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

Good morning. Welcome at the presentation of financial results of Santander Bank Polska Group for the first half of 2024. My name is Agnieszka, the Head of Investor Relations at Santander Bank Polska. Today, the results will be presented by our CEO, Michal Gajewski; Maciej Reluga, a member of the management board responsible for finances; and Wojciech Skalski, Head of Accounting and Financial Control Division. I'd like to encourage you to ask questions via the link available on the website, or you can also send questions directly to me at [email protected]. So let's start with the presentation, and then we will hold a Q&A session.

Good morning. Thank you, Agnieszka. My name is Michal Gajewski, and we will start the presentation now. After the first half of the year, we have generated a good net profit, and I am optimistic about the next quarters. I am convinced that this year will be satisfactory for our customers and shareholders despite the processing regulatory challenges. Briefly speaking, after the first half of 2024, we recorded a gross profit of PLN 3.200 billion. In quarter 2 alone, we generated a net profit of PLN 793 million. At the same time, the tax revenue was PLN 1.267 billion, while the total regulatory costs amounted to PLN 272 million. So the total burden in the first half for our group amounted to PLN 1.539 billion. Let's move on to Slide 7 with general operational data. As a group, we provide services to over 7.5 million customers, out of which over 4.3 million are digital customers. Santander Bank Poland itself has 5.9 million customers, and the number of our digital customers grew year-on-year by 7%. We have 3.6 million of such customers. And in terms of mobile app users, we recorded a growth by over 13% year-on-year customers. Deposits totaled PLN 215 billion and grew by 7%. The gross loans portfolio also grew by 7% to over PLN 174 billion, which means an increase in the market share by 50 basis points in one quarter only. Assets grew by 8% year-on-year up to PLN 283 billion, and customer funds grew by 10%, up to PLN 237 billion. On Slide 8, you can see the key financial results. I will discuss the results later. Now let me highlight the key items. The group's net profit was PLN 2.4 billion. Net interest income was PLN 6.7 billion. Customer deposits totaled PLN 1.7 billion. On a comparable basis, both net interest account and fee income remained at a similar level as in the first quarter. Total income was PLN 8.3 billion growing by 9% year-on-year. TCR was 17.8%. Tier 1 was 16.7%. Our capital position remained high. Return on equity for the group was 19.1%. And the group [ kind of had ] excellent liquidity. The consolidated LCR at the end of June was 200%. Slides 10 to 12 refer to new products for our customers. So maybe let's go straight to Slide 13 to the business data. In the retail banking, we have 6 million accounts for individual customers, up by 5% year-on-year. In quarter 2, we opened 110,000 personal accounts in Polish zlotty. On an annual basis, accounts in Polish zlotty grew by 4%, while foreign currency accounts by 10%. In quarter 2, we sold mortgage loans worth PLN 2.7 billion, which is less than in the record-breaking quarter, the first quarter of this year. But the previous quarter was marked by 2% safe mortgage loan program. And in quarter 2, such loans accounted for only 23% of mortgage loans. That's why the sales dropped in this product line. In the second quarter, almost all of the portfolio was granted at an adjustable fixed rate, namely 95%. Total share of loans with adjustable fixed rate for 5 years in the entire mortgage loan portfolio and PLN grew to nearly 37% at the end of June. Cash loan sales in quarter 2 totaled PLN 3 billion, up by more than 16% versus the previous quarter. And the entire first half of the year, we granted PLN 5 billion of cash loans. And that entire first half of the year. Net investment fund was PLN 900 million. And that entire first half of the year, net sales reached PLN 3.1 billion. So retail assets of Santander TFI were PLN 21.6 billion. Our market share has been growing. Now it's almost 11%. In the SME segment, we're also acquiring new customers. We are opening new accounts, nearly 15,000 new business accounts for SME customers. SME loan sales totaled PLN 1.4 billion, up by almost 10% versus the previous quarter. In Business & Corporate Banking, trade finance and leasing income increased by 10% year-on-year, and credit income also has risen. Credit limits grew and pace of new limits in factoring, leasing and trade finance also has grown. We have a higher income from M&A consulting when it comes to corporate and investment banking, income from capital market services grew, and we have also significant growth in trade finance services. Income on transactions in institutional clients department increased by double digit, mainly 21%. Slide 15, I have already referred to gross loans at the consolidated level by 7% year-on-year and 4% quarter-on-quarter. We are growing faster than the market. And we also recorded a nice growth in terms of leasing portfolio. Slide 16, customer funds, 7% growth in customer deposits in the first half year. And these deposits stood at PLN 215 billion. In the year, the deposits grew by PLN 14.6 billion, PLN 2.1 billion was the growth in business deposits while PLN 12.5 billion in retail deposits. Now let's go about [indiscernible] financial performance net interest income and margin. And the net interest income in quarter 2 was PLN 3.3 billion and declined by 3%, and that was driven by the impact of the cost payment holidays, which accounted for PLN 130.5 million. If we strip it off the net interest income grew by 1%. In the first 6 months, interest income grew at the pace of 4% year-on-year, while interest expense reduced by 2%. The net interest margin for the 2 quarters annualized on a quarterly basis was 8.7%. If we strip all the set maybe holidays, it is 5.28%. Okay. Then net fee income. It grew by 9% year-on-year in the quarter 2 alone. It stayed flat on quarter 1. Year-over-year, we saw really good performance when it comes to asset management fees, insurance fees, FX fees, account fees. Quarter-on-quarter, we also saw weak performance when it comes to FX fees, insurance fees and asset management fees. Summarizing our income line, Slide 19. In the first half, the total income stood at PLN 8.3 billion, which has grown by 9%. If we adjusted that by payment holidays, the income grew by 10%. Interest income grew by 6%, driven by interest rate changes, fee income, and fee income which grew by 9% year-on-year. Then come other operations were actually driven by the actions taken by [indiscernible] settlement. And the cost of those settlements the first half year was PLN 35 million. Now let's talk about costs. Slide #20. Total costs for the first 6 months totaled PLN 2.6 billion, which is the growth by 11% year-on-year. And that was proven by the banking guarantee fund payments of PLN 253 million. Last year, it was PLN 175 million. If we strip off these costs, the total cost grew by 9% compared to the last year, driven primarily by inflation, salary adjustments and IT costs. Staff costs, they increased by 7% year-on-year, and that reflects the adjustment of salaries in September last year. That also reflects the cost of the long-term incentive share-based program that we launched. In quarter 2 alone, the total cost decreased by 9% compared to quarter 1. If we strip off the banking guarantee fund cost, that was PLN 206 million. The cost grew by 3% quarter-on-quarter. The cost-to-income ratio for the group at 31.1% was really a solid one. Now provision, Slide 21. The total provisions for the expected credit losses on a consolidated basis totaled PLN 611 million for the first 6 months, and approximately PLN 380 million worth of provisions was created and imported to the corporate risk has been stable in the order of 70 bps. The balance of provisions in the 6 months of this year was slightly higher than in the corresponding period last year. And there was the one-off factor. We introduced it to [indiscernible] retail and SME exposures to Stage 2. And this is a change consistent with the practice applied on the Polish and the European market and recommended by the European regulator. After that change, we are actually in sync with the market. The quality of our loan portfolios are good in our opinion. We also observed stabilization or even some slight improvement when it comes to the key risk indicators such as the NPL coverage ratio or delinquencies rates or the cost of risk. I've already discussed banking investment regulatory costs at the outset of my presentation. These levies are still very high for the whole sector. So summarizing our performance in the first 6 months, you can see that on Slide 23. We already mentioned interest income and costs and our income line. But this slide also shows the cost to [indiscernible] that we say. After 3 quarters, that was PLN 1.5 billion. And in quarter 2, so it was PLN 1.250 billion. And that's what we have taken in provision. Summing up, that's been a good 6 months for us, another quarter in a row when we kept high net interest income and net fee income. When it comes to the business, I think it went well in the 6 months. We're actually growing our customers. We've been growing organically. We've been recruiting new ones. And that bodes well for the second half of this year. Thank you very much for listening to me. And now the floor is yours. Let's have the question and answer session.

Let's start with the questions we've already received on mail, but let's suggest we go this way. I will suggest our CFO, Maciej Reluga, starts with questions referring to our net interest income facility. What is the sensitivity of the NIM to the move on the interest rate curve by 100 bps? What will be the sensitivity of NII due to new NII [ swap ] limits? And the first thing is that the governor of the MVP recently made a stock statement on the interest rate cuts. And now that they should be expected in 2026. And we also have a higher outlook for inflation in 2025 than before. And the question is what are the implications of this for the macro outlook for our NIM and ROTEs? So Maciej, if you could answer these three questions.

Can you hear me?

Yes, we can hear you. There is an echo, but you heard the questions, right?

When it comes to net interest margin and sensitivity of the net interest income it's in the order of PLN 300 million to PLN 350 million, of course, assuming that we have a constant balance sheet. But looking at the statistics, what part of the loan portfolio is based on the fixed rate or fixed rate that is hedged. It grows a few percentage points. In the middle of 2024, it gives us 40%. When it comes to the regulatory limit NII [ swap ], we already seen the change sensitivity. We are winning the regulatory limits. So we don't have to do anything extra because of that. But depending on the market landscape, we are getting ready for the lower interest rate scenario. And that's about the first question. When it comes the expected interest rate cost we expected in 2025, it does not materialize, and what we have already done should be enough to fit into the net interest income swap limits. Our [indiscernible] should be okay. We do not give you any guidance for NIMs or ROTEs. It would be too far as such going to outline the scenario what might happen with our key indicators. Thank you.

Okay. So now maybe I will take over and I will answer questions about the fund loans. The first question was about provisions that exceeded 100% coverage level. So do we expect any comments from the regulator about the optimal coverage level? So I have to say that we have never received any expectations from our regulators. Of course, our regulatory authorities monitor the situation in the banks. But we have never received any decisions taken at the external audit levels. We have never received any comments or suggestions in that matter. I don't know what the situation in other banks, but we have never witnessed anything like that. Of course, in the second quarter, we topped up our provision. We now exceeded 100% coverage level. We think that this reflects the situation on the market. And this reflects the situation at courts and behavior of our customers, both those that sign settlements with us and those that go to cost. What's the number of foreign currency mortgage loans granted -- historically ever granted in Santander Bank Poland Group. In total, in Santander Bank Polska, we had 62,000 such agreements. I would have to double check that, but I think that's the right figure. In Santander Consumer Bank, 27,000. What's the proportion of active lawsuits, concerned loans that have already been repaid? [indiscernible]. When it comes to our bank, this is about 7% when it comes to inactive customers. So about 7% of them went to court. In Santander Consumer Bank, I do not have the data, I will have to double check, but I don't want to express my opinion. I would rather check that first before telling you.

Okay. So now let's move on to the next group of questions. Long-term funding ratio. There are two questions. How much is it according to your estimates? And how do you plan to reach the required level? And what's the new long-term funding ratio at the end of June 2024? So I would like to hand over those questions to Maciej.

At the end of June, it was around 40%. So we are in line with the target, which was 38%. And in the future, well, it depends on many factors. First, how the mortgage loan portfolio growth, how our RWA growth, together with our entire loan portfolio. Because this affects the capital and dividend, so depending on that, we will need certain issues for TLAC/MREL and this will impact long-term funding ratio. And if it turns out at the end of the day that we will be below the level of 40%, 2.5 years from now, we will have to issue -- or make additional issue.

Okay. We have a question referring to IT. Do the IT systems of Polish banks, that is both something Santander Bank Polska and SEB are connected with the Spanish parent company? Are there any plans to introduce common IT platform or domestic vulnerable to an attack like the one carried out in Santander Group that resulted in the leak customer data in Spain, Chile and Uruguay? And is this combined with leak of employee data? [indiscernible] update affected the bank operations last weekend. Did they entail any additional costs?

Now let me tell you that we are very serious about security and cybersecurity of our employees and customers. And that's why we -- any clusters that we have or that we share with our parent company, all these platforms are subject to special surveillance. And of course, they are always modified or -- we always seek consent of the regulators for doing that. It's not that our transaction or banking platforms are the same as the ones used by our parent. We use the ICBS system. So we don't have the same platform ICBS platform from [indiscernible]. And for security reasons, we keep part of the data in Spain, but that's cybersecurity. That's about cybersecurity in the case of any hybrid attacks. If our data centers were threatened and [indiscernible], so that's the first line of defense, but these are not transactional systems. These are results of the systems for keeping data from transactional systems, but they are not useful transactions. But the question is the leak of data possible in another place? Of course. As I have said, we made [indiscernible] in place ensure security. And we have the processes compliant with the top standards. So we believe that we won't see [indiscernible], but I don't want to provoke anybody we meet all the standards, and we keep investing in security. This the problems with the trust state update affected the bank's operations. Yes, we have some problems, but our processes actually worked very quickly, and our teams reacted swiftly and we did it in consultation with the Group as well. We particularly saw problems in our communication centers. Some laptops of our employees and workstations were affected. They had to be reactivated on site and the systems have to be recovered physically. But very quickly, all the transactional systems and the bank security systems were very quickly recovered. There were no additional costs related to that. And the only thing we did, we carried forward our release of the system to another date.

Okay. And now maybe I'll ask Wojciech, our Head of Financial Control, to discuss the tax, the effective tax rate which is computed after having the dusting the nontax cost, it's usually around 90% and this time only 50%. Why? Wojciech, could you answer that question?

Of course. Good morning everybody. I do encourage you to take a look the Note 15 in the consolidated report. You will find there more details. For the bank, on a solid basis, the effective tax rate was 22.4% and having shift of the Swiss bank effect and the provision, it was 20.6% or 21.6%. So that's normalized. It's not maybe, but it's close to 19% on average. But this was also driven by some other costs like banking guarantee fund costs and other costs which were not tax deductible. What has happened at the consolidated basis in quarter 2 having stripped off the Swiss bank effect, the interest -- effective interest rate would be 14.6%. But is this item, the technical assets created by our subsidiaries in Santander Consumer Bank office. And this element drives down this effective rate so much. This is the requirement on the [ IFRS 39 ] on interim reporting. If the rate is not unnaturally high or distorted, and that's what was set in our company. In this case, they can create these technical assets to normalize tax rate to some extent. So that's why Santander Consumer Bank bid did it, and that's the whole comment.

And the next question -- the next level of questions are the spreads. What will be the change in the quantitative criteria for identifying an material increase in credit risk effect the level of provisions? And the second question is the outlook for the risk cost.

Let me answer the first question relating to reclassification to Stage 2. As I said during my presentation, this change is consistent with the practices applied on the Polish market but also in the European market. And that's also recommended by the European regulator. After changes, the Stage 2 of the bank account is the same as the median of the market. But as we -- the recommendation was to change, and to make the approach of the bank's consistent. IFRS in this aspect leaves quite a lot of leeway to banks. And how the criteria should be applied? So we think -- so we are -- so we don't expect any additional reactions on the regulators to that. When it comes to the outlook on the cost of risk, we usually don't give any guidance here. I don't really remember whether we said anything about that in the year-end outlook for the customers. We were saying what we put in on our strategy and recent quarters showed that the stabilization at the level of around 70 bps is okay, is an -- of course, there are some customers that we actually take a look at in more detail. And because they're standing to some doubts, but I think the guidance is roughly 70 bps.

Okay, now loan. The first question refers to the impact of the new recovery funds that were unlocked for Poland, and that will be gradually dispersed. So the question is, can we see any impact of that situation on growth in our banks? And how can we, as a bank, benefit from this program? The second question is the increase in the corporate loan portfolio was 5.5%. Quarter-on-quarter that's the largest increase in 6 years. And what's the reason behind that? Has there been such a high rebound in the demand for loans? And I have also seen one more question. Will the increase in corporate loans in quarter 2 -- does the increase in corporate loans in quarter 2 result from higher investment activity?

So I will start maybe answering those questions, and then Maciej will add his comments. Okay. So let's move back. Well, yes of course, this is a great news for the Polish economy, that EU recovery fund have been unlocked. We all know that now the projects are being identified, and it has to be done quickly in order to use the funds. We do not have a lot of time to use the funds. So both the public and private side are active in order to use the recovery funds to the largest extent possible. This is good for the economy. And whatever is good for the economy, it's good for the bank and the banking sector. So we want to participate in that, not only in terms of bridging loans but also financing additional needs that may arise in connection with those EU programs. We are very happy, and we are helping our customers in building their business plans, so we will be also supporting them by financing those projects. I am very glad about the increase quarter-on-quarter. And -- we have invested a lot in this business line last year. We invested both in the scales of our bankers, increasing customer service quality. In the financial report, we could see that we are the leader in terms of the skills of our bankers. So first of all, we are growing on our existing customer base. We are providing our customers with both simple solutions such as overdraft but we are also financing our customers' trade activity, and we were hand in hand with our customers to help them grow their business. But we are also acquiring new customers. We've been acquiring more and more new customers who appreciate our processes, how quick they are and how skilled our employees and bankers are.

Okay. So this is about loans. And last question, when it comes to loans, there is one more question about consumer loans. And in the context of corporate loans, has there been any change in pricing and risk appetite? No, we have not changed anything. So this growth that we are showing to you in quarter 2. First of all, they prove that the growth in loans has been sustainable across all the lines. Consumer loans grew without changes in pricing and then corporate loans, starting from SMEs up to middle -- medium companies and large corporates, we grew across all the lines and some areas in double digit. And as you may remember, we were quite optimistic at the beginning of the year when we presented the results for 2023 when it comes to lending activity growth. And we could see some pipeline, some demand for loans, and it's materialized in many areas. And we outpaced the market because -- and the National Bank of Poland showed that the market grew by a little bit more than 0%. And in our case, it's 7%. And we are expecting a continuation of this trend, depending on the macroeconomic situation. But we believe that the economy should change or shift from consumption to investments, and we are optimistic about that. And when it comes to loans, there was a question about the impact of 2% safe loan program. So 23% of mortgage loans were connected with that program, I believe. Yes, it's 23%. I checked that. Okay. So 23% of new sales came from the safe loan program.

So let's move on. Okay. So what's left, actually? The questions about costs. Okay. So Wojciech, could you answer those questions?

Yes, of course. There was a question about our growth quarter-on-quarter by PLN 100 million. Half of that growth is due to the one guarantee fund and the rest is connected with other components. So please read Note 13. You can see the details there. And in general, apart from inflation and record low unemployment, we should also bear in mind about a growth in minimum salary. Maybe this does not affect to bank employees, but it affects the cost of our service providers. So for example, cleaning services, transportation, those costs are growing in line with what happens on the labor market. And when it comes to the general comment on the cost, there was a question about the salary indexation that could be expected in the second half of the year. And the second question, so Martha who also asked the question. Can 1-digit growth in staff costs be maintained? Well, this growth is better than in the sector results from the variable component, mainly the bonus. That is a significant component of our salary costs. And the indexation of the adjustment of salaries that has been -- that was taken in quarter 3, well, this year, the Management Board also analyzes the budget and analyzes the market situation. At that moment, the decision has not been taken yet. So we should be patient about that. Can the growth of staff costs be maintained? Well, as I said, this depends on the decision of the Management Board. And the general guidance on the cost is that bearing in mind all the stimulants of the cost, we should bear in mind that our growth and costs result from the market situation that may change. So we monitor the cost regularly and we should expect a continuation of our cost discipline.

Okay. I can see 2 more questions. What is your opinion about the run rate in the payment holidays? Well, that's the first question. And the second question, the growth in business loans, do you think it's the beginning of the plan?

Let me start with the so-called payment holidays. I keep repeating that the state interference in a contractual relationship, payment holiday is something different. This is the interference of the public authority in the contractual relationship, whereby it's decided that one of the party for the contract is not getting the remuneration due to them. And that's the definition of that. If you look at the run rate program, we were like -- when estimating cost we relied on the head rate for the previous addition of the program and to those who were entitled to avail of it. This is not even 11%. That's the actual, estimated was 14.9%. This uncertainty is gone that the customers who did not need the requirement of the aid still applied for the aid under the program. But now the customer awareness is higher and those who are not entitled do not file for this type of product. So the cost we receive are from those who meet the criteria of the program. We do not expect any additional provisions for that purpose. Maciej, could you add to that, to that?

The provision is approximately PLN 135 million. And we take into account the orders expected by the end of 2024. [indiscernible] The run rate for the target group during the previous program. And the hit rate against the total loans is in the order of 15%. The CEO said that in recent days, that was 11%, but probably we'll reach that level of 15%. So the whole provision for that effect, they will be confirmed. The changes will be possible if there were any drastic changes in customer behaviors in the second half of the year, which we do not expect. Business loans. We've already answered that question. Could it be because of a longer trend? Yes, we want this trend to be -- to last for long. Last year, we were completely flat market. We outpaced the market by roughly 10%. The whole market now has started to move, but we are outpacing this at least by twice. So we have the appetite to win in new customers. And we will continue asking and things will get trend while the prospects for the Polish economy are positive. And we will be, of course, growing in a very safe way. Have we skipped any question, Agnieszka, if you could take a look and check.

There was one question referring to deposits and the share of term deposits in total deposits. How do we see it in the context of debt potential interest rate cuts. Of course, there are different scenarios, but it's reasonable to assume that this ratio will behave in a stable quarter in the quarters to come. Yes. There were 3 questions from the Internet. One refers to the Internet. What was the growth in corporate loans in quarter 2 was driven by the growth in investment loans. And there were 2 other questions. TCR in SCB was 44%. Is there any idea to optimize the capital structure. And the next one, what was -- what do you think the new regulations like Sierra and CLD will have on the recruited assets and capital ratios. And these are all the questions that we received. Maciej, if you could answer about the capital ratios.

The share, I would have to check. But some loans that we sanctioned were investment loans, and that was part of the loans that accounted for the growth, but we will have that checked in detail and provide you with the answer in writing.

And Maciej, if you could answer the question on capital ratios. CRB, CRM, [indiscernible].

At this stage, we will not share our preliminary estimates when it comes to the impact of the new regulations. Now when it comes to capital surplus, well, it will not result in any special pressure. I think that growth is more sensitive. Yes, but we are still analyzing the impact, and we are considering the mitigant so sharing the information at this early stage is not really sensible. On top of that, it has to be capital ratio. Well, that would be to do it through dividend payment. But the business model of SCB is that is they have relatively high NIM, but relatively high NPL. And the NPL has to be 5% to be able to pay dividend and that's quite a challenge. So that aspect will require further analysis and considerations. Let me add that we have taken into account the specific situation with the very high solvency ratio. The bank is showing a loss for the first half of the year because of the Swiss franc issue. And it is difficult to say how things will develop at the end of the year. But one of the arguments, that this bank does not require any resolution of recovery plans to be taken out is that the capital base is very high. So as long as the situation is not clarified. When it comes to Swiss francs, this high capital buffer has its advantage.

Okay. I don't see any more questions. Okay. Then we can sum it up. Thank you very much for your questions. The ones that we have not answered in full, of course, we will provide you with the answers in writing. Thank you wish you a nice afternoon and a good day. Thank you very much. Goodbye. [Statements in English on this transcript were spoken by an interpreter present on the live call.]