The focus is now on growing revenue after several years of balance sheet clean-up and cost cutting. The traditional focus of the bank has been the SME segment and now it aims to focus selectively in this this segment while eschewing the mass market retail space, where its smaller size and more limited customer reach made it hard to compete against the bigger Greek banks.
Attica believes that with quality service and niche focus it can pick up business. As a small bank (1.8% market share in business lending), there is enough client attrition from the bigger banks to provide scope for Attica’s expansion. The niche approach means that the bank, for example, will not usually aim to make loans to the big corporates in investment projects but to lend to the smaller partners, the smaller subcontractors in the ecosystem.
There have been some management changes, including new chairman Costas Mitropolous and Antonis Vartholomaios being brought in as co-deputy CEO. Besides being chief executive of one of Greece’s most successful management consulting companies, Kantor, and being a senior executive at PwC, Mr Mitropoulos also has banking experience with Eurobank and was the first CEO of Greek privatisation agency, PQH. Mr Vartholomaios was a board member of the Greek privatisation company (Hellenic Republic Asset Development), as served as CEO/chairman at Athens Water Supply and Sewerage Company and his experience also includes management positions in Greek venture capital company EuroHoldings, Egnatia Bank and Pegasus Securities.
The key pillars of the strategy are as follows:
1.
Grow the business: the bank has now disclosed that it aims to its double balance sheet in five years, and the net loan book in three years from end of 2019.
2.
Focus on growth sectors: the target business areas within the SME segment are environment, energy and infrastructure; the bank has identified these as areas of significant growth in coming years in Greece reflecting investment needs and government policy after a decade in which Greece invested 1% of GDP pa less than European peers due to economic crises and austerity.
3.
Dual modern and traditional client relationships: the bank intends to buy a digital platform (cheaper than building in-house) and combine this with old-fashioned client relationship banking in targeting the SME market and the personal banking for professionals segment.
4.
Alliances for efficiency and quality: these include for the bancassurance (with Interamerican Insurance company, part of Achmea, a Dutch insurance group) as well as financial advisors UBS and Euroxx.
5.
Zero legacy NPL: management is aiming to reduce the legacy NPL book (46% of gross loans) to zero by 2021. The plan involves additional securitisations and participation in the Hercules plan.
Of the ongoing actions needed to support and underpin this strategy the following need to be highlighted:
1.
Personnel: Reskilling, reallocating staff, new hires. The bank is taking advantage of favourable labour market conditions to make some strategic hires, strengthening the management team to help drive this growth. Some are obvious such as moving more people into client facing roles and reducing staff in loan restructuring.
2.
Digitalisation: The bank also plans the digitalisation of its processes as much as possible. This is not so much a differentiating strategy but reflects the need to further increase efficiency, cut costs and improve customer relationships. The platform will be bought rather than developed in-house and the costs can be offset by some of the cost-cutting elsewhere.
3.
Raising capital to fund growth: management recognises that the bank will need additional capital to be able to expand its balance sheet on the scale envisaged in the business plan. We detail the capital needs in the Valuation section below. There are various potential approaches to raising the capital, including equity and hybrid capital structured to be recognised as tier 1 by the regulator. The bank believes that loan securitisations might reduce the amount of capital that it might need to raise.
4.
Reduce non-performing exposure (NPE): the bank also disclosed that it aims to have zero net legacy NPLs by 2021. The bank hopes to have loan loss charges (LLC) closer to peers and to see this trending down towards 100bp. Attica Bank will also seek to optimise its existing exposure in securitisation. Attica is considering its participation in the Hercules scheme, but is first looking to increase visibility on the NPLs. The Hercules scheme is a Greek government-supported asset protection scheme that will involve a special purpose vehicle (SPV) securitising bank NPLs with a government guarantee and a junior tranche to be sold to investors. This scheme was approved by the European Central Bank (ECB) in October 2019. Attica is also looking at a possible further securitisation in the second half of the year, if market conditions allow, in deals likely to be similar to the two already carried out. It expects to have about half of its legacy NPL management outsourced, which would free up management time and focus and may also release capital.
5.
Sale of non-core banking assets, including real estate assets: Attica Bank intends to sell down all of its property, centralise its back office and move into a new headquarters to improve cost efficiency. The bank has indicated that some gains on the sale of real estate are likely, but no guidance has been given on how much this might amount to.
6.
Bancassurance is expected to help drive fee growth following the announced alliance with Interamerican insurance company. Here the focus will be on the professional personal clients (such as engineers, lawyers, etc).
7.
Mining the existing client base: now that the bank is back in a growth phase, it intends to reconnect with many of its clients that are either underpenetrated or for whom it ceased to be the major bank during its troubles in recent years. Attica has 600,000 personal accounts, but only 120,000 active; it has 3,500 SME clients with deposits, but only 1,000 have loans.
Along with skilling up the workforce, Attica’s cost-cutting efforts will continue. Staff reduction will be done through natural attrition. Attica is targeting another 15% decrease in administrative expenses in 2020, with staff costs stable (new hires offsetting attrition). As part of the business plan, the bank expects to redesign and relocate some of its branches.
Q2 and Q319 results show delay pain
Because the bank has been focused in recent years on shrinking its balance sheet, cutting costs and cleaning the balance sheet, it has been difficult to start to redirect attention and effort towards growing the balance sheet again. As a result, growth in recent quarters has not matched earlier expectations. This has resulted in both net interest income (NII) and fees falling short due to lower business volumes. We note that single owner business and SME lending rates fell in 2019 (Exhibit 7) by about 20–30bp and this had an additional adverse factor. Following the clarification, approval and roll-out of the new strategy, the bank now appears well placed to deliver on the necessary planned loan growth and business rebuilding.
Delivery of this growth will depend of the successful implementation of the actions highlighted above.
Underlying revenue in Q319 was down 31% y-o-y due to net interest income being 46% lower than 12 months before. The net interest margin as percentage of financial assets shrank from 2.7% in Q318 to just 1.5% in Q319.
The bank reported underlying EBT losses of €9.8m and €8.2m for Q219 and Q319, respectively. The bank is operating quite below its structural capacity and so the drop in revenue as it repositions results in significant losses.
Reported revenues are affected by gains on securities, which are included in other income. The underlying revenue figures exclude some one-offs such as the significant gains on securitisations (€47m) booked in Q418 from the last loan book securitisations (Metexelixis).
Non-performing exposure (NPE) as a percent of gross loans now stands at 46%. The coverage of the NPE by provisions and collateral now stands at 120%. The annualised average impairment charge fell back to below 1% in Q319.
The statutory CET1 ratio was 11.9 in Q319 and we estimate that the fully loaded CET1 was 8.2%.
Exhibit 1: Attica Bank – quarterly progress
€000s |
Q318 |
Q418 |
Q119 |
Q219 |
Q319 |
y-o-y % |
q-o-q % |
Net interest income |
17,643 |
13,221 |
12,801 |
10,601 |
9,466 |
(46%) |
(11%) |
Net fees and commissions |
1,005 |
2,567 |
1,362 |
555 |
1,367 |
36% |
146% |
Other operating income |
851 |
49,609 |
9,212 |
5,710 |
3,976 |
367% |
(30% |
Total revenue |
19,499 |
65,397 |
23,375 |
16,866 |
13,442 |
(31%) |
(20%) |
Total underlying revenue |
19,499 |
18,397 |
23,375 |
16,866 |
13,442 |
(31%) |
(20%) |
Operating expense |
(16,352 |
(19,350) |
(16,471) |
(16,863) |
(17,743) |
9% |
5% |
Pre-provision profit |
3,147 |
46,047 |
6,904 |
3 |
(4,301) |
(237%) |
n.m. |
Impairment charge for loan losses |
(3,512) |
(2,907) |
(5,000) |
(9,136) |
(3,566) |
2% |
(61% |
Reported Pre tax |
(3,109) |
42,652 |
1,905 |
(9,760) |
(8,022) |
158% |
(18% |
Underlying pre tax |
(2,865) |
(4,173) |
1,905 |
(9,983) |
(8,267) |
189% |
(17%) |
|
|
|
|
|
|
|
|
Net loans |
2,037,604 |
2,015,100 |
1,592,144 |
1,566,670 |
1,550,419 |
(24%) |
(1%) |
Ratios |
|
|
|
|
|
|
|
NIM % financial assets |
2.7% |
2.0% |
2.0% |
1.7% |
1.5% |
|
|
LLC % net loans |
0.7% |
0.6% |
1.5% |
2.3% |
0.9% |
|
|
Non-performing % gross loans |
52.4% |
41.0% |
42.0% |
44.0% |
46.3% |
|
|
Impaired % net tangible assets |
180% |
114% |
117% |
123% |
130% |
|
|
NPE % LLA coverage |
45% |
43% |
33% |
34% |
33% |
|
|
NPE % coverage with collateral |
123% |
125% |
123% |
126% |
120% |
|
|
CET 1 Statutory |
12.8% |
13.4% |
12.5% |
12.1% |
11.9% |
|
|
CET1 fully loaded (est.) |
10.1% |
8.9% |
8.7% |
8.4% |
8.2% |
|
|
Source: Attica Bank, Edison Investment Research.