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

Hello, and good afternoon, everyone. We would like to welcome you to the Q4 and obviously also full year 2020 financial results of Bank Pekao. As always, we'll be joined with our management. We'll have obviously Mr. Leszek Skiba, CEO; Tomasz Kubiak, Chief Financial Officer; and our Chief Economist, Ernest Pytlarczyk. We'll follow the presentation in the usual manner. So we'll start first with our introduction and our presentation. And afterwards, we will move to the Q&A sessions. And we'll start first with the session for those registered on the line. And afterwards, we'll come also to the questions that have been placed in our mailbox. So with this short introduction, I will pass over to Leszek to kick off the presentation today.

Thank you very much. Good afternoon. Before I start, I would like to outline our agenda of our presentation today. First, I will summarize our performance and key achievements in 2020. And next, I will hand over to Ernest, who will talk about macro outlook; and Tomasz, who will present you the details of our financial performance. What was the most important pillars in 2020? The first was prudent growth. Prudent means that we would like to have increase in prudent segments of our business, but we have the growth, the growth of assets and increase of scale. The second pillar is digitalization and efficiency. This time of pandemic is time of fast digitalization, and we show you the numbers that present our -- the value of our digitalization. And efficiency means that we kept our spending under control. The third is resilience and responsibility. This time was important to be proactive. Proactive means we addressed important systemic risk related to COVID-19 and potential loss of -- in assets -- in value of assets, and the second, Swiss franc legacy loans. And this was very important for us to be proactive, means we were determined to save 2021 numbers and to keep all provisions in 2020 to be very fast and very active and potentially to have very strong revenues in 2021 and to pay out dividend in 2021 as soon as possible. Important numbers from these 3 pillars is the growth in assets, 15%; and the growth in prudent segment, mortgage loans, 6%, you can see. And digitalization was important for us. We achieved important milestone, 2 million active mobile users. And this operating cost under control, the dynamic was negative, minus 3.4%. What is important for us, that we pay out more than PLN 7 billion subsidies to our clients, the money from PFR, this special scheme -- government scheme. And we set up extra related to COVID-19 provisions. The value of this asset -- or this provision is PLN 800 million, means we are ready to see the loss in value of asset. But still, it is statistical-only provisions. But it means that will have very positive impact on the revenue and the profits in 2021. And this is our condition to pay out this dividend, I said before. On this slide, you can see that the profit is almost flat. If we strip out 2 important one-offs, effect of COVID-19 provisions and Swiss franc-related portfolio provisions. What was important, profitability? Profitability was important during 2020. Digital progress, 2 million new client -- 2 million active mobile users, I said, but also more than 400,000 new clients in 2020 during this very tough time for our client. Risk management, very prudent credit policy and this extra provisions and all costs under control. The important prudent growth, it means that was time of the growth in assets. We are the second bank in Poland. We grew in mortgage loans. This is the very safe segment of our market. And important increase in savings, retail consumer savings. We actively supported our clients. We supported our clients in access of -- to financing throughout the year in capital market, selectively deploying balance sheet, particularly in areas of our strategic focus, and distributing vast public support programs for corporate sector. And we are very happy again this year, we are a leading bank arranging innovative ESG-linked bond securities. This is 2020, is time of pandemic and time to accelerate digitalization. We are proud to accelerate rollout of digital platform. We are proud to introduce new application for kids, PeoPay KIDS, and a lot of new improvement. We show that digitalization is very important for our bank. And this is also the time when we set up new strategic partnership with Tpay, Tpay is the leading independent payment processor in Poland, in order to launch comprehensive e-commerce service for our clients. We are very active. These numbers show that this is important, and huge increase in active mobile users. It is the -- digitalization means that this is opportunity to sell, tax our loans, cash loans online. It is important increase because the half of our cash loans were sold online. And you can see important increase in number of Tpay transactions. It shows that this is popular among our clients. Digitalization is also the opportunity to cut costs. It is important to see branch optimization. We understand that this is the time when our clients -- and the shift of clients' preference to move from branches to be active in -- through the digital channels. What is also important, that we are prudent. Prudence was important and important milestones of our strategy. The level of COVID-19 provisions is the highest in the sector, 4x more than top 4 banks. We increased Swiss franc provisions to highest in the sector. And we nearly 3x covered the -- all lawsuits value, although this -- our Swiss franc portfolio is very, very small comparing to the other banks. But what I can repeat, that this is important step to have our portfolio and our bonds cleaned to see profits not -- the impact of this COVID-19 at Swiss franc, impact on the profits in 2021 should be almost negligible. And it is important to be active and to be -- to set up this opportunity to pay out dividends for our investors when -- as soon as possible. And this is the most important for messages, acceleration of digital transformation. The grew -- we grew in scale and acquired customers despite the very tough conditions. We maintained careful credit policy and set up important provisions to -- provisions because of the important risk in the sector. Thanks to that, our financial profile provides strong capacity for capital deployment and dividends. Thank you.

Let me briefly summarize development in the Polish economy in 2020 and the final quarter of that year. Definitely, second wave of the pandemic brought new restrictions, but the economy has proven to be more flexible and quite resilient. Definitely, economic agent adapted to a new environment as a result. Polish GDP contracted only by 2.8% in the whole 2020. Many economic indicators already point to a swift recovery with industrial output already growing at a double-digit pace. Construction is back in the green. We see more -- we see retail sales being more correlated with imposed or reimposed restrictions. But definitely, the propensity to consume is on the rise. We also have to mention very important role played by public support. The policy response in Poland, both on monetary and fiscal front, was very significant, among the most -- among the biggest in Europe in terms of -- as we compare it to GDP. Why I mentioned it at this stage, it, using this logic of trickle down, led to a hibernation of employment. And it also protected the balance sheet of households and corporates, which will play enormous role in a next phase. We hope it will be the recovery phase we start in second quarter of 2020 -- '21, sorry. As I mentioned, the stage is set for above-average economic growth over the medium term, and it's both confirmed and -- confirmed by European Commission. So here, we present the graph complied by European Commission. So definitely, Poland will outperform European peers over the next -- over the 2-year horizon, both in 2021 and through 2022. Turning to engines of growth. We think that large pent-up demand may play a significant role, both in household and enterprise sectors. As I mentioned, balance sheets are healthy, and we expect both households and enterprise sectors to participate in a brisk recovery from second quarter on. We still think that the industry may lead the recovery, and the key driver may be very the restructure of the Polish economy, which is well positioned to also play a major role in this new supply lines after the second -- after the pandemic. Overall, Poland is expected to be one of the best-performing economies in the European Union over the coming years. And we think that GDP growth in 2021 and 2022 may exceed 4%. So it will definitely affect the risk policy, the risk appetite at our bank and we think that also our strategy.

Thank you. Good morning. Starting from the net profit, the composition. So we gained PLN 1.1 billion of net profit reported in 2020. But if we look at the drop of that, the 49% drop, you can see that majority is coming from actually creating the COVID provisions and Swiss franc more provisions. What is important is that those 2 provisions are not for, so far, incurred losses, but are for our prudent approach, anticipating somehow potential deterioration of situation in that. But of course, this we will finally see. The other elements are -- one-off elements are also described there. So BGF contributions, restructuring provisions, another impact which is mainly commercial, so kind of an impact of the net interest rates and also a lower standard cost of risk. Looking at that net profit in quarters. We achieved PLN 185 million net profit in Q4, which is similar to Q1. But on financial assessment, I would say that this was quite a good quarter, even, I would say, maybe the best quarter of the year. We kept disciplined costs. We kept NII stable quarter-over-quarter, as anticipated. And we had some rebound in fees and commissions. Of course, we decided to create additional Swiss franc provisions. That's related with the expected court discussions as well as the potential discussions on entering into agreements with customers. We wanted to have this fully provisioned in our books and not to have also discussions on profit or on the impact on P&L of this next year. Gross operating profit year-over-year, down by 8%. And what is worth to mention is, of course, the cost discipline, 4% almost versus fourth quarter last year. If we compare to the third quarter, clearly, a pickup in revenues, related mainly with better fees and higher activities of customers. And we're happy about that. Now starting from NII. As anticipated, the bottom of NII was somewhere on the edge of Q3 and Q4. So NII was kept flat practically or slightly positive quarter-over-quarter. Year-over-year, of course, a drop, 42 bps, related to the cut of interest rates. But if we try to decompose, you have the Slide 18, which decomposes the drop of the NIM year-over-year. But if you think versus third quarter, the reason of the drop of the NIM in the third quarter is the liquidity surplus. So we had simply around PLN 5 billion, on average, more deposits in Q4 versus Q3, although you probably will not see it in end-of-period numbers. But on average, that was the difference in the levels. And that liquidity surplus was kept in the [ govies ], which generally created some negative impact on the NIM, although with probably no travel, slightly positive on the purely NII. Volumes year-over-year, plus 1% growth. And it's, I think, very positive as we were also anticipating at the end of the year that we should have a 0 plus in the volumes. This year, we manage to keep that promise, and total loans are growing by 1%. 3% growth in retail, as said by CEO, driven mainly by mortgages. Corporate segments, mainly mid-SME, those were the segments that have been growing with some reductions in the public sector and the large sector on the corporate side. If we look at the savings, deposits have been inflowing to us both on the retail and corporate side this year. We have been describing this in the last presentations. So I would not add much to this. But at the end of the year, we were, of course, also looking at corporate deposits. And some decline in that respect was also well controlled by us. Fees. Now fees have been very nicely developing in the quarter -- in the fourth quarter. And actually, we are slightly above the fourth quarter of 2019. Credit fees were the ones -- actually, looking year-over-year, it's the credit card fees that have been causing the biggest problems. The other categories of fees are -- have been rebounding to nice levels. FX, very strong in the fourth quarter. Lending fee is very strong in the fourth quarter. So some pickup in corporate volumes have been visible in the second half of the year and also in the fourth quarter. And thanks to this, some fee income also was possible to manage. Of course, brokerage was another element that somehow offset the drop in mutual funds, but that was also a very good year in those brokerage fees. Cost discipline, very well maintained year-over-year, 2% nominal drop, 3.4% excluding restructuring costs. Fourth quarter, a little bit higher than the third quarter, mainly due to some variable compensation elements that have been -- that have -- for which we created some extra provisions. And also usually, fourth quarter has some seasonalities in non-HR costs related with sending out different -- generally post costs to customers. Now we remain, of course, a very safe bank. Very good levels of Tier 1 ratios, allowing for, during old times, pay out 75% at least of dividend. Total capital ratio and Q1 ratio at nice levels. We, of course, have the restriction from the KNF on the first half of the year, but we definitely expect to be able to pay out something in the second half of the year. And for sure, at least the old dividend policy, we believe, could be applied for this for 2020 profit. Now a prudent approach and the NPL ratios. The first important information is that we don't any negative information coming from the loan portfolio. So far -- and this is throughout all those segments. So as we see the expiry of the payment moratoria, they are practically fully repaid after those moratoria. We do not see any deterioration, nor in the corporate nor in the retail portfolio. So all those elements are looking fine. If you look at our provisioning policy, the blue cost of risk lines are the standard cost of risk, which is very low in the fourth quarter. And of course, you see the extra provisions that have been created, touching both the COVID still potential provisions, which are 52 bps throughout the whole year, as well as the Swiss franc mortgage visible in the fourth quarter. Our NPL and coverage ratios remained -- coverage is improving and NPL ratios are generally stable. Now last thing about the mortgages, Swiss franc mortgages. Now we all know that this has never been a problem of Bank Pekao. And looking at Slide 25, we would like to draw your attention to the following. First of all, the portfolio is around 2% of total loans and 1% of the total assets. Second, it has not been granted by Bank Pekao but by Bank BPH. And third of all, if you look at the years when the loans have been granted, the portfolio is concentrated between 2004, 2005 and 2006. Now please take a look at the average Polish zloty and Swiss franc exchange rates during this time. This is the general reason why this portfolio remains quite safe. And if you think in the middle chart about the proposal of the KNF and the head of KNF and what is currently being discussed in the banking sector in terms of those settlements, at the end of the day, the proposal is comparing the loan to what probably is what you know. So comparing the situation if a person took a loan originally in Polish zloty and what, taking into account his repayment, would be today his balance sheet versus the Swiss franc mortgage. Now if you look at this -- and that's the information in the middle chart. The loans originated between 2004 and 2005, majority of those customers simply have still the benefit of having the Swiss franc mortgage loans. The principal of the loans generated in 2006 in those settlements should be -- if settlement would be input, would be generally around 25% reduced, although the most dangerous loans from the settlement point of view are the 2017 and 2008 -- 2007 and 2008 loans, where those numbers are reaching 50% reduction of the principal. And what is the most important in our portfolio is that we don't practically have those 2007 and 2008 loans. So this is why this program is not that painful for -- in case we would decide for it. It's around PLN 400 million. And the current level of provisions is already covering that. Last thing, shortly about the status of integration with the Idea Bank. So we are -- first of all, continuity of business has been fully maintained, and everything is working perfectly. We are onboarding the staff. We are stabilizing all the IT topics. We are doing documentation review. So that's the current status of those works. But cooperation within the company is very good in that Idea. We have started all the integration projects. So both plans for migration of customers, of IT migrations, of combining total network of branches in order to have all the synergies delivered on time, as promised. And last but not least, and probably from the P&L perspective, most important that the cost we have concentrated very much in the first 2 months of delivering the cost of funding synergies. And up to now, we generally see that around -- in March, around -- sorry, in February, already around PLN 5 million of monthly funding synergies are being already realized. And we're even planning to double this figure later within the year. So the funding synergies are being quickly realized, and we are very, very happy about that. So summarizing again, first of all, prudent growth. So we managed to grow despite difficult conditions, growing in the safest segments as well. We put a lot of attention on digitalization and efficiency. We cost cut -- cut costs very much. And we delivered a lot of digital solutions for our clients. And we very resistantly provisioned our bank. Thanks to this coming -- the new strategy 2021, we will not have the luggage of all the systemic problems. We will be clean for any COVID scenarios and Swiss franc mortgage scenarios. We will focus on transformation and growth. Thank you.

Thank you very much, gentlemen. I will pass over right now to the moderator. If we can start with the Q&A session first for those that have registered on the line, and we will try, obviously, to ask those questions. Afterwards, we'll move to those that have been put in place on the list in our mailbox.

[Operator Instructions] And the first question received is from Anna Marshall of Goldman Sachs.

Two questions for me, please. Firstly, on dividend, just wanted to follow up on Q4 -- to elaborate a little bit more on the topic. So what would be the required tax for payout in the second half of the year apart, of course, from the regulator updating their guidance? So would you call an EGM? Or can you propose some sort of conditional dividend to the AGM in spring? Also, would you consider paying out only from 2020 earnings or from prior year? So that was the first topic. And the second topic was on the cost of risk. So just to confirm, given that you've already provisioned substantially for COVID-19 in 2020, would 2021 be a normalized year or lower but still more -- above normalized cost of risk?

First of all, on the dividends, of course, we need to remember that at the end of the day, during the last 2 years, it has been the regulators which have been driving fully the dividend payout of banks. And the uncertainty related to their decisions is the main drivers. Our regulators said that in the first half of the year, we should not make dividend decisions. And we are in a situation, let's say, wait and see for the second half of the year. Now our clear intention is to go -- is to be able to distribute some dividends for our shareholder in the second half of the year, and that has been anticipated very much. I think it's too early to describe would this be only 2020 profit or also 2019. We will see what will be the position of the regulator at the end of the day. For sure, our willingness is to keeping, let's say, capital levels at our target levels. And you know they have been very much disclosed. So T-ratio above 14.5% at this stage but maybe will be reviewed in the strategy. We will be making decisions upon the discussion with the regulators and the willingness to share, let's say, profits with our investors. In terms of COVID provisions and provisioning, at this stage, my first guess would be probably closer to -- through the cycle levels in 2021 because so far, nothing wrong is going on in the portfolios and we have quite a good buffer. But we are still before the, let's say, finalization or the repayment of some of the govie support because the programs will be actually ending somewhere in April and May, the government support programs. Part of this, of course, will have to be returned. Large part will be subsidies. But -- so we will see and be wiser after that moment when the support programs will no longer be in place in the economy, and this will be at the moment of answering about asset quality in a nice manner.

The next question we received is from Gabor Kemeny, Autonomous Research.

A few questions from me, please. First one on net interest income. After your NII stabilized in the fourth quarter, do you expect to be able to grow your NII in the first half of 2021? Second question is on Swiss franc mortgages. Can you help us quantify the losses you expect from a potential negative scenario by the Supreme Court in late March? I think you indicate in the report a scenario where your FX provisions could be higher on the basis of a Supreme Court decision. And the last question is on the BFG charges. How do you expect this to change in 2021?

Right. In terms of BFG, I think it's around PLN 100 million drop, looking at the first, let's say, intentions of BFG, which have been published. But we're still waiting for the official letters. In terms of Swiss franc mortgages, I don't know if it's worth to do a speculation now on this, meaning at the end of the day, what we see at least in our portfolio is a quite low number of generally suits because we have around 22,000 still active loans and around 500 suits going on. Now the question is how much that number of 500 suits might increase. Looking at the Swiss franc, even negative verdict. And we have been evaluating different scenarios, even going 4x, 5x, those kind of -- or even how many -- those -- some of them are very much stressed. Some of them are relatively stressed. So those are, let's say, the numbers we've been evaluating, which generally, in our case, wouldn't mean a creation of a high number of provisions. I believe we have been -- we are quite well provisioned with this respect. And last question was, I think, NII. NII now will be very much correlated to the growth of the loan portfolio. So if we managed to pick up in loans, especially in the second quarter, that will help NII to grow in this first half of the year. And that's the most important driver. We, for sure, hope for that, that we will be able to grow. Also very important to start growing in those more risky but higher-yield segments like consumer loans and micro loans. We are now very much working to return to the sales levels of pre-COVID times.

[Operator Instructions] And the next question is from Alan Webborn of Societe Generale.

Could I just ask you about your corporate loan growth? I mean clearly, it's one of the more difficult areas to understand at the moment in the market, and you seem to have stood out as doing a little better in the fourth quarter. In your view, is this the start of a trend? What's driving the trend? It seems to be more large corporates than anything else. Could you just give us a little bit more flavor as to what's happening in that part of your business?

We definitely have encouraged a growth in corporate loans in the fourth quarter. And this has been visible in the mid-segment and visible in this SME segment. Those are the not smallest SME but generally not micro yet but small companies. We have been also seeing some good growth on the leasing side and factoring side. Those are the 2 definitely products in this area. Large corporate has not been very much growing, although there are some transactions, but more driven by type of M&As or things like that. So some kind of a leverage financing. Those are the only, I would say, big transactions on the market. Still some money coming from some -- from PFR. But definitely, we are having a good attitude now in those core segments where we actually want to grow, so mid and large. And we believe that in those segments, the trend will be continued. Of course, banks will be much more careful now on commercial real estate segment and so on. But for sure, the core corporate should start growing. I don't know if you want to add anything from the macro side on growth of corporate loans.

Yes. We think it should amount to 3% per annum. So definitely would be correlated with investment growth. Second half of the year, much better. Corporates are cash rich, so risk profile is improved over the course of last few months due to public that I mentioned. In general, 2022, that this year should bring really positive results.