ING Bank Slaski SA

WSE:ING

Earnings Call Transcript 2021-Q4

[Operator]

Hello and a very good morning. Welcome to our press conference on results of 2021, including quarter 4.

Let me introduce the participants. Brunon Bartkiewicz, our CEO; Bozena Graczyk, the Vice President for Finance; and Rafal Benecki, Chief Economist of the bank. We also have Iza Rokicka with us from Investor Relations, and we will be available for you during the Q&A session. So the floor goes to Brunon. Brunon the floor is yours.

[Brunon Bartkiewicz, executive]

Hello. Good morning, everyone. We are presenting our Q4 preliminary results, which, of course, means preliminary results for the year. And that most probably makes you curious and attentive. With your permission, I will take a brief moment to cover the main topics that are of strategic and tactical character. Rafal will present our assessment of macroeconomic events in 2021 and I know that you have quite a few questions about that and Bozena Graczyk will present financial topics, which, as far as I understand, given the number of events in Q4 might raise comments and certainly questions. In order to leave a lot of room for you to ask questions to converse with us because I assume that our figures are quite clear and quite predictable and quite straightforward.

However, when it comes to details, you're probably going to have more questions. So the year 2021, and I'm going to refer mostly to the year rather than Q4 only was undoubtedly very fruitful in terms of important and interesting events apart from the pandemic, that was giving a bearing on the economy as a whole from our perspective, mostly it was impinging on the security of our customers and our employees. I would say that there have been many events that were less predictable. And even within there, we had quite a few turbulences and elements of uncertainty or some violent changes. The economy, corporations, banks do not like upheavals and turbulences because for that reason, we need to make adjustments and adjustments are neither simple nor easy. And accordingly, there are some disturbances that you might want to ask us about.

However, despite such an interesting and eventful year. This has been the second year in a row with so many events happening. I would say that a bank is doing its job, focusing on their most important things that it's core business. And we discussed that regularly from one conference to another. So as a reminder, our main mission is to provide services to our customers. So the increase in the number of customers and transactions that product volumes that are used by our customers is a priority for us and will become -- will continue to be a priority.

We also need to mention customer satisfaction, which is a somewhat lofty topic but we need to remember that the promises that we make to our customers are delivered. And what we promise is simpler, better life, and we support our customers in making informed important decisions in the lives. When we look at the increase in the number of customers considering that many customer relations were closed down are due to new KYC and AML regulations.

But the growth increases -- the increase in deals and number of customers and the shift to remote and electronic channels and decline of transactions that required human intervention from our staff in terms of changes in customer behavior and also the increasing area that is being covered by self-service banking. So all this has gone according to a plan. Undoubtedly an important element is this quite strong shift towards electronic channels and a decline in transactions that require human intervention and unprecedented decline in cash transactions at bank branches with the support of our staff.

This happened in the last year. And our bank strategically triggers those changes and adapts on a continuous basis to those changes in order to avoid any sudden transformations and revolutions. Our compliance has been really a very important priority for us. This is yet another year in that regard, that is important. Regulations have been expanding, and we need to pay ever more attention to them. We have an increasing share of our staff employed in compliance-related areas. Undoubtedly, some of the most Important moment are AL regulations and KYC regulations and GDPR regulations because there is a lot of work to be done. A lot of activities and regulators have high expectations as to the work of physical analysts not just robots and automated analysis.

So as we have mentioned in our publications for some time, do remember and do bear in mind that bank as of today, we comes to AML and KYC. We employ around 1,000 people dealing with these areas. This has been a skyrocketing increase in cybersecurity. And probably within cybersecurity, these would be new games, fraud related rather than security-related ones. So crimes, social crime. So identity theft, data extortion, trying to talk people into making investments, which are not investments. These are fraud attempts. So references in a very effective and professional way to those very unethical behaviors through playing on either greed or the desire to protect one's own money or one's own loved ones.

The famous trick, the so-called [grant sun] trick that has been prevalent in Poland. So we have focused attention on the fraud attempts, and we have identified these transactions in a systemic way, counteracting them because this is a race, but we also have been running awareness campaigns among customer base because we see a lot of room for maneuver for fraudsters here.

So we have been counteracting that and also and our staff have been working remotely outside our distribution network. We, of course, have been very concerned about how this extensive volume of remote work might impact the wellbeing and mental health of our staff. So we spare no effort to try and protect our staff against all of these potential disruptions. We have been trying to go back to our regular well-being practices such as preventive health checks and we have been continuously talking about taking enough exercise and so on. So all of these activities have been going on. Another source of stress among our staff in 2021 was inflation in salaries and wages and towards the end of 2021, also all kinds of rumors and uncertainties about the so-called Polish Deal.

So in this connection, our bank has been performing a number of actions such as taking care of the well-being of its staff and also raising their salaries as necessary to maintain the same living standards and our bank will continue to do that. Which means that with these inflation rates this will mean that wage and salaries costs are going to increase and as they did in Q4. And they are set to increase throughout 2022, '23 and the odds are and Rafal will mention that in his comment that also throughout 2024, this is going to be the case. So our bank is certainly not going to economize at the expense of the health and well-being of its staff. And stability of our IT systems. As we know, we have been taking care of the stability of our IT systems with adjustments and changes. And as we have announced, we have joined -- we have embarked upon quite a radical change of our economic structure and something that we can call our chassis, 3 main strands are here to be mentioned.

First of all, a replacement of our core systems into solutions, not really systems into a solution based on the philosophy of smart contracts. That is to say a construction or a solution. I do not want to say it's an application because it's not really an application. It's an architectural solution. Top machine vault, and we have already communicated that and we also use

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performance of AI.

Ladies and gentlemen, apart from what you can see from the figures, there are some underlying changes. You have seen our employment growing in the tech and IT departments. Of course, you see less about the colossal changes in operations or in our product tribes. What has been going on has been a very intensive work, meaning that our staff are getting educated. And we keep exchanging our staff into those who have stronger competencies in data and AI.

As ESG elements are also going to be our priority because they are going to have an impact on the economy, on important decisions to be made by our customers. And of course, with all these changes that we expect are the ones that regulators expect. We would like to participate in all of those changes as citizens and start with ourselves, and this is our focus. But let us remember that 2022 is a year where we will be expected to comply with new credit policies, reporting requirements. And we have to notify our customers well in advance to know where we are heading and also where these reconstructions are going to take place also within our supply chain. So these are our key priorities. And the main elements that has been happening.

Maybe just one piece of information that I'd like to comment on. When I talk on compliance, apart from what you see in these slides, that goes beyond 2021 and refers to the beginning of 2022.

We have received 3 resolutions of administrative proceedings, the factors which were fines imposed by the financial supervision authority. Concerning AML and concerning the income sources and wealth sources of our clients and their verification. The second concern RS deposits holder which is also a pretty well-known issue concerning a number of banks in Poland, and I'm sure you're familiar with it.

As for the rest, numbers tell the full story, I assume -- the results speak for themselves. I see no surprises there.

The bank is following its strategy lines in a pretty surprising environment, but this is nothing new. We strive to remain stable in all contexts. This is the bank that we want to be. This applies to 2020 and 2021 and beyond. I'd like to think that these results are very stable in our current context. And I'm sure you are aware of that.

Let's move the Q&A opportunity beyond the end of this presentation, and allow Rafal to speak about the macroeconomic data first.

[Rafal Benecki, executive]

Thank you. Ladies and gentlemen, let's talk exterior situation, interest rates globally, then Polish forecasts, oral economic situation, inflation, interest rates and the energy transformation costs locally. Let's start with the global bit. The inflation has been increasing globally. It's reaching its record highs everywhere. This is due to 3 major shocks. First, the post-pandemic supply and demand shock.

The demand is strong. Monetary policy and budget policy interventions have been 2 to 3x stronger than due to the previous financial crisis. You can see that on the graphs to your left, left upper corner. Let's take the U.S.A. GDP has noted a strong rebound, the strongest of rebounds. We're already at the pre-pandemic levels, the stimulation is a little bit weaker in Europe.

The demand is -- the supply is weaker also due to the supply chain disruptions. The Fed supply chain disruption index shows this very well. The disruptions are strong. They have been stronger than at the beginning of the pandemic. We saw some improvement before 2021, but the disruptions remain very significant. The prices are increasing. The second shock is the energy one, gas prices. And the third shock, an important structural change is the energy transformation. We know that it makes sense.

However, it has been accelerated in a -- coupled with the pandemics, which is unfortunate. The rhetoric of inflation globally and interest rates has been changing in the recent weeks. The Fed, the Bank of England and the Bank of Canada have changed their philosophy. They want to increase the interest rates and tighten the qualitative policy. The head of Fed has become from one of the bearish to one of the bullish -- most bullish professionals at this level. The right-hand graph on my slide shows that strong interest rates increase will happen first and then we should come to a halt as if by mistake. The 5-, 10- or 30-year interest rates are not reacting according to the growing interest and the growing expectation of interest rates increase.

We feel that the long-term interest rates is not necessary telling in regard the recession. The low long-term interest rates, they reflect the supply and demand situation. Central banks are still accumulating debt. The supply isn't great. So the interest rates in the long term aren't high either. However, the central banks are signaling that they're not happy with the situation. The Fed has been mentioning the QT, instead of quantitative easing they're talking about the quantitative tightening. So interest rates increase is ahead and tightening the balance sheets, which should increase the interest rates.

Now let's come back to Poland. First, let me give you an account of the end 2021. 2021 was a rebound year. In Q4, we saw a 7% increase in GDP and a consumption boom, to be honest. As we see it, given the macro data the households have been smoothing out their consumption. The 10% inflation looming in January mean the households will maintain the level of consumption which tightens their budgets.

The risk of the second round effect. So postponing the high costs of production to retail prices, well, this risk is increased because it's easy for the companies to do so. The end of 2021 situation indicates that the 2022 starting point is strong, and it's easy to move the cost burden on to retailers. We feel that GDP will slow down in 2022 due to the consumption levels mainly. The disposable income of households could decrease, but maybe not as significantly as it was previously thought of. This could grow by 1/3 of the rate that we had thought before the pandemic. The inflation is high. However, on the other hand, budgetary speaking. The households will give us a 2% -- will receive a 2% stimulus via the so-called anti-inflation shield. So in the short term, there will be an inflation shock, but not as drastic as dramatic as we had previously thought.

The household data show that the smoothing out of consumption will happen, 5.7% to 4.5% growth decrease will probably happen. However, we're optimistic. We feel comfortable at this point. Let me say that industry and exports could surprise us positively throughout this year.

The German economy, American company are waiting to fulfill their demand, which could act positively upon our overall dynamics. The 4.5% GDP growth could be the number. The consumption is at risk, but not as much of a risk as we had previously thought. So exports and industry once again, these could be the positive surprises.

Now let's talk inflation. In 2022, 9% is the mean number for inflation throughout the year. If the anti-inflation shields remain until July, that is. They could be prolonged, extended until the end of 2022, and then the inflation could be contained at 8%. This would mean, however, that in 2023, the inflation will in turn increase, 6% to 7% could be the number for 2023. 6% with the shields ending with the shields ending earlier, 7%.

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and yesterday we heard that the strengthening of this tendency would be in line with the Central Bank's policy. And I feel that this stems from what we've just said. The economy has been growing. The consumption has been booming. The prices of these have been paid by the consumers.

And the -- we do foresee the larger 10% inflation rate in January and stronger Polish zloty. The interest rates increases are -- usually their effect is postponed by a quarter more or less and to halt the inflation, strong interest rate increases and the tendency to do so is the correct course. The mean inflation prognosis for 2022 have increased in our case due to the growth factors that I've mentioned.

Hence, the Polish Central Bank has launched this new expectation channel via the Polish zloty position. The target rate for the Central Bank today -- this year was to be 4%. And for the next year, it was to be 3.5%. We've modified this forecast to 4.5% this year. As for the exchange rate, we feel that the Polish zloty could be strengthened via increased rates and not just talking about increasing them. So we need both announcements and increases. And hence, we have modified our forecast to 4.5%, if that makes sense.

[Bozena Graczyk, executive]

Hello, and welcome, everyone. Yes, indeed. As we have heard before, our income statement has been very eventful in Q4. But after the comments that were made this morning, I understand that you really know very well what happened in some of the items of our income statement. So our net result was PLN 669 million and PLN 2.308 billion, which is much better than last year. And this increase in the results means that nominally, we have increased by PLN 971 million, thanks to 2 increases in revenues, PLN 666 million in income and commission result.

And as you can see, the balance of reserves has dropped by PLN 733 million. And last year, this balance of reserves in the context of COVID and macroeconomic adjustments were very, very high. And this net result means that we continue to improve our results. And in the report, you can see that ROE has grown by 2.7 percentage points quarter-to-quarter. And if we adjusted our revaluation reserve then our ROE year-on-year would increase by 5 percentage points to 14.4% and this element will no longer be mentioned in my presentation, but I will just comment on other income. It has been a long time since we had negative results. This quarter, it has been almost PLN 9 million loss. And in this item, we would have all of that -- reflected all the turbulences of Q4 changes of interest rates by the NBP and very dynamic changes of the income curves. And then we have the net effect of certain discrepancies throughout Q4 due to different repricing of assets and instruments that have a hedging effect on these items. And this item only, we have recorded a loss of PLN 33 million.

This is a direct effect related to the increasing interest rates and the dynamic changes in the curves that I mentioned. And for the sake of comparison, in Q1 of 2020, this item was significantly positive. So that would be enough about our preliminary financial results. And I would like to comment quickly on our net interest income. And this has PLN 1.4 billion, which is a 15% increase quarter-to-quarter, which is a result of growing interest rates, but also growing customer base volumes.

Our loans and deposits have grown by around 4% quarter-to-quarter and 14% to -- 13% to 14% year-on-year. For the sake of comparison and to enhance -- to highlight the impact of increasing volumes on our interest income. I would like to say that our loan balance and deposit balances have grown by respectively, PLN 20 billion and PLN 19 billion, which have also have an effect on our interest income.

And very briefly, comment on the fee and commission income. And what has happened here we can see mostly the effect of higher volumes and gradual repricing of our assets as a result of growing interest rates. And let me just draw your attention to the changing structure of interest assets. Because in Q4 alone, our loan portfolio grew by over PLN 5 billion. And over that same time, we reduced our investment portfolio by PLN 4.5 billion, which changes our sensitivity to interest income. As far the expenses and cost -- financing costs, we can see a reduction of our financing expenses, 22 basis points. And this is also the result for further improvement of our deposit structure.

The main increase in our liabilities is in our current accounts. As a result of all of these events, our quarterly margin has improved by 35 basis points and amounts to 2.88%.

And in anticipation of your questions, let me comment on our sensitivity to our interest rate increases in 2021. If we consider all of the changes of interest rates between October and January, including the total increase of 215 basis points of reference rate, then we estimate with many unknowns and many factors that might modify this impact. We estimate this impact on interest result at between PLN 700 billion and PLN 900 million. This estimate has been done with a permanent balance at the end of 2021, and it takes account of the income ratio curves that have stabilized. And the question is for how long or for how short after the last January increase in interest rates. And let me also point out that this sensitivity and this figure should be viewed in the context of many other variables that might accompany us throughout 2022 to in terms of income curve and maybe subsequent decisions of the Monetary Policy Council and also other regulators.

So do bear in mind that this is a very preliminary estimate, and we cannot guarantee that these results will materialize very exactly.

As for our fees and commission income in quarter 4, the year-on-year increase was 10%. As you can see, we have a slight decline on commission income in Q4. This decline results from this acceleration of calculation of intermediary costs that we entered into our books in this quarter. This is a one-off negative effect and the impact, PLN 22.6 million. This is the figure. Without that, our commission income would be PLN 499 million and an increase would be 15% year-on-year and 3% quarter-to-quarter. And what draws attention in our fee and commission income is the dynamics and the income for account handling. So there are some seasonal fees to be included for high balances that we charge in Q4. And invariably, for a number of quarters, we have had a situation with a very positive trend in results on currency exchange transactions. We're seeing increasing transaction rate and especially in the corporate segment.

And I think Q4 really stands out positively in that respect, when it comes to commissions from the capital market when we were talking about brokerage activities. So -- what also deserves attention is the overall dynamics of our income from fees and commissions in accruals, 21% year-on-year increase, which is a very strong achievement. And a few comments about our expenses. Expenses have gone up by 9% at the end of Q4, that is PLN 757 million. The higher quarterly expense results mostly from higher personnel costs.

In the commentary, we specified very clearly the sources of that result. On the one hand, we established a provision for optimization of operational processes, almost PLN 30 million in Q4. On the other hand, we also paid benefits related to the pandemic and adaptation benefits. This is also almost PLN 32 million in personnel costs having a bearing on our Q4.

As regards the increases of expenses throughout 2021, then we see a 7% growth and what really is worth noting is the comparison of the dynamics of costs and income in our income statement. As you can see, income has gone by 11% and cost expenses by 7%, which is quite a healthy balance and healthy result. And of course, let me draw your attention to the cost-to-income ratio throughout 2021, it's 43% which is down by 1.3 percentage points despite increasing expenses throughout the year. And a few words about risk expenses and cost of risk. In Q4, this was PLN 144 million and our quarterly margin for cost of risk in this context was 40% of basis points, and you have noticed that this figure for the retail segment contains PLN 56 million of additional reserves for foreign currency loans, and we have also taken account of the macroeconomic data changes in Q4.

As a result of the quarterly changes in macro data. That's PLN 19 million out of which PLN 16 million pertains to the corporate segment. And I believe that it's worth noting that as a result of this change of our estimates our reserve coverage ratio at the end of the year is 21% to 41%, so starting from the first of October, we have offered settlements based on the PFSA chair guidelines. And by the end of January, this year, our customers have filed 591 applications for settlement. And we have already concluded over 100 such settlements. In the context of our portfolio and active loan agreements, which are under 4,000.

So our results that we have achieved in settlements are comparable to those that we have observed in other banks, another bank that offers settlements to be more precise. As for the quality of our portfolio and provisioning, this has been very stable. The cost of risks have been -- are at record low levels. On the one hand, provisioning levels at Stage 3 has gone really up. As for our capital adequacy ratio, you can see that our TCR rate stands at 15.8%. It has gone by 2.5% -- 2.5 basis points down throughout the quarter. And you can see the factors that influence that, including the payment of dividend from profits of 2020 PLN 660 million, and we have paid a subordinate loan, which also have reduced our TCR by almost 60 basis points.

And to 66 basis points of the impact based on an intensive increase of our volumes in the last quarter. And maybe the last piece of information before our Q&A. Our current report has been published today, and it's also incorporated in our presentation, the Management Board intends to pay around 30% of our net profit as dividends. And this intent of this volume of dividend is based on our assessment of the bank's need for capital and is also a derivative of our estimates related to the increases of our commercial volumes in the coming future. I think this will be it from me for now, and I'd like to ask for questions.

[Iza Rokicka, executive]

Thank you very much indeed. The Q&A session is now open.

I will try and put them into thematic categories, if you allow. Let's start with our credits and loans. Question, quarterly decrease in mortgages and cash loans in retail. Is this due to the increased interest reference rate in Q3 versus Q4? And what are the expectations for 2022 in terms of credits and loans?

[Unknown Executive]

Let me answer the first question. In Q4, the market was weaker definitely, and interest rates had their impact there, for sure. The second component isn't a surprise for you either. From November on we have noticed increased repayments -- increased -- also an increased number of early full repayments which we feel that's completely natural in this increased interest rates economy. These aren't very significant numbers, but we're talking PLN 100 million -- PLN 200 million more than previous months than in previous periods. So this is noticeable.

Decreased sales of mortgages is, however, very significant here. The lower availability of apartments for sale. Also is an impact factor here. And these are all pretty natural factors. They're not entirely normal. And I would reference what Rafal has said here, individual clients have a lot of cash and they try and repay their loans and credits, which isn't the surprise because polls do like their credit action.

However, they do not like the credit overhang. So we're still high in terms of production and sales in Q4 and this hasn't fallen, this hasn't increased. The 2022 forecasts, well, you know me, and I do not like forecasts. It's very hard to share these observations with you because we simply don't know. It depends on many, many factors. The future outlook of many different entities and individuals is relevant here. We have all seen what has been happening between November and now, between November and January. Last year's production in case of our bank -- in the case of our bank, it was a record high, and we can expect it to decrease this year, but this is nothing to be worried about.

Mr. Rafal, who will have his two cents.

[Rafal Benecki, executive]

In the scale of national economy and mortgage sales, I'd like to say a few things. There are opposing trends here. First, inflation shock and increased interest rates, on the one hand. On the other hand, more than 2% of GDP will flow into households by decreased personal income tax, different kinds of Shield programs, which will hamper the growth. We expect the 1/3 decrease of income in households compared to the pre-pandemic levels. And this disposable income could increase as much as by half. This is not, however, dramatic and the sales of mortgages shouldn't be throughout this year as low as it remains suggested by January data.

Throughout the year, however, we feel that well, January is the adjustment month. This is the time of reckoning for the households. The increase of disposable income is there at this point. In terms of corporate loans and corporate investments the rate should be similar for investments in 2022 as it was in 2021. Some risks are actually lower now before the end of 2021 the investment, we're very optimistic. Now they're down due to the energy cost, disruptions in supply chains, the costs of investment goods are high. However, corporate credit rate should be similar to what we experienced by the end of 2021. Again, the trends here are opposing. The plans are optimistic. They had to be corrected for. But we have been positively surprised. The industry and exports are a positive surprise. 5% is the growth rate for corporate credit, we feel, similar to the end of 2021.

[Iza Rokicka, executive]

Thank you very much indeed. Next up, we've got some questions on deposits and the market situation. Is there a competitive pressure in deposits -- in the deposit department? And what kind of pricing levels are we expecting this year?

[Unknown Executive]

The bank is prepared and the strategies are prepared. There is no pressure on the market today because the situation is too unclear. It should clarify within the next 2 to 3 months. Today, I feel no one is able to tell what kind of scenario we're going to follow.

[Iza Rokicka, executive]

Now again, let's get back to interest rates. There's a question of exposure of our credit portfolio to the increased interest rates.

[Unknown Executive]

We are still researching and looking into this. Not only the interest rates but also inflation rates of all components that apply to our corporate entities. We haven't seen any excessive effects or impacts there so far. The situation is still unclear. However, the demand will be impacted, I feel, rather than the possibility to repay -- than the ability to repay by our clients. Our clients will probably keep doing what they have been doing for the last 2 to 3 months. So they'll repay early, they will reduce their positions, their debt positions. As for today, no disruptions are foreseen. This is a linear situation though.

The disruption in increased interest rates are nonlinear between September 21 and the end of the year. You all saw the rates and the situation in these terms was unprecedented. The exposure and sensibility of entities there isn't clear. We can only hope that the supply chains will be less and less affected, and well, otherwise, some entities will experience some serious disruptions in functioning. But for today, I don't see this very clearly.

This question references mortgages to a certain extent because there is a certain correlation there. Every bank ING as well, will take into account some buffers to assess the creditworthiness. Every company had to account for an increased creditworthiness with increased interest rates. For many years, since ever, we have been giving these credits for 80% TV, ITV factor to prevent the repayment -- the nonrepayment risk.

The correlation is certainly there. increased inflation and increased interest rates mean increased salaries as well, which translates into buffering the negative impact of the interest rates on creditworthiness. Increased interest rates and increased unemployment scenario moreover, isn't even there. Isn't even on the table. It's not going to happen on the Polish market, we can tell now. This could have been potentially very disruptive, but we don't see this happening anytime soon.

[Iza Rokicka, executive]

Increased interest rates question. Are the clients -- do the clients tend to repay earlier their mortgages?

[Unknown Executive]

Yes, we have answered that. I would say that the repayments are increasing by the factor of 2. This is not super significant, but we saw this back in November, and we can see this now in January as well.

[Iza Rokicka, executive]

The commission income-related question. Is the bank going to ditch some of its income sources in this case?

[Unknown Executive]

Well, we have not disclosed data, but I can tell you that the levels are similar year-on-year. No further decisions have been made. There is a certain correlation between the rates on -- applied to the funds accumulated by the clients and the fees that the banks required. So we need to take the correction into account, but that's it.

[Iza Rokicka, executive]

Let's move on to foreign currency loans, Swiss franc loans. And let us refer back to the reserves in Q4. So what were the -- what was the motivation behind this reserve increase? Is this provisioning at the acceptable level now? And next question. Are the settlements going to -- the settlement rate, is it going to slow down with the increased interest rates? How do you think?

[Unknown Executive]

Have always been very cautious in provisioning for the foreign exchange -- for the foreign currency loans. We're bound by due diligence here. We try and balance many different factors while creating provisions and reserves. In the context of what happened in 2021, we did take into account the chronological horizon for these credits. We have extended the periods. We have taken into account -- we took into account the exchange risk. In a more detailed way, in a way that followed the offer that we make to our settling clients. We adjusted the conditions of her offer, adjusted them to the present conditions. And we tend to acknowledge the repayment situation, the early repayment situation, which translates into our forecasts as well. So many factors behind the correction here.

We do take a good look at all the scenarios that are comprised within our models. We update them constantly. Are the provisions enough? I would say that, yes, the 41% coverage rate gives us the largest provision amount in the banking sector. With this amount of settlements, this amount of legal suits and this rate of settlements, I can tell you that as for December 21, this is well enough for our models and for the factors that we acknowledge for provisioning.

[Iza Rokicka, executive]

What about the interest rates that are rising and customers' propensity to convert mortgage loans?

[Unknown Executive]

Well, an open ForEx risk, vis-à-vis a PLN mortgage loan is probably a challenge for customers, whether or not they want to go for it. So there is certainly this correlation, and it does exist.

[Iza Rokicka, executive]

And 2 detailed questions about our operational expenses in Q4. Can we share some assumptions for creating a provision for optimizing our operations. And what is the factor behind the rising cost of buildings in Q4.

[Unknown Executive]

Let me start with the second question. As you know, in our accounting principles, our own real property are valuated at fair market value. This is not a commonly acceptable standard, but we use it in accordance with IFRS. So each -- we value it at fair market value and what happened in 2021 was a negative adjustment of the valuation of real property, our own assets, which is unrelated to the market milieu, but throughout 2021, we incurred very high investment expenses on buildings.

So within that model of fair value, they are written off in an income statement and also in the context of comparing the balance sheet value to the valuation value. So from that perspective, this valuation was negative and it had a bearing on our income statement in 2021. And let me just say something about the components of those expenses. These are expenditures that are encouraged on the creation of buildings that were in line with our environmental pledges for instance, the change of ventilation system in Katowice and also reengineering of the heating systems. And all of the other adjustments that we have been telling you about, such as photovoltaic panels, solar panels on windows that generate electricity and heat and so on and planting additional trees. We have been very serious about that. And we just took advantage of the time on the buildings that we own, and they were almost empty, and we just accelerated all of the processes incurring additional expenditures.

So we have a 20-year old building in Katowice, which is in excellent condition, but we had to exchange an entire air circulation system that entailed considerable expenditures. But we just referred to our environmental pledge and we start with ourselves. So this is not really significant in the perspective of 2021. But of course, we had to make an adjustment in our income statement.

As regards the provision for optimization of operating processes. In the past, we also never disclosed our assumptions for other similar reserves and provisions. So I think this question is too detailed for this kind of conference. So we would rather not present these assumptions, but let me just say that any such provision is created in accordance with IFRS, and it's reflected in the bank's plans and activities that have been confirmed in management board decisions.

[Iza Rokicka, executive]

And at the end, a question about costs of more general ING's expenses can -- are they likely to grow more slowly than the inflation rate in 2022?

[Unknown Executive]

Well, presumably so, but not all of them, undoubtedly, all of them. So if you're asking if our expenses, HR expensive -- expenses, which are a very high item if they can be lower than inflation rate. Well, I don't know what the inflation rate is going to be rougher on those -- this.

Well, I asked him back in December, whether or not his productions were correct. But the decisions on increasing HR costs are not taken every month. This would disrupt our entire cycle. So we have to adopt these decisions. And according to the plans, I think I have been quite clear about that. I just cannot imagine that considering medium-term inflation, I cannot imagine creating a gap for our staff.

So we would perhaps in any opposition to the comments that we had from my peers in the market. We are trying to catch up with inflation and follow the inflation in terms of salaries and wages, and we know that there is more than the inflation. There is the income net -- loss of net income under the Polish Deal. So within the entire economy as a whole, this group is perhaps not very numerous, but it is easy to imagine that staff of an institution such as ours, IT specialists, which are highly sought after on the market. It is quite obvious that people are affected by the Polish Deal. Well, this is a considerable number, almost 2,500 of our staff, and we need to take that into consideration. And it is our principle not to create any technological gaps, innovation gaps and commercial gaps vis-à-vis our customers, and the very last thing that we would like to see is a pay gap for our staff members.

[Iza Rokicka, executive]

And we have a few more questions coming in the context of our capital ratios and capital positions. And let me just read them one by one.

The first question refers to the Management Board's intention to pay dividend? Why not 50% in accordance with the bank's dividend policy?

[Brunon Bartkiewicz, executive]

I think I have already answered that question. Yes, but this is not just Bozena. I think she shouldn't be burdened with answering all these questions.

Well, ladies and gentlemen, we have always implied that our dividend policy would correspond with our capital position at a bank in the long term. So we firmly believe that this level of dividend is adequate to the growth rate and the regulatory changes that are installed for us in the coming years. So this is our proposal. And if you're looking at the conditions, and of course, our bank does fulfill the conditions for of 50% of dividend payment.

This will be decided upon by our general meeting and our Supervisory Board. But this decision provided that our assumptions are true, then this would mean that we would need to supplement our capital. We believe that dividend payment at 30% will ensure that the bank will remain capable of healthy growth in -- and this is in line with our dividend policy. Because in communication, we have provided that we intend to pay dividend up to 50%, which means that it will not always amount to 50%. And we have consensus here.

[Iza Rokicka, executive]

A detailed question in the context of TCR for Q4, the impact of the revaluation of securities on these ratios. Could you tell us the amounts?

[Unknown Executive]

Yes. As for the valuation of securities and let me just highlight that based on regulations Article 408 CRR, we have applied for consent for a temporary handling of this variability of securities to avoid a negative impact on valuation. And this is a notification process. And accordingly, in our financial report as of the 31st of December, this negative impact is not present in our report.

[Iza Rokicka, executive]

And as a follow-up to the question, on capital adequacy. This macro hedge valuation is not included. How does the bank perceive the situation in the context of rising interest rates?

[Unknown Executive]

Yes, derivatives and valuation, which is part of macro cash flow hedge strategy. This derives from our yield curve, and as of the 31st of December, the reported valuation corresponds with valuation of the curve that was there as of the 31st of December. So from this perspective, a change of this yield curve in one way or the other, would translate into the revaluation reserve and depending on how this curve flows in 2022 and especially in a situation where the reality of interest rates is going to be different than the yield curve as of the date. So it can potentially have a negative impact on the revaluation reserve.

[Iza Rokicka, executive]

And the last question, it has just popped up. So it has not been thematically structured. How does the bank assess the risk of claims from PLN borrowers given the continued WIBOR or WIBOR increase.

[Unknown Executive]

Openly speaking, I think there is a threshold of contesting the contractual arrangements.

And I think there is a border. I still do believe that there is some kind of a threshold that we shouldn't cross.

[Iza Rokicka, executive]

Thank you very much. This has been the last question that we have received. Thank you, everyone, for all your questions, and thank you for the presentation.

Yes, and we do thank you and see you in a quarter's time. Thank you very much, and goodbye.

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