Bank Millennium SA

WSE:MIL

Earnings Call Transcript 2018-Q3

[Artur Kulesza, executive]

So good afternoon, ladies and gentlemen. Welcome to Bank Millennium conference after third quarter 2018. Let me introduce our team today. We have the Chairman, Mr. Joao Bras Jorge; we have Chief Financial Officer, Deputy Chairman, Mr. Fernando Bicho; and Chief Economist, Grzegorz Maliszewski.

My name is Artur Kulesza, I'm Head of IR. And we'll be conducting, with a pleasure, today's webcast. We start traditionally with a short presentation of main highlights of the results, followed by a Q&A session.

So CFO, Mr. Bicho, will conduct the first part.

[Fernando Bicho, executive]

Thank you. Good afternoon. Thank you for attending the conference. As usual, we will go through the presentation of results highlighting the most important points of our performance during the third quarter and year-to-date.

In the first 2 pages of the presentation, on Pages 4 and 5, we are summarizing key figures from our performance. On Page #4, we would highlight as one of the most positive things that we achieved in the recent quarter, the relevant improvements of net interest income, which grew by more than 5% quarter-on-quarter and almost 7% year-on-year. At the same time, we also had a decrease year-to-date of the cost of risk, which shows still the solid quality of our credit loan portfolio, which is requiring less provisions than 1 year ago; the solid growth of net profit by more than 9% year-on-year and almost 4% quarter-on-quarter; and the relevant improvement of the net interest margin during the third quarter by 10 basis points versus the second quarter of the year, which was one of the factors that triggered the relevant improvement in net interest income.

On Page #5, we would highlight the acceleration of the price of customer acquisition, a very strong quarter, plus 57,000 net growth in active customers, 56,000 in online and mobile; the solid growth of the customer funds from individuals of almost 9% year-on-year; and also the relevant growth of the loan portfolio, excluding FX mortgages, at 14% year-on-year.

So moving now to more details and starting with these main highlights. So we finished the month of September with an accumulated net profit for the year of PLN 548 million. This means 9.3% higher result than 1 year ago. And specifically, in the third quarter, we reached a net profit of PLN 200 million, which is our best-ever quarter without one-offs in terms of net profit. ROE, stable at 9.5%, but sitting on a very sizable equity base. And the cost to income, stable at 46.6%.

As I said, we have relevant improvement of the net interest margin, which we have somehow already signaled in terms of trend already 3 months ago, the improvement of 10 basis points in the quarter, bringing the NIM of the third quarter to 2.67% and is helping the growth of net interest income by 5.4% quarter-on-quarter, which was also supported by volume growth and 2.67% year-on-year. The commission income, still growing year-on-year, but being negatively affected by capital markets environment, especially in terms of the sales of investment products. Operating costs growing 5.2% -- 5.6% year-on-year against the growth of 5.2% of operating income.

In terms of cost of risk, annualized cost of risk at 47 basis points over total net loans. And in terms of asset quality, the impaired loan ratio or stage 3 ratio at a stable 4.7%.

Capital ratios, still very strong. Tier 1 and Common Equity Tier 1 at 20.9%. Total capital ratio at 22.9%, very much above the regulatory minimums. Also, we would also highlight the second upgrade in the last 12 months of our rating from Moody's.

On Page 7. We continued the solid improvement of the net profit. So the growth in the quarter of almost 4% versus the previous quarter is very positive. And it was supported by the growth of core income by 3.8% versus the previous quarter. On a yearly basis, core income is growing by 5.1% year-on-year, supported by the growth of net interest income.

The cost of growth is also -- was also at the level of 5.6% year-on-year and 4.6% quarter-on-quarter. In terms of the trends, the personnel costs growth is in line with what we have been showing in previous quarters. In fact, the growth in the quarter was 1.5%. Annual growth was at 7.5% and we are having to keep more or less the same type of growth at the year-end, so it means to have a growth of personnel costs year-on-year at around 6%, 7%.

In terms of admin costs, there was a spike in the third quarter, which I know that some of you were not expecting, but partially driven by some not regular accrual of costs throughout the year. So I would say that probably, the second quarter was a little bit lower than what would be normal, while the third quarter was a little bit higher than what would be normal. But anyway, this brings the annual growth of total admin costs and the depreciation to levels that are around 4%, 5% year-on-year. And so basically, regardless of some ups and downs on a quarterly basis, we are still heading towards having annual growth this year of costs at around 5% year-on-year. Still inflated somehow by the trends of growth in staff costs.

As a consequence of these trends of similar growth of costs and income, the cost to income is relatively stable at 46.3% -- 46.6%. And still, we expect these trends to be kept in the next quarter.

Looking at the evolution of the revenues and starting with the net interest income. Again, this is the most positive aspect of the third quarter. The improvement of 10 basis points in terms of net interest margin was supported, at the same time, by a decrease of 3 basis points in the average cost of deposits and, at the same time, by growth of 3 basis points in the interest on loans. This improvement of net interest margin, which is now the highest from all the quarters that are shown here, together with volume growth, brought an increase of 5.4% of net interest income on a quarterly basis and 6.7% on a yearly basis.

On the commission side, year-to-date, still a growth of 1.1%, a small drop in the quarter of 0.7%. But as you can see from the pie chart, it is visible that what is depressing the loss of commissions is the performance of fees from investment products and capital markets, which dropped year-on-year. And this offset into a large extent the growth in fees connected with transactions and loans which are having a healthy growth during the last 12 months.

On Page 9. Asset quality remains good and stable with an impaired loan ratio or stage 3 ratio of 4.7%. And as a consequence, the cost of risk is lower than 1 year ago at 47 basis points over total net loans against 54 basis points 1 year ago. In terms of quarterly provisions, the increase was very small versus the previous quarter.

Capital ratios, very comfortably above the regulatory minimums, including the new regulatory minimums that we announced just 2 days ago. And in terms of liquidity, no change versus the picture that we have been showing.

Moving to the second part of the presentation in terms of the business results, starting on the highlights of Page 11. As I mentioned in the beginning, very strong quarter in terms of customer acquisition with a net growth of 57,000 customers just in the third quarter and a 12-months growth of 175,000 net. Strong growth of accounts and cards by around 300,000 each year-on-year. Sales of cash loans and PLN mortgages at the high level, above PLN 800 million, as in the previous quarter and representing almost 40% growth year-to-date. Solid growth of retail customer funds at 9% yearly and a growth of 236,000 active mobile users.

On the corporate side, still, we kept the double-digit growth of total loans, leasing and factoring at 10%. The double-digit growth in factoring and leasing sales, 16% and 11% growth year-to-date, respectively. And also a very solid growth of current account balances in corporate by 19% year-on-year.

In quality, again, once more, we were on the top 3 of all the rankings of the Newsweek Friendly Bank 2018 and reaching the top position in mobile banking.

Looking at the evolution of loans and deposits. So first, loan portfolio is strongly growing, 14% year-on-year, excluding FX mortgages, which contracted 8% year-on-year. And as a consequence, we are continuing to change the structure of our loan portfolio with a higher share of other retail loans and PLN mortgages and also loans to companies and leasing and shrinking share of FX mortgages that is already below 28%.

On the customer funds side, the growth of 6% year-on-year, in which the most important driver was the growth of 10% of retail deposits, which is helping the gradual increase of our market share in deposits from individuals. While companies' deposits have been more flat also due to the huge excess of liquidity that we have. And investment products suffered from negative net sales in the third quarter. Still, year-on-year, we are showing a growth of loan-deposit investment products by 1.6%.

Page 13. In terms of retail customer funds, we are also continuing the change of the mix with the highest share of current accounts and savings accounts, which grew by 17% year-on-year, and a small drop of time deposits by 1% year-on-year. The number of current accounts is following the significant growth of active retail clients. We have a growth of number of current accounts of 252,000 year-on-year.

The number of active retail customers’ growth in 12 months reached 175,000, and especially was very strong in the third quarter, as I mentioned before, with the 57,000 net growth. And the growth of clients and current accounts is also followed by a significant growth in the number of cards, both debit and credit cards, by more than 300,000 in the last 12 months, and with the significant market share in credit cards transactions of 8%.

On Page 14, illustration of the strength of our digital channels. Year-on-year, a growth of 195,000 active digital customers, reaching almost 1.3 million, and the growth of 236,000 active mobile customers, reaching 888,000.

Digital channels are growing in terms of share of sales of specific products. And especially, we reached a very high share already of the number of cash loans than through digital channels, 45% in the third quarter. Time deposits, high share is capped at 89%. And in our goodie smart shopping platform, also an acceleration of the downloads of the goodie app to almost 600,000 at the end of September.

Page 15, regarding the loan side. It's visible the change of the loan portfolio in retail, with a very strong growth of PLN mortgages by 21% year-on-year and consumer loans by 15% year-on-year and a drop of 8% in FX mortgage loans. The sales of cash loans and mortgage was very similar to the previous quarter, slightly lower. But year-to-date, we have a growth of 39% of cash loan sales and 37% of mortgage loan sales.

Moving to the corporate side on Page 16. The deposits from companies dropped 3% year-on-year. We have not been aggressive in this segment in terms of pricing. But the most important is that current account balances are growing at a very solid pace, plus 19% year-on-year. On the lending side, 10% growth. This time, mostly driven by the strong growth in factoring by 13% year-on-year, but also corporate loans and leasing growing at 9% year-on-year.

On Page 17, the sales of leasing and factoring continued to be a strong driver of the growth of business in corporate. In leasing, the first 9-months sales were 11% higher than 1 year ago, reaching PLN 2.4 million. And the factoring turnover also grew by 16% year-on-year. And additionally, other relevant growth was shown in the volume of FX transactions and guarantees and LCs.

Page 18 illustrates new solutions and developments in Millenet and mobile app. We would call the attention to the relevant share that our Millenet application had in terms of applications for Family 500+ and Good Start applications, 8% of the share in the banking industry; and new functionalities and enlargement of the options available in mobile that we have been introducing both on the lending and on the savings side.

Page 19, another illustration of the top rankings of the bank in terms of quality, which keeps -- and it's not only the fact that we are on the top, it's the consistency of being always on the top during the last 6 or 7 years.

And so with this quality message, we finish the presentation of the results, and now we are open to questions. Thank you.

[Unknown Analyst]

In January, we can now congratulate you on your results. I mean, results were very solid, so it's difficult to find a weak angle or a weak spot. But nonetheless, we're not here to applause you. So I have a question on the quality, especially in the corporate segment. This is the only segment which is showing an uptick in NPL ratio. Also, if you look by buckets or by stages, there's quite a significant growth of stage 1 in corporate segment. And other banks are not systemically, but nonetheless experiencing some issues in the corporate segment. So any comments on that front will be welcome. And second question will be on the sustainability or ability to further improve your NIM, especially your lending margin in subsequent quarters because, obviously, the progress in 3Q has been very strong. But is this repeatable score or not?

[Fernando Bicho, executive]

The first question, I think you were mentioning the increase in -- the decrease in stage 1, yes?

[Unknown Analyst]

An increase in stage 1 corporate loans was quite significant, I think.

[Fernando Bicho, executive]

Let me check, double-check.

[Unknown Analyst]

It was my impression that -- what I was aiming at is that if you look at these lines with NPL trends, the corporate one is the only one which reversed the positive trends, not markedly remarkably, but...

[Fernando Bicho, executive]

No, I think -- so in terms of stage 3 ratio, so we moved from 4% to 4.2%; but in March, we were at 4.4%. So I would say that here, there is not -- I mean, generally speaking, we always can have some cases where that can move between the buckets. But I think that we do not see fundamental changes in terms of the quality of the corporate loan portfolio. And as a consequence, also, we do not see the need of creating a significant level of provisions. Even if you look at what we created in the third quarter versus the second quarter in corporate segment, which we are showing on Page #9, the amount of provisions was very similar. So this is just to say that we do -- although, of course, we always may have cases that have some deterioration, but at the same time, we are also benefiting from other cases that have improvements. But all in all, we are not seeing a deterioration in the corporate loan portfolio. And also, we are not seeing, for the time being, relevant need of increased provisions for this segment.

[Unknown Analyst]

And the overall provision amount, I mean, I have a feeling -- I mean, it looks to me that the overall provisions were down a little bit quarter-on-quarter, which is another -- which is a second quarter of decrease. I thought...

[Fernando Bicho, executive]

They were slightly higher because we are considering in provisions -- in total provisions, we are considering, in fact, 3 items. We are considering the pure provisions that have a separate line. We are including the results on modification that we are also showing in a separate line. And additionally, we are including the provisions that are associated with the portfolios that are at fair value. And so -- and because, in essence, this is cost of risk, it's not fair value. And so we are considering these 3 items as part of the cost of risk in order to be comparable with what we were showing 1 year ago without being under IFRS 9. And so the -- so when we take all together, we have a lower cost of risk than 1 year ago by 6 basis points. It's below our expectations in our guidance because we were, in the beginning of the year, we were thinking that we would be somewhere in 50-something basis points over total loans. But the truth is that so far, we have not been facing situations that would trigger a stronger need of provisioning and also that would trigger a deterioration of the stage 3 ratio. So this is regarding asset quality. Regarding the second question was about cost of deposits and margin?

[Unknown Analyst]

In margin because, especially on the lending front, you improved it by more than just the calendar effect, improved even a mix effect, it would imply.

[Fernando Bicho, executive]

So I think -- so first, you remember that we have been expressing some expectation that we could improve the net interest margin because I remember that after the first quarter in which we showed a drop of the NIM, there were some questions if this was going to be a trend. And there were some concerns about that. At that time, I remember that we said that we were expecting to recover these. And in fact, in the last 2 quarters, we clearly improved. I think that going further, the improvement will come from the asset side rather than from the deposit side. I think that in terms of the cost of deposits, we are again at a level that we were in the third quarter of 2017. But the asset mix change should still help us to improve the average NIM. I don't -- we are not committing to improve the NIM every single quarter because, of course, sometimes, there are different promotions, different composition of the growth that may affect the NIM. But I think we are having to reach the NIM that we had before the interest rate cuts that happened 3 or 4 years ago, which -- because I remember that when those cuts happened, we were at -- we had reached our highest NIM at around 2.70-something percent. And so we are -- sooner or later, we will come back to these levels of 2.7% to 2.8%, but supported by the asset side, not so much by the deposit side.

[Unknown Analyst]

One more question from me. We discussed this last time, Joao, I remember the operating jaws, so the pace of revenue growth versus pace of cost growth. Unfortunately, the latter is outpacing the former. And we discussed about the outlook and your initiatives. And you said that you think that the pressure on wages will ease somewhat at that time. It hasn't so far. Maybe it will come in time, I don't know. But what issues -- I mean, what actions are you going to take, if any, to address this? Because we see negative operating jaws, and you are not the only in the service, and not great news for the bank.

[Joao Jorge, executive]

True. One of the positive thing is that, of course, the same percentage in revenues, it's a bigger amount than that percentage in costs. So even if the percentage is the same, there is a positive impact. But it's true, managing the salaries level is being very difficult. We are not forecasting a major change. We are only forecasting kind of a slowdown of the pressure. The labor cost is coming directly but also indirectly. So it's -- even in terms of administrative cost, in terms of security, transportation, any kinds of services, it's appearing some increase of the costs because there is increase of the labor cost. I must say that even in terms of maintaining the headcount is especially a challenge. So we are already in full capacity of recruiting and training. So it's even -- just not even a problem. Of course, it's already a problem of operational capability to select, to recruit and train enough people to handle with attrition. And even in our case, we have a little bit less attrition than the sector. So it's -- but it is this case. The only thing that we can commit is to maintain the performance in terms of the revenue side that somehow will offset these. 1 year ago, we were here all together and we were presenting the strategy. And when we were presenting the strategy 1 year ago, we were highlighting that we would not, from one side, we wouldn't like to double the pace of growth in terms of customer acquisition. In that time, for us, it was a little bit too ambitious. But we said that we work, I mean, from a 3-years target of 300,000, and we were announcing 600,000 net growth active customers for the next 3 years. We are already near 175,000, so we are completely on target. So we will be able to do it. The second one was speeding up the lending by consumer loans, by companies and by mortgage. Also, we are building then the mortgage bank that would be -- gives sustainability to this growth. And also in that, we are, if you exclude the Swiss franc portfolio, we have a 14% year-on-year. So looks like we are able to do this. So it's -- we are going to try to control as much as possible the costs speeding up the revenues. But it will be very difficult to commit anything differently in terms of cost, so we are expecting a kind of a slowdown on the pressure. But also, at the same time, we want to win the war of talent, so we want to have the best people. So it's -- we will try to become more and more efficient, but maybe more efficient by serving more customers, not by decreasing the cost base.

[Fernando Bicho, executive]

We have a related question, so to speak, just to delve in that. Of course, we have in our strategy a target of reaching a cost to income of 40%. And we did not -- as you remember that when we said 40% after 3 years, we did not say how much it will be in each year, okay? So at least this is a mistake we did not do. And of course, 40% was a very challenging target for cost to income . And we were -- we said it from the beginning. But still, we are not -- we are still keeping that target in our midterm goals because it drives also the proper behaviors through time. But this does not mean that the cost to income has to decrease 2 percentage points every year. I mean, there will be a combination of factors. This year, as we are seeing from the results after 9 months, we are benefiting from a solid growth of net interest income. But we are being damaged by the performance in terms of commissions due to the lower fees from investment products than what we were targeting. So -- and also, we are facing some additional costs. But this is life, right? Not everything is going always according -- not everything goes in the perfect way. But looking for the time horizon of 2 to 3 years, we still believe that with the changes that are being done in terms of the asset mix and deposit mix and the volume growth that we are targeting, these will help to get close to the target. We, of course, we cannot be sure if we will be exactly at 40%. So this is impossible to be sure. But the trend is to improve the cost to income through this period of time. And also, of course, there will be a moment in which the cost to growth in percentage terms will start to be lower due to the base effect, right? But it's not going to be immediate, right, so it's going to be through time. Now of course, the pressure is still there, but there will be a moment in which we expect that the base effect will also start to play a role.

[Artur Kulesza, executive]

Thank you for this explanation because this covered 2 questions from Internet. Thank you for them. More questions here from the room?

[Unknown Analyst]

Could you please comment on your plans with this SKOK Piast? It seems that there's a lot of branches because it's like more than 10% of your branches. It's like 40 something and you have 350 or something like this. And the reasoning behind this, if you can share.

[Joao Jorge, executive]

The reason, I think, is very clear. So the general idea of the banks have been participating in the restructuring of the financial market. And one by one, if you think about the banks, they have been acquiring one SKOK and they're helping also the authorities to solve this. It was our time to do it, and we try to do it in the most efficient way. That, we will be managing in the best way. As you know, these are transactions that, in general terms, they are neutral in terms of P&L impact. Of course, they give a lot of work. But it was also our time to do it, so we did it. And then we are going to try to manage it to the best way as possible and also integrate and, I would say, be efficient when there is to be efficient, some other markets, maybe they are even interesting. We are analyzing this case by case, branch by branch, situation by situation. It's not -- it was a question of later or sooner to be our time to do it, I would say. And for us, it was also positive because KNF delay a little bit of the timing in order for us to prepare. So we asked for an extension of the time when we were invited. We received the extension, allow us also to understand now the mechanisms of these because these are complex. It's a 3- or 4-part deal between BFG, between [ Caixa Crayovi ], between everybody. So it's -- and now we are executing.

[Unknown Analyst]

It should not have a major impact on earnings or restructuring cost, operating cost?

[Joao Jorge, executive]

No, no, no. There is no major impact in earnings. There is a couple of more hard work for some colleagues.

[Unknown Analyst]

Okay, okay. Maybe about the general topic because I remember one of the topics in your strategy was improving this asset management business, building some platform for the clients. And it seems that, at least temporary, that the outlook for the market is worse. And I wonder if you still expect this, let's say, asset management business to be another let to your business, so you give up a little bit because of what you see right now on the market?

[Joao Jorge, executive]

So in this part, of course, the results are disappointing. It's no doubt. We were forecasting some effects by MiFID, but we were not forecasting, of course, all the situation that we have. We have a mix of 2 situations: one is connected with the global market; another one is connected with some cases that we have in asset management business in Poland that, that also impact in terms of visibility and in terms of reaction of the customers and everything like that. So what we are doing is that we are maintaining the same aspirations, but the starting point is different. So it's for you to see our targets. So it's like we expect the same growth that we were expecting, for example, next year now that we are making the budget. But the starting point, of course, it needs to be lower. All the other works, we are keeping. So all the other works in terms of robot advisory, in terms of on-boarding of the customers in terms of digital platforms, in terms of giving new tools to asset -- to relationship managers, in terms of asset management products, we are keeping the same. Also, we are analyzing very well. How is going to be the full interpretation in terms of MiFID as well from KNF? There was some, I would say, some evolution in terms of the interpretations as well. We decided, since the beginning, to keep all the options open for us in terms of direct asset management, the third-parties asset management, asset managed insurance. So all of that, we are having, and we will adapt ourselves as there is no guidance also in the market.

[Unknown Analyst]

My last question about your appetite for M&As, anything you could share? Is there anything new?

[Joao Jorge, executive]

There is nothing that we can share up to now. The only thing that we can share is what we said 1 year ago that for the first time, we put in our strategy an opportunistic way for looking for M&A. If they will be reasonable and if the transaction will be accretive and makes sense, it's a strategic fit. If it will appear, then we will announce. But for the moment, there is nothing for us to announce.

[Unknown Analyst]

Just 2 questions from my side. First, what could be the scale of the potential share of sub debt that you already announced, that you are planning to do? And second is, how do you feel with your target for 2020 net profit of PLN 1 billion? I know you feel good, but I mean, whether this is like ambitious, conservative, and whether this would require any interest rate hike?

[Joao Jorge, executive]

So for the first, feel very confident, so we are feeling very confident for that. And we believe that even that one, probably we'll be more progressive than other targets, as we were talking about cost of income and everything like that because that maybe this one, it will be a little bit more progressive. Let's see. Also, as you know, we are not very stressed even when it is 1 quarter or not. So we know very well the direction. For having this target, we created some -- a strategy, a strategy with a lot of things behind it. I don't know, today, we were analyzing the credit cards business as well. And because I was challenging our teams why we are growing so much in terms of turnover but not as much in terms of commissions. And the explanation was normal and very good is that because customers are using so much the credit cards, they don't pay annual fee or monthly fee, depending by the cards. Because they are using well, so they are not need to pay this commission, which is good. So from one side, you have more interchange fees. From another side, you have less normal per card fees, let's call it. And you need to believe on this strategy because nobody have products that pay commissions and not use it, nobody. So it's a question of sooner or later to have a share and then to have cancellations and level of debt, so you need to believe on that. And what we believe is that the strategy that we are building in terms of customers, in terms of usage and to have this disposition of the bank as very strong quality, very high-end Net Promoter Score and intensive usage. It's very good. Also, we have a meeting in terms of cash flows. And even we -- Mr. Bicho even had a joke, saying, don't laugh at this meeting. I have something to say to the analysts, which is also we were seeing that we have a lot of potential of our customers. So there is a lot of potential, a lot of customers that use us as primary bank, that they have consumer loans elsewhere, which is also good because we know that we are good on that. We are good in selling consumer loans to customers that are banking with us. And so we were analyzing and we are seeing that we have banks that use us as primary banks. So they have their salary, their expenses here and everywhere. And then they have consumer banks in other banks, so it could be interesting also.

[Fernando Bicho, executive]

Regarding the subordinated bond issue, so we are considering to issue probably still in the fourth quarter, but between fourth and first quarter, but probably still on the fourth quarter. The size of the issue probably will be up to PLN 1 billion. Last year, we issued PLN 700 million. And then -- so basically, we will see what's the proper moment to start with it. And this would help again to further optimize the capital structure of the bank because, as you see, although we did already the first issue of subordinated bonds 1 year ago, still, we have much more surplus of Tier 1 than of the total capital ratio. So by doing a second issue, this would balance more. And second, we also would follow the trend because, in fact, this year, there have been at least that I remember, 3 other banks issuing subordinated bonds. So it seems that there is a market for that. Of course, it sounds like good news in terms also that, of course, we also are benefiting from 2 upgrades of the rating in the last 12 months, and this is not indifferent for a buyer of the subordinated bonds. I think this is also relevant information. For us, it will also create the midterm conditions for distribution of dividend, which is also relevant. Although it's not an obsession, but as we said already several times, we are trying to create conditions that one -- because otherwise, also, we are always being depressed in terms of ROE, which also is something that we need to fix. So basically, this is what we are planning.

[Unknown Analyst]

On your FX mortgage buffer, were you surprised by the size of the increase? And second question is, is there anything you can do to improve it? Because there are different components in the algorithm, as I understand, so you can behave more properly? Maybe just beyond component that is a problem or can you do something...

[Fernando Bicho, executive]

What was the first question that you said?

[Unknown Analyst]

No, the first question, were you surprised by the scale of the...

[Joao Jorge, executive]

Are you surprised by the scale?

[Fernando Bicho, executive]

Okay. So I can give just some general explanation because it's really -- it's very technical explanation because really, on one side, we had a relevant decrease of the FX mortgage portfolio that was used as a basis for the calculation. But on the other side, the methodology incorporates the increase of the standard risk weight from 100% to 150%, which was not incorporated in the previous decision. And then this much more than offset the positive impact that we would have by the decrease of the FX mortgage. Then of course, there are a few other components which also slightly increased. But really, what was the major driver of the increase of the buffer was this one, was the increase of the standard risk weight. And for banks under IRB, like we are, of course, this has a major impact. The problem of this, of course, is always that the decisions do not come at the same time. And so, of course, for us, as a publicly listed company, we would prefer to have everything done at the same time. And so we would not have to give explanations to the market about why sometimes we have bigger excess of capital later. We have less excess. But as you remember, we never said that the excess is fixed, right, because of the different timing of the decisions. So this is the first answer in the first question. The -- what can we do? I think we have been doing a lot in order to solve this because we have been trying to reduce the size of the FX mortgage loan portfolio by showing different options to our customers and being really friendly and flexible in terms of finding solutions for the reduction of the portfolio. The consequence of this is that we are having 8% annualized amortization of the portfolio, which -- of which there is already relevant part that is coming from early repayments. We have very little conversions to PLN. We do not find interest in our customer base for the conversion, to be honest, until now. But we have relevant -- we have had relevant early repayments during the last 12 to 18 months. Of course, it's also influenced by the level of the FX rate, but not only. And so we have been, in a discrete but active way, providing different alternatives in order to reduce the portfolio. So from this perspective, we cannot be more friendly and more active than what we have been because we have been for more than 2 or 3 years. Apart from this, there's not much more that we can do. I think that also, I believe that we are reaching the limit in terms of, let's say, components of the buffer, let's say. Because there will be a moment in which then this should decrease just due to the reduction of the portfolio, right? But there is still one thing that still can happen, as we all know, which is this increase of the LGD, which was 1 of the famous 10 recommendations from KSF. There is a project that was published in May. But until now, it was not yet approved. If it would come into force, on one side, it would increase risk-weighted assets; on the other side, it would decrease the Pillar II buffer to a large -- so I don't think there will be a one-to-one compensation, but this would not have major consequences in our assessment.

[Artur Kulesza, executive]

Thank you. You can ask more questions.

[Unknown Analyst]

Can I just ask a couple? The new sales of mortgage loans, because we just heard that in the consumer lending new sales, you see still potential for Bank Millennium to increase that. I just wonder, what do you feel about the mortgage portfolio of the new sales? And what is going on right now on the market, whether we are already past the peak in terms of new sales in this or not?

[Joao Jorge, executive]

It looks like it's maybe not a peak, but a plateau. So it looks like there is somehow some stabilization in terms of -- I would say, let me rephrase it. I see some stabilization in terms of transactions, maybe still some potential of growth in terms of mortgage. Because for a while, when we start to see the -- some increase on the market and some more transactions, there was some initial moments that we saw more transactions without increase on mortgage because there was a lot of people vying for investment and in cash. Now there is a bigger percentage of mortgage. And probably, we see some plateau in terms of transactions, still slightly increasing in terms of mortgage. But it's true that we think that we see some maintenance from these levels and not increase. In terms of the bank, we will maintain more or less this level. So it's -- we could do more, but we are trying to do in a balanced way. We think that we learned also lessons on the past. Somehow, we were imbalanced. And more and more, we believe that the universal bank needs to have -- does not need to be the same, but the similar presence in different segments. So it needs to have more or less the same market shares in all the products that are in financial markets. So it's -- we would like to maintain the levels that we are in.

[Fernando Bicho, executive]

The market shares or origination of market's loans year-to-date have been between 6% and 7% for us, which is exactly in line with our national market share in retail. So that's why we believe that we are more or less at the levels. Of course, if there will be a chance to do something more at the proper price, of course, we will not neglect these. But we are not going to force just volume at the expense of the overall margin that we have.

[Unknown Analyst]

And maybe just a follow-up on the loans-to-deposit ratio. Where would you feel comfortable with this ratio going to?

[Fernando Bicho, executive]

Internally, we have defined not going above 95%. In the medium term, when we will have the mortgage bank and the mortgage bank will start to issue covered bonds, even we will have an additional source of liquidity that we do not have today. And so -- and then even we can be more comfortable even in leveraging more, but I would say that 95% is -- has been for a long time our threshold. The market average is slightly below 100%. We are the second lowest, I think. We have the second lowest loan-to-deposit ratio. This is an opportunity, let's say, because in terms of -- of course, if our loan growth will be faster than the deposit growth, there will be an additional margin that will be generated just by this leveraging. But we are still very far from that. So it's not -- so I would say loan-to-deposit ratio is not a limitation for our organic growth.

[Artur Kulesza, executive]

So if I may, maybe a little bit related question from Anna Marshall, Goldman Sachs now, thank you. Loan growth, how sustainable is that year-on-year growth pace in the key lending segments delivered in 3Q? What is your outlook for loan growth 2019?

[Joao Jorge, executive]

We want to maintain, so it's -- we have been on these levels of 14%, 13%, 15%, excluding Swiss francs. So it's the way that we look in terms of performance, to not be here with the impact of FX all the way and things like that. So we have as an effort to decrease as much as possible the FX portfolio. Excluding the FX portfolio, we think that we have conditions to maintain this pace of growth in the next years.

[Unknown Analyst]

Thank you. More questions from here? If not, I have more through Internet, more details maybe. But one is, what is the level of retail NPLs written off?

[Fernando Bicho, executive]

In the third -- I think the question is related to the third quarter. So the loans that were written off in the third quarter were essentially retail loans, especially non-mortgage loans. The level was around PLN 88 million, if I'm not mistaken. And so -- also, this is visible in the decrease of the stage 3 ratio of non-mortgage retail loans that we are showing on Page #9, that there is a drop in the quarter, and this was driven by those write-offs. We did not sell out NPLs during the quarter, so this is just purely the effect of the quality of the portfolio and the write-offs.

[Artur Kulesza, executive]

Another detailed question about increase in consulting costs in the quarter, in the third quarter.

[Fernando Bicho, executive]

I would answer with -- that year-on-year consulting costs are almost at the same level. So I would say that there is nothing to give particular explanation. We have different projects, so I'm not going to break down the projects for different reasons. And so -- but I think that when -- I was expecting this question anyway, so that's why I was looking at the year-on-year growth of the consulting cost. And really, this year, year-to-date, it's only slightly higher than 1 year ago. So I think -- and this is more volatile on a quarterly basis.

[Artur Kulesza, executive]

Last question, I think, not answered through Internet from Anubhav. BFG charges why are higher in 3Q versus 2Q?

[Fernando Bicho, executive]

In fact, this is one of the excuses to have higher admin cost in the third quarter versus the second quarter. But it's due to the fact that when we booked the BFG cost in the first quarter, we had to make some estimations. In the second quarter, it turned out that our -- we have overestimated a little bit the contributions in the first quarter, so we made the correction. And now we come back to the -- to a normal level. Additionally, the contributions to the deposit guarantee fund are done on a quarterly basis. And so if the deposit base protected by the banking guaranty fund increases, obviously, there is also a growing contribution to the fund. But the main reason was the adjustment that we did in the second quarter because of the resolution fund estimation.

[Artur Kulesza, executive]

Thank you. I see no more unanswered questions because dividend plans recovered. I saw -- more questions here? Yes, please.

[Unknown Analyst]

Maybe one more question from my side. So when can we expect those consulting costs to come back to normal levels?

[Joao Jorge, executive]

I was coming back. So imagine that in your group, somebody asked this as well. So I would think it's very difficult. We have been alerting also with our talks with the authorities and the people that decide also some monetary policies and all of that about the pressure that it's being felt in terms of personnel costs. There is other things, so it's even in terms of mixing. For example, in terms of advertising, at the moment, what is happening in terms of advertising is that we are putting more money in digital, but we are not cutting money in traditional advertising. So we are just spending more money for the same reach. And then this is a need as in the channels. During some time, it happens like that. So during sometimes, as we were putting more electronic channels, we were just creating more interactions with the customers and we were not reducing branches. Now the scenario is changing. Now we have a situation that, for example, this quarter, 25% of new customers, they come through digital; 45% of consumer loans were digital end-to-end, so without intervention. So it means that there is a time that you start to make substitutions. When are we going to start to make it? I think it will take a little bit more time. So I think it's maybe at the end of the strategy. So in 2020, we will start to see a situation that costs will just grow as inflation, so very benignant. And the revenues will still grow with the inflation, plus GDP, plus our own activity. I hope.

[Artur Kulesza, executive]

Okay, thank you. More questions? I don't see. So thank you very much for participants in this conference for all questions. And let's meet maybe next year already. Thank you very much.