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

We would like to give you a very warm welcome at our another quarterly conference with the presentation of our results. Traditionally, for some time now, we have organized those conferences in a hybrid form, with some people physically present here in the room, and hopefully, numerous people interested in our quarterly results following this online. Ladies and gentlemen, traditionally, we will start with the presentation, and that will be followed by a question-and-answer session. We have our standard agenda for today, something that you might have expected. So let's move on to the most important things about our bank. I am hugely unhappy to announce the results of the bank with a loss of PLN 347 million. This is the highest-ever loss in the history of our bank in recorded history. And it would be hard to be happy about it. Of course, this is the result of credit repayment moratoria. We posted a cost of that at PLN 569 million. And in the third quarter, we had also the additional cost related to this [ ISP ] system for commercial protection of bank -- of commercial bank's protection. If we hadn't had those negative impact, the result will be close to PLN 570 million to market, completely different reality. So in fact, if it hadn't been for the historical factors, so that is provisions for Swiss franc, loans and the repayment moratoria, we would deal with a smoothly functioning bank returning on investment at the rates expected. Unfortunately, the reality is different. Slightly positive information again with this background is that after 3 quarters, the bank remains net profit at PLN 149 million, which is, of course, a small amount compared with our aspirations and the hard work that almost 8,500 people provided during this last year. And as regards other general things that happened, leaving beside those key numbers, this has been a period of growth mainly in the corporate banking, where we increased our market share on the side of deposits, as well as on the side of loans. So in this respect, the bank grew. In retail banking, we are clearly noticing the slowdown in the economy, mortgage loan market is collapsing, and we see also downward signals and other types of loans, that is cash loans or loans on -- other non-mortgage loans. However, overall, we see more intense activity of retail customers. Our clients use mobile banking and online banking more often than they do use our cards, which is good news to us. The bank remains and will be focused on sustainable development. On ESG matters, we made some significant progress, which we will comment later on. Actually now, let's look at our strategic pillars. I will not discuss in detail all elements that you can see in the slide. I will just focus on those related to ESG. Two pieces of information. First of all, about PLN 600 million was the growth in green financing volume granted in the third quarter. In total, this volume grew by PLN 5.7 billion, which is a solid, robust number and a very positive trend. Secondly, we have received ESG rating from Sustainalytics', which is one of the leading rating agencies in this area, 10.9 is the best ranking among all banks in Poland. This is a very, very attractive, good level, showing low risk in the field of ESG in our institution, which is absolutely the reason for us to be proud of our strategy and the correctness of action we take. I will not discuss the details of other points. You can see them clearly, explicitly in a well visible presentation. Statistics. Shown in the graphs here regarding our digital activity. We can see that more and more of our customers actively use remote channels. This growth is higher in GOmobile, that is our mobile application. Personally, I'm also a faithful user of this application. And I can say with full responsibility that it is user-friendly, modern, easy-to-use and multifunction application without any weird additions and things that are unnecessary. In my opinion, simplicity is sometimes much better than excessiveness. The number of tokens in digital portfolio shows how many more of our card are inserted in various mobile devices, roughly 5% growth quarter-to-quarter and plus 18% quarter-to-quarter transactions done by BLIK, which confirms what I mentioned before, namely that our customers are more transactional, that is they perform more transactions using our channels. Here, you can see a mix of better news and worse news. I will start with a more positive news. Investment products, plus 22% quarter-to-quarter. I wouldn't like to say that it is the beginning of a lasting trend. However, after the decreases from the previous trends, we can see it as a positive trend increase in the number of transactions on payment cards and lower acquisition of personal accounts, as well as lower acquisition of clients in small and medium enterprises and corporate clients. This is linked to the fact that we focus increasingly on customers who will be active in terms of making a big number of transactions and who will treat our bank as the primary partner. And to a lesser extent, do we focus on acquisition that just improves the statistics. Also, we see a lower activity of customers resulting from the global economic slowdown, which we still do not know how we'll develop and how we'll transform or how long it will last. As for loan activity, I mentioned those mortgage loans quarter-to-quarter minus 91% on mortgage loans. That shows the condition of the market, reflecting the interwoven factors that you must have heard about from a number of sources, high interest rates or high cost. It is more difficult to be creditworthy, and apartments are still expensive. Also the whole housing market is burdened with a number of risks. First, we had those related to Swiss franc loans, now repayment moratoria. Also a clear decrease in cash loans. However, it is not comparable in terms of scale with the mortgage loans. We can see that our clients, Polish clients are worried about the material situation. They feel, they see that funding is more expensive. So they try to make some economies and live more frugally because there was a lot of uncertainty ahead of us. As regards the dynamics, they are -- in terms of volumes, positive. You can see it at a glance, with greater share -- market shares. When it comes to the number of clients and the retail holders, this has not changed. And we have performed portfolio cleansing to close durably inactive accounts. So this what has brought a global decrease and/or drop in the number of clients. This is not a result of client skepticism or reluctance to work with us. When it comes to the results of themselves, a couple of reflections. The normalized income due to holidays, no change here quarter-on-quarter. Operating costs are quite under control. The operating costs in quarter 3 is at a satisfactory level, especially given the inflationary and wage pressure. We're going to manage our cost in a very prudent and rational way. We have written off extra amounts of PLN 134 million for the Swiss franc loan risks. So we've been busy building our reserves, and definitely at this -- at the end, someone might have said. When it comes to profit, I told you the number of the loss and the theoretical profits. And I guess, that backdrop you would have been more successful in the previous periods, but we are left at the end of the day with more than PLN 300 million of loss. The next satisfactory parameter is the cost of risk, a very small base amount, one of the [ smallest ] in market, which has been core -- that corroborates a very rational approach to risk. And the quality of that portfolio remains at a very good level. The interest margin, no change here. We have modified our strategy a bit in terms of using swaps. We will tell you later about that, and I expect your questions in this regard. The return on capital, 2.3% as we reported. It is not a satisfactory level for anybody. It would have been or might have been 2 digit or double digit, but well, that's how it looks like. Now costs versus revenue ratio, the proportion is still too high for us. So we will continue efforts to increase our quality, but still in our reports, it has been at the level that we have never or almost never seen before. Now a word or two about loan holidays. I believe that this slide is self-explanatory. What is interesting is the number of the clients who applied for the credit holidays. That's more interesting rather than the volume of those transactions. This is because of the clients who have bigger loans, who have incurred bigger loans and their volume is much higher. We're the first to apply for the holidays because the benefits are the largest in that group. And I quoted an observation the other day. And one of the prominent newspaper titles that the highest holiday loan was -- sorry, PLN 8.7 million, and I wanted to draw your attention, all the politicians or the decision makers in general, so whether the holidays have been calibrated really soundly for those to benefit those who actually need that assistance rather than going broad side. We supported the holidays. We have implemented the applications and the remote channels. However, there are clients who apply for those holidays only for a partial period. So I believe that this picture is more complicated than it is at a first glance. So much for the warm up, now macroeconomic figures and [indiscernible].

Good morning and good afternoon, and thanks, Przemek. I'd like to give you a forward look at what happened, what is going to happen, because it is quite obvious that the economy is slowing down in the coming months and quarters, the economic activity will remain weak, very weak. Are we in for stagnation or a downturn recession? Well, we will have to wait and see because many -- plenty of factors that can affect the economy, the status of the economy. Of course, the main factors include the war in Ukraine, which is ongoing, the international economy situation is not very much supportive of the Polish economy. The EU funds are smaller than expected, which is not helpful, especially from the point of view of investing. And last but not least, what is going to be the most important factor of inhibiting the economic situation as the persistent and speeding up inflation that undermines the real income, disposable income that restraints consumption perspectives thereof. We expect inflation to speed up in the coming months. We expect to reach over 20% early next year. But what gives rise to my concern mostly as that expectations -- inflation expectations of business and of households detached from one another very strongly. So that may lead to inflation remaining with us for much longer than we wanted or we wished. And this is what National Bank of Poland also forecast, as well as what's the Monetary Policy Council referred to as well. Now the question arises about the shape of the monetary policy on its perspectives in the coming months. The inflation is starting to speed up after 2 months [ post ] the real interest rates are going to be more negative, the real realistic interest rates are going to be negative and the largest banks will continue the process of monetary tightening through [indiscernible]. We may wonder if the current interest rate of NBP are sufficient to stabilize the financial market, especially that and the exchange rate of zloty. Now with regards to our business, our bank sector, this coupling of high interest rates, downturn and inflation is detrimental to the need for loans, although the consumption loans, consumer's loans have been on the rise and are still at a very decent level. And households, in households, however, new production grounds to very small numbers. I don't want to finish my short speech on a pessimistic note, but the upcoming months are going to be difficult and full of challenges. But to avoid finishing on a very negative note, we should remember that the private sector has went into the downturn with a very high number of profitable businesses, the number which is quite high. And similarly, the households of the similar experience, unemployment remains low. Even though there is a downturn, we may be helpful that once the economic situation improves and the economic policy becomes more consistent, our economy may return to -- on the sustainable and quick growth path. Thank you very much, and over to Jean-Charles.

Good afternoon. As already stated by Przemek, at the end of the [ first ] quarter, the business trends were positive in terms of the loans portfolio, the growth was close to 11%. We kept on strengthening our deposit base, and the deposit grew by [ 15.4% ] year-to-year. Unfortunately, the result was significantly impacted by 2 components, the main one being related to the impact of the credit holidays and the second one by the creation of IPS. So it means that at the end of the third quarter, net result reached PLN 889 million, down by 58% compared to the previous year. NBI grew by to [ 3.3% ] year-to-year. A few components, like any such evolution. The first one is [ due to ] the increase of the [ buffers ] rate, which gave a positive impact in some of revenue, but we are facing a few challenges such as an increase in the cost of deposits, visible that the fight for the liquidity has started. And then third, a significant increase in the cost of our cross-currency swapping. So the thing that I'm going to explain further in recognition of NII components. In terms of cost, significant pressure on the cost coming from the inflation first, and also growing costs coming from ESG and IPS. In terms of ratio, so cost income/ratio reached 62.9%, so plus [ 6% ] compared to the previous year. If we normalize the cost/income ratio, the cost-to-income ratio will be [ better ] by 67 basis points. So in terms of CHF mortgage loan portfolio, we are keeping on increasing the coverage ratio. In terms of impairments, I would say, good quality of our assets, cost of risk under control, plus 13% compared to the previous year. Focusing on the loan portfolio, a positive trend at the end of the third quarter, overall [ plus 11% ]. If we adjust the growth by the impact coming from the credit holidays across book value adjustments, the growth would be 12.1%, with 2 different stories. The first one, a very good trend in terms of corporate business, plus 15.5% year-to-year. So really positive trend. In terms of retail business, it's visible that the demand is lower. So that is visible growth close to 5% year-to-year and moderate quarter-to-quarter. As regard the CHF mortgage loan portfolio, the first topic is that this portfolio has been impacted by the deterioration of [indiscernible] and Swiss franc, first [ peak ]. And then we are keeping on negotiating with our customers, so we reached more than 1,000 positive negotiation, which is a good news. And in parallel, we are keeping on increasing the coverage ratio. At the end of the third quarter, we booked additional PLN 134 million, which allowed us to reach 36% coverage ratio. Deposits. In terms of deposits, it's an information we already shared during the previous presentation. We are strengthening our deposit base, the liquidity is more and more expensive to that make sense, and we have decided to secure the liquidity position. So broadly, so we are changing the structure of the deposit base. So less and less [indiscernible] deposits and more and more [indiscernible] deposits. So the cost of the deposit gradually increased quarter-to-quarter. Investment product. We're able to truly meet the decrease. So it's here that there was a slowdown in the outflow from investment product year-to-year, a significant drop, 42.1% quarter-to-quarter, much more moderate, 3.1%. Let's have a focus on the NII, and I think I'm going to spend more time to explain you what we did. And in fact, we have analyzed net interest income with the net trading income. So year-to-year, taking into account the impact of the credit holidays, net interest income were flat. If we exclude the impact resulting from the credit holidays, plus 42.4%. The evolution is explained by different parameters. The first one is to use is coming from the increase in NBP rate, but in parallel, we are facing with 2 challenges. The one I already referred to is related to the gradual increase in the cost of the deposits. So Q3 compared to Q2, we increased the cost of the deposit in order to be able to gather additional deposit and secure the deposit position. This is one of the key topic. We have booked a provision for PLN 29 million, which is related to the fees we have to reimburse to the customers related to the registration of the mortgage. So it's a specific peak. So PLN 29 million. And another component which is significant, I'm going to spend more time, we changed our approach to manage the liquidity in euro due to the significant increase on the cost of the cross-currency swap. So to get a clear picture, it results in a negative impact in NII to make it now we are placing the money into no [indiscernible] account instead of investing in bonds portfolio. All in all, it translated PLN 80 million negative impact in NII. In parallel, it resulted in a positive impact in net trading income, and we are going to look at it later, and you will see that there is a correlation. By doing so, we were able to limit the loss resulting from the increase in the cross-currency swap. If we have not performed such change in our approach, the impact will be PLN 30 million. So negative additional impact, PLN 30 million. In terms of fees and commissions, I would say we're able to maintain the level of commission at a very satisfactory level, year-to-year plus 17.1%; quarter-to-quarter, minus 5.2%. But the decrease is still moderate, with [indiscernible] which are obviously impacted. The first one is related to the loans, and the second one being related to the assets under management as we saw previously. So now I'm coming back to the second part of my explanation related to the change in our approach in terms of liquidity in euro. As you can see now, so in terms of net trading income, significantly increased quarter-to-quarter. In terms of transaction with the customer, stable level compared to the previous quarter, meaning that the savings we get coming from, I would say, our [indiscernible] strategy and no more cross-currency swap is giving this positive impact. So combining NII evolution and net trading evolution, you can see that there is a sort of compensation. In terms of net investment income, a few million coming from the revaluation of the portfolio, which measure at fair value. Operating expenses, depreciation and amortization, year-to-year plus 24.3%. So a huge pressure coming from inflation, which is obvious. And the second topic, additional regulatory costs. We paid this year the main [indiscernible] to the creation of IPS. Quarter-to-quarter, the good news is that we are able to keep under control our costs. So our costs decreased by 3.5% quarter-to-quarter if we are excluding all the [ mandatory ] costs. And as you can see, we are keeping on updating and changing our operating model, which is translating in a rising trend in terms of [ FT ]. A few words about the net impairment losses. I think it's not something new, it's something we already shared. So low cost of risk in Q3. Year-to-year site increase plus 30%. It demonstrates that credit policy in the [indiscernible] and asset quality is really good. So we have no alert so far. On top, we have performed some adjustment in our methodology. The first one was related to what we are calling the post-model adjustment translated in a positive impact of PLN 37 million. We review our approach in terms of provisioning for the zloty mortgage loan, focusing on the specific bucket, which is linked to the customers having DTI above 70%. And it results in additional provisioning of PLN 21 million. And the last adjustment is related to the changing the model and more granularity in the parameter we are using. I'm referring to LGD, which gives PLN 16 million positive impact. NPL ratio, I would say, no deterioration. So 3.3% at the end of Q3, which is a good news. Slight comment about the NPL ratio for farmers, a slight increase coming from the fact that this portfolio is a decreasing portfolio. So NPL is to some extent stable, but the portfolio is gradually decreasing overall exposure for agro. In terms of Stage 2. So no significant change quarter-to-quarter. So the evolution is not negative, slight increase in terms of Stage 2 for institutional coming mainly from leasing and a few exposure, which has been transferred from Stage 1 to Stage 2. Capital ratio. So capital ratio is still above the minimum capital requirement. So we still have a buffer, a negative impact coming from 2 components. The first one, a gradual increase in the risk-weighted assets. So as a consequence of our growing business. And second factor coming from the significant, I would say, negative valuation of bond portfolio, which is impacting our Tier 1 ratio.

Thank you, Jean-Charles. To summarize all that, I think I'm impressed to say one word, unpredictability and uncertainty. We'll live in a word which makes it very difficult to predict what happens in a quarter's time, not to mention a year and times where we were able to forecast very easily the exchange rate in 5 years was granularity of 3 digits after the decimal point. we have war in Ukraine, we have high inflation, we have a downturn which may transform into a recession, and we don't know how long that would last. We have energy crisis. We are looking at winter coming, we don't know how long it will last and more the situation with energy or fuel sources will be like. So there are many factors that impact that uncertainty. What is very important for our bank, in our opinion, is that we are a very agile organization that is absolutely capable to adjust a new real. And we showed that we demonstrate that right after the COVID-19 pandemic broke out, we also proved that when new regulatory challenges appeared. And I believe that in that in those times of turmoil, we are going to survive. We're going to continue our technology transformation, and we still have a long way to go, but we are very happy and proud of the progress we have made thus far. We are going to focus very much on sustainable growth. And we're going to be very meticulous about our client relations. We know that they are under stress and the situation might be more difficult than it used to be in the past. And our role is to accompany them in that difficult time. We believe that the bank has very much geared up to weather the storm. There will be a silver lining to the cloud, and I think the situation going forward will be good. Thank you very much, and I open the floor for questions.

Good afternoon, [indiscernible]. I do agree that it's very difficult to forecast anything. But could I ask you about projected scale of deterioration of your portfolio and increase in the risk cost? And extra follow-up question about corporate loans. It's quite natural that small- and medium-sized companies will be not so good off, will be worse off, but which industries are going to be impacted at the most? Next question. What is your prediction about how the people spend their holiday money? Do they pay it back to you? What is the scale of that exercise? And then the final question is about new reference rate. Are you prepared?

Okay. Let me start from the very recent question. We are prepared for the new reference rate. We have participants of that exercise, we're in touch with other banks and with the association of the Polish banks. The reform is going forward and is going to happen, although we were surprised by it originally. And the good news is that, as a result of the National Working Group, it's not going to be the first January '23, but rather the January 1 of '25 will be the day when the current rate will be replaced by a new one. So I'm not going to offer any other thing on that. When it comes to predictions of cost, we do not disclose any forward-looking numbers, but we are busy with reviewing our portfolio on an ongoing basis. And that portfolio does not show any indications to be worried. We have been very conservative and meticulous in building our portfolio, and we are optimistic from that point of view. You asked another part of the questions which -- that which industries will be affected the most, I believe. Well, I think what looms of our economy is the downturn of consumption and the internal demand. I see Michal nodding. Those industries, which are very much dependent on consumer activity will be put under special pressure. But if I may offer you a helicopter view, the Polish companies at large are in a good standing and well prepared for more difficult times, even drop in sales, if materializes, will not translate to serious problems. And last, officially, a little bit off the record, I should say that in my conversations with the business people be it business-wise and also as part of socializing. I have never had any dramatic opinions on the contrary. Sometimes, I hear some optimistic comment. We plan investment or we hire new people. And one more reflection, if you can let me. In the context of the uncertainty about what might happen. Well, 1 day, the war in Ukraine will come to an end. And I believe, hopefully, as most of us here, I believe that this one will end well for Ukraine and for the liberal world. Once this happens, I would expect an outburst of euphoria, a complete change in the mood. The diffusion of tension which the war caused in the neighboring countries. And this might be a huge stimulus creating positive energy and getting business courage. I think the crisis is caused -- any crisis is caused by emotion, psychology and what we have in our heads. And if we clear our heads of political emotions, we might be more enthusiastic about dealing in a positive way with business and economy. And I have already forgotten the second question. Okay. No, I will be direct. I do not have attended any studies or analysis on this point. But after the first amount of credit holidays, we had surplus payments. We had increase in people spending on household appliances on the holidays. I do not have -- probably will not have with a short time any accurate studies. But yes, there are those things coming on. But I think we should not record the surplus payments if the credit holidays have been calibrated accurately to help those who are really need.

Unless there are further questions from the room, we have some questions asked by participants online. Jan Marcinowski, does the bank plan to join on proximity BLIK like [indiscernible] or Santander, [ Alior ] Bank? If so, when would and what time perspective?

Well, the fact that a few banks have implemented this has not yet convinced us this is a priority. Now we're working on implementing BLIK for entrepreneurs, micro segment clients. So as of now, I cannot give you an answer when BLIK or Android -- proximity Android will be available on our offer.

[Foreign Language]. you see any trend for people to trust their funds from PLN to foreign currency deposits?

Maybe I will take this question because the data are generally available. You can find it on the website of the National Bank of Poland. Looking at the breakdown by month, indeed, since the pandemic broke out, and new factors of uncertainty appeared, including the war in Ukraine, indeed, the structure of deposit change. We have a growing share of foreign currency deposits. That is probably a natural response. Probably the share of foreign currency deposits was considered by household as insufficient before those 2 major crisis began. But this is not really something that would change the whole banking sector, putting us on an explosive dynamics with some major reason for concerns in macroeconomic terms.

And another question from Mr. [indiscernible]. BGK and PFR bonds are to be exempt from banking tax. Does your bank has the intention to grab this opportunity and get exposure to those instruments.

We will see.

The bank that's subject subjectively about finances. The bank had recorded the decrease almost to 0 on mortgage loans. How long will this freeze last and what effect it might have on bank's profitability?

Sure. I would like to remind that the demand in mortgage loan significantly decreased. So I will say the gap between being more selective in granting the mortgage loan and market, which has totally collapsed, is not huge. To be flat, I cannot answer the collapse of the market. In terms of profitability, I will say that this is our job to adapt. So it's a new parameter that we are going to adapt.

Maybe I will add something in macroeconomic terms. Indeed, it seems that the demand for mortgage loans response to interest rates. We know that this is a long-term product. So compound interest and cost of the loan matter. But on top of that, there are various other factors related to the need for housing in Poland. And in general, we have a shortage of housing. And we should have more flat, more apartments, more houses to meet the needs of the society in general. Once the interest rates become less painful to households, the demand for mortgage loans in connection with this not satisfied social need for housing should appear. But today, it would be hard to say that it will happen in a year, in a year and a half, or maybe 9 months from now. But at some point, the demand will appear, because we still do not have enough housing spaces. We do not have enough housing in terms of thinking that every family should have its own house or apartment. There is a certain cultural background, which makes people think that you should be the owner of a flat, apartment, a house. Well, many countries in Europe or in the U.S. rely on rented apartments, rented houses. So maybe we should launch a discussion on that.

Should it really be a common belief that you need to be the owner of a flat or house? Could you simply rent it? Just philosophically speaking? [indiscernible], how come you have those record low cost of risk in the phase of macroeconomics slowdown. Was there any change with sale no, no major sale that would affect this [indiscernible]. What was the quarter-to-quarter drop due to on debt papers and bonds?

I think Jean-Charles explained that during his presentation.

[indiscernible] mention and also the termination of some hedging.

[Foreign Language] Did the bank achieve the highest margin on interest rate, assuming that the costs are as they were presented?

Not with one parameter, which is what about the next evolution of the NBP rate. So we don't know if we know recently, but for the future, we don't know. But what we know is that we are facing with a growing cost of deposit competition either. So I would say at this stage that we can assume that we reach a peak in terms of net interest margin coming mainly from the growth in the cost of deposit.

Next question, what was the impact of COVID-19 quick fix on the capital parameters? What will be the reserve for supporting loan takers in Q4 '22?

COVID quick fix impact, 44 basis points in terms of Tier 1.

And the provision for the creditor support fund in Q4. I don't remember that, but it's not a significant number. In Q4?

[indiscernible] market was almost PLN 50 million for the door platform. So yes, we will take [indiscernible]. Sorry I have a technical issue. So what we announced PLN 50 million initially as a potential impact. We have to keep in mind that potentially the role of allocating the additional contribution is going to be impacted. The first 1 by getting, which basically is not going to be a part of the bank contributing and we have to wait what next. So it's highly likely that the impact will be higher than the one we disclosed.

[Foreign Language] will BNP might [indiscernible] the franc accommodation, that accommodation more plausible given the EU Court of Justice verdict?

I'll take this question. I am not going to speak about negative impact of that verdict of [ Eurojust ]. We expect this to happen in the second quarter of next year. That might not need to be very negative. We have implemented a pilot project to strike agreements, accommodations with our loan takers. These are negotiable, and we are going to adjust it by the project and the conditions thereof to the current situation. I would be far away from pessimism when the next year's Court of Justice verdict is [indiscernible]. That was the final question, last question. Are there any -- are there any questions from the Internet or from room here? Well, if not. If there are no other questions, I can't hear any. We thank you very much on behalf of the Management Board of BNP Paribas Polska for you partaking of this meeting, and we are looking forward to host you again. Should you have any questions later on, we would be more than happy to take them. All the best to you. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]