Bank Millennium SA

WSE:MIL

Earnings Call Transcript 2022-Q4

[Unknown Executive]

Good afternoon, everyone. Welcome to Bank Millennium 4Q/2020 (sic) [ 4Q/2023 ] Results Call. With us, we have our usual participants, Mr. Joao Bras Jorge, Mr. Fernando Bicho. And as usual, the structure of the meeting will be pretty much the same. We aim to finish the presentation this time in maximum 25 minutes. So there's a change to a normal 30 minutes routine. And then obviously a Q&A session will follow. I'm also happy to see that the investors are sharing our positive take on the results given what the share prices are at the moment.

So let's stick to the optimistic tone for time being. Over to you, Mr. Bicho.

[Fernando Bicho, executive]

Thank you. Good afternoon. Thank you very much for attending this presentation of our preliminary results for the fourth quarter '22 and full year '22. Just as a reminder, we plan to publish on the 15 of February, the full audited financial statements and the Management Board report and ESG report. So we will go as usual through the presentation.

And Pages 5 and 6 illustrate key profit and loss items and the balance sheet and other business items. But as they are shown later on in the presentation, I will skip these 2 pages. And we will go directly to Page #7. The most important facts regarding our fourth quarter performance were that first, we had a positive net result in the fourth quarter of PLN 249 million after a series of quarters where we have shown a net loss. So this is the first important thing. And the second is that also we had a substantial recovery in terms of our capital ratios that allows us to close the year already clearly above the new minimum regulatory capital requirements. Apart from that, also to mention that the level of recurrent net profit or adjusted net profit, meaning the net profit, excluding extraordinary items, namely cost of the credit holidays and the FX mortgage related costs, but also correcting by the temporary savings that we have in banking tax.

This adjusted net profit doubled versus 1 year ago, supported by a stronger growth of NII and also that together with the cost of growth allows us to significantly improve the cost to income to an adjusted level of 36%. And last but not least, we finished the year 2022 with a lower-than-expected cost of credit risk at 44 basis points over total loans.

On Page 8, a reminder that although we have been facing different problems and challenges in the recent past, we are sticking to the execution of the strategy that -- for the years '22, '24 that we have announced in the beginning of around 1 year ago. And so on the right side of the Page 8, we have the status of the strategic goals that were announced at that time.

And as you can see, we are in line to achieve them even some of them clearly ahead of schedule. And we would particularly underline the significant growth of the customer base in retail during the year 2022 and also the increased share of digital clients in our total active client base. And on the financial side, the significant increase in the level of recurrent profitability of the bank.

And additionally, we should mention that in 2022, if not the cost of the credit holidays, the bank would have already generated a positive net result, although small, but it would have been already enough to cover all the costs connected with FX mortgage loans.

Moving to Page #9, going now in more detail. We see on the right side of this page, the gradual improvement of the net profit on a quarterly basis without extraordinary items, which grew 9% quarter-on-quarter and more than doubled versus 1 year ago. Also on the left side, it is visible, the breakdown of the results of the bank during the last 8 quarters and 2 years in terms of the extraordinary items that affected the bottom line.

And as a conclusion of all these impacts, and although we managed to already have a positive result in the fourth quarter, we finished the year with still a net loss of PLN 1.015 billion, still already shrinking this loss versus the previous year.

On Page 10, net interest income slightly dropped versus the previous quarter as somehow we were already anticipating, also taking into consideration the fact that interest rates in Poland seem to have peaked. In fact, we have already some decrease of the market interest rates after the peaks that were reached a few months ago.

Still in the quarter, we continue still to have some increase in the average remuneration from loans, while at the same time, continuing to increase the cost of the deposits. But the increase in the cost of the deposits in the quarter was much smaller than what we have noticed in the third quarter. And so we finished -- we had in the fourth quarter a small drop of the NIM to 4.63% from the peak achieved in the third quarter.

On the net fee and commission income, we increased by 13% versus the previous quarter. But of course, in the third quarter, we have made an adjustment regarding the creation of a provision for return of commissions.

Moving to the cost side. Last year, we faced some extraordinary events, namely the extraordinary contribution to IPS, which was then later partially neutralized by lower cost of BFG, but still overall costs grew 27%. If not, with these contributions to BFG and IPS, the overall cost growth would have been 11%, clearly below inflation. And as a consequence, the adjusted cost to income improved year-on-year from 42.5% to 36.2%.

On Page 12, regarding asset quality, I think that the asset quality, loan quality of the bank has remained strong and resilient. This is shown by having kept the impaired loan ratio at 4.5% despite the fact that, in fact, we are not growing the loan portfolio. We are shrinking -- in fact, we shrank the denominator during the last year. Still we managed to have an NPL ratio at 4.5% together with a relatively low cost of risk, which for the full year stood at 44 basis points over total loans. And this was exclusively driven by cost of risk from retail because as it is shown on the left side of the page, the cost of risk for corporate was insignificant during the full year 2022. And for this performance of cost of risk also contributed to the sales of the NPLs as it is shown also on the right side of the page.

Regarding capital, on Page 13, we can see the evolution of the capital ratios and also how they compare with the minimum regulatory requirements. And it is visible that in the fourth quarter, we managed to significantly improve the capital ratios. In fact, we improved capital ratios by around 180 basis points as a combination of the positive net result of the quarter, improved valuation of the bond portfolio, which means lower losses on the bond portfolio. Significant reduction in risk-weighted assets, especially in the corporate area, also supported by another securitization transaction and a number of other factors that brought the Tier 1 ratio of the group to 11.28% -- 11.3%, sorry, which is clearly above the new minimum of 10.2%. And the surplus is even higher at the level of total capital ratio where we reached 14.4% against the minimum of 12.7%. Liquidity position of the group very strong, in fact, with an LCR above 220% at year-end.

Regarding the FX mortgage, we continued the significant effort to reduce the size of this portfolio. Again, in 2022, in currency terms, we managed to decrease this portfolio by 17% on the top of a similar reduction in the year 2021. And as a consequence of this, if we look at the outstanding of FX mortgage deducted by the part of the provisions that are allocated to the loan portfolio, this portfolio already represents less than 9% of total loans.

We continue to increase the provisions for the legal risk in the quarter with PLN 478 million through P&L. And where we stand now in terms of provisions versus the total outstanding, as we see on Page 15, total stock of provisions for Bank Millennium originated FX mortgage loans stood almost at 47% at year-end compared with almost 26% 1 year ago.

The effort to reach amicable settlements with clients in court and out of court continues and did not slow down, although the number of settlements that was possible to sign during this quarter dropped to 1,312, still above the number of inflow of new court cases. And the cost of the settlement was similar to the one that we have shown in the second quarter and lower than in the third quarter.

Moving to the second part of the presentation regarding the business performance and the highlights. As I mentioned in the beginning, we had a significant growth of the number of active customers in retail by 193,000 year-on-year, and we reached already 2.5 million active digital customers. We had a stronger growth of deposits versus loans where the loan growth was impacted by market conditions, the decrease of the FX mortgage portfolio and also our efforts to manage the risk-weighted assets.

On Page 18, we see the breakdown in terms of evolution of the loan portfolio. So year-on-year, the net loan portfolio dropped 3%, while still we have the growth of PLN mortgages by 4% and almost flat portfolio in terms of consumer loans and the drop in corporate loans and leasing. And so as I already mentioned, we continue to dilute the share of the FX mortgage portfolio in total loans. On the deposit side, we had a good quarter, especially on the retail side and bringing the overall customer deposits growth to 7% year-on-year, while we stabilized the level of the investment funds after several quarters of drop.

On Page 19 and with some more details about retail. So a good performance, as I said, in retail deposits that grew 4% year-on-year. And on the other side, in terms of sales, we had a continuation of the drop of the origination of new mortgage loans due to all the market environment and higher interest rates. And so the origination stood at PLN 933 million in the fourth quarter, a drop of 24% quarter-on-quarter. And the overall origination was 23% lower than in the previous year.

On the consumer lending side, the drop was much smaller. And in fact, when we look at the year-on-year comparison, the overall origination of cash loans just dropped 3% year-on-year. And still with this drop, we managed to slightly improve our market share.

Page 20 illustrates the growth of the number of active customers, micro business customers and current accounts, very strong numbers, which shows that at the same time that the bank is addressing the recent challenges. The normal business, normal retail business moves on.

And also important, the continuation of the increased importance of the digital channels as it is illustrated on Page 21, especially these numbers of 2.5 million digital channels, users, 2.2 million customers using the mobile banking, 81% of the cash loan sales done through digital channels, 95% of time deposits and also 34% share of digital channels in the acquisition of current accounts during the full year 2022.

The next pages illustrate in a more descriptive way the innovations that we have been continuing to provide for our retail customers and business customers, also the awards that have been attributed to the bank as illustrated on Page 24 and also the continuation of the development of our Goodie platform. I will not go through all these details, but this is a clear illustration of the continuation of the digital strategy of the bank, which is producing visible results.

And moving to the corporate business side. The loan growth in the corporate segment was constrained by the capital limitations that the bank faced in the second half of the year and also by the significant effort that our corporate area made in order to support the process of reduction of risk-weighted assets.

Altogether, this brought a reduction of gross loans to companies by 2% year-on-year, in which we had a drop of 5% in loans to companies, partially offset by a growth of 3% in the leasing portfolio. On the other side, corporate deposits continue to grow by 15% year-on-year. And we would like to also highlight the gradual improvement in transactional activity of our customer base, which translated into a growth of 3% in domestic transfers in the last year and a growth of 21% in FX transactions and with a large part already being done through our Millennium ForEx trade platform.

On Page 27, the leasing origination year-on-year dropped by 9%, while the factoring turnover remained stable and the volume of FX transactions significantly increased by 21%. So these are the most important highlights of our fourth quarter and full year 2022 results, and now we are available for the questions. Thank you.

[Unknown Executive]

Thank you very much. That was 20 minutes. I clearly underestimated your ability. As usual, there are many questions already. And as usual, we'll try to group them. Maybe this time we start from Swiss franc related because it's clearly a bit of a point of attention.

A number of questions is relating to the pace of settlements and the new number of negotiations, the participants are asking if the 1,200 to 1,300 settlements per quarter is a new sustainable rate and whether we see a shrinkage of space for negotiations with our clients?

[Joao Jorge, executive]

So although we would like to go back to 2,000 settlements per quarter, with high probability this will be the level. I don't -- it's difficult to know if it is 1,200, 1,500. But it's clear that as we go through the database of customers for more than 3x already that we had a lot of discussions with the customers. There is a new trend that is appearing, which is the customers that would not like to do anything, so they would like to stay with their Swiss franc mortgage loan and want to -- don't want to litigate, don't want to convert, don't want to only repay, don't want to do anything. They want to stay as it is, which is, of course, their own right. Also, we see some increase on the settlements on the court cases. Of course, this is more on the hundreds level. So it's -- they are less material in terms of number of cases. But it's positive that even already some law firms are already approaching us for groups of 10 or 15 customer settlement that we analyze and we propose for their customers what could be the settlement.

So summing up, I would say that, yes, maybe this 1,200, 1,300 could be the next trend for the future as we are going to achieve also running out of our customers in terms of customers that want to convert, don't want to litigate and don't want to stay and the ones that don't want to stay so in Swiss francs, yes.

[Unknown Executive]

Thank you. Another question, a few questions are relating to the dropping number of lawsuits against us and whether we could comment in that context on the run rate of provisions that we expect in 2023?

[Joao Jorge, executive]

I would not like to be very optimistic on that. I know that some colleagues were a little bit more optimistic. So it's the same. So we always thought that we would need to convert as much as possible. And this is the only way to solve the solution and to solve the problem, sorry. And this, of course, as we convert more, there are less contracts, and so there is less litigation. So we believe that this trend is normal, so we would have less and less cases. But I would not like to be very enthusiastic year. So it will be a normal drop as time goes by and not a radical change that suddenly there is no litigation, I would say. Yes, yes, yes, of inflow. So I would not think that suddenly we will have -- they will disappear, even because I think it's very important for people to understand that there is also a physical incapacity for the court system to handle.

So the court cases that we are having now sometimes are court cases that they will put [ some months ] before. So all of this process is a normal process. So it's unfortunately, we have the situation in Poland, and this is going to stay like we have. So -- but also what we are having today is what we predict in the past. So it's somehow in our models, in our models for negotiation, for approaching for our customers and for making provisions. We are analyzing also what are the customers that are with contracts and what how they behave, what is the probability for them to litigate. And so what we are having today is what we expected 6 months or 1 year ago. So we are not surprised.

[Fernando Bicho, executive]

And regarding the financial side, the implication of -- because the question is also about the potential run rate of provisions for 2023 for this legal risk. So what we can -- so first of all, just to remind, I did not stress this during the presentation, but when we look at 2022 level of provision for legal risk compared with 2021, the amount of the provision was already lower not hugely lower, but it was already lower. So this is just the first point. Although on the other side, we had higher cost of negotiations. This is the first point.

The second point is that the drivers of the provisions for the FX mortgages tends to be the inflow of the court cases. So much more than the probability of winning versus losing because we are gradually reflecting in our methodology, the actual situation in terms of court verdicts. And so what makes more difference for the future provisions is how the future inflow of court cases compares with the one that we are expecting to have.

So if nothing would change, of course, without any other factors, then of course the provision for legal risk in 2023 should be lower than in 2022. Then, of course, we always have to be prepared for some extraordinary adjustments that can come by different reasons. But the base scenario is that the provisions should be lower as long as there is no change in terms of trends in the inflow of the court cases.

[Unknown Executive]

And surprisingly, we also have questions relating to the potential impact of negative ECJ ruling. So what we think a one-off provision might be as a result of that, there's actually a very specific question here.

[Fernando Bicho, executive]

So this is one of the factors that we -- so first of all, because we believe that there's a lot of expectation about the date of 16 of February. But just to remind, 16 of February is the date of announcement of the opinion of the General Counsel of the European Court of Justice is not the date of the verdict. If the verdict will be negative regarding the right of the banks to have the remuneration for the capital that was lent to the customers during a long period of time, then of course, we would need to make this adjustment in our methodology.

Currently, we are not attributing -- we have been attributing in a conservative way, a low probability to this when calculating the provisions. This does not mean that we think that it is not fair. It's the opposite. This would be the fair solution for the question that was submitted, that the banks are entitled for the remuneration. In case that decision, that verdict will not be according to what we think is right, then of course we would need to eliminate from our methodology the probability that currently we have assigned to such remuneration, which is a relatively low probability. So we would have to make an adjustment, which would be -- which I don't want to -- not to -- let's say, to quantify because it also fluctuates through time. But it would not jeopardize the yearly results of the bank. I think this is what we can say regarding this.

[Joao Jorge, executive]

Especially, we always -- we were always very prudent to what disclosure here, because there is always a tendency to mislead this. So at the moment, if we would explain all of this, this will mislead as taking as a very small amount. And so it's -- and also, I remember in beginning that we were always very prudent on that because this will be misleading as well in beginning of all of this saga as a very small risk. Now everybody is surprised that this is coming to an end because it's, of course, everything that starts needs to finish as well. I would like to remind you all that if we would not have the credit holidays, would have already a positive result of the year of 2022, even with Swiss francs. And when we were explaining more than 1 year ago that we would be able to dilute the Swiss francs with the operational results, it was very difficult to hold the market to understand how this could be possible.

And of course, by negotiating, making provisions at the same time and everything like that, now we are achieving this level. So at the moment, we are quite confident about the probability that we have to that. The adjustment would not be natural in principle. Of course, this is always discussions with the auditors as well. And of course, one thing is what we have in our methodology. The other thing is also what the market does and how we need to adjust; and also, if it's going to be a major change or not in the behavior of the customers. We and I think all the players that are living and working in Poland, we understand that the expectations of nonremuneration is already the speech of the lawyers. And so the customers that are litigating, the customers that are talking with lawyers, everybody that is reading the press believes that there is 0 probability of any remuneration. So this is already embedded in the market, in the behavior of the customers and everything. But one way or another, we need to have these materializations, I would say. So...

[Unknown Executive]

You also mentioned credit holidays. And there's one question whether if there's going to be no extension of credit holiday schemes until 2024. Do we plan or expect to further reverse costs in '23?

[Fernando Bicho, executive]

No. The provision that we have now for credit holidays for the year 2023 is our best estimate of the usage of the credit holidays during the year 2023. So for the time being we, otherwise we would release it now. We would not wait. So what we have now at year-end with this adjustment that was communicated to the market in the beginning of January is our best estimate of the final cost of the credit holidays. The actual cost depends on the number of people that take usage and also on the level of interest rates that exist at the time that they use the holidays. So there is more than one factor than just the number of people that are coming versus the moment where we made the estimation. So for the time being, we are not anticipating increase or decrease. What we have now is our best estimate of the cost for 2023.

[Unknown Executive]

It's probably worth also mentioning that we're not that far off from the market average, which is probably around 68% at the moment. So unless market changes, there should be no change at our end.

Now there's a number of questions relating to our capital recovery and generally capital. Few participants ask us about our thinking of the length of the capital recovery. One is asking whether the fact that we already are above minimum capital ratios, means that we still stick to year-end '24 as a potential time when we exit the scheme?

[Joao Jorge, executive]

Maybe I will start, and then Fernando will complement. So this quarter for us was very important because we returned to profitability and will return to the meaningful capital ratios. So now, of course, we will concentrate on MREL. And in due time, initially, our plan was first half of 2024 to exit the recovery plan. But we are not in hurry -- so if it is going to be earlier, yes, but this is our first plan. I think it's very important to say that we will keep working in optimization of capital. So this is not achieved, and then we don't do nothing more.

So we will keep looking for transactions or securitization, optimization of risk-weighted assets, improving of methodologies or any other transaction that will help the capital position of the bank and also put us in stronger position to manage any other constraints or any other turbulence that can be in the future. So we are in the same way that we were very confident when we announced what we were doing and how we are doing and everything.

Also, we are not now going in hurry to reverse everything at once because we think it's due time, it's very important that we achieve this. It's very important also to all the market players to solve the capital first. Now we can focus ourselves in MREL. But we will keep -- so we should keep expecting risk-weighted assets management, securitization and the type of transactions. So everything that will help our capital.

From another side, we are still also very optimistic in terms of natural results. So we think that all of the improvements that we did in our business model, in our efficiency, will keep delivering results. So it's probably now more in volumes than it improves of the margins, but we are quite confident about what we are going to deliver this year. And this, of course, will also create capital. So I remember 1 year ago, we were a lot of challenging if we need to make a capital increase and everything like that, we explained what we were doing. But in the same way, now we don't want to jump to overconfident situation, saying that everything is done and we don't need to pay attention more, because this is not true. So we will keep building our capital position through profitability, capital optimization, improvement of methodologies, securitization and other kind of transactions. And of course, now with a little bit less stress on capital, now we can focus in MREL that we are fully focused in achieving during the year of 2023.

[Unknown Executive]

Thank you, Joao. You actually answered the few questions which were precisely about what you said, namely whether we will continue to securitizations given that we are already above minimum levels. And the other question was about whether the fact that we are not meeting P2G buffer means that we will continue with optimization of RWA. The answer is obviously been given and the answer is yes.

Now we move to questions relating more or less directly to 4Q, a few analysts asking us about the FTE developments. They're no longer dropping and they're asking in which areas we are employing.

[Joao Jorge, executive]

Truly, what changed was retention. So it's -- so this even catch up is a little bit surprising. So we decreased heavily in terms of attrition and turnover in IT and also in the network. I would not consider -- so first of all, we do not have a big target in terms of headcount reduction. So we have a big target in terms of efficiency, but efficiency can be achieved by 2 ways. So one way is to use less resources to serve the same number of customers and to deliver the same revenues, or another way is to stabilize the headcount and the infrastructure and to serve more customers. And with high probability, we would now be more in a position that we have stable headcount, control the cost base increase, of course with inflation, salary pressures, but I would say, control and with higher percentage growth in terms of the revenues. So I would say that we would stay more or less at this level in terms of headcount, 50 plus, 50 less. So it's not any dramatic situation, I would say.

[Unknown Executive]

Thank you very much. Sticking -- remaining within the subject of 4Q. It was a very simple question. Did the bank pay contribution to FWK/IPS in 4Q, there was no contribution to APS in 4Q, and we did not pay FWBK because the law did not require us to do so. There was also a question about other elements that contributed to capital recovery in 4Q, but I think Fernando covered that pretty much in detail, maybe you want to add.

[Fernando Bicho, executive]

No. In the presentation, we have even, let's say, a graph splitting the most important aspect. And then there are always some additional technicalities associated with the calculation of capital like DTAs and so on, which also benefit from positive results and the reduction of the loss on the bonds. But the most important is what we factors are the ones that we underlined. I just -- because there is also a question about if we expect still that our capital ratios will drop below the regulatory requirements during the coming quarters.

So just to be clear, of course, our plan is to stay permanently above the minimum regulatory capital ratios that were communicated to the bank in the end of December at all the time. Of course, everybody knows that on the 1st of January, the transition period for the treatment of the bond portfolio that is so-called available-for-sale portfolio that was affecting 60% the own funds of the bank. The losses were affecting 60% the own funds of the bank. From 1st of January, we are fully reflecting such losses in the capital ratio, which means that on the 1st of January, there was an impact from increasing this negative impact on the own funds, which was already partially reversed during the month of January due to the continuation of the drop in bond yields. And so as a consequence, a significant reduction in the valuation -- in the negative valuation of the bond portfolio. Just for the avoidance of doubt, even with that impact on the 1st of January, we would be clearly above the minimum regulatory requirements.

And now looking at the recent valuation of the portfolio, in fact, this impact from this change is relatively small. So summarizing, we want to keep at all moments the capital ratios above the minimums, but this is not the only issue we need to -- we want to make sure that they are sustainably and comfortably above the minimum regulatory levels.

There is related somehow related question regarding MREL asking what is our expectation regarding the amount of issuance of MREL eligible instruments until the end of 2023. And so I just would like to remind that what currently exists are still interim levels targets. We are expecting that probably during the second quarter, our target will be updated, taking into consideration the new Pillar II requirement, P2R requirement that we received in the end of December. So it means that, in fact, the MREL requirements should be lower than what they are currently.

And so we are counting with this during the second quarter of the year. And then we are already trying to anticipate what should be the -- what will be the position of the bank by year-end. So we anticipate the need of issuance of MREL bonds until the end of this year in an amount which should be somewhere close to PLN 2 billion. We think that this amount would be enough to fulfill the requirements that will be enforced at the end of the year if there will be no prolongation of interim level. Because if there will be prolongation of interim level, then the amount needed would be lower.

[Unknown Executive]

There was also a question about amortization rate of mortgages, whether it has accelerated along with higher rates?

[Joao Jorge, executive]

Yes. But it's not just higher rates. It's the people that took mortgage -- took the credit holidays and then of course, they amortize, yes. So this also is administration that there is 0 social rationale for the credit holidays because not only mortgage in Poland is already upper mass segment product. Yes, of course, there is 0 stress on the mortgage payment, what was the usage of the credit holidays to early repay the loans.

[Unknown Executive]

Now we're moving towards outlook. There was a question about the fees, which seem to have been under pressure from weak mortgages and perhaps synthetic securitization and what our thinking about the fee outlook in 2023 is, actually, mortgages are not that much important, right?

[Fernando Bicho, executive]

I think what we can say for now is that we are not very optimistic regarding fee and commission income for 2023 for a number of factors. There are several lines which are being affected. So on one side, we still have the negative trends until recently of the investment funds, so making the year-on-year comparisons negative. We have also some limitations in terms of loan growth, especially in the corporate sector, which is also a limitation for part of the fees that we will be able to book. Also, higher interest rates means that we are not charging commissions on the deposits. So it means that also when we will compare with 2022, we also have some negative impact. But again, for us, what matters is when we look at the overall combination of NII and NCI that the trend will still be positive. So this is what is important, but we are not driving let's say, expectations about improvement of the fee and commission income line this year.

[Unknown Executive]

Talking about outlook. There were also 2 questions about the deposits and what we think will grow from 2023. And there was a question about the demand evolution for various types of loans that we see, mortgages, cash loans, corporates.

[Joao Jorge, executive]

So it's mortgage with all of these discussion of the credit, all is changing of [indiscernible] and everything. It's a market that, unfortunately, for the youth of the country is being destroyed, and we need to wait and see how it's going to develop in the future. It's a pity that this is being done. It's surprising how the European Commission was able to change without drama LIBOR to SARON in Swiss franc portfolio, which is so problematic. And we are here with this drama and incapable to make a smooth process. But I think that this is going to be the impact. It's clear that there is a need in the market for the younger generation to buy a house. It's clear that there is the willingness of the banking sector to provide this sector, just hope that the authorities will help us to serve these customers.

In terms of consumer loans, small business loans, credit cards, overdrafts and all of that, we are quite optimist. We believe that there is a normalization of these interest rates. So of course, the interest rates went up, but also with high inflation and higher prices. So this is a normalization of this levels, and we believe that there is room for having a more active market. And so we expect a better performance. We don't see a lot of room to improve net interest margin, but we see some room to improve net interest income through higher volumes. Due to the risk weighted asset management, we would not be very active in huge transactions, syndicate loans and these kinds, but we keep being very active in SME landing and so we also see some room in this sector.

[Unknown Executive]

Okay. Fernando, have you cherry-picked any questions that we have not addressed? I think we've mostly covered, unless you…

[Fernando Bicho, executive]

There's a question about cost of the deposits, I think just department. Yes. There is a question about cost of the deposits. I think the increase of the cost of the deposits is not only the increase of the interest rates on the deposits is also the change of the structure of the deposits because as time passes, when we have higher level of interest rates, of course, there are part of current account deposits that came back to time deposits where they were before the pandemic. So this is a natural and natural process and this translated in this overall cost of the deposits that, that we showed in one of the pages of our presentation.

But as we shown in the fourth quarter, the change in the overall cost was smaller than in the first quarter. Still probably the first and second quarter may still show some increase, but at the same time, due to the fact that no further increase of interest rates are expected, that market rates already started even to pricing in several quarters ahead, a decrease of the interest rates and actually the bond yields already reflect these. I think this also will put some, will cool down potential significant further increases of the cost of the deposits.

[Unknown Executive]

All right. Thank you very much, gentlemen. I think we answered, if not all, then almost all questions. Any closing remarks, Joao?

[Joao Jorge, executive]

Just what can we say that we are happy from the results that we present and especially from the employee side because it's obvious that for a while, we were having very strong operational results, but we were not materializing this in net profit. So -- and this is always a very difficult dilemma for everybody. So it's internally, I was drinking coffee with some people in the middle of the day, and everybody was happy with the results, which is -- which, of course, it's important for us. We are optimistic.

So as usual, the markets are estimating a decrease of interest rates because they are estimating some slowdown or some recession. We are estimating maintenance of these interest rates for a while with the soft lending not because the conductors of the monetary policy where talent enough because the economy is resilient enough. And so this means that, of course, it will be a higher cost of risk, but it will be still a low cost of risk comparing with higher interest rates and deflation. And we see some, of course, some slowdown in terms of economy, but still very positive, still positive, not very, still positive, I would say, economy cycle. The economy in Poland is very resilient, and so we will see transactions, credit, dynamic.

One thing that we learned for a long time ago is that customer acquisition sooner or later materialize in revenues and some models say that it's 4 years to full capture the value of the customer, but it does matter. So all of this customer acquisition that we are having in recent times will materialize in revenues in the future. So we are quite optimistic. So we know that we need to combine all of that with prudent in terms of managing the capital, some aspirations in terms of growth of the corporate sector where we think that we have the know-how and the talent needs to be postponed 2x with higher capital ratio. But anyhow, we are quite -- although knowing that there is some challenges, but we are quite positive for the next quarters.

[Fernando Bicho, executive]

Just because one question came in, it was about the cost of credit risk that we also discussed today in the morning during the press conference just to clarify. So as we showed, we had last year a cost of risk of 44 basis points over total loans. Without the NPL sales, the cost of risk would have been 55 basis points over total loans. Today, in the morning, in the press conference, we said that we provided a range of expected cost of risk somewhere between 60 to 70 basis points during 2023. The drivers for this is that on one side, and although we are not significantly growing the corporate portfolio, it's difficult to expect that we will have, again, another year of almost 0 provisions for the corporate segment. This is one factor. So we always have to come with something. And second, on the retail side, this higher interest rate environment leads us to believe that we may need some additional provisions for the retail portfolio, both for the consumer lending and also for the PLN mortgage.

So altogether, we are providing this range. Of course, we know that last year, the performance was better than what we had expected. We will do everything, of course, once again, to repeat this performance that the performance this year will be lower than this guidance. But for the time being, based on the scenarios, macro scenarios and so on that we have. This is the, let's say, the range that we can provide in the beginning of the year.

[Unknown Executive]

Okay. This concludes our conference. Gentlemen, thank you very much for your answers and obviously, for your time. Thank you very much, all the viewers for your interest and time. To remind, we are reporting the full 2020 accounts on the 15 of February. You may expect that we normally have our AGM in late March, and obviously our reporting date for the first quarter is 28 of April. Thank you very much. And as usual we're at your service if you have any further questions. Thank you very much.