Bank Millennium SA

WSE:MIL

Earnings Call Transcript 2020-Q1

[Artur Kulesza, executive]

Good afternoon, everyone. Welcome to Bank Millennium first quarter results call. With us, we have our President, Joao Bras Jorge; and our member of the Board, CFO, Fernando Bicho. The setup or the standard of the event will be similar to the usual one. We'll have a presentation first, and then a Q&A session will follow.

Unlike normally, obviously, you cannot ask questions live, but we encourage you to ask these by taking the dark blue square or bottom about the webcast window and [ submit ] or type in your questions. Questions will be served on the first come, first served basis, unless we can aggregate them into subjects of things. Thank you very much.

And over to you, Fernando.

[Fernando Bicho, executive]

Thank you. Good afternoon to all. Thank you for attending this webcast presentation of our first quarter results. I wish that everybody is healthy and that you can follow properly this conference. We have the presentation of results of the first quarter, organized a little bit in structurally in a different way than the usual due to the unusual times that we are living. And that's why we would like to start with the first part dedicated to COVID-19 impacts.

First of all, starting with Page #4, we would like to stress that since the beginning of this crisis, we have been trying to provide as much support and information as possible to our clients, including the creation of our dedicated websites and banner communication on our portal with a lot of information regarding how to do safe banking from home. Also we've personalized campaigns then through SMS as a PUSH or the box in our Millenet application. And also supporting specific initiatives, which, in this case, involve the support to the Institute of [ Bureau ] Organic Chemistry of the Polish Academy of Sciences, which developed the first Polish tests for COVID-19. Additional facilities for the customers were also provided, including contactless cards transactions with an increased limit to PLN 100 without in confirmation. Also, most of the transactions could be done safely and mostly from home. And thus, we introduced the fully online current account opening with the use of selfie.

On Page 5, of course, the most visible aspect of the support that we gave to customers was the introduction of temporary credit holidays or, let's call it, in the scope of the private moratoria that was implemented in Poland. We were one of the first banks to introduce this facility for our customers, and this consists in a temporary deferral of principal and interest, and with a process that can be done remotely through our Millenet or TeleMillennium, so without the need to visit the branch.

We created a dedicated sub Internet sites to credit holidays with all the necessary information and also about the conditions of access.

In terms of statistics, we also decided to be very clear around the statistics of the credit holidays that were already approved. And we have put here the latest possible informations or this information that you see on the table on the right-hand side is reported to 5th of May. And we can say, in general, that the total on balance sheet, performing exposure, which was subject to request of the credit holidays represented 12.9% of the total performing outstanding portfolio as of the end of March. But again, these requests include requests submitted and approved until 5th of May. And with an average on mortgage between 11% and 13%. In consumer loans, a little bit less, 8% of total outstanding. In corporates, 12% and in leasing, a higher percentage of 27.5%.

And also, as you can see from the bottom right-hand side graph, it is visible that after a peak of requests that were submitted into last week of March and first week of April, the numbers have gradually come down and are much lower than in the beginning of this program.

On Page #6, the support provided by the bank covered, of course, also micro companies and corporate clients. And apart from the credit holidays, we also have implemented the PFR financial support, the BGK guarantees under new more favorable conditions and also loans supported by BTK Liquidity guarantee fund. And finally, also in the scope of these safe banking times, we also introduced remote signing of all agreements for SMEs and large companies.

And at the same time that we have implemented these measures, we have also been understanding the reaction or -- and feedback of our customers to the initiatives that we have taken. On Page #7, we can say that the clients are satisfied with the bank's performance in the current environment. Most of the clients did not experience any problem during this period of time. They also very much appreciate this possibility of online banking. And so in general, 92% of surveyed clients are satisfied with the current bank activities. And among the main reasons are, first of all, they don't point to any problem in terms of the service, so 38% of them; 31%, ability to perform -- time ability to perform banking operations and also the quality of the service. And no needs to -- no visible changes in terms of the way the banking is serving them. Of course, at the same time, a few points highlighted that still can be improved.

One of them understandable, the long closing branches and especially -- partially driven by the fact they offer new safety measures that we had to introduce and also that restrict that and the scope, and the number of people that can be in the branches at the same time.

On Page 8, we present a summary of the different programs that we have already been introduced during the last 2 months by the state to fight the effects of this pandemic on the economy. I will not go through them because they are probably clear now.

I would just mention that as far as financial sector and banking system margin specifically concerned, the most important negative impact from the measures was the significant credit card performed in March, and they are provide the National Bank of Poland, which was just material impact on the revenues of the Polish banking system.

And on the positive side, the removal of the systemic risk buffer from 3% to 0%. That was then still in March. And also, the additional liquidity provided by NBP to the market through repo transactions and through bond purchases. And finally, also the BFG decision to postpone the implementation of mail requirements and not setting an interim level to be achieved by the end of the current year.

On Page 9, just a brief summary of what happened throughout this crisis time.

In terms of business continuity, which was the -- and safety of employees and customers, the reaction and adjustment was very quick. 96% of the branches are open. And so we were able through -- about this period of time to keep most of our branches available to customers. At the same time, only 10% of headquarter and corporate sales employees have been working at the office during the periods of the lockdowns. So we have more than 3,000 people working, on a regular basis, remotely. And even at the level of the retail branch network, which is -- which had -- which has to be physically open, 8% of retail network employees were able to work remotely during the peak of the lockdown.

Contact center was also capable to respond to the significant increase in the number of contracts by customers, especially from -- on the peak of 23rd of March, where we have more than 20,000 calls serviced, which is much, much above what is the average numbers also with a limited waiting time. And in terms of credit holidays, as already mentioned, we were one of the first banks to provide the facility to our customers.

At the same time, the digital channels continue to show their resilience and the daily cash loan sales through mobile already were up well above PLN 2 million level per day in late April.

Page 10, brief summary of the main implications of the COVID-19 pandemic to the financial results, actual and future of the bank and of the banks.

So first of all, of course, this crisis will translate into lower demand for financial products and services, which may decrease as a consequence to demand for loans and sort of previously assumed levels of origination of new loans, and also transactionality, which may affect the overall level of commissions.

Second, of course, we -- of course, we know that this crisis can affect the financial situation of borrowers. And as a consequence and anticipating that this can happen, we decided to preemptively create a provision of PLN 60 million for COVID-19 related risks. The weakening of the zloty may also translate in some additional costs of the legal FX mortgage risk. And so we increased the level of provisions by PLN 55 million in the first quarter.

And last, but not the least, the gap of 100 basis points in the reference rate of NBP and of 150 basis points in the non-BAT rate will translate into initially estimated impact of between PLN 160 million and PLN 190 million in net interest income between the second and the fourth quarter of the year. And of course, this initial estimation at the end of the day will depend on the evolution also of the business volumes and timing of the repricing and mitigation actions that we already started to take.

On the risk management side, of course, this is specific, very important in these types of crisis. We have been reinforcing the monitoring of the loan portfolio in retail and corporate, maintaining a very quick and close contact with the companies and clients.

We try to identify potential signs of deterioration and downside risks in our exposures triggered by this crisis.

Our focus above all is on the current client base, especially on the corporate side, on the existing corporate customers and not -- and so we do not have relevant risk appetite for new exposures. We have a small exposure for 2 sectors, which are generally perceived as more vulnerable to the current crisis, which is 2 reasons, entertainment, accommodation, shopping centers and so on.

But of course, we also know that in these times of uncertainty, we need to continue to monitor the evolution of these developments and to see the impact in terms of loan quality and loan impairment parameters. We think that this assessment, of course, will go on during the second quarter, but we believe that the second half of the year will be the period where it will be more feasible to have a more clear picture about the real consequences of this pandemic in the quality of credit, especially after the end of the period of credit holidays.

So now I would pass quickly to Grzegorz Maliszewski for a very brief summary of the macro status and outlook.

[Grzegorz Maliszewski, executive]

Good afternoon. The economic situation and economic outlook deteriorated substantially during Q1 as the restriction implemented by the government reduced economic activity in industrial sector and in service sector. After severe recession in Q2, which we estimate at around 10%, the economy is expected to improve and recover partially, but the risks to the economic growth in the second half of the year are still downside, because of uncertain situation -- pandemic situation and possible second wave of pandemic in the autumn.

Our forecast for the full year for the GDP growth at minus 3.5% is somewhere between forecast from rating agencies that have recession at minus 2. And IMF forecasts, we've, therefore, for the recession at 4.3.

We expect unemployment to go up to 9% in terms of reduced unemployment rate and situation in the labor market shows that companies are very active in cutting costs and reducing employment, especially in the corporate sector.

On Slide #13, communicators from financial markets. The Polish MPC was very aggressive in responding to the crisis, with the cut by 100 basis points and starting nonconventional monetary policy. We do not see much room for another rate cuts, especially that currently, they are at record low level and very low compared to other Eastern European countries.

But we do not rule out another cut to support the economy and to support public finances and to lower borrowing costs. As far as foreign exchange is considered, after initial depreciation of the polish zloty, we see some stabilization, and we expect European will hover between [ 4 54 60 ].

It's worth to note that the also government undertook very aggressive actions to support the economy and to support companies. And this is reflected in substantial increase in general government deficit that will go up to 9.5% from 0.7% in the last year. This is pretty aggressive fiscal stimulus net debt might help to mitigate negative economic effects of the pandemic.

On Slide #14, few data on monetary aggregates after Q1 that are historical, but shows some acceleration in deposits and loans growth. But forward-looking indicators presented on Slide #15 from Central Bank survey, suggests substantial deterioration and reduction in demand for loans, both in corporate and in household sector. And in the same time, a more tighter credit policy.

Last, but not least, on Slide #16, there are a European commission forecast. It's worth to note that in this very pessimistic data flow, outlook for Poland looks less or even least pessimistic compared to other European countries with the recession of only 4.3%, which is the smallest recession in the year, which might be attributed to the structure of the economic or Polish economy and a relatively low share of sectors severely hit by pandemic. And also very aggressive actions by the -- from the government and from the Central Bank.

However, despite of this better performance of the Polish economy, unemployment rate will go up substantially, which will have negative effect of -- on consumption and the economic growth.

Once again, it's worth to stress the increased uncertainty regarding economic outlook. That will be related to the situation in pandemic and possible risk of another wave in the outlook.

Thank you.

Fernando Cardoso Rodrigues Bicho

Chief Financial Officer

So we will move now to the next part, a brief update of the Euro Bank integration process. And of course, we more and more start to speak about the numbers, about integration costs and the expected synergies.

On Page 18, the summary of everything that we have done so far. And we -- in the first quarter, we incurred PLN 30 million of integration costs. And at the same time, we've already captured PLN 23.5 million of synergies. So as we had expected, the impact of the integration is gradually fading on the negative side, so small impact pretax of PLN 5.3 million in the first quarter.

And we keep the guidance that we gave last time that overall, total integration costs will be clearly below the original amount of PLN 355 million. In fact, it will be below PLN 300 million cumulative, and which means that the total -- we have -- and not all of them through P&L. Also, it's necessary to stress part of them were through PPA adjustments and others through CapEx or write-offs.

And on the other side, the synergies will tend to increase from the decisions that were already taken and implemented, we are already estimating over PLN 100 million in 2020, as can be seen on Slide 19.

And in fact, the target for this year is to achieve PLN[ 156 ] million, as you can see on the graph on the right-hand side, down bottom of the page in terms of targeted synergies and integration costs.

So here, we can say that we are on track to achieve the synergies in terms of OpEx, the integration process already consumed 73% of the total plan, and 2020 synergies are expected to represent already 67% of the [ creating ] year 2022 target.

And also, it is visible on the left side of the page that the amounts remaining to be done during the current year of integration costs are already much lower than the one that we incurred in the first quarter.

Page 20. As a consequence of time passing the ex-Euro Bank portfolio is reducing its share in total loans. Since November, we have been doing -- we have, let's say, completely unified product structure to all the clients regardless, if they were originally from a Bank Millennial or from Euro Bank. And the cost will continue -- we also continue to have to make room for additional cross-selling and upselling to the former Euro Bank customers.

The optimization of the branch network after the operational merger is also visible. During the quarter, we reduced the total number of branches by 31, which still at least higher than this number still planned for the remaining part of the year.

The employment level is also decreasing. These numbers still does not fully reflect the restructuring of employment, it was done -- that was announced in January, which will be visible in the second quarter.

Now moving to the financial performance section. On Page 22, we have a summary of the main items. Of course, the comparison year-on-year is -- shows high-growth due to the fact that in the first quarter of '19, we still did not have concluded the acquisition of Euro Bank. If we look on -- anyway, we would like to point the solid growth of fee and commissioning income by 19% year-on-year and 6.5% quarter-on-quarter. This small drop in NII quarter-on-quarter that I will explain later, and at the same time, the relevant reduction of costs, excluding integration costs and contributions to BFG, which fell almost 5% quarter-on-quarter.

The total NIM reached 2.81% in the first quarter. The cost-to-income adjusted for this resolution fund contributions on a linear basis reached -- and other one-offs reached a 48.3%. Cost of risk at 75 basis points, without COVID-19 provisions, higher than in the previous period, and I also will elaborate on that later. Finally, the return on equity adjusted at 8.4%, meaning excluding these extraordinary items.

Page 23, number of customers already above 2.6 million, of which online and mobile over 1.9 million. And very strong numbers in terms of liquidity and capital ratios. So not with the picture, much in line with the previous quarter.

So during this first quarter, we had 2 or 3 relevant items which need to be taken into consideration when analyzing the evolution of the results. The first was this COVID-19 provision of PLN 60 million. So it's a provision that was created, anticipating a potential deterioration on the credit quality. So it's not that we already could see the deterioration in our indicators, but it's rather the anticipation that this will later be translated into the deterioration of the credit condition of part of our clients. And so we decided to preemptively make this provision of PLN 60 million. It was booked not as a reduction to gross loans, but there's other liabilities, so on the liability side. And then this provision in the second quarter based on what information and what detailed review of the models will be allocated to specific exposures or portfolios.

Second relevant event. We increased the provision for FX mortgage liberal risk by PLN 55 million in order to reflect deterioration in the nature of the decisions of the Polish core during the recent months in the Polish banking system and also due to the depreciation of the zloty versus the Swiss franc.

In terms of the asset quality, the -- as I mentioned, we did not see relevant changes in the asset quality indicators. So the impaired loan ratio remains clearly below 5% at 4.75%. And the cost of risk overall reached 108 basis points, of which 75 are -- is the cost of risk, excluding COVID-19 provisions.

On the capital side, very strong capital legacy ratios. And after the reduction of the elimination of the systemic risk buffer, in fact, we have a surplus of more than 4 percentage points above the minimum regulatory capital ratios.

Page 25, just a brief summary. So of course, reported ROE at 2.7% with linear assumptions regarding the resolution funds, 8.4% adjusted, excluding the extraordinary events that I mentioned.

In terms of operating income, we had a growth of 24% year-on-year, a decrease of 3.5% quarter-on-quarter.

Page 26, we had an operating cost reported growth of 35% or 28%, if we exclude the integration costs variation year-on-year. On a quarterly basis, we show a growth of 6% on costs, but we need to remember that we have the booking of the resolution fund contribution of PLN 58 million in the first quarter. So if we exclude this contribution, and also integration costs, total operating costs fell 5% quarter-on-quarter. And so the underlying cost-to-income ratio was at 48% in the first quarter.

I already mentioned the reduction of the number of branches and number of the FTEs in the quarter. So I would move to Page 27.

Total net interest income grew 38% year-on-year and fell 2.8% versus the previous quarter. The evolution of NII in the first quarter was influenced by a few factors: one, the reduction of interest rates that had a small impact already in the second half of March; second, one last slide, meaning the fourth quarter; and also, the impact on the average yield of the portfolio, cash flow portfolio from the fact that we have been fully neutralizing and giving back to customers the fees on early repaid cash loans, on a linear basis, which also represents some additional deduction versus what was being done in the fourth quarter.

On the other side, following what somehow we had signaled in the previous conference, we managed to decrease the average cost of deposits from 1.07% to 1.03% in the first quarter, and this is still before the adjustments on the pricing of deposits that we have introduced lightly after the crisis, and which will still produce effects in the next several months.

We had a strong delivery in terms of net fee and commission income, plus 19% year-on-year, plus 6.5% quarter-on-quarter, mainly supported by growth of insurance fees.

Pages 28, asset quality and cost of risk. So the ratios of impaired loans is still relatively stable.

So although, slightly deteriorated from 4.56% to 4.75% during the quarter. And we had some additional provisions. So PLN 60 million provision for COVID-19, I already explained.

Regarding the other part, so the additional -- the increase in the cost of risk, excluding COVID, was divided between corporate and retail on the corporate side, driven by 2 cases that deteriorated during the first quarter.

In fact, indirectly, also with some COVID impact, which accelerated already difficult situation to a worse situation. And so this increase the cost of risk in corporate, but it's very limited, as I said, in 2 cases.

On the retail side, we also had some impact of the -- of no activity in terms of recovery during the second half of March, which, of course, limited the ability to recover on a normal basis the amounts that are sometimes overdue in our consumer and mortgage lending portfolio.

On Page 29. Liquidity, very strong. Loan-to-deposit ratio at 86%, and despite the fact that, in fact, we have been lowering the cost of the deposits during the first quarter, so -- and the fact that loans growth was inflected by the depreciation of the zloty. And capital ratios, again, I already mentioned the very stable ratios on the one side and much bigger buffers versus the new minimums.

I will move now to the last part of the presentation on business performance, which was differently impacted by the COVID-19 crisis. So on one side, we still had a very strong quarter. In fact, a record quarter in terms of market origination. We had sales of PLN 1.3 billion, market share above 10%. And this was also due to the strong pipeline of applications and decisions that we have, which still fueled March and partially April, although, of course, then later, the demand has partially fallen. And also, relatively good sales of cash loans of PLN 1.3 billion, with a very strong growth versus 1 year ago, but we still did not have Euro Bank then but already partially affected in the second half of March by the lockdown.

On the company's business, very strong growth of current accounts volumes, which shows the defensive strategy of companies that hardest cash in current accounts, and a solid growth of loans to companies by 7% year-on-year.

Page 32. The loan portfolio growth year-on-year was mainly driven by the Euro Bank acquisition, which took place in the end of May. Still on a quarterly basis, the growth was 3%, partially inflected by the depreciation of the zloty. PLN mortgages represent now over 30% of total loans. FX mortgage historical from Bank Millennium below 20%; cash loans, 19%.

On the customer deposits, we had a growth of 3% quarter-on-quarter, 25% year-on-year. But on the other side, of course, we had the negative impact of the crisis on the assets under management or investment funds that replacing our customers, which the total amount fell by 19.5% year-on-year, and this is the combined effect of net redemptions in March and depreciation of the value of the assets under management due to the corrections in the stock exchange.

Page 33, very strong role of digital. We have more than 1.9 million active digital customers, of which almost 1.5 million mobile. Very strong share of cash loan sales through digital channels, 46%, slightly lower than 1 year ago, but this is purely due to the fact that the client base of Euro Bank had less penetration of mobile. So this somehow deflated the number, but it's still very, very strong and will increase through time. And this is a very strong numbers also for -- in terms of digital opening of current accounts over 20% in the quarter, entirely positive as traditionally.

The Page 34 also shows the relevant increase year-on-year of the transaction rate in [ OpEx ] of online payments, an increase of 41% in transfers, 25% in the number of clients with mobile authorization, 49% in e-commerce cards transactions and 35% in Internet payment transactions. In these times, the importance of digital is even more relevant.

On Page 35, we are illustrating 3 relevant solutions regarding the possibilities of banking from home. One is that we were the first bank in Poland to launch a service where we -- which allows bank's customers to use our Internet system, our Millenet Internet system to sends transfers from their accounts in other banks, so already a consequence of PSP 2 developments.

The second relevant point is the introduction of the possibility of opening a personal account remotely with the client's identity confirmation using personal ID and face photos.

And third, the introduction of the possibility of remote signing of agreements in Bank Millennium's corporate banking network.

Page 36, goodie continues to grow. In the first quarter, 170,000 app downloads, and also more interesting, the cashback program that was introduced.

Page 37, retail loans. I already mentioned most of the evolution, so of course, in the first quarter, the growth was driven mainly by mortgage loans, because the production of cash loans was not enough to a relevant growth of the portfolio.

And all customer funds year-on-year, a growth of 24%, but of course, with the drop of investment products being offset by a significant growth of current accounts and savings accounts by 43%. Mortgage sales, as you can see, the best over a long, long time. And cash loan sales, not the best of the last 5 quarters, but the second best, in fact.

Page 38. Number of customers growth decelerated in the first quarter, but still, we are already above 2.6 million. Also relevant growth of micro business customers, which grew 20,000 in the last 12 months and almost 1 million new current accounts during the last 12 months and 750,000 cards.

Moving to corporate on Page 39. We still have a solid growth year-on-year of deposits by 7% year-on-year and the gross loan to companies, 6%, driven mainly by loans to companies by 7%, but lower growth in leasing, which portfolio grew 3% year-on-year. And the reason for this is that leasing sales were already relevantly impacted in the first quarter, which is traditionally weaker, but still was weaker than 1 quarter ago -- 1 year ago. And the leasing sales were 28% lower, while factoring turnover was still higher by 6% versus 1 year ago.

So these are the most important points about our first quarter results. Now we are available for the questions.

[Artur Kulesza, executive]

Thank you very much, Fernando. Before we move to questions, I have to praise some of the analysts coming to us and wins the prize for being the first and actually ask most -- the higher number of questions. And normally we'd be granting CEO handshake as a prize, but just not this time. What do you think?

[Joao Jorge, executive]

Maybe later.

[Artur Kulesza, executive]

Okay. I decided selfishly to, let's say, combine questions into sections or areas of interest. And not to jump from one subject to another.

[Artur Kulesza, executive]

So let's start with the past, meaning results, and there were 2 or 3 questions on that. And then we'll cover, broadly speaking, COVID's [ smart sway ] and post-COVID reality. And the question on -- I will be reading the questions to you -- for your, let's say, understanding of the answers. So the question on results as such were that, first of all, there was a question from Raiffeisen about insurance fees in first quarter. Insurance fees were strong in first quarter. Was there any one-off component?

[Fernando Bicho, executive]

Yes. We -- usually, in the first quarter, they tend to be higher. In this particular quarter, we had a concentration also of some of the settlements that increased the level of the fees. So of course, we cannot take it as a reference for the remaining quarters of the year, although we still see a lot of value coming from insurance in the future. And in fact, it's even one of the areas where we think that in this new reality still can deliver more value.

[Artur Kulesza, executive]

COVID-19. The first question comes from analyst, on this particular subject, comes from Societe Generale. The analyst is asking about macro assumptions behind COVID-19 provision and how we should see the risk costs in the future.

There's also a question from Santander about the split of COVID-19 provision into retail and corporate. There's also a question about -- an interesting one. If there were no FX legal provision, would you create more COVID-19 provision? What cost of risk do you expect for the sector and cost of risk at Bank Millennium in 2021? And it's pretty much around that. And there's also a question about sensitivity to COVID-19 of ex Euro Bank portfolio and of Bank Millennium. So this is pretty much COVID-19 provision and cost of risk questions.

[Fernando Bicho, executive]

So I will try to go one by one, and I'm going to take the risk of disappointing. Some of the market analysts that like more technical and sophisticated explanations, but I'm going to be straight to the point. We still live in a very uncertain macro environment. So we did not see anywhere in trying to make updates of macro scenarios and introduce them in the models in a period where there is so much uncertainty to such extent that even the National Bank of Poland did not provide a new macro scenario. So what we decided to do was we recognized that this crisis will trigger potential deterioration in the financial situation of borrowers. And we thought that it will be appropriate to preemptively create a provision, which was not allocated to any portfolio. So it was not allocated to retail or corporate or to specific exposures. It was, let's call it -- I know it's not technically correct to say, but it's more like a general provision for COVID-19 purposes, which was done post-model calculations. So it was not yet the result of introducing macro assumptions in the IFRS 9 model. We still did not do this. It was rather the separate assessment of potential consequences of this crisis and trying to preemptively start covering the potential needs of provisions for that effect. What we plan to do in the second quarter is to develop our macro scenario. This is one.

Second, we also wait for the publication of the new macro scenario from NBP. But probably this will not come on time -- in time for the second quarter, say, calculations. Probably this will be delivered only in July. So only in the second half, we also can take into consideration the projections of the Central Bank. And as a consequence of this work, we will allocate this provision to specific exposures and/or portfolios during the second quarter.

Regarding the size of the provision, from what I could see, taking the benefit of not being the first to announce this provision, we see that the level of provision as a percentage of total loans is not far away from the number that I saw from several other banks. So this is the first comment.

If the question is, should it go more for retail or for corporate, it's too early to say. Of course, we know that we tend to think that probably corporate should be affected, first of all, especially SMEs, but in general, corporate exposures. But we need to give time to see the evolution and to see the levels of deterioration that can be happening in the next few quarters. We believe that the size of the deterioration will be more visible in the second half of the year and not in the second quarter of the year. And this is due to the fact that part of the clients can still apply or already applied for the credit holidays. And consequently, that deterioration may not be visible in terms of date past due, simply because they are not due.

And so we need to understand that in the second quarter, maybe some things will be already visible, but not the full extent of the impact of the crisis in terms of credit quality. I -- we believe that this will be more visible in the second half of the year. So this is what we can say about the COVID-19 provisions. We are not, for the time being, being able to separate and to assess whether the impact of the COVID-19 will be more visible in the ex Euro Bank vis-à-vis Bank Millennium, right? We still do not have enough evidence or data that allow us to take any conclusion regarding that.

Regarding the cost of risk for the sector and for the bank, what I can say is that from what -- from when we see the announcements of the European banks of the first quarter results, we saw that banks, in general, were increasing the cost of risk between 2 to 5x. The -- in the -- but depending a lot also on the starting point. So in our case, we have already a relevant increase, but most of it preemptive, in fact. But we do not know at all how the evolution of the risk will be, especially to which extent all these support programs that have been introduced by the states and by the banks can help companies and borrowers in general to survive this more difficult time and then to become regular buyers again after the end of the credit holidays period. And so this is still very difficult to anticipate. I think we need more time to understand the full impact.

The only -- I think I would just stress what Grzegorz Maliszewski said before that, at least in the middle of bad news, we see this European Commission forecast for the GDP growth as the less punitive one in the European unit. If this will be true, Poland should suffer, like it suffered less also 11 years ago or 10 years ago in the previous crisis. But I think it's still too early to be able to take conclusions.

[Artur Kulesza, executive]

Thank you very much. Remaining in COVID-related subject, questions from [ KRB ] and Wood. Does your 2020 NII guidance include impact of lower deposit cost? And related to that, what is Bank Millennium potential to cut client deposit costs? And can we expect that retail base depo cost will, however, -- will hover around 0? And is this too optimistic?

[Fernando Bicho, executive]

I will respond -- I will answer the first part on the -- regarding the estimation of impact on NII. So we already, of course, took into consideration some repricing mitigation actions on the deposit side when providing this estimate of PLN 160 million to PLN 190 million impact.

[Joao Jorge, executive]

And of course, maybe not so close to 0, but it's clear for us. And I think it's -- we think that it's going to be clear for the customers as well that there will be a trend for a very residual interest rate deposits pricing. Of course, it's -- somehow in some segments, there was some competition of treasury bonds. But even these ones are decreasing. And so we think that there is a potential to -- with time -- of course, there is here the cost of time to reprice it, because savings accounts and even term deposits -- term deposits, when they mature and they are renewed, and savings account is always around 2 months of information to customers. So there is always a gap between the pricing decrease or interest rate decrease and the pricing decreases made by the banks. Of course, you need to always keep in mind that in terms of current accounts that we do not remunerate. The impact of the interest rate cut is fully in our net interest income.

[Artur Kulesza, executive]

Okay. Next set of question is about credit holidays. What percentage of credit holidays applications were denied and what was the reason? And also, there's another question from Trigon this time. What part of PLN 9.1 billion credit holiday portfolio comes from current Stage 3 portfolio?

[Joao Jorge, executive]

The statistics of credit holidays that we provided on Page 5, these are statistics of performing loans. So we need to be -- so because there are 2 completely separate parts. One is the credit holidays that are provided as part of this private moratoria, in which one of the conditions that we have is that these loans are not past due. So to be clear, we are -- this -- we are providing. So if -- for the customers that are asking credit holidays, when they are already nonperforming or, let's say, delinquent, then this goes -- this is treated not for this purpose, but also -- but it's treated also maybe subject to specific restructuring of the exposure or modification of the exposure that exists, but we should not mix the 2 things.

So when we speak about this moratoria, we are speaking about clients that were performing normally. But due to this uncertainty and because of considering that they may be -- that they think that they may be affected by COVID-19 crisis does not mean that they were already affected. They ask for these credit holidays. And so -- and this is exactly in line with what we have been reading from these EBA and ESMA guidelines in terms of treatments of these credits. All grace done do not trigger any reclassification of the notes. If we have the same type of requests from clients that were already impaired or with days past due, we are treating them in a separate way. So that's why we are putting it on Page #5 the percentage of performing outstanding.

[Artur Kulesza, executive]

Okay. So this includes questions related to credit holidays. Question about a little bit going to the future. What is the percentage of current origination of corporate loans granted with BGK guarantees? Can we get more color on how lower client activity impacted F&C in April? Was there any seasonal fees that may not repeat in second and fourth quarter? Second?

[Fernando Bicho, executive]

I would say that it's too early to have these kind of indications. We are acting -- we incentivized heavily the usage of the guarantees, but it's too early to talk about this. Of course, there is -- it's important to understand that there is a shift in terms of corporate -- in terms of corporate activity. So the corporate, in the latest years, have very ambitious plans and always increasing number of customers and also the loan portfolio. And with this situation, there was a refocus on the relations with active customers and in maintaining the credit lines, so not expanding, but maintaining. In certain cases, always trying to reducing the cost and to have the intensive usage of the BGK guarantees. But it's too early to see indications in terms of lower activity. So the only thing that we saw, it's a little bit more activity due to turbulence in terms of treasury products. But besides that, I would not see.

In terms of retail, maybe I can take the question to go to retail. So what -- our activity in retail, we have January and February, it's very strong, because we are -- during the merger, there is always consequence. The merger was very successful in operational terms, but there was some time for the sales teams to recover the sales activities, because of course, during end of November and December, there was a lot of work to handling customers' questions, changes of systems, a lot of that. But January and February, we were already in line with our estimations. Of course, with the lockdown, we went to, I would say, 20% of the activity that we have in our budget. Now we are more at a 50% level. And our goal is to achieve a 70% level, which is ambitious, because it's a strong recovery. This is in average. Of course, it's, as you saw, some -- each products have their own specificities. You saw already a strong performance in terms of mortgage, because a lot of decisions of life of the customers in terms of acquiring new houses were done. So it was during March, they were speeding up the mortgage applications and execution and disbursement.

In April, it's still strong, but it's a little bit lower. And we think that it will be slightly lower, still positive. So we see ourselves in a regular base in the quarter maybe to do between PLN 1.2 billion, PLN 1.3 billion really in terms of mortgage production. In terms of consumer loans, maybe it will be more at PLN 1.2 billion level or even a little bit below during the next 2 quarters. We already made some risk adjustments, because it would be natural that we would make some fine-tune in terms of our models, in terms of our credit acceptance, in terms of how we give -- how we consider some income of customers. And so it's natural that we would put these risk fine-tunings, let's call it like that, or these risk appetite adjustments in our models. And we already did it, and we are really working at levels that I said it's already working with these models.

[Artur Kulesza, executive]

We have a set of questions relating to the so-called [ smart sway ]. And first is what is impact of your returns on NII? What was the one-off impact on NII, other operating costs? And is the bank using a linear method? And if so, what was the cost of adjustment and what was the impact of NII? So 3 questions on that.

[Fernando Bicho, executive]

So first, we -- during the first quarter, we implemented a linear return instead of proportional return. And second, the levels of returns from the past that we have been performing still did not trigger the need to make additional provisions for future returns. So we did not change the level of the provision that we had made in last year between third and fourth quarter of around PLN 66 million. So this still proved, until now, enough to cover the returns from the past.

Regarding the ongoing impact of the -- of these returns in terms of no longer appropriated income, let's say, I will give as -- more or less as a reference that this represents around PLN 25 million -- PLN 24 million, PLN 25 million in the quarter. So if we would not have this sway decision, we could have had our net interest income higher by PLN 25 million in the quarter. Does that answer everything?

[Artur Kulesza, executive]

And now we are gladly moving to post-COVID world. It's a little bit of forecasting and -- forecasting and predicting. First question is more related to Bank Millennium itself and the rest is probably more general. So I'll ask the one that relates to us directly. Do you plan additional cost cutting related to COVID-19?

[Joao Jorge, executive]

So I will first go around and then answering directly to the question. So mainly what we have done? So first, when we have this crisis, we start with this pandemic management, so protecting people, the employees, the customers, protecting the business continuity. Then, of course, supporting clients with the moratoria, with the guarantees, with the cooperation PFR successfully, because we have a smooth business continuity. During some time, we had only 10% of our headquarter people working in office. So we were successful in deploying the remote working, even for call center, which is always complex, and it's -- with all security cases, all the sessions with home working is safe and controlled, all the cyber security protections in place, so everything in place. And now slowly, we are making our plans and the long time to make the returning to the office. So I would say that -- and even the branches, they are prepared to work with proper protections, the securities, the materials. They are prepared to work in a regular basis in these, let's call it, new normal. And this is something that we will maintain, but the activity was more or less that.

And so what we did is that we deployed working for 3 months, May, June, July in terms of tactical adjustments to this new reality. And there, of course, there is the reassessment of the budget, with cost cutting and reassessment of investments. There is the risk monitoring and reinforcing the capabilities in terms of collection. And then there is a part that is extremely important, which is analyzing the digitalization process and the possibility of reduction of branches. Because what we are witnessing during these 3 months is of -- apparently is that we are seeing 3 months -- 3 years of what we were forecasting in terms of digitalization of the banking services.

So we always thought that, okay, there will be a process of digitalization of the consumers. And with the process of digitalization of the consumers, we will go through a reduction of the branches and our presence in the physical world. Seeing the speed that is happening at the moment, even sometimes in generations that we thought that would not happen, we could speed up. So we are analyzing. I don't know what we disclosed in terms of after-merger reduction of branches. But at least in our mind, it was around 100, 50 and 50 more or less. Now we know that we are already disclosing that we are going to do more than 60 this year. And as time goes by, probably it will be a little bit faster. It's not -- of course, there is a cost impact that is relevant. But we are doing also, because there is a consumer change that is relevant. And so it's -- if -- even the role of the branches is changing. So it's -- we think we can speed up a lot of cases sometimes is also with the negotiations with landlords when the rental agreement is terminating. The capacity of the other branch that is nearby to accommodate traffic. So it's -- but it's clear that we can do a little bit faster things that we were seeing in our horizon of 2 or 3 years.

There is a question also I saw about the consumers and the change of the consumers. We think it's a little bit too early. So one of the things that we are going to do during these 3 months is also standing the foundations in terms of the consumers and also the employees in terms of work organization. We understand that this is going to change, and maybe this is going to change faster and deeper than we thought. But in our evidence, it's still -- the only thing that we see is that there is a trend for more basic consumption and avoiding more luxury and gadget consumption. But besides that, it's difficult to forecast much more. But digital assets to this, it's -- I'm just going to give one example. It's -- in our mind, mortgage would never ever would be closed without a physical intervention, because it's -- of course, people apply, people do a lot of things by digital. But in our mind, people will never do it without a physical and going to see a face of somebody and signing the papers and everything. And now we think that it's possible as well. So it's not just opening accounts, making transfers, buying a consumer credit. Probably at the end of the year, we will see also a full digital mortgage process, which is something that it's -- it makes us think about what is the role of the different channels.

[Artur Kulesza, executive]

And the other questions are more or less touching the area of how we see the world after post-COVID, but these were addressed. One question regards our expectations on support from regulators, Central Bank or our Minister of Finance. And do we have any?

[Joao Jorge, executive]

I don't forecast any specific measures to supporting the banking sector. I think that the measures that were taken to support the economy are relevant, especially the PFR. And we are seeing that customers are applying and are being accepted. So this is a very important process that could support the Polish economy. Special measures for the sector, not. There are some areas of the sector that are never talked about, smaller banks, cooperative banks, the SKOKs and everything, that they were already in the border of the profitability and even in the border of the viability. And this interest rate cut could put in a more difficult horizon at least. So I think if there will be measures -- should be measures trying to support these less talked parts of the sector.

[Artur Kulesza, executive]

Do you want to comment on the bad bank concept?

[Joao Jorge, executive]

I think it's a very rough discussion of -- it's not even a discussion. It's exchange of ideas. I don't see concrete plans to do with bad bank at the moment in the Polish sector.

[Artur Kulesza, executive]

Mostly answered, unless there's one specific question that Mr. Bicho would like to address.

[Fernando Bicho, executive]

No. I was just also reviewing all the questions. I think that we touched almost everything. There's also one question about RWA density going forward. This is a function also of the loan growth that we are going to have and change of the structure of the loan portfolio. If in the near quarters the driver will be PLN mortgage, then of course, the density in terms of RWA is lower. And so as the PLN mortgages, we'll get more share in the total loans, of course, then there could be a little bit decrease in, let's say, this density of RWA. But otherwise, this would not change much.

I think this was one of those that was pending. If there were no FX mortgage legal risk provision, would we have put more provisions for COVID-19? So it's a good question. It's a good question. But what I said already in the beginning was what we have done seems to us more or less in line with average of some other banks that have done such type of provisions. So I cannot say that we would do necessarily more. I think -- as I said, we were -- we thought that we could preemptively take the move. The truth will come later. So that's why I don't want to put too much technicality in the explanation of the PLN 60 million of provision, because I think the value in 3 months of that technicality will be 0. So that's why we preferred to sign. This was the first quarter. We did what we did. Second quarter, we'll start to provide some more visibility. Hopefully, this -- at least that part of visibility will be enough to allocate, but it's not a must that we need to allocate immediately to the specific portfolios of exposure.

The objective here is not the technicality. The objective here is what is the proper level that needs to be done. But also, we need to take into consideration the guidance from regulators, local and international, which is to have this midterm view. And so we should not run from one quarter into the other, which is -- we know that there are people and companies that are going to be affected by the crisis, but also what matters is if after this crisis in 3 or 4 quarters' time, there will be normal or not. And this is the view that we need to take and not just running from one extreme to the another extreme in terms of making and unwinding provisions, because this is not the purpose.

[Joao Jorge, executive]

But even if I can, the word that is behind these 2 provisions that we made is a lot of products, because we made a provision, the Swiss franc mortgage when partially the quarter closed. So it was a preemptive action as well. And we made a provision on COVID, credit risk when we know that we are with a lower exposure in the corporate sector, because we have 3% market share in U.S., 7% of individuals. And the micro and small business or small-small business, we have even much, much less. So we have close to 1. So it's an area that we are not exposed. And also, we are not a bank strong in commercial real estate, financing, shopping centers and the office parts and things like that, which, of course, under this readjustment of the economy and the readjustment of the commerce are going to be the impact. So it's -- the question is not so much if we would have space, we will do more. The question is there to why we did so much, and it is more because to be aligned with the market, because there is not an easiness to do nothing at the moment. So we are going to create space, to make it smoothly in the next quarters, but there is a lot of prudence in the 2 provisions that we are making.

[Fernando Bicho, executive]

There is also a new -- just one more question, if first quarter '20 was impacted by some positive one-offs in costs? No. So in fact, we highlighted what was the relevant, which was the integration cost that we booked, PLN 30 million. And there was no other relevant positive or negative one-off that we can identify in the first quarter, of course, apart from everything that was disclosed, including the impact of the banking guarantee fund fees.

[Artur Kulesza, executive]

I think we largely addressed -- answer the questions. So in case we haven't, it's obviously the blame is on me, so please do resend the question to me and we'll see -- cater or we'll address this ASAP. Thank you very much, gentlemen.

[Joao Jorge, executive]

Thank you.

[Fernando Bicho, executive]

Thank you very much.