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

Good morning. We'll start today's teleconference. My name is Agnieszka Dowzycka. I'm Head of Investor Relations at Santander Bank Polska. I would like to welcome you at the presentation of the preliminary results of Santander Bank Polska for 2024. Today's presentation will be presented by Michal Gajewski, CEO; Maciej Reluga, CFO; Wojciech Skalski, Head of Financial Accounting and Control Division. Before we start, I would like to remind you that you can ask questions via the link provided online and also you can send e-mails to my e-mail address. The presentation we will discuss today is available at the website of Santander Bank Polska. And now let me hand over to our CEO.

Good morning. Welcome at the presentation of the non-audited financial results after the fourth quarter of 2024. I'd like to highlight that those are preliminary data, while the full audited report for 2024 will be published on the 25th of February. This was the first year of implementation of our new strategy in each of the 3 pillars, which are total experience, total digitalization and total responsibility. We've been working on strengthening our market position and our brand. We will continue supporting our customers. We will keep taking care of our stakeholders and we will also keep building value for our shareholders. Last year, we generated a gross profit of PLN 7.3 billion. In quarter 4, the gross profit was PLN 1.5 billion. In 2024, the tax charges amounted to PLN 2.8 billion in gross corporate, including corporate income tax of PLN 2 billion and banking tax of PLN 819 million, while the total regulatory costs amounted -- and the tax regulatory charges totaled PLN 785 million. So we can see that our bank contributes a lot to the state treasury. In Slide #7, we can see the general operational data. As a group, we provide services to over 7.5 million customers. The number of digital customers keeps growing. In Santander Bank Polska alone, we have 6 million customers and the growth of -- in the number of digital customers is nearly 8% and mobile banking customers grew by nearly 13%. Customer deposits grew by 11% and were PLN 232 billion. The gross loans portfolio grew by 9% to PLN 180 billion. The assets grew by 10%. Customer funds totaled PLN 256 billion and grew by 12% year-on-year. Slide 8, key financial results. Net profit of the group for 2024 was PLN 5.2 billion. In quarter 4 alone, the net profit was PLN 913 million and was charged with additional legal risk connected with Swiss franc loan. The net interest income was PLN 13.9 billion, up by 6% year-on-year. In quarter 4 alone, it stood at PLN 3.6 billion, up by 1% versus the previous quarter. Net fee income totaled PLN 2.9 billion, growing by 7% year-on-year. In quarter 4, it was PLN 726 million and was higher by 2% when compared to the same period of 2023. Compared to the previous quarter, the net interest income stayed at the same very high level. Total income was PLN 17.1 billion, growing by 7% year-on-year. Our capital position, as you can see, is very high in place. Return on equity was 20.4%. We can demonstrate excellent liquidity. The LCR at the end of December was 215%. Slide 10 to 12 show general information about individual segments, new products offered to our customers in 2024. So I would like to go straight to Slide 13, showing business data. We have 4.7 million accounts for individual customers, up by 4% year-on-year. In quarter 4, according to our estimate data, we opened 110,000 new personal accounts in Polish market. During the year, we sold mortgage loans worth PLN 11.2 billion and in quarter 4 alone, PLN 1.9 billion worth of mortgage loans. In quarter 4 alone, almost 97% of the portfolio was based on adjustable fixed rate and the total share of loans with adjustable fixed rate in the entire mortgage loan portfolio grew to nearly 42% at the end of December. And as a reminder, in September, it was 39.5%. In quarter 4, we granted cash loans worth PLN 2.9 billion, up by 18% versus the previous year. And in the entire year, we sold cash loans worth PLN 11.4 billion, up by 18% year-on-year. Investment funds, net sales in quarter 4 totaled PLN 1 billion. Retail assets at the end of quarter 4 were PLN 24 billion. And our market share almost 11%. In the SME segment, we've been developing dynamically as well. In quarter 4, we opened almost 19,000 business accounts for SMEs. And in quarter 4 alone, we opened over 69,000 accounts. In quarter 4 alone, we sold loans to SMEs in the total amount of PLN 1.3 billion and in the entire year, PLN 5.3 billion. Lease sales in 2024 was PLN 4.2 billion, which means a growth by 11% year-on-year. Business and corporate banking, credit volume grew by 12%. Credit limit sales grew by 16%. As you can see, we have also a double-digit growth in FX income. In trade finance, we grew by 25% year-on-year and derivatives transactions, very good growth. ECM services, also an impressive growth of 63%. And now the balance sheet, let's start with loans, Slide 15. I have already mentioned the growth in gross loans at the consolidated level by 9% and 1% quarter-on-quarter. Slide #16, customer funds deposits. They grew by 11%. And at the end of December, they totaled PLN 232 billion. So comparing that year-on-year, the deposits grew by PLN 22.7 billion. Profit and loss account, Slide #17, net interest income and margin. Net interest income totaled PLN 13.9 billion, growing 6% year-on-year. Interest income increased by 4%, while interest expense decreased by 1%. In quarter 4, the net interest income totaled PLN 3.6 billion, growing by 1%, while the interest income grew by 2%, while interest expense increased by 4%. The net interest margin annualized on a quarterly basis was 5.27% in quarter 4. Slide #18 outlines our net fee income. In the whole year, that was PLN 2.9 billion, and that's the growth by 7% year-on-year, including the growth driven by the activity of our clients in transaction fees, credit fees, insurance fees, which grew dynamically by 9%. It's worth highlighting that we did it without growing our fees and charges. And that reflects how active our clients are. In quarter 4, we continued earning high net fee income, just like in quarter 3. Slide #19, income. Total income was PLN 17.1 billion, and that was the growth by 7% year-on-year. If we deduct the effect of the so-called payment holidays, then our total income grew by 8% based on our preliminary data. Operating costs, quarter 4 show that we are really effective. The total cost in 2024 were PLN 5.1 billion. That was driven by higher contributions to the banking guarantee fund, inflation, salary reviews and a higher cost of services. Staff costs increased by 6% year-on-year. Administrative expenses, if we deduct regulatory expenses, they increased by 6%. The operational effectiveness ratio, that is cost-to-income ratio for the group is at 29%. And for the bank itself, it is 28%. Provisions for loan losses, the net balance was PLN 983 million at the consolidated level. And in the quarter 4 alone, it was PLN 75 million. The cost of risk in quarter 4 were approximately 60 basis points. The net balance of provisions after 4 quarters was lower than recorded in the previous year by 14%, and that's the effect of the good credit quality that we've been witnessing. In 2024, we sold NPLs worth more than PLN 2 billion, which gave us the gain of PLN 248 million and that's the impact on the gross profit. In quarter 4, we sold the NPLs worth PLN 831 million with a gain of PLN 99 million. The key risk indicators remain at a satisfactory level in our opinion. The nonperforming portfolio is at the same level. It does not account for more than 4.4% of the whole portfolio. In quarter 4, we updated our parameters for calculating provisions. And this, thanks to the good quality of our loan book, actually reduced our net balance of provisions. Slide 22, I've already mentioned the regulatory cost, taxes and the total burden related to that. And that was PLN 3.1 billion in 2024. Summing up the year, Slide #23. Let me just highlight the costs related to legal risk. Across the year, that was PLN 3.1 billion. In quarter 4 alone, that cost was more than PLN 1.4 billion. So wrapping up, I'm saying that 2024 was a really solid year for us. We continued growing our net interest income and fee income, and they continued nicely -- they grew nicely. And I'm really happy with the growth in fees driven by the activity of our clients, transactional fees, credit fees, insurance fees, which grew by 9%. Let me highlight again that we -- these fees grew without changing, raising our fees and charges, which reflects how active our clients are and how good a relationship we have with them. When it comes to our business, I'm also happy with our performance. Our market shares grow and they grow profitably. And this is really something that bodes well for this year and thereafter. You quite often ask us about our credit volumes. And as I've said, we are happy that we are growing in a profitable way, dynamic way that we outpace the market that we do not do it at the cost of higher risk. And we have the profitable growth both in loans and deposits. Thank you very much. And now the floor is yours. We've already got some questions.

We received 20 questions about numerous issues, Swiss francs, macroeconomic situation, margins, net interest income, capital dividends, loan provisions. So if any of you wants to ask any questions referring to those issues, please wait until we answer and then ask questions if our answers are not satisfactory. Okay. So maybe let me start with the questions about Swiss franc-denominated loans with the current status. I'll tell you about the settlements, claims. Okay. So maybe let's start with the settlement. In our final report and in our flash data, we can also see that at the end of the year, we made 13,000 settlements pre-court and those made after the case was filed with the court. And in quarter 4, it was -- we had 3,700 settlements. We offered settlements to 98% of active customers, including those customers who filed claims with the court and those who did not. We will provide the full data in our financial statements, but according to the data at the end of December, we can see that the group received claims totaling PLN 7.9 billion. When it comes to the number of claims from customers who repaid their loans fully, we will provide the exact data in the report. But for the time being, it's 15%. Okay. So that's it about Swiss-franc and free credit function and VIBOR. When it comes to VIBOR the growth in the number of cases filed is minor. All the decisions, rulings of the courts are favorable to the bank. In the majority of cases, those decisions have been legally binding and the security of claims, the request for securing the claims have been rejected by courts. So the courts have quite uniform interpretation in decisions. We know that positions were filed to the European Court of Justice as well, but we cannot see any [indiscernible] as we challenge to see their agreement. And the public side also expressed their position openly in the same manner, they cannot see any grounds for challenging the legal agreement. And it was expressed also in the position filed with the European Court of Justice in October. When it comes to free credit sanction, we can see high activity from customers who buy consumer liabilities. Another portion of questions was filed with the European Court of Justice for example, about the proportionality rule in Poland, we know that minor breaches even can be challenged. There are also questions about the activity of entities that buy liabilities and whether they act legally. But as I said, we do not have a lot of cases like those.

Now, when talking about funds, there is a question between the reported cost of risk today and the level of provisions in the current report. The decision on the review of provisions parameters in December, the impact was roughly 1.2 while the rest of the difference relates to legal costs, court costs. So we have this difference. But we can move on. And macro, there is a question about the impact of the funds from the EU. We've been assuming that the lending growth will accelerate in 2025. And this will be primarily driven by -- in the sector of businesses, corporates. And this, of course, will be driven by the acceleration in investments in 2025. And this is backed by the European funds. I cannot tell you how much percentage points will be counted by the funds flowing from the EU, but there is this interconnection. The acceleration in the corporate loans segment from 5% to roughly 7%, 8%. Based on our performance, you can see we are growing faster. And the total growth of loans across the economy will not be that quick because we had this one-off that is the 2% loan impacting the mortgages in the first 6 months of 2024. So there might be some slowdown, and we assume that the quarterly sales should be more closer to what we saw in the latter part of 2024, and that's quite obvious. And referring to the next question that the loan for the start program will not be continued and what will be the impact on our sales of mortgage loans. We assume that. So we expect the volumes, as I've just said. And there is a question about corporate loans. How did you manage to grow once again in corporate loans above the market? Well, let me tell you that we did not just manage. It was a purposeful deliberate strategy of our bank to strengthen our position in this area. And as you can see, we did our job well. Our Corporate and Business Banking division performed well. I will not be revealing any secrets of ours, how we do it to outpace the market and the growth. Of course, we try to grow with our existing clients. We propose them new solutions, but all the efforts that we've taken first to build this business model to review it, to build the strategy for the corporate market. This actually yields fruits. We have the momentum. We want to continue growing in that segment. It's a very interesting one. I think that we are becoming a leader -- definitely a leader of growth, but we want to be a leader on that market when it comes to services to corporate clients. The other part of the question, we don't see any nervousness. Well, we can also see that talking about the balance sheet, there is a question about deposits. I will come back to that when answering the question about the margin. So maybe now a few words about the capital and dividend. There is a question referring to our capital surplus. Do we want to grow organically or in any other way? What will be the dividend paid? And there are some other questions related to the dividend. Our dividend policy is consistent. We think it's our duty to share our earnings with our shareholders. We haven't received an individual letter from the KNF. There was a general letter addressed to the market. Of course, we keep talking to the regulator, and we will be seeking the approval for dividend payment. And with regard to capital, there is one minor question. What is the expected impact of the CRR 3 on the capital ratios? In the case of our bank, we will see a positive impact, roughly several basis points, and that refers to each level Tier 1, core Tier 1 and total capital ratio, both on consolidated and stand-alone level, the impact will be similar. The key factor which stands behind it is because the credit risk requirement decreases because of a lower weight for denominating loans in foreign currencies, for example, and there will be a lower requirement for operational risk as well. Now let's move to the net interest margin and the outlook for the interest rates and then for margins and the sensitivity of net interest income to changes in interest rates. Well let me start. We expect that the first interest rate cuts will take place in the middle of 2025 in July. The scale of cuts will be roughly 100, 125 basis points and this cut off to be continued in our opinion in 2026. And we realize that there is a lot of uncertainty. The market pricing changes quite dynamically. And we've been getting ready for this scenario. The question is also about the increase of our hedging quarter-on-quarter. Yes, we increased our hedges quarter-on-quarter. The share of fixed rates in our balance sheet, both for the customer and based on hedges. Now we have 50%. And we gave you the figures quarter-on-quarter. So you can see the regular growth. At the end of 2023, it was 32%, 40% and now it's 50%. Apart from increasing the net scale of hedging, especially when the market reacts, our rates are attractive. We are close to the peak of interest rates. And of course, we keep hedging our balance sheet and we supplement the hedges that actually are unwind and because we have some hedges with shorter duration. So we try to renew the maturing hedges and to actually enter into new hedges. Our sensitivity remains more or less the same. The change of 100 basis points, the cut of 100 basis points, the net interest income sensitivity is in the order of PLN 340 million, of course, based on the fixed balance sheet and that's a difference in margins of roughly 0.15 basis points. But of course, the interest rate cuts will be, to some extent, neutralized by the growth in our balance sheet. And what else and deposits for quarter 2 and the growth in margin in quarter 4. As you can see the mix of our balance sheet was as it was in quarter 4. And despite the fact that there were no special offers for deposits, we still have that flow of deposits. We -- our deposits are, of course, profitable. Maybe they give us a bit lower margins. But when we take the volumes of deposits quarter-on-quarter, at the end of December, we see a bit worse NIM than actually we had in the course of the quarter. So these changes were not material. And because the inflow of deposits was not driven by special offers, part of that is actually -- will be stable, sticky to our balance sheet. We don't know to what -- of course, what portion, but definitely some of that will stick to our balance sheet. I think I exhausted the questions related to NIM and NII. And there is a question about long-term funding ratio. Okay. It's 42.8%.

Operating cost in 2025. Well, we cannot provide you the detailed data, but the discipline we showed in quarter 4, we want to maintain it. We want to keep our cost income over 30%. And as the history shows, we will be heading towards total cost around the level of inflation. We do not want to exceed that level. And then there were questions about the cost of credit risk. Why the cost of provisions was low in quarter 4. A few questions about that. And the question about guidance for 2025. I tried to explain that, but maybe Maciej will be better.

So I would have to reiterate what Michal said. In quarter 4, well, it happens every quarter. But in quarter 4, we sold NPLs. So we do it each quarter, but last time, we sold more over PLN 800 million. And the second element is the review of risk model parameters in quarter 4. And due to very good quality of the portfolio, we improved the parameters, and it resulted in PLN 100 million -- PLN 106 million of savings as far as I remember. So those are 2 significant things. And the third one, the most significant in general, not only in quarter 4, but in general, we can see that the situation of our customers and the macroeconomic situation is very good, and we cannot see any significant cases that would be in distress and the quality of the portfolio is good. Will the situation be maintained in 2025? Well, the macroeconomic situation suggests so. So we cannot see any significant changes for the nearest months when it comes to risk factors. But there is high uncertainty around the situation of exporters. But when it comes to the macroeconomic situation for 2025, it is favorable. And the cost of credit risk will be at a similar level, maybe a little bit higher. But looking across the cycle in our strategy, the band between 70 and 90 in the current situation, we will aim at the lower end of this range. Do we have any more questions?

We have a question about the coverage.

127%. Coverage of the active Swiss franc loan portfolio, 127%.

I don't know if we answered the question about the capital, namely the significant level of capital buffer. And what you said about the dividend.

Now maybe let's say a few words about the organic growth. Well, we will focus on organic growth because we do not have any plans for growing in any other way than organically. We showed that we can grow in a profitable way and organically, and this is our main line of growth. As I said, we want to maximize payment of dividend. We are in dialogue with our regulator, and we want to focus on organic growth. And as we can see, we are able to do that in a profitable way. Agnieszka, do we have any more questions in the meantime?

No, I have no more questions.

Okay. So if you have any more questions, feel free to contact us. And let me remind you that in a few weeks, we will publish the annual report with all the information. And now thank you for today. Goodbye. [Statements in English on this transcript were spoken by an interpreter present on the live call.]