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

Good afternoon. We welcome you at the conference announcing financial performance for Q1 2025. CEO, Cezary Stypulkowski; Dagmara Wojnar, our CFO; and Ernest Pytlarczyk, our Chief Economist. Over to our CEO.

Good afternoon, ladies and gentlemen. Welcome at yet another meeting. We have just announced our new strategy. Q1 was mostly committed to developing our new strategy, but on top of it, we were able to deliver good performance. I may say that they are good across the board and they fit in on the trajectory that we have outlined in our strategy. Our repeated net profit was quite high, PLN 1.7 billion. Cost/income 38% reported; adjusted for any additional [indiscernible], 31.3%. So capital retained at the high level. Total assets also up, not very high dynamic, but very decent. The loan portfolio is not as dynamic as we expected, but the main reason is that we had some repaid loans in the segment of the large enterprises. And cost of risk, low. And NPL still at the level that we believe to be representative for the banking community in Poland. And it gives us safe buffer to possibly pay the dividend. This is what I've been talking about earlier. The growth in lending has been visible across segments where we don't have, to be honest, fair share. So in cash loans and micro financing and also mid- and small-sized enterprises, it seems that in all these 3 segments we have 2-digit growth, and this is in line with our ambitions. We do hope that this trend will be sustainable. But as I said, this is also a good sign that we are following our strategic ambitions. And one of the first words that described this ambition is growth. Actually, all segments were contributing to the good performance. Here, we have the actual numbers that show activity within the bank in the retail sector. And here, we really want to pay attention to further growing the loan portfolio. We continue a very lucrative process to penetrate our customers with new applications. We have been lagging behind the market. We are catching up, and it seems that we are doing quite well with catching up. In terms of enterprise banking, so midsized and midsized large enterprises, this is where we fit right in. And you see double-digit growth at all the lines. So that really shows we do have a lot of vigor and we hope to keep it up. In the corporate banking, as I said, loans were under pressure, but the leasing portfolio has been growing with better structure than historically. If you have been tracking leasing, you might have noticed that in that segment there has been a substantial change in financing or in the growth dynamics, particularly in the machine and heavy-duty truck segment. Well, these segments were showing a declining trend, but we were able to actually fit in. We were under-weighted with trucks, and that served us well. Another area is custody services. Perhaps they are not really determining our overall performance, but it's worth to say that we are trying to have the leadership position in the market and we are continuing to invest in custody services. As I explained earlier, in terms of the growth that we are interested in and reaching out beyond the horizon, when you look at the trajectory of our strategic goals, we are going steady. Obviously, 1 quarter is not representative for the whole story, but the starting point certainly looks encouraging. In terms of the offering that we target our customers with, I would like to highlight 2 things. Well, first of all, we renewed preferential loans for medical students. This is not a key component of our activity, but really shows how we think and what our long-term strategy is and how we want to target in the long term selected professions. So each student of medicine may actually anchor their education with Pekao SA using our loan products that we offer together with BGK. Probably it's also worth to mention that we do offer new products with the investment EU guarantee (sic) [ InvestEU ]. This is the new EU fund, perhaps Dagmara will cast more light on that development. And something that seems to be quite important in the whole context is continued effort to improve accessibility and availability of our services, both in the mobile platform and online platform for the enterprise sector. I said on many occasions that Pekao believes that demography continues to be a challenge. Over the past few years, the bank has made a step forward. We were able to activate a relatively large number of young customers, 1.1 million customers over the past 3 years. We are aspiring to attract another 300 customers -- retail customers. We have a quite good understanding of the communities of young customers. We continue to see the issues of demographics. Our segment of people between 35 and 55 is not perhaps fully complete, but the acquisition is going well. We have to pay the costs but in 10, 15 years, we will see the revenue. As I explained earlier, this is where we are trying to catch up. We offer more and more coverage with mobile apps to our customers. Numbers are going up. We are far from full saturation. We want each customer to have the app. We are concerned about security and proper authorization. We want to make sure that authorization services are done on the mobile platform, whether or not the customer is an active user of such platform and such services. There are certain new functions that are offered through our remote channels. I believe that the key thing is improvement with PeoPay. We also improved the BLIK payments, but this is still something that we need to catch up. And the activation of PeoPay with the use of e-ID in the remote channels, this is something that is part of our catching up strategy. In 2020, I opened my account this way with Pekao to prove to colleagues from my previous institution that it is possible to actually set up your account remotely. At that time, mBank didn't offer this capability. And back then with selfie, I was able to set up my personal account. So Pekao is still improving that functionality. And I believe that in the long run, it will be key functionality that will help us attract new customer base, especially young customers. We are a key player when it comes to corporate banking. And I think that I can say that in terms of corporate banking, we can claim to have #1 position despite of the aspirations voiced by our competitors. What I would like to highlight on this account is that we continue to offer loan products. But also beyond that, we have our strength and restructuring of that. We do have some examples of deals that were closed in Q1. You may recall that I was saying that lending for large corporations was under pressure. But nevertheless, we were able to close some major deals. And now over to Ernest.

Yes, that is true that a lot is happening in terms of macroeconomic expectations, but this is all related to the developments across the ocean. There are major revisions of GDP projections as high as 1 percentage point, a high likelihood of recession in the U.S. during the second half of this year. In Europe, the projections were revised downwards, but just 0.1%. There are 2 major themes, the trade war, but also what's coming up in Europe, major interest rate cuts, and they may offset the trade war effect. On top of it, the trade war effects are not targeting Europe as such directly. And on top of it, there is a lot of investments coming on in Germany in infrastructure and in defense capabilities. So there are 2 things that are important for Poland. Just to make a point that there is still -- we are still waiting. We don't have any downward projections for the Polish GDP. We are still crunching the numbers to see how vulnerable Poland would be to higher tariffs. There are 2 or 3 transmission channels. One is direct, another one is indirect. In direct, it means that we actually provide -- supply our products to exporters from Western Europe. And the third channel, well, it's most likely that the cheap goods from Eastern Asia will be coming to the market, so goods that are not saleable in the U.S. And that may become the most sensitive channel, that will be most vulnerable in terms of the Polish economy. So the GDP stands at 3.5%, this is the consensus. Poland is the only country in Europe where optimism of consumers is going up. And we continue to confirm our thesis that 2025 is not going to be the year of savings. It will be the year of consumption. Consumers will consume as they get better income. We believe that the second half of the year should be much better in terms of the investment. Double-digit dynamics, mainly public sector investments. And I believe that export will be also a driving force. I think that the Polish economy will be able to have more space in the European export markets. And in terms of nominal things like inflation, wages and interest rates, we do see accelerated this inflation. There are revisions downwards. We see that the inflation at the end of this year should be 3% or below. The wage pressure has softened. And we've seen some movement in the labor market. There is quite an equilibrium. The annual rates show that the growth of wages will be around 7%. So momentum is definitely less. And the prices of commodities and energy are also lower, and zloty has appreciated. And as a result, we do have a revision of interest rates. National Bank of Poland made a pivot initially, they claimed that cuts will come in the second half of the year, but now it's actually May and June when it's expected. May and June 50 basis points, and then we will see how the economy responds. So probably 100 basis points this year. And terminal rate was expected, 3.5, and this is something that is clearly shown in our projections. So we are not really diverging from the sort of mainstream midterm and long-term expectations. Thank you.

Good afternoon, ladies and gentlemen. Now a few words about our results. Let's start with the assets in our balance sheet. Loans, 4% up in total. The thing that is very good thing for us is that the segments that historically had a lower weight are now bouncing up. If we look at cash loans, we have seen 25% growth year-on-year. In mortgage loans, PLN 2.4 billion new sales. And mortgage loans that gave us third place in the segment of mortgage loan sales in the entire sector. As Cezary mentioned, sales of guarantees in the first quarter, we have signed an agreement for over PLN 1 billion in the first quarter. That is an agreement on preferential funding as part of InvestEU program with a novelty in the form of green guarantee for sustainable projects. Deposit base up by 8%. We are also happy about the growth in the assets in investment funds by 32% and customer acquisition. In savings loans, that was about 170,000 of newly opened accounts. 133,000 entirely new accounts. It is also worth noting that interest rates increased only 3.2% year-on-year in spite of the volume growth, and that happened thanks to effective -- efficient pricing policy and management of our liquidity requirements. LCR at 243%. Loan-to-deposit ratio at 60%. Interest results, we see less than 11% growth and 13% growth in margin on that. The contribution of individual elements to the margin on interest-bearing assets that was also seen in the interest-bearing assets, over 3% growth in our balance sheet, but with the cost going down by 11%. As Ernest has mentioned, we are getting ready for a decrease in interest rates. It is happening slightly more quickly than we had initially assumed, so it is worth saying a few words about our sensitivity to interest rate changes. The natural sensitivity to interest rates decline results from the -- resulting from the balance sheet structure is about 20%, 25% and we will have to cope with that until the end of this year and the following years. The first thing worth mentioning here is that we use derivative instruments for about PLN 20 billion in hedging transactions. In loans, we also have 90% of mortgage loans with fixed interest rates, that is 30% in the portfolio. In 2025, we will see a revaluation of about 25% of our bond portfolio. The effect will be visible starting in the second half of the year with about 10 basis points impact on our results. And then we have deposits and the possibility to adjust or manage the price of term deposits. We have about 28%, 29% of those deposits in our structure. One thing that was presented during our strategy presentation is something that -- in the horizon of our strategy, we are planning to remodel our mix. We will focus more on our micro and small companies segment in SME. That should have a positive impact on interest rates, 3 to 7 basis points. As regards result on fees and commissions, 10% growth year-on-year. And the major contributor to the increase came from investment funds and management of those funds. The volume of those funds grew, hence, a positive contribution to our overall results. As for cost-to-income ratio, it is at 38% with bank guarantee fund that is the cost of the first year. Without this cost, it would be at 33%. It is also worth mentioning regulatory charges that grew about 27% year-on-year. As for personnel costs, these grow with the main driver of those costs being indexation revision of remuneration. As inflation goes down, we assume the growth in personnel costs to slow down as well. As for the challenges linked to infrastructure, technology and IT, we assume that the investments that need to be made within the time line of our strategy will contribute to fixed assets and depreciation. Now over to Marcin.

Thank you, Dagmara, and good afternoon. Cost of risk. As you can see, the cost of risk is relatively low. It is 33 basis points, which is below our expectations for this year. That partially stems from the fact that the first quarter is usually the quarter with the lowest cost of this type. We also updated the parameters for group methodology. And if it hadn't been for those changes, probably the risk cost would be some 10 basis points higher. This, however, does not change the fact that the portfolio behaves very decently. We didn't have any major defaults and that is something that we have been seeing for quite some time now. In spite of some issues related to energy costs, certain loss of competitiveness of our partners in Western Europe, for example, in the automotive segment, in spite all of that, for the time being, this has not translated into any deterioration of the portfolio quality. NPL that is nonworking loans in the entire credit portfolio, here nothing much happened. This ratio remains at a stable level. Also, we have a stable level of coverage of the third basket that is something that we watch as part of our market parameters. Both us and our competitors try to optimize NPL, for example, by selling portfolios that are fully hedged. That contributes to the better result on NPL. Very strong capital position. You might be aware of the fact that our dividend payment has been approved at the level of 70% of the result for last year, which is more than 9%. I think that's a very satisfactory result. Capital ratios grew compared to the end of last year by 1.3%. And this is, on the one hand, the result of recognizing 1/4 of the results for the second half of 2024 as part of equity. And it seems, at least for the time being, that the positive impact of the implementation of a new version of CRR (sic) [ CRR3 ] is slightly higher than we had communicated previously. Capital ratios grew about 0.8% as a result of implementation of new rules. What is more, we expect those capital ratios to grow about a further 0.5% because -- of the total capital ratio because we issued a subordinated loan at PLN 750 million. A similar situation in MRE (sic) [ MREL ]. The surplus over the minimum required is up by 1%, slightly less than capital ratios, but this is also because we bought out bonds for PLN 750 million because those bonds were no longer efficient from MREL perspective. And here on MREL, we have slightly lower results than on capital ratios, but still the buffer is increasing. We uphold what we said previously, about EUR 500 million benchmark issuances next year. And I think now I can hand over to Dagmara again.

Okay. So to sum up, reported result, PLN 1.7 billion. The result without one-off events, PLN 2.1 billion, 14% growth in recurring net profit. Strong profit revenue lines, very good. We have 10% growth in commissions, interest rate growth as well. And it is also worth adding that last week we refreshed our program of settlements related to mortgage loans in Swiss francs. So we will invite our customers. We will reach out to them as well. All of that gives us a good starting point for the implementation of the new strategy.

Yes. And that brings us to the Q&A session. I would like to invite our guests here. Okay, we can see the first question. Dariusz Gorski, Santander brokerage house.

My first question, maybe provocative. Three Polish banks have reported their results. mBank, 11% up; Santander, 8%; and Bank Pekao S.A., 4%. mBank has shared its expectation to maintain the expectation. Santander mentioned its pipeline. And a question to you. Can Pekao SA catch up with those fastest-growing banks? Or is there anything that could change to move your growth faster?

Of course, the key thing is major transactions. As I said earlier, in the segments where the bank was under-weighted, we have 2-digit growth. But indeed, in the segment of large enterprises, our portfolio decreased as a result of large repayments. That is the key factor. And I would like to add that we have those strategic portfolios, which we defined in our strategy that is not secured consumer products, SMEs and micro enterprises. Here, we have all 2-digit growth with a positive pipeline. So we expect this rate to be maintained in those segments. The challenges or any special circumstances concern 2 portfolios. One of them is large enterprises. For example, energy groups communicate how much money they get from the resistance and recovery fund. And another element is mortgage loans. The sales are satisfactory. We also have a safe base loan and also we have the safe period when...

[indiscernible]

Well, I don't want to antagonize you. But to us, an important thing is to compete against public money. So after the large portfolio, actually repayments that we've seen was the result of the recovery plan funding and partially combined with BTK funding.

My second question is about the place of Pekao Bank within the PZU Group. My analytical review points out the moment when there was a discussion going on about Alior situation and that was putting pressure on Pekao. Now as Ernest said, after the presidential election, some banks may start their MLA processes. And to my knowledge, Pekao SA has their hands tied because we are not familiar at this point what is the ultimate structure of the group. And what is the position of the bank about the holding structure that PZU suggested? And are there any other alternatives that would not sort of keep your hands tied?

Well, we are part of the PZU Group. PZU has direct 20% shareholding in our capital. So this is a sizable share. As you may recall, when there was a discussion unfolding about the Alior Bank late autumn 2024, I made it very clear that the key thing is the capital allocation within the structure of the entire group because of the solvency, because of the CRR, solvency 2027, et cetera. The discussion is going on. And it was said on many occasions we continue to have a dialogue, and the model that will emerge from this dialogue will be geared to best use the capital and assets that are available within the group. It is premature for me to communicate that. The whole idea of the holding structure, in my opinion, is somehow letting over my thinking, I believe that this is the solution that will help us put our capital to a better use and we will be better placed to manage the whole structure. We know that today, under the current circumstances, if Pekao SA was not to have direct merger with Alior and it was not part of our short-term strategy -- well, let's not forget that reasons and premises for the reallocation within the group were not sufficient because the charges for the banks are much higher than for the insurance companies. So we have to be patient for a while yet. But as I said the whole pathway with the PZU holding seems to be going to the right direction.

So let's move to the online questions. One question was partially answered during the presentation, but it was about the susceptibility of our net interest rate margin per 100 cuts -- by 100 bps and also looking forward.

So as we said, this vulnerability is 20% to 25% each 100 bps cut. In the second quarter of 2025, we will see the outcome and the effect of the repricing of the bond portfolio. It could be approximately 10 basis points. But looking at the long-term cuts, as I mentioned earlier, the change in our product mix will actually make us less sensitive to that by 3 to 7 percentage points. We do have term deposits that may be subject to repricing. Their contribution is at 28% to 29%.

Another question was about [ EBZ ]. So the rate is better. It was 36% at the end of last year. Currently, it sits at [ 40% ]. But I think that we should draw attention to the fact that, in our case, a large part of this ratio comes from the capital surplus, and I was explaining earlier that our capital surplus has been growing. And also another thing to consider is term deposits. They are part of that calculation. And these factors are temporary or transient because there is a way how this ratio is changing. On the other hand, we will have incoming MREL issuance and they will contribute on the upside to this ratio. So we will certainly have a discussion where it is 2 factors that contribute to that and they tend to finance the long-term assets in the banking sector where the current rules should not be more sustainable. And here the ratio we are right on the target. It's 3.5% to 4%, depending on the date of the -- at which you look at the total assets in the balance sheet. Well, do you intend to actually weigh the indexation of wages?

Well, we have a collective bargaining agreement that covers a large number of our employees. There is an indexation clause within this agreement. So there is not a straightforward thing to do. I may just say that the key members of the personnel of the bank who had this clause in their contracts had their contracts revised. And in their case, this automatic approach was waived. Myself, I'm not in favor of such automated indexation that links wage rates with inflation rate. I believe that the wages should reflect the market conditions in the labor market. But we are bound by the rules that were decided many years ago, and we are going to honor them.

Another question is less about the performance, but it's more about what [ Camil ] was talking about. What -- how do you evaluate the capital changes in Santander Polska? And would your bank be interested, together with the consortium, in sort of tackling this challenge?

Well, there are owners in place. And the owners decide whether they want to continue their engagement in this country or not. I said on many occasions that many international shareholders act at the whim, revolving doors. They come in and they exit right after. The bank that is currently operating under the name Santander will -- I think that we've seen that bank in many different profiles with many different shareholders. So my opinion about the structure of the banking sector in Poland has been stable for the past 30 years. And it appears that over the next few years, it's going to materialize. Obviously, there is a need for international investors in this market and the quality of such investors matters. Santander really did a good job with the assets that they acquired in Poland, and they substantially extended their activity via acquisitions. So I don't really have comments to that, and I don't have comments on previous shareholders on that regard. But our position is quite particular. This is what [ Mr. Slarski ] was saying. Well, we are facing the moment when there will be a regrouping within the PZU Group. And as a group, we have to calculate our capital capabilities. I do believe that we have a fairly high capability. But obviously, there is always a limit that you hit at some point. And only after we complete this internal dialogue within the group we will be able to make clear what is the acquisition capability of Pekao SA. And obviously, we need to acknowledge the fact that PZU Group and the insurance company that is leading it may have similar ambitions. Fundamentally, given the current situation, I do not see sufficient financial base within the PZU Group to make this deal possible. it would probably require the increase in the capital. You would have to actually raise the capital externally. But again, this is a premature consideration. Only when we complete our reorganization process and only when we will follow the way towards the holding structure that [ Mr. Slarski ] was outlining and once we consume all the consequences of the process, we will be able to discuss more active role of our bank potentially.

Are there any further questions? If not, we will not take any more of your time. Three Polish banks, 2 regional banks and a brokerage house pronouncing the results. Thank you very much for your attention, and have an enjoyable weekend. [Statements in English on this transcript were spoken by an interpreter present on the live call.]