Alior Bank SA

WSE:ALR

Earnings Call Transcript 2020-Q1

[Krzysztof Bachta;CEO & President of the Management Board, executive]

I'd like to thank for the first few questions that appeared on my tablet. But as traditionally, we will answer the questions after the presentation. We will quickly make a presentation first. So as you've noticed, and as we've already communicated to you, we don't have the so-called provisions for COVID as for quarter 1. So we may say, to a large extent, that it is the last quarter before COVID, but I'd like also to focus on COVID and effects of pandemic, which are seen in our earnings -- net earnings and in sales and in net profit. So while you will see it -- within the next -- within the last 2 weeks, its impact.

So from the presentation, I will not focus on this slide because it's a sum up. So the net profit of PLN 73 million that we inform on. And as for impact of ECJ, this is just shown for your convenience so that you could see how much it impacts -- this ruling impacts our earnings. And without the effect, the -- most of the trends are positive. But now just quickly showing the next slide, so that to have more time for many, many questions. So for net financial profit, PLN 73 million; revenues year-to-year, slight drop, as you can see here. So a large part of the drop connected with the ruling of the European Court of Justice.

As for general administrative costs, a large drop-offs connected with BFG falls. And these contributions -- because of these contributions, thanks to the structure of our deposit. And as compared to our Alior Bank to other banks, our contribution to the resolution fund was a bit smaller this year. So we may say that some measures taken already in 2018 now produce effects. So the remaining costs, we might say, have been kind of plateau. So we fully control costs. As for the cost of risk, we see an increase mainly in KI segment, and we will talk about it more. So Marek Szczesniak says that quarter 1 of that year also had one-off effects connected with the so-called ECL revision release due to calibration of the model, so that the first quarter of previous year was extraordinarily good. And now quarter 1 here is sort of normal without visible effects of that pandemic.

Some just major ratios, NIM. As you can see, it's very high. It still remains at a very good level. So in quarter 1, we can't see an effect of the drop in interest rates, which we will discuss later on. So without this ECJ, we will be able to maintain NIM at a very high level of 4.7%. As for C2, our situation is similar without the effect on the revenue side connected with ECJ and this ratio would improve. As for CoR ratio, it's 1.93%. So it is below our guidance, which was 2.0. Of course, by the end of the year, the level of 2.0, as you may guess, today in the context of the pandemic would not be realistic, but we would also discuss some kind of sensitivities here. So I would say, of course, right at the beginning that we are not able to say precisely what the level of risk would be here -- this year.

We may say about some analysis of sensitivities related to this result and our reality. So our credit volumes in our segments; here, you can see the picture, which is partly from before the pandemic, and partly, it takes it into account. So the last 2 weeks of March, we saw a significant fall resulting from the lockdown -- the beginning of the lockdown effect of kind of normal activity of customers at our branches. So that was the greatest effects, but objectively, the results for quarter 1 are still very good. So micro sales at the level above our plan, good mortgage loan sales, and we hope to maintain it in the following quarters.

A relatively good new lease sales in the quarter 1, and we expect a big fall here because looking today at the situation that the sector hardest hit. So that would be drop in sales in new cars. It has already dropped and leasing sales may also drop by even 70%. So these values in the future will be much solid. New sales would be like that. So loans new space were also affected by a drop in activity within the last 2 weeks. And that was also related to the measures of ours connected with a kind of more strict credit policy to have kind of loan -- cash loan, so that to take into account the clients of -- that could become higher-risk clients, and we took actions so that to accept -- improve acceptance ratio.

So now capital ratio is at very high levels. As you know that the effect to large extent of mainly lowering capital earnings, capital requirements by 3 percentage points. So there's PLN 2.2 billion of provisions above the threshold.

So as for liquidity ratio, here on this chart, you can see that when we entered the pandemic period, we had very good liquidity up to even 150%. So we may say that objectively, we are well prepared for the situation because liquidity was even above our standard expectations. But due to the lowering reserve -- capital reserve, this ratio would be below 170%. That gives us a basis for lowering cost of deposits in the future. And we did it throughout the whole year, and you will see it in our performance, our results. And then we still have very good basis for lowering cost of finance in the following quarters.

Now remote channels development. That was a very important element on this quarter. And for photo ID, it's Alior Bank's own method, thanks to which we are able to remotely -- fully remotely without any physical contact with clients, verify his or her identity and signing of the contract, which is very useful functionality these days. And we have also Autenti and electronic signing of these 2 solutions connected with electronic signature, mainly for entrepreneurs at the moment. But obviously, these solutions will be to a larger extent, implemented for other clients and Poczta Polska, the Polish Post enabling cash payments in 1,300 outlets all over Poland. That's -- we are very happy with the awards that we won.

And for customer services, we had very high positions in 2019, and we are the leader of sales that's important for the future as regards BGK guarantees. Today's conditions, these guarantees are important for the support of the whole economy, so this is definitely our competitive advantage because we can do it. And it is part of our, I would say, DNA. As for innovativeness as Tomasz Sienicki was granted an award. So once again, I'd like to congratulate him that is for implementing blockchain, and it was used practically, thanks to which bank saved many millions of zlotys on letters sent to the clients. So we do it now fully electronically. We don't send, let's say, physically letters to customers.

Now Section 2, COVID-19 impact on bank's operations. So of course, as remote work is concerned, you'll hear at each conference that banks and other institutions now use remote work. We did it earlier, but this increased nowadays because earlier, we used it, we -- might saw it sporadically in practice. Now most of operating and support functions, which are not on the first -- the frontline as regards to contact with the customer have been that service remotely. As for the contacts with customers, it is important that during the pandemic, we should be able to maintain very high operating efficiency.

So we give some number scales, opened our online branches, and we ensured all measures that are necessary, that is personal protection equipment. So 94% of branch offices were opened. As for contact center, we increased these collections and we are very efficient here. So I'd like to thank our workers at the first frontline, so -- in our branches and in partnership outlets and branches because indeed, our employees met the expectations of the clients who needed in this situation also help. So as for our communications activities, very soon as the bank marketing, we're able to improve communications or really to transform it from the product-oriented one to the one more based on the needs of these times that is banks from home and that is promotion of all remote channels.

So for people who are interested in it, please check Facebook of our, let's say, [ wise granny, ] that's mainly for our Polish customers. It's a very interesting person who really supports us with regards to electronic banking for seniors. So other very charitable -- charity activities here, as regards to our logic in most of the cases, in addition to increasing support for health care, which we did not support before that. So we transferred some funds for the hospital in Szczecin that became the infectious disease hospital fighting against COVID. They did not have equipment for the additional tasks, so we are very happy that we were able to help them. So -- and we also helped some other organizations that we cooperated with like Health Center for Children. We bought some tests, and we also bought other equipment and other materials for other organizations that we cooperated with before and also laptops so that to enable students and learners remote learning. So now we would discuss credit, and it would be Marek Szczesniak who will do that.

[Marek Szczesniak, executive]

So thank you. In the first half of March, we started taking actions and directing against COVID, including measures under sectoral dialogue coordinated by the union of polish banks and here from scratch introduced new processes for credit vacations. So we proposed to the customers to variance. So the first one is a deferral of capital interest installments for 3 months. And the other was deferral of principal capital repayment for 6 month. As of 30th April, in total, the share of this credit vacation in the Alior Bank portfolio is at 11%. So on the slide -- on Slide #14, you see the results of the major of our share is our leasing companies at 23%. Whereas in Alior Bank, in particular, segments of this portfolio, the result is about the average value of 11%, thanks to other upgrades of the process, our effectiveness. I mean the capacity of the process is very high, much higher than the inflow of new applications and this inflow of new applications very quickly is diminishing, is being lower and lower. So in the last week of April, it was about 1,700 applications as compared to the peak week of -- week 3 of March where we had over 22,000 applications. So over 40% of all applications that were handled by Alior Bank.

As for the profile of clients applying for this credit vacation already, so in the majority, these clients that have applied for that, for -- this kind of vacation have not lost their sources of income, which shows on the slide -- chart on the right-hand side of Slide 14, where we present the share of particular clients who launched their applications for this called repayment holidays of Alior Bank based on the classification at the end of February 2020. So just before the effect of COVID, and these are in majority regular clients classified under basket 1. And in some segments, the share of basket 1 is over 90%. And in other segments, it is much above 50%. And we are also observing how this profile of clients is changing and how the inflows of their salaries into accounts is changing.

And here in the majority, the situation of those clients did not change significantly. So the first conclusion here could be that as regards to so far applications for repayment holidays are, in majority of cases, preventive action taken by customers, but this is the population generally of higher risk than the remaining part of our credit portfolio.

Now could you comment interest rates? So how impact of interest rate cuts, after these cuts the bank the estimate impact on quarterly results would be about PLN 75 million to PLN 85 million. As most of these costs, it is based on some guidelines as to the possibility of lowering rates on the deposit side as well, which we are doing and we are continuing these activities while observing of what's going on in the market. So in quarter 1, we can see some element of impact of interest rate cuts through rate cap on the loan, and this is about PLN 5.8 million on net income. So over PLN 7 million impact on interest income. So as a bank, we are taking measures so that to prevent this kind of erosion of income.

So on the revenue side, we improved the effectiveness of cash loan by increasing the share of commission or increasing the share of insurance on cross-sell and the sales of loans. We are discussing here just new portfolio. So that would be just see when we have new sales and kind of saturation of our portfolio with new sales. So we are adjusting our offer all the time. You are not surprised at it because we did it effectively last year, as you can see by the finance -- cost of financing. And these activities will become more dynamic in the following quarter. As for other elements, we are looking also at the cost that we see some potential for savings of logistics costs or fleet -- vehicle fleet or the operating cost fleet rentals. And of course, bank is always keen on automation, on building online processes. So here, natural effectiveness would appear because of these activities.

So going further now to operating -- operations. I would briefly discuss it because how a section shows that all activities that we took to build a lasting relationship with the clients or connected with increasing -- improving the quality of services lead to better relations, and we become the first choice bank. And all these activities produce effects. And objectively, we do deliver. And here, the number of retail clients increased 170,000 year-on-year. We are very happy that the quality we see on the right-hand side here, the ratios, by which we measure the activity of our customers, the new customers that open our accounts have new transactions, that's increased by 60%. Perhaps the current inflows that show that the client really makes transactions. And here, we also have seen a 67% cross-sell cash loan sales in remote channels.

So objectively, at the background, again, of the quarter 1, we see that where demand and some reducing risk actions taken by us decreased the volume of cash loans. We see because this channel because of its effectiveness will increase its share but we see also good increase of mobile applications users, 60% year-on-year. The savings account and online accounts increased by 60%. So they are good results, which are the basis for seeing that the digitalization and remote sales is developing quickly in the bank and was developing before. So we were very well prepared when the pandemic appears.

So NPS now own branches and partnership outlets, here the results are very good. But I'm very happy that it increased by 11 percentage points year-on-year. So as you can see, it's a very high increase. Because in the last years, it is a record ratio and at a very good level, and we hope it will still increase. And we are also now simplifying communications, which is helpful. So we have this number here. It is 189. So these are all communiques, letters, documents that were drafted, so that we have the simpler communication with clients so that the clients understand what our expectations are. Also they just understand that what you want to communicate, plus improvement of the processes quality increases this NPS ratio. So this is really high.

So now micro clients. We have above 200,000 customers. So in -- we have in quarter 1, so many active clients. So we are very happy with that. We are happy also with online acquisition and issues connected with total transactions. So in the next quarter, we will perhaps show you the same or maybe different ratios. Because of social security insurance, some of the customers would be exempt from paying these contributions. Hence, in April, the ratio would be much lower, but we see, on a year-on-year basis, that activity of our customers and the number of active customers of ours grows much faster than the total increase of customers. So we are very happy with it because we want to have active clients, customers, so that they buy more products.

And this Micro slide, which we always say, not much changed. But one important news is that from April as regards these Micro segments, we are in a situation where the coverage by guarantees would increase by 100% because it is a compulsory element on our part since April. And on the other hand, the very way of the construction guarantees in the near future that is extending their period increasing the coverage ratio. At the same time exampling by BGK from the fee from guarantee. And this all leads a situation that the product really, it is his effect. So as entrepreneurs obtain financing, and it is good for us because of cost of risk and capital lowers for this MSP, MS -- small, medium-sized enterprises.

So we were happy with a ratio that is the customers using BankConnect service. That's the system that makes our customers come back to our electronic system by their systems, that is by mainly accounting systems of this, and that's why they are more connected with the bank. It is more convenient for them to use bank services. So that was really helpful, and it increased by 200%. So this is a very good dynamics of using the tool. Now as far sales in the previous quarter, we announced that the sales according to our production should be about PLN 1 billion quarterly. You, I guess, remember that. But because of the pandemic in the last week of quarter 1, the sales did not fully achieve this figure, but we are pleased with the results anyhow, but it is connected with several drivers.

Part of the customers did not sign credit agreements by checking the situation, the justification of their investment by analyzing generally the situation, the circumstances. So part of these situations are also due to our credit decisions that is we just held up or deferred some transactions for the next months. And part was due to natural situation connected with the fact that customers just kind of postponed some transactions. And we see that in April, these sales should be good. But even today, we must take into account the impact of the pandemic on investment projects of our clients. And that's why the risk -- the assessment of risk credits kind of more goes further and takes into account this aspect.

As for BGK guarantees, you know that we've been a leader in this area for a very long time. So we see this fund of -- that clients are very interested in working capital, so the pool of PLN 5.5 billion, which went with fund in investor finance over PLN 6 billion credit. So this is the product that would be growing significantly. Soon, of course, after assessing creditworthiness, we will say that it would be safe and profitable product that would build credit balance.

And finally, as regards to this operational part, it's important PFR shield some statistics now connected with, of course, Alior Bank. We were one of the first 3 banks that was operationally ready to start to enter the program. So the very program as you observed, of course, PFR communications is unprecedented scale, very quickly constructed from taking the decision to have such implementation by the bank and the PFR took 2 weeks, and it was really very fast because after 2 weeks, first payments were made, and that was necessary and this is impressive Hence, I would like to thank the Alior Bank's team that is taking part in the project. So they did a very good job indeed. But as regards the effects, we had about PLN 329 million of funds that reach our customers. So the program would have very great bonus for saving, entrepreneurs and jobs, and indirectly will improve the situation of the bank connected with the fact that the base of bank customers would be more solvable now investment.

[Tomasz Bilous, executive]

Good morning as regards to results, Krzysztof has said a few things already, but I want to stress a couple of key things. The interest rate result is quite good, and it keeps a good trend. The margin is very stable. And in the first quarter, as I said -- of this year, we have seen an interest performance of PLN 7 million. So that is not correct adjusted against the dynamics. So it may even be more than that. And the whole result reached in the first quarter, we have about PLN 30 million of the good result net, but there have been some rapid changes and estimations concerning the rates and the exchange -- currency exchange rate movements or the share prices.

Now fees and commissions. Here, the FX had an impact on this result. So this is because some of the transactions involving currencies were making a small positive increment for several months. At the end, it is being valued against the average rate -- exchange rate. But then PLN 0.30 jump was seen in the middle of last March. So that was the reversed trend and the result on fees and commissions shows that now. But that was just once and no more, a one-off effect.

There are some other effects showing up effects of the crisis. Because with our very rapid changes in the expectations that results in some PLN 7 million, then the pricing of the Visa shares that we have in our portfolio in connection with the prices changed by about PLN 8 million. So altogether, this has made this PLN 30 million net.

The cost of -- operating costs -- overhead costs have not changed. Risk costs will be discussed by Marek later on, but before COVID, things were just average. Now how the -- what happens in the field of volumes. Quite comparable to the previous quarters of the year, good growth in the retail segment, year-on-year. In business segment, well, that shows the situation that we discussed in the previous quarters. On the deposit side, we have decent increases on the individual customers. Long-term financing is being attracted to this bank and liquidity is okay, but we are largely financed by the business segment and the credit volumes growth is as -- it could have been better, but the last 2 weeks of March, especially in the business segment, showed some slowdown.

Interest result. Well, perhaps we should mention a very good interest margin and a very significant drop of financing cost, 17 basis point year-on-year. In the second quarter, we will probably see even more dynamic change in this field.

Now provisions. Well, that has been changed by the FX transactions in the recent times, but that was just a one-off event. And now April and May brought things to normalcy. The cost of the bank. The bank is paying all the time at a -- quite a stable level if we not mention the BFG. We have shown here a line of the normalized overhead costs without the provisions that we were discussing in the third and fourth quarter last year. So these costs are very stable, and we are going to keep them under strict control in future and, of course, looking for more optimization.

Now credit risk, Marek?

[Marek Szczesniak, executive]

In the first quarter of this year, the credit portfolio balance grew by nearly PLN 1 billion. 2/3 of this change was in the individual customer portfolio, where we could observe a growth of the housing loans. On the business side, in the first quarter this year, we have seen more sales. And consequently, the micro business transactions grew too by some -- large corporates dropped a little bit by 0.4%. But all that is in line with the bank's strategy adopted because it was speaking about increasing the share of low loss products in the housing segment. On the business segment, we were working on the concentration. We were reaching better tickets and better collaterals.

As regards the other parameters, which describe the quality of the credit portfolio, NPL is very stable in the individual client segment. In the first quarter, 1 percent point growth. And on the business segment, the coverage that is the NPL portfolio coverage by the credit risk write-down has also been very adequate and stable. The cost of risk has improved clearly quarter-on-quarter from 2.39% to -- has changed to 1.93% on the whole portfolio. In the individual client segment, we have been close to the forecasts as well as in the business segment.

The next slide, Slide #34, shows the quality of the new lending operation that we have 2 CoR products that is the cash loan for the individual customers and the micro segment. And the quality here is -- has been stable and good. And this trend has been improving since 2017. And the very early indicators, which can be some -- give you some expectation on the next half of the year is also optimistic. This slide shows this quality by the default rate.

And that is why the last generation, which is measured here tells us about the lending action quality.

Now the next slide is about -- it presents the structure of our credit portfolio, in the first place, the business client portfolio by industry and in relation to the current situation from the viewpoint of the sensitivity, and in other words, the expected resistance to the COVID impact on further prospects resulting from the economic slowdown. So our new credit policy is -- will rely on the different industries. We are going to update it very readily to accommodate for the new developments and to accommodate for the new risk related to the pandemic. We are validating this also by comparing it with the -- in the behavioral way. We are looking at the incomes on our clients' accounts by industries.

And as you can see, this division between -- into the high, small and medium risk is being -- is validated very well against the change in the turnover changes. These values show how the turnovers have been changing since April this year against February. And that's the same group of clients. And the low-risk industry showed some increase by 5 percent point in April. For the medium risk, it's down by 11%. And for the high risk, the decline was by 41%.

And the next slide shows -- we show the structure of our whole business portfolio and our biggest exposures, top 100 in the context of this model I've mentioned. So here, I must say that in the whole business segment, 73% of the exposure is classified as low risk. 12% of the most sensitive industries. A better situation, even better situation, is found in our biggest exposures because the top 100 of the whole business portfolio, the low risk is 83%, and 83% from the point of view of our regular portfolio. So this structure on the second and third graph is seen very clearly. Only 3% of these exposures, the biggest ones, are now considered as high risk because they are most sensitive to the current situation. Then you can see some more information about the role of credit vacation to different groups of the low, high and medium risk and split into the micro and other business clients.

And the last line says about -- speaks -- tells us about the collaterals in every segment. It's over 50% at this level. And in the high-risk industries, it's very high. So after haircuts, it is fully recoverable. And that is also the effect of our measures taken in 2018, in which we came up with different structuring, higher collaterals. And on the micro segment, the whole sales in the last year was big -- included very high BGK guarantees.

And the next Slide #37, I'm showing you a similar point of view at the structure of the cash loan portfolio to individual customers. 79% of the exposures are considered to be low risk. Let me explain, the individual clients are being allocated to these different risk groups. These are individuals running their own businesses and individuals who make the incomes by having work contracts where the employers are also low risk. And this category also includes all incomes of -- such incomes like retirement, pensions and permanent allowances. Such people like law enforcement people and other uniformed services. All that is because of the COVID situation.

And the last slide in this chapter shows you the main lines of changes in our lending policy in March -- last March and April. Of course, these changes that have taken place have reduced the accessibility of -- to our lending action in relation to the COVID situation, but we are trying to keep these changes, which are quite comprehensive. We try to keep them in line with the scoring models, with the incomes and we pay more attention to the current situation rather than the result of the previous years. We are also having different requirements in collaterals, like the life insurance, people who want housing loans are being evaluated against a little bit different criteria. The characteristics of this COVID-related risks is much different than a, let's say, normal economic slowdown risks. And they hit on different industries in very different ways. Some parts of the market are suffering strong blows and others are not.

So the changes we are introducing in our lending is not very much typical product by product, but it refers to segmentation of the market, and that allows us to keep our models updated and quickly introduce new solutions.

[Krzysztof Bachta;CEO & President of the Management Board, executive]

I think at this point, we can start questions and answers. I have a lot of questions already here on my tablet. So I can just answer them one by one, but I must mention one thing. My great thanks to all who have been involved in the issue of the credit holidays. Some processes were built from 0, from scratch, but there are many other people at the front line too who are working for these credit holiday. So thank you for that.

Now answers and questions. I have simple questions. I will answer in a simple way. When more elaborate ones, we will be done. Okay, let me read them in English.

[Krzysztof Bachta;CEO & President of the Management Board, executive]

Question-and-answer session. Okay. So first is, have you booked any additional COVID-19-related provisions in Q1?

As we have said, in the cost of risk, the first quarter, we have not yet done that because there were no objectively good assumptions for it. But as regards the impact of the COVID on our performance, well, the directly -- direct effects about PLN 30 million mentioned by Tomasz, not to mention things like lower sales, et cetera.

Second question is rather difficult. Well, you may think that we are not showing the guidance because there are a lot of variable factors in our environment and some values like our precise sale of our credits. It would be difficult to precisely define and tell. But that will perhaps be better discussed by -- commented by Marek.

[Marek Szczesniak, executive]

In the second quarter, we will face this challenge of estimating the COVID provision. Right now, we've been talking about the resistance of our portfolio. But during the first quarter, we could not responsibly and precisely say, what would be the guideline value because the main parameters, main assumptions for certain estimation were not precise enough. There is more and more information now incoming. First of all, information about the size and profiles of clients who would seek those vacations and suffering some financial problems. The second issue is the issue of the macroeconomic scenarios and also of the resistance of different industries and the COVID impact on the industries and individual customers. So these macroeconomic scenarios are much more adequate today than they were a month ago.

So I think during the second quarter, some mechanisms, not regulatory but more practical mechanisms introduced by banks will help us to develop a more consistent assumptions. And therefore, the provisions made by banks in the future will probably also make the results more comparable between other banks rather than if the provisions were done in March.

[Krzysztof Bachta;CEO & President of the Management Board, executive]

And then I will ask our moderator to ask questions online via conference. So one more question about ECJ ruling, quarterly impact on the interest result as changed. Can you say that the 33 -- PLN 63 million is the result of it?

Well, the answer is very simple. No because this result will be much lower than PLN 60 million quarterly. That's what we expect. And you may remember, I used to say that the struggle between banks, the consolidation struggle was increasing. We used to be a bank that consolidated other banks.

And now in the recent quarters, like the third and fourth quarter and the first quarter of this year, just until quite recently until the middle of this month of the -- after until end of March, we were rather being consolidated for a change. So that means that there were many early repayments caused by other banks. And once this does direct recovery. So this reduction of consolidation that we've seen in April. And well, we've done a similar thing, too. So this result -- this effect should I expect, be much less in the future.

I ask Operator to open the channel for questions asked via conference call.

[Operator]

[Operator Instructions] We do not have any questions from the audience currently.

[Krzysztof Bachta;CEO & President of the Management Board, executive]

Okay. So we have a lot of them via online channels. So maybe I will go on with questions as directed via online, and then we will pass to the conference in case any questions appear. So the next question is very generic from Santander Bank, Polska. Some bank managers in Poland comment that investor net income in 2020 would be at around 0. Do you share that opinion?

Well, this is quite tough question, I would say, to say on the whole market level. Of course, what we see in first quarter is only the part of the effects, only some of the banks in Poland see the COVID provisions, which are basically, I think, only a part of future cost of risk. So I believe that this scenario is possible. In my opinion, I would not say it would be around 0 on the whole market, but definitely like more than 50% less than last year on the average for the sector.

The next question on the restructuring of corporate clients. In recent press, there are comments about effort of Polish banks to change law on the restructuring of corporate clients. What is your take on the restructuring law? What changes in the law would you support? I think it's the right question for Marek.

[Marek Szczesniak, executive]

As I said before, we are continuing our work on diversification. And on introducing the completely new model for the business segment, it's going to be a partner like model, too. We are going to build credit competence on the side of the sales force too. So that will be a segmentation based on the potential of the different departments. And this model will also be updated. We can see it's been updated quite recently, too. And now months-by-months, we're going to manage this model. As a rule, we are paying great attention to good structuring of the transactions to lower diversification, better collaterals and on the micro segment. A very important segment is segmentations by industry and also a high level of collaterals in the form of guarantees by the bank guarantee fund.

So here, we see a lot of symptoms that show that the measures taken already in 2019, although preventive mention such like exiting some exposures where we had a high commitment. So now because of COVID, they cause our resilience be a bit better if it had otherwise without those activities. Now a brief comment about the restructuring. So we see generally the current situation because we expect much bigger need for big effective restructuring processes. So definitely, all activities that would streamline the work of courts or finds other channels for service. So for kind of banking deals. So banks, for extent, takes some responsibility for such deals with a client. So while sound proceduring is what we be needed. So the Davis in the details depends how these solutions would be adapted to the current situation. Of course, it must be done in such a way so that debtors are not hurt. So our experience with restructuring is started objectively, it takes a long time. So the entities that saw this kind of court legal structuring, just stick -- stay there for a long time. So of course, if it's done all faster, that would lead to more certainty of the economic activities.

[Krzysztof Bachta;CEO & President of the Management Board, executive]

Next question, FX commissions is to Tomasz.

[Tomasz Bilous, executive]

Just to explain, getting back to history last time -- last year, we changed this FX presentation of these transactions and FX margins and the input also FX spot transactions. So as a rule where bank does it on an everyday basis with customers obtains quite small but positive margin versus the current exchange rate. So these transactions have such specific feature that the date of delay, they stay on the books, and they supplement this plus, too. And at the end of the day, they are valued to the current average exchange rate.

So under normal conditions, the measured banks obtains at each transaction even it's valued at the average exchange rate, which is not really variable during the day. It remains positive, and it is part of the commission result every day to some extent. So -- but as I say, in March, we had kind of very high evaluation of exchange rates. I don't remember the date, but within 3 days, there was an increase by PLN 0.3, which means PLN 0.1 above the average exchange rate in the day.

Therefore, these transactions that were made before the noon after -- in the afternoon, they were valued by several grosz higher. Hence, this evaluation result, not typically was accumulated and commissioned.

But it was because of this 3-day collapse of the exchange rate, and it did not have impact on the stability of this line overall because we've been observing it. For several months, and it always gives a small but positive results. So after this one, fluctuation, everything got back to normal again.

[Krzysztof Bachta;CEO & President of the Management Board, executive]

So the next question, I will try to answer them because it's about ECJ ruling, PLN 64 million. So these were prepayments or because of provisions to prepayments in the future?

So here, the answer is simple. Our provisions that we created in the quarter 3 and 4 for this kind of historical repayment, as we call them. Today, we might say, it's enough, it's sufficient. And today's, say, inflow or use of the provision is smaller than the trajectory that we projected for this provision for the day, but it's not the cause for dissolving the provisions. Definitely, these provisions are today adequate, but we will still observe the situation. So far, I mean, the inflow has been smaller than our guidance. So as for this impact on the income interest. So there are no historical repayments here. It contains to current repayments made in a current quarter because of kind of new production and fall in a -- on a particular day.

The next question. Coding stage 3 from which industries?

[Marek Szczesniak, executive]

Understand it's about increase of NPL in quarter one by almost 1 basis point in the business client segment. So here we must discuss 2 aspects. First of all, as regards of counter this migration to stage 3. In the majority of cases, it pertains to 1 client. It's exposure that was built in 2013, 2016 from the construction industry. However, impact -- the ratio was impacted the denominator that has the balance value of the credit in the business credit portfolio is lower than the planned result. It's about the PLN 1 billion difference, and it pertains to the segment of large companies. And that also had kind of second impact on the fact that this mathematical ratio in increased by 1 percentage point, say, mathematically.

[Krzysztof Bachta;CEO & President of the Management Board, executive]

The next question. So I think that it's now too early. So today, the strategy covers 3 years, but as regards our, say, guidance that we intend to do in the context of digitalization of the bank and building the primary relationship, it is more valid now than when -- as compared to the time when we prepared it as regards to financial effects, that is by the end of 2020. It will mainly depend on the final effects of the whole economy rather than action taken by the bank itself.

So far, therefore, if there is no macroeconomic scenario, which will precisely respond to what would happen by the end of 2020. We couldn't answer that. And I think such scenario ought not be prepared in the near future. But as for other KPIs, the more operational ones, they are valid.

The next question. I think, Marek, what are the main reasons for negative decisions to applications for repayment holidays?

[Marek Szczesniak, executive]

Here, the acceptance rate as presented earlier, fluctuates depends from -- on the segment from 91% to 99%, the highest is in the leasing company and a bit lower, but above 90% in the KB and KI clients of banks. So here major factors, major drivers are connected directly with the situation of the client, applying for repayment holidays. So namely in a situation where there are some kind of hard premises showing that, for example, that some enforcement procedures have been initiated the DPD is very high, not necessarily at our bank, but at other banks of a particular clients.

So here such applications are redirected from more automated processes to not fully automated processes. What's -- we do have, of course, the analysis factor everywhere, but they are treated more, so to speak, individually with a view to restructuring. And here, therefore, we have such cases as some enforcement procedures taken by enforcement officer, and that's why the client cannot get a positive decision for repayment, how it is. But it doesn't mean that later on some of the clients later on in the longer process could become part of the restructuring, which to some extent, should finish positively.

[Krzysztof Bachta;CEO & President of the Management Board, executive]

I think the question is to me now. As for kind of remote work, we really now are convinced that bank could be very effective here. And we did not imagine earlier that it would be possible that so many people start working remotely, we would be able to operate as before, almost. I mean almost -- because there are some differences, I mean, because, of course, human interactions and -- are important and the quality of communication is different. I mean the teleconference changes these aspects, in fact. So -- but as for the potential for reducing the office space. I mean first of all, because mainly these are long-term contracts, that's one thing.

And the second is that I do envisage, and we've been observing that, in fact, that part of people want to come back to work in the office because not everyone has progress conditions at home to work there. That's as simple as that. But I mean going further outside that as a bank philosophically would have and our managers would permit more people now to work remotely because before that, there were some kind of mental sort of barriers here in people's mind and management's minds, et cetera. So now the trend will change. And we would have, of course, some savings in office space, but it's too early to say how much. But from the social viewpoint and loyalty of employees' viewpoint. And from the viewpoint of team building, that's my personal opinion.

At the end of the day, the possibility of kind of splitting the work from family life. I mean -- what I mean here when you don't work at home, it's important for many people. That's what I think. But the effects, I guess -- I think, I'm sure it would not be as high as we might think now potentially it should be. So as for the network of branches and our strategy, we shouldered the idea for this physical presence in the next 3 years. If I want to say what COVID would change? I think it's similar to digitalization. Of course, COVID accelerates digitalization everywhere. And that's similar for the network of branches. And that would mean, in our case, some acceleration. And we will do that this year. I mean acceleration and the strategic objectives as provided for in the strategy, but not increasing. At least at the moment, we don't see the need for that.

The next issue is about bad bank. So what are the chances for creating the bad bank in Poland. I think it's not only the idea of NBP, but also the sectoral idea. It would be very useful from the viewpoint of the time when banks exit crisis in order to improve the structure of bank's balances and relative bank's capital position because such tool would enable that. But it seems that for some time -- we need some time to develop such solutions. NBP has already done a lot of work by preparing some ready-made solutions, which are being consulted now with broadly understood regulatory environment. And what I think what is now important, we have to work more on the details, and it will take some time. As for the chances, I think that would be something that would be very good for the banking sectors. So well the idea should be, I guess, implemented.

So now the -- how high was the costs connected to adapting the network of our branches to New York. I'm not sure -- I don't know. I mean these disinfectants, this [ PPE ] protection, all these facial masks, I mean, all these things, it's -- it costs more or less to PLN 2 million, PLN 3 million. I guess until now, maybe a bit more. But what is crucial here is that at the same time, there are kind of other costs going down, like ourselves using vehicles, fuels, electricity in offices. So there are some costs that compensate for the increase in the cost of our preparations for this pandemic. But this is the issue, of course, that we -- on which we should not save because -- and here for our own branches and for partnership branches, we would like to ensure safe conditions for our employees and for customers. Hence, we did not make any savings on these particular items.

So now I have one more question about a drop in commissions for cash. Tomasz, on FX transactions. It's a question to Tomasz. But the first question is what cost commissions on customers FX transactions in the light of the need of such instruments on the part of the clients? And the second question is similar -- FX results lower. So that means that FX position was opened at the banks. And that means because of the weakening of the zloty, it was a loss. And what was the loss in those 3 days of March?

[Tomasz Bilous, executive]

So to answer the first part of the question now. So this is something that I've already discussed in the previous answer, in fact. So I think, in fact, yes, I answered that. I'll not repeat it. So it's the effect of these spot transactions made by -- during these 3 days in March, but it doesn't mean that the bank had an open FX position. Bank as a rule at the end of each day, closes FX position. And it's normal, natural bank's activity, which is safe, and it works in all conditions. And what I've already mentioned is that foreign exchange currency at which was valued for this transaction rapidly changed throughout the day. So we have to split these things.

So the valuation of that transaction was like that in those 3 days that the result was negative because of these rapid increases in foreign currency exchanges, but the bank's position was as usually closed as should be and transferred to treasury. And as regards to this movement, the bank, of course, made a loss on that, which is reflected as valuation. It was about PLN 20 million because these transactions were naturally closed at a different FX rate or the banks had to supply currency. But that was just a one-off event connected with these 3 days of very rapid increases in foreign currencies or exchange rates.

[Krzysztof Bachta;CEO & President of the Management Board, executive]

Now I guess, it's time. Questions via conference call. So maybe if you can ask for additional questions. Well, the question is in Polish.

What about repayment, how these are the connected state debt? And what is the coverage for that, if so?

[Marek Szczesniak, executive]

So there is no clear answer here because while these credits in repayment holidays are all treated from the stage perspective in the same way. It's not so. So as I've already mentioned during the presentation, the decisive majority of transactions covered by repayment holidays at the time of implementing such an application. I mean they were exposures without any overdues, and they were classified at stage 1. And from the perspective of the DPD. So as, let's say, premises for classification, they are still classified at stage 1. But in the data presented as of the March 31.

So here, even for part of these transactions in a situation where despite of DPD 0 for other reasons due to valuation of risks through behavioral models, DPD level increases, so we have [ seek premises ] here. So a significant increase in risk. That's why this -- then the reserve is appropriately adjusted. And the classification is changed into stage 2 and the level of 0 type transactions and stage 2 is quite similar to the previous level of being it in provisioning, so it's kind of -- on average, it's about 9% to 10%, generally.

[Krzysztof Bachta;CEO & President of the Management Board, executive]

So I think we have also another question, which has impact on our quality and our vigilance. So amounts on Slide 36 do not sum up to PLN 27 billion, total exposure for business segment up to PLN 21 billion only. So in which industries, can we find the remaining PLN 6 billion then? I think it's a very good question now, but if I quickly look at these 2 charts, really the sum on Slide, it is the PLN 21.4 billion. But if we look at Slide 33, we have the whole portfolio of business clients here. We can see that about 20% of the whole portfolio is earlier re-leasing. And in my opinion, we didn't show this breakdown by industry for earlier leasing, but for the remaining banks' portfolio.

Maybe, Marek, could you confirm my reasoning.

[Marek Szczesniak, executive]

So we did not hide this PLN 6 billion that was missing. Now PLN 5.5 billion is on Slide 36, and that's because of leasing. And then leasing, the situation is completely different in terms of industries. We have great sensitivity here, especially as regards passenger transport and generally transport. But on the other hand, the risk is a bit different because in each case, we have an asset. So we expect as regards -- I mean, impact of leasing, we expected mainly due to sales decrease because that decrease is revenues, especially in commission, also in leasing due to insurance. But we, of course, would observe carefully the cost of risks, we would have higher. But definitely, it should be a safer portfolio than the average bank's portfolio.

[Krzysztof Bachta;CEO & President of the Management Board, executive]

The next question, I think, should be answered by Tomasz. It's a follow-up about margin and NII, quarterly impact PLN 75 million and PLN 78 million, means that our lower cost of financing. So what kind of level of financing is adopted in that guidance?

[Tomasz Bilous, executive]

Obviously, yes. We accepted some assumptions here. So as a rule, first of all, such that we are unable to fully follow a drop or fall in interest rates on the credit side because there -- it's impossible because there were a lot of groups, products at 0 rate or even -- or such rates that further lowering of them was not possible as a rule. Wherever possible, we assume that it would be about 80% reaction in response to a drop in interest rates. We did not calculate the target cost of financing because, obviously, it is still uncertain because we are observing the market situation. We are looking how fast other banks respond and how deeply they respond. So at this stage, we did not estimate the kind of ultimate cost of financing, so that these were more or less reactions about 80%, let's say, reaction, wherever possible. That's response to the change of rates.

[Krzysztof Bachta;CEO & President of the Management Board, executive]

So now a similar question to Marek. I mean the question that was answered but from the different, let's say, angle. So during quarter 1, we have an increase in regular credits in corporate sector by PLN 300 million, why?

[Marek Szczesniak, executive]

So as I already answered earlier, on the one hand, this is reclassification of one client. This is half of that amount that we've been discussing here. But on the other hand, it's also a bit different achievement of the result as regards to NPL sales. Because we assumed that 1 transaction of portfolio -- KB portfolio would take place in quarter 1 this year. We made the transaction in KI. That's -- that is retail client. That's why this outflow under NP strategy for reducing these older exposures that was for a long time and stage 3 default was a bit lower and that one kind of relative change that we've been discussing here was about PLN 300 million. And that's because of COVID. As regards the market in debt, we must assume here that the results here and the conditions for making transactions in the perspective of the following months, I guess the conditions here would be more difficult in the coming future. It may change -- may -- the situation and plans as regards to our NP strategy, maybe not long term, but it might mean kind of deferral here of -- in time of such transactions -- of some of such transactions.

[Krzysztof Bachta;CEO & President of the Management Board, executive]

Some more questions, and we would finish. Now we have also several fans of Slide 36. So Slide 36 is, again, to be discussed. Another question is asked about it, but it's a simple. So I will answer it. So you said that 3% pertains to the highest risk. Regarding to the slide, it is 13%. So which version is true?

So I'm very happy that Slide 36 is of such great interest to you because we wanted to show how the situation looks as regards the effects of round 1. Of course, the true information is 14%. But on this slide, we see that 3% is for low -- medium risk client. This is top 100 clients, and it's not a mistake, so it is like that here because we wanted to show it like that. So incidentally, they have, let's say, the same result. But indeed, 14% is high-risk and 3% is for medium-risk, and that's really correct.

So I think we have one more interesting question about the crisis. You now enter a recession with a 21% share of NPL in business segment. So what was the share of these clients who applied for repayment holidays? Will these companies survive the clients? And maybe you should increase the NPL for this portfolio of clients?

So in my opinion, I think situation depends mainly on a specific client. So if we deal with some debt recovery on real estate. So maybe in the future, we would use the value of that real estate, but it doesn't always mean a kind of very significant worsening of the situation of particular clients. It will depend on the industry and assets that they have there. So now looking at some of the companies, which are subject of restructuring with which we had restructuring plans agreed. So those companies, as we know, which were earlier in a difficult situation and were subject of restructuring plans objectively, resulting from COVID. I mean at least some of them have more difficulties because if they are in an industry which is hard hit, for example, here we have some examples, some shopping malls in NPL portfolio.

So in that case, it would be difficult to have services -- to service debt for them, so they applied for repayment holidays. But from our viewpoint, it's a kind of structuring the debt because of the shopping mall is closed. But later on, they have a chance to have kind of new flows because of restructuring of that clients. So we do agree. We accept such applications, and it is also in our interest and in the clients' interest to restructure it.

[Marek Szczesniak, executive]

It's clear that the current situation, the pandemic and the economic slowdown, well, makes us to expect that it will have an impact on the recovery rate. Now regulations, that's 1 aspect, regulatory. And also the time, the duration of the court litigations will play a role -- the revaluation -- repricing of the assets will also play a role to all banks because that is important for the whole sector and for the efficiency of the measures being undertaken and the -- and the realization of the collaterals, the sale of all sorts of assets.

Now as regards the role of the credit vacations, I would split my answer into 2 -- well, 2 segments where we are already doing the vindication. Well, there is no turning back from it once it's launched. On those customers who are mentioned by Krzysztof, who were halfway in the structuring -- restructuring and they were doing it well, so the sensitivity of those customers is quite high. I can't give you the numbers now, but I expect it's going to be more than usually -- than the usual 11% of our portfolio because this schedule of the restructuring and repayments was usually precisely tailored for the financial potentials and possibilities of the particular clients before COVID situation.

And the buffer that was related to the surplus, the client might have may not be not sufficient anymore. So in most cases, we are seeing short-term adjustments. We are doing short-term adjustments of the amounts and times of payments. So in other words, in adjusting the repayment schedule to the plans for returning to the starting point situation after the crisis.

[Krzysztof Bachta;CEO & President of the Management Board, executive]

Well, just 2 more questions. About NPLs. One is of the educational type, I would say, and then you will add your comment on it, Marek. Somebody says that the sale of NPLs has no relation to the volumes. And so well, the sale of NPLs clearly has played a role, is important. Depending on the number of the NPLs, if we sell 200 million of them, then it's going to be the same amount less, right? So it has some role in it. As regards to business clients, apart from the 1 client we mentioned before, we are seeing a natural increment from the other segments caused by the probability of risk and defaults. And we do not see any increased risk in the first quarter in those other segments. But I understand that there were a little bit less measures to reduce the NPLs? Marek will confirm it.

[Marek Szczesniak, executive]

Yes, I confirm. This indicator is structured, as Krzysztof said. The CoR may be different when you look at the net values, but the NPL is static. It describes the structure of the balance sheet. Well, it is sensitive, of course.

[Krzysztof Bachta;CEO & President of the Management Board, executive]

Next question, what was the impact of NPL sales in the first quarter?

[Marek Szczesniak, executive]

Relatively insignificant. It was positive, about PLN 6 million, PLN 7 million. At this level, if we can make a sales transaction and sales of NPLs and make a positive result, it means that they were well provisioned in market terms. So that's why we are going for such transactions because they improve the bank's performance.

[Krzysztof Bachta;CEO & President of the Management Board, executive]

And I think the last question addressed to Tomasz. What is the influence of the statutory regulations on the consumer loans?

[Tomasz Bilous, executive]

Once again, the statutory limit on the fees on consumer loans. Well, I will try to answer that. There are 2 issues here, right? That's one of them. And here, we can say that it is about the important part of the portfolio at the second reduction. Quite important it is about a dozen or so million in a quarter. Now as regards the fees and charges, I think this level that is in the COVID law is negligible, I would think, less than 2% of our consumer loan production. So I would say in more -- very single specific situations that might come to view, so this limits do not have any impact on our portfolio.

[Krzysztof Bachta;CEO & President of the Management Board, executive]

So that's it about the questions, I think. I am worried that there were no questions from the audience. Well, there's something might not be working. But anyway, we are always available for you. So if you have any additional questions, and you are not able to ask them right now, so please let us know we can either organize another conference call, especially for you or we can -- you can ask your questions directly to Investor Relations. So thank you very much for today's conference -- for today's meeting, we hope we will soon be able to meet more directly. It's different when you speak to the camera only, not the living people. Okay, all the best to you. See you next time.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]