page four. Let’s note the key highlights of our nine month results. Our operational performance has been solid in the first nine months. Despite the adversity due to COVID, our core revenue generation has proven resilient, allowing us to comfortably absorb loan impairments of EUR737 million, of which up to 40% are COVID-related. We delivered profit after-tax of EUR130.6 million, which is up almost 43% year-on-year, along with a strong capital position of total CAD at 18.3%.
Supporting our customers has been at the top of our agenda as we consider the restoration of normal economic activity a national priority. To this end, we have been actively implementing payment moratoria solutions and participated in State Support financing programs towards customers affected by COVID. In terms of new credit, we dispersed through to end of October new loans of EUR4.6 billion. This amount includes our participation in the funding program sponsored by the Greek Development Bank and the European Union.
On deposit gathering, the group’s domestic private sector deposits have expanded by EUR1.3 billion in the nine-month period and by EUR0.8 billion in the third quarter only, stemming mainly from businesses. Our operational turnaround continues unabated, compliant with the aspiration of our strategic plan, which was announced in November 2019. The acceleration of the bank’s digital transformation as a result of the lockdown witnessed in the second quarter resulted in increased utilization of digital means that was sustained post-lockdown, allowing for 93% of monetary transactions of the bank to be performed via digital channels within the third quarter.
Despite the adversities, we remain committed to timely executing the business plan we announced in November. Our transformation plan is already underway. From the EUR120 million cost-cutting envelope we announced, already 65% secured with 25% of branches in Greece and 20% of employees reduced over the past couple of years. The implementation of our Galaxy securitization, which includes also the sale of our wholly-owned servicer, CEPAL, has entered into the final stages of the transaction process.
Following the selection of the preferred bidder last week, we target signing to take place by year-end. We have also received HAPS-compliant credit pre-ratings and have applied for the provision of guarantees on senior notes for an amount of up to EUR3.7 billion under the HAPS scheme thus securing our expected economics and significantly derisking our transaction. As a result, we are expecting the capital impact on our total CAD pro forma as of 30th of September within our envisaged capital envelope for the transaction at circa 280 basis points level that we guided previously.
Naturally, this will be informed with the final terms and structure of our agreement on Galaxy. The carve-out of the bank’s NPE Management Unit into CEPAL is targeted to be completed by the end of this month, ensuring a seamless transition of the business and operational continuity for the bank. Post completion of Galaxy, Alpha Bank’s NPL ratio in Greece is materially reduced to just 13%, whereas its NPE ratio will fall to 24%.
Let’s now move to Page 5 to discuss Alpha Bank’s support to its customers during the COVID crisis. New disbursements in Greece stood at EUR4.6 billion year-to-date to both business and individuals. More specifically, in the Entrepreneurship Fund II that we call TEPIX, Alpha Bank managed to secure the largest volume of liquidity for its business customers among Greek banks. To this end, we have already disbursed our approved amount of EUR0.4 billion. This program has recently been extended for the system, so as to provide liquidity for a further EUR850 million.
Moreover, the bank participated in the State Guaranteed Sponsored Program for Businesses by providing so far financing of EUR0.7 billion out of the first phase of the program. For the second phase, we have been allocated another EUR0.6 billion. Our target for the full year is for new disbursements of over EUR5 billion, with the majority coming from new financing for businesses under the State Guaranteed program.
Let’s now move into page six to look at the support we have been offering to our customers in the form of moratoria, deferring installments for both individuals and business customers up until the end of December of this year. At the end of September, active moratoria offered to our performing customers reached EUR4.2 billion, and that accounted for circa 17% of our performing exposures in Greece.
On a segmental basis, most of the solutions offered as of September were in mortgages, amounting to EUR1.7 billion and that makes 24% of our performing mortgage book in Greece, with moratoria to wholesale customers following with EUR1.6 billion or 12% of our Greek performing loans. Looking at the Gefyra program on offer by the state, we note that circa 160,000 applications were submitted to the platform, whereas 108,000 were received by the Greek banks, out of which 44,000 were related to Alpha Bank borrowers. With regards to customers under moratoria, we note that circa 40% or 1.1 billion of our retail customers have applied to receive the subsidy.
Coming at the pace of implementation, as shown at the bottom left chart, the run rate has plateaued at the low level of EUR100 million per month until the end of September when the EBA deadline for applications was met. Looking at the table at the bottom right hand side of the slide, you will notice that as of September, there have been EUR1.2 billion of moratoria expirations. With our latest data as of mid-November, 87% of them is performing.
It is of great importance to highlight here the proactive stance that the bank has taken with regards to the management of the moratoria granted. This involves conducting detailed moratoria portfolio segmentation and devising strategies to match each of the segment’s specific criteria needs, while contacting more than 13,000 clients by our relationship managers in order to assist in their financial planning and design the level of support they may need post-moratoria. To this effect, for those customers that may need further support, we have devised products to assist their specific needs and restore the full installment repayment in a gradual manner.
Let’s now shift our attention to page seven. During the first COVID lockdown, technology and digital banking were instrumental in accommodating the changing needs of our customers. This is evident in various countries, and even more importantly in Greece, which has recorded impressive increases in application users during the past quarters, as you will see on the upper left chart according to an equity research analysis.
Even more importantly, you will notice at the chart at the top middle part of the slide that Alpha Bank is a leader amongst its peers with regards to its engagement rate in mobile banking. Indeed, users of mobile banking continued to exhibit steady growth in the nine months of 2020 as active users increased by 47% to 750,000, while financial transactions performed through mobile banking registered an annual increase of circa 66% in the nine months, reaching over 9 million. Moreover, as contactless transactions become more important, Alpha Bank has actively promoted digital wallets including Apple Pay, the innovative payments application for iPhone devices that Alpha Bank brought to the Greek market in April 2020, the new my Alpha Bank wallet, a digital payments experience that Alpha Bank provides via Android as well as the new Garmin Pay service for payments through smartwatches.
Notably, active users of all digital wallets serviced by Alpha Bank exceeded 150,000 since launch, with respective transactions currently at almost 600,000 on a monthly basis. Going forward, our digital transformation program will build on the wide penetration of our digital channels and the digitization of the new customer onboarding journeys focusing on developing digital sales, with priority given to credit products while enhancing the bank’s remote customer servicing channels. Moreover, our digital program will focus on securing gains from a reduction in branch transactions by transferring business-related teller-transactions to digital channels.
Let’s now move to slide eight, where we present the significant milestones that we have achieved so far and the remaining final steps to close the Galaxy transaction. As you can see on the time line, with the receipt of binding offers at the end of October from two reputable international players, Project Galaxy entered the final stages of the transaction process. The bank has now announced the preferred bidder, whereas signing is targeted by the end of this year upon completion of the negotiations.
Further progress has been made across other important transaction work streams. Applications submitted under HAPS for the provision of guarantees by the Greek State for senior notes of up to EUR3.7 billion for the securitizations of EUR10.8 billion gross book value. In parallel, the bank has received preliminary credit ratings for the senior notes of all three SPVs, while the carve-out of the bank’s NPE Management Unit onto CEPAL will have been completed by the end of this month.
Hive-down completion and closing following receipt of all regulatory approvals are expected to take place towards the end of the first quarter of next year. As we have already stated, the completion of Project Galaxy will deliver a material improvement in the bank’s asset quality and will allow Alpha Bank to normalize its cost of risk and continue transformation plan towards the stated profitability targets.
Turning now to page nine. The completion of Project Galaxy will deliver a substantial improvement in the bank’s asset quality position. As you can see at the top graph, NPEs in Greece will be reduced by circa 50%, while NPLs will be reduced by more than 60%. The reduction will result in an improved NPE ratio of 23%, while exposures of more than 90 days past due will constitute only slightly above 10% of the total portfolio.
The Galaxy securitization addresses predominantly the highest risk areas of our NPE portfolio, as you will see on the chart on the left bottom of the page. The majority of exposures of over 90 days past due of dennounced exposures as well as exposures under the bankruptcy law are included in the transaction. As a result, the remaining NPEs are not only lower, but also have on average much better characteristics, with close to 50% of the portfolio on a paying or below 90 days past-due, compared to circa 70% before the transaction or 75% on average for peers.
For the remaining portfolio, as you can see on the bottom right chart, the bank has taken provisions corresponding to 60% of the original exposures. This takes into account the partial write-offs implemented on the specific on balance sheet accounts. It is useful to note that this view is aligned with the view of the regulator when assessing the prudential backstop requirements.
You can see that significant workout activity has already taken place on the remaining NPE portfolio. And the currently on-balance sheet exposures of EUR8.6 billion have received partial write-offs of EUR3.5 billion, utilizing the same amount in cash provisions. We expect that the substantial debt relief already provided to delinquent customers through restructuring should enable significant level of re-performance from the remaining portfolio, while we continue the restructuring effort for customers that are still delinquent.
And at this stage, I will pass the floor to Lazaros.
Thank you, Vassilios. Good afternoon to everyone. We start on page 11 with a summary of the key financial trends for the nine months. We can see on the top part of the page that despite the adverse conditions due to the COVID-19 outbreak, our core operating profitability significantly improved in the first nine months of the year, up by 4%, driven by improved core revenue performance and operational efficiencies. Our trading line of EUR256 million and one-off costs of EUR21 million led to a reported pre-provision income of EUR892.5 million in the first nine months of the year.
For the full year, core pre-provision income, excluding trading gains and one-off costs, is expected to trend 2% higher than 2019 reported levels, as resilient net interest income and incremental cost savings are expected to counterbalance COVID-19 crisis adverse impact on fee income. In the third quarter, net interest income stood at EUR382 million, down by 2% Q-on-Q due to the lower income from loans, reflecting the sale of Neptune portfolio and decreased average business loan balances as well as the adverse impact from market rates on deposits, though this was partially offset by the improved funding costs and mix.
Looking at year-on-year trends, net interest income was resilient, reaching EUR1.154 billion despite COVID-19 headwinds as the lower income from loans, mainly due to spread pressure, was counterbalanced by the benefit from the lower wholesale funding and deposit cost. Going forward, we expect net interest income to trend flattish versus 2019 as asset re-leveraging and deposit repricing in the fourth quarter is expected to counterbalance pressure on spreads.
We should highlight at this point that we will recognize the full TLTRO III benefit in our results next year. Specifically, until we are formally notified that we have fulfilled the target set under TLTRO III guidelines before being granted the minus 1% interest rate, we will book interest based on the minus 0.5%. This means that EUR30 million of the benefit earned during the second half of 2020 will be booked retrospectively in the second quarter of 2021.
Net commissions and fees income picked up versus the second quarter to EUR85 million, up by 10% Q-on-Q or EUR7.5 million, primarily attributable to an improved performance of card business, network fees and loan disbursements. In nine months 2020, net fees and commission income amounted to EUR252 million, a yearly increase of 2%, supported by higher revenues from cards, increased fee generation from asset management, and the enhanced contribution of investment banking, brokerage and bancassurance.
For the full year, fees are projected to decrease 2% year-on-year, improved versus our previous guidance of minus 4%, due to the impact of lower demand for banking products and transactions as well as the significantly lower contribution from tourist arrivals that are partially counterbalanced by investment in bancassurance products performance. On the OpEx side, recurring operating expenses for the group continued to decline, down by 3% year-on-year to EUR768 million, primarily as a result of lower staff costs by 6% due to headcount reduction and reduced general expenses by 3%.
As a result, the corresponding cost-to-income ratio declined to 54% versus 56% last year, improving operational efficiency. In Greece, recurring operating expenses declined by 5.8% year-on-year to EUR 609 million. Recurring operating expenses are projected down by 4% year-on-year on lower staff costs, having fully crystallized the 2019 Voluntary Separation Scheme benefit and a year-on-year decrease in G&As of 3% despite COVID-19-related costs.
In the last two years, we focused on the optimization and reconfiguration of our platform in Greece. And by year-end, we will have almost a quarter less branches in Greece and almost 20% less personnel from the beginning of 2019.
All-in, if we now turn to Page 12, we see that our strong pre-provision income generation allowed for the absorption of the increased provisions we have taken due to COVID-19 of circa EUR 287 million for the nine months, resulting to a profit before tax of EUR 141 million. It is worth noting that the nine-month profit before tax adjusted for COVID-19-related impairments of EUR 287 million and excluding trading gains of EUR 256 million, stands at EUR 172 million.
On Page 13, you can see the evolution of our total capital in the quarter, which stood stable quarter-on-quarter at EUR 8.4 billion alongside our quarterly profitability, the positive impact of a decrease in credit risk led to an improvement on total capital adequacy of 16 basis points quarter-on-quarter to 18.4%. However, adjusting for a rise in intangibles due to the acquisition of 100% stake in CEPAL, total capital adequacy ratio came at 18.3% at the end of September 2020, providing a buffer of EUR 3.4 billion overall capital requirement of 11%.
A reminder here that following recent relaxation measures, we have the ability to further improve our total capital ratio with additional capacity for Tier 2 as well as Tier 1 by 164 and 206 basis points, respectively, as portrayed in the lower-left part of the page.
Lastly, let me note that our GGBs portfolio of EUR 5.3 billion is equally split between FVOCI and amortized cost portfolios. As of September, we had unrealized pretax gains of EUR 0.4 billion.
Let’s now turn on Page 14, on liquidity and funding. As you can see on the top-left chart, private sector deposits increased by EUR 0.8 billion to EUR 41.7 billion at the end of September, with core deposits from corporates accounting for the majority of inflows. It is worth mentioning, as depicted in the chart below, that after similar trends in previous quarters of 2020, we witnessed a rebalance in the mix of deposits from time to the less costly core deposits.
Our Eurosystem funding remained at EUR 11.9 billion at the end of September 2020, reflecting the full utilization of our TLTRO borrowing allowance. Currently, 17% of our balance sheet is funded via the European Central Bank, resulting in a blended funding cost of minus 7 basis points for our entire balance sheet.
As far as our liquidity ratios are concerned, a notable improvement has recurred in the past 12 months, with our LCR standing at 118% as of September, whilst the loan-to-deposit ratio decreased further to 96% for the group.
Moving on to Page 17, NPE balances in Greece reduced by EUR 43 million during the third quarter, bringing the stock down to EUR 18.3 billion at the end of September. Looking more specifically at gross formation in Greece, entries decreased by the lowest observed in the series of about EUR 350 million, reflecting intensified collection efforts, the application of course of payment moratoria, and the impact of State Support Schemes. Exits stood at EUR 400 million, mainly on the back of reduced curings, a halt in liquidations, and a slowdown in collection activity due to the COVID-19, which negatively affected the rate of contraction.
As shown on the right-hand side of the slide, gross formation in wholesale posted a positive evolution, driven by a couple of corporate cases, which were classified as UTPs this quarter, whereas retail continued posting negative formation.
Now moving on to our last slide, Page 18. We provide evolution of cost of risk on a quarterly basis along with a breakdown of the COVID-related impairments for the period. In the third quarter, impairment losses on loans stood at EUR 169 million. On top of the preemptive COVID-19 provisions booked in the previous quarters of EUR 234 million, the bank recognized in the third quarter incremental COVID-19-related impairments of EUR 53 million in order to incorporate the possibility of change in estimated modifications due to the COVID-19-affected operating environment.
As a result, impairment losses on loans and advances reached EUR 737 million or 2.5% over net loans in the nine months with COVID-19 related provisions of EUR 287 million. In the lower part of the page, you will note the breakdown of our nine months impairment losses between core and noncore loans.
With noncore, we refer to our exposure sold or expected to be sold under securitization and portfolio transactions, so we’re mainly talking about the Galaxy perimeter. Core loans related to both performing and nonperforming exposures, excluding the Galaxy perimeter of course. Two points to make here. The first point is that our underlying cost of risk, excluding COVID, is at 1.5% over net loans in the nine months 2020.
The second point to make is that both in 2019 as well as in the first nine months of 2020, it is evident that the core perimeter has a lower underlying cost of risk, closer to the 1% mark over net loans, alluding to the envisaged formalization of our impairment line post-completion of the Galaxy transactions. And now we open the floor to questions.
The first question is from the line of Floriani Jonas with Axia Ventures. Please go ahead.
Hello good evening everybody. Thanks for the presentation and for the comments. I have a few questions on asset quality and strategy. I would like to understand how you’re thinking now about your life post-Galaxy. I’m aware that it’s still like maybe a quarter to be officially done. But I remember, and I think Mr. Psaltis mentioned in the call, that you’re still going to refer to your targets presented in the business plan.
This business plan was presented back in November 2019 in a different environment and I think in a different expectation. The target for your NPE from that business plan was below 10% in 2022. Do you still – are you still holding to that number? If that’s the case, can you share any views on how you’re expecting 2021 to pan out in terms of new flows of NPEs? I’m also aware that you mentioned that you have a 13% default rate on your expired loans under moratoria. I mean on top of that, what else can we expect in 2021? And how are you planning to defend the balance sheet as well? And I think that linked to that it is the question on capital, right?
So you confirm your guidance in terms of Galaxy impact on your capital ratio. Now after that then, and having in mind that you’re still going to have a quite high level of NPEs, how much of that capital you think that is going to be consumed, also taking into account the additional issuance that you mentioned in the presentation? Yes. So I think that’s pretty much it on asset quality. I mean it’s quite a few questions, but they’re all linked to the same topic. And maybe just on the new flows driven by COVID and on the exposures that are going to come out of the moratoria, I mean, what kind of additional cost of risk we may have to be prepared for in 2021 as well? Thanks.
Well, Jonas, it’s Vassilios. I’ll start with a bit of trying to put a bit of a framework in what you asked because that must have been seven or eight questions. So I’ll try to put it a bit in a framework, and then I’ll pass the floor to Lazaros to go a bit more into the numbers. I think what is important at this stage is to make sure that everyone understands what is our strategy for Galaxy and what has been also our strategy into that transaction.
Alpha Bank admittedly started from a very strong capital position addressing its NPE issues. We have been in the forefront of doing transactions. And actually Galaxy, as you all know, is not just the largest jumbo securitization in Greece, but also one of the largest in Europe. The interesting part is to appreciate how much we have gone head on to tackle the NPL portfolio, i.e., we have looked very much into addressing the most problematic parts of the book.
That is the important part. And that’s why you see that as we put on Slide 9, post all this effort that we’re going to be putting, as you put it, in life after Galaxy, we’re going to be having a significant head start in terms of the composition of our NPE book versus our peers. There you see that 50 – that practically 54% is going to be NPL, what’s the rest – whilst the rest of our peers are on average at 74%. I think that speaks for the fact that we have been consciously addressing the most difficult part of the book. So that is point number one.
Point number two that is that once we have been doing all that, still our capital levels are quite resilient even in a post-transaction world. And you have been picking up on our confirmation of the capital envelope that we set aside on the transaction. On top of that, what we are also remind everyone is that the coverage is not something that one should look just statically into it, but also should take into account whatever it has been already used towards the customer in order to bring him in a better shape and/or getting faster towards or with a better envelope towards a liquidation.
And this is what we put down that if you actually take into account also the write-offs into the provisions, then we’re talking about a 60% mark for our remaining book. Because obviously that only looks at whatever is going to be on our balance sheet the day after Galaxy. So I think we are making, I think, quite a confident statement that Alpha Bank has moved towards being – in the day after Galaxy, in a position of strength, both from a capital point of view, from an accumulated coverage point of view, but also and much more importantly, from a portfolio mix point of view to address its issues on an expedient basis.
Now having said that, is it really now the time in the midst of the second lockdown to come forward and reaffirm to the point when exactly we’re going to be targeting our 10% NPE target? Well, I think it is a bit better to wait until we actually sign the transaction so that we can confirm all these issues. And at that point, we will be able to share with the market more information as also we’re going to be out of the second lockdown and closer to the point where the vaccination also would start. So on that in a more informed way, we will be able to share with you more information. Lazaros, would you want also to get to the point of moratoria, please?
As is clear here in the presentation, we have active moratoria of EUR 4.2 billion as of September. Obviously, the outlook depends on the duration of the lockdown and the restoration of normal market conditions in 2021. But from what we know and understand to date, we see a certain credit mitigants that will help us address potential flow to the stage 3 loans on this performing perimeter. And we are also planning specific management actions in order to sustain any flows.
On the credit mitigant side, you have state-sponsored schemes that account anywhere between EUR 1 billion to EUR 1.5 billion of moratoria. So there is a population in retail which is entitled to the Gefyra program. Applications amount to EUR 1.1 billion in this particular moratorium perimeter for the Gefyra program. And almost half of the retail customers in the moratoria perimeter are eligible for the state subsidy. So these are natural credit mitigants to help us sustain the flow.
On the corporate side of things, customers are also eligible to state-sponsored schemes in which we participate, but also to the advanced program that the government is giving to these corporates. So based on our estimates and the management actions that we have already started in the fourth quarter of the year for collections activity and dialogue with the customers to understand their needs in 2021, we could expect a default rate of 15% to 20% of this moratoria perimeter into the stage 3 loans post our management actions.
That flow, coupled with defaults from the performing perimeter that we estimate based on our budget and risk models for 2021 that translates into gross inflows of approximately EUR 1.2 billion, EUR 1.3 billion in 2021. So that is the gross inflow part driven by not just moratoria defaults, but also through normal flows in the portfolios. To counter this gross inflow, we should take into account the fact that we have a significant for both NPE portfolio, which has received restructuring projects in 2019 and 2020.
And we should expect to see curings out of this portfolio, curings that will counterbalance to a large extent this EUR 1.2 billion to EUR 1.3 billion inflow that I have referred to. And then our ability to further decrease the stock in 2021 will really depend on closing procedures and further debt relief to be provided to our customers.
There is some uncertainty behind the closing procedures, you will appreciate. For example in November, auctions are suspended. That could be also the case in December. We are assuming though that normal activity will resume in 2021 to also allow for closing procedures in the year.
Depending on all these moving parameters, I would say we expect to reduce the NPE stock in 2021. But this is obviously subject to a few factors, which are now moving. And you should expect us to provide more guidance in the fourth quarter results.
Okay. Thanks guys. Just two follow-ups. Now first on Gefyra and the number you show on Slide 6. That EUR 1.2 billion is just the total of applications, right? So this EUR 1.1 billion is not approved or confirmed yet, right? And I suspect that if not, then you have a plan B. If out of the EUR 1.1 billion, you have, I don’t know, EUR 0.8 billion to EUR 0.7 billion of approved applications now.
Now – and the second one is on – is again on back on the NPEs. And based on your comments, would you agree that in theory if you go through a similar exercise to Galaxy in the next year, that would be like a less costly reduction, less costly impact to capital versus Galaxy given that you’re saying that it’s a well-provided book and of higher quality as well. So in the theoretical exercise that we come out to the same portfolio, we should expect less than the 280 basis points impact to CAD, right?
You have seen in the asset quality composition page that a good part of our portfolio post-Galaxy comprises of nonperforming exposures below 90 days past due, for which we have built a significant loss budget, both on the level of cash coverage, but also on the level of accumulated write-offs in order to finance curings. So that’s our focus on this perimeter.
Now on loans above 90 days past due, again, there you should expect to see restructuring efforts, especially with regards to facilities which have characteristics supportive of further restructuring, like for example mortgages with low LTVs or recent vintages certainly, not denounced loans and loans outside the 3869 household Bankruptcy Law perimeter, which was what we had included in the Galaxy perimeter. So we’re talking about a more restructurable perimeter with better asset quality characteristic and obviously requiring a lower loss budget. This is also evident in our recurring cost of risk that I have shown both in 2019 and in 2020.
You have seen a split between core and noncore portfolios with the noncore portfolios Galaxy perimeter accounting for a significant part of our cost of risk. Why is that? Because that was the worst part of the portfolio with more dated loans with worse characteristics that deserve a higher cost of risk. Now venturing into scenarios about further sales, I think it’s premature. Our focus now is fully on completing Galaxy. This is big on its own, and our target here is to finish this on time.
Your next question comes from the line of Sevim Mehmet with JPMorgan. Please go ahead.
Yes, good evening. Thanks very much for the presentation. My first question is on cost of risk as a follow-up to my previous colleague. You helpfully show, and you’ve also presented in the results that more than half of the underlying provisions this year were related to assets which will be sold with Galaxy.
So looking ahead, can I ask whether you’d be comfortable to reach your original 100 basis points post-Galaxy cost of risk in 2021 or what would be the time line in your view? And additionally regarding COVID-19 provisions, can I ask if you’re still assuming a 1.1% cumulative GDP growth in – sorry, drop in 2020 and 2021 in your IFRS models, as you had presented earlier in the year.
Because on Page 18, I see a different forecast now. And if so, how would this impact your cost of risk outlook? And just a technical one as well. On Page 9, where you show the pro forma NPE balances for Galaxy, it seems the difference in the NPE stock, pre- and post-Galaxy is EUR 9.4 billion, whereas obviously the gross book value of Galaxy is 10.8 billion. So I just wanted to understand where this technical difference comes from. Is it because the portfolio has changed post announcement? Or what will be the reason there? Thanks very much.
Yes. Sorry. This is Lazaros. In terms of cost of risk, we are trying to present normalized cost of risk so as to help you understand the underlying trends on a pro forma basis. And truly, the underlying cost of risk in 2020, in first nine months, if you exclude COVID charges, amounts to 1.5% over net loans. If you include COVID charges, it goes up to 2.5%.
Now if you just take a look at the core portfolios excluding COVID charges, the 2019 and first nine months of 2020 allude to a cost of risk around the 1% level. So if the question is whether we will be seeing this in 2021, obviously I need here to state the obvious that 2021, it’s a year with uncertainties. We should expect to see more data points so as to give a more firm guidance with regards to 2021. We are still in a lockdown. There are still moratoria in place. So I think we would be in a better position to provide guidance for 2021 as time goes by in a few months.
However, you should expect, I think, to see a higher cost of risk than 1% in 2021. It could be 1.3%, 1.4%, but certainly above the underlying trends in 2020. Still, given the quality of the portfolio and assuming that we see a recovery in 2021, this is still a macro-driven story line. You should expect from 2022 onwards to see cost of risk normalizing towards the 1% level that is implied in our numbers of 2020.
Now you asked a question about COVID-19 provisions, EUR 287 million booked in the first nine months of the year. We have applied stresses on our risk parameters, not just stage 1 and stage 2 but also stage 3 loans. And we have done this throughout the year as we had more visibility about the drivers, be that GDP assumptions, be that real estate prices, time to sale for the liquidation of collateral, sectorial stresses for corporate exposures and probability to modify specifically unsecured loans in this more challenging environment.
So all these were the kind of drivers that led our COVID charges through also post-model adjustments not entirely through our risk models, which are kind of muted in these unprecedented periods. But we are doing post-model adjustments in order to properly apply stresses in our books.
Coming to your question about a more adverse scenario for GDPs, we – the state budget now provides for almost a double-digit reduction of GDP in 2020 and almost 4.5% increase in 2021. That is a CAGR in GDP of approximately 4%. And throughout adjustments and stresses, we are currently marked at these levels. So with the COVID adjustments that we have taken in our books, we are marked at this more adverse scenario. Obviously going forward we will be observing trends and new forecasts and we will be updating our responses accordingly.
Coming to your third question, to your third question about the GBV in the Galaxy portfolio, the gross book value, yes, that is moving. If you have live relationships in these portfolios, we do management actions, we do write offs. We have judicial actions in this perimeter, so this is moving. Obviously, the reference point is the gross book value as of the reference date of the securitizations, which is EUR10.8 billion. That is the nominal value of the securitization. And then obviously the gross book value is moving and everything that happens post the securitization day happens on behalf of the securitization holder. Now the bank, the day after the investor.
That’s very helpful. Thanks very much, Lazaros.
The next question is from the line of Boulougouris, Alex with Wood & Co. Please go ahead.
Yes, hello everybody. A quick question on your guidance that you had provided for 2020. I know 2021 is difficult to mention anything and we have to expect Q4 results – wait for the Q4 results. But you were – you mentioned, Lazaros, that fees were better in the nine-month period, and we should now expect a decline of minus 2% for the full year. On the other lines in NII costs, should we expect any change on core PPI?
Also, should we expect any extra COVID-related provisions in Q4? Or given what you said previously, given the assumptions which are close to the budget, we shouldn’t expect any more COVID-related provisions, at least in the fourth quarter. And it is my first question. And my second question, sorry if you reply – you answered this previously. Regarding the capital impact of Project Galaxy, it remains as you had guided previously, 250 to 280 basis points. Is there any change on that? Or – yes, that’s it. Thank you.
Thank you, Alex. On your first question, the top-line drivers and guidance on this one, I said that when it comes to net interest income, we expect a flattish net interest income flow for the year. And I have also highlighted the fact that when it comes to the booking of the TLTRO III benefit, we don’t book the full benefit that corresponds to this period. But we expect for the conditions to be met in March 2021, so as to book retrospectively almost EUR30 million of net interest income. If you have this in the 2020 accounts, you would have a slightly positive net interest income. But in the absence of it, it’s flattish outlook for net interest income.
On fees, we have updated our guidance for minus point – 4% to minus 2% as we see more activity in the third quarter, less so in the fourth quarter, which has seasonally less fees than the third quarter, which is supported also by the – even that tourist season, so minus 2% on fees. And when it comes to OpEx, you should expect a minus 4% on recurring operating expenses. The reported expenses could be higher than that. That also depends on whether we would want to front-load any management actions in the fourth quarter of the year, as we did last year.
So if you sum up all these lines, coming to the core pre-provision income, we would expect to see a slight increase of 2% year-on-year on approximately EUR860 million of PPI, core PPI. That is obviously supported by the trading gains that we have already posted in the year, allowing for significant absorption of increased impairments. Now the second question has to do with the COVID-related provisions. I have explained the drivers in the three quarters. With what we know currently, we’re not expecting additional COVID charges in the fourth quarter, unless there is something new that we should take into account.
And your last question on the capital impact of Galaxy, as Vassilios said, we think we can execute our transaction within the capital budget for the project that we had announced when we started back in May. And we retain our guidance provided in the previous quarter of around 280 basis points on our total capital adequacy ratio, driving it down to 15.5% post the completion of the transaction. Obviously, we will be updating our projections as we continue with the transaction until we close.
Okay, thank you very much.
The next question is from the line of Memisoglu, Osman with Ambrosia Capital. Please go ahead.
Hello. Many thanks for your time. Just following up on the Galaxy impact, that 280, does that still correspond to the, I believe, EUR2 billion was the estimated impact on tangible book? Is there any color you can provide on that? Thank you.
Yes. That is the – for the accounting impact.
Okay, thank you.
Well, thank you very much for attending our nine-month results. I wish everyone to stay safe and healthy. And I wish also happy Thanksgiving for the people in the U.S. And we are looking forward to further apprise you with our full year results into the New Year. Thank you very much, and have a good evening.