ING Bank Slaski SA

WSE:ING

Earnings Call Transcript 2022-Q3

[Piotr Utrata, executive]

Good morning. It is my pleasure to welcome you at the conference, during which we present the results of ING Bank Slaski for the Third Quarter. The presentation will be delivered by Brunon Bartkiewicz, CEO; and Bozena Graczyk, Deputy CEO, In-Charge of Finances. My name is Piotr Utrata, and I'm working in the press department.

[Brunon Bartkiewicz, executive]

Ladies and gentlemen, good morning. Third quarter results. I would love to start my presentation by saying that this quarter was similar to the 2 previous ones. However, unfortunately, I cannot start -- I can't open the conference with these words. I think it's not nice for the Head of a listed company to announce losses. Therefore, my duty today is not pleasant at all.

Of course, you are all aware of the reasons why we do not report good results for this quarter. The times are difficult. Of course, you know us and you're aware that our tension is not generated by the result, because the result is just a result. The current situation is quite unexpected. It's something that we were not able to foresee last year. In a nutshell, the whole business sector has become less predictable. So I have in mind not only our institution, but the entire sector.

Our business model, as a bank, is based on a stable and predictive growth. And the current macroeconomic situation and the regulations that are in force generate a lot of instability. This has been going on for the last year. One of the source of our worries is the retail loan portfolio, which is not growing. It's not growing because the production level is relatively low. Moreover, we have a high level of overpayments and repayments.

We understand the situation quite well. However, it is difficult to predict anything about the fourth quarter and the coming years, making any predictions is quite difficult. It is difficult because the cost of retail loans is going up. We also have a difficult situation on the housing market. Moreover, the loan moratoria or the suspension of mortgage repayment have taken its toll because they may affect our results.

Taking all that into account, I would like to stress a few things. The first is that a model that is based on a very fragmented retail portfolio gives us quite a stable situation in terms of lending and assets in our balance sheet. The same applies to our deposits. We are present in various parts of the market, which have varying dynamics.

Thanks to that, our Bank is more stable despite the generally unpredictable situation. Therefore, I believe that our bank is able to continue to grow and develop -- to develop its business model, we can still focus on our clients' needs and on improving the quality of our relationship with the clients. This means that the transactions and the sales procedures that we offer to our clients are as transparent and clear for them as possible, so that we can contribute to our clients' success.

I don't know what you are most interested in. I will hand over to Bozena Graczyk in a moment, she will give you the details of our results in the third quarter and over the last 9 months. I'll just say that this quarter was quite unusual, but we can still remain on a stable trajectory of development, and we can still achieve our goals. Maybe this quarter has not been ideal. Nevertheless, our tactics and modus operandi remains the same. Yet we operate in a slightly less predictable environment. So this affects our results of course, but they are secondary to our general business model.

And now I'll hand over to Bozena.

[Bozena Graczyk, executive]

Good morning, ladies and gentlemen. That's sure that it's much more difficult to talk about Q3 report when we need to report a loss, it was PLN 317 million this year, and this is the first for 14 years loss recorded in the history of ING Bank Slaski.

Of course, as it has been said before and in relation to our current report of July the main reason behind this loss is of course the effect of loan repayment suspension and repayment holiday, which affected our net interest income. This adjustment has been included as you perfectly know from quarterly approach the impact of the repayment capital, it's 1.32 -- PLN 1.63 billion, and that is in accordance with our preliminary forecasts where we assumed average 70% participation of customers and repayment holidays. In Q3, this participation amounted to 62%.

When talking about our forecast for the future, still we assume similar predictions as the ones which were presented at the early stage and result after 9 months of '22, our net profit was PLN 1.40 billion, which represents a loss by 36%. I think that from the perspective of what happened to the PLN and what happened in 2022 in relation to the reality, financial reality and economic reality in 2021 that shows the situation.

Of course I'd like to comment, our net interest income, on Slide #12, you can see our presentation with regard to net interest income, which has been adjusted on purpose by credit moratoria. So, it's difficult to talk about any trends and portfolio behaviors, maybe before I move on to explanation of this position, let me tell you that in this quarter we reclassified the position between the net interest income and net provision. This is the reclassification that we get from provisions securing our IFRS transaction in micro hedge.

In order to reflect the real character, that affected the net interest income. The net interest income is PLN 155 million, the second quarter it was PLN 130 million and in the first PLN 27 million. We wanted to reflect the nature of this position taking into account increasing materiality of this position in our balance sheet.

What is worth mentioning at this point is that, in Q3 our net interest income was PLN 1.8 billion, it's a 5% drop quarter-to-quarter and our quarterly net interest income is at the level of PLN 353 million, it's a drop by 19 bps versus the previous quarter and the main reason behind that is of course the raising cost pressure and funding cost pressure and increasing interest of customers deposits. As you perfectly know, during Q2 we increased the interest rate at saving account from 5 basis points to 1%, so the interest rate on our accounts in disposition is 1.5%.

When it comes to net commission income, quarterly income is PLN 531 million, it's a 2% increase quarter-to-quarter and from the aggregated perspective is 1.8 -- PLN 1 billion, 16% increase year-on-year. And it's worth mentioning that in this quarter our FX transaction income went back up by 6%, cards transactions and this is a result of an material increase of the number of transactions and the value of individual transactions which translates into such volumes.

Of course from the -- on the other hand we experienced a slight decrease quarter-on-quarter related to the capital markets, it's a natural consequence of the situation on the market and commissions which are related to handling customer accounts, but this is an effect of the changes that we introduced and the cancellations of commission on a high balance accounts.

When it comes to total costs, you got accustomed to the presentation including the bank levy to present you the influence of broadly understood regulatory cost on the level of cost that we need to incur, our cost operating -- cost including the banking task went up to PLN 986 million. They increased by 19% year-on-year and that means that our cost for 9 months 2022 represent PLN 3.33 million and they went up by 32%.

Last quarter, we had some one-off incidents. It was the Commercial Banks Protection System and creation of that cost was PLN 430 million. This quarter that was an additional contribution at the level of PLN 41 million, which increased the burden and burdened the position this quarter. But also, we had no deposit guarantee fund. We -- there was only an amount of PLN 39 million that we incurred in the first quarter this year.

And it's worth mentioning that payment to Commercial Banks Protection System Fund, they represent deductible -- tax deductible. So with -- I will use this opportunity to refer to the Banking Guarantee Fund decision taken recently. So they increased the DGS commission from PLN 2 billion to PLN 502 million, which is a result of the decision. So taking into account the current level of assets credited to this account, which is PLN 1.83 billion. And the target value, that means that we do not expect any charge of contribution to DGS.

Apart from that, apart from all these additional costs to the so-called [indiscernible], Commercial Banks Protection System, the banking sector contributed the credit support fund. In the third quarter, we had PLN 25 million of costs, including PLN 7 million for contribution for Q3 out of PLN 400 million, as total contribution and PLN 18 million. This is our estimated impact resulting from this contribution at the level -- at the sectorial level of PLN 1 billion. So this cost has already been deposited and included in Q3 results.

When we take a look at the total regulatory costs that we incur as similar phenomena are experienced by other banks. So together with the banking test in Q3, we incurred to PLN 231 million of cost. That means an increase of 39% year-on-year. And after 9 months, it's worth mentioning regulatory cost is PLN 1.2 billion, and that means an increase by 9% year-on-year. This is a significant factor and element of our cost increase at ING this year.

Additionally, regulatory cost represents 36% of the total Bank cost. When it comes to our own costs, they amounted to PLN 752 million in Q3, and they are practically stable quarter-on-quarter, when we take a look at an increase of cost. Year-on-year, they went up by 13%, mainly due to the effects of roaring inflation and related increase of employee cost and as a consequence of pay rises that we announced in April this year.

When it comes to the cost of risk, as you can see this quarter, the cost of risk was PLN 206 million, including on the one hand, PLN 132 million of costs with regard to the change of macroeconomical landscape. And as you can read from our presentation, this cost was related mostly to the corporate client segment. And it is directly related to change of GDP index.

We also released some provisions at the level of PLN 73 million with regard to the sales of loan from Stage 3, mostly in the retail segment. So I think these 2 phenomena explain our quarterly cost of risk, which this year due to all these changes and the normal behavior of credit portfolio, went -- amounted to 53 basis points.

If I were to comment the quality of our loan portfolio, I think it's worth mentioning that it is stable and on a good level. In Stage 3, we -- the participation, the share of these loans went down by 15 bps. It is related to the sales of Stage 3 loans, both in the Retail segment and in the Corporate segment as well.

You might be interested of what you can read from the slide at the bottom. So the reasons behind the increase of Stage 1 in our gross portfolio. So here, let me provide you with an explanation. This is due to our modeling changes related to normal revision of our model approach to identification of Stage 2, what happened in Q2 2022 means a change of premises -- to important premises related to declassification of Stage 1 loans as Stage 2. We accepted a methodological change consisting in the fact that 3-fold increase of PD when the loan is sanctioned, it results in reclassification to Stage 2. This is one of the effects.

On the other hand, we assume that loans on the observation list get to Stage 2. As a result of that, you can observe that the share of loan in Stage 2 went up. But on the other hand, you can see that to get it with this reclassification, the provision coverage ratio didn't change. So we can see that reclassification to Stage 1 was the marginal had a marginal impact on the cost of provisions.

And here, it's worth mentioning because for sure, you would like to ask a question about this, that all these changes and all these reclassification changes from Stage 1 to Stage 2, as I've said, these are purely modeling in the nature, and they don't affect our loan policy. I would like to make that clear. At the same time, let me share one more comment. As you can see, our provision coverage ratio in Stage 3 decreased, and this is an impact of a decrease of sales of receivables from this stage which took place in Q3.

A few comments when it comes to our capital adequacy, as you can see TCR ratio is at a stable level, 14.4%. What happened, on the one hand, we included this results to our solvency ratio. On the other hand, we can see improvement of Tier 1 ratio, which affected our TCR on the other hand, together with rising loan volumes mentioned by Brunon, especially in the corporate segment, which are covered with higher risk. This ratio went up proportionally to the volume of our loan portfolio.

Before we start our Q&A session, I will refer to the comment about MREL. As you can see, last quarter, we informed that we can see and a need of higher engagement, higher exposure in terms of minimum requirement for own funds and eligible liabilities, as you can see from the banking guarantee fund, which was announced at the end of September. The principles and requirements with regard to MREL have changed. So such requirements will be decreased in a short perspective, and that means to us and to the that has consequences on us and on the entire banking segment.

Of course, following the voice of the Financial Stability Committee, we agreed that MREL instruments should be tackled in a systemic manner and knowing that we do not have such a need that we informed about before because of this internal targets that's changed. Now we are in the middle of analysis in order to establish our short-term within creation of our MREL buffer. So the works are underway, and we will inform you as soon as such analysis are over.

So I think that I would wrap up my presentation, and I would like you to ask your questions.

[Piotr Utrata, executive]

Yes. Let us open the Q&A session. I have already received a few questions. Let us start with more general questions.

The first one is from Interia. Why do business owners decide to take out loans given the current economic situation?

[Brunon Bartkiewicz, executive]

I think it's a very good question. Let me answer you in the following manner. Life goes on and business owners take informed decisions. I think that it may be connected with a preemptive action that business owners want to take because they expect that in the future, there will be higher costs to be born for loans. The inflation in Poland is quite high. And also in Poland, we have a very widespread phenomenon of transferring the effects of inflation to the target customer. These loans also support to a certain extent, investments.

I think that also the business owners just cannot continue to put off certain business decisions. In our case, an increased activity in this segment is not connected with large infrastructure investments or projects, because I think other banks in Poland finance these types of endeavors. In our case, this is just regular -- this is a result of a regular activity of our clients. This concerns revolving loans and investment loans that are usually taken out by our clients. So this is nothing out of ordinary.

We also have observed increased activity in renewable energy sources and investment in these renewable energy sources and in energy efficiency investments and we welcome this fact. But still, this is not the only answer that would account for an increased dynamics that we observe in this segment, in small corporate loans. However, I'm unable to make any forecasts regarding the activity in that segment because there is a lot of uncertainty, and I think we all intuitively sense that this is the case.

[Piotr Utrata, executive]

Another question concerning the assets in the balance sheet. Interia, another question from Interia. Do you intend to buy out more bonds in 2023 and to increase their shares in the banks -- their share in the Bank's assets?

[Brunon Bartkiewicz, executive]

Our main goal is supporting economic growth by offering direct support to our clients, this is our priority. We give enough loans to provide funding to the market, this is our priority, not investing in state bonds.

[Piotr Utrata, executive]

There are a few questions regarding suspension of mortgage repayments. Did you analyze the decisions that your clients took with extra funds that stayed in their pockets due to their suspension of mortgage repayments? In other words, what do your clients do with the money they saved, thanks to the suspension of mortgage repayments.

[Brunon Bartkiewicz, executive]

I'll be honest, it's difficult for us to make any deduction to -- like to deduce anything about our clients' behavior. As you're probably aware, we have a complicated relationship with our clients who have taken out mortgage loans with us. The level of consumption and that may have an increased in connection with the suspension of mortgage repayment is difficult to estimate. What is a source of concern for us and for the entire market is that the situation is not possible as it's not stable.

In the media and also among the decision makers there were calls to use these funds to overpay or to repay mortgages. However, we haven't noted any additional repayments or overpayments. Nevertheless, we assume that there is a group of clients who save up the money from the suspension of mortgage repayments to make an overpayment or an early repayment of the loan. But we haven't of their mortgage, but we haven't noticed this type of activity.

[Bozena Graczyk, executive]

But please remember that for the time being only 2 repayments out of the possible 8 have been suspended. So it's too early to make any forecasts or estimates.

[Brunon Bartkiewicz, executive]

Regardless of the suspension of mortgage repayment, we have noted an increase and we've noticed increased consumption among our clients and increased level of remuneration. So our observations are in line with the media reports. However, whether an increased consumption is the effect of neglecting inflation or quite the contrary being worried about inflation, that we do not know. So we do not know why we have observed increased consumption spending. Naturally, we are all excited with the current situation, but still we cannot draw any definite conclusions from what we see, because we do not have enough data.

[Piotr Utrata, executive]

A question from Business Insider, also about suspension of mortgage repayment. How does it affect the risk connected with mortgages? What would be the cost of risk if this government program had not been introduced?

[Brunon Bartkiewicz, executive]

Well, the quality of our mortgage portfolio is good as a role. So taking into account the average risk level in that portfolio, I can see that we haven't noticed a direct relationship between the level of interest in the suspension of mortgage repayment and the risk level in principle. As you're aware, the decision to take -- to apply for a suspension of mortgage repayment does not affect the rating of a client. However, as a Bank, of course, we carefully analyze our mortgage portfolio in order to be able to predict what may happen to our mortgage portfolio when the possibility of the suspension of mortgage repayment is over. And for the time being, this has not affected our cost of risk and the risk level.

I think I understand what is behind this question, and I'll answer it in the following manner. Those clients who have been defaulting on their payments or have been repaying their mortgages irregularly before the moratorium was introduced, and now they do not have any irregularities in their repayments, we still adopt a conservative approach and we treated them as "problematic clients."

On the other hand, those clients who have not shown any symptoms of difficulties with repaying their loans, we do not change our assessment of them because we are unable to assess or predict to what extent the moratorium affected them.

[Piotr Utrata, executive]

Trigon. Have you observed any new areas of risk in the corporate segment? Is the Bank benefiting from a growing demand for loan in that sector? And what about the solvency ratio?

[Brunon Bartkiewicz, executive]

That's a lot of questions. Our Bank in the corporate sector has always had a conservative approach. We're observing new risks and new threats. However, we are not, as a Bank, modifying our policy in any significant manner. We haven't noted any major tendencies, new major tendencies forming. What we are observing is -- are early signs of decreasing activity in that area. However, this is not a reason enough for us to change our ways.

Let me add that our portfolio of corporate loans is systemically growing. And we respect our values and our principles with regard to the corporate loan portfolio. So no changes on our part.

[Piotr Utrata, executive]

Santander. How does ING assess its capital position? In TCR, the buffer is at 3%. If a systemic risk gets back to the level of 3%, ING would have no buffer with regards to TSR. How would you comment on that?

[Brunon Bartkiewicz, executive]

Our levels of solvency ratio -- we have provided enough buffers in our solvency ratio indicators. If a requirement for new buffers appear, we have a host of instruments that we can apply to make sure that our solvency ratio is in line with our strategy and risk-assessed assets. Therefore, we are not afraid of any negative impact of our adopted solvency ratio.

Let me add that we expect a certain equity surplus because the OSE buffer will change, and it has not been reflected yet in our capital adequacy ratio, because -- so 25 basis points is something that we expect in quarter, for us a decrease of our minimal equity levels. Effective capital management, main principle of it is not to lead to a situation of the shortage of capital, but over capitalization is not a recommended state as well.

[Piotr Utrata, executive]

Another question from Santander about LCR, it's 132%. What is your target level in midterm?

[Brunon Bartkiewicz, executive]

Let me put it like this, adequate and safe, of course. And of course, above our extended norms and limits, but it's not a bank practice to reveal the targets. So it's not intentional, especially when we take a look at the shaping of this ratio, it was 200% last year, and that was the level at which it has been observed throughout the entire banking sectors. And now for many reasons, and we have presented these reasons also recently that the average ratio in the sector goes down, we manage our LCR adequately to our needs and to the market situation. But of course, we share your view that this is an important ratio from the point of view of monitoring and actions taken, so we confirm it.

[Piotr Utrata, executive]

So now maybe let's talk about net interest margin. Can we expect a further decrease of this margin? Do banks have adequate means to compensate that?

[Brunon Bartkiewicz, executive]

When it comes to the future, of course, we will not comment on the future. But for the time being, we are restoring the element of predictability, but stability and tranquility in the market. We are far away from such market conditions. We need to remember that on the solvency market and on the deposit market, the situation is a bit complex at the moment. So because we're dealing with an stable CPI and inflation, which is felt by customers, clients and investors. And it's much more -- much above 18% that is announced.

When it comes to the revenue -- to the income generated by financial assets, of course, they are totally different. And it goes beyond any doubt that they will not have any further impact. When it comes to purely financial assets, banks are not competing only with themselves with one another, but they compete with other forms of financial assets.

Also, these which bring other level of yield. So for that reason, the situation is very dynamic in that respect. But we cannot observe it only in short-term perspective and only from the perspective of the banking sector, because the banking sector from the point of view of complex deposit, if you take a look at the results, it shows that this cake is not -- it's not going -- it's not increasing. It's not going any further. So our customers have higher revenues, but they spend more, and they do not retain capital in the form of assets.

So many which was to be earmarked, they were also capped in term deposits and this is something we -- and plus, there are some alternative forms of investment and such an alternative form of investment is, of course, for example, investment facilities. What we can see what's going on in the market, the market is shrinking. And these might be real estate. But I think that this element has exhausted the dynamics. So the share of real estate for cash, the potential exhausted, of course, there are some retail bonds, but they are also losing their dynamics and that this perspective.

So what will be their future? I don't know the bank beyond any doubt and the bank's offer when it comes to acquisition and retention offer, we have the best offer on the market, but do not expect that it will have any material impact if there is no influx. So the target net interest margin, it will depend on the interest rate. And as you can see, there is a lot of turbulence and a lot of unpredictability on this market.

And on the other hand, there is a question, what is -- will be the target level of interest rates? And what will be the response of the banking sector? In case of all macroeconomic challenges and potential changes of interest rates if they occur. And it depends on many players, not only banks are participating in this process.

[Piotr Utrata, executive]

Let's move over to a question from PKB. What was the impact of so-called bridge margin and in which line of P&L it was posted?

[Brunon Bartkiewicz, executive]

When it comes to our policy in that respect, this impact was PLN 5 million and it burdened the net interest income.

[Piotr Utrata, executive]

One more question when it comes to net interest income from Santander. Cash flow had influence of net interest income, can it affect the current decisions taken by the banks?

[Brunon Bartkiewicz, executive]

I think we have already explained this topic and our macro cash flow hedge strategy and this impact on the solvency ratio. There is no impact in fact. So with regard to that from this perspective, we can -- our structures should be perceived in long term and throughout the cycle perspective. And from this perspective, we shouldn't combine and relate any short-term operating decisions through a long-term strategy and to the level of macro cash flow hedge currently.

Of course, it can affect our operating decisions, but Bozena is totally right, the main element here is that our strategy and functioning and bank management boils down to management in long and mid-term, not in the short term pampering of results. And our understanding that it will not pay off. Do we -- are we willing to maintain stability? We do not -- if we count on stability, we do not see any reason for changes.

Of course, 2 years ago, we could see -- or we had -- we were convinced that the [indiscernible] A will lead to result B. Today unpredictability is broken because these principles don't function anymore because of multitude of functions and turbulence in the macroeconomic landscape. So this is the reason behind this unpredictability. But it doesn't mean that the impulses are wrong or the results are wrong, but the combination of both has changed.

So we need to go back to stability. I don't want to talk about crisis, because we are not in crisis. We're in the situation when the customers' behaviors and market players are looking for new balance. And as a result, the Bank needs to react to that adequately. Also from the perspective of managing of our liabilities and assets and our net interest margin as well.

So, when it comes to operating cost, the fifth quarter in a row, the number of employees in ING is decreasing? Do is reflect the changes in the Bank branches or in the headquarters as well? So the Bank decreases the level of employment for 10 years consequently, because we had to change the employment with regard to compliance, in mainly anti-fraud, KYC and AML. So these were reasons behind increasing employment, but the bank wants to be more and more efficient.

So this is the evolutionary change. And we, in a revolutionary manner, we're decreasing the number of employees, the reduction and laying off anyone is not the result, it's a result of our increasing efficiency of operations, including implementation, ongoing implementation. I'm looking for a good publish word, ongoing processes, I don't want to sound too hybrid and the increasing level of digitization of internal processes.

Of course, the impact of the decreasing number of bank branches has its impact, but we are not decreasing bank branches for a year or 2. We change their profile and this is something which should be pointed out. It's not about closing bank branches, but over the last 10 years we redefined our branches and something which we used to call a branch. Now it's a relation center. So this is our approach to change, but that change has been in place for 10 years. We started in 2010, I think the entire reduction process, downsizing process, and it's underway.

[Piotr Utrata, executive]

Another question with regards to CHF settlements. The number of settlements has been reduced significantly. And what is the reason behind that?

[Brunon Bartkiewicz, executive]

It results from the quality and the approach of the Bank to settle as it remains unchanged, but our customers don't want that anymore. They don't want that because they think that maybe they will get a better offer ultimately, so lack of stability and lack of predictability affects the market players. So our approach and our willingness to generate settlements as soon as possible is really the same and at the same level, we -- but both sides need to agree.

[Piotr Utrata, executive]

And the last question from [indiscernible]. How would you comment on the Moody's change of rating for the Polish banks? Downgrading, actually.

[Brunon Bartkiewicz, executive]

I'll respond briefly. I am not surprised. I'm not sure if it requires a longer comment. It is what it is. That's what I would say. It has a lot to do with attitude. Polish, there was saying that Polish banks are very modern, but not profitable. And I think this, combined with the situation in the year 2022 resulted in concern and worries of our partners from abroad. I'm not surprised, but I'm also not happy about it. PLN 12 billion in suspension of mortgage repayments is one of the main factors that weakens the room for maneuver for banks in the long run. What I mean here are both balance sheet items and our possibility to grant loans in the future.

On that sad note, we are ending this press conference because we have run out of questions. I hope that this is the first and the last quarter in which we are reporting a loss in our financial results. The last time this happened was in Q3 2008. And this was triggered by an event that we referred to later as the financial crisis. I hope that this will be no longer the case. I hope that after Q3 this year we'll only have positive results to report. And this is the positive note on which we would like to finish this conference. Thank you.

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