Erste Bank Polska S.A. (EBP) Earnings Call Transcript & Summary

Hello, ladies and gentlemen. This is 10:30, so let us start. My name is Agnieszka Dowzycka, Santander Bank Polska. I'd like to welcome you at the presentation of the financial results for the first half of 2021. Together with me is -- there is the CEO, Michal Gajewski; CFO, Maciej Reluga; and Wojciech Skalski from the financial accounting. As I have said, my name is Agnieszka Dowzycka, and I am in charge of Investor Relations. CEO, over to you.

Hello, ladies and gentlemen. This is Michal Gajewski today. So this is yet another time when we're meeting here in this remote form, but I heard that starting from the next quarter, this is conditioned by the pandemic situation. I hope that we will make it. I'd like to start my presentation from saying that from the perspective of the bank's core business, the recent period of 6 months can be deemed as successful. The economic situation has been stabilizing, and we can already see some harbingers of the revival. Credit volumes still remain under pressure, especially in the corporate sector, but this will improve over time. We are hoping to see some improvement, and we're looking with optimism into the next quarters. Before we comment on the results, I would like to mention our charity fundraiser We Will Double Your Impact. We run it together with our customers and employees. This time, we supported 16 children psychiatry centers to which we donated a total of PLN 2 million. You can catch more details about this fundraiser on the Slide #5. Now let us go to the financial performance, Slide #9. As a group, we provide services to over 7 million customers, out of which over 5.3 million customers in Santander Bank Polska. In total, together with SCB, we have almost 3 million digital customers. Deposit portfolio went up by 4% year-on-year and stood at PLN 173 billion. Gross loans flat at PLN 148 billion. Assets are on the rise. Customer funds up by 7% year-on-year to the level of PLN 192 billion. In terms of assets at the entire bank, this is the amount of PLN 231.4 billion. Now let us go to the Slide #12. I'm sorry, this is Slide #10. This is Slide #10. So just like in the previous quarters, we had several events that influence the underlying profit. And of course, the details can be found in the presentation and the report. When we talk about the underlying profit, we take into account 2 important factors. And these are the BFG premium as well as provisions for legal risks related to FX mortgages. At the end of June, attributable profit stood at PLN 374 million. And in underlying terms, it went up by 8.7% year-on-year. In quarter 2 only, it stood at PLN 223 million, which was 50% more than in the previous quarter. Net interest income stood at almost PLN 2.8 billion, and it was lower year-on-year, and this drop stemmed by low interest rates and low demand for credit. Fee and commission income was over PLN 1.2 billion and was 18% higher year-on-year, which is a solid result. Total income stood at almost PLN 4.4 billion, 1.5% higher year-on-year. Return on equity was 3.8% and 7.5% in underlying terms. We have a very strong capital position, much above the requirement, and our Tier 1 capital exceeded 19%, and TCR was about 21%. I'm going to reiterate that in the quarter, I think that the group has a substantial capital surplus. It is extremely large. So now for the group, it is almost PLN 13 billion. And for the bank itself, it is almost PLN 14 billion. And I think that there may be questions about the dividend payout, but let's not talk about this right now. We will take the potential question in the Q&A session. Now let us go to the Slide #12. And on this slide, you can say the activity of our customers broken down into specific segment. Each quarter, the number of users in the most channels is on the rise. This is 8% year-on-year, up both in retail and business segments. The number of mobile users in the retail is 18% up, 15% in SME and 19% in corporate. The number of transactions in mobile banking have been up over the recent months by 48%. And in terms of application to business, it's by almost 60%. I think, though, this is not a major surprise because the customers are visibly using remote channels more and more eagerly. On Slide #13 and 14, we are showing new things on [indiscernible]. We keep developing our position. We have organized educational activities. Let me just mention a couple of things, the biometric solutions to have mobile authorization of transactions, life insurance, for example, with the extended cover for [indiscernible] paid adviser. In the case of stock traders, we introduced the new way of verifying their identity when opening an account using the selfie. We also introduced eHealth and eLeasing solution. There's also an option to take a business loan in a mobile application. In the public sector, we've been reinforcing our position, and subsequent local authorities uses this [indiscernible] to bank with us. Let us move to our financial performance, and let's start with the financial data. Slide 15, retail banking. Just like across the market, the sales of our mortgage loans is on the increase. In the first 6 months of the year, we saw loans were PLN 3.5 billion. In quarter 2, it was PLN 2.2 billion. Year-on-year, this is 76% and 56% growth quarter-on-quarter. June alone was a record high month with nearly PLN 800 million of sold mortgages. Cash loans, they're on the increase of [indiscernible]. In the first 6 months, we saw cash loans were PLN 3.4 billion from corporate in the quarter 2, along with PLN 1.8 billion. And so far, this is the highest sale since the beginning of the year. Year-on-year, the growth was 44%, and the growth quarter-on-quarter is 15%. When it comes to the sale through remote channels, the sales increase 44%. The sales of net investment funds stood at PLN 2.4 billion. It slowed down a little bit in quarter 2, but this was PLN 700 million, and this was one of the best results in the market. The office in Santander TFI at the end of quarter 2 stood at nearly PLN 19 billion. When it comes to SME customers, we are very happy with the sales of leasing and the sales of loan products because we think [ credit product ] was PLN 1.3 billion. When it comes to business banking, even though the demand for loans was lower, we saw an increase in the sales of credit limits. We also saw good performance when it comes to services [indiscernible]. We saw a [ 4% ] increase in the turnover from the FX platform by 40% and 42% growth in trade finance. In corporate and investment banking, we doubled our revenues on the capital market, and we also saw a robust growth in income from the volumes that we provided with mergers and acquisitions. [indiscernible] growth across all business lines. Slide #17, gross loans. Across the 6 months, because of the pandemic and the support program, the demand for loans was subdued. The gross loan portfolio in the bank increased slightly, and Santander Consumer Bank decreased by 8% year-on-year. So on a consolidated basis, we saw a slight decrease down to PLN 148.4 billion. I've already mentioned the sales in the retail segment. And initially, we can see the growth in the loan portfolio not as dynamic as in retail, but it's still 5% year-on-year and [ 4% ] quarter-on-quarter. And this is because of the better utilization of the existing credit loan. In business banking, loans are more or less flat. But in the segment of the largest corporate, the lending increased by 3% year-on-year. The leasing portfolio has increased by 5% year-on-year, up to PLN 10.8 million. The value of net sales stood at PLN 3.3 billion, increasing by 47% year-on-year. The factoring company also saw a growth in its turnover, and its portfolio increased by 27% year-on-year. What makes us optimistic is that business clients are more and more willing to talk about new lending, and there is a bigger and bigger interest in credit facilities. As I said, this makes us optimistic when it comes to the future. Our outlook for the growth on the market and in the sector is 4.8%, including 3% growth in business [indiscernible]. Now let us go to Slide #18. The customer deposits went up by 4% year-on-year at the end of June, stood at over PLN 172 billion. This stems from the yearly increase in retail deposits by 4% and business corporate by 4% as well. In annual terms, deposits went up by almost PLN 7.3 billion. Term deposits are growing -- current deposits are going up very dynamically. Investment funds are going up very dynamically, 44%, up year-on-year, and this stems from regulatory net sales but also the low base reported last year. Now let us go to our P&L, net interest income and net interest margin. After the first half of the year, net interest income stood at almost PLN 2.8 billion. In quarter 2 alone, it was PLN 1.4 billion and was 2.5% better quarter-on-quarter. In annual terms, net interest income dropped by 10%. Annualized NIM at the end of June was PLN 2.50 -- went up by 3% and was 2.59%. It was higher than a quarter ago. This stems from several facts. There was a drop in interest costs under deposits due to the continuing decrease in volumes of current funds, accelerated sales of consumer and SME loans. There was also a negative impact of the growing bond portfolio. As we have mentioned before, we are hoping to see some positive effect on NIM and NII in the upcoming months. Now let us go to the Slide #20, net fee and commission income. I think that this is a very solid one. At the end of June, this was PLN 1.2 billion, up by 18% year-on-year. In quarter 2 alone, fee and commission income went up by PLN 600 million, which is in light of the visible effects as the pandemic should be viewed as a [ solid ] result. The increase in fees and charges is visible in all the lines, both in retail and business banking. Now let us move on to the Slide #25. So coming from the first half of the year, went up to PLN 4.4 billion, up by 1.5% year-on-year and 6.8% quarter-on-quarter. In quarter 2 alone, the total -- in quarter 2 alone, we saw an increase of all the other income. Other income lines went up mainly on the back of revenues, and this advantage weighed to PLN 100 million posted in quarter 2 of this year. We are very happy to report core income related to the consumer business activity going up. Now let us discuss the costs, Slide #22. If you look at that picture, if we want to compare apples to apples, there was an increase only by 1% year-on-year. And taking into consideration the inflation level, this is only a slight increase. We have lower BFG premium. Administrative costs are decreasing at a [ 3-digit ] pace. And I would like to mention that even excluding the effects of the premium, we would have a drop in administrative cost by 2% year-on-year. Staff costs went down by 1.2% quarter-on-quarter, and we released a provision for bonuses in the last year in the second quarter. And the fact that we are raising this provision this year, this is related to some positive effects that we can see and the profitability that we report. This is why we want to pay the bonus to our employees. Total costs went up by 14% quarter-on-quarter. And in annual terms, they were up by 22%. Increase in costs in quarter 2 stems, among others, from an increase in other operating costs due to raising a legal risk provision related to the Swiss franc mortgages in the amount of PLN 518 million, and there was a breakdown of this amount, PLN 423 million for the bank and PLN 95 million for SCB. Now let us go to the Slide #23, provisions. In quarter 2, we have adjusted 5%, and this results from efficient functioning of the portfolio. We reviewed that portfolio. We released PLN 88.2 million of COVID provision. And as I said, we have reviewed the model. There are several factors impacting the provision in the first half of the year. This is the share of credit exposure with a delay in the second quarter that dropped by 5% quarter-on-quarter. And there was no need to raise the provision on the performance of the portfolio. Also, we do not observe any specific -- any significant downgrades to NPL on the corporate portfolio. Also, we need to mention the Shield 4.0 that was granted in the total amount of PLN 410 million, out of which PLN [ 60 ] million were [ active ]. And even though we actually accept the Shield, they have to declare that they lack the source of income. They actually are capable to repay the [indiscernible]. We saw also the nonperforming portfolio of business and retail loans, PLN 119 million in total in principle, and this had a positive impact on our bottom line of PLN 12 million. Of course, we keep reiterating that on an ongoing basis, especially any receivables covered by the program. Also those are the [indiscernible] by the business clients, and they will have to settle the amounts received under the first PFR Shield. If you look at our fiscal burden, Slide 24. The regulatory costs in the first 6 months were PLN 295 million, contributions to BFG, the National Depository of Securities and the like. The banking tax in the first 6 months stood at PLN 300 million, and the corporate income tax was PLN 354 million. So this was a big charge to our bottom line. Summarizing our performance, Slide 25. It was a good 6 months for our bank. But our economic environment, even though it improved, still makes us to be very agile in everything on what we do to respond proactively to any new development. A question then comes to pandemic. We can see the higher activity of our clients. We are rebuilding our business, and we do hope to see a bigger pace of growth in the lending area. We are still uncertain when it comes to the FX loans, and we had to increase our provisions and the macroeconomic data. This is actually confirming that we are bottoming out. The social sentiment is improving, and we are optimistic about the upcoming next half year. So now it's time for Q&A. Go ahead.

We have been receiving questions already during the conference. I'd like to start. [indiscernible] group.

I'll start from what we have said about that principle and the dividend payout because we've got a question about the payout with a likelihood of a 30% payout is still big where there is some likelihood of [indiscernible]. We are talking about the 30% of the profit from 2020. As Michal have said, we think that we have enough principle for payout and for covering some unexpected risk in the future. When it comes to the payout, our intentions do not change, and we want to pay the dividend in line with the regulator's recommendations. Any formal -- no formal decision has been taken. And of course, if there is some formal decision, we'll have the current report. And during -- due to the legal structure of all the process, according to which we have a dividend fund, it is crucial to examine the interim statements. This examination will start with no delay, and we will inform you about the upcoming decisions. But as I have said, our intention is clear. We want to pay the dividend. The second group of the questions.

This refers to Swiss franc loans. And the question is about the stage. The bank is -- when it comes to potential settlements with Swiss franc borrowers and whether the bank expects subsequent provisions to be raised to legal and whether we have [indiscernible] question among our clients.

Let me answer this question. When it comes to the survey -- let me start from the last question. 70% of clients are actually interested in entering into a settlement, 21% are not interested at all, and 9% of those clients answers I don't know. So these are the results of our survey. Of course, we keep examining other proposals of settlement. We've been testing solutions, and we are testing this in such a way that we've been building certain [ functionalities ] in our systems and our electronic channels. We are setting up links with the code of arbitrage with the KNF, and this is a big work of our technological units and also our analytical teams. So in this area, we are doing a lot, but we haven't taken yet a decision, the final one. As I said at our conference with journalists today in the morning, we think that 2 conditions have to be met. First of all, we need to have a wide-ranging market consensus, a commonality of the solution. And the second thing is legal certainty as to the implications, effects of signing such settlements. And our in-house law is saying that only a settlement signed in common court are because of arbitrage with the KNF gives us certainty as to the legal effect of such a range -- such a settlement agreement.

What about the subsequent covenants for legal risk?

Well, we think that the provision charge that we have now, we think they're adequate. We will also see how things are going to develop. In the second half of the year, we will see what is the outcome of our decision of the civil chamber of the code and the full compensation. Given today's levels of [indiscernible] against them, we think that this provision is adequate.

The sales of mortgage loans was really strong. Do you think you're going to increase the sales of mortgage loans in the upcoming funds?

Yes, we think there is a chance to sell more. We want to strengthen the sales. There was a big demand on the market for mortgages, and we think it's a chance for us to increase our share.

We have many questions regarding the guidance, in fact, in all the P&L line, but let's [indiscernible] into that. Let's start on the risk charge. There's a question, why did the bank release the COVID provisions? And so aren't you afraid of the second wave?

Well, I think that all of us are aware of the fact that another wave of COVID-19 is very probable, but we can say that every subsequent wave of the pandemic contributed to get to a lower -- to minor effects in the economy. We also need to reiterate which we have -- what we have written in the report several times. We have post-model adjustments and release the COVID provision, but we took account of all that in loan loss provisions. We review the models every 6 months, and parameters of the model have changed. So that we can't say that the provisions in the second quarter were lower because -- since the COVID provision has been released. No, it's not like that. We have included all these factors in our models because we have had a review, and I think that this is a significant element of the entire picture of the provisions for the second quarter. When it comes to guidance, well, the situation seems to be quite good. Of course, if there are some risks, some uncertainties in macroeconomics and specific sectors, I think that we all know about them because we can say that the pandemic is still with us. But the least of all trends that can be observed in the second quarter should be reiterated. On the performing loans portfolio that credit in -- with arrears are on decrease. There are no significant downgrades to NPL. On the NPL portfolio, there were several increases of the coverage, which contributed to increasing the coverage level. But the coverage ratio is affected by the fact that there is some decent repayment of the exposures. So I can say to wrap it up that, in fact, this is just too difficult to provide a specific guidance because there are many unknowns. But I think that in 2022, we will go back to the risk charge ratio from -- before the pandemic, but we will see what happens in 2022 and in the second half of this year. So far, the trends have been good, and we can see that reflected in the provisions for the first half of the year. I want to remind you that the first quarter was affected by a one-off, and the provisions were lower.

There's a question about the growing credit volumes in individual segments. As I said during the presentation, the loans are going to grow across the sector by 4.8% according to our focus, and when it comes to business loans by 3%. We think that the dynamic growth will continue in retail, and the demand for business loans in the mid-cap company looked [indiscernible]. The bigger companies is going to [indiscernible]. And there's also a question about the potential for growing our interest income, primarily by increasing our activity levels and the sales of loans. The whole sector is taking over liquidity, so there will be a lot of competition. But we think this is our chance, and we can see opportunities for growing our sales and increasing our market share. We don't have yet really detailed data on individual segments and the growth in individual lines. Let me go back to the risk charge because there are more questions about that. Let's try to talk about that in some [ thematic group ]. Obviously, the current level of COVID-related allowances up, releasing the PLN [ 90 million ]. So bonus provision in Santander Consumer Bank because they are going to review the provision parameters only in the second half of the year. We've done it in the second quarter while [indiscernible] -- this is PLN [ 31 million ], and that's shown in the bar chart on Slide 23. So this is the COVID provision in Santander Consumer Bank. There is also a question when -- which segment was hit most by this with your process? And what was it about? We also review a whole parameter across the [indiscernible] in the midterm to take into account the effects of the pandemic. I think that the most important element were [ cash balance sheet ]. There is also a question about the dividend and capital. I think we've answered that. And going back to the guidance for net interest income.

There's another question. It's around the further room for cost containment, especially when it comes to the cost of funding.

Well, there are a few trends on the market [indiscernible]. In quarter 2, we had the decline of interest [indiscernible] deposit, and that was determined by the maturity profile of our deposits. [indiscernible] deposit and the financing in SCB. That was maturing in quarter 1, and the full effects are visible in quarter 2. The deposit was [indiscernible] longer than 1 year [indiscernible]. So there will be some effects, but they wouldn't be immaterial, really. An important element of that credit mix on our group is it is going to improve as we expect. This should improve our interest margin. What we have in mind are consumer loans and SME loans, first of all. We can see clear revival here in those 2 lines, and we [indiscernible] that it will continue. And there was another question related to the over liquidity in the sector. Of course, any [indiscernible] of investors and the liquid assets, they are yielding less than average. So this is a factor that impacts our margin, but this is purely mathematical effect because we are gaining something on that as well. As we've said, we have a positive trend in the interest income, and we hope for positive trends in the upcoming quarters, counting on the revival of lending and keeping the costs under control because we are really doing our best. Fee and commission income. So we can see that these lines are very good. In fact, in all the business lines, there are many long-term factors, factors that stem from the changes in the fees and charges that we were trying to implement in a very efficient manner, and we were trying to communicate them in a good way to customers. We have double-digit growth in, in fact, order lines. We hope that the business environment is going to change in a positive manner. If it's that, I think that such good trends are going to continue. There is also a question about the tax rate, whether there is some specific reason for it being lower versus the first quarter. In the first quarter, it was 47. Now in quarter 2, we have 43. So 47 versus 43. There are 2 factors behind that. There are some element of the costs that are [indiscernible] deductible. In the first quarter, there was BFG and legal risk provisions related to FX mortgages. In the second quarter, we don't have BFG, and we have dividends of some PLN 100 million. So hence, the difference between the second quarter and the first quarter. I think that this is maybe all that we have addressed most questions.

No, there are no more questions. In fact, I haven't received anything. So that's all.

Okay. So if you have any more questions or comments, we are ready to take them. More details can be found in the report. So I encourage you to read them. Thank you for your participation, and see you next time. Thank you.