Bank Millennium SA

WSE:MIL

Earnings Call Analysis

Significant Profit and Capital Ratio Growth in 2023

In 2023, Bank Millennium continued its upward trajectory, marking its fifth consecutive quarter with a net profit, achieving PLN 576 million for the year, a figure that would swell to PLN 3 billion excluding extraordinary items. The bank's Net Interest Income (NII) increased by 13% year-on-year, bolstering core income growth by 10%. Notably, the bank's cost-to-income ratio remained exceptionally low at 29.6%. Capital ratios saw substantial improvement with Core Tier 1 at 14.7% and total capital ratio at 18.1%, exceeding the required thresholds comfortably. Additionally, the bank exceeded several strategic targets ahead of schedule, including amassing over PLN 3 million retail customers and increasing digital client activity to 90%. The reported Return on Equity (ROE) stood at 9.1%, climbing to 21.7% when omitting extraordinary events.

Strengthened Capital Ratios and a Focus on Digital Channels

The company achieved a substantial increase in its capital ratios over regulatory requirements, thanks to initiatives like a securitization transaction and reduced losses on available-for-sale bond portfolios. A digital wave has swept across its operations, marked by jumps in the number of active digital customers, a surge in mobile app usage, and the introduction of top-rated banking apps for corporate clients in Poland.

Consolidating Profitability Amid Sector Challenges

With a net profit of PLN 576 million, the firm held a firm ground despite headwinds, such as provisions for FX mortgage legal risks. Net interest income (NII) saw significant year-on-year growth, although sensitivity to interest rate fluctuations remained a factor to watch. Fee and commission income was relatively flat, and operational costs were tightly managed with a 5% increase.

Loan and Deposit Dynamics Shaping Financial Health

The organization witnessed a 9% growth in total deposits while maintaining a prudent loan-to-deposit ratio of 69%. This financial prudence is also evident in the careful handling of non-performing loan (NPL) ratios, which stood at 4.6% thanks to strategic NPL sales.

A Resilient Asset Quality and Proactive Approach to FX Mortgage Risks

Asset quality proved resilient in 2023, performing better than expected with the cost of risk forecasted to be around 50 basis points. Efforts to address the FX mortgage saga included noteworthy provisions totaling close to PLN 7.3 billion as the company navigated through unforeseen European Court of Justice decisions. Settlements with customers played an integral role in this strategy, with a continued focus anticipated in 2024.

Cost Management and Future Guidance

The institution successfully restricted cost growth, barring exceptional items, and expects this trend to continue with projected cost increases not surpassing 15%. Looking ahead, interest rates in Poland are predicted to retreat to around 4.5-4.75%, which may impact NII based on the company's sensitivity analysis.

Employment Strategy and Capital Allocation Priorities

Despite industry trends, there are no plans for sweeping headcount reductions. The company continues to invest in emerging fields such as data science and AI. When it comes to dividend distribution, while capital appears robust, the company is clear that it must first complete several regulatory steps before considering payouts to shareholders.

Business Outlook and Strategic Focus

The firm surpassed its 2024 business results target, achieving a remarkable PLN 3 billion against an expected doubling from PLN 1 billion to PLN 2 billion. Capital allocation will prioritize areas like SME and corporate banking, aiming to optimize returns while maintaining capital risk management.

Earnings Call Transcript 2023-Q4

[Operator]

Good afternoon, everyone. Welcome to Bank Millennium 4Q 23/2023 Results Call. We're very pleased to have started the earnings season for Polish banks at a high note. We have surprised the market positively.[ Share ] price is also responding quite nicely. With us today, we have Mr. Joao Bras Jorge, our Chairman of the Board and CEO; and Mr. Fernando Bicho, Deputy Chairman of the Board and our CFO. As usual, Mr. Bicho will provide a synopsis or presentation of the results, and then both gentlemen will be available for questions. Fernando, the floor is yours.

[Fernando Bicho, executive]

Thank you very much for attending this presentation once more. One quarter is gone, and we make today the summary of the fourth quarter and the full year 2023 results still on a preliminary basis. So we would start with the page #4 of the presentation, which tries to summarize the main achievements during the year 2023. First of all, we improved significantly the capital ratios of the bank during the year 2023. And at the end of December, we have a Core Tier 1 ratio of 14.7% and a total capital ratio of 18.1% on a consolidated level, which means a significant improvement of more than 5 percentage points over the level that we showed in the end of September 2022. And this allowed us to fulfill in a very comfortable way, all the minimum capital requirements, including P2G. Also, important was the fulfillment of the interim and then final MREL requirements as of the end of December, following the improvement in the capital position of the bank and also the issuance of EUR 500 million of senior non-preferred bonds that we made in September. And also for the improvement, both on capital ratios in the MREL fulfillment also contributed the loan securitizations that we have done during the year 2023, namely the leasing securitization that we completed in July and the cash loan securitization that we concluded in December. Regarding profitability, the fourth quarter of 2023 was the fifth consecutive quarter with a net profit, which allowed us to close the year with a total net profit of PLN 576 million or PLN 3 billion if we exclude extraordinary events. The results were supported by a strong NII growth by 13% year-on-year, excluding the impact of credit holidays and which also supported the growth of core income by 10% year-on-year. The full year 2023 cost-to-income ratio was exceptionally low, lower than 30% at 29.6%. We had during the year, the exceptional contribution of the gains from the insurance transaction that we announced in the first quarter. And also, we showed a solid management of credit risk with a relatively low cost of credit risk at 39 basis points over total loans. The focus that the bank had in the improvement of the capital ratios and on the fulfillment of the MREL requirements did not prevent us from continuing a solid business development, although temporarily affected in the area of corporate lending by the effort of improving the risk-weighted assets. And so first of all, our total deposits grew by 9% year-on-year, and cash loans grew by almost 8% year-on-year, while PLN mortgages grew 3.6% year-on-year. We also had a substantial growth of the investment funds under management of 26%. Due to the significant growth of deposits at a faster pace than loans, which actually slightly contracted during the year, the commercial liquidity surplus crossed PLN 33 billion and the loan-to-deposit ratio dropped to 69%. Also on the commercial side, we will highlight the growth of overall cash loan sales by 16% year-on-year. And also the growth of micro-business loans by 56% year-on-year, 90% of which collateralized by BGK guarantees. Moving now to more details. So pages 6 and 7 have a summary of the main key profit and loss items and key balance sheet items, which I will be referring throughout the next slide of the presentation. And so going directly to page #8. As I already mentioned, the net profit of PLN 576 million in the full year 2023 followed a very positive development after 2 years of net losses. And it corresponds to a reported ROE of 9.1%. If we would exclude the extraordinary events, both positive and negative, our ROE would reach 21.7%. And as a consequence of the growth of the adjusted net profit by 34% year-on-year. Apart from the other items that we already mentioned, namely the growth of NII and a very low cost-to-income ratio, we also highlight that the NPL ratio stood at a comfortable level of 4.6%, also supported by sales of NPLs that took place in the second and in the fourth quarter. On page 9, we summarize the status of several key indicators that we presented when disclosing the strategy for the years 2022-2024. And as we can see in several of them, we already reached the targets 1 year in advance. This is particularly the case of the number of active customers in retail, which during the fourth quarter of '23, crossed the PLN 3 million threshold. Also the share of digital active clients in the total active client base that reached already 90%, the share of digital in sales is growing towards the target and was already at 75% by year-end.On the financial side, the net profit excluding extraordinary events reached PLN 3 billion when we actually had foreseen PLN 2 billion to be received in 2024. Of course, at that time of course, that was also benefited from a higher interest rate environment. Cost-to-income ratio exceptionally low, below 30%, and this return on equity, excluding extraordinary events is 21.7%. On the risk side, the NPL ratio staying below the target of 4.7% and the share of FX mortgage in total gross loans continuing to decrease staying at around 11% at year-end before deduction of the provisions for FX mortgage legal risk. Apart from these quantitative targets, we also should highlight the continuation of the recognition from the market of the top quality of the services provided by the bank to with customers that we already mentioned in previous presentations, but once again, reminding the bank received awards for top quality both in terms of the friendly retail banking was in terms of the branch network and on digital. On page 10, going now through more details of the results. So as we already mentioned, fifth consecutive quarter with a positive net result. The result of the fourth quarter was PLN 115 million positive or PLN 741 million, excluding extraordinary events. And the ROE on a reported basis, as we mentioned, 9.1%. So despite the fact that the year continued to be significantly affected by sizable provisions for FX mortgage legal risk. On page 11, looking at the evolution of net interest income, the growth year-on-year was 13%, excluding the impact of credit holidays. In the fourth quarter, we had already some decrease of the average remuneration on loans as a consequence of the cuts of the interest rates and also due to the substantial fall of around 80 basis points in the level of the market indexes in the fourth quarter versus the third quarter. At the same time, we also already show a reduction in the average cost of the deposits. But of course, this translated into a reduction of the NIM during the fourth quarter. And in terms of NII, we had a drop of 6% versus the previous quarter, which may seem large, but we need to remember that from this 6% drop, more than half is connected with the cost of the senior non-preferred bond issue that we concluded in September, plus the final adjustment of the cost of credit holidays, which was around PLN 9 million in the fourth quarter, plus also some costs from the securitization transactions that flow through NII. So actually, if we deduct these separate extraordinary impacts, the drop of the NII was clearly below 3% versus the previous quarter. Regarding net fee and commission income, it was rather flat, just 1% growth versus the previous quarter, while the full year amount was just 3% below 1 year ago, very much in line with the expectations that we had in the beginning of 2023. Moving to the cost side, overall, year-on-year, we had a drop of operating costs by 5%. This was supported by the much lower contributions to banking guarantee funds and also to IPS. If we would exclude these regulatory costs, we would show an increase of total operating costs by 14% year-on-year with very similar growth between growth of staff costs by 13% and the growth of admin and depreciation by 15%. Still, this is in line with the trends from previous quarters. And the bank continues the gradual process of optimization of the branch network. So actually, during the full year, we had a reduction of 22 branches, while the number of employees remained flat. Regarding asset quality on page 13, the bank continued to benefit from strong credit quality and which translated into a low cost of credit risk and higher coverage of NPLs by total provisions. So the NPL ratios I mentioned, was at 4.6% at year-end and the cost of risk at 39 basis points over total loans in which we would highlight the very low cost of risk for the corporate loan portfolio. And also, as we already mentioned, the result of the fourth quarter was further supported by another sale of NPLs, which has a positive gross impact of PLN 42 million. Page 14 summarizes the picture of the capital ratios, MREL requirements and liquidity. There was a very strong improvement of the capital ratio during the second half of the year, including in the fourth quarter as well, supported by the impact of the securitization transaction and also reduced losses on the available-for-sale bond portfolio. So we finished the year with a substantial surplus of the capital ratios over the minimum regulatory requirements, which were also adjusted downwards in December '23 as we announced through a current report. So we are now enjoying a quite large surplus over the minimum regulatory requirements, including P2G. And on the other side, we also fulfilled the MREL requirements at the year-end, supported by this combination of capital improvement and the issuance of senior non-preferred bonds. The liquidity indicators continue to further improve with LCR already above 300% due to the continuation of the growth of the surplus of the liquidity due to the different trends of deposit growth versus contraction of loans.Regarding FX mortgage, on page 15, we still have continuation of the inflow of the [indiscernible], but before going to that, the portfolio continues to be reduced. Year-on-year, we had a reduction of 15% in Swiss franc terms, of the exposure. And at the same time, we continue to build up the provisions against legal risk. In the fourth quarter, we created PLN 620 million for the Bank Millennium originated portfolio, bringing the total balance sheet value of provisions to close to PLN 7.3 billion. This means that the net outstanding of FX mortgage loans over total net loans dropped to around 4%. On page 16, we show also the evolution of the inflow of court cases, which in the fourth quarter was lower than in the third quarter. While at the same time, we had an increase in the number of settlements which came back above 1,000, and actually, the fourth quarter was the best quarter of the year in terms of amicable settlements with FX mortgage borrowers. So overall, we have more than 21,000 settlements which is equivalent to 35% of the active loan agreements that existed at year-end 2019. The total amount of balance sheet provisions for FX mortgage legal risk as a percentage of gross outstanding of FX market loan book was close to 83% at the end of December. Moving now to the second part of the presentation regarding business results, apart from the numbers that I already mentioned, we would highlight the overall growth of retail customer funds by 13% year-on-year. Together with 3 million active customers in retail, 2.7 million out of them are active digital customers, which means that active digital customers are growing at a faster pace than the overall number of active retail customers and also a significant increase of payment [ cards ] by 140,000 following the growth of the number of customers. On page 19, we see the picture of the growth of loans and deposits. So we had a contraction of net loans year-on-year by 4%. But if we exclude the FX market portfolio, actually, we had a growth of 1%. This growth was depressed by the fact that loans to companies, leasing and factoring decreased year-on-year due to the focus on the management of risk-weighted assets. On the other side, the deposits continue to grow at a solid pace, 9% year-on-year, and the growth came both from retail and from corporate deposits. And in investment products also following better market conditions, we had a growth of assets under management by 26% year-on-year to over PLN 8 billion. Page 20, some more details about retail loans. Retail loans dropped on a gross basis by 2% year-on-year but they would grow 5% year-on-year if we would exclude the FX mortgage loans. And the main driver of this growth were consumer loans, which have grown by 7% year-on-year, while PLN mortgage by 4% year-on-year. The sales of cash loans increased by 16% year-on-year while the sales of mortgage loans dropped by 27% year-on-year, although the fourth quarter was already the strongest quarter of the year in terms of new origination. Retail customer funds grew solidly, double digit to 13% growth, of course, with a stronger growth of investment products and term deposits due to the higher interest rate environment, but at the same time, still with a growth of 2% in current and savings accounts. Page 21, apart from the figures that we already mentioned regarding the growth of clients, we would like to stress also significant progress on the micro-business clients' segment, reaching 141,000 customers active at the end of December. The growth of current accounts by more than 100,000 also is worth mentioning. The number of digital users continues to grow at a fast pace, including also in the second half of '23, 1.9 million BLIK users, a growth of 22% year-on-year, apart from the other impressive number which is almost 2.5 million mobile users. On page 23, digital channels with growing importance in terms of sales illustrated by shares of 81% in cash loans and 41% in current account acquisition and 90% in investments. On page 24, we continue to invest and to work permanently in terms of improvement of quality and innovation, especially [ internet ] banking. And we are evaluated by our customers essentially through the mobile app, its design and its ease of use and availability. And we can observe the appreciation of our efforts by the clients, by the increase in the usage of our mobile app. [indiscernible] platform continues its growth path with a 70% increase year-on-year of all main parameters, connected with users and transactions in the fourth quarter of 2023. And moving now to the corporate business, of course, as it is known due to the focus on strict risk-weighted assets' management, there was some contraction in the corporate loan portfolio both in loans to companies, but also in leasing and in factoring. But on the other side, in terms of other activities with the corporate customer base, the numbers were positive. We continue to have a solid growth of companies' deposits and also our efforts to improve the risk-weighted assets or capital consumption of this segment was successful in terms of utilization, high utilization of BGK guarantees, targeting mostly SME customers. And at the end of the year, we have a current stock of BGK guarantees at the level of PLN 4 billion. Other numbers that are also important are the growth of transactional activity with the corporate clients, which is illustrated on page 27, with the growth of the volume of FX transactions by 21% year-on-year while domestic transfers grew 1%. Still some decline in leasing sales by 12% year-on-year, but a clear rebound already in the fourth quarter. And the same is true for factoring in which the turnover was lower by 5% year-on-year, but already with a rebound in the fourth quarter. On page 28, the digital effort and investment of the bank also covers corporate banking clients. The biggest achievement in the year 2023 was the launch of the new mobile app for companies and which has been classified as the best rated banking app for corporate clients in Poland. And on the other side, we continue to introduce further functionalities, including in the fourth quarter, the introduction of the Millennium Forex Trader in the mobile app. So these are the most important highlights of our 2023 results, and now we will go through the questions. Thank you.

[Operator]

Thank you very much. Indeed, it's time for the Q&A session. As usual, there's one analyst namely [ Amy ], who's very fast, and she already sent many questions. So we will probably start from the questions of hers because they cover a broad array of areas. First question would be unusual, on costs. Shall we consider part of the Q4 G&A cost as non-recurrent?

[Fernando Bicho, executive]

There is always some seasonality in costs. Usually, the fourth quarter tends to reflect some higher level of costs. We, of course, need to recognize that the FX mortgage issues also have some impact on costs, especially legal and court costs, which were more significant in the fourth quarter. We cannot say that this is a one-off because we still did not finish to manage this situation, so they still can continue. But of course, we are having some extraordinary impact also on the cost side due to the legal costs and court costs associated with the litigation that is still going on regarding FX mortgage loans.

[Operator]

Sticking to the cost subject, could you share with us the expected cost evolution in 2024?

[Fernando Bicho, executive]

I think -- so we know that costs are going to grow in 2024. In 2023, as we mentioned, the cost dropped 5% due to the fact that there was no contribution to IPS and the costs for the banking guarantee fund were much lower than in the previous year. There were no contributions to the deposit guarantee fund actually in 2023 in Poland. So we will not benefit from this base effect from '22 to '23 for the year 2024. And on the other side, still some spillover effects from the high inflation and high salary pressure from the recent quarters will still spill over to 2024. So for the time being, we are still assuming that cost growth in 2024 will still be double digit because first, as I said, salary growth pressure is still relatively strong. We are also focused in retaining talent and retaining people. So this is inevitable. Also, there was and there is still inflationary pressure coming from the growth of minimum salary in Poland, which last year was 20%, and this year will be 19%. And this influences the level of costs in several outsourcing contracts where basically, the costs are very closely connected with the level of minimum salaries in Poland. So we have this situation where minimum salary in Poland is growing at a faster pace than average salaries in Poland. And this translates in also some growth of administrative costs. So this year, we are prepared for a situation where we will still have double-digit growth of costs, not necessarily as high as the 15%, excluding BFG that we show on page 12 of the -- 14% without BFG and IPs that we showed on slide 12, but still, this is our current expectation.

[Operator]

I don't know if you agree Fernando, but starting from the cost comment, it's a bit of a sign of a new era, right? We used to start with Swiss francs, and then we discuss costs for the first place. Back to normal, maybe. NII, there's a handful of questions regarding NII. Could you please give us some color on your NII expectations in 2024? What policy rates are you assuming?

[Fernando Bicho, executive]

Our baseline scenario is that interest rates will drop this year in Poland to a level of around 4.5%, 4.75%. This is our base scenario. Of course, expectations have been volatile. So several months there were even expectations that they would fall even more. Now due to the change of rhetoric of Monetary Policy Council, such expectations are a little bit more prudent. But still, we are assuming that there will still be some decrease of interest rates. So this is the base scenario. Regarding the NII, I already explained what was behind the drop of the fourth quarter versus the third quarter. On the other side, now looking at the beginning of the year, we started the year with a slightly higher level of interest rates that we had in recent months because due to the change of expectations, the reference -- the indexes slightly changed upwards. So this repricing of the loan portfolio that happened between end of the third and during the full fourth quarter, will be more or less stable or even slightly revert. And this can be supportive for some stabilization of the level of the NII. While, as we already showed in the fourth quarter, we already managed to start the decrease of the average cost of the deposits which is also made much more comfortably because of the fact that we have a huge excess of liquidity. So our view for the nearest period is for some stabilization of the NII. Regarding the sensitivity, of course, we will publish in the end of February when we will publish the audited financial statements, of course, we will provide more details. Our sensitivity for the exposure in PLN, in Polish Zlotys is still around 2%, but on the other side, we also have some interest rate risk in Euros, right? Because we have also loans and deposits in Euros and additionally, we have the MREL issue that was done in Euros, so. And here, the sensitivity is a little bit higher than in Zloty. So I would say that overall, the sensitivity to 100 basis points cut should be around 3% at the end of the year. But that's indirectly the question, our expectation for the nearest period is some stabilization of the level of the NII. And we also have to say that we have not benefited from, let's say, growth of the loan portfolio in terms of improvements of the NII. As you saw, even we had a contraction of net loans, so. And so we have -- on one -- so the loan portfolio is not contributing volumes, it's not contributing for the increase of the NII on one side, which means that all the excess of the liquidity is being invested in securities, in bonds. And so where, of course, let's call it the margins that can be appropriated are smaller than in traditional loans, right? So this is also another factor that has temporary influence in terms of the evolution of the NII.

[Operator]

A bit of a different angle, but pretty much same story. Do you plan to further increase your financial assets portfolio? So obviously we're going to give indications on NII.

[Fernando Bicho, executive]

The increase is just a consequence of the trends of growth of deposits versus loans. But of course, we expect this year that we will start growing again at a faster pace, loans because we don't have capital restrictions that we had 1 year ago. So we have space to have a rebound incorporate. So we think that part of this growth of the deposit is going to be absorbed by growth of loans. But of course, it also depends on market trends, market and also demand. Lower interest rates can fuel some additional demand and also investments, growth can fuel additional demand. And we are counting that this will happen gradually. But at the end of the day, the liquidity will need to be -- continued to be invested in financial assets.

[Joao Jorge, executive]

Just a note, I think it's relevant to understand is that the deposit business per se is very profitable and [indiscernible] especially because we do it mainly in retail and when it is in companies, is in SME companies. So the growth of this business goes by itself. So it's not just in the need to financing the credit portfolio. Besides that, of course, we are in our path to get out of the recovery plan. And when we get out of recovery plan also starting to paying banking tax and the government bonds also are quite beneficiary for the banking tax. So this is also a combination of all of the preparation that we need to do, but the deposits per se, they grow alone without the -- just to be the reason to finance the credit portfolio.

[Operator]

Final question on NII NIM, what is the duration of your bond portfolio average?

[Fernando Bicho, executive]

I think I would say that on average, probably around 3 years. So a little bit longer in Zlotys, a little bit shorter in Euros. But I would say the average is around 3.

[Operator]

Moving away to another subject, asset quality. Asset quality has been very resilient in 2023, better than guidance in cost of risk terms. What cost of risk do you expect as you move more towards corporate and away from mortgages in 2024?

[Fernando Bicho, executive]

I think that we expect the cost of risk to -- normalized cost of risk, I would say, to be in the traditional area of around 50 basis points. And this has been traditionally our guidance. The performance has been better in the last 2 years than this guidance, actually. But still, we believe that this is the trend that we will be somewhere around 50 basis points of our total loans. This is due to the combination of still very resilient quality of the loan portfolio from retail and also very good quality of the corporate loan portfolio because actually, as we showed in the presentation, the cost of risk in the full year for corporate was just 13 basis points. So also, even if when we start to rebound the corporate loan portfolio, this does not trigger immediately a significant increase in the cost of risk, right? So as long as we will be able to manage properly the credit risk as we have been showing in recent years, there should not be any jump in terms of credit risk. But in normal circumstances, we would say that it tends to go to the central level of around 50 basis points. But there are also two additional things that can have impact on the quality of the portfolio, especially for retail. One is lower interest rates, right? Because if interest rates will continue to go down, this is positive for the credit quality, both of retail and corporate. And the second is whether there will be or not new credit holidays because if it will have the indirect impact is that also the quality of this portfolio will be somehow more protected. So [indiscernible] with the cost for the banks but still. So I would say that these are the general terms, the way we see the evolution of the cost of risk.

[Operator]

Inevitably, the subject of FX risk needs to appear. We have three questions from [ Amy ]. How do you read the recent ECJ rulings? Does the debate around the statute of limitation worry you or worries you?

[Joao Jorge, executive]

All the topics connected with Swiss francs, it's a concern for us. Of course, although we see it as extreme low probability, this is a topic that worries us. And with the more recent -- because there is also another question. The more recent decisions from the ECJ, they need to be somehow digested because there is always an understanding that, or a view that they can have immediately impact and as we already learned even with decisions in beginning of the year connected with remuneration or the payment for the usage of capital, we understand now that, of course, this is not immediately impacts and somehow this takes time. And also, it's not so dramatic as people sometimes forecasted. So the most recent ones, they will have consequences more in terms of the legal strategy than any other impact. I think it's very important that the analysts starts also to understand that there was a lot of materialization of the risk with decisions that we had since the beginning of the year in European Court of Justice. The materialization of that risks [indiscernible] in terms of the flow of cases, in terms of customers' activities, legal offices activities and everything. So what we have today is -- we can assess it as the reaction of all the stakeholders of this topic of the decisions of the beginning of the year. Somehow, we are quite comfortable because it was more-or-less the reactions that we expect and the provision is that we did it when it happened and all of that, as we explained. From another side, the bank starts -- they start to have also an operational problem, which is how to manage all of these cases because these cases, they keep going. So it's going to courts, we have decisions of first instance, then we have decisions on second instance, then we need to solve each court is deciding in a certain way, each judge of that court are deciding in a different way as well. So we need to manage all of these -- sometimes even a court decision is not easy to be understood by both parties of the conflict and how to solve it and how to offset of this decision is not easy. So there is operational effort that needs to be done the same way that some years ago, we focused our attention to the supplements and to create systems, competence, people for the segments. We are working very actively now to create the competencies to address this new challenge and also to be able to settle this risk, to solve this risk, to offset this debt without major operational risks and with additional cost and without more confusion.

[Operator]

Thank you. And the participants of this call would obviously like to know our view on the cost of FX mortgages in 2024. They either asked it directly or in a more nuanced way asking whether the recent ECJ ruling will have an impact, whether we expect Q4 to be recurrent level of FX mortgage provisioning going forward around that thing.

[Fernando Bicho, executive]

So first of all, of course, we will provide a more detailed description about FX mortgage legal risk in our annual report. So as usual, the section about this problem will be very detailed and you will be able to see also the update of assumptions that were taken into consideration when completing the provisions for the year-end. But in general, so I will not enter into all the details, but what we can say is that, of course, for the level of the provisions that we have done in the second half of the year, the main contribution came from the recognition of this additional inflow of court cases, which was above the expectations that we had in the beginning of this year, although as we showed in the fourth quarter was a little bit lower than the third quarter. And so we are now covering through our provision methodology, a much larger number of court cases existing in future than what we had in the end of the third and in the end of the second quarter. So this is one comment.So going forward, of course, generally speaking, we expect the year 2024 to have a lower level of provisions for legal risks when compared with 2023. So 2023 was the [inaudible] of provisions, which was against our expectation in the beginning of the year because, honestly, we were not expecting one or two of the decisions of the European Court of Justice, which are extremely, extremely arguable, but it's what they are. And so, of course, the effort that we have to do in 2023 was much bigger than what we were expecting. So we are expecting less effort for the year 2024, although it will remain sizable. As I said, we are more comfortable with the assumptions regarding the inflow of the court cases because we are analyzing the trends and so. But this is not the only parameter. We have other parameters that are connected with the success in the negotiations with the customers, both in the court and out of the court with the actual amount of the losses that result from each judgment. And so these are variables that we need to continue to permanently monitor and if necessary, to make any adjustments in the future. But our baseline scenario is to have a clearly less effort of provisions in the year 2024 versus 2023.

[Operator]

Very specific question is about the targeted level of provision coverage, which we don't like to call provision coverage. And what is the level of this provision coverage that we have in mind? And should it be reached in 2024?

[Fernando Bicho, executive]

We don't have this target. We don't. We already said several times, this is not a ratio to assess whether or not the risk is fully recovered. This is not a ratio and we do not promote it as -- this is just a ratio that allows to make some comparison across the industry, but it's not -- so we are not saying that this is a ratio. So it's not by reaching 100% of provisions of our total exposure. We will say that the issue is finished, not at all. What matters are the assumptions that are underlying the calculation of the provisions and the balance sheet provisions that we have, which means what are the assumptions regarding the inflow of court cases and the total number of court cases, what is the assumption regarding the actual cost of the loss per each loan, what is the structure of the loans that are coming to the court and what is the success of the negotiations that we are having. And these are things that influence the amount of the provision. So I think that if the trends will not change, of course, the banks will end up with more than 100% of the provisions as a percentage of the exposure. This will happen. Probably some of them will already show, and still making provisions. Still making provisions. So I think that what is important, and this is what we are focused is not in targeting the ratio. What we are targeting is the proper assessment of the risk and the coverage of this risk by provisions. And due to the fact that there has been deterioration through time, we had to be updating these parameters. But looking from another side, we have now already PLN 7.3 billion of provisions that sit on our balance sheet for this risk. So we are much more protected against negative developments than where we were 1 year ago or 2 years ago, 3 years ago. Can it get worse? It depends on some evolution of parameters and in terms of which -- but again, we just want to make clear that we do not have this type of target. There is also a question about -- just to be clear about the statute of limitation because there was a specific question, what we are doing. But what we are doing is to exercise our rights by filing counter claims at proper moments against the customers to protect the right for the return of our capital. So this is actually what we have been doing already since the end of -- since already 2 or 3 years ago. So this is what we are obliged to do in order to protect our rights for the return of the capital.

[Operator]

Well, maybe you could comment on settlements. We reached again over 1,000 in Q4, and analysts are asking for our thoughts in 2024.

[Joao Jorge, executive]

So we are happy that we achieved 1,000. We were always -- even when we were having a 10, we were talking about 1,000. This is very good news because this is -- allow us to keep our mind that settlement is the best way to solve this problem and amicable settlements with customers is -- they are -- it's always possible to do it even with extreme situations. And so we will keep it. This is a capacity that will create of taskforce that communicate with the customers with specific systems, with specific proposals, with a lot of flexibility to adapt the offer to specific customers, and this is what we are doing. We believe that we will be making settlements, have this problem to be solved. So we don't think that there will be a European Court of Justice decision that one day you will make completely impossible for the bank to have a proposal to the customer. So we are happy with the results. And we keep the target, of course, as we have less contracts and more settlements than and unfortunately, also more court cases, we will have less capacity to make settlements, although more and more, we are making also the settlements in court. Also, maybe I can -- because I saw some questions about also the repaid loans, settlement loans and everything, I think it's always important to clarify a little bit this part. We don't like to give specific numbers because people always start to make extrapolations. But sometimes we can give some guidance just to see to see more-or-less the numbers. We have more-or-less the same claims in the last quarter that we had in the first quarter. And roughly 550 per month. And so we could say that in rough numbers, and I'm just talking about rough numbers, I would not be very wrong if the -- if in the first quarter, we would have 500 court cases of contracts that are still alive and 50 contracts that were already repaid. And now we have the same 550, and they are 450 contracts that are alive and 100 that are repaid. So we keep more-or-less our view that the risk is the contracts that are live, not only by the impacts per contract, but also with the probabilities of to file a court case. And we are quite comfortable about the estimations that we have at the moment. Also, there is a specific question about cases, court cases of settlements. So they are still very few. We have more than 20,000 contracts that we made settlements and I would not be very wrong that it should be around 20%. And sometimes the numbers change because we have court cases that they are withdraw because sometimes there is also a mismatch between the settlement established and the court actions. So it's not a driver that we are seeing on these cases. And there is no reason to -- with all the decisions from ECJ that is a court, but nothing from Justice is coming from there. We don't see any reason for more changes of behavior. It's more the timing that -- the consequences of new decisions can have consequences of the impacts, but we start to think that they will not have more consequences on the flow.

[Operator]

" Although we guided for double-digit cost growth with 2024, analysts are still digging in the subject. 2 or 3 questions relates to our thoughts on wage costs and any wage restructuring that we may have in mind given that some of our competitors or peers have announced sizable work for reductions?

[Joao Jorge, executive]

So we don't plan any organized headcount reduction. We have around 1,500 terminations per year. 1,000 is termination by the employee, 500 termination by the bank. It means that in terms of reductions due to quality of the performance or by performance or even reductions by changes of the profile of the bank, they have been done in the long run without major problems and without the need to initiate any big program in mass reduction. Also, we still see the growth of the control areas, task forces connected with Swiss francs, recruitment in new areas of data science and AI. So we don't see a lot of our global headcount to change. We see the change of the type of colleagues that we have, and this goes with the time in the normal process that we are having. Also, you need to assess that the cost is not always just a salary. We are trying to reduce also the attrition. And this attrition when it is, of course, by the employee resignation and in areas that we are going to recruit exactly the same type of person to do exactly the same cost, under our study, it's between 9 months to 18 months to achieve the same performance as the previous employee with the right experience. So this is also a cost for the organization. And so it's very important to keep competitive policies and to retain as much as possible the high-performing employees.

[Operator]

We have another question, which kind of looks like we are in a different era. Capital looks fine. Any chances for a dividend in the midterm?

[Joao Jorge, executive]

So today in the morning with the journalist, I joked about that as well. First of all, thank you for that because it means that you are following us in a very constant way, and also in a very optimistic view. But we cannot move from the recovery plan to dividend as fast as we would like. We have a lot of steps to do. First step is, of course, [ exit ] recovery plan. Second step is to fulfill the requirements from the regulator to be able to pay dividends. And also, of course, you know the effort that we did in terms of risk weighted assets and management that we did. And now we think we have the capacity, the potential to have now proper allocation of capital as well, especially in SME [indiscernible] corporate that we would like. So of course, in the long run, the policy of dividends must be done, but we are still far away for being able to pay dividends.

[Operator]

We have just crossed 1 hour, which is typically a limit to the call, but Fernando doesn't like to leave questions unanswered. So maybe last question, which you liked and you were back to --

[Fernando Bicho, executive]

There are a few questions about securitization. So I just would like to say that first, of course, there are costs of securitization of assets. Of course, we have a capital relief. So we have to pay for something for this. And part of this cost is reflected in NII. Just as I have estimation in the fourth quarter, this, let's call it, margin that we had to pay on the securitized assets overall, was around PLN 20 million again PLN 16 million in the third quarter. So there is a quarter that is being reflected also on the NII. So this is one comment. The second one is also that there was a question saying why the impact of the securitization in December was lower than expected. Actually internally, it was higher than what we expected. So I don't know from where exactly comes this understanding because we ended up doing a much larger securitization transaction than what we were initially planning. So it was over PLN 7 billion of notional of cash loans. Maybe the difference is that, of course, cash loans do not have a risk weight of 100%, have 70-something percent. So the capital savings from a cash loan portfolio is not the same if you securitize the corporate loan portfolio with 100% risk weight. So maybe from there, maybe there is the reason for some difference of expectation. But actually, the impact was very relevant, was very significant, and this was the major driver of the improvement of the capital ratios that we have shown in the fourth quarter of this year. Any questions?

[Operator]

I believe we covered, I mean, most angles or most questions, maybe not really just order detail, but I think we covered them all. So thank you very much for answering. And Joao, any closing summary remarks as we're heading into 2024?

[Joao Jorge, executive]

Just some of you are very kind in the analysis that you wrote during this period. And we are -- of course, this is the quarterly results, but is the full year results. And of course, we are quite proud by the work that all of us and the colleagues here in the bank were able to deliver. We will keep maybe the story from 2023 that is recapitalization of the bank. The [indiscernible] waste management, the securitizations and all of that will change more for proper allocation of capital. But there will be always a preservation of capital in our minds, the story of the strong business results, so we need to put in our mind that our target for 2024 was doubling the business results without extraordinary impacts from PLN 1 billion to PLN 2 billion and this year, we had PLN 3 billion. Of course, there is a huge impact of the interest rates increase, but there is also under this number, a very strong growth of the commercial activity. And this, we will keep this activity. We need to remember also that it takes time to materialize the gains of the growth of the business, customers and everything. This is our way of working, acquire, then cross-selling, then upselling. So it's our way that you know it very well. So probably these next times, it will be more by the volume and less by the gains on margins due to the interest rates. But for the time being, also, it looks like at least will not be so aggressive the interest rate cuts as it was for customers [ years ]ago. And besides that, also, we will keep the delivery of the strategy. The strategy have very visible moments like the 3 million customers active that we achieved or even that 90% of them are digital. So there is some very hard numbers for the people that are understanding banking-specific universal banking, understand how they are important and difficult to achieve. But at the same time, also, we will deliver some of the transformations that have been also important to maintain the efficiency because it's only in a very digitalized and the standardized bank, it's possible to have low cost to income and to raise with the number of customers and transactions and business that we are having with the same structure that we used to have with a much smaller number. And also we are already working for a while on this part of the corporate side that we are confident that we also will deliver the first numbers that will be visible still already this year, 2024. Of course, crucial in developing lending is to do it with the proper risk profile. So these things takes time. We are extremely proud that we have the book reduction without increase of cost of risk which is very, very difficult because usually, what you reduce is the big utilities and the big tickets that have lower risk. So I think this is also an outstanding certification of the quality of our colleagues of underwriting. But this will be visible as well. So I think the story for next year is capital preservation, strong business results and some starts to see some signals of the development of corporate business.

[Operator]

Gentlemen, thank you very much for the answers and obviously, for your time. To our audience or to our viewers, the next data point from us is obviously, February 28th when we will report audited and final results for 2023. We will probably hold our Annual General Shareholder Meeting in late March, and we will report first quarter on the 10th of May. Thank you very much for your interest. Thank you very much for your time. Good luck and hope to speak to you and see you soon. Thank you very much.