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

Good afternoon. Welcome to Bank Millenium Second Quarter '24 Results Call. With us we have Joao Bras Jorge, Chairman of the Board and CEO; and Mr. Fernando Bicho, Deputy Chairman of the Board and our CFO. Over to you, Fernando.

Good afternoon. Once more, thank you very much for joining our quarterly results presentation. Today, we are covering the second quarter and first half results. So let me start by Page #5 of our presentation with the main achievements in the first half of 2024. We can say that the first half of the year was marked by further improvement in core profitability and high efficiency, still very strong asset quality and liquidity and also material net profit despite the cost of the credit holidays and the cost related with FX mortgage portfolio that were also partially offset by some positive tax impact. We would like to stress that of course the second quarter was very important for us because of the formal conclusion of the capital protection plan in May and also for the exit of the recovery plan in June. So we closed a chapter that was started exactly 2 years ago and we are showing now very solid level of capital ratios with a consolidated Tier 1 ratio at 14.3% and the total capital ratio at 17.1% with a significant surplus over the minimum regulatory requirements and also fulfilling the MREL requirements also with the surplus. And as we had already expected and communicated before from formal point of view, the MREL requirements were reduced in June this year. Important is also to say that if we would include the first half net profit in own funds, this would have close to 1.3 percentage points to our capital ratios. We had the seventh consecutive quarter with a positive net result. We closed the first half of the year with a net profit of PLN 357 million, which is exactly at the same level as the first half of 2023. And excluding extraordinary events, the underlying net profit was at PLN 1.5 billion, a growth of 6% year-on-year. The result was driven by strong NII, excluding the impact of the credit holidays, growing by 5% year-on-year and 2% quarter-on-quarter with the NIM at 4.32%. Core income was up 4% excluding the credit holidays. The cost-to-income ratio adjusted at 31%. And the cost of credit risk at 50 basis points during the first half of the year supported by a sale of NPLs in the second quarter. We returned to the payment of the banking tax after exiting the recovery plan already in June. And finally, the reported ROE was 10% and 19% on an adjusted basis. Pages 6 and 7 present the key profit and loss items and key balance sheet and business items that we will go through in more detail throughout this presentation. And especially, we would highlight not only the fact that we kept the same level of net profit despite having benefited in the first half of last year of the extraordinary gain from the bancassurance transaction, but also that the cost in the second quarter clearly decelerated versus previous periods. And the cost of risk is within the guidance that we have given in the beginning of this year. And on the business side, a very strong quarter especially in terms of deposits growth, investment funds and also consumer loan growth. Page 8 regarding the status of the strategy cycle 2022-2024 so which is reaching its end. Basically we are already in line with most of the targets that we have set almost 3 years ago. So we can say that basically the most important targets have already been achieved. When we move to Page 9 looking now at the evolution of the results. So as I mentioned, a total net profit of PLN 357 million in the first half of this year. If we exclude extraordinary events, in the second quarter we had a net result of PLN 834 million, which is 3% above the second quarter of 2023. So from this perspective, we are able to show a very resilient and high level of profitability before extraordinary items. Looking now in more detail to the evolution of revenues and starting with the net interest income. We had another very good quarter. Net interest income, excluding the impact of credit holidays, grew 2% quarter-on-quarter and in the first half of the year 5% versus last year. It should be noted that looking also at the second quarter of this year versus the second quarter of last year, the growth was 3.5% excluding the impact of the credit holidays. And we need to remember that in the meantime interest rates are lower by 1 percentage point versus the level where they were 1 year ago. We also would like to add that we cannot forget that we are also facing some additional costs that are going through the NII from the MREL bond issue that we have done in September last year and also the securitization transactions that also were done last year. And so when we look for a like-for-like comparison of NII underlying, excluding these additional costs, actually the NII grew by 10% year-on-year. In this quarter, we had a small drop of the average combination on loans, but also a small drop in the average cost of the deposits and so there was a marginal decline of NIM to 4.28%. In terms of net fee and commission income in the first half of the year, the amount of PLN 390 million, slightly below 1 year ago by 3% where the lower fees and commissions coming from the insurance business were largely offset by the growth of commissions coming from cards and investment products. On the cost side, the second quarter was clearly better not only because we did not have contribution to the resolution fund, which was booked in the first quarter of this year, but also because there was a deceleration in some other items. So all in all in the first half of the year, we had overall growth of 14% of total operating costs with a stronger growth of staff costs by 16% and other admin costs by 12% in a context where we had relatively stable employment base and also a very minor reduction in the number of branches. On Page 12, looking at the asset quality. So first of all, the cost of risk in the second quarter was clearly lower than in the first quarter with PLN 71 million of total provisions bringing the average cost of risk during the first half of the year to 50 basis points, which is exactly in line with our past guidance. The second quarter was supported by a sale of NPLs with a positive impact of PLN 45 million pretax and this supported the reduction of the NPL ratio to 4.5% and still an improvement of the coverage ratio of NPLs by total provisions to 74%. Moving to capital on Page 13. So we had some drop in the capital ratios in the second quarter, but still finishing the quarter with a very strong ratio. So as I mentioned, Tier 1 ratio or core Tier 1 ratio 14.3%; total capital ratio at 17.1%. First of all and also anticipating already some of the questions, I need to remind that the capital ratios that we are presenting do not include the first half net profit both on solo and consolidated level. So this is the level of regulatory capital ratios because we in Poland in order to recognize the results in the middle of the year in nonfunds, it is necessary the specific approval of the regulator. And so that's why we are putting here exactly the ratios from a regulatory point of view, but of course we are also adding this information that if we would consider the net profit of the semester in total own funds, our capital ratios would increase by around 1.3 percentage points. So very solid levels of capital ratios significantly above the minimum requirements and also the same applies to the fulfillment of the MREL requirements. This stronger growth of deposits versus loans continue to drive down the loan-to-deposit ratio, which finished the first half of the year at 64%. Moving to the FX mortgage. In the second quarter, the inflow of court cases was similar to the inflow of the previous quarters so slightly above 1,600 cases and at the same time, we achieved more than 1,000 amicable settlements with clients. The number of active agreements continues to be reduced at a fast pace. At the end of June, the number of active loan agreements was already below 29,000, a reduction of 19% year-on-year. At the same time, the combination of reduction of the portfolio negotiations and verdicts and additional provisions makes the share of net FX mortgage in total -- gross FX mortgage after provisions as a percentage of total gross book already below 3%. On Page 15, the level of provisions for legal risk in the second quarter was similar to the first quarter at PLN 518 million bringing the balance sheet value of provisions for the Bank Millenium originated portfolio to slightly more than PLN 7.5 billion. The total provisions of outstanding mortgage loan value crossed 100% in the end of the second quarter and stood at 101%. Moving now to the second part of the presentation regarding main business achievements in the Page 17. We had a very strong quarter and first half of the year in terms of deposits growth. Total deposits portfolio grew 16% year-on-year including also the retail deposits. Also very strong growth of consumer loans. The portfolio grew 8% year-on-year while the origination grew 10% year-on-year. In terms of PLN mortgage, also a rebound in origination translating into a growth of portfolio by 6% year-on-year. Also very strong growth of investment funds, a growth of 32% year-on-year. And the first signs of clear change in terms of corporate lending are coming mainly from the leasing business where the origination in the first half of the year was higher by 20% versus 1 year ago. Finally, the number of active customers continued to grow at a solid pace. We have now 3.083 million active customers in retail with 92% actively digital. On Page 18, going in more details. So total loan growth was -- net loan growth was 1% year-on-year or 4% if we exclude FX mortgage loans and this growth was mainly driven by consumer loans and PLN mortgage while corporate still slightly down as a consequence of the temporary restrictions that we have applied during last year for the purpose of management of the risk-weighted assets. Structure of the loan portfolio not much changed with the share of cash loans above 21% and the share of PLN mortgage below 49%. Customer deposits, as we mentioned, very strong growth especially during this first half of the year both in retail and in corporate and at the same time followed by significant growth of investment products with a total outstanding value above PLN 9.5 billion at the end of June. On Page 19, we can see that the growth of retail loans excluding FX mortgage on a gross basis was 7% year-on-year driven by the growth of consumer loans and PLN mortgage with significant growth in the consumer lending production in the second quarter higher by 33% versus the previous quarter and in the first half of this year growing by 10% versus the first half of last year and allowing us to achieve a market share above 10% in terms of new sales. At the same time also, there was a rebound in the sales of new mortgage loans from a relatively low level from last year. In retail customer funds, the growth was across the different products so from current and savings accounts to time deposits and investment products. The number of active customers continues to grow at a solid and regular pace. We added up 38,000 net number of active retail clients during the second quarter. And also the same although it was at a proper scale growth we are seeing in the segment of micro business. And the number of cards grew by 120,000 versus 1 year ago. Page 21. We continue our mobile first approach placing the app in the center of our actions. At the end of June, we had 2.6 million active mobile users, a growth of 10% year-on-year; 2.8 million active digital users, a growth of 8% year-on-year; and 1.9 million BLIK users in the second quarter, a growth of 16% year-on-year. Page 22 updates also the share of digital in the sale of different products; 83% in cash loans, 45% in current account acquisition in the second quarter, 95% in term deposits. And also a significant role of digital in terms of receiving applications for different governmental programs such as the DOBRY START 300 or the benefit of 800+. Last, but not least, significant growth in BLIK payments, growth of 35% in BLIK transactions, in e-commerce P2P, contactless, buy now pay later. Other digital developments to highlight in this quarter on Page 23. We launched currency exchange for our retail customers in the mobile app and also we were the first bank in the market to get involved in the project of buy now pay later in which the bank's customers can now use the BLIK Pay Later service. Page 24, continuation of the significant increase of the goodie smart shopping platform, an increase of 54% year-on-year in the number of active cash back users and a growth of 66% in the number of transactions made via goodie cashback. Moving to the corporate side. We see for the second consecutive quarter signs of rebound in the corporate business more visible for the time being in leasing. Overall, year-on-year, the portfolio on a gross basis is still down 2% because of the temporary restrictions that I already mentioned. But as I said already, 2 quarters of signs of rebound. At the same time, we are benefiting from a significant growth of deposits, 15% year-on-year and 3% quarter-on-quarter with the growth divided between current accounts and while time deposits actually stabilized in the second quarter. And also we see a gradual increase in the transactional activity especially visible in the volume of FX transactions, which were up by 43% year-on-year and domestic transfers by 5% year-on-year. On Page 26, we see that the growth of origination of leasing is very strong. Total origination in the first half of the year reached almost PLN 1.9 billion, a growth of 20% year-on-year. And also, as I already mentioned, the growth in the volume of FX transactions by 43% year-on-year. Page 27, we continue to adjust our offer for corporate banking clients' needs. We are introducing new guarantee programs based on BGK guarantees and also developing our internal competencies in terms of ESG. So these are the most important points from our results in the second quarter and first half of the year. And now we will go through the questions. Thank you very much.

As usual, I'll try to group questions into some thematic parts. Many questions related to DTA and I think it would be good if you could explain to our guests the dynamics of DTA, how it worked, what was covered and what expectations or what developments we expect in the second half of the year?

Yes, I saw that there were many questions about this topic. So going point by point just to have the full picture. For a long time we have been fighting to consider the costs associated with FX mortgage especially the losses as considered for tax purposes. In the end of last year, as we disclosed in our annual report, the Supreme Administrative Court issued a negative verdict. But at the same time, it became clear that what could be done was the correction of the last 5 years in case the loans would be invalidated. And so what we have done in the first half of this year was to make the adjustments connected with revenues and also with FX differences connected with the FX mortgage loans that are assumed to be invalidated and to consider those losses in the calculation of the DTA. So in the first quarter, we booked an initial amount divided between corporate income tax and DTA of PLN 68.8 million and in the second quarter an amount of PLN 192 million, of which PLN 171 million was booked in DTA. So once again this relates to loan agreements which are assumed to be invalidated during the specific period of time and based on which, we will be correcting the level of the tax and considering it as a tax loss. So going forward because there are also many questions about how this will unfold moving forward. So the value of the DTA regarding FX mortgage will fluctuate depending on the level of the FX rate, depending on the inflow of new court cases and depending on the pace of verdict of the courts regarding the court cases. So these are the most important and also to a lower extent, but also depends on the settlements that will be achieved in the meantime. So these are the parameters that will influence the evolution of the DTA going forward. Apart from the FX mortgage, also we should highlight that in the second quarter we had some additional impacts on the DTA namely the credit holidays. We created a provision for credit holidays of PLN 201 million that also generated a DTA of close to PLN 40 million. And obviously for example, this part will disappear until year-end because the credit holidays will expire in the end of this year. So if you look at 1 of the notes to our accounts, Note 18 where we have the breakdown of DTA, it is visible that the DTA growth was generated not only because of the FX mortgage, but also because of some other factors including this 1 connected with credit holidays. Then the increase of the DTA generated 2 impacts at the level of capital. One is the growth of risk-weighted assets because of course there is a weight assigned to the DTA and the second was that there was an excess of 10% of own funds that was directly deducted to the Tier 1 capital. This deduction would not happen if we would consider this additional net profit of the first half of the year. So actually when we will incorporate in our own funds the net profit of the first half or of the full year, this additional impact will simply disappear assuming that nothing else in the meantime of course we'll be adding to the DTA. So we expect that first part of the DTA increase of the second quarter will disappear during the third and fourth quarter as a combination of some verdicts, elimination of DTA connected with the credit holidays. And in terms of impact on capital, I can say that maximum until March next year this negative impact should be largely eliminated or even earlier if we will include in our own funds the result of the first half of the year.

I hope it's clear. We also had questions on long-term funding ratio, which is a relatively new thing?

So it's also to put in the context to all that are seeing us. So there is a new ratio approved just 2 weeks ago by the regulator that will enter into force on the 31st of December 2026. So we are still 2.5 years before that date. Second, this ratio establish percentage of the mortgage loans that should be covered by, let's say, long-term funding; but in fact it's a combination of long-term funding and also excess of capital. And there are different weights assigned also to the market so I will not enter into these more technical details. So what we can say right now is that. So first, we are still 2.5 years before the introduction of this ratio. The second thing that we would like to remind is that 5 or 6 years ago we decided to set up a mortgage bank and mortgage banks in Poland are the banks that can issue covered bonds because in Poland, universal banks cannot issue covered bonds. So covered bonds can only be issued by mortgage banks. So we have set up our mortgage bank, which has been up and running already for a few years, and we also in the second quarter made the first issue, a small issue for the time being because also it was not necessary to do a large issue, but we made the first testing issue in the local Polish market. The bonds were rated AA+. After the issuance, even the rating of the bonds was upgraded to AAA. And so I just want to say that we have already a platform in place that will allow us through time to issue amounts through covered bonds that will contribute to the fulfillment of the long-term funding ratio although the covered bonds is not the only way to fulfill the needs because also other capital instruments such as MREL bonds or subordinated bonds will also count. And on the other side also we cannot forget that in the next 2 years, the net value of the Swiss franc portfolio will be 0 and the Swiss franc mortgages are also covered by this requirement. So it means that by the time that we will reach the end of 2026, this portfolio will no longer be there to be financed by long-term funding. And also a lot will depend also on what will be the evolution of our PLN mortgage portfolio. So all in all, we would like to say that this new requirement will be incorporated in our planning process. We have the instruments that allow us to comply in the future with this requirement. It does not matter what is the level today. What matters is because many of the instruments that we have today will not matter in 2.5 years' time. So what matters is how we will prepare the plan to fulfill in the most efficient way possible the level of the ratio that is required for the end of 2026.

Another question on the subject of interest is the performance of our insurance fees. Analysts spotted a bit of irregularity this quarter and the question is about the reasons and most importantly, if this is a new run rate for this line?

We would say that it's better to assume this level as the run rate. We made the bancassurance transaction last year. The implementation was done in a, say, sequential way. So this is the level that could be assumed to be the run rate for the time being.

And also the new recommendation. The bank assurance business became less profitable also due to the new recommendation from the authorities.

Which was incorporated in the meantime...

It was incorporated also in the process, in the transaction, in the pricing and everything, yes.

There was a number of questions related to deposit pricing. One of the analysts noted that we have above average pricing or cost of deposits and the questions were whether in the flat interest environment, we'd be willing to lower deposit pricing? And the other analyst is asking what would trigger a cut of deposits if at all?

So the deposits profit pool is the biggest profit pool in the banking activity in Poland and so it justifies by itself even if there is high liquidity in the system and high liquidity in the banks, the business per se is highly profitable. Sometimes the pricing difference between the banks is also the combination of what they have in current accounts, what they have in time deposits, also what they have in corporate versus what they have in retail. So there is a lot of reasons for that. We believe that we are still in a down trend of the cost of total time deposits so there is still space to work on that. However, it's a combination between growth of the volumes that we are achieving at the moment. It's a very good opportunity to increase the time deposits presence because it's a period with over liquidity in the market and with high disposable income of customers. We have being working mainly on deposits of retail and of course the growth in corporate was the same percentage, but yet it can be a little bit more opportunistic. In retail it's normal activity. As you know well, we tend to have price differentiation for the daily bankers. So we're trying to have the savings of the customers and the full relations with the customers and not so much just bigger time deposits from more affluent/private banking customers. So we think that is still the potential to keep growing. We grew a little bit the market share. It's very difficult to grow the market share in deposits of individuals, but we grew around 30 basis points year-on-year. So it has been a positive experience and it's exactly the volumes with this proper price management that allow us to present this solid net interest income even with the environment of the interest rates. Although it's not so low as initial forecast for this year, they are in fact 1% lower than a year ago.

While you have the microphone so to speak, there was also a question about the very good origination level of consumer loans in the second quarter. Were there any particular reasons or drivers behind that?

So I would say that the second quarter was as good as the first quarter was not so good. So mainly very strangely the market of consumer loans revamped in Poland since the beginning of the year. We didn't change anything about our process, our models, our risk assessments, our risk appetite, nothing at all. So we have been working with the same criteria and with the same way and we were more successful in the second quarter. It's true that we made some changing in the pricing. Looks like it's as adequate. So it's increased a little bit of the interest rates, reduced the commissions, looks like it's more attractive and simple to explain to customers and we have been more successful. But we are more or less aligned with the market share. So we have a 10% market share in consumer loans in terms of the stock and also in terms of production. So I would say that it's quite balanced.

Sticking to the loan subject, there was a handful of questions relating to our growth outlook for SME and PLN mortgages in particular, our risk appetite and the demand that we see not only in the short term, but also in the midterm.

So first, a little bit of PLN mortgage. One criteria that is less seen by the analyst is the number of active customers because I understand it's more difficult to see. But 1 thing is a fact. Any time that we are increasing the customer base, sooner or later we will increase the card fees, we will increase the time deposits and savings of customers and also consumer loans. Mortgage is a little bit different because of course customers also can consult their bank, but there is a little bit of more shopping around. So there is a little bit less competitive advantage even if you have a strong customer base in terms of mortgage so you need to be on the market through price and product. We view the big volume versus 1 year ago, a little bit less market share. We would like to maintain this volume or even slow down a little bit. So it's clear that our intention is not overperforming mortgage. Would we even reduce a little bit our percentage of mortgage in total portfolio? In terms of corporate or SME, so SME with corporate let's call it. We have been working quite hard. We are out with our capital constraints. It takes some time to change completely the approach. So we were having an approach of preserving capital, reducing the risk-weighted assets. So to change the network and even the customers' interactions take a little bit of time. We see a lot of more activity. It's already very visible in terms of leasing. That is a faster product. We are quite confident that in the second half of the year, we will show already visible increase in terms of corporate portfolio. And it's no doubt that the future strategy will have main importance of the SME development. We believe that we have strong credit capabilities. This is shown when we decrease the portfolio because when we decrease the portfolio, it's usually if there is a less quality credit portfolio. It will show because of course when we reduce the portfolio, you reduce the best quality credit that is repaid or sold and this is visible with our cost of risk. So we believe that we have the credit capabilities, also the commercial interaction with the customers. And sooner or later, we will show it already in second quarter and, as I said, it will be an area of future development of the new strategy.