Bank Millennium SA

WSE:MIL

Earnings Call Transcript 2021-Q4

[Dariusz Górski, executive]

I should say welcome again because it's been not long ago that we've met last time, and I hope we have not reached an annoying level of frequency of meeting with yourselves. It's just a worrying level, perhaps of how frequently we come to your screens. Before we start, obviously, present our guests, our speakers today, Mr. Joao Bras Jorge, Chairman of the Management Board, CEO; and Mr. Fernando Bicho, Deputy Chairman of the Board and CFO.

Before I let the gentleman speak, I need to do a bit of a housekeeping duty. I would like to remind you that the data that we present today is preliminary unaudited. So you need to wait until 21st of February for the publication of full unaudited data.

Thank you very much. Gentlemen, the floor is yours.

[Fernando Bicho, executive]

Thank you. Good afternoon. Thank you for attending this presentation. Yes, so they -- when we were preparing for this presentation, I just recall that last time that we were able to have a physical meeting here with the presence of analysts and investors was already 2 years ago. So it is already 2 years, consecutive years that we are making these presentations only through electronic channels, so which shows how quickly the time flies. So today, we will present the fourth quarter and full year 2021 preliminary results. I will not go through every single detail of the presentation that was previously distributed to you, but I will try to focus on the main points and on the main messages regarding the performance of the bank during the year.

I will start with Page #5, where if you remember 1 year ago, we said that 2021 will be a transition year before new strategy rollout. And at that time, we presented the snapshot of the main objectives that we were trying to achieve in the year 2021. And now after closing the year, we can say that on one side, we had a quick recovery of business results. And in fact, we had a record year in terms of origination of mortgage loans with almost PLN 10 billion of new mortgage loans originated and also with the sales of cash loans up 21% year-on-year. And the net profit without FX mortgage costs up 57% year-on-year.

In terms of operational efficiency, we continue the fine-tuning of the branch network after the significant reduction that had followed the acquisition and merger with Eurobank in 2020, and we further reduced the number of branches by 8% in 2021. And we achieved a reported cost-to-income ratio of 46% against the planned target of 47%. And on the full digitalization path, we also achieved significant milestones. The share of digital clients is already above 80%. And we continue to extend our digital customer base beyond customer age segments, and we launched in 2021 the mobile app of Junior that was also a significant success.

Page #6 reminds the pillars of the Millennium strategy that we have announced almost 2 months ago, inspired by people, as you recall, and that will be underlying our presentations during the next periods. And also on Page 7, we just remind what are our strategic ambitions for 2024, which I will not repeat now, but also which show the path that we expect to follow and to achieve during the next 3 years and in which the year of 2021 was very important in setting some trends that create a very good base for further growth and development.

Pages 8 and 9 summarize the key P&L items and key balance sheet and business items. We will go in more detail throughout the presentation. But just here, I will highlight. First, the significant improvement of net interest income in the fourth quarter rose almost 15% versus the previous quarter, but also in the full year already with a growth of 5% versus 2020. The double-digit growth of fee and commission income also in 2021, the reduction of costs by 6% year-on-year and also the much lower costs of credit risk, which was less than half of the levels that were shown in 2020. On the other side, we had a significant increase of the provisions for legal risk which generated at the end of the day, a net loss during the financial year of 2021. But still, if we would exclude those extraordinary costs connected with FX mortgage legal risk issues, we would have shown for the first time a net profit above PLN 1 billion.

And on Page 9 also, we can see as main numbers, the solid growth of loans by almost 7% year-on-year. While at the same time, we were significantly decreasing the net value of the FX mortgage loan portfolio and also the excellent achievement in terms of the asset quality by reducing the NPL ratio to 4.4% from 5% 1 year before, while increasing, at the same time, the coverage of NPLs by provisions.

Moving now to Page 10. So we had in the full year 2021, a net loss of PLN 1.3 billion. Excluding the FX mortgage related costs, we booked a net profit of PLN 1.1 billion, which is 45% above the year 2020, also excluding other extraordinary one-offs. It is visible on the right-hand side of this page, the sustained growth of the net profit without extraordinary items, which in the fourth quarter was already above PLN 300 million. And also despite some items that negatively affected operating income during the year, that still when we compare the fourth quarter 2021 was also above the fourth quarter of 2020.

So in a step short on Page 11, we have on one side, the adjusted net profit, so excluding extraordinary items growing 45% year-on-year in 2021, a strong rebound of net interest margin, fees up by 11% year-on-year. And adjusted ROE, excluding this FX mortgage related costs and extraordinary items at 13.6%, cost reduction by 6% and the higher level of coverage of NPLs over 90 days.

Going now in more detail through the P&L on Page 12. We were already in a positive trend regarding net interest income coming from the second and third quarters. We had already signalized that even without interest rate changes, we would achieve a higher NII in the full year '21 versus 2020. But of course, we also benefited from the cycle of increase of interest rates that started in the beginning of October, which helps to further increase the net interest income in the fourth quarter by 15% versus the previous quarter and bringing the overall NII higher by 5% versus the previous year.

The driver of this growth was the quicker repricing of loans when compared with deposits and which is exactly what happened when interest rates went down. So when we had the cuts of the interest rates after the beginning of the pandemic, we also saw at that time a faster repricing of loans downwards than the adjustment in the cost of the deposits. So as a consequence of these 2 trends, our net interest margin increased from 2.61% to 2.98% in the fourth quarter. In terms of fees and commissions, we had the best quarter of the last 8 with a growth of 7% versus the previous quarter. And in terms of full year, a growth of 11% versus the previous year, and in which we had a strong contribution of commissions coming from loans and cards and also from account service and other.

Moving to the cost side. So we had a reduction of cost on a reported basis by 6% year-on-year. If we exclude the contributions to the banking guarantee fund and the integration costs, the costs would have been flat versus the previous year, which still is a significant achievement taking into consideration the cost pressure that in general companies and banks are facing in Poland since mid-last year, which are translating into higher pressure in terms of staff costs, but also in terms of other admin costs. As a consequence of this positive performance, the cost-to-income ratio decreased and on an adjusted basis, reached less than 43% when compared with 45.8% in 2020.

Throughout the year, we had a continuation of a gradual adjustment in the number of employees, which fell by 357 on a yearly basis. And also, we had the continuation of the fine-tuning optimization of the branch network, which was reduced or consolidated by another 47 branches during the year 2021.

Moving now to the FX mortgage portfolio. So looking at the full year, we had a significant reduction of the portfolio in currency by 17%, and just in the fourth quarter by 6%. So this is the reduction excluding FX impact. As a consequence of this and also the growth of the other portfolios, the FX mortgage portfolio continues to be diluted. And the portfolio overall represented 12.4% of total gross loans or 11.4%, just the part that was originated by Bank Millennium.

We had still a continuation of the increase of new lawsuits, although at a lower number than in the previous 2 quarters. And on the other side, we continue to increase the amount of provisions for legal risk, which in the fourth quarter 2021 reached PLN 662 million, just connected with the part originated by Bank Millennium. And this was the amount that influenced the P&L in the first quarter, bringing the cumulative balance of provisions against legal risk to close to PLN 3 billion.

On Page 16, still continuing on this topic of provisions. So as a consequence of the increase of the provisions for the legal risk and the reduction of the portfolio, the total stock of provisions represents now 25.7% of the outstanding balance of FX mortgage loans originated by Bank Millennium. In the last 3 quarters, the number of new lawsuits was still relatively high, although in the fourth quarter, as I said, was lower than in the previous 2 quarters. But at the same time, we had higher number of amicable settlements with clients. In the fourth quarter, we reached agreements with 2,614 customers, which implies a cost of the negotiations booked through P&L of PLN 144 million.

Page 17. It's just a new split of the segmental reporting. That also will be included in our annual report in which we isolated the segment of FX mortgages in order just to show in even in more detail, where are the revenues and costs connected with this portfolio. And of course, confirms the clear picture that the core business is really the source of the pre-provision profits, while the FX mortgage segment is generating a significant negative result as a consequence of the cost connected with provisions for legal risk and also the costs of the negotiations of settlements with the customers. And this not to speak, of course, about the additional capital that is currently allocated to the portfolio of FX mortgage.

On Page 18. Liquidity continues to be solid. The loan-to-deposit ratio was stable at 86%. In terms of capital ratios, of course, they fell as a consequence of booking a loss in the first quarter. But at the same time, we managed to offset the impact of this loss partially through reduction of risk-weighted assets. And also at the same time, there was a decrease of the minimum capital ratios that the bank is obliged to fulfill as a consequence of the update and reduction of the Pillar 2 buffer that was communicated in the fourth quarter. We continue our preparation to the potential issuance of senior non preferred bonds in the first half of '22 in order to fulfill MREL requirements. And last Friday, we confirmed by current report the approval -- internal approval of setting up the EMTN program.

Moving now to the second part of the presentation about business development. On Page 20, a few highlights. So on one side, retail business growing fast, already above pre-COVID levels and also corporate segment already showing signs of gradual improvement. We finished the year with overall loan growth of 7% year-on-year, very strong sales of mortgage loans, as I mentioned, almost PLN 10 billion, cash loan sales above last year by 21%. Debit cards growing almost by 100,000, active digital customers 2.3 million and customer deposits growing by 12%

On Page 21, going in more detail through the numbers. The growth of the loan portfolio was driven by the significant growth of the PLN mortgage loan portfolio by 29% year-on-year, while the FX mortgage portfolio contracted. The consumer loan portfolio grew at a smaller price, 4% year-on-year. And important is also the rebound in corporate loans, driven by leasing and factoring leading to a growth in the full year '21 of 4%. Structure of the loan portfolio continues to change with the dilution of the FX mortgage portfolio and an increase of the share of PLN mortgages. Looking at the customer deposits, where we have not been aggressive in recent periods. In the quarter, the growth was just 1%. In the year, 12%, mainly driven by growth of deposits from companies. And in terms of investment products, the fourth quarter was affected by market correction. And so for the full year, overall growth of investment products was only 3%.

On Page 22, apart from what I already mentioned, the growth of the PLN mortgages driving the overall growth of retail loans. We should also mention that if we excluded the contraction of the FX mortgage loans, total retail loans would have grown 19% year-on-year. This was supported by record sales of mortgage loans, which peaked at PLN 2.8 billion in the fourth quarter of '21, a growth of 24% year-on-year, leading the full year sales, 46% above 2020 and allowing us to reach a market share of 12.5%. On the cash loans, the fourth quarter was weaker than the previous one. Still, cumulative sales were higher by 21% year-on-year and our market share stood above 10%.

On Page 23, the pace of customer acquisition is increasing. So in the year, we had a growth of 87,000 active retail customers, of which 30,000 just in the fourth quarter, while also the number of cards increased significantly, 95,000 increase of the number of debit cards just in 1 year.

Page 24. Some figures to illustrate the increased usage of banking services online by our clients. So we would highlight that 77% of cash loan sales in fourth quarter 2021 were done digitally, and this represents a double of the number that we had 1 year before. And also 29% of current accounts were opening through digital channels in the fourth quarter 2021, and this represents an increase of 32% versus the fourth quarter of 2020.

The growth in payments and e-commerce services is growing at a fast pace, as you can see on Page 25. In fourth quarter '21, as much as 1.58 million customers performed at least one e-commerce payment and 64% had choose to pay by BLIK. And apart from this, all the other indicators show a significant increase in the usage of value-added services as it is shown on this Page 25.

On Page 26, we keep the innovation pace. In this quarter, we would highlight the launch of innovative application, the app for Apple Watch. Also the continuation of the digitalization of the mortgage loan process, including now the possibility of attaching insurance policies and also the developments that are being done in our investment funds, investment products platform that will be even more visible in the near future.

On Page 28, moving now to corporate business. we have a gradual growth of the loans that was -- which reached 3% year-on-year, which was clearly driven by a strong growth of factoring by 10% year-on-year in terms of portfolio and also leasing, which portfolio grew by 7% year-on-year. We also see a robust pace of growth of current accounts by 18% year-on-year and a strong pickup in transaction activity and digitalization of clients services progressing, of which we will highlight the implementation of 24-hour FX trading for our corporate customers. That is now fully available and also with conditional orders, and also the increase in the number of agreements signed digitally.

On Page 29, it is visible the recovery and rebound of leasing sales, which increased by 57% year-on-year. Leasing had been the most affected segment in -- during the pandemic, but now in 2021 had a huge rebound. Factoring also growing very solidly, 17% increase in turnover versus the previous year. And last but not least, also a significant increase in the volume of FX transactions by 26% year-on-year.

So these are the most important points regarding our results of the fourth quarter and full year. Thank you very much.

[Dariusz Górski, executive]

Thank you very much, Fernando. While you were presenting, I tried to as usual to combine questions or organize them into groups. I'm sending them to you now. And let's start as usual with questions relating to our 2021 results.

The first question touches other comprehensive income, which we in fact did not report fully. The question is other comprehensive income did not -- was not fully recognized in Tier 1 TCR. This is the first question or statement actually. And then why using this approach, if there is enough room or surplus in your capital ratios.

[Fernando Bicho, executive]

Yes. So first, of course, we will report much more detailed data on the 21st of February when we will publish our audited financial statements. But looking concretely to the question about the other comprehensive income and specifically, about the valuation of the bond portfolio. Obviously, the bond portfolios were affected by the significant increase in yields that happened in the fourth quarter, even though we had a -- not a long duration in our portfolio, but as everybody knows, all parts of the curve of the old curve were affected. And so the -- we had -- but we applied as a capital treatment the -- what is foreseen in the CRR in which we treated the change in equity valuation of bonds, which was in the fourth quarter, there was a depreciation of close to PLN 700 million, capturing 30% of that impact in the decrease in the own funds.

So this is according to CRR. So in 2021, we applied this 30% of this negative valuation. In 2022, it will be 70% of the valuation. But of course, what will happen during the current year is that part of the negative valuation of the portfolio that existed in the end of 2021 will disappear due to the fact that some bonds will be approaching maturity. And so part of this negative valuation will, in fact, flow through the lower NII of this portfolio in the next periods. So as a consequence, the capital impact was minor.

[Dariusz Górski, executive]

Second question. On the past would be on the cost of risk in the corporate book. Write-backs in the corporate loan book continued. When do you expect normalization and at what level?

[Fernando Bicho, executive]

So first, we did not have a relevant growth of volumes of corporate loans in 2021 as we have shown. The book overall grew 3%, but of which leasing and factoring grew, but corporate loans decreased as we are showing on the page -- one of last pages of the presentation. So on one side, we did not have a relevant impact from volume change. Second, we did not face deterioration of the quality of the portfolio, rather the opposite. The third, we cannot forget that in general, companies benefited from a strong financial support during the pandemic, which allow them -- most of them, to keep a very solid financial position. And there was a recovery of the economic activity in 2021.

Having said that, of course, the year 2021 was extraordinary in terms of having low cost of risk. When we presented our strategy 2 years -- 2 months ago, we mentioned that our average level that we would expect for cost of risk would be around 50 basis points per year. And of course, now there will be some other factors that, at that time, we could not anticipate such as higher than expected interest rates and some cost pressure also that will -- that is affecting in general, the economy, the holding companies. So we expect some normalization throughout the year, but we are still not seeing for the time being signs of deterioration of the portfolio. But of course, it's something that we will need to monitor through time.

[Dariusz Górski, executive]

Thank you. Now a very detailed question regarding our fourth quarter results. What were the drivers of other admin costs quarter-on-quarter growth in the period?

[Fernando Bicho, executive]

It's relatively simple to answer. So usually, admin costs -- so first of all, to say that the staff costs were flat versus the previous quarter, which I think is something that should be highlighted, taking into consideration the significant pressure that is happening now in Poland and also looking at the overall growth of staff costs in Poland, which is at levels of close to 8% to 9% year-on-year. So still to keep stable staff cost in the quarter, we believe was an achievement. Looking at the admin costs and depreciation, the increase in the fourth quarter was mainly driven by 3 items. One was much higher marketing costs in the fourth quarter. The second, legal costs connected with our FX mortgage portfolio and the third -- and counter claims that we had to submit during the fourth quarter.

And the third, connected also with the higher consulting costs, taking into concession the number of projects that we have been -- that we were doing in the last year, including the update of our strategy that was announced in December. So these were the major drivers. Overall, we still think that there was a significant improvement overall in the cost last year despite these negative pressures because we continue to show -- to be able to capture savings in different cost items, which helped to achieve this overall full year result.

[Dariusz Górski, executive]

Thank you. Question maybe for Joao. If you could comment on consumer loans dynamics in the fourth quarter after a strong pickup in 3Q, there was a slowdown in 4Q -- in fourth Q.

[Joao Jorge, executive]

Mainly, it was a slowdown in demand. The consumer loans are -- they have some seasonality also here in Poland, especially for us. They are very connected in the second and third quarters, connecting with refurnishing, traveling, improvements. And in the third quarter -- and fourth quarter sometimes is a little bit slower. And probably also the idea of -- and the change of interest rates, but also the comments, the articles, the information in terms of increase of interest rates, they would require some time also for the consumers to adapt to this new reality. From what we noticed, it was a slowdown somehow everywhere. And we believe that this is normal and probably this is will so -- will be a trend that we will see in beginning of this year in this first quarter because even if there is a salary that compensate when there is inflation, increase of prices, higher taxes and then higher interest rates, usually for the Polish consumer, they take a position of prudency and some slowdown in terms of lending.

[Dariusz Górski, executive]

Thank you very much. I think we mostly answered questions relating to the past. So now questions on 2022 and further out. Some of them are very direct actually because some analysts asking, what do you expect on your NII line fee line, cost of risk line. So we will not be that direct in our answers. Needless to say that some banks on the market do not want to discuss future at all. But we won't be that far going. So let's try to do it in a more elegant and somewhat, let's say, intellectually challenging way for you. So you don't get a free lunch. First of all, the question is on the outlook for NII in 2020. But along this question, there's another one, which asks about the new NII sensitivity in the current interest rate environment. And also, what is the outlook for depo costs after the good management of deposit costs so far? So like 3 questions, but around NII and NIM.

[Fernando Bicho, executive]

So I will try to explain the drivers and -- but of course, we are exactly now in the middle of a period of unexpected just a few months ago and on the other side, very sharp increases of interest rates, and we are still in the middle of the process. There is this expectation that next week interest rates will move up once again by 50 basis points. And so we are not yet in a new level that we can consider as stable that will allow to have the full picture going forward. So what I'm going to say also, it needs to be taken with the proper, let's say, reserve due to the fact that some effects are still not fully clear. But in general terms, what we can say is that, first, it is visible that NII already strongly increased in the fourth quarter by 15% quarter-on-quarter. And also the NIM moved up to close to 3% in the quarter. And this is still only with partial recognition of the process of increase of interest rates, which happened in the fourth quarter.

The second thing is that, as I mentioned during the presentation, most of the loans reprice quicker than the deposits as it happened in the opposite direction as well. So it means that in the short term, we are amplifying the effect, but there will be a moment in which also there will be some increase in the cost of the deposits. But for the time being, we, of course, we expect the NIM to continue to increase. In fact, in December, the NIM was already above 3.2%, just in the month of December. So it's obvious that for the first quarter, we can expect a NIM not lower than 3.2%.

The second point is that regarding NII, where we had this 15% quarter-on-quarter increase. In the first quarter, we are still going to continue to relevant improvement on one side. But the full picture for the year is a little bit more careful due to the fact that while we can benefit from higher level of interest rates, at the same time, we will need to take into consideration the potential impact on volume growth, which as I said is still too early to assess. But of course, we see some signs of lower origination of mortgage loans in the recent weeks and also consumer loans, although January is not the ideal month to be able to assess the real demand for consumer loans. For the corporate, the picture is still not fully clear. So we still need some more time.

So what we can expect is, first, clear improvement of NIM, as I said in the first quarter, at least 3.2%. Second, NII still in the short term improving due to this different speed of adjustment of remuneration on the asset side versus costs on liability side. Third, the NII also being favorably supported, but at the same time, anticipating that at the end of the -- for the full year, the volume growth may be lower than we were initially expecting several months ago. And for example, one thing to illustrate, this is that -- that is somehow the market consensus that origination of mortgage loans during the current year will be 10% to 15% lower than in the previous year. So this is just, let's say, illustration that there will be some -- there may be some impact on volumes, which for -- according to our current views will be more than offset by the improvement of the overall margins.

[Joao Jorge, executive]

Yes. I think it's important also to understand that behind this, there is always a lot of consumers and different timings and exactly what Fernando said. So it's -- the lending is immediately, and that's why it was so painful the decrease of interest rates because the lending is immediately and liabilities take more time. But then we start by the term deposit, it's a little bit longer term, and it takes some months to go to savings accounts in terms of repricing. Maybe in the long run, we can expect also some changes of mix because there was a major change of consumer behaviors because interest rates were so low that people left all the money in current accounts. So it's normal that there is some shift here.

And also with higher interest rates, also the maximum rate and issuer rate can be higher. And the year, we will see if it's -- we will see what is going to be also the changes. Of course, this is a positive impact. But for us, it's a little bit too fast. So we would prefer that this interest rates hike would have started 6 months before at least and more announced and slowly because it's also disturbing a little bit the normal liquidity in terms of market, the number management of the clients, of their installments. And there is always -- we remember very well when the interest rates were get to 0, that somehow the consumers were giving the -- or they were -- the responsibility to the banks. So the banks were guilty because they were not giving decent rate -- decent percentage in term deposits. So but it's very clear that once again, we will be guilty because the installments of the loans will increase. But so we would, of course, prefer in commercial terms to have this in a more smooth way.

[Dariusz Górski, executive]

One question is touching on NII, but not directly. An analyst is asking whether we see accelerated prepayments of retail loans. And if so, do we expect this trend to have any impact on our small [indiscernible] as we call it here, provisions?

[Fernando Bicho, executive]

So what we can say -- so first of all, we were surprised in the morning to see this question. We were not expecting to have this question. But from the information that we have, there is a small, but very small increase of early repayments. But it's still in the material level, so -- when compared with what was happening 6 or 12 months ago. So there's a little bit of increase, still too early to take conclusions from that. This is the first thing.

Second, most of the time, we did not charge commissions when selling mortgage loans, not -- it was not always, but most of the last 10 years or 15 years, as far as I remember. In most of the years, we were not charging commission when granting new PLN mortgage loans, as it has been the practice, for example, in the last 12 or 24 months increase. So it means that there is no such thing as a small [indiscernible] at least that we can anticipate regarding the potential early repayment of the loans. This is what we can say for…

[Joao Jorge, executive]

And in consumer loans, we have already a pure mechanism that is already offsetting and the grow well and the returning immediately. Returning immediately, but also accounting as the time is happening. So it's not -- there is not an issue yet.

[Dariusz Górski, executive]

Thank you very much. Then there is a handful of questions regarding fee outlook. There is one direct question. What is the fee outlook for 2022? But there's also a question, do we plan to continue charging customers' deposit fee? And I think these are the 2 key questions on the fees.

[Joao Jorge, executive]

I think both to this last -- it's obvious that this in principle will not happen. We will see how it's going to be the end of the year. But if we are talking about deposit fee of high volume deposit at the end of the year with a low probability at the end of 2022, it will happen. We will see. But there will be for sure a change in the compositions. And also I think the analysts should be prepared to see even also in retail some changes of the mix because during the decrease of interest rates were some composition in consumer loans, a little bit of more commission or more insurance penetration. And as interest rates go up, probably we will have more revenues on the interest part, but a little bit less elsewhere. So there is always some offsetting of this part of commissions versus net interest income when the interest rates go up.

[Dariusz Górski, executive]

It was already answered. We're moving to further down the P&L. One analyst observed that HR costs were flat year-on-year for the full year despite 8% growth in workforce. And does it -- is this a sign of wage pressure? And what in general should be expected for HR costs in 2022 and '23?

[Joao Jorge, executive]

I think some time ago, I was in an event with colleagues from another banks. And somehow, I was surprised that the people were considering the biggest threat, not Swiss francs or the geopolitical challenges, but the labor shortage and the world of talent. And it's obvious that this is a big challenge. We will see also our peers, they will relate. Since the beginning for us, it's very clear that we need to offset the salary pressures through efficiency. And this sees a little bit what we have been pushing since the beginning since 2020, when we start to push a little bit further the synergies from the merger. Then when we went through different process that we explained here like a completely reengineered on the mortgage process that is a very labor-intensive process in order to achieve results.

We would never be able to make the volumes that we are making at the moment without this reengineering of the process because it's -- gave us a competitive advantage, but also give us efficiency and this capacity. So first of all, this salary pressure is here for staying, and we should expect that we will have a per head increase of cost of HR costs. And we will try to offset partially. We will never be able to offset completely, but partially by being more efficiency and by that having a lower headcount. But also, please remember that also the mix will change. So as we become more digital, the workforce of the bank is changed completely of a pure traditional branch-based bank. So also the cost per head changes.

[Dariusz Górski, executive]

Thank you very much. I mean, obviously, our colleagues who certainly listen to the call will probably be very pleased by the first part of the answer, probably less pleased by the second part of the answer, but okay. That's the banking reality. Now questions relating to cost of risk. And first, very direct question is what cost of risk and CHF provisions do you expect in 2022? But in a more elegant way is, what are your cost of risk expectations and what will be the impact of higher interest rates on those? What is the maximum level of interest rates manageable from asset quality and cost of risk perspective? This is an interesting question.

[Fernando Bicho, executive]

So it's interesting question. Of course, it's not easy to answer, right? So as I mentioned, we had this sudden very sharp increase of interest rates, which -- so it means that the full impact of the increase of interest rates on installments by customers is still not fully reflected. So this is the first comment. The second is also that the impact depends on -- not only on the increase of the installments that happens for different types of credits, but also to other variables such as what is the evolution of the remuneration of people. And we know that -- there are multiple factors here now on the table. We have, on one side, increase of minimum salary in Poland by 7.5% in January, which drives also some growth -- general growth in some other lower, let's say, lower base salaries.

The second thing is also there is a -- there was a change in the taxation system, which also triggers changes in the disposable income from the -- for different classes of individuals. Third, there is this high inflation. Number four, also is the fact that when granting the loans, of course, the bank adopts scenarios that are not exactly the ones that are enforced at the moment of giving the loans, but also assuming some changes in the interest rates. So we still -- it's still too early to make a full assessment about what can be the potential impacts on asset quality of this increase of interest rates. We are -- for example, just as a reference, we -- in September, we had [ V ] board levels at around 0.2%, 0.3%. Now they are at 3%. And the NBP rate moved from 0.1% to 2.25%. There is the expectation that can still go to 4%. So it's completely in the period of 6 months, everything has changed, and we need to analyze carefully the potential implications.

But for the time being, our base scenario for the cost of risk in 2022 is the one that we have disclosed during our strategy presentation, which will be some kind of normalization at around 0.5% per year. This continues to be our base scenario. I think that we will see the first impact coming from the demand from loans, probably. Then we will see if there will be relevant impacts in terms of asset quality for specific classes of customers. And again, just highlighting that in principle, if everything that we said will be confirmed, let's say, lower segments with lower remuneration would have a higher increase of disposable income versus higher segments of remunerations, but we will need to see in practice how this will unfold.

[Dariusz Górski, executive]

Thank you very much. There's a handful of questions which circulate or center around on outlook for lending and demand for lending, given -- for borrowing given higher interest rates. But I think we largely touched upon it, so unless you want to elaborate. Okay, we will answer these questions. There are 2 questions about our capital and capital requirement. First is do we expect capital requirement to drop in 2022 as a result of CHF provisions and amicable conversions? How big could this impact be? And second, about sensitivity of capital to higher interest rates and whether we have made any precautionary measures.

[Fernando Bicho, executive]

Sensitive of capital?

[Dariusz Górski, executive]

Uh-huh.

[Fernando Bicho, executive]

So regarding the first question. Our objective is to produce the share of FX mortgage loans in total loans to below 10% as quickly as it is -- as it will be possible in order to create the possibility of removing the additional capital add-on that we have for FX mortgage, which is still significant. And as we presented during our strategy, we believe that this is possible to achieve until 2023. So it can happen sooner or later depending on the pace of reduction of the FX mortgage portfolio and the growth of the other loan portfolios and evolution of FX rate. So there are several factors that have influence.

But we have this clear objective of bringing down the share of FX mortgage in total loans to below 10%.If that's -- when and if it will happen, it will allow us to be entitled in principle to benefit from the elimination of the Pillar 2 buffer as it happened with several other banks in the past if the methodology will not be changed. And so this can happen, as I said, until 2023. If it will not happen in 2022, at least, we would expect an update of the Pillar 2 buffer as usual once a year in the fourth quarter. So I think this is the answer to the first question.

Regarding the second question. I think let's -- I will try to answer in a simple way is that with higher interest rates, we will have, in principle, higher recurrent results. Higher recurrent results means higher profits or lower losses, whatever, whichever is the let's say, the forecast. So from this perspective, it is beneficial. There is a short-term negative impact, which was -- that we already discussed, which is the valuation of the bond portfolio, which as I said, it has also some capital impact according to the regulations. But also, we know that part of it, we expect to be eliminated during the year 2022. So…

[Joao Jorge, executive]

And the biggest impact was already achieved because it's already embedded the interest rates at 4%. So unless there is another movement of another 4, the -- so if we are talking about more 50 basis or less. So the big jump was already then.

[Fernando Bicho, executive]

Yes. Yes. So that's why we would expect it to -- although it will come tomorrow for -- in terms of the coefficient that will be applied, the absolute amount will be -- that will be smaller. So generally speaking, higher interest rates should give us support for further improvement of the recurrent results, even if we will be facing some higher costs on one side due to the inflation pressure, and some higher cost of risk if it will happen due to the -- also to the higher interest rate environment.

[Dariusz Górski, executive]

Thank you. And last but not least, we have received questions relating to Swiss francs. But without this, conference call wouldn't be complete. This time actually, very few questions I have to admit. They're mostly around number of decreasing number of lawsuits, whether we see this in the fourth quarter, whether we see it as a seasonal thing or a beginning of a trend. How do we see our provisioning buffer? Do we think we need more provisions? Then there are questions about the settlements, mostly about expectations. And if you could share what is the progress in January and whether we see any seasonality or correlation with high interest rates.

[Joao Jorge, executive]

So that's -- we would not to give some too optimistic expectations in terms of decrease of court cases. It's true that in last quarter, it was smaller. But in our view, the movement is still negative in terms of flow of cases and in terms of decisions of courts. So although we are confident even in the cases that were related to the bank in European Court of Justice and also the cases of Supreme where we will try to make our position. We are working in this less positive scenario. And so it's -- we are not expecting a huge decrease, even if there is a slowdown, a huge decrease or a new trend of lower court cases. This is the first point.

And also, we are not expecting a turnaround in terms of court decisions. These will reflect what we always said at the year of '21 and '22 were years of where we would have, in our view, the biggest impacts in terms of provisions of -- and costs for the solving the legacy portfolio. And this is what we are doing. We were a little bit surprised. I think that I said in the meeting 1 quarter ago that our view would be more at 2,000 level of settlement. So it was a little bit be more than we were forecasting. But I'm quite thought in this. I think that we have a good structure here. So I cannot say if it is 2,500, if it is 2,000 or if it is 3,000. So it's very difficult to forecast. Each customer is a customer. There is -- each reality is a reality. January, for example, it's winter holidays. There is a lot of people in fact stay in the home in quarantine, so it's not extremely positive, but we believe that the capabilities that we have in that time, we will keep having it.

So once again, 500 more 500 less, but we believe that we will be able to reach agreement with customers as we have been doing up to now. Higher interest rates is, of course, a challenge, but this is a combination of FX discount and the conversion with an installment. So it's -- in the way that we are doing, we are seeing case by case. So -- and when there is willingness to find the settlements, we will be able to find it. So we see as a continuation what we have done up to now. We don't see as a big transformation from what we did up to know. So it's obvious that the situation is still not finishing as we would like. But it's clear that the next year will be, again, as it was already this year, but a major step to solving this saga by settlements, by provisions, by contract claiming, so by several ways, but it will be.

[Fernando Bicho, executive]

Just, of course, to reinforce the idea that, of course, we will try as much as it is possible that the recurrent results of the bank that we expect to improve during the year. We'll absorb a larger part of the additional provisions in case they will need to be done during the year 2022. So we -- it's difficult to make forecasts about additional provisions because it depends -- essentially it depends on inflow of court cases and the nature of the court decisions and plus a number of other aspects and clarifications that are still not which has to be before us. So -- and this can determine more or less needs of provisions. But of course, we are still anticipating the continuation of need of making provisions. What our expectation is that we will be able to generate higher recurrent results that would absorb a larger part of these additional costs if it -- when it will come.

[Dariusz Górski, executive]

Also to add, I mean I've listened to the morning call with media, and it's worth sort of repeating what was said there, namely that while you think about the sensitivity or propensity of customers to convert into Zloty sensitivity to interest rates. Also remember that some people simply pay off the loans. So they are totally insensitive to interest rate levels because they want to repay and while they what -- [ older, ] thereafter is attractive exchange rate. Okay. Fernando, any questions that we omitted that you particularly would like to answer?

[Fernando Bicho, executive]

Just final checking.

[Dariusz Górski, executive]

Okay. So allow us a minute or 2. Just to see we're very diligent and try to answer all the questions that arrived, nothing to hide.

[Joao Jorge, executive]

So when Fernando is checking the last questions, I will just put a little bit our view in this year because somehow the year when it started was confusing for us because 2020 was a very challenge year due to COVID, protecting our people, the customers, business continuity and all -- and then the moratoriums, support of the companies, programs with governments, all of these. And then we start to have this dream that now is coming to a scene and everything is finished. So it's -- and certainly, the things is, as Fernando said, 2 years past, and we are still here in these videos and everything. So it looks like that the year somehow there is always this taste of social. And for us, it's important because we have the supervisory board last Friday, and so it was always a reflection.

And then for us, it looks to us that we made a major movement in terms of solving the legacy issue. So between the settlements, between the amounts that we create provisions, between the capacity for the bank in terms of defending their interest and argumentation, even in terms of operational levels, we are today as operating in courts, in massive cases, which might -- it takes a long -- a lot of challenges in operational terms, in the operational risk. And at the end of last year, we had all of these waves of contract claims that the bank had to put. So it's -- but we are quite happy that to all of these efforts is clear visible, and also assessed by the market that the bank made a major improvement in the direction of solving this legacy.

At the same time, and doing simultaneously, so the bank also made a major improvement in terms of revenues and in terms of cost control and efficiency. And it's very positive because it's -- we always have this dream of achieving PLN 1 billion of net profit. We didn't achieve it yet. But if we detect the FX costs, we'd achieve it. And in operational level and in commercial level, this is very important because it's a clear indication. And this is before the interest rates because we have the 1.1 and 1 is the impact of -- 0.1 is the impact of the interest rates. So we adjust by natural business, by managing the business, the volumes, the interaction with the customers, the efficiency and cost control.

And on top of that -- and in top of that, in this strange year also, we put it out this strategy for the next 3 years. And that we present in the last meeting, and it was well assessed by all of you that we are very happy for that. This is also -- we sized then -- we don't do it as just an exercise to the analysts. We do it mainly for ourselves and to be able then to roll out. We are in full rollout mode on this strategy and going through all of the plans that have the components of the strategy that we present to you. And so we added -- I would say that we are very optimistic for the year of 2022. So it's -- there is a move -- a little bit around the country at the moment, a little bit like the weather today, it's very gloomy and a little bit gray because it's inflation, it's the new taxation, it's the geopolitical challenges, whatever, but we are quite optimistic.

And we are optimistic also for the economy and for the capacity of the country to react well to these situations. And we are particularly optimistic for our business. So it's -- of course, low interest rates. It's always a very challenge time for the banks. Now with good economic growth, the bank being prepared higher interest rates and then a more dynamic and normal economy and life of people. We are very optimistic for the prospects or with the prospects of the bank and the bank activity for the future.

[Dariusz Górski, executive]

Joao, thank you very much for your optimistic comments. And given the grayish misery of today, but the spring is coming, nonetheless. So...

[Joao Jorge, executive]

Will take a while.

[Dariusz Górski, executive]

Okay, Joao. Thank you very much for your time, your presentation and your answers to questions. Thank you very much, the audience for listening in and your interest in our bank. We will meet with you on the 26th of April. So there will be a little bit of breathing space and we will not bother you, unless you attend one of many conferences that brokers are organizing between now and of April. It's the eighth time that we're wishing your health and safety. So unfortunately, this -- although it's actually good wishes in general, but stay healthy, nonetheless. Keep up the good work, good luck in what you do. and see you soon. Thank you very much.