mBank SA

WSE:MBK

Earnings Call Transcript 2018-Q2

[Unknown Executive]

Good afternoon, and welcome to this conference which will sum up the results of mBank Group in Q2 2018. As usual, we have CEO, Cezary Stypulkowski; CFO, Andreas Boeger; and our Chief Economist, Ernest Pytlarczyk.

Over to the CEO.

[Cezary Stypulkowski, executive]

Good afternoon. The key message of Q2 is an increase of core income, including net interest income and net fee and commission income, as well as trading income. The second key message is that the LLPs have increased by, well, to 99 basis points in Q2. My third message is the launch of our online banking platform in its new layout, which will come gradually, it's not a big bang, and Apple Pay as a new functionality we now offer to our customers.

So after this brief intro, over to Andreas, who will take you through the rest of the presentation.

[Andreas Boeger, executive]

Thank you very much. So after the short intro, I would like to guide you first again through the volume development, and then I think we can go back to the summary slides at the back end. But maybe let's start with the volumes, and let's start with the development of the loans to customers, on Page 9.

I think if we speak about volumes and the development here, it's important to first notice that the quarter was impacted also by FX movements. So whenever we speak about volumes, we also have to look at FX. Swiss franc increased by 5.3% versus zloty, and euro increased by 3.6%. So taking this into account, the overall volume of loans grew by 3% in the quarter.

And how does this look for the business lines? In terms of corporate exposure, corporate loans grew by PLN 2 billion in the quarter, which is up 3.8% after FX. This is above market growth. And there also we have a slight uptick in our market share, where the market share right now is 6.5% for corporate loans.

For retail loans, retail loans particularly strong in nonmortgage loans. Nonmortgage loans, the volume is up by PLN 1 billion; so up by 7.5% in the quarter. And generally, up by 2.7% after FX. Talking about FX, always the thing in the retail portfolio is obviously that we have a large Swiss franc portfolio. The Swiss franc portfolio in the quarter decreased by CHF 108 million and now stands at CHF 4.06 billion.

So what were the dynamics behind it? Next slides about the new business. New business development in the quarter very promising. So new business when it comes to mortgage loans, mortgage loans we had the highest sales of mortgage loans since Q4 2015, with PLN 1.15 billion of new mortgage loans sold, which is up 16% over the quarter and up 15% year-over-year.

Even better dynamics on nonmortgage loans. Nonmortgage loans, we had a record quarter, with PLN 2.3 billion in new sales. And for example, if you look at this where we now stand, we have PLN 2.3 billion worth of sales. Our market share right now in nonmortgage loans is 5.6%. This over the last 2 years is up from 4.9% to now 5.6%.

I generally think it's still lower than the market share we have in other retail areas, but I think when it comes to nonmortgage loans you should also remember that our strategy for nonmortgage loans is not that we aggressively go out in the street and address other banks' clients or people who actually don't get the money. We base this very strongly on transactionality, and the idea is that our clients get our offers for basically then having nonmortgage loans in the form of cash loans, credit cards or overdraft facilities.

Going to corporate loans. And if you remember, corporate loans in the first quarter was, for example, a bit weaker than in Q4, but still much stronger than the first quarter 2017. The corporate loan sales in this quarter are up by 5%, PLN 6.8 billion; year-over-year up by 12%; and the first half over the first half is even up by 25%.

A question we also had in the last presentation of results was the fraction of investment loans in this. Investment loans made up roughly 1 quarter of these sales. This is also in terms of the nominal of the investment loans is up year-over-year, trending upwards. It's slightly a bit downward from Q1, because in Q1 maybe you remember I was speaking with Q1 we saw an uptick in investment loans but mainly in March, and then -- but April, May and June basically went back to slightly increasing versus history but not with the same growth rates as in March.

Coming to leasing, leasing number of contracts up in a very good manner, 27%, and also the leasing portfolio is up by 3.4%.

Going over to deposits. In deposits, we have seen the continuation of the strong inflows based on the transactionality we want to see with our clients. That translates into numbers. If you look in the corporate business, corporate business the term deposits were roughly flat in the quarter, and the transactional accounts were up by PLN 1.2 billion.

And for retail business, in the retail line, the term deposits were a bit lower than in the last quarter, and you know we try not to have too many term deposits. But transactional deposits were up by more than PLN 2 billion, PLN 2.3 billion, which is up 4.9% in the quarter. And if you take the green bar on the chart and you compare this year-over-year, the transactional deposits in retail banking are up by 16%.

So how do these volumes then transform into income? Looking at income, on the next slides, important on income is we have record core revenues. Core revenues are a bit above PLN 1.1 billion, at PLN 1.103 billion. So as I said, this is a record number.

What is behind this number is if you look at net interest income, very strong increase in net interest income: PLN 38 million there in the last quarter more than in the quarter before; and on a yearly comparison, PLN 90 million more. So this is 4.6% in the quarter and 11.7% up year-over-year.

Going to net fee and commission income, for net fee and commission income this was the first quarter in which we are not showing the legacy insurance revenues which we basically sold was the organized part of enterprise that was sold from mFinanse. This negative effect was roughly PLN 28 million that you don't see in NFC anymore. NFC is down in the quarter by PLN 19.9 million. So there were offsetting effects, mainly coming from credit-related fees and also card fees which were able to partially make up for the revenues we are not having here, in this line at least, anymore.

Because you see part of the revenues from the organized part of enterprise sale, you see net other operating income, which is PLN 15 million.

Last, not least, we have trading income, which is roughly flat quarter-over-quarter, but up year-over-year. The backbone here was also a strong FX result and good client activity when it comes to FX. As I said before, we had FX fluctuations in the quarter. These FX fluctuations obviously are also good for the client business because this is good for the hedging business.

From income, we go over to costs. Costs, key message here is costs are under control. Costs on a quarterly basis were growing less than 1%: 0.9%. On a yearly basis, they are up by 4.2%, adjusting for the BFG charges. So the 4.2% is significantly lower than the increase we had in income and also in core income. And that, I think, is a very good dynamic we want to see there.

Looking into the cost base, personnel costs in the quarter up by PLN 11 million. That's also the highest increase. This is this 4.8% we're seeing here. What were the drivers behind this? The drivers is, on the one hand, part of our retail business is paid on a commission basis. So with the higher sales we see some more commissions that are to be paid. We will also see higher motivation and bonuses for which we also have put the numbers in. We have higher staff costs when it comes to training also. And also part of it is salary increases, but the salary increases I think of this PLN 11 million were only PLN 1.6 million. So the rest is the other 3 items I was mentioning.

When it comes to material cost, material cost basically flat over the quarter, slightly up. Material cost year-over-year, even down by 1.3%.

Depreciation also down in the quarter, but up year-over-year. Down in the quarter, this is driven by some effects, for example, that we had some life spans for depreciation basically ending in the first quarter. So this is why the second quarter will be less. But in the future we will have new depreciation because, as you know, we keep on investing. So this is not a trend that we now have depreciation going down from here. I said last time depreciation will slowly creep up, and that will still be the case.

That leads us to a cost/income ratio of 42.1%. But I think it's more important to look at the normalized cost/income ratio (i.e., taking the BFG charge in half for the first half of the year, and also for the first half of the year taking the one-off effect out from the PLN 290 million sale of the organized part of enterprise). So this is 44.8% normalized cost/income ratio. And there how I always like to look at it, it compares to last year for the first half normalized, 46.5%. So nearly 2 percentage points better when it comes to cost/income ratio.

And I think very important, as I mentioned, for cost is costs slightly rising, but income really rising at a much higher pace.

Going over to cost of risk. Cost of risk in the quarter, highly characterized by much higher cost of risk in the corporate sector. You know we spoke about this in the Q1 presentation, where for Q1 the whole corporate LLPs, so LLPs plus also the fair value result, were only minus PLN 13.9 million. So a very, very low result in Q1.

And we were already saying there that we think that overall cost of risk might exceed 70 basis points. We now have in total PLN 111 million, roughly, LLPs plus fair value result on corporates. And so I think we're seeing part of this.

It's very difficult to also judge these results from 1 quarter. So I think one has to see ideally a year or maybe half-year. So I think if you take the half-year perspective, that also doesn't show that is that tremendous what we have in corporates.

But our outlook for the year is that we think the cost of risk for the full year will be in the 70s. But I personally think that for corporate LLPs in Q2 we should have seen the peak of the year. But it will not be the same as in Q1, obviously, because then it will not add up to 70 bps, or in the 70s.

Let's go to the next page, Page 15. So the higher cost of risk, obviously, also translates into some of the loan portfolio quality numbers. So we have a bit higher nonperforming loans, and we've also increased the coverage ratio on some of the nonperforming loans.

But over all, if you look at our nonperforming loan ratio, which is 5.2%, so still below the market, and it just went up from 5.1%. So I would say this is a minimal increase.

Last, not least, looking at the capital and liquidity indicators. So capital, up. Capital -- Tier 1 and total capital, still above 3% above the regulatory minimum; this is what I want to say. TRE are up in the quarter, to PLN 74.2 billion. The trend, while this is upwards trending, is on the one hand the aforementioned FX movements we have seen in Swiss francs and in euros, but we're also seeing increase in the business. So this is also why our RWA and TRE are going up.

Speaking about liquidity, still very strong liquidity ratios on LCR and also NSFR. So I think this is a very good basis to do business.

Generally, before I move over to Ernest, I think my key message is also here, and Cezary said it before, I think we have very strong volumes. So all engines are running. We've shown this on the new business development. We have record core net interest income and core revenues. So think this is also very good. The backdrop this quarter is higher LLPs, but we also had very, very low LLPs in the first quarter.

And with this, I would hand over to Ernest.

[Ernest Pytlarczyk, executive]

We are in the process of upgrading our projections. The second half of the year should be a little worse than the first half, but we have been upgrading the trajectory for H2. We believe that Polish growth is endogenous based on the labor market, consumer sentiment, and we don't think there's any excessive leverage. The leverage based on consumer loans is much lower as a percentage of consumption than in 2007-2008.

Investments. Well, the picture here is rather mixed. Public investments are growing prior to the local government election and were in line with the timeline of spending of EU funds. Foreign companies are investing. Local companies are not investing as heavily. According to the NBP report of the monitoring of companies, we believe that different sectors need investments to a varying degree, depending on the level of utilization of their production capacity.

Labor force is quite inexpensive in Poland, much cheaper than in other countries, including other countries of the region. We still get a big inflow of labor from the east. So the policy of granting work permits to foreigners is being relaxed. Poland has granted the biggest number of work permits to foreigners in the EU this year. So the human factor remains key to production in Poland.

I'm rather skeptical as to the way the economists look at our growth model. They believe investments are short and that proves that the cycle is weak. But I believe it is a fetish of the economists. Investments have been inflated over the past few years with the inflow of EU funds, whose spending was not always efficient. Not all the investments of private companies sponsored by the EU proved efficient on market terms. This is a market economy, and you need to invest only as much as you need to.

And I think that our foreign partners have reached the same conclusion. Their economists are not complaining that investments are low. Companies are investing as much as they need to, and they are replacing their technologies as much as they need to.

Looking at rates and inflation, we believe inflation will be gradually rising, especially core inflation, but the increase is still low and not enough to convince the Polish Monetary Council to change the interest rates. Only ECB activity could impact the Polish Monetary Council. The Polish Monetary Council is unwilling to act in the circumstances.

The real economy is reflected in the monetary aggregates, and there's no boom in investment loans. Our bank is doing much better than the sector, I believe. The signals are mixed. Households have increased mortgage borrowing, and the environment is quite favorable to mortgage lending: a lot of consumer sentiment, good outlook, a strong labor market. And banks take advantage of this situation. There's no alternative really to the banks when it comes to bank deposits.

Polish risk has a very strong perception. There's a very low public debt budget deficit. The zloty remains within the bracket, ranging from PLN 4.2 to PLN 4.4 against the euro, and I think we will stay there with potential appreciation because momentum is building up in the monetary aggregate in favor of the economy.

Q2 -- well, GDP growth was above 5% in Q2, above the expectations.

Thank you.

[Unknown Executive]

Now we open the floor for questions.

[Unknown Analyst]

Let me be politically incorrect and start from the end, from the bottom, so to speak. There was some inconsistent communication in the media about your comments on this year's results. Someone said [ 250 ] plus one-offs. PAP, the Polish Press Agency, said something else. Could we clarify that?

[Cezary Stypulkowski, executive]

[ 250 ] was net of the one-off. I said your estimation was PLN 1.25 billion was reachable. That was my point, that PLN 1.25 billion was reachable.

[Unknown Analyst]

Plus the PLN 178 million, plus the one-off?

[Cezary Stypulkowski, executive]

I said reachable. I wasn't very specific. That's not my intention to be very specific. I'm saying that our guidance since early this year was around PLN 1.25 billion. And we'll see what happens. But I think based on the first half we are quite optimistic.

[Unknown Analyst]

Speaking about fees, which dropped, we know why. But there were also some one-off fees from cards. There was strong commissions on loans, which may not be replicable. So what is the outlook in the long term, because last quarter was strong? But what's happening next?

[Andreas Boeger, executive]

So I think on fees and commissions, talking about what we want to achieve, this year we want to reach the billion. I think that's clearly what we want to see. It's not always linear when it comes to the results, especially when it comes to the expenses. So we have seen this, for example, in the fourth quarter last year. But we are working towards getting this year getting the PLN 1 billion in. And then from then on, we should obviously grow this. Fees and commission on credit, not everything is really shown in fees and commissions. You're right. Some of this with effective interest rates is not shown purely in NFC. But I think we want to reach the -- well, finally, we want to have the billion this year and work ourselves upwards from there.

[Unknown Analyst]

Did you participate in the dispute with the anti-monopoly office concerning permanent media?

[Cezary Stypulkowski, executive]

Yes.

[Unknown Analyst]

I understand the conclusion -- the jury is still out.

[Cezary Stypulkowski, executive]

Yes. So that would be premature to ask.

[Unknown Analyst]

I have a question about new volumes. The numbers we've seen growing quarter-after-quarter. Was the Q2 number the maximum of what you're hoping for? Or do you think the volumes may continue to grow? I'm speaking of both mortgage loans and nonmortgage loans in retail.

[Cezary Stypulkowski, executive]

Nonmortgage loans. Well, they have been growing steadily quarter-by-quarter. Our model here is not necessarily specific, but it's quite consciously limited by the fact that we link the supply of such loans with transactionality. We're not dogmatic about it, but that's the expectation. Customers should be transactional to get credit lines. We don't like to extend classical cash loans. From this perspective, it would seem that -- well, it's not that we have exhausted the customer pool, but of course it is not infinite. We think that the transactionality of our customers is quite strong, as reflected in our share in the market of card transactions ranging, well, up to 15% depending on statistics. In national payments, that's around 15%, as well. In ecommerce, we also have a substantial market share. And it would seem that this model provides a sense of security and is still open for expansion. So it may continue to grow. Same goes for mortgages. Our aspiration, which has slowed down due to circumstances, including the suspension of our expansion in mortgage lending until we started to issue covered bonds, and the effect may not have been fully optimized in terms of the bank tax, but we are expecting this to grow. In corporate lending, we believe that the current increase as reported in the first half is the end of the story. Quite likely, we may open up new alleys to explore. We are not an SME segment champion. We are much better in corporate banking, but we are less present in SME transactions, partly due to our small branch network. But we've also reorganized our credit process. So I believe when it comes to smaller companies, which are still corporate customers, we will be in a position to grow our portfolio more than ever before, although it's not so big. At bank level, SME customers -- well, our exposure is about PLN 7 billion, I think. So even if we grow this portfolio, it will not make a great impact on the total volumes. In general, however, I wouldn't say that this is the peak. We'll see how it goes. We cannot really predict what happens next, not accurately, but both the active economy and the growing customer portfolio should help to grow these volumes.

[Unknown Analyst]

This question may seem obvious after last quarter. The sharp increase of the cost of risk in corporate banking, I understand your message. This was the peak in corporate banking, you said. And I understand that your guidance is 70-plus basis points for the year. But what happens, really? I understand that you have an exposure to a debt collector. So did that make a contribution to this one-off? I'm not asking about names. I'm just asking about the specificity of this increase.

[Cezary Stypulkowski, executive]

It was well distributed. It wasn't really concentrated. I realize that's your job. You will look at the results on a quarterly basis. We are much more –- well, we want to look a much bigger picture. We don't think it was a major event. The cost of risk was low in Q1, and I think we are quite conservative in our approach. But there wasn't one single position or exposure that would have affected our cost of risk. But as Andreas has said, we believe we will come back -- we'll go back to normal, around 70 basis points, later this year.

[Unknown Analyst]

Well, banks like you are saying nothing much is going on. But if you look at so many individual cases, they make an impact, taken in aggregate. So it's snowballing.

[Cezary Stypulkowski, executive]

Well, consider one issue that I need to stress here. In the last few quarters, we said that we had released a lot of provisions. So we are not concerned when we have to set up new provisions. On a net basis, after 2013-2014, I can't speak about the details, but last year we released relatively more provisions. But as I said, we are not really concerned about it. We don't believe this is extraordinary in any way.

[Unknown Analyst]

But can you see this as a special pattern across the sector?

[Cezary Stypulkowski, executive]

Well, we are starting to see a pattern. But looking at recent statistics and the cost of risk and the risk charge on an average basis, it has been rising month-after-month. Since when? I'm speaking of this year. So year-to-date. The third month of a quarter has the biggest, the highest cost of risk. But April, May increased even more after Q1, and there seemed to be this uptrend.

[Unknown Analyst]

And what about deposits? You're saying that transaction customers represent a bigger part of core deposits, but that's an impressive growth. Do you need it? The margin has not improved much during the quarter, but it should have been a better quarter. It was a longer quarter in terms of the number of days.

[Andreas Boeger, executive]

So generally, the margins on deposits were flat for both corporates and for retail. When we compare the margins to also what we see what the competition is having, we think we have very strong indication that we have the cheapest funding base and the best transactionality in the market. So for us, this is a cheap way of getting funding. It comes with some cost, but it's cheap. What we want is, as we've said before, we want the clients really have to have the transactionality with us. If we want to grow in nonmortgage loans, where I've said that our market share is 5.6%, so this is below our market share in deposits, also. We want to grow. We want our clients to be our clients. We want to get to know them, then we want to do a lending business with them, et cetera. It's -- when it comes to overall asset/liability management aspects, I think that's the second part of your question next to this interest expense part, is we don't have the feeling that we are in a mega abundance of deposits. But if you look at our liquidity ratios, we are also quite liquid.

But it's -- within our funding mix, we can adapt. But if you look at strongly growing deposits, we also had strongly growing loans against it. So we currently don't have an imbalance in the way we steer the bank there. So part of the question was also the net interest margin? Okay. Sorry. Because on net interest margin, the net interest margin in the quarter is down by 3 basis points, which is minimal. I have spoken to my investor relations colleagues. They have said on the one hand it's also a topic on how you calculate this, because some of your models might not even show this. Because what we show is we always show the month-end and then we show the month-end averages. And you basically have 2 effects in there. Next to the effect was how you calculate month, month-end or quarter-end. The one is the FX effect, because obviously Swiss franc went up and euros went up, but mainly Swiss franc went up. So that, obviously, with a CHF 4 billion portfolio, the portfolio itself increased. The portfolio we've always said from a risk point of view is fine, but the portfolio itself is quite heavy and is not contributing very nicely to NII. So that was part of it. And also what was part of it is that the loan growth was quite steep in that quarter. And some of these loans, if you disburse the loan more towards the end of the quarter, obviously you don't earn the whole interest part of it. So for example, in Poland, if in May the first week of May is closed and you have the loans more towards 15th to 20th of May disbursed, obviously your volume is going up but you don't show the interest income on that. But we generally think the 3 basis points down, the trajectory for mBank's net interest margin should go up.

[Unknown Analyst]

I have a short question about margins on corporate loans, because on the data provided by National Bank of Poland it seems that the new origination is taking place at lower yield than what's on balance sheet and this spread has increased to 30 bps. And I wonder how the marginal new corporate loans that you have compares to what you have on the back book. And do you see any trend of increasing competition here?

[Andreas Boeger, executive]

So from the numbers I am seeing, I don't see a compression in the margins we have. You have 1 or 2 basis points fluctuations always, et cetera. But it's not that we are seeing that the growth in corporates is basically bought with low margins. This I can -- for our numbers I cannot confirm this.

[Unknown Analyst]

A question -- well, based on press reports about the development of a pan-European bank based on mBank, could you comment?

[Cezary Stypulkowski, executive]

No decisions have been made, but as I have said before we are working on it conceptually. Last year, the French bought our solution. They are implementing it in France. And in this context we are now considering the viability of such a project, but this is all we can say at this point.

[Unknown Analyst]

I have a question about another project, which has come to an end, or is coming to an end, Orange. I know from your comments that the format did not quite work for you. But my question is about the impact, the financial impact of determination of the contract or the project.

[Cezary Stypulkowski, executive]

Well, there was the original cost of creating a separate environment for Orange Finance back in 2014. We are not expecting any significant impact on costs. We have had some contractual obligations towards Orange. They have been met, and we are not expecting any further impacts.

[Unknown Analyst]

\

Question about NPL lift. The regulation on the statute of limitations, could that impact the growth rate of the sale of your portfolios?

[Cezary Stypulkowski, executive]

No, I don't think this is expected to make a big impact. I don't think so, but maybe we need to think about it in more detail.

[Unknown Analyst]

I have an old-fashioned question about CHFs. The repayment rate grew from 7% to 9%, I believe. Why? Is it because of the strong FX rate?

[Cezary Stypulkowski, executive]

Well, we've always had some early repayments, and I believe the stronger zloty, PLN 3.5 now, that's probably prompted some additional early repayments. But that wasn't really very significant. I think this is more to do with the booking of loans, the closing of loans that were not being repaid. This is done on a regular basis. We convert them to the zloty. So they disappear from that portfolio. The sensitivity to the volatility of FX rates, well, the legal amendment was proposed and discussed for a while. But sensitivity of customers to FX rates is not strong. Early repayments happen when the zloty appreciates against the Swiss franc, but I think the legislation has really dampened that sensitivity, effectively. So when there's more rumors going around about the potential conversion of the currency, then people stop repaying early. When nothing is being said, there's more early repayments. One way or the other, it's not a big difference.

[Unknown Executive]

We have a question that came online about margins, but I think it's been answered so far -- it's already been answered. So are there any other questions from the room?

If not, please join us for a snack. Thank you.