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

Good afternoon, ladies and gentlemen. Thank you for joining our call following our release of Q1 2025 results. We have, as always, a strong team with our CFO, Head of Finance, our Economist and IR team and a Chief Risk Officer. As you know our company very well, as always, I suggest simply to start directly with Q&A.

A couple of questions from my side. There are already plenty of topics on the NII and the NIM. But my question is, what is your, let's say, economic view on the potential cut to the remuneration of the mandatory reserves? And what could be the impact on your NIM on your net interest income? I just wanted to make sure that my calculations are correct. So that will be my first question.

Piotr, maybe you will start with your macro view on probability of this event.

Yes. We know that there has already been a discussion on the topic at the NPC on the issue for quite some time. But so far, an important argument against such a change was that financial result of the Central Bank was deeply negative. And then the change regarding interest on required reserve wouldn't have a desired positive fiscal effect. And that's why some NPC members that we talked to on the issue signal that the change will not happen because simply it will not bring positive fiscal results. Possibly, projections of the financial result of the Central Bank for this year or maybe for the next one indicate that there is a chance for returning to the positive results. So maybe now there is a chance for the positive fiscal impact of such a change, and that's why maybe they will start to seriously discuss so -- and also given the context, the regional context, given that other central banks in the region have already conducted such a change. I think it will happen. It is only a question of time, whether it will be the nearest MPC meeting or later. I think it very much -- even what we have heard from MPC members, it very much depends on the projection of the Central Bank's financial results. If it is going to be positive this year, so then savings on elimination of the interest of required reserve will increase transfer to the central budget, then it may happen. If there is no such a chance for positive result, I think it will not necessarily happen. That's my take on the issue.

And do you think it will be cut to 0 or like half?

To tell, maybe I would bet that it could be a gradual change. But I would also not rule out simply one move to 0. I think it could also happen potentially.

If you can comment on impact?

Yes. Taking into account what Piotr said that for now, we don't know and what level would be if they will decide to cut to 0 or to the other number, but also taking into account that we already -- and we assume that -- okay, we are already almost half year. So assuming that it will be cut, so then we're talking about a few basis points impact on our NIM in the context of 2025. But finally, it will depend when, of course, and to what level. But we are talking in this context of a few basis points on NIM.

Sure, sure. The next question maybe on fee income. The beginning of the year is like, I would say, not great, not terrible. And what would be your outlook for this line for the entire year, the dynamic, for example?

We declared last year that we're going to keep the pace of dynamic here single digit 5% to 10%, and we will see and we will try to execute this option in the market. Yes, this result is mainly an effect is dynamic, negative one is an effect of one-offs in the first quarter of last year. And what we see, we see that core drivers of fees and commissions are going quite well. We see a kind of acceleration even if we take into account that we had less number of days -- working days in the first quarter. In the longer run, the share of fees and commissions in core income should go up.

Okay. Short question on cost. Would you maintain your outlook for this year, like low double-digit increase in total OpEx, including regulatory costs?

Yes, we keep this. Keep this, yes.

Okay. And the last question on the legal risk in the consumer loans. Any comments on the development here, the number of litigations and the value gradually not really dynamically, but growing. You have not recognized the provision for this yet. What is your view on this risk?

The number is still, I would say, stable. Today, we win in court 90% of the cases. And so up to now, we see rather that the risk is reducing. So we don't make the decision to create additional provisioning. We provide only for these cases in the court.

Do we have any other questions? Gabor, please.

A few questions from me, please. The first one on margins. Just to clarify your NIM guidance. Are you expecting a broadly stable NIM at the Q1 level for the coming quarters? Is that fair? Or shall we model some decline?

No. As we explained during the conference and in line with our declaration from previous year, we should see the lending level for this year not lower than 4.8%. That's the average margin for the last year. Interest margin, you mean.

And of course, the margin will be under pressure after the rate cuts. So it actually will -- in the next quarters will have an impact on the margin.

It doesn't mean that it is a target. It's a threshold for us for this year. It's not the target. But of course, we will take actions simply to keep it as we can, maybe higher. But to be honest, if the macro scenario is like we are seeing here, we shouldn't be lower than the 4.8%.

Okay. Very clear. And on your NIM or rate sensitivity guidance is PLN 500 million is very kind of reassuring, I would say. Do you have a sense of at what rate levels would this sensitivity increase significantly? I believe the forward markets are pointing to around 3.5% short-term rate by next year. So if you go from 4.5% to 3.5%, how would your sensitivity look like and potentially at lower levels?

So I would say this actually is a few elements. One is because the sensitivity, which we are showing, they are based on 100 basis points, right? So -- and when actually it will have a higher impact, when the rates will be at the level in which, for example, for a term deposit will not be able to adjust the pricing of term deposits or savings account. So then the sensitivity is growing. Secondly, the growth of the balance sheet itself also is growing sensitivity usually in our case because then we start to hedge on our side. And also when the sensitivity is actually increasing when we are actually with the rate on our consumer portfolio are hitting the maximum rate, which we can have on it, which is in Polish is called [indiscernible], but it's maximum rate, which we can have on consumer loans. And if we hit that rate, then we go down. But what will happen before that due to the fact that the new measure supervisory outlier test concerning NII is measuring 250 basis point move for PLN then even earlier, we will be forced to actually make an action potentially to add additional hedging due to increase of sensitivity of NII for the SOT purposes because it's 250 move, not 100 as we 100 basis point move. So increase of balance sheet, a situation in which we are actually are not able from the model point of view, adjust rates on deposits by 100 basis points in case of SOT NII by 250. And on the asset side, is usually actually when we hit for the consumer portfolio loan, the maximum rate which we can have, and then we have to decrease it. So that...

Remind me what's the threshold you need to stay below in case of a 250 basis point shock?

It's 5%. We simply calculate the delta calculated based on the formula described by Jakub, and then we divide by the capital. We should be 5%.

5% NII. And just briefly on capital, if I may. On this op risk impact on your capital ratios, can you explain this a little bit to us? I think you are flagging 65 basis points from CRR and then another 2 maybe also from CRR. So what is the operational...

It's the same source. Yes, that's the same source, CRR, but Piotr simply made a split for better understanding, 60-something is connected with credit risk and 20-something connected with group operational risk. But the source of the change is the same, CRR 3.

In the op risk, this is connected with the losses which we have due to the Swiss mortgages.

Yes, that's what I thought. So shall we expect some reversal here as the Swiss franc charges come down we have a time line for that...

It will temporarily...

The 22 basis points...

Also, it's due to the fact that we switch method because we were one of the banks on the Polish market who use advanced management approach for op risk. And then we had to switch to the new standardized method. And it's also due to the change of method of calculation. We're also adding what Piotr said, additional provisioning resulting from CHF, it added also some capital requirements.

Okay. Very clear. Last question from me would be on your capital requirements. And I believe there is a countercyclical buffer about to be phased in. Is it 200 basis points maybe by next year? So if I just apply that simply on a fully phased basis to your current buffer of 277 basis points, which you have above the minimum requirements for a 75% payout that would come down to below 1%. Any thoughts on that?

Actually, we are actively managing our capital position. And as a kind of general rule, we definitely want to be above dividend levels, keeping also around 1 percentage point of kind of management buffer. So for example, what you can expect potentially from our side, for example, Tier 2 issuance, if needed. It's also connected with the change of rating of our senior non-preferred debt, which was changed in the first quarter from Ba3 to Ba2 because we agreed with Moody's that will keep certain level of subordination, meaning Tier 2 or more subordinated instruments in relationship to our assets. So this also will trigger from our capital structure, Tier 2 -- potential Tier 2 issuance. That's one point. Second point, our own funds will also slightly increase after general shareholder meeting, assuming that general shareholder meeting will accept Management Board and Supervisory Board proposal concerning around 75% payout because part of the profit out of this 25%, which will be retained will increase our own funds. And additional point usually what we also do and assume that part of the first half profit, we -- after approval of Polish FSA, we include in the own funds. So this also will actually -- and we assume also that we will do in this year. Last year, we included PLN 1.3 billion on the group level to the own funds.

Have you had any discussions about buybacks with the KNF at all recently?

Recently, there was no, I would say, extensive discussion concerning payback, except the fact that, okay, in our strategy, we assume that we can -- in our dividend policy, we can pay the dividend or share buybacks. But for now, there was no any more concrete discussion with Polish FSA.

I have a question, maybe you could give a little bit of your personal commentary on what do you expect from the Polish sector following the [indiscernible] entry? Do you think it as an opportunity maybe to grab more share during this kind of handover and perhaps some disruption as one of your competitors or maybe more competition going forward? Like any insights would be welcome.

We opened such a discussion simply to be better prepared for the different scenarios, and we analyze both the change, no change and negative change for us, positive, negative and neutral. And what we do, we simply define actions to be taken to make usage of the situation. That's -- but it's not a -- we do not classify this M&A as a kind of consolidation on the market. It's a change of the owner from local market, of course, rumor maybe 1 year, maybe 1 year plus internal connected with allocation and change management and all this stuff. From this perspective, we want to be ready and execute any opportunity on the market, including both segments, retail and corporate.

Any other questions? Should I assume that the results were quite clear.

Maybe one more comment to the Gabor question. Please take into account that in the dividend levels, already 2% of countercyclical buffer is included. So did this according to the Polish FSA dividend policy. So of course, the question mark is what they will do going forward with the dividend levels. But currently, they already assume 2 additional percentage points to cover the countercyclical buffer.

Jakub, so the 12.5% and 14.5%, the debt there is the countercyclical buffer, is it? Page 25, I'm talking about the chart on the right.

So the dividend levels already includes 2% of countercyclical buffer, yes. And they are on the TCR level and 14.4%.

May I kindly ask you to comment on the deposit trends. And specifically, are you seeing any incremental pressure in the sector right now for deposits? I'm asking is it seems like there's some inflows into term deposits again and pricing is increasing. And if that's the case, how do you see the developments later in the year relative to loan growth overall?

Okay. So from -- I would say, I understand that you're referring to the retail deposit pricing. So what we see, we see rather from the structure point of view that is not changing as fast as we thought it will change towards current deposits. So that means that the part of the term deposits is decreasing, but is decreasing at a smaller pace that we assumed. That's why also what you can see that potentially the rates might be slightly higher. However, we don't see pressure on deposits on our side. Having -- if you also look from the LCRs point of view, you can see that our LCR is around over 240%. Many players also have LCRs above 200%, which create no pressure on the deposit pricing. What you can see, of course, you can see offers for a new money with conditions. So it's treated as we see kind of -- and they are trying to attract new customers. giving a -- for example, 7% on saving account for a new money. But in general, I would say we do not see pressure on the -- currently on the deposit pricing. As you can see on our deposit base is growing quarter-to-quarter. So we -- on our side, we are trying to change a little bit our deposit structure also in the context of the long funding ratio implemented by the recommendation of Polish FSA, meaning that we -- in April, we implemented a product 5-year long for retail cost customers as a saving product, which will contribute to the long-term funding ratio. And we are currently in the discussion among other institutions with Polish FSA to change one thing in this context, one thing in the long-term funding ratio recommendation because currently, we can have deposits only by the end of 2027. We can include them in the long-term funding ratio. And we are actually discussing to remove this time restriction and use these deposits as a normal form of long-term funding next to covered bonds, next to own fund surplus, next to MREL issuances. So from this perspective, okay, we are, as a biggest bank, also showing because there is no common product, such also similar projects are on the market that we also would like to, on the one hand side, give customers a good product and on the other hand, address regulatory requirement.

Any additional questions? So thank you for participating, and hope to see you next quarter. Thank you, and goodbye.

Thank you.

Thank you very much.