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

Good afternoon, ladies and gentlemen. A very warm welcome at a conference dedicated to the presentation of the results of Bank Pekao SA. for the first half of 2026, we have Cezary Stypulkowski, CEO, Dagmara and Ernest Pytlarczyk and over to the CEO.

Okay. There are good forecasts for the second half of the year, so we are optimistic. Profits are under pressure, but you are all aware of that. We operate in the environment of the highest tax thresholds in Europe. So the surplus of income tax also hits the results of the bank. It is worth stressing that our core categories continue to grow, core categories of credit assets, maybe slightly less in mortgage loans. But here, we had the kind of thinking that I shared with you at previous conferences, that is we, as the bank try to reposition ourselves as the bank that has a holistic approach to the market rather than focusing only on volume drivers. In the fourth quarter, we expect very decent commissions growth annually, that is 11% up. The bank also keeps increasing its digital penetration. In retail banking, here we had some backlog, but I think we are quite deft in catching up with the leaders and the strong capital position, Dagmara will probably tell you a few words about the issuances that we had previously this year, and that actually completed our plan for this year. Key reference point, I think, -- maybe it's worth saying that cost income ratio normalized that results from BFG charges continues that our ambitions are above our ambition levels. I have repeatedly said that the bank is in the process of investing, reorganizing and I do not approach to this target dogmatically. So the fact that we stay around 35% is our achievement. The portfolio growth, risks, costs under control. Marcin will probably talk you through that in greater detail. The good news is also that in those areas of client activity, where the bank is still underway in terms of market share. We see continuous growth. You can see that both in consumer finance and micro business funding volume. And the flagship element medium market. That's our key element in terms of positioning. So we can say that all segments decently contributed to our results of the first half of the year. You will not hear the indication of the most salient and ambitious growth parameters with reference to sales or scale of revenues from individual types of operations. And trusteeship services, maybe that is not the major business line, but still they are valuable because this generates valuable revenues and commissions. And we had a lot of importance to that you might recall from the presentation of our strategy that is undoubtedly focused. We pursue and against our peers, we are doing well. I have referred to the strategy presentation. Now we still have years horizon within this strategy because it was a short-term strategy in which we wanted to prove to ourselves, but the bank was capable of organic growth. And it seems that our market shares do a little bit up, of course, we cannot expect miracles. We do not expect to completely transform the market within a short time. This opportunity existed historically in the past with our Italian processes, in particular, but we can say that this year has already confirmed that the bank does have this capability of mobilization, and that's something we are happy with. All those indicators may be acceptable but that is explainable by tax issues. So we are everywhere else within our targets formulated in the strategy. So we reached slightly above the horizon. We keep growing. We become more accessible by slowly reorganizing the bank, we gain a little bit of more of operational efficiency. Our offer is continually enriched for analysts and investors that might not be such an important issue, but I would like to stress 1 thing, namely -- something that we started last year, namely the return to the Pekao SA as the most international bank with the focus on polish ambitions on traveling. And last year, we had the first promotion focus on travel and now we have a greater scale promotion to encourage traveling among our customers. And first, summary of the results indicate that it seems to bring fruits. That means that the bank needs reposition itself -- yesterday, actually, I experienced 2 events. One was with the client and another was with a business partner. That was a client of Bank PKO BP who complained about the bank PKO BP, by writing directly to me. And in the second case, that was a partner who works with our bank and he misspelled the name of our bank. So that's something that set us thinking. There are several products while prepaid MasterCard from SME, you can read about that. For sure, it matters for SMEs, but this does not change the world to a greater extent. And the important thing is that we consistently build the availability of our services for digital channels. Historically, we had a lag behind the market in this regard. But now we can say freely that we are at par with our competitors. And also, we endeavor to have a big bank in digital services and show a new phase of the Pekao SA in the retail banking to show us some more modern bank. As a person who now uses a mobile app of Pekao SA, I must say that on a few occasions, I was surprised by its features. I tended to think it was maybe not that good. And now we can say that we are really at par with the market. And now PeoPay it matters because for the younger clients, this is an attractive feature, travel package has already been mentioned. So we can say that let's wait for next year. and some transactions that we concluded this quarter. Of course, here, you can see a list of major transactions. In the second quarter, maybe it is worth focusing on as being the range and dealer in euro bonds -- we signed a strategic agreement. We are the main domestic partner with aspirations to go beyond that market. So here we have those EUR 2 billion that BK had, it is also worth mentioning the transaction which seems to have disappeared from my slide, but we are open to those customers who are thermally entrenched in the Polish market, but also who come to us and are interested in PLN funding. That allows me to hand over smoothly to my colleague Ernest.

We have GDP forecast 3.5%, which is a slight downward revision. The reason was weaker beginning of the first quarter. The second quarter was quite good. And we have to say that Poland is not the epicenter of the events related to the oil crisis with the war in Iran. We had a well-timed CPM package. We were afraid this would hit the consumers. But basically, the timing of CPM was such that the consumers do not feel quite so strongly the bucket. The inflation expectations have not destabilized and it seems that our economy has coped best in Europe with this situation. The rest of the year is likely to be similar, some investments, slightly less consumption. And the investments will drive the economy but also the banking business. We see that in our loan portfolio of enterprises. And reality, we hope that this will continue. And also, we prepared a report that discusses several years ahead, not all topics, especially macroeconomic topics from Poland have been well investigated. So we made an attempt to orient ourselves in the market and think of some sign posts for the future. Energy transformation is something that makes a great macro difference we are a construction site in terms of a variety of power plants, gas, wind, energy storage facilities. AI story keeps coming back in various narratives across the world. And it also seems that the AI popularity wave also boosts a variety of sectors here to an only small extent, dependent on imports, plus it's easy to build here. On top of that, there is this nuclear energy theme because Polish electorate is quite favorable to nuclear energy, which is not typical of the entire Europe and that makes Poland stand out against the backdrop of Europe. We spent almost 5% of GDP on armaments and that is not likely to change anytime soon. if you follow the news, that is probably a reason to justify the investment. The first wave of expenses on armaments is mainly focused on local content. And in the second wave, there will be more interesting things going on because there will be more collaboration with the European enterprises with better know-how. and we can talk about positive fiscal multipliers, the second wave. Of course, we also have to note that it -- the armaments increase will have a positive impact on GDP. But also there are some challenges that Europe has to face Chinese shock. Europe will reach for protectionist policies. a variety of customs barriers plus, there will be an attempt to structure supply chains based on European resources. Poland has an extensive industrial base. And it's impossible to think of this industrialization escape in Poland or bypassing Poland plus location and the right place in Europe. So these are 3 pillars. And as a result, we are quite optimistic about Poland, noting greater growth in GDP than other large European countries. For the current year, it's 3.5% compared to, on average, below 1% in midsized EU member states. And a few words about the nominal dimension. A few months ago, there was a major concern, but we will have major interest cuts than the market locked in 4 caps, we didn't believe in that study. And now we are at the point where the National Bank of Poland starts talking about the cuts. As I mentioned earlier, Poland was handling the oil shock pretty well. And now the inflation is not really sticky because once it becomes sticky. It's really hard to manage it later and reverse the trend. Nothing dramatic happened here. Our prediction is that there will be no interest rate hikes. We don't have the automatic transmission that ECB goes up, we go up accordingly. Next year, we will probably see a cut, but not a major one. So the environment will be with the higher volumes, especially with market loans, especially with such a curve what set expectations regarding the interest rate, the prospects for refinancing become burning and it will happen eventually. Today, like the 5, 6 of the financing happens outside of the mother bank. So that's an interesting point. Large volumes amongst the corporates have spill over to smaller players and AI theme and the defense theme. I believe there is an interesting macro environment for the defense sector.

Good afternoon, everyone. So perhaps a few words about the actual numbers. our lending was up by 10% in total. This is another quarter when we are growing faster than anticipated in our strategy. I would identify 2 areas: retail and corporate. In terms of corporate loans, mid SME and large corporations are growing at a 2-digit rate. When it comes to mid and SME, for the past 6 months, we acquired over 1,000 new customers, which is excellent news. In terms of the large corporations, they are up by nearly 13% on a year-to-year basis. And we would like to keep that lending bank corporate dynamics for the next quarters. In terms of the retail lending, we have a major uptick in cash loans. The volumes were up by 15%, with sales 16% up year-to-year. In Q2, we've seen the record high sales of cash loans, PLN 2.3 billion. Mortgage loans were growing at a slower rate, 1-digit growth. Now moving on to the deposit side. Total deposits were up by nearly 7%, retail, 8%; corporates 11%. We are really happy to see current accounts moving up. Last year, it was 73%. And this year, at the end of June, we've seen over 75%. This is the share of the current accounts. And we keep on opening new accounts we opened nearly 230,000 premium accounts and Sokos accounts. And more than 1/3 of it is dedicated to customer under the age of 26. In terms of investment funds, you may remember that at the end of Q1, we faced some challenges in the market because of the war. This gap is being filled slowly but steady. And in June, we've been at PLN 4.4 billion. And a few words about issuances. Last 6 months, we're quite active on the Euromarket, we had 3 issuances, EUR 1.71 billion in total value. What I should say is that the terms were really excellent for the execution of all 3 issuances. And we see a growing base of international investors. So this is a major feature for the past 6 months. In terms of NIM, on the year-to-year average bubowas down by 150 bps. Our net interest margin was down by 35 to 46 basis points depending on treatment. Two things that need to be acknowledged, lower interest rates and that was offset to some extent by higher volumes. We explained in our strategy, but we want to make sure that across all the key segments where we were underweighted tax micro, SME, and mid we want to really grow our market share, and we want to grow at a faster pace than historically, and we've been delivering accordingly, which translates positively in offsetting the negative effect of low interest rates and the NIM decline. So looking forward, we are actually positive about NIM and we believe that the interest rate cuts from last year and the 1 interest rate cut that we had this year has been properly accounted for in the current level of NIM. And there's about sensitivity to interest rate cuts. It's 10 to 15 basis points per 100 basis points in terms of cuts what has already happened and what helps us manage the sensitivity is, as I said, growing volumes of our loans. And on the other hand, the hedging strategy that we had in place, and the growing volume of IRSs. We do see the dominance of periodically fixed rate in our mortgages that are newly sell, and we also manage our deposit side of the balance sheet. In terms of commission and income, another strong quarter, 11% growth on a year-to-year basis. And as you can notice, we've seen growth across all the contributing categories. So commissions on loans, on cards, asset management, strong 2-digit growth, but there are other contributors such as account fees and FX margin. Now moving on to the costs. we make sure that we keep operating costs under discipline. As our CEO mentioned, we are transforming the bank, and we continue to invest. So there are 2 cost drivers in the cost base. On 1 side, we see the cost of wages and the cost of wages have been going up year-to-year. The rate is the 1 digit rate. On the other hand, we have assets and depreciations. And here, the growth is 2-digit. And this is the result of the IT investments, new strategies -- new strategy projects and more active marketing efforts. As I mentioned, we are investing actively in the bank, which means that depreciation as a sort of translation of the CapEx will be growing. And now over to Marcin.

Thank you. In terms of cost of risk, they continue to be stable. It was 342 basis points for the last quarter and 47 and -- 42 year to year. So we stay within the range that we've been sitting in for some time, and there are 2 contributing factors, but are well familiar very low cost of risk in the retail segment, where the loss ratio is very low. And that's also connected to new estimates of the write-offs in the segments where we see less likelihood of the default. Now in the corporate segment and enterprise segment, the cost of risk are oscillating within the normalized levels for the long-term projections, and it's still lower than past year some years ago. And that affects our NPLs. Actually, it has -- NPL has been quite stable, and it was even declining because we sold the NPL retail portfolio, approximately 200 million in nominal value, 26 million in profit in Q2. The NPL coverage, the nonperforming loans, so the coverage has been growing slightly, and it's higher in the enterprise and corporate segment because of the lengthy court proceedings in case of bankruptcy or restructuring processes involving larger, more complex entities that might have over to you again. So finally, let's highlight some facts about the capital. We keep a strong capital position. We have the surplus in CT and then the total capital ratio. We -- in our strategy, we say that 50% to 75% of the net profit will be paid out in the dividend. And with these capital ratios, we are all safe with it. In terms of MREL, again, we meet the criteria. And we reached the ultimate level above 24%, even taking into account the increase of the anti-cyclical buffer that will happen in September this year. We are working on 2 things. One is securitization, and that should materialize at the turn of '26, '27 and another thing is 81 issuance. And that would be all. Thank you.

[Operator Instructions] But I do have some questions from analysts. Some analysts have been asking what about the credit spreads? And what is the competition level in the area of the credit margins?

Let me take this question. We see a major pressure on the margins here, especially in the corporate segment. And now when we look at our -- where we sit in the market and given that each bank has the ambition to grow in the corporate sector, I have to say that this is the strongest pressure by far.

There is a handful of questions about European CotoJustice ruling. Well, we disclosed the amount in our report. The question is whether this is just one-off charge to PLN and what is expected to happen next?

I would like to really distance myself from the role of the adviser of the La Chancellery and legal tesorolofirms. So I would rather refrain from comments here. This phenomenon is the inflection of the Polish market. But the discussion is ongoing, how to interpret that ruling and my personal opinion is that we should stop offering this product in the current form in the form that was challenged. The ruling of the ECJ implies that we should really split it in 2 elements that were combined into the package which will be difficult for the customers. The whole area, I should say, of the customer protection instead of shifting towards such a direction where many products will be very complex from the customer point of view, and they will be just tick the boxes without really thinking many of us do it daily because there are so many legal requirements, but this is not adjustable for the customers. . And by itself, they become the source of risks that we are discussing here. We are not discussing the credit risk here. We are not discussing the balance sheet risk. In Poland, we tend to focus on the legal risk. and the legal risks are byproducts of the emerging industry that is living of it. So my answer to that is that we estimate at a certain scenario. I'm not going to explain it in detail, but I'm not going to make it a secret since I am the Chair of the Polish Bank Affiliation Board but we have a discussion within the banking sector. And as a community, we have already voiced our opinion to ECJ how this product could be offered in reasonable terms and how to settle the contracts that are currently active.