Bank Millennium SA

WSE:MIL

Earnings Call Transcript 2020-Q2

[Artur Kulesza, executive]

Good afternoon, everyone. Welcome to Bank Millennium First Half 2020 Results Call. Thank you very much for joining and your interest in our bank. With us, we have Mr. Joao Bras Jorge and Mr. Fernando Bicho, the usual suspects. And we do not have our economist, Grzegorz Maliszewski, with us today, but we'll try to answer competently, more or less, questions on macro side if these arise. The team, as usual, will present our results, and then there'll be a line -- or actually, an e-mail box open for questions. Over to you.

[Fernando Bicho, executive]

So good afternoon. Thank you for joining this conference. We hope that everybody that is following this conference is healthy. We have our presentation of the first half results today, which is a little bit longer than usual, but we wanted to give enough information and details about how we are managing through this unusual period. So we have divided them -- the presentation in 4 parts, and we start with the first connected with the way the bank has been managing through this COVID-19 times.

So on Page #4 just as an introduction. Of course, this year is being marked by the significant impact of this COVID-19 crisis, but also the subsequent or related events, which in Poland and for us means specifically the significant cuts in interest rates in Poland, 3 rate cuts between March and May. Some preemptive provisions for credit risk that we have done in the first quarter and also partially in the second quarter in anticipation of COVID-19 impacts on the quality of the loan portfolio, the strengthening of the provisioning for FX mortgage legal claims and also some additional provisions for returns of cash loan fees.

So against this background, the bank has been focused specifically first of all in the protection of the health of employees and customers and ensuring the business continuity, which was very important during the period of the lockdown; but at the same time implementing mitigation measures at the level of risk management, executing the synergies plan resulting from the Euro Bank acquisition and merger; the additional cost-cutting measures, which will have already relevant impact in 2020; and also adopting mitigation repricing decisions on both the deposits and loans side as a response to the significant decrease of interest rates.

So in the next few pages, we will be illustrating how we have been operating and managing through this crisis. And starting with Page #5, a reminder that from the beginning, we were focused in supporting customers through a number of actions, which first of all, were driven by the preservation of safety and allowing as much as possible transactions and operations to be done remotely from home, which include, for example, a fully online current account opening process with the use of a selfie, dedicated websites, a lot of information and continuous flow of information with customers and with personalized campaigns addressed to customers; and last but not the least, also providing as one of the first banks in the market, the availability of credit holidays during this period; and also online cash loan sales.

Gradually, we have been returning to the new normal, and we're close to 50% of headquarter employees are already back to the office against almost 90% that were working remotely during the peak of the lockdown. Also, we see a gradual return of the traffic to the branches, which reached already 70% of the pre-COVID levels versus 40% at the lowest level in early April; and also a normalization of the flow of calls and electronic correspondence.

On Page 6, the status of the temporary credit holidays, to remind that these holidays are under the umbrella of the private moratoria that was prepared under the supervision of the Polish Banking Association (sic) [ Polish Bank Association ] and notified to the local regulator, and then subsequently sent to EBA where we are providing deferral of principal and interest installments. We are presenting here the statistics as of the end of June. So we had around 10% of the portfolio -- of the loan portfolio under credit holidays, of which 11.7% in retail, only 3% in corporate and 12% in leasing. And also in the lower graph, we show the maturity of the credit holidays by month, which also allows you to see that they are relatively spread out during the next 4 months because part of the customers opted for 3 months only holidays, others up to 6 months.

On Page #7, also important to mention that we have been providing solutions for companies and corporations, both small, medium and large in order to run the business during this pandemic. And we would highlight on one side, the implementation of a process of applying and checking the status of the applications for the subsidies of the Polish Development Fund Financial Shield program through Millenet, our electronic banking application; also, the new possibility of application for the business account in Millenet; and also extending the scope of authorization -- token authorization for the users of trade finance module transactions.

On Page 8 also, the developments that have been done in Millenet that allow the possibility to exchange electronic documents for signature, so without needs of physical interaction and to send the signed documents to the bank also using the Millenet system.

On Page 9, we continue to closely monitor the feedback and opinion of our customers during this period. And according to the assessment that has been done, we concluded that 94% of the clients are satisfied with the bank's activities, and they do not see a change in the availability of the services during this period, especially during the period of the lockdown and also do not see change or deterioration in the quality of the service that is being provided. So in general the customer base of the bank is satisfied with the services that are being provided. And the top 3 reasons is that they are not facing problems. They have the ability to perform the transactions remotely, and also they are happy about the quality of the service.

Page 10. Of course, we understand that this COVID-19 pandemic will accelerate the change in customers' habits that was already taking place, but this process will be accelerated. Here on Page 10, we show some statistics, which are interesting to illustrate the end of the lockdown period and how this is already being reflected, for example, in the peak of the mobile parking tickets payments and the increase of the debit cards transactions and the significant increase in link transactions -- PayByLink link transactions, which had their peak exactly in the peak of the lockdown.

Page 11, I will not go in details. This is known, I think, to everybody. This is just a summary of the different anti-crisis measures that were taken in Poland that have been especially important to minimize the impact at level of companies and businesses, and also on the regulatory side on from one side, the softening of the capital requirements criteria by the elimination of the systemic risk buffer, but on the other side, the significant cut of interest rates, which affects the profitability of the banks.

So on Page 12, we would like to illustrate and to explain how we have been managing and responding to this crisis. So of course we have a 3-phase approach for these because this crisis requires a complex response due to the multiple implications. But we see the crisis not only as a way to mitigate the risks and the impacts, but also as something that can bring new opportunities. So first, we had the Phase 1, which was crisis management and business continuity, which was focused on the crisis management, ensuring availability of key processes and systems and limiting the impacted level of employees and clients. Then we moved to the second phase, which is still short-term based, which was the preparation and decisions in order to maximize the level of resilience of the bank in this environment and also to prepare for different outcomes in terms of macroeconomic and financial scenario. And the third phase is already looking beyond this COVID-19 times and to understand what will be the new normal, what will be the new opportunities that will be generated by this crisis and to consequently adjust the bank and the services and projects that it is providing as soon as it is possible.

On Page 13, illustrating this Phase #2. We have a short term internal project that we called Millennium through COVID-19 in which we tried to address very quickly the main impacts of this crisis and also to start preparing the foundations for the business model after the crisis. So in this project, we covered several streams. The first one connected with P&L and financial impact of the crisis in order to prepare and implement measures that would mitigate its negative impacts, especially on -- in terms of revenues due to the cut of the interest rates, but also in terms of general profitability of the bank.

The second was connected with credit risk management in order to especially adjust the credit policy to the new environment and to reinforce the monitoring of the risk of the credit portfolio. The third focused on digitalization and maximizing the number of customers that are using digital channels, increasing the level of penetration of digital sales and promoting an active cross-channel cooperation in order to increase the number of digital customers and also to improve the level of digital education. The #4 -- point #4 was business revamp.

And I should say that we have reacted to this crisis, not only from the perspective of mitigating the risks and cutting the costs, but still not neglecting business. And so we continue to ensure the proper focus on the business volumes and on the transactions and also on keeping top customer experience in all business segments. The point 5 was dedicated to branch network and call center, which is basically focused on optimizing the physical presence of the bank and also to continue this process of migration to remote channels. And the sixth point is connected with the future bank, which has on one side, the understanding of the clients' preferences in the world post-COVID and how it will be their behavior; and on the other side, also what type of adjustments should be done in terms of work organization and company culture, especially after this experience of working partially remotely.

On Page 14, in terms of, let's say, more financial direct impacts of this project, we have to react to the cut of the interest rates, which was damaging due to the fact that amplified the cut of the maximum interest rate, so the maximum interest rate available for consumer loans, but also made interest -- real interest rates negative, and also this made even bigger problem due to the fact -- due to the existence of the banking tax. And so we took decisions that were on one side, connected with the repricing of the cost of the deposits, which we have -- we were forced to cut following the 140 basis points interest rate cut. And this reduction of the cost of the deposits is happening in a gradual way, but it is already visible in the reduction of the cost of the deposits in the second quarter.

The second point is connected with cost reduction, where we are accelerating the plan of capturing the synergies of the Euro Bank deal and further delivering additional savings of 10% in 2020.

The third part -- the third point is connected with the careful management of the credit risk, which includes on one side, more conservative provisioning in the first half of 2020 and very tight monitoring of the portfolio and also a fine-tuning of the structure of the new origination of loans. But as it is shown by our numbers of the second quarter, we did not stop lending. We continued to be active, but with reinforced risk monitoring and risk assessment principles.

And the fourth point of the project that is very important is this acceleration of digitalization of sales and service and also -- will also cover internal processes in order to further achieve cost savings in the future. And we are keeping a strong focus on business development and the most visible example of this is the growth of mortgage loans in the second quarter.

So now I would move to the second part of the presentation, the status of the Euro Bank integration. On Page 16, it is visible that for the first quarter, for the first time in first quarter, we had positive impact on the cost side from the acquisition of Euro Bank. So the total synergies were higher than the integration costs booked in the second quarter and we have an overall target of reaching already around PLN 150 million net synergies in the full year of 2020 growing to PLN 220 million in 2022, while the level of integration costs is going down.

More details can be seen on Page 17 in terms of integration costs. So in the first half of the year, we booked already 42% of the 2020 yearly plan. The 2020 synergies represents more than 70% of the closing year 2022. And we see that also quarter after quarter, there will be an increase in terms of contribution of the synergies, while the integration costs that are remaining will be booked this year because what is coming next year is already irrelevant.

So moving now to the third part of the presentation with the financial performance of the bank. Pages 19 and 20 summarize some key profit and loss and balance sheet items. Just a reminder that, of course, when comparing with one year ago in terms of volumes, year-on-year, it's one year ago we had already Euro Bank. But in terms of P&L during the first 5 months of the last year, we did not have yet completed the acquisition of Euro Bank. So in this context, the numbers of net interest income growth and total cost growth are inflated due to that fact. What is important to mention is that in the second quarter, the fall of net interest income was probably lower than what would be initially expected after the rate cuts. And on the other side, we have the relevant decrease of costs quarter-on-quarter, excluding integration costs and contributions to BFG, so the quarterly costs fell almost 8%.

We continue to adopt a conservative provisioning level in terms of loan loss provisions. We -- although the provisions were in the second quarter reached PLN 166 million, including allocation of the COVID-19 provisions that we have done in the first quarter, so bringing the total year-to-date level of provisions to PLN 363 million. We also added PLN 168 million in the first half of the year to FX mortgage legal provisions, of which PLN 113 million in the second quarter. And the net profit reached PLN 54 million in the second quarter and PLN 72 million year-to-date. Cost to income, excluding extraordinary items, at 47%; and also with ROE adjusted for extraordinaries at 8.7%.

On Page 20, significant growth of the number of customers year-on-year, partially driven by the Euro Bank acquisition, but also by significant organic growth and also a very significant growth of online and mobile customers. Deposits growing faster than loans, both on a yearly and quarterly basis, although if we exclude FX mortgage, the growth in the year-on-year is more significant, is 7% year-on-year. Very strong liquidity position with a loan-to-deposit ratio below 83% and a very strong capital ratio at 20%.

Page 21, still continuing the main highlights of the quarter and of the first half. On the top of the additional provisions for FX mortgage litigation, we also booked additional PLN 60 million of provisions for cash loan fee refunds. And the quality of the loan portfolio remained relatively good in this period with an impaired loan ratio at 4.9%. The cost of risk year-to-date annualized at 98 basis points over total gross loans, or 79 if we exclude the COVID-19-related provisions.

Page 22, more details about the evolution of net profit. So when we look at the net profit evolution year-on-year, excluding extraordinary items, we have a drop of 7.7%. In terms of operating income, we have a drop of 6.6% quarter-on-quarter, which was mainly driven by the cut of interest rates.

On Page 23, we can see more details about evolution of costs. And it is clear that in the second quarter, we made significant progress in terms of starting to appropriate cost savings. So we had a drop of 6% of personnel costs and 10% of other admin and depreciation quarter-on-quarter. And the total quarterly costs were 8% below the previous quarter, excluding integration costs and contributions to BFG, or 22% lower on a reported basis. The -- after the restructuring that was announced in the first quarter, the number of employees fell by almost 300 in the quarter, a year-on-year drop by more than 400. And the number of branches as a part of this branch optimization process continues. So we have a drop of 73 year-on-year. In fact if we look, since the end of December, we had a reduction of 61. And we probably will finish the year with an additional reduction of around 49, so bringing the total number of branches more than 100 lower than in the beginning of this year.

On Page 24, the net interest income. On the right-hand side, you can see the evolution of the interest on loans and deposits. It is visible, the significant drop of the average cost of deposits in the second quarter to 0.72% from 1.03% in the first quarter. This is going still to fall further in the third and fourth quarters.

On the other side, it's also visible, the reduction of the interest on loans, which is on one side, part of the normal adjustment due to the cut of the referenced rate and of the [ viewers ], but also to a larger extent reflects the cut on the maximum interest rate in Poland, which fell from 10% in beginning of March to 7.2% in the end of May. And this also affects part of the portfolio.

On fee and commission income, we have a growth of 10% year-on-year, a decrease of 8% quarter-on-quarter. In the first quarter, we had some fees that are typically higher in the first quarter. But still, it was a good quarter in terms of fee and commission income.

Moving to asset quality on Page 25. So of course, the impaired loan ratio did not move much. So in the quarter, from 4.8% to 4.9%. Of course, it's true that we have customers under credit holidays. So this, of course, is also supportive. But in these times, we still can see relatively stable quality of the loan portfolio.

On the other side, the cost of risk of PLN 363 million in the first half of the year includes the allocation of PLN 60 million of COVID-19 provisions than in the first quarter, plus an addition of PLN 9 million in the second quarter. And this was allocated to products, to specific products, but especially to a large extent to the retail portfolio.

On Page 26, I already mentioned very strong numbers in terms of liquidity, a significant increase of LCR due to the release of the obligatory reserves and further improvement in the loan-to-deposit ratio to less than 83%. And on the capital side, a significant surplus over the minimum, new minimum requirements. So we have more than 4 percentage points surplus over the minimum total capital ratio after the cut of the systemic risk buffer.

Moving now to the fourth part of the presentation on business development on Page 28. So the business did not stop in the second quarter, and we see the growth returning. We should say that mortgage never stopped at all. We had, every single month, very strong production of new mortgage loans. And we finished the quarter with PLN 1.5 billion of origination of mortgages, which gave us in the first half of the year, a market share of 11% in new origination.

And on the other side, we also had resilient cash loan sales. Of course, they fell versus the previous quarter, but still higher by 2% year-on-year and reaching PLN 1.1 billion.

We have a 10% growth of deposits against 8% yearly growth of loans. And we also saw in the second quarter a rebound in the balance of investment products after the significant drop in March due to the impact on the stock exchange of the COVID-19 crisis.

On the corporate side, very strong growth of deposits, which grew 13% quarter-on-quarter and 19% year-on-year, especially on current accounts, while loans to companies dropped 4% quarter-on-quarter and were stable year-on-year as, of course, in these times, there is much less demand from the corporate side. But interesting to say, we have a stable level of factoring turnover year-to-date versus the first half of 2019, which shows that -- and this is a sign that the drop of the economic activity is softening.

Page 29, so as I already mentioned, deposits were growing faster than loans. In terms of loan portfolio, the fastest-growing parts now are mortgage loans, which grew almost 10% year-on-year, while consumer loans grew 2.2%. And as a consequence, we continued to grow the share of PLN mortgage loans, which is already above 32%, and diluting the share of FX mortgage.

In terms of loan deposit investment products, it is visible, the recovery that I mentioned in the balances of investment funds, which grew by 7.5% quarter-on-quarter, although still dropping 13% year-on-year.

Page 30 and following slides showing the level of importance of digital channels in terms of service and sales. So first of all, we have a growth of 30% in the number of active digital customers year-on-year. So we are approaching the 2 million number, and also a growth of 37% in the number of active mobile customers. 48% of these sales of cash loans -- of the number of cash loans in the first half of the year were done through digital channels. And also 26% of current accounts opened in the first half of the year were done online.

Page 31, high transaction rate in all types of online payments. Here, we can see the evolution, the growth of 42% in online transfers year-on-year, a growth of 310% in the number of clients with mobile authorization, a growth of 40% in e-commerce card transactions and a growth of 69% in Internet payment transactions. So this shows how the speed and the increased importance of digital channels in terms of the transactions performed by our customers.

Page 32, a continuation of interesting statistics, growth of 56% of the number of BLIK users and of 89% in the number of BLIK transactions, 26% (sic) [ 28% ] in mobile top-ups and 187% in mobile contactless payments.

And the solutions regarding the possibilities of banking from home, as I mentioned in the beginning, are illustrated in Page 33, namely including this possibility of opening the account with a selfie. And also the possibility, which was provided by Bank Millennium as the first bank in Poland to -- that allow customers to make transfers through the Millenet system from their accounts in other banks.

Page 34, in the end of June, we implemented a new goodie app for stores. And we continue significant growth in terms of app downloads, 190,000 in the second quarter, 1.8 million from the beginning of its launch until today.

Page 35, looking at the retail business, just a few additional numbers. So the loan portfolio in retail was growing at 12% year-on-year without FX loans, while customer funds grew 7%, affected by the decrease of investment products by 13%, but with a very strong growth of current accounts and savings accounts by 27% year-on-year.

On the bottom part of Page 35, we show the very strong performance and growth in mortgage loan sales. We, in the second quarter originated almost PLN 1.55 billion of new mortgages, a growth of 44% year-on-year, 50% year-to-date. And also, cash loan sales resilient, still of course, dropping versus the previous quarter due to the lockdown, but still very close to the fourth quarter level and 17% below the homologous quarter of last year.

Page 36, to mention the fact that in June, we received the banking license to open the mortgage bank. It still needs to be followed by the approval of the operational license. And so realistically, we expect the bank to start activity in the first half of 2021. But this, we see this as a way of ensuring sustainability to our mortgage lending business by providing also medium-term funding. And also, this is consistent with the growth of the market share in origination that we are seeing -- that we are showing since 2015, coming from very low levels in 2015 and '16, to levels already above 10% in the first half of 2020.

Page 37, current accounts and customer acquisition, of course, slowed down in the second quarter for obvious reasons, but still a very strong growth year-on-year of 34% in active retail customers. Also significant growth in active micro-business customers. And in the number of cards, which grew by 587,000 in terms of debit cards and 88,000 in credit cards.

On the corporate side, we have a mixed picture because we have very strong growth of the deposits, which grew by 19% year-on-year and current accounts grew by 77%. This is interesting and show that companies are still benefiting from very strong liquidity. So they are not showing short-term liquidity problems, and at the same time are showing a very cautious cash management.

On the other side, of course this crisis is affecting the demand for loans, and that's why the portfolio of loans to companies, including leasing and factoring, stabilized versus the level of one year ago and fell 4% quarter-on-quarter.

Page 39. The area that has been more affected in terms of this downturn in a sense has been leasing in which the second quarter sales were 37% lower than one year ago. While it is interesting to see that the factoring turnover only dropped 5% year-on-year, so being much less affected by this downturn.

So this finishes our presentation of results. In the appendixes, we have some additional slides about -- with macro information that we can use in case of needs. But now we are available for questions. Thank you.

[Artur Kulesza, executive]

Thank you very much. You know the drill. We have already received quite a number of questions, so we'll try to address these. I have sorted them by subject. So as previously, we tried to address -- answer the questions which relates to our second quarter results, then some few questions about COVID and then a handful of questions relating to the future.

[Fernando Bicho, executive]

Okay. So starting with the guidance on fees for 2020 and if the bank intends to make changes to its price list? And if so, what kind?

So I can start just with the current status. So on one side, the second quarter was relatively good because we did not notice a significant drop in loans fees or in investment funds fees. And so -- and also this recent rebound in investment funds, if it will continue can help with the downturn that we saw in March, April, will not be -- will not have such a severe impact on fees as we were initially thinking. And also the fact that the bank continues a new normal business, let's say, is also supportive in order to avoid that the fees will be significantly affected. And especially, I'm speaking about the loan production in retail, both cash loans and mortgages, which are important because not only because of the margin, but also because of some associated fees. So we think -- we are not expecting of course a significant pickup, but we see the level of the second quarter is relatively sustainable in terms of fees.

In terms of changes to price list?

[Joao Jorge, executive]

Yes. So we -- there will be always small changes, but we don't forecast a major change on the price list. We believe that the bank have room for an improvement in terms of asset management. And especially now that it's clear that the bank is having a market share in terms of individual customers between 7 to 8 in terms of number of accounts, in terms of active debit cards, in terms of total market share of total deposits of individuals, et cetera, and now cash loans also in mortgage. And we have 4 to 5 in terms of investment funds. So it's an opportunity that we should capture now in 2021.

And besides that, as Fernando already said, this -- we could see, not only through the good production of credit and all the fees/insurance that are attached with that as well as with decrease of the interest rates and especially the maximum interest rate that we can apply. Of course, the combination will involve more commissions plus insurance. So part will be not seen because it's in effective interest rates. Other parts, so it depends a little bit from the loans. Other part is more visible because it will be directly on commissions. But it's not by a radical price list, but by more the change of the price mix, let's call it like that. We will see some improvement in this area.

[Fernando Bicho, executive]

The next question, what was the NII level in June '20? In what month would NII hit the bottom?

So without entering into monthly data, which we always try to avoid and not to take sometimes conclusions as to based on a single month. And also because we had this question about some guidance about NII in today's morning conference with journalists. I think that we see the level of NII of the second quarter is sustainable. So we are not expecting further downside on the NII versus the level that we booked in the second quarter. Of course, we still have some repricing on both sides going on in the third quarter, meaning both on the deposit side and on the credit side. So there are still -- the average yields on both sides will still go down.

On the other side, the business volumes for now are supportive. And of course the business volumes growth is also important to offset part of the contraction of the net interest margin.

And so what we can say is that we believe that we are getting to the levels, minimum levels after the 3 rate cuts. And so we believe that in the third quarter, we don't see, for the time being, downside versus the second quarter. It can be slightly better but -- or around the same levels. It depends on a number of factors, which are still difficult now to forecast.

The next question is what was the impact of the rate cuts on second quarter? And what is guidance on 2020 NII?

So I think I already I think answered this question. So we see that on a quarterly basis, our NII fell 7% from PLN 690 million to PLN 640 million. So let's say the -- we can see the direct impact is PLN 50 million. But of course, it's not so simple like this because there are multiple factors, including volumes. But it was reported, we had a PLN 50 million drop. And as I said, we don't see, on a quarterly basis, we don't see further downside.

Next question is about impact of fees returns on NII. I understand that the question is about when we compare with the past, how much less we are booking in NII due to the fact that we do not -- due to the fact that we are returning the fees to the customers, if I understand correctly, this is the question.

I think this represents between 2% to 3% of quarterly NII when we compare with the first half of -- when we compare with the pre-September '19 situation, let's call it in this way. Of course, the things we also need to be always take into consideration that the profile of the production is not the same. So sometimes there are periods in the past where we have more early repayments, then there are periods where we have less early repayments. So the numbers or the percentage of early repayments in each quarter is not the same, and so these numbers can fluctuate. But I would say that something between 2% to 3% is how much less we are having in NII due to the fact that we are returning fees to the customers.

The next question is if the provision for future commission returns created in the second quarter was done in interest income?

The answer is no. The provision was booked in other operating cost.

Then a question about -- to second quarter FX results at [ PLN 27.9 million ], 36% lower quarter-on-quarter, 39% lower year-on-year. Seems weak, what is the reason behind that?

So on the first quarter, there was a peak of FX transactions after the eruption of the crisis. So there were many companies, for example, that were doing FX transactions in anticipation and using the weakness of the zloty. This is one reason. There was less activity in the second quarter from companies, and this is also another reason.

And also, we -- and also mortgage, FX mortgage loans, we already implemented for all the customers that pay installments in FX mortgage loans, the average NBP rates when they are paying the installments in zloty. So we are not charging any spread in their payment of installments of FX mortgage loans. And this also was also implemented in the second quarter and also has some impact on the lower FX result.

The next question is about the growth in other operating revenues in the quarter by almost PLN 40 million quarter-on-quarter. We have here a number of impacts. We had -- one was including sale of real estate, which generated capital gains; also some settlements still connected with the Euro Bank acquisition, which also were booked in other operating income. But to a large extent, this is more -- they were on the other side, consumed on the operating cost side in terms of additional provisions, especially for these cash loan fees returns in the PLN 60 million of provision that we have booked.

The next question -- so we have some questions about FX mortgage legal risk provisions. So one, is the level of second quarter Swiss franc provisions a surprise for the management? Should we expect similar level of provisions for CHF in the coming quarters? So this is the first question.

The next one is if we could elaborate on the main factors that triggered the increase in the provisions for FX loans.

And the next one is why didn't we inform in the current report, the mBank deal, if we don't consider this as a one-off event.

So I think that's the 3 related questions about FX mortgage -- provisions.

[Joao Jorge, executive]

So I will start and then you complement. So we think that, as a management, especially after the end of last year, so up to the end of last year when we were not having provisions made for these legal risk in Swiss franc mortgage, we -- this was a risk, nonmaterialized that there was on the bank. And of course, we always discuss this difficulty to assess the risk and how we could assess this and all of that.

And then last year, there was a construction of a provision. There is -- we start also modeling, also explaining the difficulties that would be for that. And today, we have this movement from a risk that exists, that people have the knowledge of that risk, but it's not materialized and it's difficult to quantify. As time goes by, it's more estimated risk. And between the probability is the number of cases, the litigations that the bank has.

So all of that, it's a process that the bank does it on the estimation, also following with the inputs and the adviser and guidance of the -- of its auditors and we go on these directions also. And as time goes by, due to the increase of cases and results and the expectations that we will have, there will be a process of also transforming these potential nonquantified risk in a risk that is becoming estimated through a provision mechanism.

[Fernando Bicho, executive]

So I remind that we implemented the methodology to assess the provisions for FX mortgage litigation cases in the fourth quarter of 2019. At that time, we created a provision of PLN 223 million. We increased the provision in the first quarter by PLN 55 million. And now in the second quarter, we increased the provision again, bringing the total of the semester to -- by PLN 113 million, so bringing the total of the semester to PLN 168 million.

We -- also to remind that on one side, we still have a very small number of cases that were effectively judged in court. So that's why we also -- but on the other side, we are also looking at statistics of the decisions from the Polish banking system as we -- our number is still relatively small. And of course we are also taking that into consideration when assessing the outcomes of the bases that we have.

We already made provisions in the fourth quarter of '19 and in the first quarter of 2020. So -- and we made -- so we don't -- and as we wrote in our financial report today, this is something that we need to regularly review. And if the negative trends will continue, we will need -- we may need to continue to increase the level of provisions connected with FX mortgage litigation risk.

So this, it became a part of the normal process, such as is the process of assessing the credit risk or whatsoever. We are not saying that we will need to do provisions every quarter because we don't know. But if the negative trends will continue, we will -- we may need to continue to increase the balance of provisions.

And I don't want to enter into this discussion why mBank published their current report and we didn't because I think this is not the issue. I think that the market is already applied to our share price, a significant expectation of losses connected with FX mortgage loans. So if we look at the evolution of share price of the bank since the moment that the situation of FX mortgage litigation materialized until now, in relative terms, we were more affected. And we know that we were more affected because of this problem. So the market has a level of expectations. And so it's completely not relevant to enter into this, let's say, current report raised that each time that we make a provision, we issue a current report because we believe that the information is completely clear and transparent in our financial statements.

As I said, we already made 2 consecutive quarters of provisions for FX mortgage loans. And so what the market may expect is that every quarter, we will assess the situation and we may need to further adjust the level of the provisions. So I think regarding FX mortgage provisions, I think we exhausted the topic.

Then we have COVID provision --two questions about COVID provisions. The first one is if we believe that COVID provisions against retail loans -- against the retail book taken in second quarter can be sufficient to cover any deterioration in asset quality once the moratoria ends, or there is no visibility on this? So this is the first question.

And the second question is if we -- if our approach to COVID provisions was discussed in any way with the regulator?

The second -- so the straight answer to the second is now there was no guidance from regulator about to do the provisions for COVID-19. But on the other side, I think we have done what everybody has done, which was in the second quarter, we incorporated in the -- we incorporated a more negative macro scenario in terms of forward-looking information that was incorporated in our IFRS 9 models. And so we included in those models the numbers of recession in Poland. And as a consequence, we had this allocation of provisions to the specific portfolios, especially into the retail portfolio. The total amount, PLN 69 million, of which PLN 60 million have already been done in the first quarter.

So with the macro scenario that we used, the current level of provisions is the appropriate one. If it is sufficient to cover potential deterioration, the scenarios that we included in these calculations already assume a specific level of deterioration. So we would say that as long as the macro scenario will be consistent, the macro reality will be consistent with our scenarios. They should not trigger by themselves a significant increase in the level of the provisions.

But obviously, we will need to follow the behavior of the borrowers after the end of the credit holidays. If you look at the slide of presentation where we showed the split of the credit holidays...

[Artur Kulesza, executive]

Slide 6.

[Fernando Bicho, executive]

Slide 6. You see that in retail, part of the customers complies and states only with 3 months of holiday. So they did not extend up to 6 months as it was possible under the product moratoria. And so it means that already in July, we will have some that will stop the credit holidays. And then the remaining ones mainly until October.

And then what we are going to see is exactly to monitor the return of the borrowers to the normal payment of installments. But for now, we do not have any bet of or with expectations. We have just -- we see that part of the customers took these holidays as a...

[Joao Jorge, executive]

Preventive measure.

[Fernando Bicho, executive]

Preventive measure, exactly.

[Joao Jorge, executive]

So up to now, we have been surprised more by the positive side than the negative size. Since the beginning of this pandemic, we were forecasting a very difficult environment and with the bigger consequences. We fine-tuned our models. We put some expectations. We adjusted to not conceive credit at the lower ratings, some knockouts, some mechanisms.

And we are seeing that from one side, in terms of the behaviors up to now, they have a positive trend. And also in terms of the normal production already with the, I would say, significant more prudent risk engines, we see normal activity. And as you know very well, we mainly offer credit to existing customers. So it means that also we measure their income, the stability of their income, spending activity and the [indiscernible] even.

And that's why we showed here even some slides like in 10 that also it's in the debit card activities, the digital transaction, but also the nondigital like the ticketing in parking. So it's clear that there is a return to activity in Poland and that the economy and the individuals are reacting much better than forecasted.

[Fernando Bicho, executive]

Still about COVID provisions, there is a related question, which is how much was allocated to the retail segment and how much to the corporate one?

So from the PLN 69 million, around PLN 60 million was to retail and the remaining to corporate. So that's why I said that the significant majority was to the retail part.

I think that regarding COVID, there is also a question about if we could provide the cost of sensitivity to macro assumption changes. Like for example, if the GDP would decline by additional 1% and the unemployment is higher by 1%.

It's really difficult to give a direct answer to this. We implemented the macro scenario that assumes a contraction of GDP close to 4%, so not very far from the projection of the government as far as -- and also from the projection of European Commission, rating agencies. But of course, what we'll do in the third and fourth quarter is to assess the latest information in terms of macro. And if we will see that we need again to operate in the macro scenario, of course, we will do it. But for the time being, we think that we should still wait 1 or 2 months and see how the numbers will stabilize.

I'm saying this also because we see that the recent numbers are better than what the market was expecting. We see in the last few weeks a stream of data, which shows, really, a gradual return of the Polish economy to normality. Of course, it's not to full normality, but it's really much more positive than what was being somehow anticipated. And so we will in the third quarter continue to assess the macro scenario. And of course if we will see that should be more deteriorated than what we are assuming, then we would, of course, we would do it.

There is also a question about breakdown of [ Swiss franc ] provision, how much for future returns and how much for back book?

So this is for the future returns. I mean for the customers that will early repay the loans in the future, there is no provision. I mean this will -- they will be receiving the returns as they early repaid the loans, so there is no provision established for that. This is somehow protected already in the way we are accounting for those commissions. So the commission -- the provision that we have done was for the early repayments of the past.

The next question is about 50% of employees is already back in the office. What is our expectation regarding the percentage of employees working remotely in the future?

[Joao Jorge, executive]

We don't have yet a scenario for that. We believe that a lot of issues connected with the company culture are still difficult to assess. I think the productivity, it's not such an issue as everybody was afraid in beginning. We were quite surprised by the capacity of the bank to put from one side, to be able to still operating with the branches and feel security to deploy all the measures in protection of employees and customers in such a fast way; but from another side, to be able to operate remotely. The 10% that we have, more or less, as it was sometimes even a little bit less, in the office was more the people that would like to come to the bank instead of the people that have to come to the bank. But -- so we could operate with the 100% remote.

We start to increase very slowly, always a little bit like a month after the government. So as soon as the government was opening the economy and reducing lockdowns, so we were always reacting, more or less, a month after. And first, we moved to 25%. Now we moved to 50%. 50% is a cap. So we are, more or less, with 40%, 45% is the occupation. We believe that we are going to stay like this up to October. On October, November with the flu season and with probably a second wave, we will go down again. But meanwhile, also the [ stickiness ], the company culture, all of that was readjusted.

In the future, we are thinking about -- so we were going in a completely different direction. If you know our facilities, we know that we have coffee shops inside. We have common meeting rooms. We have scrum teams that sits together from different teams. We were even in the middle of refurnishing and redesigning of the head office.

Now we understand that we will have a mix between almost fully home, partial home and almost fully office together. And we are making this exercise, but we just know that we will need less real estate. We will -- and we will make some adjustments already. So we in, Wroclaw, we were spreading 3 offices, and we will concentrate in one building. We are taking care of that in Gdansk as well. We used to have a training center here in a different area. We are also to concentrating her in Warsaw.

So we know that as a trend, we will need less space for head office, but we don't have yet the full picture about what is going to be the percentage, if it's going to be 50% fully home or are we -- how it's going to be, the proper organization. This was one of the streams that we had in this project. We had a stream in terms of future terms of the consumer. And another one was new formats of home working -- of working. But these ones are things that we'll still develop during 2020 up to the end of the year.

[Fernando Bicho, executive]

So continuing. So one short question was about the impact of this revaluation in the second quarter and first half was PLN 7 million.

We also have a question about capital. It's a question about what would be the impact in Tier 1 if the risk weight on CHF mortgage loans would be reduced from 150% to 100%.

And so we would not have a direct impact on risk-weighted assets because we are a bank under IRB and this portfolio is under IRB. So the consequence would come through the potential reduction on this Pillar 2 buffer, on this additional capital charge that is annually reviewed by KNF and currently is at level of 4.85%. So in the depth process of review, which usually happens every year, then the -- if the standard risk weight would be lower, then this could have influence in decreasing the size of that Pillar 2 buffer. And as a consequence, would further increase the capital buffer of the bank.

Then we have a group of questions connected around costs and branches. So we have, what is the base for 10% cost savings from previously budgeted OpEx for 2020? Do we expect underlying costs to be down in 2020 versus 2019? Savings in which areas we are expected to bring the 10% OpEx reduction? Is the OpEx cut by 10% and 17% CapEx cut related mostly to branch closure? What other branches have to be closed? Do we expect any further cost cut on top of what was already announced? And what level of branch closures and headcount reduction could we expect for 2021?

So trying to take the questions in a combined way. So the cost savings are coming from different sources, but structurally, we are decreasing the size of the branch network. So there will be reductions in the costs incurred with branch.

We are also spending less in a number of other areas, such as marketing, consulting and so on. But we went also to other items which -- in which even although not so important for the cost part, but also an effort is being done in order to further reduce the costs. Of course, the reduction of cost come both from personnel and from admin costs.

The cut of the -- so this cut of 10%, as we wrote in the presentation, so it's excluding the integration costs and the BFG. Because of course, when we sometimes -- when we are accelerating the pace of optimization of the branch network, we have to incur upfront some integration costs. The cut of 17% in CapEx is mainly due to the fact that when we prepare the investment plan for the current year, we have foreseen a number of investments related to real estate and with branches, which are no longer going to be done. And this is the biggest explanation for such a cut.

Then in terms of branch evolution, so we -- as we show on Page 23, so during the first half of the year, we decreased the number of branches by around 60, and we -- 61. And in the second half of the year, we have a further net reduction of around 49. This is net reduction in the sense that sometimes we are in fact -- we are not -- we are merging 2 branches which are relatively nearby. And so we -- but in terms of total number, the final number versus the end of 2019 will be lower by around 110.

The evolution of the number of employees, so after the employment restructuring that we have done -- that we have launched in the first quarter, it is already visible to reduction in the second quarter. But it's also possible that with this effort, there will be some still further reduction, but it's difficult to quantify for now.

If we have any further cost cuts for the future that have not been announced?

[Joao Jorge, executive]

We will, but it's -- they were not announced. So we will continue with the exercise. So it's -- we think that there is a change, a little bit, the paradigm of banking here in Poland. So the banks were focused in growing revenues and acquiring customers, selling new services and anticipating somehow some cost increase, although this cost increase would be at a lower pace than the revenue increase. With this decrease of the revenues, so it's -- we need to have the similar cost of the -- cutting off the costs.

One of the things that we did during the lockdown was interviewing and making a research among our customers. And we saw that they were very happy with the remote services, the ability to bank even in lockdown and everything. But we realized that 2/3 of the customers, so it's 2 of each 3, they declared that although they were very happy with the digital services, they would like to return to branches and to have this human touch and contact. Which they did because now we have this 70% traffic of pre-COVID, so it makes sense. But from another side, it means that 30% of the traffic somehow is lost. And so there was a speed up of this trend of needing lower physical support.

And because of that, something that probably we would do in 2 years or even 3, we were able to do it now. And so we will have these 110 closures up to the end of the year. Then we will see a little bit how it is, the next trends, and also how it is, the growth of customer base, with all of the services that we are deploying also at the same time.

One of the things that also we learned during this process is that even some customer journeys that we were not foreseeing as full digital, now we are seeing that the clients because they are as consumers doing different things in nonfinancial full digital as well, that we can go with process end-to-end full digital in some areas that before in investment or mortgage or something, we are always saying that the human touch would be important in this customer journey. Which means that first of all, some of the additional savings cannot be done just by an effort and some squeezing as we were during 2020, but they need to be done with also process reengineering. And then, that's why we also initiate internal project in terms of operational efficiency, that we will work very intensive up to the end of 2020, beginning of 2021 and that we hope that will already bring some efficiency and gains in 2021.

[Fernando Bicho, executive]

I have to come back to NII because there's one question that it's also important that the bank has expected up to PLN 280 million negative impact on NII this year from the 3 rate cuts. Does the management see upside or downside to this figure? How much of this impact was already reflected in first half 2020? And how much will be recognized in the second half of the year?

So the -- as we wrote in the current reports that we issued about that topic, and of course, when we are assessing the impact on NII, it's based on multiple assumptions regarding level of interest rates, mitigation measures and so on. So what we can say right now is that we see more upside in the sense positive developments than negative, if interest rates will stay at the current level. We see better perspectives for the second half of the year, which could make the impact less negative. How much of the impact was already considered? As I said, as we showed, we have a fall of PLN 50 million in net interest income versus the previous quarter. So this is objectively one part of the fall.

Of course, on the top of that, we did not grow, right? Because if we wouldn't have normal business growth, we would have had a growth, which of course we are not quantifying externally. But our original plan was to have a growth of NII, not a contraction of NII on a quarterly basis.

And so but to answer directly the question, we see potentially better second half in such way that we will finally have a lower impact than was initially foreseen. But we are still in July, and we are still very much in the middle of these developments, and so we don't want to inflict too much expectations. But for the time being, we can say that we are more optimistic about the evolution of NII also due to the evolution of the business volumes during the recent weeks and especially during June and the beginning of July.

Now we move -- there is a question about the mortgage bank, why we decided to launch the mortgage bank and what will be the cost of launching the mortgage bank?

So I think that the slide that we are showing about it, which is Slide 36, illustrates the main reasons why we are doing it. We have a very sizable mortgage loan portfolio. We want to make it sustainable. We want to be a relevant player in mortgage loans. I think we would describe as mortgage loans becoming even more relevant than what they were already.

And we want, as I said, we wanted to make it sustainable. And to make it -- and one of the elements is to also create the possibility in case of need, to have medium, long-term funding associated with that, which will be cheaper than the normal senior funding for banks. How much it will cost? We are still preparing now the operational part of the mortgage bank to get the operational license. It also will -- yes, it's still dependent on also some fine-tunings and understanding about the levels of outsourcing that can exist between the mortgage bank and universal bank.

So I still cannot be very precise about the cost, but we see that more, the value in terms of the possibility of having a funding source, which today does not seem important because, of course, we are sitting on an 83% loan-to-deposit ratio. So it's not because of what we have today, it's but we need to have a long-term view and not to do things only when we need. And that's why we had started the project 2 years ago, we took much more time than what we were expected. We reached now the first milestone, which was the banking license. We hope that the second milestone will come by the end of the year with the operational license. And then this also will give us more comfort for further growth and strong market position in terms of new mortgage loans.

Next question is about guidance for loan growth, consumer, PLN mortgage and corporate in the second half, if this has changed from first quarter expectations?

[Joao Jorge, executive]

We -- it's a little bit what you already said. So we had some ambitions. So it's -- we are doing -- we are having quite a good performance in terms of volumes today. If what we had in June and what we are having in July are sustainable, it means that we will have up to the end of the year, good business volumes. But in a prudent way, we will wait and see. And -- but it's clear that we are in a more optimistic path than we see people commenting around us. Let's see. And of course, our optimistic past is not by perception. It's as we see our customers transacting, buying, doing things. So it's we see how they spend, what they are doing, how they circulate.

And so our expectations are very positive. Of course, it's below our commercial targets that we have. So we have very ambitious targets, especially when we -- because we -- 2019, we were having this merger with Euro Bank in a very speedy way. So we wanted to concentrate everything in a single year, so the transaction, the legal merger, the migration, everything in order to be clean and ready during 2020.

So -- but of course we are at least seeing in a positive way to achieve the pre-COVID levels. Maybe not the growth that we were forecasting, but at least the pre-COVID levels, we are quite confident. Let's see how it's going to be the remaining months of the year.

[Fernando Bicho, executive]

There is another question about the future, but I think partially, we already said what we could say. Because the question is what are your thoughts on the new normal in the long term? What we shared is short term.

[Joao Jorge, executive]

I don't know what people think about the new normal. It's always a very nice exercise when we think about what was the forecast on the future that were done in the past. So it's the probability of something being right is always very, very small. So if you think about how people thought about in the past, it's cars that are flying, it's colonies in the moons and Mars. But of course, there is not a single idea about computers and about less in Internet or artificial intelligence, whatever. So it's the capability to forecast is always strange.

I think that we -- the way that we are seeing is in a very pragmatic way. We think that the consumer somehow is going to change. We have been more trying to leverage the knowledge that we have in our own consumers and how can we serve better our clients to achieve success, and so to have a complement in their financial life, but to have success. And so we invest a lot about understanding and to be close with them. Some areas are very potential, but there have been, I would say, disappointments.

One of the famous one is the Internet of Things. So even for fun, we developed our app in terms of Google Glasses, even knowing that would never go nowhere. Then the watches, of course, also knowing that it would go nowhere. But this is an exercise that was done always in this bank to be close to the innovation and to understand.

Probably the second -- not maybe such a disappointment, but at least less -- or less materialization that people are thinking would be artificial intelligence, but then we will see. But it does matter. We are quite optimistic in terms of what we can do with the knowledge that we have with our customers. For example, one of our main concerns is, of course, the preference of our customers. We were very happy. We were measuring the NPS. We were very happy at the moment. We don't know if even we are not having over-classification.

Because the COVID, so people during the COVID, they appreciate more the services that they are reliable. We understood that, for example, for the consumers, this environment with no interest rate is very painful. And it's very difficult for a person that have their savings not being remunerated. And -- but we believe that our future is to be close to our customers, to understand our customers, to try to achieve excellence in serving them. And because of that, we have every time a bigger natural market share. We are quite happy for what we are having in terms of normal customers' activity. So we have 8% in terms of debit cards usage, in terms of activity of main relations, in terms of 7% in terms of total deposits of individuals. This will put some challenge for us for the next time in terms of what we can make in catch-up of asset management and things like that, but...

[Fernando Bicho, executive]

Is the bank going to have fully digital mortgage sales?

[Joao Jorge, executive]

We think it's possible, which something before we were thinking that it would be completely impossible because we thought that never consumer would do it like that. We are working for that. We don't know if this is going to be fully used or not. There is some documentary part that is still a challenge, but we are working on that.

[Fernando Bicho, executive]

There is also a question about if -- what was the value of funding from PFR that the bank intermediated so far? We have a percentage, I think. I think it is very close to our natural market share.

[Joao Jorge, executive]

No, it was more. So because it's -- in terms of value, it's more than 4%.

[Artur Kulesza, executive]

More than 4%.

[Joao Jorge, executive]

More than 4%.

[Fernando Bicho, executive]

And I think we -- time to go. I hope that we did not miss any relevant one. If by any chance we missed, apologies, but then Maliszewski will be available for any further clarification. But we tried to cover as much as possible, everything that we see here in the least.

[Artur Kulesza, executive]

Okay. Any closing remarks? No, I think we're done here.

Well, thank you very much for your interest again and for participation and for your very sometimes challenging questions. As usual, we, IR department, remains at your service. Thank you very much. Obviously, we wish you all good health. And I hope to see you and obviously speak to you in the future. Thank you very much.