ING Bank Slaski SA
WSE:ING
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Earnings Call Analysis
Q3-2023 Analysis
ING Bank Slaski SA
The company's operating expenses have increased by 15% year-on-year over the last nine months, attributed to inflationary pressures. This rise is particularly evident in salary costs and IT-related expenses. Despite these increased costs, the company is demonstrating stability in its provisioning ratio and a notable decrease in the cost of risk, which has dropped to 38 basis points in the third quarter, indicating a healthy loan portfolio quality.
There is a slight negative trend in the company's capital adequacy, which has been impacted by newly granted loans that are property-secured but not yet capital-effective. Despite this, the company maintains a high liquidity buffer, indicating that they are well-prepared to increase credit activity when appropriate.
The company has not confirmed whether it will partake in offering a 2% safe loan mortgage program. However, there is a noted increase in mortgage interest outside this specific program. The housing market shows significant activity with intense property price increases, implying that market dynamics will continue to have an impact irrespective of specific mortgage programs.
The company is apprehensive of the government's draft for extending the mortgage moratorium without concrete regulations in place. Alongside sector-wide concerns, the bank is opting to withhold estimations on potential costs until further regulatory clarification. Executives advocate for the usage of existing borrower support funds over extending the moratorium.
Following the economic slowdown, the company anticipates that the manifestations of credit risks will not dissipate instantly, especially within the smaller enterprise segment. Although economic revival is on the horizon, potential negativity in credit portfolios may emerge up to two years later due to delayed impacts of inflation and high employment costs.
Despite verbal expressions of interest in investment loans, this has not translated into increased lending activity. Corporate loan demands are not uniform, and working capital loans volumes are declining as businesses adapt to a cost-efficiency strategy in the face of inflating raw material prices.
The company is contemplating the recommendation of dividend payouts for 2022 but remains cautious due to risk materialization and ongoing discussions with financial authorities.
There has been no increase in complaints regarding cash and mortgage loans; however, the steady stream of complaints, especially regarding Polish mortgages, raises some concerns within the company.
The company is investing in the redesign of the front end of its retail banking applications to improve client experience and cater to growing functionalities within a confined mobile screen space. On the infrastructure side, efforts to advance multi-cloud platforms and response speeds are underway to ensure system reliability and prepare for future technological challenges.
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A warm welcome to our meeting dedicated to the results of Q3 2023. I'd like to introduce the people at the table, Brunon Bartkiewicz, CEO; Bozena Graczyk, Vice President, responsible for Finance; Iza Rokicka, responsible for Investor Relations, ESG Reporting and Market Analysis. My name is Piotr Utrata. I'm the spokesperson for the bank. And now over to Brunon.
Good morning. It seems that our results in Q3 have not come as a surprise to you. That's what I gathered from comments from this morning. And that's probably the case. I'd like to assure you, however, that apart from the fact that the results are in line with expectations and the numbers particularly numbers related to growth and dynamics of commercial balances show that technical recession does happen during the growth stage of Polish banks, including ING, but I'd like to assure you that it's not as boring as numbers would suggest. Many things are happening and what we're happy about, in particular, is let me repeat myself. This boring quarter was a further a quarter of the implementation of our strategy. And many things happened to this result.
I think no point in quantifying, prioritizing, but the growth of the number of clients right now at a stage where there's a lack of momentum in the market. This looks really good. Market share looks really good. Of course, there are volatile corporate deposits. We are seeing faster mortgage lending based on the 2% mortgage that we're not participating in. This is the government program. But these are short-term events -- transitional events in all other aspects. However, we have stability. Linear predictive implementation of our strategy. I would also like to tell you that what we're dealing with is that in many areas, we are seeing a significant change in the behavior of clients. Transactional profiles of clients are changing, the use of mobile devices in generating not just the simplest transactions or orders, the phone has become the key tool for relations between banks and individual clients, but phones are also getting more important for corporate clients.
But what we're also seeing is that in a way, clients are embracing digitization. They are happy yet through use smartphones, digital devices. We have reached a certain stage of maturity. That's just a signal for you. We'll be coming back to this new trends, new behavior in the coming quarters. This is relevant because this is yet another stage of technological change in the behavior of our clients. Some things are the new normal and they are mature. For us, this entails new challenges, new directions. We are going to talk about new projects, but preparing for new ways of assessing the bank operations by our clients. New technologies, the transformation of our infrastructure, it comes to the 4, but also the client-facing instruments come to the 4.
In October, we have demonstrated the new version of [indiscernible] , My ING, this is a new tool that is embraced by our clients. And that's important for ESG as well. This change that we've been talking about for years is so important that it's part of the bloodstream of the bank, but a lot of work is still ahead of us because the requirements, queries, doubts as to the needs of our clients from the largest to individual clients and the smallest businesses. This is expanding. So many initiatives in this respect. And as a result, we have to introduce ESG aspects into our bloodstream so that we can fulfill our mission to support our clients in making important decisions and ESG brings a lot of such important decisions that our clients have to make.
Volumes. Well, you can see what they are. The horse has 4 legs, basically. The future that we are not going to comment on, but we have been indicating to you that an economic slowdown is right next to us. We're just waving goodbye to it, passing it, overtaking it in a way. We're hoping for a faster growth, not just because the bank is making money on it, but because these are aspects that are important for our clients. The cut in interest rates will mean lower revenues for the bank, but this should be offset by the high economic activity of many clients. So we are optimistic about the future and we are happy with the fact that what is not very convenient for the bank, what has yielded the highest results is slowly over. The result, PLN 1.5 billion almost in Q3. That's the gross result, PLN 4.1 billion for 9 months. P&L dynamics compared to last year without cleaning, don't make any sense.
I pointed out the results of 2022 were an outlier and did not reflect the work of the bank. This was based on some decisions such as the mortgage, moratoria. So no point in making comparisons against last year. That's why we have been providing this information in detail so that you know what was the impact of these changes on results. The result is still structurally high due to the interest rates, but that is also changing as we know. Let me emphasize again that we welcome these changes. We are happy to see them. And I think no point in me talking anymore. You have read our results. I will be delighted to take your questions if after a very sophisticated and detailed explanations from Bozena, you will have any questions, in fact.
I will try to be very brief as well, talking about what happened, especially in our P&L and results in the quarter 3. So to sum up, quarter 3, we've had net PLN 1.162 billion, which was consistent with the market expectations. That's the means that we're a predictable bank, and we are developing in a stable manner as expected by the market. Over the 9 months, our net profit, PLN 3.170 billion. And seeing the credit moratoria and regulatory costs. I would like to draw your attention to the fact that we've had a 10% growth of our results in interest rates, thanks to higher volumes and an improvement of our margin. The highest results from the remaining revenues, we've had PN 151 million. vis-a-vis what was a lot lower last year. And let me comment this item. We see, on the one hand, a very positive impact of the currency derivative transactions, and that's the outcome of the activity of our treasury and financial markets.
But you can also see, on the other hand, in quarter 3, we noted an accounting adjustment, and I wanted to emphasize that due to the ineffective hedging transaction. That's an accounting adjustment also due to the fact that it will reverse with time. It purely results from the fact that there is a mismatch between the overestimation periods of the security instruments and the hypothetic derivatives that are subject of our security and the amount of PLN 100 million that you can see in quarter 3 will be reversing over the next 6 months, whereas it will not be a linear process. It will depend, in particular on how the market interest rates develop. And that inefficiency is the result of the sudden change of interest rates of 75% and the quick reaction of the curve due to that change. Now certainly, lower regulatory cost is something that we have spoken about so many times that I don't need to dwell on this anymore. But also please note the lower cost of risk, 19% this year.
As a result of all these changes in our P&L account, we have accumulated ROE of 21%. So we are adjusting it as usual, to take into account the macro cash flow of the hedge. Now we have the interest outcome. We have 10% increase year by year. That PLN 6 billion already seeing our balance in quarter 3 alone, that's PLN 2 billion. Our cumulative interest margin in the quarter 3 is [ PLN 358 million ]. It grew by 5 basis points quarter by quarter, but the quarterly margin for interest rates is on a comparable level vis-a-vis the previous quarter, and that's [ PLN 371 million ]. Let me also remark on the credit-to-deposit ratio -- loan-to-deposit ratio is below 80% after quarter 3, 78% and 1%. And that's the level which is the outcome of what's happening in the structure of our balance sheet.
This year, we are noting quite a lot of dynamics on the deposit volume, 5% growth, where there is a low demand for loans. The volumes have grown only by 2% year-to-date. Now the fee and commission income, looking at the 9 months of this year, we've seen PLN 1.6 billion. So it's a growth of 2% year-by-year. And what we're seeing here and noting is the continuous improvement for payment and credit cards, debit and credit cards. We commented on that before. This is both higher number of transactions in terms of the number of transactions, but also the amounts of these transactions. Hence, we are seeing such big increase here. Also, in particular, in this quarter, we can see an improvement of the results in the financing, and that's the corporate loan segment, especially in this quarter. And what's also very good news to us is that we're looking at the increase from the distribution of participation units, which reflects the positive trends on the investment fund markets.
Now costs, expenses perhaps will not dwell on the regulatory costs. They dropped by 45%. And the phenomena that came into play this year and last year, this is something you're quite well familiar with. But our own expenses have grown over the 9 months year-by-year by 15%. And you can clearly see the impact of inflation. So the increase of salaries but also own expenses, practically for every item, you can see the impact of inflation and the growth of prices, particularly in IT, but also property administration costs. Now cost of risk, PLN 151 million this quarter, there, these costs are lower this quarter than the quarter before it. Now looking at the macro effect, it's practically nonexistent right now. We can see a slight shift due to the macroeconomic data that impacts the retail and corporate market differently. We're looking at practically excluding the macro data impact in this quarter.
This year, the macro factors have contributed positively PLN 51 million, whereas last year, this was a contribution, increasing the cost of risk by PLN 200 million. As a result, our accumulated cost of risk, excluding certainly Swiss francs is 40 basis points. And in the third quarter alone, it's 38. And you can also see here, looking at the quality of our portfolio, we see total stability both when it comes to the share of Stage 2 loans in the growth portfolio. And here, you can see quite significant stability in the provisioning ratio as well. Now for the capital adequacy, you can see [ 16.56% ], there was some negative dynamic. These are some risk-weighted assets that came into play newly granted loans specifically that are not yet effective in terms of capital but are secured with properties. On the other hand, we have the clear 1 that's dropped by 17 basis points. That's the outcome.
Also of the discrepancy in terms of time looking at the fact that for accounting provisioning, we're looking at the status from end of year, but for the RP method. We're looking at the current values. This will neutralize once we see the financial outcomes from 2023. So as a matter of fact, it's also a traditional situation. We've had 194%, we have quite a lot of liquidity buffers. We just need to increase our credit activity. That's all from me. Thank you very much. Can we have some questions, please.
All right. Q&A then. Let me start with the first question. In recent days, another commercial bank is joining the group of banks offering a safe loan of 2%. Is ING going to join that group or not?
We have not taken a decision to that end, so I can neither confirm or deny. It would be good if the situation was clearer for us around this program, so we shall sit and wait for a while.
Yes, we have more details regarding the question about these mortgages and Bank PL. What is the sales of these loans like? Is it true that clients are more likely to take 2% mortgages in other banks?
The 2% mortgage is quite specific or it's addressed a specific group of people, which means that not all the clients are eligible to participate or to apply for this mortgage, but we definitely see an increase in interest in mortgages in the group outside the 2% mortgage. So I do think that, to a great extent, we're looking at standard perhaps outcome of suspending the needs to finance properties for many people.
But also on the other hand, we're looking at intense increases in property prices. So therefore, the group of customers that want to make money on the growing prices are also becoming active. I think that even without the 2% program or its equivalent, we're looking at quite significant changes on the property market regardless of whether this program continues or not, and that's an increasing trend.
A question from the room. Can we please have a microphone.
Hello I have 2 questions. The government adopted the preliminary draft for extending the mortgage moratorium, what would be the cost for your bank? Have you estimated that? And another question the perspectives on the cost of risk since we're already almost behind the economic slowdown, and we're waving it goodbye, should we then expect a decrease in the cost of risk.
The credit moratorium, we do have some estimates. It's very difficult to evoke from one unless we're sure whether these regulations are going to come into force and in what form they are. Against the backdrop of the banking sector's opinion, let me perhaps the position of the Polish Bank Association. The criteria that have been put into place a criteria that will not exclude many borrowers as a sector and ourselves, we also believe that the fund for support for the borrowers that has PLN 1.3 billion at the end of September should be should serve the purpose of supporting the borrowers rather than extending the mortgage moratorium in the form that precludes the economic factors from coming into play. So from this point of view, we're preferring to see what regulations come into force, and then we will be sharing our estimations.
I understand that you are also familiar with the estimated range of mortgages in the Polish portfolio. Those up to 400,000 and 800,000. These are quite significant figures. So in this version, this is a massive program, especially for the up to 400,000. Point two, let me draw a wider macroeconomic picture here. The cost of risk and the problems of entities will not disappear together with economic revival. Quite the contrary statistics will demonstrate that in an undistorted economic cycle, which I must admit, we haven't seen for a while because we've recently over the last 2 decades, always seen a quite significant intervention of the states. But when we look at pure data, a deterioration or an occurrence of problems in practically every segment, predominantly in a smaller enterprise segment. These become apparent, especially 2 years, up to 2 years following the end of the stagnation.
So I'm avoiding the word recession like the plague because it's a technical term. But we're perhaps saying goodbye to the economic slowdown, but that does not mean that the credit portfolio will immediately improve. Quite the contrary, we should be expecting data on the worsening of this landscape in terms of small islands, perhaps not to a large extent, but not on a big scale, but we will be seeing those components. There is a bit of a shift in terms of time, just like with the cost of inflation, we already see that the inflation is dropping, but it weighs quite a lot, especially the cost of salaries. And we can see that there is also a delay in terms of how the effect of it are being visible are being seen. The cost of employment in Poland is still very, very high.
In the context of this question, I think we can ask a related question. Does ING see any increase in the interest among people in the use of the borrower support fund.
We've seen that. This was a result probably of the remainder of the existence of this fund by the media. So we did see it. But when the fund was supported with a big sum of money now from quarter-to-quarter, the number of applications is dropping.
How long?
We don't know. But if you connect these 2 elements, the fact that the shock is slowly over. There's shock stemming from rapid increases of interest rates and the economy doesn't like any shocks. So the shocks are slowly over after the increase of interest rates, that's slowly behind us, and the repayments will start dropping with high momentum of salary increases. You can't expect the situation to get worse for borrowers. There's not much logic here. Of course, there are black swan events where people are not able to pay off their debts. This is basically for reasons related to life, divorce loss of partner, or sickness. With the high level of interest rates, they are maybe more pertinent, but things are getting slowly back to normal in inverted commerce.
The borrower support fund is the most just mechanism that addresses the needs of people in a difficult situation, people who need support. So the mass popularity, the mass impact of assistance from the borrower support fund is not that significant. Falling interest rates, higher salaries should help borrowers and the fund is the place where you can get support if you find itself in the most difficult circumstances as a borrower. Do we have any other questions from the room?
So I would like to sustain my opinion, the opinion of Mr. Bartkiewicz that the moratorium does not address a significant problem. It's not the best tool for the job, basically for helping people in dire situations. Now questions from the Internet? Does ING expect further drops in the sales of mortgages on a variable interest rate.
Yes, it's natural when interest rates are falling, that's a simple approach, but we are thinking about this situation. This trend is quite visible. The share has dropped to 80% in Q3. It's still 80%. So we think that in the awareness and behavior of our clients, they have adopted the right thinking that a fixed interest rate has benefits for clients. It does entail benefits for clients. It's a good aspect when you are dealing with lower interest rates. So we are not forecasting very significant cuts in interest rates to 1.5% or 2% over the next few years. And there are housing needs to be addressed. So there will be a transitional period when variable rate mortgages get more popular. We are not seeing in behavior of clients. And in the comparison of our situation to the market, bigger differences, which means that we are using WIRON. This is not something that deters clients, the fact that we're using WIRON rate.
So transitionally, clients are calculating the repayment amounts, but awareness is rising, awareness of the advantages of fixed rate. So we're getting to a form of balance we have been selling fixed rate mortgages for 5 years, and it will be up to the client to make a decision whether they want a fixed or variable rate. The fixed rate has been with us for long enough for clients to be able to make an informed conscious decision. There has been a change of behavior, and it should be up to the client to make a decision about which kind of rate they are interested in.
Now corporate loans. Do you see higher demand for corporate loans and in investment loans specifically.
The interest in investment loans expressed verbally has been noticed. It's been the case since the beginning of the year, but it did not translate into higher lending. The volume of loans for working capital needs has been going down. And this was linked to an escape from inflation and it's related to costs. So businesses have been increasing the inventories. Now they are looking to improve efficiency. So they're getting rid of stock because the purchase prices of raw materials will continue to rise, but the rises will be much lower. So the PPI indicator is better for us than CPI. So these elements mean that what we're seeing in corporate loans is not true as such because this is too much of an aggregate working capital is going down.
There is interest in investments. On the other hand, whether you can see it significantly. Well, here and there, but we wanted to cascade to the entire economy. So we remain optimistic, but it is an optimism based on experience. And from a pretty positive outlook on the world, this autumn, the situation in the Polish economy, but the wave is still not upon us. It needs time. It needs convictions. It needs credibility. You need to be able to believe in the stability of the economy. We are missing some activity for exports and we could also use important state investments. We're waiting for that, but you know very well, and I know very well that it's up to decision makers.
Another question. What is the bank's position on the interest of businesses on the iron rate loans. We don't see any difference between WIBOR and WIRON.
The indicators are just as good. We're not trying to guess which one is better. Even in the midterm, no one can tell us which indicate has nominal values that would differ. So we are not seeing any major threats for absorption. As you've seen on the amended road map of the National Working Group NGR. And my colleague has been sitting on this group. I'd like to thank Bozena for fantastic work. A great job on the NGR, the National Working Group. In the amended road map, it is assumed that in principle, all entities on the financial market, including primarily banks will be producing on the basis of WIRON rather than WIBOR.
From the first of July 2024, WIBOR will no longer be used for loan production. So our experience that says that clients are accepting WIRON as a reference rate is a good forecast for what's going to happen. We all expect that the market will be flooded with new information about new banks switching to loans based on WIRON. That's what we expect.
Thank you very much, Bruno. You have also addressed another question about the extension of WIBOR until 2027.
Well, I did not comment on that. I only commented on the first of July 2024. And of course, it is important whether WIBOR will be extended until 2027. We, as a bank, welcome this decision. We are very happy about it because to a large extent, this mitigates risks related to a speedy road map, the previous draft, the new map gives us much more predictability and stability, us and our clients.
Let's move to a different topic. Does ING consider recommending the payout of dividend in 2022.
We promised we are still thinking about it. Perhaps Bozena, you can comment on that?
Considering the passing time and the materialization of risks and the KNF has warned us against this in the dividend letter. We started talks with the KNF, the financial supervision authority on the possibility of paying dividend for previous years. But it's a very early stage. So let's not comment any further.
Do you see an increase in complaints in cash loans or [ Polish ] mortgage loans.
Not an increase, but the fact that they are still coming in is a bit of a concern, but they are coming in for mortgages and Polish mortgage, together with questioning -- it's about 60 applications throughout this period. They are still coming in, and I'm a bit concerned that they are.
We have One question in English from Bloomberg. How long from macro cash flow hedge in falling credit environment.
I will respond in Polish, our bank, regardless of the interest rate applies the strategy of securing risks for the interest rates. So you can't really give a close ended response to such a question. We match our strategies to the level of interest rates, the behaviors of our clients and it is in that way that we shape our policy for macro cash flow hedge. So dropping interest rates against this backdrop, certainly, will have a positive impact. But I cannot really give a clear response to a question in this form because it's not a measurable effect.
And the last question, at least it looks for the time being, what outcomes are you expecting from the change of the front end of retail banking? Why are you moving away from the characteristic looks in the mobile application. We also need to know about the changes in the IT infrastructure, what back-end component do you want to improve in this architecture.
Number one, we are hoping definitely that the new formula, the new aesthetic and navigation and the interface will be something that's going to appeal to our clients. That's the reason why we are preparing it. Everything needs a facelift every now and then, the number of functionalities that we have to cater for clients' needs is growing. So it's important for us to figure out how to put it on the screen in a way that allows the client to navigate this one easier. And we're trying to give our clients a choice in terms of how personalized their app is and how they can navigate in the mobile app world where a lot of services are being offered for mobile apps.
I think this is probably the biggest offer in Europe. So managing the complexity of the website on the small screen is a challenge of some sort. Certainly, there are some studies behind this focus groups, experts, evaluations, et cetera. And we are certainly aware that it will not appeal to everyone straight away. But we are convinced that within a short period of time, everyone will be delighted with a new version. If they're not, we will release another one. And this is how it will continue until the end of the world, of course, there will no longer phones when the world ends. But using a relatively small screen of a mobile phone is driving this trend.
Let me emphasize this again, it's a small screen. This is becoming a limiting factor already. So we're looking ahead at yet another challenge, how to deal with serving the clients' needs in a different format. Let me phrase it that way. And the second part of your question?
Infrastructure changes in the infrastructure.
Ladies and gentlemen, what every bank needs, I will not be going into more details here, but let me just repeat what we spoke about when we mentioned that we were going to try to move towards the [indiscernible] platform a few quarters ago. We have the same purposes still in our minds. We need to build banking infrastructure that's more secure and also openly speaking, to a great extent taps on the advantages of multi-cloud so that we don't have to be dependent on the reliability of physical brick-and-mortar data processing centers. I will be quite open. The war in Ukraine also provided food for thought here. It demonstrated yet again the things that we were taking for granted are not necessarily reliable, not necessarily due to warfare alone.
And another aspect here as well that comes into play is -- what we're more and more inclined to do due to regulators being able to serve clients 24/7 without any incidents which means that our systems have to be available for our end clients always, not 99.98%, but always at all times. And that's a slightly different requirement and we need to reconstruct our infrastructure. And another aspect, which is obvious, is also linked to security, and that is the speed of reaction of our systems. The heavier multifunctional front-end systems we have, the bigger challenge it will be to generate a short response time. In the past, we used to say that 30 seconds were okay. Now 50 milliseconds is a problem for our clients. So that's yet another challenge causing us to have to reconstruct the infrastructure.
And last but not least, even though it seems that the majority has already been accomplished in terms of digitizing the interaction between us and the clients, frankly speaking, we don't feel that this is the case. The number of changes that are still needed to be put in place is so big and the bank operates in such a complex multi-sectorial environment that we need systems that are able to absorb the huge number of changes that are being introduced. In a sovereign way, let me phrase it that way, in such a way so that these changes did not require intense work in the area of coordination of all of that with the remaining part of our IT infrastructure. We need this to be put in place in a manner that automatically guarantees the impermeability of the rest of the system. Please forgive me for using the jargon.
It's not the time or place to tell you about the details of how we want to achieve those 4 components, but I understand that you realize what big technological changes need to be put in place that is ahead of us, I want to say, but perhaps it's wrong tense because we are already working on it. It's already happening, and we have measures put in place already, and we know which division is taking with root. So the armies are already engaged.
Okay. One more question from web. Please tell us what's the interest rate sensitivity rates of vis-a-vis the lowering of interest rates for the next 12 months.
Those are difficult questions. There are more and more factors impacting the sensitivity, the change in volume, the changing curves over time, but also the changing market behavior in reaction to the shift in interest rates. So to be able to responsibly answer this question, let me again quote our annual report from last year where we demonstrated the impact and the sensitivity of our balance sheet towards the changed interest rates and we were looking at the decrease by 100 basis points. We disclosed that was about PLN 450 million but please do study the assumptions that accompany these estimations. They are so volatile over time that you need to make an informed decision. So looking and disclosing such sensitivity at this point of time, there is quite a significant risk of error.
So I think it's against this backdrop that you need to look at the data we have already presented. Obviously, in our annual report for 2023, we will have to tackle this challenge yet again because it's one of the required disclosures. So we will certainly adequately make reference to this topic. But please do take into account that there are so many volatile factors, so many that actually the estimation will always be subjective to a certain extent.
Okay. One more question, please. The MREL requirements, your estimations and plans.
As we informed you a few times already, after the 31st of December this year, we will be terminating or completing our MRL requirement. The estimation that we have already now is EUR 1.5 billion of [ high-end ] MREL vis-a-vis the situation that we have right now. So as an additional value of the loans that we will be getting as part of the SB strategy, these will be loans granted by ING Group.
Okay. Last chance? Thank you very much for participating in our conference, and see you in a quarter. Thank you.