Santander Bank Polska S.A. (0DVR.IL) Earnings Call Transcript & Summary

Hi, ladies and gentlemen, my name is Agnieszka Dowzycka. Welcome to the presentation of financial results of Santander Bank Polska for the first half of 2025. I'm here with the CEO, Michal Gajewski; CFO, Maciej Reluga; and Wojciech Skalski, Financial Controller. Before we start, let me remind you that throughout the course of this conference, you can send out questions using the link online or you can send them directly to my e-mail box. The presentation is available on the website of Investor Relations at Santander Bank Polska.

Thank you, Agnieszka. Ladies and gentlemen, welcome to the presentation. To begin, I'll address key transactions from the last quarter. I'll start with the largest one announced on the 5th of May, the planned sale of a controlling stake in SBP to the Erste Group. Of course, this is subject to regulatory approval, it will most likely be completed around the end of the year. This is one of the largest transactions in the history of the Polish banking sector. We see it as a great advantage for our customers. When this transaction is closed, we will become part of the -- one of the largest groups in Central and Eastern Europe, as the group has a deep understanding of our region's realities and, like yourself, they focus on building long-term relationships and delivering the best customer experience. At the same time, they invest in innovation, digitization and mobile services. A major advantage of this change will be enhanced international cooperation and the ability to support our customers in newly and highly promising markets. We will offer new opportunities while continuing to ensure the best possible experience for our customers across all business lines. I want to emphasize that the shareholder change process did not affect our current business operations, as reflected in our results. We continue to follow our strategy, operate under the same principle, the same team and the same mission to help customers prosper. Regarding the name and logo change, it's too early to discuss this, but you know we have experience in managing such projects and when the time is right, we will inform you. We will carry out this process efficiently respecting the needs of our customers and our employees. The second transaction announced on the 16th of June is the sale of 60% of SCB shares to the Santander Group. All details were provided in the public current report and this transaction affects the presentation of our financial results for the first half of the year. SCB is presented as discontinued operation. For the purpose of this conference, I will -- the management report and financial statement includes figures for both continued and discontinued operations. However, for the purpose of this conference, I will focus primarily on the figures for continued operations, that is excluding SCB. Moving on to the results. In the first half of the year, we generated PLN 4.12 billion in gross profit. Our tax and regulatory charges amounted to PLN 1.8 billion. The group's net profit for the half year was PLN 3.074 billion. With the second quarter alone that was almost PLN 1.4 billion. In the report, you see discontinued operations, and it shows the loss of PLN 378 million, and this includes without SCB's result and the deferred income tax related to the sale of Santander Consumer Bank. Including this change, the net profit was PLN 2.752 billion and in quarter 2 alone that's PLN 1.18 billion. Let's move on to Slide 7 on general operational data, where we remind you that we serve over 6 million customers. The number of digital customers continues to grow. We now have 3.9 million, the vast majority whom, that is 3.2 million, use our mobile app. The number of digital customers have increased by over 6% year-on-year and the mobile app users by more than 10%. At the end of the first half of the year, customer deposits totaled PLN 221 billion, and the gross loan portfolio stood at PLN 163 billion. Total assets amounted to PLN 315 billion. Now Slide 8 with key financial results. I'm again reminding you that today's conference covers financial results as presented in the financial statement that is excluding discontinued operations. So again, Slide 8, the group's net profit from continued operations in the first half of the year was PLN 3.1 billion. In the second quarter alone, it was nearly PLN 1.4 billion. Excluding discontinued operations, net profit for the first half of the year was PLN 2.752 billion; and in Q2, that was PLN 1.080 billion. Net interest income reached PLN 6.35 billion, up 7% year-on-year; in Q2 alone that was PLN 3.4 billion. Compared to the previous quarter, net interest income remained at a similar level. Net fee and commission income amounted to PLN 1.47 billion, an increase of 6% year-on-year. In Q2 alone, this figure was PLN 744 million. Total income reached PLN 8 billion, up 8% year-on-year; in Q2 alone, it exceeded PLN 4 billion, a 2% increase quarter-on-quarter. We enjoy strong capital position. Return on equity for continued operations was 21.9%. The group maintains excellent liquidity with the consolidated LCR of nearly 200% at the end of June. On Slide 10 to 12, we show you new offerings introduced for our customers where we go across our business segments. So let's move straight to Slide 13 of our selected business data. We start with retail banking. We manage 4.8 million personal accounts in PLN, that's 2% more than a year ago. In the first half of this year, we opened 212,000 new PLN personal accounts. Cash loans. We issued PLN 6 billion in cash loans in the first half of the year, that is 9% more than a year ago. In Q2 alone, we issued PLN 3.1 billion. This is -- this marks the record-breaking quarter for cash loan sales, which we're very pleased about. The various newly granted mortgages was PLN 4 billion. In the second quarter, it was PLN 2.4 billion, and that's less than last year. But let me remind you that we're comparing against a very high base due to the Safe Mortgage 2% program. However, on a quarterly basis, as we're showing on Slide 25 in the attachment, we're seeing a rebound in the market, and this is the best quarter for mortgages in the past 4 quarters. Similarly to last year, 97% of new mortgages sales were granted at an adjustable fixed interest rate. The share of fixed rate in the total portfolio reached 45.9%, and in March of this year, that level was at 44.2%. Now net sales of investment funds totaled PLN 1.4 billion. Retail assets under management of TFI reached approximately PLN 26 billion. Our share in the market is over 10%. Let's move on to the SME segment. In the first half of the year, we opened 36,000 new business accounts. In Q2 alone, we opened 16,000. The value of loans granted to SMEs in the first half of the year was PLN 2.7 billion, leaving very good performance. Sales reached PLN 2.4 billion, that's up 18% year-on-year. Business and Corporate Banking. Sales of new credit limits rose by 11% year-on-year. Credit volumes increased by 9%, while FX volume by 12%. In Corporate and Investment Banking, the revenues from capital markets services doubled, while the revenues from treasury transactions were 17% higher year-on-year. It's important to say that we received the award for Best Investment Bank in Poland at the Euromoney Awards for Excellence and -- so we were recognized by international panel of experts. We were named the Best Investment Bank in Poland, we have a very strong position here. Now let's move to the balance sheet, gross loans. As you can see, you different segments contributing to that, including the discontinued business. In the first half year, the loss loan portfolio stood at PLN 163 billion. [indiscernible] in Slide 25, we are showing that we can see really good sales of cash loans, SME loans as well as really good sales of mortgages. Slide #16, Customer Funds. I've already mentioned the deposits of PLN 221 billion. Investment funds stood at PLN 26.5 billion, growing 20% year-on-year and 6% quarter-on-quarter. Overall, customer funds, that is deposits and investment funds, totaled PLN 247.5 billion. Slide 17, Net Interest Income and Margins, so we are moving to the profit and loss account. The net interest income totaled PLN 6.4 billion, growing 7% year-on-year, while quarter-on-quarter, the net interest income remained flat, growing only slightly. Net interest margin for quarter 2 annualized on a quarterly basis, as you know, for continued operations totaled 4.89%. Just for information, we are showing the margin for both continued and discontinued operations, it is 5.04%. Net fee income, really good information here is the net fee income totaled PLN 1.5 billion, growing 6% year-over-year, and the growth against the previous quarter was 2%. So we see good pace of growth, and we have the continued growth trend, especially the fees for asset management, insurance, FX and brokerage fees, notably good results. On a quarter-on-quarter basis, we show good performance when it comes to FX fees, but also cards fees and brokerage fees as well, which grew quite nicely quarter-on-quarter. Let me highlight, and it's worth stating that, that this is all driven by the bigger number of transactions done by our customers. We would not introduce any changes to our scheduled fees and charges. Slide #19, Income. I've already mentioned that PLN 8 billion, growing 8% year-on-year and 2% quarter-on-quarter. Let's move to Slide #20. In the 6 months, the costs totaled PLN 2.5 billion, driven primarily by higher contributions to the banking guarantees. If we exclude regulatory costs, the total costs grew by 7% year-on-year, of course, driven by inflation, salary increases and the changes in service prices. Quarter-on-quarter, the growth was 1%. Compared to the previous quarter, total costs, excluding regulatory costs, increased by 1%. The pace of growth in quarter 2 alone remains low. And if we look at the cost to income ratio, it was 30.9%; and a year ago, it was 31%, without any major change. Slide 21, Loan Loss Provisions. The net balance of provisions for expected credit losses at the consolidated level, excluding Santander Consumer, was PLN 243 million. A year ago, that was PLN 448 million. This decline is the effect of the high base that we are comparing to. Just to remind you, in the first half of 2024, the bank extended the criteria for classifying loans to Stage 2, which led to a one-off impact on the net balance of PLN 124.5 million. We have a good effect of continuing good quality of our loan portfolios. we have a stable level of past due payments. We do not have a growth in the new NPLs, and we have a continuing large -- good levels of recovery. All of that translates into the cost of credit risk, which is now 33 basis points. The key risk indicators remain at sound levels. The NPL share is at the safe level of roughly 3.9%. There were no one-off major events in quarter 2 that could impact the net balance of provisions. We reviewed the parameters as we do on regular basis in line with IFRS 9. And these are the parameters that we use for calculating provisions. As you can see on the next slide, we sold nonperforming portfolios worth PLN 301 million and that gave us the gross profit of PLN 60 million. The banking tax and regulatory costs, I've already mentioned them. Out of the gross profit that we earned in the amount of PLN 1.9 billion that regulatory and tax were levied stood at PLN 700 million. And in the first 6 months, the gross profit was PLN 4.1 billion, while levies totaled PLN 1.8 billion. Now the summary on Slide 23. Now our performance after the first 6 months was sound. And we are showing the net profit of PLN 2.7 billion. We also show the impact of excluding SCB from our group. And this loss on discontinued operations totaled PLN 327 million. These results, first of all, from the way we recognize the deferred tax assets of PLN 400 million, and this is the effect of selling Santander Consumer Bank shares. All the details of -- were presented in the investor presentation that was published along with the current report in June once we announced the transaction. Coming back to summarizing the first 6 months. I'm happy with the data, which confirm the increased activity levels of our customers. This is reflected by the growing number of digital payments, remote payments, the big payments. The number of accounts we have is growing. We have 7.5 million accounts, including 4.8 million personal accounts. We are really happy with our net fees and that's been growing quarter-on-quarter. Also, our net interest income improved. It's higher by 7% than a year ago. This reflects the activity levels and good condition of our clients. This is also reflective of sound quality of our loan book and low level of provisions. When it comes to our business operations, we already mentioned the dynamics. And that's all fits into the good trends, and we can see that it is going to continue in the quarters to come. And now let's move to the questions-and-answers session. Maciej, if you could, please.

Let me start with funds. We have 2 questions about that, that could be easily addressed. What is the outlook for targets related to FX mortgage loans and now also provisions? When do you expect the provision cycle to end? So let me first highlight that we have the adequate level of provisioning. So our models are regularly reviewed by external independent auditors and the levels we're presenting now after the first half of the year is adequate. It is aligned with all the regulations and our internal models. Let me remind you the coverage ratio for our portfolio is 138%. Now the outlook, I don't want to enter into details because as I said we have the right level of provisioning. We continue our settlement program. It's better to settle than to see both for the customer and for the bank, and we continue to remain in that path. So strictly speaking, if we were to add up provisions, we would have. Now questions about the political landscape. What implications do you see from the latest presidential elections on the monetary, fiscal and regulatory outlook for the Polish economy and the bank? And another question in the area, press reports indicates discussion of additional bank taxes in Poland, what is your outlook on the already proposed regulatory actions and its impact on Polish banks? Now starting with taxes. I don't want to comment on media speculation. We're working together with the Association of Polish Bank. The discussion is ongoing. However, we are not commenting on the press releases, it's really difficult to say and talk about the impact. We have -- our stance has been firm. We have the most burdened banking sector in Europe and the world, probably. So every time we have an earnings call, we always make reference to the regulatory burden. They are very high. So any additional charge will only have a more impact on that. When it comes to politics, I wouldn't like to comment on that. I wouldn't like to refer to any political issues. I can only say that our new shareholder has the experience, they've experienced some political turmoil, but what is most important for us is economy, and our forecast are really optimistic going forward. And we will come back to that in a minute to the growth, but there is one more question, maybe Wojciech you could answer. With regard the deconsolidation of Santander Consumer Bank, what effects can we expect, anything special in the second half of the year when it comes to Santander Consumer Bank deconsolidation?

We actually commented on that quite a lot in our current report, as our CEO mentioned. I don't know what was the question driving it asking about special effects, but referring to the information we published on the 16th of June, just to remind you, we still have to recognize income on that transactions if all conditions precedent are met and that PLN 3.1 billion. And as a consequence, the rest of the deferred tax assets will have to be recognized and that's in the order of PLN 180 million. And that's consistent in what we put in the appendix to the current report of the 16th of June.

There are more questions about the volumes and in reference to our earnings call a quarter before, when we were talking about the outlook for growth in corporate loans in the coming quarters. What would be the supportive factors and what are the specific sectors?

Well, the first quarter was when we had this growth at a smaller level, but starting from quarter 3, 2024, we cannot complain about the growth. Of course, second quarter was a bit untypical and compared to year-on-year, and you have that on Slide 15 for continued and discontinued operations, and you have some details there that confirm that both an SME investment in corporate banking, the growth are going to be continued in quarter 3 and our CEO has mentioned that before. I would say the growth in all segments of the bank and they are also seen across the sector. The demand that's been building for corporate lending, I don't know whether we could pick any specific sector because it happens across different sectors. But in quarters to come, looking beyond 2025 to 2026 definitely the sectors related to energy will be important. In 2026, we expect the solid growth in loans by 7% here overall. The economic growth will be driven primarily by investments as already is happening now. This will be conducive to loans. The lower rates will also support lending. We are optimistic. And let me just mention the loans for individual clients. The acceleration mentioned by the CEO in new sales, Slide 25, really good performance when it comes to cash loans, and it bodes well for us for the second half of the year.

Moving on. There is a question, of course, about NII and NIM. And the question starts with the reference rate at the end of this year in 2026 and the implications. What is the sensitivity of NII and NIM and so on? Starting with the reference rate. We expect 2 more cuts in September and November by 25 bps. As we all know, the inflation was better than expected, and we will see that we will be close to the inflation target. This will actually support further cuts, and at the end of '26, we expect interest rates in the order of 4%. Our sensitivity, we give you information quarter-on-quarter. This year, it is worth mentioning what part of the sensitivity results from discontinued operations. We were saying that it's in the order of PLN 300 million less than in quarter 1. In the half year, this is PLN 282 million for the group and 10% of that is accounted by SCB. So on continued operations, the sensitivity is PLN 250 million. And I'm talking about the sensitivity to a cut of today by 100 bps and that's the effect for 12 months assuming the fixed balance sheet. And this sensitivity was reduced in previous quarter. Every quarter, I provide you the share of adjustable fixed rates in our portfolio. And what I have in mind are those sanctioned at the fixed rate and those hedged by swaps, and that's more than 53%, and that's more than 50% of this half year. And that's really it. We have a question now about the capital. Michal, we have a question, can you explain the negative effects on the capital in Q2?

Well, if you look at the ratios, after the 30th of June Q1 13.51% and TCR 18.06%. So there was a slight decline and this is due to the increased level of the risk-weighted asset quarter-over-quarter that's around PLN 3.6 billion. Total funds went out -- went up by PLN 150 million. We grew our business. This changed the level of the risk-weighted assets. When we look at the retail and the business segment, the risk-weighted assets were also pushed by the growth of business and corporate banking. It was also impacted by the synthetic securitization transaction. The minimum level are still met. We still have -- we still go much beyond the required TCR at the bank level that's PLN 10.3 billion above. So we are totally secure. And the decline was down to the increased level of the risk-weighted assets and that was related to our ongoing business across customer segments. Talking about the capital something that's important, mentioned by Wojciech, when we released the current report, we're talking about the pro forma impact on the data as at the end of 2024, what the consolidation would mean? We were talking [indiscernible] 37 on consolidated data. We're showing you on Slide 8 what it would look like as at the end of the year, and we're showing you the difference.

Now the last question that we received. Does the bank plan a provision on unauthorized transactions of customers [indiscernible] case and also provisioned for the free loan sanctions? Well, you should read the note to the financial statement where we discuss the risk. We have about 25 lawsuits where the bank is defendant relating to the free loan sanction. We're monitoring this at the level of the entire market. We're also looking at the situation at our bank. The verdict so far has been favorable to us. So we haven't made any portfolio provisions in that respect. But we look into each individual case. The bank has a PLN 2 million worth of provisions for individual cases. And for us, this was adequate for this type of risk. I don't see any more questions. Did we get anything in the meantime?

Yes, I have a question from [indiscernible]. We have a question: Can you comment the trend underlying loss loan provisions excluding discontinued operations? The credit provisions look low for this point in the cycle, it would be interesting to know whether you think that this level is adequate? And generally, what do you think about loan availability and the default rate in the portfolio? Do you see any negative changes when it comes to the outlook for the credit portfolio? So this was my simultaneous translation of that question.

Well, I will take that. We're very happy of the good quality of the credit portfolio. We have an excellent -- our customers enjoy an excellent standing. They do very well with the economic landscape at the moment, and they proved resilient to the development. We see improving financial performance, improving flows of our customers. We continue to review and update our models. Our models are regularly reviewed by our auditors and those models are also resilient, and they proved adequate in classifying customers. Our assumptions are positive when it comes to economic development, no one-offs. We're not expecting any major one-off in the following quarters. So we will continue this good level and this, of course, impacts the level of provisions.

We have one more question. 53% of portfolio is hedged. What is the timing of that hedging, and we're talking about interest rate hedging?

About 2 and 3 years.

That's all the questions we've received.

Okay. So thank you very much. We don't have anything else to add. Thank you very much, and have a good day, and have a good summer. Goodbye. [Statements in English on this transcript were spoken by an interpreter present on the live call.]