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

Hello, everyone, and thank you for joining the presentation of preliminary financial results for Q4 2022 and full year 2022. I'm Maciej Krywoniuk, responsible for Strategy and Investor Relations in the bank. The presentation that we will be sharing with you today is available on our website, so you can find it under Investor Relations section. And we've got today with us Natalia Bozek, the Chief Financial Officer of the bank. So I will hand over the floor to Natalia in a second, and we are inviting you to the Q&A session following the presentation. So Natalia, I hand over to you. Thank you.

Thank you very much. Good day to everyone. Thank you so much for joining us. It's a very good day for us. It's disclosed in our preliminary financial results for the fourth quarter. But at the same time, it is just a mark of the overall 2022, which appears to be a great year for Bank Handlowy. When we look at the summer in a nutshell, basically, the bank recorded [indiscernible] profit of PLN 1.5 billion. which was primarily driven by the growth in revenues, 55% year-over-year, resulting from both customer business and preliminarily our value proposition, which we have for our strategic segment, but also from the highest interest rate environment and the repositioning of our balance sheet, which resulted in a very good performance of our professional markets. Together with the controlled expense environment, our operating margin increased over 100% year-over-year. And basically, when I look at the retail, which is at the very high level of 24% above the cost of capital is clearly above the level of inflation. We were focused during the 2022 in a number of actions among which was one. There was one important topic related to the executing green asset goal. And basically, we realized 80% of this goal for the 3 years, and that was -- that is a very good indication of how we are informing the ESG strategy. And also, we executed the growth in -- of the asset portfolio in a commercial banking segment, which is one of our strategic client segments. When we look at the client activity, clearly, there was a visible progress made in consumer business. And so when we look at the number of Citigold Private Clients, it increased substantially year-over-year followed by a growth in deposit volumes. And also, when we look at customer effects, it's a great achievement because we've been actually disclosing to the market on a quarterly basis that our FX revenues are reaching very high levels. Yet, every single quarter it seems like we are beating that, achieving 30% growth in FX volumes year-over-year. And at the same time [indiscernible]. That was in a nutshell the summary of the 2022, but actually, let's focus on the fourth quarter and see some trends whether they have been presenting the trend, which we've already observed or anything special work highlighting happened in the fourth quarter. In a nutshell, I would say that the fourth quarter was a continuation of the strategy which the bank started executing some time ago and which proved to be very effective. On the one hand, there was a commitment given to the improving profitability of the Consumer business and maintaining value of the business. And that was clearly visible in the space of growing the revenue in the consumer business space, that was not only executed in line of the high interest rate environment, which was reflected in the unsecured assets, but also it was driven by the growth of our liabilities, especially in the wealth management proposition. When we look at the private banking, as I've mentioned, clearly a very significant increase of the clients and some pickup already visible in terms of the domestic transaction volume on the credit card business. So the second important product within the Consumer Business space. Institutional Banking is clearly an execution of the strategy which bank decided to implement since the beginning of 2022, and that was very much in line with growing volumes on the small and medium enterprises, so called Commercial Banking segment. It was a strategy of maximizing net interest margin on the back of the [indiscernible] of the bank's liquidity. And that, obviously, speaking about liquidity, the liquidity improved significantly. Currently at the year-end loans-to-deposit ratio was on the level of 43%, which is very much visible by the growth of deposit of 14% year-over-year with the overall growth being large by 1%. The financial performance of the fourth quarter was basically had some record. Clearly, the revenue for the quarter was the highest in 2022, exceeding PLN 1 billion and the net profit on the level of PLN 479 million, which is basically the function of pretty well-controlled expense despite the high inflation and some moderate growth in the cost of credit. When we talk about the business activity, I would say that the business basically, as mentioned, executed quite a few transactions. Some of them were very much in the area of our green assets growth. Some of them were very much related to strategic areas of our business. And I happen to ask to be also awarded for the product, which we basically offer to our clients in the category of working capital award for the best use of supply chain finance. When I thought -- when we talk about the volumes, briefly, actually, that's clearly visible that the institutional banking is doing very well in many fronts. The growth of the deposits is visible year-on-year, quite substantial growth, slightly below the sector. We basically grew our deposit in the ICT business by 4%. But actually, in some areas, the dynamics year-over-year demands were extremely high, like in the commercial banking, 32% or within the space of our multinationals 16%. The loan volumes also in the core strategic segments were quite substantial, 18% in the commercial banking and the same level of growth visible in our multinationals, while the corporate clients, given the postponement of some investment, so a lower need for financing at this point in time. Transactional volumes, I would say, are looking quite promising. In terms of the FX volumes, the ICT volumes saw some decline in growth year-on-year. But at the same time, the bank realized higher revenues on the better margins on these volumes. Transactional banking is quite a good story in terms of the corporate part and maintaining quite a high number of transborder and cross-border money transfers. Consumer business, the volumes look I would say -- it's not a surprise. I must say when we look at the consumer business that loan volume is being affected by the high interest rate environment. And with the current interest rate level that is lack of appetite or at the same time ability in terms of the customer credit partners to take new loans volumes. So basically, the appetite for loans in both unsecured and mortgages has decreased. And basically, the year-over-year dynamics are quite visible, 14% drop in asset of lending and the mortgage loans, which were always our driving product, growing products at this point in time also see challenges in terms of the volumes. When we look at deposits, deposit volumes are doing just great. Overall, on the year-on-year level, it is 6% growth which is above the sector. It is very much driven by our value proposition to the wealth management proposition to our Citigold -- CPC clients. What is visible is visible as a switch between time deposits and current account balances, which is also a significant sign of the current sentiment of our wealthy clients. And given the equity market and sentiment towards investment and insurance products, the deposit -- time deposits with this level of interest rate environment are more favorable from the client perspective. Transactional volumes, they look quite promising. When I look at FX volumes in consumer business, significantly increase year-over-year. And what is really worth highlighting is that actually, the technology solution the bank implemented some time ago is basically extremely successful. 73% of our transactions are being processed via electronic -- online via Citi Kantor. In terms of the credit cards, basically, we see both actually -- value of the transaction increasing in terms of the foreign transaction as well as domestic one. So that is a sort of a pickup in the trend, which we currently see in the consumer business. [indiscernible] just a reflection on the page #9, the reflection of our commitment to corporate social responsibility. And this is just to highlight that throughout the year, which appear to be extremely difficult one, given the market developments. Bank focused on maintaining its promise to society, helping Ukraine, providing a lot of educational activities and boosting online sales, and also supporting women from both Poland and Ukraine in developing their professional career. When we look at the numbers, Page #11, talking about revenues. Clearly, the fourth quarter was a great quarter, over PLN 1 billion in revenues and the significant growth which we see in both legs of our business, not only quarter-on-quarter but also year-on-year. When we look at the institutional banking, 34% growth compared to the prior quarter is a result of the repositioning which the bank started doing at the beginning of last year, investing liquidity into debt securities and placing them in the financial instruments, which are delivering the best outcome of two, maximizing net interest income and at the same time, protecting the value of our capital. Consumer business is reflecting the growth quarter-on-quarter, even excluding the impact of credit holidays, which were recorded in the third quarter. The fourth quarter is growing 12%, and this is on the back of the liquidity and on the back of the increased margins on the unsecured lending. The story about the institutional banking and the client revenue is very promising. It still has a very high double-digit growth, despite the fact that this is slightly lower compared to the second and third quarter, which we saw this year. The reason of that is very much driven by fees and commissions, which we saw higher in the space of episodic deals, which were still with us in the beginning of last year. The primary driver of our year-on-year taxes in terms of the growth of the client revenue is very much interest income on the back of the asset growth, high transactional volumes in terms of the FX, increasing our revenue 13% year-over-year, and at the same time the challenge which we see in terms of the net fees and commission income on the back of lack episodic deals. Net interest income. The biggest contributor to the growth in revenues it's a good story in both legs of the business. Consumable business is growing despite the -- or is growing more than we -- so unsecured lending and the liquidity, which we generate in the consumer business is giving higher revenues, offsetting the increase of the cost of interest, which bank is finding on the back of the deposits and the product mix. Currently, as we've mentioned a couple of slides ago, there is a switch between from current accounts to time deposits in the consumer business space. And that is actually a value proposition which also the bank maintains towards the wealthy clients in the lack of sentiment or appetite for investing into investment and insurance products. The net interest margin has increased substantially, reaching 584 basis points in the fourth quarter. And that is very much driven by the debt securities, which is clearly visible on the bottom right side of the slide, where we're representing the change in the liquidity over quarters and the change in the debt securities for the last 5 quarters. Net fees and commissions, I would say, feels like they are under pressure. When we look at the absolute numbers, year-over-year the fees and commissions declined 17%. However, we see some pickup in the fees and commissions quarter-on-quarter. That is, however, not necessarily visible equally in the both leg of the business. While the ICG business is delivering very well on fees and commissions despite challenges on the brokerage side, the loans, custody, and transactional banking is doing great, quarter-on-quarter. And some of our products are doing very well, like transactional annuity business is doing also year-over-year. For the consumer business, the story is more like mixed. On the one hand, we have lower fees and commissions as a result of investment and insurance product, which basically are accounting for a significant portion in the total fees and commission share. But on the other hand side, we see the decline in fees and commissions on the banking accounts and credit cards, which is a sort of a sign of the specific interest rate environment we are living in at this point in time. For the consumer business, especially the high interest rate environment, is basically unfavorable factor for the clients to pay more on the fees and commission front as there is a certain appetite for the consumers, so pay for the relationship with the banking. So naturally, in the high interest rate environment, fees and commissions are basically under pressure. Treasury. I just mentioned that we've successfully executed the strategy, which we had over the last couple of quarters of repositioning our balance sheet structure, making sure that we can optimize net interest income, and at the same time, improve revaluation result from the IFRS portfolio protecting the capital. So as a result of that change, which we've managed to implement in terms of the debt securities as well as taking some losses in the third quarter of the last year while repositioning our portfolio. Basically, we improved our capital -- our valuation, mark-to-market valuation on [indiscernible] portfolio by 27%, and at the same time, we substantially increased interest income coming from that business line. The other part of the treasury activity related to the FX is a great story as I already mentioned, that despite the fact that we reached the current high levels of transactional volumes and revenues coming from FX, we continue to build every single quarter the revenue generated from that business line. Last quarter, we saw a little bit of the slowdown in terms of this growth, but this growth was still visible by 1% compared to the third quarter of 2022. Treasury results overall, including the professional markets and customer life is very much a success story, increasing by 63% year-over-year. Expenses, what I would say is it's a very good story. Although we see some growth in the areas which are basically associated with the inflation or revenue generation. PLN 316 million for the fourth quarter and very efficient level of expenses reaching the cost-to-income level of 30% is a story of the growth in staff expenses quarter-on-quarter, year-over-year is quite a justified solution driven by [indiscernible] . But it might feel like a surprise that quarter-on-quarter expenses in staff expense area are growing by 20%. The growth is very much correlated with one-offs, positive one-offs taken in the third quarter related to the holiday accrual release, which was the case in the third quarter, and therefore it's a driver for the increase in the fourth quarter and also is a driver of the incentive -- higher accruals for incentive compensation, driven by the growth of revenues. Administrative expenses, they are growing quarter-on-quarter primarily reflecting the cost of [indiscernible] modeling. We have just started a renovation of our headquarters. So some expenses which were not attributed to depreciation has been already taken in the fourth quarter. And when we look at the year-over-year comparison, administrative expenses do reflect investment in our IT costs, they do reflect higher marketing expenses, driven by the higher inflation and therefore distribution expenses are higher. And basically, they also year-over-year in terms of the full year reflect the growth in the regulatory expenses, although in the fourth quarter, we released some of the costs to our bank guarantee fund on the back of the adjusted expectation coming from the regulator in terms of the funds to be -- contribution to be paid. When we look at the cost of risk, this is an area which could trigger potential concerns when we look at the cost of risk in terms of nominal value, but more importantly, in terms of the basis points. When I recall the conversation which we have had over the last quarter, the bank's commitments presented by me was the declaration of the cost of risk in the range of up to 50 basis points. When we look at the last 2 quarters, it feels like we have exceeded that bank's commitment or expectation. What I wanted to say is that actually the last 2 quarters were clearly in the quarter of reflecting changes in the macroeconomic environment and assumptions, primarily driven by the change of the GDP, which in 2022 was close to 5% now is estimated to be less than 1%. And it was driven by the lower expected investment as well as high inflation. So that macroeconomic assumptions have been reflected in the models to reflect that statistical provision or macroeconomic provisions for the future. So basically, the growth of the cost of risk is more like one-off or episodic reflecting the potential changes in the portfolio, given the macroeconomic scenario rather than worsening of the portfolio. And that story is basically visible in both legs of our business, Institutional Banking and Consumer Business. The Consumer Business also saw the macroeconomic statistical provision for the portfolio, driven preliminary by inflation and inability of the customers to pay their debts. But as mentioned, this is more like the statistical with no clear signs of worsening of the client portfolio at this stage. With that, basically we are coming to the summary of the financial results and maybe just to reflect on a couple of items. The revenue growth is a great story. Clearly, it's visible that the key driver of the growth is net interest income. When we look at the expenses, 11% on the year -- on the full year basis, given the inflation, given some strategic investments which we have assumed for both institutional clients and some, especially in the cyberspace, but also in the space of the transactional volumes in the Consumer Business we decided to invest in are also gets reflected here, higher regulatory expenses. It is basically a very good target. If we think about that additional charges which were posted on the bank, 11% growth, I would consider as quite justifiable growth given the current market environment and pretty good management in terms of the cost-to-income ratio. When we look at the impairment losses, clearly, for the full year, they are higher than we saw in the last year. But clearly, the last year was a level of cost of risk impacted by the release of COVID or pandemic provisions. When we look at net profit over PLN 1.5 billion for the full year, driving variable return on equity, an improvement of assets and very stable and safe TCR ratio above the regulatory minimum of 2022. And with that, actually, I would pause here. Thank you for being with me for the last 30 minutes.

Thank you, Natalia. And now it's time to open up for questions. [Operator Instructions] So I guess if there are no questions, you can always reach out to us either by phone or by e-mail. So from my side, thank you very much for joining today. Natalia, do you want to say a few words at the end?

What I wanted to say is actually thank you very much. It was a great year for us. So hopefully the next year will not be worse. So with that, I actually thank you so much and have a good day.

Thank you very much, and have a good day.