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

Good morning. It's 11:00 already. My name is Agnieszka Dowzycka, I am Head of Investor Relations in Santander Bank Polska. We would like to welcome you all at the presentation of the financial results of Santander Bank Polska Group after the first half of 2023. Today with me, we have Michal Gajewski, our CEO; Maciej Reluga, our CFO; Wojciech Skalski, Head of Financial Accounting area. So let me give the floor to our CEO, Michal Gajewski.

Good morning. Welcome at the presentation of the results after the first half of the year. At Santander, we want to consistently and consequently help our customers. And our business model worked well. We are performing against our targets as planned. But as we said in the previous quarter, we must bear in mind all the external factors that affect our performance. At the end of June, we generated PLN 3.2 billion of gross profit. At the same time, the tax levies were PLN 1.2 billion, while the total regulatory costs amounted to additional PLN 194 million. We closed the first half with a solid net profit of PLN 2.3 billion. In Slide 7, we can see general operational data. So let's move on to the slide. As a group, we provide services to over 7.5 million customers, out of which over 4.2 million are digital customers. And at Santander Bank Polska itself, we have 5.8 million customers, of which 3.2 million to 3.4 million are digital customers. Year-on-year, the number of digital customers grew by 7%, and the number of mobile app users grew by nearly 14%. Customer deposits totaled PLN 201 billion and grew by 9% year-on-year. The gross loan portfolio year-on-year grew by 3% to PLN 163 billion. Our assets grew by 7% to PLN 264 billion, and customer funds alone totaled PLN 216 billion, which is also a material growth year-on-year by 10%. And now Slide 8, I will discuss the results in detail in further slides. Now let me highlight the key items. So as I said, PLN 2.3 billion of the group's net profit for the first half of the year. Net interest income was PLN 6.3 billion. Net fee income was PLN 1.340 billion, an increase by 5% year-on-year. The total income was PLN 7.6 billion, and this means a growth by 17% year-on-year. But this year, for the group, it was over at 20.77% and return on equity was 14.3%. Our capital position, in my opinion, allows us to generate further growth and address all the risk factors that could occur in the future. And in our assessment, it also allows us to share the profit with our shareholders. Now Slide 10, our customers. As I said, on Slide 7, 3.4 million active digital customers, including 3 million retail customers, which means they grew by 7% year-on-year. 356,000 SME customers, a material growth in this segment as well by 8%. And in terms of large businesses, we had over 21,000 such customers. The number of mobile application users is also growing. Currently, it's almost 2.6 million customers, in the retail by 13% and SMEs by 24%. The number of transactions in mobile banking also grew. We have already made over 70 million transactions in the retail segment, 29% year-on-year; and 2.2 million transactions in SME segment, a growth by 34%. On Slides 11 and 12, you can see our new products and services and our customer support activities. Let me mention just a few key highlights, new products and services. For example, for retail customers, we prepared a refreshed account and debit card offering. On the 1st of July, we launched Santander Account, Santander Max account and Santander on the go package. For SME customers, we improved the lending process, introduced the time-to-yes. For corporate customers, we introduced more improvements in iBiznes platform, an option of executing transactions at a future phase in the eFX module and simplifications of electronic services [indiscernible]. In Slide 13, we have some business data. For example, we have 5.7 million accounts for individual customers, an increase by 6% year-on-year, which translates into 322,000 more accounts year-on-year. Accounts in Polish Zloty grew by 4%. Foreign currency accounts grew by 12%. We also opened more accounts for foreigners. In this area, we recorded a growth of 18%. In quarter 2, we sold mortgage loans worth PLN 1.6 billion. This is a double growth versus quarter 1 this year. And in total, in the first half of the year, we sold PLN 2.4 billion worth of mortgage loan. When it comes to cash loans, the cash loan sales in quarter 2 totaled PLN 2.5 billion. On an annual basis, this is an increase by 3% and by 6% quarterly. And our sales in remote channels has been also growing, 67% in quarter 2. And in quarter 4 last year, 57% of accounts were opened, and loans were given in digital channel. In the first half of the year, we sold PLN 4.8 billion of cash loans. Net sales of TFI investment funds totaled PLN 1.2 billion. Our Santander TFI assets totaled PLN 15.2 billion, and the market share was over 10%. We are very happy about that. And in total, in the first half of the year, net sales of investment funds totaled PLN 1.9 billion. In the SME segment in quarter 2, we opened 16,500 business accounts, out of which 52% were sold or opened in digital channels, including 31% of that in e-commerce. In the first half of the year, we opened over 35,000 customers -- 35,000 accounts for SMEs. Total loan sales grew by 3% quarter-on-quarter and totaled PLN 1.4 billion. In business banking, so in larger company segments, we recorded good performance in terms of lending and we've been recording a growth in both loan and deposit balances. We have also increased our income on transactional banking, and 12% growth in income from the eFX platform. In Corporate & Investment Banking, we recorded a growth in income from transactions in credit markets and trade finance services. Now Slide 15. As I said, gross loans grew year-on-year by 3% to PLN 163 billion. I have already mentioned sales in the Retail and SME segments, and Business Banking loans grew by 3%, while in the largest company segment loans grew by 15% year-on-year. The lease portfolio grew by 10% to over PLN 13 billion, and the value of net sales was PLN 3.8 billion. Our factoring subsidiary has been also developing. It has grown by 7% by the turnover, which is very crucial for this segment during that time grew by over 14%. Slide 16, customer funds, the deposits grew by 9% year-on-year and stood at more than PLN 200 billion at the end of June. Quarter-on-quarter, they grew by 2%. Comparing year-on-year and in quarters, they grew by PLN 17.1 billion. The growth of PLN 10.6 billion of that was recorded in the Corporate segment, and PLN 6.5 billion in Retail. We can see some growth in term deposits and the decline in current accounts, which is natural given the interest rate environment. The group [indiscernible] excellent liquidity with the consolidated LCR at 205% at the end of June. Slide #17, net interest margin and net interest income. Net interest income in quarter 2 was PLN 3.2 billion, which is a growth of 3.5% quarter-on-quarter. Across 6 months, it was PLN 6.3 billion, growing by 22% year-on-year. The negative adjustment of net interest income in view of recognizing the impact of payment holidays was PLN 44 million. This is a result of updating our estimates to date. It was driven by the higher growth in deferred payments in 2023. As you can see on the slide, the reported annualized interest margin -- net interest margin in quarter 2 was 5.37%. That was -- it was flat on the previous quarter. Slide 18, net fee and commission income. We saw here the growth as well by 5% year-on-year as the generated fee income was PLN 1.3 billion. We saw really good fees, especially in credit fees, which grew by 14%, debit card fees by 26% and insurance fees grew by 8% and growth in credit card fees by 4%. Importantly, the net fee income was PLN 678 million, growing by 2% quarter-on-quarter. Quarter-on-quarter, we saw a good growth in FX fees and fees for funds management, which saw the growth by 23%. Slide #19, income. PLN 7.6 billion growing by 17% year-on-year and grew by 4% quarter-on-quarter. Lower income on other operations year-on-year are the results from our activities aimed at making settlements with customers [indiscernible] mortgage holders. For the group, the cost of debt was PLN 267.5 million for 6 months and in the quarter alone it was PLN 82 million. At the end of June, we signed 6,700 settlements, of which 1,200 was signed in quarter 2 alone. [indiscernible] the other noninterest and non-fee income totaled PLN 232 million and PLN 72 million in quarter 2 alone. Overall cost, Slide #20. They increased by 9% year-on-year. This was a result of lower widely formed contribution to banking guarantee fund and from the fact that the fees for the Institutional Protection Scheme posted in quarter 2 2022 were lower at PLN 407 million. So [indiscernible] the cost overall increased by 16% year-on-year, driven by inflation, salary increases, IT costs and building maintenance. We adhere to our cost discipline. Administrative expenses on the same basis actually declined by 1% quarter-on-quarter. Staff costs grew by 21% year-on-year as we actually revised the salaries in September 2022 and because we increased the variable component of the total pay. In the first 6 months, the cost-to-income ratio for the group was 30.4%, improving to what we recorded a year before when it was nearly 39%. Slide #21, net balance of provisions. In the first 6 months, it was PLN 590 million. This is a growth year-on-year, which resulted from the low allowances we posted in the previous year and the observed impact of the economic landscape on the condition of our customer's portfolio. [indiscernible] with some annualized basis after quarter 2 is 80 basis points. The NPL coverage ratio is stayed at 58%, while the NPL ratio at the end of June stood at 4.9%. Slide #22, taxes and regulatory costs. I've already mentioned that after 6 months, out of the profit of PLN 3.2 billion that we earned on a gross basis, we had assigned PLN 1.2 billion to taxation levies and PLN 194 million to regulatory costs, including contributions to the banking guarantee fund of PLN 175 million. Slide #23, summary. We can see that we are improving our performance quarter-on-quarter. Our sales volumes grew significantly, and this shows that our business performance in quarter 2 was better than what we saw in the solid quarter 1. Of course, we are focusing on our overarching aim that is to help our customers prosper. Our efforts have been appreciated because we were awarded the title of the Best Bank in Poland by Euromoney. That's all in presentation, and now let's switch to the questions and answers.

We have quite a lot of questions. So maybe let's start with the one that has been stated a few times, the outlook for the dividend. When do we expect the formal letter from the KNF on dividend distribution? And what's the probability of dividend distribution, especially after the last, recent negative opinion about PKO BP? So let me answer this question. First of all, we received the official letter and it said -- it referred to the European Court of Justice judgment being the condition in a way for dividend distribution. And as I've mentioned to you already, our capital position, our performance actually allows us to share the profit to pay the dividend, and also to cover all the risks that could appear in the next quarters. So we will uphold our recommendation, and we wanted to get back to the discussions with the KNF about that. And we also try to compensate the KNF and given our capital position and our current performance and the situation of our bank, we will try to convince the KNF that we would be able to pay the dividend. But we will not give you the probability of that happening. But in my opinion, we have very strong arguments supporting our recommendation. Okay. Now the outlook for interest rates and what's the sensitivity, what's the outlook on NIM? What we've looked for a longer period of time that this is not the landscape for interest rate cuts, given that we have the inflation, the inflation projects in place. And what did the NBP projections show when it comes to inflation. Nonetheless, the guidance of the NBP governor that we actually heard in July states clearly the conditions and outlined the landscape for interest rate cuts in the coming future. The inflation might hit 1 digit in September or August. So we will see. But since the inflation might decline further, we expect that maybe not as much as the inflation target, but then it might trigger the interest rate cuts. So it is really likely that we might see some cuts in October or maybe already in September. Then it seems to us that there will be some break in the cutting cycle. But then in 2024, we will have the continuation of that. We do not envisage such cuts because the market is really aggressive in pricing in this potential cut. But if this was to happen, well, of course, the reality is that we will see some cuts. And for time being, we've been facing some stabilization. And this is in line what we've been saying at previous conferences. If interest rates keep falling, clearly, it will be difficult to keep our NIM as it is. But of course, that will depend on the sales of new loan situation in the sector. The sensitivity of [ NIM ] interest income through the interest rate changes, we do not provide it clearly in the report. We just actually provide you the sensitivity in line with the model. But as you know, our sensitivity to the interest rate was quite high when the interest rate hike cycle [ started ]. But in the recent quarters, it was contained. And when we think about 2 years ago about the share of variable interest loans in the total loans, it was 95%. Now the fixed rate loans represent 1/4 of our portfolio. And this is a result of higher sales of fixed rate loans and the fact that we hedged part of our balance sheet with Zloty transaction. There's also a very specific question referring, which part of the book is hedged and then what segment? The segment primarily refer to mortgage loans. And I can say that, on average, this is hedged for -- from 4 to 5 years for the [indiscernible] book. And when it comes to the new sales to show you the tendencies, the fixed rate loans accounted for nearly 80% of sales in quarter 2. And at the beginning of the quarter, it was 72% and it grew to more than 80% at the end of June. So these 2 trends really led us to decrease the sensitivity. Okay. And our next group of questions refers to Swiss franc issue. What are the assumptions for saving provision? Is there a bigger interest after the European court's judgment? Are there any changes in customer behavior? Let me answer this. Of course, we can see a growth in customer interest in getting information about the credit history after this CJEU judgment. And this is also the result of the intensified marketing actions taken by law firms dealing with this. It can, but doesn't have to translate into the bigger number of lawsuits. This is already included in the [indiscernible] for expected cost of legal [indiscernible]. We think that provisions are adequate and they correspond to the model. That is the right model that we have in place. Of course, the growth in provisions in quarter 2 is related to the update of the number of our expected lawsuits. And as I said, it looks like our expectation. In the report, you can see the parameters that we are taking into account when building our model. We keep thinking that settlement is a better position than a lawsuit. And that is why we've been offering settlement to customers, and we are proactive in our actions in this respect. Actually, we covered the entire Swiss franc portfolio of active agreements with our settlement efforts. We started to talk to those customers. We are in the course of negotiations with them. And we could see that there were some expectations when it comes to the judgment, and there were different interpretations of this judgment. So that was the period before the judgment. And just afterwards, when the -- with some slowdown in the pace of signing the settlement. But now -- but we can see that now we are coming back to the pace that we saw before. And the customer's willingness is there. Of course, this is also driven by our marketing activities that we've taken together with other banks. And all the time we've been continuing our efforts. We are [ persuading ] the customers to go ahead with settlement. But of course, we have also the [ troublesome ] customers who want to repay the denominated Swiss franc loans or indexed Swiss franc loans, and we respect their choices of course. So you can read that in Note 33 to the report. You can read there the assumption -- about the assumptions of the model and sensitivity to different scenarios. Okay. And now we have a couple of questions about settlements. How many settlements have we signed? Are those settlements based on the KNF chairman conditions? And there are some out-of-court settlements. There are some court settlements as well. We do not have the exact statistics. But we believe that each settlement is legally binding. And what was the last question? Is it in line with the rules set forth by KNF Chairman? Yes, those settlements are in line with the KNF's Chairman proposal. And what can we expect in the quarters to come? Well, we have been negotiating settlements with customers, but we do not have any targets for that. And the number of settlements in quarter 2 dropped due to the number of settlements made in quarter 1. And that's all about Swiss francs, I believe. The cost of risk -- there are a couple of questions about that. I have just received a few questions about settlements as well. The cost of settlement dropped strongly quarter-on-quarter. Will the bank improve their offering to encourage more customers to make settlements? We do not provide any values in the settlement scenario. And we cannot give you those numbers because it is in DTA, in deferred tax assets. So that's the answer to this question actually. The cost of risk, NPL, why such a growth in NPLs? Is it due to retail or business customers? This was due to retail customers, namely mortgage loans. There have been a certain number of customers who use the Borrower Support Fund and met all the conditions to be deemed NPL. I believe that the 100 basis points has been revised 2 quarters ago. Because a quarter ago, we said that the situation looks a bit better than the peak. It would be lower than 100 basis points. And a quarter ago -- I would support what we said a quarter ago because it's in line with our expectations, namely an increase in the cost of risk that took place. But this results from how we calculate that. Because in 2022, we started off with low figures, and quarter 2 of 2023 was more or less at the level of quarter 3 and 4 of 2022. So that's why we increased the ratio to 80 bps. And further on, we believe that this level should stabilize. And in the first half of the year, we had the inflation. The GDP was close to recession level, with inflation still being high. So we do not give any guidance other than a quarter ago. And there is a question about the ESG. Will the creation of a special unit dedicated to ESG affect ESG activities in the bank, increasing the eco-friendly conditions of buildings and so on? Well, the majority of our buildings meet actually ESG conditions. So there will be no pressure to increase costs for that. And we believe that the entire ESG agenda is, first of all, a great business opportunity for us. And we are very active in energy transformation. We participate in many transactions. We are the leaders, in my opinion, in this area, especially in terms of the largest transactions that take place in the Polish market. So even if some costs would be triggered on the administrative side, we believe that business benefit will be much higher. Will ESG shape remuneration policy? Well, we are benchmarking ourselves against the market. This is our approach. So we are looking at the market situation. We compare the salaries of our employees to the market and we adjust them accordingly. And we want to pay in line with what market pays to employees. There was also a question. Do we plan any salary rises? So actually, each year, we review salaries and we decide on that, so this is our business as usual. We do not announce any salaries and this is a fixed element of each year's salary review process. So we will see what this process brings this year. And what's the progress in PSD and BLIK deferred payments? I do not want to answer this question. We will have a meeting with the shareholders soon. But we -- I may say that we want to join this solution together with PSP and BLIK. We believe that the skills and especially in terms of customer experience that this company has is very strong. That's why we're very strong supporters of this initiative. And there are also a question, what is the outlook when it comes to the net income in 2023? Well, I think that, overall, we expect the continuation of the trends and the growth in the order were a mid-single digit, and that's what we should be continuing. What is the dynamics in individual credit segments in your opinion? Do you envisage further growth in the sales of mortgage? Because now the interest has shifted towards the customers who offer the loan at 2%. Apart from that, we see the growth in lending and it grew a lot in quarter 2. Even though we've heard that many people refrained from taking out loans, waiting for the 2% loans, but nonetheless, we had a solid quarter. And I think that the mortgage loans will continue growing. And the same is expected for cash flow. We can see the vendors of increased demand for investment loans. We'll see if they are confirmed. So the scenario for 2023 and '24 is the economic revival, which should actually stimulate the lending growth, which should start growing at a sound pace. What else? So we are trying to pull together -- the number of questions together, and we keep receiving new ones. So please excuse us for a second. What is the level of repayments in the FX portfolio compared to December, and I'm talking about the loans which were not prompted to settlement? No, we will repay the balance in [ euro ]. But what you're asking, I understand is what was the original value at the moment of function and the value of loans repaid. The response to the second part of the question is easier because I don't have figures to answer -- at the top of my head to answer the first part. But the payment ratio is really low. And the second question, referring to the -- are there any huge drop with regard to the loans that were already repaid. Well, we can say this is a marginal number. And there is also a question whether the banks ask for tax interpretation? Whether the cost of Swiss franc lawsuits could be viewed tax deductible? And if so, what categories of costs are viewed tax deductible? We can say that we ask for such interpretation, especially if we lose lawsuits. And the interpretation received was negative, that we cannot view it as nontax -- as tax deductible. But of course, we will continue our efforts. The question is also whether you are interested in acquisitions on the Polish market, because there is a [indiscernible] put on sales? Even though I think that we have huge skills in acquisitions and mergers, at the moment, we are not interested in that. I mentioned that a number of times that our model is the one of organic growth and not a model of mergers and acquisitions, as we wish to see a number of years ago. Has the bank received any lawsuits concerning the assumption of a free loan? We will have to have that checked. But I think there have been very few such lawsuits. And another question, do you think there will be any payments to [indiscernible]? We think that in the year 2022, '24, a neutral when it comes to the ESG contribution. Of course, there are also payments that -- Institutional Payment -- Protection Scheme. And so we've already paid a lot, and we don't need many more payments in the coming year. So I think it will be neutral. And the 2% loans, we have not discussed that yet. [indiscernible] will offer that, yet we well at the turn of quarter 3 and 4. And probably the last question, what is the outlook for overall costs in 2023? Actually, apart from the trends that you've seen that are going to be continuing, there is one element, a new one. And this is related to what the CEO has said, that is the review of salaries in the second half of the year. And this will have more impact on the cost in 2024 than in 2023. Apart from that, we do not expect any additional elements. And if we took off such elements on a quarterly basis, if we look at comparable costs, then the dynamics is close to 0. And as we look on the administrative expenses only quarter-on-quarter, we can see that our cost discipline is really sound, and this is not going to change. Agnieszka, is there anything else?

What is the outlook for the growth in loans for this year, for us as the bank and the group and for Poland?

[indiscernible] discuss that I think.

No, I don't have any more questions. That was the last one. So thank you for your numerous questions. We hope that we answered all of them in a satisfactory manner, in quite an organized manner, given that there was such a big number of them. If we have not answered any of your questions and you cannot find the answer in our report, of course, we will be in touch. And please join us at the next conference after the published results for quarter 3. Thank you, and goodbye. [Statements in English on this transcript were spoken by an interpreter present on the live call.]