ING Bank Slaski SA

WSE:ING

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, everyone. I would like to welcome you at our conference summarizing the entire first 6 months of the year and the second quarter. I would like to introduce to you the President of ING Bank Slaski, Brunon Bartkiewicz; Bozena Graczyk, Finance Division; Rafal Benecki, Chief Economist; Iza Rokicka, Investors Relations; and Piotr Utrata, [indiscernible]. So let's hear the presentation. And it will be followed by the Q&A session.

[Unknown Executive]

Welcome, everyone. I understand that you want to ask us questions, so we'll try to go quickly through the presentation. Yet we will still be obliged to remind you of the key elements of our strategy and how they translate into strategic implementation, this time look at first half.

So the most important test, I believe that we're the only 1 who mentions it. So the number -- the growth in the number of clients, the verification of our ability to acquire clients in the first half of the year is as planned, even faster than planned. So year-to-year, the increase of retail clients is 287,000 new retail clients, it's a good number, much better than the 250,000 clients that we've been mentioning for 10 years now. The increase in corporate clients, so SME and mid-corporates and that's 600,000. And in retail clients, we've got also those smallest entities, so sole traders or entrepreneurs. So those are included in the number of almost 4.7 million clients. What defines this year -- this first half of the year is nothing strange. We've been mentioning for a long time now. All the engines are running well, especially the lending ones, despite our doubts and concerns to the not fully sustainable growth of the economy or of the economical cycle.

So in the third and fourth quarter, we've been saying that we've got quite a selective view on the areas in which we should accelerate or not accelerate in terms of credit risk. But despite all those elements, the fact that all the drivers, all the engines, meaning mortgage loans, unsecured loans, cash loans, and loans to smaller and bigger companies, leasing factoring and loans to the biggest entities, they are doing well. They are efficient. And even -- the lower values now are fully operative. And year-to-year, lending is growing by PLN 12 billion. So that means that we've got a very strong lending growth, probably 1 of the best among Polish banks. And we are adjusting the pace and the structure for the difference in bases accordingly. In this quarter and in this half of the year, they are showing a growth. That's also the result of big deposit operation at the end of June. In normalized perspective, our loan to deposit ratio is around 90%. So we are going in the direction that we have been talking about for a few years now.

So all the drivers are running quite fast. Even though, in the small business area, we've got quite prudent approach. But overview of the main risk areas, stronger related to the companies that are dependent on the [ senders ].

In terms of public infrastructure, I would be saying that after the first quarter, we had some doubts how the economic cycle would look like because we're -- as Rafal mentioned, in the moment that we're expecting an aggregated number of, and combination of public investments and accumulation with private investments of the entities not related to building infrastructure. And we still got hope in that areas -- they are rather hopes, than the facts.

As a result, basic profitability ratios and return on and assets and equity and the adjustment of the balance sheet structure are according to our expectations and plans.

As a result on Slide 5, we can see that the income is growing and also costs are going. The costs are mainly related to salary increase, was also mentioned. When transforming the bank, we need to transform also our headcount structure. So with relatively stable employment, we're employing quite different people with different qualifications. So this is a [ limit ] of transformation. And surely, we are moving to higher salaries for our employees. So the adjustments that we've been making since April last year lead to this result. And this is the proper moment for us to make those changes.

Other costs are according to plan. So the main determinant of our cost, is the cost of salaries. And this is a healthy cost, a sound cost to adjust the salaries at the bank to an attractive level, so that we continue to experience a lack of the hands to work and specialists.

So the net interest margin is still at quite high level, at an elevated level. Even though, the elements of growth, we're slowly running out of them. So the -- keeping the high price of lending is somehow related to the higher margin pressure, but in the areas in which we are -- it is not that visible. However, the trend is visible.

The net interest margin results from the fact that the structure of our lending portfolio is changing. And the more higher yield loans, like consumer loans, for example, are in the portfolio. The higher pressure on the margin and the margin is decreasing. So this is managing the structure. Also the costs of acquiring the funds, when we've got the savings accounts company, for example, then the margin on those products is somehow reduced, when we are going in the normal direction. So current deposits and current accounts then the margin is improving.

So that all comes down to our expectations and forecasts areas. So the actual actions in the market, we've been doing the savings campaign to accelerate in the structuring of deposits in the retail area because we've been expecting that in the first quarter, the interest rates, we think that they will rise. That's -- now, there is no longer such expectation. The cost-effectiveness ratios and the ratios of the assets quality, so the core elements determining the quality of our exposure -- of our credit exposure.

The ratios of incurring liquidity, interest and credit risks are still strong. Capital spending is solid and sound. So the high price of lending does not translate into a major deterioration for our capital ratios. So this is the direction that we have been pursuing.

As a result, when we compared the result half year to half year, we can see that the growth in incomes are as determined, so as budgeted. So the growth in the volumes is followed by the growth in income. It's not in the same line because of the margin pressure and other factors related to fees and also, one-off factors. And the costs are really exceptionally high because of this push of the personnel costs, which we did in 3 stages over the last 12 months.

So the costs go up. But as you can notice and you have noticed already that quarter-to-quarter data, despite this personnel cost growth, that costs are to stabilize as budgeted. So considering various costs and the bank levy, as you can see on the slide, the key results, net profit, profit after tax before tax, it is 5% year-to-year. So you can just see this component of cost, which had to be a bit stimulated or regulated, so just another threshold on it.

On the next slide, and I think this is the slide really of interest to you, because it shows the growth in the basic area. And the basic presentation you will see PLN 12 billion of lending growth year-to-year here. And I do think this is the basic component which impacts this, when you take corporate deposits, the special element at the end of June and that we have this level of 90% of loan-to-deposit ratio, this is what we have been discussing 2 years ago. And this is the ultimate level we wanted to arrive at. And this ratio is to be further improved. And the reported one is [ 8 6.1 ] but still, this is the result of some -- one-off operations, but we follow the track.

Okay, that's just about quarterly data because second quarter was pretty fast in terms of our growth. So the entire 6 months were really strong. And one should emphasize really, and I will say it in a few minutes. So after the part presented by Rafal. That true to fact it is all year -- half year because the record results we have. And traditionally, this is a very strong growth in lending, as usually seen, much stronger in many quarters, we have 2x, 3x higher than the market does. And this trend, its tendency for 10 years, is still visible. And just in brief, I would like to share with you some observations on economy growth.

So macroeconomic data, we promise it to you that at least every 6 months, we will comment open fees developments and we didn't do it at the beginning of the year. Now we would like to adjust it. So because really, this 6 months saw a lot, many developments, many phenomena. But before I give the floor to the more wiser person, so Rafal. So a few comments on my part.

First, we are convinced that Poland really peaked in terms of the business cycle, when you think about GDP growth. What we do today. So this is the growth of the GDP of over 5%. Actually, we go for the big phase. We don't want to say that dramatic decline is ahead, but we go for the big phase. So going from this -- being in this stage, will take place. Despite the fact that we are entering now strong growth in public investments and some other factors, which pushed -- which drove this growth. Without investment factor, just deteriorate -- they deteriorate in their growth in supporting this GDP. And we have very -- some very imbalanced elements here. Because we have accumulation of public investments. And in our opinion, also, private investments should follow, should make up for this. And we do expect to see it still this year.

And in the labor market, which is more and more difficult, and migration market, which really is at full steam, but has some limitations, some constraints. So our base assumption is that what -- that the monetary policy council is also saying, we don't see inflation changes and we don't expect any changes in interest rates. So we will go for this big stage and some slowing down without interest rate changed. So with interest rates kept actually at a pretty low level. And this is a new phenomenon for all of us to experience. We don't know what it's impact in the longer run on the economic situation in Poland, but we are of the opinion that we've lost a bit, the opportunity to go a step -- to make a step ahead. And we are more and more really susceptible to factors. And Rafal will share with you a few elements. And Slide #9, I think, is really important regarding the conclusions of this engines of our GDP and our basic forecast. So Rafal please, take the floor and present some details to ladies and gentlemen.

[Rafal Benecki, executive]

So the first half of the year, the growth was over 5%. And for the year, we will be around 5% of GDP. And I do think it's a peak, really because Polish economy proved resilient to euro zone slowdown. And this is the impact of the situation in Poland, consumption and investments also start up. And I would like to devote some attention to it, because this speed-up makes the economy situation to remain stable in Poland. As regards public investments, as Bruno said, we observed a big increase -- a big rise of official data for full quarter is 30% year-to-year. And we do believe that this first half was about 35% in terms of public investments. Whether we can keep it or not, is the question because observations of union funds of -- payments of [ euro ] funds is important. We see speed-up really in payment of subsidies. And before the end of second quarter, we saw this sped up, so before the June -- so this investment will really start up -- really is really driven up. And the dynamics are not to be really kept because 30% -- 35% it is comparison to the very low level. So this public investment growth pace will not be that high, but will be kept because we have contracts of much money in the European budget, actually contracted through Poland to us and now they go up. And in quarter 2, [ 130 billion ] year-to-year only. And this is really of significant impact on the Polish economy. Because we do believe that the eurozone is slowing down the pace of growth. But the cycle -- investment cycle makes us keep this good situation in Poland, even with the eurozone slowing down.

So this growth in investment projects, of course, has some barriers, some hinders, like, for example, the labor problem but we can see some percentage of companies counseling tenders offers. And the bids are higher that the estimates by 90% even. But the question is, how the companies are to manage with limits on the staff. For example, construction companies, 90% say that select their orders. So in the first half of the year, actually, this speaks for the public works were 30% lower year-to-year. So this cycle is really to flatten down because we have this labor barrier here. But it will just last longer, that's the meaning of it. And what's more important, as I said, it is that it's really is driven and starts up and private investments really is a question because you cannot grow without them over long-term. They were pretty low. And they are not really -- you cannot see the revival actually, here. And it was 0% at the end of the year. And this year, our cautious estimates are that private investments will go up by 5% or 6% only.

And you can see the first symptoms of the speed-up of investments at the beginning of the year, you can see it in the research done by National Bank of Poland. And some details you can also see in corporate lending. But this beginning of the investment will be with own funds. So in our forecasts, we see more speed-up in the corporate lending in the entire economy. This is my focus for the next year to see. Why we don't go up? [indiscernible] is here to respond to this question. Some of them really accepted by us. It is poor investment activity of the state-owned companies. Last year, it was really weak and the plans for this year are more ambitious, over 17% outlays. But concentrated in railway transport mainly. Other rigs, power sector, we do not see such amounts here. So this differences will not be that high. And other barriers for private investment projects, it is the new [ barters ] on the companies. So no rigorous tax policies, split payment or [ sub union ] standard file for the tax to be paid. And actually, Hungary research shows that it doesn't work like that. When you have shortage of employees, you should invest, but Polish companies -- the conclusions from Poland are 50-50. It's not that we follow this trend, we are more the economy-based on expensive models, so it can limit investments. But within this argument is not really to explain fully this situation.

But for last element, also important, which also makes investments not to be investment bond, it is the situation abroad, because leaving the eurozone, the slowdown is really taking time, it's really hard to work. We see this global growth is not really good and that's also is to impact the revival pace in terms of investment. So to wrap up, we see 6 percentage growth, but this is what we can afford now as Polish economy, this growth. A big fact this -- besides this investment -- lack of investment is the external -- are external factors, is about eurozone situation, global growth, trade wars also. And this risk for [ oversee ]region was a bit higher, but now it declined because we have some agreement between European politicians and U.S. authorities. If really this risk was to appear, then Poland is really least susceptible to trade wars.

But what is unfavorable here, it is the time when this risk arises. Because at the time when European economy actually was fighting back the slowdown, we had the few [ a down to ] new customs and this really worsened the situation, the PMI.

So this element of trade wars really slows down the exit from the problematic economic situation and threatens global growth. So we don't present the forecasts for Poland, we don't make them very aggressive. Our GDP forecast below 4% for next year is really cautious. And the main threat is actually the situation in the eurozone. That, also some symptoms of some late cycle of growth, which really impacts German economy and Polish economy, which are really tight with one another. The poor investments in Poland is also a threat over long term, because economy is less and less competitive, when you compare it with the region, so the share of investments in GDP goes down. And this is how we lose against other economies. And see this stage of the economic situation, the investments are really too low, which also impacts the competition.

So taking into account the situation structure of domestic growth, we are expecting the GDP growth rate below 4% next year. And I believe that inflation will slightly increase, but not to the extent in which it would require [ the personal ] account [ rates ] to raise interest rates. And can see great balance in the growth of loans. We are expecting over 6% growth in the inter-banking sector, over 7% next year. The acceleration next year is a result of the continued sale of mortgage loans. And okay, thank you. That's all on my part.

[Unknown Executive]

Thank you very much. Taking into account the time that we have left, maybe let's move on to the financial results. Of course, our market shares -- well, they're not surprising. They are along the line of our expectations. We are growing faster than the market. So accordingly, our market share is growing. Let's just -- let me just emphasize our significant share in -- of 11 percentage points in terms of the product loans. So all those elements not only translate into quality and risks in our credit portfolio, but the necessity of adjustment, taking into account of the size of our portfolio.[indiscernible]

Now, I will try to sum up the financial results for the second quarter, just to give you the time to ask questions. I know that there will be questions. So in brief, net profit in the second quarter, as you can see on Slide #20, it was around PLN 372 million, up by 16% quarter-to-quarter and 3% year-to-year. So in the first 6 months, the result was PLN 695 million, 5% more than the same period last year. The strong growth factor and growth driver are -- is the income, which is strongly growing. And this is mainly due to -- mainly the asset production. We are also cost-effective bank. As you can see, our cost of income ratio was 46%, and it is a slight improvement versus the information from last year. Our return on assets after 6 months, it's 12.3% and it keeps on improving versus the first 6 months of 2017.

Now let's move on to Slide 21. And for the income, and from the second quarter went up by 4% quarter-to-quarter and 10% year to year, so a strong growth. It was due to the growth that is the commission -- net commission -- net interest income and we have such good results in terms of income, both in the return group segment. And in this quarter, what we should emphasize is much higher increase in the retail segment due to the [ result incurred]. In terms of the net interest income, PLN 920 million, up by PLN 31 million from the last quarter. Out of this PLN 10 million can be attributed to quarter, which was longer by 1 day. And the remainder is due to higher business operations. Here again, because contribution of retail segment of lending activity, net interest margin was 2.93%, up by 5 basis points from the previous quarter, out of which the basis of improvement are due to 1 day more and the rest can be attributed to business operations and [ would like to state ] that the margin drop in the first quarter was a temporary effect, and this was due shorter quarter and the special offer of savings products.

Now we are going back to the standard margin. I don't think everyone has noticed, but we've applied several measures, which make the data represent differently. So you may think that the data are changed, so it may be slightly different than the data that you have in your Excel, due to the implementation of IFRS line and adjusting the presentation. The interest income from the derivatives almost so the result on financial instruments. And for that change, our net interest income improved by PLN 12 million in the second quarter and [ PLN 60 million ] in the first quarter. But we also adjusted the number of presentation, after amortization of derivatives from terminating hedges; so there, it happens from time to time. So far [indiscernible] in net interest income and now it has been most so the result on hedge accounting and this change have already impacted our results. So it was [ PLN 13 million ] in the second quarter and [ PLN 13 million ] in the first quarter. This may not be the most

[Foreign Language]

[Technical Difficulty]

We are very sorry, but we had some technical problems and we are to continue with the presentation.

And now we discuss the risk costs of -- this is the Slide 25. And when you compare 2 quarters, so with the operating balance, we were saying that IFRS 9 is really to change the data in terms of risk cost and this is what happened in this quarter. In the previous quarter, the risk cost was pretty low. And now it seems to be pretty higher. Because actually, our quarterly risk cost margin rose to [ 1.7 ] from [ 1.4 ] last quarter. So because of this volatility of the margin, what we recommend, we recommend that you look the 6-month result of the risk cost, because we have only 2 quarters, but in the next quarter, we will encourage you to make the analysis for the 3 quarters. Because then, you will be able to see more stable risk costs. Without this volatility of the quarter, which is inherent feature of IFRS 9 and which always accompanies it.

So the 6-month risk cost is 0.55% versus 0.5% quarter-to-quarter a year ago. So it is more stable behavior of this lending portfolio than we could see. And in this presentation of the 6 months, this risk cost in the first half was to PLN 269 million, up by PLN 69 million from the half second year of last year. So that you can understand better this situation, this phenomenon, what should we attribute it to.

We introduce to you one more slide, which is Slide 26, which really explicitly is to show you what happened to our portfolio. And because risk cost, as I've already mentioned, it is in the retail segment. And I would like to inform you that nothing exceptional happened in our retail portfolios. As you could just see it -- seeing it just at first notice -- at first glance. And this effect actually can be fully attributed to implementation of IFRS 9, which is visible on Slide 26.

And to introduce it even more to you, we presented to you that cost of risk as reported in the second half last year, by IFRS 39 clean of one-offs. And in that way, we have comparable data presented in the opening balance sheet. So in the second half of last year, as you were also informed at the last conference, we had one-off events of PLN 23 million approximately, which followed the sale of NPL portfolio. And this was the impact of PLN 11 million and PLN 12 million were the results of the calibration of the mortgage loans, which was made in quarter 4. And that's how our 6-month risk cost in this year is -- it's the difference between PLN 139 million and PLN 95 million. And if you want to analyze the factors of this growth, we can name 3 main categories of changes: First, it follows -- this growth follows the growth of lending in general because as you remember, under IFRS 9, every new loan, which is in stage 1, is categorized -- is given 12-month expected loss. So first into this category and it was PLN 7 million in this half of the year. And it's the result of intensive lending and the growth in the volumes. If we continued with IFRS 39, this item would be below PLN 5 million. So it's additional impact of this IFRS 9. And PLN 26 million growth in risk cost due to occurrence of the risk cost of stage 2. And this is the biggest impact of IFRS 9, which we can see. We didn't -- we wouldn't have this cost, if not for this IFRS because we didn't have such a category. And PLN 11 million should be attributed to the growth in the coverage ratio, which also, to a large extent, is a result of the implementation of the IFRS 9. And also having this information, so having it in mind, when we see various costs, components, we also show to you some KPIs, which we use internally to monitor the lending portfolio, also the retail lending portfolio. And please see that nothing exceptional happened. We show it to you on the diagram, the share of overdue loans. So PDP of up 30 days in this healthy portfolio. When you can see from mortgage loans, it is really stable ratios and low ratios.

For cash loans, it is because of the product nature, they are higher, but they are still low.

And for the second quarter, this ratio is the same as it was last year in the same quarter. Only what we've observed, it was higher overdue loan share. And this graph showing that these ratios went up through the first quarter of this year for entrepreneurs. So for the sole traders, for the smallest ones in the retail segment reported. But you can also see a drop in this ratio later.

And when we think about the annual losses, which we understand as the growth, the 6-month annualized costs of that shifting of the loan from stage 2 to stage 3 versus the healthy portfolio in stage 1, stage 2. Then you can see that these ratios are really stable. And what should be really noticed -- the only thing to notice, it is that this ratio went up [ 0.68 ] to [ 0.51 ] for entrepreneurs. And this is a result which we really envisaged. And this is natural consequence, considering the stage of economy we are at. So we envisaged such portfolio behavior. And we can see that during the last 2 quarters, actually we had higher lending losses, some more defaults versus the previous periods.

Okay, please speed up [ Gretchin ] now. So I think -- so this is just a brief introduction for the 6 and 3 months. And just wrapping up this quality of the portfolio and risk provisions, I would like only to make you look at Slide 27, please.

So when you see our standard disclosures in terms of portfolio quality and provisioning. And as regards irregular portfolio so non-performing portfolio, this ratio is really stable, but it is much lower than generally for the banking sector. And please look, specially, on this transfer between quarter 4 and opening balance, because this ratio didn't go up really for us, but for banking portfolio, it was 1 percentage point growth. So we don't know what are the reasons behind it. We are looking for the impact of IFRS 9 because maybe there are banks in the banking sector, which in the opening balance sheet added their gross values of loans also to provisionings that [ down marked ] the interest. Maybe it was provisions in full and that's why that don't impact the value of net assets, but they change their coverage ratios and the portfolio of nonperforming loans in total portfolio. This is open issue, open question. And in the second half probably, it seems to me that we will have some changes in the presentation. We didn't add penalty interest to the balance sheet. So you cannot see this impact for us here. We only changed the manner of presentation of impairment interest and this PLN 150 million, you'll remember it, year-to-year.

As regards to the coverage of nonperforming loans, you can see that in the corporate banking, this ratio is as it was in the opening balance and drop in when compared to first quarter for retail banking, up by 0.1 versus the opening balance in the first quarter. So I would like you really to look at -- because of this provisioning growth, our provisioning ratios in stage 1, in stage 2, and stage 3 went up. And these are just crucial growth, significant growth.

And before you ask your questions, as to the future of the risk cost, I would like to inform you that we expect further volatility quarter-to-quarter. And that's why I do believe that you have to get accustomed that we receive volatility in the banking sector. That the banks presenting their results, also [ ING ] bank was drawing your attention to this, but this risk cost is expected to be analyzed in the longer perspective and not quarter-by-quarter. And we do believe that such effects will be also seen in the quarters to come by other banks.

And only briefly about capital adequacy, let me just focus on the total capital ratio. As you can see on the slide, it's dropped by over 71 percentage point. And you can see 2 events behind it. So the decision of the general meeting on profit distribution and the growth of lending portfolio. And let me tell you that this growth of lending portfolio really entails higher consumption because we need time to start up with collateral. So such a structure of our capital with intensive lending in this quarter was much higher because we were not able to establish our collateral as needed. So that's all about the wrap up. And if you have questions, then please, you are welcome to ask them. And about risk cost, I hope it was already exhausted. But I understand that you may need more information about it. So maybe let's start with this topic, if I may ask.

[Unknown Executive]

So first we'll answer the questions from the room and then from the Internet. So maybe, let's start with risk costs, so on the hottest topic.

[Unknown Analyst]

So risk cost. It seems that this PLN 37 million due to modification of methodology is not -- it doesn't fully explain all the changes in the retail segment, as regards to risk costs. Do you think that part of this portfolio is doing slightly worse or this is just the accounting effect as such?

[Bozena Graczyk, executive]

So as I've mentioned, our main ratios, according to which we've been monitoring for the portfolio, we can't see anything that will be worrying us in the retail portfolio. The IFRS 9 cause high volatility due to the mixture of many factors, impacting [ HED and PD ]. And also, since this is the FRO models, when it comes to transformation from stage I to stage 2, so the effect on stage 2 is the highest one, the highest -- the impact. But while the portfolio is moving from stage 2 to stage 3, it is most visible. But when analyzing our disclosures in this respect, you can have your own conclusions. But the volatility when moving from stage 1 to stage 2 and the other way around is the most important factor. So in the portfolio, we've been growing in terms of consumer loans and entrepreneur loans. But these are small parts of our portfolio. So it's PLN 1.6 billion at the entrepreneurs loans. So these are not high amounts. And this part of the portfolio, which is growing at high pace, some mortgage loans have a strongly stabilizing role. So the portfolio does not have the attributes that would imply the increase in risk cost, apart, of course, from this natural process. So the -- so this is okay, PLN 5 billion, a bit more. So the average risk cost must be growing. This is the fact that we've envisioned and this is the result of our product mix. But except for this entrepreneur loans, when this risk cost was growing for the last 2 quarters, there's nothing worrying about the factor, so the volatility of credit risk in terms of IFRS 9 is high. We've been expecting deterioration of the portfolio in SME and MC segment, but it has not happened. I mean, at least at larger scale, they are quite stable. So this is what's -- how we think it can be attributed to.

[Unknown Analyst]

When it comes to future volatility, do you think this is the future of the, let's say, the preliminary introduction of IFRS 9 or it will stay with us?

[Unknown Executive]

We think that its impact may go down, which will be due to calibration of models, which is taking place now. Also, we've been discussing with the FSA recommendation our OHS to harmonize the approach of banks because now, as you can see, the approach is very different. But -- and the approach is not only for the bank, but also different organizational units of the bank. That's referring to what Rafal said, the high factor of volatility will be volatility of macro economic factors.

[Unknown Analyst]

So I would like to introduce another topic, the cost of funding. The other banks have already said that they can see that in the sector, the cost of funding, especially retail deposits is starting to grow. I remember that in the first quarter or the fourth quarter, U.S. ING wanted to have a slightly better deposit offer. So it's not to change the competition then. So they think that it's temporary and that special offers are making the funding costs higher? Or do you think that it will stabilize or it's beginning of a new trend?

[Bozena Graczyk, executive]

When it comes to the trend of the entire economy or financial sector, I think this is quite stable. With the acceleration of lending, the increase in lending is lower in the entire market than expected, but we still think that it will accelerate, which Rafal presented in the lending basis is 6% this year, 7% last year. You know that year-on-year the market is not growing at this pace, but corporate loans are starting to grow at 5%. And that was the market vulnerability. So the banks want to be dependent more on their own funding, so funding for deposits. And everyone knows now that the way to stable deposits, to savings accounts and current accounts goes through special offers. On short-term horizon, of course, they increase the cost. And because there will be higher demand for deposits, then special campaigns may be a permanent element of the environment. So the entities, which have a weaker deposit position, must increase quite significantly [ the count ] so while the special offers of 2.5%, for example, were normal, now we've got these special offers of 3% or even 3.5%. So this may be slightly desperate approach. But all market institutions are starting to compete for a relatively low base of deposits because the deposits of the high consumption are not growing that fast, despite the increase of all those elements. Like the salaries, for example. When it comes to corporate, deposits stabilize the situation over longer term, with the faith in which we think that the -- also private investments will grow. As Rafal said, they will first reduce the core balance in the corporate area. Of course, they will differ, but we think that it will also take place there. To sum up out of all those streams, we think that the cost of acquiring funds will be growing. Even though the interest rates on corporates like the current accounts or the core savings accounts will not change.

[Unknown Analyst]

I've got a question about some of the risk costs because I have run a different decomposition of this PLN 102 million. And I believe that some loans from stage 3 have moved in your case and the coverage risks show here as 75% and that accounts for PLN 35 million of costs in the retail segment, and the transfer from stage 1 to stage 2, that explains [ PLN 15 million ]. And in new production, there is minimal provisioning coverage in the first stage, only PLN 5 million. And the increasing coverage mainly in stage 2. And that explains another PLN 20 million. So in my perspective, some of your loans moved to stage 3. And my question is, why is it happening? And why the coverage in stage 2 has increased because that increased the risk cost by PLN 20 million? So what's your approach?

[Bozena Graczyk, executive]

I understand that you're looking at the change quarter-to-quarter and we presented it change of the 6 months, which for us is more adequate in terms of the normal operations of the portfolio. So that explains the difference that you're giving versus the data that we presented on Slide 22. This quarterly change is caused by many events, mainly, due, as I said, to the moves between the stages of loans. So -- and also, quite complex mechanisms, according to which we are updating [ PDN ] to LGD. And the coverage ratios have increased in all stages. So therefore, they translated into higher risk cost, but what happened since IFRS 9 implementation is higher cost in stage 2 and higher coverage in stage 3, which is due to higher LGD. And also, please notice that this LGD is also dependent on what percentage of the stage 3 portfolio is moving to -- this past year because it increases along with increase of number of days past due. So that's correlated with the changes in -- of loans in stage 3. So a number of factors. That -- when we think about the presentation for you in the coming quarters, I think that at some point, we'll be able to show you the composition in more analytical terms. And so far, we've presented this way, but we want to show you greater granularity, so that you're able to understand better what happens in our portfolio in terms of risk cost because there's so many factors impacting those.

[Unknown Analyst]

So maybe 2 more questions. The President said that to loan-to-debt at the adjusted at 90%, it will improve. So therefore, it will grow or decrease? So it will increase above 90%, okay. And the second question about margin on lending products versus the margin that you've got on the balance sheet. Is that improving or deteriorating, in terms of the corporate loans and mortgage loans?

[Unknown Executive]

These are the data that we cannot disclose.

[Unknown Analyst]

When it comes to the sales in the second quarter, so the historical data?

[Unknown Executive]

Well, yes, these are historical data. It's not on sales of new product, we've got everywhere lower margins than historical ones. And please note that in mortgage loans, we've got in the portfolio many loans based on even older margins. So today, we've got products on higher margins than historically the entire portfolio. And corporate, area and cash loans. So in terms of consumer loans, they're not significant disturbances, no. In consumer loans, we're getting to the place in which we're starting to get lower because the portfolio is very young. But if you wish, exceptionally for the third quarter, we can present you the margin on the new production versus the entire portfolio for the third quarter. And now, I would just be quoting from my memory, and I'll give you wrong numbers, so it's not a good idea.

[Unknown Analyst]

So maybe in terms of risk costs, if you could present us with the composition or more risk cost in retail area. Was it rather in the consumer loans or in mortgage loans?

[Unknown Executive]

So in the first half of 2018, it was below -- it was PLN 9 million in mortgage loans, the [ impairment list ] so the entire -- so mainly for small entrepreneurs.

[Unknown Analyst]

And an additional question about risk costs in the corporate area because in Slide 24, we had an upper tendency in the share of loans with over 30 days past due. And we have seen the results of this in the second quarter but in the loans for entrepreneurs, from the fourth and the first quarter of this year, we did not see this upward tendency in risk cost for the second quarter. Were there any higher or better solutions for the corporate area which somehow deserved the image.

[Unknown Executive]

What we represent in Slide 26, these are micro entrepreneurs even. So this is the retail part.

[Unknown Analyst]

Just one more question, technical one. When the portfolio is moving from stage 2 back to stage 1, do we have the release of provisions?

[Unknown Executive]

Yes, we are moving from the expected loss.

[Unknown Analyst]

Is it going straightforward?

[Unknown Executive]

Yes, in the next quarter.

[Unknown Analyst]

So there is no grace period?

[Unknown Executive]

Okay. As you can see on Slide 27, average terms at the end of the second quarter, we've got [ 3.7 ] to [ 6 ] coverage in stage 2. And the difference between stage 2 and stage 3 -- okay, I'm sorry, that's [ 0.6 ] in stage 1. The difference is released when the loans are reclassified from stage 2 to stage 1. So the volatility is high here. And then, we are releasing or establishing the loans. So they are pretty sensitive and we're also mentioning it with opening balance because our portfolios are really susceptible to this reclassification of stage 1, stage 2, stage 3. So that's why you can see this volatility, which is pretty high.

[Unknown Analyst]

So maybe one more question on my part from the other area for retail deposits. The data presented to us in the Excel sheet, one could see that -- one could see cannibalization of 10 deposits in retail with the current ones. Do you see it? Do you recognize it in your management data? Are you happy with the growth of lending in retail in the second quarter of this year -- in deposits, yes, I mean deposits.

[Unknown Executive]

Yes, we are happy with it. We are happy. We are satisfied. We have emphasized many times that 10 deposits -- traditional 10 deposits when you are referring to them is a defensive instrument in our policy and they are declining. They have been declining for some time. When we need defense, then we avail of them. But it is alternative to savings. And that's how the system works. So 10 deposits, typical 10 deposits, 3 months, 6 months and we don't have longer ones in Poland. It is just -- they are extinguishing, they are dying.

[Unknown Analyst]

I do agree with you but when we have this promotions, which you have had this effect.

[Unknown Executive]

Yes, but we arrive at it by using fixed deposits. Yes, it is not a special promotion which we use in the savings account. So it's different approach.

[Unknown Analyst]

Yes, true to fact, that's what I'm talking about. So the 10 ones are declining or have been declining for a long time. And the current were going up with promotions and it was visible more than in the second quarter. So that's why my question, whether you are happy with this level?

[Unknown Executive]

Yes, we are very happy.

[Unknown Analyst]

When you say it and when you don't talk about the special situation, so with all the growth, the number of core deposits in current accounts was significant year-to-year, PLN 5 billion year-to-year. Yes, is that -- am I right?

[Unknown Executive]

Yes, with total data, retail and corporate. [ Free ] retail [ 1.8 ] or [ 9 ] in corporate. So we are very happy about it, because the structure is following the path we've set. So when we talk about retail on the [ so-called ] deposits, I mean, deposits presented on the balance, I'm not talking about investments -- about mutual investment funds. So it's 22% now. Please check this out first. It's almost 22% of all time deposits. Because these are not the figures which are presented. And this is a big change, gradual change, but we see it. And we are happy about the growth in current accounts. And we can also see in the number of current accounts, we show to you in the report. And also, in the transactional volumes of our clients because each account -- and we want to have active accounts only, not only the accounts to delight you, but to have accounts with transactions made. So active ones, operative ones. And we compare it against competitors. And we can see that our current accounts are really current accounts, so are used really by clients. But this is starting point to consider them as stable accounts, with stable core deposits. But growth is significant. Okay, over [ the year ] from 20% to 22% in the entire structure considering the strong campaign of savings, we did at the turn of December and January, which is, of course, presented here because the impact is to recognize on our balance. Because these funds are recognized. With promotional terms and conditions, they are on the balance as at 30 June. They have not been lost. And they increase the cost of acquiring funding. And when they go down from the promotion, this cost is also to decline. And when another campaign, another campaign, so campaign by campaign as it goes. Have I answered your question?

[Unknown Analyst]

Yes, yes because I'm not really sure. So another question on my part. About the banks plans as to asset management business, ING Group doesn't have asset manager? That's one. And second, when you have strategy to have cheaper funds offered, how is it here, locally at ING?

[Unknown Executive]

Yes, we feel good with it.

[Unknown Analyst]

Yes, but any changes to be planned? Do you plan...

[Unknown Executive]

[indiscernible] I'm not going to talk about changes which are in the pipeline.

[Unknown Analyst]

Yes, but there are some press comments that the bank was interested in idea or with something?

[Unknown Executive]

Yes, I've also read these publications.

[Unknown Analyst]

All such assets as every bank holds now could be of interest for ING or is it just beyond your...

[Unknown Executive]

Yes, we do believe that we have responded in the presentation to this question, actually.

[Unknown Analyst]

Okay, I got it. Would you comment, open this topic of the [ franc ] problem. Also the press was discussing it, whether the bank -- I'm really interested in, before the court issued their verdict, the judgment, agreed to pay the client who brought the case to the court. So have you agreed to pay it earlier?

[Unknown Executive]

In each case, the bank follows the law, strictly follows the law and the judgment of the court. But regarding the news comments, presentations, opinions of observers, watchers, we are not to comment on it because it's a court case. And we are waiting for the final settlement. But we abide by all the rules, of course.

[Unknown Analyst]

But that's not the final decision, is it?

[Unknown Executive]

Yes, we do believe that yes. But this is not always so. Because each party can make their declarations. And the difference there is between us and client. And we don't want to comment. And we don't want to comment on the comments made by the other party also.

[Unknown Analyst]

We do believe that this is what the finance and true finance require. So when we talk about disputes, 2 questions on my part, is ING a part of this proceedings -- administrative proceedings of fair competition and consumer protection office on the information provided on the durable medium?

[Unknown Executive]

Yes, yes we are.

[Unknown Analyst]

And second question, are you also a part of this claim filed by retail clients about interchange fee -- I mean, historical case?

[Bozena Graczyk, executive]

Historically, as you know, many retail players made this case with court because should this verdict be really approved, which is now as if aside, yes, because this is the case of the competition office. But it open for the civil suits the way. So the civil suits to be really operative, they need to be filed. And they have to -- something has to happen so that they don't reach the time limit. So some people raise such issues. And there are many such dormant, let me say, disputes awaiting pending decision. There are many such ones. But when you refer to the latest information from a few days ago, I don't know anything but they are addressing us. But it's not the final element, don't say it like that. As to the case of [ Walkik ] so please refer to our note in the financial report, where we discuss this competition office case on durable medium. Because this office approached many banks from the sector, individually, so bank by bank.

[Unknown Analyst]

And this is the question of accruing fees for the courts when the settlement period really differ. So the client made a transaction? Didn't make a transaction? Was it settled?

[Unknown Executive]

It was not settled? Also it refers to the matters [indiscernible] Yes, yes, interchanges, but there's one more topic. So reimbursement of the fee, when the fee is charged upfront. But the loan is prepaid by the client. So all of these elements in the banking sector, they also impact on us. But the stages are different of these cases. In terms of materiality, what is important? It is durable medium case. But we don't have the final verdict, final resolution of the competition office and that you will find in the note.

[Unknown Analyst]

May I? I have one question, detailed question and general question. The detailed one pertains to whether with the client agreements, do you have some alternative benchmark for viable ratio? And whether you inform clients in some manner that in the agreements, it's possible to have it changed into alternative ratio benchmark versus viable one? I mean the agreements that you made with clients.

[Unknown Executive]

Yes, Piotr is to respond. Yes we have. Yes, please microphones, okay, so the translators can hear.

[Piotr Utrata, executive]

We have provisions in the agreement when viable is not to be -- if we see some distortion here then we have then some areas, some space to have other benchmarks set for clients and it's for corporate clients and the biggest strategic holdings. Yes, I'm not really sure -- 100% sure of it but I can provide you with response but I think it's going to be implemented for retail as well. It's not strictly defined. No, it's not strictly defined. It is when something is to happen then not only us but also other banks have to agree on the approach to this and on this benchmark to be chosen. Because it is usually -- but it's the average for the last periods of quotes of this ratio, so which were considered when calculating the interest of interest base. And for details, I can come back to you if it is okay. And the second question of yours, please? So the other question, please.

[Unknown Analyst]

Could you name some cases of an unbalance, which you see, so lack of label? It is cumulation of public investment projects, which we can see, what else can you name? What other non-balanced factors can you name? And is it also relating to the fact that there is much, for example, power prices grow visible. Is it not to impact inflation? Because base inflation is different from the one, including the energy prices?

[Bozena Graczyk, executive]

The basic element we've mentioned to you of some non-balance of this economy cycle, it is delay versus the typical situation of private investment projects. We have relatively little activity in terms of adaptation of manufacturing attributes, to future challenges. Bullish economy is first and is really working hard and using the output capacity for much time without enlarging the base. And without clear trend for dynamic -- or proactive, let me call you, like with the change of this machinery base, for example, with that base consuming less human capital in production and this are the potential barriers which this growth non-balance can reflect in the next stage, so crisis stage or in the next development stage, because I don't want to use this word crisis to frighten you, and we had the trend where we saw some economic distortions or disruptions with this high potential of unused manufacturing output and it could be utilized. So devaluation and exports start to gallop, but here, we don't see really this element to transform ourselves at the same pace as other countries in other regions do.

[Unknown Executive]

Apart from this GDP structure, it's difficult to point some serious imbalances. There is some in housing markets. We can see a 2 digits increase in flat prices, we think that this will be the trend. As in the region, it's been happening in the region for a year now, in Poland in some parts of the region it has started. But it's important that the majority of those flats are about, in exchange for cash, so it's not a problem for banks. And historically, it's not a tragedy. Before Lehman Brothers, we had such cases. And other elements, high supply of office space, final south-side banking sector, without any major threats, also labor markets. As you point out, this is imbalance. There are different perspectives, local, regional and we do not think that the percentage of the FTEs to be filled with candidates is not set so high, but salaries are not growing at such high pace that there are many complaints still. The reason behind this is the fact that the Polish labor sector was quite regulated. The bank adjusted to the situation, that was our case, but the rest of the companies are doing it now with some delay. But the original comparison suggests that it's not so bad, comparing to the local perspective. No country in the region does not have -- no country has the access to 1 million workers from Ukraine. So they can be used also. And also the benchmark for imbalance in labor market are some of the announcements concerning the salary raise. That may slightly slow down, we had also adjusted the forecast in this respect. The inflation in some comments, especially of the economists from London, they believe that there will be an inflation boom and we think that if we experience a rebound, this will be at approximately 2.5%. So this imbalance is not too high. Of course, it will happen, it will take place. But it's not -- it will not be intensified so much and it will not make the Monetary Policy Council raise the interest rates.

[Unknown Analyst]

[indiscernible], Bloomberg news. I wanted to ask you -- because you've mentioned that this macroeconomic element would be also important in the risk terms and could you please provide further explanations? The fact that we are going now through the economic cycle peak, how this can impact the write-offs in quarters to come? And second question, are you currently buying union investment or NN local branches, I mean the mutual funds?

[Unknown Executive]

So maybe let's start with the first simple question. So macroeconomic models. Bozena, please?

[Bozena Graczyk, executive]

So according to the IFRS 9 we are in, macroeconomic factors are acting straightforward, either deteriorating or improving with your [ HED ] factors. The correlation of those factors -- of different factors for different portfolios varies. Macroeconomic are more apparent in the retail where GDP applies more to corporate segments. Plus banks, they are applying additional weights and complexity to their models. So it's difficult to answer your question because there are many determinants of different weights impacting both PD and LGD ratios. But as a result, the deterioration of macroeconomic factors triggers deterioration of the PD and LGD, but with different impact for different portfolios and different time horizon, because macro factors are not only considered for short-term horizon but also for long-term horizon. Therefore, they somehow make the changes in the PD and LGD ratios or different segments' average. So it's really very difficult to answer your question because no one clear relationship of point in time where we can see the impact of macroeconomic factors on PD and LGD. Surely, they adapt this volatility and it also depends on how and macroeconomic factors are changing the PD and LGD.

[Unknown Executive]

I'm afraid that I'll be as nontransparent in my statements. So specific economic events are -- will not be commented by us. Can I have the question?

[Unknown Analyst]

I think that my question is simpler. The fixed rate loans, you implemented them over 2 months ago, so what's the interest? Are there people who'd like to take out such loans? I think that this is the record sales in the market. This a 16 item -- 16 loans, I mean, that, against the benchmark in our market, this may be treated as an achievement.

[Unknown Executive]

Taking into account the number of the loans, are you expecting -- I think you should be expecting that this is not a huge amount or something that would disturb the bank's results. We are not -- okay, we are not making fun of it. We believe that [ bond ] needs a wide offer of mortgage loans, including the fixed-rate loans. So we've introduced this product but we think that the subsegment -- we're hoping that the subsegment of mortgage loans markets will be separated. So that works in such a way that we're saying that it will not run without support and we are getting the response that actually we need to start first to see the support. Now the question whether this was in branches or online? Really, 16 loans. And are you -- so do you expect me to know actually? Or the number is so low that I wanted to know? Because the number is so low, we do not know. And I really regret that the number is not bigger, I don't know.

[Unknown Analyst]

What's the tenor, is it 6, 3 months? That was the extension possibilities or moving to another product?

[Iza Rokicka, executive]

We have here the question but I think we should finish up because we are running late. So a few issues...

[Unknown Analyst]

I wanted -- as my colleague from Bloomberg, I wanted to ask about slowdown, relatively big slowdown, that you expect next year. How do you think it will impact the results of banks? Can we expect that there will be much higher provisions? And it will lower dynamics?

[Bozena Graczyk, executive]

Let me emphasize that we've been mentioning this slowdown in GDP growth, versus these very high ratios. It's not a drama that's going to happen and growth will be still quite high. It will be 3.7, we've slightly adjusted the number. But at the same time, we believe that the lending production will be even accelerated. So, it's not [ coupled ]. So it's not a GDP drop, it's a GDP growth rate slowdown. And it does not translate into a lower growth rate of the volumes or of the financial sector. So I don't think that we should draw conclusions that the income or the structure of generating the results in banking sector should dramatically change. So the GDP structure, dominated by consumption, financed by the embedded issues into the GDP structure, dominated by investments to a large extent, where the share of the banking sector will be higher. So it's more preferred structure. So there will be no deterioration of the results.

[Unknown Analyst]

And you've said that you expect that investment loans will -- investment will rise for -- the investment loans will rise. So what do you think about working capital funding and the split payment in particular, what will happen?

[Bozena Graczyk, executive]

Well, as a rule, it should generate higher needs for liquidity funding. And so this is what we've been expecting but it's too soon today to be able to determine what will happen but as Rafal indicated, split payment is one of the elements. And one of the drivers for uncertainty of the corporate clients, because they are concerned that they would have problems with payment stoppages. And we're talking about accumulation of investment, the entire chain, the entire process, from the contractors, the supplier, so on, we observe that there's a problem in taking part in certain tenders. Because there is uncertainty in the access to some resources and some vital ratios. For example, labor costs, which are one of the tender conditions. But also profitability and to micro issues regarding bank.

[Unknown Analyst]

In the presentation you mentioned, that the increase in the number of accounts is its gross terms, are gross and net terms similar in terms of number of clients?

[Bozena Graczyk, executive]

No, they differ quite significantly. Because we've got both demographic and market outflow. So if we've got a net increase, for example, of 287,000, then the gross increase, I don't remember the number.

[Unknown Analyst]

So this is the net, not the gross number?

[Bozena Graczyk, executive]

That's 418 year-to-year, when it comes to special offers from the deposit campaign from second quarter year-to-year.

[Unknown Analyst]

I understood that before the end of June it started.

[Bozena Graczyk, executive]

It started now, it starts at the beginning of July.

[Unknown Analyst]

But can we expect that the impact on the interest margin can be similar to what happened at the turn of the year in the first quarter?

[Bozena Graczyk, executive]

Okay, now I'm lost. Please help me, I don't know what's the question.

[Unknown Analyst]

At the end of the second quarter and the beginning of the third quarter, we've got another special offer, yes?

[Bozena Graczyk, executive]

No, we get special offers all the time. But strong campaigns, which impact the volumes, they took place at the end of December with market intensity in January, but the special offers we've been mentioning, we've got them all the time; this is the campaign. The fact that we've got the offer, it's per month. The president is looking at the watch. I don't know if I can continue.

[Unknown Analyst]

Okay. I would like to talk about the allowance that Rafal was forecasting next year. So do you agree that the increase in loans in the Retail sector will be much higher than this year? Judging by those growth rates and the base effect, the volume should be much higher? And the bank is the leading market player and it's been increasing the market share. So do you agree with the forecast, it'll be more retail in the new production?

[Bozena Graczyk, executive]

For the entire sector? For the entire sector yes. Yes, this is our base scenario. In terms of the mortgage sales, the growth rate is high but next year, there will be also the price effects, which will contribute to it, to the mortgage production and we believe that there will be some recovery of consumer loans, that was mostly driven by wages and 500 plus program. At some point, we've got leverage effect. So we've got slightly -- we think we'll have a higher rate of growth next year.

[Unknown Analyst]

And we're talking about micro data, yes?

[Bozena Graczyk, executive]

And the corporate loans would, like, I believe, that they will accelerate, first the investment on the finance of own funds, that's why we've got lower dynamics of corporate deposits. And the next year, there will be greater acceleration in corporate loans.

Thank you for the questions. We've got several questions from the Internet but so far, they've been answered, I believe. Thank you for the participation in the conference. Thank you very much.