ING Bank Slaski S.A. (ING) Earnings Call Transcript & Summary

[Interpreted] Good morning. Let me welcome very warmly at the wrap-up of the second quarter of this year and first semester presentation will be run by Boleslawski, CEO, in charge of investments; Rafal Benecki, CFO, and my name is Piotr Utrata. I'm the Bespokman. Bozena, let me hand it over to you.

[Interpreted] Good morning, ladies and gentlemen. Indeed, I would like to start out by saying that -- we are, as ING Bank Lansky very satisfied with Semester 1 performance for Consistently, our business and financial data illustrate that we deliver on the bit of life strategy of -- what is noteworthy is that in Q2, we obtained 101,000 new retail clients, which is the highest growth for 6 months, also 19,000 of companies, which is very good performance Q-to-Q. We do believe that this is a result of combination of the attractiveness of our offer and very simple and intuitive digital processes. And this quarter, we offered to our clients subscription-based accounts, and we expand their functionality and value. For the smallest companies, micro companies, we produced a new digital way of opening an account with us, which was designed from the very basis to simplify and streamline the process. And we are very much persuaded that this growth of consumer base shows that ING continues as #1 choice, 1 of #1 choices on the Polish market. We also in the credit portfolio by 9% year-on-year and deposits grew by 3% Q-on-Q and 16% year-on-year. And the second quarter shows record-breaking levels of sales of retail lending, 18% more year-on-year and 1% more Q-on-Q which gives us PLN 7.8 billion loan and closes with PLN 15.5 billion of new crowded exposures. The retail credit offer increased 9% year-on-year to the tune of PLN 2 billion. On mortgage side, we have PLN 5.8 billion volume, which means 19% of growth year-on-year. This is also maintaining a record-breaking level from Q1 and a very strong second position on the Polish market. As you can see from the value of mortgage lending, we have the second largest in this back in this segment, and we have PLN 72 billion of mortgage loans exposure. What is also noteworthy is that in the previous quarter, we rolled out the digital mortgage, which is a remote process available from my ING app, which speeds up access to housing loan that Q2 is also the first period when we fully integrate ING TFI, which is the second largest DFI on the Polish market. Thanks to this consolidation and merger. The value of our investment products grew by 250% year-on-year and 133% Q-on-Q, reaching the sky level rocketing level, PLN 72 billion. And our market sharing TFI market measured by the value of capital funds is in excess of 15%. The value of commercial lending grew 7% year-on-year and 3% Q-on-Q. especially notewhere our loans in wholesale banking, 15% year-on-year and 4% Q-on-Q. And we embark on new major investments, which naturally promote the largest clients on the corporate side, but with ongoing processes and projects in the pipeline also in lower corporate banking sector, we will increase our exposure. Also, I wish to tell you that those year-on-year growth in Q-on-Q growth are very spectacular from our perspective. Nevertheless, we do not rest on our laurels. We want to systematically grow and -- to this end, I would like to show you the overall tendencies for 5 years. We were on average growing at the rate of 7%, whereas the market growing 4% in loans. On deposits, our average for 5 years is 10%, market average is 9%. What we want to bring to your attention is our strategy of developing deposit offer and growth of market shares. And to this end, I want to tell you that in the corporate sector, we grew from 10% to 10.5%. And on deposit retail, from 11%, we -- we grew from 10.4% to 11% and obtaining new customers and obtaining funds and opening up new accounts and deposit accounts is a response to the challenge to build banking relationship, which allows us to tap banking products at larger scale. And this, of course, translates into all our results. At this stage, I would like to wrap up with the results and hand it over to Rafal from macroeconomic dealers.

[Interpreted] Good morning. Very warm welcome. In the utomacroeconomics as it stands. I would say that we have ready made data for Q2, the impact of the energy shock related to the first stage of the war is limited, slightly higher fuel prices slightly higher inflation slowdown on the revenue side and consumption has slowdown. However, the other growth engine that this investment is going on quite well independently, of geopolitics, which is also prompted by resilience and recovery fund structural funds and if we want to look through the lens of sectors of the economy in Q2, the construction sped up to reach 0.5%. The industrial production also rebounded to some 5% retail on the contrary has slowed down Q2, all in now, shows growth to the tune of 3.8% and 3.4% for the whole year. If it wasn't for the second stage of a wall in the Middle East, we will review our projections upward, but we have Stage 2 of the war with Iran, so we are conservatively assessing growth at the tune of 3.4%, bearing in mind the risk that might be involved this year. The economy will, to a large extent, be growing, thanks to public investments. And we see that the EU fund cycle speeding up and monies are disbursed, which translates into good construction performance and loan performance. What is going to be important is public investments, but private investments will also probably performed quite well. Looking at industries and sectors -- on the supply side, services performed very well. Industry is also doing well, but very strong growth that we saw in June will not be repeated. And there is a structural change, contribution of services sector will be growing, industry will rebounce but not to the levels that we saw in the past. It doesn't imply that we will be like Estonia like economy with the dominating services sector. Nevertheless, services are not to be looked down on. And thanks to services, we weathered the stagnation period quite well recently, unlike our neighbors, and we are fairly optimistic as to the important share of the services sector in the overall economy. Industry, as I'm saying, will slightly rebound, but it is not to be expected but we will return to the picture as it was 5 or 10 years ago, manufacturing was so important. The second factor is inflation, of course. And after the first stage of a war, inflation reached the target level. The readout of inflation in June was on target 2.5%. And in fuels, it was slightly below. The first stage of the war confirmed to us that the situation on the consumption side is not as good as it was in pandemics and the energy shock slightly bars, as I can show you on this slide, will have a selective impact on traveling, on recreation and leisure tourism and other disinflation factors continue to exit. The influence imports from China Poland stands out in comparison to other countries as for the deflationary impact of exports from Asia. The supply the demand side and the domestic picture doesn't allow inflation to grow much beyond, which is a very important focus as the war still ranges and will probably continue for a while. Looking at the motivations on the 2 sides of the conflict, it is likely to last a little bit longer. Nevertheless, we think that the inflationary effect will be transitional in 2027. So inflation will hit the inflationary rate target, and we do not assume any increases or decreases of interest rates in Poland, whereas next year, some 50 base -- basis points, bps are to be expected from the Polish Central Bank. Now for the moment, the Polish Central Bank was most gentle and not interventional after July press conference, the market was assessing, evaluating the possible reductions, but the rhetoric has changed now, the board announces that interest rates will not be changed. So we are quite stable and this has bearing on the level of our currency unlike checks, who want to reduce, for increased interest rates unlike the Hungarians. We have a fairly neutral position, and this has negative bearing on our currency standing in 2027, reductions are to be expected in terms of interest rates. But this year, known news. Two other areas that I want to highlight for your attention is the 5 years, we've been running project, which is the third item in our to case of macroeconomic tools next to projections of models, exel and econometrics we also employ qualitative analysis. We ran interviewed with business representatives. We want to know what kind of ambitions drive them, and we have had 30 interviews, and I will tell you briefly what the results and conclusions are.

[Interpreted] We are trying to understand the situation of Polish businesses and the wake of competition from China and demographic problems. In a natural, Polish companies seem very creative and going about those problems, but not creative enough in the area of innovation, crediting, leveraging and international expansion. These are conclusions. In this graph, we are showing changes in employment recently, the growth in employment is mainly due to employing foreigners. And these are official data showing more and more foreigners on the published labor market. in our study, we've shown, however, that there's a large chunk of it is unregistered import of labor estimated at even PLN 0.5 million. So there are no conclusions to be drawn here. On the 1 hand, the business tends to be creative and going about the shortage of labor. But on the other the creativity shows us keeping the status quo, the model based on cheap labor. And there's not enough creativity and audacity and the realm of innovation and investment. which is shown in the graph. Low level of automation expressed in terms of the count of robots per 10,000 of labor. Please mind the changes, the new drives including data on data. So there are a few new robots as of recently. In 2022, there was a peak, and then we were back to a low account of new robotin sold, which is worrying. In this area, the creativity of the published business is not enough. Thirdly, look at international expansion. We are talking a lot about the business needing to scale up, including internationally at this stage of our economic development. Looking at the FDI and the area of absorbing FDA, we are on the par with the neighbors. However, in the area of international expansion, we are lagging behind our neighbors, including the checks and the Hungarians. So this would be a short summary of our research, which is to be continued. This is our message. We are communicating to our clients. We are doing some organic work to show room for improvement. Last but not least, just a few words because I'm conscious of time. We are -- we've analyzed the EU ETS reform, which is very important for our regulatory framework. Our CEO is alluding to that quite frequently. This past spring, there were high hopes on a major change in the ETS system. Western European leaders tended to say that the emission rights were expensive and decarbonization was not going fast enough. So the European Commission promised to reform the system. We analyze the reforms, but we thought that they were quite limited -- too limited for the appetite. They are not changing the competitiveness of the European business. if anything, they might slow down the pace of growth in emission rights in the years to come. This would be all from my part.

[Interpreted] Thanks, Rafal. So -- to sum up the financials, the gross profit in Q2 amounted to PLN 1.9 billion. We know that this is higher than the market expectation. As a result, our gross result in the first half year amounted to PLN 3.2 billion, which was 15% growth year-on-year. It is, we believe, a result of consistent growth of commercial activity on the positive phenomenon on our P&L, our income grew 7% year-on-year, which is faster than the growth of operational costs, 6% year-on-year. At the same time, we recorded 37% lower cost of risk. And the result in this quarter was -- saw a contribution of full consolidation. The provision results, 107% higher. And the overestimation of our shares in TFI to the fair value, the one-off result amounting to PLN 106 million. The for estimation to the fair value, especially in the minority packages, not a simple thing to do because according to the accounting principles, we we're obliged to take and adjust the difference between the fair value and results by the control premium discount amounting to 18.7% vis-a-vis the pure transactional value. At this point, we need to explain our approach to estimating legal risk this quarter. And here our interest income was corrected by PLN 12 million. In the wake of the ECJ consumer credit opinion. For a long time, we haven't capitalized the commission, and we haven't taken the commission for a long time already. So the PLN 12 million is a full effect following the court's decision. At the same time, in this quarter, we set up an additional PLN 19 million provisions for legal risks -- we are very cautious and proactive as a bank by nature, looking at the legal environment we set up PLN 20 million for unauthorized transaction provisions and PLN 70 million per new provisions set up for other legal risks we can see resulting from consumer protection-related issues. The antitrust office proceedings respectively, our bank and the sector and the ECG decisions. Also when it comes to one-offs and the tax consequences, we have a new effective tax rate. We expect it to amount to 37.3% vis-a-vis 39% we estimated after Q1. As a result, our net result this quarter amounted to PLN 1.2 billion which is year-on-year 5% higher. Our net result, 6 months into the year is over PLN 2 billion, lower than last year. mainly due to a higher corporate income tax rates. Our ROE adjusted by macro cash flow had amounts to 20% which is in line with our strategy and above our long-term strategic objective. To comment upon the net interest income, it's stable this past quarter. It amounted to PLN 2.3 billion which was the same level roughly as in the previous quarter, but it was higher 7% higher year-on-year. Our net interest margin was 13 bps lower quarter-on-quarter at 3.07%. As you can see here, there's a pressure on asset profitability. Net interest income dropped by 17 bps quarter-on-quarter, down to 4.59%. It's a natural result of asset repricing at lower market interest rates looking at the interest rate changes as of lately. And as we mentioned before, growing pressure on margin and new production which is a result of a very tight competition on the Polish banking market. In this quarter, our financing cost lowered by 2 bps to 1.63% which is a result of a mix of strategic actions. -- because we want to grow on the market on the deposit side, and it was also due to changing interest of basic resources collated by our clients. As a result, what would the considerably bigger growth of deposits and assets of our clients. Our LTD ratio this quarter lower to 72.6%. It's because the poses grew 7% 3% and quarter-on-quarter, respectively. But please bear in mind that the market average is even lower than that. According to my data, it's 66%. And -- so we are still keeping this indicator above the market average. Speaking of the commission income. There are many changes here after full consolidation of -- the capital market type commissions grew considerably in the past quarter, up to PLN 111 million versus PLN 53 million in the previous quarter. which is over 100% growth quarter-on-quarter and as much as 171% year-on-year. Also, please bear in mind that the FX result grew 13% quarter-on-quarter and 5% year-on-year. As a result of higher transaction activity of our clients. So we are back to the trends of the past. We are also happy about our cards income, 17% growth quarter-on-quarter and 2% year-on-year as a result of higher activity of our clients. And the insurance result grew 3% quarter-on-quarter and 8% year-on-year. It's a seasonal effect in it. You can see a slight reduction in commissions tied to financing. On the cost side, there are several things to mention. Our operational costs, including banking tax in Q2 amounted to PLN 1.3 billion, which is 6% more year-on-year. And cost grew 7% year-on-year and 10% quarter-on-quarter. The main driver here is personnel costs. On the 1 hand, it's due to the pay raise announced before our wait to pay fund grew by 5%. But on the other hand, it's another result of full consolidation of TFI costs, which is reflected in various items and the P&L, personnel costs and costs included. And the consolidation also had the bearing on the management board cost apart from standard cost consolidation, as we mentioned before, we also have costs integration to be born after the ownership change. It's already visible this quarter to be still visible in the next quarters. These are typical costs resulting from growing post transaction costs. We also have a new element here related to the depreciation of intangibles, identify as a result of Batstride allocation, which is identification of customer relations spend out from the transaction. They will stay a permanent element of P&L throughout the tenure of estimated relations identified in the process. We also have higher marketing costs this quarter, PLN 11 million more. It's a result of a dedicated promotional campaigns around the assistant campaign and the mortgage campaign and growing IT costs. and directly a result of our technological demand as well as higher technological costs related to integrating ING TFI. If we could switch quickly to the cost of risk Q2 of this year are very low cost of risk as compared to previous periods in total PLN 41 million of costs risk incurred as compared to PLN 193 million a year ago and PLN 111 million a quarter of low cost of risk is aided by several factors. We have positive result on NPL sales, especially in retail sector and also we updated macroeconomical projections. Our models are very susceptible to any changes and fluctuations on the macroeconomic side. And after all the wiring situations related to the Middle East, we see the results of PLN 26 million of provisions set aside from macroeconomic risk also in the retail sector. Hand in hand, what is also visible is that in this quarter, we have lower cost of risk in the corporate sector, we see reduced inflow of new exposures into Stage 3 -- and I do hope that tendency will prevail also for the future. As a result, our accumulated cost of risk was 33 bps and this is much below the long-term average, which is to the tune of 65 bps and as you know. And in result, the contribution of lower cost of risks to the positive financial result on the growth and net side is tangible and is marked. As for the quality of portfolio, the share of third stage credit was 3.82% reduced by 12 bps and 3 bps year-on-year, which is, of course, the result of successful sales of NPLs on the 1 hand side. And on the other hand side, sales of the rest of our portfolio and a result of activities on the balance sheet side. The corporate portfolio enhanced -- was enhanced by 11 bps which is due to the sales of NPLs and the new sales, which, by definition, will improve the results. The retail portfolio is very good. The NPL ratio was improved by 15 bps this quarter which has resulted -- which results from the sales of NPLs. We are very happy to see very solid quality on the side of mortgage lending. It is 0.4 more stable and versus a very good figure. Also spinning off of NPL meant that provisioning ratio in Stage 3 could be reduced and is now at the level of 48%. And very briefly on our liquidity ratio after Q2 versus 14.9%, which is reduced by 88% of BPS and its impact on Tier 1 well, this is due to consolidation of ING TFI adjusted on risk-weighted assets versus related to the sales, but also the changes of the model we keep improving our model in order to customize it. to real day secumstances. This brings me to the end of the presentation of results. Other questions.

Yes, there are many questions online. Let me start with reconfirming very request, could you reconfirm the impact of the Court of Justice ruling on the interest rate performance, PLN 12 billion, as I was saying. And this is a very conservative and adequate gauging looking at the implications of Court of Justice ruling. And a follow-up, could you please expand on it the provisioning for the application of the Court of Justice ruling means that you will be very cautious concerning the commissioning of transactions.

[Interpreted] While the impact is very little, very meager. -- as you can see. We have had in our portfolio series certain loans offered by our branches where commissions were charged. And this is a very meager, very minute value as compared to the performance of the banking sector in this country. We are always cautious -- and we always keep evaluating legal risks. So there may be some impact of ruling in the future, some residual impact, but -- according to estimate in terms of the adjustment of interest result and the rolling, we have like 100% of coverage of legal risk. And this is related also with the consumer production both safeguarded by the Polish antitrust and the Court of Justice ruling. And macro flow hedge impact on your interest result for this quarter. Well, this is related to -- if I could have the right slide what is the value the value was not shown on the slide, but explicitly, there's impact of macro cash flow hedge on our interest result is not shown, but consistently, we've been implementing our hedging policy macro cash flow hedge. -- is an instrument that serves this purpose and bearing in mind the actions that we have taken so far. The delta is positive quarter-on-quarter.

There is another question. Could you tell us more precisely what was the impact of TFI consolidation on bank results and bank income.

As for commissions income -- this is more difficult to be calculated, if I may put it like this, because we -- of course, before full consolidation of TFI, we were distributing TFI units, and we had contribution of interest profit related to the distribution activity. Now this is all eliminated from the bottom line. And we do consolidate all the revenues, all the profit that we have from fin this respect. What I can tell you right now of the top of my head is that the impact of consolidation on the commissions performance is to the tune of 50-ish -- PLN 50.5 million for the whole quarter 2 of 2026. And when it comes to consolidation on the operational cost side, generally speaking, I may tell you that this is more or less 1/2 of the costs that we were showing you in stand-alone NPL, which is to the tune of some PLN 11 million of impact on personnel and PLN 12 million on nonpersonnel costs. But this is to be followed. This is to be what Q-on-Q, I don't want to show this explicit impact, the impact of consolidation of individual factors in our NPL.