Bank Handlowy w Warszawie SA

WSE:BHW

Earnings Call Analysis

Bank Reports Record High Net Income

The bank showcased a robust quarter, with net income at PLN 1.8 billion over nine months surpassing the full-year record of 2022. Third-quarter revenues hit PLN 1.1 billion, while net profits were PLN 592 million, yielding a strong return on equity of 13.7%. Despite moderate demand for loans, there were positive signs with an 8% growth in deposits. The total capital ratio stood at 23%, compliant with TLAC criteria. Consumer Banking dipped by 5% due to one-off events, yet core client revenue grew by 10% with a 13% expansion in Citigold private client portfolios. Investment product sales surged by 18%, and FX volume remained stable despite a 1% increase. The bank's Treasury activity flourished, and costs reflected disciplined management with a 2% quarter-over-quarter decrease. The bank also affirmed its sustainability commitment, targeting net-zero for operations by 2030 and promoting renewable energy usage.

Record High Net Income and Healthy Year Performance

Citi Handlowy had a remarkable quarter, reflecting a robust performance with net income reaching an impressive PLN 1.8 billion, matching the total of the full previous year, and attaining a noteworthy return on equity at 13.7%. Despite a quieter demand for new loans from corporations and consumers alike, the bank exudes positivity with an 8% uptick in deposits, attributed to slightly eased interest rates.

Steady Institutional Banking and Commercial Segment Rebounds

The institutional banking segment maintains revenue stability, buoyed by a 5% hike in global client activities and flat commercial banking performance. A resurgence in the commercial securities market and a 6% boost in commercial banking payment transactions underpin this stability. With a focused eye on growth, the majority of new loans being long-term signals a strong future for the bank.

Consumer Banking Flourishes with Investment and Loan Growth

Despite a superficial dip, the consumer banking segment saw core client revenue jump by 10%, bolstered by a 13% growth in Citigold private client portfolios and a substantial 18% increase in investment product sales. Additionally, the credit card acquisitions and cash loan sales exhibit a vigorous 18% quarter-over-quarter growth, reflecting a crescendo of consumer confidence and engagement with the bank's offerings.

Deposit Surge Signals Attractive Pricing and Effective Client Acquisition

A noteworthy aspect of the bank’s operation is the ongoing rise in deposits, with a 7% year-over-year and 5% quarter-over-quarter growth. This trend not only indicates an attractive pricing policy but also underscores the success of the bank’s strategy to entice new clients, notably within the prosperous Citigold segment, by cross-selling wealth management products to deposit clients.

Transactional Banking and FX: A Mixed Bag of Dynamics

Transactional banking is thriving with a 10% domestic transaction volume spike, while currency trading volumes remain generally stable. However, there's a significant 40% annual drop in FX volumes due to lower volatility compared to the previous year. Consumer banking loans level off, marking a pause in growth, yet the stability within the quarter hints at potential recovery ahead.

Commitment to Sustainability: Banking on Green Futures

Aligning with global sustainability trends, Citi Handlowy has committed to a net zero target by 2030 for operations by focusing on renewable energy adoption and boosting building energy efficiency. These initiatives are echoed by the bank's clients and stakeholders, reinforcing the bank’s role in spearheading environmental stewardship in the financial sector.

Robust Revenue Growth, Stripped of One-Offs

While the revenue presents a flat quarter-over-quarter, it's essential to consider the exceptional items that influenced previous quarters. Excluding these one-offs, revenue has actually grown, highlighting an underlying robustness in the bank’s operational performance with a notable 49% growth over the previous year's figures.

Earnings Call Transcript 2023-Q3

[Adam Piotrak, executive]

Okay. Hello, everyone. Welcome on financial results conference of Citi Handlowy for the third quarter. My name is Adam Piotrak, I'm responsible for Investor Relations at Citi Handlowy. I'm with Maciej Krywoniuk, the Head of Strategy and Investor Relations department that will run this presentation.

Maciej, the floor is yours.

[Maciej Krywoniuk, executive]

Thank you very much, Adam, and welcome, everyone. Thank you very much for joining. We will be sharing the presentation on screen. You have it also available on our web page. So I'm moving on to Slide #2 now, which is a summary of third quarter financial results.

I would start by saying that this was a very strong quarter for the bank. When you look at the first 9 months of 2023, the net income level is at the level of PLN 1.8 billion. And it's my pleasure to share that this is about the record [ high ] net income for full year 2022. So this is a piece of good news this quarter.

In terms of the financial results in the third quarter, the revenue was at PLN 1.1 billion and net profit reached PLN 592 million. This landed us with return on equity level at 13.7%. So very, very high level compared to previous quarters.

When you look at the balance sheet performance, and I'll cover it in more detail on the next slide, but what we have observed is still relatively limited demand for new loans among corporate sides, and similarly, in the consumer business. However, there is some positive signals in the third quarter, reflecting the slightly lower interest rates. And deposits, they are growing at 8% this quarter.

In terms of the capital position of the bank, the total capital ratio of 23%. This is a reflection of the fact that Polish FSA have brought PLN 800 million as tier 1 capital. And the 23% is making us meeting the TLAC criteria that the bank shared with you some time back.

Moving on to Institutional Banking and the performance there. So revenue was at a stable level compared to second quarter 2023. I've touched upon on those. So the loans volumes unchanged quarter-on-quarter. There was some rebound that we observed, especially among global clients, which grew 5% quarter-on-quarter. And there was flattish performance in Commercial Bank with 1% quarter-on-quarter growth. I've mentioned the positive sentiment, what we observed is that among our newly granted loans, majority of it were long-term loans, which is a good signal for us.

In terms of transactions, we have observed return of activity on the commercial securities market. We participated in bond issue or EBI with a value of PLN 400. In Commercial Banking, one of the growth engines is the new economic components. So the digital leaders are among our clients. And so we actively conduct business activity with them. The payment transaction volumes in the Commercial Banking segment increased 6% quarter-over-quarter.

Good news in transactional banking line. We see growth of operating accounts. The business volumes are also growing. The domestic transaction volume increased by 10% quarter-on-quarter. At the same time, in the fees and commission income line from payment transaction, we noticed 4% growth quarter-on-quarter.

Consumer Banking, this is a segment, which recorded a very good set of results this quarter. Although on the top line there, you can see the decrease 5% quarter-on-quarter. However, this is a result of one-off events recorded in the second Q. So core client revenue grew by 10% quarter-on-quarter despite slightly lower rates environment. The private banking and it's a story we've been sharing with you for several months and several quarters. We are observing increase in number of Citigold private client portfolio, which grew by 13% quarter-on-quarter.

Citigold's client base also grew 5% quarter-on-quarter. Now this resulted in a significant increase in the sale of investment product, which grew 18%. And in fact, we recorded high quarterly sale. That was a record high quarterly sales volume since first quarter of 2022.

Our clients are actively using the Citi Kantor solution, which is the FX solution for our clients, a number of transactions realized -- processed via Citi Kantor grew by 10%. The FX volumes are flattish. There was a slight increase by 1% quarter-on-quarter. Unsecured loans, there was improvements among individual clients. I've not -- I've mentioned the positive sentiments towards lending. And we have observed a strong acquisition of credit cards. Also, the sales of cash loans increased. And it was a healthy 18% growth quarter-over-quarter.

Moving on to business volumes. I'll start with the Institutional Banking. So the loan volume in this segment decreased year-on-year, 6% and it was flat quarter-on-quarter. This is a reflection of, firstly, high rates environment. And on the other hand, also some uncertainty in the operating environment.

I've mentioned stable levels of loan portfolio in the commercial banking and an increase among global clients. And in terms of the deposit volume, what you can see at the left bottom hand of the slide, it's a growing volume, 8% growth year-on-year, 3% growth quarter-on-quarter. And in fact, commercial banking is growing most dynamically. It's a segment where we have observed 4 quarters of consecutive growth.

I commented on the new loans to institutional clients, there is PLN 1.6 billion of new volume. I mentioned majority of it is the new loans for longer periods, long-term loans, and this is a good sign for us. The FX volumes are a reflection of very strong volumes last year, which was a year of very high volatility. So there is a drop of FX volumes, almost 40% year-over-year against 2022. And the transactional banking, number of cross-border money transfer as well as corporate card transactions and online transactions are growing which is a reflection of strong client activity among our corporates.

Moving on to consumer banking. This is a segment where the loan portfolio declined 6% year-over-year. We managed to stabilize the portfolio quarter-over-quarter. And in terms of the deposit volumes, this is where we are observing very steady and healthy growth, 7% year-over-year and 5% quarter-on-quarter. I would comment here that it's a reflection of several things.

So we definitely -- our pricing policy is attractive for the clients. I would say that this deposit strategy is, in a way, our cost of acquiring of new clients, especially in the space of Citigold private clients and Citigold segments. This is the model where it's based on the cross-sell of wealth management products to our deposit clients. And when you look at the business and financial results, we are doing it effectively.

I've commented on the FX volumes at the opening, it's -- these are healthy numbers. The FX volumes are primarily executed by our online channels and there is also positive trends in cards where both card transaction value, domestic and cross-border, is growing. It's been a quarter with the holiday season. And it's also -- there is some specific for the third quarter where there is more transactions that are done abroad among our client base. However, this year-over-year growth is something that is playing in our favor.

Moving on to a slide where we cover our ESG theme. So basically, I would say that we have committed the net zero target for our own operations, i.e., Scope 1 and Scope 2 by 2030. It's also linked with clearly laid out strategic plan, how we are going to achieve that. Definitely, we want to use 100% energy from renewable sources.

We will also increase the energy efficiency of our buildings. And I think what's important here is the refurbishment of our Senatorska headquarter building in Warsaw. Achieving this goal would not be possible without the refurbishment and there is a number of solutions that are very much oriented towards lower emissions and more sustainable consumption of media.

We have had a pleasure of hosting Val Smith who is Citi Chief Sustainable Officer. She was in Poland, meeting our clients, she attended several business forums. So very positive feedback from our clients. And we have been able to share some of the global experience among our clients here locally in Poland on the ESG front.

And now moving on to the financial results. Speaking -- I'm moving on to Slide 7, which is the revenue slide. When you look at the total revenue, this is significantly above 2022 level, 49% growth. A few words of explanation around third quarter.

When you look at the top line, you can notice that it's flattish 1% down quarter-over-quarter. However, second quarter was a quarter characterized by several one-offs. There were PLN 8 million revenue around dividends, and there were PLN 12 million of equity investments valuation impacting positively the top line.

And when you clean up the numbers, the ex-one-offs, the revenue is growing. There was also some one-offs around provisions for [ client ] portfolio in the third quarter. So ex-one-offs, the top line is growing. So it's a reflection of -- this graph is a reflection of both sales, business volumes and treasury activity. This will be 3 things I would point to.

In the spirit of transparency, when you look at the client revenue and institutional banking, there is a decline, 21% decline in the ICG space, and 2 core factors are FX line and the interest expense line. So this is what's impacting the institutional banking revenue.

Now on the consumer banking, there is growth both year-on-year and quarter-over-quarter. I have commented on the Citigold and CPC, and this is where there is positive contribution to our revenue growth in the consumer banking space from the Wealth Management activity. It's also contributing positively to net fees in commercial line which is growing.

And moving on to net fees and commissions. I would comment more on the right-hand side of the slide and spend some time on the structure. So I've mentioned some revival and some positive sentiment around GSG clients in the lending space. You see the fees from loans are growing, and it's directly attributed to this positive sentiment.

Definitely, what we see is the lack of one-offs in the capital market transactions, and this is negatively impacting the fees of commercial line. And I've discussed the contribution from deposit clients and the transaction banking clients, and you see -- it's an important component of the mix with 62% share. And this is growing both quarter-on-quarter and year-over-year.

The Consumer Banking, you'll see in the description of the structure that new clients that we have acquired, I mentioned that both CPC and clients -- Citigold portfolios are growing. The new clients acquired in the last 12 months generating more than 65% of revenue. And this is primarily in the investment product balances, which grew 13%.

This is the cross-sell that we are executing from our deposit base, and it's visible in the investment product line, where fees are growing both quarter-on-quarter, 2% and 9% year-over-year. There is very healthy growth in dual currency investments, and the balance of which increased by 45% quarter-over-quarter. Cards, positive trends in cards as well in the fee line both 8% quarter-over-quarter and 15% year-over-year growth.

Moving on to our treasury activity. We have always shared with you that it's a line when you need to look at this more from a long-term perspective, not necessarily the quarterly one, and there was a strong performance in the last 12 months. Both trading income and net interest income, you can see that it's been a very, very strong performance in the last 3 quarters. Speaking of FX income, which is a reflection of the client activity, I've mentioned that 2022 was a record year in volume, so with this extraordinary high volatility linked with the war in Ukraine, but we were able to achieve the stable revenue stream.

Finishing up the treasury slides. I think it's worth to underline that the revaluation reserve, the negative revaluation reserve is more and more positively impacting the capital position with decrease of the negative impact from the revaluation of the portfolio.

Expenses. The next slide is the -- it's a story of the cost discipline, something we'd be recognized for and something we put in attention to. The third quarter was a quarter where traditionally, we have released holiday accrual. And the cost line decreased quarter-over-quarter 2%. Year-over-year, we have observed 8% growth.

Talking of which, I would point to several aspects explaining a little bit of the increase in expenses. So definitely staff expenses. It's a reflection of increase in other salaries level among bank employees and this negatively impacted the cost line. The results of the real estate costs. I've mentioned the refurbishment of our headquarters building. So it's behind that PLN 12 million growth of the regal estate category.

And there is also higher energy costs that we incurred. And this is the PLN 12 million that you see growing. Short comment on the PLN 49 million decrease in regulatory expenses. So basically, the regulatory expenses decrease is a reflection of lower banking guarantee fee charges that we incurred this year compared to previous year.

And this is the cost line. The cost of risk I would say in one word, it's stable. It's something that is a good news from our perspective. We have got an early warning system that is working. 2023, commenting more on the long-term horizon, was a year when we reversed some of the statistical macroeconomic provisions.

I think there is several news out there in terms of the specific industry performance. I want to assure you that we have been running several stress tests in our corporate portfolio, and there is no industry-specific negative signals among our clients. And it's a reflection of our carefully selected target market, I would say.

Looking forward to 2024, I would say there is a positive sentiment and basically, there are no worrying signs at the moment that we would be sharing with you. In short, this is the presentation. If you -- in case you have any questions, the floor is yours. So we open up to questions, and we will be addressing them.

[Adam Piotrak, executive]

Okay, Maciej, It seems that we don't have any questions. Thank you for your presentations. If you will have any questions, feel free to contact with us. Our contact details is on the website, citihandlowy/investorrelations. Have a nice evening, and see you and hear you next quarter.

[Maciej Krywoniuk, executive]

Thank you very much. I'm looking forward to our next earnings release.