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

[Interpreted] My name is Agnieszka Dowzycka, I'm responsible for Investor Relations at Santander Bank Polska. I'd like to welcome you at the presentation of the preliminary financial results of Santander Bank Polska Group for 2023. Today with us, we have our CEO, Michal Gajewski, our CFO, Maciej Reluga; and Wojciech Skalski, the Management Board member responsible for Accounting and Financial Control division. [Operator Instructions]. I'd like to mentioned that throughout the conference, you can send your questions via e-mail to [email protected]. I'd like to give the floor to our CEO now.

[Interpreted] Hello, everyone, once again. Welcome at the presentation of the non-audited financial results after the fourth quarter of 2023. Let's start with the net profit. In my opinion, we generated a solid net profit and proved that our mission of helping customers [ soft path ] is reflected both in the social and financial dimension even in the context of persisting regulatory and systemic challenges. Today, I would like to say a few words about our new strategy as well. But first, let's start with our performance. So last year, we recorded the gross profit of PLN 6.850 billion. At the same time, the tax burden was PLN 2.7 billion, while total regulatory costs amounted to additional PLN 211 million, so the total burden was nearly PLN 3 billion. And in quarter 4 alone, we generated a net profit of PLN 980 million. Now let's go to Slide 10. As a group, we provide services to over 7.5 million customers, out of which over 4.25 million are digital customers. In Santander Bank Polska alone, we have 5.9 million customers, including 3.5 million digital customers. Year-on-year, the number of digital customers grew by over 6.4% and mobile customers by almost 19%. Customer deposits totaled PLN 209 billion grew by 7% year-on-year, and the gross loan portfolio year-on-year grew by 4% over PLN 165 billion and assets grew by 7% year-on-year to PLN 276 billion. And now Slide 8, key financial results. Of course, I will discuss the results in detail in a further slide, but now let me highlight the key items. The net profit of the group in 2023 was PLN 4.831 billion in quarter 4 alone, the net profit was PLN 980 million. The net interest income was PLN 13.116 million grew by 36% year-on-year ended the quarter 4 alone, the net interest income was PLN 3.4 billion. Net fee income in 2023 was over PLN 2.7 billion in quarter 4, PLN 710 million. Total income was PLN 16 billion versus an increase of 29% year-on-year. And in quarter 4 alone, the total income was PLN 4.2 billion. The TCR for the group was over 18.36% and the Tier 1 for the group was 17.18%. And for the bank alone, 19.62%. The return on equity for the group was 20.3%. As you can see, our capital position has been still kept at a high level. Slides 10 to 12 both the slides describe the general information about individual segments and new products for our customers. So maybe let's go straight to Slide 13 that show some business data. We have 5.8 million accounts for individual customers, up by 5% year-on-year. In quarter 4, we opened 114 personal accounts, while in the entire year 461,000. On an annual basis, accounts in Polish zloty grew by 3.4%, while foreign currency accounts by 10.5%. In quarter 4, we sold mortgage loans worth PLN 2.9 billion, that is 22% more than in the previous quarter. And in the entire year, we sold PLN 7.6 billion worth of mortgage loans. That's up by 7% versus 2022. The share of fixed rate loans and new sales in quarter 4 was 87%. And in entire the 2023, the share of fixed rate loans grew from 39% in January to 89% in December. So the total share of loans with adjustable fixed rate for 5 years and the entire PLN mortgage loan portfolio grew to nearly 29% at the end of December 2023. In quarter 4, cash loan sales totaled PLN 2.4 billion, that's better than in the previous quarter. And the entire year, we sold loans with PLN 9.7 billion, that's better by 4.8% year-on-year. The level of lending in remote channels have been growing in quarter 4, it was 71%. Net investment fund sales was PLN 1.3 billion in quarter 4, while in the entire year, PLN 4.7 billion. So our retail assets in Santander TFI at the end of the year, were PLN 18.5 billion. Current market share was 10.9%, and it grew by 1.6 percentage points versus the year of 2022. In the SME segment, in quarter 4, we opened over 16,000 business accounts. In total, we opened over 67,000 accounts for small and medium enterprises during the year. SME loan sales grew by 25% year-on-year, while quarter-on-quarter, we recorded a growth by 10%. And in total, in 2023, we granted PLN 5.4 billion worth of small and medium enterprise loans. In Business Banking, we recorded good performance in terms of lending, we recorded the growth in loan and deposit balances on an annual basis. We also increased income on transactional banking by 67%. We also recorded a double-digit growth in FX income and our loan and leasing income by 12% and 18%, respectively. In terms of corporate and investment banking income from transactions and credit markets grew materially by 80% and income from trade finance services also grew by 79% year-on-year. Now let's move on to Slide 15, gross loans. As I said, at the consolidated level, the gross loans portfolio grew by 4% and then quarter 4 alone, it grew by 1% versus the end of September '23. In our both subsidiaries, leasing and factoring, we recorded a double-digit growth. So it's a very good development of our business. You can see the details in Slides 31 and 32. Customer funds. Customer deposits grew by 7%. That's over PLN 209 billion at the end of December. On a quarterly basis, deposits slightly decreased. Deposits grew by PLN 12.7 billion. The group can boast excellent liquidity, the consolidated LCR was over 218% at the end of December.

[Interpreted] On Slide #17, personal loans account, our net interest income and net interest margins. The net interest income was PLN 13.1 billion and in the quarter 4, it was PLN 3.4 billion, which was better in quarter 4 by 1% quarter-on-quarter. Interest income quarter-on-quarter decreased slightly while our interest expense reduced by 8%. As you can see, as we expected at the previous conferences, the annualized net interest margin throughout the last year was stable and amounted to [ 5.4% ]. Slide #18, net fee income. The growth here year-on-year is 6%. And the net fee income totaled PLN 2.7 billion. In quarter 4, it was PLN 710 million and there was also a sizable growth compared to quarter 3 by 6%. Year-on-year, we saw really good performance. When it comes to fees, especially insurance fees, foreign currency fees, asset management fees and brokerage fee. Quarter-on-quarter, we also saw really good results, when it comes to asset management fees, brokerage fees, insurance, fees and leasing fees. When it comes to consumer, Santander Consumer Bank, the net fee income grew by 3% year-on-year and 12% quarter-on-quarter primarily under the credit and insurance line. Slide 19, income. Total income was PLN 16 billion, which represents a growth of 29% year-on-year. The income on other operations was still driven by actions taken to make settlements for it's FX mortgage borrowers. For the group, the cost of these settlements was PLN 313 million, while in quarter 4 alone, it was PLN 24 million. At the end of December, across the global we had 9,300 settlement [ side ]. For the [ 107,700 ] which represents nearly 24% of the Swiss franc portfolio as at the moment of compared to what we [ had at ] the moment of starting settlement. In 2023, we made 5,100 settlements and 405 of these were made in quarter 4. Operating cost, Slide #20. This cost totaled PLN 4.7 billion, and they were at flat year-on-year given the lower regulatory costs. If we eliminate the regulatory fees, these costs were growing by 19% year-on-year, driven primarily by inflation, pay increases IT costs and building maintenance costs. Staff cost increased by 26%. First of all, this was the follow-up of the pay increases that we introduced in September 2022 as well as those that we made in September 2023. This was also driven by the cost of the long-term share base in census schemes, as well as accruals for bonuses that we make for really big performance for 2023. In quarter 4 alone, cost increased by 2%, while the depreciation increased by 4% in quarter 4. The cost-to-income ratio for the group is 29.5% but for the bank, this is 27.1%. Last year, for the group, it was 37.9%. Slide #21. The net balance of loan loss provisions after 4 quarters at the consolidated basis is PLN 1.1 billion which is 28% higher than the year before. This growth was driven primarily by the impact of the economic situation on the condition of our loan portfolio because of credit risk after quarter 4 was 0.72%. The key drivers of the net balance of provisions are as follows. In the retail and SME portfolio, retail stabilization of positive payments. In the corporate portfolio, we saw some deterioration of standing for some selected customers. And the sub driver was the sale of the NPL portfolios were PLN 314 million in principal in quarter 4 and that had a positive impact on our bottom line of PLN 31 million. The NPL ratio at the end of December was 4.58% on a consolidated basis and for the bank, it was 4.44%. Let's talk a little bit about banking tax and the regulatory costs. That's Slide 22. As I said, the burden was PLN 2.7 billion, of which PLN 1.9 billion was paid in corporate income tax and PLN 782 million in banking tax. Additional regulatory costs totaled PLN 211 million. Summing up, 2023 was really good with the solid financial performance. We improved our net interest income. We boosted our inventories. We saw the growth in sales volumes, especially when it comes to mortgages. When it comes to our business, I think that both quarter 4 and the entire [ 1 to 23 ] were really good. Taking this opportunity, I would like to tell you a little bit about our new strategy. 2023 was the last year of our 3-year strategy that we were pursuing before. It was also the year, when we were working on a new strategy for the bank. And this is related, of course, to our strategic planning cycle, both in the bank and across Santander Group. Of course, we are part of the global Santander Group that we operate locally in Poland. So we can align the strategy to what we are doing here, we can adjust it to our markets where we are. The focus of our new strategy is only people on customers and employees, we are focusing on building the best possible experience and invoking positive emotion in collaboration with the bank. We believe that this is the base -- best routes to build sustainable profitability for shareholders. And thanks to this, we can actually achieve excellent financial performance and meet our ambition of being the most profitable bank in Poland. Our strategy is based on 3 pillars. The first one is total experience. And this embodies the -- our belief that customer satisfaction and employee engagement are paramount to succeed financially. We focus on building customer experience and employee experience. We believe that this can make us distinctive that the work on total experience is something new that will make us stand out in the market. So that we are the best both employer for our people, but also a Tier 1 bank for our customers. And thanks to that, we will be able to generate the best possible return for our shareholders. The second pillar is total digitization. We think that we really have to accelerate the digitization of our processes, services and products both for our customers and our employees, and -- but our internal processes in the bank. And we want to do it fully responsibly not only as a responsible corporate citizen, but also thinking about being responsible towards the business environment, communities, but also being compliant with all the legal requirements and the income system, which is ethical -- top ethical standards. Little ambitions, but in order to achieve it, we can avail and leverage the possibilities and technological solutions that the group provides us with. And that's why I've been saying that this local strategy is consistent and certain to the group's strategy. More about the strategy is available on our website. So now let's move to questions and answers. The floor is yours. And thank you for this part.

[Interpreted] Okay. So there are a few questions. I will try to group them. But maybe let's start with that dividend. Can you see the regulatory risk that the dividend for 2023 paid in 2024 may be decreased by the interim dividend that you paid in 2023? And second question, will the dividend paid in December decrease the dividend paid in 2024, given the fact is that it was an interim dividend? So the interim dividend did not come from the profit of 2023. It was paid from a part of the dividend reserve to which of almost 100% of the dividend from 2022 was moved. And the third question. Will the bank discuss the opportunity of payment of the 100% of dividend for the regulator because the baseline scenario is payment of 75% of the dividend? Well, as you can see in the data published today, the preliminary data show that we have met the criteria for 75% because the NPL ratio is below 5%. The Swiss bank share of bank ounces below 5% and even below 3%, I believe. So we meet the criteria for the payment of 75% of the dividend. This is -- those are the guidelines that became a published for the entire sector. But we haven't received an individual recommendation. We expect it to be received from the [ Canada ] soon. So as we could see in 2023, we are still on the opinion that our capital foreclose is very high -- even too high, when compared to the expected risk and capital lease given the growth expectations for the next year. So we assume that theoretically payment of some profit from the previous years that we have and the dividend results could be possible. But this will be the subject of our discussions with the regulator. Today, we are still expecting the individual recommendation for the distribution of profit for 2023. And there was a question about production of employment. I'd like to say that we are not planning any redundancies. First of all, we want to grow. And we believe that our strategy is the strategy of growth. So we are not planning to any staff redundancies and when it comes to Court of Justice of the European Union decisions, our situation is adequate. We believe that we will demand the return of economic capital after indexation, as I said, [ 95% ] in our opinion is the adequate level.

[Interpreted] It was also my question, what are the your expectation of cost of this provision. Now this provision takes into account all the costs that we are expecting in the case of the legal situation. We do think that the settlements are better, and we will be continuing on that track in our opinion, this is the best solution both for the customer and for the bank. There's an interesting question about the chance to reduce headcount, it appears again. So a few people are thinking about it and considering that. But of course, let's move on. The revival and corporate loans. When do we expect that? And if we expect it, our focus for the loan growth is in the order of 8% but for the companies, for the businesses, we think that it might be even a 2-digit growth. Yes, we expect the revival as some has been there, so were already seen last year. And 2024, my believing materialize with this and the investments are growing and this will be fueled by the private sector and this will stimulate the demand flow. So we expected, yes. Let me talk about the cost of risk. In quarter 4, there was -- you show a similar -- you had a sizable sale of NPLs. If the cost of 85 bps of goods, indicator of marks. We keep emphasizing that the sales of the NPL portfolios is something depend by the market situation. We don't have any guidance. We are just looking at what is happening. When it comes to the guidance for the cost of risk. Let us go back sometimes. In the past, we used to say that the cost of risk over the cycle is in the order of 80%. In our previous strategy for the 3 years, we were referring to the average before the pandemic to slightly below 80 bps. And that's what we delivered. It is slightly above [ 70 bps ]. If you look at our targets and KPIs of our strategy for the next 3 years, we are also saying the band expected for the next 3 years, and that's 70 to 80 bps. That's what we were saying before. And this is still something valid for us given our balance sheet. What is the opinion of the management Board about the new mobile application because you can see the decrease in the number of mobile customers? When outlining Slide #7, I was saying that the growth in the users of the mobile application was 19%. I can't see any decrease here. But let me comment on that. This application is already available across the entire 2023. But in September, we have the mass rollout. And the NPS results of sales decreased but in our opinion, this is more a follow-up of the migration process than the assessment of the very up and the follow-up of the customer experience they have with [indiscernible] each change also the change of the application is also followed by a decline. And when you have mass rollout. The customer satisfaction is falling and only afterwards is build up slowly but surely. And this is the assumption, when we introduced the new applications and that we will see a rebound clearly. We take efforts to make this experience better. In the autumn there was some event -- incident, but that was not related to the mobile app, but to the brakes in services, other technical services, which impacted the customer satisfactions, also what they experienced with the mobile app. The NPS was -- our NPS was amongst the 3 after 2023. So we are among the leaders. The implementation of the mobile app was something that we introduced because customers were saying that our previous mobile app was something to be improved. And that's why we introduced the change. We have to work on that continuously, and we are all aware of this that it does not need each and every need our customers have and we do have to take efforts to improve mobile app. And this year, we'll be focused on this as well. There were 2 other questions. Now let me discuss those related to net interest margin. Let me find out what are the reasons why you are maintaining the net interest income just like in the previous quarter, even though there was a decline in interest rates? And there are a few reasons to that. One, the lower cost of deposits, yes, that's one of the reasons after the first decline, we adjusted prices of our deposits and we took into account the possible further cost. Was it driven by the deferred repricing of loans? Yes. That's what it was. To show you the scale, we might remember each quarter, we tell you which part of the balance sheet was based on the fixed rate. Either we have the fixed rate assets or we have floating rate assets, but there hasn't by [indiscernible]. And that was 28% after quarter 3 and quarter 4, it was 32%. The other 68% of the floating rate. And if we look at the scanner and the repricing period, 1/3 is based on 1 month rate nearly half on the 3-month peer and there's quite a lot of 6 months based on 6-month rates. So not all the assets have repriced yet, and this is something yet reflected in our results yet. So this is in the federal and of course, it will continue. And to some extent, this is neutralized by higher volumes and sales. So we have the flexibility in our performance to interest rates. And now the sensitivity to changes in interest rates in our case, if they move by 100 basis 500 million. Is it related to interest income from the bond portfolio? We were saying that we were hedging our balance sheet with that top transactions. We were also extending the duration of our bonds. But as you know, the bank market is very volatile. I hope that this explains why we have a stable NIM. And you might remember that in quarter 2, we were saying that it should stay at the plateau for subsequent quarters, and that was what is happening. And now a question about remuneration. What percentage of the total staff cost is represented by bonuses and so on. Last year, bonuses and equity-based schemes represented 20% of the total remuneration cost. And the equity base, the increment of [ 20% ], these bonuses. And this scheme based on the equity instruments depend on the performance against the budget. And the extent to which we exceed our budgets. That does -- this was values last year. As -- and moreover, as I said during my presentation, the 26% growth in stock cost was related to the fact that in 2022, we revised salaries to increase to the pay and that was only in September, and that was carried forward to 2023, while in 2023, we introduced the pay increases only in September, which was also reflected in the higher cost for quarter 4. [Indiscernible] cost, we had the provision, the accruals made for the payment of bonuses and made the fact -- and that actually made quarter 4 to replace all those elements in the slide. There are 2 more things. It seems to me you've already just mentioned what could be the level of provisions for Swiss banks in 2024? In our opinion, at the end of the year, this is the adequate level of provisions, what we already have in place. And there is one more question on more a suggestion or request how to reflect certain things in our annual report, when it comes to Swiss bank things? Well, I don't think we have to look into the IOM report. We always try to describe it properly where we are showing the costs arising from the active Swiss bank exposure and this is the line. And in other operating costs, we are showing the cost of those Swiss bank exposures, which are not active. That is those which were clear. Beyond that element of the operating cost or the cost of legal services, but these are internal costs. Can it include staff cost there? No, we do not show them separate and we do not allocate it as a cost because this is some internal staff costs. This is an element of staff cost. And there is also a question about the number of new lawsuits. The growth after fourth quarter is PLN 5,600 and this is for all 4 quarters for September to June and September, this was PLN 1,400. So we can see that there are a bit fewer lawsuits than before. Then at the beginning of 2023, we can see that our program of settlement has been working. What was the outlook for fees and commissions? Well, we don't give guidance in this respect. But you could see clearly last year that it was really steadier and that we also had a really good quarter 4 in this respect. And we pay a lot of attention to have this item growing because it's independent of interest rate changes. And just one more thing. What is the sensitivity of the net interest income and net divisions margin to the changes in interest rates at the end of 2024? I don't understand this at the end of -- over the 12-month horizon. That's what we are quoting. And that's how we have described about sensitivity. The total sensitivity of NII is in the order of PLN 500 million. And of course, that would materialize gradually in the upcoming quarters, assuming the stable balance sheet structure and size and of course, we would be neutralized. And then one question about credit volumes. Previously, there was a question about businesses now about consumer and mortgages. We think that their trends will continue, when it comes to the sales of these product. And that's it. There are no more questions now. There was a repeated question about the sensitivity to interest rate changes, but I actually, about to see that, that when you are actually answering that question. So thank you very much and see you next time in the next quarter. Goodbye.