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

[Foreign Language] Good morning, ladies and gentlemen. I would like to welcome you at our press conference. Today, we'll present consolidated results of Bank Millennium group after 2 quarters 2022. Results will be presented by Chairman of the Board, Joao Bras Jorge; and Deputy Chairman, Fernando Bicho. Before we start technical information, we broadcast the press conference in 2 languages, in Polish and English. So please choose the favorite one. And the presentation in both versions you see at your screens. During the conference, please write your questions on chat. After we finish presentation, they will all be read and answered. So I give the floor to Fernando Bicho.

Thank you. Good morning. As usual, I will drive you through the presentation, and we would like to start with a brief summary on page -- on Pages 5 and 6. As we see on Page #5, we continue to have in the second quarter and the first half of the year a significant improvement of the operating results of the bank. And this is illustrated by a significant increase in net interest income by 68% year-on-year and 23% versus the previous quarter and also at a relatively moderate growth of costs because the cost growth, excluding contributions to banking guarantee funds and to IPS in the second quarter, the total cost growth was only 9%. We also continue to benefit from relatively low cost of credit risk. And so despite still the need of doing additional provisions for FX mortgage legal risk, we significantly decreased the loss of the bank in the first half of this year versus the last year, half of the level of last year. And if we exclude the extraordinary items, in fact, we doubled the result versus 1 year ago. On Page 6, we also see that the -- on the business side, the trend is very positive and strong, especially illustrated by the significant growth in the number of active customers, which increased by 173,000 year-on-year, and especially the number of online and mobile customers that grew by 273,000 also versus the previous year. On Page 7, we show the main financial highlights. So the adjusted net profit without extraordinary items grew more than doubled versus the previous year, driven by strong growth of net interest income, while fee and commission income grew at a much slower pace, only 3% year-on-year. And so the adjusted return on equity, excluding extraordinary items, was at 23% and the adjusted cost-to-income at 33%. The next pages we will show -- we show the details of the results. So starting with Page #8. It is visible on the top right graph, the gradual improvement quarter after quarter of the net profit of the bank, excluding extraordinary items. And in the second quarter, the level reached PLN 637 million, which is 30% more than in the previous quarter. On a reported basis, during the second quarter, we would have had a positive result even after FX mortgage legal risk provisions, if we have not, at the same time, the extraordinary contribution to the institutional protection scheme, IPS and this contribution, which reduced our results by almost PLN 200 million net was responsible for the net loss in the quarter of PLN 140 million. But as it is visible, there is already for several quarters, a gradual improvement on the capacity of the bank to generate results even after the provisions for FX mortgage legal risk. On Page 9, we see the evolution of net interest income, which, of course, increased recently due to the significant increase of interest rates. So in the second quarter, it increased 23% versus the first quarter. And the net interest margin was also close to 4.5%. We had continuation of the increase of the average interest rate on loans, but also it is already visible the increase on the remuneration of deposits, which will continue to happen in the next quarters. On the fee and commission income, the growth was 3% year-on-year, but dropped 7% versus the previous quarter due to the decrease of commissions from investment products and capital markets products, especially investment funds due to the significant correction in the market. Page 10. Regarding costs, I think we had a strong performance in the second quarter in terms of costs. Total costs on the first half of the year only grew 9% versus the previous year. If we exclude BFG and IPS, so it means this is a cost growth much below inflation. We had a growth of personnel costs by 8% year-on-year and admin costs, excluding BFG and IPS by 11%. We had a continuation of a downward trend in terms of number of branches as a consequence of the ongoing process of optimization and also number of employees. Page 11, the asset quality remained strong. The ratio even improved in the second quarter to 4.3%. This was supported by a significant sale of NPLs that also generated a positive result of PLN 40 million. And as a consequence, we were able to keep the cost of risk in the second quarter at a relatively low level at 37 basis points over total loans. On Page 12, the liquidity continues to be very solid, a loan-to-deposit ratio of 83%. The capital ratios are still decreased in the second quarter as a result of the revaluation of the bond portfolio and the net loss that we still booked in the second quarter, but they were still clearly above the minimum capital ratios requirements. Moving now to the FX mortgage legal risk on Page 13. We continue to have a significant effort to reduce the portfolio of FX mortgage loans. The reduction in currency was 20% versus the previous year and 5% versus the previous quarter. As a consequence of the decrease of the portfolio and also deducting the legal risk provisions, the FX mortgage portfolio share in total gross loans has been decreasing, and it's now around 10%. We still had a continuation of inflow of court cases at a similar pace as the previous quarter. And this was one of the drivers of the continuation of the increase of the provisions for the legal risk, which totaled PLN 467 million for the Bank Millennium portfolio during the second quarter. On Page 14, we -- as you can see, due to the significant increase of provisions and reduction of the portfolio, the total stock of provisions as of the end of June represented more than 36% of the outstanding balance of mortgage loans. In the second quarter, we continued the significant effort of negotiations of amicable settlements with our clients. For the fifth consecutive quarter, we achieved more than 2,000 successful negotiations in the second quarter, more precisely, 2,175. This number was clearly above once more of the number of new court cases, which totaled 1,554. Of course, this has a cost, but continues to support the reduction of the overall portfolio and to -- in order to decrease also the legal risk. Moving to the second part of the presentation about the business development. The main highlights on Page 16. We had a solid loan growth of 5% year-on-year, driven by the growth of PLN mortgage loans by 19% and leasing portfolio by 8%. We already reached 2.4 million active digital customers, and we have also a solid growth of debit cards by more than 200,000 year-on-year and customer deposits by 7% year-on-year. Page 17, we see a clear rebound of loan growth, excluding FX mortgage. So the growth was 11% if we would exclude FX mortgage loans, driven by PLN mortgages, as I mentioned before, a growth of 19% year-on-year. Also, we saw some stabilization in the portfolio of consumer loans after a small drop that we had in the first quarter and also a rebound in loans to companies driven by leasing. On the deposits, growth was driven in the last 12 months by deposits from companies. But in the second quarter, we have already a rebound in deposits from retail clients. The structure of the loan portfolio shows the continuation of the dilution of the FX mortgage loans. Page 18, we had some slowdown in terms of origination when we compare, of course, the sales of mortgage loans in the first half of the year with the same period of last year, there is a drop of 11%, but it's still a very strong level of origination of mortgage. And in cash loans in the second quarter of this year, we had a clear rebound, plus 26% versus the first quarter, although in cumulative terms the first half of the year was 7% lower. Page 19. Already mentioned a very strong pace of growth of the number of customers, total number growing by 173,000 year-on-year. Number of current accounts increasing by 132,000, also a continuation of steady growth of microbusiness segment. This growth is being supported by the development of our digital channels. We show on Page 20 very significant numbers in terms of importance of digital channels. So for example, 78% of sales of cash loans were done through digital, 91% of term deposits, 32% of the acquisition of current accounts. We had an increase of 51% in the number of current accounts that were opened online. This -- on Page 21, we also illustrate that through the mobile app and Millennium had to -- we are providing access to additional nonbanking services, especially really administration in smartphone, top-up codes. And also, we continue the improvement of our solutions. This time, we are showing on Page 22, the redesigning of the process of opening an account online and in the mobile app with logging into another bank or with a new selfie process. So this also makes this process of acquisition of customers much more -- much easier. And Page 23, again, a reminder of the support that we provide to Ukrainian citizens also through our digital channels. Page 24 also updates the growth of our goodie platform with more than 221,000 downloads of the app during the first half of the year. Page 25, on the company's side, a clear rebound, a growth of loans of 5% year-on-year with a clear rebound of leasing that grew 8% year-on-year. At the same time, a strong growth of deposits by 24% year-on-year. And in general, a sustained increase of transactional activity, both in terms of cash turnover, domestic transfers, foreign transfers and FX transactions. This is also seen on Page 26. Leasing sales, although year-on-year they were flat, the portfolio grew 8%, as we already showed. Also a growth of factoring turnover and 15% growth in the volume of FX transactions. The digital effort to support our customers is also focused on companies and small businesses. This time, we are illustrating on Page 27 the significant increase in the number of business accounts opened in the first half of '22 versus second half of '21, a growth of 60% and a growth of 40% in the cash loans for micro entrepreneurs that were completed in online channels in the first half '22 versus the second half of '21. Finally, on the third part of the presentation, credit holidays and capital management. So after the publication of the new law regarding credit holidays, we announced that the maximum cost, if 100% of the borrowers would come, would reach close to PLN 1.8 billion. We also announced that we would book the upfront cost of the credit holidays in the third quarter based on an expected participation rate between 75% to 90%, which is above the average level that was considered when we see what other banks have published. As we announced by current report 1 week ago, so on Page 30, and also as we are repeating in our report -- first half report that we published today, due to this significant impact, due to the upfront recognition of the cost of credit holidays, we are expecting a negative result in the third quarter and also that this impact on the capital ratio can be around 300 basis points. And as a consequence, our capital ratios can fall below the minimum requirements between 118 and 174 basis points depending on the size of the final provision that we will book. And so as this was -- this triggered a risk of breaching the capital ratio, that's why we announced the decision to launch the recovery plan. The recovery plan that we have is a normal process for all the banks. It's updated every year. Our last update was approved by KNF in February this year. And also, as we announced in our current report and we are repeating today, we intend to increase the capital ratios in a comfortable way above the minimum requirements through a combination of further improvement of the operational profitability and also through several capital optimization initiatives such as the management of the risk-weighted assets, capital consumption through securitization transactions. So these are the most important points of our results. And now we are available for questions. Thank you.

Yes. So we are moving to a Q&A session, and we already have a few. The first one, in the context of credit holidays, how does the bank see the all year cost of risk?

So we still anticipate to the cost of risk in the second half of the year will be higher than in the first half of the year. This is due to the fact that in the first half of the year, on one side we benefited from the sale of NPLs and with a gain, and this reduced the cost of risk, especially in the second quarter. So this is one point. And the second point is also that gradually interest rates have been going up. And so as interest rates go up, we can anticipate some deterioration in some -- in the cost -- in the risk of some clients. But on the other side, for the mortgage loans in PLN due to the introduction of the costs of the credit holidays, we do not expect deterioration because if someone will have a problem, we'll apply for the credit holidays. And so we are not expecting in the short term a deterioration of the quality of the PLN mortgage loan portfolio. So -- but overall -- so overall, this is the picture that we expect for the second quarter.

Next question, how does the bank assess the Swiss franc borrowers' interest in settlements? Will the quarterly cost of settlements continue to decrease?

So we were very happy that we kept this capacity to settle more than 2,000 per quarter, as we have been expressing this is our target in a constantly base. It's interesting that for the first time -- and this is only achieved because we speak in a regular basis with all the customers there today have Swiss francs. And we keep inviting them to find a settlement and to discuss what could be the best solution for them. For the first time, lately, we are having even customers that saying, no, no, we don't have nothing against. We are not going to make any court action. We don't have nothing. We just want to stay in Swiss francs because it's much lower installment and we want to stay as we have, and we want to repay normally without any stress. We will see how it goes. So it's -- we still have as a main focus to solve and to convert all of our portfolio. So we will keep insisting and offering solutions to our customer. The decrease is also because it's more because there is settlement more or less the cost is the same. So I would say that the transactions and settlements that we achieve with customers, they are very much connected also with the situation of the FX rates on the settlements that we are making and also the kind of the solution that we found for each separate customer. But in average, the cost is very much the same as the previous quarter. And so we don't think that there will be a trend of decreasing and even if there is any trend, it will be of increasing.

Next question. In the second quarter, the sales of mortgage and cash loans increased quarter-to-quarter. Does the bank expect a decrease quarter-to-quarter in third quarter?

Yes, we expect this acceleration of the credit activity. This is very much connected with the major slowdown that we will see in terms of the economy in Poland. And it's not seen yet, but we believe that also in this period, after holidays with all the expenses of the holidays and the back-to-school, people will feel a lower disposable income, but also a lower, should I call it, a lower propensity for expenses or for investments and for big decisions. So one way or another, we don't expect nothing dramatically, but we expect somehow a steady slowdown of the credit activity. A lot of the second quarter activity was seasonality somehow as well. So from one side, there is in second quarterly or second quarter, always a bigger activity in terms of consumer credits because people have take decisions in terms of spending holidays, transformation of their homes and these kind of things. And on mortgage, there was somehow also some processing of bigger activity in terms of credit applications that we had in first quarter, and this was also connected with some changes by the regulations of KNF. This made a big increase of the applications in first quarter that have been processed in second quarter. So we don't -- we are not stressed about the future, but it's clear that we are seeing a steady slowdown also in the activity of credit by the cost of credit, but also by the decrease of the appetite for consumption and investment decisions in terms of the consumers.

How is currently behaving the portfolio of retail borrowers who are particularly exposed to increased inflation and high rates -- high interest rates in Polish zlotys?

I think Fernando already said more or less that, but...

So in retail, we have basically PLN mortgage, and I already commented about PLN mortgage, so that the credit holidays will imply that we don't anticipate that there will be problems in the short term with this portfolio. Second, we have FX mortgage, but the FX mortgage so far was not affected by the increase of interest rates because the level of the Swiss franc was still relatively stable recently.

And there was some bad loans then very long term...

It was a long time ago. So we don't see problems there. And then we have the consumer loans. And in the consumer loans, we also -- of course, we have a portfolio that already comes from the past, but also in the new origination also we reduced -- we did not increase the price of the new loans in the same scale that we had the increase of interest rates. So that's why also. Of course, we are anticipating that there will be some deterioration. This is, of course, it's -- when we have such a move of interest rates, of course, we are expecting some deterioration. But for the time being, we are -- we do not see yet such an increase in the NPLs from the retail sale. Of course, it's something that we will monitor very careful during the next months. But I think also, each borrower also is adjusting to the new situation, to the new environment. And so we expect some deterioration, but not substantial.

And is the bank considering a share issue in order to increase capital ratios after the expected decrease in third quarter?

No. It's exactly the reason why we went through a recovery plan, it's because we took a different decision. So instead of making a share issue to recapitalize the bank, we went through the process of generating organic and through the specific transactions like securitization or optimization of usage of capital in order to in a organic way to rebuild the capital of the bank.

In second quarter, the bank suspended the work on bond issued in foreign markets and in Poland. Does the bank see the possibility to enter the market with a new issue of subordinated debt or S&P this year after reduction of the rating and launch of the recovery program?

I think we think the problem is not so much our own situation, but the market. So in the first quarter, we were not able to issue because the market simply disappeared, and there is no conditions to make any issue of this type at all. And we will see if there is a improvement of the market conditions, but the market conditions, there are 2 things that -- or 3 things that are not helping at all. The war in Ukraine, it's bringing also instability to the markets. Also the turbulence and economical environment across Europe and the world is also making more difficult to way of issuing this type of bonds. And third, that also must be said, these unpredictable regulatory and legal environment in Poland, it sits completely the cycle, and it will be make impossible to make any issue in short term of this kind of instruments. So it's -- I think we need to go through a confidence rebuilding process for the investors in Poland before being possible to issue any kind of these instruments.

We go back to the recovery of capital ratios. And the question is, will it be enough for the recovery of the capital ratios to limit the development dynamics and make potential securitization transactions? Does the -- or to exclude increase in capital, are these investments an option?

The capacity of generating net profit is the most important strategy to rebuild the capital. As we stated, we were already achieving the crossroad where the normal activity of the bank is already enough to cover the effort that the bank is doing in Swiss francs. So these allow us to forecast even because we have a very intensive policy of making provisions for Swiss francs this year and the year before. And at the same time, we are making settlements and everything. So we would see in our view that we would go to a pace that from one side, we have the results increasing steadily. And from another side, we would have some stabilization or even decrease of the effort in terms of provisions. And with that we would -- we will be capable to produce results, results that revealed the ratios. Then securitization is, of course, a process. There is another process that it's less seen, which is improved management of the capital, namely to develop more credit activities that consume less capital like mortgage and reduce activity or smaller corporate transactions that are also protect, for example, with guarantees from the BGK. And these allow us by reducing very large exposures from syndicate loans with uncollateralized credit exposures during this kind of credit changing and the balance sheet management allow us to keep high activity, but also reducing the needs of capital. So we believe that this is what we are going to do, and this is what we will need to do. The -- so we don't see slowing down our digitalization process. We don't see keep not investing in the customer experience. Obvious when we are in these kind of moments, we will manage costs in a more prudent way, but the path is through management costs in a more prudent way and having results from the normal activity plus improvement of management of capital. And once again, we don't consider at all any capital increase.

How many lawsuits did the bank file against the clients in relation to use of capital? What has been to date experience as regards court decisions in this type of cases?

So the first group of claims submitted by the bank was done in the end of last year. It was around 1,700, if I remember. This year, we will do another group, but I should stress that before doing that, we will offer to such -- to all that group of customers the possibility to reach an amicable settlement. So this is part of the process that we have implemented. Regarding the court decisions, we do not have final court decisions about this. Most of the process of these claims were put together with waiting for the final also decision on the court case that was submitted by the clients. So we still do not have conclusions about the result of these counterclaims process.

Next question partly was answered, but I read as promised. What are your expectations as regards the credit action? Do you expect a decrease in demand for loans, especially as regards companies? Do you expect a deterioration in quality of the portfolio due to the increase in provisions of impaired loans?

So I think we talked rightly about this, but there is this question about company. So maybe I would say that we are seeing bigger utilization of working capital and overdrafts of companies and much, much lower activity on the investment side of companies, namely, for example, leasing that is a instrument for investment in equipments. This also shows in our view, some -- from one side, some more difficulties in terms of their financial activity in short term, maybe by increase of cost, inflation, whatever, but also some more prudence or less optimism in terms of the future for the economical development because it was a major slowdown, we saw just after COVID, the rigor increase of the activity on the investment side, on the equipment side and all of that. And now we see a kind of a big slowdown on this part with a bigger usage of these short-term financing facilities. So we don't see deterioration in terms of credit risks of companies at all, but we see their activity reflecting a less optimistic picture for the Polish economy.

And last question which I see on chat. How does the bank assess the legal environment in Poland in terms of banking activity? And is the bank considering exiting the Polish market?

So the bank is not considering exiting the Polish market. We like the Polish market and especially in our situation that we -- 50% of the capital of the bank belonging to a group, but the other 50% is in the Polish Stock Exchange and owned by institutional investors and private Polish investors. So it's -- we feel it very well. But it's obvious that have been challenging the legal frame here in Poland. And what is really, really, really frustrating is we could have done it differently. If we would have done the credit holidays, as we did in COVID times, none of these problems would have appeared and the customers would have done -- would have had the same benefits as they did in a very easy way, in a very organized way, with the private moratoria during COVID. So it's -- this lack of cooperation, this lack of working together to find the best solution for the movements that we are having in the economy and also with the fears of the population and the needs of the consumers is somehow disturbing. And it's a pity that there is this belief that by changing the laws and by making court cases and by finding by the authorities is a way of looking for solutions. But as always, we need to scope with whatever is decided and this was decided with the last majority in the parliament. So what we need is to implement in the best way the credit holidays at the moment in the way that we believe that is beneficiary for the customers and also that allow them to make this in a smooth path. So it's -- this is what we are doing, and this is what we will do.

Thank you. And these were the last 2 questions which we see on the chat. So we would be closing. We are closing the meeting today. Thank you very much for participation. If there are any further questions, we are at your disposal any time. Thank you very much.