Bank Handlowy w Warszawie SA

WSE:BHW

Earnings Call Transcript 2021-Q3

[Maciej Krywoniuk, executive]

Okay. It's 3:00. So hello, everyone. Thank you for joining. And before we start, I would like to ask everyone to put them on mute so that it's more comfortable. And basically, hello, everyone. This is the presentation of consolidated financial results for third quarter 2021 of Bank Handlowy w Warszawie S.A. We will go through the presentation that we have shared with you by e-mail, and we are open for questions at the end of the session.

So let me go to Slide #2, which is the summary of third quarter. And I'll share with you a few highlights from a business performance perspective. And basically, it was a good quarter. The net profit for third quarter reached PLN 93 million. This is 28% quarter-on-quarter growth. And in a nutshell, it's a result of both higher client revenues and cost discipline.

So when you look at stand-alone net profit for September year-to-date, it amounted to PLN 563 million. And this is the result of primarily higher FX revenue, which was 7% up quarter-on-quarter and net fees, which also grew 5%. Expense discipline, we've mentioned that expenses reached PLN 275 million. This represents a decrease by 2%. And looking at the cost of risk, this is back to normalized level at 35 basis points in Q3.

We also paid out the dividend for 2020. And the dividend yield was at the level of 2.6%. Bearing that in mind, our capital position remains strong. The TCR ratio is at 19%, which is significantly above the regulatory minimum that's imposed by KNF. Briefly, what happened in both Institutional Banking and Consumer Banking, started with our institutional banking business. The revenues there were up 14% quarter-on-quarter. This was primarily a result of strong growth of the client business. Looking at loan volumes, they were up 2% quarter-on-quarter. Deposit volumes were also up 5%.

Very solid quarter in our FX business. This was 76% up quarter-on-quarter in terms of volumes. And we see the client activity on the institutional banking side. The rebound in GDP is also helping. We also saw positive trends in capital market transactions, our brokerage house acted as Global Coordinator in capital increase transaction for one of the pharmaceutical companies. And we've been also investing in customer experience and some tools that improve that. One of the examples that you can see on the slide, the Citi Payment Outlier Detection tool, this is allowing for intelligent verification of ongoing payments. This is in the area of our Treasury and Trade Solutions business.

And so on the back of the rebound in the economy, we have also recorded strong transaction activity of the clients. One of the examples is the area of cross-border money transfers where we see growth of 23% year-on-year. Our consumer business, the revenues were flattish quarter-on-quarter. It's worth noting then that excluding the one-off dividend revenue that we recorded in the last quarter, the revenue increase was 5% quarter-on-quarter.

Main drivers, it was strong transactional activity among the individual customers. Similarly to our ICG, the institutional business, we recorded growth in FX volumes in our tools, Citi Kantor. They were up 26% quarter-on-quarter. There were some healthy trends in both domestic and foreign spending on cards. These were up 7% quarter-on-quarter. Our core area wealth management in the consumer space also recorded a very solid quarter. It's worth noting that the average volumes of the assets under management increased for the fifth quarter in a row. And we were also able to acquire customers, that was a quarter with the highest acquisition of Citigold clients for 3 years, the quarter-on-quarter increase was 40%.

So all in all, a good quarter, and I'll go into more details. On Slide 4, you see the picture of our institutional banking balance sheet, where loans are a reflection of the demand side of things. So basically, we see that in totality, the loan volumes was down 10% year-on-year. It was up 2% quarter-on-quarter. And there is different dynamics depending on the segment, we recorded some repayments among our largest corporate clients. It was down -- the portfolio there was down 4%. It's also the situation where corporate clients are reaching out to capital markets for financing. It's a bit different among commercial banking, so the local corporates, SMEs and mid-cap companies. The portfolio there is 7% up quarter-on-quarter and slight growth among global customers, global clients are up 2% quarter-on-quarter. The liquidity is there. So basically, corporates are still quite liquid, post-COVID aid programs. And what you can see is that the deposit volumes are 7% down quarter-on-quarter. They're up 5% -- sorry, year-on-year and 5% up quarter-on-quarter. However, the -- bearing in mind the liquidity position, it does not hurt us.

And a few words on the transactional volumes, I've mentioned the FX volumes on the first slide. So the FX volumes are 55% up year-on-year among global clients. We have observed growth of new relationships with South Korea, Czech and Brazil. And basically, in Commercial Banking, this is 10% growth year-on-year. It's basically twofold. On one hand, it's a result of acquisition of new clients and basically also some growth in the e-commerce and software segment. So basically, good trends also supported by cross-border money transfer volume and also growth in trade finance asset portfolio.

And moving on to the next slide. The Consumer Banking business, what we can see is consistent growth of deposit volumes. They are up both year-on-year and quarter-on-quarter. And basically, this is where we see that customers are willing to invest. They usually come with a deposit product to us, and it's then converted into investment products. You can see the growth in the investment product sales and assets under management on the right-hand side, they are plus 30% -- plus 38% year-on-year, so significant growth in this space. And what we have observed also with the growth in the mortgage book. It's been up 2% quarter-on-quarter. So basically, this is a reflection of the investment sentiment among our customers.

Bearing in mind, our target market, there is still not that much growth in the unsecured loans. Basically, they are 1% down, and we are looking forward to the revival of demand among our customers in terms of the unsecured loan portfolio. So good trends in the consumer business as well. We are acquiring customers and basically, you're seeing the corresponding drivers on Slide #5.

Moving on to more financial results on the consolidated level. On Slide 7, you can see total revenues, and basically, you can see the split I've been referring to it at the beginning a little bit. So basically, our institutional banking was up 14%. You see the client revenue dynamics. They -- that's double-digit growth that is quite consistent over the last few quarters. And key drivers from a product perspective are FX, 39% up and capital markets that were up 20%. So this is a reflection of client activity in these product areas. And basically, on the consumer banking, it's flat. And when we exclude the one-off that's up 5% quarter-on-quarter. Both Institutional Banking and Consumer Banking are growing when you look at the year-on-year trends.

In terms of the net interest income, you'll see that on Slide #8. So the Institutional Banking was able to record 1% growth. It's a reflection of interest margin, the client interest margin that grew from 2.5% to almost 2.6%. You can see the details on the right-hand side at the top. At the same time, the consumer banking business was flat from a net interest income point of view.

In totality, the net interest income for the bank was flat quarter-on-quarter. It was down 21% year-on-year. It's also the reflection of our balance sheet structure. And you can see the debt securities portfolio that is at a significantly lower level compared to the same -- to beginning of the year -- end of year in fact, 4Q '21 and basically also the margin on investment financial assets is also down. And that's all translated into the trends in the net interest income, and you see the details on the slide.

In terms of net fees and commission income, it's Slide #9. You can see that the fees and commission income increase was driven primarily by transactional banking, customer and wealth management business. So good trends there. 5% growth quarter-on-quarter and 15% growth year-on-year. And in terms of the structure I would draw your attention to transactional banking. It's the split that you can see on the right-hand side, it was up 40% year-on-year, 2% up quarter-on-quarter. Our customer business was -- also recorded 30% growth year-on-year, and it also grew slightly plus 1% quarter-on-quarter.

In the Consumer Banking business the investments that were driving the fees and commission income, they were up 25% year-on-year and 6% quarter-on-quarter. So these are really the key highlights in terms of the fee dynamics of our business.

Moving on to treasury. So basically, it's been a good quarter for treasury business. You can see that basically, the treasury results quarter-on-quarter, it grew 31%. What I would like to draw your attention here too is that the trading results and the client FX business that's what we disclose usually in one line, we would like to share a bit more in-depth view here with you. So basically, the client FX business is representing 77% of the mix here. And on the back of the volume growth that I was referring to in the beginning of the presentation, the income on client FX you can see that it's been growing 39% year-on-year and 7% quarter-on-quarter. So it's just to share the message that basically is the recurring portion of the treasury results. And these are the transactions that we are executing with our clients.

Expenses, Slide #11. This is a quarter where we decrease the expense base quarter-on-quarter, 2% down. It was up 1%. I think what's important and what requires a few words of explanation is the staff expenses. You see they are 11% down quarter-on-quarter, but it's specific of the third quarter where we are releasing some of the holiday accruals. However, when you look at the year-on-year, the staff expenses are up 4%. And this is basically a reflection of some of the wage pressures that we are all suffering and we are probably not alone here in this situation. We are also investing, and this is reflected in our depreciation line investments executed this quarter was primarily the customer experience related investments and the Citi Payment Outlier Detection and the toll that we briefly described to you was one of the examples of investments in the corporate payments area.

And last but not least, cost of risk. So basically, we are back to the normalized level with our cost of risk. As you can see, it's at the level of 35 basis points, which, as we indicated, in a few of our conversations. This is basically the normalized level for the bank. Worth mentioning that our nonperforming loans are -- the ratio is significantly below the sector. We recorded 3.7% NPL in the third quarter, whereas the banking sector was at 5.9%. So you see the details on Slide #12.

So all in all, it was a good quarter. And now I am open to your questions.

[Unknown Analyst]

This is [indiscernible] from Avaron. First of all, I have one question about your capital ratio because there was a sequential drop quarter-on-quarter. And I see that there is quite a jump in risk-weighted assets driven by some counterparty factors. Can you maybe explain that? Is it temporary? Or what was actually behind?

[Maciej Krywoniuk, executive]

I think the change in the TCR ratio was primarily driven by the dividend that we paid out. It's reflected in the TCR calculation. So if I were to point into one of the main reasons, it will be the dividend.

[Unknown Analyst]

Maybe you can also give us some comment about your outlook. I mean, the macro team and the treasury team on the current rate hike cycle in Poland. I mean what is the target level of rate that we should expect in your view? And given the fact that you have lots of cash on the balance sheet after the divestment that you made in 1Q, do you see right now in 4Q that you are like deploying this back to market to rebuild your bond portfolio or rather this is a topic of 2022?

[Maciej Krywoniuk, executive]

Okay. So I'll start with the -- thank you for the questions. Basically, I'll start with the last one. It's been our tradition that because of our market share and the bond market, we were not commenting. And it's a question we've been getting several times in the last weeks. And basically, this is really a timing question, and I think the team proved themselves a few times that the timing was usually right, and they are observing the market at the moment. In terms of the -- in terms of the -- and then they are reacting adequately.

And basically, in terms of the reference rate, we have got the slide, Slide #15, on the macroeconomic environment. And basically, this is where you see the house view on -- our chief economist on the reference rate. And he is -- Piotr Kalisz is expecting 2.25% at the end of 2022. So this is, in fact, current forecast of our Chief Economist.

[Peter Priisalm, analyst]

Peter Priisalm from Avaron Asset Management. Can you give some color on cost of risk outlook going forward? On one hand, we haven't seen kind of a very significant spike coming from the COVID crisis in banking sector in general, I mean, inorganic cost of risk. But what about the supply chain issues and then kind of

[Audio Gap]

[Maciej Krywoniuk, executive]

[Audio Gap]

trends. So we are observing and analyzing the disruption of the supply chains. We are looking at the inflation. And basically, there are no trends at the moment that are really worrying us. So it's -- from our standpoint, it's a healthy portfolio. And as I mentioned, the normalized level is around 30, 40 basis points.

[Peter Priisalm, analyst]

I have still one more question. Some of your peers commented during this reporting season that they see some let's say, positive outlook for potential loan growth in corporate business in investment loans in next year. I mean, do you confirm that or let's say, is your client book, let's say, a bit different and less related to some CapEx cycles maybe or what is the perception from your side?

[Maciej Krywoniuk, executive]

Thank you, Peter. Basically, I think I would echo basically what was mentioned by our competitors. Basically, starting at the moment, there's still quite a significant portion of liquidity among corporates. And on the back of the quite healthy macroeconomic trends, we are expecting as well the growth, the rebound of demand, especially among SME and MME customers. So this is in line what -- with the expectations of the market. And basically, as I've mentioned, especially among our corporate client segments, so the top 2 local corporates. And there is quite a lot of activity going on as well, but this is more some capital market-based transactions and the results. So there is also, I would say, it's been a few quarters of activity and the momentum is still there from our conversations with colleagues responsible for the segment. So yes, we -- with one sentence, we are expecting the rebound there.

Any more questions? If not, then thank you very much for joining. We are available for you by e-mail. So you can please reach out to us, if you need any clarification or you've got questions. So we are available for you. So again, thank you very much, and have a good rest of the day.

[Unknown Executive]

Thank you.

[Maciej Krywoniuk, executive]

Thank you. Bye-bye.