Bank Millennium SA

WSE:MIL

Earnings Call Transcript 2020-Q3

[Dariusz Górski, executive]

Good afternoon. Welcome to everyone. Welcome to our 3Q results call. It's more virtual than before, obviously, due to obvious reasons. We heightened our security measures. So we are all joining in remotely.

The drill is as usual. We will have a presentation at the beginning, and then we have a Q&A session. Unlike in the past, the questions can only be asked by using chat. If you cannot use chat because you're calling in by telephone, it would be ideal to send them to my email address, which is [e-mail]. This is the order of things.

[Fernando Bicho, executive]

Dot P-L.

[Dariusz Górski, executive]

Dot P-L, yes, progression. Correct. Okay. So let's start. With us, we have Mr. Joao Bras Jorge, our Chairman of the Board; and Mr. Fernando Bicho, Deputy Chairman of the Board and CFO of the bank. The floor is yours, gentlemen.

[Fernando Bicho, executive]

Thank you. Good afternoon to all. Thank you very much for joining this presentation. I hope that technically, the conditions are good and that you will be able to follow. And also we have simultaneous translation through another channel.

So as usual, we will go through the presentation of the first 9 months 2020 results.

And we would start with Page #3 of the presentation, which focus the 4 things that we are specifically happy about the third quarter. The first one was that there was already some stabilization of the net interest income and core income after the significant rate cuts that we faced during the second quarter. So in fact, the net interest income was only marginally down, while the core income -- while fees were flat versus the previous quarter.

The second important point is that we had a record quarter in terms of origination of new mortgage loans, close to PLN 1.8 billion in the third quarter, higher by 15% quarter-on-quarter, and bringing the full year origination to PLN 4.7 billion, which is 54% higher than 1 year ago. And translating into relatively high market share of origination of 14% in the third quarter.

The third point is that we achieved another milestone in terms of the number of active digital customers, which crossed the 2 million mark during the third quarter, which represents a growth of 27% year-on-year. And specifically, mobile customers already exceeding 1.6 million.

And the fourth relevant point to highlight here is also the rebound in mutual funds where the assets under management of our Millennium TFI and third-party funds combined grew 13% quarter-on-quarter, so almost entirely offsetting the outflows and the decrease that we had faced several months ago.

So moving now further. Let's start with the COVID-19 impacts and the bank's response. This Slide #5 is a reminder of what we already presented 3 months ago. But just to recap, of course, the results of 2020 of the bank are significantly affected by, first, the significant cuts in interest rates in Poland. Second -- third, the impacts on credit risk provisions coming from COVID 19; and fourth, still some additional provisions for returns of cash loan fees. Against this more negative background of the year, we have been focused in, of course, first of all, protecting the health of employees and customers and ensuring the business continuity, which is shown by the numbers that we will speak about in a minute.

But at the same time, taking mitigation measures at the level of risk management in this more uncertain environment. Executing the synergies coming from the Euro Bank transaction and adding additional cost-cutting measures, which will have already relevant impact in 2020. And also at -- acting at the level of repricing both on the deposits and loan side.

On Page 6, just a reminder of a number of actions that we have taken to support our customers. I will not go again through all of them. They were also presented 3 months ago. But in fact, all the actions aimed at on one side, driving the services of the customers to a more digital base, and allowing them to bank smoothly without the need of coming to the branches on one side. On the other side, putting instruments available to as a cushion against these temporary problems generated by the lockdown in the credit holidays.

On Page #7, we present the current status as of the end of September of the credit holidays, so private moratoria that was implemented back in March. It finished in the end of September. As of the end of September, we had PLN 5.1 billion of outstanding which represented 6.8% of the loan portfolio outstanding still under the credit holidays and the yield amount under the public moratoria.

The schedule of the portfolio with active credit holidays in terms of their expiry date is shown in the bottom graph of this page. And what, of course, we still have relevant amounts expiring between October and December. And we still will need to see the customers that use such a facility will behave after starting again to repay the installments.

What we can say so far is that looking at the customers which holidays finished between June and August, there was an insignificant percentage, only 1% that had expired -- that were in 30 days past due bucket as of the end of September.

On Page 8, this COVID-19 pandemic, of course, is accelerating changes in customers’ habits. So we have here an illustration of the numbers of those transactions, but also shows the clear rebound after the period of lockdown. So it's visible a significant growth in BLIK transactions versus last year, PayByLink as well and also the recovery in parking tickets just shows -- it's used here to illustrate how the country reopened after this period of lockdown. And in fact, during the third quarter, we had a much more normal situation.

On Page 9, a reminder of our response to the crisis. Of course, we had the first -- the Phase I, which was in the outbreak of the pandemic, which was essentially focused on health, safety, business continuity. The second was dedicated to the Millennium's COVID-19 project, which we have internally done until July in order to maximize the level of resilience to this new environment, including all these measures in terms of recovery of revenues and reduction of costs and proper management of the risks through these times.

And the third phase, where we are right now, is also to recover and to get to a new normal, where we will have the bank prepared for a new environment of very low interest rates for a long period of time. And also -- but also with a more digital approach, which will cover not only the part that is seen by the payments, but also the internal processes of the bank. And as a consequence we will have the plans for 2021.

On Page 10. As a reminder, also, so we -- as a response to this crisis, we launched further cost savings measures on the top of the cost synergies that were expected to be captured from the Euro Bank transaction. And at the same time, accelerating the capturing of such synergies from Euro Bank transaction to as much as possible. And we have announced as a target to cut the earlier planned 2020 OpEx by 10% and CapEx by 17%.

In terms of recovery of revenues, we significantly slashed the cost of the deposits during the third quarter, following the cut-off interest rates by the monetary council almost to 0. We also pay special attention to credit risk management and also with some more conservative provisioning in the first half.

And finally, we have been accelerating digitalization of sales and services and also of internal processes. But at the same time, we have kept -- we have not neglected continuation of business development and this is especially visible in the performance of mortgage loans during the third quarter.

So moving now to the second part of the presentation about the Euro Bank integration and further efficiency improvements. On Page 12, the status of the integration costs and synergies. The gross synergies continues to increase in the third quarter, but they were partially offset by some additional restructuring costs of PLN 70 million, which were taken in the third quarter of the year. Anyway, we continue in line with the plan, with already a positive contribution from cost synergies to the P&L. And so the target of gross synergies for the full year 2020 remains valid. And next year, we'll be almost fully appropriating the cost synergies from the deal.

Page 13, just a further illustration of the -- of how much we have incurred of integration costs so far last year and this year. Again, I remind that we are accelerating some of the original plans. So in fact, we are moving some integration costs from next year to the current year in order to accelerate the capture of the savings. But the transaction is already being accretive on the cost side and with the targets that were originally announced for the cost synergies to be achieved as announced.

So now let's move to the third part of the presentation about the financial performance of the bank. Page 15 and 16 have a snapshot of the results. Of course, year-on-year, we have a growth of net interest income of 9% and net commission income of 7% reported by the Euro Bank transaction, because we did not consolidate Euro Bank within the first 5 months of last year. At the same time, the reported costs were also higher by 7.5%, although on a pro forma basis, they were already down 7% year-on-year.

The net profit in the year-to-date reached PLN 132 million. In the third quarter, PLN 60 million, of course, it is a substantial decrease versus last year, mainly due to the combined effect of additional provisions for FX mortgage litigations and the impact of the cuts in the interest rates. Anyway, excluding extraordinary impacts, the cost-to-income is between 46% to 47%. The cost of risk, excluding the COVID-19 provisions was at 80 basis points year-to-date. And so, of course, we are having this impact, but before extraordinaries, the performance of the bank is strong.

On Page 16, some data, more on the business side. So more than 2.6 million active customers, more than 2 million active digital customers. Total customer funds at PLN 94 billion, which is a growth of 6% year-on-year. Deposits also growing almost 7% year-on-year, although almost flat in the quarter, which is normal after such a quick and dramatic cut of the remuneration rates of deposits.

On the loan side, annual loan growth at 7% year-on-year without FX mortgage. And driven by P&L mortgage growth, very strong capital and liquidity position and also continuation of the increase of the coverage ratio of impaired loans by provisions to 68%.

Page 17, main highlights, apart from what I already mentioned, I would highlight the fact that during the third quarter, we have cut the cost of deposits by 62%, bringing the average cost of deposits in the third quarter to 0.23% versus 1.03% in the first quarter of 2020.

And on the operating costs, if we take the pro forma of last year, including also the first 5 months of Euro Bank, we have, in fact, a reduction year-on-year of 7%. We increased during the quarter, again, the provisions for FX mortgage litigation by PLN 130 million, bringing the total accumulated provisions in the balance sheet to PLN 521 million and year-to-date of PLN 297 million.

Page 18, again, illustration of the evolution of net profit and operating income. It is visible in the third quarter already a growth of operating income versus in the second quarter. And although still falling 7% versus the first quarter of this year and being 10% lower year-to-date than in the same period of last year.

On Page 19. On the cost side, so on a reported basis, we -- of course, we had a growth of the cost due to the consolidation of Euro Bank. As I said, excluding the Euro Bank impact from the first 5 months of -- if we would take into consideration the Euro Bank cost of first 5 months of last year, as well as integration costs. In fact, we have a cut of admin and depreciation costs by 9% year-on-year and staff costs by 6% year-on-year, which brings a combined reduction of costs of 7% versus the pro forma of 2019.

On the right side, you can also see the continuation of the branch optimization process with continuation -- with the number of branches decreasing by 107 versus 1 year ago and by 100 versus the end of last year. And at the same time, the operational efficiency also being translated into a reduction in the number of employees by more than 700 in the last 12 months.

On Page 20. The net interest income, we believe, has reached its lowest level of the year. The difference versus the second quarter was only 1.8% or PLN 11 million. So we still have, of course, some full quarter impact of the cuts of interest rates that will have happened in the second quarter. But most of -- but we would say that basically the impact is done. And so -- and especially, this was mitigated by the significant reaction that we have taken in terms of decreasing the cost of the deposits. On the right-hand side, you can see that the cost of the deposits fell in just in 1 quarter from 0.72% to 0.23%. Of course, we still have a decrease in the average yield on loans as a consequence of still repricing of loans [indiscernible] and also of floating rate notes. But most of the impacts are already captured in the third quarter. Net fees were flat versus the previous quarter, higher by 7% year-on-year.

On Page 21, asset quality remains sound. Impaired loan ratio even improved in the quarter to 4.7%. Also during the quarter, as a supporting action, we also had the sale of a portfolio of NPLs of PLN 155 million, of which PLN 49 million was on balance sheet loans, with still positive contribution to the amount of provisions of the quarter by PLN 11 million. And so the cost of risk here to that is at 80 basis points, or 92 if we include the COVID-19 provisions. We did not do specific provisions for COVID-19 in the third quarter.

Page 22, liquidity indicators, very sound. And also the capital ratio with a significant surplus above the minimum requirements surplus between 3.7% to 4.9% above the minimum required levels.

Moving now to the fourth part of the presentation on business development. And so the highlights, I already mentioned several of them. So -- but really, we think it's a milestone for our bank to cross the number of 2 million active digital customers in the times that we are living right now, where digital will be even more important than what was expected some time ago.

Also the very strong origination of mortgage loans in the third quarter, in fact, increasing our market share to 14% just in that quarter. Still resilient production of cash loans, PLN 1.2 billion in the quarter. An overall 7% growth of retail loans or 12% year-on-year if we exclude FX mortgages. The rebound in mutual -- in assets under management in our investment fund management company and third-party funds saw -- with a growth of 13% quarter-on-quarter.

On the corporate side, we still have the growth of deposits, driven by the very high level of liquidity of Polish companies. In terms of lending, in fact, loans to companies plus factoring were flat in the quarter while still contracted. Still, this was a better performance than the average data from the market.

On Page 25, some more details about loans and customer funds. So apart from what I already mentioned, of course, in the quarter, we had a small decrease of retail deposits as a consequence of the significant repricing, partially offset by growth of deposits from companies. So with deposits in the quarter virtually flat and still growing 7% year-on-year.

On the loan portfolio, of course, now the driver of the growth is mortgage loans, which contributed to the 2% growth in the quarter. In investment products, a good rebound in the third quarter. Still, year-on-year, we are [ off ] to 6% below in terms of outstanding, but it was -- but we are on a good trend.

Now on the next pages several additional data about digital. On Slide 26, it is visible the importance of digital channels for sales and service of our customers. In the third quarter, 50% of the cash loan sales were done digitally, 91% of time deposits and 23% of current accounts opening. So the numbers continue to significantly grow. Active mobile customers grew 33% year-on-year and active digital customers to 27%.

And it's just as an illustration of how quickly things are changing, we just inserted here on Page 26 this [ caption ] that it took us 15 years to reach the first million customers in digital, and it took us 3 years to reach the second million. So the speed is really -- is really impressive.

Page 27, transactionality online also increasing significantly. So transfers higher by 42% year-on-year; 87% growth of e-commerce BLIK transactions; Internet payment transactions growing 8%; e-commerce, 37%.

On Page 28, 56% of the new or increased overdrafts of the quarter were done through digital channels. Contactless mobile payments more than doubled versus the third quarter of last year. And below, again, shows just the -- it's more for the illustration also of the reopening of the economy after the lockdown translating into these tickets and parking statistics and sales. And on the other side, mobile top-ups also increasing by 25%.

Page 29. The bank has been heavily investing in facilitating banking remotely and digitalization.

Here, on this page, we illustrate a number of additional initiatives, including the Millennium investment program, which is now available online entirely in mobile banking. And the continuation of the -- adding new banks to open banking services. We have now, for our customers, the possibility of having 9 banks available through the service.

The tracking of the mortgage loan applications also, which makes the process of origination of mortgage much smoother and easier to follow from the customer perspective. So these were all developments that were implemented very recently.

And on the next page, the same improvements for corporate, including a new platform for FX transactions, and also prepaid card register and 3D-Secure password defining for all cards. So everything aimed at making life easier for firms and companies, especially during these difficult times.

In goodie, continuation of the more than 134,000 app downloads during the third quarter of the year and further developments on the app.

Page 32. Some more details about the retail business. Of course here, the highlight is for the growth of sales in mortgage, almost PLN 1.8 billion in the third quarter, which means we're bringing the year-to-date origination to PLN 4.265 billion, which is 49% above the same period of last year. In cash loans, the picture, of course, is not so extraordinary due to the impact of this crisis and some lower demand, but still, we had a rebound in the third quarter. So we originated more than PLN 1.2 billion of new loans, bringing the total year-to-date to PLN 3.6 billion, which is only 7% below this period of last year.

On Page 33. I already mentioned the growth of active retail customers, which continues 14,000 in the quarter. Of course, now we are proceeding at a little bit slower pace than what we used to have last year also due to these restrictions that we are living, but also very strong growth of number of current accounts year-on-year and of debit and credit cards.

On the companies and corporate sides, so as I mentioned before, loans to companies and factoring were flat on a quarterly basis. So the overall contraction by 1% came from the reduction in the leasing portfolio by 3%, which, in fact, illustrates the relatively low demand for new investments, which is, of course, affecting the sales of leasing.

On the deposit side, the situation is still very, very liquid with a significant growth of 66% in current accounts. And also what we could observe in the third quarter was a rebound in the clients' activity and transactionality after the lockdown. While at the same time, we are progressing with this digitalization of the client services.

Page 35 illustrates the situation of sales of leasing, which were year-to-date, 32% lower than in the same period of last year. While on the other side, the year-to-date factoring turnover was already 6% above the levels of 1 year ago.

So these are the most important highlights about our first 9 months and third quarter results. So now we will be going through the Q&A session. Thank you.

[Dariusz Górski, executive]

Thank you very much, Fernando. So we have concluded the first part of the presentation. As we have said previously, it's probably best if you ask your questions through chat. For those who have joined via telephone connections, please use my e-mail address, which is [e-mail]. You can find it at the back of the presentation on our website.

We have 2 questions coming. The first is about the impact of current commission returns on the net interest income in 3Q this year. What is the impact?

[Fernando Bicho, executive]

I think we need to look at -- of course, when we are comparing the results of this year with the results of last year, we have to remember that the ruling of the European Court of Justice only came in September last year. So during the first 8 months of last year, there was not this automatic process of returning the fees to the customers for the remaining period of time. So just to say that, which means that in the first 8 months of last year, banks, in general, were operating some additional -- were accounting for some additional income, which stopped to be accounted since September last year. So when we compare year-on-year, of course, the impact is more relevant.

When we -- if we are -- so it's -- we -- the impact is more to cease to have income than to have an additional cost. So this is how we can explain the impact of this new environment. So of course, we -- I'm not able to have a direct comparison also because there were so many changes in the structure of the portfolio. In the meantime, we [ have Euro ] Bank in which the loans were also accounted in a different way, and we have to book them at fair value. So we cannot -- it's difficult to make a direct comparison. But I would say that on [ total devices ], we still have probably something between, let's say, PLN 10 million to PLN 15 million at least of the impact of NII that comes directly from these returns. This impact tends to fade away through time because, of course, we know each time that we are originating a consumer loan, we are already trying to anticipate the likelihood of such a loan being early paid in the future. And as a consequence to have the proper provision for such return from the very beginning of the loan. And so that's why I say this impact should fade away through time.

[Dariusz Górski, executive]

Thank you very much. We have more questions coming. I'm trying to sort them a little bit by topic, but before this happens, the next question will be about the deposit cost.

What is the level of quarterly deposit cost you expect to reach after the full repricing of deposits?

[Joao Jorge, executive]

Maybe you can elaborate also in net interest income and net interest margin because there is also questions about it.

[Fernando Bicho, executive]

So about deposit costs. So we -- as you saw, we were in the quarter at the level of 0.23%, which means that it was done very quickly. It was a -- it was a very quick reaction. And now we think that the cost of deposits will stabilize somewhere around 0.1% -- between 0.1%, 0.15%. This is most likely where we will finish with. This is the answer.

Regarding interest income, we had in interest income a combination of several impacts. First, we had the cut of the maximum interest rate on consumer loans, which took place in the second quarter, which affected part of the stock. Then we followed with some initiatives to improve the margin on the new loans, so a combination of essentially less discounts on interest rates, for example, in some higher commissions as well. So we believe that the economics of the new origination improved again in recent months.

And third, we also have the under repricing of all the loans that are indexed to market, rights and indexed to [ EURIBOR ] which took place between the second and third quarter. So looking forward, what we see is that we are originating more loans, especially mortgage loans, which will be accretive for the margin because this will be replacing -- this will be replacing partially low yield in government bonds.

And second, also, we believe the cash loan portfolio is not shrinking, which is also important. So we are originating at least enough not to shrink the portfolio. And in corporate, we expect sooner or later to start to get some rebound.

[Dariusz Górski, executive]

Thank you very much. Next question is about the cost of risk. Do you still expect second half cost of risk could be lower than the first half cost of risk?

[Fernando Bicho, executive]

I think so. In the third quarter, we had a little bit lower provisions than in the second quarter. Not significantly lower, but a little bit lower than in the second quarter meaning in the second quarter, we had PLN 166 million. In the third quarter, PLN 150 million. The scenario for the fourth quarter until now was prepared to be relatively positive in the sense that as we have shown until now from the clients that exited the credit holidays until now did not show significant signs of deterioration. Of course, what we still have as uncertainty is, first, the clients that will finish between October and December, the holidays, and we need to monitor and to see if there is any problem with such clients or not. And this, of course, we still need time to see.

And second, if the second wave of the pandemic will have impact on the economic activity and would trigger problems for the borrowers. So these are the 2, let's say, especially the second uncertainty, which became more visible now in the last 2 weeks with the growth of the second wave. Of course, makes us being cautious in terms of making now forecasts about the cost of risk for the future. What I can say is what we also said in the morning to the journalists. Until now, the cost of risk was better than what we were expecting in the second quarter, in April or May.

At that time, we thought that things would be worse. Until now, they were not as bad as we thought that they would be. In fact, they have been quite good, even. But -- we are still before this next phase, which will be important, meaning the next 3 to 6 months are important to assess how these customers will return to normal payment of installments. So -- and this is the only question mark. If nothing will happen with this, we will tend not to have any relevant increase in the cost of risk in the fourth quarter.

[Dariusz Górski, executive]

We also have a question on the cost of risk from Marta. And the question is, what is the underlying cost of risk following acquisition of Euro Bank? I understand that this is cost of risk for Bank Millennium ex Euro Bank, right?

[Fernando Bicho, executive]

I've been saying about everything. I understand that the question is because we used to say that in the past that in several years, we were expecting the cost of risk to be between 60 -- 50 to 60 basis points. And now we are at 80, excluding COVID-19 impact.

I think the question is what is the new normal of cost of risk? I think in the past, we said that after the acquisition of Euro Bank, it should be higher because we essentially strengthened the consumer lending portfolio significantly and which has traditionally a much higher cost of risk than the mortgage one. And so we should expect that, on average, the cost of risk should be higher than what was traditionally [ lending ] alone.

How much higher? Now we are in the middle of this pandemic, and it's very difficult to say what is the new normal. Because this year is completely not normal in terms of the events that we are facing. What -- but, of course, the acquisition of Euro Bank should always bring, if nothing else would have happened, would have brought the cost of risk of the bank to somewhere to the 60, 60-something basis points zone.

This is not -- but we cannot -- this is not always possible to isolate. I should also add that during this year, we introduced the new default definition. It is also a little bit more restrictive in terms of classification and consequently, in terms of source of the associated provisions. So we did it from the beginning of the year. So there is also some impact coming from that more conservative implementation of default definition. So there are -- so for now, we believe that the third quarter result was quite good in terms of cost of risk.

We don't see the fourth being much worse unless there is another significant hit to the economy if -- or if there is a second lockdown.

If not, we think that then the question mark is the group of customers that are under credit holidays, which we will need to track very, very closely, and we will see the behavior, although we are not pessimistic for the time being.

[Dariusz Górski, executive]

Thank you. Since we briefly touched the COVID pandemic subject, we have a question about this. We are experiencing another leg of COVID pandemic. Is it causing Bank Millennium to...

[Joao Jorge, executive]

Sorry, we lost ...

[Fernando Bicho, executive]

Sorry, we lost you, Dariusz. Can you repeat?

[Dariusz Górski, executive]

The question was about originations of mortgages, among others. The question is whether we are experiencing any limitations to this from COVID pandemic.

[Joao Jorge, executive]

Okay. So maybe I can answer this one. So mainly, what we saw since the beginning was some transformation even in the demand for credit. So even when we break down in, for example, in corporate, we present the breakdown of leasing factoring in. So it's visible that factoring with trade is already recovering and leasing, substitution of equipment, not so much. But also if we would go inside of corporate, we would see that we had a major decrease in overdrafts and some increase in, for example, investment credits. And this is a lot also for those -- so the impact of the program of supporting the economy of PFR that was the injection of liquidity in companies.

So there is some transformation. For example, in individuals, there is still demand in terms of mortgage, and there is a lower demand in terms of consumer loans. What we did since the beginning, and this was done right in the beginning, is that as soon as there was the pandemic and also the impacts in terms of economy, we did the assessment of the existing portfolio and the revision of criterias and the need of additional provision or not. Monitoring also the credit, especially in corporate for the future, but also we made the adjustment of the models for the next year. So with the forecast and from that, we don't see any reason to change these. So we start to just accept a little bit better ratings in terms of consumer loans, more demand in terms of LTVs for mortgage and not accepting some types of income.

Also some selection in terms of sectors and dividing very well what are the sectors that we believe that are protected, even in a more -- a less positive or more positive -- pessimistic scenario for economy. And so this was done. Now even with the second lockdown -- the second wave, let's call it like this and additional restrictions, we are not seeing any reason to change. So what we think is that the third quarter was better than probably the fourth quarter will be, but the general scenario for the Polish economy, it's similar to our expectations.

And they are, I must say, a little bit better than it was forecast in the beginning of the pandemic. So it's -- so for the time being, we, of course, see less production of credits as we were forecasting in our business plans in the beginning of the year. But also, we don't see a major slowdown from what we are doing at the moment. We even, for example, in corporate we are seeing some signals that can allow us to be slightly optimistic for the next quarters.

[Dariusz Górski, executive]

Thank you very much. A bit more general question before we get into the Internet ones. Do you plan to introduce any changes in the area of F&C?

[Joao Jorge, executive]

We think that fees and commissions are always a thing to divide. And there is clear -- there is a change in terms of the mix of the pricing. But we are not planning because we also don't think it's a good strategy. A major increase across the board in all the price listings. So we think it's a lot about more the combination, sometimes a little bit more penetration of insurance, sometimes the component of the commission a little bit higher. So it's -- the decrease of interest rates was so big, that somehow the pricing strategy needs to be changed, a little bit less waivers. But we don't believe they have to -- it's feasible in the future, just a major increase across the board in the price list because this will make just customer attrition a negative selection.

[Dariusz Górski, executive]

Thank you. We have now received a bundle of questions relating to Swiss mortgages. The first would be, what is the main reason for CHF 130 million provision in 3Q '20? Was it caused by changes of model assumptions or rolling over the model by another quarter? And then should we expect a major review of Swiss franc provisioning model in 4Q '20?

[Joao Jorge, executive]

I think Fernando can address this one. But I always remember the colleagues that Fernando has explained that this is a methodology, because there is not experience and data to really build a model, as everybody in the market is talking about models versus the number of court decisions is so small that this is more a methodology.

[Fernando Bicho, executive]

Exactly. So starting with the first part why we made CHF 130 million versus CHF 113 million in the second quarter.

So basically, the statistics have been deteriorating in terms of court decisions. So there is a growing number of negative decisions. And as a consequence, we reflected this in the calculations that we have done. So in fact, this was the major driver of the higher amount of provisions in the quarter.

We did not change much the assumptions of the methodology. We just keep updating the data with the statistics about our own crisis and about market cases every single month.

Regarding the -- if we should expect a major review in the fourth quarter, this became a regular process. So every quarter, we will be assessing the level of provisions that we have for this risk.

The fourth quarter is always special in the sense because it's the closing quarter of the year. And so also implies a higher level of discussion with the auditors. And I don't have any specific expectation for now. We have just closed the third quarter, so if I would have something already, then we should have booked it already in the third quarter, let's say.

So -- but of course, we will review again the levels of provisioning and also we'll update the statistics. And we will take whatever is needed as a decision regarding the provisions. I don't -- so I don't know if -- I don't expect for now, anything extraordinary. But what I want to serve is that every quarter, every month, we are [ updating ]. And especially at the end of each quarter, we are reassessing everything according to the methodology and according to the market rate.

[Dariusz Górski, executive]

Thank you. So we remain in the subject of Swiss mortgages. The question is what is the percentage of clients that were offered Swiss franc mortgages conversion at 3.2, 3.0? Why the bank decided for such a move? Will this program be continued? What is the percentage of clients that would eventually receive such a conversion offer?

[Joao Jorge, executive]

Let me address this one. So we have been explaining since the beginning that we have open communication with all the customers and that we try to address also their challenges. Some time ago, the challenge was more that they would like to move house and so it was more the change of collateral maintaining the loan. So this was more what they were requesting.

1 year ago, due to the increase of sale, there is [ an income ] in the general population in Poland was more conditions for early repayment because this was more interesting as a solution for them. Lately, due to the radical cut in interest rates in Poland, it's more conversion. So every time, each customer have their own challenges. So these approaches are varied case by case. So it's not these programs that is mentioned or this percentage or -- so it's more a case by case. It's a lot addressed by the need of the customer also.

Sometimes, there is also some specific conditions even of the customer in terms of unemployed or not in terms of -- so we assess the bank issue. We assess the customer issue. We assess the solution that the customer also is proposing. And this is what we are going to do. So it's -- since the beginning, we think that we also need to find solutions and any solution that is solved, even if the percentage is not very, very big, is also better for the bank and for banking customer relations. So it's -- so there is not a general program or a percentage that we are doing. We are doing case by case, situation by situation, and this is our plan to continue.

[Dariusz Górski, executive]

The last question on Swiss franc mortgages is, what is the current status of Supreme Court work on guidance on Swiss franc mortgages court cases?

[Fernando Bicho, executive]

So I think maybe I can answer this one. I cannot answer it because basically, we don't know. So -- because we -- what we know, most of what we know, comes through the media, and there were some contradictory news on one side about preparation of something. On the other side, when we saw a recent interview, we concluded that maybe there is not going to be a general approach to the topic from the Chairman of the Supreme Court. So that's why some news have been contradictory. And so we don't have visibility about this topic for the time being.

[Dariusz Górski, executive]

Thank you. We also have a question on so-called floors. Could you comment on Wojciech's stance regarding frozen PLN mortgages? What is the downside to NII if all those floors would be removed?

[Joao Jorge, executive]

I think we should not comment in the question like that. I think it was clear even in statement of Wojciech that we were talking with Wojciech. And besides that, also, we are addressing this in a customer-by-customer situation. So it's -- so I would say like that. So it's not an assessment that we can do it like that. So it's -- we are still in discussions with Wojciech.

They recognize that it was very clear the contractual clause, but also alert us that we should also have an open mind for the decrease of interest rates. Of course, this is always a little bit more difficult for banks because when the legal maximum interest rate is by the law, but when we are forced it’s not so much, but we are addressing this.

[Dariusz Górski, executive]

There's a forward-looking question, which is actually implying an answer. Do you exclude participation in potential M&A?

[Joao Jorge, executive]

So I think that we always will look for all the opportunities, but truly, we are excluding. What we believe that is better for our stakeholders is really to make the transformation about the business model. Before -- and I saw that there was also a question in terms of the strategy. So maybe I can address the both of them.

So before, in Poland, the banking business would be or was increase the revenues faster than the costs. And mainly by higher volumes, and it was some control on the cost, but of course, they were growing. And put a lot of energy in the volumes.

With these radical changes of the interest rate environment, and especially because it's first time, the revenues -- the marginal revenues per product, they are really significant slower -- lower. So it's not possible just to have a solution that, okay, we need to sell more. We need to go big and we need to also to look and to change the marginal cost per transaction. So we need to change the marginal cost per product sold, and this is not easy. So this takes time. This needs also a lot of reengineering of processes, a lot of standardization and a lot of automatization.

And so this is what we think that we should focus at the moment. This is what we think is the best for the bank and to all the stakeholders. And this is also why we also want to take 1 year to go to the strategy again. So it was -- in the beginning, it was more the pandemic. So in beginning, because there is a question about the unit strategy. So in beginning was -- we were just, okay, it's not possible to make a strategy during 2020 because the COVID situation and all the change of the economical environment.

But now that we are more -- or we are seeing more a path that is going to happen in the future in terms of the pandemic and in terms of the economy. Now it's also -- we think that due to the radical change of the environment that we have, it's better if we are focused on making this business model transformation and this conquer for the effectiveness in terms of the bank. And to achieve this in 2021 is the works that we are doing over since 2020. So it's -- we see that in 2021, we will have the possibility to make the revision of strategy for the next 3 years. So '22, '23, '25. But for the time being, we are making here a short plan in taking the bank through this transformation to be able to catch back the profitability even in this low interest rate environment.

[Dariusz Górski, executive]

I think there's still we have left. We only have one question left. What is the offer in Bank Millennium investment program fund unit, structured deposit, shares in listed companies? This refers to the online investment program that we have launched, right?

[Joao Jorge, executive]

It's mainly investment funds. So the investment program, the PMI is investment funds embedded inside and that's it. It's not shares or structured deposits inside.

[Fernando Bicho, executive]

There is also a question if we are due to the second wave of the pandemic, if we are going to limit origination of loans. And if we continue to further increase the production of mortgage above PLN 1.8 billion, which...

[Joao Jorge, executive]

Yes. I think I addressed this one, but it's -- yes, it's just -- I think we -- in the mortgage, we see some stabilization at the level that we are doing. So it's -- we are thinking that the risk profile of the mortgage that we are underwriting at the moment are very positive. And also the spread -- the margin spread, it's interesting. So we think that it's a product that is still in demand, but -- and we are going to keep it.

And we believe that the second wave, of course, the speed of the second wave surprised everybody, but everybody was expecting. So it's -- there was, of course, some wishful thinking in all of us in our personal mind because the summer went so well. So we were already forecasting that maybe we could be surprising positive. But all the documents, all the forecasts, all the security plans of the bank and business continuity, we were forecasting a second wave. And even we increased a little bit the presence in the head office to reinforce the culture and the participation.

And in 31st of July, we heavily decreased it, again, forecasting that due to the reopen of the schools and the full season, we would have a peak in terms of contamination. So it's what we already -- but I must say, of course, the intensity of the last 2 weeks were not forecasted. This is clear.

But the second wave was forecasted. And in our business, more the lower projections, the way that we are working, we are forecasting just the impact of vaccination on the second half of 2021. So it's the full normalization, we are just forecasting at the end of 2021. And we are forecasting some normalization a little bit like the summer that we had in the first half of '21. But sometimes, of course, our positive mindset put us, okay, the vaccine is going to be approved at the end of the year. So in January or February, everything is okay.

We address that, of course, not. This is a massive production, a massive distribution, a massive vaccination program. So maybe in our business models, in our way of working, in our risk models, but also service models for our customers and everything, what we are forecasting is an improvement of the situation a little bit like we were in summer in the first half. And then, of course, then with vaccination at full normalization.

[Unknown Executive]

Meanwhile, last question has arrived. Can you address the outlook on costs, given there was a relatively fast rebound following the last lockdown? Was there any change in the approach?

[Joao Jorge, executive]

I will address generally, and then maybe Fernando can precise something. I think what we did, and I think we were clear already in the last quarter to explain this. So we anticipate what we were planning for 2 years. So in our -- and then we put a little bit also rationalization due to COVID.

But the first thing that we did it was we were planning to take 2 years to make some consolidation in the network and also some consolidation in some services.

And so as soon as we have this combined, so we have some challenges in terms of cost structure, but also we had more than 30% of decrease of the traffic, so we anticipate this. And as Fernando said, also taking a lot of -- taking some integration costs upfront.

This is one part that we did. But also, as I explained, we believe that it's crucial for the bank, reducing costs. So it's crucial for the bank, reducing costs in order to have this new business model that I was talking. So to have this marginal cost for product that we are selling lower because also the marginal revenue is going to be lower. So it's without saying any guidance or something like that. But this is something that we are -- cost control and management is something that the bank is going to keep in its plans in the near future.

[Dariusz Górski, executive]

Thank you very much.

[Fernando Bicho, executive]

Yes. And just -- so of course, we are not going now to make already statements about forward-looking guidance for the next year. But of course, we are exactly working in the proper planning for the next year and for the next year. Of course, we are already assuming a reduction in the costs especially due to this optimization that we are doing in the bank at the level of network and at the level of the head office. So we expect to have in next year reduction in the cost base versus the current year. I will not now guide to the range of expectations we are indicated, but we are exactly planning next year for another cost reduction versus the costs booked in the current year.

[Dariusz Górski, executive]

Thank you very much. I think it's also worth highlighting that the quarter-on-quarter slight increase in operating expenses was driven by restructuring costs. And we simply had to provision for these. And if you take these out, and there are PLN 15 million of these, then there was a drop on a quarter-on-quarter basis.

[Joao Jorge, executive]

Exactly.

[Dariusz Górski, executive]

Okay. Thank you all very much for your questions. And obviously, participants for answering those. Thank you very much. Stay healthy and keep the distance.

[Joao Jorge, executive]

Thank you.