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Welcome, everyone, to Bank Millennium First Quarter 2022 Results Call. With us we have your guests or participants, Mr. Joao Bras Jorge, our Chairman of the Board, CEO; and Mr. Fernando Bicho, Deputy Chairman of the Board and CFO.
Before we start, I would like to ask a rhetoric question, who said the banking is boring and hopefully, [ either or the ] 2 gentlemen will be able to answer that on maybe some other opportunity, our participants in the call.
Before -- I mean, without further ado, I'd like to welcome Mr. Bicho. He will present results of our bank in the first quarter, and afterwards, there will be -- both gentlemen will be available for the Q&A session. Thank you very much.
Thank you. Good afternoon. Thank you for joining this conference on our first quarter results.
We start with a snapshot on pages 5 and 6, where it is visible that in the first quarter, the bank had a very strong operational performance with a strong increase of core income, which was, of course, driven by the significant increase of interest rates but also by a solid performance in terms of fee and commission income, which was much -- which together we're growing at a much faster pace than costs. We also continue to have a quite low level of credit risk provisions.
And on the other side, we still booked significant amount of provisions for FX-mortgage legal risk. And additionally, also relevant amount dedicated to settlements with -- amicable settlements with customers. As a consequence, we had a net loss of PLN 122 million in the first quarter, which is significantly narrower than the one shown 1 year ago. But for the first time since the third quarter 2020, we have shown a pretax profit. If we exclude extraordinary impacts coming from the FX-mortgage legal risk, the net profit of the bank more than doubled in the first quarter to PLN 485 million. This was supported by significant growth of net interest margin, a significant reduction of the cost-to-income.
On Page #6, regarding some key balance sheet and business items, we continue to show a strong pace of growth of active customers, a growth of 129,000 year-on-year, a growth of 237,000 if we look just at online and mobile customers. We had a total deposit growth of 10% and a loan growth of 5% and a significant decrease of the net FX-mortgage loan portfolio by almost 29% year-on-year.
Moving now to details starting from Page #7. And looking at the top right graph, it is visible the improvement of the underlying profitability of the bank in recent quarters, which -- and especially that the one in the first quarter 2022, of course, supported, as I mentioned, by the increase of interest rates, but this also shows the capacity of the bank to generate organic results, which will gradually more and more cover the costs connected with the FX-mortgage loan portfolio. If we look on an adjusted basis, the annualized ROE, excluding the costs connected with the FX-mortgage reached almost 20% in the first quarter of this year against 10% in the first quarter of last year.
On Page 8, regarding the main financial highlights, apart from the significant increase in the normal profitability of the bank, excluding FX-mortgage related costs, we also highlight the significant decrease of cost-to-income, which on an adjusted basis reached 35.5% and still now cost of credit risk at 40 basis points over total loans.
On Page 9, more details about net interest income, which had a strong growth of 25% quarter-on-quarter and 54% year-on-year, driven by the repricing of loans, which is also starting to be followed by repricing of deposits. But the different speeds of the repricing led to an increase of the net interest margin in the first quarter to 3.77% from almost 3% a quarter before.
In terms of net fee and commission income, we still showed a solid quarter, 3% higher quarter-on-quarter, 8% higher year-on-year despite the fact that the market situation contributed to lower fees from investment products.
On Page 10, significant improvement of the cost-to-income ratio to 35.5% on an adjusted basis, 41% on a reported basis. With a total cost growth of 14%, but excluding the costs connected with the Banking Guarantee Fund, the cost growth was 7% with a continuation of the optimization of the branch network and also a slight reduction in the number of employees.
On Page 11, asset quality remained strong, allowing us to have a cost of risk, which is very similar to the previous 2 and 40 basis points over total loans. And also with stable NPL ratio at 4.4% and without having any positive impact from sale of NPLs, which did not take place in the first quarter of this year.
Regarding the FX-mortgage portfolio, we continue to try to accelerate its reduction. In currency, the portfolio was reduced by 5% in the first quarter or 19% versus 1 year ago. This means the reduction without FX impact, allowing us, together with the increase of the provisions to continue to dilute the portfolio in total loans, reaching now slightly below 11%. We continue to strengthen the provisions for legal risk as we already announced 2 weeks ago with a charge in the first quarter [indiscernible] of PLN 451 million.
In terms of trends, the first quarter was still positive in the sense that we managed once again for the fourth consecutive quarter to have a higher number of amicable agreements with customers than the inflow of new court cases. In this first quarter, we had a total number of amicable settlements of 2,200 in Q1 against 1,568 new court cases. And the total cost of the amicable settlements stood at PLN 124 million. As a consequence of the provisioning effort and the reduction of the portfolio, the ratio of legal risk provisions against the gross value of the mortgage -- FX-mortgage book crossed 30% in the end of March.
On Page 14, regarding liquidity, the situation remained relatively stable with -- but with a decrease of the loan-to-deposit ratio to 81%. In terms of capital ratios, of course, they were impacted mainly by the depreciation of the bond portfolio, which has the impact on own funds and to a much lower extent by the net loss booked in the first quarter of the year. Still, we have a comfortable surplus over the minimum requirements.
Moving now to the second part of the presentation regarding the business highlights of the first quarter. We would like to highlight the good dynamics in terms of the retail business and also corporate showing gradual improvement, translating in overall loan growth of 5% year-on-year, which is, of course, a depressed number due to the reduction of the FX-mortgage portfolio with a growth of 24% of PLN mortgage loans and 8% of the leasing portfolio. Debit cards grew by 163,000 in 1 year, and we reached 2.4 million active digital customers. And customer deposits grew 10% year-on-year.
Regarding loans and customer funds on Page 17. So the total loan growth, if you would exclude the FX-mortgage loans would have been double digits at 13% year-on-year, driven by PLN mortgages with a smaller growth of loans to companies and consumer loans. This allows the continuation of the change of the structure of the loan portfolio with a lower share of FX mortgage loans and the higher share of PLN mortgage.
And on the other side, customer deposits grew 10% year-on-year with stable retail deposits and much higher growth of corporate deposits with the first quarter decrease of retail, offset by increase of corporate deposits. At the same time, investment funds have been subject to a significant correction due to the market situation. And as a consequence, in the end of March, the assets under management were 13% lower than 1 year ago.
On Page 18, some more details about retail. Of course, we already had some decrease in the origination of mortgage loans and cash loans. The numbers that we are showing here that corresponds to disbursements, show a reduction -- still a very solid performance because we originated PLN 2 billion of new mortgage loans in the first quarter, just 7% below the first quarter of last year. And on the other side, the cash loans with an origination of PLN 1.1 billion, which stood 12% below the first quarter of last year. And this is a natural consequence also of the extraordinary events that we had during the first quarter in terms of the war, but also in terms due to the increase of the interest rates.
Regarding the retail customer funds, it is visible to -- the start of some change in the structure of the deposits towards some recovery of the share of term deposits in total deposits.
On Page 19, strong numbers in terms of retail banking growth, in terms of number of customers that grew 45,000 in the first quarter. Also the number of current accounts growing at significant speed and also the number of debit and credit cards also growing strongly versus 1 year ago.
The numbers of mobile banking showed continuation of breaking records, especially in this quarter, we would highlight the fact that at the end of March, we crossed another milestone of having 2 million mobile banking users. Just to remind, we celebrated our first million just 3 years ago. So it shows at which speed mobile banking is becoming a major channel in transactions and services to customers.
On Page 21, we continue to support the clients in managing their money and introduce new functionalities in terms of e-administration projects and also in help to Ukraine in terms of charity support, also adding new banks in the open banking services and also providing investment advisory service through our electronic channels.
Some additional numbers regarding digital can be seen on Page 22. Regarding new current accounts, the share of digital channels in opening current accounts in the first quarter reached 32%. The number of current accounts opened in the first quarter online grew by 53% compared with all of this quarter of last year. And in terms of cash loans, digital channels were responsible by 78% of the number of cash loan sales in the first quarter, and the number itself grew by 38% versus 1 year ago.
Goodie continues its development on page -- as you can see on Page 23, with 89,000 additional downloads in the first quarter and PLN 3.3 million of cashback just during the quarter.
And moving to corporate business on Page 24. We have already loan growth of 4% year-on-year with a relevant rebound in leasing, which grew by 8% year-on-year and in other loans to companies by 4% year-on-year. While at the same time, deposits grew strongly by 38% and also with a trend of increasing of the share of time deposits in total deposits, which is natural when interest rates start to go up. The -- also, we see a strong pickup in transaction activity, which was especially visible in terms of FX transactions and also in the pace of digitalization of client services.
Numbers of leasing can be seen in more detail on Page 25, so a growth of 12% of the origination in the first quarter versus the first quarter of last year, while factoring grew 3%. And as I mentioned, the significant growth in the volume of FX transactions by 27% year-on-year.
And as we are showing on Page 26, also we continue to support the business with building a comprehensive online offering for corporate and business clients in which we would highlight that we have -- and a growth of 49% in the number of small business accounts opened online since the fourth quarter of 2021 and also a 34% share of the digital channels in business cash loan sales just in March 2022.
So these are the most important highlights of our first quarter results of 2022. And now we are available for questions. Thank you.
The questions starts coming in. As usual, we try to group them into logical, more or less, sections.
First question is related to our results. First question is about NII. With the current WIBOR, what kind of NII quarterly evolution do you expect? Is it fair to assume that the bulk of the positive repricing is still to come? What deposit beta shall we assume?
Yes. Regarding the evolution of NII, we cannot provide a very precise guidance due to the fact that we are living in an extraordinary period in which the interest rates have been growing permanently during the recent almost 6 months. And so, it means that there is still further repricing of the loan portfolio that is going to take place in the second quarter. While at the same time, we started also to gradually increase the interest rates on the deposits already in the first quarter, but also already becoming more visible in April.
So -- and at the same time, as we already showed in -- both on the retail and corporate side of the presentation, higher interest rates may also translate into some change of the deposit mix in which savings accounts and time deposits may gain again some space versus purely current accounts, which, by the way, we cannot forget that we have the opposite situation when interest rate were cut just in the beginning of 2020 after the beginning of the pandemic, we had the opposite effect in which a part of the deposits migrated from selling accounts and time deposits to current accounts because we were paying almost 0 in terms of remuneration of those deposits.
So now we can anticipate some change. It's difficult to say exactly if we will come back to the same structure that we had before the pandemic or not, it's still too early to say. But, of course, we expect some change, which means that, of course, we also have to expect some growth of the cost of the deposits as time goes by. And the pace of the growth, again, is not exactly the same as the loan portfolio in the same way that it was also not the same when interest rates came down.
So, we also -- we provided in our financial report some sensitivity of the net interest income to changes of interest rates, but assuming that everything will be repriced with the current market rate as of the end of March 2022. And the sensitivity, if we would assume that everything is repriced would be quite small, around 5% or 6%. So -- but, of course, this is assuming that everything would have been already repriced as of the end of March, which still did not happen because, as I said, due to the different repricing timing of the loans and deposits, there is still further repricing that will happen in the second quarter. So in the short-term, we are still going to continue to see increase of the NII. But as I said, we also expect gradual increase of the average costs of the deposits.
And there are indeed many questions regarding NII, but we answered it as much as we could.
The other questions relating to results touched upon are cost of risk is one very specific question about a relatively low cost of risk in the corporate segment in the first quarter. What was the reason? I mean, any releases? And there was a couple of questions regarding our thinking on the cost of risk in further quarters -- next quarter?
So first, the NPL ratio remains stable. So we did not face in the first quarter, deterioration of the quality of the loan portfolio. Second, of course, we anticipate that the significant increase of interest rates can generate in the future some additional non-performing loans. And as a consequence, we anticipate that instead of having a cost of credit risk around 50 basis points, which was our original plan that even we mentioned in one of the previous meetings that it can be higher, but not significantly higher.
For the time being, we are assuming that the cost of risk for the full-year could be somewhere around 60 basis points of our total loans. But as I said, for the time being, we did not see yet deterioration of situation both in the retail and in the corporate portfolio. But as I said in the -- we can assume that if interest rates will continue to go up and will remain high for some time that, of course, then we should not expect 50 basis points of our total loans that has somewhere in the range of [ 60- to 50-something ] basis points.
Inevitably, there are questions regarding our Swiss franc portfolio. One numerical question on how many active loan agreement that we have in Swiss francs? I think it's very easy to actually calculate because we provided the drop of the number of active agreements in the year-end number. But for the simplicity sake, it's below 45,000 at the moment.
More important question is about the settlements. A comment on customer propensity, do we expect similar rate going forward? Will people be less inclined to convert given PLN rates and so on and so forth? What's basically the outlook [ for that ]?
Our target is to maintain these levels. So we -- I think we said last quarter that our goal for this first quarter was to reach again this 2,000. So we did a little bit more. But this -- I would say that this is our pace of execution or at least our intention. The way that we structure our openness and the position with the customers, we are adapting more or less to what are the conditions. So there was a time that the idea of almost some of the customers were to make early repayments, then a lot of them went through conversions and another early repayment again. Sometimes the concern were more the FX rate for the conversion. Now, we see also that it's very important to have a good offer in terms of fixed rate on the conversion, and we are adapting more or less that.
We have been putting a lot of effort on this area, not only with a large group of senior negotiators to talk, and we always maintain same person talking with the same customer and tracking all the conversations that were done during this period, but also a lot of data analytics, trying to understand what are the groups, the ones that already have a low balance, the ones that have still a longer duration for the loan to be end, the younger ones, the older ones still adopting these -- to this situation. We don't forecast in a quarter to make something outstanding. And our idea is to go [ likely ].
So our view for the Swiss franc is very clear. So we want to negotiate and reduce the portfolio as much as possible. Of course, this is a lot of effort and also a lot of money invested, but we think this is the only way really to solve the problem. It's not just by provisions because the problem don't -- before converting or settling, it's not solved. And another part also is to make higher provisioning. So it's -- in our view, it's the only way to shorter the problem of this legacy portfolio that we are having.
There are also questions relating to our origination of cash loans in the first quarter, it's somewhat dropped. On top of that, there was a question about the outlook for both cash loans and mortgages in the remainder of the year.
So there are moments that the activity -- the commercial activity is very strong. But sometimes, the financials are not so strong as there are other times that financials are very strong, and this gross sales are not so strong. So I think this quarter is a quarter of very strong business financial results. So if we take out, of course, the FX legacy portfolio, we have a very strong business and financial results shown in the adjusted return on equity and also -- which is also important, very strong operational results when we see these -- the efficiency results.
So when all the savings, all the redesigning of the processes, standardization, automatization that were then are shown in the cost-to-income, adjusted cost-to-income. So it means that we are able to analyze, decide and disburse the mortgage at levels that are very high without the needs of the teams and the costs that we were having 2 years ago, for example. But it's obvious that also when we are in the moment with a war in a country that are neighbor with high inflation and with higher interest rates. So the demand for credit, it tends to reduce from the cost of the credit to the less confidence from the consumers, and this is obvious. We are believing that this, unless there are a lot of more radical changes, maybe we can see some improvement at the end of -- at the middle of the year. But it's obvious that we will see a lower production of consumer loans and lower production of mortgage loans in the year of 2022 in the Polish banking system that we saw in 2021. This is obvious for us. However, the profitability of the production will be more interesting probably.
There was also a question relating our cost rationalization activity, whether we expect further reduction of branches going forward, whether we expect further reduction in headcounts or shall first quarter be considered as a more or less stable level?
So we believe that the trend is this one. So there is a huge work for them for -- from the bank in terms of digitalization. And this digitalization is, of course, bringing a lot of efficiency and will decrease the need of physical presence as time goes by. It's the point of [ inflation ] driven that is together with the increase of business as well. So it's from one side having more business that will require or that will not require more physical presence. And from another side is even reducing the physical presence. So we are not in a hurry, but there is a natural trend of reducing branches. We think that this will happen very normal in the next years. Probably we are in a phase of some slowdown on the reduction, and we will see another wave of increasing reduction in next year.
But anyhow, we are very committed with efficiencies. So it's -- the process that's still -- and that to be very physical is customer acquisition. So it's a process that although the customers, they will look for pricing for characteristic of the accounts and all of that. For digital, the onboarding, the first account, the discussion with the bank employee about their needs, the first one is a lot physically. So this will slow down a little bit probably the pace of decrease of branches. But we do not see any business model in banking in the future in Poland that will require the maintenance of the physical presence that we have at the moment. So it will decrease for sure, without any big targets for that. So we will decrease as the consumer also will require less and less physical presence.
Fernando, few questions to you. They mostly regards capital. They -- well, first question was about the impact of negative other comprehensive income on equity. What is the size or impact of negative valuation of bonds?
There was also a question about the capital in the context of our ability or willingness to produce more loans, whether it will be selective or are we reducing our appetite and so on and so forth?
Okay. So the reduction that we had in the capital ratio in the first quarter was mainly driven by the impact of the revaluation of the bond portfolio that is valued through other comprehensive income on the Page 36 of our report that today published. We can see that the results in other comprehensive income of debt securities in the first quarter was minus PLN 394 million. So 70% of this amount affected on funds. And additionally, also due to the fact that this year, the impact on -- of this valuation of the bonds on our own funds is bigger from 30% in the end of December '21 to 70%.
Also, the other -- overall, the -- there was an increase of the weight of the losses that were already shown in the end of the year -- at the end of the year. Just to remind, we had around minus PLN 700 million of negative valuation of the bond portfolio. At that time, it's counted as 30% of that to own funds. Now, with the additional depreciation, 70% of that is booked in own funds. So the majority of the impact on the decrease of the capital ratio is, in fact, driven by the valuation of the bond portfolio because the net loss, which also affect the own funds was much smaller than the one that we had 1 year ago. It was only PLN 122 million.
Of course, going forward, there will be a moment in which yields will stabilize. And, of course, these losses will start to be reversed because through the NII, in fact, because the bonds that have this negative valuation has yields below the current level of market rates. And so, gradually, this will come through the net interest income line. And so, of course, how much it will be reversed, [ it is ] depends and to what level the bond yields will stabilize after this significant correction? So I think this is the biggest explanation. At the same time, this impact was partially offset by a reduction of risk-weighted assets during the quarter.
Regarding the question, if these effects or not our appetite for loan -- for lending? No, in fact, we have already said, I think 1 quarter ago that we were focused in continuing the development of our retail business and also the company's business, but we were not fighting for large single ticket deals, which have relatively low margins and high consumption of capital. And the same approach is kept on an ongoing basis.
There was also a question about our lower cost-income, but more importantly, what are you going to do with the benefits of our cost-income ratio? Are we going to invest, spend more? And in general, what is the outlook for costs in 2022?
We are maintaining our strategy, and we have a cycle that we will invest heavily in terms of digitalization. So it's -- we have -- we put to our targets in terms of, not only customer growth, but then also we said that we would achieve PLN 3 million, but also in this PLN 3 million, 90% will be digital customers and also the [ ample ] size would be in average 80% of [ them ] through digital channels. So this means a lot of investment in terms of data analytics, in terms of new systems, new people, new technology, but these have been the cycles that we are doing. So there is nothing radical to do at the moment. And I would say that this is -- so we would keep investing from one side in the development of the bank, their customer base, their products and satisfaction of the customers and then the digitalization that we see as the only way to have a viable cost-effective banking business in the future.
And also, there is other side that is very visible that we are investing, which is holding our legacy portfolio. So it's more profitability and better capital position we will have. Faster we will negotiate provisioning and solve this legacy part. Of course, every time that the Swiss franc is strong and zloty is weak, we delay a little bit the ending process of [indiscernible]. But anyhow, we are as committed. So just because sometimes it's a little bit longer or more costly as it was shown, for example, this quarter. So even when it is more costly, the settlements, we do not give up about doing the settlements.
We also have questions about our bond issuance plans in 2022 and '23. What is the size of the planned issuances?
I will say round number for 2022, the number finally can be a little bit higher or lower, but somewhere around EUR300 million to EUR500 million could be the amount to be issued during the current year. In the next year, it should not be higher than this, but in fact, it always depends on the update of the final MREL target, which is something that will come every year. So we had a recent update in the end of March. And in 1 year's time, we'll have another update. So things can change a little in the meantime. But for now, this is -- what matters is the size that we could do during the current year, which is the one that I mentioned.
I think we have reached the end. And now we've received the inevitable questions that came in very different mutations and forms relates to the government measure disclosed yesterday. I think any that they put the most precise and read it loud. So the other question is, can you please comment on the government measures disclosed yesterday? Do you expect the new PLN 3.5 billion fund to cover the [ 1/6 ] decline on loan yield? Otherwise, how could this be implemented? Do you think the comments on WIBOR are a part of the ongoing discussion or something additionally worrying? There are many other questions about what we think of this idea and how this might impact our business?
So precisely on this part, this information is very recent. We need to have some time also to see what's going to be the impact and also what to execute. The previous fund to support borrowers was creative, but then never used it because we need to understand that in Poland, mainly we have inflation-based with salary increase. So the disposable income and the conditions of the consumers in Poland is very, very strong. So it's -- although it's obvious that the cost of credit will increase. But even so, to go to a level that would require systems we end up to be -- to a smaller group. So we -- of course, this will be a cost for the banking sector. I just hope that we will not just increase the fund without knowing how to use it as it was last time. So it will be better if we start to use it. And then we [ grow ] whatever it needs because at the end of the day for the banks, it's a contribution but if it also helps to solve, NPLs is not [indiscernible] and what the worst is just to put another PLN 3 billion on the fund that already at PLN 600 million. And then the money stays there without any usage.
In terms of the WIBOR, we will need to see. Of course, it's every time that we make these radical changes. It's always a [ disturbance ] for the market. We need to understand also that WIBOR is not just used in mortgage loans. It's interbank rate. So I think this needs to be discussed and then with the proper timing, we heard that it's going to be in a year's time, the possibility to change to overnight rate. If it is overnight rate, we are talking about a difference that is not very large in the long-term.
But I think a long time ago or some time ago I said something against the fast and sharp rate hikes, they have sometimes happened, and some analysts also were then tweet about this. And then this is clearly not our favorite environment. We prefer to have a cycle that is longer and then in small steps because this is the cycle that allow the consumers to change their behaviors. These radical steps make sometimes too fast adjustments, but also these adjustments also have decrease of demand for credits and sometimes increase of cost of risk and worse than that, a lot of turbulence and public pressure.
But for the time being, also, I would like to highlight that from another side, the Polish banking sector is highly profitable. So we still have a very costly banking tax and even so the banks, if we would take out the Swiss franc mortgage costs, the system is very profitable. So sometimes then the system end up to being able to introduce in turn inside of the economics of the systems and inside of the pricing. These additional costs that are put on top of the system.
I think we've answered all the questions diligently. So thank you very much for this gentlemen. This concludes the Q&A session and maybe it's time for closing remarks.
Not just I end up to say a lot of things in the Q&A. But -- so we end up with the results that we're quite happy. Of course, it's a loss, but when we extract the cost of the Swiss francs, we see a very solid business model and with a very profitable bank. Also, we are confident that, although with inflation and some increase of the costs, but this effort in the last 2 years in terms of efficiency are here for staying. So we will have a much higher rate of increase of revenues than we will have in terms of costs. And this is, again, we maintain our position in terms of Swiss francs, as I said. And we hope that we will keep, in a quarterly basis, to bring this capacity of settle between -- or at least 2,000, let's call it -- let's maintain this target of in a quarterly basis to be able to deliver around 2,000 settlements and like that every quarter to solving the problem.
And as Fernando said, the cost of risk that we understand that they have been or is worried for a lot of the analysts, at least when we look to our portfolio and when we incorporate the [ company's ] dependence of Ukraine or Russia for raw material or for markets or something like that or even the higher installments in terms of individuals, we see an increase of the cost of risk but nothing dramatic. And besides that, we are, of course, very confident in terms of this strategy for 2024.
All of these changes, these additional charges that we are talking about, and they will be, of course, with a negative impact in the short-term. But at the end, in the long run, we do not see that this will be dramatic because, as I said, the market tends to adjust and to reprice to accommodate these additional costs. And we're quite happy for the numbers that we are having in terms of more strategic. So a number of digital customers, sales than in digital, customer acquisition. So all of that, we believe that these numbers are quite interesting. Even in terms of corporate, we also try to list and flavor in our presentation and to disclose a little bit more what we are doing in this segment. So we think that everything is in line in our plans to achieve what we propose for ourselves in 2024.
Thank you very much. This concludes our call. We will meet precisely in 3 months' time on the 26th of July. Thank you very much for listening. Thank you very much for your questions. And as usual, the IR team is at your service. Thank you. Goodbye.