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

I think we're all here, and we can start at 11:30. My name is Agnieszka Dowzycka. I'm in charge of Investor Relations. Welcome, everyone, to the presentation of Preliminary Financial Results of Santander Bank Polska Group for 2022. I am here with Michal Gajewski, the CEO; Maciej Reluga, the CFO; and Wojciech Skalski is responsible for financial accounting. [Operator Instructions] Mr. [indiscernible] I give the floor to you.

Ladies and gentlemen, welcome to the presentation of Preliminary Financial unaudited financial results. It was a tough year for the entire banking sector, full of unprecedented geopolitical and economic challenge. In such harsh conditions, it was difficult to build enough capital base to become a key driver for the economy or strategic projects such as the energy transformation. I need to highlight, however, that Santander Bank Polska Group managed those challenges quite well. And at many levels, we proved that our business model is robust and well performing. Last year, we generated PLN 4.350 billion of gross profit. The tax levies were PLN 2.125 billion. The additional regulatory charge was PLN 2.429 billion. And despite this high strain, we closed the year with a solid net profit of PLN 2.799 billion. Let us move forward to Slide #7 with the general operational data. A few words about our customers. As a group, we provide services to 7.4 million customers out of which 3.5 million are digital customers. Santander Bank Polska alone provides services to 5.7 million customers, including 3.2 million digital customers. Year-on-year, we registered growth in this respect of 10% and we have 12% more mobile customers. Deposits are worth over PLN 196 billion. This is up 6% year-on-year. Gross loans up 4% year-on-year. Assets, 7% year-on-year, with customer funds now worth PLN 209 billion. This is an increase of 3% year-on-year. We're moving to Slide 8 with financial highlights. Net profit, PLN 2.799 billion in fourth quarter alone, that was over PLN 903 million. Net interest income, PLN 9.652 billion. Net fee and commission up 3% year-on-year to PLN 2.566 billion. So total income, PLN 12.4 billion. Return on equity, 12.1%. Despite the fact [indiscernible] and in the [ nominator ], we had quite a large [indiscernible], which is over PLN 10 billion for the [indiscernible]. TCR For the group, 19.27%, [ CET1 ] 17.54%. I want to highlight our robust capital position and ratio well beyond the regulatory level. This proves we are well prepared to further growth, and to respond any risks that could materialize in the future. This is a solid result, very good performance, and we are ready to share profits with our shareholders. I will be talking about it in detail later. Slide 10. Our customers in numbers. As I've said, we have 3.2 million digitally active customers in retail, that's almost 3 million customers, 10% up year-on-year. In SME that's 340,000 customers, that's up 9%. In business and corporate banking that's over 21,000 customers, that's up 3% year-on-year. As mentioned, we have more and more mobile app users at the moment, that's 2.4 million. That's up by 12% in retail, 11% in SMEs and 10% in corporate banking. This, of course, impacts the number of mobile transactions. In fourth quarter alone, we had 64 million of such transactions, very good performance here, both in retail and SMEs. We have rolled out a new mobile app which we're working on at the moment. We're working on the final functionality. It is now in trial version, and it will be rolled out to our customers this year. Slides 11 and 12. We see information about the new product in our offer. So just the highlights here, we've managed to introduce a digital process for sending our repayment schedule to our cash and mortgage borrowers. In SMEs, we have a new solutions where business owners can turn their smartphones or tablets into payment terminals. For larger businesses, we implemented a qualified signature. We also have a new agreement framework following the plain language rules. Slide #13. In quarter 4, we sold mortgage loans worth PLN 653 million. We know the situation in the market at the moment that sales are going down for mortgages. Cash loan, sales was PLN 2.3 billion. Year-on-year, that's up 15%. We maintain high sales of cash loans, also with digital channels. Quarter-over-quarter, total sales is more or less the same with a minor decrease. [ TFI ] net sales, we had a lot of redemption but we see those are slowing down in December. The whole year was not great for this branch of business, and we know the reasons, the uncertainty in the market and the outbreak of the war in Ukraine. SME, high sales of business accounts, 17,000 accounts, high levels in digital channels and e-commerce, high growth year-on-year. In terms of loans products, in quarter 4, sales went down 5% year-on-year, 2% quarter-over-quarter, sales reached PLN 1.2 billion. Year-on-year, we see an increase by 1.1%. Business Banking, loan products up 14% year-on-year. And income from eFX platform, up by 28%. CIB, substantial increase from transactional banking and financial markets as well as treasury services. Slide 15 now, gross loans. We see an increase at consolidated level by 4% to over PLN 158 billion. BCB, this product up 10%; CIB loans up 9%. We see that this market and sales here are noting significant growth. Leasing growth up 9% year-on-year, positive trend here. Net value of sales that's PLN 6.8 billion for leasing. Factoring portfolio that [indiscernible] shrunk, but the revenues increased by [ 13% ] year-on-year. Slide 16, customer funds. Customer deposits up 6% year-on-year to reach PLN 196 billion at the end of December. Year-on-year deposits went up by over PLN 11 billion. We see growth in term deposits that's up by PLN 31 billion. We see a decrease in current deposits by PLN [ 3.7 ] billion. Share in term deposits increased to 29% at the end of December. To sum up, we have excellent liquidity position. LCR, was 177.3% at the end of December. For the bank alone that was 163% -- over 163%. Now let's move to Slide 17. Net Interest income and margin. The net interest income was PLN 9.7 billion and the year out and the fourth quarter around was PLN 2.8 billion. We should remember about one-off nonrecurring [indiscernible] quarter-to-quarter. And they were as follows: that is the cost of payment holidays in quarter 3, it was PLN 1.358 billion. In quarter 4, it was PLN 186 million. Overall, in the year, it was PLN 1.544 billion. Another factor was the adjustment of PLN 78 million posted by Santander Bank Polska related to the reimbursement of the bridging loans and bridging fees. Having flipped all those items, the net interest income declined by 1.5% compared to quarter 3. As you can see, the annualized net interest margin in quarter 4 was 4.94%. On a like-for-like base, reached 5.28%. What were the drivers? One of them was the posting of those nonrecurring events to the net interest income. All the details of it are presented in the presentation. Another driver was the growth in [indiscernible]. So let me remind you that 10 times since the beginning of the year, we increased interest rates on our deposits, responding to the needs of our customers and tracking what is happening on the market. In quarter 4, we had a very attractive proposition, a special offer for personal customers at [ 8% ]. The annual net interest closing was impacted by the acceleration of cash flow sales and corporate loans, but also by the higher yields on securities. Net fee income, Slide #18, the growth by 3% year-on-year. It was PLN [ 2.6 ] billion. Now as I said, it was an increase of 3% against 2021. We viewed a robust performance given the market landscape, especially as the fee expense in quarter 4 included a number of nonrecurring items. In quarter 4 alone, the net fee income was PLN 619 million and shrank by 7% quarter-on-quarter. We can see here what was the impact of the lower loan sales on the level of credit fees. But that was on the upsides that the FXs and brokerage fees increased and conformed really well. FX increased 27% year-on-year, insurance fees by 9% and the same goes for debit cards, it was 12% in profits. In Santander Consumer Bank, quarter-on-quarter, the net fee income was higher by 21%. Year-on-year, it was lower by 9%, primarily driven by product card lines and fee expense. Slide #19, total income. It was PLN 12.4 billion, PLN 3.5 billion of that was recorded in quarter 4 end-all. Having excluded the [ posted ] cost of payment holidays, income looks flat on quarter 3 2022. Lower income on other operations was driven primarily by what was happening in the financial markets. In the year, they stood at PLN 163 million, driven by lower trading and revaluation, negative gains on other financial instruments and by lower income from dividends, given that we sold our stakes in our Visa companies. Slide #20 outlines operating costs. They increased compared to 2021 by 17.8%. Of course, the key drivers were the regulatory levies, but also inflation and salary increases that we provided to our staff. Having stripped of the [indiscernible] contributions to BFG, contributions to institutional protection scheme and borrower support fund. The group's cost increased by [ 4% to ] 5.1% year-on-year, driven primarily by high cost of using IT systems. On the like-for-like basis, having sort of the restructuring provision of PLN 36 million that we created for the completed employment optimization program, that [indiscernible] cost increased by 10% year-on-year. In Santander Consumer Bank, the operating costs stood at PLN 476 million, declining by 6% and the staff cost in [ FCB ] also declined by 1% year-on-year. The cost-to-income ratio is really good, below 30%. And we would like to keep our effectiveness of operations in this year. Of course, they are selling [indiscernible] related to the inflation pressure on admin inflation expenses and staff costs but definitely, we can view ourselves as a leader when it comes to our effectiveness. Provision, Slide 21. In the whole year, the net balance of provisions was PLN 895 million on a consolidated basis, which is 20% lower year-on-year. For cost for a loan, it was PLN 324 million which represents a growth of [ 8% ] year-on-year. Of course, we can see the slowing down credit market. We can see our customer spending deteriorate. This is driven by the macroeconomic landscape. So the pace of growth in the loan book is slowing down, and we can see the growing cost of credit for individual portfolios. This cost of credit still in the September was 0.55%, while at the end of December, it was 0.59%. The key drivers of the net balance of the provisions are as follows: in the personal customers portfolio, you see a number of downgrades and growth in the [ down base ] to the NPL portfolio. In the case of the [indiscernible] portfolio, this risk is in part mitigated by support [indiscernible]. In SME, you can see the growth in delinquencies and downwards to the NPL. In corporate portfolio, we saw 1 downgrade -- significant one to the NPL. The net finance of provisions was also impacted by new management adjustment of PLN 79 million altogether. We also sold part of our NPL portfolio and the balance is the PLN 450 million with the positive impact on our bottom line of PLN 16 million in Santander Consumer, it was PLN 231 million with a positive impact of PLN 33 million on their bottom line. The provision coverage ratio is safe at 57.4%, while the NPL ratio at the end of the year was below 5%. Slide #22. I've already mentioned that banking tax and regulatory levies, their PLN 4.3 billion of gross profit starts with levies of PLN 2.1 billion and the regulatory levies of PLN 2.420 billion. Referring now to the Slide #23. Referring to the previous slide, this is heavily burdened by regulatory and fiscal levies. But on the other hand, we have to say that our bottom line was positively impacted by interest rate hikes. You can see in the profit and loss, but there is also a provision for legal risk attached to mortgage loans. And after 4 quarters, this provisioned PLN 1.739 billion in quarter 4 alone is about PLN 669 million. Closing now, let me emphasize that our core business is also doing well. We are pursuing our strategy and mission of helping our customers prosper. We are gaining new customers. Despite huge challenges driven by the current economic and macroeconomic situation, which does not bode us -- make us optimistic, we proved in '22 that our business model works well and brings the expected deals. So the floor is yours now for questions and answers.

So the questions are coming in. We have a question about the issuance. There are a few questions that are relating to that subject. We're planning to issue bonds to comply with the [ MREL ] this year. What will be the value? When will there be the first issuance within the new program? We've just released the current report. What type of securities will there be? Is bank planning to buy back Tier 1 bonds.

Let me start. Just to remind you, we've seen this in the performance for the last quarter, and we will see it in the annual report. We will be publishing it by the end of February. Now we only have available to report based on unaudited data. We could [indiscernible] MREL and TLAC criteria, and we have quite a large buffer. But both, in TLAC and in the securities, that will allow us to comply with the regulatory levels. We have securities and bonds that mature. This year, maybe they don't mature this year, but they will not be eligible for MREL or TLAC. And in such situation, we will be applying the call option and we will have to substitute those securities with different issuance. Hence, the new current report and the planned issuance. We have securities in euro, but the program we've just announced is in PLN because we want to first issue in the Polish market. We haven't yet determined the value. But the total value of issuance in 2023 is several billion. That's about 4 billion or 5 billion worth of issuance to substitute the paper that -- the securities that we have currently holding. This is related to the buyback of the bonds but even if we enter this particular amortization period, when we have securities with maturities of above 1 year, it's still eligible for TLAC. So it's about comparing the cost of the securities. Even if we have [indiscernible] to security, we have to compare that prices when compared to senior securities. But that's still ahead of us. And we still need to make decisions. I hope I've answered your questions.

Now, let me answer the question about the level of NPL. So over the NPL level coming out close to [ 40% ] is not a threat to the dividend payment. It is below 5%, and it's much better in the [indiscernible] in Santander Consumer Bank. In my opinion, we managed well, the NPLs, both in the bank and in Santander Consumer. We are also selling off our nonperforming [indiscernible], and that's good news because you can see that this has a positive impact on our bottom line. The market still provides good prices for nonperforming portfolios. So we will be leveraging that. And in my opinion, there is no risk that next year -- this year, this level would be exceeded. When it comes to the previous year, this is clearly said that this 5%, we are below that level. So the question is about the expected regulatory changes. Apart from the extension of payment holiday solutions, my only comment here is that I will not refer to [ craft ] speculation. There were different statements made on them but we will finally see what is going to be the decision. When it comes to other factors, we don't really know what is going to happen. But as I said, our mobile, this is always so resilient, when we can see [indiscernible] with a large expense to what is happening to the unknowns, and it's difficult for us to speculate when it comes to any other changes in upstream regulations or any other upstream developments that might take place and that is in the year 2023.

There is another question about issuances. Are we planning any AT1 issuance if there is an opportunity?

We can't see any need for this.

There are also questions about the dividend.

Dividend outlook from -- as I said, our result was solid enough in our opinion, plus we need all the conditions and the criteria for dividend payment in our opinion. But in our view, we think we can pay out the dividend, but we have not received an official letter from the KNF. We are talking to the regulators, and once we get the letter from them with their approval, we will be able to issue a recommendation. I am looking forward to that, and I'm optimistic. But still we need to get the decision.

There's 1 more question. After the results of quarter 4, can you confirm that the K1 dividend can -- has been met? And can the bank increase the level of payout?

Well, [indiscernible], I think the CFO answered to this question due moment all. When it comes to the very criterion, I understand that this refers to the share of FX [indiscernible] mortgages for households in the total portfolio of liabilities to nonfinancial increase. And for this, let's take a look at Page 27, the [indiscernible] of the report. This is below 5% based on the data that we are showing now.

There is a question about the participation in the payment holiday. So we had 54.3% of the mortgage portfolio, that's volume-wise. That's the average hit rate for the entire payment holiday scheme. And according to our observation, people, customers for [indiscernible] in 2021, are those who applied for the program most. 47 -- almost 40% of customers applied to have the payment extended for all the installments. According to the big data profile here and the data does not differ from the average parameters for these sectors. What is the exposure to agri lows because there is a plan apparently, we don't know, to introduce payment holidays for that sector too?

You will get the detailed information about exposure to different sectors in the [indiscernible] when we will be using our full report.

Two more questions. The media are quoting the CFO, will you be able to mitigate the negative trend also relating to the interest rates?

In terms of the net interest margin and the trend, I talked about it before, in terms of the migration trends, it was stronger when we were increasing the interest rate. I can just remember that irrespective of the migration, we have an increase in current deposits, we have new customers. So even if the migration trend is continued that doesn't mean that it has a substantially negative impact on net interest margin. When I said stabilized, I didn't mean that we would be at the same level, but I meant that we would be at the current level. So my message really stays the same. I said the same thing about a quarter ago. On net interest margin, it is likely to go down. This is the trend we saw in quarter 4 and I mean the margin that excludes the one-off factor because we have a slight decrease that according to the projections, we have delayed trend on the pricing of deposits. But through assets, the effect of higher interest rate is visible. So my message is not different to what we talked about a quarter back.

Let me come to the question about the provision coverage for the portfolio of mortgages [indiscernible] at the end of December. 42.4% at the end of December. And in our opinion, this is an adequate level of provisions. When it comes to the verdict, the ruling from the European [indiscernible], we don't know what this is going to be. But we know, we will be [indiscernible] in this respect. And what is the opinion of the regulators on the shift? Difficult to speculate, we will see notes the opinion of [indiscernible] as well. But of course, we will be waiting for this ruling and then, we will take adequate actions. When it comes to deposits -- okay, that's already been mentioned. No, we've mentioned the process. We were talking about specific values in individual segments. Please, you have that in presentation and then the [indiscernible] we're not disclosing that yet. The outlook for the cost of credit, the cost of risk and operating costs in '22. The cost of credit, you might remember, a quarter ago, I was saying that this environment of recession, there might be moments when the customer credit will go even up to 100 bps. And if you look at the Slide 21 -- 20, 21, when we are showing our figures, we could see a big difference how it looked, or where were the provisions for credit losses in the first half of the year and in the [indiscernible] in the first half of this year, we do not expect anything better, maybe even worse. We might have some delayed effects of the growth in inflation, energy prices, gas prices on the condition of our business customers. Even a simple exercise when we imagine that in the middle of 2023, we have a situation when we don't have the same cost of credit like in the second half of the year, only this would imply quite clear growth, not up to 100 basis points, but quite a bit. There is a lot of uncertainty that we rather expect that there will be a deterioration of that ratio, but we'll see what will be the scale. It's difficult to expect that with such a weak economic growth that we are going to see in the first 6 months with continuing high interest rates with the growth in prices, it's difficult to expect that condition of our customers continues as it was in the last year.

And when it comes to the operating costs in 2023?

Well, I think I've already mentioned that -- I've already said that there is a pressure and the cost might grow a little bit, but we always benchmark that against the provisions we have. And our effectiveness ratios, we want to keep them, and we wanted to go a cost-to-income ratio below 40%. And I think this is really good.

We have no question in English. We've answered questions in terms of the net interest margin. But there is a question about the volumes. The main driver for growth in loans in 2022 was the [indiscernible] loans. Mortgage retailers were on a different side, what could happen this year?

We really expect similar trends to 2022. [indiscernible] not so much. And that is the [indiscernible] second part of the year. In retail, remaining retailers, well, let's we'll be looking on the balance sheet and on sales, because we had some early payment that impacted the balance sheet. You see in the annexes of cash flows was actually quite good. So -- and it had a positive impact on our net interest margin. In terms of business loans and terminals, I wouldn't expect a rebound, maybe towards the end of the year. Overdraft, we had decent growth here. This will not change because of the rising CPI and businesses need money to find the day-to-day operations. Agnieszka, any more questions?

No, we don't have any more questions coming in. That was our last question.

Thank you very much, ladies and gentlemen. Have a good day.