ING Bank Slaski SA

WSE:ING

Earnings Call Analysis

Net income declines amid rising costs and cautious market outlook

In the third quarter, the bank reported a net income of PLN 1.1 billion, a 3% decline year-over-year, influenced by increased costs and provisions. Operating expenses rose 11% due to inflation, while the provision level was PLN 428 million, also higher year-over-year. The return on equity continues to be strong at 20.5%. Total commission income grew by 8% to PLN 1.7 billion. The bank maintained a solid loan-to-deposit ratio but noted subdued demand for corporate loans, reflecting general market caution. Looking ahead, the capital adequacy ratio is targeted to increase to 12.5% by year-end 2026, as proactive measures are taken to manage risks.

The Current Financial Landscape

In the latest quarter, the bank reported a net income of PLN 1.1 billion, decreasing 3% from the previous year, with an annual net income totaling PLN 3.06 billion. This decline can be attributed to increased operational costs driven by inflation and rising provisions for potential loan defaults. Specifically, operational costs grew by 11%, or PLN 310 million year-on-year, while provisions for credit losses rose to PLN 428 million. This reflects the challenging economic environment that has impacted profitability.

Interest Rates and Revenue Streams

The bank has seen interest income rise by 110% year-on-year (after adjusting for a credit moratorium effect), reaching PLN 6.6 billion. The interest margin in the third quarter stood at 3.62%, marking only a slight two basis point increase from the prior quarter. However, the cost-to-income ratio improved to 42.6% over the same nine-month period, indicating operational efficiency amid margin pressures.

Commission Income Uptrend

Commission income has demonstrated resilience, accumulating PLN 1.7 billion over nine months, an 8% year-on-year increase. Notably, this quarter alone saw commission income at PLN 582 million. A significant component of this growth stemmed from credit card fees and brokerage activities, which jumped by 26% year-on-year, reaffirming consumer engagement despite prevailing economic headwinds.

Provisions and Risk Management

In addressing credit risk, particularly in the retail sector, the bank has proactively adjusted provisioning levels, reflecting a cautious stance amid economic uncertainties. A noteworthy detail is the considerable proportion of Stage 2 loans in the retail sector, indicating higher risk levels in some segments. The bank's conservative provisioning strategy aims to shield against potential worsening of loan performance, maintaining a focus on financial stability.

Trends in Loan Activity

The bank's mortgage loan segment remained robust, with a significant 85% of mortgage loans issued at fixed rates. However, overall demand for corporate loans has stagnated, attributed to prevailing economic conditions and the cautious investment climate among businesses. The management has noted the need for greater economic stimulation to drive demand back to healthier levels.

Future Guidance and Strategic Outlook

Looking ahead, the management has guided for an optimistic perspective on GDP growth, positing a potential rebound to growth rates exceeding 3% post-2024. This aligns with efforts to adapt banking strategies to stimulate investment and support economic activities. The bank is committed to maintaining a conservative but proactive approach to its credit policies, enabling it to respond promptly to changes in market conditions.

Challenges and Opportunities Ahead

The current environment presents both challenges and opportunities. Rising inflation and global economic uncertainties have led to higher operational costs. Nevertheless, increased engagement in digital transaction platforms and a solid increase in credit card usage are signs of evolving consumer behavior that the bank is well-positioned to capitalize on. In navigating these dynamics, the bank's strategy is focused on maintaining a balanced approach to growth and risk management.

Earnings Call Transcript 2024-Q3

[Piotr Utrata, executive]

[ Bozena Graczyk, ] responsible for Finance, CFO; [ Elizaveta Kiszka, ] Investor Relationship Manager and ESG reporting. I'm Piotr Utrata, and I am the spokesperson of the bank. Brunon, please take over.

[Brunon Bartkiewicz, executive]

Welcome. As every quarter but today, due to the celebratory mode, we will try to be more cheerful than the atmosphere around us, the quarter 3 is heat and floods -- flooding. So a lot has happened from that point of view. A lot has happened also within the bank given the fact that we have projects, streamlining of processes, we have made a lot of effort in order to streamline the solutions that we have in the area of the security of our clients, vis-a-vis the unceasing wave of attacks of criminals and the search of a model that would perhaps that would make them even more fortunate. That's their action.

These subjects are happening in the background. You can't see them in the figures, but the reason why I'm mentioning this is that the economic activity of quarter 3 has been rather insufficient, and that has been more of a mantra recently. This is another quarter in sequence that we're talking about another year of low investment activity, subsequently. So if there are reasons to be concerned, that is perhaps what we should be talking about.

But as I know, that's not necessarily the focus of your attention because here, at least, because perhaps you're seeing experts who deal with the economy on a slightly higher level. But for me, managing a mid-level bank or perhaps slightly bigger bank on the domestic market. I feel concerned, deeply concerned about this because time is the only thing that we mustn't waste.

Now for the bank's results, the increase of clients, transactions, everything is happening correctly. Of course, we are feeling the lower increase of [ kind base ] because not much happening in the market, then the increase of your market share is not happening very fast, either. But for the transaction volume, things are going really well, very well.

As a matter of fact, the number of transactions carried out by our clients, mostly retail, individual -- perhaps less so corporate given the -- all that I said just before. Still, the changes are happening. Perhaps they're not -- the increase is not that of 30% or 40% like it was a few years ago, more of a -- up 10% in terms of electronic transfers performed by clients or the debit transaction.

So the ballpark is a 10% increase in this sector. But one component that's slightly different is the mortgage activity. So the -- for our perspective of state intervention, what is referred to as aid programs, state aid programs, which means that there are some emotions emerging on the market, happening for quite some time now.

And these are the expectation of an increase in property prices, which then translates into an increased demand activity in the property sector. Given the short supply, this is causing the self-fulfilling expectations. But indeed, the mortgage sector is quite high. We're not yet at the peak that we had for the record year, but these volumes are quite high, and the bank is maintaining its #2 position.

We are now back and volatile interest ratio -- interest rate market. For many years, we did not have the changing interest rate on offer due to the shift in the attitude of regulatory authorities in the WIRON rate. I'm sure you are aware of the Phase 1 and Phase 2 of social consultations. So hence, we always emphasize it is our goal not to confuse our clients.

So at the moment, we are now also offering mortgages with changing interest rate. It's not yet a record-breaking market, but we're pretty strong, and we're #2 and still growing on this market as the second leader. In the corporate area, which arises most concerned, there is hardly any increase here, but also in the markets in general, hence, our attitude. Our share in the loans is the same, remains the same even though there is hardly any production happening.

Corporate clients, just as retail clients have quite a lot of liquidity surplus and just a question of where to invest. So either in real estate and properties or asset management products, and that's an ongoing trend. Our concern related -- is related to the low activity of corporate loans, and that's happening, and it's been going on too long. Other than the adjustment to the inflation in the cash loans well, not much happening in the corporate loans in the market, and that's been the case since quarter 4 2019.

And we're in another subsequent year that, while this is happening, the economy is still producing more or less 3% GDP growth and the indexes are not too bad. It's just a matter of attitude. And what you conclude? I conclude that this 3% GDP is due to the momentum that we've had, and we need to really feed the engine to go forward. And this is insufficient to ensure the [ competitivity ] of the Polish economy, especially that quite important transformation projects such as energy, production, transfer -- energy transfer, armaments and combating -- counteracting the trap of mid-level income.

So the issue that our labor market is, to a large extent, saturated and suffering a deficit. So what's happening here is that there are colossal investment needs. And with no push, this will be quite difficult because the demand on the market is too low. And let me say that again, it's demand that's too low. So it's not the interest rates that are a problem. However, it is not helping that they are so high.

So I'm also emphasizing that -- we have -- this is -- since quarter 4 2019 that we've been looking at either decrease or a stable environment. So 2020 was more of a transition phase with COVID.

Now with the prolonging recession tenancy -- hello. Welcome. I will continue if you allow me. So I don't want -- I didn't want to use the word recession. It has a different meaning in economic terms, but there is a certain level of stagnation on the market, vis-a-vis the needs that our economy and our society are demonstrating this is unsatisfactory.

And what's happening is that there are individual isolated elements or components of threats that could pose a risk to the stability of our corporate clients. So we can see some individual components. Perhaps -- do I see any industries where there is a deterioration? I would say no. Some industries are doing better than others.

However, there are some individual cases on the level of some entities where there are some disturbances. Whether or not this would be a sign of a breakdown of their sales or perhaps some unfortunate investments? Well, in the times of recessions, these become more visible. I don't want to abuse the word recession. We're not facing one as a matter of fact because we have a GDP growth year-by-year. So we can't really say that we have that.

But we do see that -- a slowdown. So when we observe that, we try to provision -- make provisions for that on the desired level, and I hope that you can see that we're a rather conservative bank. And I think the last 20 years have demonstrated that. So while the uncertainty is sustained, we can see some disturbances. And seeing that we provide for that. I mean we make provisions, and those are on an increased level.

Let me just remark again we cannot really see any sudden or serious crisis, but we are reacting conservatively and perhaps slightly ahead of time because, frankly speaking, when there is a pickup -- when the economy picks up, these imperfections, individual imperfections will be even more visible.

Now these figures seen, nothing dramatic is happening. But we would want to make sure that we are ahead of time disclosing such phenomena. So hence, those increased indices with risk costs. And you will be asking us about this, perhaps, but I've jumped ahead a little bit, bringing us forward to the discussion ahead.

The rest is visible in the materials that you have received. I'm sure you have made comments about this, and you have made comments about our revenues and costs. And I'm sure you have remarked all of you, that there is an increased cost of risk. There's slightly -- that's slightly less surprising to us than it is to you. But that perhaps is due to the fact that we know what's in the background, which you might not know. And I think this is what the roles are here and the roles to play.

Now for the remaining aspects, I think that you can study the materials presented regardless of the fact that sales or new production or net changes are, I would say, quite gentle on the market, which brings us no joy because unless you are moving forward, you miss out on development opportunities, and that's the most painful lesson, seeing such interesting times, full of challenges.

We cannot seem to be able to go forward. And I do understand that there is a threat of war and a difficult situation in Germany, which definitely is our most important trade partner. Still, internally, there's so much work for us to do that this should not be happening. So from the point of view of creating economic dynamics, we're looking at a phenomenon of negligence and that's not a good thing.

What else? Well, I think that would be it. I have commented on the attacks. We are seeing this. Everyone is now talking about it. Of course, we have cyber criminality attacks that are more and more complicated. We have AI models that are being used, more and more sophisticated ones, a very powerful and professional attempt to manipulate our clients. Hence, as you can see, the banks and our bank's response is quite straightforward awareness raising.

I can -- I think that you have seen the campaigns, an unprecedented campaign is happening right now. And some functional solutions and perhaps limitations of functionalities that increase security is also something that we're going to look at going forward because that needs to be done because the threat is out there, and it's quite significant. I'm not necessarily going to link this cyber security issue to the war outside.

However, a lot of that activity is happening in circles, which are definitely not friendly to the Polish National Security. And that would be -- I don't think the rest of the figures are any surprise. Peaceful times mean that it's easy to do forecasting, which is an ailment of mine because I would love to come to you with a new creative surprise, but it's perhaps to calm from my sake.

I shall leave you with this, hoping that I will be receiving multiple questions in the next session. Now over to Bozena, who will guide you through the details very professionally, as usual.

[Bozena Graczyk, executive]

Hello, very briefly, just to leave some space for a discussion. Quarter 3, net income is over PLN 1.1 billion, and this is result that has been close to the expectations. It's lower than last year. And you can see that in our accounts, this has been impacted by the increased costs and provisions.

I will make a comment on that. And for our performance here, the net income is PLN 3.060 billion, that's 3% lower than the year before. And if we were to adjust this for credit moratorium in quarter 2 and 3, PLN 150 million, then actually, the year-by-year performance would be very close. And what's really worth looking at is the big aggregates impacting our financials.

We have higher interest rates, 8% increase and commission PLN 122 million year-by-year, 8%. This is an insignificant increase. But on the other hand challenges related to the level of inflation and the performance of our statutory measures, that our costs of operations are increasing 11%, PLN 310 million year-by-year. And what I mentioned earlier is the higher provision level, PLN 428 million, and that's also an increase year by year.

From that point of view, we are maintaining ROE, which is high accumulated. That's 20.5%. Our cost to income is 42 -- total income is [ PLN 42.6 ] after 9 months. So -- we are looking at the interest rates after adjustment for credit moratorium. It's PLN 150 million of negative impact after the second quarter and third quarter, 110% increase year-by-year. Now it's PLN 6.6 billion, in the quarter is 2.2% and that's 1% increase quarter-by-quarter and 7% year by year.

Our accumulated interest margin in quarter 3 is 3.62%, and that's 2 basis points of change, vis-a-vis last quarter and our interest rates quarterly margin is 3.61%. And I think it's worth looking at our loan-to-depo ratio and it's below the desired levels still in our balance sheet structure, but the level is higher in this quarter than it was last quarter and [ 76.1 ]. And that, again, is also good news.

With regard to the commission rates, you can see that for 9 months, we have PLN 1.7 billion, which is an 8% increase year-on-year. And in this quarter, PLN 582 million, and income 2% up for the quarter. I believe that we can see growth across all categories of the commission income year-on-year.

I would like to pay attention to 40% of charge and credit card-related income, not to mention the distribution of participation units and brokerage activities. This year have grown by 26% year-on-year. Now in terms of the operation costs or operating costs, you can see that for 10 months, PLN 3.5 billion, that's 12% increase of growth, ingredient factors include increased operating cost by 16%.

This is due to a variety of items that goes without saying, particularly inflation-related cost of building maintenance, advisory services, IT services, all of which continue to be under extreme inflation pressure. Payroll, 9% up year-on-year. This is something that we have been talking about during the previous conference as a result of the pay raise campaign of April this year. And in proportion, we also have the bank tax increase by 12% year on year.

Now if I were to comment on risk, Gabruno had actually said a lot already. This slide shows the overall dynamic of the reserve cost, PLN 349 million -- excuse me, PLN 349 million of provision of reserve risks or provision risks and 83% of disbanding in the retail sector.

Now with regard to the isolated island growth of risk in the corporate banking sector, it is tied in with the stagnation period that we have been observing for quite a while now. Now as Brunon said before, we are assuming that as the macroeconomic situation improves, if -- should it come true, the cost of risk is going to drop over successive periods.

Whereas in principle, our priority is to remain prudent and respond to all and any symptoms of the negative performance of our clients. We have excellent retail portfolio performance. Mortgage loans actually have a negative cost of risk, the net of disbandment or repayment. This was affected by the portfolio behavior as such.

But on the other hand, we also have the performance on the sales of passive revenues. NPL sales in the retail sector gave us PLN 57 million. In terms of the portfolio quality and provisioning, this is a natural consequence of what we were talking about before. The Stage 3 performance in the retail banking has definitely -- had contributed to it, 32 basis points quarter-on-quarter and it has resulted from the NPL sales. 27 basis points has been contributed by the sales of retail loans.

Now we also have the Stage 3 provisioning ratio related income in the corporate sector. Regular clients -- excuse me, loans have grown by 41.1% -- [ by 0.4 -- the percent ] at the end of the quarter, 5.7%. And now we have also noted a number of shifts in the various stages. I believe that it is highly notable that the share of Stage 2 in the growth portfolio, in the retail loans is a result of our analysis of the overall impact of flood-related effects on the retailed portfolio. As part of a good analysis practice, we shifted part of the loans to a provision of PLN 11 million provision pool.

We have also reclassified quite a few loans to Stage 3 which obviously has reduced the coverage ratio, well provisioning ratio, if you will, in this segment. The reclassifications are so-called early reclassification, which ultimately means that they have not yet passed their entire life cycle of regular loans. Provisions do tend to grow over time for that stage on the one hand. On the other, it is also the results of excellent portfolio hedging or security.

We also have the capital adequacy issue, 14.98%. It has dropped by 44 basis points quarter-on-quarter, which has resulted primarily in the risk-weighted assets change, specifically when it -- well, across all segments, but that is a result of model changes and the provisions of portfolio segments across different stages.

A quarter ago, we promised you that we are going to comment on what will be happening as a result of the -- introducing of the MREL level, I believe. This is associated with the -- this is associated with the intricacies of provisions, of related provisions. The stage of intricacy and the fact that we are passing through different risk stages means that those are cautious estimates.

Nonetheless, PCR related effects, we ought to be positive across the board and up to 1 basis point. That is growing the capital adequacy ratio as a result of introducing the CRR 3 [ as the speaker said ]. Now -- we are very much aware that the market has commented extensively on the change of capital or equity buffers.

And we have also published a report proving that we are all suggesting that we are expecting a change to the system buffer. With -- in our case, it's going to be 50 -- up to 50 basis points in Q4, 1% for that is going to be adopted for that buffer.

On the other hand, our schedule is also -- also includes anti-cycle buffers for the future. In Q1 of next year, 1 percentage point and by successive 1 percentage point per quarter. Now TCR-related without B2G will be 11.5% at the end of next year, 12.5% at the end of the next year, and it is going to continue growing by the end of 2026. I believe it is worth mentioning that we did something else. And in early October, we issued the MREL.

We took out a credit line as part of a nonprivileged senior loan of EUR 350 million for 4 years. I think that is all in terms of the main comment in a nutshell concerning our financial performance for this quarter.

Now let us proceed with the Q&A session. We are going to respond to questions from the floor, followed by questions asked by our online speakers.

[Konrad Krasuski]

Konrad Krasuski, Bloomberg. Well, I must say that the introduction was rather gloomy with regard to your financial performance. Well, you believe that interest rates are not the main driver of the underperformance or poor demand for corporate loans. So what has to happen? We want -- we were very much hoping for national recovery plan funds and so on and so forth. What do we have to do in order for the demand to grow?

What are we missing in the economic policy creation? That's question #1. And secondly, I have a related question. The debate is going on, how many treasury bonds can -- that the banks continue buying given the -- what government needs.

Don't you think that it is much easier to invest in 2.7% or central bank derivatives, 5.75% rate rather than in any kind of loan? So how many T bonds can you buy? And question #3, associated with question 1. So what is your opinion concerning retail sales opinions? With regard to your cards or credit cards and other instruments.

Do you believe that there is something wrong with the Polish consumer market or retail sales? Or haven't you noticed a deep decline therein?

[Brunon Bartkiewicz, executive]

Thank you very much for that question. Thank you for those questions. Very good questions, not really tying in with our bank. They are of the general kind. But I will try to take the charge to respond to the challenge. With regard to question #1, the poor investment engaged in by private entities in Poland in response to the overall needs.

Well, this decline has been on since 2014. We are just closing a decade of a declining propensity for investment in Poland. This also ties in with the relatively high use of manufacturing capacity in Poland that we do have. Well, in services, it is not as apparent, but that is the general market impression.

And those circumstances actually do arise in circumstances of insufficient employment on the market, which means that all businesses ought to move to investment in order to replace production means with state-of-the-art solutions, with limited labor and intensity and electricity intensity factors, albeit our companies are not really dependent on electricity prices.

Nonetheless, the dependency is there. And given the electricity price increase forecast, this is what people should do. Astonishment is it comes as a surprise, which means that the response to the question, why is investment in Poland so poor is rather complicated, which ultimately means that incentives to boost investment ought to be valuable in nature or assorted in nature.

Indeed, tax stabilization and other instrument stability and other preferences applied by the government, i.e. a uniform energy policy, a uniform monetization policy, a uniform policy of following certain growth engines. Quite a few years have passed since the most recent government attempt. Nonetheless, for the past 10 years, we are not operating according to a clear set of guidelines.

As a result, businesses are showing a preference for concentrating on the accumulation and retaining their scale of operation rather than shifting towards efforts to scale their enterprises, both with regard to the range itself, i.e., exports and in terms of capital provisions.

Obviously, an investment rate for the past 10 years are nothing optimistic or changes ought to be introduced for purposes -- for aforementioned purposes. Legal stability across the board, clearcut priorities. Regrettably today's economy, unless the government introduces clear rules will not manage, will not be well, which means that we need priorities.

Priorities are a much better solution than state intervention. It goes without saying that financing, low-cost financing included ought to be of great importance to the overall situation. Nonetheless, the Monetary Policy Council operations and related credit performance can be traced over the last decade. So the cut to interest rates did not have any major impact on loan campaigns or economic growth. I wish to remind you that inflation had risen in the '20 -- or inflation rose in 2019 already. So we have to convince our businesses that investments are worth their while.

Each and every way of lagging behind means that people are getting used to [ watch us ] there. And that's causes great grief to me. I believe that what we do need our clear-cut guidelines and operations that ought to be consistent in their implementation. This is exactly what we have on the market and businesses.

Now a related aspect involves awaiting or expectation. Businessmen today, Polish businesses are showing an exceedingly high propensity for saying, let's wait for the program, let's wait for further incentives rather than taking matters into their own hands. Poland cannot afford economic growth of 3% year-on-year.

Anyone interested in the 2025 budget in any way can see it very clearly. And we all know that the economy is a very strictly defined organism. Without economic growth, we will not be able to maintain our budget. What we are going to need? Well, we do need growth as the desert needs to rain.

Now with regard to September consumption or consumer rates after August, September came as a surprise. Nonetheless, I would like to emphasize and point out to that consumption rates cannot be seen as the main driver for economic growth. It had been seen as such for excessive periods of time.

We are definitely attaching greater hopes to Germany rather than Poland. Poland is actually doing well, specifically the post summer holidays' rates do give us hope. Nonetheless, we cannot forget that economic growth is not really driven by consumptions -- by consumption.

The consumer rates, on the other hand, with increases to remunerations to salaries, which is not really tied to the productivity of Polish economy. Now given the lack of economic growth, what on earth are we to compete with if not with the productivity? As a result, Poland is not really perceived as an attractive target for investors over 10 years' perspective.

We still have low labor costs and excellent workforce quality. Nonetheless, that excellent workforce quality is definitely a -- well, brings a cold shower effect because salaries have grown by 10%, 11%, 12% year-on-year, which is rather colossal. Nonetheless, we are very much aware that in the most desired areas, that increase is significantly higher, which ultimately means that -- it is not consumption or the growth in salaries are to carry us over in through the modern area of long-term competition.

Firstly, we have to focus on energy transformation, both in terms of -- so it is about generation and transmission. But that will involve public works. And on the other hand, be it services or heavy industry, energy consumption will be growing because we are going to be shifting towards an electricity consumption-based economy. If we want to be a country for big server farms, for example, well, that is a very energy -- a highly -- high consumption industry.

It consumes a lot. And that's quite obvious. So that's more or less the point. Another thing is armaments. Well that's a big burden to the budget, but it's also a huge opportunity, frankly speaking, to modernize the economy to make sure that it gets a, I don't know, 6, 7 gear, I'm not sure what the gearboxes are in the most modern cars now, but that's generally what I'm looking at huge funding -- and it's important that they cascade throughout the economy and push it forward.

And the third aspect that I consider a priority as well is the cost of work and the scarcity of labor force. We will not be able to handle this. The demographics are not really going to handle this or immigration isn't either because we're looking at excessive costs and social burden. If we were to attract hundreds of thousands if not millions of new immigrants into Poland, where do we take them from anyhow?

So that's to a large degree, the response to your question, but that's how I see it in general. But the issue of the September readings of consumption indices. Well, I'm glad that the ones in Germany are doing well. I'm always more glad to see that.

Now bonds. The level to which the normal commercial banks being pushed out, given -- I take deposits from the bank and I invest them into loans on the market. Well, now we're quite far from this practice. Back in 2020, I also remarked that there was a shift in paradigm in terms of how money was flowing. So interference of the state in that role, which disturbs the process and such habit causes the outcomes that we are seeing right now, which basically translates into the fact that if the state borrows money from the bank and then the state gives out money more or less, perhaps less effectively openly speaking, at least that's the view I subscribe to. But that's my own opinion. I'm just a simple economist.

From the point of view of the whole balance sheet of banks, well, that is an excessive concentration on one entity, assuming that the state treasury and the pricing of T bonds which are not dependent on the results and performance of the banks, well, that's new topic. Now there are factors, and we have seen that, that might come from outside the state, which can quite suddenly change the pricing and the evaluation of the T-bond's value.

And therefore, a huge share in the banks, it's a certain risk, and it's an element of concentration. So from that point of view, we could think of perhaps looking at balance sheets of banks and seeing whether they are resilient enough. And where is the border line beyond which investing in the treasury bonds happens with the relative scarcity of other tools that are liquid enough and appealing enough in terms of interest rates that could compete against treasury bonds.

But that is not -- it's not the case that the banks prefer to invest in treasury bonds rather than loans. That is untrue as a remark, but since there are no loans, and there's a river of money flowing looking for its place in the economy, it will concentrate in banks, in the property market. And only to a certain degree -- I know Sebastian will be unhappy that I've said that, but only to a certain degree, will it become equity because the level of instability and uncertainty and burning your fingers is still making waves.

So I have heard this many times that banks prefer treasury bonds because it's safer. I don't see it that way. That's not how I say. I think loan-to-depo ratio that very often is something that we make reference to, which, by the way, is about 70% in the sector here in the country is slightly improving, but that's not a very good practice in general.

Let me repeat again. What we're looking here is, again, it's something that could be perhaps turned into good potential. Poland is a country where entrepreneurs have relatively little debt. The overall sum of loans to entities versus GDPs are on the level of 11% in Poland. And the EU average -- and I know that they are decreasing those indices, is about 35%, right?

Now when these countries experienced significant growth, and we're solving their economic and social problems when they were emerging like we are now, these indices were on the level of 60%, 70%. So our banking sector is rather small, vis-a-vis GDP, which is due to the fact that enterprises are not using their elbows strongly enough. I understand 3% GDP, hurray. But that is just a matter of attitude and outlook. Since we are an emerging country and a growing country, we should be having a 5% GDP growth, and we are not going to. And that's a dilemma that is of concern to me as an economist, a humble one.

But still, I've been in the area long enough to have a right to respond to your questions rather than just to say I don't know anything about it. Have I succeeded in responding to you and showing you my views?

[Konrad Krasuski]

Another follow-up question, perhaps. The government has showed the midterm financing plan that it's presenting to the European Commission. And there are some blood freezing macroeconomic forecasts there. The GDP growth in 2026 or '27, I don't recall exactly, will be reduced to 1.7%, while the inflation will be -- will maintain on the level of 4%, 5% and interest rates about 4%. Is this a warning sign that -- well, for a while, perhaps this year and next year, we will continue growing a little bit, but then it will be really, really bad? You're looking -- you're saying that 3% is not good enough. And what about 1.7%. So that's question #1.

And question #2, if I may. What I'm concerned about is the state debt limits in the bank. I figured out that I was going to find out who sets the limits. It's not the issue of risk because their weight is 0%. So -- there is no limit as a matter of fact, when it comes to risk criterion. So what's the story here? That's a technicality.

[Brunon Bartkiewicz, executive]

Okay. Let me explain. Poland cannot afford to grow at 1.7%. Poland cannot even afford as low as 3%. Our forecast is perhaps optimistic. But still they are saying that there is potential for us to have a growth that is north of 3% after 2024. And that is my wish to you and myself. Second point, the weight of risks and capital is not the only element when we look at when we assess the financial instruments.

We looked -- I also remarked the option of changing the pricing level of T bonds. It's a liquidity tool. That's the reason why they are kept on the balance sheet of banks if they are not -- if they are not booked in hold to collect -- as a whole to collect item given that the economic quality -- this has changed terminology.

I still call it maturity anyhow. But -- in any case, you know that this is -- this part of financial assets where you recognize their normal depreciation. But this comes with a certain burden. Most of such portfolios still are recognized as per their market value and the impulse might come from even outside, which means that the potential difference in pricing should have to go through either P&L or capital. And that means that the appetite for such vulnerability, which means that every bank has to have a specific scenario and look at how much it can afford.

And then decide to what extent or how long they want to invest in treasury bonds because in the blow might not just impact the value and the absorption potential of the whole balance sheet and the P&L of the bank. But also it could be linked to the time perspective over which the treasury bonds are held in the bank, whether they are just original or hedged towards the profile of the bank has.

But risk-weighted assets towards nominal is the only -- is only one aspect of that, but it's not a component of a dynamic outlook on the potential blow or factors coming from outside. And then excessive concentration is seen. The National Bank of Poland has seen this issue for a while in its newsletters, it is making reference to it. Today, the risk is assessed as low. But a few years back, it was considered to be one of the major risks about 3, 4 years ago when there was accumulation of a sudden breakdown that was 2020, 2021. That was the NBP's report or the European Financial Congress report, that was considered one of the most important, if not the most important risk factor in the banking sector.

[Piotr Utrata, executive]

Are there any more questions in the audience? Perhaps I should read one from online. The cost of risk, especially in the corporate sector, perhaps a few questions could be asked at the same time because they refer to more or less the same topic. Can we still talk about the isolated character of risk of cost in the institutions. Those booked in quarter 3, do they refer to -- only to the clients where write-offs were made in quarter 2. How many quarters will take for ING to reconstruct its ratio in the corporate sector?

And how does the bank assess the risk of financing of and the upcoming credit needs of companies that are responsible for energy transformation?

[Bozena Graczyk, executive]

That's a lot of questions. We still believe and we see that in our portfolio that we're looking at individual isolated problems that our clients are experiencing from various sectors of the economy. So we cannot really say that we're looking at actual sectors of the economy that are causing mass increase here.

We're looking at the corporate sector, where there is a one-by-one analysis based on ratings and financial performance data and the solvency analysis. So from that point of view, those are isolated individual cases. So in a large credit portfolio that we hold as a bank, well, that does not refer to 2 or 3, but a collection of -- yes, individuals, still individual cases that we have targeted provisions for.

Like I said earlier, we will absolutely keep the highest level of caution and apply IFRS principles. This is how we assess the risk of this portfolio. Now the question on how many quarters will it take for us to rebuild it? I don't think this is the main point of our discussion. Let's bear in mind that the share of Stage 3 in our credit portfolio also depends on how this portfolio is going to grow.

So there is a -- there are 2 aspects to the calculation. Now the slowdown of the portfolio also means that there is an increased share of Stage 3 loans in the whole loan portfolio. So I think that's something that we need to take into account. Another point is the sales of NPL loans. And we have showed this in our disclosures. We have sold in quarter 3, some retail loans. And in quarter 4, we have sold also some loans from the corporate portfolio. So then our ratio will be improved -- but this is a normal business as usual procedure. Just like we said before, we treat the sales of NPL portfolio as one of the elements of our business activity.

So other than the fact that we're -- the outside situation means that there was no sales of external receivables. So I think I covered those 2 topics. I think Brunon will take question 3.

[Brunon Bartkiewicz, executive]

But you volunteered. Financing of the companies -- public companies held by the state treasury. Every case is individual and different. So I don't want to respond collectively, but among the companies that are partially owned by the state. There is a significant extent to which there are some problems. Media, there is a lot of media coverage of that topic. Sometimes perhaps some of that is even close to the truth. It's best to talk about restructuring privately without excessive publicity. And to a large extent, we are looking at entities without state treasury involvement, but there are also public entities very often, and so there are some rigorous rules as to disclosures.

So yes, there are some element of adjustments that are necessary and that's obvious. The other part of your question are involvement and our exposure in terms of entities that will participate in the energy transformation process. There are a lot of these entities. Let me just recall. For the production side, where there is quite a significant factor related to the distribution network and entities that are considered by us as carbon entities, so where quite a significant proportion of the revenue generated is linked to thermal carbon according to our 2015 definition. Let me just remark that in 2025, the transition period that we opted for expires. So we will no longer be financing such entities, as you can easily figure out those that are carbon entities according to our disclosure from 2015 will no longer feature.

Now there is another component that we were all hoping for that is to isolate all coal-based operations and divesting them to another entity. Nonetheless, that is not cast in stone. I don't see that -- such an assumption in the 2025 budget. Now with regard to the operational cost question, now let us blend 2 quarters. At the end of the third quarter, the bank had 185 facilities, what is the future in terms of the employment. The headcount dropped by 128 in the third quarter. Is that the result of shutting down bank branches?

Okay. That's again, me again, it's all uphill work, isn't it? 185 branches of physical facilities, that's approximately 20 fewer than we actually reported for year-end 2023. Now if any of you are archival aficionados, do take a look at the history of our last decade. We were closing our branches at a rate of approximately 20 to 24 branches per annum. We want to reach 200 facilities.

Nonetheless, I understand 200 branches shut down. Now if you consider what clients come into the bank for, the propensity for actually visiting a bank or a bank branch is dropping. Let me reiterate, we are not calling them really branches. We call them meeting places in order to tell the bank that our bank facilities are there to meet. Meeting places are places where meetings take place, are not locations where you can close a financial transaction.

We still have customers who want to have cash access. We have a network of bespoke facilities to handle that. Actually, if you go downstairs and turn right, you will be able to reach our meeting place and another 50 meters down the road, you will find a cash access facility. These units should be meeting places, indeed.

Nonetheless, in order to avoid a technical/behavioral debt with regard to client expectations, this is the process we shall be following. This is obviously the direction we are going through -- we're going to be following. We are not going to declare the ultimate number. Nothing is written in stone as said before. Now I would like to emphasize that the bank has a major network of cash machines. Nonetheless, you probably do know that the -- it will come as no surprise to you that ATM transactions are dropping across the board, 10% per annum, which means that the number of clients or number of customers is growing while the number of ATM transactions is dropping. On the other hand, we are reporting a growth in transactions closed or handled with the use of credit cards and debit cards or charge cards is growing as is the number of volume of noncash or non-card transactions, such as the BLIK system.

Okay. Now what's over to optimization and restructuring provision period of 3 years. We are -- this is now a work in progress. It is in the pipeline. Those are all phenomena that are now in progress and share in progress.

Nonetheless, I would like to point out that life is not that simple, that we are going to go on laying people off. We continue laying people off, yes, but we are employing new ones. So the net result is what counts. Question from the floor.

[Unknown Analyst]

I would like to ask the following. The sales of mortgage loans, the share of fixed interest rate mortgage loans is 85%, considerable growth quarter-on-quarter. When is the growth? And with regard to the high share of the fixed interest rate mortgage loans, is that a direct result of your policy? Or is that a derivative of high customer interest.

[Brunon Bartkiewicz, executive]

Well, in Q3, we did not -- we were actually not issuing any variable interest, interest rate loans. We were based on WIRON. And only at the end of September, we introduced 1 month WIBOR loans, which means that the production of the third quarter is due to a period preceding that change, which I explained, which means that this 85% share is an artificial effect.

The more natural one is the one from the previous quarter, which is approximately 40%. I could not hear the question from the floor. The speaker is not using the mic. The response is naturally -- indeed I'm rather regrettable -- rather regretful because as always, clients are behaving rationally. Nonetheless, we always have to refer whatever we are doing to what is going on, on the development market in Poland.

We have been repeating time and again that as the banking sector as a representative of the financial sector. What we need is a set of certain guidelines, fixed guidelines with regard to mortgage loan conditions. That has not yet been resolved, which also ties in with a fee for early repayment. This is something that has not been regulated, either, for fixed interest mortgage loans. But in layman terms, in order for the mortgage loans to work and for it to become a truly credit instrument rather than an instrument that keeps on changing, those amendments is what we are going to need.

[Unknown Analyst]

Okay. But with regards to client interest, what do they prefer? Do clients prefer fixed or variable interest rate loans? Today, 60-40, I would believe, percent. This is something that has also been listed in your conference kit, but the overall -- the previous speakers' comment was obvious.

[Brunon Bartkiewicz, executive]

Yes, the greater the change to fixed interest rate mortgage loans, the higher the interest and variable interest rate loans. Nonetheless, mortgage loans in Poland are contrary to what is believed in Poland, continues to be a rarity, a rare asset for the majority of the Polish society. Not to mention the fact that not everybody believes that they can actually afford it. So it should be in our best interest to promote this particular financial instrument, which would mean that we could contribute to something resembling law and order on the housing market.

On the one hand, we have rather disquieting demographic tendencies. On the other hand, we are continuously facing a hunger for housing facilities. So the situation is truly peculiar. We invited people over to our newly opened restaurant and only 1 client fits in the doorway with thousands waiting out in the street. That is my personal belief, but I'm only a modest economist. Now the interest rate performance, why such a high cost of hedging quarter-on-quarter?

To be frank, it is -- this question is both easy and difficult to my mind. On the one hand, we have a net change to evaluations that affect the value of the revaluation provision. On the other hand, we have the actual effect of overall transactions, of the volume of transactions closed within a government period and moved to the -- or shifted over to the interest margin.

So we have a number of factors here. On the one hand, we have the historical conditions of hedging transactions for the previous period. On the other hand, we have the dynamic associated with the ever-changing structure of the macro cash flow hedge, which as time passes and as interest rates change, tends to dynamically adapt to needs arising from market replication.

So I believe or I would advise you not to focus on the growth by PLN 69 million of the macro cash flow hedge -- higher in this quarter, but to pay greater attention to how the macro cash flow hedge cost affect the interest rate -- the interest margin.

[Piotr Utrata, executive]

We have a number of questions from the Internet to quite diverse one by one.

When will ING introduce T bonds to follow? Well, it takes 2 to tango doesn't it? The bank wants to do that, but it takes 2 to tango. What is the so-called free loan sanction and WIBOR-related sanctions?

[Unknown Executive]

Now with regard to the free loan sanctions, those are isolated cases, fewer than 100. And the events or the suits, which have already found a closure in court, 90% have been won by the bank, which definitely proves how marginal the phenomenon is.

Now with regard to WIBOR-related suits, yes, indeed, the banking sector has seen such suits. It's not a mass phenomenon. I believe that they are fewer than 1,000 if memory serves. And all these cases that have already been closed judicially have also been won by the bank. So this, I believe, shows how low risk the issue is. I think that with regard to WIBOR clients, I think that the proceedings before the European -- the Court of Justice of the European Union is much more important in terms of WIBOR-related loans.

Nonetheless, we would like to also remind you of the position of regulators in the plural across the Polish board, across the board in Poland, all of whom claim that WIBOR loans do not carry any premises to be questioned.

[Unknown Analyst]

Let us continue with lawsuits. With regard to franc-denominated loans, some banks are expecting a drop in provisions since 2006. So what is the situation in your case? What will happen over the next 2 or 3 years?

[Unknown Executive]

Well, yes, indeed, the range of provision growth is definitely on the decline whereas on the other hand, the provision coverage is growing or provisioning is growing. On the other hand, we also have to pay attention to the assorted statistics for individual banks. It obviously is always about the ratio of ongoing cases to the portfolio. It is also about the volume of conciliation agreements that are waiting to be signed.

In our case, the issue is rather minor. We are only facing hundreds rather than thousands of non-closed credit agreements. It has always been a rather minor issue given our lowest share in the overall Swiss franc-denominated loans issued across Poland. We are definitely going to be witnessing a phenomenon of bank provisions declining to that particular purpose.

This is going to bring stability. I think that the greatest risks have already been hedged have been provisioned in the banking sector, ING included. This is definitely something that will keep dragging behind us and haunting us for a couple of years. From the P&L perspective, we can definitely say that franc-denominated loans has ceased to be a major challenge to the sector. Whereas socially speaking, I believe that is a disaster. That is my personal belief.

Since this disaster has not been halted and will definitely go on haunting us, it's definitely something that is an abomination. Well, greed breeds miracles, doesn't it?

[Unknown Analyst]

Okay. Are you considering changes to the overall capital structure?

[Brunon Bartkiewicz, executive]

The banks keep developing insurance companies, 45% seems insufficient. In terms of capital optimization, well, I believe that capital investments are not really important to optimization. We do not see a cause and effect connection here. Now the Stage 3 CRR-related effects have impacted our -- the risk of our retail portfolio. This is something we are focusing on at the moment. Moreover, we have been saying time and again that our joint venture structure that we have chosen many years ago is both correct and adequate.

[Unknown Analyst]

Brunon, a question for you. Dear CEO, thank you very much for that presentation. We understand when you are saying that businessmen are too cautious in terms of investment. But don't you think that this also applies banks, ING included? ROE is now highly above the cost of capital. Don't you think you should downgrade your margins and stimulate businesses, offering cheap loans? Why are banks so cautious in their approach and are not giving -- setting a good example for businesses?

[Brunon Bartkiewicz, executive]

Logically put. I do understand the question. Nonetheless, the question itself comprises an assumption that stimulation through lower reduced margins will drive business turnover. It won't.

[Unknown Analyst]

And Reuters question, when are you going to announce a new strategy for the bank?

[Brunon Bartkiewicz, executive]

Very interesting question. The bank has its own strategy drafted in 2004, '05 at the turn of the 2 years, and we are sticking to it. It's still working. I do not really understand the definition of the term strategy as such, to be frank. If we were to refer to the financial forecast for the next 3 years as a strategy. Then ladies and gentlemen, each and every bank has supported its own forecast and strategy together. Each bank has to share that with the regulator. But as you well know, we do not share our forecasts with the market. Apart from the components we are obliged to reveal.

We believe that our rules of operation and directions of operation are sufficiently transparent for the market to have no problems with the conclusion how the bank is going to operate over the next years. So do reach for the adequate data, your forecast of a couple of years actually has come through with regard to our bank.

It's enough to look at what's happened before. Of course, we weren't able to predict the pandemic and many other issues. But we do have a certain operating perspective. We disclosed it quite precisely back in 1994 as far as the future-oriented solutions are concerned. And ever since then -- so more or less for 30 years, we haven't really felt that you could have any problems predicting our lines of development over the upcoming years.

So I don't know personally -- I don't see any reasons to change that, especially when predictability is subject to such significant changes. Anybody who announced or disclosed their strategy back in 2019? Well, congratulations to them.

[Piotr Utrata, executive]

Thank you. There are no further questions. So next conference will be held in early February for the first performance in quarter 4. Thank you very much. And this will be fascinating because we will be talking about macroeconomics and macroeconomic forecasts. And all the best in the New Year in that case.

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