Bank Millennium SA

WSE:MIL

Earnings Call Transcript 2021-Q3

[Dariusz Górski, executive]

Welcome, everyone, to Bank Millennium 3Q Results Call. Feels like -- a little bit like yesterday but it's already October, unfortunately. We are first, again, in terms of the speed of releasing the results to the market, and I hope we're also first in many other disciplines, so to speak, or rankings. You know the drill, first, we will present results and additional comments, then a Q&A session will follow. We have the usual participants, Mr. Joao Bras Jorge, our Chairman of the Board and CEO; and Mr. Fernando Bicho, our Deputy Chairman of the Board and CFO.

Gentlemen, the floor is yours.

[Fernando Bicho, executive]

Good afternoon, [Foreign Language] welcome to our results presentation. As usual, I will guide you through the presentation with 2 parts, one more dedicated to the financial performance and the second to the business development.

Going directly to the first part and starting with Page #5. As we had announced several quarters ago, we consider 2021 a transition year before the new strategy hold out. But at the same time, we had announced some short-term targets to be achieved during this year and they are being fulfilled, in fact, as you can see on this Page #5.

We have a net profit without FX -mortgage costs up by 74% year-on-year. We have a strong increase of sales of cash loans by 20% year-on-year and also a very strong year, in terms of origination of new mortgage loans at around PLN 7 billion year-to-date.

On the operational front, we continue to focus on operational efficiency, which is translating into continuation of the optimization of the branch network with the number of branches down by 7% year-to-date, and achieving a reported cost-to-income ratio below 46%. On the digital front, we have this ambitious target regarding the share of digital clients, which is already above 79%. And we continue to drive for innovation and during -- in recent months, we have launched a mobile app for junior customers of the bank.

Pages #6 and 7 show highlights of the key profit and loss items and key balance sheet and business items. We will go through them in detail in the next pages but as a quick snapshot, we can see the continuation of the recovery of net interest income translated into a growth of 2% -- 2.1% of NII versus the previous quarter. Also a strong growth, double-digit growth, of net commission income year-to-date versus the last year, and a decrease of operational cost by almost 10%.

At the same time, benefiting from much lower cost of credit risk and on the other side, much higher provisions for legal risk during the first 9 months of the year. The NIM also recovering and the cost to income, as I already mentioned, below 46% and on an adjusted basis at 43%.

Page 7 also shows the continuation of the solid trends of growth of business of the bank translated into reaching almost PLN 100 billion of customer funds, more than 2.6 million active customers, more than 2.2 million online and mobile customers.

At the same time, the loan growth is driven by mortgages with a significant reduction of the net value of the FX-mortgage portfolio.

Moving now to the details of the results on Page 8. So we -- of course, we -- as we have already announced, we still booked a quarterly loss in the third quarter of PLN 311 million, which is similar to the first quarter. But when we look at the underlying results, so excluding the FX-mortgage related costs, we have a clear improvement, which you can see on the top-right graph of Page 8, with a net result before this FX-mortgage related costs of PLN 257 million in the third quarter of the year, which is 34% above the same quarter of last year. The -- and if we calculate the ROE on an adjusted basis, so without these costs, the ROE will be above 12%. Operating income lower by 5% versus the third quarter of 2020, which was driven by the additional cost of settlements of FX-mortgage loans because the core income is already clearly growing.

Page #9, the main financial highlights of the third quarter and 9 months. This solid recovery of the net profit with a growth of 52% year-on-year, if we adjust the net profit by the FX-mortgage provisions and collected legal costs and the costs connected with settlements with clients as well as evenly distribution of the BFG costs. The NII rebounding by and the NIM already up by 12 basis points year-on-year on a quarterly basis, fees up by 11%, and the cost reduction by 10% year-on-year.

On Page 10, we can see the evolution of the net interest income, which shows a clear rebound. In the third quarter, the net interest income grew by 2% year-on-year and on an accumulated basis, it's only lower by 1% versus the first 9 months of last year. And so we have gradually been eliminating the negative deviation versus of last year. Our projection was that we would already close the year with an NII above last year and of course, now with the recent increase of interest rates, this will be even more than achieved.

It is also visible the recovery of the net interest margin from the lowest level that was achieved in the third quarter of 2020, and we are already above 2.6% quarterly NIM.

And on the other side, the net fee and commission income also show a solid performance, 11% growth year-on-year. The third quarter fee and commission income was 12% above the August quarter of 2020. And we see a clear progress in fee and commission income connected with account service and others, cards and loans.

Moving to the cost side on Page 11. So total operating costs are lower by 10% year-on-year, and this is an effect on one side of lower contributions to the Banking Guarantee Fund and on the other side, a number of cost-saving initiatives. If we exclude BFG and integration costs, still total operating costs are lower by 3% year-on-year. And this is both driven by staff costs and admin costs.

The reduction of costs is following the gradual reduction in the number of employees, which at the end of the third quarter, the number was at 6,366, so a reduction of more than 800 in the last 12 months. And by the optimization of the branch network, which has the biggest impact last year, following the merger with Euro Bank, but still, in the last 12 months, we have reduced the number of branches by 61.

Regarding the quality of the credit portfolio on Page 12, it remains very strong with impaired loan ratio or NPA ratio of 4.7%. And this is supporting the relatively low cost of risk throughout this year. In the third quarter, total cost of risk reached 42 basis points over total loans, bringing the total 9 months cost of risk to 36 basis points over total loans, and this is still clearly below our historical average and the good performance is happening both in the retail and in the corporate portfolio.

Page 13, moving now to the FX-mortgage portfolio. We continue to have a drive in order to decrease the absolute and relative size of the FX-mortgage portfolio and the portfolio in currency decreased by 12% just in the first 9 months of the year. And the portfolio is being diluted in the total loan portfolio, following the accelerated pace of amortization or conversion to Polish zloty and also after the deduction of part of the legal risk provisions that we have been doing. And so at the end of the third quarter, the share of Bank Millennium originated FX-mortgage in total loans was at 12.6%.

In the third quarter, we have still noticed continuation of the inflow of new court cases, which you also can see the evolution on the bottom-left graph. But the inflow of court cases was very similar to the second quarter. And on the other side, we have still reinforced the provisions for -- against the legal risk. As we announced already 2 weeks ago, we created in the third quarter with P&L impact, PLN 452 million of provisions for legal risk for the Bank Millennium originated FX-mortgage portfolio, bringing the total accumulated provisions to over PLN 2.3 billion.

This means, as you can see on Page 14, that the total accumulated provisions now represent 20 -- more than 20% of the gross FX-mortgage exposure of Bank Millennium. So continuation -- continuing the acceleration of the coverage of the legal risk. And we believe, based on the recent trends, that we are, let's say, having above average -- above market average coverage of the FX-mortgage portfolio.

Another important driver of the reduction of the FX-mortgage portfolio is the negotiations with customers of conversions of the loans to Polish zloty or early repayments. In the bottom left of Page 14, you can see the comparison of the inflow of court cases with the amicable settlements with customers through conversions or full early repayments. And as it is visible in the last 2 quarters, the number of amicable settlements clearly exceeded the number of new court cases. Of course, the settlements imply a cost, and this cost was significant in the third quarter and reached almost PLN 146 million, but it is helping to, as I mentioned, to reduce the absolute and relative size of the FX-mortgage portfolio and in order -- and also mitigating the legal risk.

On Page 15, liquidity continues strong, and the group capital ratios are still much above the minimum requirements with an excess of close to 4 percentage points of Tier 1 and TCR over the minimum requirements.

So moving now to the second part of the presentation about business development with the main highlights on Page 17. We can say that retail business is growing fast, already above pre-COVID levels, and also the corporate business shows clear signs of improvement. So overall, loan growth was 7% versus 1 year ago, strong market sales of PLN 7 billion, cash loan sales higher by 20%, investment products higher by 16% versus 1 year ago. Active digital customers at 2.2 million and customer deposits growing 5% year-on-year.

Moving to Page 18. The strong growth of retail loans is being driven by PLN mortgages. Overall, total mortgage loans grew 9%. But of course, this was -- the growth was offset by the reduction of the FX-mortgage portfolio. But already, we show solid growth than most companies by 5% year-on-year and consumer loans by 4% year-on-year. At the same time, the structure of the loan portfolio continues to change with an increase of the share of PLN mortgages to 40% and the dilution of the FX-mortgage portfolio, as I already mentioned.

On the deposits and customer funds side, here, we had flat deposits quarter-on-quarter, but this is a result also of the completely not aggressive position of the bank, in terms of paying for deposits. And so overall, year-on-year, we have a growth of retail deposits by 5% and corporate deposits by 6%. And on the investment products, a growth of 16%, as I mentioned, although in the third quarter, the growth was smaller, only by 1%.

On Page 19, looking in more detail to the retail portfolio. So a very strong growth of PLN mortgages by 27% year-on-year and also a very solid growth of consumer loans by 4%. The retail customer funds driven by the growth of current accounts and savings accounts, and with a decrease year-on-year of term deposits, which is natural after the having interest rates almost at 0 level.

The mortgage sales were very strong in the third quarter, PLN 2.25 billion, slightly below the third quarter, but the trend continues to be very strong. And year-to-date, the growth of mortgage origination is 50% above the same period of last year and with a market share above 12%. In the cash loan sales, the rebound is also visible, almost 1.6 billion origination in the third quarter, year-on-year accumulated growth of 20% and a market share above 10%.

Still on retail, the active customers grew by 32,000 versus the previous quarter. And this is also being followed by the growth of the number of current accounts after the cleaning of some inactive accounts that we have done 2 quarters ago. And on -- the same effort is happening on the micro-business segment with a growth of 9,000 year-on-year, and also a sustainable growth of 98,000 cards during the last 12 months between debit and credit -- between -- in debit cards and 8,000 in credit cards.

Moving to Page 21. On the digital front, the numbers are really solid, as I already mentioned, more than 2.2 million active digital users, of which 1.9 million mobile only users, more than 1 million BLIK users in the third quarter and with a significant growth of BLIK transactions during the third quarter, when compared with the same period of 2020. And also important to the fact that we had 1.8 million transactions authorized by clients through the mobile app, contributing to a significant reduction in the conception of the app as it is shown on this Page 22.

Page 23, still about digital, the importance of this channel for investments. The digital channels already represent 50% of investment product sales and 55% of the MiFID questionnaires in August and September were already completed by clients online.

Page 24, the same development in our Goodie smartshopping platform, with more than 100,000 app downloads in the third quarter and a significant amount of turnover of cashback in the third quarter, PLN 141 million and PLN 2.8 million of cashback returned to customers.

On Page 25, moving now to the corporate business, a clear rebound on the lending side. So especially visible in the growth of factoring portfolio by 13% year-on-year and also leasing by 5% year-on-year, and leasing has been probably the most affected segment of the corporate business during the pandemic but now it shows a clear rebound. And finally, other corporate loans were flat year-on-year as we have been focusing on lending, which -- fulfilling minimum profitability conditions and so it has been a more selective growth that we have been applying in recent months. There is also a strong pickup in transaction activity and also we continued the process of digitalization of the client service.

On Page 26, you can see the clear rebound in the leasing that I was mentioning. The origination of leasing was above PLN 1 billion in the second and third quarter, and in the first 9 months of the year, leasing sales were 65% higher than in the same period of last year. And the same picture for factoring with the growth of the factoring turnover by 23% year-on-year.

So these are the most important highlights of our results for the third quarter and 9 months of the year. And so now we are open to the questions.

Thank you.

[Dariusz Górski, executive]

Thank you very much, Fernando. As usual, we'll try to group questions into themes or subjects for the convenience of the listeners or the viewers. First, it looks like we have done a very good job in terms of expanding our historical results because there are very few questions about past. But nonetheless, there are some.

First question, I did not quite understand that maybe you'll be able to get it better. The question is what is the reason for higher write-offs in 3Q compared to the previous quarter. It may be relating to credit charges, right, simply?

[Fernando Bicho, executive]

First of all, in the second quarter and in the first quarter, we had a partial support to the cost of risk from the sales of NPLs, which are shown on Page 12. So this is one reason in the third quarter, we had no sales of NPLs. In fact, this is the main reason versus the second quarter because in the second quarter, we had PLN 90 million of -- that comes from the -- that came from the sale of NPLs. The second also is that, as it is visible in this page, we had a negative cost of risk in corporate during the second quarter. And so of course, we are still growing, so we cannot assume that the cost of risk of corporate will continue to be negative. And so it was very small, very slightly positive, 5 basis points in the third quarter, but basically, these 2 elements together, together with the growth of the loan portfolio because we cannot forget that we are growing the loan portfolio, not contracting the loan portfolio. So the growth of the loan portfolio also drives some increase in the amount of the provisions. But as an explanation for the average cost of risk that is the most -- these are the -- these were the drivers.

[Dariusz Górski, executive]

A question for Mr. Joao Bras Jorge. The analysts have spotted that we had a drop in disbursement of mortgages in the third quarter. They ask for a reason. They ask for outlook. And also there's a question of probably a potential borrower, because the question is about how long does it take Millennium to issue a credit decision?

[Joao Jorge, executive]

I'm not so sure but I have the memory that we said in the last quarter meeting, maybe it was with the press, I don't remember, that we were doing a little bit more than we were forecasting or that we wanted. And so we -- there was a big discussion how to reduce -- not to reduce the sales in a product that the customers like, the network like to sell and everybody likes in the bank. And -- but we also understand that we need to have a quite balanced position and so we end up making this reduction, forcing a little bit in the process. And we have this idea that, of course, it will not be for everything. Of course, there will be always special programs, but to digitalize as much as possible the process. Otherwise, it would not even be possible to disburse 50% more than the first 3 quarters of last year.

And we continue with efficiency, reducing people, especially mortgage that in the past, in the previous process, was a very paper and human intensive process. So with this -- we like this kind of volumes that we are having. Maybe we could go again to this 2.5, but we are not obsessed and we would like to have this kind of production for a long period and not have excess of production during some time even because although, it's low consumption of capital, there is some consumption of capital. We have been doing big effort in terms of risk-weighted assets in -- of corporate side, reducing exposures that do not have side business, less interesting margins. And of course, mortgage is long consumption of capital.

But we know that we need to preserve capital during this period so we prefer to have this for a short period of time or for a long period of time, these levels of production, so between PLN 800 million disbursement per month. It should be the level that we can do. We can do a little bit more, but not much more. That's our target. If I remember well, we have -- we are working at the moment with -- for that [indiscernible]. And so if the application due, it is done in the proper way, we should be able to have further its time to 2 years.

This excessive fast time, 2 years, is creating some issues because then the customers are asking to go a little bit lower or slower to have time to prepareing all the process from their side but we are very happy with this redesign of the process that we did and we believe that this also give inspiration for some reengineering in other process and continue with the efficiency that we started 1 year ago.

[Dariusz Górski, executive]

Thank you very much. As you have heard, you're more than welcome to come to Bank Millennium and apply for a loan and you will be processed, so to speak. If you're not, you can invite me [indiscernible]. We don't want to be too quick because it's causing a lot of discomfort to our clients apparently.

Sticking to results per se related questions. There was a question about the reason behind the drop in credit fees in 3Q, was it related to lower origination of mortgages that we just touched upon? And what we think is the outlook for fees in general for the rest of the year and for 2020?

[Fernando Bicho, executive]

We are showing on Page 10 of the presentation, the breakdown of the fees. So in fact, it came from 2 sides from 3, in fact. So we had a little bit lower loan fees, slightly also a little bit lower insurance fees because we had some settlements -- annual settlements in the second quarter. And -- but in general, not all the fees and commission income are completely regular through time. So we need to take this into consideration. And in the second quarter, we had some, let's say, certain income in insurance that were beneficial for the drive. But I think what -- but knowing that we -- this is not a regular item in every single quarter. That's why I highlighted that versus the same quarter of last year, we had a growth of 12%. So -- and I think what you -- I think what is also important is to take into consideration knowing that there is sometimes some seasonality of some of the fees that still on a quarterly basis, year-on-year, we still have a solid growth of 12%.

[Dariusz Górski, executive]

Sticking to Q-on-Q volatility of movements. There was also a question about the costs, whether there were any one-off admin costs in the third quarter because they increased on a quarter-on-quarter basis? And following up on this, what's the outlook for the remainder of the year in 2022, especially in light of the HR cost inflation?

[Fernando Bicho, executive]

I want to say the first part. So in the second quarter, we also had some extraordinary settlements of costs that reduced, in fact, the cost base of the second quarter and which did not occur in the third quarter. So that's why there is this comparison, this growth versus the previous quarter, although, if we compare with the third quarter of last year, the costs are still clearly lower than the third quarter of last year.

[Joao Jorge, executive]

In terms of HR costs, we are managing as we can. There is clearly a huge salary pressure in Poland. We -- there was this salary pressure already before COVID pandemia. With pandemic situation, there was some, I would say, during last year, some slowdown, but it is speeding up again. And this means that somehow we are offsetting the headcount reductions that we are having and the benefits of this headcount reduction with some salary raises. Also there is something that we also need to keep in mind is that the business model is changing and also the structure and the type of employee that the bank has is also changing. So it's -- there is an increase in a constant basis of IT, data science, customer experience professionals that they are in high demand and at a high cost for the bank. And so this is something that -- it's a reality that is for staying and the bank will manage in a way that we will retain these best people and will offset, if not all the personnel costs pressure, at least partially, by continuously improving in the process and having, as time goes by, less and less headcount.

[Dariusz Górski, executive]

To finish off with results-related questions. There was a question about net losses eroding capital and also about our view on the current capital position and excess of capital. And within that context, there was also questions about bond yields, which are rising and whether we expect them to have a negative impact on our 4Q capital and capital ratios?

[Fernando Bicho, executive]

So regarding capital. So of course, when we are having quarterly losses, this is -- of course, this is having an effect on own funds, which is also partially offset by the careful management of risk-weighted assets, which we have been doing and especially, in the corporate area. So -- But still, as we have shown, we have a significant excess of capital ratios over the minimum requirements. So this is clear.

And second, we also believe that all the efforts that we are doing now, in terms of provisioning and in terms of mitigation the legal risk, also will contribute sooner or later, to the gradual reduction or even elimination of the additional capital charge that we have, which is still relatively high. We have a Pillar 2 buffer of 3.4 percentage points. And we believe that through time, with the dilution and reduction of the FX-mortgage portfolio and mitigation of the legal risks, we can continue this process of reduction of this Pillar 2 buffer and ultimately, to expect its elimination, which will release further capital for the bank. So this is what I can say regarding the capital. The other question was?

[Dariusz Górski, executive]

Bond yields.

[Fernando Bicho, executive]

So this correction on the market already had impact on the third quarter as it is shown in our financial report, in terms of other comprehensive income. So this is -- so I think this is clearly stated there. There was a further correction in October, which will further imply a correction in the valuation of the bond portfolio. We were not very aggressive in terms of the bond portfolio so -- because basically, our bond portfolio was essentially concentrated in maturities up to 4 years. So of course, there is always a negative mark-to-market because all the yield curves moved up. But still, we believe that within -- the overall size of the bank, this is relatively diluted. So I think we will not have a major impact coming from that.

[Dariusz Górski, executive]

It sounds like the interest rate hikes have sparkled attention and this is becoming a hot topic again. And we had various questions relating to this subject. In general, the question is about our sensitivity to interest rate hike, whether we repeat our sensitivity from the first half report, what is the outlook on NII as a result, whether we expect growth in revenues in the fourth quarter as a result of the first 40 basis point hike. It's around this subject.

[Fernando Bicho, executive]

I will start answering the question. So first of all, as I mentioned during the presentation, even without interest rate -- the recent interest rate increase, we were already in a clear trend of finishing the year with net interest income in -- for the full year 2021, above the full year 2020. And this was going to be achieved clearly. If you remember, in the end of the first quarter, we were 11% down year-on-year.

In the end of the second quarter, 4% down year-on-year, in the end of the third quarter, 1% down. So we were already clearly in a trend of reaching the full year '21 above full year '20. Of course, the recent increase further makes us comfortable regarding the achievement of that result. In terms of sensitivity, we stated the sensitivity, both in our first half report and once again now. So we stated that an increase of 100% or 100 basis points of the yield curve, would translate into a growth of NII, of 11% in the next 12 months versus the previous 12 months. So this is the sensitivity that we have disclosed. This is a static calculation, obviously.

So in practice, of course, it can be better or worse, depending on concrete actions that are taken in terms of repricing of products, the repricing both on the lending and on the deposit side, so that the sensitivity, as I mentioned, is 11% positive to a 100 basis points parallel shift in the yield curve.

[Joao Jorge, executive]

In our view, and I think we said this already in the past conferences, the last interest rate cut of 40 basis points on summer 2020 was already outdated. So it was -- if you remember well in the time, NBP forecast of a drop of GDP of 5.4% but the banks that they were using a frequency data, they were already forecasting just 3% as it was, for example, our case. And so it was a little bit excessive and we are offsetting this because also it was visible that the inflation, even before the energy crisis, it was clear that the inflation was not just a supply issue. It was coming back pressure in salaries that we saw in 2018 and '19.

And so this first 40 basis is an adjustment. We are not foreseeing a lot of corrections to be there. Of course, maybe we will see some in corporate deposits some adjustments, some fees that were charged when the interest rates were really close to 0 can disappear on the long run. Of course, there will be an interesting part in terms of new production of cash loans and old production that will readjust meanwhile, this is obvious. But this is the first impact. Then as we will have other hikes of interest rates in the future, then we will see some adjustments, and we cannot also -- we can't also believe that the banks will appropriate all of the benefits of the hikes of the interest rates, there will be always some part that will be also offset by increase of cost of deposits, of savings later on. Also if there will be much higher interest in terms of consumer loans, maybe there will be some offset in terms of commission.

So it's -- then it needs to be seen as -- I think the first one is -- it's just the readjustment without the needs of the banks to compensate a lot this initial part of 40 basis points. But if we have another 50 and another 50, there will be also some offset that we need to start to have this in mind as well. So it will not just be benefiting loans and 0 cost in deposits, there will be somehow some -- of course, there will be benefits for the bank, but it will not be at 100% of the interest rate hike.

[Dariusz Górski, executive]

IR is not typically involved in sales of banking products. But apparently, we have a person here on the call who is also interested in taking a consumer loan. The question is, what is the typical interest rate in consumer loan? And will it go up with rate hikes and by how much?

[Joao Jorge, executive]

We believe that consumer loans are attached or, let's say, the different way. The system of the maximum interest rate in Poland is very conservative. And so the majority of our production is at -- it's at maximum of interest rate, let's call it like that. And it's just lower when we make specific actions that we do for customers that are what we call it, new to the product, so to improve penetration of the product in our database, shorter maturities, shorter also -- or smaller amount that also we do to improve the cross-selling of our database. So it's the maximum and as the maximum will go up, we will also go up in that perspective.

Of course, it may be a specific customer with a specific transaction. I don't know what we are doing at the moment. But in our view, this is the right pricing. So we will move with the -- and I think this is the important part of the question, is that if we will go up with the maximum interest rates as the interest rates go up with the increase of the reference rate, then yes, yes, I would say, almost all the production or at least the vast majority of the production will go at the same pace as the interest rates will go up and the maximum interest rate will go up.

[Dariusz Górski, executive]

We're through with, let's say, technical questions, and we can congratulate ourselves Fernando, on disclosure of legal risk because there was no question about legal risk provisions this time. However, we've probably done less well on the settlement front or maybe it's a novelty because we have many questions about settlement. And again, many permutations, but they all circle around one question. First of all, why is there a difference between the cost of settlements between third quarter and the second quarter, given that the difference in the number of conversions and full repayments were so low? People have asked about specific terms, and there's also a few questions about the tax treatment. What is the difference between FX legal risk provisions and cost of settlement with customers?

[Fernando Bicho, executive]

I will try to summarize the main points of all these questions. So first of all, as you -- as we are showing on Page 13 and 14. In fact, we are trying to provide as much as possible disclosure regarding the evolution of the provisions on one side, the evolution of the number of court cases on another, and the evolution of the amicable agreement with clients, which cover conversions to Polish zloty, and early repayments of loans here in these pages, we have shown full the number of conversions to Polish zloty and full early repayments. On the top of that, we still have some additional partial early repayments that are also negotiated.

The second thing is that this is a process that already started quite some time ago. Of course, now it has achieved a lot of visibility due to the number of agreements that were signed. But this is a process that was already started many quarters ago. Even I remember that we have stated in some time in the quarterly report that we have a constructive approach in order to find solutions with the customers. And of course, this constructive approach was to try to have solutions that could be agreed between us and each individual customer. The conditions for each customers are different and depend on -- the outcome for us and the loss for us depends on the specific characteristics of the loan.

So it depends on, when the customer took the loan? At which FX rate he took the loan? How long was the loan, for how long was the loan? What was the average amount of the loan? What was the current outstanding and so on and so on. So there are a number of factors that impact. And so that's why we don't want to enter into averages because each customer is -- each customer is a customer, each loan has a different situation. And that's why one of the differences between the second quarter and the third quarter is that although the number of the negotiations was not much, much higher than the second quarter, although still it was 300 more, comparing the -- between the second quarter and third quarter. The profile of the loans that were negotiated in the third quarter probably involved bigger amount loans and also some of these characteristics turned out to imply bigger losses for us than the ones that were settled in the second quarter.

So -- this is what we can say about the -- so it's not so much about, are we giving more now versus what we were giving before? This is not exactly the issue. The issue is that things are evolving, also the FX rate, unfortunately, has been going against us. So each time that the FX rate is worse, that is Swiss franc is stronger also our loss is increasing. So there are a number of factors that -- but the nature of each loan that is settled has a lot of importance for the final outcome. So this process is still going on. So we are continuing the effort in the fourth quarter. We will continue to show negotiations. We also had this question today in the morning regarding expectations -- from the journalists, expectations about further settlements.

This something that it is ongoing. As long as there will be interest from the customer side, we are always interested. So -- and we are always available for the negotiation and doesn't -- so this is completely -- does not -- we are not setting a time limit for this. We are always open for the negotiations. And so we expect that at least during the fourth quarter, we will have still a good price of the negotiations. The third quarter was exceptional, in fact. But we still expect a good number of agreements to be signed in the fourth quarter. Regarding the tax treatment. So tax treatment, the provisions that we have been doing and due to the fact that most of the recent trends of courts are more towards invalidity of the loan agreements. So in general, in the third quarter, basically the provisions that were done did not have any -- we did not consider for the time being, any tax effect. So the gross impact was almost equal to the net impact. It does not mean that it will be like this, but in a conservative way, this is how we have treated this. The settlements were booked as an FX loss and so this part, yes, we considered.

[Dariusz Górski, executive]

Within this context, there was also quite a number of questions about the value or volume of settled mortgages, which we did not provide. And honestly, we do not intend to provide it because those would be a free lunch. You can divide one by the other, and this will be due to wrong conclusions.

[Fernando Bicho, executive]

Yes. So we don't want to provide that average because, exactly as I mentioned, each -- these are individual negotiations. This is not a general offer. These is -- these are individual negotiations which are based on the concrete conditions of each borrower.

[Dariusz Górski, executive]

There were also a few technical questions but I'd rather take them offline about our market share and a couple of other nuances which I don't think require the whole audience to listen to within the context of your time, which is obviously very precious. There was few questions about -- there was one question about -- I wrongly stated there were no questions about legal risk provision, there was one, and it was, how much of this was allocated? And you can find the answer in the FX risk section, but for your benefit, out of PLN 2.4 billion at Bank Millennium, PLN 2.1 million was allocated, but all the details are there. So just find it in the report.

[Fernando Bicho, executive]

There is also a question about court verdict in the first instance versus second instance verdicts. So in the section of our quarterly report, where we described the legal status and the evolution of the court cases, so it is stated that, I think we have 90-something percent of the loans still before -- 94% or 96% of the loans still before first instance verdict. So we have an extremely small number of first instance verdicts and even smaller of second instance verdicts. So the first instance verdict -- in first instance verdict, in the recent times have been very negative because unfortunately, the court started to automatically issuing decisions without taking care about the proper circumstances and analysis of the merits of the case. So in the second instance, the picture is more blurred.

So there is less visible distinction, although still the trend is negative. But I should remind that there are still important issues, which are not clear and which can significantly affect the out -- the final outcome of the cases as well as the amount of the losses, mainly we -- it's still not clear the right of the banks to be entitled to compensation for the uses of capital. This is something -- it's one of the pending questions in the Supreme Court and also in the European Court of Justice. If this question will be finally clarified as we hope that the banks are entitled to this conversation, of course, this would change the picture in terms of the provisions that are being done. And we think also that would contribute to a much more constructive approach from the banks and from the borrowers in order to reach amicable settlements.

[Dariusz Górski, executive]

Sticking to the FX-mortgage risk. There was a question about our estimate of the maximum loss on the portfolio. It was actually relating to our year-end '20 number, which was 2.4. But obviously, we continue to provide fresh numbers. And also again, I would direct you to the FX risk section because this time, we provided a lot of data PLN 3.5 billion is the new number, but there are also other scenarios provided, so you can see the differences between each of them. And lastly, there are a few questions regarding the outlook about cost of risk, fee, cost, lending volumes next year. But I wonder if we actually want to answer them now because not far away from here in terms of time, we will meet again, because most likely in early December, we will be presenting to the market our mid-term strategy. And maybe this will be a better opportunity to discuss about 2022 and mid-term outlook, unless the gentlemen want very much to share your thoughts on 2020 now?

[Joao Jorge, executive]

We are working on that. And so it is exactly this in the beginning of December. It will be adequate time also. We are quite optimistic for the Polish economy. And for the capacity of the bank to take opportunity on these developments, and we keep our target of having in 2021 and 2022 the majority, not totally, but majority of the burn of this legacy risk. And just a flavor because I know that it's complex for understanding that how this process is done and everything. So we have more than 100 negotiators and these negotiators, they go through the process, always the same person to the customer.

So we -- because it's a journey that is also complex to the person. It's -- we are converting credit, we are unwinding a position, we are also explaining and a lot of information was done, a lot of expectations were done, a lot of press is done, a lot of sometimes conversation with lawyers were done. We have -- any settlement that we are talking about, it's between 5 to -- 4 to 5 conversations with the customer. So it's a process that takes a long time and it's complex for both sides. So each case is really a case. So it's not an offer that we launch through internet and say, everybody take it or not. Even so we recognize a lot of merits of the possibility of a solution like that. And in due time, we will take this decision. But now it's more we are reacting to what is the expectation of a customer. And sometimes these expectations connected with installment, sometimes there is expectation of selling the asset and then just repay and move forward, sometimes it's looking for conversion and elimination of the risk or sometimes also some psychological sharing of the burn of this non-expected depreciation of zloty.

So it's a mix, it's a process we took a long time to achieve this. As Fernando said and we started a long time ago. And last year, in 2020, we made 1,500 or something more settlement, so it was a process that during 2020 also we started. And there is wave, sometimes there is a big interest from customers, sometimes a little bit less, and it's not what we are forecasting. For example, we are forecasting less activity at year-end. Maybe it's going to be exactly the opposite and there is a lot of people that wants to solve their issue before the year-end, so we don't know. We believe that each case that is solved is good for the bank in terms of reducing the risks of this legacy portfolio but it's also good for the customers and solving this situation that is not comfortable to anybody.

[Dariusz Górski, executive]

I'll try to earn my sales bonus again. So do come to Bank Millennium either for conversion, settlements, new product, whatever. Do come and talk to us. Fernando, do you have any questions that are interesting for you to answer? I have to say that Fernando is very diligent. He goes to the rest in small steps, and he doesn't like to omit any question, which is a bit scary for an IR person, but life is as it is. Any questions that you would like?

[Fernando Bicho, executive]

I think we covered most of them but some technical issues will require further clarification.

[Dariusz Górski, executive]

Thank you very much to all the yours for your presence, your time and your interest, and obviously, all your questions. If we omitted any of your questions, I do apologize for that. It was not intentional and if you feel that any of your questions have not been answered, please do contact IR department. We will be happy to help and answer.

Gentlemen, thank you very much for your time. And the viewers will -- you will hear from us shortly, as we said, before the end of the year, we will likely come back and we'll share our thoughts about near-term plans and prospects. So it's not the time for the new year greetings yet or Christmas greetings. So we'll -- you'll hear from us again.

By the time, keep safe, stay healthy and good luck. Thank you very much.