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

It's 11:00 a.m. Good morning, everyone. I am responsible for Investor Relations in Santander Bank Poland. And I'd like to welcome you at the presentation of financial results of Santander Bank Poland for the first half of 2022. Today with me there are the CEO; Michal Gajewski, the CFO, Maciej Reluga; and Wojciech Skalski, responsible for Financial Accounting Area. [Operator Instructions] So now I would like to hand over to the CEO.

Hello, everyone. Welcome at the summary of the first half of the year. As always, we have been pursuing our mission to help people and businesses prosper with great engagement. And now our mission becomes even more important because there are difficult quarters ahead for the Polish economy. Our product proposal and the value we bring to our customers translates into good financial results, and we can see that in our profit and loss account and balance sheet. However, our profitability has been affected by many burdens and costs that impacted our results materially. If it were not for those external extraordinary risk factors that the scale of impact could not be foreseen, we might be more optimistic to date. But during the first half of the year, the entire banking sector faced extreme challenges. First of all, there was the Russian aggression, invasion of Ukraine with all its consequences at the geopolitical, social and economic level. Secondly, stagflation is coming. Economic growth slows down significantly, inflation stays at an elevated level. We had a series of interest rate hikes. And on the fiscal side, some measures have been taken that do not help combat inflation. And thirdly, we have additional burden for banks connected with the borrowers support plan. In the first half of the year, we recorded the gross profit of PLN 2.47 billion. At the same time, the tax burden for the group was PLN 1.1 billion, including PLN 732 million of corporate income tax and PLN 368 million of the banking tax. Moreover, we paid regulatory costs for the Bank Guarantee Fund, the KNF and The Central Securities Depository of Poland and for IPS. All of this totaled PLN 692 million. So the total burden on our performance in the first half was PLN 1.8 billion. And this is about PLN 200 million more than our net profit for the first half of the year, which totaled PLN 1.6 billion. At the same time, we know that our performance in quarter 3 will be burdened because of payment holidays, which we estimated preliminary at PLN 1.34 billion, assuming that 50% of our borrowers would use the program. We are also waiting for the charge for the borrower support fund. According to our estimates, this can be another PLN 165 million, which will also drive down our performance in the second half of the year. Despite all those charges, we will be still fulfilling our mission of supporting our customers. So now let's move on to Slide #7. We provide services to over 7.3 million customers as a group, out of which 3.5 million are digital customers. The bank itself has 5.6 million customers, 3.2 million digital customers. The number of digital customers grew by 11% year-on-year. Customer deposits totaled PLN 184 billion and grew by 6% year-on-year. The gross loans portfolio grew by 8% year-on-year to over PLN 158 billion. Assets grew by 7% to PLN 245 billion. Customer funds totaled PLN 196 billion, growing by 2% year-on-year. In Slide 8, we can see key financial results. Of course, I will discuss them in detail in further slides. Now let me highlight the key items. In the first half, the group delivered the net profit of PLN 1.616 billion. The net interest income was PLN 5.179 billion. The fee income grew by 6% year-on-year and totaled PLN 1.281 billion. The total income was PLN 6.5 billion. The return on equity was 10.3%. And let me remind you that the denominator is under influence of a significant capital surplus that for the group is over PLN 10 billion. The TCR for the group was over 19%, and Tier 1 was over 17%. So our position is very strong. Our capital surplus is high. Of course, the capital ratios significantly exceed the regulatory minimum ensuring security of operations and stable growth of business. Slide 10, our customers. I already said that in the bank, we have over 3.2 million active digital customers, 2.8 million in the retail segment. We have recorded significant increases throughout all the segments. The number of active digital customers is growing across all segments. The number of mobile application users is also growing in all segments. We can see that this contact channel is very popular among customers. This is reflected also in transactions in the mobile banking that were over 54 million transactions in the retail segment. And Slide 11 and 12, you can see our new product proposal. You can see that we conducted several educational campaigns. Let me just mention that we implemented the Asseco qualified electronic signature for our Santander Internet users. And we also implemented a cash loan with a fixed interest rate. In the SME segment, we conducted educational campaigns and training for business women. We increased the automatic credit limit in the corporate segment. We implemented the multicurrency credit line and leasing limit service. And we also added the trade finance module and improved our EFX platform for our corporate customers. Now some business data in Slide 13. Mortgage loan sales in the first half totaled PLN 5.3 billion. This is a significant growth year-on-year, but we can see that on a quarterly basis, there is a lower demand from customers. We recorded a sales decrease by 18% versus the first half of the -- first quarter of the year. Cash loans sales increased also in remote channels. In quarter 2, we sold more than half cash loans in remote channels. Investment funds. Here, despite the fact that gross sales increased, we are witnessing many cancellations due to the uncertainty and volatility of financial markets. On a positive note, we can say that the fund from the canceled -- the money from the canceled funds go to the accounts of our customers in our bank. In the SME segment, business deposits grew by 5%, and also loans in this segment grew by 2.3%. In business banking, credit limit sales grew by 25%, and the income from the eFX platform grew by 34%. In the corporate and investment banking, our transactional banking income grew materially, and the income from transactions on the financial markets, treasury services and trade finance increased. Now the balance sheet, Slide 15. As I said at the beginning, the gross loans at the consolidated level grew by 8%, which is PLN 158 billion in total. I already mentioned the SMEs and retail, but in business banking loans grew by 8%. And among the largest companies, loans grew by 10%. The lease portfolio grew by 10% year-on-year to PLN 12 billion. And the factoring subsidiary recorded higher turnover by 17% year-on-year, while its portfolio increased to PLN 8 billion by 18%. Slide 16. Customer deposits grew by 6% year-on-year and were PLN 184 billion-plus. Year-on-year deposits grew by over PLN 10 billion. We can see a growth in term deposits by PLN 12 billion and on current deposits by almost PLN 3 billion, while funds and savings accounts decreased when compared to the previous year by PLN 4.6 billion. The share of term deposits and total deposits grew from 13% to 19%. This growth results from negotiated deposits in corporate and private banking segments. As you can see, we can still boast excellent liquidity. The LCR was over 172%. And for the bank itself, this figure was 160%. I already mentioned the investment fund assets that dropped. And then Slide 17. Net interest income and margin. In quarter 2, net interest income was PLN 2.9 billion, while the annualized NIM increased by 122 bps up to 5.24%. That was driven by the interest rate hike and the growth in interest income, but also our interest expense increased by 135%. This was driven by the interest offered on deposits because 5x in the 6 months we increased our interest rate on deposits. The margin was also impacted by the accelerated sales of cash loans, mortgage loans and corporate loans in previous quarters. That was also driven by the growth in yields on debt securities. Net fee income, Slide #18. PLN 621 million, growing by 3.4% year-on-year. This is a robust result driven organically without any hikes in our special fees and charges. Compared to quarter 1, it reduced by 6%, primarily driven by lower brokerage fees and fund management fees. But we have really good fees when it comes to account fees, transfers, FX fees, credit fees and insurance fees. When it comes to Santander Consumer Bank, the net fee income was lowered by 16% year-on-year, driven primarily by lower credit cost fees. Income. PLN 6.5 billion, of which PLN 3.5 billion was earned in the second quarter alone, which was driven by the net fee and interest income. Lower other operating income was the follow-up of what is happening in the financial market. In the first 6 months, they stood at PLN 53 million. And they reduced because of lower dividend from the Aviva companies that were sold, also the lower gains on the sales of bonds and lower trading and revaluation income combined with the growth in bond yields and IRS spreads and pressure on zloty. Operating costs. I already mentioned the regulatory levies. The pace in contribution to BFG and Institutional Protection Scheme, all that increased by 29%. On a comparative basis, that is stripping the payments to the Institutional Protection Scheme and contributions to BFG, the underlying growth in total OpEx was 6% year-on-year. Staff cost. The increase is a result of salary increases by 8% year-on-year. But at the same time, we reduced the headcount across the group by 5.7%. Of course, we are tracking the market what is happening. Because there is pressure both on administrative and staff costs, nonetheless, we will continue to keep our cost effectiveness. Loan loss provisions, Slide #21. The total net balance of provisions on a consolidated basis was PLN 230 million, which is lower by 63% on an annual basis. In quarter 2 alone, the net balance of provisions was PLN 110 million. That is lower by 58% year-on-year. Of course, we can see more and more harbingers of the slowdown in the economy. But nonetheless, the financial conditions of our customers was stable. We saw the growth in the loan portfolio by 8% and continued decline in the cost of risk in the individual credit portfolio. The key drivers of our net balance of provisions were as follows. In the case of the retail and SME, that was a slight increase in the delinquencies, the stable level of entries to NPLs in the corporate portfolio. The net balance of provisions for expected loan losses is good. In the corporate portfolio, we had a few pieces with regards to the NPLs with the total value of PLN 22 million. Having reviewed our risk parameters, we reflected the impact of the future -- of the future macroeconomic landscape. And of course, this is reflecting the impact of the war in the Ukraine. As we are showing on the next slide, in quarter 2, our group saw the nonperforming debt worth PLN 260 million in capital with the positive impact on our result of PLN 42 million. The NPL coverage ratio is stable at 61%. Also, the cost of risk is low and the NPL ratio after quarter 1 was 4.7%. The banking tax and regulatory costs. I've already mentioned that at the outset how it impacts our profitability of our business. These are huge amounts. And as I said, they are higher than our net profit for the entire 6 months. And undoubtedly, this is a huge cost for us and real burden. Summing up Slide #23. Well, of course, as you can see, apart from this fiscal and regulatory burden, our bottom line was additionally impacted by costs related to FX mortgage loans. In our current report, we communicated in June that we increased allowances for that purpose by PLN 760 million, increasing the coverage for the legal risk up to 33%. But in the total loss, you can see that this cost is disclosed at PLN 850 million when it comes to the cost of legal risk attached to mortgage loans. It includes this allowance of [ PLN 757 million ] as well as realized losses on fully valid decisions with invalidated mortgage loan agreements as well as the cost of the legal services related to bank loan cases. On top of that, we have the overall estimate of the entire banking sector when it comes to the cost of the payment holidays, assuming that 100% of the entitled will avail, this is PLN 20 billion. This is not yet reflected in our figures, but we will actually post our figures by the end of July, and we consistently are of the opinion that this is bad news for the banking sector. We think that the customers should be supported, especially those in distress. But the payment holidays should be really addressed to those who do need it. And as I said, this will strongly fuel inflation and will reverse the effects of interest rate hike. Closing off, let me highlight that our core business goes really well. We are capable to win new customer growth and follow our mission. Let me also highlight that we are growing our loyal customer base. Yes, the economic landscape and the burden do not make us optimistic. This makes us really concerned as to the upcoming quarters, which will be marked by the macroeconomic landscape, the slowdown and high inflation. So now the floor is yours.

We have already received some questions. So let me start with question 1. How much the borrower support fund was used comparing quarter-to-quarter and year-to-year?

I cannot tell you exactly from the top of my mind, but I can tell you what the scale of requests is. But there's no need to compare those figures year-to-year because last year we have received almost none -- no requests. But last year, we signed 5 agreements and at the end of June, we signed 350 agreements, while 600 requests were filed. So that's the general scale. The scale is not so large. And so that's it.

What Santander Bank Polska expects from the new sales of mortgage and consumer loans?

Here, you can see that the trend that started in quarter 2 will continue. So the demand for mortgage loans will be lower. We can see that looking at the number of credit applications filed, we can see significant slowdown in mortgage lending. But when it comes to cash loans, we have recorded some increase in quarter 2. And our observation, when it comes to the activity of customers in the electronic channels and the number of applications filed, there is no slowdown. Customers are still interested in those products. And we think that the next quarter at least will be another quarter of growth. There was no question asked about that, but let me just add as you worried about the situation in the corporate loans. In the recent quarters, mainly due to interest rate hikes and inflation, we can see, of course, a lower demand for investment loans. Especially given the general uncertainty in the economy, we don't think that, that situation will change, but the demand for working capital loans is still high because prices are higher and businesses need more loans to operate their businesses. So given the situation in the mortgage lending, cash loans and corporate loans, we think that this situation will stay the same in quarter 3. Mortgage loans will be weak. There will be an increase in the working capital loans for businesses, and investment loans will decrease.

Subsequent questions refers to Swiss franc. Well, let me read them out. Why do we have higher provisions for that? And what shall we expect in upcoming quarters? Where is -- what is the safe coverage level when it comes to provision coverage for that portfolio? What was the level of [indiscernible] in the quarter 2? And do we think that the pace of increasing the banking provisions might decline?

Well, the number of losses against the growth was -- it was over 10,000 at the end of June. So we have the growth. The question related to the growth in provisions, well, it was driven by the number of losses and as well as by the -- was driven also by the decisions taken by court. Some of them are fully valid, as I said. This was also driven by the cost of legal services. We didn't have any guidance as to the upcoming quarters. Even though undoubtedly, we will be observing the market very carefully and responding depending on the number of losses. As you can see, the 43%, we are within the market. And this is the similar rate as for other banks. And the level of provisions, we think they are adequate.

Okay. Then moving on numerous questions coming. So let's not me lose anything here. The cost of growth, what shall we expect in quarter 2? Is this more probable to see the slowdown reflected only in the cost of risk only in 2023? And there was a similar question.

Let me -- what is referenced that we had the guidance before at 100 basis points at the press conference. The growth by 100 basis points means really that second half of the year. But let me refer to that once again and be more precise. Talking about 100 basis points is difficult to say that this will be in 2022 because some things may be carried forward to 2023. We are not giving any guidance for a given period that this will be that in '22 and that in '23. We rather expect a growth in the cost of credit risk in the upcoming quarters. Given the sort of the economic slowdown, the most likely recession in our scenario recession was built into that for some time already. But all the harbingers are that we probably should revise it further because the recession will be deeper. And in real terms we might not see any GDP growth at all. So given this environment, it's difficult to expect that customers' financial spending would be the same as in quarter 1. And whether this cost of risk will grow already this year or in 2023, we will see. But in this cycle of the slowdown, this growth of 200 basis points or even more should be expected without saying whether that will be at the end of 2022 or the beginning of 2023 because let's agree on that, we do not know it yet. But we think that the first half of the year was good from the point of view of cost of credit risk, even though the environment is becoming more and more demanding.

There is also a question on the -- about the assumption. Why only 50% of people are going to avail all of their credits of payment holidays?

Well, we try to be data-driven. We had 2 surveys among the customers. And we also had the survey in the last week, and the results of those surveys were basis for our model. And that was the survey saw that 50% of customers declared to avail of that support. That is why we built that into our model. Similar things goes for BNP Paribas, even though the ratios are higher. But we will see that in reality. So we will be adjusting that either upwards or downwards. We actually did it based on data. And in this context, do we expect that the payment holidays will actually reduce the cost of risk in retail? That will depend on how well available that what will be the individual spending. But this is possible to some extent. This will be an element of the model. But this is possible to some extent. And one more thing about cost of risk. Will that 100 bps should be [ accounted ] to corporate portfolio in the majority? I think I already answered. Most likely, yes. In the cycle when the companies are not only pressed by higher interest rates and higher cost of operations, when it comes to the prices of energy and gas, in the environment, they will -- when they will have the problem with actually demand and transferring the price on to their offtakers and there will be inflationary pressure. Yes, all of that will lead to the pressure of the growth in credit risk and will be more driven by corporate customers and the retail customers. But looking at models that try to capture them when we have the interest rates high by 600 or 700 basis points and how we can actually -- saying this will actually impact on the mortgage loans. And there was also a question about NIM and NIM outlook. We have a question mark. But on the one hand, looking at the interest income, in the second half of the year, we will see the growth in income because of the interest rate hike because not the whole effect has already been disclosed in our figures. And on top of that, there might be some tightening of the monetary policy after summer. But we don't know to what extent it will be neutralized, but it will be in interest expense. It's already visible in the second quarter and probably this all can see. We could clearly see the effect of the changed deposit pricing, and we know what is happening on the market. There are also -- not only by the banking sector and retail bonds, and this will also be driven by our liquidity situation. So all of that will impact our movement in deposit rates. We would try to keep our proposition at good levels as the CEO actually gave you a couple of examples, but it's difficult to tell you what will be the scale.

This might can sound yes, but we will continue the trend in the upcoming process. But let us remember that in quarter 3 we will have this effect of the holidays posted in July. So we will see what will be happening with the payment holidays, and all that goes through the net interest income and that will impact NIM in quarter 3.

We have 1 more question. What's the reason for an improvement in the capital quarter 2 versus quarter 1?

So [indiscernible] fund increased due to unrealized losses on -- which results from the reclassification of the portfolio that we already reported in our presentation for quarter 1 and quarter 2. You can find the details about that there. And anything else?

We have just received 1 more question. Let me read it out. What can we expect after the revision of the dividend policy? Can K1 parameter disappear?

This is not a question to us because we are not developing or drafting the dividend policy of the banking sector. This is up to the Polish Financial Supervision Authority. And this is the last question. We have exhausted our list of questions. So I think that we can finish at that point. And maybe just last question was about whether this parameter will be significant. When it comes to our dividend policy, it stays the same. And you all know that we will be doing everything to pay the retained profit. We do not know what will be the opinion of Polish supervision authority. But we want to keep an individual -- we are of the opinion that the dividend policy should be adjusted to the situation of individual bank because each bank -- each bank differ when it comes to capital surplus or some shortages. So let me finish on that note without going into further detail. So let me ask you once again. Have we missed any question? But I don't think so.

Yes, I have no more questions received. So thank you very much for the attendance. See you next quarter. Goodbye. [Statements in English on this transcript were spoken by an interpreter present on the live call.]