Bank Millennium SA

WSE:MIL

Earnings Call Transcript 2020-Q4

[Dariusz Górski, executive]

Good afternoon, everyone. Welcome to Bank Millennium 4Q 2020 Results Call. With us, we have the Chairman of the Board, Mr. Joao Bras Jorge; and Mr. Fernando Bicho, Deputy Chairman of the Board and the Chief Financial Officer. Although we tried to bring back the pre-COVID spirits by gathering in the same room, unfortunately, the audience cannot be here with us. So we'll stick to the usual drill and the usual structure of the meeting. First, Mr. Bicho will briefly present the recent development and the results. Then a Q&A session will follow. [Operator Instructions]

Gentlemen, the floor is yours.

[Fernando Bicho, executive]

Thank you. Good afternoon. Thank you for attending this presentation. We will start just with some brief information about management under these pandemic times. So as we just remind on Page #5 that during this period of time, of course, our very high focus has been on protection of -- the safety of employees and customers and, at the same time, ensuring a possibility for our customers to do transactions and banking in a safely and remotely way from home.

We also have continued to implement a number of initiatives that facilitate also the contact with the customers and also the quality of the service, such as the online tracking of mortgage applications on the retail side and also on the other side, translated into the increasing share of electronic signature in the processes in corporate banking.

Of course, one of the relevant points of these banking in COVID-19 pandemic times was the credit holidays that were made available to clients. The status is shown on Page #6. At the end of the year, we had already a very small exposure still under the credit holidays, PLN 561 million, which represented only 0.7% of the total loan portfolio. And specifically, the public moratoria represented really a very small part, only 444 applications; PLN 53 million of outstanding, which represented only 0.1% of total portfolio.

So as we had already presented in previous quarters, the holidays -- the credit holidays expired especially during the fourth quarter, as you can see on the top right graph. And what is important is also that the quality of the expired credit holidays, clients still remains good. We have included here indicators that show that from the mortgage loans -- from the PLN mortgage loans, only 1.1% was overdue. 2.1% of the holidays in FX mortgage and 5% of the consumer loans. So overall -- from the overall amount of loans under credit holidays that already expired, only 2.5% has some kind of delay as of the end of the year.

The recovery of the activity and normal life continues, as illustrated also on Page #7, with continuation of the increase in e-payments, also return to normality in terms of the number of the debit card transactions. On Page #8, we would like to stress the fact that despite these times that we are living, customer satisfaction has remained high. And this is shown by different rankings where Bank Millennium is positioned always on the top 3 ranking in items such as general customer choice, best quality of the branch service, best quality in terms of remote services, appreciation by the customers. So in all these indicators, the bank has been able to rank in the top 3, and also keeping the retail NPS indicator at a stable level versus previous years, when, of course, this year, in 2020, it was more challenging due to the restrictions in terms of the service in branches.

On Page 9, we consider 2021 to be a transition year before we will roll out a new strategy. So taking into consideration still the uncertainty that still remains and these quick changes that are taking place due to this pandemic, we have concrete objectives to be achieved in 2021. And then in the second half of the year we will present the new strategy for the next 3 years. And so we are focused on one side, on quickly recovering the results that were affected by this pandemic and by the consequent -- subsequent cut of interest rates. And we intend to achieve this by improving the business results through better pricing and higher sales of core products, in which we expect to achieve a double-digit growth of cash loan sales and higher mortgage sales than in the previous year, and also a rebound in the growth of the corporate loan book above PLN 1 billion.

The second important point is to focus on operational efficiency, which involves reengineering of processes, automatization, standardization and simplification, with significant increases in productivity. The optimization of the branch network was largely done already in 2020. So only some additional fine-tuning will be happening. And we target an improvement in the cost-to-income ratio to around 47% in 2021. The third important focus is on full digitalization, where we have the target of exceeding the level of 80% of digital customers in the active customer base by the end of 2021, with a significantly digitalization of sales processes, keeping top-notch customer experience and expanding the digital customer base beyond the current age segments.

So now, also quickly, status of the integration and synergies deriving from the Euro Bank transaction. We have here the status as of the end of 2020, where it is visible that we already had a net impact pretax of synergies of PLN 100 million. So we have been fulfilling the plan that was originally announced. And the amount of synergies is expected to double during 2021 due to the fact that the remaining integration costs that still are to be incurred are small, while we will be capturing the full benefits of the acquisition and restructuring that was done in the meantime. The more detail is shown on Page 12, where, as I mentioned, the remaining integration costs to be incurred are marginal. And as a consequence, the gross synergies will be almost fully appropriated between 2021 and 2022, as originally announced.

Moving now to the performance of the bank in the fourth quarter and in the full year of 2020. So we finished the year with a positive net profit of PLN 23 million. Of course, this represents a substantial reduction versus the previous year due to the combination of some extraordinary events, of which the biggest was the significant increase in the provisions for FX mortgage legal risk, which increased by more than PLN 400 million, so -- and reaching PLN 714 million in 2020.

Still, I would highlight that we had overall growth of operating income of 3%. And inside this operating income, we had a growth of net interest income of 3.3% and the growth of commissions by 6.7%, of course, helped by the acquisition and merger with Euro Bank. But still shows a significant higher growth in operating income than the growth of the cost that we still have due to the same reason. And so finally, the much lower net profit was a consequence of this additional provisions for FX mortgage legal risk and also for some increase in provisions for credit risk, part of them directly attributable to the impacts of the pandemic.

We have, finally, in the year 2020 a net interest margin of 2.61%, a drop from 2.84% in the previous year, but with already a small recovery in the fourth quarter by 4 basis points versus the previous quarter. Overall, the cost-to-income reached 49% on a reported basis or 46.7%, if we would exclude extraordinary impacts.

On Page 15, some additional indicators, where we would highlight the solid growth of the loan portfolio by 6.2%, or 8.7%, if we would exclude the FX mortgage loans, with a small increase of deposits due to the significant repricing that we have done in a very quick way from the moment that NBP has cut the interest rates to almost 0. Keeping also, at the same time, a solid asset quality. We kept the impaired loan ratio, or stage 3 ratio, below 5%, while improving the coverage ratio throughout the year; and also finishing the year with very strong capital ratio still with a total capital ratio at 19.5%. At the same time, I will also highlight the significant growth in online and mobile customers that grew more than 200,000 during the year, crossing more than 2 million at the end of the year.

So Page 16 is just the highlights of the more relevant indicators for the fourth quarter and for the full year. Apart from what I already mentioned, we would highlight the good performance in fee and commission income in the fourth quarter with a growth of 7% and the decrease in staff costs by 10% quarter-on-quarter. On a yearly basis, again, the stronger growth of revenues than the costs, of course, especially helped by the transaction with Euro Bank and the increase of the coverage ratio of the NPLs over 90 days by provisions.

Moving on to Page 17. We here -- illustrate here in more detail the evolution of the results of the bank. So as we had already announced 1 week ago, through a current report, we booked a net loss of PLN 109 million in the fourth quarter as a consequence of the significant additional provisions for FX mortgage legal risk. Year-on-year, excluding extraordinary items, we had a drop of net profit by 23%. And we have without this -- we would have without this extraordinary items a return on equity of around 7.8%. So we are stressing these numbers also to show the capacity of generation of results by the bank before the impact of these extraordinary items.

Page 18 illustrates the evolution of net interest income. There was still a small drop by 0.6% versus the third quarter. This was the result of some reduction in the overall balance sheet, but especially in the bond portfolio, and also with some accounting impact from the end of the credit holidays. But on the other side, the positive aspect is that the net interest margin went up from 2.49% to 2.53% in the fourth quarter. Net fee and commission income had a good performance in the quarter with a growth of 7%, and also the same 7% growth year-on-year, with especially stronger performance from payment cards and insurance during this quarter.

On Page 19, moving now to costs. We continue to implement measures that allow us to reduce the cost base. So on a reported basis, we had a cost growth of 1.6%. But we already show a clear trend of decrease of staff costs. This is also a consequence of the reduction in the number of employees, which took place after the merger with Euro Bank. So during the last 12 months, we had a reduction of more than 1,000, which means a reduction of 14% year-on-year.

At the same time, there was the process of optimization of the branch network, which translated into a reduction of the number of own branches by 128 in the last 12 months, which means a reduction of around 21% of the -- our own physical branch network, which is a consequence also of the changes that are happening in the banking system and in the overall environment with less usage of branches by customers and more remote banking. At the same time, we will highlight that year-on-year, we had relevant growth of costs to the Banking Guarantee Fund, which partially explains the increase of the costs.

Page 20, asset quality. So despite the extraordinary year that we faced, we still finished the year with a NPL ratio below 5%. The cost of risk on a reported basis reached 83 basis points over total loans. If we would exclude the provisions attributable to the impacts of the pandemic, we would have shown a cost of risk of 65 basis points over total loans, which means slightly below than the year before.

On Page 21, regarding the FX mortgage portfolio. There was a continuation of its reduction with a reduction of 8% in currency year-on-year. So FX mortgages represents now 17.4% of the total loan book. And at the same time, we made significant additional provisions for the legal risk in the fourth quarter, increasing the coverage to 6.7%. This coverage means total provisions for legal risk divided by the outstanding FX mortgage portfolio. And the flow of lawsuits was similar in the quarter versus the previous quarter. Page 22, liquidity and capital remains strong. In capital -- in terms of capital ratios, we have both the total capital ratio and the Tier 1 ratio more than 5 percentage points above the minimum required levels. And we should take into consideration that in these required levels, we have a buffer of 3.4% connected with the FX mortgage portfolio.

Moving now to the last part of the presentation, on business development, on Page 24, some main highlights. Of course, in 2020, the mortgage sales were the best, let's say, performing product in the bank. In the fourth quarter, we originated more than PLN 4 billion -- more than PLN 2 billion; and in the full year, PLN 6.8 billion, which means an increase of 57% versus 1 year ago. There was also, in the fourth quarter, a relevant recovery of assets under management in investment funds by 7%, and we crossed the threshold, the milestone of 3 million debit cards. We also crossed the level of 2 million active digital customers, and we had an overall loan growth of 6%.

More details on Page 25. So the driver of the growth of the loan portfolio last year was the growth of mortgage loans, overall 12%, with a smaller growth of consumer loans by 2%. On the other side, customer deposits were flat with a small growth of retail, offset by a drop in corporate deposits. But we need to remember that this is the natural consequence of the fact that we have cut significantly and very quickly the remuneration of time deposits and savings accounts, as a consequence of the decisions taken by the MPC between March and May. On the other side, we can see the recovery of other customer funds, which grew 6% quarter-on-quarter. And in fact, we finished the year with a total balance of investment funds almost at the same level of the end of the previous year.

Page 26, digital continues to increase its importance. And we would highlight that in the fourth quarter, 59% of the sales of cash loans were digitally, and 26% of current accounts opening was also done digitally. So we continue to observe the relevance and the increased share of digital in the sales of different products of the bank. Also significant growth shown on Page 27, in terms of online payments, with the largest increase coming from the BLIK transactions, which grew by 91% year-on-year, while the number of users increased by 41% and e-commerce transactions increased by 90%.

Page 28 is just a description of the permanent efforts to implement new solutions and innovations to keep the highest level of quality of service in digital to our customers. As I already mentioned, we -- in the meantime, we also allow tracking of mortgage applications remotely. And we have been expanding the capacity of open banking supporting sales capabilities of digital channels. And the same progress continues in our goodie platform with 169,000 additional app downloads in the fourth quarter.

Page 30, some more details about retail. So overall, retail loans grew 9% year-on-year or 14% if we exclude FX mortgage loans, while retail customer funds grew 1%. Total mortgage sales increased 57% year-on-year and 19% just quarter-on-quarter. While cash loan sales still performed very well under this extraordinary environment, we originated in the full year PLN 4.6 billion of cash loans, only 7% below the previous year, and keeping a market share of 10.7%. On Page 31, of course, the pace of customer acquisition slowed down last year. Still, we had an overall growth of 61,000 active retail customers and 15,000 active micro business customers, and we had the continuation of the growth of debit cards crossing the 3 million milestone.

Moving to companies, Page 32. The corporate deposits dropped in the fourth quarter as a consequence of the implementation of fees on deposits above specific thresholds because we are, in fact, generating a negative margin also due to the banking tax and by holding those deposits. On the other side, the fourth quarter was positive in terms of rebound of loans to companies, including leasing and factoring. When we look at the full year, we had only an overall drop of 1%, which is better than the drop that existed in the market. And also with the mixed picture, we have a flat loans to company portfolio, an increase of factoring by 6% and the decrease of leasing by 5%, because leasing was the sector that was -- the segment that was more affected by the downturn in investments. And this is shown on Page 33 as well with -- in which we show that leasing sales dropped by 29% year-on-year, but at the same time, factoring turnover increased by 10% year-on-year.

So these are the most important aspects of the results of the bank after the fourth quarter. Now we will dedicate time to answer your questions. Thank you.

[Dariusz Górski, executive]

With your permission, we'd like to make a very brief break, and we will simply discuss the questions as they were coming to group them to make it a more coherent and organized Q&A session. So allow us half a minute or maybe a minute.

[Dariusz Górski, executive]

Okay. Thank you very much for your questions. As I said, we tried to group them into themes and blocks. First group will cover history, so effectively our results, and there will be a little bit forward-looking. First question relates to the revenues and top line. The question is on NII outlook. What trajectory do we expect for NII and NIM in 2021?

[Fernando Bicho, executive]

So we expect a gradual recovery, slowly, but gradual recovery. This is supported by the fact that basically all the impacts of the cut of the interest rates are recognized through the P&L. We are assuming a stable interest rate environment for the foreseeable future. We are counting with continuation of the loan growth, especially in mortgage, also stronger growth of cash loans, consumer loans versus what we had in 2020. Also some rebound in corporate. So the loan growth volumes will support.

And on the other side, it's true that we finished during the fourth quarter the -- basically -- we basically finished the process of repricing of the deposits. So there, we don't have much more space to do anything. We were quick to react. But basically, it's finished. And so we expect that the combination of these drivers will translate into a gradual recovery of the levels of net interest income. Of course, first quarter is a special quarter because it has less 3 days than the previous quarter. So there is always -- or less 2 days than the previous quarter. So here, it's maybe slightly not visible. But the trend, we believe, is going to be positive, but gradual.

[Dariusz Górski, executive]

There's obviously a related question about whether we see further room for improvement in funding costs. And also the question about the impact of bond deals on NII.

[Fernando Bicho, executive]

The funding cost, as I said, we basically finished the repricing that was possible to achieve. Regarding the bond yields, so most of the impact is already done. Of course, there is always some fixed rate bonds in the future that will mature and that then will have to be replaced by others at potentially lower levels. But we don't think this is going to be very material in 2021. So we -- I think, basically, the effect is already felt throughout the fourth quarter of 2020.

[Dariusz Górski, executive]

There was also a question about customer acquisition in the fourth quarter. Apparently, the dynamics was not as strong as it was in the previous periods, especially in terms of current account openings and new customer acquisition. Within this context, there was also a question about mortgages because they were very strong in the whole year and in the 4Q. And why were they so strong?

[Joao Jorge, executive]

So let's first go through a little bit through the customers. And I think in this Page 31 is where we can see the main picture. So we were having up to now a very strong customer growth, especially because what we monitor -- what we present and what we track is the active customers and -- which means that natural the ranks they have between 5, 10, maybe it's a little bit too high, but there is a 5 of a kind of a natural attrition. Customers that move away or from the city or from the country or they die or they marriage and 2 accounts are transformed in a common account, this matter there is a natural attrition like that. And which means that, for example, we had -- we present here in Page 31, plus 61,000 of active customers, although we present more than 200,000 of digital customers and 145,000 of active customers -- or active debit cards.

Which means that so we have more or less 250,000 growth of active customers, and then there is some attrition and so which is presented like that, Mainly, even being a digital bank, even having the possibility of opening accounts with a selfie and with a courier or at the end of the days the physical channels are still relevant for customer acquisition, not only the natural branches, but also the points of sales that we have in shopping centers, the kiosks and everything. So the closing of the -- the lockdowns or the limitations of circulation that we had in the country had the major impact in terms of customer acquisition. We believe that -- at the same time that there will be opening of the circulation, but also a trend to a bigger acquisition in digital. We will see some offset of this trend, and we will see maybe not so heavy growth as that we had in the past of 200,000 of active customers growing per year, but, for sure, higher than the 61,000 that we have this very specific year.

In terms of mortgage, it's important to say that after this initial impact of COVID that we have the impact in terms of the volumes. But of course, we have even a bigger impact in terms of the decrease of interest rates or maybe the big cut of the interest rates. We had an exercise of repricing. The exercise of repricing, the major impact in terms of cash loans because, also, we had some adjustments in term of risk. So we believe that we will see the growth of the production more in the beginning of this year with bigger normalization of the needs of the consumers. And with the needs of the consumers, then we will see the need of the consumer loans for satisfying this consumption. We had deposits that we are seeing a normalization of the volumes in the last 2 months of the year and also in January. So we believe that also the adjustment of the pricing of the deposits, it's already absorbed by the customers. And so we will see now a normal growth of the deposits.

In terms of mortgage, it was an area that we didn't see a need of any price adjustment. There is a strong demand. The bank was very fast in reacting in terms of the adjustments to be done in terms of acceptance of income, acceptance of certain LTVs. So this was then since beginning, and we are just seeing a very strong demand here. And it's across Europe. So from what we are seeing it's across Europe. I think it was more -- we were on the right place to capture this strong demand of the market. But there is not anything special. We even see a more -- I would say, a more prudent share of lower LTVs in terms of the mortgage applications and the mortgage disbursements that we are doing at the moment. It's interesting to see that it's -- the last quarter, we were seeing also a more dynamic in corporate loans. So it looks like, first was mortgage, the end of the year is more corporate, and we are already seeing in the first month of the year more dynamics or bigger dynamics in consumer loans.

[Dariusz Górski, executive]

And there was -- while we are in mortgages, there was also a question about the competitive landscape for mortgages in 2021, if we see pricing pressures and so on?

[Joao Jorge, executive]

What we are seeing is that the need that we are having more than a pricing or a product issue, it's the service level issue because we are trying to match all of the process of operational efficiency and cost-cutting that we were doing with the ability to fulfill bigger volumes. So a big part of the cost reduction that was done last year was besides the consolidation of the branch presence that we have across the country, was also some initiatives of headcount reduction in head office. But what we need now to do is the reengineering of the processes.

And in terms of the mortgage, we are making a full reengineering of the process, allow us to have -- besides the full digital process, now we are already moving besides the application also to have the capacity to make the interaction with the evaluators also to be done in a digital way, also the tracking of the processing the bank for the clients to be then fully do through the mobile or the Internet application. But what we believe that can be our competitive advantage is just we have a streamlined process that is fast, easy to the consumers. And this will be our competitive advantage for next year.

[Dariusz Górski, executive]

As we're going down the P&L, there was also a question relating to fees. In particular, what were the drivers behind good growth in card fees in fourth quarter? Was it transactionality or pricing? And what were the drivers behind insurance fees in the period?

[Joao Jorge, executive]

I will make a general comment and then Fernando a detailed comment. So as I already said, we made the repricing of the consumer loans. And a lot of the repricing of consumer loans was done through the insurance penetration. In mortgage, we didn't do. In corporate, we did by the increasing of the commercial margin. And in consumer loans was a little bit by commissions, but a lot by the insurance penetration.

[Fernando Bicho, executive]

In the fourth quarter, we also had some positive impact coming from settlements that were connected with previous -- from previous periods, especially connected with cards. So not all the increase of the cards fees in the fourth quarter is directly attributable to that quarter. It also corresponds to some additional settlements that were connected with the previous periods of the year in terms of higher income on one side and lower costs on the other, about insurance and securities I guess already.

[Dariusz Górski, executive]

The new metric or the new measure that we provided, namely active FTEs also caught some attention. The questions are, why is there such a difference between the regular FTEs and active FTEs and what was behind the strong drop of active FTEs during the year?

[Joao Jorge, executive]

Truly in the Polish market, there is always -- I think, it's around 15% of long-term leaves. The bank share of women is 67%. So between initially -- and also by the age. So between initial maternity leaves and then, of course, also authorized leaves for caring family, it's a number. Truly last year was a little bit lower than usual. So last year, somehow, there was a reduction. 2019, sorry -- yes, last year -- Not last year. 2 years ago, was somehow a reduction. And this year, it was a little bit increase also.

We need to accept that also there will be a tendency to take long-term leaves also to support family during this pandemic time. So it's not -- so I would say that 2019 was a little bit below what is normal. 2020 was a little bit higher than it's normal. But between the big numbers, what we work is with this, the active FTEs, because it's the people that are engaged, working in the bank, being paid by the bank because the other ones are all paid by social security or with -- and paid leave. So this is what we track because in the long run, this is the people that are fulfilling the needs of employment here in the bank.

[Dariusz Górski, executive]

We're migrating down the P&L. Now questions about cost of risk. Could you shed more light on the spike of NPL ratio in fourth quarter? Why the NPL ratio in the corporate book increased and coverage ratio dropped? What is the outlook for 2021 for cost of risk? And what would be the normalized cost of risk for the bank after Euro Bank acquisition? And there was another question on that. Does the flat cost of risk guidance assumes COVID impact or higher share of cash loans in 2021?

[Fernando Bicho, executive]

So let me try it one by one. If I will forget one, you have to please tell me. So regarding the cost of risk in the fourth quarter. In the fourth quarter, we had several opposite effects. We had, on one side, 2 elements that increased the stage 3 loans. One was that part of the loans and the public moratoria were classified as stage 3, as recommended by -- commonly by the big 4 audit firms in Poland. So this was one impact in terms of increase of NPLs in retail. And second was 2 or 3 cases from corporate that we reclassified from stage 2 to stage 3. And this was one effect. Then we had on the opposite side, we had some extraordinary recoveries in retail, plus the sale of NPLs, which was also essentially retail, which took place in the fourth quarter.

So finally, we had an increase in the NPL ratio of corporate, which is visible in the fourth quarter, but, again, attributable to 2, 3 cases, which were more affected by the pandemic. And it's not at a default. It's that they have a worse financial and economic situation. And so prudentially, we should reclassify them to stage 3. Still looking at the numbers and comparing the numbers with where we were 1 year ago and 6 months ago, the numbers are still in line with the numbers that we had in the end of June, for example, in terms of the coverage of the provisions for the stage 3 loans. So it's comparable with the numbers that we had in June. Then the next question is...

[Dariusz Górski, executive]

Outlook we discussed.

[Fernando Bicho, executive]

Outlook -- regarding the outlook for 2021. I think we said 1 or 2 quarters ago that our expectation was that the cost of risk in 2021 would be lower than the cost of risk in 2020. And based on the currently available information, this is -- we still have this expectation unless, of course, there will be further deterioration of the economy, and this pandemic will take longer in terms of lockdown or in terms of partial restrictions of activity. But our base scenario is that the overall cost of risk will be lower in 2021 versus 2020.

How much lower? I mean we don't -- we cannot be very precise, but somewhere between 70 to 80 basis points would be probably the level that for now we are considering. Why we think that it can be better? Because we think -- we see that the unemployment rate did not deteriorate so much in Poland as in some other countries during this period of time. Also, companies had a lot of support and so were able, in fact, to go through these more critical stages with proper liquidity and so -- and then restarting their activity, except some specific sectors of activity. So we -- in this area, we are relatively positive that it is going to be achievable. Next one?

[Dariusz Górski, executive]

It's cost of risk after...

[Fernando Bicho, executive]

After?

[Dariusz Górski, executive]

After acquisition of Euro Bank.

[Fernando Bicho, executive]

I mean it's very difficult -- in the middle of this extraordinary times, it's very difficult to be precise about what would be the normal cost of risk. So as I said, this year, if we would -- 70 to 80 seems for now something that is achievable. In ideal world, probably 60 to 70 would be achievable, but it is probably not going to happen this year.

[Dariusz Górski, executive]

There was also a question about the unusually low tax rate for us in the fourth quarter, if there was any. If we could add color to that, please.

[Fernando Bicho, executive]

So I think in the previous -- 1 or 2 previous quarters, which was unusually high. But I think we -- of course, we have some items which are always negative in terms of tax rate impact. Why we had a much lower tax rate this quarter is that we consider the partial tax effect in part of the provisions associated with FX mortgage legal risk. So this is the reason. And because we did this -- we have considered this in the fourth quarter, of course, this took into consideration a part of the provisions that existed. And so the effect was more visible because it was concentrated in just one single quarter.

[Dariusz Górski, executive]

I think we covered most of the questions related to our 4Q results and 2020 results. If there are more, we're happy to answer those on more individualized terms. Now questions relating to our 2021 thinking in the interim year strategy. The question was about cost-to-income ratio target. Your cost-to-income ratio target of 47% versus 49% this year seems conservative. Given the end of integration costs and the likely drop in BFG charges, what do you think of odds of BFG charges dropping in 2021?

[Fernando Bicho, executive]

Maybe I'll start with BFG charges. We still are waiting for the final information regarding the level of the charges. So we don't want now to try to guess because we know that the final decision belongs to the Banking Guarantee Fund, and we need to wait for the decision. So of course, we hear -- we see the news, and we see that maybe at the end of the day, the charges may be lower than were originally announced in October, November, if I remember. But we need to wait to see what exactly -- not only what is the final number, but also what is the structure. I mean what is the part connected with deposit guarantee funds and the part connected with Resolution Fund because the structure is also important in order to assess the impact versus what we booked in 2020.

[Joao Jorge, executive]

I think in terms of targets for the future, and -- we keep our goal to have midterm closer to 40% cost-to-income, and this is what we want. It's obvious that when we have a situation as we have with COVID, we have an impact from one side to the costs, and we have the impact with the interest rate cuts on the income. And this obliges to start again the process with a higher level and to go through the process. I think it's important to close understand that because it was in the question also talked about Euro Bank. So one of the things that was positive is that, okay, we closed the process of Euro Bank. The merger was done. The systems were acquired. The integration costs were below the plan. The synergies are captured and higher the plan. So this is a chapter that is closed. Then we had the second part, which is after COVID, we initiate without waiting a process of cost restructuring, speeding up the consolidation of the branches with a high decrease of FTEs and starting working already in 2020 all of the processes of the reengineering that we are going to -- then to -- that will be delivered during 2021 on these cost gains.

For us it's very clear that -- and there is an environment with 0 interest rates. The revenues are challenging. And because of that, also the cost structure needs to be challenged by us and reduced by us. And what we achieved last year is already recurrent. And what we will achieve next year will also be -- we believe that it will be visible at the end of the year. So we are not in a hurry. But that's why even we took a year of waiting for the strategy because we understood that we would need a year of fast adjustment in a very tactical way to adapt the bank to the new conditions. And this is what we did last year and also what we are finishing this year. But we have still our ambitions to go to the level of 40% cost-to-income. So it's a question of also giving some time for the bank also to adjust to this big change of the conditions of the banking activity that we had here in Poland.

[Dariusz Górski, executive]

And there was quite a large number of questions relating to our voluntary conversion schemes or repayment schemes. And analysts or participants are asking about what percentage of clients agrees? Whether we send these offers to particular groups of clients? Are we going to accelerate or increase this activity ahead of the Supreme Court verdict? Are they structured or unified? How many of the Swiss franc loans have been repaid last year? And these kind of questions were coming up.

[Joao Jorge, executive]

I will start to answer and then, for sure, Fernando, also will complement. So it's known that our position have been always open to find a solution in Swiss francs. We even had questions in previous meetings of analysts, about some offers, about some newspapers. This is -- and we're never trying to not say that this is our position since the beginning. So it's -- in beginning, we already explained that people were looking for other situation, so more, how can I buy a new house and so change the collateral maintaining the credit? Then when there was a big increase in terms of disposable income with increase of salaries in Poland, start -- mainly 2, 3 years ago, we start to have a lot of approaches from customers asking to have a negotiating FX rate if they would early repay the loan and lately, with the big decrease of interest rates, so with the -- where the installment in zlotys can be similar to the installment in Swiss francs they were asking to convert.

And we have been open to this, sometimes even sacrificing a short-term gain to have this solution. The same way, also, we have been open to participate in all the initiatives that across the years we saw on this area. Unfortunately, there was never possible to have a solution, and an umbrella from the authorities to find a solution for all the system. So because there was not a solution from all the system, we have been working in individual cases for customers. We salute this initiative from Chairman of KNF. We think that was moved by issuance of duty to offer this possibility to the system. We are in a very initial terms to assess what could be the impact, what is the legal assurance, the legal certainty. For this, legal certainty is not just in terms of the contracts. It's also tax interpretations. Also the acceptance of other authorities, how this is seen by all the stakeholders of this process.

So we -- this is a process -- I already said, this to somebody that it's a problem of 12 years cannot be solved now in 12 weeks even. So we need to have times to do this. It's seen already that even the banks that are a little bit more advanced on these studies and that already -- maybe they made their decision, they already expressed that the final decision would be needed to be taken by shareholders meeting. So it will be something more in the middle of the year. We -- for us, it's a little bit early for that. But anyhow, as always, our position is very open. We like the possibility to have a solution for the system.

And so we are making our internal assessments, thoughts, also in terms of operationally, how this can happen. Because we have been open to customers to negotiate also, we are knowledged about how this process is handled, how it's needed because the people are not negotiation with head office. The people are negotiation across all Poland. So we need to have also the operational capability to do this in a very local level. So I would say that, individually, we keep our mind and openness to assess and to negotiate and to be open to discuss to any single customer in terms of solution for the system. Also, we are open, and we've seen a very positive eyes if there is a solution that is across the industry.

[Fernando Bicho, executive]

So regarding the numbers of customers that are finally early repaying or converting the loans to zlotys, these numbers fluked away through time. In the -- I can say that in the fourth quarter, we had a few hundred per month of clients that either early repaid the loans or converted to zloty. So due to this, we had some acceleration of amortization of reduction of the FX mortgage portfolio during the fourth quarter.

Regarding -- let me also -- because I see here also some questions about the provisions that we have done and just also to try to clarify. So apart from the provisions that we announced in our current report, which was strictly connected with the portfolio, which has been originated by Bank Millennium, we also did some provisions for the book that came from Euro Bank, PLN 36 million, which, of course, increased the amount of the provisions. But on the other side, this impact is offset by the valuation of the indemnity from Société Générale. So just to clarify that these additional provisions were neutral from a P&L perspective. I think there were also regarding...

[Dariusz Górski, executive]

Share.

[Fernando Bicho, executive]

Yes. Because there is a question about what is the share of the production of FX mortgage in our book coming from 2007 and 2008. So we already answered this in the past. It's about 50%. So that's why this indicator is known. So in our book, this 2 years represent more than 50% of the total. What else?

[Dariusz Górski, executive]

And there's, obviously, quite naturally, a range of questions relating the potential systemic solution of FX mortgages, which Mr. Bras Jorge partly touched already. So the questions are, is the settlement proposed by KNF attractive for Bank Millennium? Are you in dialogue with the Supreme Court on FX mortgage questions? What outcome do you expect on March 25? And most interestingly, what could the regulator, MinFin central bank, do to attract banks and borrowers to the agreements of FX loans?

[Joao Jorge, executive]

We would like to be in really contact with the Supreme Court, but not.

[Fernando Bicho, executive]

We are not allowed.

[Joao Jorge, executive]

We are not allowed even to interact. Let's wait and see. During our experience in the different tentatives of solutions for the system in the past, somehow there was some lack of cooperation and coordination between the different stakeholders, namely the state and the entities. So our wishes is that this time, this would be more successful because we think that the aggregation of the interest on the bank side is easier to achieve than the aggregation of the different stakeholders, namely the state entities. So it's -- this is the biggest challenge, and it would be important if it is going to achieve, especially because comparing to the solutions of the other countries that we have been seeing, this solution -- it's -- the burner of this solution is bigger to the banks. Some countries, they had a solution like 1/3, 1/3, 1/3. So the cost of the solution was 1/3 the state, 1/3 the client, 1/3 the bank.

And here, what we are talking about is a solution that the cost will be 100% supported by the banks. I'm very pragmatic on that. So I'm not criticizing or nothing. So it's -- the solution, it is what it is. We don't know yet. It's too early for us to assess what would be the decision for the bank, and we are still assessing the impacts. But anyhow, a solution is always a good alternative. To have a solution in the system is always a good alternative. Even then, if the bank decided not to apply it. So it's -- we believe that this is a good step. So it would be very beneficiary for the system, the banking system, for the Polish economy and for the country if the system -- if the solution go further, independent of our participation or not. So we see it in a very positive way. And we just hope that there will not be excess of interventions. That the proposal will be killed even before being available to be used.

[Dariusz Górski, executive]

Still remaining within the Swiss franc topic, the question was about what is the scenario that we plugged into our 2021 transition year with regards to Swiss francs?

[Joao Jorge, executive]

We have been used to try to manage in -- let's say, in 3 time horizons. So we have clearly a past issue to manage. And this is a legacy. And this is what it is, which is the Swiss francs. And we are managing as it is. This is a legacy that we need to forecast as time goes by. Before we were forecasting as a disclosure of the risk. Then when we start to have provisions, we have now a methodology that we are trying to materialize in terms of provisions what is a potential legal risk. I alert that at the same time, we have, from one side, the provisions, but we have a special capital buffer also for this risk. So these 2 amounts are, let's call it, the assessment in our balance sheet and P&L, and the provision part about this potential risk. And this is -- and we try to manage as possible. And we don't lose a lot of time to -- trying to incorporate future scenarios in terms of our budgets and things like that.

Then what we are focused is -- one part is the present, and the present is how can we deliver the best operational results through increase of revenues and decrease of costs in the next year? And then how can we work for the future because we believe that the future in banking, it's different from the present of banking. And that we need to manage these needs to invest and to reinvent ourselves at the same time that we present the results for -- in a quarterly basis. And this, we do it in a way without hurting each of the areas itself. So we know that we need to manage the legacy without jeopardizing also the results that we need to present today and the investments that we need to do to the future. But it's not possible or we don't dedicate a lot of time trying to make. Of course, we try to make scenarios. Of course, we try to make tactical plans. But there is not a lot of advantages in our budgets to put probabilities of the KNF solution or not. At the moment it's the -- I would say, the methodology of applying provisions that we have in our systems.

[Dariusz Górski, executive]

I think we've largely covered the questions. But unless Fernando found a question unanswered, which he particularly would like to answer, then, well, we'll see.

[Fernando Bicho, executive]

Of course, I would like to just to remind that we -- today, we are disclosing the preliminary results of the year. Of course, all the details, including audited financial statements, annual report will be published on the 22nd of February. So we -- of course, by the end, you will have much more details as usual versus what we could present today. But anyway, we tried to present today really what is the most important from the results of the quarter and of the year and about the main risks that, of course, we are also managing, but also about the plans for the near future, which I think are important in terms of anchoring the expectations.

And that regardless of the higher or lower level of provisions that we may need to do this year, we have a business plan that will deliver an increase in the operational profitability of the bank that will help, together with all the remaining buffers that we have that will help to dilute the impact of the provisions to whatever the level that we may need to do. But also reminding that, as Joao was saying, making scenarios, we still leave with a lot of uncertainties in terms of impacts. And so to be honest, we also will need more clarity regarding important aspects, not only of the court decisions, but also the KNF proposal in order to continue to try to have a more clear picture about the potential impacts.

[Dariusz Górski, executive]

Thank you very much. This concludes our presentation. Thank you all for your interest in Bank Millennium. As one of the concluding remarks, I can tell that we obviously did a lot of effort to keep you attracted in our story. Not only we refreshed our presentation, which we hope you like more, but also we took care of the drama, you can -- you have to admit and of the momentum in the results. And we think of this as the end of the season number one, and this is the last step result in this season, hopefully, and we start a new season in May, hopefully, with interesting dynamics, but a little bit different script.

So thank you again for your interest. Obviously, as usual, if you have any questions that we haven't answered or more questions, you please do contact the IR team, and we'll be more than happy to help you with. And to remind, we have the full year results due out on 22nd of February. We also normally have our AGM in the middle of March or maybe in the second half of March. And also with some of you, we will meet in a number of investor events that are taking place between now and the first quarter results, which are due in early May. Thank you very much again. Stay healthy. Keep fit.

[Fernando Bicho, executive]

Thank you. Bye.

[Joao Jorge, executive]

Thank you.

[Dariusz Górski, executive]

Thank you very much.