Bank Handlowy w Warszawie S.A. (BHW) Earnings Call Transcript & Summary

Okay. It's 2:30 so I think we can start. Hello, everyone. Good afternoon to you. Welcome to the preliminary consolidated financial results presentation for Bank Handlowy w Warszawie S.A. Today, we will be also sharing with you the strategy for 2022 and 2024. I guess the agenda for today is we'll start with the consolidated results, following -- followed by the Q&A session. Then we will move to the strategic presentation, which will also be followed by the Q&A. Both presentations have been shared with you by Adam Piotrak, and they are available at our website under the Investor Relations tab. And today, we have got with us Natalia Bozek, the CFO of the bank. So Natalia, the floor is yours. Thank you.

Thank you very much, and very good day to each and everyone. It's a pleasure to announce the preliminary financial results for the fourth quarter as well as for the full year because, indeed, the fourth quarter was a very solid one, putting a solid mark for the overall performance of 2021. In -- just in a few words, definitely, the level of the growth of the net income in the fourth quarter doubled the level which we saw in the third quarter, being the total net profit of PLN 186 million for the fourth quarter. That was definitely boosted by interest rate increase which we saw in the fourth quarter, which positively impacted the interest revenue on both ICG and GCB segment, but also it was driven by the client activity as well as treasury performance. Total revenues at the level of PLN 572 million are a significant increase of 25% quarter-on-quarter. And basically, what is key here to mention, not to read whatever is already visible on the page, is just to reflect that we saw a very strong momentum on our fees and commission income, which increased 7% quarter-on-quarter. And also, we saw a continuation of our very good results in terms of the volumes and customer FX revenues, which increased 13% revenue-wise quarter-on-quarter. We continue to have a very good story on expenses. Although they increased 4% quarter-on-quarter, they are -- the growth is healthy. And the majority of the growth in our expense base is driven by the growth of our revenues. Cost of risk, a very strong performance. I would say that it's very fair to mention that it's not only reflecting the strong and healthy quality of our portfolio -- credit portfolio, but more than that, it does not reflect any additional release of the provision which we've taken in the past for COVID-related matters. So that performance of our net credit losses is purely driven by the very good quality of our credit portfolio as well as client behavior on the consumer business side. A couple of remarks with -- when it comes to the 2 segments of our business. Definitely, there is a huge pride in observing how our institutional banking developed this quarter. The total revenue increased by 24% quarter-on-quarter, and it was driven by interest increase in the space of client assets as well as our treasury performance with growth of the volumes and the growth of the yields on the investment securities. But at the same time, I think it was -- it is very fair to mention that it was another quarter -- another strong quarter in terms of strategic transactions. We basically had the pleasure to announce every single quarter a sort of episodic transaction. So in a sense, it's a continuation of our, I would say, in that space, business-as-usual performance in relation of strong investment banking activity. And this quarter, basically, the bank took part in IPO arrangement valued at PLN 1.1 billion, which is really important to notice. Long awaited, the increase of assets volume. It's fair to say that actually they increased quarter-on-quarter. And this was, to some extent, a very, I mean, pleased (sic) [ pleasant ] surprise to be seen because we've expected that trend to start somehow later in this year while it already started being visible -- the appetite for financing started to be visible in the fourth quarter. And our net loan volume increased by 4%, largely in the space of the ICG business. And in some areas of the Institutional Client Group, the increase was double digit quarter-on-quarter and in some, double-digit year-on-year, which is, again, a very positive trademark. A positive -- a very positive story of proving our strong solutions provided within the cash management area. Citi Handlowy was ranked #1 in Euromoney ranking for the best service within the cash management space. So this is the space which is extremely important from the perspective of transactional volumes, which we are currently observing with the client. But more importantly, it gives us a significant strong base for the future growth, which is expected in our 3-year strategy, as it will be discussed in the second part of our discussion. Consumer Banking, I would say, is a very interesting evolution as well because, basically, the total revenues increased 27% quarter-on-quarter. But actually, it's fair to comment that it includes a one-off transaction related to the equity valuation. And excluding that, the business grew by 15% quarter-on-quarter in the space of revenues, boosted by the positive impact on the interest rate increase. We are continuously pleased to see the increase of our deposit volume at 4% quarter-on-quarter as they represent transactional accounts and growth of accounts in the private banking. And it's fair to say that actually our CPC clients increased by 23% year-over-year. So I would say that actually in all of the consumer business, path to profitability is proved to be delivered. Just a couple of points -- not to go through all page by page, but actually just a couple of points and as a reflection. Page #4, when we talk about the institutional banking, fair to say that, as I've mentioned, the growth of the asset already started. You can clearly see some selected transactions with our clients where we were either global coordinator or underwriter. And we were able to finance -- to arrange financing of approximately PLN 2 billion for our clients in the second quarter. And it's fair to mention that some of these assets are so-called green. They support green asset, they support green investments in the space of ESG. In terms of the Page #5, I would -- basically would wish to draw your attention on a couple of items. One area of our pride is basically the loan volume increase in the CCB space, so the commercial banking, which is growing 13% year-over-year. And this is extremely important from the perspective of the strategic focus, which we have dedicated to the CCB, assuming that this will be the area of our business -- the segment of our business where we can see -- where we can gain the market share. When we look at the global clients and corporate clients, the dynamic on the year-on-year decreased due to some repayments of a couple of loans. But we can see, at the same time, a very positive trend, increasing the volume of the assets in global client and corporate segment quarter-on-quarter. And within our global clients, which is our strength, we grew assets by 12%. Deposit volume, they decreased. They decreased quarter-on-quarter and year-over-year, but actually, they decreased in the 2 areas of our client dimension. One is public sector, and the second one is the corporate clients. And I would say that within the corporate clients, financial institutions are the ones which are being also reflected here. What I would say is that it's -- given our strong liquidity -- very high liquidity, that decline is in line with our best -- or the most efficient way of using the balance sheet given the current interest rate environment and given that some of the clients might have an appetite for repricing of their deposit base. Looking at the consumer volumes, just a few comments here. What is clearly visible is that our unsecured loans are lower compared to the prior year level. And also, we recorded a decline compared to the second quarter. That's very much in the space of our cash loans business as well as lower credit card volumes. Some of them are driven with the specific of this fourth quarter. Definitely, the fourth quarter for the credit card business is not the best one from the utilization. Usually, the third quarter is better one. It's called a holiday period so we do see more utilization of our credit cards. The fourth quarter is not like that. And this has a reflection in both volumes as well as in fees and commissions. Now what is really encouraging is the growth of our mortgage loans, which grew 9% year-over-year. Just 2 comments from the Slide #7, which is actually pretty well expressing the 2021. First and foremost is that actually our net profit for the 2021 on the level of PLN 747 million is -- I mean it's the highest from the last 7 years. But what is pretty important with the current capital position which we have, with a strong and very high total capital ratio above 20%, it gives a solid ground for returning this profit to shareholders if only we get the final confirmation from our regulator that we are allowed to do that. Return on equity for 2021 is above the cost of capital, reaching the level of 10.5%. And what I'll only draw your attention to is that actually, the 16% growth in revenues for the full year is basically the reflection of definitely increase in the interest rate, which helps, but at the same time, it is a reflection of the very strong performance of our treasury activity throughout the year with a special attention for the first quarter of 2021 when we realized a significant gain. But at the same time, it is also a solid proof of our client activity, which stayed with us throughout the year, boosting our fees and commissions as well as FX volumes. Moving on to the consolidated financial results. When we look at the total revenue, clearly, what I would like to present is that -- first is that actually the consumer business is growing quarter-on-quarter and year-on-year excluding one-offs which we've taken in the fourth quarter, which is a very good prognostic for the future and is a very good prognostic proving that we are focused on delivering profitability. And we are focused -- given the strategic decision of our strategic shareholder, we are focused on protecting the value of this segment of the business. Institutional Banking, which accounts for 75% of our revenues in the client -- or the bank revenues, is proving to be very solid and very strong. It's the next consecutive quarter when we can see the significant quarter-on-quarter growth compared to the historical periods. So fourth quarter of 2021, we saw 23% of our client revenue growth compared to the fourth quarter of 2020, and this is the fifth month -- quarter on the row with a very strong client revenue increase. That is really boosted by a couple of items. It's actually reflecting the core competitors (sic) [ competencies ] which we have in the ICG business when we speak to the automation and digital solution which we provide in the space of FX transactions. Basically, we saw the 32% year-on-year growth in FX volumes. And what is really important to say is that more than half of the transaction volumes are being done through that digital solution which we developed for our clients, so-called Citi Kantor. The other thing which is really important to mention is that we also recorded 11% year-on-year net fee and commission income. And this growth is not only supported through the episodic transaction but also transactional business in the space of cash management, our custody business as well as brokerage house. Net interest income, basically, 2 fair comments to say is actually -- one is in relation of our increase of interest income in the ICG business, which is reflecting the growth of the volume on the client side, which we spoke about, but also increase of the margin driven by the interest rate environment. And at the same time, we also increased our interest income in the space of the professional market, driven by the higher yields as well as higher volume as we basically purchased a short-term treasury bills which proved to be quite attractive in terms of the yield. When we look at net interest margin, it improved. Definitely, it's very keen to see that almost 50 basis points of improvement in the client interest margin is largely driven by net interest income increase in the commercial banking space, again, driven by volume and strength. Fees and commission, not to repeat what was already mentioned but fair to say that 7% growth quarter-on-quarter is indeed a reflection of constant growth throughout the year, 7% year-on-year growth with it. And in some spaces, it's a quite attractive growth. Institutional Banking itself in the fourth quarter recorded 17% growth, boosted by our brokerage activity, boosted by our transactional banking and at the same time, reflecting episodic transaction in the investment banking space. Consumer business is reflecting a decline in fees and commissions in the fourth quarter. It is clearly visible when we compare the fourth quarter to the first quarter, but also when we look at this from the perspective of year-on-year dynamics, and there are 2 reasons for that. Basically, the third quarter is really boosted by transactional volumes driven by holiday periods. Our clients travel a lot and we do have a significant number of FX fees. Fourth quarter is definitely more like quiet in that space. We observed 33% decline in the transactional volume related to the foreign trade on our credit card. And at the same time, we can see that our year-over-year activity in the fees and commission space decreased by 2%, largely driven by the fact that actually our customer assets declined. And we have suffered with the acquisition level of the cash loan volumes driven by pandemic, which we still saw significant in the first half of 2021. Treasury itself, Page #12, is -- just a couple of remarks of the reflection. Very positive story on our customer FX, which -- again, 13% growth, proving that our clients do recognize solutions which we provided to them. And this is supported by the 32% growth in the volumes. When we look at that component, it's definitely a significant component of the growth in that space. It's a significant positive impact in overall trading and client FX results because, actually, that area of activity accounts for 75% of overall trading results. So FX -- customer FX volumes and spread are very positive. And December itself, which is pretty fair to mention, was the best month since 2015. So it only shows the level of interaction which we have with our clients and the level of utilization of the capabilities which we deployed to our employees in terms of the foreign currency exchange. Expenses, just one remark on the slide. The growth quarter-on-quarter is -- at the same time year-on-year, is basically reflecting a positive impact of our increase in the staff expenses space. There are 2 reasons for that. One is in relation to our change in the accrual for incentive compensation as 2021 was a very good year from the perspective of volumes and revenue growth. At the same time, the incentive compensation piece related to the phantom shares also increased as the stock price of Bank Handlowy increased significantly over 2021. We got a reflection in the valuation of incentive compensation portion for that piece of incentives. We continue to find savings, however, just to make sure that we are in a position to improve our cost-to-income ratio. And it's a pleasure to announce that fourth quarter was a very good quarter with a cost-to-income ratio on the level of 50%, 3 percentage points below the fourth quarter of 2020. Cost of risk. Actually, I basically said a little bit -- or elaborated a little bit on the cost of risk in the beginning. What I wanted to draw your attention towards the following is 2 points. One is in relation to the COVID provision, which we still have on reserve -- unresolved on the level of PLN 43 million with a potential upside in the 2022. So the very low cost of risk in the fourth quarter is basically proving a very solid and strong performance of our clients and at the same time, very healthy credit portfolio which we have, although we already increased the level of our assets in the consumer business space. And the second point which I wanted to make is in relation to some, I would say, strange, if you can call it -- if you wish to call it that way, strange trend observed in the coverage ratio and NPL ratio. So while in the coverage ratio, basically, the banking sector remains stable throughout 2 quarters, basically, Bank Handlowy saw the increase. But this increase is basically sort of a presentation change which the bank decided to adopt at the end of this year, increasing both the value of the asset as well as the value of our provisions by interest -- contractual interest which were accrued. And that impact is just a presentational impact which doesn't change the net asset value in the balance sheet but actually has a onetime negative impact on the presentation of coverage ratio and NPL ratio. Excluding the impact of that presentation, the NPL ratio would be at the level of 3.4%. And at the same time, we would record the same trend which is observed in the banking sector, meaning declining or decreasing NPL ratio. And the coverage ratio would stay at the level of 75%, which will be very much in line with trend on the market. What is really important to notice is that irrespective of that presentational change, the loan portfolio quality is significantly better compared to the market level. And with that actually, I would pause because the last page is the summary of the capital group financial results, and I believe that we've discussed all of that during the previous slide. So maybe I will just pause, leaving the space for asking any questions. If there are no questions, maybe I will just spend a couple of minutes reflecting on our strategy, which the bank adopted in December 2021, for the next 3 years. And I mean I believe that you have the presentation and I believe that you can clearly see the details, so maybe not to go clearly page by page. Let me just maybe put a couple of notes which are important, from our perspective, to notice. And for the sake of time, we will just keep the flow of the presentation side by side. But obviously, if there's anything in the presentation which you would wish to explore more, please kindly ask a question. Do not hesitate. Just ask a question and I will be happy to answer it. But what I would say is actually that the strategy which we adopted includes the priorities for 2 segments of our business, so ICG business as well as consumer business. Obviously, the focus and the priorities will be different for the 2 legs of our business given the Citi decision to exit consumer banking in 14 countries. So definitely, that is reflected in our strategy, saying -- or indicating that if we learn more about that transaction and how this decision evolves, we will definitely have to adopt or reflect these changes in the strategy. But for the time being, not having -- we're still in the process of not having a large information on the progress. What is extremely important was to focus on protecting the value of the business and possibly maximizing the value for the potential investors. When it comes to the ICG business, there is a strong focus on the dynamic client growth. And this is clearly in the space where we believe we might get or achieve an increase of the market share. And clearly, our commercial banking and -- with a particular focus on the e-commerce and digital agenda is the 1 leg of our Institutional Banking where we believe will be the biggest growth in the next 3 years. Obviously, we are dedicated to ESG. And we are dedicated -- when we look at the strategic areas, we are dedicated to digital and clearly, Institutional Banking as it proves especially our focus on investment banking and the strength of our bankers in the Institutional Banking space, where, together with our Citi knowledge, Citi partners, we can clearly deliver the value for our clients, especially for those who want to be global, who want to go abroad and where we can provide the best digital solution as well as IPO transactions. Macroeconomic assumptions, I will not talk a lot but maybe one point of reflection. As you can clearly see from the right top -- right bottom side of the page, definitely, there is an optimism. Our strategy already includes an increase in interest rate environment, reaching the level of 225 basis points. The strategy was prepared in -- during the autumn in 2021, but actually, at this point in time, we can clearly see that the read of the market is that this rate may go even further, creating a very positive opportunity -- a very good opportunity, this is what I wanted to say, very a good opportunity for the revenue of the Bank Handlowy if they go beyond 225 basis points. I will not be exploring, if you allow me, on who we are and what are the key trends impacting Institutional Banking because, largely, it remained unchanged from the strategy which we had -- from the previous strategy of 2019-2021. But actually, one point to make is that definitely, we are seeing the trends related to sustainable economy, and we do see the trend of M&A, equity and debt capital market activity which is reflected in our strategy. If I can elaborate a bit on Page #7 in terms of the main initiatives. I would say that there are a few items how we want to achieve -- 2 items expressed on the page related to how we want to achieve that. And I think that one thing which is pretty interesting is definitely our focus on the client asset growth. And that will be definitely achieved not only from the perspective of the clients' needs for the financing but also from the perspective of how we want to deliver the product to the client. And that clearly will be supported by the credit process optimization, which is very much like the fast track, so changing the way of how we look at the processes in order to optimize the time to market delivery for our corporate clients. And also, we -- that will also positively impact the client experience. But more than that, obviously, we need sort of the revised credit policy, which is already assumed in our strategy. What is really important to mention is that all of that does not trigger a higher cost of risk as the strategy currently assumes that we will have approximately -- or to say that our cost of risk will be on the level of 40 basis points. And as we can see the current level of our cost of risk, it feels like there is a space for a revised credit policy which will address client needs in post-pandemic market environment, not significantly changing the appetite for risk. That will lead to the client acquisition. And also, one point to make is that we will still despite -- some of the investors or analysts which we had a pleasure to talk to today in the morning, despite of their view that probably it might happen that actually that the market will be -- it might be the last year of the significant investment banking activity and then there will be quiet years, looking from the read of the market and the needs of our clients, we still believe that there will be a space for a very -- to capture a very good momentum in our investment banking activity in the next 3 years horizon. Obviously, the dynamic of that might be slightly declining in the last year of our strategic assumptions, but clearly, 2022, 2023 are with us. And what is really important is that this investment banking opportunities are not materializing only in the space of our large corporate clients but also we see the increase in appetite for that. And we have proof of transactions already being reported that this investment banking activity is also sort of a new financing for Commercial Banking space. Page #10, just grabbing the attention for path to profitability on the consumer business. And it's just reflecting the strategic decision of our shareholder to exit the consumer business space but is focusing on initiatives which will maximize and protect, to the large extent, value of the business. And this is very much in the line of our installment -- growth of volume in installments, focusing on affluent clients where we do have a track record of a very good progress in that space. And despite strategic decision, CPC clients' wealth management volumes stayed with us or even more, they increased. In the CPC clients, we saw the year-on-year growth of client by 23%. And also, we saw 9% growth in our deposit volumes. So this is only proving that that's the area of the business where we should continue and clearly focus. And also, we will be focusing on credit card acquisitions. However, that will be done in a different way than how we wanted to -- or we used to do it in the past, in a way that will not involve significant investments and will not involve any partnership. It will be done through the maximization of our in-house capabilities to acquire more clients and retain clients, increasing their satisfaction. Page #11, basically, is around people who remain to be extremely important in delivering the strategy. And that's where -- the focus on people will be first and foremost to allow them to be engaged -- more engaged, boosting the engagement. It will be very much driven by the change of the culture, where we all will feel pride from delivering the strategy, improving the satisfaction and quality of the services delivered to our clients. But also, it means that we will be focusing on diversity and mobility, which will boost the development program for the employees and, at the same time, increase engagement. And as a summary note, Page #13, key financial goals, what this all means from the financial standpoint. So in the next 3-year horizon, the strategy assumes that total revenue growth on average by 6%. But that is, as I've mentioned, based on the assumption that our interest rate environment is on the level of 225 basis points, which we all believe, at this point in time, it will be higher. The customer revenue growth, so this one is really boosted by solutions to our clients as well as to the increasing market share and acquisition of the client. It's expected to grow 8% in the Institutional Banking and 12% in the Consumer Banking. So in the consumer bank, it is really about reversing the declining trend. The customer growth (sic) [ customer assets growth ] is 6%. And what is really important to mention is just our dedication to the ESG, and the 6% includes PLN 1 billion of the green assets, which are very much defined by the European Union definition. We will continue our dividend story. And our intention is to return to our shareholders not less than 75% of the dividend and at the same time, achieve the return on equity above 12% and return on assets around 140 basis points. We've already achieved 120 basis points return on assets in the fourth quarter this year. And obviously, with all of that, we do want to focus on our efficiency ratio improvement below or at 50%, which will also be very much driven by tight control on the expenses. With that actually -- that's all what I wanted to highlight in terms of the strategic focus for the next 3 years. So I know that I have extended the time a little bit. But I would like to open the room for asking any questions. So the floor is yours, our dear analysts and investors. Maciej, shall we assume that there are no questions? Nothing from the call?

Yes. I guess there are no questions on the call. We haven't as well received any questions by e-mail. So again, if you would like to find out more, just let us know now. It seems everything is clear and transparent. So in case you would like more information, reach out to Investor Relations. We've got the contact details. So from my side, thank you very much for today. Natalia, do you want to say a few words at the end?

I just wanted to say that this is a pleasure -- it was a pleasure. It was a pleasure to present these financials. Definitely, it was a very solid quarter for the bank. I wouldn't say surprising, but to some extent, some trends positively and very nicely surprised us in the space of the customer assets growth and in the space of the fees and commissions, not even mentioning the positive impact on the interest rate, which we already saw in the fourth quarter, with the hope to see a bit more in the coming quarters. So with that, actually, I would like to say thank you to all of you, and wish you a very good rest of the day.

Thank you very much, Natalia, and thank you, everyone.

Thank you.