ING Bank Slaski SA

WSE:ING

Earnings Call Transcript 2024-Q1

[Piotr Utrata, executive]

Good morning. Welcome to our conference, in the course of which we are going to be summarizing the Q1 2024 financial and business performance.We are going to be chaired by Brunon Bartkiewicz, the CEO; Bozena Graczyk, Vice CEO, Responsible for Finance. I have been joined by Iza Rokicka, Responsible for Investor Relations and ESG Reporting. My name is Piotr Utrata. I am the press Spokesperson.[Audio Gap]

[Brunon Bartkiewicz, executive]

Good morning. The first quarter of this year, in terms of statistics, was actually very calm, very peaceful and very boring, which obviously is just ostensible. Regardless, we have identical tendencies to those we have observed last year. A very strong fluidity on the market, a certain disparity in expectations, growing interest in credit, and our credit campaign, despite the growing interest rates, the propensity for taking out loans is growing. [Audio Gap] in the of course, so we have an inflow of deposits into ING, regardless of the credit campaign, which means that our liquidity is structurally growing, which is hugely important. According to our expectations, this process will continue over quarters and years, and we are also hoping that the increased credit campaign will actually give a result of the surplus liquidity, surplus client liquidity to be absorbed by the credit campaign.Some funds may actually be allocated to investment instruments, TFI primarily, that is the investment fund society implement. Nonetheless, the dynamic is such that, it is contributing to the actual gap. The corporate market weaknesses are still there and visible. We assume that that this year the market will bounce back. The number of applications has already been reflecting that.Now, with regard to main components, as a result of the National Recovery Plan and EU funding, we'll most certainly become more visible at the year end, and in primarily in 2025. So we do have something of a slowdown in terms of the balance sheet performance, whereas other things have been happening as well. And they are hugely important. We do have a certain client propensity pattern and other implements that are showing a huge dynamic and it applies to all instruments across the board. The number of transactions entered into by our clients, the number of online transactions with offline and cash transaction volumes dropping.Now, the volume of ATM transactions definitely shows us and points to how profound changes to client behavior is [Audio Gap]. The process is ever-deepening. We are also very hopeful in terms of the stage activities online and e-identities. That is hugely important because the fraud volumes have also been growing on the market. This is something that we have been talking about before.Obviously, the stronger our defense, the stronger action taken by fraudsters. These new technologies are also hugely important in order to protect our clients' interests. The client and transaction accrual in the bank has actually been gradually stabilizing. We are very much aware that the dynamics of interest, non-interest, and non-commissioned revenues has been triggering your interest.Bozena and I will definitely be talking about it. Nonetheless, to be honest with you, nothing important has been happening therein. The difference between actual performance and your expectations are nothing beyond the regular.In terms of other aspects, our report and our presentation show us where you are -- where we are -- excuse me, and how we are pursuing our plans. Certain performances have been repetitive and come as nothing of a surprise. We are occasionally asked about our long-term plan concerning the walk away from thermal coal. At this point, PLN 51 million has been put into the thermal plant shutdown, which means that we are actually very, very close to what we had been declaring by 2025.Let me also add that, primarily, all these companies have much looser ties to thermal coal. For example, fuel transportation companies. Nonetheless, they do tie in with our plans. There are unquestionable associations.That is all I would like to say at this point. Our early morning commentaries have already proven that you are very correct in terms of interpreting our report, and we don't think that we need to explain anything else.I understand that the dividend has been paid or will be paid shortly, and probably that had been associated with the extraordinary shareholders meeting which took place just under 1 month ago. That is all I would like to say at this point. I'm looking forward to your questions.

[Bozena Graczyk, executive]

Good morning. A very warm welcome to all of you. In the first quarter, we generated PLN 993 million in net profit, 9% more than last year. That improvement is directly results from our direct revenue. Interest-related income grew by 16%, commission revenue by 10%.Now, Q4 to Q1. Once we compare that, the performance obviously is worse in Q1, given the fact that we have been recognizing the profit notified to the Financial Supervision Authority of PLN 179 million. I would like to emphasize as well that our lower revenue ties in with the poor performance in Q4, PLN 97 million, and obviously that it tied in with the security related accounting, and also tied in with changes to interest rates.Risk-related costs have grown by 20% Q-to-Q. Comments shortly, which means that Q1 to Q4, well, we generated a drop by 22%, but I think that all the aforementioned effects have to be taken into account. The cost of revenue, 46%, after Q1, our accumulated ROE by macro cash flow hedge, 22%.Now, in terms of interest performance, Q1, PLN 2.2 billion that is a level very, very close to what we had in Q4. That's also 16% year-on-year improvement. Our accumulated interest rate margin remains close to that of Q4. It actually improved by 2 basis points, whereas the quarterly margin dropped by 16 basis points from 3.7% to 3.54% in this quarter. As you have said yourselves, that is a result of the MREL emission in 2023.As Brunon has already told you, the loan-to-depo, 74%. That is a level lower than that we recorded in Q4. As said before, it is an effect of the structural over-liquidity in the banking sector. The entire banking sector has been facing the challenge. In our case, well, depo are growing 11% year-on-year, and also we have a poor demand for credit, 1% growth year-on-year only. Hence, the ratio has been a point of interest for the entire banking sector and will require profound structural change. In terms of commission-related performance, PLN 576 million this quarter, 3% growth quarter-on-quarter and 10% year-on-year.Now, in comparison with 2023, I would like to point to the performance of 57%. That is an improvement in the credit card and charge card segment, 8% improvement due to the separation of funding or financing. This is quite typical. 6% on FX, which ties in with the transaction change that is quite regular, not to mention participation units. Related assets have been growing as well.Now, in terms of our operational costs, in Q4 2024, PLN 1.26 billion, 10% growth year-on-year. Should we take a closer look at the main dynamics of our operational costs? The dynamics have remained unchanged and tie in with inflation.In April last year, we introduced a standard increase, this year, approximately 8%. As a result, the overhead and the general cost of operation, given the changes to our payroll costs growing by 10% year-on-year, well, we have observed a similar growth in the general or overhead cost.Q4 is always a quarter that is hit by regulation costs. The banking guarantee fund membership fee has been imposed already, PLN 151 million. That's 2% less than last year. I would like to remind you that, this year, the sector membership fee is PLN 1.5 billion, a general growth of 7%.The financial supervision authority, the membership fee, PLN 27 million, and has grown by 14% year-on-year. This year, the banking sector has not yet been exposed to depo guarantee fee that is in all probability will come next year. We have already, we have noticed, been commenting the growth of the cost of risk, yes, PLN 31 million. That's approximately 18% quarter-on-quarter. That has been contributed to by 2 main components.On the one hand, the low basis of the fourth quarter, positive tax interpretation that we have received. On the other hand, we have had a change to our assets, liquid assets primarily, that have been pledged with the banking fee in a different way to long-term investments, i.e. T-bonds. PLN 191 million cost of risk, PLN 163 million of which reserves in the corporate sector, 43 in retail sector, quarterly margin 49 basis points, accumulated 39 basis points.As the Brunon has already told you, we have hit a very specific point in the cycle. On the one hand, economic perspectives are improving. On the other hand, the corporate sector has been still facing the past slump in the economic cycle. The cost of risk has been and shall be growing. This is something that we have mentioned during our previous meetings with you. The cost of risk are shifting in comparison with macro costs. When we go into detail, we find that macroeconomic reserves are disbanded in favor of individual reserves stemming from the economic cycle effects or outcomes.None of these phenomena are non-typical. I don't know if you can recall the cost of risk before, for example, in 2019, similar phenomena had taken place. You have also noted probably that in terms of the retail sector, we have normalized the cost of risk. Q4 was excellent. Probably you do remember we had profound model changes.Now, in terms of the quality of our portfolio, I would like to point out that the performance of the portfolio very much coincides with the current economic cycle moment in Poland. The third stage project has grown by 14% -- 14 basis points, a quarter-on-quarter, 36% year-on-year.Now, with regard to the higher rate that primarily applies to the corporate sector, it is also notable that neither we have in the Q1 had we actually sold any irregular portfolios. And the sectoral data had pointed to the -- a certain drop in the general segment, which ties us into MPEL sales.A very brief commentary concerning the liquidity performance. 68 basis points, that's the improvement in comparison with Q4, following the decision of the General Assembly. On the one hand and on the other, the index has dropped by 46 basis points, stemming from the weight from the -- risk-weighted assets evaluation. Obviously, that has also been affected by the postponed or deferred tax settlement.And I would like to emphasize that according to regulations in Q4 this year, we are going to be correcting the liquidity ratio by the payout of profit for last year, PLN 1 billion of deferred dividends paid out following the decision of the Q2 General Assembly. That's all in terms of a brief commentary. We do invite your questions.

[Piotr Utrata, executive]

Q&A, please, we're going to start with questions from the floor. And obviously, we are also going to be asking our online listeners to ask questions with the use of the bespoke tool.

[Unknown Analyst]

My question is about this slide. What would be the long-term financing ratio based on the current principles suggested by the KNF?

[Brunon Bartkiewicz, executive]

Well, we are now in consultation, so this ratio is still not final. In Q4 last year, there was sectoral work going on with the KNF and the banking sector came up with some recommendations on the shape and capacity of the markets for financing this ratio, for instance, by cover bonds locally, not overseas. As a result, well, we still have to wait until the consultation round finishes. We might expect very material remarks from the banking sector, though, because this ratio seems very high.For ING Bank Slaski, our ratio is higher than the average for our top 8 banks in the industry. But we still have to wait for final decisions to give you the final ratio for ING Bank Slaski. For sure, it will be largely financed by the covered bonds. We have the mortgage banks, so we are ready for the issue. I hope this ratio will be rational and at a reasonable level for the banking sector in Poland.

[Unknown Analyst]

And another question pertains to legal risks in consumer loans. Do you have any litigation when it comes to the sanctions pertaining to these loans? What's the value of this litigation? And have there been any decisions made, no decisions, no final decisions made? And the volume is negligible from the perspective of our portfolio. The first decisions, though, are showing very beneficial development of events. And my last question, WIRON. Abandoning WIRON. Do you feel that this change might bring in some difficulty for the bank? I mean, from the perspective of market instruments. Do you mean the possible change of WIRON?

[Brunon Bartkiewicz, executive]

Well, we do have lending based on this rate. Still, this does not seem a major challenge for us. What seems more of a challenge is possible confusion of our clients resulting from this situation. So, we do want that if this change happens, as a result of the decisions of the working group, it has to factor in the WIRON production. Although, we are aware that we are dominating in this area. But quite importantly, RFR rates switch should be confirmed. If the decision is final and confirmed, then it means a lot of analytical work, which is time consuming, too.As well, it means the necessity to build a market for that, because any RFR rates requires active market. And we have a problem with active markets in Poland. So, I'd say it's a circular system. It's easy to say we are not introducing the rate because we have no market for that. And since there is no market for that, we are not introducing it. So, it's a vicious circle we are talking about. Something that we need to break together. It takes a concerted effort to make a change here, which means that we all have to contribute. We are trying to contribute to that, bearing in mind the future of our institution and our clients. And now, I do hope that social consultation goes smoothly and sets a clear direction for us.And then the operations resulting from that are fully up to us. We are experienced in this area. Also, the number of entities which already have WIRON-based products might not be minimal, but it's not huge either. So, I think we'll be all right. But please bear in mind that, quite importantly, the changes are made by an external entity. It is not just a whim of the bank. I think it's quite important.Yes, but it's fair to say that it's good that such consultations are happening, knowing the experience of the financial industry with the volatility of WIRON. And the steering committee and the whole national task force make decisions pertaining to risk-related ratio in Poland on a longer haul. So, this decision has to be fully substantiated and based on a thorough understanding of the objective. So, as ING Bank Slaski, we are supporting the steering committee in their road towards a final decision about the rate to be binding in Poland for 50 or 100 years to come.Well, we've been turning our attention to that as of 2020. Well, how to put it in words? In 2020, I called it a change in the flow paradigm in the Polish economy. It does result in a structural over-liquidity, and we've been saying it all along. And we know that low investment level has always been a challenge to the Polish economy. Also, structural over-liquidity seems a challenge and is potentially dangerous. The rest might be supported, but it all still requires a well-concerted effort so that our economy and our society tackles its problems, because it's economy first, and then you can set about solving social problems. That's what I've always said.

[Unknown Analyst]

My question is about the share of Stage 2 and the corporate portfolio and increasing it. Has there been any concentration of some industries and portfolio 2 and 3?

[Brunon Bartkiewicz, executive]

We cannot see a material risk of concentration in this ratio. What you see is normal migration of portfolios resulting from updating the ratings. Please bear in mind that our bank changes the PD ratio because of behavioral factors, which in turn translates onto changes in Stage 2. This is normal migration, nothing of concern, a normal transfer of macroeconomic to individual ratio, part of your normal economic cycle. It's a very important question, and thank you very much for asking it. Please bear in mind that our portfolio like all in Poland is well diversified. Thank God, we are not a monoculture, susceptible to many generations due to some eccentric forces.Well, some entities might still be affected by the eccentric force when there's an abrupt turn of events, so we can see a certain worsening. We always try to analyze the situation for potential generations and commodity, real estate or agri-food industries, and we are analyzing that really thoroughly. Many industries in Poland are doing quite well in such a situation, but if we talk about the demise of the whole global or European economy, whatever you call it, an abrupt downturn, if you like, is there, but we can still see that the Polish GDP is still fit for staying at the level of 3% for at least 3 years. This is how we see it, but I cannot see any concentration of adverse elements here.

[Unknown Analyst]

Another question is about the borrower support fund. How do you see it?

[Brunon Bartkiewicz, executive]

In the first quarter, we can see that it's been stable. We are right out of the interest rate peak, so naturally enough, the level of use of this fund as correlated with interest rates shows this kind of behavior, and that is normal. And please remember the spillover of very high remuneration growth. It is a stabilizer to this end as well. But if we talk about seeing many people who cannot serve their loans, not really. It's rather a civilizational thing, an aftermath of the CHF situation.

[Unknown Analyst]

Another question pertains to corporate loans. We hear that you still have many applications, and you can see a large interest in those loans. You've been seeing it for some quarters already, but we cannot see it in the results. The new sales in the quarter, in leasing or in factoring was not overwhelming, so to say. Do you see it as a disappointment as well? Maybe it's been taking too long, and when will we see it reflected in the results?

[Brunon Bartkiewicz, executive]

Well, speaking of economic growth, I'm very easily disappointed, because I still have a dream of 5% GDP growth. But it's a dream of mine, especially that I think we badly need it, and we are fit to achieve that. Because my experience shows that you either move forward, or you drop out. There is no in between. There is no go-between. But if we compare ourselves with more bureaucratized economies or with less appetite for growth, Poland is doing quite well, but it needs an investment and trust boost.For many years, we've been trying to unlearn the economy to grow. Now we have to teach it, make it relearn to growth. At the end of the past quarter, we've seen some first signs of interest, but we need more than that. Indeed, now we can see more applications across all groups, investment loans, revolving, and so on and so forth. But still, the overpayment is very visible, because please note that with the over-liquidity, Poland is a country where households are doing well and corporates are doing well, because they have loads of money.So the first quarter was a breath of optimism, but you cannot see it in figures as yet, because we are not presenting the production. It's not like in a mortgage loan, where the production gives you a relatively fair prognosis of what happens in the quarters and months to come. Still, undoubtedly, lack of investment and lack of the boost is visible.We are still of the opinion that the investment -- boost translating on the GDP growth will be growing, but because of the calendar limits, we won't see it until 2025, rather. At first, we'll see a certain fiscal and appeasing absorption based on some sped-up spending, and only then you'll see it as a multiplier of investment at large. And the economy has been long waiting for that. We have a dream that this investment-supported economic growth speeds up, but, well, not yet.Tomorrow, we are starting the European Economic Congress in Katowice, you know that. We prepared certain reports for the Congress on what to do to kick-start the investment in Poland. We've been talking to many entrepreneurs, and the reports are very interesting. They're already published, so I strongly encourage attending the Congress and discussing the reports, because it's so important. To sum it all up, again, and now corporate loans against the total bank group of investment in Poland is 11%, which is a disaster.The corporates are investing, but without external funding. This is the litmus paper showing us that things should be different. This ratio should be 2x or 3x as high, but with this level of investment we have now, it's hard to expect normal levels we need, because sometimes we say, is it good or bad? To me, it's disastrously low. It should be at least 3x as high to jump to the Western European level.

[Unknown Analyst]

Okay, another question related to that. Since the volumes are still not visible, is there any pressure on the side of the margins the banks accept, or any price pressure, knowing that the cost of financing is relatively low as well?

[Brunon Bartkiewicz, executive]

I think the level of interest rates and bank margins is not a blocking element, a growth blocking element. Of course, there is a certain pressure with a low demand, but it's not only the price that's decisive here. A very important initiative we are trying to promote all the time is that a country like ours should focus on cheaper financing, but it's not just a matter of commercial entities like banks, but also a matter of a fiscal burden. Please note that, the state takes a huge credit margin. Once again, to me, the bank levy as a support for fiscal problems of the state, it might stay as it is, but let's not make it a price-supporting element in lending. That would be a mistake. Take it as corporate income tax, but please don't spoil the economic growth by blocking on high costs, including, for instance, the bank levy.

[Piotr Utrata, executive]

Let us now shift to online questions. We have a follow-up question to a topic that we had already mentioned. Has the bank actually reviewed consumer loan agreements in response to suits filed?

[Brunon Bartkiewicz, executive]

Okay. Truth be told, regulatory conformity and risk mitigation is an ongoing process at the bank and throughout the sector. We are a responsible corporation, and as such, we have to respond. Obviously, the legal risk is now #1 in terms of risks affecting the sector. We are continuously reviewing agreement clauses and amending them as appropriate.

[Piotr Utrata, executive]

Thank you very much. And one other question concerning legal risk with regard to CHFs. Do you believe that the April 21st resolution of the Supreme Court will affect the CHF reconciliation agreement signing process?

[Brunon Bartkiewicz, executive]

Truth be told, the late April developments have changed very little in terms of interpreting CHF-related legal risk. We, as the bank, have always been interested in entering into reconciliation agreements. We are obviously as interested as our clients can be. We are not really expecting any change in trend. We believe that reconciliation agreements are a much better solution than a lengthy court process. Well, an act of law would definitely be the ultimately best solution. I believe that, evidently, social quiet is not high on the agenda, which kind of, you know, affects me as a person who believes in the rule of law.Now, with regards to the quantification of the 8% raise, we are talking about a raise as of the 1st of April 2024. The bank believes that the environment ought to be predictable to the staff, which means that we are introducing raises only once a year and we have been sticking to the rule for the past 30 years.

[Piotr Utrata, executive]

Now, with regard to the mortgage loan sales in Q1, a WIRON or fixed rate? What was the share?

[Bozena Graczyk, executive]

Well, the presentation has already shown the sales of mortgage loans. We had a variable, well, 32% of our production was a variable rates -- for an overall amount of PLN 3.6 billion.

[Piotr Utrata, executive]

And there is a very detailed question concerning the macro flow hedge in other banks.

[Bozena Graczyk, executive]

Well, ING has to account for a number of factors to account for profit. I think that I would ask for details, because macro cash flow hedge moves are identical in our bank as throughout the banking sector. Its transactions are also always the basis for macro cash flow hedge, and they are naturally subject to a change in the fair value over a specific period. And once IRS becomes mature, they are shifted, they are deferred quarterly as the margin presented and reported. I believe such behaviors are very much regular.

[Piotr Utrata, executive]

Let me -- today, you are summarizing your work at the bank. What is the succession? What kind of challenge does CEO, Bartkiewicz see for his successor? What kind of challenges do you think your successor will be facing?

[Brunon Bartkiewicz, executive]

We have not been sweeping anything under the carpet. We have no skeleton in the closet. Everything is there. No elephant in the room, no gorilla in the basketball court. So, it's all about continuity. This is something that I can absolutely assure you of. We have no shortage of challenges, but I think we would all be bored were it not for challenges. So, I hope that he or she is going to find the process and the work interesting.

[Piotr Utrata, executive]

I understand that. We are thus closing today's conference. Thank you very much and see you next time.[Statements in English on this transcript were spoken by an interpreter present on the live call.]