Bank Millennium SA

WSE:MIL

Earnings Call Transcript 2019-Q1

[Artur Kulesza, executive]

Ladies and gentlemen, good afternoon. Welcome to Bank Millennium conference after first quarter 2019. Management Board of the bank is represented today by Chief Executive Officer, Mr. Joao Bras Jorge; we have Chief Financial Officer, Deputy Chairman, Mr. Fernando Bicho; also Chief Economist, Grzegorz Maliszewski. My name is Artur Kulesza. I am Chief of IR. As always, we'll start with short presentation then followed by Q&A.

So I give the floor to Chief Financial Officer, Mr. Fernando Bicho.

[Fernando Bicho, executive]

Thank you. Good afternoon. Thank you for coming today and thank you for attending this conference webcast.

We will go through the presentation of the first quarter results, and we can go directly to Page #6 of the presentation. We should start by saying that we had a good beginning of the year and especially in terms of the business results. But also, we managed to show a better first quarter results than 1 year ago for the reasons that I will explain later.

We reached a net profit of PLN 160 million, which is 3% above 1 year ago, with an adjusted ROE adjusted by extraordinary items and also regularly accruing the contributions to the banking guarantee fund, this ROE adjusted at 9.1%, still influenced by the significant loss of equity versus 1 year ago of almost 10%. Cost to income at 46.1% is lower than the ratio for the full year 2018.

In the first quarter, we had a very strong growth of net interest income by 14.6% year-on-year. It was flat on a quarterly basis but mainly due to shorter quarter. Net commission income refer to the downwards trend and grew by 1% versus the fourth quarter of 2018 although still showing a drop of over 5% versus 1 year ago due to the negative evolution of the investment products during the last year. Operating costs still grew by 9%, excluding BFG contributions to -- that were booked in the first quarter.

We kept a high level of asset quality with an impaired loan ratio of stage 3 ratio at 4.4% with a relatively high level of coverage of total impaired loans by provision at 73%. The cost of risks stood exactly in the middle of the range that usually we have showing as a guidance at 55 basis points over total net loss on an annualized basis. And loan-to-deposit ratio at very low 81%, so with the bank fully prepared in terms of liquidity position for the acquisition of Euro Bank.

On the capital side. We strengthened the capital ratios during the first quarter due to the decision of General Shareholders' Meeting of the Bank of retaining the full net profit of 2018 in the owned funds of the bank; and second, by the issuance of PLN 830 million of subordinated bonds on the 30th of January, which in the meantime were already approved by KNF to be included in Tier 2 capital of the bank. As a consequence of these 2 main factors, we reached a total capital ratio of 25.6% and a Tier 1 ratio of 21.5% in the end of March. Finally, we had also an upgrade of the rating of the bank by Moody's to the level of Baa1.

Moving to Page #7. I already mentioned the growth of net profit by 3% year-on-year. We have to take into account specific events of the first quarter that justify the evolution of the result. Of course, on one side, on the negative side, we had a significant increase of the contributions to the resolution fund which almost doubled versus 1 year ago, slightly, partially offset by a small decrease in the contributions to the deposits guarantee fund. But as a consequence, we, during the first quarter, had higher contributions to the banking guarantee funds by close to PLN 30 million. So this is -- this was the negative.

On the other side, we had the positive extraordinary impact of recovery of a tax asset which has been provisioned several years ago and which finally was recovered, which has a positive impact on the P&L of the quarter by around PLN 24 million.

So these 2 events did not fully offset but to a large extent offset each other. And there's a consequence of the operational improvement that we were able to show an improvement in the net profit of the quarter by 3% year-on-year.

Operating income grew 13%, but especially we would highlight the solid growth of core income by almost 9% versus the first quarter of last year strongly supported by the growth of net interest income. Operating costs in the recent past have been growing at a little bit faster pace than what we used to show. In this case, 9% growth versus the first quarter of last year excluding BFG contributions, 16% if everything is included, with similar growth of personnel costs and other admin and depreciation. The cost-to-income ratio at around 46%, very similar to the levels coming from the previous year.

Moving to Page #8. Now in providing some more explanations regarding the evolution of the main items and starting with net interest income. We had, as I said, first of all, a very good increase of net interest income year-on-year, 14.6%. The net interest income was almost flat versus the previous quarter. We had, on one side, less 2 days versus the previous quarter. Second, we had a small increase in the average cost of deposits, as shown on the right-hand side graph. It's to a large extent attributable to the fact that we had a significant increase of the deposits in the fourth quarter of 2018. Also, as a consequence of some promotional campaigns, still some spilled over in terms of the costs to the first quarter of this year, although I can say that the trend is again positive, and we would expect in future quarters to again reduce the average cost of the deposit price.

The second factor is also that we issued subordinated debt at the end of January. So we have already reflected in the overall cost of funding -- not in the deposits but in the overall cost of funding the additional cost of the subordinated debt, which in fact is responsible for a contraction of 4 basis points of the NIM during the first quarter versus the fourth quarter.

We also have a very small impact of implementation of IFRS 16, which is to a small extent reflected in net interest income. This I would say would represent 1 basis point contraction of NIM just due to this IFRS 16 implementation standard.

Finally, we also have to take into consideration that we have been preparing for the transaction of Euro Bank. And as a consequence in terms of the liquidity management, of course, we have been preparing the liquidity that is necessary for the payment of the price and for the repayment of the funding of Euro Bank to Societe Generale, which translates into having shorter tenor of the investments of the bond portfolio, which, of course, have a lower yield.

So putting everything together, we have this, let's say, paradox of, on one side, a very solid growth of net interest income versus 1 year ago while, at the same time, having the contraction of the NIM in the quarter which, as I said, we expect to reverse in future quarters.

In terms of the net commission income, the good news is that we saw signs of improvement already in the investment funds commissions. And so of course, this does not offset the fall that we experienced last year. And so year-on-year, total commissions are still falling 5%. But as I said, we see some positive signs in terms of flows to investment funds and as a consequence on the fees that we get from these funds which, if continued, should allow us through time to smooth this year-on-year comparison and to -- ultimately, to come back to a growth of fee and commissioning.

On Page 9. The asset quality remains solid. Even the overall stage 3 loan ratio improved to 4.4% although partially due to the -- through high [ tax ] that we have done during the quarter.

The cost of risk was higher than 1 year ago, 55 basis points over total net loans, PLN 72 million. I should, first of all, remind that last year, we had exceptionally low level of cost of risk. We were open about it. We said that it was exceptionally low, and we would not expect that it would be repeated this year. And in fact, we are back to the range of 50 to 60 basis points, in this case, 55 during this first quarter. We don't see -- we cannot say that it is, let's say, a deterioration of the quality of the loan portfolio. There are always episodically exposures that need to be additionally provisioned and which translated into this cost of risk of 55 basis points in the quarter.

Liquidity, I already mentioned, very, very strong. And the credits on capital ratios' also stronger in advance for the transaction of Euro Bank.

So moving now to the second part of the presentation on Page 11 and just starting with a brief update about where we are in terms of the process of acquisition of Euro Bank. We are still targeting the closing of the transaction in the second quarter but more completely in the end of May, of course, subject to having the necessary regulatory approvals. So if this would be achieved, this would allow us to do the legal merging of the 2 banks by the end of the third quarter and to be able to do the operational mergers too before the end of the year, which will be -- which basically would still -- was the plan that we have presented in November when we announced the transaction. So for the time being, we are sticking to these targets. Of course, not everything depends on us, but we are doing everything in order to be able to achieve this plan.

On the -- but having said that, we are not neglecting the other parts of the plan, which is the execution of the organic growth strategy, which is translated into very strong numbers that are shown here on Page 11. On the retail side, a very strong pace of customer acquisition which continues from the previous year and which translates into a net growth of 222,000 customers active in retail. The quarter was also marked by record-high sales of cash loans, PLN 988 million, which represent a growth of 29% year-on-year; and also very strong sales of new mortgage loans, 866 -- PLN 856 million, a growth of 14% year-on-year. Deposits grew 11% year-on-year in retail, of course, more flattish versus the previous quarter after an extraordinary strong growth in the fourth quarter. We almost reached 1.5 million digital customers from retail, a growth of 22% year-on-year.

On the corporate side, we keep the same trends, double-digit growth of overall lending, 14.9% year-on-year; also followed by the same pace of growth of deposits.

And in terms of quality and innovations, we continue to be regularly rewarded with different distinctions and awards from different entities, especially in terms of quality of service, social sensitive bank. So -- but it is consistent with the trends that are coming from previous periods.

Moving now to Page 12 and regarding the growth of the loan portfolio. Excluding FX mortgage, total loans grew by 17.8% year-on-year. And this is -- this keeps the trend that is coming from the previous years with especially strong growth of mortgage and also of consumer loans. And this structure of the loan portfolio continues to change with a higher share of PLN mortgages and other retail loans. And on the deposits side, very solid growth year-on-year of total deposits, 11% in retail; 15% in corporate. And also in the lower part of the page, the illustration of what I already mentioned, this rebound in investment products with a growth of 4% versus the previous quarter, although still falling 8% versus the previous year.

On Page 13, we show more details about retail business developments with continuation of the solid growth of current accounts and savings accounts deposits with a growth of 16% year-on-year, with a more modest growth of term deposits; and the very -- and the consistent pace of customer acquisition with 59,000 net growth of active customers in retail just in the first quarter of the year. And this growth is to a large extent supported by the increased number of current accounts which grew by more than 300,000 year-on-year and also followed by also more than 358,000 growth in the number of total cards, with market share in credit card transactions above 8%.

On Page 14. The overall growth in retail is strongly supported by the growth of digital channels. We think these numbers are impressive. We are showing a growth of 22% of active digital customers to almost 1.5 million and the growth of mobile customers active by 40% year-on-year, already crossing the threshold of 1 million. This is -- apart from supporting the overall servicing of these customers, this is also becoming a relevant support of sales, illustrated by this very high share of the number of cash loans that were sold through digital channels which stood at 48% in the first quarter of this year comparing with 37% last year.

In time deposits, the picture did not change. This is already happening like this for several years. But also digital channels are becoming relevant for current account acquisition, representing already a 25% share in the first quarter.

The mobile channel importance is also illustrated on Page 15 with several other indicators such as the explosive growth of number of BLIK transactions or HCE cards portfolio and mobile top-ups, which also shows how heavily used are our mobile applications.

And also for these, of course, we are continuing the regular process of releasing innovations and developments of our e-banking applications, which is illustrated on Page 16, which is, of course, I think generating this regular use of our mobile application.

And also the same is shown in Page 17 with the increased downloads of our goodie applications, our smart shopping platform, which already crossed 1.1 million downloads since the start and specifically 200,000 just in the first quarter of 2019.

On Page 18. Retail lending evolution was very positive during the first quarter due to this significant growth of sales of cash loans which, I repeat, grew by 29% year-on-year, reaching PLN 988 million. So we went to another level. It's the consequence of many years of improvements that we learn on this area and bringing the overall growth of consumer loans year-on-year to 17.5%. Mortgage in -- mortgage loans, also a very good quarter especially when compared with 1 year ago, 14% growth, PLN 856 million origination, generating a growth of the portfolio by 20% year-on-year.

Moving to the corporate size. Deposits grew 15% year-on-year, but especially current account to deposits grew 16%, also showing higher transactionality of our customer base. While loans -- total loans grew 14% on a gross basis, 14.7% on a net basis, with specifically a growth of 17% in loans, 12% in leasing and 9% in factoring. So this is basically keeping trends that are already coming from previous quarters.

And the sales of leasing and factoring as shown on Page 20. I'm also supporting this growth. This time, the growth is not double digit, it's around 7% year-on-year, but still very supportive for the overall growth of the corporate business.

These are the main highlights of our first quarter results, and now we will be available for questions. Thank you.

[Artur Kulesza, executive]

So we welcome questions from here or from Internet also. We are ready to take your questions.

[Unknown Analyst]

Maybe a question on employment. It grew a little bit in this quarter. I mean it's not a big figure but still -- I mean you're just before the acquisition, and I'm just wondering in what areas are you increasing employment right now.

[Joao Jorge, executive]

So we have been -- or were having an initial trend that was connected with the normal deployment of some activities. So namely, this is before the SKOK, but that this was mainly the opening of these mini branches that we see in the first page. And we are talking about 100 people here from the mini branches that we opened. And same also in terms of capacity, call center, a lot by the device -- or the customer advice -- let's call it the customer advice and the service of the customer advice and some people on digital. Also, we were affected this quarter through the SKOK because we were expecting that SKOK Piast process would be, I would say, fully terminated, still in first quarter, and we are terminating a little bit less. But SKOK Piast we already had at the end of the year. So at the moment -- yes, at the moment, the trends are these. So it's more the normal increase that we were having due to the customer advice and some support functions like call center and the deployment of the mini branches that's about...

[Fernando Bicho, executive]

It's about 19 mini branches.

[Joao Jorge, executive]

They are 19, and there is already 100 people.

[Unknown Analyst]

Okay. And could you please comment on the costs side. Adjusting for the BFG contributions, costs are up plus 9%. I mean you're growing your book at the fast pace, but still do you see this level -- this dynamic as sustainable? Or that was impacted in some way?

[Fernando Bicho, executive]

No, we don't think that this will be the new trend of growing 9% year-on-year the costs. Of course, this is unusual for us because usually in the past, we are showing much slower growth. Not in personnel costs because in personnel costs, this trend was already coming. This time, it's also coming from an other admin and depreciation costs together because we are putting them together just not to have 2 technical explanations about the implementation of IFRS 16.

I think here we need to take into consideration a few things. On one side, general inflation of the services provided by external companies to the bank. This is mainly driven by higher salaries in Poland. So every -- all the services that we use from external companies that depend on people are increasing due to the pressure that exists overall in the -- in Poland regarding salaries growth. So this is one driver.

The second driver is that, of course, we are already preparing for the transaction of Euro Bank, and so we are not exactly embarking on a cost optimization exercise of our existing structure before the transaction. We -- as you may understand, we are not doing this. In fact, even we are already incurring some costs connected with those preparations. We are not giving this as an excuse for the overall growth of costs. But of course, it's obvious that we are trying to prepare as much as possible in advance the bank for the acquisition of Euro Bank, which drives some additional costs associated with it such as consulting lawyers and some preparations connected with the future and IT migration which, of course, do not help. But then, of course, we -- and then on top of this, we have some costs that are associated with the increased number of customers, increased number of transactions and so on and so on.

So this is just the -- let's say, the explanation. Of course, the -- we hope to conclude the transaction in the second quarter. The transaction by itself will not change materially, which I mean will be more confusing for you to assess the picture because we're adding another bank. So it will be more difficult for you to assess exactly what comes from us, what comes from the combined entity. But I think that after we will complete the operational merger, then it is possible then to work on the final operating structure that should be targeted, that in which, of course, we also expect to have some cost synergies which will be important for the deal, as we presented when we announced the deal. And this will come during next year basically or between 2020 and 2021.

So this is the -- let's say, the -- how we see the process. We know that we are facing now some additional costs, but it's part of -- we cannot avoid it. But we did not lose the picture of how the picture should be after all the process of the acquisition and merger will be completed. And especially we will -- we did not forget our clear target of bringing down the cost-to-income ratio to a clearly lower level than this 46% that we have today. Of course, the timing to achieve this will be, let's say, at full speed in 2021 because in 2020, we will still incur integration costs associated with the acquisition. They will be partially already incurred this year, partially next year. The full benefits of the transaction, including on the costs side, we should really see in 2021.

[Unknown Analyst]

And could you also please comment on the level of sales of cash loans? I mean not so far ago, you've managed to sell like PLN 200 million per month. Now you're over PLN 300 million. Was it an extraordinary quarter, the first quarter of '19? Or do you believe that you are now at the level which allows for sales generation?

[Joao Jorge, executive]

We believe that now we are prepared to have a level of 300 per month. So now, it's -- of course this -- it's a lot to the increase of the customer base. So as we are increasing the customer base. In our case, as you know, we weren't just with active customers. So sometimes, the numbers -- absolute numbers, don't look so impressive. But this increase that we are having, 200,000 every year of net growth of active customers, and this is also very visible on the numbers. For example, the active debit cards and things like that, that we've seen. So it means that the customer base is increasing, and so we are being able to sell with the same risk models, with same criterias that we were having to sell. There is a trend that for some time, we were -- we are seeing it in the market, which is somehow, some, let's call it migration, from the customers to having consumer loans to their universal banks. And this you see it in also the other banks, and we are taking benefits on that. Lately, we have been, if you see our commercials and everything we have been promoting new-to-loan customers. So it's to be for the first loan with us or the first loan to them with special rate, with specific amounts, shorter tenures. But it's also because it's obvious that the increase of salaries and also other social benefits increased the disposable income, and so sometimes, there is also increase of lending just by increasing the debt of the same customers.

But to escape a bit from this trend is also important. This promotion, they have been reacting very well. Also, we are already in the phase of deployment of some projects on the past connects with personalization. So it means that the targeting in terms of commercial approach is improving also. Today, we are deploying -- slowly, we're starting deploying. We were already launched to all the customers but we are deploying the new generation in terms of digital experience that also will allow to have a personalization in communication with customers. This is a process that is going to do. So but at the end of the day, we are quite confident to have a very stable, same risk profile and everything, now PLN 300 million per month.

[Unknown Analyst]

My first question would be on cost. Could you share us your estimate about the cost of new pension scheme, PPK annual cost for the bank? And the planned changes in the social charges starting from 2019? This is in Social Security fund, this limit for the salaries. So what would the cost of this? I remember you sometimes ago, you said that it will be 3% to 4% of your personnel costs, so whether you can confirm this or not?

[Joao Jorge, executive]

So the PPK, we already decided, we will have it in the bank. But we didn't decided yet what is going to be the percentage that is going to be supported by the bank. So we start discussions on that, how to balance the incentive to employees to do their side as well with the participation from the bank, and how to promote this...

[Fernando Bicho, executive]

And also this year, the impact will be marginal, right? Because this will start probably end of the third quarter or so. We don't know exactly which month this is really going to start. I mean, we know that we have to wait benefit from the first of July, but there is also some timeframe implementation. So I think for this year, we don't -- it's not relevant. We don't have yet -- I was not prepared to answer this question, to be honest. I don't have a complete estimation yet for this. What I can tell you is that our mutual fund management companies, one of the first one that is ready and authorized to manage PPK, this I can tell you because I received this information today.

[Joao Jorge, executive]

And also that the bank will do for their employees. [indiscernible] and it looks out to incentivize this to do with a little bit more than normal. But this needs to be in the logic that every -- both parties do it so to be valued by the employees. Because sometimes, we do things, and then it's not valuable, then it doesn't make sense.

[Fernando Bicho, executive]

Regarding the second question. We did not make recent estimations because this was something that was to be introduced already, I don't remember, one year ago or so. Then it was not. Now it's again on the table. We still did not look too much at it. Of course, it will have some impact on personnel costs. On the other side, the next year is going to be already the year where we are also making all these, let's say, changes and combined merger. So it -- of course, it will be a component of the negative side, but for now, I don't have an exact number to give.

[Unknown Analyst]

And the second question on cost of risk, you said that from time to time, some exposure require some additional provision. The question is whether this have happened in the first quarter? And if yes, what was the sector that experienced this kind of ...

[Fernando Bicho, executive]

In fact, we had some increase in the cost of risk of corporate, as we can see on Page 9 exactly. So we have PLN 33 million of provisions for companies. These of course includes loans to companies, leasing and factoring altogether. So this PLN 33 million includes everything together compared with PLN 18 million last year. I can say that from time to time, in the corporate side, we have 1 or 2 cases that become nonperforming, and then we need to create provisions. The sectors usually change so I cannot say that it is always coming from the same sector. I also can say that sometimes in the past, the problems of the companies were triggered by tax issues. So sometimes, tax issues trigger the nonperforming loans. And then this is always something that we are trying to be very, very careful in trying to assess. So it's not a pure credit risk of view, it's something else, so sometimes, it's very tricky to try to understand these in advance. But generally speaking, it's still kind of episodic than, let's say than a flow of new cases that are becoming impaired. We have established already for several years a strict monitoring processing in order to try to anticipate these situations. But in this quarter, of course, we had a little bit more than usual in corporate. I don't see it yet as a trend for the time being.

Also in the quarter we had some additional provisions that will also support some additional write offs that we made during the quarter. The amount of write offs is even stated in the -- in our quarterly financial report that we published today. The amount is not excessive, especially compared with [indiscernible], but anyway, we also have some provisions that helped to fully provision some retail exposure that finally were written off, which of course had a small impact negative on the P&L but contributed to the decrease of the ratio from 4.5% to 4.4%., and especially for the drop of 11.3% to 10.4% in terms of consumer loans stage 3 ratio.

[Unknown Analyst]

And maybe one more question. Do you plan any major NPL sale this year? And if yes, how do you -- what is your perception about the current pricing level compared to the previous year?

[Fernando Bicho, executive]

We always, on a regular basis, we look at the possibility of selling some portfolios of loans, rather for the administrative reasons than for P&L reasons because what -- we expect marginal impacts, positive or negative, on the sales of NPL, and especially now that the market clearly changed after the events of the last 2 years. And so [ technically ], we will try to sell something. There are less interested entities. The prices are clearly different. But anyway, we are very straightforward on this type of thing, is that when we sell, we sell. So we don't finance. We don't finance the sale. We don't -- just pure sale to get rid of things that we believe there is no value in keeping and where the recovery effort no longer compensates. But the impact should be absolutely marginal.

[Unknown Analyst]

Could you share with us your view on the new production in terms of profitability? Because the other player that reported results today commented that they see increasing competition. So my understanding of that is that new production, marginality, profitability should go down. What is your view on that?

[Fernando Bicho, executive]

In any specific type of loans?

[Unknown Analyst]

Across the board, so cash loans in mortgage and corporate.

[Joao Jorge, executive]

Cash loans, it's true that it is happening. But it's more -- or at least we thought, in our case, more about some specific marketing actions that we were doing. So we were doing specific marketing actions to customers that were not having loans with us, and we know that they were having loans with other banks at -- so we made these campaigns that is seen in the windows that we offer a promotional rate for a smaller-ticket cash loan, for a smaller, and also duration. So it's -- we are not seeing at the moment, or at least in our production, but maybe also our production is a little bit different because it's more centralized in our customer base, I don't know. In terms of mortgage, we see a little bit intensification of the competition, let's call it. This is true. We see it. It looks like everybody is trying to have a little bit of more production in competition here.

Corporate, I think it was, although it's extreme competitive. So corporate...

[Fernando Bicho, executive]

[indiscernible] competition in corporate is still very, very strong.

[Joao Jorge, executive]

Yes. It was always very difficult to understand. So with only -- the only time that the transactions are not competitive or are in price is that when they are big enough to demand international players. So if the transaction is so big that cannot be placed just in Poland, then spreads are completely different. As soon as you put international cost, that is different. But if the transaction, if it is a big transaction, is being able to be fulfilled by the national players, it's even difficult to understand how low.

We have been -- you know our strategy in corporate, so it's -- we have been growing 12%, more or less 12%, 14% portfolio every year for the last 4 years, more or less. We are very focused in this mid corporate, in international levels. It's the SME, but in Poland we call it mid. So it's PLN 200 million, PLN 200 million and something of turnover. And where we make tickets of [ 10 ] PLN 40 million, and this is what we have been doing.

Also this not -- there's no participation in bigger transaction sometimes make it more difficult to have clear guidance on market share. But we think this is the process to be had. But in corporate, it's very demanding, very competitive as it has been in the last 5 years or something.

[Artur Kulesza, executive]

I have some questions from the Internet. Maybe in the meantime, I can ask 2 questions [indiscernible] Anubhav from SocGen. I think one, we answered about OpEx, but there is also OpEx growth, but there is also a question how do we see BFG contribution for the next year? So continuing this cost issue. If you can [indiscernible] for us to comment.

[Fernando Bicho, executive]

I think we have been facing higher costs to the banking guarantee fund. So of course, this year, the impact is strong in the first quarter. Fortunately, we were one of the less affected in terms of the overall growth due to the structure of our balance sheet, but it's still relevant. And of course, here the problem is that the level of capitalization of the funds is still relatively low versus the levels that will be needed in the future, right. So here, we are not anticipating -- we are not very optimistic about this part. But of course, this question should be one to ask to BFG because there's a strategy communicated to -- and they have targets when to achieve the fulfillment of specific amounts or pressures into entering specific funds. But I mean, we ...

[Joao Jorge, executive]

Yes. And then at the end of the year, there was -- or the beginning of this year, there was a proposal of the bank association to start to allocate the part of the banking tax to speed up the constitution of the resolution fund. Unfortunately, it was not set. Because we are, at the same time from one side, it's the cost for the banking sector. If you're putting the banking tax plus the BFG is extremely high. But at same time, the size of the funds is extremely small for the sector itself.

So this, maybe you can address to the authorities.

[Artur Kulesza, executive]

Yes. Other question from Anubhav. With economy expected to see some support from fiscal stimulus in the second half, can we expect some boost to our volume growth?

[Joao Jorge, executive]

No. I think it's -- we are known by preferred sustainability than some gems in the quarter. So our big compromise that we have to all of you as investors or representative of the investors is that we are going to keep the organic development and the organic effort and the commercial approach and successes at same times that we are working on the transaction. But nothing spectacular is going to appear, whatever will happen. So it's -- sometimes, we achieve other levels, and it was highlighted by you, for example, in consumer loans. Because during a long time we opened relation, we were saying even when we were not able to achieve it, that our level, our target, our dream was PLN 200 million per year. Now we are confident that we would be able to do PLN 300 million per year. So we are confident. And we have this driver and mortgage in corporate. We are going to maintain this period at the same time that we will make the transaction. The transaction is very challenging, because as Fernando already said, usually you make the closing, and then you make one year for the legal merger, and then another year for the operational merger. Here, we are talking about making the closing in May, and then up to the end of the year to make the legal merger and operational merger. This makes a big effort. We are very optimistic but also confident in our operational teams, IT teams and everything because it's, of course, a huge data migration. And also in operational terms, we will need, in a very short term to train all the Euro Bank sales force to be able to operate in Millennium systems, because this is what is going to happen at the end of the year. But we are prepared, and we think that we would be able to make this in the record term. Of course then, we will have 2020 to make the second part of the liberal transaction, which is after making the good migration and merger for the client base, then to capture the synergies also in a fast way. But in terms of performance, I think commercial performance, our ambition is to sustain this path, I think.

[Artur Kulesza, executive]

Thank you. There are no more questions here. We still have some from Internet. And now, from -- coming from Santander, 3 questions on the Euro Bank planned deal. So maybe I ask them all together. What are your current estimates on the one-off impact on P&L of expected 2Q acquisition of Euro Bank? Second, what are your current estimates on pro forma CET1 ratio after 2Q acquisition? And the third, what were the integration costs in the first quarter '19? Have you been included -- have they been included in the total '19 '22 integration budget of PLN 350 million?

[Fernando Bicho, executive]

So these questions are very detailed, but I will try to give some guidance. But there are some things that we simply do not have the numbers before running the specific process and closing the transaction.

So first of all regarding the one-off impact of P&L of the transaction we still do not have this assessed but what I can say is that from overall consolidation perspective, of course, in the second quarter we just -- we will just be consolidating Euro Bank in the most optimistic scenario for 1 month. So the impact on P&L from this perspective should not be very big. The biggest impact that -- I think I already explained this in a previous meeting. During the period between acquisition, formal acquisition of Euro Bank and operational merger, the biggest impacts on P&L will come from the outflow of the price that we are repairing; the replacement of part of our excess liquidity by direct financing to Euro Bank because this is the impairment of the indebtedness, which in this part is positive, the first one is negative, the second one, of course is positive. And I will say for the first period until the operational merger, to a large extent, this is -- these are the impacts because then, the other impacts will come from integration costs partially booked this year, partially booked next year. We disclosed the amount of expected integration costs in the November presentation, and probably they will be splitted. We still don't know exactly the proportion, but one part will be this year, another part will be next year. And then only next year, we can start to capture the synergies of the deal materially.

And so -- but for the current and also on the top of this, we will have some accounting issues which are normal in this type of transactions, which you can find examples in the previous transactions and on the Polish market, what type of impacts they can be, including impacts of uniformization of accounting standards, initial impacts, fair value, PPA and so on and so on. And of course, we will also have this process, but these things are still not calculated. Some of them are purely accounting, let's say; I mean, are not substantial. But of course, when we will present the second quarter results on the 29th of July, of course we will provide the guidance and an explanation about what will be those impacts.

Regarding the impact on the capital ratios, we also disclosed this initially as an estimation in the initial presentation. So in terms of the impacts on Tier 1, it was close to 5 percentage points impact.

The integration costs that we already incurred. Again, we already incurred something, but we are not still -- we are just considering for now, this part of the business. Then of course, later on in the year, we will be more specific about how many integration costs we already booked this year in order also to allow the market to understand how much will be booked this year and how much will come next year.

And the final question is around if we are having any material change in the area of the nonperforming exposures or in nonperforming loans management because it is written here that other banks are preparing NPL strategies to [indiscernible]. We are not preparing it so I can say, that we are not preparing any NPL strategy. For now, we were not requested to prepare whatever. Of course, we know that, or everybody knows that at the European level, there is now this idea that the NPL ratios should not be higher than 5%. Which, of course, will have implications for those that are still above, but probably will try to come down. We also see this trend already in the Polish market, that the statutory ratios, after the initial impact of IFRS 9, are coming down. But this is the only thing that I can comment. We are clearly below this 5% level. So I think according to our last assessment, we have the third lowest statutory ratio of the Polish banks as of the end of December. So we believe that we are very comfortable with the ratios that we have.

The ratios will change when we buy Euro Bank because of different structure of assets, right? Of one portfolio, they have much more consumer loans, much less mortgage. And of course, our ratio will change just by starting to consolidate Euro Bank. But it is obvious, right? This is not a secret. But we are not preparing any changes in terms of what we do normally. In terms of how we recognize the NPLs. I just don't know if this question is also related to the fact that somehow the market expects by the end of the year, some guidance regarding IFRS 9 implementation, also recommendations about IFRS 9, which probably will come. But I would say this will come prior to the end of the year. And then we will see if those recommendations will trigger any needs to adjust what we have already implemented. I think we are being quite transparent in terms of the numbers. We are providing the breakdown of our loan portfolio from stage to provisions. So I think it's relatively easy to make a benchmark of what we have versus what others are doing and to take a conclusion from there.

[Artur Kulesza, executive]

Thank you. So this was the last question from Internet. We have here [indiscernible].

[Unknown Analyst]

Just this Euro Bank, because from what I understand, in this 5 percentage points impact you expect from consolidation of Euro Bank on your capital ratios, I think that you mainly mean this RWAs here. So this capital requirement from that. But does it include any expected value impact of expected losses recognitions, so this case that we had to move during the recent deal?

[Fernando Bicho, executive]

No. Basically, that estimation included the risk-weighted assets plus the goodwill that we are paying for the transaction. These were the 2 main impacts that were considered in that estimation.

The initial impact on provisions from the transaction will -- if it will happen, will come through P&L. So it would affect the net profit of the year, would not go directly next on funds. So it would somehow reduce our capacity to generate capital, but not -- would not impact directly immediately the capital ratios. We don't expect it to be very big. But again, I have to say we are still before doing that work, and this work will be valued between May and July in order to be able to provide first assessments of the impacts of the transaction in the first half report. This is our target, to provide this first assessment.

[Artur Kulesza, executive]

Yes. Do we have more questions from here? Nothing. Also from Internet? Yes, we answered. So thank you, everybody, for participating in this presentation and conference. And we of course invite you already to the next one after second quarter release, say, more probably on the deals. Thank you.