Powszechna Kasa Oszczednosci Bank Polski Spólka Akcyjna (PKO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. I'm very glad to welcome you at the presentation of PKO BP's financial results after the first semester of 2023. The results will be presented by Vice President of the Board, Dariusz Szwed, Marcin Eckert and Piotr Mazur. President, the floor is yours.

Good morning, ladies and gentlemen. I'm really glad to have you all here at this presentation of financial results for the first semester of 2023. It's a very exceptional moment after this decision of the Court of -- European Court of Justice and what is really important is that we've had a very solid result at the level of PLN 2 billion. And what if it wasn't for this decision, this result would be much higher, it would be at the level of PLN 5 billion. But of course, let's not look into the past. Let's concentrate on the present and let's say that it's a very good result. It's a record high. So you can keep investing until the end of the year. If it weren't for this decision by the court, the result of the higher 10.6% as regards to ROE. This is a very important result if it wasn't for the extraordinary items. It would be much higher, 22.3%. Our core revenues have grown by almost 21% year-on-year, which has shown that we are a very stable institution, and we are maximizing our revenues. 4.31%, this is the NIM ratio. Cost to income ratio, this is also something we should be proud of 32.9%, which has grown by 11 percentage points year-on-year, and it's a very important key element of our strategy and I do hope that we'll be able to improve it and that this remains at a stable level. And COR, another reason for presenting this as a success at the level of 53 points which is a stable result, and it shows that our spending is very good. So this is all due to the fact that our people have done a great job, I'd like to thank them for that in this very dynamic world and ever-changing world. It's a very hard thing to achieve. There is also a lot of work and effort, which has to be stressed as an important key factor. As regards to other key financial data that we would like to present today, which is the total asset which has grown year-on-year by 7% and quarter-on-quarter by 3.8% and it's at the level of PLN 461 billion, the bank has been developing, growing. We are very proud of it. And this is not the end of our growing trend. 0.5% new customers, more customers this quarter than in the previous quarter, plus 3%. The financing that we gave, excluding mortgage loan at the level of PLN 255 billion, also a huge growth. The [ interest ] ratio at a very good level, savings also at a very good level, almost PLN 500 billion, very stable book built on stable, solid foundations, deposits, which are very solid, which are kept in the bank -- with the bank for longer. So we can then predict the financing of our activity in better manner. We are also well prepared for loan actions. We are ready to support Polish entrepreneurs, Polish economy, entrepreneurs who function in the Polish market, and we do hope that there will be a better situation in the economy. And in Q3 and Q4, there will be more expenses, but there's been a slowdown so far, but new symptoms have shown that we are very well prepared. We have a capital cushion here in order to support companies and investments. The NPL ratio, another improvement year-on-year, quarter-on-quarter, 20 points year-on-year and then quarter-on-quarter, a very good element of our portfolio. This is a very important aspect I will be dealing with later on in the presentation. Now mortgage loans. This is something that needs to be stressed because there is a very important program introduced by the government, a safe 2% credit and we are on time. We did everything to be on time, and we have got almost 13,000 applications submitted and this is -- this amounts to 73% of the received mortgage applications and PLN 400,000 in the average amount requested. And here in our bank, as you can see, we are at higher values. So now the situation is stable as regards mortgage applications benefit that I'll be talking about it. You all know what is the situation. But what we are very proud of and what we are observing is that there is a growing interest from our customers because we are offering another program within this product within this program, which is also a first home. And we most -- we've had like 400 new accounts which were opened, its new dynamics, and I do hope that this program will become very popular. Now within our strategy, which we'll be discussing for some time here, the semester is a very good starting point for analysis, and we have been concentrating on young clients as we are the first ones to offer account for children, we have accounts at the value of PLN 2 billion, and they've been there for 10 years or so. So we decided to modify the application slightly. It's become safer which needs to be stressed here that we have a better protection as regards financial operations for people who will be using this application, a very modern layout because we want to be here, be modern on the market, be present on the market and what we are doing for some other clients who are not only children, but it needs to be stressed because it's one of the most important pillars of our strategy is the AS-variated services and we haven't seen each other in 3 months. So a lot of dynamics there in this field, a lot of changes in our applications. This is this telemedicine, which was there already before. There are some new applications and functionalities which make the use of this application easier and safe screen, for example, the possibility of repairing a broken file. This is also available. Let's stress the importance of safety. We are all under the influence of some threats, cyber threats. This is a priority of us. So we would like our clients to be really safe. And the Legimi Code, which is hit and this is a code which enables to have access to e-books, audio books, 180,000 of titles. And this is also available for the IKO application and a very important moment to hand over us because we would like to introduce a very innovative program for those who would like to rent a plant. It's called simple rent, and we would also like to help as regards streaming and this is all available to our clients. We are very optimistic about it. And of course, it will -- it is available on smartphones. As you remember, we want to be the leader on the market to keep our leading position. As regards mobile banking, we need to stress it because it may seem hard to grow further looking at our client base, but we keep growing, though, and we have more and more clients. We have more than 7.6 million clients who have already used this application. And as you can see, the banking world is now moving online, is becoming mobile, as you can see. So that will be all. We have also new products. New products are available in our applications, purchase of gold, first account, tax receivable and liabilities management. The list is quite long, and you all know the functionalities. Let me share with you one more fact. I would like to stress that we are a strong capital group. We have the mortgage bank, TFI, leasing, factoring and insurance, 5 elements in our core banking activity, we have an important show in each of them. Our ambition is to grow our market share and to use these core businesses to have -- to deliver true value and to deliver customers and to provide customers with high-quality service. We selected 5 core businesses here are mortgage loans quite a share, 54% mutual fund, TFI, here we have a share of 20% Polish recovery fund, quite service in 31.5% by our flat leasing. The share of 30.7%, more than 127,000 customer service. We know that there is a growth tendency on the market. We want to be present, and we do hope that the number of customers in this core business will grow. Factoring. We are the second largest factoring company in Poland in terms of the number of customers, the increase in financing reported year-to-year was of 21%, a high dynamics, and we did count on our factoring. We do hope that these services will meet customers' expectations in terms of cash, liquidity, factoring is a good solution, which may easily replace revolving or cash loan. And with that, we do hope to increase the group's revenue. And let me end with the insurance. Insurance activities are actually very, very important. We have our own insurance company with more than 13.4% of share in bancassurance. These are the figures for the first half of the year. And these numbers, we expect that these numbers will grow. And we have more than 1.8 million active insurance policies. I do stay optimistic, and I do hope that this number will grow every year and will have an impact on the financial results of the group and of the bank. Some more figures regarding market shares to give you the overview of the evolution year-to-year. We managed to grow 1.2 percentage points year-to-year. We are ready in terms of cash. We have the liquidity cushion, and we are prepared to provide further financing, deposits of nonfinancial business entities. Here, we had a drop, but this was a conscious decision. We want to have a stable portfolio based on more predictable deposits of natural persons. We are happy to see that the retail loans are on the rise. Look at the major loan lines, every line has revealed -- has generated a growth at 16% growth year-to-year. We know that there are some things to be cleaned up, some things related to the pandemics and the evolution of the market, but we do stay optimistic, especially in the view of the incoming safe 2% loan and other housing loans. Retail deposits presented very, very positive value. This is an attractive offer for customers and retail, our deposits compensate the losses in corporate deposits. Let me now move to the strategy. We are in the mid of the year, and we have the results which show our achievements. What have we managed to achieve? First, we are really happy to see that the number of our customers and clients has been on the rise and the measures that we have implemented have successfully contributed to the implementation of our goals 3 -- top 3 NPS should be achieved at the end of the year. A lot of efforts have been implemented in order to improve the staff satisfaction and the staff retention levels. We do take care of our staff. And thirdly, we try to develop the corporate loan portfolio. In terms of volume, we've been financing more and more LDG projects. And I think that the new marketing campaigns will be launched to share you our activity in this area, and this should have an impact -- positive impact on the volume of loans. Equal opportunities bank, that's also one of the goals of our strategy. We have achievements here. We provide a number of offers of development. Please look at the overview of all measures taken because analysts are listening to us, let me move quickly to some more financial items. Here, you see our major goals, return on investments, cost to income, cost of risk and payment of dividends. Here, we are really close to achieving our goals for the last item. Well, here, we may have some challenges because of the rolling of the Court of Justice of the European Union. The return on investment, 10.6%, cost to income 32.9%. We will do our best to manage it as closely as possible. Cost of risk, 0.53%. So we are in the midway towards the goal set in our strategy. And in terms of new lending activity, we should keep this value. Let me thank you for this part. And now let me move on to Marcin, who will present the financial results.

Thank you. Good morning, ladies and gentlemen. Our reported net profit was PLN 2.441 billion and was 10.6% higher than in the previous year. This result is impacted by the cost of extraordinary items of PLN 2.9 billion. The cost of legal risks of Swiss franc loans and the lack of guarantees for the BFG deposits. The ROE was calculated for the first half of this year and was at 10.5%, excluding the extraordinary costs. The revenues were of PLN 11.339 billion, 20% higher than the last year. As in the previous year, the growth was fueled by the revenues from the core activities by a rise of 20.6% year-to-year. Let me highlight that this growth quarterly was of 4.5%, and the revenues from the core activities rose by 4.3%. The core revenues are at 98% of all our revenues, which shows clearly that our business model is focused mainly on generating revenues from interest, provisions and fees and insurances. The net interest income rose by 29.3% year-to-year, up to PLN 8.579 billion as a result of a high increase in interest margin and in volumes. The net margin rose by 4.31% by 18 basis points comparing to the margin in the previous year. The net interest income in the second quarter rose by 4 points, PLN 339 billion, that is 4.9% of growth quarterly. What are the factors which impact the net interest income and net interest margin? Well, there is an increase in the net interest income, thanks to a better volume of transactions. An average interest of bond portfolio and better interest calculated on foreign exchange-denominated loans. As a result of the increase in EURIBOR and LIBOR USD over that period, didn't -- interest cost rose mainly because of the term deposits and they were compensated by further decrease in cost of collaterals. In the incoming quarters, we do expect that the national interest rates will decrease which will have an impact on the interest of the loan portfolio. The mortgage loan will grow, the term deposits will have a short maturity date, and we will use the collateral policy and all of that should secure our results. The sensitivity of our net interest income will be of PLN 830 million. That is around 4.7% of the net interest income generated for the first half of 2023. Moving on to the Retail segment. We have seen a growing trend in C with a quarter-on-quarter dynamics at a level of 1.2%. The bank has achieved a very good result in the Q2 with a growth of 20%, both quarter-on-quarter and year-on-year. There is a strong growth as regards mortgage and consumer loans. We've also observed a solid, more than 6% growth in volumes of deposits and investment funds. In the Corporate segment, there was a 2-digit growth of volumes -- of loan volumes year-on-year after a very strong first quarter, where the growth was at the level of 8%. The second quarter has brought a natural slowdown. As you can see, there is a growing interest in green financing as regards to the volume and the portfolio of products. The deposit base of our corporate clients is now stable. The fees and commission income is still stable. We can see a growing trend as regards to the income from the banking activity, especially as regards to cars and exchange rates, which offsets the effect of market pressure. The overall cost in the first quarter were at the level of PLN 3.731 million, lowering by 10.5% year-on-year, the overall result due to regulatory conditions and the remaining costs were under the inflationary pressure, the cost effectiveness, though, was at a very good level. And as for the first semester, it was at the level of 32.9%. Now I leave the floor to my colleague, who is responsible for risk.

Ladies and gentlemen, as you can see, we have a very good result when it comes to the write-offs for this quarter, but those write-offs is positive -- has shown a positive tendencies and we still -- we're still able to maintain positive cost-to-risk ratio. As you can see this confirmation in our loan portfolio, and this concerns the share of liabilities and the share of liabilities is decreasing and the coverage -- provision coverage is growing, and we are very glad because our share in this segment is growing. And thanks to the technologies that we've been applying and will be discussing them later on. We are able to maintain the lowest cost of risk possible on the market. And moving on to the next slide, which is, I think, good proof of the fact that risk is good in technology, but not and when it comes to marketing because we wanted to show that new technologies bring a lot of added value as regards to the results of the bank. But I think this slide from the marketing point of view is not a good one. It's not a good proof. But I would like to stress, though, that we've been investing strongly in new technologies, in cloud solutions, we are applying a lot of solutions of this kind when it comes to assessing loan and credit risk especially in consumer finance, about 20% of the decisions are based on those new technologies, considering the fact that we will be taking into account the whole portfolio offers, consumer finance and then SMEs. Then we'll be talking about PLN 200 million, PLN 300 million of additional results of lower cost of risk or interest income. So those are the opportunities which can be insured by new technologies as regards to the results of the bank. And this is well seen in consumer finance where market share has been growing and the cost of risk is at a stable level. Moving on to the next slide. The settlement program. We've been very satisfied with this program. Let me remind you that we were the first bank in Poland having this kind of settlement program. We crossed the threshold of 50% of customers who are concerned with this settlement program and what's more, after the decision of the Court of Justice, we've seen a positive trend when it comes to new loan applications. Even in August, this trend should be maintained. Then the last slide. Strong capital, solid capital position, 19.83 percentage points. For the total capital ratio, it's a solid basis together with our standing, everything that has a positive impact on the development and growth of our bank. Thank you very much.

Thank you, gentlemen. To sum up, what is the most important in those last 6 months. Reported net profit for the first half of 2023, PLN 2 billion, ROE at a level of 10.6%, excluding extraordinary items regarding the decision -- court decision, it would be at the level of PLN 5 billion. As regards to net profit and ROE will be at the level of 22.3%. We are very satisfied with the fact that the dynamics is kept. And of course, it has improved. Of course, it depends pretty much of the interest income, but we are now managing it in a very efficient way, considering deposits because we want our deposit offering to be attractive. And here, the margin is at a very good satisfactory level, which allows us to generate a satisfactory result. C2E ratio below 33%, as you can see, a very good risk management and nonperforming loans there were covered. So it needs to be stressed, and we have very -- assets at a very high level at the level of PLN 471 billion and what Piotr said, it is a proof of the fact that we are managing it very well. And Tier-1 ratio also at a very good attractive level. Thank you, ladies and gentlemen for this part of our meeting. Once again, I would like to thank our people for their effort. And I would like to invite you again for the same kind of event in 3 months. Thank you.

Now invited to ask questions. I already see the first questions on the chat. M&A transactions. That's the first question. The press reported that you may be interested in the takeover of Velo Bank, in what way this transaction will build the value for minority shareholders?

It's true. It was reported by the press, but we are not going to comment on it, you know that M&A transactions like silence, our history shows that only some have been completed successfully. Right now, we are at the stage of no comment. The quotation stage -- we are in a quotation stage and the deadline is set on 15th of September, and we will not comment for now.

The second question, the cost of financing and the offer of deposits, why did you offer in June, 10% on deposits? What kind of volumes did it attract?

This was a business offer. We celebrated the 10th anniversary of our IKO application, and that's why we offer such high interest on deposits. We also attracted new customers, more than 20,000 new customers, for the bank used that offer. You know what on the cost of customer acquisitions, the cost of promotion actions. I don't think that the cost of these interests were high. We are extremely happy with the results. There were 3 basic requirements to be met. And the deadline set by the end of October, and the offer is still open to all eligible customers. In terms of cross-sell, it is very satisfactory, and it helps to build our cross-selling capabilities for the future.

The next question, deposits and cost of financing. Why the cost of deposits are on the rise, while they are down on the market on average?

Well, ladies and gentlemen, indeed, the cost of financing related to deposits have increased in the reporting period. We took the decision to attract more deposits from the market because we do expect that our lending activity for corporation and SMEs will expand and to be ready in terms of liquidity, we took the decision to attract the surplus of deposits from the market. With the improved liquidity, we will be able to use this extra financing when the economy really recovers as the main bank to finance the Polish economy, we will be ready for that lending activity.

The next question, why did you have a decrease in insurance, especially that you had a major increase in mortgage loans and in consumer loans? Why the drop in insurance activity?

Well, there are different reasons behind it. The decrease year-to-year is mainly caused by our lending activity. The lending activity, the housing loans were not that strong after previous year. And the volumes of those transactions had an impact on insurance. So we sold less housing loans, and we -- as a result, we sold less insurance products related to such housing loans.

Next question. Material costs rose more quickly than staff costs. What categories of costs are growing the most?

Wells, energy, fuel, all consumables used by the bank. We are a major network and that requires a lot of expenditures to make it operate well. But I don't think we exceed the average.

Are you going to establish the provisions for Swiss franc loans?

Well that depends on the process of settlements. In the second quarter, we made some major provisions for that in order to anticipate the future challenges. But it will all depend on the behavior of our customers. I would not exclude the establishment of new provisions but not that high as in the second quarter.

Next question, are you in a dialogue with the KNF on the payment of dividend?

We received a letter from the KNF stating what can be paid under what period. We were required to consult the KNF on the payment of dividends after the Court of Justice of the European Union rendered its ruling. And as required, we made a consultation and the opinion of the KNF is that we should not pay the dividend for 2023 in 2024. However, we can pay the dividend for 2022 in 2023. We do hope that in the incoming years, we will be able to pay the dividend on the undivided profit still disclosed in our balance sheet.

Do you think that you are going to renew the so-called loan holidays program?

Well, the press says that the government may take such decisions. We do not know the details of the government decisions yet. When -- once they are known, we will respond, but we are ready to -- any decisions, including the renewal of such scheme. We will not wait until the last moment. The analysis has been done. We are prepared.

And the final question for now regarding the quality of your assets. You have a robust portfolio of assets. Do you have any expectations regarding the deterioration of the asset? Do you believe that the economic downturn may have an impact on those assets and may be felt also in 2024?

Well, that depends on the macro situation -- macroeconomic situation. We do see the changes in the portfolio. Over the last 2 years, we've established a number of provisions and the provision coverage ratio of Stage 2 and 3 are quite high. So as you know, the bank has established a number of provisions to cover more risky customers or more risky industries. So even if we have defaults, they are already covered. So if there are no sudden development in the macro situation, the positive trend should be maintained in terms of the quality of loan portfolio.

The next question, aren't you afraid that the mortgage loans granted right now would be subject to the long moratorium?

Well, I think this is a long-term forecast. We cannot predict everything. It would be time consuming. For now, we don't see such risk. We don't have such a scenario on the horizon. Thank you for the question, though. We will pay attention to that. For the moment, I cannot give you any clear information.

I think this is the last question we've received for today.

Yes, thank you very much. Please be invited to our next result briefing. Thank you very much for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]