ING Bank Slaski SA

WSE:ING

Earnings Call Transcript 2020-Q3

[Piotr Utrata, executive]

Welcome. I'd like to welcome you at our conference, which summarizes the outcomes of the third quarter of this year. They will be presented by Brunon Bartkiewicz, the CFO -- the CEO; and Ms. Graczyk, Vice President for Finance with us; investor Relations, and myself, my name is Piotr Utrata. I'm the spokesman for the bank.

Handing over to you, Brunon.

[Brunon Bartkiewicz, executive]

Thank you, Piotr. Welcome. We welcome you warmly and hope you are all in good health.

As we do every quarter, I'd like to open with a statement that this quarter was rather boring and another one in which we continued to implement overall vision and approach in developing of the bank. However, this quarter, I have some difficulties with making that statement.

This was certainly not a quarter, which was -- which could be put into the boring category, but we did achieve the targets we've set for ourselves, and we did not lose the medium- and long-term objectives, in other words, achievement of our vision.

When we prepared ourselves for this conference, we thought that many questions would be about the behavior of our customers, and the primary question of whether the digitization is a topic that is likely to continue -- or a phenomenon that's likely to continue and stay with us. Obviously, there are other topics and themes that I'd like to undertake as well, but you have been discussing that with many other banks, I'm sure. And many banks here in the market have presented their Q3 results.

So allow me to go back to this main objectives, so that we understand the structural topics, such as cyclicality and the art innate to our business. So whether we have pandemic or otherwise, we -- it is our task as financial institutions to actually go through these without problem and focus on the clients, our primary concern.

Our time is limited, so let us walk you through the customer behavior topics. Let me underscore again, and I will leave the numbers for you to review, but we are indeed facing a stepping up of certain phenomena. The pandemic is a catalyst or enzyme of the changes we are actually facing or observing over the years, but the rate at which behavior of customers coming into the outlets has really speeded up.

And these are changes that we have been discussing. In other words, switching into the electronic channels, people who feel comfortable in the electronic channels has increased this year. Specifically 2020, the early months, the initial 6 months, we've observed as the increase or stepping up of the rate of switching into these channels.

And we see, indeed, the mobile banking coming to the fore in the customer behavior. And the customer is indeed able to conduct all of his business -- banking business via mobile device, so something that we looked at with a smile in the past.

In other words, how is the customer able do -- to see everything on a small screen are no longer a concern. And as we mentioned that, the processes we observe and discuss -- have been discussing for a long time are elements of continuing transformation of our institution adjustment for these changes, in other words, how is this digitization acceleration indeed having to do with the -- with our existing brick-and-mortar structures.

So if you look at Page 5, you can see the adjustment of actual outlets has been a process that is a decade-long process now for us. Let me state that in terms of lack of cyclicality, and we prepare -- we need to build, let's say, adjustment. We create a structure that is resistant or resilient to changes.

And I'm sure you're asking yourself whether we are planning any radical changes, vis-a-vis the pandemic. And the answer to that is no, because we have been continuing these changes quarter-to-quarter and year-over-year. And in my -- it is my conviction that we do not need urgent needs there, and we will continue following or tracking the changes in behavior of our customers and clients.

Please note on Page 6 that whenever we talk about automation and changes in behavior of our customers, we look at the retail customer cohort. And you will see the same paradigm is also taking place in our servicing of the corporate banking clients.

In those areas, we also see a number of changes in the behavior of persons who represent these corporate entities who perform these transactions, apply for transactions and so forth. These -- with us via mobile devices, so this is worth underscoring. And I would state that once more in our digitization strategy. We have followed this through in all our customer segments and structure.

Now moving on to the third -- 3 -- 9 months and the third quarter results. This year, indeed, we have seen the lack of -- let's say, radical lack of insurance, various interest rate cutting and the need for response to customers' difficulties has changed our map rapidly. We have inflow of funds coming, particularly on the corporate accounts, coming from protection, coming from support institutions. And these funds have been coming to the deposit accounts, so these liquidity funds from the state aid, these entities have less capacity to draw loans or -- and repaying of the loans.

Customers are that -- their debt -- their propensity to draw debt has been very limited with the degree of lack of stability. They are not keen to draw that loans. So the slowdown or, let's say, postponement of investments by the corporate sector are not just something that can be ascribed to pandemic alone. We have noted that, over time, as one of the key elements in terms of loss of use of the economic growth for building up of economic advantage or strength in the longer term, for the future.

So in today's landscape, companies are drawing on state aid measures, awaiting for various funds from transformation programs is something that is likely to be decisive into the coming years in terms of competitiveness of Polish economy long term. We do realize the momentous changes that are coming through and the decisions we took -- undertake in connection with that.

The bank has been engaged in these state aid programs, and we have been particularly engaged in passing on the PFR or the state Polish development funds to corporate customers. And you've been looking at the numbers since the morning, so there aren't any particular difficult elements to look at and surprises there in terms of operation of our basic P&L aggregates. But I'm sure you will have additional questions on the -- both the revenue and the cost side.

On the revenue side, we have the expected hit on the interest income side and the various legal requirements that have come, so there is a delay on the asset side, on the liability side, on the retail. We need to be now informing with even greater, let's say, speed. We've been relying on core deposits, liquid deposits, in other words, current accounts and much less on fixed time deposits or investment-related. Hence, the reduction of funding cost takes time because we do not have this clear cash flow rotation based on fixed time deposits, but it's pretty stable by that measure, and we've actually stressed that in the past.

On the loan side, there has been extensive diversification of the portfolio, and the dynamics of the portfolio has been actually quite good. In some areas, of course, stronger dynamic, growth dynamic; in others, less so.

You, I'm sure, pay much attention to the credit moratoria. Page 11 actually looks at this. And Bozena will discuss that in detail later, so let me just give you a brief intro into that.

The key elements here is as follows. The nongovernmental moratoria, but at this stage, also the state aid related, vis-a-vis portfolio, they remain at a relatively low level, but they are also relatively longer term. The main point here is that we -- those that have been applied for by our clients in April, May, they are -- they were typically 6 months. So September, October, they are falling into.

Today, of course, we're looking at closure of the third quarter. But in October, we are observing interest -- continued interest in these moratoria and movement into statutory from nonstatutory. This moratoria as applied for even today compared to the nonstatutory, which we've experienced in the second quarter of the year are quite different, different numbers altogether.

If I am to speak about the future in some way, which I avoid to -- we are likely to see growth of the statutory credit moratoria applications. Even if they grow by a factor of 2 in 2020, the primary moratoria are those that are now banking sector adopted measures rather than state aid driven.

As far as the portfolio of those that have been terminated, the moratoria, it's too early to say in the fourth quarter, we will clearly see a majority of these moratoria coming to completion. But there is no threat there, we believe. With conservative approach, we have been provisioning for that just to make sure that we are prepared for any -- for future.

Looking at the balance sheet, we can see the changes, rapid changes in the overall business. The inflow of deposit funds, slowdown of the lending activity and domination of liquid assets or safe assets, if not liquid, and bank has invested there in order to achieve stable and well-structured balance sheet. Looking at the yield -- yielding assets, we have moved to a lower margin asset. So overall margin is lower.

Page 11, we can see a pretty stable growth of loans over the market. If you look at corporate loans specifically, you -- this is not surprising that our, let's say, participation in the stage PFR support funding, 10-plus part in the market. Our market share continue to be looking good in linear terms.

We have focused over this period to cater to the needs of our clients, even in the second wave of the pandemic, which are -- which is pretty fearful. We have not detected any panic, let's say, behavior in our clients' behavior. We've not seen it in March, and we don't see it today.

But in our direct operations, we are focusing on our staff to make sure that they can operate safely and the burden of work on a remote basis, for example, and continued inflow of fearful information is something that we focus on. And it's our staff who are cared for, and we hope that they can pass that on to our clients and customers who will, we hope, find answers to their dilemmas and questions.

And to ensure continuity, we've not undertaken any rapid decisions or changes in our behavior, and this is not the best time to restructure. The level of fear is high, both among the staff, but also generally in the country.

We continue on track with our key development objectives, and we do not see threat to any changes in the, let's say, customer services that we have planned for. They are mostly electronic channel related, and we don't see many needs for deferral of the implementation of these solutions. So we deliver these new solutions to serve our customer base better, and we continue to be on track with the plans that we have set for ourselves in this respect.

And I will -- let me stop at this introductory part of our presentation, and I'm sure you're interested in the numbers and the results. And to drill into that, I'll leave that to Bozena, and acts -- I've taken up too much time, so please catch up, so there is more time for questions.

[Bozena Graczyk, executive]

Hello, and a very good morning to you. In these dynamic times, let me summarize the dynamic changes in our financial performance for quarter 3 and explain where these changes come from.

So very briefly, in quarter 3, our net profit amounted to PLN 440 million, or 6% higher than 1 year ago. After 9 months, our net profit is PLN 1.024 billion, dropping by 15%, vis-a-vis the comparable period of previous year.

And I think what is really worth noting is what we had that before, despite considerable decline in interest rates and regulatory costs that were particularly perceptible in previous years. Our results before the reserves has been higher by 6% year-on-year. As you have seen from our results, this has been driven by a rising income.

Our profitability since the beginning of 2020 has been under heavy pressure from risk costs. In this quarter, very much as in all other quarters, we have seen the impact of macroeconomic forecast that are embedded in our models and IFRS 9. In this quarter, there has been an increase by PLN 43 million.

Since the beginning of the year, the macro impact is PLN 337 million. That's the cost of risk for 9 months of this year. And let me take this opportunity to say that in this quarter, we increased our provisions against Swiss franc mortgage loans by PLN 20 million, so the total provision is PLN 75 million, which is 8% of our Swiss franc portfolio.

Looking at our financial performance, let me emphasize high operational performance, which in adjusted cost to revenue ratio amounted to 44.7%. According to the trend that we have observed since the beginning of this year, our ROA has been declining. Our ROA adjusted by MCFH is 10.6%, which is by 2.6 percentage points lower than 1 year ago.

The interest margin -- or interest income has changed a lot during this quarter in terms of amounts and trends. So our interest performance has been influenced by the dramatic cut on interest rates this year. It has improved by 3% quarter-to-quarter, thanks to lower interest costs. They declined by 31% quarter-to-quarter, PLN 64 million this quarter.

And as you know very well, this is a consequence of the declining account percentage interest rate for this bank account. So in the first step, we declined from 50 to 25 basis points and starting from the 1st of September to 5 basis points.

Looking at interest income, they declined by 2% this quarter. And this decline took place, despite the fact that interest on customer dues remained unchanged, and our credit portfolio rose by 2% quarter-to-quarter. So the declining interest income is due to interest on securities.

So on the one hand, you see that the share of securities in a balance has been -- balance sheet has been rising, even though interest on securities dropped by 10%, despite the fact that quarter-to-quarter, our portfolio rose by 6%. This is related to the fact that the share in the balance sheet has been rising, but it's relatively lower in terms of the profitability of the portfolio, vis-a-vis loans. And there is a decline in profitability of those investments because the securities that we purchased with higher rates are coming to maturity, and they're being rolled over to securities with lower percentages rates to follow the change in interest rates. So these 2 factors are largely behind our lower profitability of our interest income, and you have our quarterly interest margin dropping by 2 basis points, hitting 2.84% at the end of the quarter.

In the context of our previous comments, you shouldn't be surprised to know there is this loan to deposit ratio, which dropped, vis-a-vis the second quarter only slightly 79.4%. But take a look at the year-on-year dynamics. This ratio declined by 12.6 percentage points.

If we are looking at major changes, then corporate deposits rose by 38% and retail deposits by 14%. And during the same time, the credit portfolio rose by 7%. So this clearly explains the behavior of this factor, which reached a historical low.

And a few words of comment about the result on commissions. This year, this rose by 14%, PLN 50 million quarter-to-quarter. What is particularly visible is increased income in corporate sector, an increase by 15% this year.

The retail segment also went up at a similar rate, 14% up. Although nominally speaking, it's PLN 15 million, and half of that refers to the card results.

The increasing performance, when we're looking at the components on customer accounts and currency exchange transactions, there are 2 main factors. First of all, it's the effect of our customers being more active and prefer carrying out more transactions during this quarter, and higher fees for bank accounts and also a result of different changes in the fees for high account balances. The quarterly improvement on our card result is a higher level of transactions in the retail segment.

Let me just tell you that the number of card transactions in this quarter rose by 35% quarter-to-quarter. The number of cash withdrawals rose by 29% in other ATMs. And our own ATMs, it has risen by 16% quarter-to-quarter. So there is a bounce back effect, a rebound effect after the lockdown, which ended at the end of June.

When we talk about retail customers, we should really mention the brokerage activities result, which improved by 12%, thanks to a 7% increase in the number of brokerage accounts and a high increase of -- in the assets accumulated on brokerage accounts.

And here, I would like to mention the 12% of increase of inflows with participation units, and we achieved the level of last year after 3 quarters of this year. When we think about the fees and commissions, it was the result of the second quarter that was mostly negatively burdened by the effects of lockdown, which translated into lower revenues in quarter 3, looking at our performance and the structure of different fees and commissions at our bank. We see that we have rebounded in this quarter.

And please take a look at what has been happening for the 9 months since year beginning because these figures show a trend in changes of fees. They have risen by 9%. And I think, virtually, in each category of these revenues, there are 2-digit increases with the exception of card payments or card fees, but this is related to the one-off settlement with our partners last year, which is not happening in 2020.

And a word of comment about our operational costs are those costs rose by 4% this quarter and 10% since year beginning, reaching a magical figure of PLN 666 million. And what I think needs to be commented on, in anticipation of your questions is, of course, that PLN 21 million up in personnel costs, and there are a number of reasons behind that increase, especially the more real provisions against our annual salaries and also increase in employment.

When you look at these data on the slide, this quarter, we increased our employment by over 100% -- over by 100 people or FTAs, sorry, not percent. And looking at the structure of our employees, we had a declining share of our employees in our distribution network in favor of our headquarter staff, mostly IT, and all kinds of regulatory projects.

As for other cost items, let me draw your attention to the increase in cost related to marketing and promotion. In quarter 3, we had a marketing campaign that drove those costs.

And a word of comment in order to understand the growth, and I would like to say that the costs have been generally increasing. And when we look at cost drivers, please do notice that the regulatory costs have risen by 30% year-on-year, and our own costs have risen by 7% year-on-year. And they are in line with the increase in revenues.

And a word of comment, which I also shared last quarter. So the pandemic, of course, has caused a lot of turbulence to our profitability and the profitability of the banking sector as a whole. But we have not halted our projects.

Our projects are development-oriented, regulatory-oriented, and we have tried to adapt to the situation. We sometimes change the pace of the projects, but never the coverage.

As for cost of risk, I remember in the comments, there were some conclusions that our cost of risk in this quarter seemed to be low, so a few comments on that for you to get a better understanding. The quarterly cost is PLN 145 million. PLN 43 million, it's an additional write-off related to our macroeconomic assumptions. And this year, we created PLN 339 million of additional provisions related to the pandemic.

Looking at the structure and segments, then PLN 56 million is the retail segment and PLN 283 million is the corporate segment. As you remember very well, our quarterly process is the revision of macroeconomic scenarios. We revised them and review them every quarter.

So as for those provisions -- those forecasts, we made an adjustment to the unemployment curve. And when you look at the impact of the previous quarters there, the impact has been slighter, vis-a-vis what we saw in the previous quarters of this year.

Another important element that we would like to draw your attention to, and we do it occasionally, is that apart from quarterly changes, we continuously work on developing our models that we apply for risk management and also provisions calculation under our annual back testing processes and validations of our models as well as a result of market changes, including, not surprisingly, changes in customer and consumer behavior. We adapt our models, and this might, of course, influence our cost of risk.

This quarter we changed the retail segment within cash loans. We modified that SICR threshold, which is a definition of a significant change of credit risks, which drives loans from Stage 1 to Stage 2. The SICR level went up. And as a result, we reduced the revaluation reserve write-offs by around PLN 55 million. So the PLN 145 million also includes the PLN 55 million decrease -- million of decrease.

And in this situation, and apart from the model and the model revisions, we are looking at our customers and their behaviors. And we're looking at different factors that we should include when we assess the adequate level of reserves and provisions.

And in this quarter, much like in the previous quarter, we decided to make a number of adjustments outside our models. Firstly, we created 62 million worth of provisions for loans under active nonstatutory moratoriums, of which PLN 41 million is the retail segment and PLN 21 million corporate segment. And let me just tell you that this is not a new phenomenon because the first adjustment happened in quarter 2, that was PLN 13 million.

And secondly, and which is a new element of cost assessment risk -- cost of risk assessment, we also made provisions against statutory moratoriums. In this quarter, we adopted a conservative stance on how to approach statutory moratoria.

This is in response to the recent agreement during the supervisory and banking panel, following which the loans that are under statutory moratoria, because of a factor involving job loss, this triggers a reclassification of these lines into Stage 3.

This is a very restrictive interpretation, however, by definition. And in principle, we should put those loans into Stage 3, unless the bank has very detailed information that might -- may help those exposures to remain in Stage 2. As a result of this change, we create PLN 22 million of additional write-offs for a portfolio of around PLN 60 million. And of course, in addition to that, the cost of risk also involves PLN 20 million of provisions against FX loans and Swiss francs. And I think this gives you a foundation of -- to understand what happened in the cost of risk at our bank.

Looking at the quality of the loan portfolio, the Stage 3 loan qualifications has remained stable. There are just slight movements there in the corporate portfolio. And we have slight improvement in the quality, so that applies to the largest corporate clients.

In the retail, 16 basis points increase, however. If you look at the statutory moratoria, and its treatment has driven an increase of that ratio by 11%, that's a key explanation of this.

Looking now at the Stage 2 categorized loans, you can see retail particularly decline, which is really a result of the requalification of SICR. Looking at the first, second and third stage assets, the coverage -- provisioning coverage have -- levels have increased somewhat.

Now looking at the capital adequacy now, at the end of the third quarter, that stands at -- the total capital at 18.64%. According to the EBA requirement, we need to be back -- requalifying the portfolio at a given balance sheet date, resulting from changes occurring after that date. So this is something that we've been reporting after second stage at 17.43%. Now, this is 18.38%.

And there -- the change there is the result of recognition in the capital of the changes, so it's not a change of -- within that took place in the third quarter, but rather adjustment of the second quarter results. So we've made these adjustments according to IFRS 9.

And of course, this is the interim transition period in application or implementation of the IFRS 9. And this is particularly visible in Stage 2 qualities.

Now pure third quarter change in PCR, that's increased by 0.23 -- or 33 basis points, and SME support factor is the main aspect here as a response to the COVID developments.

So that's a brief summary of third quarter results, and we have saved for you a lot of time for the Q&A.

[Piotr Utrata, executive]

Yes, there's a number -- a great number actually of questions. As traditional, I will group them -- have grouped them thematically. And let me start by a question of [ Mr. Krasovski ] relating to the second phase of lockdown.

What are new actions and crisis fighting actions undertaken by the government? How will that impact the moratoria or loan stimulation factors? How is that going to impact the banking sector behavior?

[Brunon Bartkiewicz, executive]

This is a broad topic, inexhausted -- inexhaustible. I have stressed the element of uncertainty and that, of course, is linked to the question that no one has an answer to, what is the likely scale of pandemic in Poland. And hopefully, this -- the most pessimistic scenario is not going to come through.

So in addition to the resilience, let's say, a feature that this bank has been clearly demonstrating, we clearly can expect a deepening of the lockdown with the linked sector-based statutory assistance or moratoria programs. So this is going to be maybe phased into sector and subsector measures. And the government has been announcing -- making announcements in this respect. This, of course, impacts some of the elements that our bank will participate in.

Other elements are less predictable for us. Various elements of moratoria that would not create forbearance on nonstatutory basis. There is no space for these elements.

The staging into Stage 3 is not something that's going to happen. Whether we will see expansion of these statutory moratoria programs, I cannot say with any assurance.

Moving on to the interest income questions, what the -- what is the result of the returns on the -- returns or down payment -- paying down of the loans -- early paying down of loans on this. We've looked at this last quarter, and we said PLN 30 million, PLN 40 million impact. When we looked over the 9 months of this year, we believe that this is same impact -- same scale of impact and is likely to be at that level over the entire year. So this is what you can look into.

[Piotr Utrata, executive]

The interest rate reductions or cutting has impacted the market. How do you assess that? Was that prediction of PLN 220-plus million pessimistic?

[Brunon Bartkiewicz, executive]

It was adequate to the conditions that prevailed at that time, is the right answer to that, but we took into account the assumptions on the volume of various -- and changes undertaken by the bank in terms of our interest policy -- interest rate policy. So this is -- this was difficult -- this is difficult to apply to the different changes that have taken place over the year, so there are assumptions that come through or otherwise. And we have really not been much of mark. This was a fair -- true and fair assessment at that -- for that time, but backtesting is really adjustment to realities. And that's not the best science, by the way. Taking into account the multiplicity of assumptions, it's difficult to back test after just 2 quarters of extraordinary changes in the market. So this volatility of various volume, let's say, factors or contributions is -- makes it difficult.

[Piotr Utrata, executive]

Looking at the interest margin in the third quarter, there's a question of decline there is lower than in comparable banks, Polish banks. What is the underlying reason for that? And can we assume that interest income in the third quarter is the lowest that you can get to in the course of the year?

[Brunon Bartkiewicz, executive]

It would not be elegant to compare ourselves with anybody. This is something for you to do and not ourselves.

If I am to point to, I would say, cost of funding, structure of that, and I've mentioned that in my statements. And also look at the fact that balance sheet structure may vary from bank to bank in terms of distribution and size of the assets available to them. And the changes are driven in different directions.

Are we comparing ourselves to overall interest margin or credit margin alone? So this is -- there are various portfolios, various ages of these portfolio. So focusing too much on quarter-to-quarter results, in this respect, is not reasonable. I understand your analytical intentions there, but to draw conclusions from comparisons of 1 bank to 2 over a period of 1 or 2 months based purely on the margin development is likely to be the wrong direction to go.

Let me also focus your thinking on the following. The most recent adjustment in interest income we've introduced in -- on first -- September 1. So this is pretty recent.

If someone has a strong core deposit component, and if bank adopts a decision to change the rates as of, say, 1st August, or September 1 compared to a quarter that's 3 months, then the change will look dramatic naturally.

[Piotr Utrata, executive]

Thank you for this additional point because there was a question of whether we have room for reducing funding costs further.

[Brunon Bartkiewicz, executive]

Look at the funding costs, so the answer to that is simple if you look at that. We don't need to comment any further on that.

Note that, and I will add this, the bank's position is that there is no space in Poland to introduce negative interest on the liability side.

[Piotr Utrata, executive]

And another point on the interest income interim expense. How do you estimate the, let's say, sensitivity of the interest income if interest rates fall to 0 level?

[Brunon Bartkiewicz, executive]

This is no time and place to comment on this. These are purely theoretical discussions, hypothetical indeed. I personally pray for us not to fall into an extended period of negative interest rates.

[Piotr Utrata, executive]

Thank you. Moving on to questions relating to fee and commission income. There are many that are very similar. The commission and -- fee and commission income was volatile.

Were there many one-offs? Do you plan detailed changes in your price table? The income on FX and cards is sustainable over the coming quarters.

[Brunon Bartkiewicz, executive]

So let's address them one by one. Interest income, there are no one-off phenomena. So from this perspective, we are -- and we have been repeating this in the past. We've repeated that.

The changes in our interest -- commission -- fee and commission is the behavior of our customers in terms of their propensity to undertake transactions. And looking at the -- with the lockdown, in the second quarter, there are changes -- substantial changes in the transaction volumes performed by our customers.

Do we plan further changes? You are aware of the changes we've announced, vis-a-vis the table of fees and commissions for both retail and corporate customers. So this is information that's public by now, and you can revisit that.

And the third question was, please repeat.

[Piotr Utrata, executive]

Whether the FX and card-related income is something that's sustainable and could be expected to continue in the further quarters.

[Brunon Bartkiewicz, executive]

The response, effect after the lockdown, in early part of the year. And now with the incoming second lockdown, these income will be -- happen -- will be quite volatile between quarters. Let's illustrate that.

The rates -- the growth in electronic channels has been 20% year-over-year. That's CAGR. What's happened over the pandemic period, which is a very limited period, in debit cards, daily cash withdrawals is PLN 162,000 -- million transactions.

Note the first phase of lockdown. In August, when de facto social activity returned to pre-pandemic levels, social engagement, we've seen over 200,000 transactions per diem. So looking in the incoming lockdown, how much of that is going to come down with the shopping centers being, let's say, locked?

This is unpredictable entirely, even if we were to compare February and April, which was the peaks and valleys of the period. So debit-related transactions is just not -- we are not able to predict, even if we are now into the November. And this is just as a clarification. These are not questions that we are able to answer. Please note how strong the volatility is. The government's decision of yesterday to close -- shut down all of the shopping centers is something that we cannot cater to -- for.

[Piotr Utrata, executive]

Now your brokerage activity, PLN 23 million, do you plan to expand that income? You've -- a couple of years ago, you've shut down institutional customer service for brokerage. Wasn't that a wrong decision looking back? You have no access to...

[Brunon Bartkiewicz, executive]

Well, this was our decision, and we hold on to this, whereas operations of the brokerage house for the retail are highly automated. So whenever you mention about expansion or development of that business segment, the question is, will we invest further deeply into that.

Well, the answer is we have invested deeply into that already, and the outcomes of that are visible. It's the brokerage houses that are able to service high volumes of transactions that are doing well. And in other words, automated system allow that, hence, year-on-year increases in that -- of double-digit increases in that.

Looking at the personnel costs, year-on-year, 118 full-time equivalents have increased. Polish banks have been actually terminating their contracts in the entire banking sector. So these are 3 questions in one.

First, whether outside of the operations that Bozena has mentioned, technology and regulatory, whether we have a decrease in employment, that's affirmative. The regulatory, let's say, requirements has driven 300-employee -- plus in employment, in all the other segments of the banking operation employment or staffing has been reduced. And we have continued with transformation of our staff. But this year, we have held that back because of the -- we do not want to create an undue increasing of the, let's say, uncertainty in the staff. So I've answered 3 questions. The regulatory burden has increased our need for hiring employees, and that's a continuing phenomenon over the years where control and testing and nonfinancial risks and primarily employment -- did they -- KML increased.

In IT, we also have adjustments in employment. Plus bank has changed formula of its operation with external entities, taking into account changes in the legislative environment. We have been -- this is no surprise. As we proceed with automation, we have been cutting headcount, and -- but that's not been happening extensively in the fourth -- third quarter.

Did I miss anything? Moving on to your slides, these slides.

[Piotr Utrata, executive]

A rather detailed question related to one of our competitors. PKO BP within the quarter closed 1/4 of its corporate centers. Now it has 32.

How many corporate centers does ING have? And what are the results of the digitization of corporate clients? What is the impact on distribution channel.

[Brunon Bartkiewicz, executive]

Again, a few components. It is our deep belief that digitization in services for corporate clients is highest in Poland at ING. The notion of corporate center is not identical from one bank to another, and comparing these notions is like measuring the temperature of water with some inappropriate device. And when we are -- when somebody is trying to compare ING to PKO BP, it's like comparing apples to oranges.

[Piotr Utrata, executive]

Thank you. Let us move on to questions about credit holidays or moratoria. So let us begin with a very basic question, which seems that there are some problems here.

What are the main differences between credit holiday statutory versus nonstatutory? And what is the difference in the approach to provisioning in these respects? What are the differences?

[Brunon Bartkiewicz, executive]

Firstly, nonstatutory moratoria, this is a formula of an agreement across banks that was signed and initiated at a very early stage of the pandemic in Poland. Banks just came together and announced that.

In the meantime, what appeared after a few months were EBA guidelines in that respect, and banks followed suit and jointly announced what these rules were pertaining to in order to comply with EBA requirements.

So wrapping up, we could say that nonstatutory moratoria covered both individual customers and the smallest, medium-sized companies that were able to apply for a suspension of loans -- loan servicing and interest and principal, what's the Polish for it, yes, the interest and principal were suspended.

And this fine-tuning meant that these elements were specified -- specifically mentioned, and all these documents are available from the websites of all banks. And certainly, the union of Polish banks has those documents with all of the agreed versions with notification to EBA, which was sent via the Polish Financial Supervision Authority and, finally, applied for.

Banks were granting those moratoria in accordance with EBA guidelines by the end of September. And initially, they were announced by the end of June in terms of availability and then they were extended by the end of September, and the maximum tenure is 6 months.

And of course, within all those agreements and a nonstatutory moratoriums, the bank's offers from the aid program that was developed, all of these offers were received response from the public during the months of great fear of the pandemic, that was March and April and into May. So in that regard, In terms of the nonstatutory moratorium, we have individual customers and also businesses.

The statutory moratorium is a parliamentary decision that was introduced. I can't remember the exact date, but that was around June. And the features are as follows.

So those moratorium refer only to individual customers, so retail customers. That means that payments are suspended, and no interest accrues during the moratorium period, and the period is 3 months. And this program, of course, has been introduced by the government, and this program has not been set for a definite period. So it's up to the government to decide where and when it ends.

[Bozena Graczyk, executive]

Let me just add that it might cover customers who have lost a job or the main source of income. So this is a different definition of statutory versus nonstatutory moratorium, and that would also have an impact on our provisioning.

[Brunon Bartkiewicz, executive]

Let me just continue by saying that the banking moratorium, the nonstatutory moratorium, was notified to EBA, and that's why banks were able not to classify those as forbearance, something that would necessitate restaging of those loans into Stage 2 or Stage 3. So including those lines into that portfolio by 3rd of September prevented them from being reclassified to Stage 2 or Stage 3.

As you remember, from the previous quarters, we looked at credit holidays, and we assessed the risk profiles. And we started off provisioning in quarter 2 for active nonstatutory moratorium.

As for the so-called statutory holidays or moratoria, so that possibility that banks are offering to customers who are losing their jobs, and considering their interpretation that I had mentioned before, the interpretation from the supervisory and audit community under the ages of financial supervision, something that we mentioned earlier, an information was released to public domain.

So the interpretation that is currently enforced is that since the condition for statutory moratorium is a job loss, and job loss is identified, it's a very powerful trigger for higher credit risk or reclassification to Stage 3, which is also set out in the financial supervision recommendations. So consequently, according to that interpretation, statutory holiday should involve reclassification of those customers to Stage 3.

And according to that interpretation, we had certain criteria that were very hard to meet, but they were still possible, where banks could prevent their customers from being qualified to Stage 3, including the savings, for instance, extra income, the creditworthiness of the partners or spouses and so on.

But by and large, we should assume that this is Stage 3, unless some banks can prove mitigating conditions and keep -- and then they can keep loans in Stage 3. So this would be the major difference between statutory and nonstatutory moratoria arising from EBA guidelines and all of the interpretations that we mentioned that were recently released onto the market.

Well, I am sorry that we kind of use that jargon of statutory and nonstatutory moratoriums, and we assume that this is a very well-known distinction. But let me tell you that it's important to remember that, considering the end of September, which is our perspective today. nonstatutory moratoriums, nongovernmental moratoriums are kind of triggered by the banking sector themselves.

We accepted -- for retail customers and individual retail customers, and this is the only way to compare, so by the end of September, we accepted around 56,000 of moratorium applications, and they are coming to maturity. With the government moratoria, it's 1,000. They have been granted since June, and they continue with an upward trend.

So this is, by way of comparison, government moratoria include 3 months of interest holiday and 1 customer can apply for 1 instrument from 1 bank under this kind of moratorium. And they are immediately reclassified to Stage 3, briefly speaking.

[Piotr Utrata, executive]

And another question about moratorium. The extension of moratoria -- the governmental moratoria, does it involve an extension of the portfolio? And which portfolio reflects the highest interest?

[Brunon Bartkiewicz, executive]

Well, customers have the right to swap nonstatutory into statutory holidays, and they have the right to take advantage of those instruments. And in October, we witnessed a slightly higher number of applications from customers for statutory holidays, as nonstatutory holidays were coming to an end.

I think this is quite clearly related to the situation of the kind of increasing lockdown measures in the Polish economy. So that was a response to your question, but we need to reiterate that this is only the retail banking segment.

[Piotr Utrata, executive]

And what is the difference between the mortgage loans and cash loans?

[Brunon Bartkiewicz, executive]

These are not segments. These are products. Yes. And as regards where this interest is higher, indeed, our recent observations show that there is a higher interest for mortgage loans.

And I think this could be related to the fact that customers make sure that mortgage loans are not irregular loans. So customers, whenever they apply for a statutory moratorium for mortgage loans, this should be viewed in the context of customers' attempts not to turn those loans into irregular loans, and that depends on place of residence and other factors. And it might seem that a product, such as a cash loan, is a natural, perhaps more significant product where one could save more or receive a reduction of higher interest.

But we need to remember that the moratoria from the government are not very high in value, as Bozena has explained. And our bank has been provisioning for the potential impact of those moratoria as a symptom of potential loss of ability to serve or repay loans once the moratoria expire. PLN 60 million of exposure, roughly, at the end of quarter 3 and PLN 22 million of provisions for that purpose, we established.

[Piotr Utrata, executive]

So to close down that round of questions on the cost of risk, is the level of risk from quarter 3, can it be maintained in subsequent quarters? And if not then, what would be the leap that you anticipate?

[Brunon Bartkiewicz, executive]

We do not comment on any future developments. Just please consider how many factors influence the volatility of the risk at our bank and any other bank in this country and across Europe.

So any forecasting would really be like fortune telling. So we would really need to make a number of assumptions and give you a simulation.

We have adopted a number of assumptions. But if you ask this question like this, and if anyone gives you a specific answer, this answer would be highly inappropriate because this kind of predictions are impossible.

[Piotr Utrata, executive]

And 2 more questions related to loans. The first one is about selling mortgage loans. Can we expect further decline in the bank's involvement in housing loans?

[Brunon Bartkiewicz, executive]

Our involvement in mortgage loans is, so to speak, and maybe the figures don't show it, but it's very high, and we do not anticipate it to decline.

[Piotr Utrata, executive]

And one more question about corporate loans. How does your bank assess the prospects of lending for businesses and households, considering the demand and supply factors?

[Brunon Bartkiewicz, executive]

Well, I'm beginning to figure out what this question is all about. And let me say the following. I cannot see at all that lack of supply from banks could block the lending and certainly not at our bank. But one factor that is unpredictable is the demand from businesses. And a number of factors and components that would impact this demand among businesses is very large.

There is one thing that I would like to draw your attention to. The demand -- investment demand component, which would create and expand the capacity of investments among individuals. This largely depends on either aid programs from the government or from public works implemented from government funding.

Businesses have a low propensity to undertake investments. And let me highlight that again, they have low propensity to invest in their capacity. And statistically, this has been the case for 7 years.

So the pandemic has actually fueled more uncertainty into an environment, which already was quite conservative in terms of investments. So aid funding could help that, but businesses invest only when they are certain that increased manufacturing capabilities would be -- would have response from the market.

And here, only the governmental projects as clients would really offer our capacity, but banks themselves do not stop their lending. They also read magazines and the press, and there are those comments that -- about banks stopping their lending, which is not the case.

[Piotr Utrata, executive]

Another question about adequacy ratio. EBA proposed that some of the nonmaterial assets, such as software, be taken away from calculation. If these new rules come into force, how much your capital base would reduce?

[Brunon Bartkiewicz, executive]

Well, this potential change for next year, 4 basis points effect would be the outcome of introduction of that change. Bozena is not mentioning percentage points.

[Piotr Utrata, executive]

One more technical question on the interest income side. PLN 129 million of interest costs, will that include the interest deposit cost purely -- pure or plus any negative impact of the...

[Brunon Bartkiewicz, executive]

This is total. So this includes also, if you look at the components of interest income and expense, this in line with IFRS, the presentation of interest and hedging under that item is in line with that. So this is indeed -- this includes the net effect of the interest expense, which includes the liability side, the negative impact of hedging positions.

[Piotr Utrata, executive]

So a more general question, Reuters -- coming from Reuters. Will the sector register loss overall for the year 2021?

[Brunon Bartkiewicz, executive]

Is that so? Did you ask for 2021 expectations then? Frankly speaking, I have no idea, and anyone that would have their opinion on this would not -- I don't know what they would be basing this on, so let's be reasonable.

Hopefully not, of course, because that would mean that the group of banks that are incurring losses would be increasing dramatically, and that would also mean that financial sector stability deterioration of -- with all of the consequences for the entire economy, we should actually be making sure that this doesn't happen or at least hoping that it doesn't happen.

[Piotr Utrata, executive]

A comment to articles -- press articles where customers of ING are mentioned in money laundering schemes. Are there any administrative measures undertaken? What is the current stage of these?

And will bank actually establish any provisions against such a phenomenon? And another question, will the employment levels be driven by the compliance requirements for ALMs?

[Brunon Bartkiewicz, executive]

The answers to both are no and no. The scale of growth in employment has no connection with the topic that you've mentioned. The press information note -- I think I should abstain from commenting on this, but these are difficult to comment on, these topics.

On one hand, this is a sort of hearsay, basically, that someone -- the famous jokes on it's -- we've not been given a bicycle, but someone stole a bicycle. Mentioning names of clients, banks has no right to comment on any elements at client or customer level -- individual level because this is banking secrecy aspect.

So asking for detailed information from us is just not something we can respond to in any way. If there are any administrative proceedings, these are also classified proceedings.

So even answer to the question of whether there is something specific running somewhere is difficult to say. So you're putting us in a difficult position.

Firstly, there is no basis so -- to create any provisions, and we have not created any provisions. We will be informing you should we be in position to establish or be in need of establishing.

[Piotr Utrata, executive]

Isn't Bank Spoldzielczy interested in any takeovers considering the consolidation of the sector and the attractive low pricing of banking institutions in the market?

[Brunon Bartkiewicz, executive]

Let me repeat something that I've been saying for a long time. We have no difficulty with consolidation processes in Poland. We have problem with banks, let's say, terminating their operations because they're not able to generate capital base strength -- strong enough to fare well within the realities of the market. There's a number of banking institutions that are in the category of having such difficulties.

There is another fact that there is an excessive burdening of the sector, and that's another issue. In addition to cyclical and pandemic-related burdens, we have other types of burdens.

So takeover doesn't release you from these additional -- these burdens, in general. So anything one does needs to be driven by a rational decisions and assessment. So this is something that you should focusing your questions on, I believe, to focus on these burdens for the banking sectors.

It's true that propensity to take over entities under conditions of high burdening and very dramatic changes in ROE, which has -- from a, let's say, top positions have been falling to the tail end of economic of banks throughout Europe. So under these conditions, takeover of assets or entire entities would mean that it's linked with taking on additional burdens and risks relating to both regulatory and administrative burdens on top of the integration process burdens that normally occur under such conditions.

So that's the problem. If there is a large group of entities that have problems, Polish banks have difficulties with absorption of these entities, and one cannot count on extension or entry of capital from outside of Poland because there isn't -- this is not an attractive option for them.

So that's what I've been alluding to. This results in this specific phenomena, the grow -- the increase in the number of entities that have difficulties meeting the various capital adequacy and other ratios. And you -- that makes for the problem.

It's not that we -- it's because we do not have a market solution to deal with that specific problem, but we've been talking to that on a number of -- for a number of years. So this is not something new. Pandemic has only brought that to the fore and made it ever more clear.

[Piotr Utrata, executive]

What is your position to the reference rates? Do you have alternative benchmarks if LIBOR rate, for example, disappears?

Are you looking at alternative indicators -- market indicators? Are you preparing for that?

[Brunon Bartkiewicz, executive]

Our bank is consistent with the banking sector's behavior in this respect. Specifically, we're in a continual dialogue with the Polish financial authority -- financial sector authority, and we behave in a very consistent manner in this respect.

[Piotr Utrata, executive]

One more question coming back to the financials. However, looking into the future, is it reasonable to expect the banking, whether the burdens coming from the bank guarantee fund charges are likely?

[Brunon Bartkiewicz, executive]

Well, this is misaddressed because we are and -- question. In terms of managing the drivers that we have under control, that's another topic. But the rates charged by the Bank Guarantee Fund is something that we do not have any influence over. It's up to the council, BFG Council to do that.

If you -- retail deposits and postponement of that for 2 years is something that is being considered, everything there, of course, is up to the Banking Guarantee Fund. Would ING like to be able to buy back its shares?

PKO BP doesn't necessarily mean that all the other banks might have -- be facing the similar situation. And PKO BP is working to change its charter in this specific respect, whereas we are not.

We have come to the list -- end of the list of questions. Thank you very much for all those questions and the answers, and we will be reconvening in a matter of 3 months now. Thank you very much.

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