ING Bank Slaski SA

WSE:ING

Earnings Call Transcript 2018-Q1

[Piotr Utrata, executive]

Good morning, ladies and gentlemen. I would like to welcome you at our conference for the first quarter of this year. I would like to introduce to you CEO, Brunon Bartkiewicz; Bozena Graczyk, CFO; Iza Rokicka, the Head of Investors Relationships; [Yolanda Alvarado Rodriguez], the Chief Accountant of the Bank. Thank you very much, Brunon. Please take the floor.

[Brunon Bartkiewicz, executive]

Thank you very much, Piotr. Yes, will you click for me, Piotr, yes please?

Ladies and gentlemen, the first quarter featured, to say straightforwardly, a few interesting themes, and I would like to preview on them. In terms of macro data, the element which undoubtedly can be seen on the market, it is much acceleration in the mortgage production of first quarter, and we see this [global wave] in housing construction and mortgage, which really were a bit delayed first as construction, but now they speed up. And in the time to come, we will have more information about the first quarter, and more and more data will confirm the fact.

But this growth in mortgage lending is significant, and this production in mortgage lending is significant. And the growth in this market is really in good 2-figure numbers. And this also impacts us, because we produced more mortgages in the first quarter 2018 versus the first quarter 2017. Yes, this is more than twofold growth in mortgages production on our part. And the entire market really moves up. And on this market, and it's also visible, more and more concentration is visible.

And we see this chart, where you have 6 basic players, so the basic players in the mortgage market, and you know them perfectly. But when we compute the production volume of the 6 players, then they account for [indiscernible] 92% of the production of the entire sector. And this for some time has been growing up, and it's really visible with this activity. Because we have the main or the primary player of Pekao [indiscernible], and then we have much follow-up.

So that's why the biggest take the biggest share in the market, and this long-term will [impact it]. And of course, the players will be [there]. And just to present it to you in terms of consolidation, because you always ask about it, and that's accompanied by much price pressure, and it starts to be visible, or is already visible, for some years now -- good morning -- on the primary market, but also on the secondary market. And it's not that we have all statistical data now to confirm how it translates into [the speed] of making transactions, but rental data also start to show that this is really hot market.

And it's just [beyond a doubt], and do want to show you the data for 2010 and not for 2006 so that you are not really feeling the fear. And this is all about the market, or maybe we were talking all the time about the investments, investments, investments, and we devoted much time recently to the factors which could impact growth in inflation.

So the first quarter shows some implicit signals because, as we said, something which was to be certain, so the speed, acceleration in the public sector happens in infrastructure. It is visible with some accumulation, so some risks, but investments in private sector, we can see that we have here some delay factor.

It is really disturbing now when we think about it. I think it destabilizes the economy to some extent, because we have too much delay, really the slowdown in investments, and we can arrive at a situation where we will have a cycle without strong investment impulse in the private sector.

And as to pricing, we still have a situation with much pressure on salaries, does not translate into higher global inflation ratios. So that's why it's difficult really to consider that we have more and more -- but we can see more and more signals from the Monetary Policy Council, which really postpones the interest rate increase, even delays them to very far dates, so maybe it will be the cycle so that we will have the full cycle without movement in interest rates. We can say it. That's just on it.

About us, the first quarter, as you may see, record sales for a few years in the number of new clients, and this growth in number of clients undoubtedly we needed. That's the time now to have it. And the element which really contributed to the strong production in clients and to making our brand more and more recognizable on the market, and it's really worked good for us in terms of this recognition.

It was this element supporting. It was just for savings campaign, which was pretty strong, started beginning December, with really offer devoted to the market with a price which was not exaggerate, 2% on the new money for 4 months. And this campaign is still in the pipeline, and we had very good response, which in our opinion only confirms that we are perceived by the market still as a market really setting the trend for savings accounts and for [indiscernible] in terms of the term of savings.

And this strong growth in clients, we also saw it among entrepreneurs. We accelerate the pace, we've been mentioning for some time, and also the corporate clients. These are good, sound results, best ones for long period of time, and it [seemed] that it was not a good time, actually, to entrust of new clients, to welcome them. In transactional terms, it also looks good because volumes of transaction goes up very rapidly, and it is in these areas in which we wanted to increase.

So mobile channel, the number of mobile channel users, the number of corporates using mobile channel, the number of companies -- I mean individual clients, but also companies, entrepreneurs who contacting us use only mobile channel. We also see here a strong growth, so this is really okay.

But the value of cash transactions, or the number of cash transactions is declining, so this trend, which has been apparent for 2 years, is already affirmed, and we can say it in terms of ATM operations, which much boost in post transactions, and also the growth in BLIK operations, which we would like also to stress here, as from our perspective, and also from the entire banking sector, it is very important venture because BLIK, in our opinion, it is not only a platform for starting up e-commerce in Poland, but also for the identity purposes for the future.

So in this regard, it was good. The landing, first and foremost, mortgages went up pretty fast, but we see some lack of balance in this market. And it shows that we are more and more cautious, because when we refer to last year, we are more and more prudent not to make mistakes here because, as you can feel already from my presentation, that we start looking at the market from the viewpoint of coming stoppage, yes, whether we [see this freeze] in the 2 or 3 years to come, but with lack of balance, which we can see [indiscernible] acceleration in public sector. And this [further] dramatic, I would say, delay in private investments makes us arrive at a situation where we have more uncertainty in many areas of the market, and also deterioration of quality of selected or some groups of business entities.

And this is more and more visible. We see it in our conservative management models for risk. We saw it mainly in the quarters 2 and 3 last year, and from that time, the percentage of nonperforming loans, or entities whose situation deteriorated, is, practically speaking, the same, but we see the trend which is to increase. And it also translates into our costs, because we need to increase our risk costs, and the ratio itself, of a percentage, so [the default] rate.

In retail loans, we don't see this situation, practically speaking. The production is mainly mortgages, and the quality of the portfolio is really excellent. And our activity intensified. Activity in non-mortgages for retail companies really follows our expectations, and we don't see any distortions here.

In terms of results, I would say that certainly there is lower interest income versus the fourth quarter last year and is to some extent year-on-year. Also in the first quarter, a quite important impact is the number of days between the fourth quarter and the first quarter. If the first quarter had the same number of days as the fourth quarter, then the interest income would be more or less PLN24 million higher than the one we publish, and interest costs would be more or less PLN4 million higher. This is the result of the pure arithmetics in this regard.

So in net terms, interest income would be PLN20 million higher. This is just for comparison. PLN7 million in the first quarter. We had less from the interest income for -- changes for the obligatory reserve. I think it was 1.35 down, and with more or less the same core deposits. And this costs us PLN7 million. Even if we take all those elements together, let's call them, for the comparison purposes, if we take them into account, that means that our interest income went up by PLN3 million quarter-to-quarter, so this is a weak growth. This is made up of the savings campaign I've just told you, which costs more money because this 2% is with the inflow of these funds into these accounts, on these promotional terms and conditions. This had not the impact in the last quarter. We've started a campaign at the beginning of December. It applies to the first quarter because it will last until June, and then we will see its impact in the subsequent quarters. They will cool down in the third quarter unless we do a new campaign, but its main impact accumulates in the first quarter.

Additionally, we had a decrease in securities and derivatives income in the first quarter, so the information that you are interested in, whether income on lending is under rapid pressure, I would say no. Still, the interest margin on investment lending activity, still it trends up, although this impulse is cooling down. It is also impacted by our higher activity in consumer credits, also our significant lease activity, where margins are higher.

But also for traditional products, such as mortgage loan or SME loans, the margin did not go down in the first quarter versus the fourth quarter in terms of funding cost. The funding costs in the retail part went up, was enlarged by the costs of the campaign and the cost of interest, which are related to this promotional campaign. While this trend we've been talking about for a long time now, so stronger increase in current [recounts] rather than on savings accounts or other accounts, because, practically, we don't have term deposits at the bank. This is PLN1 billion, more or less, at present. So it has an impact on the fact that our funding costs did not go up. When we eliminate the difference in the number of days, then we would have around PLN4 million of difference in that regard, with a strong volume. It doesn?t have such a big impact on the margin.

In terms of the cost of our operations, mainly in the first quarter, there are 2 main elements that have an impact on higher costs versus the fourth quarter. The first element is higher personnel cost. This is, I would say, a permanent element. I would like to remind you that the bank raised the salaries for its employees on 1 April and 1 September last year, and 1 April this year, so the result is still persistent. And we will have higher costs here. So this is not my forecast, but this is pure arithmetics, and it will have an impact on our costs.

The other element is accumulation of IT projects of PLN22 million in the first quarter this year. These are our stronger moves towards rebuilding the infrastructure. These are costs both incurred, but also the provisions, the reserve for the future purchases, for licenses, and renovations, reconstructions in that regard.

But also -- so PLN22 million is accumulation of IT projects, and this undoubtedly is not a revolving character, or this is not a trend or any other increases in costs. Taking into account these 2 major elements have a smaller impact, while the first one I would like to stress, once again, this is not incidental, but taking into account the situation in the market. But also building of our bank towards a bank that sets higher requirements for professional skills, because we can see a rapid growth in internally the number of people that deal with programming or IT architecture, data management. The new professions for the development of product and all that, as also the proportions are changing, so fewer and fewer people make simple operations, and this is reflected. So, undoubtedly, even if we keep this growth rate and in proportionate increase or decrease in the number of employees, so, undoubtedly, cost per person, per FTE, will go up.

If you look at the costs in the number of our employees, then you can see that this is a strange trend, which is higher number of FTEs year-on-year. It's nearly 120 people, 40 people. I would say these are temporary workers, short-term workers, because this is how we cover our peaks in that regard. Other people, these are FTEs that we had for the new production lines that we have in that regard with the rapid growth in [lease] in factoring and entrepreneurs, so this is where we needed more FTEs. In other areas, traditional professions and jobs are reduced, others go up.

But more or less, this is a trend which is going down, although we still see that our growth rate is higher than our growth rate of further optimization and digitalization of our processes. So all in all, we still have higher number of FTEs, which is a new phenomenon because we haven't had it before for many years. And as I said, the bank year-by-year is a machinery that produces more and more. And even though, in our opinion, we do a lot to optimize our processes and to digitize them, still this increase also forces us to increase the number of FTEs.

I was trying to summarize very quickly the set of slides. We've had, at the beginning of our presentations, capital ratios. You read more than I speak, so I know that you read the documents before, so I wouldn't elaborate on this. Liquidity ratios, capital ratios, are very good. Cost to income ratio are a bit disrupted due to one-off operations. Market share, we rebuilt the methodology here, but the trends are exactly the same as each time. Some numbers may be different because the values are presented here, but if the explanation below the chart is not sufficient, we will go back to it, and we will try to explain it in more details.

Now, we will proceed to the financial results. So, Piotr, would you be so kind to go to Slide Number 14, detailed elements for commercial development, we will leave it for the question-and-answer session, if you don't mind. Bozena, may I ask you?

[Bozena Graczyk, executive]

Yes. Very briefly, because you've said a lot about the financial results of the bank in the first quarter, I would like to pay your attention to the fact that good, I would say even very good, net income from the perspective of the booking method of the BGF contribution. You can see that the net income went down by 12%. If we spread it over time, the net income would go up by 5% quarter-to-quarter and 4% year-on-year.

So from that perspective, we are happy that our net income systematically is growing, but also it translates into very good ROE results. We are over 12%. I would like to stress that, even though it went up by 2 percentage point, which is the result of the one-off costs that you've heard before, still it is at a very high level. Our cost to income ratio also is slightly higher than it was in the fourth quarter. It is the result of higher costs, but still it is a very good figure, 46.5% after settling with the BGF costs. And in our opinion, this is a very good ratio, in our perspective.

In terms of structure of income that we present on Slide 15, if you look at income per category per business line, they systematically grow quarter-to-quarter, but also year-on-year. Both in the corporate business line, but also retail business line, total income versus the fourth quarter went up by 2%. And here you've seen it, and you commented on it in the morning.

So I think that here I would like to say that we have PLN37 million income that we realized on the sale of different -- that securities. We've sold them from the 2 portfolios, from the portfolio available for sale. This is the name that tells you a lot. This is the portfolio that -- this is an equivalent of the available for sale, but also we sold from the euro bonds, and this is the amount of PLN5 million of additional income, so PLN136 million. You will see it in details in our notes. It translated into a net increase in the first quarter.

Net interest income, the CEO said a lot. I would like to add that, if you eliminate one-off transactions and the number of days, and the lost income from the obligatory reserve, our net interest income margin would be slightly higher. And I would like to pay your attention to the fact that there are better loan-to-deposit ratio. We've explained what happened in the -- this ratio went down in that quarter, in the first quarter of 2018. We are above the ratio we had in the first quarter 2017, that is 86.3. Taking into account what's happening in the market for retail loans, we can expect further growth in that ratio in 2018.

As regards income on fees and commission, then we are very satisfied with that trend which we are observing, both on a yearly basis and quarterly basis. This fee and commission income was PLN380 million, and it went up at the end of the quarter by 5%. And actually, I think what can be added at this point, it is that you can see this income also in a different way presented, as it was done earlier, because we change the format of presentation. As to cash back income, it is presented now -- cash back costs, yes, sorry -- and they are presented under marketing costs now, and earlier they were presented to lower the commission costs.

And I would like to draw your attention also to the fact that you can see that Visa card income and credit card income, they decline year-by-year, and it's almost 0% quarter-to-quarter. But I would like you to see that, when building the expectation about the next quarter, what we see, it is that in different periods the [settlements] of income on Visa card transaction. Last year it was settled in first quarter, and this year we expect in the second quarter. So you will see the shift between the first and second quarter in terms of this item.

As regards the total expenses, we've already said everything before. So I will only add that these costs, except for BGF, they increase quarter-to-quarter 15%, and also year-by-year 5%. And I would like to show you the different structure of this BGF costs, and we show it in the presentation, the annual compulsory fund fee. It was PLN58 million versus PLN72 million last year, while quarterly it went up by the same amount. It was PLN26 million versus nearly PLN19 million last year. So this will also change into a different structure of BGF costs in this year.

As regards the cost of risk, I would like to emphasize that, at the bank level, our risk costs are very stable, and the cumulative margin is almost 1.5%. And the quarterly margin, it declined a bit, and I will explain why, but it is the effect of IFRS-9 implementation. It was 0.42 percentage points versus 0.51% in the fourth quarter last year. In the retail banking segment, quarterly cost of risk, PLN37 million. And as regards the level of margin cost, quarterly it is a bit higher, 0.38% versus 0.35% last year.

As to corporate segment, you can see it's PLN57.8 million. And as a matter of fact, as regards quarterly presentation of risk cost margin, we have 0.45% versus 0.63% in fourth quarter. And when you see the trend in our risk costs, when risk cost is a bit lower in the first quarter, PLN95 million versus fourth quarter. And I am of opinion that this is a phenomenon which results from implementation of IFRS-9 and different PD and LTD levels, also due to migration between stages one and stages 2. And you will learn more about it through higher provisioning coverage, especially in the stage 2, and risk volatility will be higher because we will see quarters with risk costs being a bit higher, and then a bit lower.

On Slide 20, I would like to emphasize, because we present differently our ratios, especially provisioning ratios now, so that [in the] quarters to come, this history will be built on, and we will mature in it. And we'll be able to say more about trends, about provisions in the stage 1/stage 2.

But as you can see on this slide, IBNR, which was 0.28% last quarter, now we have average coverage ratio cumulative for stage 1 and stage 2 of 0.55% on the opening balance and 0.51% at the end of fourth quarter, which actually translates into coverage of [3.43%]. When I mean the total coverage ratio for stage 1 and stage 2, and this is the main impact of IFRS-9, which we can see. And this coverage ratio in stage 3, as you can see on this slide, well, you can certainly see that this coverage went up.

But you have to look at it more from the -- more technically speaking, so technical change due to different recognition of impairment interest, which was provisioned for. But it was provisioned for in total, so 100%, so it rose this coverage ratio. And I can tell you now that we see different interpretations of recognition of this impairment interest across the banking sector. You will see different changes at the transition date because there are banks which impairment interest include the penalty interest, cumulative as well, which are really to increase this ratio. But we, in our approach, we only present the effective interest, so without penalty interest.

So this ratio will look different for different banks, and I would like you to keep it in mind, because as you remember from our previous presentation, after 4 quarter, we didn't increase in net terms [the] provisions because, since [indiscernible], there were no such needs. And please remember that these ratios, macroeconomic ratios, significantly impact the level of PD and LTD, and I would like to encourage you really to read our notes in the financial statements, where we really clarify the new structure of risk costs and the new structure of loans in terms of IFRS-9. And this history will be built up quarter-per-quarter, and then we will be able to talk more about these trends.

As to capital adequacy, which is presented on Slide 21, when, as a matter of fact, what should be said, it is that our ratios, both Tier 1 and TCR, are very good. They are above the minimum capital requirement for KNF, so for supervision authority. And the total capital ratio is 2.7% higher, and Tier 1 by 3.7% versus where capital requirements set for ING Bank Slaski. And in these results, which you can see, they do not include the division of profit and accumulation of profit due to the decision of a general meeting. And you will see the results in the second quarter, where this ratio will go up due to retaining some profit in our capital.

And I think that's all which should be said about the results presentation, and now I would like to give you the floor for asking questions.

[Iza Rokicka, executive]

Questions first from the room, and we will give you the microphone. We will pass the microphone, so please ask your question to the microphone, and then we will respond to the Internet questions.

[Lukasz Janczak, analyst]

Lukasz Janczak, Ipopema Securities. I have a brief question about the costs and the salary raise. From the April 2018, is it comparable for the salary raises we had last year, or is it just similar? I would like to be able to assess the impact of the salary.

[Brunon Bartkiewicz, executive]

It was higher than in April last year, but smaller than in September [one], so closer to the September [one].

[Unknown Analyst]

I have a question about IT costs, because one-off outlays activated in the balance sheet usually, so are presented in the assets. And I would like to ask why you put them into the income statement. So it was investment, yes, [you treat it like that]?

[Bozena Graczyk, executive]

No, we didn't put it on the assets, no. We didn't impair any intangible assets, no, explaining this movement on our part when you remember our policy as regards impairment and depreciation of intangible and tangible assets, and we have this limit much higher than in other banks. And this is why we have one-off. We gave this limit or not, I don't know, and it results in one-off possibility to include in the costs also significant outlays. And please remember that the international standards are very restrictive as to putting on assets different license fees, so the ones presented in income statement should be presented [there].

[Unknown Analyst]

I have one more question about deposit campaign. Could you share with us the volume of the deposits, the total of deposits you welcomed by this campaign by the end of March, significant amounts? And I believe that you -- with 2.5, you are to sell them until the end of June, yes, or are they to expire in June?

[Brunon Bartkiewicz, executive]

No. until June, we have campaign, and it is for 4 months. So the last pool of these funds is to expire, actual to extinguish, in October. And the volume [of] the price, no, we are not to give you this information.

[Unknown Analyst]

I would like to come back to Slide number 16 with the interest result, so net interest income. I would like you to explain this change in the first quarter, because we cannot [see] it in the interest cost, but it's no increase. But here, you see that, quarter-by-quarter, they went up by PLN35 million, more or less. And even if we--.

[Brunon Bartkiewicz, executive]

--In interest cost, net interest cost, when we take the difference of days, they would be lower, the interest -- but versus 4 quarter, yes, because first quarter was shorter. Yes, the first quarter was shorter.

[Unknown Analyst]

Yes, I know, so PLN4 million up.

[Brunon Bartkiewicz, executive]

No, down. No, down, when we take the rate of 90 days, yes?

[Unknown Analyst]

Yes, but I'm talking about net interest income, because PLN35 million-plus quarter-by-quarter last year, and I think it is the consequence of volumes. And when we add up the mandatory provisions and the number of days, so PLN31 million of interest income, then this growth would be up by PLN5 million. So something happened in [this income here.]

[Brunon Bartkiewicz, executive]

So, I said that we have some margin pressure, yes? Yes, so I explained to you that largely on the income part, it refers to derivatives.

[Bozena Graczyk, executive]

Please look at the note concerning the structure of interest costs and income. You will see PLN16.6 negative hedging transactions, which are the element of regular trading activity and derivatives. In the notes, I think we have PLN16.6 million versus positive impact we saw in the first quarter last year, which was PLN12 million. So when you offset it, you see the delta [in this] change. It is crucial, and it really impacts what we present on this slide, which is the slide showing our net interest income and margin for the entire structure.

So, it's not only these elements. You have here the amount if we level up first quarter versus fourth quarter, you have PLN37 million. And we [indiscernible] that, when you compare the dynamics of the last quarters, because volumes go up, but they continue to go up, but we have this situation where the margin itself, the net interest margin, goes up on the loans, but this growth is slower.

[Brunon Bartkiewicz, executive]

So between the lines I would like to [say you], but please don't get accustomed to such big growths in interest income because it's one of the drivers stops functioning now. Yes, so please, it's 3 quarters ago we said we were expecting much competition and decline in margins, yes? Please remember that, for 3 quarters, we have been mentioning it, and these margins actually go up. So this competition is not as strong as we expected it to be, and this is also the follow-up of this lack of private investments.

[Unknown Analyst]

Another question on my part about marketing costs. Can you see seasonality here, or is it that quarterly fees are just stable quarter-by-quarter?

[Bozena Graczyk, executive]

We make them flat, but volatility is as you can see it in the quarterly reporting. But we don't have something that we accumulate all marketing fees in one quarter, and in the next quarters there is nothing to follow. That's not our practice. We just level it out. But when we activate a big campaign, as it was for the savings campaign, then these costs start to be -- and start to be visible as it was in the fourth quarter last year.

[Unknown Analyst]

Good morning. I have a question about the net interest income, fee and income-income, which was very good in that quarter. From what I understood, you said that the lower costs on fee and commission was due to technical shift of the costs to marketing costs.

[Bozena Graczyk, executive]

Yes, they are recognized in comparable terms. So when you look at that slide, you can see the proper trend, except for the cash back costs, while still, as you remember from our previous discussions, we can see here a seasonality in settlement. We see it in certain quarters.

[Unknown Analyst]

In the notes, I don't think you had this information, because I didn't see such information, such difference. I understand that these costs on the fee and commissions are seasonally lower in the first quarter.

[Bozena Graczyk, executive]

PLN22 million of costs in the fourth quarter, PLN11.5 million in the first quarter. This is the seasonality we can see between the fourth and the first quarter. This is on Slide 17.

[Unknown Analyst]

Yes, but in the first quarter in 2017, you had PLN17 million.

[Bozena Graczyk, executive]

Okay, so this is a strongly technical question.

[Unknown Analyst]

Another question related to fees and commissions, insurance income, which went up so strongly quarter-to-quarter. If you can comment on this, is it a level that we will see in the subsequent quarters? Is it a new types of insurance that you added to the products?

[Brunon Bartkiewicz, executive]

We still add insurance products, and you can see the growth rate here is very high. And you remember in the -- we've seen the drop related to regulatory requirements. We couldn't offer group products. Now, we are in a normal production.

[Unknown Analyst]

Maybe another question about NPL loans for corporate business lines. If you may comment on this, because we've seen the sale of the portfolio, of the nonperforming portfolio, of I think PLN80 million. If we add this, then we can see a strong increase here even compared with the opening balance. Was it for big corporates or on SME, in which sectors maybe?

[Bozena Graczyk, executive]

In fact, we didn't observe any particular phenomena for the corporate portfolio. We didn't see any significant one-offs. This is a normal trend due to the structure of our loan portfolio.

[Brunon Bartkiewicz, executive]

If you look at -- because as I understand, you refer to Slide number 20. Maybe it's not so well visible. I think Slide number 19, you can see it very well. If you look at the risk costs for the corporate banking, and the cost of risk margin cumulative, but the cumulative one is quite well presented in the first quarter, the third quarter 0.51%, and the first quarter 2017 0.29%. So we can see an increase here, as I commented before. It was in the first and in the third quarter.

Also because in the second and third quarter, we also observing what's happening on the market. We, on the one hand, paid attention to the review of the portfolio and the establishment of NPLs, but also we released -- slow down the production in the areas which were encumbered with higher risk. And the higher risk was due to these characteristics of not really balanced development of the economy in Poland. So, lack of investment with strong deployment of capacity and accumulation of investment in the short-term 2012.

Let me remind you that year, and everything is obvious. Here, you -- and the shortage of labor. This is a difference between the year we have now and 2012, accumulation of potential investment in short-term combined with a very strong utilization of capacity and shortage of labor because we don't have Ukrainians in Poland anymore. And this is a dangerous situation, and we've been thinking about it. Somebody who decides to open a big construction may encounter a barrier which will make him unable to meet his commitment. This is the major element of 2012, but now this is large-scale. But also, it's not only limited to road construction. This is [in a] dangerous element, and we've been talking about this for 2 years now. Maybe we do not articulate it that much, but we've been talking about it for 2 years.

So we are prudent here. Our increase in activity for corporate loans, our dynamics, is colossal, but this is stopped now because there are dangerous elements here.

[Bozena Graczyk, executive]

You should look at the relative value of costs is PLN58 million. If we exclude the first quarter 2017, this is the lowest risk cost in this segment. So, it is -- also shows, but it only shows that the provisioning coverage either went down or is comparably flat.

[Unknown Analyst]

Is it the level that for you is satisfactory, this provisioning coverage ratio?

[Bozena Graczyk, executive]

Yes, from the perspective that our approach to IFRS-9 implementation is based on prudent assumptions. In this context, you should look at the provisioning coverage and cost from the perspective of that's at stage 3, this provisioning coverage is stable and is not subject to significant changes. You refer to the sale of the portfolio. You should know that we had only PLN1 million of positive income on the sale, because this is also defect that we, the banks, less and less, we also sell portfolios that are provisioned for. We sell portfolios which are effectively provisioned for.

So on the one hand, the corporate banking segment is subject to stronger impacts of the transition from the stage 2 to 3, because these values are more sensitive from the relative PD change perspective. And it translates into higher volatility, especially for the corporate portfolio.

[Brunon Bartkiewicz, executive]

The sale -- these are not the biggest entities, referring to the other part of your question.

[Unknown Analyst]

CEO, you've mentioned about the elimination of the dynamics, of the cooling down the dynamics in the corporate segment. I would like to ask about the mortgage loans. Do you also plan, or do you also think about including some -- about stopping these dynamics, or maybe you will be more selective?

[Brunon Bartkiewicz, executive]

No, we don't see any risk element here. Our criteria of granting loans are sufficient and conservative.

[Unknown Analyst]

Okay, one more question. Do you have any estimates for the issue of MRL? And what's your approach to the estimates that we will say are publicly available sector-wise from PLN50 billion to PLN130 billion? These are the numbers, that these will be the issues of bonds.

[Brunon Bartkiewicz, executive]

In my opinion, yes, I think we are in this range.

[Unknown Analyst]

But to which figure, the bottom one or the upper one in terms of your--?

[Brunon Bartkiewicz, executive]

--Yes, we've recognized. We have a plan. This is a quite remote perspective, 2023, but we have a plan, but this is not -- we do not publish it. It's too early to announce that. But this is not the fact that will paralyze us. I sleep calmly.

[Unknown Analyst]

[Indiscernible.] You said that there is a disproportion between public investment and private investment. Why this proportion is a problem, is an issue? Why this imbalance makes some problems? Is it combined? You've said that there is a risk of accumulation of investment and that the contractors will not be able to meet their commitments.

[Brunon Bartkiewicz, executive]

This comment applies to public constructions, which need a lot of resources. I'm not talking about human labor, but also about raw materials, seal, cement, et cetera. But also, lack of increase in private investment means that corporates work at the top of their production capacities. The level of utilization of forces, labor forces or production capacity is very high and has been like this for a long time now.

With the normal conditions and the necessity of functioning in the international trade, and international competition is the foundation of our element, it should translate into the fact that the entrepreneur is not focused on keeping his [sale], but should invest to enlarge it and to concentrate all his powers to increase his competitive edge, but also to sell more and more product. And this is happening in Poland, to a lesser extent.

If today all entrepreneurs, for various reasons, come to a conclusion that this should be happening, and they will start to invest, they will encounter the same barriers, so shortage of human labor, shortage of raw materials, glass, cement, et cetera, et cetera. This should make prices go up, as you can see. Prices do not go up, so this is an additional argument to show that something is happening here. This may mean that we don't see higher prices, but still it doesn't mean that, in many sectors of our economy, such as construction sector, hotels, which is exploding rapidly, increase in construction costs is [off] 20%, 30% year-on-year.

So if you calculate the business model, and suddenly you have to increase your costs of a very important element by 20% or 30%, and on the other hand, even given this increase, is not able to find the resources, then the business model collapses. And this is the credit risk.

And I think that now I've explained it sufficiently. This is the risk that we can see. These investment should be happening. We are waiting for them to happen. They should happen within 5 years, and they will happen within 2 years. Some of them will not start at all, and this is a shame.

So I would like to say that very often we forget that in economy, in fact maybe philosophically summarizing this meeting, the most important loss that you can have is a waste of time. Today, we are wasting our time from this perspective. When we do not build a new factory, when we do not fight for markets abroad, we are wasting our time because this market is not waiting for us to wake up, but somebody else takes this market. So if we build -- and we need a strong economic growth, higher than the one we have in Europe for many years.

To eliminate social turmoil tension, we have to build a competitive economy, so we cannot afford to waste our time. I'm sorry for this emotional tone of my statement, but I think we should think about it. We are wasting our time a bit.

Of course, everyone is happy about the economic growth we have in Poland now. I like to complain, but I would like to have this growth balanced, sustainable, because then it could be higher by 2 percentage point for a longer period of time.

If today the economy in Western Europe collapses, having our competitive level, we will be affected by this. We have to be aware of this, and we have nowhere to run. With the previous crisis, we had huge unutilized production capacity, and we entered the area that other people couldn't, because we were cheaper. This mechanism probably will not work because we don't have these free production capacities, because we did not produce them over recent years. So from my perspective, as I said, I like to complain. I like to grumble. We've lost our time. And this is a shame, because we will not have it back.

[Unknown Analyst]

You can find [indiscernible], you can find income, but not for time. But why these private investments? Why they don't go up as you expect?

[Brunon Bartkiewicz, executive]

Oh, I'm not that wise, sir. This is the area which I don't really want to have you hear it from my knowledge, still having some scraps of knowledge in this regard.

[Unknown Analyst]

So this headcount increase you're observing, is it specific for Bank Slaski, or is it across all banks and will be observed across all banks?

[Brunon Bartkiewicz, executive]

Oh, yes. A large number of this growth, a large volume, it is that we shifted for [HI] structures at our organization. And actually, in the first period, they require new resources. You need professionals. You need [agile cultures]. You need [pace cultures]. You need to rebuild the organizational framework. As far as I know, all the banks want to shift to [these agile] structures. Welcome.

[Unknown Analyst]

We had a special session in July, I think -- no, in May last year, so I thought this was already defined.

[Brunon Bartkiewicz, executive]

So, Katowice, but how -- can you say it in Polish? It's a different organizational structure which makes us [reconstructure], rebuild -- revamp our product development area, where we combined all forces, IT operations, product developers, [indiscernible] -- sorry for my jargon -- into one construct based on [scrums and tribes].

And these are, yes, very nice, very nice Polish phrasing, yes. I'm sorry, but I will not be able to translate tribes into Polish because, as far as you know, the only word which comes in Polish, it is [foreign language] in Polish, which is "tribe" also in English. [A set is a group of our mate.] Yes, I really would like somebody who would like to work on such a tribe or pack of wolves, for example. So I'm very sorry for English terminology, but all the words follows with terminology.

And these are just self-regulating teams, so 8-person group with specific scope of activities which we call the target, also purpose, purpose. Sorry, in English, it's very nice when you use the [indiscernible] for English, and this team is to self-organize to have maximum effects. So we create micro-company with specific purpose, specific objective, and with agile structure. Each organization which tries to have many improvements and changes, transformations, so gradually each organization is to change [across the world], because it's not really a new concept.

So we said in May, as well, that the master [pattern] -- so for inflection of it, it was with Spotify company, which introduce it for the first time. And really, our employees, not me but my colleagues, visited Spotify to see the structure, to see this organization, and to see this experience in implementation of this concept. But maybe we can discuss it at a different session, or when I am in Katowice, you can see it in Katowice. So I invite you, please come, because in Katowice, [indiscernible], please come also to see [their rooms], because architecture was where the layout is completely different.

[Unknown Analyst]

I would like to refer to [first] net interest income, but about outlook. I would like to ask a question. So it should decline, but the savings effect should fall down, which was given as one of the reasons of the change in this income, unless you decide in the second half of the year to start with a new campaign. And I would like to ask about the factors of your decision. I think the problems you mentioned, but I think you would like to build up a better capital base in the second half of a year.

[Brunon Bartkiewicz, executive]

Maybe not really capital, but our obsession is about growing the number of clients, yes. I'm not going to hide it. And another element, it is that we say today how to build future for the coming 5 years in terms of balance sheet structure, which path to follow.

And also, I would like to stress, as Bozena mentioned, we have discussion from the low level of loan-to-deposit ratio. So we have sufficient deposits to cover our lending, but our lending goes up significantly, and when you see it, we are close to the level, or even at the level of PLN10 billion increase year-to-year. So we need to have the best, stable bid on trust -- yes, I would like to emphasize it -- deposit base so that the funding costs are low, because each bank, which really pushes too much lending and forgets funding, has this problem. You know the situations. You know the banks I'm talking about. So these 2 elements should be balanced.

And as you know, we are the bank which first takes [indiscernible] deposits, and later knows at what pace is to produce lending. And because this pace of lending is so strong, as we've mentioned earlier to you, and you can see it in our market share as it grows. So we need really to envisage how good our deposit base is, because these are clients, and clients actually build -- comprise [first] deposit base. It is not that we are to use fair market funding. We will use funding, but for long-term loans when we have time to do that.

But we are not to say that we want to fund ourselves from the entities which are really price-sensitive, for example local government [indiscernible], because you have [tender] every year, and you never know the decision, yes? Because market demand really shapes this, and it's all of 15 -- of 20 or 50, yes, [indiscernible]. But we would like to have stable client database. So when -this year], the loans will continue to grow, and especially mortgage loans, which exploded. Please notice it. And the topic we discussed with you also is to explode.

Then we will not grow at PLN10 billion, but PLN15 billion, PLN16 billion. And when all our plans for 5 years term perspective need to be constructed otherwise. We expected really drainage of deposits first year due to strong growth in lending in general. And this actually doesn't come true. We don't see it actually because we talk about the market, how it's going to act, and not something else. So I'm not able to say to you now, because in 6 months, maybe yes. And for the next year -- but not really, yes? [And the rule, in our thinking], it is to do the move earlier than the competitors do, so we need to be ahead of the competitors to make it cheaper. And that's all.

We wanted to be loan-to-deposit of 90%. We have lower level because we expected more fight for deposits. So [first call deposits] fight should be started earlier, too. So when everybody fights for something, we don't need to queue, to say it plainly, yes, to say it bluntly, because so is life, because when I know that there is a queue, I just go earlier, yes, take a place in this queue.

[Unknown Analyst]

Mr. President, one more about the mortgage loans, because after [this rise] in first quarter, was demand on the market still visible in this segment? What would you envisage? What would you project for this group?

[Brunon Bartkiewicz, executive]

After so many years on the market, yes, we show especially this first slide to you, because this first slide explicitly is to show that we are of the opinion that there is no drive which would decrease the pace of mortgages production this year, or lower it to the level below a few [thosand one]. But today, [BLIK] was proclaiming that the number of applications, 18.5, yes, quarterly, in April, when you think about market comment.

So we want to suggest to you that, as to future, although we don't have the cumulative data for the market for April yet, it is for BLIK, for Amron, the data are available for them. And [indiscernible], we don't have [this data], so we share only with you the information we know, which means that, as we can see, that this is to be record year of mortgages in [this] 10 years' time.

We will go over PLN50 billion, yes. You think Amron formula, yes, which we always present to you, but we don't have this data today. Amron prepares [their] data after publication of results by banks, yes? But PLN50 billion is to be broken, I think. All [the symptoms are there], and these are big volumes. And not to worry you - bigger numbers were seen once in our history, yes, weren't they?

[Unknown Analyst]

One more question. Do you expect some movements on the regulator's part as they see it also as regards stopping [first] lending?

[Brunon Bartkiewicz, executive]

I don't see any reasons why it should be [culled] down, because the demand on the market is pretty strong. But some risk, really enormous risk, concentrates in developers' sector, but not in individuals when we talk [indiscernible]. So really, taking ahead, being ahead of your next question, we don't fund developers, which seems to be consistent wrap-up of this topic.

[Iza Rokicka, executive]

I don't see any more questions from the room. Via Internet, we have 2 additional questions about the net interest margin. Both were already responded and addressed via Q&A session, so I think we can close our meeting now. Thank you very much for your attendance, and I would like to welcome you to lunch.