ING Bank Slaski SA

WSE:ING

Earnings Call Transcript 2018-Q3

[Brunon Bartkiewicz, executive]

The presentation of the results of the 9 months, so 3 quarters. I would say, as we were joking, we don't have any surprises, so maybe just brief information.

As you could see and we've seen your remarks from today's morning, so we may wrap up with the results are not a surprise to you either. And I think we will be able to leave you more time because during the last conference, it took 1.5 hours, including the questions. So we will shorten up our presentation and then you'll have more time for questions, so that we can end up in a 1 hour.

So key element of watch list, it is -- which is crucial to us, it is that we managed to keep very high dynamics of lending. And this year, of course, the market is much different than it was years ago. So it sped up, but what we already pointed to you for a few quarters now, the market sped up, but the number of market players really declined because we have much concentration on the market. And now on the market, you can see and you can feel it, that the biggest players are playing this game and [phase] that up as follows the economy. But evidently, we can see in terms of ratios. But let's call it the runner-up's group is really staying behind -- is lagging. And you can see that the group offset and 8 banks really perfectly dominate, prevail in the market, and in some elements of the market, this growth actually is even smaller, but we're not to discuss it because you are already aware of it.

A few key elements we are very happy that we trespass this border of lending of PLN 100 billion because this is some threshold to pass, this PLN 100 billion of lending. We're also happy, and I don't know whether you've realized it actually, but half of this portfolio was triggered over the last 5 years. So this [is this line], this threshold, which we always kept in view, with stable growth -- sustainable growth this path -- this race is to follow. So we have this effect -- this increased effect. So when we compare the values of our lending portfolio, 2013 and today, it's up by 50%, with a portfolio -- the similar portfolio, so this is how it goes.

As we said from the very beginning, the key element of having such good ratios. So lending increase, which is really noticeable this year because it's all year around actually. So it's one in the history, we've never had such increases in net turns. And this means that production -- because reverse volume, it means that production really stood up. So this year, we are for -- increase of PLN 13 billion, PLN 14 billion and this is obvious. Of course, considering the decline, which always follows in December, why such big numbers? This is because of what we talk to you for a few years now, but because of lending, the bank tries to function in many areas.

And in these areas, in which we try to be present and try to operate really strongly manner, so diversify our action in terms of lending in this period, so at present, actually all these engines are pretty strong. And, of course, some are worse. For example, we see this year slower pace of growth of lending in the mid-sized components. But this year, actually, the biggest ones actually stood up. So having many engines in the pool and as you can see, not all engines are used because some are exited. And we're not that active in all the market segments. For example, [ Serb ] government units of electricity sector just to refer to a few elements of our lending policy. Still with the diversification of lending causes the growth to be as they are.

In third quarter, besides keeping the trends -- the basic trends, so growing the number of clients, we are also to have it as a special year here, but all the other segments actually worked good. And the other element -- distorted element is the one, which you probably also noticed. So it's slower pace of growth of asset under management. So mutual funds, I mean, here. And this actually really combined [ or fused ] with the growth of deposits on the retail part. So that funds, which really outflowed from the market, we have net growth, but outflow was significant and they removed the funds to the saving accounts.

So in terms of margins, for example, we still see this trend. And I think you can see it explicitly now, but the practice of stable deposits in accounts -- deposit accounts, which entails higher core deposits in current accounts, and you can see the results. So the growth of PLN 12 billion year-to-year of deposits at our bank, 50% it is in current accounts. And we pinpointed that and we emphasized how important it was for volatility of interest rates. But as we are emphasizing the base scenario assumes that interest rates changes -- interest rate will not be changed until 2020. But the way of change after 2020, we are balancing of 2 scenarios today. So up and down scenarios because they are like-levered in our base scenario when we see the portfolios.

The significant factors of some novelties in Moje it's not some, it's just important to us, Moje with the further growth of multicurrency accounts, the FX exchange platform. And you've recently asked about the sales of fixed rate loans, which is also combined in terms of strategy and further reaching other clients and establishing mortgage bank. So that our agenda is just because we expected [indiscernible], but this quarter, we will have the license to start operations of mortgage bank, and we follow the schedule. Of course, our signed agreement with KNF so Polish Financial Supervision Authority, but with [ lawsuit ], we were a bit surprised as well because it -- actually, the values are surprising to us because they are quite high, not at the of the third quarter. I'm sorry, but we are sitting on your bullpen, something can happen, okay, just off the record, my comment. Now it's not about the bullpen, it's rather about the quality of your trousers to tell the truth.

So coming back to mortgage loans -- fixed mortgage loans. So today -- so after September, after the end of September, okay, so in October, I mean, this data, we have them totaling PLN 176 million. Isn't it [ estimate ], yes it is. So we didn't expect much response on the part of clients, but we have it. We can see it actually.

And this client response actually seeing this medium core deposits for these loans it is the clients who are more affluent. So upscale clients, upscale mortgage loans where this fixed rate loan is more popular -- it's rather popular. We don't hear that other banks have the same experience, but we can see that it is not shocking data or really changing that trend. But as you know, we are accustomed to launching something, so drip by drip, we have it and then we have really a fuel.

About the results, Bozena will say a few more comments.

[Bozena Graczyk, executive]

We -- also on Slide 8, we show you some elements of the lending company to show to you that our lending actually for 10 years now, it is over the growth rate of the market. And on this slide, you can also read about this PLN 50 billion over the last 10 years, so it's pretty easy to follow. But we are trying to show to you that our stability of lending growth is much higher than stability of growth of this lending portfolio in the market, and this is our intention. This line chart are approximate, but for the year 2012, where our production -- our growth was 67%. So 2/3 of the total lending portfolio in Poland, it will not come again. It will not recur.

And with this stability, the market which speeds up, then our share is falling down, but still the growth rate is higher than that of the market. And, of course, it translates in the market share.

And on Slide 9, you can see this part concerning our market position. And when you see both household loans and corporate loans. And here, we have on the big aggregated data. So I do think that when we just forget quarter-to-quarter increase and year-to-year increases, and we see the perspective, which I always encourage you to do because that's how we perceive market developments, so that trend is really explicitly set and it is easier to catch up with because this situation of the sped up growth or deviation of this curve of the last period. So after 2013, let's say, like that, then I think it's pretty clear and obvious and they don't require any comment because it is difficult to comment open figures.

[Brunon Bartkiewicz, executive]

Before I give the floor to question, just a few words. We give you some images from Run Warsaw event. And this Run Warsaw event, it's really particularly important to us because to some extent, in our organization internally, it is like run ING. So really popular, in fact, among our employees training for it, preparing for it, taking part in it. So now for this Run Warsaw event, we had more than 35,000 employees with families taking part in it. And active marchers and runners, it was like 18,000. So from among employees, so it is really important event and that's why we show you some pictures, some images But I think it's more like propagating of our institution, our bank because we're really proud of our organization of our employees to be vertical to attend such events.

And a few words about the segment mentioned before, a segment, which is one of our top priorities. So development of our activity among the smallest entrepreneurs. The subsegment as we treat it, it is a part of our retail hard detail. It's not corporate. And we call them entrepreneurs and mainly entities running, so sole traders and the entities without complex structures, simple entities, but we believe that they are and will play a more and more important role in the economy. And we do believe that both the market and us, we underinvested both entities, which have specific needs.

And these specific needs are shown are on Slide 12 to you, and it's only the intro. But mainly these are the entities, which do not specialize in services running the administration. They don't have accountants, they don't have CFOs, sorry Bozena, to say that. They don't have the risk head. They don't have a person managing their cost or controller. They don't have the invoice runner. And we do believe that it's our duty to support the subsegment so that this subsegment of our economy is not behind the development of what is happening, for example, in the U.S. or in Western Europe.

So to attend to those entities in a proper manner and stand up to the expectations, we have an entity, but not an entity being professional entity. So you have to need to transfer the border of offering services. And these services, not the ones called 5 or 6 years ago banking services only. To these entities, it is also important to have invoicing service, booking costs, preparing tax returns, capacity to [ capella -- convey ] resources around the agenda, with all the service we have, the agenda for both entities are -- is very important.

And when this agenda can be really combined with [ payday ] invoice, if you look at the liquidity problem in the 32nd week of the next year, that's what the client needs. That's the information they need. And this is the element to be used to bid a cluster of some services, which we developed gradually to help the clients -- within our online platform to help the clients find a response to the services they actually need. So that's why you'll find all these elements on the slide.

In many areas, thinking about these entities makes us come into the area serving more corporate entities or individual entities. So from thinking from this group of entities we started with, we thought that was the reason to form it where these clients are not to generate traffic and the scale, but it's for them, what is most important, what they need most.

This is the solution. Because as you know, many Polish entrepreneurs, and telling upright, is within 30, 50 kilometers of the business office where they work. And it cannot generate and will not generate or ensure the capacity to survive in the market. Because many of them in many sectors is just too small area of working for those entities. So those entities, as we can see also in statistical data, they have some challenges to face.

On the next slide. Therefore, we also show what we've managed to implement for this group of clients, what are our achievements -- tangible achievements. Please note that there are many of such clients served by us. That's the net growth. Our target is approximately 30,000 new clients. Of course, we wish all those entities will be successful, but we're expecting that there will be a massive growth of such entities, in particular, sole traders.

And our solutions are directed to address the needs to sole traders mainly. So the IT specialist, for example, cooperating who have many clients. So that was in brief. It's an important segment just brief information for you, but we believe that the number of solutions that we've been generating within this cluster that we're trying to develop for them, we believe it will be developed -- interesting to observe.

So the current aspects of our business activity, you can see them on the slide, so I won't repeat them. But what you're more interested, probably in financial results, I regret you've learned also about what's important to us. So Bozena, I will give you the floor.

[Bozena Graczyk, executive]

We've already heard your comments about our results in morning. You thought -- you've gave us neutral assessment as regards to our results after the first -- the third quarter. So no surprises. Let me just briefly summarize our main achievements and results.

So looking Slide #18. Our net results after third quarter was PLN 379 million, up by 2% quarter-to-quarter and after 3 quarters up by 4% at level PLN 1.74 billion. It's worth emphasizing that we continue to maintain a high-efficiency cost-to-income ratio at a stable level after 9 months -- at a level 45.5%. So we'll discuss dynamics. We believe that's positive results. We've continuously high return on equity at level of over 12%. So I believe that's one of the best results in the banking sector.

Looking at our net interest income, Slide 19. It's up by 4% quarter-to-quarter and as much as 11% year-to-year. It can be attributed both to great results in lending portfolio growth and the changing liabilities mix, where our share of retail deposits and current accounts are growing, which possibly translates into the net interest margin. It went up by 5 basis points quarter-to-quarter and reached 2.98. Of course, that's also the result of 1 day more in the quarter. When adjusted for a number of days, it went up quarter-to-quarter by 1.5 basis points.

I would like to draw your attention to the fact that our loan-to-deposit ratio has been growing, and the growth is quite intensive. After the third quarter, it's 90% and that's highest level ever for this situation. So that's a result of acceleration in terms of lending, which is higher than the growth in deposits.

Looking at net income on fees and commissions. After 9 months, it went up by 9%.

Looking at the results of all the banks that have already the results that's also the highest result in the banking sector so far. And also there are many sources of those positive increases spots of growth. In every area of fee and commission income, we've been growing. It's been a solid growth.

What happens to our current income? So last time, we've mentioned one-offs due to settlements with our current partners, which surely contributed to the growth in the second quarter when adjusted -- the results adjusted for the third quarter without those one-off effects. So that's the level that we've been maintaining at satisfactory level. And it should be mentioned, that we've made provisions for the settlements when it comes to the proceedings regarding [ derivative ] and medium -- the proceedings of the office for competition concern of protection. The total costs -- operational costs, it was PLN 577 million in the third quarter by 4% for quarter-to-quarter and 9% year-to-year as you can see on slide.

And the cost curve is also due to the increase in general and administrative costs, PLN 17.5 million. And also what we've mentioned already last time, there's been a number of different development projects, both in the area of IT and certain regulatory projects and their costs, depending on the progress of those projects are also included here. And we believe that our cost dynamics is getting comparable to the cost of other banks that are simply growing, both of those costs and the costs of salaries. And with costs of the third quarter, we've consumed all the pay raises for the last year and for this year. After 9 months, this cost growth is 10%, and it's getting more and more comparable to the trend of our banks as they also rise the salaries for employees.

Now the risk costs. We've discussed it in detail during our last conference. Our risk cost in the third quarter was lower by 23%. It was PLN 144 million. The result also includes the favorable impact of sales of Stage 3 receivables, that was -- in terms of the trends in the comparable periods of last year, it was around PLN 21 million. So I would like to emphasize that for us sales of receivables is a recurring activity year-to-year. So for us, this change of risk costs is not of the one-off nature.

And also please note that the requirement of IFRS 9 that the banks should separate the result on sales of receivables to be amortized because, of course, there's been a debate how it should be displayed, but we do it -- we display it in the income statement in risk costs.

When it comes to our retail banking segment, as I've mentioned that last conference, please do note -- look at the quarterly risk costs after implementation of IFRS 9. So that's why you've got the comparison after 9 months of 2018 and 9 months of 2017. And this risk costs was 34 -- 54 basis points, that's actually even lower than in the comparable period last year without IFRS 9 at that time. And, of course, we cannot avoid this variable nature of the income statement, the same goes for other banks.

When it comes to corporate segment, then no sale of the portfolio here, but greater coverage, greater provisioning in Stage 3, which is due to several individual cases where following the change of the restructuring strategy, we've increased the provisions for several cases in Stage 3. And also we've got some new cases in Stage 3 in this quarter.

Lending portfolio quality is presented on Slide 23. Performance and share of the nonperforming portfolio is much lower than in the banking sector. It went down to 2.8% versus 3% last quarter, which is the result of the sale of nonperforming portfolio.

If we look at the coverage ratio of assets in Stage 3, then it went down in the retail segment to 70%, that's due to the sale. And on the other hand -- in the corporate banking segment, it went up to 54.8%. So in anti-bank trust key growth that's in total 59% and the coverage ratio of assets in Stage 3. Still let me emphasize that due to penalty interest, this cannot be compared well across the sector.

The coverage of our assets in Stage 1 and Stage 2 is the equivalent of what happened this year after implementation of IFRS 9. After third quarter, that's 3.80, and it went up slightly with the constant coverage of assets in Stage 1 due to intensive lending portfolio in this quarter -- intensive growth of the portfolio.

When it comes to capital adequacy, described in Slide 24. Our consolidated total capital ratio did not change quarter-to-quarter. We've allocated parts of our profit from the first half of this year and also consumption due to growth of lending portfolio. As you know, from our current reports in October this year, we took subordinated loan worth EUR 100 million. And it will increase by 55 basis points our ratio. So that's the pro forma estimate.

[Brunon Bartkiewicz, executive]

So that would be it when it comes to the summary of our results. So now time for your questions. Just please let's stick to the time frame of 1 hour. Please ask questions with the microphone. If there are any questions online, then we'll also answer them.

[Unknown Analyst]

I want to ask about the results of the margins. For me on lending portfolio, there was not an improvement maybe that's by fault of my Excel file. But a small contribution to the margin growth in deposits. So what was -- what happened there?

[Brunon Bartkiewicz, executive]

Understanding -- let me answer. Yes, actually, the drop of margins in the credit market is much lower than expected by everyone on the market, taking into account this structure, but the margins on the credit market -- of course, they have been dropping everywhere, but the mix of assets has been changing. So we are -- the year '19 favors an improvement in margins. Yes, there's been slight improvement in credit margin, but that's also the result of what has been happening in terms of the competitors on the market and the growth of individual lending portfolios. But taking into account, mix of liabilities, then the contribution of liabilities of deposits is visible and that's significant. If you take into account that this share of deposits has been -- in -- of course, deposits in current accounts has been constantly growing. And also what we've mentioned last quarter, so [phasing out] of this promotional effect savings accounts. It's -- we've discussed it for 5 or 6 minutes last time. So I think this is exactly what you've expected and what you can observe now. And also inflow of transferring client's funds from participation units into bank accounts. And that's particularly visible in this quarter more than we would expect it. Now savings and loan-to-deposit ratio, and for a very high growth, from 83 to 90, unprecedented for a long time in [my introduction of the scheme] or never seen in the history actually. So was it the target -- was it -- has different plans?

[Unknown Analyst]

We've been mentioning it like every quarter for the last 3 years, where is the threshold? You've been -- you've had the comfortable equity position.

[Brunon Bartkiewicz, executive]

Well, it's enough to calculate with loan-to-deposit ratio to 93%, 95%, and the difference comes from different structures. There is no pressure, no constraints in terms of regulatory requirements. So depending on the profile, loan-to-deposits at 93%, 95%. If not higher, then it's quite comfortable. Because we've already exceeded 90% as Bozena mentioned. Of course, there are some days when we still have 89%, but on certain days, even 91.7 -- 91.8, which means that we, as a bank, are also trying to relearn how to feed our liquidity in terms of short-term instruments. Because we're getting close to this threshold where we can no longer say that we've always had the liquidity. It's still the safety threshold. It's around 93, 95. I think it's kind of universal approach from the banks, which are highly dependent on non-core deposits. So those with the strict maturities. So in our asset and liability measurement policy, we've been reducing our dependence on deposits, that most of your current term deposits, they're slightly different. But when you look at our deposit portfolio, it comes close to 110 or even more, PLN 1 billion, but level of term deposits. So it don't mean term deposits among corporate clients that last just 3 or 4 days. But let's say, mass deposits 3 to 6 months. So if I remember correctly, that's below PLN 2 billion. So please have a look at LCR ratio. That's a very big difference with such a loan-to-depo ratio. Our loan-to-deposit is still over 120 depending on the day, depending on the structure, but, of course, going south. So the regulatory requirement is 100. So there is still some space for development of loan to deposits. But as every prudent stable bank, we don't want to get close to this regulatory requirement. It's clear that liquidity is the core element of bank management, which we sometimes forget, thinking that, that's a credit risk. But in our understanding, the liquidity risk is the most important.

[Unknown Analyst]

Yes, but I was not intending to criticize you, by saying that you're approaching something. It was just observation, okay, but not making fun, this growth improves the margin, yes?

[Brunon Bartkiewicz, executive]

Okay. Yes, it has a different characteristics as well. So loan-to-depo ratio lowers also our, let's call it, encumbrance from being in the securities market because we buy the securities to fill in this ratio. So the difference between commercial balance and the balance sheet values is pretty low, and it was really much reduced. When you want to see it thoroughly, just see the dynamics of growth of lending and total balance sheet. And then, you will see that our balance over recent 3 years, it was just lien-ed. So less leverage in this traditional approach, which also makes us be less dependent on debt securities, which are in the market. I don't want to imply, but we have something to Polish risk because these are sovereigns mainly, but they are encumbered with some defects. For example, they are valued mark-to-market. So we also reduce our exposure to rapid changes to valuation, so pricing of those papers. So when we have distortions and when we have wins, then it can occur. And we survived, but not really in the far past, just not to forget it.

[Unknown Analyst]

While I have this microphone in my hands, I will ask one more question because we devoted some time last quarter also to discuss the prospects of perspective for lending for 2019. And the bank growing 14%, you cannot see any problem there. But even at your point, you can see that this bar -- sales bars are really declining. And you can see -- and the p data that the loan sales actually is slowing. And being ultra-positive a few months ago, seeing this market next year, are you still this positive considering new volumes and the demand for loans? Or has your approach changed?

[Brunon Bartkiewicz, executive]

No. We remain optimistic, and I was trying to show it to you. So I will repeat without discussing the details of future predictions, which we don't do as you already know. The dynamics in nominal terms in this year is much higher than assumed. And optimistic. Yes, we remain optimistic about 2019 as you know from our previous presentations, our optimism. Okay. Let me wrap it up differently. Looking forward, we are very optimistic about 2019 and full stop here.

[Unknown Analyst]

Second half 2020 is still a question mark -- big question mark?

[Brunon Bartkiewicz, executive]

I pointed to it when I said, and I hope it was a straightforward that we're not eliminating the scenario, but 2020, will see interest rates falling down and not going up. And I do hope that you also seen it -- recognize it.

[Unknown Analyst]

[ Connor Pleseski ], Bloomberg News. I have 2 questions referring to your optimism for 2019, which lending product will develop fastest, big corporates or mortgages? Or will it be balanced as you like it most? And second question when we see fee commission income, then you're among few banks with increasing such fees from the equity capital market. We talk about distribution of the mutual participations. And is it possible to keep this rising trend quarter-to-quarter showing the [indiscernible] poor situation of the market? What is the trigger of this growth on third quarter? And the question to one-off, what is the acquisition in asset managers in Poland?

[Brunon Bartkiewicz, executive]

So you have 3 questions.

[Unknown Analyst]

Yes, But 2 group of questions.

[Brunon Bartkiewicz, executive]

When we think about 2019, I would say, as you know, we are cautious about trends and observations of subsegments of economy. And I mean here, corporate clients. But in 2019, this is the year, which I like because every market will make it possible to retain good sales of loans. But I do hope that I have explained already and now I will repeat it once more. It doesn't mean that it will be growth dynamics higher than it is this year. Yes. Now straightforward, really set clean, which I don't like, actually, to do. Second, fees and commissions on the mutual assets management. So capital market saw mid-term as the whole market, we do believe that income will not go up, it will be the other way around. And we expect the guidelines of PFSA office in this respect. And we do believe that, as everybody does, some verification will occur here. Margins or one-off income are pretty high. You can also see it when you see the final cost of a Polish market versus the cost of Western markets. So they will be under pressure and they will go down. But our approach is not to change. And our strategic approach, I mean, it is still to operate on this mutual funds market to be very active there. Because we see it as a crucial element of long-term saving approach, which we, our society, Polish society, needs. So putting straightforward, even if we are to earn less on it, then we have to do that because that's what market needs. And we want to do it in the most effective manner possible. So for many quarters, we were showing you the data that the main element of our strategy was to build, for example, systematic savings programs using mutual funds and the offer targeting mass clients, which, okay, needs more long-term savings, should have this perspective of 4 years plus. And this is what the market needs. So fewer, smaller earnings from the affluent people, but better stable development of those people with capacity to save long term. So that's why there's a relative stability of income in that respect because of this mix, which we apply here. Because deviations, it is one thing. But the below processes, it's the other thing. The third question I'd like not to remember it, but still I do remember it is, I know I can count on you here. I would respond really using my practice of many years of responding in that manner. So unfortunately, we are not able to comment on it.

Microphone please.

I'm sorry, but I cannot hear the question not up to the microphone. But you do not think that we are an entity thinking strategy on -- about a short-term perspective. We are patient. Patient is positive, yes. But negatively say, I don't know how to say it. I have 1 word in mind, but I'm not going to -- yes, we're not to be thrown away from the market.

[Michal Konarski, analyst]

Michal Konarski, mBanku. I have a question pertaining to because you're just open to different things and dynamics of lending can be bit weaker next year. And my question is whether -- when trade is to happen, could we count on considering higher dividend -- I mean, dividend payout?

[Brunon Bartkiewicz, executive]

Yes. You went really far to the future, which we'll not comment upon. Yes, but theoretically spoken, theoretical considerations, yes we can do about forest, yes. Precedent, theoretically for such considerations. No, I don't have -- I don't have sentence. I don't have my opinion on it. I'm sorry, I cannot respond to it -- to you more precisely. In many cases, I don't try to respond with precision, but I do try to do it. But I will refer to our principles of dividend payout. When we overcapitalize, then this.

[Michal Konarski, analyst]

So maybe a question. What is your opinion about the solvency ratio? And the appetite for the growth of the future for the next year?

[Brunon Bartkiewicz, executive]

As you have noticed, we are trying to stick to keep the ratios' levels and the buffers considering other requirements of PFSA. So the new dividend policy in some proportions, so that we keep some freedom, some space, some room to operate. We are now at the satisfactory level. And I do hope that the operation, which was reported in the current report, so the sub-debt origination also gives you some thoughts maybe not said like that, but lets you think that when we need it, we are not afraid to use this tool.

[Michal Konarski, analyst]

We -- for capital and exposing bank to other expenses?

[Brunon Bartkiewicz, executive]

No. We are not following that fashion. We are not just fed-driven, no.

[Unknown Analyst]

So a few technical questions, yes, to pose right now, now, okay. This transaction of NPSA really impacted the interest results?

[Brunon Bartkiewicz, executive]

No, it didn't.

[Unknown Analyst]

And the issue of the durable medium, what was its impact on the fees and commission? And which item is it presented?

[Brunon Bartkiewicz, executive]

In the third quarter after the decision settlement with [ UOK ], we made provision of about PLN 30 million, which was recognized as negative adjustment of income result for cards. So that's why this result is really incomparable.

[Unknown Analyst]

Yes, because dynamics quarter-to-quarter is known, but year-to-year, this was my question to follow. Okay. So that's the root cause of it. Okay. So this drop, okay.

[Jaromir Szortyka, analyst]

Jaromir Szortyka. I have a few questions, but let me start with 2 questions. You were mentioning 93%, 95% threshold of LTD. Do you understand it correctly that for you, 95% is this hard threshold not to pass, so unprofitable threshold? Or is not very hard threshold?

[Brunon Bartkiewicz, executive]

Yes. We are far from this LTD of 95%. You noted that last quarter of this year -- because this is how it is to have growth of loan-to-d, we sped up lending, but we slowed down the deposits as well. Yes. So as we were explaining to you 3 years ago, 2 years ago, 1 year ago, we slowed down with deposits, but at the same time, we didn't hamper, but we developed deposits being current accounts. When you see the year 2018, then this lending growth is pretty high. The deposit is a little bit higher than we planned because of distortions in the Asset Management market. So Asset Management market, thank you very much, Bozena, which slowed down our growth in the loans-to-deposits. But we are not that far away from this ratio, which we're reaching. So it's not like that, that being near the threshold, top threshold, it's not like that it is just the pressure of the market or a revelation of some kind. It is in our management. So please accept my word that, to the threshold, we will not reach the threshold because that's not what we want to do. We needed to start to activate our deposit instruments, which in our opinion are weaker in terms of core deposits approach. So we would have to use the funding, short-term funding really volatile corporate funding, which is much more expensive today because that's how the market really manages the loopholes. And we had to enter the bond market, which we are not really interested in today. Or we would have to have that face of offering term deposits which are expensive because term deposits today as you can see, are much more higher than the rational thinking and functioning of the lending market. When funding on term deposits 3, 4 basis points per year then it is like an aberration approach. It's an element, yes, it's some conversion but you cannot really earn on it because you have the areas to enter, which are really exposing you to risk because you are lending production and you need to be exposed to higher lending risk to have such funding costs. And we don't want to reach the threshold and we're not reaching the threshold. So balance sheet management as of one of the primary things, which Bozen and I are paid for, please believe me loan-to-depo of 95% will not happen in the bank. Just believe me, it will not happen. Unless something terrible happens. But something that could lead such situation, I don't think anyone would like to see it in Poland. I can imagine several scenarios but we don't want them to materialize.

[Jaromir Szortyka, analyst]

One more question. I wanted to ask about fixed rate loans. Maybe it would [develop] somehow? Could you give some comparable data or comparable risk for clients? What's the difference for the client when it comes to basis points between fixed rate and variable rate?

[Brunon Bartkiewicz, executive]

That's in the offer. It's public information. In a moment, Iza will give you the data. But other elements concerning the criteria of taking the credit risk do not differ. The product's the same, just different fee scheme.

[Jaromir Szortyka, analyst]

And also I wanted to ask what are your plans observing of last 2 quarters, any major transitions from Stage 2 -- from Stage 1 to Stage 2?

[Brunon Bartkiewicz, executive]

Of course, it's been dynamic. IFRS 9 [calls for reclassification] from Stage 1 to Stage 2 and the other way around. And when we look at the movements in between, these are quite high volumes but in net terms, we've got growth on these items. And this is what we have expected now in how IFRS 9 functions. But it's approximately 10% of our portfolio. That was the opening balance and that's still the same figure after 3 quarters of 2018. So no major change here. But I must also mention that the banks differ in terms of the reclassification criteria from Stage 1 to Stage 2. And that's reflected in the growth rate of risk costs quarter-to-quarter and the percentage of share of Stage 1 and the entire portfolio. I understand that you want to ask whether we have been seeing some trends of deterioration, some sectors of the economy, well you must know about certain areas because they have been described in the press. There is an element of distortion in the markets because there are no major visible trends. Last year, we've mentioned that we're a bit afraid of the enterprises that are too much dependent on tenders for example, and what can happen to the resources and inflation in terms of fulfilling such contracts. I believe that you observe now, that there has been some adjustments that can also lead to some distortion when it comes to functioning of such operations in terms of electrical -- electric power. Because for sure there will be an increase in costs for business entities which is a threat. And also phasing out [the effects] of developments when the entities are prone to certain shocks in terms of the penalties for functioning in the VAT schemes. Not as many as there used to be, but surely you must notice that there are still some individual cases of penalties. But no other trends that we have been observing in terms of the adjustments for the current situation. And still we emphasize that we're after the

[Audio Gap]

and that requires a different approach. In terms of differences in interest rates in mortgage loans that's 50 basis points more in terms of fixed rate loan.

[Jaromir Szortyka, analyst]

Now the question whether you have been preparing for any issues and whether it has been somehow arranged within the group, how it will look like. And at the bank level.

[Brunon Bartkiewicz, executive]

Yes. Of course, to answer, the 23rd. That's the days for all the institutions and that the requirements cannot be built within a short-term perspective, that's a strategy that we need to build. That there is no complete set of regulations that the entities will be able to use and the basis for the calculation of [ MIR ] requirements. So and the potential -- the -- potentially at the consolidated level mortgage banks can be exempt from this obligation when it comes to the structure within the group. This information has already been disclosed previously in the current reports. ING Group has agreed with its regulator, the [ SBA ] approach for all the entities except for Poland because including Poland in the single point of entry in terms of the issue and the approach to resolution, it would require the approval of the Polish Financial Supervision Authority. So we do not have it and we will not have it, at least for now according to our best knowledge. But you take part in conferences of Bank Guarantee Fund so I think you know it.

[Jaromir Szortyka, analyst]

Just a question about costs. The assumption for 2019 after 3 quarters this year, we've got 10%, and FSA data show that there is 5 plus -- plus 5. And would you think that the costs will rise in terms in 1-digit figures?

[Brunon Bartkiewicz, executive]

Well, as you know, we do not comment on future events. Still this year, but also somehow in 2019, I will see the effect of our salary raise policies. Our salary raises are much stronger than at our main competitors. That's also due to the fact that we have been experiencing a period of organic growth. While it's not true for other -- for our competitors because mergers entail very serious, there are many cost optimization actions, and that's why it is [ deserted ]. So we want to -- we're trying to adjust the structure of our cost to our growth. And that requires some adjustments. And they -- these, they will take place this year and also next year. This year majority of banks made a salary raises once. We did it twice. So in the fourth quarter, the dynamics year-to-year and quarter-to-quarter will be different because these are political decisions. But we're convinced that with such growth rates and such growth rate of -- some change of profile of our operations, we need to give proper remuneration to our employees because expectations are high. And the headcount has been dropping in our competitors while it's stable for us. We are this kind of bank as we've always said, like a stable, not very interesting, everything has been growing certain pace. So our capacity is adjusted to the growth rate of our production. If we accelerate, then not everything can be consumed by digitalization and process optimization. So we got the adjustment of salary or wage pressure. We heard the opinions that we're accelerating inflation in this regard, but we believe that's reasonable, that's justified. But with the lower number of FDs at the bank, the bank is now twice as big as it is used to be 5 years ago. That's got its consequences.

[Jaromir Szortyka, analyst]

Now, the question about costs. Is it your ambition to maintain the budgets for new projects -- the budgets for a new projects at the same level [year 2]? That's like PLN 40 million?

[Brunon Bartkiewicz, executive]

This is the kind of question that goes slightly too far. So here, I cannot comment on this.

And of course, I do apologize for that. I think there are no more questions here in the room or in the Internet. So thank you very much for your participation in the conference. Thank you.