Bank Polska Kasa Opieki S.A. (PEO) Earnings Call Transcript & Summary

So apologies once again for this few minutes delay, hopefully right now without any interruptions. So as always, we would like to welcome everyone this time to 2019 financial results presentation of Bank Pekao, and warm welcome to everyone who join us here at Warsaw Stock Exchange in person as well as those that follow broadcast live in the web. As always, I'm joined with our CEO, Marek Lusztyn; as well as our CFO, Tomasz Kubiak. And without any further delay, I would like to pass to -- for the presentation.

Thank you, Pawel. Welcome, everybody. I'm very proud to present 2019 results of Bank Pekao. 2019 was a very strong year for Bank Pekao from a business and financial standpoint. It was the strongest year in terms of the commercial activity in a decade, and once more, it was reinforced by our responsible approach to business. We wanted to highlight to you 3 distinctive dimensions that define our approach to banking that we have cultivated through decades, on which we have delivered again in 2019, which are growth and efficiency, customer experience and innovation and responsibility and sustainability. As it comes to growth and efficiency, we have increased recurring net profit by 10%, in line with our guidance. Our commercial businesses are stronger than ever by growing commercial revenues by 12%. We have reached PLN 200 billion balance sheet level. And our cost/income ratio is the best-in-class, we have improved it to 41%. Customer experience and innovation is a key pillar of our strategy. Through client acquisition achieved best-ever results in customer acquisition. We have opened almost 0.5 million new current accounts for retail clients. And to demonstrate our cutting-edge digital solutions, as we were the first bank that allowed opening current accounts through selfie to our retail clients, we are growing 33% in the mobile growth. On the corporate and investment bank side, that was always one of the best business areas of Pekao. I'm very proud to announce that for the first time ever, we have been awarded Best Investment Bank in CEE by one of the leading magazine, that is for the first time ever, so we are increasing our footprint in terms of the corporate investment banking beyond the Polish border. And everything of that happened with record-low cost of risk. We have sustained the best-in-class cost of risk in the Polish banking sector. 2019 was a significant year from the perspective of European Court of Justice rulings, and I'm very happy to announce that Bank Pekao was one of the least impacted. I'm also happy to remind that we remain European champion in terms of resilience, as we were one of the best banks in the EBA Stress Test, and we are also leading sustainable financing, supporting energy transformation of Poland and our clients. So going to the next slide. On this slide, I wanted to reiterate our strong financial performance in 2019 with 10% recurring profit growth delivered, in line with our ambitions. And what is important to highlight on this slide is that we have achieved all of that pulling basically all the financial levels of the P&L. So we have a very strong top line growth. We have maintained best-in-class cost control, delivering 250 basis points reduction in cost/income ratio to one of the best-in-class ratios of 41%. As I have mentioned, we maintained a sector-leading risk management reflected in the best-in-class cost of risk at 43%. This was happening in the environment where some headwinds provided the decrease of the nominal net profit, which was impacted primarily by -- the highest in the country, contributions into the banking guarantee fund, and to some extent, European Courts of Justice charges. Going to Slide #5. This is a very simple message. In 2019, we have demonstrated a very strong acceleration in building profitability and volumes at the pace that has not been seen before. On Slide #6, we are proud to announce that we have crossed PLN 200 billion in terms of the balance sheet size. And since the acquisition of Pekao by PZU and therefore, we have doubled the speed at which we are growing our business. Going to the next slide, Slide #7. This growth was spanning all across business lines and customer segments. We are providing over PLN 80 billion funding for Polish enterprises. We have spent over PLN 2 billion funding for local governments for the modernization and support of local communities, in particular the energy transition of the public transport. We are leading back in terms of financing of the renewable energy and energy transformation, investment loans, supporting our corporate clients were going up 11% year-on-year. And some of the -- those type of transactions are pictured on this slide. In retail, customer acquisition is one of our strategic targets. And I'm happy to underline that in 2019, we have opened almost 0.5 billion new current accounts. We have demonstrated very solid performance in the digital sales processes and unprecedented growth in the acquisition of micro clients. And this was recognized by our clients. So just to mention a couple of awards that we have received for our performance. The Newsweek magazine rated us as the #1 most customer-friendly mortgage bank in Poland, and our Infoline was, once again, named as the top in the country. As it comes to corporate and investment banking, as I said, for the first time ever, we were named Best Investment Bank in Central and Eastern Europe for 2020 by Global Finance Magazine. We remain the best investment bank in Poland for the first time in the row, best corporate bank in Poland for the third time in the row and also we have received a number of awards from other magazines as it comes to corporate and investment banking business and that very strong relationship-based business has also very clear revenue perspective. We have increased our revenue per corporate client by 24% in the last 2 years, which is unprecedented growth as it comes to our history. And it is a demonstration that we are delivering also on this part of our strategy. We said that in corporate banking, we will be pushing towards the increased cross-sell as -- and you can see on the figures here, this is already bearing the fruit. As you see on the next slide, Slide #10, we have best-in-class cost/income ratio improvement, thanks to the very strong and sustainable operating jaws effect. We keep and maintain our cost effectiveness, thanks to a number of efficiency projects that we have launched and implemented. Over the last 2 years, we have decreased cost/income ratio by 400 basis points, and we are constantly increasing our profitability through acceleration in the revenues. So the productivity per employee over 2 years' period was increased by 24%. This is happening, thanks to our market-leading solutions and our DNA of being very innovative bank in Poland, a front-runner of customer-focused innovation. 2019 marks our 90th anniversary of Pekao history. So here, we have highlighted a number of innovations that we were first to put on the Polish market to advance customer experience. Just to name a few, we were the first one to launch the ATM, first one to issue a credit card, the first one to introduce the internet banking in Poland, first one to launch the brokerage house, and most recently, first one to allow opening current accounts through a selfie. We are not innovating for the sake of innovation, we are innovating to bring tangible results. And those results are unprecedented in terms of Pekao history. We have implemented a complete change of operations and implemented new functionalities through our innovation lab and very wide digital transformation program, which allowed us to increase almost by 2x number of active mobile users between 2017 and end of last year. Digital sales share of consumer loans increased by 14%, that is 1.5x of 2017-2018 period. We are now selling 41% of our consumer loans directly through digital channels. And in 2019, we have seen a fifth-fold increase of PeoPay transaction volumes. We are doing this in a way that is responsible and sustainable. We remain a leader in responsible banking with the highest standards of customer value protection, caring for environment, social impact and sustainability. In terms of the environmental implications, we are at the forefront of financing energy transition in Poland. Just to name a few examples, we have provided financing for the largest wind farm financing project in Poland in last year. We are supporting low-emission public sector initiatives. And for small and medium enterprises and individual clients, we are providing programs, we are supporting the energy transition on their side as well. As an employer, we are supporting local communities. We are supporting gender diversity. I'm very proud to announce that as the only Polish corporate, we were included in the Global Index of 500 companies, which are most committed to advancing women career by Bloomberg, that is Bloomberg Gender Equality Index. MSCI, which is rating the overall environmental social and governance framework, rated us with the highest rating among the Polish banks. And in terms of the sustainability, our policies are very focused on sustainable financing and client value protection, which is clearly demonstrated in the numbers that you can see on the following slide, Slide 14, where we are demonstrating that, thanks to responsible approach to banking, putting clients' interest first, responsible risk management, the fact that we remain European champion in balance sheet resilience, as proven by the EBA Stress Test. We had one of the lowest negative impacts of the European Court of Justice rulings in terms of the accumulated impact of Swiss mortgage and consumer loans verdict. Going forward, to sum up on the strategic plan execution, we would like to remind that strategic execution was built on 3 pillars: financial performance with a focus on strategy delivery in terms of the strong financial KPIs; digital transformation and delivering a better digital experience to our customers; and operational transformation to improve our operational effectiveness. In terms of the delivery of financial performance, we are on a proven track to implement 2020 strategy. Last year, we have delivered acceleration of top line growth, maintained cost discipline and maintained risk prudence. So as exhibited on Slide 17, we are on an excellent track to reach our strategic targets and 2020 expectations. On digital transformation of the bank, which is demonstrated on Slide 18, our digital obsession is implemented through unprecedented progress on our Go Mobile road map. We have very strong progress of digital transformation and best-in-class functionalities and user experiences. We started that road map in 2017 with mobile-first strategy with PeoPay 2.0 being awarded for the best financial innovation in the world. 2018 brought us additional functionalities with API, our payment leadership and omnichannel experiences. In 2020, we are about to launch PeoPay 3.0 with a number of best-in-class functionalities and remote channels. And this is going to happen in a couple of weeks from now at a dedicated press conference. And looking forward beyond end of this year, early next year, we are planning to launch yet a new version of our app -- reach of value-added services and personal assistance, which we aspire to be one of the best in the world. We are also well on track on operational transformation, enhancing our sales channels, processes and customer experience. In 2019, we have implemented back office centralization and redundancy program and number of operational transformation and sales effectiveness initiatives in pretty much all the business areas. We have completed pilots of client value management and sales force effectiveness projects in corporate and retail. In 2020, we'll bring a complete delivery of those 2 initiatives. We'll improve our effectiveness in sales and operations. On top of that, 2020 will bring as well improvements in the cash processing optimization, new workflows in the small and medium enterprises and micro clients and redesign of our digital footprint. As it comes to beyond 2020 strategic vision, we would like to build on exactly these 3 pillars, with which we have started this presentation, and we aim at building client-centric bank, achieving a sustainable growth in a digital era. As it comes to the growth and efficiency, we would like to continue on growth while maintaining our leading cost/income efficiency, accelerate transformation programs and work on the further business mix improvements and cooperate with PZU, in particular, in terms of the big data and analytics. In terms of the customer experience and innovation, we would like to focus more on enhancing our customer-centric culture and focus more on net promoter score; further improvements in the digitalization initiatives, which are ongoing and accelerate customer-oriented innovation leveraging on big data and AI. And as it comes to the responsibility and sustainability, we would like to remain the risk champion and resilience benchmark in the European banking, reinforce responsible banking commitment and support our clients in innovation and energy transition, which brings us to the section about the detailed financial performance, and I'm passing over to Tomasz.

Thank you very much. Good morning, ladies and gentlemen. Let me start with the bottom line. We try to present to you the -- our normal business growth, which is around 10% as Marek has anticipated.

We'll improve over the next quarter's presentation.

Yes. We'll improve those. And then the one-offs, which we've been mentioning during this year. Of course, it's almost doubling and highest BFG in the sector. By the way, BFG has announced the new split and the growth just a few minutes ago, and that is in line with what we've been guiding. So we expect our BFG to fall in 2020. The second one-off is, of course, the European court verdict, that's around PLN 100 million impact recognized in the second half of the year. We had much lower sales of real estate, which was a big impact on last year, and we have also paid a little bit more for the restructuring programs because we had redundancies in 2019. So eliminating those one-off elements, the bottom line is growing in a speed of 10%. And looking at -- and looking also at the fourth quarter, that was a quarter with almost PLN 700 million net profit. Of course, without the European court provisions, we would be easily crossing PLN 700 million in year-over-year. That's also quite a nice dynamic. Looking at the reasons of this. It's, of course, the operating jaws that were quite clear in our situation. Gross operating profit is almost -- comparing to the fourth quarter of 2019 almost 15% higher, which is a great success. Accelerating revenues, another quarter of acceleration of revenues and cost control, allowing for good positive jaws effect. From the accounting point of view, of course, NII was the main driver of the growth of revenues and fees and commissions close to 3%. Looking at the business perspective, it was the business revenues that were growing over 10% this year. The total revenues were a little bit impacted by the repricing of the bond portfolio which we've been mentioning, but generating a very -- an extremely successful business development is a feature of 2019 results, and we're extremely happy about this business development. Looking at NII. NII was close to 10%. NIM went up by another 3 bps. It would be 5 bps if not the impact of around PLN 10 million in the NII of the European consumer loan court results. Year-over-year, NII grew around 4 basis points. So that's equivalent to this 1 bps per quarter which we've been anticipating. Repricing being done, strong repricing on deposits during 2019 increasing margin also on the lending side. If we look at the driver of the NII, it's, of course, volume. Volumes, lending volumes have been growing by 8% both in retail and corporate. Quite a diversified growth, in corporate concentration on especially the MID segment but also the SME segment. So particularly the segments that we have been putting our strategy on. In terms of deposits growth, we've been particularly focused on retail as it was anticipated. Corporate is very tactical for us, where we have good liquidity. We don't grow in corporate. We look at the pricing. From this perspective, 9% growth in retail volume is a good result. And also assets under management, it's worth to note that they grew by 11%. Fees and commissions. The growth in fees -- of fees and commissions on comparable basis is around 3.5%. Comparable basis meaning excluding the effect of the European court on the consumer loans. We have booked PLN 14 million in the second half of the year of returning fees to the customers, which reduced that income on the fee side, on the lending fee side. Without -- with this effect, fees are growing at a pace of 3%. And I think that growth of fees of around 4% is sustainable for us as it was presented during the last quarters. Majority of the categories of fees and commissions are growing. When we look to costs, very successful cost lines. Costs well below inflation even if we take into consideration the redundancies program. Without excluding those costs, the cost dynamics is 1.7%. A lot of initiatives have been made to cut costs, both on the HR and non-HR cost. Some of those are initiatives or effects of those initiatives are spent, of course, because we're investing, and we're investing a lot as it was also presented by Marek, but very good cost discipline, allowing us to get closer to the strategic 40% cost/income ratio. When we looked at cost of risk, we are known for great cost of risk results. The fourth quarter was slightly higher, and you should take 2 things into consideration. First of all, part of the provisions related to the Swiss franc mortgages have been booked in the provisions lines. That's around PLN 36 million in the fourth quarter. We have been also doing some write-offs on lending provisions in one of our subsidiaries in the mortgage bank. Over there, a portfolio -- a level of provisions have been significantly increased. That's around PLN 35 million impact of provisions on that subsidiary, and this is also something that have impacted our fourth quarter provisions. It's a one-off provision, mainly related with changes in the value of the collateral that has been significantly reviewed, but generally, cost of risk discipline is on track and the full year of 43 basis points excluding those Swiss franc mortgages, it's a great result in the sector. Capital ratios, liquidity. This is all on track. Liquidity, quite high. LCR, quite high at the end of the year. Total capital ratio above 17%. Tier 1 ratio above 15%. In a position to fulfill all requirements. On the dividend, as you know, the management Board did not yet make the decision on the dividend. It is expected in the second quarter. When we discuss our strategy, we don't look only, of course, about the 5 most important indicators. We look at other things. Acquisition has been very strongly growing, and it has been growing actually all across the bank. So both in retail as the new current accounts, but also very strong acquisitions in corporate and in SME. We have been growing in consumer loans. We have been growing in mid-corporate segments and SME segments as it was announced in the strategy. We are also very much improving the revenue per customer -- per corporate client. So those -- all those cross-sell initiatives are very much helping us. The digital agenda is not only in the new application, but you can see a big increase in the number of clients that are using our mobile application, one of the, I think, strongest growth in the sector in the fourth quarter. Also, digital sales through mobile trial and consumer loans are now close to 40%. Last but not least, efficiency. Decreasing number of branches, decreasing number of FTEs, not impacting revenues growth. Revenues are accelerating. Efficiency is increasing. Cost control, one of the best in the sector. So having said that, just summarizing our results. Net profit or recurring net profit at the growth of double-digit growth, 10%, thanks to actually great acceleration in the business, very strong double-digit growth in business revenues. Strict cost control, cost/income ratio are on track for the strategy, 40%, very good acquisition. Net profit touched by the European Court results, but thanks to the approach of the -- long-term approach of the bank, being keeping customer interest as the most important one, we are one of the least touched banks in this sector, both in terms of consumer loans and in terms of Swiss franc mortgages. Thank you very much.

Thank you very much, Marek. Thank you very much, Tomasz. So concluding maybe the first part of the presentation, we'd like to open right now the Q&A session. First, inviting questions from those that joined us here in Warsaw, and then we will follow up with questions from those that join us on the line, please.

Can we have the microphone, please? There's a gentleman with the question.

Maybe I will just repeat for -- so everyone could hear there was a question about dynamic of key retail loan products and what do you expect in the coming quarters?

Sure. Mortgage sales despite slight decreasing, and this is -- the decrease is related with the social -- with the government programs where -- which some of them were stopped and -- or changed, and we had big participation. So mortgage sales went slightly down year-over-year because of that. But generally, those are good levels and good volumes, and I wouldn't worry. In terms of consumer loans, we see the market a little bit weaker and -- partly probably due to this European court verdict, maybe due to some other factors, but we are looking forward for speeding up in this segment. The bank is -- and the network is very concentrated on this. A lot of internal projects have been also set to increase efficiency of the network. So we are looking forward for acceleration and further growth in the sales in the next quarters.

Maybe it's worthwhile to highlight that both in mortgage lending and in the cash lending, we had actually quite substantial improvement in the margin on the new sales. On mortgage lending, the margin improvement on new sales is 9 basis points, and on the cash loans is double-digit percentage wise.

Okay. So maybe I'll just repeat for the benefit of everyone. There was a question regarding impact of revaluation of stake in VISA impact on Q4 results.

That was around in the range of, say, PLN 30 million and that was related with the review of the level of discount that is applied to those shares. And we know that the market has done such a review. During the last 2 years, we have updated more or less to the market standards, and we assess this level.

Please, we've got the microphone now, so should be smooth now.

So maybe usual question about your guidance on NIM. Whether you maintain the 1 bps improvement per quarter in 2020? And maybe the second question on costs. Firstly, of BFG, given this -- some communication from the BFG, what scale of decline do you expect for 2020? And the second question on cost is, what could be the provision for the planned redundancies in 2020?

On BFG, less than this year, up to PLN 50 million, let's put it like this. And the second question, I'm sorry, I didn't hear.

What can be the expected provision for the planned redundancies?

I think you should look more or less, I would look in line or at this stage, what we can say is probably proportionally to what we have in 2019. We are just starting the discussions with our unions on this. And upon a settled agreement, then we will communicate the potential level of provision which would be booked in the first quarter 2020. At this stage, the best assessment would be proportional to the number of people engaged in the provision that we made in 2019.

One question, maybe on the revenue side. In 2019, you experienced a decline in the yield on the securities portfolio and should this continue in 2020 as well given the recent level of interest rate in Poland?

No, I don't expect material effect on this. Our yield on the portfolio is more or less close to 2%, which is close to the 10-year yield on the market, that is currently yields on the market are somewhere between, let's say, 1.6% and 2%. So we are somewhere within this range. And I don't see a large amount of portfolios that would be material.

Maybe 1 question on cost of risk. Your guidance is around 50 bps for this year. So do you think it's quite, let's say, conservative or it's something that will eventually happen? And the question is where this growth will come from?