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

[Interpreted] Good afternoon, ladies and gentlemen. We would like to welcome you at the presentation of our financial results of the second quarter. At the beginning, I will introduce our presenters. Magdalena Zmitrowicz, our Vice President for Enterprise Banking division, Leszek Skiba, Pawel Straczynski CFO; and Blazej Szczecki, In-Charge of digital transformation. I give the floor to our CEO, Leszek Skiba.

[Interpreted] Thank you very much. We are meeting here to discuss the results of our second quarter in the slide that you can see now. There are 4 key points that we have identified as a good summary of this quarter. If we go one by one. The first is about the scale of growth that we recorded, both in our enterprise segment, corporate banking, including enterprise segment. Magdalena Zmitrowicz will discuss both detail -- discussing details, and we are very proud of having achieved volume growth that were the highest among our key competitors and a separate part of the presentation will focus on that. As for the second point with regard to retail banking, we are extremely happy with the high rate of growth in digital channels. It matters to us, and it is key theme of our entire strategy to make sure that digitization, especially in retail banking takes place at the right pace. Briefly, this will be presented in the slide concerning our PeoPay application as for operating efficiency and higher interest rates, we reduced the cost to income ratio. And then we made our deposit offer more attractive. The last element here regards responsible as is always the case in the [indiscernible] approach to risk. This quarter, we had a material one-off event or material one-off events, but also right of -- to mortgage loans. And the one of events had a strong impact on the results of this quarter. We will discuss details of this. Let's go to presentation. In this slide, you can see the result in the second quarter, 23% lower than in the second quarter 2021, to a lot extent. Mostly, as Pawel Straczynski will discuss in his part of the presentation. This stemmed from 2 criteria, loans in Swiss francs and the second contributor was the contribution to IPS that is this system of institutional protection, which we established together with other leading banks. As for Corporate Banking and Enterprise Banking, we experienced very significant growth in volumes that we recorded along with improvement of the result on profit on interest and commissions throughout the whole bank, additionally managed to maintain the cost of risk between 50 to 60 basis points, also regulatory charges and loans in Swiss francs method. The 4 pillars of our strategy are our guidelines and reference framework. It led us to increase the number of active clients in mobile banking. 3.2 million is the target we are aiming at, 2.6 have already been achieved. And we can see that we will deliver our target within the time horizon of the strategy. The second element is the cost of risk based on quarterly data, 8.2%, slightly below the target. However, taking into consideration the entire 6 months of that is better result in the context of higher interest rates, responsibility, risk cost at 51 basis points and cost to income below the target of 42%. Actual number is 37%. As for the increase of volume in loans from large corporations, 16%. In the enterprise segment, as much as 27%. We are also growing in terms of new current accounts of retail customers, and the increase was 45%. It is also rather than that we recorded a high rate of growth in digital channels. That has seen through the increase of activity of mobile customers, 19% up. digitization rate in increased to 63%. And I would like to remind you that this is one of the KPIs in our strategy, indicating the proportion of processes and retail banking that can be completed in digital channels. When you're talking about 63% here, 63% of processes that the customer can complete in digital channels. And of course, we target within the strategy horizon is 100%. As for cash loans, the increase was up to 73%, 17 percentage points up. That was in retail. And our PeoPay application. As we already signaled last time, it is very important to us to make sure that digitization is not only something that takes place in our back office, but also is experience and visible to our customers. We modify the PeoPay application to a certain extent that the latest changes can be made available to customers as they are introduced. For example, loan repayment holidays and PeoPay application, and this was not something that all banks did. Here, we also have suggestive of payments, subscriptions. We can see what our competitors are doing in this regard, we want to be better than them. So our functionalities are more flexible, allowing greater personalization of services. With regard to companies. We are proud of being with our clients. So we are involved in ESG projects, Goldbeck Solar, that is a syndicated loan for photovoltaic farm. We were the long agent, security agent in this project, but Magdalena can share more details of this transaction. It was also very important for us to sign European development bank, the PLN 200 million, with respect to transactions that will be extended -- that will be given to small and medium enterprises. And also women entrepreneur be the beneficiaries of this project. We have 7-year bonds where we were the coorganizer with Hillwood construction loan. And on the right-hand side on the slide, you can see the award. As usual, we try to make sure that we keep the highest standard in investment banking, we awarded on this account is the best investment bank. Also for the second year in the year, golden banker for the best personal account, that is also a business protector and want for support to enterprises in combating the pandemic effect and also euro money. Very briefly about the development of in Ukraine. As we signaled earlier, we are making great efforts to support refugees from Ukraine to make sure that people look from Ukraine and live in Poland and have access to banking services in a very simple, flexible performance. So it is not only the availability of Ukrainian in applications as a language. We canceled fees for bank transfers support in public services, such as applying for 500-plus benefits through digital channels. Also, previously, we talked about the charity activities. But it should also be said that we support Ukrainian refugees through voluntary activities, volunteering for the [indiscernible] in our bank and the support of employee volunteering the offer. The support is something that is very high on our agenda. We make sure to increase the volunteering activity of our employees who worked for Ukrainian refugees more than 3,330 hours were offered as volunteer in support to victims of war. Almost 70,000 accounts were opened from Ukrainian citizens. In total, the accounts that we have today, we stand at more 223,000. A brief summary ROE in the first half of the year at 11.1%. So that is above our target. Cost to income 40.4. So that is a better result than the target in our strategy. We are aiming at achieving the target in terms of the number of active hours of mobile banking, PLN 2.6 million, and in digitization, 63%. And I give the floor to Magda.

[Interpreted] Good afternoon. Warm welcome to all of you. Indeed, when we watch the developments in enterprise banking, we have 2 segments there. Small and medium enterprises and MID enterprises. We could see an increase in sales at the end of last year and then the first quarter this year. In the second quarter, we also recorded growth 5 billion new services, new sales, loans, leasing, factoring. We also maintain high dynamics of acquisition that is at the level of last year. Both new sales and acquisition translate into the balance, current balance after the second quarter, almost PLN 33 billion. So now we grow in all lines. also, it should be added that clearly, both companies are beneficiaries of disruption in supply chains that we saw during the COVID pandemic. A lot of orders from foreign companies directed to Poland, but not only Poland, also the Czech Republic, Hungary, the beneficiaries. So our companies are clearly the winners in spite of the increase in employment cost synergy and cost of raw materials. We have more orders. Also, thanks to the fact that we have a stable bank, we have long-term relationship with customers, and we respond to customers' needs, supporting the growth. Our loan policy does not change. So clearly, companies show good results. Also, I would like to show you here that the first quarter, we didn't have data segmentation shows sometimes divergences. But our comparisons quarter-to-quarter us versus other banks show our portfolio development dynamics at 22% after the second quarter, 27%. And it is extremely important, something to which we pay particular attention at [ Pekao ] is the quality of our portfolio. That is the security of the portfolio and NPL is low. The cost of risk is at 2%. Also something that meets very much, that has always mattered to us very much. And in particular, the COVID pandemic is that we are looking for guarantee products for our customers. And I can say that we are the leader in sale of guaranteed products, in particular, FGP and guarantees, PLN 7 billion of secured portfolio, but also de minimis and BiznesMax guarantees. There is a new guarantee unique in the Polish market with [indiscernible] almost PLN 5 billion with new guarantee products for our clients. And the agreement that Leszek has already mentioned with the European Development Bank, PLN 200 million for leasing that we signed a not long time ago. That is an agreement for small and medium and prices and support to women entrepreneur. Also in the offer, we had -- we've also had liquidity loans on click products. We keep speeding up the learning process as well as interest loans that enjoyed a lot of interest because these were practically loans at a 0 cost in cooperation with the BGK. So we're talking about the large growth of the portfolio. What is important and probably every banker pays attention to this other than growing in the loan portfolio. We're also significantly growing the banking portfolio through transactionality, both in terms of currency, turnover. We're talking about 43% in terms of currency spot turnover. There was a lot of volatility in Q1 also in Q2. Hence, probably the result, but also a lot of work when it comes to hedging instruments, forwards derivates, 19% of growth year-on-year. And when it comes to interest rate hedging, plus 73%, we're not only growing on FX, but also on the volume and number of transaction customers as well as volumes, basic drivers, volumes of national and international bank transfers. We're also very happy about this because we can see that our clients bank more and more with us. And there's a lot of increasing cross-sell on the portfolio. Consequently, we're consistently developing the Enterprise Banking segment. The self-servicing segment, Pekao24 is being expanded by new functionalities. We're also working on with the new fully electronic. Loan application, also the selfie solution that we implemented during the pandemic, and we're trying to make sure that this way of cooperating with the customer should be as intuitive as possible and as comfortable for customers as possible. What we're also paying attention to when it comes to renewables, funding [ RES ], we were emphasizing this. And we can see a lot of interest from the customers when it comes to renewables. And this is also definitely part of our energy strategy, transformation strategy. We're supporting those projects, expanding our teams. So also, I'd like to take this opportunity to thank our clients for their trust cooperation. I'd like to thank our employees for the good -- very good the second quarter. I'd also invite those people who are not our clients to join our bank. So you're all kindly invited. Thank you very much.

[Interpreted] Hello. Now it's my part. Briefly about the macro situation presentation and forecast. Looking at the situation of hard data for the last 2 months, we can clearly see that the economy is entering into a slowdown period. Technical recession is almost certain. We have the second quarter to quarter a decrease, but it's an effect of high starting point, notwithstanding as we look even further ahead of those scenarios that seem to be alternative negative scenarios, they are becoming more and more probable, owing to the fact that the inflow of influx of energy resources to the West [indiscernible] simply be started. It's an element of geopolitics and the gas blackmail. So we can see -- on the right-hand side, the aftermath that could be triggered for Germany's economy. As we know, this economy is key for the Euro land, also for Poland when it comes to the trading partnerships. And this scenario is what we more -- want to increasingly adopt as the baseline scenario. These risks are not internal to Poland. There are rather beyond our eastern or western border, and they might result in the scenarios presented by us being more negative. The chances are that -- the chances that we might -- that we might not be very precise when it comes to our forecast. It all depends on the factors that we mentioned on the provision of natural gas, Germany is the largest economy also with a large proportion of chemical industry. What we can also observe is the deterioration of hard ratios also soft ratios when it comes to the economic cycle for the banking sector run by the National Bank of Poland. Here, the scenario is even very negative. Of course, history shows even recent history from several years -- several months back at the beginning of the conflict. I thought it might also be overrated. What we will be observing will be a tug of war between what we can see, maybe not in the commodities market, but in terms of the inflow of energy resources, the increase in energy prices, gas prices and the impact on disposable income to customers and also fiscal policy, well which is starting trying to protect the customer, the consensus is beyond the soft landing. However, it's shifting systematically towards hard landing and a significant recession in Western Europe. What we can see in terms of interest rates and inflation. This is the factor determining the interest rate pathway. Inflation has achieved a plateau of 16%. Then we have the beginning of the year and the risk is that it might go higher up because we have a translation of the tariff decisions when it comes to the retail recipients of gas energy. We cannot estimate it precisely. And then we were talking about a decrease owing to the slowdown and in the slowdown or recession period because we are rather into a recession, we will be talking about GDP growth year-on-year at the beginning of next year for various reasons. But in the period of a worse economic cycle, also, it should have an impact on inflation. So 6% of inflation is what we're talking about. 6% is -- would be a real positive, real interest rate and probably the interest rate hikes should be reversed. So interest rates should be lower by that time. And what the governor of the National Bank of Poland has been saying also in global terms of scenarios are very the long end of the currency is reversing. If we're talking about the short-term scenario, we think that the hikes are still feasible this year because of the inflation because of the market pressure. And the PLN rate, it might be under pressure. We don't think it's the beginning of the cycle of hikes, but as the case can always be at the end of the cycle of hikes, it's hard to guess whether it's this moment or slightly later. But I would guess that there might -- we might still expect through 1 or 2 hikes and then it would be reversed. Over to Pawel.

[Interpreted] The results for Q2 was marked by 4main drivers. 1 of them are obviously very positive and 3 negative factors. The first positive factor was obviously the significant increase in net interest income by PLN 1.2 billion, whereas the 3 negative factors that impacted the net result as compared to Q2 of the previous year was, first of all, the net IPS institutional protection schemes contribution that we made a decision to participate in this voluntary scheme. Another factor is the provision related to the Swiss franc portfolio, that's about PLN 402 million. After the end of analysis, considering the FX rate changes, the changes in interest rates for the PLN loans as well as the potential interest rate hikes in Switzerland as well as in analyzing the so far actions filed. When it comes to their numbers and average amounts, we decided to update the model, calculating the CHF-denominated loan provisions. And this new calculation resulted in an additional write-down of PLN 402 million. And at this moment, our Swiss franc portfolio valued at PLN 2.8 billion, is almost provision -- is provisioned almost in -- at 40% because the total provisions amount to roughly PLN 1 billion. The third one-off factor that had an impact on the results compared to the previous year was a one-off recognition in the operating costs of the results of the review performed and the reclass in IT of expenditure between CapEx and OpEx. That review that we performed in Q2 showed that some of the expenditure incurred so far that had been recognized in the balance sheet should have been reclassed to the P&L as operating expenses. We're talking about this relatively insignificant amount compared to the balance sheet total assets or the materiality level, we decided that this amount of 180 -- roughly 180 million -- sorry, PLN 83 million would be recognized as a one-off. The dynamics if we're talking about the comparison between the quarters, we're talking about a decrease, first of all, owing to the one-offs. We're talking about decrease by 23% and vis-a-vis Q1 of this year by 48%. The ROE in Q2 was at the level of 8.2%, and Tier 1 at a stable level of 14.8% because the cost to income, including BFG and excluding IPS was at a level of 37%. The gross operating income semester grew by 80% from -- well, to PLN 3.8 billion. In the case of quarters, comparison between quarters, also the dynamics were positive vis-a-vis last year almost by 68% vis-a-vis the first quarter of this year by 8.5%. Operating income, [ 1821 to 1822 ] by almost 44% quarter-to-quarter by almost 44 -- 45% and compared to Q1 this year by over 9%. In terms of operating costs, the increase was by 4.7% and excluding the provisions for employment optimization by 9.9% versus net of BFG and IPS. Quarter-to-quarter, 16% -- plus 16% vis-a-vis Q2 last year and Q1 this year by almost 11% -- result on interest achieved, thanks to high interest rates above all. Net interest income, semester to semester higher by over 73% from [ 2 673 to 4 636 ]. And quarter-to-quarter, compared to the second quarter last year growth by over 91% compared to the first quarter this year, up by 24%. Net interest margin for semester 379 basis points, that is 149 basis points with the average [indiscernible] [ 02129 ] with 6.25% versus previous quarter last year, 183 basis points up on net interest margin. And compared to the first quarter of this year, up by almost 70 basis points from 334 to 412 basis points. During the conference of journalists, I also mentioned that in our assessment, we have achieved this a peak in net interest margin at 412 points. And I quoted a rather broad range where our net interest margin should stabilize. Here, this will be driven by both macroeconomic situation and the actual share of the cost of loan repayment holidays that will be recognized in the third quarter. But this is something that I will discuss in a moment. Loan volumes in retail, we are at the level of last year compared to the first quarter this year, a decrease by 1.3%. Mortgage loan portfolio is more or less at the level of -- at the end of the first semester 2021. But compared to the first quarter, it is lower by PLN 1.1 billion. And if we look at the factors that contributed to this, we had higher sales by about PLN 1 billion additional sales plan repayment also at a level of about EUR 1 billion. But at the same time, surplus payments or early repayment of loans to the tune of about PLN 1.2 billion. And in a moment, we will discuss deposits. Here, we have more or less a level by which we saw deposits in Retail segment decreased. And that leads us to the conclusion that some customers use their deposits in our bank to make earlier repayment of the mortgage loans. And the Corporate segment, very high dynamics in loans, 12% year-on-year and 3.3% compared to the first quarter. Loan portfolio at almost PLN 99 billion. In deposits, we recorded a decrease year-on-year in retail by about 3%. That is over PLN 3 billion. And compared to the first quarter this year, the decrease was by about PLN 1.3 billion, which is 1.2% down. We have also seen a significant increase in -- decrease in investment funds of -- and that was a decrease by over PLN 4 billion caused by the macroeconomic situation, but also by the improving situation with regard to deposits, not only in our bank, but in the entire banking segment as well. As for corporate deposits, here, growth very high 17 percentage points year-on-year from less than PLN 85 billion to almost PLN 97 billion. And if we compare the first quarter to the second one, we see a decrease by PLN 500 million. So we can say that this is practically negligible change. As for results on fees and commissions, semester-to-semester dynamics, that is more than 10% up. The most positive driver was an increase in currency. ForEx transactions related to high volatility of currencies in the market in the second quarter. We recorded also a decrease in fees on management and brokerage services. So we come back quarters compared to the second quarter last year, an increase in fees and commissions slightly over 6%. And the comparison to the first quarter this year shows an increase of about 1.5%. We have significant dynamics of operating costs, cost mainly by an increase in regulatory costs that is our joining of the IPS, but there are 2 further factors. One is recognition of 83 billion -- of PLN 83 million as a one-off event -- one-off write-off from CapEx to OpEx, but also coming into falls of the remuneration increases negotiated with our social partners and effective since the first of April this year. Dynamics of operating costs without provisions for optimization of employment almost 10% and reported dynamics 4.7%. If we compare quarters compared to the second quarter '21 16.4%, up in operating costs compared to the first quarter this year, up by 10.9%. And capital position remains very good, Tier 1 at 14.8%, 9.5 percentage points higher than the regulatory minimum, and higher than dividend criteria. The total capital ratio, 16.6% versus the minimum of 11.3, which is also over a 5 percentage points higher than required and on a safe level in terms of dividend criteria. MREL 16.6% set by the regulator for this year, target is 16.8% for next year, that is 17.7%. The situation in potential moral issues has not changed. We're monitoring the situation, and we are monitoring any decisions that are issued. So we will decide depending on how the situation develops, bearing in mind the obligation to meet the requirement of at least 16.8, cost of risk in the second quarter at a higher but stable level of 51 points. And the conference summing up the first quarter, I mentioned that we expected an increase in cost of risk, but we did not expect this growth higher than other cost increase impact in the strategy. And we estimated that between 50 and 60 basis points in the strategy. Obviously, here, we have the additional impact of the additional provision for Swiss franc loans. We had an improvement in coverage ratio, NPL to 4.8% without the assets from the former Idea Bank, in total 5.6%. So that is lower than the second quarter '21. Swiss franc coverage ratio puts us as number one. In other banks as a percentages range between 13% and 36%. The reasons behind the increase of the provision for Swiss franc mortgages were also discussed and the regulatory factors. Of course, there is this governmental program of the so-called loan repayment holidays. We estimated our cost of participation at 85%, and we estimated the cost of this program at PLN 2.4 billion. This cost will be recognized as a one-off item in the third quarter this year. We did not publish any estimates regarding borrower support fund because of the range in which we expect to participate is very broad. The PLN 210 million that we quote here on the slide is our estimation. So is the middle of a pretty broad range. can -- once details of this program, details of the banks, involved in the program are known. We will share such information based on more reliable calculations. And the third factor that I have already mentioned, recognized in the second quarter this year for average [ PLN 440 million ] of our contribution to the voluntary protection fund that is this institutional protection system for commercial banks. So a brief summary now. We increased very significantly our of operations in the corporate segment that was both in corporations and in Enterprise Banking segment. We have continued high pace of growth in digital channels. We introduced more functionalities and improved our applications. We have improved our operational efficiency we are making our deposit offer more attractive by responding both macroeconomic indicators and the steps taken by our competitors. We have demonstrated a responsible approach to the risk associated with Swiss franc mortgage loans. And we also actively participate in the governmental programs to support borrowers. We represent the position that the costs that we are to incur today compared with the cost of a non-introduction of such programs and nonparticipation in this kind of support. Borrowers would in the future result in a much higher costs be those for the banking sector or be that for our bank. And I think here about the general situation of the sector on the other hand, is a deterioration of the loan portfolio quality.

[Interpreted] This closes the first part of our meeting. Now let's pass on to the Q&A session. Thank you very much for your participation in person or attendance in the room. This is the first time that we're holding this meeting on a hybrid basis. Certainly, since the pandemic previously, we only had it online. Let's start with the questions from people in the room and then we will pass on to the online questions.

[Interpreted] It's nice to see you in person. I have a question about the capital adequacy? And what sort of profit -- what proportion of profit has been included in it? And what proportion of dividend, if any, has been accrued in the regulatory capital?

[Interpreted] As of today, we have included half of the result in the ratios, and the dividend for this year is at the level of 51%. The dividend policy is also defined at between 50 and 75 points. I'm not sure if this is -- this information is sufficient. I would perhaps add to this because we're showing the details for Slide 53 in the back up. So as we compare ourselves to the competition, we're showing it on a different basis because we have a different portfolio to a different approach to the portfolio -- securities portfolio. And in our case, it has a very insignificant impact 0.5%. We had an increase in the operating risk because of the CHF. But mind you that these drivers have not significantly shifted the ratio on a quarter-to-quarter basis.

[Interpreted] My question was rather moving towards understanding whether this year, you will be able to circumnavigate the MREL issuance. Because I understand that if this ratio is at 16.6% and MREL was at 16.8%, then next year, you won't be able to pay the dividend.