Bank Millennium S.A. (MIL) Earnings Call Transcript & Summary

Good afternoon, everyone. We're happy to be back. We're back as promised with this time of release or presentation of our new midterm strategy called Bank Millennium Inspired by People. The performance of today show you obviously know very well, but for those who are new perhaps, and for [ regulatory ] reasons, I would like to present Mr. Joao Bras Jorge, who is our Chairman of the Board and CEO, and he will be hosting or presenting most of the presentation. With us, we also have Mr. Fernando Bicho, Deputy Chairman of the Board and CFO. Before I hand over, I have to play a role of a bad cop, so I have to basically flag the fact that there is a disclaimer in our presentation and it's an inherent part of the presentation and of our strategy, and whatever we say today and whatever is written there should be read within the context of the disclaimer. Thank you very much. Joao, over to you.

Thank you. Good morning or good afternoon, everybody. It's my pleasure to present the strategy for the bank for the years of 2022-2024. Maybe we can go directly to Page 5. And it's -- Millennium is known and seen for years as having clients in the center of our thinking, our working, our solutions and is with them that we are always working together what we are going to do. And now we went a little bit further and we complement these with internal view and insights. And the strategy that we present, it's truly inspired mainly by our people. And this is interesting because also in the format that you see always in the strategy, we do market research, we do benchmark. We see the new trends in terms of technology. But this time, the internal debate and the internal view was the source of the big part of the inspiration of the strategy. The pillars that we are presenting for the strategy are, from one side, the top quality and instant offering that we prevent to individual clients; our aim to become the first choice in new micro businesses; to have the role of strategic partner supporting the corporate development, all of that supported by innovative solutions and the top notch of customer experience, with a mobile-first approach. We aim to be a sustainable organization on the climate neutrality path and to maintain our position as a great place to work for our people and also for the acquisition of top talents. In Slide 6, we can see even an illustration of this inspiration by our people. And I could not say it better about these new trends as Piotr, a colleague of us, that joined Millennium through the Eurobank acquisition and that's the manager in terms of customer experience team. And as he says very well, "With more remote channels to serve. It is extremely important to find the balance between humanity and technology. Go online, but stay human." And this is exactly what we are doing. And in Slide 7, we present in brief our target in this strategy. From one side, we plan to continue to increase numbers of active clients with a target to reach 3 million customers in 2024, driven by keeping the top quality and by being a market leader in terms of NPS, continue to grow in our scale with 30% growth in assets, maintaining this efficiency and profitability that we want to do, with the aim to achieve the -- or to move from 40% cost to income to 37% cost to income. Of course, this cost to income, net profit and return on equity without the Swiss francs' costs. In terms of profitability, to move from PLN 1 billion of net profit to PLN 2 billion in net profit in 2034. In terms of return on equity, to move from 9.5% to 14% in 2024. In digitalization terms, to go to 90% of digital customers in the 3 million customers and 80% of digital sales. In risk terms, to have below 4.7% of nonperforming loans. To have in mortgage, below 10% of FX mortgage as a percentage of solo gross loans. And in terms of people, to maintain the position of top employer in Poland. If we go to Page 9, we can see the macroeconomic outlook that we are forecasting for these 3 years of this new cycle of strategy. We are seeing a strong positive GDP growth forecast for Poland, and not only comparing to Europe but also Central Eastern Europe, but also an environment with a low unemployment and very high disposable income. All of that, combined also with a very strong programs that help the development of companies, the green migration, and this carbonization of the economy. Page 10. We see these double engines that help the banking business in Poland because it's an environment that not only the GDP is growing, as well as there is a catch-up in terms of penetration of the banking products. And as we can see from mortgage to investments to corporate lending, we still have a potential of doubling the business comparing to the GDP if we use as a benchmark, the Western Europe levels. From the right side, we can see our forecast for the net banking income of all the sector, and we see a potential growth of more than 40%. In Page 11, we see that the digitalization of our business have been supporting our cost efficiency. As you can see, we compare well with our peers even in the case of bigger peers and as all of you has know, bigger banks means also an easier way of being more efficiency due to dilution of costs. And on the right, we can see the very strong trend that we are having in terms of digitalization of our customer base and also the business. If we go to Page 12, we can see that even during COVID, we keep building conditions for creating this efficiency. And there is Weronika, a manager in our administration and infrastructure department says, "Well, we took advantage of COVID times by speeding up the office space modernization in headquarters, providing space that support its hybrid work." And is also during this statement also, we explained how we are not only improving the conditions but by that also reducing the cost and being very efficient. In the Page 13, we explain how we as a digital innovators, also maintain this focus on quality and also the needs of the customers. Because during our way of being and during our exercises, we research and check the needs of the customers and understand these needs following by shape better customer experience and better emotions when banking. Also through technology and cybersecurity, allow us to support the digital transformation but keeping the customers' protection. And of course, we are helping to have the changing of the process by fully adjusting to digital and omnichannel all the transactions, but also the sales processes. In the right side, we can see we are keeping the very strong capacity to have customer services and a focus on quality by the high NPS that we have in the banking system. On Page 14, we see a definition done by Celina, our colleague in contact center that says that, "Working with clients is the essence of our bank. We treat each client individual. We want to address her/his needs and the expectations in a personalized way." And this capacity is exactly what helped us to leverage what we see in Page 15. In Page 15, on the left, we are presenting the dynamical changing that we are seeing in the banking business. 60% of the customers declared using digital channels for banks. The Generation Z, it's -- which is the digital native customers are entering the banking market. Quality and convenience are a top reason for selecting a bank. 17% of the customers are willing to pay more to retain sustainability. And personalization is the biggest impact in terms of bank recommendation. And the -- on right, we see also our capabilities as a top digital bank always distinguished, with the first place by Global Finance. And also how important is already the acquisition of Generation Z that is already bigger than 40% inside of our acquisition pools. And as we already doubled versus 2020, the -- not double, but increasing 70%, the growth of clients under 18 years old. How high is the NPS and our focus on quality and how distinguished we are in terms of RESPECT Index and WIG-ESG and also how 85% of our customers agree that proposed offers that they receive from our bank are suitable for them. And even in the digitalization of corporate that already 50% of our customers are signing credit agreements digitally. In Page 16, we present how successful we were in terms of strategically deploying of new 2 areas in our bank. In the previous cycle, we were already very strong in terms of customer acquisition, in terms of service quality and in terms of digital banking. And we were able to maintain these positions as we are saying, but also we were able to develop consumer loans and mortgage. In that time, we presented as a strategic initiatives to have these 2 capabilities, and we can see now that we move from 3.5% of market share in consumer loans new sales to 8.5%. And in terms of market share in new mortgages, we move from 5.7% to 12.2%. So the bank now was able already to have these 2 new engines of growth. In Page 18, we present the 2 areas of the bank that we need to focus because at the same time, we have, from one side, the main business of the bank with PLN 791 million of net profit in first 2 -- 3 quarters, and this is a very healthy and profitable business. But at the same time, we have a FX mortgage legacy book that is having a very bad impact in the bank. PLN 200 million, as legal costs, plus the negotiations and settlement costs, and PLN 1.4 billion of provisions for legal risks. And so addressing the FX legacy book in Page 19. We demonstrated that we have been focused in reducing the FX mortgage size. In 2021, the annualized reduction pace of FX mortgage portfolio in Swiss franc terms exceed 17%, while the weight of the portfolio is already close to 14%. And we are aiming and estimating that it will be 7%, 7.2% in 2024, which means that, meanwhile, we'll break 10% threshold. In Page 20, we see our strategy on the FX mortgage legacy book from one side to maintain a consultative approach, trying to reach settlement with the borrowers. And as we can see already in the second and third quarter, we already had more settlements than new lawsuits, lawsuits against the bank. Also maintaining the legal defense of the bank position, defending the validity of the agreements and protecting the bank in case of declaration of invalidity. And from the third point, a regular assessment and the update of the provisions from legal risks. And as you can see, the coverage of the bank is already bigger than the peers. The 3 targets that we have for this strategy is reduction of the share of the mortgage in Swiss francs in the total loans to below 10%; to maintain the pace of successful negotiations in the next 12 months; and the main financial impacts to be reflected by 2023. In Page 21, I think it's very well addressed by Grazyna that leads the team that is handling these negotiations that what we are doing in terms of settlements. "The project of negotiating mortgage loan settlements in the Swiss francs involves tens of thousands of contacts with the clients each month through all the available channels. These are often extremely long talks leading to finding the best solution. Currently, over 100 negotiators are in talks with our clients." If we go to Page 22, we can see just the 3 main topics or areas where we are putting our strategy in terms of retail is mortgage, cash loans and investments. In micro business is acquisition, improvement of the value proposition and the revamp of lending. And in corporate is reengineering of the credit process, utilizing EU funds and green financing and leveraging on digital solutions. In Page 23, we can see in terms of revenues what is our plans in terms of revenues for the total bank. Our goal is to increase in 50% of the total revenues of the bank from PLN 3.5 billion to PLN 5.2 billion. And with that, increase our share in terms of the capture of the total revenue pool of the banking system from 6% to 6.5%. In retail, we want to move from PLN 2.7 billion to PLN 4 billion, and this is a 50% increase. And this will put us in a market share of total revenues of retail banking business in Poland of 8.4%. In micro business, we want to increase 100% in the revenues that we are collecting from this segment from PLN 194 million to PLN 385 million. And in corporate, a 35% increase from PLN 591 million to PLN 802 million of revenues in the segment. During this period, we will also make a change in terms of our services. And there is, of course, a kind of a silent revolution in the services of banking at the moment. And as you can see in Page 24, this is very well described by our colleague, Barbara, that is the head of branch here in Warsaw. She says, "Every day at our branches, we introduced hundreds of our clients to the world of mobile banking. We help them to install our application, activate access to the Internet account and complete the first transactions." And this is exactly what is being done. It's very important to see, for example, in Page 25, that in the left, that 33% of the digital customers were enrolled to digital during COVID. So there is needs to have this capacity to understand the transformation, but also they have the branches to making the digitalization and the onboarding of our customers. Our goal, as it is shown in the Page 25 in the right, is that we will move from 80% of digital clients to more than 90%, maintaining the 99% of the transactions being done by digital. But moving from what is already a high level so from 27% to 67% of sales done in digital, to a level of in average to have 80% of our sales made in digital. If we go to Page 26. This is an illustration of the transformation in digital that we are having from a pure Internet for making simple transactions and the mobile app to see the balance of the account, to a situation that the major transaction and some of simple sales are done in the app, to a process that digital have a major role. And the banks are even using -- the mobile apps are even using to more things like banking, even to pay parks or to apply to the government to public support actions and another -- of other activities. In Page 27, our colleague, Ernest, is explaining how we are seeing this. And as he said, "We can see how the world and the customer expectations are changing. Today, our clients look for experiences, not products. For many of them, banks stands for the mobile app that they are using every day." In Page 28, we illustrate how we are also leveraging in the nonbanking activity with our goodie platform, a discount and sales platform that we are having. And that the highlight that I would say as well is that, as you can see, this year, the P&L breakeven point is reached, which is also always a very important milestone in this kind of innovative projects. Page 29 also demonstrate how we are trying to close the loop in terms of the e-commerce and leveraging the explosion of the e-commerce that we are seeing in Poland by having installment loans, partnership with major retails and building a payment gateway and through a sector solution developed by BLIK to enter in the buy now, pay later business. In Page 30, is just to highlight that we are keeping our words in terms of digitalization and in terms of personalization. Already in 2017, we were the first bank to bet on personalization. I'm sure that by being our clients, you know that we deliver it, and we you know it how we did it and how we are doing it. The only thing that I would like to highlight is the scale of the interactions that we are having at the moment. In 2018, in our mobile application, our interactions in a daily basis were 13 million of interactions. Today it is 130 million of interactions. So this shows the complexity, but also the need of the personalization that are needed to digital banking. Going now to the products. We have here in the Page 31, a statement from our colleague, Kata Kowalczyk, that is the head of Department of Mortgage Credit Decisions. That explains that, "For a client, the waiting time for a loan decision is, next to the price and the amount, the most important element of choosing the mortgage offer." And in Page 32, we are showing what we have been doing and how we are being successful in terms of mortgage. And this is exactly by understanding what was relevant in terms of the process of contracting a mortgage that we allow us to make all the improvements that make us to have the market share of, as it is expressed here, 12.2% in terms of new production and without compromising the risk and also without competing in pricing. Today, we are having, in terms of stock, already 9%, 9.3% of the market of mortgage in the zlotys. And our ambition is to keep growing, not only with the market, but even growing our presence in the market up to 2024. In Page 33, we can see our success in terms of consumer loans. In consumer loans, as you can see on the left, we moved from 3.5% of new production to 8.5% of the new production, and our goal is to go up to 10% of the new production. And with that, capture also around 10% of the profit pool of this product. Slide 34 is investments. And here is an area that we want to grow more. We already have been successful in terms of digital sales. So we already have 60% of our digital investments. Then in digital, of course, here is full digital plus the omnichannel sales that were closed in digital. But this make us very confident that we can go further in terms of the market share that we can acquire and that we can make here a catch-up also in terms of penetration. So our goal is to move from the present around 6% market share, so 5.8% to 7.4% market share in 2024. And also in terms of penetration to go to the present penetration of 6.4% to 10% market share in 2024. Of course, when we put here also the customer growth goal that we have, so we were moving from 6.4% of 2.7 million customers to 10% in 3 million customers, which is a growth, not doubling the customers in investments, but almost doing that. In terms of Page 35, we can see bancassurance. Today Bank Millennium is one of the biggest players in terms of bancassurance with 15% of market share in terms of the bundling insurance. So insurance for cash loans and insurance of mortgage, the property and life insurance. And we will also initiate a process to sell in stand-alone products to our customer base. Going now to micro and the corporate business. We can start with the statement in Page 36 from our colleague, Agnieszka. Agnieszka said the following, "The coming years will be a time of major change for entrepreneurs resulting from accelerating digitalization and transformation towards a green economy." And this is exactly one of the areas that we want to explore. Besides that, also the advantage and the need of digitalization for these segments. And in Page 37, you can see our targets for the micro business. So for the micro business, it's important to say that we grew 54% in the previous cycle in terms of number of customers. And now we have the target to grow 34 -- 36% to 200,000 customers. But also, as you saw, we have the target of doubling the revenues in this segment. We believe that we have space for that because as we can see, when we benchmark, the percentage of micro business revenues versus the total retail is only 7% in Millennium. And in the total banking business in Poland is 19%. If we go to the next slide, Slide 38, we can see also in terms of SME, one of the interesting change. That is not only the acceptance, the usage, but also the importance of digitalization for this segment. As we can see here, today, 70% (sic) [ 17% ] of SME users, the growth of active SME users of digital services is 70% (sic) [ 17% ] versus the 11% in the previous years. And also, today, 70% of the customers declare that the digital functionalities is impacting their decision of the bank to choose. And before, just in 2019, this was close to 55%. So today, we believe that this can be an advantage for our bank. And we can use digitalization for, first of all, revamp the credit process and to decrease the time to yes without, of course, impacting the risk profile, but also developing new facilities in terms of self-services solutions and improving the efficiency of the relationship managers that allow us to conquer part -- a bigger number of customers and to leverage our position. In Page 39, we have a statement from our colleague, Martyna. Martyna is Corporate Bank Advisor in Poznan. And that says that, "For me personally, this means that in the coming years, I will have the opportunity to actively support clients in financing green investments." And this is exactly the position that all of our colleagues are having in the corporate side for the green transformation of the industry that we are witnessing at the moment and that we are forecasting for the future. We can see here in Page 40 that we want to leverage the big-sized funds from European Commission, but also the national programs that we are having for the green transformation, and we want to capture our fair share, which is 5% in the investment loans backed by European Union and by the state funds related to green finance. Going now to Page 41, our ESG ambitions. And let's start with Page 42 with the statement from our colleague, Martyna, that is Head of Retail Branch in Gdansk, but a very specific and special branch. As she said, "The bank has been using solutions supporting environmental protection for years. Moreover, we are proud of the fact that we are the first fully ecological branch in Poland." Exactly. This is a branch that we made as a pilot to be fully ecological branch. And that this know-how also we already used in the transformation of our head office in Wroclaw. In Page 43, we can see our commitments in terms of environment. And besides the bank that is already monitoring, reporting and strongly reducing its own emissions in -- over the last 10 years. And also that the bank already have a policy of nonfinancing, new coal mining or coal-based energy and even the existing exposures are close to 0. Even so, the bank made, as a commitment for the year of 2022, to decrease 50% of the emissions versus 2020 and to achieve climate neutrality by 2027 for the Scope 1 and 2. And for the full scope, so we also we spread it dit in 2050. Moreover, besides reduction of financing in polluting activities. Also, the bank commits PLN 2 billion to finance in sustainable and transformational projects. Going to Page 44. We can show our commitment in the social part. So the bank has a very strong track record in terms of CSR, but we also want to state that in the future, the bank maintained the compromises to the customers to be centrally focused the customers in terms of quality, in terms of transparency, in terms of fairness. But also to be a bank without barriers as it is already today and to have -- to be accessible to all the people, namely the people with disabilities. In terms of employees, our commitment to enhance and improvement and employee value proposition. And also to our commitment in terms of self-educating and training to adjusting all of that to the individual needs to our employees to help them to perform better, but also to help them to develop. In terms of the community, we maintain not only our cultural initiatives as over 30-years-old tradition, but also we maintain our big commitment in terms of financial education, which has been one of our most visible activities on supporting our community, but also supporting employees in their social initiatives in their voluntary actions for their own local environment. Page 45, our commitments in terms of governance. And besides our strong position for more than 10 years membership in the top ESG indexes in Poland and the signature in terms of international agreements and ESG ratings, but also in terms of our commitments in terms of ethical approach to business with regularly revised code of ethics and compliance assessment. And our commitments in terms of anti-financial crime measures measuring in place to increase the transparency and the credibility of the business relation with customers. And further development and investments in robust anti-money laundering activities namely IT systems, but also consideration of climate and environmental risks, having sustainability metrics in our risk appetite statements and the climate risk assessment in our risk policies and stress testing. A final statement in Page 46, from our colleague, Monika. Monika is an expert in our recruitment team. And of course, so a person that is having one of our biggest challenges, which have been attracting and retaining talent. She states that, "Looking to the future, we believe that effective acquisition and retention of talent is crucial competence of the bank. We also want to keep taking care of the current employees as their commitment determines our ability to achieve our ambitious goals." And in the next slide, in Slide 47, we can see that besides our very strong ranking and awards in terms of attractive and reliable employer. We want to keep developing our environment to attract top talents in terms of new ways of working, in terms of enhance employees' value proposition and employer branding, creating this inspiring and empowering workplaces and we're supporting the collaboration, innovation and maintain our attractive development programs. Going to Page 49. We have the last sum up, now in a little bit more financial and business and risk aspirations. And we go back with the aspiration to move from PLN 1 billion to PLN 2 billion as a nonprofit without the Swiss franc impacts; return on equity from 9.5% to 14%; and cost of income from 40% to 37%. Of course, these 2 also without Swiss franc impacts. In the risk terms, we expect a normalized cost of risk of 50 basis points. We plan to maintain the nonperforming loans below 4.7% and with a 6% carry of loan book growth. In business terms, it's 3 million customers, 90% digitally active and 80% of digital sales and with the FX mortgage to be below 10% of bank's solo gross loan book.

Thank you very much, Joao.