ALBKF - Alpha Services and Holdings S.A. (ALBKY) Q2 2023 Earnings Call Transcript
2023-08-09 13:13:06 ET
Alpha Services and Holdings S.A. (ALBKY)
Q2 2023 Earnings Conference Call
August 09, 2023 05:00 AM ET
Company Participants
Vassilios Psaltis - Chief Executive Officer
Lazaros Papagaryfallou - Chief Financial Officer
Conference Call Participants
Alevizakos Alevizos - Axia Ventures
Iqbal Nida - Morgan Stanley
Sevim Mehmet - JPMorgan
Simon Nellis - Citibank
David Daniel - Autonomous Research
Maximilian Gerstenkorn - Jefferies
Nagel Alberto - Mediobanca
Golub Iuliana - Goldman Sachs
Presentation
Operator
Ladies and gentlemen, thank you for standing by. I am Mina, your Chorus Call operator. Welcome, and thank you for joining the Alpha Services and Holdings Conference Call to present and discuss the first half 2023 financial results.
At this time, I would like to turn the conference over to Alpha Services and Holdings' management. Gentlemen, you may now proceed.
Vassilios Psaltis
Welcome everyone to Alpha Bank's results call for the second quarter of this year. This is Vassilios Psaltis, Alpha Bank's CEO. I am joined today by Lazaros Papagaryfallou, our CFO; and Iason Kepaptsoglou, the Head of Investor Relations.
And let's go straight to slide five please. Profitability in the first half of the year exceeded 12% with circa €360 million of normalized earnings. Revenues are up 20% year-on-year and this is driven by higher rates, volume growth and an increase in recurring fees. Operating leverage and strict cost discipline have driven the cost-to-income ratio to the low 40s, while asset quality remains relatively benign, with cost of risk having largely normalized and coming in better than the full year guidance.
As a result, we have generated €0.15 of recurring earnings per share in the first half of the year and this is up 75% on a year-on-year basis. And as Lazaros will detail later, it is important to highlight that we have grown on earnings and profitability in a disciplined manner. We have maintained our sustainable commercial pricing policies, aligning with our peers on the liability side, while defending long pricing and we have built our capital and liquidity buffer server.
We are at the start of our three-year journey, but as we highlight in our recent Investor Day, our plan is front-loaded. Our progress thus far clearly demonstrates that we are well on track to meet our financial targets of increasing profitability and thus in generating capital to support growth and distribute value to our shareholders.
As you can see on slide six, this is a reminder of our six strategic priorities that leverage our strengths and work on areas, where we want to improve our performance, enabled by our investments in people and digital. These six strategic priorities are the operational leaders we are using to achieve our financial ambition. We aim to selectively update you on the progress we are making with every quarterly result. This time, we will focus on retail and balance sheet resilience.
And let's start with retail on slide seven please. Following on from the Investor Day in early June, we have announced our new branch structure. We have also rolled out a new access model for circa 20% of the network, while we provide an all-access model for the first three hours of operations, with appointment-only service for the rest of the day. As you can appreciate, these necessitates that client interactions are predominantly advisory in nature, which is only possible when most of the transactional and everyday banking services have been digitized. For example, following the launch of an initiative to migrate know-your-customer activity to digital channels, we have seen a jump in adoption rates leading to significant FTE savings, the equivalent of one employee per 10 branches in the space of just six months. This has allowed us to deploy more capacity towards advisory services with 40% of branch staff now being relationship managers from only 34% last year and 21% in 2021.
As a result of our hard work, our retail network has been able to capture more than one-third of the total market flows in the relevant wealth segments. We have also operationalized our strategy with regards to capturing the emerging affluent client segments, with more than 300 relationship managers dedicated to the segment now having client books. The emerging affluent segment now accounts for more than 10% of the total Alpha Bank sales of wealth products, having increased its contribution six fold versus last year.
Let's now look at another of our focus areas on slide eight and this is the resilience of our balance sheet. We have made strong progress in the first half of the year. At 13.6%, our fully-loaded Core Equity Tier one ratio is now clearly above our management target of 13%. This improvement is driven by organic capital generation of 116 basis points in the first half of the year. Combined with the timely issuance of AT1, this has allowed us to create the equivalent of one billion of total regulatory capital year-to-date. This has also been assisted by the conclusion of a series of transactions that have simultaneously reduced risk-weighted assets and de-risked our NPE plan, as we now have significantly fewer Held-for-Sale assets.
Our most recent senior preferred issuance allowed us to build a €600 million buffer to the non-binding MREL targets of 2024. None of this has been taken into account in the most recent pan-European stress test due to methodological constraints. Yet despite that, we have seen a 330 basis points improvement in our capital depletion versus the last iteration of the test, paving the way for potentially lower capital requirements. Please also note that we have performed better than our European peers by 152 basis points versus the average.
Last but not least, our liquidity position has been further strengthened. Our liquidity and stable funding ratios are ahead of our targets, whilst we have as much as 30% of our deposit base in cash and cash equivalent instruments.
To conclude on my side, let's now turn to slide 9 please. The improvement we are seeing in profitability is coming from two sources. Firstly, we are seeing a structural improvement in the profitability of our business unit as the leaders were operationalizing combined with macro tailwinds to produce sustainably high returns. Our operations in Greece are showing better momentum, while the profitability of our international business has seen a step change.
Secondly, we continue to reallocate capital away from problematic assets to fund the growth of a performing business. We have seen returns on regulatory capital based on our 13% target for Core Equity Tier 1 grow from 9.5% last year to 16.5% in the first half of the year.
Group returns on the regulatory capital that we need to carry are reduced by the regulatory treatment of our deferred tax assets leading us to deliver a return on tangible equity of 12.2% in the first half of the year.
Now Lazaros will give you more detail on our guidance for the year, but Lazaros if you allow me to steal the punchline and allow me to say that we have upgraded our guidance for profitability for this year from the 10% we promised with our Investor Day to well in excess of 11%.
Now Lazaros, the floor is yours.
Lazaros Papagaryfallou
Thank you, Vassilios. I suspect it's the CEO's privilege to steal all the good bits from the CFO section.
Let's now take a quick look at this quarter's numbers. Turning to slide 11. This quarter we are reporting a positive bottom-line of €191 million versus €111 million for the previous quarter. Excluding one-offs normalized profits came in at €195 million up 20% versus the previous quarter and up closed 180% versus the second quarter of last year.
As you can tell from the small difference between reported and normalized profits there is not a great deal of one-offs to discuss this quarter. Our performance in the first half has been equally impressive with reported profits up 27% and normalized profits up 78% versus equivalent period of last year.
Slide 12 on our balance sheet. Our tangible book value grew at 7% year-on-year, while our regulatory capital is up 10% over last year's levels. Our TLTRO balance is down by €8 billion year-to-date as we have repaid the further €4 billion this quarter. Yet our cash balances are down by less as we have seen growth in our deposit base, which combined with issuance and liquidity released from our investment of assets previously Held-for-Sale has allowed us to comfortably fund the growth of our remaining assets.
Now turning to slide 13 to look at the main profit and loss components. Net interest income continued to grow in the quarter up by 4% in the back of higher rates. On a yearly basis, NII grew by 46% versus the second quarter of last year.
Currently, 10% of NII comes from NPEs, but as we have said these will trend significantly lower starting from this coming quarter following the deconsolidation of two large NPE portfolios at the end of June. Fees and commissions grew to a more sustainable level of €97 million up 10% quarter-on-quarter.
Recurring operating expenses were up by 3% Q-on-Q driven by high property taxes and insurance cost as well as a higher depreciation charge, while costs in the first half are down 3% year-on-year. Finally, cost of risk came in at 76 basis points excluding transactions in line with last year's run rate and below our full year guidance of 85 basis points reflecting the de-risked portfolio and benign asset quality trends.
And with that, let's look at the drivers of our top-line performance during the second quarter in more detail on slide 14. Net interest income continues to grow and stood at €440 million in the second quarter up a further 4% versus the first quarter, and up 49% versus the second quarter of last year.
Interest rates and the pace of increase in the overall deposit beta, continue to evolve better than expected. As a result, we are today upgrading our target for the year to above €1.7 billion and we expect the evolution of our topline to be relatively flattish in the coming quarters. The assumptions underpinning our target, are a deposit facility rate reaching 3.75%, with average three-month Euribor for the year at 3.3% and an average deposit pass through of 15%. So it is clear, that these assumptions are conservatively struck.
The commercial policies, we employ in this period of changing interest rates, are of paramount importance. On the asset side, the focus is squarely on the growing corporate book. We have been seeing the expected soft landing in spreads, but have been cautious not to pass on the temporary benefits of a low deposit funding cost, to the long-term loan facilities that we underwrite.
Our franchise is built upon long-lasting relationships of trust, and we want to avoid locking in levels of profitability that are below our thresholds and that would not be sustainable for us or would force us to have difficult conversations, with our corporate customers, once deposits reprice higher or rates fall.
As you can see, we have been consistent on the need to be thoughtful on corporate loan spreads and are encouraged to see some rational behavior in part of the market. On the liability side, we've had a very successful quarter covering €1.6 billion of deposits while being able to maintain our deposit beta in line, with the average of our peers.
Slide 15, on fees. As mentioned, we have seen a solid improvement this quarter, returning to more sustainable levels of activity and we are confident we will be able to make our target for the year. Lending and transaction activity, have driven growth this quarter and this is reflected in the performance of our retail and wholesale operations.
On asset management, higher assets under management have driven up management fees. However, this has been offset by lower volumes of sales and redemptions leading to lower transaction fees as well as a different mix of sales in favor of CCABs [ph].
On to costs now, Slide 16. This quarter we have seen an impact from higher taxes, and insurance costs. Our cost-income ratio stood at 44.7% in the quarter, and just 37% in our domestic business. Despite inflationary headwinds, our performance remains well on track to meet our full year guidance. And this is reflected in the revised guidance -- the cost to income ratio that implies a lower cost base, on an absolute level compared to last year.
Moving on to Slide 17 and loans. Our performing loans book has grown by 3% over the past year, driven predominantly by growth in our Greek corporate franchise as well as through growth in our international business. As you can see on the right-hand side, the second quarter showed a notable pickup in disbursements, as we exited the seasonally low first quarter while political certainty re-established confidence in the market. At the same time, we have witnessed clear signs of normalization in the repayment level this quarter, as we saw a level of €1.6 billion of repayments, if we exclude the large ticket that we syndicated in the quarter.
We expect a number of large projects to be given the green light, towards the latter part of the year, which combined with a strong pipeline of disbursements in the corporate sector, make us confident in meeting the target of a mid-single digit growth in our performing loan book this year.
As you can see on slide 18, we have seen very strong growth in customer funds. Our deposits have grown by €1.6 billion this quarter, clearly the best amongst our peers. The shift to time deposits, as can be seen on the right-hand side, currently continues with the level reaching 23% in June similar to peers. The same is true of the cost of deposits and overall deposit beta making the inflow this quarter even more impressive. On assets under management, we have had notable valuation tailwinds this quarter while net additions are running at an annualized rate of over 7%, driven by mutual funds and fixed income products.
And with that, let's now briefly look at our segmental performance. Slide 19 on retail, unsurprisingly being on the limelight given the comments from Vassilios earlier as well as the pivotal role it currently plays in deposit pricing. The change in the rate environment has clearly transformed profitability with returns on allocated common equity Tier 1 at 24%, up 21% at points versus the equivalent period last year. Revenue growth has been the driver of the reduction in the cost income ratio but the business has also seen a notable reduction in its cost base as it continues to optimize its footprint.
In our wholesale division on slide 20. As you can see revenues have grown 10% half-on-half, as high rates and higher loan balances have counterbalanced the subdued level of disbursements. Recurring costs were again down meaningfully as the transformation program continues to bear fruit and as a result, we have seen an improvement in profitability by 1 percentage point. RWA optimization, including the recently completed synthetic securitization, are likely to optimize capital allocation further for wholesale leading to a further boost in its profitability.
Slide 21 on our wealth and treasury operations. Revenues are flat versus the first half of last year but of much higher quality as one-off trading gains have been replaced by recurring net interest income from our securities portfolio as well as slightly higher fees. This is reflected in the cost-to-income ratio, which excludes trading profits and has come down from 55% in the first half of 2022 to 30% this year. Normalized profits that exclude one-off trading gains have thus nearly doubled.
Finally, on our international operations on slide 22. We have seen a near tripling of normalized profits as revenues have benefited from excess liquidity and volume growth with returns on allocated capital up 22 percentage points versus the first half of last year. Our international business has posted 17% of the group's recurring profits during the first half of the year and is clearly showing tangible progress towards being a true contributor to value creation for the group.
As Vassilios mentioned, much of our targeted improved profitability out to 2025 will come from reducing the capital consumption enhanced drug from our NPAs and other operations. As you can see on slide 23 the loan book and balance sheet has fallen sharply year-on-year and we continue to target this division being responsible for circa 10% of group RWAs compared to nearer 20% at the end of last year.
And with that, let's move to asset quality on slide 24. NPE formation in Greece was again zero this quarter, with inflows affected mainly by a single corporate exposure. Robust carrying activity and repayments effectively drove total formation to zero.
On the right-hand side of the slide, you can see further information on our cost of risk evolution. The underlying cost of risk came in at 55 basis points in the second quarter with an additional 13 basis points for servicing fees and 8 basis points for securitization expenses. That brings the overall cost of risk excluding transactions to 76 basis points for the quarter versus 75 basis points in the previous quarter and 76 basis points for the whole of 2022. As asset quality trends remain benign, we now believe that cost of risk will likely come in better than our full year guidance of below 85 basis points and would expect a number closer to or even below 80 basis points for the year with the NPE ratio closer to 6.5%.
Let's now briefly look at the quarterly evolution of our fully-loaded capital position on Slide 25. As already mentioned, our strong capital generation year-to-date has significantly strengthened our capital ratios that now stand above our management target of 13%. As you can see on the top graph, our fully-loaded Common Equity Tier 1 has increased by 109 basis points in the quarter. Our organic capital generation was strong at 71 basis points.
We continue to fund growth through internal means whilst our capital generation capacity is further levered through the recovery of deferred tax assets. Our capital ratios are also proving resilient, as there was effectively one basis point positive impact from fair value through other comprehensive income this quarter due to the low sensitivity of our book to shifts in the yield curve. And then lastly on transactions, there was a positive impact of 56 basis points this quarter from the conclusion of two NPE transactions namely Project Sky and Hermes and its synthetic securitization. This means that our reported and pro forma capital ratios are now fairly aligned.
Our reported fully-loaded Common Equity Tier 1 stood at 13.5% at the end of the second quarter or 13.4% post-dividend accrual while pro forma for the anticipated RWA relief from transactions are fully-loaded Common Equity Tier 1 stands at 13.6%, well above our management target of 13%. It is important to note that we expect a further benefit of 20 basis points to our capital ratios following the conclusion of another performing loan securitization envisaged to be concluded within 2023 and reducing RWAs by circa €0.7 billion. As previously communicated, we aspire to reinstate dividend payments out of 2023 profits and we aim to secure regulatory approval in early 2024.
On the next slide, you can see that our capital ratios are well ahead of regulatory requirements while the €400 million AT1 issuance that was completed earlier this year further built our capital buffers.
And then lastly on Slide 27 we present our financial targets. We are today upgrading our 2023 guidance and at this stage have not reviewed our 2025 targets which are simply presented here as a reminder of what we shared at our Investor Day. Whilst our guidance for 2023 was only shared on our Investor Day in early June the trends that have materialized in the last couple of months have further strengthened the case for even better levels of stability this year.
I have briefly mentioned the main components throughout the presentation. But since we have everything in one place here, the main changes relate to the following items. We now expect net interest income to lag above €1.7 billion from €1.6 billion previously with rates higher than expected and deposit beta evolving better than expected. We don't expect any notable deviations in our expectations for fees or costs, but of this high revenue base means the cost-ratio will now be below 45%.
Our cost of risk will likely end up somewhat lower than originally expected as asset quality remains relatively benign. And we now target circa 80 basis points for the year effectively implying 85 basis points for the second half of the year. Better trends also mean that our NPE ratio should get to 6.5% by the end of the year.
As a result of the above, profitability will come in well in excess of 11% adjusting for excess capital. Earnings will grow to above €0.29 per share. Our tangible book value will land above €6.2 billion and our fully-loaded Common Equity Tier one ratio will likely land closer to 14%.
And with that let's now open the floor to questions.
Question-and-Answer Session
Operator
Thank you. The first question is from the line of Alevizakos Alevizos with Axia Ventures. Please go ahead.
Alevizos Alevizakos
Hi. Thank you very much for the presentation and congratulations on this strong set of results. I've got a couple of questions and a quick clarification, if I may. First question as you pointed out the deposits grew very fast both internationally and domestically. And I was wondering is this something that you try to target more and you identify a big opportunity given that deposit betas in Greece and some other countries are not increasing as fast? And could you shed some light as the incentives that you may be offering to some clients in order to bring more deposits into the bank? And then the second question is regarding the performing corporate loan spread. It's notably resilient despite the rates increasing with your peers being materially lower. Do you think about perhaps improving your pricing or bringing it a bit lower, let's say in order to gain some market share in terms of lending? Thank you.
Vassilios Psaltis
Hi. It's Vassilios. As far as the deposit growth I mean it was always very much one of our key targets. I think what has changed since the beginning of the year is that after years where it was a bit lower in the ranking, we made sure that all of our commercial people have it really high up on their priority list. So this is not something, which comes out of any particular incentives that we give to customers. I mean it was evident also that our pricing is market average but rather from the increased focus that we have both in terms of our trust in our retail network as well as also in the quite widespread relationships that we entertain with businesses.
On your second point you may recall that we have been already for a few quarters making this point that in terms of, I mean if there may be even a theoretical dilemma between making sure that you make your choices based on profitability vis-a-vis on market share, we would definitely go for the first not for the latter. This is important. This is a sign of health and a sustainability in the relationships as it has to be something that is fruitful for both sides.
On top of that, it is also important that we have risk-adjusted pricing and that's why we're very diligent in going into those cases. This means that in certain situations we may let it go. We may leave other peers of ours that may have a more aggressive risk appetite vis-a-vis us or that they may be willing to lock in at very narrow spreads for longer tenors, we may leave that. So it's not really a matter of improving pricing to get that but rather in making sure that we are navigating within the corridor that we have promised to our shareholders in order to deliver the value from our lending business.
Alevizos Alevizakos
That's great. And a clarification if I may on the CET1 capital. Your pro forma number increased and that increase is actually the year-end target to 14%. I wanted to know the 13.6% it does not include the extra synthetic securitization of the €700 million. Is that correct?
Lazaros Papagaryfallou
That is correct. It is only pro forma for transactions where we have seen the economic impact and thus we do not include anything on the synthetic securitizations. The pro forma numbers only relate to NPE transactions.
Alevizos Alevizakos
Okay. So the pro forma including the synthetic is basically closer to 14%, right?
Lazaros Papagaryfallou
That is correct.
Alevizos Alevizakos
All right. Thank you.
Operator
The next question is from the line of Iqbal Nida with Morgan Stanley. Please go ahead.
Iqbal Nida
Hi. Thank you very much for the call and congratulations on the great results. It's clearly an excellent year for the Greek banking sector, so I just want to try and understand the risks to the positive trends that we're seeing.
So firstly on loan growth, it has been a bit slower than expected, impacted by repayments in the first half for the sector as a whole. Given the high interest rate environment, is there a risk to the outlook for the second half of 2023 or 2024 from a demand perspective in your view?
And just staying on loan growth, I wanted to understand a bit better on the implementation of RRF projects, how that's coming along. And is there any, bottlenecks that you see around these in the coming two to three years?
And then secondly on asset quality, asset quality is clearly -- is still resilient but we have seen some very early signs of deterioration, given the single corporate that impacted this sector. So perhaps which sectors are you watch -- industries or sectors that you're watching more closely in terms of potential risk of asset quality deterioration in the coming quarters? Thank you very much.
Vassilios Psaltis
Thank you, Nida. Just because the sound quality was not perfect, I'll just recap the questions to make sure we got them correct. Effectively, you're asking number one on the risk to loan growth, given what we've seen in terms of repayments but also in light of higher interest rates for 2023 and also 2024.
The second question related to an update on the progress we're making on the RRF. And then the third question related to asset quality, and if there are any particular sectors that we are focusing in, in terms of trends. I think all three of those most likely relate to Lazaros, so, Lazaros, if you, please.
Lazaros Papagaryfallou
Coming to loan growth we have reiterated our target for a mid-single digit loan growth target. Indeed in the first half of the year, and that was also true for last quarter in 2022, we have seen some repayments and prepayments from corporate customers.
However, we have seen this trend abating. And we do expect further lowering of repayments in the coming two quarters. Also we have seen an increase in disbursements. You have seen €1.9 billion disbursements in the second quarter. And we do expect higher disbursements in the second half of the year.
So that trajectory is making us reiterate our guidance for the full year, for performing loans on a group basis to trend above €33 billion. That is, as I said a mid-single digit growth in performing loan balances or approximately €1.5 billion of net loan additions in the second half of the year. That also include the materialization of the pipeline, we have in RRF and Hellenic Development Bank facilities that we have already underwritten.
As far as asset quality is concerned, you have seen that we have recorded the flattest second quarter overall negative in the first half of the year. We do expect to see better trends in the second half of the year, both in terms of new defaults in retail, curings as well as liquidations which are backloaded in our plan. Therefore, we are guiding for a 6.5%, it may be lower NPE ratio at the end of the year supported by good organic trends in the second half.
Iqbal Nida
Thank you very much.
Operator
The next question is from the land of Sevim Mehmet with JP Morgan. Please go ahead.
Sevim Mehmet
Good morning. Thanks very much for the presentation and congratulations also from my side. I just have a couple follow-ups firstly on NII. I believe your guidance of €1.7 billion would imply that it may be close to a peak already. I do appreciate this is quite a conservative guidance, but taking into account the current trends, would you expect to see some upside risk to this in the second half particularly maybe driven by deposit betas?
And looking beyond into 2024, if you were to assume no changes to interest rates, how would you expect your NIMs to evolve? And again, obviously, here the main driver being deposit betas.
And secondly on capital, which is progressing ahead of expectations, you're already at your initial guidance of 13.5% post the accrual. I'm just wondering if that could potentially signal any upside to your dividend payout aspirations given you're currently accruing a very small amount or will that be just obviously dependent again on what the ECB says? Thank you very much.
Vassilios Psaltis
Let me start with the last point on capital and dividend aspirations. Indeed you have seen in the second quarter, a strong build-up of capital, which currently sits above our management target for 13% common equity Tier 1 or 17% total capital ratio. This suggests that everything we put on top is excess capital compared to the management target.
And we do expect those excess buffers to further build up until year end and beyond. You may recall that in our Investor Day, we have shown how our profitability until 2025 builds an excess pool out of which payouts will materialize. Obviously, this is an aspiration of the management to return to its shareholders, a good dividend payment potentially coupled with buybacks in order to get to a higher total return for our shareholders.
Having said that, we are aspiring a dividend payout for 2023 profits to a tune of 20% or so. This is commensurate with our capital trajectory. And of course, it will be the first dividend payment after many years. So we prefer to be conservative in our approach and the regulatory dialogue with SSM, which is currently in progress, but we do expect to see an approval coming in 2024.
Now on net interest income, your question was about the pace in the coming quarters, and whether we have seen the peak. Based on the trends, we see with regards to our deposit base and the shift towards time deposits, which is slower than expected, you see that currently time deposits make up 23% of total depos, and they are not expected to exceed 27% or so at year end 2023 plus the fact that we see now higher rates we do expect to see deposit beta lower than initially anticipated towards the 15% for the full year. That is driving better NII definitely and enables every rating of our NII for the full year above €1.7 billion.
We don't expect the second quarter to be the peak. Most probably this will be the third quarter also absorbing a reduction in the NII from NPE portfolios, which get deconsolidated. But that is an €8 million impact in the third quarter of the year.
And given the fact that beyond NII improvement, we also lower our asset base you have seen the repayment of TLTRO facilities, our NIMs are improving. And they are expected to be better than initially guided for the entire year of 2023. We are not giving guidance beyond 2023. We are just reiterating our targets for the period beyond 2023 as presented in the Investor Day.
Sevim Mehmet
Okay. That's very helpful. Thanks very much.
Operator
The next question is from the line of Nellis Simon with Citibank. Please go ahead.
Simon Nellis
Hi. Thank you very much for the opportunity. I have a few questions some of them just technical. But can you confirm that the AT1 cost the coupon which I guess will hit the numbers next quarter is that fully tax deductible? I think it is. That's question number one. Question number two would just be on further NPA transaction costs for this year. I think you've got it for around €30 million. Is that still what you're anticipating or would you accelerate cleanup given the strong topline? That's question number two. And then likewise in terms of just the cost guidance I think you had said you were targeting OpEx slightly lower than 2022. Is that still the case? And what kind of non-recurring costs are you targeting for the full year? Thank you.
Vassilios Psaltis
I'll take the two easy questions. I'll leave the slightly harder one for Lazaros. The AT1 does have full tax shields and this will come in Q3. And of the cost guidance you are correct. We have said that we expect them to be recurring costs be slightly down year-on-year. And maybe Lazaros if you want to comment on the guidance for NPA transaction costs for the year.
Lazaros Papagaryfallou
As we have explained also in our Investor Day the higher volume NPA transactions that we've done in previous years are not expected to repeat themselves in the coming quarters or years. There could be cleanup marginal opportunities for portfolio transactions but they are well covered within our cost of risk guidance that we have explained earlier on. So we do not expect any material worth mentioning NPA transaction costs for the second half of the year.
Simon Nellis
Very clear. And actually just one last one on capital. Have you deducted the 20% expected payout ratio from your CET1 that you reported? It wasn't quite clear from the disclosures?
Vassilios Psaltis
Correct we have.
Simon Nellis
Got it. Thank you. That's all for me.
Operator
The next question is from the line of David Daniel with Autonomous Research. Please go ahead.
David Daniel
Congratulations on the results and just a quick question from me. You've obviously been active in primary markets but just can you give us an update on your issuance plans or should we be thinking about 2024 rather than H2 this year? Thanks.
Vassilios Psaltis
Sorry, Dan. Could you repeat the question a bit slower, please?
David Daniel
Sorry. I'm just asking about the issuance plans for the rest of the year or should we be thinking about next year now given you've been quite active?
Vassilios Psaltis
Yeah. Indeed, we have been quite active with 181 early this year and then a senior preferred during the summer. Having said that, and especially when it comes to senior preferred and MREL we have created a good buffer against 2024 targets to the tune of €600 million. So we can now plan having a more comfortable buffer against the minimum requirements and we'll tap the markets when we feel it's the right time. We don't expect under the current plan additional transactions in the second half of 2023.
David Daniel
Thanks a lot.
Operator
The next question is from the line of Maximilian Gerstenkorn with Jefferies. Please go ahead.
Maximilian Gerstenkorn
Hi. Yeah. Good morning. Two from me; one on asset quality one on capital. So when I look at your 6.5% NPE ratio target for the end of the year I think that probably requires an NPE reduction of about €300 million. Would that be right? And could you give us an idea how the split would be between organic curings and liquidations as you mentioned? And again, just confirm that any costs related to liquidations would be absorbed by the 80 basis point cost of risk guidance? And then on capital interesting to see the DTA recovery or write up this quarter. Should we be expecting a little bit more on that front going forward?
Vassilios Psaltis
Okay. Just to review the questions for the crowd. On asset quality we got it together you've made an estimate of about €300 million reduction in NPEs in order to get to the target that we have for trade. That's roughly correct. And you want the split between organic and liquidations and whether that's covered within our cost of risk. And then on DTAs, if we expect a similar level of DTA recovery going forward. Lazaros I think both of you.
Lazaros Papagaryfallou
On asset quality your estimates are fairly reasonable compared to the absolute level of organic reduction expected until year end to get down to 6.5%. We do expect organic deleveraging higher than €350 million. In this target liquidations indeed play an increasing role in the second half of the year because the plan is backloaded on liquidations at €150 million or so for the second half.
And given the fact that we have more liquidations in the second half of the year in our organic deleveraging plan that is one of the reasons we are giving also a guidance for slightly higher cost of risk in the second half compared to the first half of the year.
Now as far as deferred tax assets is concerned and their role to regulatory capital creation you know that we have a good volume of deferred tax assets, which are excluded from the regulatory capital calculations and they get included as time goes by with profits and we increase our tangible book value. And this is the case quarter-on-quarter as we write profits. In this quarter, the second quarter of the year, the mix of our results, the tax results has been such that created even more DTAs. This is not the level that we expect to encounter in the next two quarters as far as DTA add-backs is concerned.
Maximilian Gerstenkorn
Okay. Thank you. And just a little follow-up if I may. So in the second part of the year as you said slightly higher cost of risk budgeted anyway. So nothing too meaningful then in terms of additional charges for NPE transactions or perhaps a dip in coverage.
Vassilios Psaltis
No, we don't. As we mentioned previously we don't expect any material charges for NPE transactions in the second half of the year.
Maximilian Gerstenkorn
Okay. Thank you.
Operator
The next question is from the line of Nagel Alberto with Mediobanca. Please go ahead.
Nagel Alberto
Yes. Thanks for taking my question. Just two quick ones. The first one can you remind us how much the contribution to the single resolution fund and the deposit guarantee fund that will reduce next year. And sorry, but after these two days I need to ask you if you think that the government could propose a similar measure in Greece about the bank levy and perhaps offsetting the lower synthetic charges systematic charges for -- from next year? Thank you.
Vassilios Psaltis
I will take the first question on the single resolution fund contributions, which annually amount to €60 million. That is a good part of our general and administrative expenses number in Greece. And indeed this is expected to fade out until 2025 as per the regulation.
Lazaros Papagaryfallou
Now in terms of your second question, obviously, we cannot speak on behalf of the government not even speculate what they might be thinking of. However, I think, we can't fail to observe a couple of things between the two countries. Number one is that Italy has a completely different fiscal backdrop compared to Greece in terms of the necessity to fund primary deficit.
I mean Greece has already this year a primary surplus again plus also that we have completely different refinancing dynamics. As you well know Greece has this very positive impact from the PSI that it practically has its debt underwritten for another significant number of years and the debt service in costs is probably the lowest in Europe.
Beyond that also the reason why we have seen that part of that money that is going to be raised through this levy in Italy are going to be funneled to is to support mortgage holders. Coincidentally for the Ministry of Finance and the Greek banks have jointly put forward a scheme, which is capping the Euribor to performing mortgage holder and practically rewarding them for the good payment culture that they have shown over the past few years. This is a scheme that has been proven fairly popular. It's moving on for another few months until next April. So it's going to be pretty much absorbing any pressure coming out of that.
Vassilios Psaltis
Alberto, sorry, we think there was a second part to your question. Can you please repeat it?
Nagel Alberto
No, it's okay. It was if the bank levy, potential bank levy could offset part of the reduction of the €60 million systemic charges that we are reducing in the next two years. Thank you so much for the responses.
Vassilios Psaltis
Given that they relate to different jurisdictions, the one relates to the eurozone and the other to our sovereign, I don't think the two should be linked in any case.
Nagel Alberto
Thank you.
Operator
The next question is from the line of Golub Iuliana with Goldman Sachs. Please go ahead.
GolubIuliana
Hi, good morning, and congratulations from my side as well. Thank you for the opportunity. Just two questions. First on NPE coverage, I noticed it stayed fairly flat year-on-year but is somewhat low compared to historical levels, so for example on a three-year look back and also versus other Greek peers. I was just wondering if there are any plans to increase the NPE coverage going further.
And the second question would be just your view on the potential timing for an upgrade of the sovereign to investment grade also in the light of the rating upgrade from scope, which the rating agency, which came last Friday with them citing the positive development and the fiscal backdrop in Greece and sustained European institutional support for the country? Thank you.
Vassilios Psaltis
I will take the first question on NPE coverage, which stood at 40% in the second quarter. We have spent a lot of time in now Investor Day to explain how that coverage ratio relates to the composition and quality of our Stage 3, loans which is predominantly mortgage exposures and for more non-performing exposures below 90 days past due. And this is a stark difference from portfolios, which are mainly focused on wholesale exposures that naturally carry a higher cash coverage.
Having said that, we have also given the trajectory of cash coverage in the coming years towards higher levels as a function of NPE reduction, so that the NPE ratio goes down to 4% until 2025 lower than €2 billion in terms of gross NPE exposure. That is part of our plan.
So the combination of driving NPEs lower through the mix of strategies we have presented in our Investor Day and maintaining an allowance account at around the €1 billion level should drive cash coverage higher towards the 60% level. We do expect to see a slightly higher cash coverage by year end 2023.
Lazaros Papagaryfallou
Now on your second point on the potential impact from the investment grade, there are a few comments to make. Number one is that we do feel that already for some time the excellent work that it has been done both on the fiscal consolidation front as well as also on the NPE cleanup and also from the strengthening of the bank's balance sheet is such that I think we deserve it already for some time.
Therefore, it is for us a foregone conclusion. We do expect that we have seen that from R&I the Japanese rating agency and Scope, who are not acknowledged as ECB counterparts. Therefore, we wait also for the three largest ones to have. And we have Moody's in October and S&P October, November and then Fitch sometime in December. So within the year, we do expect that we have that progress.
Now what we expect out of that is that the investor audience that can tap Greece is going to be significantly enlarged. Mind you this is an experience that Greece had up until 2011. We were investment grade. So these are all audiences that we have thought we had entertained very regular dialogue and we're now very much looking forward to reclinching that with them.
The other point is obviously that out of that it will be a lowering of the beta of Greece as a country, which coupled with the fresh wave of investor-friendly policies that are going to be put forward by the government, we do expect that the investor-led growth thesis for Greece is going to be validated.
Golub Iuliana
Very helpful. Thank you for your comments.
Operator
Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to management for any closing comments. Thank you.
Vassilios Psaltis
Well, thank you so much that you had followed up on this call today, in particularly to those that interrupted their vacations to do so. And we would very much want to welcome you on our nine-month call in a few months' time. Thank you very much.
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Alpha Services and Holdings S.A. (ALBKY) Q2 2023 Earnings Call Transcript