ING Bank Slaski SA

WSE:ING

Earnings Call Transcript 2020-Q2

[Piotr Utrata, executive]

Good morning, ladies and gentlemen, to our press conference, presenting business and financial results for Q2 and the first half year of 2020. The presentation will be held by Brunon Bartkiewicz, the CEO; Bozena Graczyk, in charge of Finance; and Rafal Benecki, the Chief Economist of the bank. At the conference, we also have Iza Rokicka, who's in charge of Investor Relations.

I'm Piotr Utrata, and I'm the bank's spokesperson. Thank you, Brunon. Let's start.

[Brunon Bartkiewicz, executive]

Welcome, ladies and gentlemen. On this sunny August morning, let us recapitulate the first half year and the second quarter of the year. We know that we are just yet another bank to present Q2 results now. So our colleagues from other banks have surely answered a lot of your questions already. In order to boost the appeal of this conference, we divided it into segments also including questions you asked at other conferences.

So after a short introduction, Rafal will present the perception of economists of the macroeconomic environment. He'll share some thoughts and observations with you. Then we'll talk about customer behavior, which will lead us to results.

We think that our results won't raise many questions, so we'll try to elicit some questions from you. We like questions and time spent on them. So after discussing some general matters, Ms. Graczyk will guide you through details. And then we'll look forward to your questions if you have any.

So firstly, in Q2, well, the light motive is the COVID-19 pandemic. So in our bank, too, we have 2 priorities in relation to that, the safety of our resources and the interest of our customers. I think in both cases, we achieved satisfactory results. The bank participated in virtually all programs of support for economic activity and employment. On Page 4 of the presentation, you have basic credits moratoria and Anti-crisis Shield's elements listed.

As you can clearly see, the moratoria, government program, was started relatively late in the second quarter. So we have no data on that to date. Let me just tell you that the interest in this government moratoria program has been moderate so far.

In March and April though the interest in the bank's moratoria program was very high. For this reason, I think there's no need for us to discuss special elements of business continuity in the bank over the pandemic periods, the period is still going on, by the way.

Of course, the bank had to react to all adjustment programs like the interest rate cutting and many other aspects, we had to address. And I think we did, and we were quite good in that. Of course, the adjustment process is still going on. For instance, in relation to interest rates, the adjustment period is somewhat longer here also because of the customer communication capabilities.

We have to inform customers in advance about any matter. And we also have certain provisions for adjustment to macro data. But we'll address the detail of that later on in the presentation.

Well, it adds up to the whole area of operation of financial institutions over the pandemic period. And I think it's pretty much clear, we'll wait for your questions in this area now.

So to this end, Rafal? You have 10 minutes max for macroeconomic data.

[Rafal Benecki, executive]

COVID-19 triggered deep recession in the Polish and global economy. There's a great deal of uncertainty about how long this slowdown will be and how deep it will be. Our assumption is minus 4.2 percentage points and plus 4.5 next year. We think that the main factors of adverse influence on this year's GDP that includes atypical shock, COVID-19, caused a major shock on considerable deterioration of natural stabilizers of the Polish economy, like, firstly, internal demand.

Usually, it was less volatile than the rest of GDP, this time, it was not the case, and then the internal demand among our main business partners. It was a major stabilizer to date, but this time, not. So it massively deteriorated the Polish export and GDP rate. Another element of adverse influence on the situation is the virus and lesser spending appetite.

In the second slide, you have a research showing the behavior of poles in the area of spending and savings against the backdrop of other countries. There's a great deal of cautiousness. Also, this uncertainty considerably deteriorated investments. So investments area will suffer a lot this year. But among positive factors, we can see a good starting point before COVID. The Polish economy was well balanced with several current account surplus, it was not leveraged, which was quite a considerable element for such a shock.

Also in Poland, we have massive anti-crisis programs. In the first slide, we can see them against the back of other programs in Europe. At the start, the grant part was the biggest in Europe with over 6% of GDP. In the grant part now, Germans are more the vanguard like the U.K., but still, the program is very big, and it considerably limited the drop in employment and bankruptcies. It boosted the liquidity, which allowed for some flattening of the slowdown curve in '20 and 2021.

In the second slide, we can also see a panel of 13 countries and a research on saving and spending behaviors. In all those countries, we asked our respondents about how the spending changed in the COVID period? We can also see their attitude to saving. Quite interestingly, the Polish consumers decreased their spending and increased the savings. Quite interestingly, in the first epidemic wave, the savings scale was small and the anti-crisis programs were quite big. So by and large, with the lower affluence of the Polish economy and the slowdown period, this is now flattening of the consumption, not as much as in other countries. Households try to spend less which affects the GDP with over 4% drop in consumption this year.

In the third slide, we discuss our analysis of impact of anti-crisis programs. These are just preliminary estimates. So we use some data based on certain assumptions. But preliminarily, we can see a GDP decline limited by 2 to 3 percentage points, thanks to the spending of PLN 132 billion within the anti-crisis shields. So far, we've got about PLN 100 billion. This is our estimated impact of anti-crisis shields on the economy growth rate in Poland.

In the next slide, we are discussing the European reconstruction fund. We assumed that over 2021-2024, we'll have plus 6% grants from the fund in Poland, which should boost our GDP by about 4 percentage points. This is considerable support altogether.

In our region, Poland is among the biggest beneficiaries of the European Reconstruction fund. Altogether, the European Reconstruction fund plus new European budget will give 7% more EU resources than in the current EU budget. But the trouble is that the money will start flowing as of mid next year. So throughout the next 6 months, we'll have to be on our own.

When it comes to opportunities and threats for the second half of this year and next year, speaking of GDP this year is still volatile. The risk is balanced or lower. We have no data, full data for the quarter, but this is the difference between our forecast and the Central Bank's forecast, where the central bank is quite pessimistic about the second quarter of the year.

When it comes to 2021, the risk is on the higher side. Also, because we'll have EU money and the Polish economy has a good starting point for reconstruction because of the prepandemic situation and large programs started in the pandemic period. We also think that at the turn of the year, there's fair chance to see the COVID vaccine coming. There are 160 research teams working on the vaccine as we speak. Some are quite advanced. So it is fairly possible that at the turn of year, some vaccines start appearing. And if they do, it might be a great factor of supporting the situation of our business partners in 2021.

Speaking of GDP again, the major indicator now is the epidemic state. We can see the second wave coming. Going away in the U.S., but coming in some European countries like Spain, Belgium, Romania and maybe Poland. So if the second wave grows, it will be a considerable risk factor.

As we know, after the first lockdown wave, we could see a minus 8 to 9 percentage points from the GDP. This was the cost of lockdowns in Poland and abroad. So this time around this impact might be smaller but still painful possibly. So when it comes to 2020, the risk is balanced on the lower side and then on the higher side.

Speaking of our view on interest rates. We think they will remain unchanged. We can compare them to the universal rate, where if you go beyond it, the monetary loosening effects starts working. And we think the reversal rates in Poland is quite high, which means that the rates are on the low level in Poland, which means that they shouldn't be lowered any further. But there are still data coming and showing the concern about the strong exchange rates.

Like in 2008, if we had a weak exchange rates, every element of the budgetary policy are stronger. Hence, the whole rhetorics about interest rates cutting. We assume that it won't happen, but in the worst-case scenario, there might be a certain signaling cutting, facilitating the weakening of the PLN, but this is not our basic scenario. The Monetary Policy Council will rather further support budgetary programs continuing the already existing, which will be the issue from BGK and PFR.

If need be, as I said, at the turn of year, up to the moment of EU money coming will have to only count on natural situation unfolding and possibly new programs. So clearly, the interest rates remain unchanged with strong rhetorics about the cutting and possible for the cutting in the second half of year, but this is not a basic scenario.

And [ QE ] will be of, say, American size, 8% to 9%. Speaking of our view on unemployment, we expect the growth of 7.7% at the end of this year and 6.6% next year. We can see a major effect of employment storage. So companies try to keep their employment at the same level at any cost. As a result, the unemployment rate is not growing as fast as we could historically expect.

We assume that there will be some layers at the end of this year and possibly at the end of next year. And then we might see some unemployment growth more this year because of the situation and maybe less so next year because of the rebounding economy.

[Brunon Bartkiewicz, executive]

Thank you very much. Let's go back to the previous slide, I'm sorry. So let's go back to Slide #5 and 6. Thank you, Rafal. We have seen that you're interested in the change of customer behavior, and we will provide you with some information in that respect. So we can sum up that pandemic COVID-19 is kind of catalyst of customer behavior that we've been observing for longer periods. But the effect of this catalyzer causes -- this catalyst causes that some trends speed it up. And in some points, we can see that they are heading towards the breaking point.

We include all that in our strategy. And we take into account the number of visits of customers in our branches, the number of transactions made in our branches and in the total number of transactions. What is important, it is always the cash operations, cash transactions and cash transactions in our branches dropped after first quarter, which -- because in March, we could see some panic on the market in terms of PLN and FX transactions.

In the second quarter, it was also reflected in the results, and we can see that people stop using cash withdrawals and cash and they don't deposit cash. And this transfer is rooted towards ATM. This traffic will probably come back as our concerns will release, but probably it will be not a drastic change. So we can safely say that more or less, year-on-year, the number of cash withdrawals dropped significantly over 30% for sure, which speeded up the pace of that decrease. And if we were to increase the mid-term 5-year term, the cash withdrawals is expected to drop from about 22,000 a day to about 7,000 a day. So it's 1/3 of the initial amount. What is important, what's interesting, COVID-19 showed that cash transactions will not -- will no longer be popular. We can see less withdrawals at ATMs, and that trend has speeded up significantly.

Now in our ATMs, our customers, ING branded ATMs, can observe much lower traffic today than it's about 190,000 transactions per day. And 5 years ago, it was about 300,000, 320,000 transactions per day. So we can see that people stop using cash, which changes the profile of functioning. So then COVID-19 was the catalyst of that trend.

We can see a significant increase of e-transactions of any kind from to e-pullup to cash -- to transfers and within this bank transfers in the retail part -- in the retail portfolio, we can see a drastic increase of the number of transactions and the number of -- and the share of mobile transfers.

In first quarter 2019 in comparison first half of the year 2020, we can see the increase in the number of transactions, mobile transactions by 15 million. So from 41 million to 56 million. And as of today, it means that about 29% of share in the total number of mobile transfers. So all transactions because non-E transactions are rarity. This share is 29% and we can safely say that it's a strengthened trend because last year in the underlying period this share was about 24%. So we can state that we can see a clear trend. And at the end of this year, 1/3 of all transactions will be mobile. So these are some trends.

Another important trend is a drastic increase in the leveling of debit cards transactions because as the traffic is routed towards -- is heading towards e-commerce, and we can see increasing number of transactions made by other methods like BLIK, for example, so you can see some leveling in terms of the number of debit card transactions, which has increased significantly over the last 5 years.

Next slide shows other trends. We're not talking about million or billion of transactions a year in terms of corporate transactions, the trend is the same. So towards higher digitalization, you can see the figures, and it does not concern only transactions, but also services, opening bank accounts and so on and so forth. So all these data you can see it on the slide.

And I think that, that gives you a clear picture of trends that we've been observing for several years. They become more and more visible. We don't have to go back to midterm and long-term data. They are visible from quarter-to-quarter. So let's pass over to the most important details about our results. I don't think that they come as any surprise to you.

I could see your first comments, let me sum up that before the cost of risk, our result year-on-year for the first half of the year went up by 8% and a significant increase of the cost of risk. I think that Bozena comment -- will provide you with some other information. We will talk about some strengthening in terms of IFRS 9 and adaptation to macroeconomic factors, which we are observing, and this is the element of unexpected that Rafal was talking about. This is the data that we include in our cautionary policy.

Other elements, I think, are quite clear to you. So the bank is still delivering on its strategy in terms of tactical activities, of course, and we will continue in that respect in next quarters.

We will have to adapt to the interest rate, which haven't been adopted yet to our results, which results from the longer period of informing customers before we will implement some cuts in the deposit part.

I think that next in the balance sheet part, it's also -- there are no surprises as well. To us, the element this coincidence of inflow of PFR subsidies to our business customers and corporate customers, which is translated into the higher -- the better repayment capacities that decreased the demand for further financing. We can see also the situation with the repayment capacities due to this inflow. On one of the first pages, we mentioned that, that PFR is PLN 9.3 billion. So it's a huge amount of money, which was earmarked by our customers for repayment of their loan and credit obligations.

What is also visible in the first half of the year and the second quarter because it is the second quarter, which is responsible for the overall performance, we can see an inflow of funds which landed on the bank accounts of our customers at -- with simultaneous low credit activity in the second quarter, which is based on this huge -- and which stems from this huge inflow of money. Some of this money is deposited on the account, and some of them is earmarked for loan repayment.

What is the result of that? The bank has to do something with that money when using all available instruments. And this is bonds and securities, which is a solution here. And we -- you can see that these are also state treasury bonds and PFR bonds, which are quite obvious instruments. Using the instruments of the National Bank of Poland is also popular. That affects the shape and that shapes our balance sheet, we can see a shift in the paradigm or of the functioning of economy and functioning of the bank. We function in a triangle between the banks, customers and state treasury, which affects the situation.

As Rafal said, the role in the first wave of lockdown, the cut of interest rates was the first thing, and now we will see that this position will be even strengthened because of the public investment in order to boost economic activity. So these are elements which -- and the manner how we adapt to the new situation on the market. It's a significant shift in our operation and in our approach, and it doesn't concern only Poland. We can observe the same situation in all developed countries at the moment, but for Poland, it is quite important result.

Our market share is -- of course, this scheme has been disturbed a bit after the second quarter 2020, which is outside of the normal trend because of this PFR programs. It doesn't surprise some spending activity has been suspended. We could see some withdrawal from the investment funds in the second quarter is also visible on the slides. So we will not treat them as a permanent trend, but we updated the whole scheme in that respect because the sole traders were included in the corporate segment, according to the recommendation that we launched.

I think that this presentation is too -- becoming too lengthy. So maybe we will provide you with the slides on our activity. And now we will move over to the results themselves because I think that they are of your interest. Despite the fact that they are boring and good, as usual, but there are a lot of elements, which are new because of the pandemic and because of the COVID.

[Bozena Graczyk, executive]

As far as in the first quarter, we couldn't see any effects of pandemic. In the second quarter, we can see some COVID activity in the profit and loss account, so it doesn't come as a surprise that our net interest in income is lower by 33% than the year before. After the first quarter, it was PLN 583 million, it dropped by 26% year-on-year. For sure, at this moment, we have to point out that despite the significant cut of interest rates that we could see during the last 4 months and growing regulatory costs, our results, as Brunon said, because the provision balance sheet is higher than 8%. And this is a success that should be stressed, and we owe it to high increase of revenues.

What stands behind drop of our profitability is the risk cost, the change of macroeconomic outlook. In this quarter, we estimate that due to the macroeconomic outlook, it increased our cost of sales significantly by 128%, and that stems from the functioning of IFRS 9 and the construction of our models. And this is a result of quarterly modification of macroeconomic parameters which shows high volatility and uncertainty. At this point, let me stress that according to our policy, we updated our portfolio provision. We increased the cost by PLN 10 million, including PLN 7 million, which was reflected in the cost of loan risk and the rest in the operating cost. This increase of provisions, CFH provisions cost that we have about PLN 55 million of these provisions, which represents about 6% of FX mortgage loans, which is worth stressing here. We have to stress the operation efficiency of the bank. Income to cost is 42.5% in the second quarter and 41% after the first half of the year.

Our ROE adjusted by the provision included in the capital was 10.7%, is 2.2 percentage points less than a year before. This drop was announced by and expected by us and taking into account how we present our ROE because this is an incremental presentation for last 4 months. It is highly probable that in the next quarters, ROE will also be under the core pressure of quarterly changes in the financial results and in the profitability result.

When it comes to the net income -- net commission income -- net interest income, we see a series of interest rate drops which cost that it -- our results drop by 5% and it's PLN 1.99 billion. Nevertheless, due to the fact that we can see increasing business volumes year-on-year because deposits went up by 23%, and loans in this difficult surrounding 9% year-on-year. It showed positive dynamics year-on-year by 4%. And net interest income grew by 9% year after a year.

When it comes to our net commission income, it is 37 percentage points less year-on-year. And this drop of this margin is due to 2 factors. It is due to interest rate drop, which was reflected in the results after the second half of the year. And -- the second quarter and stems from a growing share of our bonds, which is due to overall liquidity that we are observing in the structure of our balance sheet.

Let me stress that our securities portfolio in our balance sheet increased by PLN 19 billion, which represents 55% from the end of 2019. These 2 elements are a natural consequence of pandemic and its aftermath that affects us.

Let me point out the results showing our average cost of financing. In the second quarter, it is 12% percentage point higher. This change is due to the increase -- decreases in the corporate portfolio, one amendment was -- one change was implemented in the 1st of April and second on the 1st of June. As Brunon Bartkiewicz mentioned, we are expecting further interest rate drops for -- on retail portfolio. And the first change was implemented on 1st of July, it was from 57 to 55 percentage point. And the second one will come as of the 1st of September.

We have to mention our loan to depo ratio, which dropped by 20 -- 82%. I don't know

[Audio Gap]

increased loan to depo ratio, which before pandemic was about 90% during the last 4 months. It decreased down to this low level. It is due to our over liquidity that we are observing in the corporate segment and on the retail portfolio. But it's a systemic over liquidity, which is reflected in the result and on the overall performance of our bank and other banks, which is clearly visible after the second quarter of this year.

Clearly, the natural consequence is boosting our investment, especially in debentures and government bonds. Also, due to the financial results of banking tax.

Let me just mention a new phenomenon the banking sector will show, in particular, in the fees and commissions income. It started showing as of Q2 this year. And it is positive or negative result of the so-called credit liabilities modifications. I mean changing the repayment schedules. In the second quarter, it's mainly an effect of credit moratoria. IFRS 9 requires the comparison of the credit NPV before and after the modification. And the difference is shown as a one-off difference in the P&L.

And this past quarter, it was minus PLN 7 million for ING bank. Of course, depending on the volumes of deferral -- or payment deferrals as part of the government moratorium, the result will be, for sure, negative because it will mean losing the interest payment over 1 quarter. So far, it was a marginal phenomenon, not visible in the P&L, but after the first and the second credit moratorium, it will grow.

Speaking of the details of our fees and commissions income, in the second quarter, it amounted to PLN 344 million. It was lower by 4% quarter-on-quarter and 3% year-on-year. As you can see in the breakdown, the drop is mainly because of the lower fees on the credit products. The graph is showing that the seasonality of income also matters. The income is much higher in the first quarter and much lower in the second.

On the other hand, there's COVID-related negative dynamics of the corporate loan portfolio, which dropped by 5% and lowered the commission. In the second quarter, we also have slightly lower commission on FX loans.

It's due to 2 things, somewhat lower customer activity on the FX markets because of lower trade exchange. And on the other hand, the higher stability of exchange rates. So with smaller volatility, we had lower results in this position.

Also, please note the fees and commissions income half year on half year. A major contributor to the growth of our commissions was largely related to capital markets, in particular, the brokerage activity. Thanks to high activity of our customers, it considerably boosted the income. Let me just stress that our customer assets on the brokerage accounts grew by 50% quarter-on-quarter. And in the second quarter, we opened 117,000 new brokerage accounts, and it was the second largest result on our market.

We also saw a major growth on -- in insurance income, which is also considerable for commissions and commission income. The said income is directly proportionate to the retail value of our credit portfolio.

Continuing with expenses, the cost in the second quarter amounted to PLN 641 million. After the first half year, it grew 7% -- 9%, sorry, the regulatory cost, as we already mentioned in the previous quarter grew by 19%. The anchors are quite flat in this past quarter across all categories.

Half year on half year, we saw 7% growth in costs as a result of primarily higher personnel costs and pay rises as we signaled during the previous conference and the cost of regulatory development as well as IT projects.

Also, it's worth mentioning that in Q2 expenses, we see savings on lower marketing costs, business travel and event costs as well. But also due to additional expenses related to protecting the bank and its employees against the epidemic as well as IT costs.

Speaking of expenses, let me point out that the pandemic caused a lot of gyrations and the profitability of the banking sector as included, but it won't stop us from pursuing our projects be it regulatory or development related.

Over the last 4 months, we might have changed the pace of the projects and the priorities, but -- the priority wise, but not much has changed.

Now continuing with cost of risk, the write off -- in the second quarter was PLN 309 million, including PLN 150 million additional write-off related to macroeconomic parameters. As you can see in the slide, over the past 2 quarters, we opened PLN 296 million of provisions, directly related to potential aftermaths of the pandemic, whereas PLN 25 million pertains to retail and PLN 271 million are corporate segments.

As you know, every quarter, we've been reviewing our macroeconomic scenarios. If you wish to learn about our assumptions we used for measurement of potential aftermaths in our modules, please be advised to consultant the notes in our financial report on that.

Well, what more can I say? We already know all about uncertainty discussed by Rafal and his intervention. Well, we might -- it might seem that the situation as of late June was more stable than after the first quarter, but there's still a lot of uncertainty which can translate possibly into volatility of the economic results according to our models and the quarters to come. But no matter, the credit portfolio behavior and macro indicators, in this past quarter, we performed 2 managerial adjustments as a natural element of the volatility we are -- and uncertainty we are living in.

As you can see, our models are built based on the history of the portfolio and customer behavior. So they might not have captures or elements we are experiencing now. So what are the 2 adjustments? On the one hand, we raised the provision costs by PLN 13 million in this quarter. This is a provision on the portfolio covered by credit moratorium. It is because we assume that naturally enough, after the ramp-up of the credit moratorium and some customers will restructure. And as I mentioned before, although EBA guidelines allowed us not to move the said credits to stage 2, still following the situation, the portfolio behavior and anticipate all risks, we set up PLN 13 million provisions.

On the other hand, considering the major influx of resources from PFR, protecting the liquidity of our customers, we lowered the corporate provisions by PLN 42 million in order to reflect the large scale of support programs, which should naturally boost the credit risk understanding of our customers.

So taking out the macroindicators and managerial adjustments, as you can see in the slide, the cost of credit risk across all segments doesn't seem to show any negative trends. And it's comparable to the cost of risk we had before.

Now quickly about the portfolio quality. The share of irregular loans and the portfolio, naturally enough after all that happened and after the reduction of the portfolio grew up to 2.3. It's still a very good quality, considerably better than the banking sector average. And it also shows the direct relation between macro indicators and the structure of the loan portfolio.

You can see stage 2, our share in gross portfolio. It grew considerably, especially in the corporate segment. Currently, the share of corporate loans in stage 2 is 14.8% and grew by 5.5 percentage points as of the last quarter. And just like in the previous quarter, it's a very direct result of adjusting the macro indicators, mainly the GDP dynamics impacted the PD, the negative PD pushes loans from stage 1 to stage 2.

On the other hand, the provision coverage, the provisioning ratio in stages 1 and 2 has dropped. About pushing loans from stage 1 to stage 2, the said loans are still very good quality. So we can talk about some fresh cases with very low PD levels for stage 2. That's why the provisioning ratio has dropped. When it comes to stage 3 provisioning ratio, we cannot see any considerable changes. The situation is still safe.

Speaking of capital adequacy, our TCR, considerably grew in Q2 up to 17.7%. And it is because of 2 things. On the one hand, the profit share and lack of dividend, 92 basis points. But on the other hand, RWAs. And let me just mention 3 main phenomena, which had impact on the situation this past quarter. This past year, we changed the methods into the standard method of risk calculation, it's caused some savings. But looking at advanced methods and certain changes with the pandemic period, it allowed us to change the risk weight for euro securities from 20% to 18%, which means about PLN 1 billion savings. We also used a semisupporting factor, which lowered the mean weight for the portfolio -- for the whole portfolio. We generated some savings. Having said that, our TCR is at the safe level of 17.5% as of late Q2.

Thank you very much, and we are now looking forward to your questions.

[Iza Rokicka, executive]

Well, despite the interesting times we live in, we try to live a normal life and without stopping any projects on the situation -- addressing the situation of our customers. Please be advised that you can ask your questions directly through [indiscernible] link. We already have some questions asked. Let me try and group all their questions according to the topics.

So let's start with the net interest income. And the impact of commissions on the said result related to prepayment on cash loans.

[Brunon Bartkiewicz, executive]

It's in line with our expectations. The impact is quite small. As you remember, our guidance was the impact of PLN 30 million to PLN 40 million on the net interest income within 1 year. And it well fits into this schedule.

[Iza Rokicka, executive]

Continuing this topic, do you keep the previous guidance on the dropping interest rates and its impact on net interest income and net interest margin?

[Bozena Graczyk, executive]

Obviously, as you remember, in the current report, we listed the impact between PLN 295 million and PLN 305 million. It was based on our knowledge back then, considering the uncertainty and the profitability curves.

Frankly, it's very hard to back test it after the next period. As a matter of a principle, we still assume that this is the same impact we discussed in the previous current reports. The CEO pointed out that the adjustment to our dropping interest rates will happen over the next quarters, mainly in the passive side, deposits mainly.

[Iza Rokicka, executive]

So is there a potential to up-adjust the interest margin? And could you please also comment upon that?

[Brunon Bartkiewicz, executive]

Well, Bozena already commented upon the stage 2 of reduction of saving accounts interest, which, as you know, is a major element of our -- and stable element of our balance sheet. Please note that dropping interest rates result in drops the opposite margins. But my understanding is that the question is mainly about, I think the margin on lending. I think it's way too early to comment upon that, especially that you know and you can see that we are now practically in the breakthrough stage.

So as a very high growth of lending by the first quarter of this year, dropping in March drops in the corporate side and weakening of the growth rate in the second quarter. And according to what you know and what you'll see, clearly, late June and July are a different story now.

[Iza Rokicka, executive]

So there's one more question about the net interest margin. When do we expect some downturn on the interest margin?

[Brunon Bartkiewicz, executive]

We will not comment on that because the margin shapes the prices and the future.

[Iza Rokicka, executive]

Okay. We can see some questions with regards to net commission income and whether we are willing to change the fees and charges schedule?

[Brunon Bartkiewicz, executive]

No reasonable bank will not say that they don't predict, and they will not affect the fees and charges schedule. So let's pass over to the operating costs.

[Iza Rokicka, executive]

The number of branches dropped by another 3% quarter-on-quarter, given a decrease year-on-year. What is the perspective in midterm? And also with regard to these questions, what will be the consequences of behavioral changes of our customers that we've mentioned, are we -- are you going to liquidate part of the branches?

[Brunon Bartkiewicz, executive]

Ladies and gentlemen, I will call out some public data. For about 8 or 9 years, we are informing you that we are reducing branches, and we will cut the number of branches until the year 2020. And we implemented and delivered on the plan year-on-year and it will be clear to you. And secondly, the number of branches is adopted to the business models functioning on the market. But of course, we will not comment what will be the target value because this is an element and some trends are temporary. So please do not force us to give that answer because everything has been transparently and clearly put down in the papers and we don't want to hit headlines.

I commented on the number of transactions. It is quite precise. So let me emphasize that when we talk about branches or we talk for simplification because we assume that this is the same economic entity set up for the same business objectives and it's not true. Over the last 20 years, we've been under transformation of our branch center adaptation to our business objectives. And these business objectives have been constantly changing. So please do not talk about the number -- total number of branches because the number of branches translated to the layoffs and the effects -- employment effects. No. This is simplification, and it is not our objective. The function of our branches as in any other sector due to the change in the customers' behaviors and due to the market surrounding, of course, it will happen, and it will be speeded up because of pandemic and because of the COVID-19, which acts as a catalyst. But we are not going to comment on concrete plans in that respect because they have not been defined yet.

[Iza Rokicka, executive]

Okay. In terms of costs, what share of headquarters employees are at home office now? And are you going to redefine the manner of working?

[Brunon Bartkiewicz, executive]

Currently, for branches -- for headquarters, we don't use that word headquarters. So -- but we treat them as branches outside of branches. It is about 29% of employees, which are -- who are on home office, but we came back. We increased the number 29% -- sorry, 29% of employees work in the office. So 71% are on home office, but starting from the 13th of July, we increased the number of employees working in the actual office in the so-called headquarters from about 9%. And in the middle of pandemic of the lockdown, it was higher. We had a 0 phase, then the first phase came, and now we are in the second phase of adaptation of business models. And the second part of this question, whether we assume that home office work will become a permanent element of our operations, we say, yes. Does it exhaust the topic and the question, Iza?

[Iza Rokicka, executive]

I think that at this point, it is sufficient. So if there are any other questions or any other aspects that you'd like to mention and open to all these questions. So that's all in terms of operating costs. Let's go to the risk costs.

What level of the cost of risk is expected in the second half of 2020 and whether we expect the increase of the cost of risk after the grace period for repayment of loan will stop?

[Brunon Bartkiewicz, executive]

I think that everything is in the presentation.

[Iza Rokicka, executive]

So let me ask another question. What are your expectations in terms of the quality -- portfolio quality in the second part of 2020 and in 2021, would mainly expect that the cost of risk will be higher than expected? Or is there additional risk of increasing of cost of risk in 2021?

[Brunon Bartkiewicz, executive]

I'm afraid and I sadly have to admit that our policy in terms of disclosing data on -- with regard to the future is quite clearly defined and operating functioning well for a dozen of years. So I will not disclose an information.

[Iza Rokicka, executive]

Then the volumes now. Decrease in retail loans in the second quarter is deeper than the market average according to the MBP data. Are you going to put this appetite for consumer loans? The new sales in the mortgage, especially seems higher than the market average. Does it stem only from the drop in demand or ING limited it in any way? What was the level of acceptance of credit applications in comparison to data before the pandemic?

[Brunon Bartkiewicz, executive]

We are not publishing this data, but when you are observing. I will not refer to our data themselves, but to the market data. I think that all of you can see that in the second quarter, we have a group of banks, which limited its activity in that respect. And the second group of the bank, which didn't follow them. When it comes to this activity in the second quarter, you have to be patient and wait for the market reaction. The bank adopts its operations flexibly to the level of uncertainty and the scale of uncertainty present on the market. The bank has been doing so every -- any time, and we'll continue to do so. You, at this point, you get excited about the element with regard to the retail market and I fully understand that. But on the other hand, you are not excited about the information about -- we disclosed about 2 years ago that we limit our activity because of the coming recession, and we follow different regimes in that respect.

But let me point out that the level of adaptation to the market surrounding is constant and ongoing and commenting that with regard to the period as short as one quarter, it's not a good measure, and it's not a good base for any conclusions. Our lending activity was -- we needed them because we wanted to increase loan to depo ratio, which was commented by Bozena. So in the mid-term, the conditions or the challenges, of course, will remain unchanged. From the perspective of 1 quarter only, it is impossible to jump to any conclusions about anything in fact.

[Iza Rokicka, executive]

So last again, with regards to loans. How the bank is -- what is the bank's approach to financing the sectors, which were the most affected by pandemics, for example, restaurants, travel agency, international transport, theaters, event and concert companies and sports clubs? What is the outlook for volumes for the second part of the year and which sectors will be driving force on the market?

[Brunon Bartkiewicz, executive]

I think that in our documentation you have all information disclosed and that gives you a deep insight into our plans. Not to go to details among the segments that you enumerated in your questions, I think it is stressing that our level of exposure to those

[Audio Gap]

Page 55. And I think that it is quite informative, and we are not going to disclose any other information we present -- we disclosed this data for you to draw conclusions from that. Of course, it is obvious that we are keeping ourselves up to date, and there are some sectors which we consider as too risky.

And when it comes to financing of hotels, for example, which were ranked highly on our list or several types of restaurants, the level of uncertainty and the difficulty in constructing any idea about their creditworthiness causes that we do not put burden on this. We do not increase exposure to these sectors. So we follow the principle to be ahead of the market and to predict. So in terms of hotels or restaurants, which are not chain restaurants, in particular. I think that these sectors are -- will not be preferred by us, and they are not preferred by us as long -- and they haven't been prepared by us as long as I can remember. And as you probably know, I have a good memory.

[Iza Rokicka, executive]

So we almost exhausted the list of questions. So if anyone is interested in anything, please let us know. And if our answers were imprecise, you are invited, and you're free to ask about anything.

And another question with regard to PFR, if corporate deposits increased, and it's visible also in our banks, can we jump to conclusions that support from PFR for companies is sufficient or it's just a short-term result?

[Brunon Bartkiewicz, executive]

Help is significant. Whether it is sufficient, to be honest, it depends sufficient for what? And everything depends on the formulation of assumptions and definition of objectives of the delivery on that. I think that time will show whether they are sufficient and for what they are sufficient or not, but asked the question, it's imprecise. It is very difficult to provide you with sufficient answer, sufficient not to reduce employment in companies, we will see.

And let me go back once again to operating costs, the majority of reporting banks surprised to the upside. When it comes to operating cost in administrative and the cost of employment. And can you see a place for yourselves there? The bank has been implementing long-term strategy and increased remuneration of employees, and we haven't changed that policy due to pandemic because we focus on mid- and long-term perspective. And we didn't want to adapt the cost of operations to short-term phenomenon, which we have observed.

[Iza Rokicka, executive]

So we exhausted the list of questions. We give our audience another 3 seconds for any questions, if they haven't been asked yet? No questions. I'm surprised. Everything was clear. So no questions. Thank you very much for your presence.

Thank you very much. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]