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

Dear ladies and gentlemen, welcome to the consolidated report of Pekao S.A. Capital Group for Q2 2021. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand over to Ms. Reimer, who will lead you through this conference. Please go ahead.

Good afternoon, good morning. Welcome, everyone, to Bank Pekao quarterly results presentation. The presentation will be held by CEO of the bank, Leszek Skiba; CFO, Tomasz Kubiak; and Chief Macroeconomist, Ernest Pytlarczyk. We'll start from the presentation, summarizing our key achievements and financial performance, then we will continue with Q&A session. Now I will pass over to CEO of the bank, Leszek Skiba, to kick off the presentation.

Good afternoon. Before I start, I will outline our agenda for today. I will summarize our performance and key achievements in the second quarter and the half of 2021. Next, I will hand over to Ernest Pytlarczyk and Tomasz Kubiak who will present our macro outlook and detail of our financial performance. This second quarter and the half of 2021 was very good year for Pekao. On this slide, you can see main 4 issues that I would like to stress. It was the quarter of high earnings above pre-COVID levels despite low interest rate environment and recurring ROE in the second quarter at 9%. We are proud of this number because it is important for us to achieve 10% within this period of strategy. The second issue is that we return to dividend distribution as one of the few banks in Poland now, and we will pay out 75% of earnings in the second half of this year. Third issue is that we see that there is acceleration in business activity in Poland. And this is a wave we would like to use to grow and to see growth in loans in all sectors in whole banks. The fourth issue is we maintain our credit policy risk and we keep this under control, the costs under control. Cost of risk is one on the level of pre-COVID levels. Key achievements. It is the number that I'd like to stress is the PLN 850 million is the profits generated in the first half of this year is the -- this number is higher than in 2019. And it means that it is higher in the time of -- pre-COVID times. This is important to grow in next quarters, and it's very important for us. ROE at 9%, it is the sign for us that this target for -- that we pledged in strategy can be achieved within this strategy period. This is the time of good performance in the economy. It is -- what is important for us that even within this low interest rate framework, we maintain improvement in fees and commission income. And this is also the time when we see a decline in credit provisions, of course, thanks to good asset qualities. But this cost of risk level is lower than -- 50% lower than we assessed before for 2021. On the next slide, you can see how important is dividend policy for us. On the left, you can see that between 2017 and '19, the half of all dividend paid by Polish sector was paid by Pekao. And in -- now in this year 2021, almost 70% of dividend is paid now by us. It means that we are the leader in dividend policy in Poland, not only the highest level of money payout in this year, but the share is also impressive and we are proud. And this is to stress how important is to be dividend-financial institution in Poland. Of course, it is based on the assumption that 75% of earnings will be still paid within this strategy period. But what we communicate is that this range is between 50% and 75%. And it also depends on the -- of the level of capital and the growth of assets. On the next slide, you can see that the last stress test organized by EPA was very important for us because it's the -- we are the second most resilient bank in Poland. It shows that the policy is very conservative. And the negative scenario can lead to the decline of core equity Tier 1, 5x less in terms of comparing to the average in the European banking sector. On the next slide, you can see that this is the 4 main pillars of our strategy: customer growth, efficiency, responsibility. And according to this model, you can see that in terms of growth, in the last quarter, the second quarter of 2021, we saw impressive growth in new sales of mortgage loans, also new sales of cash loans and more than 30% of SME loans sales in the second quarter comparing to the first quarter. This time, we see that this is a strong growth of demand of credit and what is important for us to grow according to this demand. Also, regarding efficiency, we see this is still a decline in the number of branches. We would like to be more efficient. That is why you can see the growth of ratio of assets to FTE by almost 30% comparing to 2019. And cost-to-income ratio is lower by 2 percentage points and reached the level of 45% in the second quarter of '21. This is one of the important KPI for our strategy to reach 42% in 2024. Regarding customer, you can see that the steel and also impressive growth in a number of active mobile banking customers by almost 20% comparing the first half of 2021 to the first half of 2020. Also digitalization rate is one of the important KPI of our strategy. It shows which processes can be done in remote channels. Now it's 40%, 45%. The target is to have 100% of almost all processes for digital -- for customers that gain access via [indiscernible]. And also this is growth, this is important for us of our consumer loans, digital sales in digital channel. This growth -- this digital channel is important for our -- to be done in digital channel consumer loans. On this slide, you can see our -- shortly about digital transformation. Our app PeoPay 5.0 -- 4.0 will be launched within a few weeks. It is the evolution, not only in terms of new functionalities for our clients. But in terms of structural technical revolution, what is inside that will be much easier to add new functionalities for our customers. This is the important milestone for our development. Also, you can see on this slide that for corporate side, you see the growth SMEs, and middle income companies loans grew in the total -- in the second quarter of 2021. And we are proud to be with our customers. And this is -- was a time when we issued green bonds for all intents of our companies. We are very active in this sector. And of course, cost of risk, it is our responsibility to keep cost of risk under control. And this is maybe a little surprised, but this cost of risk level is on the same level as in pre-COVID time, even we see still this COVID is not over, but it is very helpful. And of course, we have the provisions that are enough to be prudent and be safe, even we will see negative scenario within next quarters. Short review of our strategy. Now you can see ROE on the level of 9%. The target is 10%. That is why we see that this is quite close. But of course, this year is not over. Cost-to-income ratio, 45%. The target is 42%. Active mobile banking customers, more than 2 million. The target is more than 3 million. This is still important for our digital transformation. ESG strategy was published in the second quarter and dividend payout on the level of 75% will be -- it is important for us in the third quarter. I will pass over to Ernest.

Let me start with a brief summary of most recent developments and also short-term forecast for the Polish economy. To start with, the economy is, basically, fully reopened. And probably the vast majority of the economic indicators are already hovering around or above last year's level, pre-pandemic level. We are monitoring some battlegrounds with respect to the pandemic development. So far, the conclusions are pretty positive. It looks like the link between infections, hospitalization, as well as mobility and economic activity, has been severely weakened. So that's why -- we -- as I mentioned, we expect a fourth wave of pandemic to materialize in Poland as well is our baseline scenario. But we also think that economic impact of potential restrictions should be minimal. That's why we stick to our 5.5% of GDP growth for the whole 2021. Turning to midterm perspective, we should assess the midterm perspectives as being very favorable for banking business. We have, as I mentioned, very positive macroeconomic momentum. We should also notice that the policy mix and developments, which lie ahead are by and large very stimulating. I feel it's very stimulative. So to start with, we witnessed excess savings in the Polish economy, which is a legacy of both pandemic era support programs, but also very high level of hibernation of the labor market in Poland. We should expect the inflow of EU funds. Some changes in tax and transfer system in Poland, which are already announced are very likely to stimulate consumption going forward. We also should expect the public investment finance from local sources, which is part of so-called Polish new deals to materially impact economic trajectory going forward. Last but not least, we should expect minimum wage hikes which should translate into a nominal growth of minimum wage at a level of 15% per annum. So -- This should stimulate especially -- this should stimulate the GDP growth, but we should focus here on nominal GDP which should definitely growing much above pre-pandemic trend. All this should definitely result in a kind of reaction from monetary policy council. So here, we point to the possibility of monetary tightening in 2022. This should definitely translate into more favorable conditions for banking business. Let me conclude that real rates will stay much below 0 for the foreseeable future. It's not only a Polish phenomena. It will affect -- It will be the case in all developed economies, and it will affect our thinking and also the actions of economic agents. Thank you.

Good morning, ladies and gentlemen. Second quarter was very good in terms of delivery of bottom line and 50% or 150% almost quarter-over-quarter. And cumulative profit also 50% above last year and also above 2019. Key highlights from those numbers, first of all, as it was raised by Leszek, a rebound in customer activity and sales. That's, I think, the first very good sign. Second of all, you can see this already in the fees and commissions number. And this is something we've been also highlighting that we expect recovery here and that's a very strong recovery. And third is, of course, cost of risk, which returned to pre-COVID levels. So those are the 3 , I would say, most important things that drive those results. Starting from gross operating profit, I would like to concentrate your attention on the quarter-over-quarter dynamics because they are the ones actually most comparable while year-over-year, of course, you have both COVID and Idea. So gross operating profit increased by 25%. Of course, in the first quarter, we had some restructuring costs, but even with those costs, and the increase would be double digit, 10%. That's coming from revenues. Revenues increased by EUR 130 million, and that's primarily as a function of both fees and commission and other income. Other income means sales of bonds, investment and investment sales and dividends and things like that. I would start then from net interest income, slightly up PLN 5 million quarter-over-quarter, and we managed to keep the net interest margin flat quarter-over-quarter. Now that second quarter was, of course, very challenging from the accounting point of view because we had to -- we finalized the so-called purchase price allocation of the Idea Bank, which was impacting a lot NII. And this is why you have quarter-over-quarter, the minus 2 basis points coming from Idea Bank and assets, which, on cumulative terms, is close to 4 basis points. And this 4 basis points, I think, is a number that is a good approximation looking forward. So the purchase price allocation mechanism, just in 2 words, it's about the fact that you are taking over assets at actually market value and not book value, and then amortizing the potential surplus of deficit in the NII. So we were actually pricing deposits above book value, as well as performing loans on deposits that has a positive impact and on loans on the negative which made some changes in the numbers. But from the pure business perspective, I like always to concentrate on something what we are showing as commercial activity, And this is the effect actually of excluding all those, let's say, one-offs or cumulative things. And this, since the beginning of the year, is rising by 8 basis points. A big move in the first quarter, but another 2 basis points brought in this second quarter. Second is volume that is driving NII. Retail volumes are 3% up. Corporate, including Idea Bank, are 10% up. Corporate including, of course, micro loans, so the net growth is 7%, but even without Idea, that would be a positive growth. Retail is driven, of course, by mortgages, almost 6% growth in the stock. Consumer loans, which were dropping during the crisis are now being flat. So the current sales are not yet allowing for the portfolio to grow. But we think this will improve in the next quarter, and we will get the rebound in the volume of consumer loans, which is, at the end of the day, very important for us delivering the 2024 strategy. On corporate, the growth is very distinguished between the small sectors, and you were seeing record high sales of SMEs and very large growth in mid-corporate. Those are our key segments, and they are growing. On the corporate side, we don't have yet the pickup in investments transferred into the volumes. So those volumes are slightly dropping. The record sales or mortgages are not yet reflected that much in the dynamics of the volume. So this is more an element of the third and fourth quarter where we will see an acceleration in the volumes in mortgages as well. On deposits, we are working a lot on mutual fund business, as you can see, and 23% dynamic in the stock of mutual funds is something very good. Great first quarter, second quarter also positive. So those good numbers generally working on price, still on corporate deposits, that's normal fluctuations. And retail is still growing with optimizing deposits from -- taken over from Idea Bank, especially the ones driven by price [ fully ]. Fees and commissions that was a magnificent quarter in fees and commissions, meaning a dynamic. I think it's a sustainable level, but the dynamic, I think, is impressive. First quarter was not yet what we expected, and we were highlighting this in the presentation last quarter that we expect the dynamic fees to actually return to levels visible on the quarter. So almost 20% year-over-year dynamic and almost 10% quarter-over-quarter. Practically, all categories of fees are growing, I think, very positive trends coming also from the economy, but also from the regular -- the repricing actions and the pricing that we are doing, we were mentioning that, that there is still some moves to be made in the last quarters of the year. Cost dynamics. Now nominal cost dynamics is 8% coming from, mainly, acquisition of the Idea Bank. Of course, in the second quarter, we have taken over some one-off costs. And I -- for me, this second quarter was -- is a little bit too high in terms of cost, meaning there are a lot of one-off costs. Some of them will be still taken in the second and third quarter, and that's, generally, the cost coming from the integration of Idea Bank. We, year-over-year, have also higher costs related to the motivation systems where bonuses were cut last year and they are returning to better levels now. And of course, amortization is a second line, which is also growing. But excluding all those one-offs that we have incurred in the second quarter, the cost dynamics, in comparable basis without all those restructuring things, is still well below inflation. And that cost efficiency is something that you know that we are famous for and will be continuing. Capital. Now Tier 1, 16.5% dropped a little bit quarter-over-quarter, but that's a result of govies repricing, so yields went up due to those -- this inflation pressure that was mentioned by also Ernest and waiting for the interest rate scenarios with really open arms, let's put it like this. Liquidity, very strong. And as Leszek was mentioning, dividend, the only actually Polish bank that is regularly paying dividends and giving that return to investors. We are very proud of such consistency coming from also responsible approach to our business. Cost of risk. Cost of risk went back to pre-COVID levels. We were saying 50 basis points through the cycle and benchmarking maybe for those levels for 2021. This first quarter was 41%. Second was 45% with some methodical changes, but -- but they are -- even they were more negative than positive, and we are not using any COVID provisions practically yet for those levels. So -- and you can see this also looking at the numbers, at the coverage ratios or at the NPL ratios which are practically flat. Year-over-year, we show for your comparison, the numbers, excluding Idea Bank, just to have this comparability year-over-year. But so far, so good on the cost of risk, of course, that's an element that you can never fully predict. But at least looking at the numbers so far, we are optimistic. So summarizing, consistent policy allowed us to return to pre-COVID levels in terms of not -- net profit and a very good second quarter results, which even had around a 9% ROE with BFG being spread throughout the whole year, so so-called recurrent ROE. We returned to dividend distribution. And after the KNF approval, the dividend -- the conditional dividend decision of the GSM of 75% payment is now unconditional, meaning it's a 75% payout. We see strong acceleration in our business activity, and that's showing in P&L and the fees and commission lines, partly in the volumes, but especially now in sales, which will transform into those volumes. And we maintain a good discipline in both credit risk and operational costs as we are famous for. And I think this consistent policy has also allowed us to consistently make one of the top 3 positions in the European stress test, which just to remind again, in 2018, we were #3, now we are #2 in the fully loaded Tier 1 stress test sensitivity. Thank you very much.

So thank you very much. So I would like now to open Q&A session. [Operator Instructions] So I will pass the voice to the moderator to open up the gate for Q&A for those who want to ask the question directly. So, please?

[Operator Instructions]

If there is no questions directly. So I have a few questions coming from Internet. So maybe we will start from the questions coming from Pekao BP. What was the reason for drop in corporate deposit?

That's generally a seasonal drop, and the fluctuation in corporate deposits is something that we have observed also in the second quarter. There was -- in the other quarters, there was not -- no particular reasons. Maybe it's a first sign of potential investments coming into -- done by the corporate and let's hope that, but there was not any specific reason for that.

So the next question, what was the reason for quarter-over-quarter growth in fees related to accounts and loans? Was it retail SME corporate segment?

Majority of that is attributed to corporate. And in terms of lending fees you could see record high sales in both SME and corporate, but also a lot of activities on debt capital market by large corporates, so all divisions or segments contributed to that. So it's maybe not always direct lending, it's sometimes -- it's sometimes debts, simply transactions that you can see in this line. So even originate and distribute model allows for this. On -- in terms of current account fees, it's also -- majority of that is related to corporate. It comes from 2 elements, so activity of customers but also from the repricing that we did.

So the next question, could you elaborate on quarter-over-quarter growth of nonpersonnel cost? Was it IT, marketing or other?

The main reason of the increase, and I'm excluding amortization and that because amortization is a matter of investments that have been done and are being done in the -- especially in the, let's say, digital path of the world. But if you look at typical OpEx type of things, without HR, that's mainly integration costs. So the fact that we are bearing some additional IT costs and project management costs in order to quickly finalize the integration of Idea Bank in 2021, which is our target. But those costs generally will repeat in the third and fourth quarter or some part of those costs should repeat. And then they will be not present in 2021. So that's a typical migration. And that's something that is fully in line with the business case that we have been doing when preparing for that transaction.

So we have also a few questions coming from Santander. So the first question related to cost, but this time, personnel cost. Could you comment on 9% year-over-year growth on personnel cost?

There are 2 elements coming from this. First of all, it's Idea Bank takeover. So simply a larger number of FTEs that is there, and that's probably explaining 2/3 of that dynamic. And then the remaining part is what I have been mentioning, meaning the bonuses system, which if you remember, Pekao in 2020, and I think it's worth to remind us, the bank with the strongest cost optimization during COVID times. On comparable basis, it was more than 3% cut in the total costs. So some of those costs, of course, are rebounding, although not too much, meaning the motivation systems are the ones that have been rebounding. And the overall cost of HR are, I think, well under control. We are restructuring the bank, which is also offsetting the element of inflationary rises and salaries.

So the question related to the dividend. Why do you pay only 75% of profits in dividend if EBA shows you as a second more resilient bank and also KNF allows you to pay 100%.

Well, I think the dividend policy has been very much addressed in our strategy, and we have been always a bank which has been consistently delivering value to our shareholders. And this also remains with dividend. We really prefer to be regularly there for you in good and bad times and not just in good times with high dividends. We have a capital plan, which is also taking into account growth elements. We could, of course, pay a large dividend now and even increase ROE to probably 8.5 even percent. But then moving from 8.5% to 10% would not be that good without capital, so that easy. And we believe we have a good idea of how to deliver the 10% through growth and that this growth and restructuring will bring ROE above the cost of capital and, thanks to this, achieving the overall. So it's a matter of strategy of regular. Of course, if we don't have growth opportunities in line above cost of capital, then we will be in the position to pay out more. You know that we have undivided profit. But at this stage, the promise is between 50% and 75% and that's what we want to stick to.

We have a few questions related to Idea Bank, to the assets that we took over. Have you had any claims related to Idea Bank assets under the guarantee obtained from BFG?

No, I don't remember any such claims that we had. Generally, I don't think there's anything surprising us, so the guarantee is working. It's going to be -- the first settlement, I think, is going to be at the end of June data, if I remember well. And it seems everything is going to be in line. No claims, and I think that the risk of claims is very much limited. It has been -- being analyzed before.