Bank Millennium SA

WSE:MIL

Earnings Call Transcript 2021-Q1

[Dariusz Górski, executive]

Good afternoon, everyone. Welcome to Bank Millennium First Quarter '21 Results Call. With us, we have on the scene the usual actors or the stars: Mr. Joao Bras Jorge and Mr. Fernando Bicho. We'll be very brief this time. We know we're competing for air time with other events, unfortunately. [Operator Instructions]

Gentlemen, the floor is yours.

[Fernando Bicho, executive]

Thank you. Good afternoon. Thank you for attending this first quarter results presentation. Let me start highlighting just as a reminder what we are showing on Page #5.

2021 is a transition year where we are focused in recovering the business volumes and the profitability that was affected by the pandemic and especially by the significant cuts of the interest rates. It's a year where we expect to be able to show growth, particularly in mortgage loans. And also, an increase in the sales of consumer loans. And on the other side, an improvement in the operational efficiency, which will ultimately translate into expected improvement of the cost-to-income ratio to -- from 49% last year to around 47% this year.

Also, we continue the process of full digitalization with clear targets, very ambitious targets of having more than 80% of digital clients in the total active customer base by the end of 2021 and also to have a large proportion of end-to-end sales processes coverage -- covered on the digital platform.

Pages 6 and 7 show a snapshot of key profit and loss items and balance sheet and business items, which we will go through the presentation in more detail. But just as main points, I would highlight the significant improvement on the cost side with a clear reduction of costs versus 1 year ago. Also, the very good performance in terms of cost of risk with much lower cost of risk also when compared with 1 year ago and showing a decreasing trend in the recent quarters. And on the other side, an improvement of cost-to-income ratio already visible versus the first quarter of last year. And also, the capacity of the bank to generate profits before these extraordinary times of creation of provisions for FX mortgage litigations. And so this capacity is translated into a net profit before FX mortgage litigation provisions above PLN 200 million in the first quarter.

And on Page 7, also to highlight the solid growth of customer funds approaching the PLN 100 billion bar. And also, the significant increase in the number of online and mobile customers.

On Page 8, we can see the evolution of the results of the bank during the last 5 quarters. And we can see that, excluding the provisions for FX mortgage litigation, the bank had a net result of PLN 209 million, which is a growth of to 48% versus the first quarter of last year. And then this was more than offset by the negative impact of the provisions for FX mortgage litigation issues, which increased in the first quarter and returned to -- were about PLN 500 million. And as a consequence, we booked a net loss of PLN 311 million in the quarter.

As we see on the right side of the Page 8, on a quarterly basis, we also had an improvement versus the previous quarter of the net profit without extraordinary items. And operating income, when compared with the prepandemic quarter of the first quarter of last year, only fell 6%.

On Page 9, a snapshot of the most important financial highlights. So on an adjusted basis, the result, net profit grew 48%. The net interest income was stable in the quarter, and the net interest margin increased by 3 basis points. We had a solid growth of fee and commission income by 6% quarter-on-quarter. Adjusted ROE, which means ROE without FX mortgage provisions, reached 9.3%. Costs were lower by 17% year-on-year, and the coverage of past-due loans by provisions increased also to 120%.

On Page 10, net interest income stabilized in the first quarter despite a shorter quarter and was still 10% below last year as a consequence of the significant interest rate cuts that took place between March and May last year. We were still able to achieve further reduction on the average cost of the deposits, which fell 3 basis points in the quarter to 0.8%, while at the same time slightly improving the yields on the loan side by 3 basis points to 3.25%. We also, again, have another step in terms of improvement of net interest margin by 3 basis points to 2.56%.

On the fee and commission sides, both on a year-on-year and quarter-on-quarter basis, we showed a solid growth of 5% and 6%, respectively, in this quarter, with a strong contribution from the fees from accounts services.

On Page 11, moving to the cost side. Strong decrease of costs. On a reported basis, a reduction of 17%; excluding BFG costs, a cut of 14%, and with the reduction coming both from staff costs and from other admin costs. As a consequence, the cost-to-income ratio improved year-on-year from 48% to 46%, assuming annualization of the BFG contributions.

And this was supported by the optimization of the branch network on one side, which we have already been showing in recent quarters. So we had a reduction of 121 branches year-on-year partially as a consequence of the merger with Euro Bank and also by accelerated optimization of the branch network following these pandemic times and, on the other side, also by the reduction in the number of employees, which was above 1,100 in the last 12 months.

On Page 12, continue to -- we continue to show a strong asset quality with an impaired loan ratio below 5% and with a trend of decreasing cost of risk since the second quarter of last year. So finally, in the first quarter of this year, we had a cost of risk of 39 basis points over total loans, which is much better than what we -- in fact, we would be expecting just 3 or 6 months ago, with significant good performance on the retail side, also supported by another sale of NPLs, which had a contribution of PLN 13 million pretax to the level of provisions.

The asset quality is also supported by the good quality of the loans that were under loan moratoria that in the meantime was finished. The current amount under loan moratoria are completely residual. They represent only 0.1% of total loans as of the end of March, and the quality of the portfolio that was in the past under credit moratoria is very good. As we are showing on the bottom right side, only a small fraction of those loans were nonperforming as of the end of March.

Moving to Page 15. Strong liquidity position, loan-to-deposit ratio back to 85% and keeping also very strong capital ratios with the surplus over the minimum requirements of more than 5 percentage points.

Moving to the second part of our presentation on business development and with the main highlights on Page 17. We have a good momentum in terms of business growth as shown by a loan growth of 5% year-on-year, record sales of mortgage loans in the first quarter of PLN 2.2 billion with a market share above 14%. Cash loan sales higher, 24% quarter-on-quarter and getting very close to the prepandemic levels. Investment products outstanding also, growing 29% year-on-year, more than 2.1 million active digital customers and customer deposits growing 6% year-on-year.

Moving to more details on Page 18. On the loan portfolio side, the driver of the loan growth has been mortgage loans, which on a combined manner grew 9%, so total mortgage loan portfolio, while loans -- consumer loans grew 2%. And we still, year-on-year, have a small contraction of loans to companies as a result of clear lower demand. The structure of the loan portfolio continues to change with the dilution of the FX mortgage portfolio in which the portfolio originated by the bank was already below 17% of total loans as of the end of March.

On the deposit side, a clear rebound from the end of the year and bringing the total growth year-on-year to 6%. And in investment products, also a growth of 5% versus the end of the previous quarter.

On the digital side, we continue to show very strong numbers with continued growth in the number of digital users and log-ins. And high share of electronic channels in the sale of products translated into 61% digital share of cash loans disbursed in digital channels and 28% share of current accounts opened online during the first quarter. The number of active mobile customers is already above 1.7 million, growing 16% year-on-year.

Page 20, just a reminder of the support that we have been providing to our clients and the employees during the pandemic. I will not go through the details. It's just to remind you that we continue this process in order to provide to our customers possibilities to do all the transactional and service needs in safe conditions.

Page 21, also important to stress that customer satisfaction, loyalty and the quality of service have remained stable despite these challenging times as shown by external surveys. And the level of recommendation and satisfaction scores have been kept stable.

On Page 22, very high transaction rates in online and mobile payments. We are showing a 66% increase in Internet payment transactions year-on-year, 45% growth in contactless mobile payments, 98% growth in e-commerce transactions through BLIK. So these are numbers that really illustrate the level of active engagement of our customer base in the usage of our digital platform.

And on Page 23, also illustration of the number of recent solutions and innovations that have been implemented in which we would highlight the further developments on the cash flow digital sales process for retail clients, new digital options for mortgage loan management and also further developments of investment products, sales process in digital platform.

And last but not least, on Page 24, continuation of the growth of goodie with 143,000 app downloads just in the first quarter.

On Page 25, we have some more details about retail business evolution. So a strong growth of retail loans, 8% year-on-year, driven by 25% growth of PLN mortgage loans and 3% growth in consumer loans with, at the same time, a decrease of the FX mortgage loans by more than 12% year-on-year. And if we would look at the overall retail loan growth without FX mortgage, in fact, the loan growth was 16%.

For this growth, contributed, first of all, the strong growth of mortgage loan sales, which has been a trend since the first quarter of last year but reached a record high of PLN 2.2 billion in the first quarter of 2021, a growth of 5% quarter-on-quarter and 64% year-on-year, and with a market share origination of 14.5% in the first quarter.

And also, we have shown solid performance in terms of new sales of cash loans, which grew 24% quarter-on-quarter and were just 2% below the first quarter of 2020 and allowing us to have a market share of 10.5%. Retail customer funds grew 4% year-on-year, with a stronger growth of investment products by 29%.

Page 26, the growth of active customers naturally now is slower in this new environment. But we keep a solid growth also in terms of acquisition of new accounts and in the growth -- in the acquisition of the cards, both the debit and credit cards.

On the company side, Page 27, the corporate deposits rebounding significantly in the first quarter and were 18% higher year-on-year driven by current accounts because virtually almost -- we are almost with interest rates close to 0 in time deposits. And on the loan side, we highlighted the strong growth of the factoring business with the growth of the portfolio by 8% year-on-year, which was offset by, still, contraction of the leasing and other loans to companies portfolio, bringing the total exposure to companies lower by 3% versus 1 year ago but still with some signs of rebounding.

Finally, on Page 28, leasing new sales, which have been one of the activities more affected by the pandemic, grew 23% year-on-year to PLN 762 million. And factoring turnover, very strong, a growth of 25% year-on-year.

[Dariusz Górski, executive]

Now time for questions. As usual, we try to group them and then will service them as they come. Thank you very much for your questions, especially those which deviate somewhat from the Swiss franc issue. But obviously, there are many on this.

Before we move to FX mortgages questions related to results, do you think current high growth of PLN mortgages is sustainable? Do you see regulators' interest in such growth? This is the first question.

[Joao Jorge, executive]

One of the lessons from the past and connected even with the overexposure that we have in the Swiss francs mortgage is that the better the bank, more balanced is the bank. So we will try to -- we have also [ some ] combination [ with growth ] with mortgage [ with also for other areas ] even if this will mean some slowdown or slightly slowdown on mortgage. So we think that the levels that we are talking about today, let's call it these PLN 2 billion per quarter, would be the comfortable level for us. So we would not mind even if it were to have slightly lower in the next quarter, not at these levels.

So we will not see next quarter PLN 2.5 billion and the PLN 3 billion and things like that. So we -- this is -- this PLN 2 billion is the level that we feel comfortable. So we would even not be unhappy if we have 5% lower production, for example, in the next quarter and then -- and to stay at this PLN 2 billion level for a while.

[Fernando Bicho, executive]

We also still keep the project of launching the mortgage bank in the future. So we are expecting to receive the operational license that will allow the bank to start its operations, which means that in the future, we may have another source of midterm funding to support the mortgage portfolio that we already have and that we will originate in the future.

[Dariusz Górski, executive]

Remaining within the subject of loan growth, next question is about corporate book. When do we expect growth to appear? And what is the general feel or expectations for lending growth this year for the book?

[Joao Jorge, executive]

So it's a little bit following the comment that I said. Of course, we have not -- one thing is what we would like. Other thing is reacting to the market needs, and what the market needs there is more appetite to mortgage and a little bit more stable in consumer loans and a little bit less in terms of corporate. It's clear that we are [ SME meets ] corporate bank. So also, if there is these extremely large big tickets, it's -- they will not have a major impact in our portfolio. And we see clear good signs. In terms of factoring, it's at record levels. Leasing is recovering.

But I would not forecast a major growth on corporate lending in Poland in the next year. In this year, I would say -- so I would say that we would stay at this level with slightly increase. But I would not -- not because we don't like or not -- we would not like it but because I'm not seeing a major change for the time being in terms of companies. Although, there is some leasing in terms of -- we see some mild activity in leasing, some reinvestment, renewal of equipments. But for the time being, we are not seeing a wave of investments that would support a major increase on corporate loan book.

[Dariusz Górski, executive]

Thank you. There's a couple of questions relating to net interest margin outlook and our expectations or view on interest rates this year.

[Fernando Bicho, executive]

So our view regarding interest rates is that, for the nearest quarters, they will remain stable. And as a consequence, the -- we expect that the improvement of the net interest income will be driven by the continuation of the growth, essentially, of the loan book and also with proper pricing of the new origination leading to a gradual increase into the average yields from the loan side while, on the other side, keeping the lower cost of the deposits that was already achieved in the first quarter.

So basically, we finished the exercise of repricing of deposits, which took place between the second quarter and the fourth quarter of last year, and it is fully shown now in the first quarter of this year. So there is nothing more relevant to appropriate there. And now the improvement in net interest income will come from the continuation of the growth in a gradual way but also not expecting, for the time being, any increase of the market interest rates, which, of course, would be supportive for a quicker improvement of the NII.

[Dariusz Górski, executive]

Two questions relating to asset quality. One is about the quality of assets after the expiry of state support measures; and second, about the growth of Stage 2 corporate loans in the quarter.

[Fernando Bicho, executive]

I think we already -- we showed it on the page -- we showed clearly on Page #13 the status of the loan moratoria and also the quality of the portfolio that was under moratoria. So as you can see, at least for these numbers, the situation looks quite positive. As we said before in previous presentations, we were always cautious to say that we needed the moratorias to finish and to wait several months to see if the customers would come back to normal servicing of the loans. So far, it is happening. And so we also see some positive signs coming from the economy and from the reopening of the economy. And so we have no reasons to believe that there will be significant deterioration from the numbers that we are showing here on Page 13.

So that's why asset quality remains solid. The quality of loan portfolio is not being, in a relevant way, affected by the loans under moratoria, apart from episodic reclassifications. And so we are positive regarding this. And we keep -- as a key objective, always to keep the asset quality in the loan ratio below 5%. This has been, let's say, a trend for already many quarters, and then we are sticking to that target.

And also, this is translating into lower cost of risk, lower than we were initially expecting. And so if the trends will continue, of course, we will have lower cost of risk this year than what we were initially expecting.

[Dariusz Górski, executive]

Thank you very much. And to complete the questions regarding our results, a near future sort of industry question, would we be interested in retail assets of Citi Handlowy that were -- or will be put up for sale?

[Joao Jorge, executive]

I think we are now in an organic mood. So for the time being and before any clarification also in all the questions connected with the legacy FX portfolio, it's obvious that it's difficult to think about these kind of transactions. And just to augment also what was said, so one area that we are more optimistic is, of course, the consumer finance part. So as the economy is opening and as people start to travel and starts to make their own projects and everything, so we are seeing a good activity on the consumer credit part. And this is an area that also will support the second part of the year for sure.

We are working already with -- last year, we made a big effort to combine the commissions with [ IRC and ] insurance penetration to offset the decrease of maximum interest rate. Also, we had some tightening of the risk criteria also for that. And since we are working with these risk appetite and also this pricing scheme, we are seeing an acceleration of appetite of consumers for these. So we are forecasting the end of second part of the year -- three quarters of part of the year. Sometimes I have already in the impression that we are already in the summer but not yet.

But remaining part of the year, more active with people circulating, consumers starting to travel and starting to make real projects that they finance with consumer credits.

[Dariusz Górski, executive]

There's also a question about target level of branch network.

[Joao Jorge, executive]

We don't have a specific target for that. We have been changing the size of the network, adapting also to the consumer habits. And it's clear that, with the changes of habits with COVID and with digitalization, we start doing less traffic and less need of branches. With that, we see that -- some readjustments and some consolidations of branches. For time being, looks like we are in the right size. 10 branches more or branches less, but it looks like we are in the right size. But it's obvious that if the consumer habits change a lot in the future, we have space to some adjusting.

One of the advantage of the acquisition of Euro Bank was the franchise model. The franchise model also allow us to be in some markets that we will not establish a physical presence by ourselves but with a light format with the franchise. With a light presence in terms of employees and all of that, it's possible to be there. So this is a good complement also with digitalization to allow us to be in more -- bigger national coverage with a lower investment infrastructure.

But -- so I would say that this year, probably, we are done in terms of reductions. But if we believe that digitalization is the process, the less physical presence will be something that will happen in the banks. And as time goes by, the need of a physical presence will be also smaller.

[Fernando Bicho, executive]

[ Just now 2 -- ] I'll answer parts about the business, just 2 additional points. So one is the question about fee and commission income. So of course, in the first quarter of this year, we have the support of some fees which are not recurrent every single quarter on deposits and accounts. But moving forward, we have been -- so with different drivers, we have been gradually improving our fee and commission basis. So we continue to expect solid growth of fee and commission income during the current year.

There was also another question about asset quality. Just to remind it, of course, we -- as I mentioned, we have been introducing in the past, last year, stricter definitions of classification of loans and the default in the retail side. We did the same in corporate in the first quarter of this year. And as a consequence, sometimes, we have some reclassifications of loans between Stage 1 and Stage 2, especially explains also the one question which is that there was an increase in Stage 2 loans in the first quarter of the year. But as you could see, this did not have a significant impact for the time being in terms of the needs -- in terms of the cost of risk.

[Dariusz Górski, executive]

And then we have a whole range of questions relating to Swiss mortgages. I think the easy way to start is the question about our intention to implement KNF chairman proposal and whether we have done any survey on that yet.

[Joao Jorge, executive]

So we were invited to join the discussions in beginning of this year. And since then, in a prudent way, we explained that, for us, the timing for taking any decision, positive or negative, would be just the second part of this year because we thought that we need to go by our own survey, our own assessment, our own legal assurance about the [ provided ] proposition and all of that.

Meanwhile, things went a little bit faster than we even were forecasting. We ran the survey. The survey was positive. We wanted to go in a very detailed survey with specific calculations per customer covered in the survey and all of that. Also assessing not only the customers there, there was a decrease of the balance and the installment, [ that also in the ] situations that there was an increase of the installment or increase on the installment and the balance. And also, we went to -- we decided to make more, I would say, acid test which would be also having with a smaller, of course, number of customers due to some limitations due to the [ quality ]. But to assess the full documentation and how the customers will react to the full documentation package of the settlement and still is positive.

By that, we now are in the period to assess by ourselves what this would mean for the bank and what would be the conditions for the bank. And the positive or negative, we believe that after summer or, let's call it, August or something like that, we'd be ready to take a decision in this proposal. We believe that this is a good settlement. We will leave that to the decisions of European Court of Justice.

And [ if they ], the panel of 7 judges, was positive for the banks and when the news are positive for the banks, these will make more probable settlement. And so it's -- it gives a better chance for the solution to be viable. But the only thing that we can say at the moment is that we see the things going through faster than we were even forecasting. And we believe that on the summer, we will be able to take a decision. And if positive on the Board, then to bring to Supervisory Board. And if positive in Supervisory Board, to bring to the shareholders.

[Fernando Bicho, executive]

And in fact, we -- the other part of the questions, so one is regarding KNF proposal. Then we have a second, which was our assessment of the European Court of Justice and Supreme Court that Joao already mentioned.

And then we have 2 additional, let's say, groups of questions connected with this issue, which is, first, the provisions that we have done in the first quarter and if this can be considered as the run rate for the future. And the second is about capital implications. So maybe I would start just to give the explanation about -- so we showed in our Page 14 of the presentation the evolution of the portfolio and also the evolution of the provisions against the portfolio.

So in the first quarter, we significantly increased the level of the provisions, taking into consideration, on one side, negative trends in court decisions; and in second, the -- still, the increased inflow of new court cases. We are not -- but for the future, for the next quarters, of course, we will be updating the level of provisions depending on the trends regarding inflows, regarding the nature of the court decisions, regarding also consequences of the decisions of the European Court of Justice and Supreme Court in practical rulings of local courts.

And we are still before understanding and having evidence about what will be the implications of such rulings. Although as said, in our view, they are more positive and in the sense of restabilizing some balance between borrowers and banks, which until now was completely not the case.

And so we cannot -- we are not able to give exact guidance for each quarter. We -- as we wrote in our report and we have been writing in our report, we will be taking a conservative view and creating provisions. And if the trends will continue, of course, we will continue to increase the amount of the provisions dedicated to the FX mortgage litigations. On the other side, if in the future, such settlement proposal would be implemented, this also would offset potentially the future flow of the court cases. And so we also need to take that into consideration.

And regarding capital consequences, we showed also in our Page 15 the status of our total capital ratio and Tier 1 ratio, which are very strong and much above the minimum required levels. And additionally, we are also highlighting the fact that we have an additional regulatory buffer connected with the FX mortgage risks, which is the Pillar II buffer, which we have for some time, which now is 3.41% of -- in terms of total capital ratio.

And of course, what we know and what we have been always trying to achieve in the long run is a dilution of the portfolio in terms of total loans because we know that by decreasing the absolute and relative size of this portfolio, this will contribute to a gradual -- or faster or slower doesn't matter -- reduction of this Pillar II buffer, which one day will simply disappear.

And so we have a large capital buffer and which is [ quantifiable ]. I mean we are putting all the numbers on the table so it's very easy for you to see how much surplus we have today plus what would be the surplus if the Pillar II buffer would be eliminated in the future. And this can give you also an idea of the capacity of the bank to absorb losses on one side.

But also on the top of that, you need to take into consideration the capacity of the bank to originate net profits in a solid way without -- before FX mortgage provisions. As we showed in the presentation, this quarter, we have more than PLN 200 million of net profit excluding this extraordinary item, which means that, on average, for the future, we are speaking about close to, on average, PLN 1 billion of net profit per year, excluding provisions for FX mortgage, which is -- which shows the capacity of the bank to organically generate capital on the top of the buffers that already exist.

[Dariusz Górski, executive]

Thank you very much. I hope we answered all your questions. I mean they were obviously circulating about the capital impact in various -- [ to put it, ]in various ways. As usual, thank you very much for your interest. And as usual, I strongly encourage you to contact us either by telephone, by e-mail or by other means. The IR team is at your service as usual.

Gentlemen, thank you very much. Any concluding remarks?

[Joao Jorge, executive]

Just to say that we are quite optimistic about the business trends and the future. And I know that because there was a specific question about corporate book and about mortgage. But we do believe we have a vision for the market that is a positive reaction in economical terms. And we prepare ourselves quite well for taking advantage of this. So our forecast in the -- for the next -- remaining part of the year and the next year in terms of normal activity is it's quite positive.

So of course, at the same time, we need to address this legacy issue. And also, we believe that 2021, '22 are really the years of solving this legacy issue in Swiss francs. So it's -- sometimes, the problems cannot be solved in advance. They may need the right environment. And we believe that we are close to this right environment.

And at the same time, that also the gains in terms of efficiency that were already achieved and that they are being still going to be achieved due to the increase of productivity and also the recovery in terms of economical activity, they will -- or they make us quite optimistic for the activity of the bank for the next -- for the remainder of the year and next year.

[Dariusz Górski, executive]

Thank you very much again, and hope to speak or see you soon. Thank you very much.