Bank Handlowy w Warszawie SA

WSE:BHW

Earnings Call Analysis

Solid Third Quarter Performance with Increased Revenues and Stable Margins

In the third quarter, Citi Handlowy achieved a net profit of PLN 544 million, its highest in the last year, with revenues exceeding PLN 1 billion. Lending grew 7% year-over-year, mainly from institutional clients, while deposits rose 2%. Consumer banking saw a 9% quarterly revenue increase, driven by wealth management growth. Notably, net interest income reached PLN 819 million, a record high. The bank maintains a strong capital ratio of 22.8%, significantly above regulatory requirements. Looking ahead, 2025 is expected to show continued improvement due to enhanced client activity and GDP growth.

Strong Performance Highlights

In the third quarter, the bank reported a revenue of PLN 1 billion and a net profit of PLN 544 million, marking the highest net profit in the last four quarters. This demonstrates solid financial performance, driven by a 7% year-over-year increase in lending volume, mainly from institutional clients, and a 2% increase in deposits.

Lending Growth and Market Position

Lending in the Institutional Banking segment saw an increase of 4% quarter-on-quarter, highlighting a positive trend with commercial and corporate banking playing key roles in this growth. The bank anticipates that client activity combined with GDP growth will foster further improvement in lending strategies, particularly in the medium term, aiming for a more dynamic lending environment by 2025.

Wealth Management Expansion

The Consumer Banking segment experienced a 9% growth in its top line, mainly fueled by advancements in wealth management services. The number of wealth management clients increased by 2% quarter-on-quarter, indicating successful customer acquisition strategies and a robust performance in financial planning services.

Revenue Composition and Future Prospects

Transaction banking revenue grew by 7% quarter-over-quarter and 17% year-over-year, contributing positively to the overall financial results. Additionally, the bank secured substantial capital market involvement through the arrangement of EUR 550 million in Eurobonds for BGK, reflecting its active presence in significant financial transactions.

Cost Management and Efficiency

The bank demonstrated effective cost discipline, achieving the lowest expense levels in four quarters, translating to a cost-to-income ratio of 32%. This management of expenses underscores the institution's commitment to efficiency in its operational processes.

Stable Income and Risk Management

Net interest income stood at PLN 819 million, the highest in the last four quarters, with a healthy net interest margin increase of 19 basis points quarter-over-quarter. Importantly, the bank reported no significant costs of credit during this quarter, maintaining a high coverage ratio of 68%, indicating strong risk management practices.

Long-Term Growth Considerations

Looking ahead, the management's outlook for the lending portfolio remains optimistic with expectations of modest growth driven by macroeconomic factors. The bank aims to enhance its lending strategy as market conditions improve and the economy stabilizes, preparing for sustained growth potential.

Commitment to ESG Initiatives

The bank continues to emphasize its commitment to environmental, social, and governance (ESG) initiatives, engaging in projects to support sustainable practices and community welfare. This focus positions the bank favorably as investors increasingly consider ESG factors in their investment decisions.

Earnings Call Transcript 2024-Q3

[Adam Piotrak, executive]

Hello, everyone. It's 2:00 p.m., so we can start the Financial Results for Third Quarter of Citi Handlowy. Hello, everyone. My name is Adam Piotrak. I'm responsible for Investor Relations. I'm with Maciej Krywoniuk, Head of Strategy and Investor Relations, who will pass through the earnings presentation. Presentation, you can find on our website in the section, Investor Relations.

Maciej, the floor is yours.

[Maciej Krywoniuk, executive]

Okay. Thank you, Adam. Thank you, everyone, for joining. A very good afternoon to you all. As mentioned by Adam, I'll walk you through the earnings presentation. It's available on our website under the Investor Relations tab.

And just to open, I wanted to share with you that we will not be commenting on the exit from Consumer Bank. Any important milestones regarding the exit will be shared with all of the market participants through Warsaw Stock Exchange when the time comes.

So moving on to the earnings presentation, starting on Page 2. It's my pleasure to share with you again that it's been another solid quarter. The revenue was above PLN 1 billion in the third quarter, and the net profit reached PLN 545 million (sic) [ PLN 544 million ]. It was the highest level in the last 4 quarters.

Looking at the balance sheet dynamics, the lending was up 7% year-over-year. It was primarily driven by the institutional clients portfolio. And deposit volume was up by 2% of the total bank. So looking at the capital position, we ended up the quarter on 22.8% total capital ratio, which is well above regulatory thresholds for the bank.

Moving on to the business segments performance in the third quarter, starting with the Institutional Banking segment. The revenue decreased by 5% quarter-over-quarter, primarily driven by slightly lower treasury results, which I'll be covering in the next sections of the presentation. On the other hand, it's important to underline that the client revenue increased by 6% quarter-on-quarter with positive contribution to the top line lending. It was third consecutive quarter of the lending volume growth, 4% quarter-on-quarter increase, primarily in 2 segments: Commercial Banking and Corporate Banking.

Just a few more comments, comment on this growth. It's primarily short-term lending. We are still waiting for the full recovery, i.e., more investment type lending in the corporate portfolio. So there are now like very strong triggers, but we are positive midterm, looking at 2025, in our view, it will be a combination of our client activity and GDP growth that will be positively contributing to the midterm growth.

We were active in the capital markets, we arranged EUR 550 million Eurobonds for BGK. The transaction banking volumes were also strong this quarter. The trade financing assets grew by 18% quarter-on-quarter, which is another quarter of growth in this area of Institutional Banking.

In the Consumer Bank, this was a quarter with growth in one of our strategic areas, namely the wealth management. And the top line of Consumer Bank was up 9% quarter-on-quarter. There were some impacts of one-offs, i.e. credit holdings, which I'll be covering in more detail in the next pages.

On the loans side, positive trends in the cash loan portfolio, which was up 2% quarter-over-quarter. I've mentioned the wealth management. What is good news is that number of wealth management clients in both CPC and Citigold were up by 2% quarter-over-quarter.

Moving on to the volumes, so starting with Institutional Banking on Page 3. So the lending portfolio was up 8% year-over-year, and it was up 4% quarter-over-quarter. Two contributors: Commercial Bank with 4% quarter-on-quarter growth and Corporate Bank with 2% quarter-on-quarter growth.

When you look at the new lending volumes, we have either granted or increased the financing and the value of over PLN 1.3 billion. And in the Jan-September period of this year, the value of loans granted were up by 26% year-over-year.

Good news also on FX volumes, which were up by 13% year-over-year. It was primarily driven by the appreciation of zloty and that was reflected in the higher activity among our largest clients.

And so last but not least, strong volumes of our Transaction Banking business with growth among several areas, including the cross-border money transfers as well as domestic money transfers and general number of transactions is growing among the transactions are also the ones that are processed online. The deposit book, it was flattish quarter-over-quarter. However, it was up by 3% year-over-year.

On Page 4, just briefly, we are highlighting the flagship transactions with spread across all the product lines. You see the examples of both trade loans, core lending as well as capital market transactions. What's important is also the public sector, which is an important element of our business mix in the Institutional Banking side. And what you see is an example of our strategy that we have -- where we are promoting digital cities. And Jaworzno was one of the cities where we are their primary banking partner and we are providing the comprehensive banking services, including the implementation of cashless and digital solutions.

Moving on to Page 5, which is the Consumer Banking book. So the business volumes of Consumer Bank, starting with lending. The lending book was up by 1% quarter-over-quarter, so slight growth, primarily driven by the dynamics of the mortgage loan portfolio. It grew 10% year-over-year and 1% quarter-over-quarter. And the lending book recorded 4% growth compared to third quarter last year.

Looking at transaction volumes. The FX, a slight decrease of FX volumes. Just a word of comment here. So basically, a number of transactions growing. However, what we observed, these were -- this quarter was characterized by small ticket transactions. Still, the digital solutions, including our Citi Kantor are very popular among our clients. However, this was a quarter where we were missing slightly the FX related to retail investment activity.

However, good trends on the wealth management side. So both the total relationship balance was up by 6%. I briefly mentioned at the opening that the number of Citigold Private Clients was growing, and so as you can see here on the slide, it was up 8%.

Mixed drivers on cards this quarter and the transaction value domestic was slightly down 2%. However, our clients are frequent travelers. And in this quarter, the transaction value that is cross-border was slightly up. And deposit book remained flat both quarter-on-quarter as well as year-over-year.

Moving on to Slide 6, which is social responsibility. It's an important element of our ESG strategy. What you see on the slide are just the examples of different programs that we are running, ranging from a program to fight homelessness under the Global Innovation Challenge 2024 as well as the Entrepreneurship Development Program. And last but not least, we have been supporting women from Poland and Ukraine through the mentoring program called Welcome. And it's an important element, as I mentioned, of our efforts. And so we'll be sharing more of the ESG-related themes during our quarterly earnings going forward.

Well, coming back to the financials and more details behind the financials, starting with the revenue on Slide 8. So it was another quarter with revenue above PLN 1 billion mark. The quarterly numbers on the top line were slightly impacted by the payout of the dividends, primarily under the net interest income line. However, it was well compensated by the client activity, primarily revenue of Transaction Banking where it grew 7% quarter-over-quarter and 17% year-over-year. The FX volumes were also up 2% quarter-over-quarter.

So good top line performance with high growth dynamics of transactional volumes and there was -- also what's important, there was lack of one-off gains on the debt securities portfolio. More details on the treasury slide in the later part of the presentation.

And especially in the Consumer Banking, the growth of the top line in Consumer Bank was driven by growing volumes of our wealth management business and there were, as mentioned, no one-offs, which we have recorded in the previous quarters.

More details on the net interest income, which is Page 9. So the NII with PLN 819 million this quarter was the highest in the last 4 quarters. I've mentioned the dividend impact on the NII, the treasury area.

Looking at the NIM trend. So the net interest margin, as you can see, was up 19 basis points quarter-over-quarter. The volume growth and increase in margin of debt securities portfolio as well as institutional loans portfolio were primarily contributing to the growth.

Also, if you look at the segment split, you can see that there is 6% quarter-over-quarter growth in the Consumer Banking NII line. And this is a combination of mortgage and our secured loans as well as credit holidays, which were a one-off impact last quarter, and we released the provision regarding credit holidays, not material impact, but positively contributing to the improvement of the NII line.

Slide 10, net fee and commission income. So slightly down by PLN 7 million, 5% quarter-over-quarter. The PLN 7 million was primarily the seasonality of our custody business where there are General Shareholders Meeting in the second quarter. There are no such events in the calendar of the third quarter, which is a reflection of the slight decrease in the fees line. Basically, there were also no one-offs in this P&L line this quarter.

Looking at the long-term trends. So this is something that we are observing. And the growth in trade is something that we are happy with. So it's been 5 quarters of consecutive growth in trade. And so I have been touching upon the investment products in the Consumer business. Looking at wealth management sales, they were up by 70% from January this year. So good trends there. And in general, the underlying business performance was strong with lack of one-offs, as mentioned before.

Page 11, which is the treasury page. So PLN 785 million and 6% decrease quarter-over-quarter. And the net interest income, as indicated on the slide, has been impacted by the lower balance sheet corresponding with the dividend payout. However, what's important when you look at the trading results, the main -- one of the main contributors to this section is the FX activity, the client-related FX activity. And this was a quarter with strong FX client revenue, which positively contributing to the stabilization of the trading revenue.

Under the AFS line, as you can see, there was lack of gains realized this quarter. However, it's also important that -- we are looking at this slide more in a -- through a long-term lens, and we are not analyzing every individual quarter here. What's important is more the long-term view.

Looking at the balance sheet, the primary component of the mix is unchanged. The high quality of debt securities portfolio was the primary element of the balance sheet in our treasury area.

Good news on the revaluation reserve in the third quarter, we have recorded PLN 199 million of the revaluation reserve. So good figures there when you look at trend since beginning of the year. So since January, it was up 55%.

Expenses on Page 12. That was the lowest expense figure in the last 4 quarters. So good news here, reflecting our strong cost discipline.

Looking at the quarterly dynamics, the staff expenses were the ones that were contributing positively. Shedding some more light on the staff expense side, the quarterly performance was also a reflection of the holiday accrual release. Third quarter is usually a holiday month where our staff is taking the annual leaves, and it's positively contributing to the staff expenses, PLN 347 million in the quarter, down 2% quarter-over-quarter. All this translated into 32% of cost income, which we are proud of.

More on the long-term view on the right-hand side of the slide. We are still experiencing some pressure on the staff expense side. You can see the growth by PLN 40 million in the year-to-date view. And basically, year-to-date view versus last quarter. And there were also growing regulatory expenses, which were up by PLN 18 million in this view.

Moving on to cost of risk, which is Page 13. And the cost of risk is a reflection of quality of our lending portfolio. And we have recorded no cost of credit this quarter. So basically, what's behind the numbers is -- it's important to share with you that on the Consumer Banking side, we have released the COVID provision of PLN 17 million, and this was released completely. So there is no COVID provision left. The performance of the portfolio normalized and our view that, that was no more needed.

On the Institutional Banking side, PLN 1 million, so close to 0 cost of credit, 68% coverage ratio, so very healthy level above the banking sector and 4.7% of stage 3 share in our lending book. So all in all, very solid performance on the cost of risk line.

And finally, Page 14, which is a summary. Just to reiterate, the net income of PLN 544 million with stable operating margin at PLN 743 this quarter. Solid net interest income, up 2% quarter-over-quarter. Slightly decrease in balance sheet, which is primarily driven by the dividend payout. All this leaves us with the returns, both at the ROE at 22% and ROA at 2.3% that are at the very healthy levels, and the capital ratio for the quarter at 22.8%.

This is all from our side from the presentation point of view. So happy to take your questions.

[Adam Piotrak, executive]

Okay, Maciej. Thank you for your presentation. It seems that everything is clear. So thank you all who joined in our earnings call presentation and see you next quarter. Have a nice day. Bye.