ING Bank Slaski SA

WSE:ING

Earnings Call Transcript 2023-Q1

[Piotr Utrata, executive]

[Audio Gap] Finance; Iza Rokicka, next to me, responsible for Investor Relations. I'd like to thank you. And welcome, if you're listening to us from your screen and also at the venue.

Brunon, over to you. Can we begin, please?

[Brunon Bartkiewicz, executive]

Hello. Good morning. The first quarter of 2023. We're in May. We're talking about March. In the meantime, as you all have noticed, a lot has been happening and will be happening. It is definitely another very interesting year for banks, including ours.

And we make a lot of effort to make it boring. And constant, persistent growth in the number of customers, more and more transactions, bigger transactional and sales activity. Those are difficult times for customers. High percentage rates, low predictability, a lot of good news and bad news at the same time, and all of that, surrounded by the atmosphere of war and geopolitical conflict. Those are interesting, but difficult times to make decisions, but times to make decisions here and now.

We are trying to be there for our customers. We're very happy to see that more and more customers are here with us too. It would seem that this should be a time where customers are looking around and looking at what's happening around them. But if you do look at Page 4 of our abridged piece, the number of growth of the customers, both retail and corporate, are good, good figures, just as if times were steady and peaceful, which is very good news for us because it seems that -- it means that we are there to do something when needed.

Client volumes year-on-year are looking quite good. And certainly, what is a problem for all of us and the social problem is the fact that residential construction and mortgages are in a very low level. You will all have heard that there are signs of it picking up in March and April, but it's picking up from a very low baseline and a very slight pickup. So let's not fool ourselves. This year will be rather weak in terms of mortgage loans and the adaption of individual clients, retail clients to the situation on the market.

The growth in the area of financial funds, we have seen some for 2 quarters, and purchases of funds, not just bonds. Deposits, well, though those are flowing for acquisition campaigns, of various institutions, so it's proportionate. So we've got a subsequent period of some tension in terms of trying to stabilize the bank's positions, big growth of deposits, but a very low credit loan activity at the same time. So the balance is going

[Audio Gap]

to a situation where it would seem that the rate should drop, because otherwise if they grow -- and no one's speaking about that -- we might be seeing some problems in the sector.

So at this bank, we are trying to put our tasks into practice and continue what we always do and we try to do regardless of the macroeconomic picture. And in my view, we are doing quite well. We're quite successful. Our market share is growing relatively. There are some fluctuations depending on the quarter, but the trend -- an increased trend of our market share is and continues to be there, which translates into what you see on Page 6, changing volumes.

When we look at deposits from clients and those that are on the bank's balance sheet is PLN 20 billion year-by-year and the loan activity is growing by PLN 8 billion. It's not so bad. We were expecting lower figures this quarter. But what we're hoping is that -- this is a period of the biggest stagnation. Let's not use the word recession. I don't think it's justified. But I think that this is the time. So these are not record high figures. But in terms of the deposit volumes, after this period where there was an outflow of cash towards bonds, well, this is what we're seeing right now. The situation shows that we're not far from the market average actually in this department.

This translates into more stability in market conditions. Looking at also the stability of the portfolio, where we don't see major changes, or what you seem to be asking about, a deterioration of the quality of the credit portfolio. You can't see that really in figures. And this is not the outcome of the fact that you can't see because there are -- you can't see this. We will see whether the moratoria will have had any influence in about a year or 2. I can't see any reason for that happening looking at comparable data.

This translates into financial results, which, to be honest, are not far from what you are expecting. So I think we're going hand-in-hand here. The main difference is in the cost of risk, which is hardly a surprise. You're not aware of all the mechanisms that are the components of the macroeconomic models. So more or less we're looking at a similar outcome.

Page 8 is a traditional slide of ours, and that's meeting our strategic goals. This pertains as to client activity, so the growth in numbers and their activity. For that, we measure whether our clients are still there and trust us and we are important in their lives, which allows us to model their stability and predict future and adjust accordingly.

Regulatory compliance, a very important topic. That's our passport to operate further. There's a lot of changes and there will be more. You probably will be asking us about that. So we have full compliance here with the rules. And it seems that we proactively and conservatively put in place what we're being expected to do. Employees, the most important asset that we have. Here, the situation is stable. It is good both in terms of vacancies, recruitment and employees data processing, data modeling, IT compliance. We don't really have any problems practically with resources.

Safe and secure IT systems. Very good outcomes here recently. But we are making a lot of effort there to make sure they're adapted in the long term. We make sure that our architecture is apt for smart technologies. So smart contracts, cloud and the whole project of changing our architecture, including Vault by Thought Machine as a concept. So all of these topics are in progress in the pipeline and they are progressing at the right pace. We are disclosing here to you our cloud rate. We're only launching this process, but it's active and it looks good.

And some figures in ESG. We are not forgetting Ukraine. One new component was the very tragic seismic quake in the areas of Turkey and Syria. We did some funding and made a contribution. And we were successful because such were the needs of the local market. And I think we were quite quick to purchase 14 big tents. It costs PLN 14 million, but we were able to procure them. It turns out that there's quite a number of suppliers here in Poland. It can host 100 people and it's heated -- one can host 100 people. We were able to organize, supply to the province that needed them. So that has been our response to the events of the first quarter.

This is very painful for us -- I'm going to be open -- because due to the earthquake in Turkey, 5 of our colleagues, employees of ING died. So additionally, that was meaningful for us.

Now, Ukraine, power supply is not stable. So this quarter, we purchased power banks, advanced photovoltaic power banks for our colleagues from Ukraine, so that they could operate even with power cuts. They could continue with our lives and work.

But I don't want our results to be dominated with tales about tragedies happening around us. All right, then. Perhaps maybe some more details about the results from [ Bozena ].

[Unknown Executive]

Good morning. A brief summary from us of the financial results of the bank. In the first quarter, our profit, PLN 909 million, that's a 15% growth year-by-year. I've been reading your comments, and I hear that this is slightly higher than the expectations and consensus. One point here, our trading results. In the first quarter, indeed, it grew significantly, and that was the result of the market activity of our treasury in financial markets, especially against the backdrop of currency and derivative transactions.

Our cumulative ROE at the end is 10.7%, is only just above what it was the quarter before. Since it's a cumulative indicator that also takes into account the extraordinary cost of last year. This is below our long-term strategic goal I must admit. The interest rates adjusted results, as you can see on the slide, grew by 6% year-by-year. And there's been a slight increase by 1 percentage points quarter-by-quarter. That's PLN 1.37 billion.

The interest rates margin dropped to 3.39% quarter-to-quarter from 3.5% a quarter before. The main reason of this drop is the slight decrease of profitability of assets together with dropping WIBOR recently. And as you can see here, consistent growth of financing costs. But revenue grew by 3% and the cost of interest rate by 7%.

The impact of credit holidays was marginally positive, plus PLN 23 million in the first quarter. As you can see as well, due to the large dynamic on deposit volumes seeing the low demand for loans, that means that our ratio is down to 77% and is far from the optimum ratio.

Now for commission, it's PLN 524 million in this quarter, up by 2% quarter-to-quarter. And year-by-year, it dropped by 5%. And what you can see here is growth for financing is by -- it's 15% quarter-by-quarter and 9% year-by-year. This is the outcome of the settlements of commissions and the increased volumes in this segment. You can see that through the lens of changes in the balance sheet.

What you can be happy about is the brokerage results growth. And we're quite happy to see the net inflow to investment funds in this quarter. We can see the net value finally of this. From the perspective of what happened last year, this is still a negative trend, minus 29% year-by-year.

Now regarding exchange, this quarter this item has dropped by 8%, 2% year-by-year. And a decrease in transaction both in terms of the value and the volume.

Credit cards, we have an increase of 3% year-by-year, quarterly drop of 12%. We can see some seasonal fluctuations resulting from quite a lot of activity of clients in the fourth quarter and significantly smaller activity in the first quarter of this year.

Now for the fees for client accounts, there is a decrease in the revenue in that item due to the fact that clients are giving up the fees for credit balance, and that results from the drop in interest rates.

Costs, PLN 1.163 billion. This is a growth of 7% year-by-year and 37% (sic) [ 36% ] quarter-to-quarter. And I think that I will perhaps stop here for a while. On the one hand, we do see changes in the regulatory costs, as you can see, due to the change of the DGS fund. Banks, including ours, were not charged with contributions to the guaranty fund, whereas last year we paid PLN 54 million. And we also noted a lower fee to the restructuring fund. Last year, it was PLN 173 million. And this year, we've got the BFG informing us after our results from first quarter it is PLN 154 million, the resolution fund. It's worth noting down that we've got a slight change in how this is calculated, and as a result, the bank levy levels due to the changes earlier this year -- because bonds guaranteed by treasury and [ repo ] have been excluded from the base used for the calculation of the levy.

You can see an increase in the cost, quite significant. And that's 21% year-by-year and 22% quarter-to-quarter -- 20% quarter-to-quarter. And you will have noted that the quarterly increase results from the fact that in the fourth quarter, these costs were significantly lower than in the previous ones. We commented on that. That was due to some of the projects that were completed below the cost predicted. And that trend is not observed in the first quarter.

The increase in the operational costs is the result of inflation and an increase of the costs that follow inflation increased costs of goods and services and the cost of labor, that's also increasing. So I think these changes should not be a surprise to anyone. From the point of view of increased costs in our bank, they are similar to what we're observing also in the first quarter in the banking sector.

In terms of personnel costs, they have grown by 17% year-on-year. That is a result that -- obviously, it is a result of the pay raises that we have introduced as a standard in April. So that is a regular and visible element on year change. We have changed the employment structure at the bank, another factor that causes changes to the average pay of our staff.

A brief commentary with regard to the cost of risk. This year -- this quarter, it totaled PLN 88 million. This quarter, we have not -- we have decided not to set up a reserve, a provision for the franc portfolio. After last year's development, we have not sold any regular portfolios. But what you can see here, well, we have noted a positive influence of macroeconomic factors, PLN 158 million of positive factor, PLN 14 million accountable for the retail and the remaining part corporate sector, that is the expected change of changes to -- an expected outcome of changes to interest rate -- interest part, obviously, of the risk factors. Were we to summarize the cost of risk, well -- or legal risk cost, barring the franc provision, 44 basis points. This is what it comes up to. And this quarter, to be specific, 22 basis points.

As aforementioned, on Slide 15, we are presenting the quality of the portfolio, quality for the bank. You can see that -- you can see low and stable share of irregular loans in the overall bank's portfolio. We have only recorded a brief increase by 17 basis points in the corporate sector in the third quarter. But those actual increases are really minor and only applying to that particular group of clients.

Another thing that is quite visible is the observable drop in the share of the Stage 2 loans. That is also the effect, the outcome and impact of macroeconomic factors, which naturally have also impacted the decrease of the Stage 2 loans in our overall portfolio.

With regard to capital adequacy, at the end of the first quarter, our total -- consolidated total capital ratio reached 16.37%. The increase, you can see here, has risen from the 1% increase in the ratio as a result of the General Shareholders' Assembly decision concerning the distribution of profits for 2022. And the positive results, positive outcomes are due to the delayed taxation payment or postponed taxes, deferred taxes, not to mention the fact that the grace period for correcting the equity value giving debentures is now over. Not to mention the fact that we're also amortizing the outcome of the quality of the portfolio on -- for the implementation of IFRS 9.

We have also received a decision of the guarantee of the banking -- of the bank's guarantee fund, and our quarterly report reads that the minimum levels have all been conformed to. We have reached the ratio to the -- with regard to the weighted capital or weighted assets is absolutely adequate. That is also the direct outcome of the previous decision, the previous one having affected the [indiscernible] ratio, all in all, 5 percentage points below average. That is also the effect of the decision to take out a loan for -- our EL loan for the next 6 years.

Now that is all in terms of the results for the first quarter. Please ask your questions. The time has come from a Q&A session. Over to you, ladies and gentlemen.

[Unknown Analyst]

I would like to request more detailed information concerning the corporate loans portfolio, because you decided to show general outcomes, including leasing and other factors. And now, last week, the President of the Debts Office has pointed out that actually irregular -- the ratio of irregular loans has risen. Have you noticed a similar phenomenon in your bank? And thirdly, have you been affected by the change to the WIBOR? Have you actually received any -- have you been sued, for example?

[Unknown Executive]

Let me comment, if I may. Now with regard to the quality of our loan portfolio, I understand that you're asking a question concerning our products. Well, what we are showing here is a bunch of consolidated data basically speaking specifically with regard to factoring portfolios. In particular, they are very high quality and they show low irregularity ratios.

The leasing portfolio is performing very well as well. And so those are our -- the most observable phenomena in the bank's portfolio. We are not showing the portfolio breakdown by product.

In terms of mortgage loans, well, our presentation has -- well, proves that we are basically not observing any phenomenon of deteriorating mortgage loan quality. These irregularities are really low. The portfolio is high quality.

With regard to the Swiss franc portfolio, well, we have such a minimum share there in that. It does not really affect our general situation. Well, we are aware of the Credit Information Bureau. We have actually applied to the office with a request for clarification concerning the methodology in order for us to be able to compare what we are recording with their recordings, with their records.

I must say that we have been astonished ourselves to learn what they published. But possibly, the devil is in the details. We are not aware of the Credit Information office's methodology. So we are not aware of what that particular ratio means.

And the third question, if you'd care to repeat?

[Unknown Analyst]

Well, you do know of the Katowice case, which obviously triggered an avalanche of debates concerning the topic. You probably know that the primary decision of the court pertaining to the suspension of repayments differentiating between the capital and the interest.

[Unknown Executive]

Well, obviously, we are aware of what WIBOR means. We are learning whatever we can in great detail. I would like to emphasize that with regard to greed-driven activities, the market is being tested. As in case of the Swiss francs, obviously, we are trying to focus on such news, for example, that the customers had not been properly informed at the outset when taking the loan that WIBOR may change. I don't think that makes a lot of sense, but it goes without saying that we are definitely going to be witness to the justices decisions and bias, if you will, or lack of being tested because there's a lot of money in it.

I would like to draw your attention to the KSF representatives comments. With regard to what they have said, they -- well, they have made a very firm statement concerning WIBOR. Nonetheless, I believe that it really makes sense to consider the nuts and bolts of the mechanism. So yes, the Financial Stability Committee has made their comments, that is KSF.

I definitely think it's worth our while to consider the nuts and bolts of the mechanism because there is a lot of money in it or behind it, if you will.

[Jaromir Szortyka, analyst]

Jaromir Szortyka, PKO BP. I would like to ask a question concerning the deposit market and the huge accruals or increases. Considering the loan portfolio and the rather low interest rates, I believe that what you're observing is -- that we are observing and you're observing is a reverse trend to what is observable in the U.S., where the loans are now shrinking. Could you please now tell us why such a huge number of deposits are coming into the sector?

[Unknown Executive]

Well, you're actually not asking a question concerning the bank. You're asking a question concerning the overall sector. There are 2 aspects there, too. On the one hand, we have customer behavior, and on the other, we have the methodology as such. In terms of methodology as such, I would like to draw your attention to the fact that customer income in Poland is now growing year-on-year considerably. Remunerations are growing.

And with regard to the volatility period of per quarter, we have noted huge accruals because simply people have more money to be spent given their remuneration, but also because they are getting rid of financial assets in other areas, not to mention the cash surplus that we are definitely still facing in the wake of the pandemic. Do you remember the payout campaign that we were witness to at the end of the first quarter of 2020? PLN 40 billion were at stake.

Things are, obviously, happening very gradually. We have higher influx and higher spendings also tying in with higher consumption. People are simply spending more on consumption. The year-on-year trend has been distorted to a certain extent. Last year, people were only getting prepared for bond investment because they have not really been suffering of the outcomes of interest rate increases. Now that trend is slowly but surely coming to an end June, July this year, probably, which ultimately means that money is flowing in a great golden river into the banking sector is true, but it is not fully certain. We are by no means certain that this is there to stay. Nonetheless, it extends beyond the attractiveness of individual offers.

Now with regard to acquisition and retention offerings -- and probably you have already noticed certain tensions between banks. Whereas, were we to only consider the untreated records, unprocessed records, the revenue is definitely high. Nonetheless, that is the condition as of late March. I would like to point out that in all probability or possibly, we might have to be patient and wait and see whether the trend is there to stay. A lot depends on consumption. Consumption in all probability will remain high as suggested by trends. So people are spending, but people are also saving on the regular or current accounts.

Now is that the effect of fear? Are people spending out -- excuse me, saving out of fear? Or are they saving for other consumption purposes? That is the question. For example, some are definitely saving to, let's say, purchase a flat later than originally planned. Or are they simply accumulating cash? It is too early to conclude.

[Jaromir Szortyka, analyst]

And a related question, if I may. What is your opinion concerning the competitive struggle for deposits? Some banks have suggested that this competition is lower, which has been -- which is apparent in terms of the term deposits.

[Unknown Executive]

Well, it depends who sets those deposits up. Let us consider the current promotional campaigns, the offerings structure in general. Economically speaking, it definitely seems that banks ought to be shifting towards other offerings in terms of acquisitions and retentions. But for example, given the media campaign, it is not necessarily so. It is definitely -- one would be definitely hard pressed to make a general conclusion concerning the market. We are definitely observing a certain market play, acquisitions versus increases in fees.

When raising fees, they -- obviously, any bank will engage in a acquisition campaign in order to calm their customers. It seems that offerings ought to be dropping. This is exactly what we thought in March. Nonetheless, April and May have shown slightly different trends.

It seems that 8% offerings ought to be vanishing off the banking market, whereas we have seen 8.5% offerings even in May -- yes, isolated, but, yes, they are there. So there is no such thing as a uniform trend. A uniform trend ought to be suggesting that things ought to be on the decline.

[Jaromir Szortyka, analyst]

And last but not least, I would like to ask a question concerning your costs in the first quarter. I would like to ask whether the cost is the new normal because the dynamics over 20% year-on-year minus regulation costs is a novelty. It used to be a 1, not a 2 in the double digit -- as the first digit in the double-digit ratios.

[Unknown Executive]

Well, what we have been observing is an acceleration of costs unquestionably in terms of commodities and services we are purchasing. We have noted a certain phenomenon of delay. In the early days of the inflation rate, the costs were not growing in proportion to inflation. Nonetheless, they have now reached the historical inflation levels. They have even actually gone well ahead thereof giving rise to new inflation expectations, which means that we should probably get used to the thought that costs shall be growing in the banking sector and that historical cost levels are unfeasible.

The cost of services are obviously different depending on the fields that they pertain to. So with regard to your question, yes, in all probability that is the new normal.

[Piotr Utrata, executive]

Now let me -- let us move to the Internet questions or online questions. Let's start with those concerning financial performance. Santander, among others, have asked for information about the rate of pay raises this year in April. What kind of percentage are we talking about here?

[Unknown Executive]

I am somewhat reluctant to show the increase because it is a somewhat ambiguous record. Whatever we could tell you now would in all probability give rise to misinterpretation in terms of the big picture. We are sticking by our declaration that our staff's pay remains attractive in comparison to what the market offers. I would also be inclined to admit that given an overall peer review, which is a regular practice of ours, not only in comparison with the banking sector -- because actually not only the banking sector is a benchmark for us in terms of competing for a challenge. Nonetheless, we have moved towards an increase in the attractiveness of our offers and pay.

This is mostly because we were expecting that this trend would be more pronounced. So we have good salaries. Things are doing well, and the trends are correct. So the rise since the 1st of April, of course, that's quite impactful. If you can just wait a moment. You will be seeing that in the results of the second quarter for sure, and those will be quite unambiguous figures but they will take into account many factors.

I'm not going to just talk about one factor because you will then draw your conclusions about the overall tendency in remuneration and the structure of hiring. But this has been another year of decent salaries vis-a-vis the market and even higher than the market average. But the numbers and figures published by companies, well, that's a very complex process, not just basic salaries. And since we are not disclosing that in the report, I'm slightly reticent to give a response or reluctant to give a response. But it will be more symptomatic in the second quarter, and you will be able to draw the right conclusions, rest assured

[Piotr Utrata, executive]

Okay. Let's move to the next question then, IPOPEMA. When can we expect the decision on the potential dividend from the profit of 2022?

[Unknown Executive]

If the ECJ verdict is convergent with the Ombudsman's opinion should we exclude the dividend -- objectively speaking, the reason why we were given a warning from the financial provision authority to not hurry to pay a dividend -- all of us have been notified about that on the market, mostly probably linked to the ECJ verdict. I would probably not want to actually make a prediction of what this decision is going to be. I have no idea. That's hypothetical and there remains the multitude of details and interpretation as to what it actually means.

The calculation of supervision authority pointed towards a gap in the commissions, quite a meaningful one. So you could boldly say that the sector is facing some challenges in the area of profitability, and we need to make the right adjustments and see to what degree that is present and on what level the provisions need to be created due to that situation. We are disclosing some information. And already now, you can easily get access to some information. That is the relationship between the level of provision making for legal disputes and Swiss franc settlements vis-a-vis other entities on the market.

Right now, PKO S.A. and us have higher ratios than other peers in the market. So it's not as if we are trying to figure out whether those costs are going to harm the bank. Still, we are talking about a burden that's present in the whole sector. So until we know the ECJ verdict, we cannot really make predictions about paying the dividend. I think we described that quite in detail. And that was the intention of the financial supervision authority.

Now announcing the date of the verdict, in my view, is not a sufficient reason to make such decisions today and announce them.

[Piotr Utrata, executive]

Okay. To continue the Swiss franc topic, there are other topics. Can you see an increase in inquiries about credit history? And to what extent do the lawsuits pertain to mortgage loans that have already been paid off?

[Unknown Executive]

Our portfolio, let me say the following, is so small that I don't think it's a good point of reference here for the evaluation of such phenomenon. Obviously, as you can see, the number of these lawsuits is growing. But it's [ 1,121 ] pending cases, PLN 129 million is the amount. So it's really not a very big amount. And those are just dozens.

And the resolved cases, well, we have 11 of them for -- and only 27 for mortgages that have already been paid off. So those are really just residue results here.

And a similar trend can be observed for loans that have already been paid off, where the number of disputes is also quite insignificant. We have to see this through the right lens. Well, when we look at -- the number of Swiss franc loans, uniquely Swiss franc loans, was just over 6,000 in the bank's history. So we could say that those that are still active, well, we have just over 3,000 of them. So just to see the proportions vis-a-vis what we see on the market.

And when we talk about gross amounts before the provisions are made, it's CHF 145 million. The francs are probably the simplest form of reference here due to the dynamic. So all mortgages -- currency -- foreign currency mortgages in our case account for about 0.7% of what's present on the market. And if we look to the value of the security that we have, I think we can say that it's not 0.26 as a percentage point.

So we can see the -- do we see the increased interest of customers that have already paid off their mortgage? Yes. But let's remember that if we've had 5 people and now we have 15, well, then that is a significant increase of interest. But these are not figures still that would indicate that there is any area of risk. Whether this is happening throughout the market, we don't know that. But the -- naturally, the verdict and the communication from law firms automatically increases the interest of people who have already paid off their mortgages. In such cases, apart from court cases -- let's remember the bank is quite active in the area of our settlement, out-of-court settlement program according to a logical concept that President [ Yaschemsky ] presented a while ago, about 3 or 2.5 years ago.

So yes, we have quite a lot of these out-of-court settlements, and these proceedings are picking up the pace. It would look that people should sit on it and wait for the verdict. But let's remember that the mediation processes are also in progress, and that is not something that happens overnight either. So it's all in progress, it's all in the pipeline.

But we're definitely not an entity that's representative of the market in this area -- unfortunately, not. You heard our market share in this department. So I don't think on the basis of that, you can make any conclusions.

[Piotr Utrata, executive]

Okay. So just to wrap up the Swiss franc topic, have bank Presidents really heard from the President of the financial provision authority that there will be no active law for Swiss francs? And what are the predictive...

[Unknown Executive]

The Presidents have heard that there will be no Swiss franc act before the announcement of the ECJ verdict, and the ECG verdict is going to be announced in 6 weeks. But we have not heard that there will never be an act. That's not the type of news that we've been given.

[Piotr Utrata, executive]

Okay. Going to another storyline, [ ECR ]. A significant increase of this ratio. What is the bank's plan to use the surplus in liquidity in order for it not to impact the financial results?

[Unknown Executive]

Okay. Let me take this question. Ladies and gentlemen, I think I've already answered this. Because from the point of view of the deposit surplus, I just started to make some quick notes during our conference and made some calculations: PLN 20 billion, ING; [ PKO ] PLN 22 billion; mBank, PLN 20.5 billion. And that's the argument. From the economic point of view, it looks as though the banks should lower the interest rates of deposits.

Will that stop the increase? Will that stop the cost? Yes. Will this socially be acceptable? No, because nobody will understand, in any case, why banks should be lowering the interest rates of deposits when inflation is at 16%. So the banks have to offer deposits on the level of 16%. The level of awareness and economic education, well, is such. Banks are not treated as commercial entities, and they are. And that's why there's a problem understanding what's happening. So it's a very pertinent question, but it's not clear economically.

From the technical point of view, let me add, of course, this is the outcome of the inflow, but also, on the other hand, the quality of the assets -- the deposits from the point of view of their stability. And what's particularly meaningful is the retail funds inflow that are of the highest level of stability. So they mostly impact the level of ECR.

And also the clearing house's securities quality has improved, and that has significantly impacted this ratio. So the balance sheet structure has been changed slightly, but also the changes that impact the whole technique of calculating this ratio.

Let me tell you a story. We're probably wrapping up soon, so maybe the time has come to say -- to talk about anecdotes. Once upon a time, there was a bank, not a very big one. And suddenly, deposits started flying in, in large amounts because expectations on the increase of interest rates have made clients collect cash in deposits. So the bank then put this money into financial instruments that were available. Nobody took out loans. So it invested in government bonds. And it was either an option to do a short term in order to create a liquidity buffer and then make a loss, or to put the money in for long-term deposits, and once the interest rates grew, there was a loss.

And that's what the bank did. Customers started taking out the money quite abruptly, and the bank started to realize the loss. And once the loss reached PLN 1.8 billion, then the customers took the rest of their funds and the bank went bankrupt, signed by SVB.

[Piotr Utrata, executive]

Okay. We've got questions from that, [ Paul ]. Let's go to those. Is there an outflow of deposits noted by the bank when there were banks in SVB and Credit Suisse?

[Unknown Executive]

No.

[Piotr Utrata, executive]

What was the purpose of lowering transaction limits in the retail sector?

[Unknown Executive]

Increased transparency and protecting our customers from fraud attacks. It seems that the amount -- the lower limit means that the potential for robbing our customers, our clients is lower. And by the way, it still is significant. We need to push that way off. It is not convenient for some clients, I know, but when we were doing the profiling, we came to the conclusion that such actions are fully justified.

[Unknown Executive]

Okay. Let me just add, because this doesn't mean that a client may not take out a larger amount. You just have to make a phone call, but it takes longer than one click, but it's safer. Due to the fact that Poland is a country where paying out funds can be done really quickly, so to close the chain of money that has been fraudulently taken away from customers is very quick.

And we've got -- in other countries, there is a D+1, D+2 transfer principle. In our country, the money flows instantly. It gets transferred very quickly. You can do that -- over half an hour you can transfer money to 15 banks. We are vulnerable to such fraud, which means our clients are making losses. And that means we have to take actions at the expense of the comfort of a few. They protect also a few, but from making a huge loss. And that's the choice we've made.

[Piotr Utrata, executive]

Okay, to continue. The risk of outflow of deposits using the big contribution of remote channels is a soft spot for the sector.

[Unknown Executive]

Yes, looking at the element of trust and guaranteeing. The situation of SVB, that's our reference point, I believe, the level of SVB -- well, they never had a liquidity contract with the regulator, so they did not have the certainty. Plus number 2, the $250,000 alleged guarantee level for an entity that held money in SVB, venture capital, company start-ups, well, that amount, they have more money than the $250,000, right? So when you guarantee EUR 100,000 in Poland -- EUR 450,000, that is a very high amount vis-a-vis the percentage distribution of clients that have accounts with us. And we could see -- observe such a reaction of companies. But here, we do not have an extended duration in the portfolio to that extent.

Now if we look at that, that situation varies significantly. And the quicker pace of payouts and the quicker flow of money in Poland, which I already mentioned, that's very quick and very easy, but that doesn't mean that it has to lead to this amount. Regardless of the standing of the Polish bank, we're not looking at large outflows of guaranteed funds. We have seen some stories quite recently, and, well, really nothing much is happening there.

If you have EUR 20,000, EUR 50,000, EUR 70,000 and EUR 100,000 is guaranteed --and Polish people know that very well and they perfectly stay inactive because there is no need to take action. So those conditions are completely different.

[Piotr Utrata, executive]

There are some fears about the quality of commercial real estate in the U.S. and Europe. Are we seeing similar problems in our market?

[Unknown Executive]

We certainly see these points. The quality of the portfolio depends to a large degree on the valuation of the real estate. In some areas and in some states of the U.S., we are seeing a 30% decrease. So there are expectations that this might spread throughout the country. It might involve -- might impact in engagements, and that's justified. Some banks have a surplus -- and that's how the American market is constructed -- a surplus of engagement in that sector.

[Piotr Utrata, executive]

So this is a question of PacWest to a large extent. Well, the decrease of value by 30% is painful and is dangerous.

[Unknown Executive]

Well, so far, we have not seen such trends in Poland, because even for commercial real estate, I would say the verification is on the level of 0 or positive. Perhaps some impact will be seen in Europe. There is the factor of ESG. If some commercial property requires huge investments in order to meet the ESG requirements, then this could become a problem. But also, thankfully, it seems that Poland is somehow free of such risks because we have a portfolio of commercial properties that are relatively young, new. And that's the advantage of a country such as ours, which is growing.

There are other countries that have a significant proportion of commercial properties built back in the 60s or 70s, and that's a whole different situation. So I see no reason for what's happening in the U.S. to transfer over here or to be able to infect somehow the Polish market, although, undoubtedly, there'll be more checks and investors will think about it.

That will definitely make investors think. They base their thinking on their portfolios. So I don't see any reason for that, although we may expect a reflected echo.

[Piotr Utrata, executive]

Now let us move to other questions concerning the net interest rate performance. The negative hedging outcome is now by 50% -- PLN 50 million lower quarter-on-quarter. Is that a result of the WIBOR change? Or is that the dilution -- the outcome of the dilution of old hedging instruments?

[Unknown Executive]

Let me tell you the following. That is the outcome of all factors as a whole. As we have told you, all instruments are dynamic and are following the WIBOR change pattern. There is also a request to discuss the interest rate performance sensitivity to changes -- on changes to the market interest rates and changes to individual credit categories.

In terms of margins for individual products, those -- this is a question of the kind we do not answer. Now in terms of the vulnerability to changes to interest rates, let me reference, once I find it, what we revealed on an obligatory basis in our annual report. Let us bear in mind, however, that the balance sheet and interest rate structures have changed.

So 100 basis points -- yes, 100 basis points. Now in the annual report, our vulnerability to the shift -- parallel shift by 100 basis points was PLN 140 million, minus PLN 349 million literally. But please consider the circumstances and changes in time, which ultimately means that this may not necessarily hold true for the future in terms of margin structures.

[Piotr Utrata, executive]

Now there's also a question concerning the bank's MREL requirement.

[Unknown Executive]

As we have already said a quarter before, depending on the VAS levels and the equity structures, that is a critical element. These needs have been estimated at approximately PLN 5 billion this year.

[Piotr Utrata, executive]

Now with regard to the interest rate performance, is ING planning to expand their offer to include treasury bonds as [ PKO BP S.A. ] did?

[Unknown Executive]

ING has already been expressing the will to introduce such offerings several times.

[Piotr Utrata, executive]

There is a question concerning the mortgage loans, the 2% mortgage loans. Will the bank join the new program that is now being proceeded in the parliament? What are the risks? And what is the overall potential impact of the 2% mortgage loan on the overall portfolio? Would you expect a rise in demand or a distortion to your portfolio structure?

[Unknown Executive]

We do not expect any major impact on the market. Moreover, the principle -- or our principles, our operational principles include transparency, operability and capacity for the full awareness of the consequences of decisions made by our clients.

Now in case of an offering that I believe is misleading when referred to as a 2% offer should give rise to a number of questions and doubts, or boiling down to the question whether we are capable of delivering and structuring a -- structuring and delivering a mechanism allowing our customers to truly understand the product even over the entire 10-year period of that subsidy.

So we have not yet made a decision. We are waiting for the mechanism to take on its ultimate form. And nonetheless, I would like to emphasize that I'm trying to tell you and inform you what is the vantage point we will take before making a decision. We are considering the option. Nonetheless, we believe that the most important thing to consider are the consequences to our customers, including those consequences that are invisible also given the relative inexperience of anybody buying a piece of property for the first time.

We believe that this gives rise to many risks, Young and thus inexperienced customers are frequently incapable of making a conscious decision for the next 10 years. Now should we compare their age through the age of complete maturity and self-efficiency, 10 years a long time. That goes without saying. So the list of questions would be humongous.

[Piotr Utrata, executive]

And in closing, we have more general questions. Let me start with the following. Is ING planning to introduce the buy now, pay later mechanism, deferred payments in other terms?

[Unknown Executive]

Well, we have already been -- we have already had such offerings.

[Piotr Utrata, executive]

And Twisto, for example, how is Twisto developing? And payment of financials -- and to what extent have been -- have you taken that market over?

[Unknown Executive]

Well, the 2 are completely separate. Twisto is a structure designed to support buy now, pay later. We have even made an equity investment. We had an act -- we were willing to be a very aggressive player on the market. Well, things have happened to him, got tangled up in his own booth, places.

You are all very much aware of the work performed by BSPA company we are a shareholder in, and the related Millennium pilot project. So we are taking a close look at what is going on. And we don't believe that is going to be a game changer. So I don't think we need any further deliberations.

Now [ Paymento ] is a company that has been with us with a long time, and [ Paymento ] has become part of our infrastructure, of our software infrastructure. Consequently, it was really, really advisable to make sure that nothing is going to happen to them. We actually made a deal with the owners of [ Paymento ], including those who are now remaining operational. We agreed that we are going to take a slight shift to the partnership structure. We are going to be the ultimate owner. Since that is good for both sides, we made a deal. In 2021, the bank formally sold shares in Twisto as a result of the mergers and acquisitions market in Europe.

[Piotr Utrata, executive]

Now we -- I have the final 2 general questions. You are a bank, usually, competent in technology. How do you see the development of AI technologies in finance, especially given the tremendous progress in technologies such as ChatGPT? When will AI-based solutions be made part of your offerings? And what kind of works are you engaging in now in that particular field?

[Unknown Executive]

Okay. Everything is correct, apart from the tense. It's not when we -- when are we going to do it. It's when have we done it. Technological revolutions are all about evolution. The presence of AI, regardless of however we define it, is already part of structures of regular companies who are using AI very extensively. It goes without saying that cognitive models are picking up speed, picking up amazing speed, which obviously is a regular thing for any exponential growth. And at a certain point in time, it becomes part of the media fashion or fashionable media, if you will, and everybody talks about them.

Now nonetheless, you are going to be -- you are going to stop talking about the explosion of AI and ChatGPT in a couple of months, and we are going to be still at it. You are talking about it to us because it is fashionable. AI structures are capable of talking to us today. And you know that. You all have smartphones, not to mention your car systems. It goes without saying that this world will be developing. ChatGPT was, undoubtedly, something of a violent step in improving what can be done.

Nonetheless, the use of GPT, GPT 4.0 to be precise, with the structure of allowing the system to be populated with our data, that's a song of the future, not least in view of data protection. Nonetheless, we have been confirming the inevitability of the system and mechanisms for a long time. The cloud system in ING definitely also is proof of that, is evidence of it.

The cognitive side in terms of Polish language progress, a battle we have been fighting for years and an obstacle to many solutions, it will definitely be conducive to populating different bots with data. Clients are slowly but surely getting used to it. The quality of these chats is definitely far from perfect. Nonetheless, the technological progress will make all new applications -- will actually meet the [ challenging ] test requirements. And things are -- well, boundaries are going to be blurred and it is definitely going to affect our decision-making schemes or schemas, if you will.

Nonetheless, the revolution is happening elsewhere: automation, improvements to productivity. The total schemas -- we are only using the phenomena triggering our imagination such as media and so on and so forth. Let me remind you of the December 2022 campaign. Those are all really clever gimmicks. Nonetheless, it goes without saying that we had for years now been facing a revolution whereby processes in the backdrop of our thinking have joined the machinery that is already there. And it definitely is going to be a player.

Nonetheless, in order to do that, you have to reconstruct the IT systems. You have to open it up and decentralize it. You have to decentralize it, deconstruct it and cloud it up, so to speak. All these changes, including the access forces and response time, all these components are pieces to the puzzle.

To respond to your question, well, it is happening. It has been happening for years. It's picking up speed, just as everything will in its own good time. Now in order to be able to take advantage of accelerated technology, you have to comprehend it and use it. The fact that we have been using it for a long time, in all probability, makes it easier for us to use it. Nonetheless, it takes more than being enchanted with gadgets. Using them properly is a totally different kettle of fish. Now the tempo of that revolution is a different thing. You have been witnessed to technological revolution for years.

I would also want to add one other thing, that Polish banks don't have any other way out. They have to shift towards novel technologies given the requirements we are all facing today. Failing that, Polish banks will not be able to survive. I don't know whether that have been the intent behind actions that are placing greater loads on the Polish banking system to force us into progress. Nonetheless, they have succeeded in forcing us into greater efforts.

That's great. I would prefer to have more money, but it is what it is. Innovation is a presence whenever there is a squeeze. We are definitely forcing inevitable innovation.

[Piotr Utrata, executive]

Okay. That is really a great moment for closing our conference because we have exhausted the great majority of questions that we have received. Thank you very much for attending our conference and do join us in a quarter.