BNP Paribas Bank Polska S.A. (BNP) Earnings Call Transcript & Summary

Good afternoon. We'd like to welcome all of the participants of our remote earnings conference. You're somewhere out there in space. We don't see you. We hope that you can see us and that you can hear us. In a few moments, we're going to talk about our performance in Q2 2021, and we're going to do this as a team. So I'm joined today by Jean-Charles Aranda, who is the CFO of the bank; and Michal Dybula, who's our Chief Economist. And in a virtual way, we can see quite clearly, we have Wojciech Kemblowski, who's our CRO. So we have a sophisticated form of communication. The difficulty is that I don't see you here. I don't see reactions. We don't have any type of visual contact, which doesn't make life any easier, but that's the way things are. We're going to have to cope with that. So I would propose that we go ahead to our presentation and start walking through the subject. The agenda is pretty traditional straightforward. I don't think it requires any type of special explanation. We're going to talk about our story in different roles. So I'll begin, and then my colleagues will take over at the proper times. So we can start with the key highlights. As you know, in Q2, we've given you -- delivered solid, robust business results. So our interest result, our commissions have grown. The number of customers is on rise. So the market conditions have improved to drive up loans. Our current expenses, OpEx, is under control. And so the results of the bank have been debited with a pretty big charge because of mortgage loans because of CHF, so the Swiss franc loan. And so we had a pretty big hit to the result as a result of that provision. The bank continues to watch and walk through its transformation process. We're augmenting our technological prowess. We're automating, simplifying our processes internally. And you can see that on the numbers that we're more and more of a digitalized bank. We're more and more modern. In terms of our business, we've mentioned that for the first time in the history of the bank, we have more than 4 million clients which is a psychologically important threshold. So the corporate business is back. We've done a number of very big transactions, high-value transactions, attractive transactions. And then we can say that our digital banking is doing very well. So we'll talk about it in just a couple of moments. So ladies and gentlemen, here you see some of the trends in terms of our sales activity with respect to customers in various quarters. And so you can see that in Q2, we were quite active in terms of acquiring personal accounts, payment cards. So cash loans are up strongly as our mortgage loans, and some of these are very highly positive. And generally speaking, you can say that we're moving up quite strongly. Our customers are more active. And so in a natural way, that means that we have a higher number of payments. We have a sample of tombstones where you can see our biggest transactions, the ones that were the most important for the results of the bank. And these are corporate transactions that we did as a bank. If you look at our volumes, and you can see that we've moved up quite strongly in terms of our retail customers as well as our corporate customers. So this is a reversal of the trend. And this is a pretty important moment showing, in fact, that the bank was well poised once the economy enters the phase of recovery, and we believe that we're going to be able to continue that in subsequent quarters. Customer deposits are up in a controlled fashion. The bank is highly liquid, and we're not actively seeking additional liquidity. The number of customers, as I've said, has exceeded 4 million watermark. So we continue to pursue our strategy, our fast-forward strategy. The recent quarter -- these are the last quarters of the validity of this strategy, but this organizes our thinking in terms about where we're going. Here, you have some tangible examples and samples of the activities that we're engaging in, which underlines each one of the pillars. I'm not going to discuss these in detail, but I would like to draw your attention to a couple of them. In the most recent quarter, we have mojeID service that was rolled out. This is quite a big facility. Of course, this was done relatively late, but better late than never. We continue to grow quite nicely our mobile application for individual customers, which is called GOmobile. We are adding functionalities, and the numbers of clients are growing quite quickly. We received a number of awards, traditional awards for wealth management. And so it's probably the biggest in the market. And based on external assessments, the best in the market, we're continuing the transformation of our branches in terms of safety, convenience and modern approach, but above all, we're actually accessible to persons -- disabled persons. We've also won an annual voting competition in terms of responsible companies. So it's third time in a row in the overall standing. And it shows basically that our activity in terms of sustainability, our care for the environment, diversity, inclusion, that these activities are authentic and basically done with integrity and the experts have basically highly regarded this, and this gives us more energy. So it's not only about our drive to generate and deliver good earnings, but also to make sure that we're doing things well. If we look at the transformation program, as I said, this is something that's being continued, and the bank will continue to do this for a long time, perhaps forever, the world is changing, and we want to be a front-runner. We want to change rapidly as we basically adapt to the evolving needs of our customers. And as a result, we are steadily rolling out functionalities, new functionality services, different tools. Externally, we've gone through a process where we sign documents electronically using the Autenti platform. Additional processes are being digitalized. And so this means that the bank is making sure that the clients are well taken care of, and that's why we're offering new solutions and the challenge that we're facing and a pretty high priority. In terms of our internal processes, we want to simplify, automate them as well as become -- augment our efficiency overall. Another important, very important subject is sustainable development, positive banking also being a green institution. This is an oversimplification. Basically, we can say our volumes of green financing have grown very strongly, some -- by some 72%. We've nearly tripled quarter-on-quarter. And so I hope this is a trend, and this has quite a bit of importance for us in this area of operations. We're going to focus on this very strongly. We have nearly 6,800 installations, PV solar installations, which were basically set up because of the financing. We have large-scale projects, primarily in wind and photovoltaic energy. So each one of the sectors were active, highly active in each one of these sectors in terms of delivering products that are ecological environmentally friendly that make it possible to take care for the environment, rescue the environment and operate in the field of energy. We have other positive changes several initiatives, which emphasize and underscore our commitment in terms of sustainable development ESGs. And so this is something that's been announced by the UN, and this is a trend that we're going to continue on an intensive and strategic and steady basis. And so now we can say a little bit about our trends, and here's a simple graph that shows where we are in Q2. So as you see, the profit is a little bit lower. But as you remember, we have a big provision for the Swiss franc loans. And this basically dropped the profitability of the bank in this period. And so we can say that the net banking income was at the same levels in Q1. Costs are totally under control. Cost of risk are slightly higher than in Q1, but they continue to be at a very low level and so the portfolio is healthy. It's a robust portfolio, and we don't see any reasons to be concerned at the current point in time. And then if you look at some of our parameters, ROE, it's 4.9%. Of course, this is something that we're satisfied by in the longer term. But having in mind the current set of circumstances, the reality, it seems to be quite a robust result. If you look at the cost-to-income ratio, CI, it's at a stable level. We're doing this in a reasonable fashion. Of course, there's some room to improve our effectiveness, and this is something we're going to continue to do. I've mentioned the cost of risk, and then we also see the provision for CHF loans in the Q2. So this will not, of course, handle the entire problem related to Swiss franc portfolio. So it's relatively small compared to the big Swiss franc lenders, but it does have an impact on the profitability and the return on equity. And that's why this provision had to be set up. We're closely observing the development of the situation, and we'll react suitably in subsequent quarters. So then we have the macroeconomic environment. So I'll go ahead and give the floor to Michal.

Thank you very much. So I'd ask you to show the first slide. So tomorrow, we'll see the preliminary estimates of GDP in Q2 of this year. So the available data suggests that on a year-to-year basis, this is going to be a spectacular growth in excess of 10% probably. Of course, we have a very low base effect, and this will play a crucial role. But what I would like to draw your attention to is that on a quarter-to-quarter basis, the economy is accelerating, and we can see this recovery. And it's becoming more evenly balanced or spread over the sectors -- the various sectors of the economy. So all in all, there's a good chance that the annual average growth will be around 5%. Perhaps, we'll even be able to surpass that level. And what's even more important, the optimism regarding forward upcoming quarters is quite justified. So if we look from the beginning of this year, we can say that investments have been picking up the pace, and this gives us the idea or portends that we could have a longer-term recovery. So we can go to the next slide. What's important here in terms of the investment recovery is that we see demand for loans in the corporate segment is picking up. We hadn't seen that up until now in terms of the volumes, in terms of new productions of corporate loans. So this is something that -- we've seen market growth here is what I'd like to underline. And we have this overall optimistic narrative about the macroeconomic environment. But we do have to mention probably the most important factor of risk. Basically, which is high inflation in July, the level of inflation was 5%. So it's twice the inflation target defined by the National Bank of Poland. And having in mind what we observe in terms of more expensive food but energy and some of the other inflationary factors, this is not the highest level of inflation that we see at present and what we'll see in this year. So high inflation, coupled with a more and more robust recovery of the economy does, of course, drive up the expectations of the monetary policy being normalized. And so the market does see that in the next few months, 10, 12 months, we should see an increase in money rates, monetary rates. And then we can go on to more a greater discussion of the financials. So thank you, [indiscernible].

[Audio Gap] For the year, we delivered solid core financial results. Good news. Corporate loans started recovering. As a result, our portfolio then grew by 4% year-to-year. Net result decreased only by 11%, reaching the level of PLN 296 million despite the additional booking of provision for Swiss franc portfolio. NBI decreased by 4% year-to-year, of which net interest income decreased by 5.2% year-to-year mainly explained by the interest rate cut, MREL implementation and low demand in corporate loans in the beginning of the year. Very good result in terms of fees and commission, which grew by 22.1% year-to-year. Net selling income decreasing by 11.9% year-to-year due to the lack of one-offs in 2021. Costs remained fully under control, and we are keeping on changing our operating model. As a result, the cost decreased by 5% year-to-year. Cost/income ratio reaching the level of 53.9%, slight decrease. As already discussed and shared with you additional provision in the CHF portfolio, PLN 259 million. I will share information with you later. And the cost of risk remained very low, and the quality portfolio is there. No significant comment in term of ratio. All the ratio in the green zone. Overall, our loan portfolio grew by 3.6% quarter-to-quarter, 4% year-to-year. On one hand, individual portfolio grew by 3.4% quarter-to-quarter, 12% -- 12.2% year-to-year. The positive trend is remaining with our good performance in term of mortgage loan. On other hand, reverse trend in corporate loans. We start growing again, which is good news. So we grew by 3.8% quarter-to-quarter, slight decrease year-to-year, 1.5%. Next slide. As regard to individual loans portfolio, the increase was mainly from the mortgage loan portfolio, very good level of sales again in Q2. And we start growing again in terms of cash loan, we grew by 1.9% quarter-to-quarter and very good performance in terms of digital sales. As for the institutional loans portfolio, the trend have been reversed and very good performance in terms of corporate loans and leasing as well. Next slide, please. As regard CHF mortgage loan portfolio and as a result of a significant increase in the number of new court cases and also further deterioration in 2 parameters, we have increased the level of provisioning. And this is why we booked additionally PLN 259 million in the first half of the year. Next slide. After optimizing the level of deposit at the end of 2020, deposits grew by 1.4% quarter-to-quarter, 2.2% year-to-year. We are keeping the positive trend in term of investment products. Volume grew quarter-to-quarter by 6.2%, 54.5% year-to-year. So the trend is there and is giving a positive impact in terms of fees as well. Next slide, please. No significant change in terms of structure of deposit. Current account is representing now more than 90% of the total deposits due to the low interest rate, and we have stabilized the cost of deposits. So no significant change compared to Q1. Then banking income. So year-to-year, net banking income decreased by 4.1% as a result of the interest rate cut, lack of one-off, mainly. When we look at the evolution quarter-to-quarter, NBI remains stable compared to Q1. However, positive trend in net interest income, fees and commissions -- sorry, fees and commission and NII and net trading income. However, we get a negative impact coming from the volatility of the valuation of the portfolio measured at fair value. Next slide. So year-to-year, the margin decreased from 2.79% to 2.47% as a result of the interest rate cut mainly and implementation of MREL. Quarter-to-quarter significant increase coming from the growth of the loan portfolio and also interest on derivatives. Next slide, fees and commission, very good news. The trend is very good. So year-to-year, plus 22.1%. All the components improved. So thanks to better activity with the customers but also change in our pricing. Quarter-to-quarter, which is dynamic as well, positive trend. Very good performance in terms of asset under management and better penetration in terms of insurance. So the trend is there. Net trading income year-to-year decreased by 11.9%. However, we have to keep in mind that last year, we take the benefit of significant one-off. I'm referring to the valuation of BIK and KIR entities, which did not occur this year. Quarter-to-quarter positive trends with better activity with our customers. So quarter-to-quarter increased by 9.9%. Net investment income, this is a part which is already volatile and linked to our professional portfolio, which is measured at the fair value. So year-to-year, we are increasing by 123% quarter-to-quarter, slight decrease. As in Q1, the valuation was positive compared to Q2 in which the valuation was negative. Costs. So costs remained fully under control. We are keeping and changing our operating model. So year-to-year, cost decreased by 5.4%, excluding BFG impact, minus 1.6%. So I think it's visible that totally we're adapting our model, we are keeping on digitalized bank. So we are adapting our cost base. Quarter-to-quarter, no significant change. We stabilize. Cost of risk.

Thank you very much. And now we can give the floor to our CRO, to Wojciech.

Good afternoon. I begin with the summary of the biggest impact of COVID 19 on our credit risk in the previous year. Now generally speaking, we have support of PLN 6.1 billion. This was support as well as moratorium. 97% of these moratoriums have already been completed, have ended, and we're to the situation -- back to the situation that was in existence prior to COVID. So the performance of this portfolio is 95.8% of the customers have returned to normal payments -- in normal amortization schedule. So our customers, as this testifies, did not need such extensive support, and they were able to navigate the waters on the market. So if you look at Q1 2021, we can say that one aspect is quite important. We released some of the provisions because of the changes in the macroeconomic scenario for 2021. And so right now, the scenarios are better than previously, but we've also identified some potential sensitivities in some of the industrial sectors where COVID-19 could have had an impact. And as a result, we've set up some provisions -- forward-looking provisions with respect to all types of industries. That means in Q1 we have provisions of PLN 80 million. So we have to have in mind that in 2020, we've had provisions of a certain amount, and we had status of that at the end of the year. And in the first half of the year -- of this year, we've added another PLN 80 million in provisions on top of the PLN 131 million that we had. And so then we can go on to the next slide, where we have basically the uptake in 2021. On top of that, in addition to the nonrecurring impact, we also had the multi-scenario approach, and this was a recommendation that was given by our auditor. And so this was PLN 42 million then we had the opposite result where we had PLN 21 million, which is a new definition of defaults. Then the PLN 80 million that I mentioned in terms of the coronavirus impact and then we have the positive impact because we sold one part of our NPL portfolio, and this had a positive impact on the risk cost of PLN 36 million. And so that means that we had a proper level of provision. And so perhaps even more than the market was suggesting we had very good prices. So what I would like to say, generally speaking, in the first half of the year, there was very few new defaults that came into the picture, which were in different segments also in corporates. In the retail segment, we had very few new defaults. We were able to maintain the same level. In fact, we even increased the level of provisions of the forward-looking type. We had a very good amount of recoveries and the sales prices that we were able to command for these NPL loans we sold. And so that means that we have 36 basis points as the level of provisions in Q2. And so around 33 basis points, if you were trying to average out the first half of the year. And so we can go into the next slide, where we can talk about the quality of the loan portfolio. So if we look at the overall bank, basically we have the lowest level we've ever had in the bank down to 4.8%. On one hand, we owe this to the management of the NPL portfolio, but at the same time, we can see the growth of the working portfolio -- performing portfolio. So both in terms of percentages and in absolute terms, so we have the lowest level in history. We can see that the loans, both retail loans and corporate loans in each one of these segments. The quality has improved, has been enhanced, and it's at a very safe level. And then I can ask you for the next slide. And you can also see this if you look at the various phases of the portfolio. In the most recent quarter, we have more in Phase I, Phase II and Phase III have a decline. So that means that we're improving the quality. On the other hand, if you look at the coverage with provisions, especially in Phase 2, well, it's growing a little bit. But we've been able to maintain the level of coverage. And so this basically confirms the fact that the level of recoveries and the sales prices that we've been able to command in the marketplace are totally sufficient and are equivalent or matched to the level of provisions that we previously set up. So to recap, in terms of the quality of the portfolio, we believe that the situation is highly stable, highly sound, and we can concentrate our efforts on development and growing the portfolio. And certainly, we don't have to think about remedying the portfolio at this stage in any way, shape or form. Thank you. And then we have the capital adequacy. The capital ratio, as a result of the increase of our loan portfolio, RWA increased, and as a consequence, quarter-to-quarter capital ratio slightly decreased, reaching the level of 13.28% in terms of Tier 1 ratio. However, the capital ratio remains in the same positions significantly higher than the minimum requirement.

So ladies and gentlemen, we have the final slide prior to our Q&A session. What awaits us? First, well, the economy has embarked on a growth phase. So we anticipate that GDP will grow substantially this year. We believe that we're well poised to tap into the conducive macroeconomic environment in order to grow. We are a bank that's focused on growth and development. And we're thinking about organic growth. Of course, we're going to phase in additional technological solutions for our customers. We're going to be highly focused on our offering linked to sustainable development. And if we look at sustainable development, we will adjust our position to ESG legal requirements. We're far along that path in doing that. I've mentioned some of the other processes. Well, this is a story that's going to last a long time. We want to have the top-end class, the fastest, the most convenient processes for our users, also our customers, internal users. I've mentioned previously, I think, that we're working on a new strategy to devise a new strategy for 2022-2025. And so the work is highly advanced. We're engaged in dialogue with the Supervisory Board members for explaining some things. And in the second half of this year, this is what I'm counting on, that we're going to be able to finalize the work on that strategy and communicate that strategy. Of course, I can review a little bit of information that this strategy will be a continuation of our growth strategy that the bank has had in the past. The bank and our shareholders has extensive ambitions in terms of being active and the scale of its operations, the magnitude of its operations and its profitability. And so we want to be very clear on that, and we're going to manage things reasonably and prudently, especially on the cost side. And I think that would be more or less it. In terms of maybe as a matter of a recap, I would say one thing. Our results for Q2 are quite robust. The core income has grown. Risk is totally under control. Same is true of costs. And then the Swiss franc factor is something that we've talked about at the previous conference. So I'd like to thank you very much for your active participation, perhaps your patience in this part of the presentation, and now we can move on to the Q&A session.

So I see some of the questions. I think we've responded to some of the questions in the course of our presentation. So one second, please. So perhaps I'll walk through the questions chronologically. So the first question from [indiscernible]. What percentage of the Swiss franc loan portfolio is -- got a provision attached to it in Q2. So if we look at the overall portfolio, it's 11.4%. But If we look at that portion which has client claims, well, then we -- the provisioning is in excess of 90%. The second question from Santander. The cost of wages are at the same level despite decline in the number of FTEs by 9.4% I had anticipated or what sort of expectations you have for upcoming quarters? Well, you're very well aware that there is, of course, across the market and the entire economy in terms of the level of wages. We have inflationary pressures, which are quite strong. Our policy is that raises are done once under a process at the beginning of the year in the first quarter of the year of the subsequent year, and that's going to be the same case here. So I think the pool of raises will be close to the level of inflation. It should not exceed the level of inflation. [indiscernible] Do you have some expectations about the ex-Fortis Swiss franc loans? Well, we have some situations in the first instances that we've lost cases inherited from Fortis, and that's reflected by the growth in the provisions for legal risks. Then we have another question from the same person, [ Camejo Seletskiy ]. The question's in English. So I think the question is going to be for Jean-Charles, probably.