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

Good afternoon, ladies and gentlemen. Let me welcome you at the follow-up call after presentation of Q1 2024 results. We do that especially for our English-speaking analysts and investors to facilitate the meeting. From our side, we have today our CFO, Krzysztof Dresler; our Chief Risk Officer, Piotr Mazur; our Finance Director, Jakub Niesluchowski; Chief Economist, [ Piotr Bujak ]; and IR team, myself [indiscernible] and [indiscernible]. As usual, we suggest to go straight to Q&A session, and I see that some of them were quite quick. So Nida, please, we are ready for your questions.

Nida? We do not hear you. In such case, [ Mikhail ], floor is yours, hopefully, Nida will rejoin us.

Thank you very much for the meeting [indiscernible]. My one question regarding capital adequacy ratios, maybe it is a bit of -- likely a few questions put together, because we've heard during the conference call, the first one, that the priority is for the bank growth, not necessarily that the payout from that surplus capital. And my question would be, what would be the comfortable capital adequacy ratios level, I mean surplus, in percentage points above the minimal requirements from the Polish FSA? As we know that the minimal requirements are going to grow. So it is hard to maybe present us like precise figure, but maybe, I don't know, 1 percentage point above the minimal, 2 percentage points above the minimum? Given that probably you have an idea about the growth of your risk-weighted assets going forward, yes? So yes, that would be my question.

So maybe I will comment on it concerning our capital adequacy as both MREL requirement because we are looking on these 2 requirements altogether to be honest. So of course, we want to have, based on our strategy and our belief will not change that, we should be able to pay out dividend, so have this capacity to pay out dividend. So we are looking not -- of course, we are looking at the minimum requirement, but we're looking on the dividend requirement. And on the one hand, they fall down as Polish FSA withdrew the additional 3 percentage points buffer on the one hand, but on the other hand, we are aware that countercyclical buffer will come in the coming years. And this is included in the strategy published already by Financial Stability Committee that we can expect 2 percentage points of this countercyclical buffer. So what we are also looking going forward in this context on the one hand. On the other hand, when we discuss the surplus, we still are analyzing the potential impact of CRR3 requirements, which will be starting first January 2025. So this is, I would say, next to growth, next to payout of dividends, is the third point which we are looking at when we look on our capital surpluses. But looking from the buffer point of view, we see 1 percentage point as a kind of monitoring buffer for us in the context of dividend levels and also on the MREL side.

We have more comfort in relation to the capital we have and it will be less comfort in relation to the MREL requirements. So the buffer what we see today in the capital looks, I would say, okay and give us comfort. However, in relation to the MREL, we think that we will have to, I would say, issue some papers in the coming quarters.

But -- so just to add on this, currently, our buffer at the end of first quarter 2024 above the MREL in relationship to total risk exposure amount is 2 percentage points. So it's pretty comfortable. But here, just refers also to the fact that we expect some capital requirement growth due to CRR3 requirements. That's why we see for this year we will be again, present on the market because, as you know, we already had 2 transactions in the first quarter.

Right. Right. To sum it up, just want to be clear on that. So if we see that the minimal requirement right now is somewhere -- I saw it on the slide, 12% to 12.5%. Then probably, we should add to it this countercyclical buffer, which will go up by 2 percentage points. We don't know still about the systemic risk buffer, yes? So it will be 14.5%. Plus, you would like to keep this 1 extra percentage point above the minimum just in case, yes? So the level that you would not like to breach, it's currently 15.5%? Am I right in terms of DCR?

When we look from the pure math perspective, so on the group level, they are slightly different due to different levels of P2G buffers in the context on dividend policy. But the dividend levels are on around 13%. So 13.02% on the bank level and 12.96% on the level of the group. And yes, looking from perspective of countercyclical buffers of this target level 2%, then we are talking about context of 15%, and then adding 1 point, then we are around 16%.

Thank you so much. That's all from me.

Please also remember that this is more or less the level which we had before the last movement of KNF. This is quite strange situation for us to have the minimum requirement practically almost at the same level as the dividend one for 75%.

Nida, please?

Can you hear me now?

Yes, we do.

Okay. Congratulations on the great set of results. I have a few questions. Firstly, on loan growth. I thought the first quarter loan growth up 2% quarter-on-quarter was impressive. And then just thinking about the coming quarters, you'd also have the benefit of the new mortgage program into it as well. So how should we think about sequential growth from here? Do you expect this 2% growth to be maintained sequentially or actually trend up in the second half of the year? And just on the topic of loans, I wanted to touch on the corporate loan growth opportunity from the RF funds. Of course, the opportunity is quite huge as we look out, but what do you think are the key risks here? So that's my first question on loan growth. And then secondly, I wanted to ask about costs. So we did see lower-than-expected costs, and I just wanted to get a sense on how sustainable this OpEx is? You've mentioned that it's been supported by a decline in inflation, but I think inflation is expected to pick up in the coming months as well. So just wanted your thoughts there. Thank you very much.

Maybe I would suggest, Piotr, if you give us macro color on the loan growth expected dynamics for the sector, and then we will move further with the costs.

Okay. So as regards to outlook for corporate loans growth, we believe that at the moment -- as regards to the whole market, I'm not talking about our performance, but as regards to the market, we are in some kind of a soft patch because we have the acceleration of investment activity in the economy, especially in the public sector at the moment, but also to some extent in the private sector. We also have quite sharp inflation that reduces demand for some kind of loans because simply nominal economic growth, the pace of economic activity is much weaker, so demand for some kind of loans in the corporate area is smaller. And we also have destocking in the economy. In the previous years, in the Polish economy, we had a very strong aggressive inventory buildup. Now it is being reversed. So we have a few factors negatively affecting lending activity in the corporate area. Anyway, our bank is doing better than the market, much better. But for the market, we see these negative factors and such relatively negative trend should be maintained until the middle of this year, maybe in the third quarter. And then we should see pickup in lending activity in the corporate segment for the whole market. And of course, unlocked EU funds will play a role here and all the structural factors like energy transition that will be a really big story in Poland. So while we are quite conservative versus expectations of some other banks in Poland as regards corporate loan book growth this year, our forecast is just 4% something versus some other banks expecting high single-digit growth at the end of this year. For the next 2 to 3 years, we believe in stronger -- definitely much stronger growth in this area, at least high single digits, possibly double-digit growth of corporate loans in the Polish banking sector.

If I can add something, we really believe that recovery funds should accelerate the dynamic pace of development in terms of investment loans on corporate side. 46% of the total amount of recovery funds allocated on climate change. We link this to energy transformation. As you know, the mix of energy production in Poland versus the rest of Europe, especially Spain, Portugal countries, yes, we have something to do and from this perspective, a lot of our client's companies really analyze how they can adjust their cost base by reduction in energy prices from PLN throughout this energy transition using our funds -- banking funds, but also as Pillar recovery funds. And of course, our forecast in terms of the pace of development is quite conservative. We also see single-digit. But this 48% on climate change, climate change is one aspect, the other aspect is 21% allocated on digitalization of companies. What is also the challenge for companies based in Poland, the level of robotization is lower than the average in Germany and the average in West countries. From this perspective, we are going to facilitate these expenditures using the investment loan channel. And there is a deadline, as you know, for recovery funds, it's mid 2026. It's only 2 years to make the usage of discounts. Yes. And we're going to build our portfolio increase based on active role in supporting our clients in this energy and let's say, digital and modern transformation. Main risks. Risks are connected with time, because of the lack of time, we are in delay in terms of utilizing discounts. I see this risk because we do not discuss about the need of energy transformation in the country and on the level of companies, there is no need to discuss and no doubt of that.

I will suggest [indiscernible] if you could touch the cosmetic question.

Sure. So maybe just one addition to the volumes. Of course, from our perspective, when we look on the main product which we had in the first quarter, mortgages, as we said during our conference, still out of around PLN 8 billion loss, PLN 4.6 million were the new loans resulting from the safe loan 2%, which in the current quarter, will be, I would say, very limited impact. So as you can imagine, we expect lower sales this quarter concerning mortgages. So that's as a kind of addition to the point concerning volumes. In terms of cost, on the one hand, if we compare quarter-to-quarter, some costs which were limited or a kind of seasonal when you look from fourth quarter versus first quarter. So we had a lower cost of marketing, for example, and lower cost of projects as we had usually seasonality in the cost of projects when we have a peak in the fourth quarter, which we don't have in the first quarter. We see now a lower pressure resulting from the energy prices, so here I refer to our administrative costs concerning our buildings, et cetera. But I would say the pressure might increase, let's say, resulting from steel. We will be realizing our projects. So we expect that there will be a usual seasonality and will have seen peak in the fourth quarter. Also in cost, please remember, there are also costs concerning our legal services concerning CHF loans. So not only in the provisioning, so the more settlements and the more cases we'll have, then the cost will grow also. So we see here a few factors, which will still actually -- will pressure our costs on our side. So indeed, the dynamics between fourth and the first quarter of this year looks not high, but we expect that dynamic year-to-year will be higher.

Very helpful. Thank you very much.

Gabor, please.

A few questions from me. Firstly, a quick clarification. Do we know that the 2 percentage point countercyclical buffer is kicking in from January 25?

So if I may comment, so no. So our expectation is based on also working discussion with Polish FSA that by the end of this year, what may appear [indiscernible] a resolution of Ministry of Finance, which will introduce the countercyclical buffer. And the strategy is, as we understand and is also stated in the strategy published, as I already mentioned, is that the first step will be 1 percentage point. And then second step will be 2 percentage points. So not 2 percentage points from the beginning. That's 1 point. And second point, according to regulations, there are going to be 12 months of grace period. So assuming that the resolution will be -- not only appear, but will be binding or can come into force by the end of this year, then adding 12 months of grace period, then we are talking about of countercyclical buffer by the end of next year when there will be binding.

The 1 percentage point or the 2?

1 percentage point.

Okay. And then...

And then 2%. However, it's not clear for us, and we do not have this information when the regulators will start with 1 point, then what will be the time spent between this 1 and introduction of the 2%. This is what we don't know, actually. If it will be 0.5 year or a year or other tenors.

Okay. And the systemic risk buffer, are there any proposals out there about reintroducing that? And any items about the phasing?

As we understand, the countercyclical buffer is a substitute for systemic risk buffer. And that's why even in the strategy, they started to name it kind of neutral countercyclical buffer allowing them in some way to introduce, although if you look from -- for example, from the ratio which is officially published by the NBP concerning the loans to GDP, which is kind of indicator if the countercyclical buffer should be implemented, is going down. So a different direction indicated that no countercyclical buffer should be implemented by they starting to call it neutral. So meaning, okay, we are starting from neutral, 2% is our target, 2%. But if -- then the ratio, for example, which is also mentioned in the regulations -- loans to GDP will grow, then they might even increase it. Above 2%.

And maybe just changing attack a bit to the credit holidays. I think you indicated less than PLN 500 million expected cost from this. I thought Pekao indicating a bit more than that, which thought was we had given that you have a bigger book. Maybe you can -- also, I think to remember that you were guiding for somewhat more than that, PLN 800 million, PLN 900 million. Can you talk a bit about why you now expect less and maybe the assumption on participation?

So if I may -- so yes, indeed, our initial estimate shows us between PLN 800 billion and PLN 900 million of the potential impact. But now we have time to verify more, I would say, in detail, the data base which we have -- of course, we don't have all the data. We also have some assumptions in our model. But which customer will qualify for the income threshold, which one will qualify for the number of kits, et cetera. So from this, we have simply more time to verify it. And we made detailed analysis based on criteria which are in the regulations. Also kind of lower level than expected, it also results from -- slightly lower also interest rates. So the discounting effect is slightly lower. So the previous credit holidays and calculation of the difference between the NPVs of the last week and without change schedule were simply higher -- the distance between these 2.

What kind of participation do you assume in rough terms?

24%.

Maybe [ Kuba ], I will add a few additional aspects. The first, remember that only loans which were granted till first July 2022 applied for this credit holidays, which needed from a maturity perspective. This time, average loan is 2 years shorter than in the case of the previous holidays. Then the portfolio itself is smaller because simply, we have 2 years of the same portfolio being repaid, and we speak about the period to some extent [indiscernible] acceleration repayments, also thanks to these credit holidays itself. The biggest problem, I think, technical, which also may, to some extent, explain the differences between the banks is assessment of the customer's income. As generally speaking, we do not have online information about what is our customer income at this moment. So we have to use the original provided by them at the moment of granting them the loan and make assessment how it changed until today. And of course, you might do it on using different level of aggregation and different statistical data. And this might differ in results, that this is the main reason why our original calculation was much more pessimistic than the one we have at this moment. I think I may add that generally speaking, we assume that the customers who took the holiday during the first period and who meet criteria at this moment, to simply qualify for holidays, will do it again. And we assume that some of the customers who did not take the mortgages at the beginning and meet criteria also, we are not giving the 0 probability for them. We are giving much higher.

And I would say that -- in this case, compared to the last case, the risk profile will have impact how many customers will use this product. And because we see by the credit bureau that our risk profile is better than the average on the market that we expect that we should have less customers who are able to use this, I would say, possibility than average on the market.

Thank you for the color. It's useful. I understand you will have this one-off coming in the second quarter, but maybe a broader question on NII. How would you expect -- can you give us any steer on how would you expect your NII to develop in the next few quarters?

Krzysztof, if you?

Okay. As you see, we increased net interest margin throughout the quarter versus end of last year. And of course, being a bank with a huge deposit base, we've taken advantage of high interest rate environment in Poland. Interest income is contributing positively. And previous expectation was that we should see interest rate cuts in first half of this year, but it did not -- we did not see up to now. Officially, Piotr, correct me if I'm wrong, we expect one interest rate cut end of year. But we don't really know whether we will see this cut or not. But even if, the repricing of the asset base and the deposit base will not impact negatively throughout the whole year. That's why we can, let's say, with quite moderate probability that we will deliver what we promised before that we will keep net interest margin at the level as previously declared third quarter last year, that was [ 435 ]. And current level is higher, and we will see -- there are scenarios in which we can keep it, yes. But of course, we also see black swans and as you know, we do not disclose forecast. That's why -- yes, but we have different scenarios in-house. And that's the main driver for us. For us, it's better the high interest rate environment than interest rate cut for sure, as you know, understand also. Yes. And this should help to deliver the final results in the year.

Just add a few points to that, of course. So when you look on also what we are doing, we've pretty effectively optimized the cost of deposit base, so that will support NII going forward. So that's one point. Second point, we also do have -- as you saw, we gained market shares in terms of volumes on the on-site. So it also will support as we look at it. So we have -- on rates point of view, so we have a higher drop of deposit rates than on the asset side. So combined here, I mean, both loans and securities. So it also supports NII and NIM. So that's another point, which I would like to highlight here. So optimization of deposit base in [indiscernible] of the cost of it. And volume growth, which actually counterbalanced in some way the rate cuts, which we had at the end of last year.

Okay. Very helpful. Sorry, just a final one because I noticed that your Swiss franc coverage is now close to 100%. Shall we model any additional charges for the rest of the year? Or do you think you are kind of largely done here? I guess, this is a question about whether those guys who repaid the loans are coming to [indiscernible] and is there a risk of extra charges coming from there?

Piotr, if you may.

Gabor, I would say that this is a good question, but this is for our customer, how they will behave because if they will go to the court, for sure, we'll have to provide additional provisions. If they will use our voluntary agreement, we don't have to provide additional provisions. So today, it's very difficult to judge how they will behave. We believe that our offer is okay, but who knows how they will behave.

[ Mihayu? ]

Hello. I have a couple of questions. Firstly, continuing on NII and net interest margin. Your hedging cost in interest expense has been sequentially declining. And now this quarter, it was minus PLN 500 million. Do you expect it to continue to decline or it is more or less now stable level? Also, if you could comment here, like at what level of rates do you start to benefit from hedges? Basically, what do you pay and receive on these hedges? And do you continue to increase your position on hedges or it is stable so far? So that's the first question. And the second question is on dividend for 2023 and '24. So as far as we could see, last year regulator allowed to pay dividend from the profits not included into the own funds. Essentially, for some banks, it meant that the payout could be given for the entire year 2023. And in case of PKO BP, the profits were already included from the first half of the year, so it's essentially meant dividend from the profits of the second half of the year. So my question is assuming that this ruling happens -- this recommendation happens this year again, how accounting works that -- in which case, profits from the first half of the year will already be included into the own funds by that point of time? Or is there a chance that they will not? Yes. So that is the second question.

Maybe just [ Kuba ] to go with hedging, if you can take dividend.

I can try to even answer this hedging, and [ Kuba ] will add probably something. Of course, that's the level of evaluation of this hedge accounting and results we see in the interest income is the function of a few parameters. One of them is connected with interior between short-term interest rates and long-term interest rates. And now it's much more positive than that was previous quarters, and we also recognize this effect in interest margin, simply the difference between 2, 3 years bonds yield is smaller versus short-term 1-month LIBOR or 3-month LIBOR is simply lower than that was before. And that's an explanation of a reduction of this negative impact. And you have to know that if hedging is not to speculate, hedging is to minimize different risks connected with sensitivity of interest income, interest margin. And if you're going to stabilize interest income on the predefined level, it means that you simply stabilize that. From this perspective, if you see the movement of interest rates in the market, your result should be same. But relatively speaking, you can recalculate potential loss. In the case that you don't have this hedge accounting in your book and what would be the result. It's a different situation. Now we are in a regime, as you know, a new requirement is called sort NII, what means in the past, the securities portfolios were calculated and covered by the regulator, as you see, by risk thresholds or limits rather dedicated to BPV, means the evaluation sensitivity. But currently, they are rather willing to stabilize interest income. That's why they expect us simply to keep the sensitivity of interest income results quite stable. From this perspective, we will try to find a natural hedging position in the balance sheet, I mean products, long-term fixed rate asset products. But for sure, to close the gap, to keep our exposure below the limit, we will close this gap using derivatives, interest rates and IRS instruments also. Yes. Dividend, [ Kuba? ]

So I can take the dividend, but just to add to the heading. On the one hand, the main reason why the result of the cost is slower is maturities of the transactions. So we already had around PLN 6.5 billion [indiscernible] maturities transaction this year in the first quarter. We expect around similar amount in the course of 2024. So answering your question, would we expect? We expect that the cost of hedging will be lower for this year than simply multiplying cost of first quarter by 4. So this is actually our expectation. And you also asked about the rate, which we have of the fixed [indiscernible]. At the end of first quarter, it was 2.74. That was the rate on the fixed [indiscernible]. And coming to dividends, you asked about accounting accrual. Here, it will be the decision of the management board because it's not automatic. Meaning that if we want to account interim profit to the own funds, we have to formally send the motion application to the KNF and grant their approval. So we haven't decided yet about it, but it's not automatic. So it's not accounting rule per se. It's a formal process which we actually -- if you look, of course, on the few last years, we usually did it, meaning after the publication of interim profit, we actually send the application motion to the KNF and then grant approval. Here, it's still not decided what we will do on our side.

I also will add that at this moment, we have completely no knowledge whether these conditions set by the KNF this year, which was, for the first time -- and frankly speaking, quite surprising -- whether this is something which will stay with us or whether this was just a one-off for internal KNF reasons. I would add one thing that even with these conditions, assuming that with our final decision of dividend, our shareholders on the meeting will follow 100% the KNF recommendation. If we add to this what we already paid in February as advance dividend, the distribution this year will equal 100% of last year's unconsolidated profit, which I think is also shows you that the KNF at the end of the day is not as restrictive as it used to be.

Okay. Okay. That is clear. And just once again, on hedges, it is 2.75% fixed rate, which you receive in aggregate on hedges right now. Is it correct?

Yes, it was at the end of first quarter this year.

Okay. Okay. And just one last question, if I may come back on switch mortgages. Could you -- this question was asked on the conference. But once again, could you comment what the recent Supreme Court decision could bring to your assumptions? Does it change much or you're already provisioned for that decision, for that incremental change?

Piotr, if you may?

I will say, we still analyze the situation. However, we don't expect that base for today, knowledge that it will have a material impact for our provisioning line. Rather it will -- how our customers behaves, it will have a bigger impact than the situation of the legal assessment of the court.

I see no other questions. So in such case, thank you for your time, and hope to see you next time on the Q2 presentation in August. Thank you, and goodbye.

Thank you. Bye.

Bye.