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

Good afternoon, and good morning. We would like to welcome everyone to Bank Pekao Quarterly Results Presentation. It's Pawel Rzezniczak, Head of Investor Relations, and I'm joined today by the management team. We've got Leszek Skiba, CEO of the bank. We've got Tomasz Kubiak, CFO. Also on my left is Marcin Gadomski, our Chief Risk Officer as well as Chief Economist Ernest Pytlarczyk. As always, the session will start with the presentation. And afterwards, we'll follow with Q&A. First, we will start with those questions asked by participants on the line. Afterwards, we'll go to the questions that have been placed with our mailbox. [Operator Instructions] With short introduction, I would like to pass to Leszek Skiba to kick off the results presentation. Thank you very much.

Thank you very much. Before we start, I want to outline the agenda of our presentation today. First, we will discuss our achievement in the second quarter. Next, it is important to talk about macro environment and financial results will be presented by Tomasz. And we will conclude with overview of our asset quality and approach to risk management. It was very tough quarter for the all banking sector in the second quarter was very tough, but it's also the quarter of response of our bank to difficult business conditions due to COVID-19. We responded with balance sheet growth of 20% year-to-year, reaching the PLN 235 billion in total assets. It is strong number for us. It is time when we were very active in supporting our client access to bank financing and public liquidity programs. We -- it's also the time of efficiency, push -- and digital push of our businesses. And the second quarter of it's also the time of prudent risk management, and it is reflected in our book that we established PLN 350 million provisions related to COVID-19. Net profit was significantly impacted in the second quarter by credit provisions. The number is -- the number of provisions is PLN 350 million. It's 86 bps. That is why we saw net profit decline in the second quarter, but also it is time of our client activity acceleration within the second quarter after because of the recovery of Polish economy. It is important for us, a time of -- when we reduce cost-base by 4%, and it is -- it had impact of -- on net profit in the second quarter. For us, the second quarter is the time of total assets growth. Now we are the second bank in Poland. The growth was 20%. It is also the time of the growth in deposits, 21% year-to-year. It's shown that we are safe haven for our clients. And also, it's time of when we saw good pace of lending growth. For example, in mortgage loans, we saw 8% of growth in the second quarter. It's also the time when we supported our clients. A lot of important transactions. We were involved in public supporting schemes, PFR and BGK. It is also important for us to be with clients and to use all opportunity to help our clients because of the all COVID-related risks. And also during this time, it was also the time when we were determined to push all efforts. And for example, it's also the time when we launched a new application, new app for our youngest clients and their parents for children older than 6, and there were also a lot of new initiatives across the segment to enable our client a broader digital services. We saw that action we take here got results across segments. We saw the growth in number of active mobile users. We saw also the growth of sales using digital channels. For example, consumer loans. And we also saw important growth of new current accounts initiative via digital channels. Within the second quarter, we saw important business growth, of course, because of the economic recovery, but we saw the growth between April and June by almost 80% in new sales cash loans, new acquisitions. And also what is important for us, the growth of investment product sales. We are prudent. We maintained prudent approach in balance sheet origination management with reduced average consumer loan ticket. We are active in use of guarantees in new SME loans, and we continue frontloading provisioning with one of the highest COVID-related provisions in Polish sector, 86 bps. We are also efficient. It's very important for us to reduce cost, operating cost-base. This -- it was achieved and operating cost-base reduction was 4% year-to-year. Next, what is also important for us to -- with the BFG charge were lower by almost 30%. And we are also efficient. You can see that the growth of revenue per FTE is almost 10%. It is also important for us. Thank you.

Compared to other EU countries, Poland's outbreak of COVID-19 has been an order of magnitude smaller. This allowed the government to proceed with its reopening strategy. Now we are in phase 4 of this reopening. And actually, all major restrictions were -- have been already lifted. Now we are not obliged to wear mask in fresh air. Fitness centers, gyms, cinemas, they all have been reopened. The recent doubling of infection rates from 300 to around 600 per day may lead to more careful enforcement of existing restrictions according to statement of Ministry of Health and some public officials. We cannot rule out that on local levels, some of the reopening decision may be rolled back. But we think the economic impact of those possible restrictions and a new wave of COVID-19 will be negligible in the moment. So definitely, we do not expect the recovery to be derailed by the most recent actions. So as I mentioned, economy has been on a recovery path, and we track the recovery. So lockdown has started in mid-March and essentially ended after Easter with restriction being gradually lifted in several stages, as I mentioned, after April 20. The economy has bottomed out in third quarter -- in the third week of April and has grown steadily since then. Mobility reports indicate that Poles' behavior is almost back to normal pre-COVID levels. We track the economy real time by our trackers which use both our internal bank data and the data from public domain. All indicates that Polish economy is recovering kind of brisk pace. We know that easing of lockdown measures led to more consumer demand and thus more production. We expect this recovery to continue, although at a slightly slower pace, because the vast majority of so-called pent-up demand has been already satisfied. And we think that investment activity may be subdued in the months, quarters to come. But definitely we stick to our forecast of pretty shallow as compared to other European countries' recession point of minus 4.4%, and we expect recovery to continue and next year grow, we estimate at 4%-plus -- more than 4% year-over-year. Thank you.

So Slide #15, I would start from the main building blocks that are composing -- impacting on the net interest -- the net profit of the bank. The big thing that you saw is that net profit is actually dominated by the COVID provisions, which constitutes PLN 441 million in the first half of the year, in line what the European peers are doing, one of the highest in the published banking sector. Apart from that, BFG has been falling, as it was anticipated, last year, and this allows us to cover the higher restructuring costs that we are incurring in this year. So looking at the results, net profit down by 34% half-to-half and 38% quarter versus the second quarter last year, as I was mentioning, dominated by the COVID provisions, by frontloading of the provisions, some pressure on revenues, but offset by great dynamics of costs. And that is the element that you can see on Slide #17, where our gross operating profit is going up by 6% year-over-year. Half-to-half, so cumulative results, still positive dynamics on the revenues. But comparing the quarters, 2% -- more or less 2% decline in revenues, offset by a very dynamic cost reduction program, reducing costs by around 4%. Now net interest margin year-over-year growing by 5%. We managed to keep this quarter flat versus the quarter last year. Net interest margin has been decreasing year-over-year, and that's an influence of 2 elements. First of all, part of the interest rate cut is already visible in our figures. That's around 17 basis points. The second element is the excess of liquidity where we see a higher growth in deposits versus loan. And those -- and this liquidity access is invested in our investment portfolio, on which yield we are also doing a good job, I think, on increasing that, or on enhancing that yield through additional instruments. So that's an element which is decreasing the net interest margin by 7 basis points, but slightly helping the NII. Now a lot of questions that we saw from the market was regarding the overall net interest impact and the evolution of the net interest margin in the future, and we wanted to give you some highlights on that on Slide #19. So apart from the 17 bps that we already incurred, we see that in the second quarter of the year, when the loans and deposits fully repriced, the margin will further go by around 20 to 30 basis points. So the overall effect of the rate cuts will be between 50 to 40 basis points on our NII. However, we are doing quite a good job, I think, on repricing of our deposits products in short term, but also on the lending products in the longer term. For example, if you look in our consumer loan sales, that's the graph on the right-hand side of Slide #19, you can see that the new -- the yield -- the total yield of the new production has not changed. So with improvement in pricing, the structure of that pricing, smaller tickets, but also more digital. The total yield on the new sales was kept stable, which means that once the full portfolio reprices, this will have a positive margin on the NIM. We've -- also are doing quite a good job on repricing the other elements of the loan portfolio that refers to corporate, to mortgages, to SMEs. And we assess at this stage that the long-term effect of this repricing will allow to reduce by 30% the total effect of the cut of the rates. So this is our, let's say, first assessment at this stage, what we can do with repricing. In addition to that, the excess of liquidity being invested in a well-balanced investment portfolio will also allow to somehow offset the effect of the rate cuts and improve NII. In terms of volumes, lending volumes grew by 6% in retail and 3% in corporate. For sure, the demand of the loans is lower than it was before. For sure, we see that a lot of our clients have been using those programs, PFR and the BGK programs supported by the government and having extra liquidity from one side, for sure, this will positively impact cost of risk. From the other side, of course, it generates a little bit lower growth on the lending side. We also quite -- keep a quite conservative policy in these areas. In terms of deposits, we've been seeing massive inflow of deposits. We're very happy with the growth in retail, 13%. Corporate also growing double-digit, 20% year-over-year. Part of this is resulting from the PFR funds. Part of this is coming from the fact that extra liquidity from PFR is also coming to the accounts of our customers kept in our bank. We are also perceived as one of the safest banks in Europe and one of the safest, of course, in the country, and we usually benefit in such stressed situation. Some recovery on mutual funds volumes also visible in this quarter, and we count on this in the next quarters. I think you should also note that -- which is showed on the slide that in the end of the second quarter, we had some extra liquidity. That was some short-term deposits which inflow in the last days of June and actually went out in July. So in looking a little bit more forward, you should eliminate those kind of extra inflows. Fees. Now for sure, fees are most under pressure in the second quarter from all the revenue lines. We did a great job on the trading income. We did really a great job by the trading -- by the trading team, but lower activity of the clients has called some decline on the fees. For sure, recovery is -- in fees income is one of our priority. On the right-hand of the slide, you can see where we are trying to do that. So for sure, mutual funds and sales of insurance products is something that we will very much focus on to increase penetration of our customers in those products and generate additional fees. We, of course, will focus much better on the customer acquisition and on the transactionality of our clients. We will also do a further review of our fees policy in order to generally increase the dynamics of the fees, let's say, somehow in line with the growth of the lending portfolio for the future and also increase the share of fees in our revenues. Cost discipline, I think a fantastic job in this quarter and in this year done by the organization. We benefit not only from lower BFG, but we benefit for a very strong cost discipline and a very strong set of initiatives of cost-cutting. And I would say that half of those initiatives are the ones that we will benefit in the longer term. Those are things that reducing the number of [indiscernible]. Those are like in-sourcing some IT activities, which allow for lower cost reduction. Of course, part of the cost reduction is, let's call it, temporary for this year. That's generally advertising spending, which is much lower our consultancy or even valuable compensation. However, we also incur a lot of additional costs related with giving -- with providing safety to our customers and our employees in those times. So taking those additional costs into consideration, I think the growth of almost 4% reduction on comparable basis in cost income is a great achievement of this quarter and very important to deliver results also this year. And last but not least, from our side, I just would like to remind you that we still remain extremely safe, both in terms of capital ratios as well as liquidity. All those at very good level with large buffers versus the sector and our main peers. Passing the voice to our CEO for the next comments. Thank you.

Thank you, Tomasz. Marcin Gadomski, CRO of the bank. Good afternoon, everyone. Now we are on the Slide 26, and we give you some information about our asset quality and how we operate right now in terms of our portfolio. So as you can see on Slide 26, the cost of risk for the first half of 2020 is 100 basis points, which is about twice our long-term strategy goal of 50 basis points which is very -- what is very important to stress here, and what already was said during our presentation, is that 2/3 of our cost of risk for the first half is related actually to kind of statistical future losses, some our expectations regarding the portfolio. So actually do not see any deterioration of the portfolio. It's just taking very seriously requirements of IFRS 9, which went into the force in 2018. As you know, compared to IAS 39, IFRS 9 requires to front somehow take future perspective forward-looking information should be incorporated into creating impairment allowance for provisions. So of course -- and taking into account this approach, of course, we are observing very big stress, which our economy actually suffered in the -- especially in the second quarter. We, of course, see different programs which are being implemented both by banks and by the state. But then on the other hand, we only will see in fourth quarter how it will impact actually our clients because different liquidity programs will be maturing about October, September. So then we will see who are actually the losers and who are the winners of the situation because if we look at the aggregated information, of course, we see some rebound. But still, we expect that some of our clients will suffer anyway. And although liquidity issues has been addressed so far, then we'll be starting observing solvency, how it will develop in coming months. And going a bit into the details how we approached provisioning in the first half of 2020. So it's very difficult, almost practically impossible to go bottom-up from exact models of [ PD ] models or LGD models for calculation of impairment allowance. And this is something which is actually very common across the market. So what we thought is right for estimating provision was to look backward and see how credit portfolios were behaving in the past. We looked into the years 2008, 2009, and we saw that generally provisioning levels on the market then was double. And we took into consideration all the information we had. And based on it, we made expert assessment, which was finalized with increasing PD for retail portfolios by 50% and corporate portfolio by 30%. Additionally, due to lockdown, we think that the recoveries on nonperforming portfolio could -- can delay by a few months. So we also incorporated this fact in our estimation. And additionally, we reviewed mostly impacted industries by COVID. So basically, for example, shopping malls or hotels, so hospitality, transportation, recreation, these kind of industries. And based on the review of our portfolio, we decided to transfer part of this portfolio into stage 2, which as you know also creates additional provisions. But then if we look at the right side of the slide, you can see what was already several times reiterated during presentation that our NPL levels do not actually materially increase. So it's the best proof I think that portfolio is of very good quality, and we do not see any actual realized loss, which would be above what we normally observed. And actually, at some portfolio, DPDs were even a bit lower due to moratoria programs, which were implemented by the bank and actually by the sector. And going into some description about our activity on the credit portfolio management, actually we take -- it takes lots of energy for us right now to -- and we invest a lot of, I should say, energy into this area in the bank. First of all, in the area of monitoring. And here, to give you an example, we updated our early warning system to properly identify clients where some issues may arise in coming future. Basically, looking at the current accounts, looking at the industry looking -- working also closely with our macroeconomist. We created also kind of intensive monitoring committees, which review regularly portfolios with some early warning signals. Also in the retail portfolio, we actually made quick readjustments and recalibration to our early vindication model. So also our kind of way of how we communicate with clients currently and how we segment clients for this communication, retail clients, also was adjusted. In terms of credit policy, there is also continuous debate and about great policy of the bank, of course, internally. But as it was said, we try to behave on one hand rationally, also kind of responsible for our clients and also for our bank. So here, for example, for corporate clients, we made some changes to the credit analysis which we perform. We focus much more on the very current information, what are the current account flows at our customers, how COVID impacted operations. What is the financial strength of our clients. So this is additional part, which we always discuss were underwriting corporate clients. In terms of retail clients, on one hand, we, of course, want to develop our relationships with clients and provide credit to them. On the other hand, in the kind of mode of responsible lending, we think it's not a good time for our retail clients to get highly indebted. And these are the regions which we try to avoid at least for the moment. Another part of our credit activity is very active participation in various state support programs. So we are one of the most active bank in terms of the guarantees for the loans. Also, we are one of the leaders of the distribution of Polish Development Fund subsidies. But actually, all in all, the tool which was widely used and was most popular across our clients was our private moratoria, so the program which was developed by the bank and our clients could have some moratoria on repayments, both in retail and corporate segment. So on Slide 27, just to kind of step back and put some helicopter view on what I said and to remind you that our bank for many years had the lowest cost of risk or one of the lowest cost of risk in the sector. So we think that we are very well prepared compared to the overall market for current situation. Also, our coverage ratios for NPL portfolio is above market average, which also limits natural risks which are related to the kind of estimation of impairment allowance in stage 3. And what was also already said that if we take multiplier of our operational profit to the -- our normal level of provisions is the highest on the market, which shows the buffer in absorption of additional losses which we as a bank have. If we move to the Slide 28, something -- a bit more detail in this direction. So we have a very well-diversified portfolio. We are present in all market segments. And actually, we are over-weighted towards safe portfolios such as public sector, peer and mortgage loans, large corporates, which are by definition stronger than, for example, SME micro enterprises, which we are underweighted. We also, as you should know, have very marginal exposure towards Swiss franc mortgage loans. And on the last Slide, 28, we have this information about different programs supporting our clients. I touched already a little about it. What I could only add right now is that we were very active and pro-client, I would say, in terms of allowing of -- allowing our clients to take advantage of these programs. They could take advantage in all channels. So also remotely via mobile Internet, et cetera. And still kind of penetration of our clients with these programs. Like, for example, 6% in retail segment is lower on the market, which we believe also shows a very good quality of our portfolio. In terms of guarantees, one thing to add, apart from [ Polish Development Bank ] program of guarantees where we are one of the most active banks, we also -- and this is something which differentiate us from many other competitors. We are very active in using guarantees provided by different European bodies. So this is something which we really believe in, especially in the segment of micro enterprises and small and medium enterprises. And I think it's for now what I want to say about our policy towards portfolio. Thank you.

Thank you very much, Marcin. With that, we would like to conclude the presentation part of our discussion today. We would like to kick off right now the Q&A first with those questions from the participants on the line. Afterwards, we have additional questions from our mailing list that we will share answers to. So with this, I will ask the moderator to kick off the Q&A. Thank you.

And the first question received is from Sam Goodacre from JPMorgan.

I had a question related to the participation rates in your private moratoria. Could you let us know the sorts of volumes or participation rate that you are experiencing in both retail and commercial? And then how are you thinking about that within your cost of risk? Is there a degree of sort of provisioning you're taking now to account for potential deterioration in those loans? And the second question I had is on your cost of risk guidance for the second half. You've alluded to frontloading. So does that mean we ought to expect a lower cost of risk in the second half relative to the 100 bps reported for first half?

So Marcin Gadomski speaking, CRO. I think I can take this question. So first of all, in terms -- in the presentation, you have kind of utilization percentage share in terms of number of clients. But if we would switch to the portfolio levels, so basically in our retail portfolio, about 8% of the portfolio is covered by private moratoria. And about 3.5%-odd percent of corporate portfolio is covered by our private moratoria, which -- and if we look at our total loan portfolio, it's about almost exactly 5%. And in terms of kind of performance of -- so maybe, first of all, this moratoria will mostly major in terms of retail in July and August, whereas for corporate clients, we see the peaks in July and September, yes. Of course, some of our clients over the kind of moratoria for them were completed and what we observed only a few small percent, like 3.5% or 4% of retail clients have early DPDs, I would say. But -- so we consider it as a very good result. So a vast majority of clients is returning to normal payment of loans, which for now seems to be very good sign. So as for now. And even this small percentage of clients, I think that still many of them actually simply forgot -- could forget that after a few months of moratoria they now need to start paying. So we are covering right now them with our monitoring actions and for sure part -- a significant part of them will start repaying. In terms of incorporation, it is in cost of risk. So as you know, there is -- or maybe to let you know, there is this EBA interpretation relating to private moratoria that if they are kind of addressed to all clients, and they are not limited, for example, to clients which have some difficulties, lost their job or some are in deep liquidity squeeze, if they are open, actually we should -- do not hit as itself, I treat as the reason for transition to stage 2 or to stage 3. So as a general rule, these clients were not transferred to stage 2 or stage 3. They remained in stage 1. However, some of them -- I don't have the statistics with me right now, but I can even kind of imagine that some of them can have some different indications of increased credit risk. And according to IFRS 9, they need to be transferred to stage 2, but it's not a significant figure. It's not something which we would kind of identify and observe as a separate issue. In terms of the second question, so cost of risk, I would say -- I would -- it's very difficult actually to answer this question. As I said, vacations are maturing in coming months. State programs, subsidies for corporations, we see there's quite a lot liquidity on banking accounts of corporate clients. So on aggregate levels you see a rebound of kind of output of the economy. So you might be in positive mode. But the fact, on the other hand, are that these liquidity measures will finish actually in September, October. So I think that only in the fourth quarter we will really know how it will be transferring into realized losses. So having it all in mind, we are -- our kind of indication for the whole year is between 90 and 110 basis points. But then of course, there is possible positive scenarios that it will be less. It's simply very difficult to say it now until all this liquidity measure will not be completed because they blur a bit the picture.

So I can only add on this stage that the government and central banks, they are all doing their best to make this recession look different than the others.

And the next question received is from Anna Marshall of Goldman Sachs.

Firstly, in terms of your expectations for this year on loan growth, could you please provide your expectations by segment for the cost specifically? I see that in your presentation you've updated your forecast for the sector as a whole, but I'm wondering whether -- how the costs should compare versus the market. And then my -- also in terms of your kind of longer-term strategy for different segments like...

Sorry, Anna…

Yes.

Apologies, but would you be able to just repeat the first questions and just be a little bit louder?

The first question is on loan growth. What are your expectations by segment for Pekao for 2020 as a whole? I see that you've updated sector expectations, but wondering what do you expect for Pekao versus the market. And also the same kind of question more in terms of your strategy for the medium-term in terms of focus segments. I appreciate you have a strategy in the works, but any kind of early indications on the front there. So that is my first topic. And the second topic is on dividends. Have there been any updates in terms of your communications with the Polish regulator, especially following the ECB announcement? In particular, do you expect them to make any changes in terms of their usual annual procedure for dividend criteria release, i.e., may they add any extra criteria to dividend payment or anything like that?

Right. Thank you very much, Anna. In terms of loan growth, at this stage, we're, let's say, forecasting a total loan growth of, let's say, somewhere between 2% to 3%, let's say, on the overall book, probably stronger on mortgages. And as you're seeing today, maybe not double-digit, but somewhere between, let's say, 5% and 8% what you're seeing now. Probably stable consumer loans or slightly decreasing, but this will depend on the -- on very much on the credit policies, especially the average ticket because at this stage we've been more conservative here than our peers, but also as Marcin was anticipating, we will see what the situation, what the development of the second wave of the pandemic will look like in the second half of the year, and we will be taking those decisions on the riskier assets very cautiously. In terms of corporate, we see a lower demand of growth. So let's say, 2%, maybe 3% growth in volumes is something that we might be seeing, maybe a little bit better. But at this stage the companies are -- have received quite a lot of cash from the Polish Development Fund, which we've been also distributing. And they don't need the loans at this stage and also a pickup in investments will probably take a little bit of time. So the demand on the loan on the corporate will also be limited. This is what I answered your question. In terms of strategy, you've been -- I think we can only keep up of what we've been so far anticipating so that we will publish this in -- by the end of the year, and all the details will be presented then. In terms of dividends, we are not expecting additional criteria. KNF has been very open at the beginning saying please don't pay any dividend in 2020. And as ECB has been doing this actually in 2 steps. This first up to a certain moment and they extended this moment. KNF was very clear. We don't expect changing the criteria at this stage.

And the next question received is from Gabor Kemeny of Autonomous Research.

I have a couple of questions about your margins. We saw a step down in funding costs. I think your funding costs roughly halved in the second quarter. I assume you have more flexibility with deposit pricing when you have such strong inflows. Would you be able to comment on the sustainability of such funding costs? And do you think with those temporary deposit flows reversing in July you can [Technical Difficulty] which you have -- you talked about 20, 30 basis points pressure from the lower rates. And I think you are saying that 1/3 of this might be offset by loan pricing. If we put this 2 together, is this a fair way to think about your margin outlook in the second half?

Yes. First of all, in terms of the funding strategy, I assess now that the impact of the interest rates will be lower than we initially thought for 2020. Also because we were able to dynamically much faster reprice the deposit volumes and lower the funding costs than initially anticipated, we also took the advantage of investing of that liquidity at relative in good -- at those times at good yields. So some of the funding costs was really done, I think, faster, which will allow to reduce the impact for this year. Nevertheless, of course, as I anticipated on the slide, this will be -- total effect of these rate cuts will be between 40 and 50 basis points on the NIM compared to pre-rate cuts NIM levels. Now when we are talking that 30% of that rate cut can be offset by repricing, this will be a longer impact. So we are talking about a 2 to 3-year horizon when we needed a new production with higher margins to actually come into our portfolio. What is the most effective in the short term is, of course, working on the funding because the funding repricing. In the second quarter -- in the third quarter, we still expect some effects of repricing of the margin. This will come from term deposits where step-by-step, some of the deposits are maturing and are repriced later. We are also -- it also takes usually a few months to reprice some of the saving accounts because you need to notify the customers in advance, and you cannot do it on the first day. So yes, still in the third quarter we still -- we will, of course, see some effect on the assets, lowering the margin, but we will also see some repricing effects on the deposit side.

And if we put this all together, can we assume that the margin decline in the second half should be less than 20 basis points?

No. I would expect it to decline by somewhere between 20 to 30 basis points.

And the next question is from [ Aaron Webborn ] of Societe Generale.

In terms of the risk costs in the second half, will we be seeing, in your view, further COVID-related provisions and some transfer of ones that you've already made into the more specific risks? Just to get an idea of you're saying that the risk costs are going to be similar in the second half to the first half. But so far, you haven't seen any NPL deterioration.

Okay. A part of kind of broader picture I already described during the presentation, answering the question before. But if I would comment a bit on the structure, which still, as I said, is very difficult to forecast. But then if we look at current forecast, yes, which we have that recession, if we look at the whole year is in 2020. And in 2021, there are already some rebound. So I would expect that at least a significant part of this COVID forward-looking provision would already be kind of consumed by a materialization of some delays or some, I don't know, restructuring issues for some corporate clients, which we would observe at the end of the year. And then as a kind of forward-looking provision would play a kind of smaller low, let's say. But then, of course, it depends on how will -- pandemia will develop, et cetera, yes. But at this stage, I would comment in such a way.

Okay. So can I -- sorry, can I follow up?

So if I can just add a little bit, one more comment. I think taking into account the unexpected, let's say, pandemic situation, I think it wouldn't be fair to give you a good guideline on the second quarter of provisions. We can fairly say that the provisions that we have done in the first half of the year and which we have shown to you are clearly frontloading. So we do not see a deterioration in the portfolio. We anticipate what we can. But it's very difficult to give you a fair judgment on what will be the second half of the year in terms of the frontloading policy and of the portfolio. We will be acting in line with the situation. And I think this is the most fair what we can address.

Okay. So is it fair to assume that the COVID provisions taken in the first half are, to some extent, targeted towards weaker industries where you expect restructuring to come perhaps at year-end I think you mentioned? And then as the moratoria [ strictly ] on retail mature, then you'll know better what to expect on that going forward? Is that the process?

I mean, as I already was talking, yes, even at aggregate level, we see a kind of recovery of the economy. We have kind of tendency to look at average, yes. But average consists of some distribution. And if we look at the distributions, there will be some losers and some winners. And it's, I think, very rational to expect that some particular clients or some sub industries will trade better and the other [indiscernible], yes. So we assume, of course, that there will be some segments of the market which will have difficulties, yes. And others are putting differently there is rationale to expect that this is a likely scenario, yes. And that's why we provisioned for it.

Okay. Can I also ask you about what your interaction with clients is in the run-up to the maturing of moratoria? I mean do you have restructuring plans in place, payment plans and so on? Or are we facing a bit of a cliff edge when the moratoria ends? How are you approaching?

No, we are very -- as I already was talking, we are very active in monitoring our clients, especially if we are talking about enterprises or companies. As I said, we have kind of put intensive monitoring units. We have 6 or 7 intensive monitoring, I'm sorry, committees, where people from business who have direct access to the client and people from risk are sitting together, and it's being done. It was -- it were weekly meetings at the beginning. Now they are biweekly. And depending on the segment of our portfolio, different people dealing with this portfolio are sitting where based on the early warning signals of either because we see what's going on account of the customer or because we know that they took a vacation or they're asking us because, for example, if you look in shopping malls, we have some waivers, yes, to the covenants because, of course, revenues for short term of these companies were lower. So some of the covenants needed to be adjusted for short term. And one of the things which we're doing when we are granting moratoria, we're requesting clients to provide us monthly information, yes. So one of the conditions for the moratoria is monthly information, which is much more frequent with -- than what you usually do. And based on this information, monitoring of the accounts of the customer liquidity positions, we are -- first discuss it internally, risk and business and discuss with the clients. And we always, a few weeks before at least know that, for example, some vacations being over or some exposure is finishing which need to be rolled over or whatever. And we are in advance discussing with our clients how we should approach if there is some issue or not. And what we -- another thing, what we did, for example, some banks gave 6 months vacations to corporate clients. We were not so willing to do so. We prefer to give 3 months with kind of the promise that if it will be needed, we can prolong it, but we need to have this checkpoint what's going on with the client and have some flexibility with our decision.

That's helpful. Good. One final follow-up. Is the run rates of non-personnel costs in Q2 reasonable? Or do you think as the activity starts up again there will be some element of costs coming back into the P&L in the second half?

For 2020 it's reasonable because, for sure, the situation will not be so that we can let costs off and still looking very [ consciously ]. For 2021, I think part of those costs will be reverted, more or less, let's say, 50% of that cut could be resulted and the other part, as I was mentioning, so the one related with IT consolidation or in-sourcing with head count reduction and so on, those are the permanent, let's put it like this, savings. But I would expect negative dynamics of costs this year.

Lovely.

Lovely, but not easy.

[Operator Instructions] And the next question is from Olga Veselova of Bank of America.

I have 2 remaining questions. One of them is about dividends. How would you estimate probability that KNF can allow to pay extra dividend in 2021? Would you say this is low or high probability to your best guess? My second question is about your loan growth. When you answered a question about corporate loan growth, you mentioned that one of the reasons for loan growth to be low is support from the Polish Development Fund. So companies have sufficient funding or funds for now. When do you think this factor will be over?

Right. On the dividends, it's a question I wouldn't like to guess the probability because it's actually a macro guess or a pandemic guess, so. So if the pandemic situation would stabilize and the prospects of the economy in 2021 would be reasonable and safety of the banking sector will be reasonable, then I don't see reasons for KNF not to allow for extra dividends. If the situation would be tough, and we would have a continuation of the second wave or anything like this, then, of course, KNF might not allow for a situation. They will probably also make the decision bank by bank because this would be an individual opinion. In terms of support of the government, I think that currently what we see is that once the corporate received the money, then they, for example, don't use turnover loans. And this is a reason why we see that the loan growth in corporate is much lower and impacting. There will be a moment when those support funds will not be as strong as they are today. And this will be a moment where corporates will start to use banking lending from one side. The other part, of course, of that question is investments because in an unknown environment, the tendency to do investments for corporate is usually lower. And of course, positive prospects for the future will also always generate pickup in investments. I don't know, Ernest, if you want to add anything to what I said.

Yes. In periods of increased uncertainty, sometimes the prerequisite for investment activities is simply the investment activity of state or Polish state in this particular case. So that is why the investment outlook seems to be tricky and less certain now. And based on the government program, we would then appropriately update our investment outlays forecast going forward.

Can I ask one more question? When you allocate free liquidity in the securities now, what is your yields currently?

Well, we usually invest in published [indiscernible] corporate bonds and also some new securities that come onto the market. So I would say, for new, we are even able to capture yield close to 2%, somewhere between 1.8% and 2%, let's say, for the new bundled yield.

[Operator Instructions] As you receive no further questions, I hand back to the speakers.

If there are no further questions, we will take also a couple of those we've got from few brokers on our mailbox. So maybe we're starting with those questions from Haitong Securities. And we -- I would say, some questions were covered already, so they will be narrowed. But maybe could you please comment on the status of your restructuring program that you set up provision in Q1? And to what extent you would -- do you plan to rely on voluntary versus, I would say, compulsory redundancies to complete this?

Shortly, I can say that we continue this program. We see that this is demand from our people working in Bank Pekao. That is why we decided to continue.

We expect a similar financial impact that we have been anticipating so far. So no changes to the original plans. Maybe there was some delay in time, maybe a little bit more voluntarily, but generally financial impacts should be similar.

Another question also from Haitong. Is -- how do you see currently the traffic levels across your branch network in a quarter and obviously over recent months since the pandemic started?

I would say that that's a very dynamic change of situation. So of course, we had a situation when people were not present in the branches. And we were also reducing the time of working of the branches. Then the traffic became coming back to normal, and we had to extend the hours of working of the branches. So I would say that this is a, let's say, ongoing process, but as you know, Poland, as Ernest was saying that the activity of Poles has reduced to pre-COVID level. And so as the, let's say, activity of them going into branches at this stage. But of course, more and more people are -- you have learned to use mobile channels. So more and more transactions are done through those channels and used by customers.

One question asked by Haitong and few other brokers. Do you expect any changes for the pricing across the fees and commission lines?

I anticipated somehow this that we are reviewing the fees policy. And for sure, in summary, as we will have to change the fee line. That's obvious looking when interest rates were 0, we could afford -- were not 0, we could afford to -- for some products to allow customers for not paying. Now we are not earning on deposits. We have to at least cover the costs or generate extra value. So that's a natural implication of the situation.

Moving further, a few questions also from Santander Polska security brokerage. Do you anticipate or plan any optimization of the cost-base in the next quarters?

I think we proved in the first quarter that -- in the second quarter that we are -- that's, let's say, a priority for us. Of course, both short-term and long-term perspective is important. And when having now discussing the priorities for the -- for the new strategy, that's a very important element of those discussions.

We discussed extensively on the NIM, but question that also appeared is -- do you sustain the guidance of around PLN 650 million to PLN 700 million impact of the rate cuts on your NII?

I somehow anticipated that the impact will be lower than we initially planned because of much faster repricing of the funding costs and some investments. So it will be lower. I think the guidance on the impact on the NIM is something which should give you the full magnitude of this.

One other question from Santander is how do you see utilization of the home office work set up across the organization? And do you see any direction for, I would say, the future setup at this stage?

Well, work office has been -- appeared for us very efficient. And in the pandemic area, I think it was 6,000 people that were even working from home office in our areas. Of course, it's not that one can say that the home office is a magic that happens and is always the best solution because you have to be very conscious on keeping people engaged, especially because after, let's say, first period of being very, very active and happy the engagement, we're not seeing your work teammates naturally goes down. So yes, we have infrastructure to have working on home office. This is, for sure, one of the possibilities that can be used in the new strategy to reduce the costs of buildings, of energy and so on and so forth. But we need to also have in mind that the culture and the infrastructure or the culture and the, let's say, workflow of the people has to be well-managed before this is, let's say, used as a permanent type of solution. So for sure, we would like to have this as a permanent solution to reduce other types of costs and also make us a more attractive employer. But of course, we need to work a little bit still on this.

Maybe add one thing that, yes, this is the 2 answers in this area. One is what to -- Tomasz said about [ pandemic ] solution, and this is one-off decision that we should take during this period when we prepare new strategy, how to organize the workflow and so on. And -- but the second is that decision on the work related to the next months because of the threat of the second wave and so on. This is 2 different answers. And now it's time to think about it.

One question from Raiffeisen. What sort of fees and commission guidance would you -- could you give for the second half of the year in terms of dynamic?

Yes. Generally forecasting in those conditions is not easy. We will be working on the fees policy and on the activity of the clients and on transferring mutual funds and insurance products and so on. But that's not something that you can do in a month's time. That requires 2, 3, 4 quarters to have it. For sure, lower activity -- for sure, for the fees for the second half of the year will be dependent on the lower activity or on the activity of the clients. And so far, it's -- the fees has fallen, let's say, by 10% year-over-year, more or less. I think for the third quarter I wouldn't give a different guidance than this, looking at year-over-year. Then maybe some recovery in the fourth quarter, we would start to see and some effects, first effects of the repricing and of the additional elements. Generally, for sure, the fee component should be much more higher in the total revenues and not just because of, let's say, lower interest rates, but in nominal terms, the fees should be growing, let's say, somewhere -- let's say, in line with the balance sheet, let's put it like this or with the loan portfolio in line. And that I would see as a, let's say, very first guide.

And maybe a final question before we conclude this, I would say extensive Q&A discussion will be a bit more strategic raised by a couple of brokers. Could you discuss your M&A appetite? And particularly, do you have interest in Alior Bank?

Yes. The answer is that there is no comment on the -- in this issue and M&A issues because now it's time to prepare strategy. We see that this organic growth is important for us, and we see that there is a lot of digitalization that should be done to increase and for our growth. Well, it's -- we see that -- of course, our strategy is that also this -- approach is that we should wait and see because the main strategy is that organic growth is the main strategy for us. But we understand that consolidation in the current condition when the interest rate are low and profits in banking sector is significantly reduced at this time for consolidation. That is why our approach towards M&A is wait and see.

Thank you, Leszek. So with that, I would like to thank you, everyone, both those that join us, analysts and investors on the line. And obviously, our speakers from the management team here in Warsaw. Obviously, I will try to cover most of the questions. If there are any additional questions that will come, please don't hesitate to contact us through the usual IR channel. And obviously, thank you very much for your time and look forward to speaking with you in the next quarter.

Thank you.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.