Bank Polska Kasa Opieki SA
WSE:PEO
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We are in a usual format, although a slightly different setup, as you can see, but with the same team. On my side, you've got CEO, Leszek Skiba; CFO, Tomasz Kubiak; as well as our Chief Economic, Ernest Pytlarczyk.
We will start, as always, with a short presentation of the quarterly achievements and financial performance. And afterwards, we'll go into Q&A. And first, we'll pass to those that have registered and would like to ask a question on the call. Afterwards, we'll go to the questions that have submitted through our online format.
So with those, I would like to pass to Leszek to kick off our quarterly presentation. Thank you.
Thank you very much, Pawel. Before I start, I will outline our agenda today. I will summarize our performance and key achievement in this first quarter. And next, I will hand over to Ernest and Tomasz who will present our macro outlook and Tomasz will present details of our financial numbers.
And on this slide, you can see this is based on our 4 key pillars of our strategy: growth, efficiency, customer and responsibility. In this quarter regarding growth, we saw important growth in balance sheet. This growth was 14% year-to-year. And it is -- we've been -- amid economic recovery, we see this recovery in rebound of our consumer and investment product sales.
Efficiency, it is important for us because we would like to see increase of NIM and this is the quarter when we saw increase of the NIM. This is what will be presented by Tomasz. And this is a time of continuation of our strategic actions to improve long-term operational efficiency.
Regarding customer, this is the time when we are in -- this is when we still saw digital transformation as the most important business challenge for us, but we see also an increase in the number of active mobile banking customer. And this is at the time also when we improved all our major KPIs in this quarter.
Responsibility is important in -- when we saw cost of risk decline to prepandemic level. But this is also the quarter with keeping all costs because the costs were flat this quarter.
Key achievements. It is -- the first quarter, the net profit was -- the growth, this profitability improved by 1/3. This is the time when this profitability improved due to the better macroeconomic conditions, but also lower regulatory costs, BFG costs.
This is also important quarter when this -- the level of provisions were on the prepandemic time because of improvement in macro conditions. And this is important to remember, we built within 2020 a safety net on the level of PLN 830 million of COVID-19 provisions. This buffer is important to -- for this year and next year, when we saw potentially a negative impact of COVID-19 on our balance sheet.
And cost control. This is also important for us because we saw this dynamic was flat, significantly below inflation.
This is maybe -- this slide, the fourth slide is about the environment, economic environment. On the left, you see that industrial production in Poland is almost 10% higher -- this level of industrial production is almost 10% higher than prepandemic time. We saw sharp decline, but the rebound is impressive. You see that this is -- now we are -- it is the blue line. We are close to 10% level higher than the prepandemic time. And this is important message that industrial production growth is very good. And if you compare this number, this -- with episodes from 2008, 2011, which means global financial crisis and the euro debt crisis, this -- well, this time was -- industrial production this time was the fall and very slow rebound. It took 40 -- 20 or 26 months to go back to the level before the crisis.
In this case, now in case of COVID crisis, we see that the crisis was sharp, but rebound is very impressive. Also, our positive perspective on the growth and our numbers in this year -- this quarter, next quarters is based on the number of people that can be vaccinated to the end of July.
According to the estimate, if this current pace of vaccination will be sustained, 70% of adults will be vaccinated till the end of July. This is also important that we will see that economy will be -- Polish economy will be open within weeks. And this is a ground for growth, this is a ground for demand on credit.
And even in the first quarter lockdown was around, we saw -- on the left, you see annual numbers. You saw 14% of growth in total assets. You saw the growth in sales of investment products.
But on the right part of the slide, you see the growth in new sales of cash loan and new sales of enterprise loans because of the growing demand in the first quarter of 2021. This is the quarter, which was the first impressive when we saw the growth of Polish economy.
Regarding efficiency, you see that reduction of number of branches is important for us. And if you compare the numbers, the number of branches, this number is minus 10%. This is the reduction of number by 10%. It also means that we are more efficient in terms of FTE numbers. The relation between total assets to FTEs is better and this growth is by almost 20%.
And what we -- what is important -- the most important for us in this quarter, and we are proud of this number, is the growth in net interest margin by 14 bps. This is the growth. This is -- it is a challenge to see this growth in a tough time when there is a lot of liquidity in banking sector, but if you compare the quarter with other banks in Poland, this is impressive because it's very hard to achieve this growth of NIM in this liquidity time.
Customer. Digital transformation is important, and we see that our work and investment yields this time strong results. And we saw the growth of active mobile banking customers by 20%. Almost 20 percentage point growth in digital sales of consumer loans. This means that more than half of consumer loans were sold in digital channel. This is a chance for us to increase this number in the next quarters. And PeoPay payment transaction is up, it's very popular. That is why we see this digital channel, this PeoPay, up. It's important as source of new transaction. It's popular within our clients.
Regarding customer, this is corporate side. We grow -- this is the time of growth in balance sheet and at high pace in key segments for us: MID segment, SME segment and corporate lending portfolio. But we are very proud of transactions we led for our clients, including some landmark ESG -- transaction ESG is important. And we'll present the strategy, ESG strategy, in this quarter -- in the end of this quarter.
And responsibility. You see that this is -- more loans were sold with BFG guarantees. We maintain prudence in this area. Of course, we maintain prudence in terms of new business loans origination. That is why the cost risk is on the level of prepandemic level. This is also important time when we started and we are ready to integrate ex-Idea Bank portfolio. This is -- the process is on track. It will take the whole 2021, but we are ready to finish this process to the end of 2021.
And ESG agenda is -- I talked about ESG strategy. This is a -- rollout of ESG agenda, we are involved out of commercial activity in this area. Thank you very much.
Leszek pretty much explained the main rationales behind our economic scenario. In short, we are very bullish on the economy and this is starting to be reflected in our numbers -- in bank numbers: in our results, revenues and risk profile. In short, let me explain short and more midterm characteristics of our economic scenario.
To start with, the third wave passed its peak in Poland and then now infections are falling faster than after the autumn wave. It is having enormous effect on economic activity. The economy has weathered newest lockdown relatively well. All indicators, internal, external indicators, are pointing to the fact that businesses adapted very well to the new circumstances, nothing to compare with the first wave of pandemia.
Consumers' expenditures have declined as a result of government restrictions, but to a much smaller extent than a year ago. Passenger traffic declined. But for example, truck traffic is well above normal pointing to very rapid expansion of Polish exports.
Starting from April 19, the government began to reopen the economy. It is -- and we think it will stick to its plan, and this is the main pillar of our optimistic scenario for the next weeks, next months.
Turning to midterm forecast. I keep repeating that the stage is set for above-average economic growth over the medium term. We -- our main pillar of our economic scenario is the vaccination. Actually, the pace of vaccination has accelerated. Poland is among the European leaders on this field. To some extent, the supply-side constraints are still valid. But as Leszek mentioned, we bet on almost herd immunity of Polish citizens by end of July. It will have enormous economic effect. It will lead to a materialization of pent-up demand.
We think the balance sheets are very healthy, both on consumers and corporate side.
Poland is expected to be among the best-performing economies in Europe. We use this graph with industrial production, and we see that the structure -- structurally Poland is well poised for outperformance.
We should also prepare for higher inflation. And let's say, it's prudent to forecast that monetary policy may be more tight going forward. We don't know when exactly will it happen. But definitely, we see possibility of large positive surprise looking at our financial strategic plan, which was based on the assumption of zero interest rates for the next 4 years. So we think we may nicely surprise you with our results.
And at this stage, I will hand over to Tomasz Kubiak.
Thank you, Ernest. So bottom line, 30% increase versus year-over-year and quarter-over-quarter. I would name 3 important elements of that growth. First, a good cost control and reduction in obligatory charges for this year. Second of all, business efficiency. So not only net interest margin improvement, but also generally good job on repricing, which will still to come. And last but not least, diligent risk management, which allows us to think of cost of risk more on through-the-cycle levels this year than COVID-related.
If we look at the recurring ROE, it's around 7.4%. So if we exclude the restructuring cost and assume linear BFG (sic) [ BGF ], that would be equivalent profitability. So returning to better levels after COVID times and that's, I think, a source of optimism.
Gross operating profit down 11% year-over-year. But quarter-over-quarter, it's down by 10%. However, if we would forget for a second about restructuring provisions, it would go up by 1%. And that's a function of some recovery on the revenues. Part of this is, of course, an effect of taking over the assets of Idea, but also some factors related into old -- let's call it, old Pekao assets and revenues, which also showed positive dynamics, especially on the NII side.
Operating costs are up on a nominal basis by 4.4%. If we try to look for a number, that is, let's say, excluding one-offs, meaning excluding Idea Bank and excluding restructuring provisions, that would be around 2.2%, which also -- year-over-year, which also is a nice dynamic, especially taking into account the fact that part of the costs are recovering in 2021 like bonuses or advertising costs.
The first point, maybe the most obvious one, is NII. NII increased by 10% or 11% versus last quarter.
Net interest margin has increased by 14 basis points. Now 40% of that increase is attributed to the assets of Idea Bank and taking over these assets. But the rest is commercial repricing and reduction of liquidity access, thanks to this. And we have been having some extra repricing element, both on the deposits and on the loan side. And for sure, we are very proud of that NIM increase, which is, as you know, an important element of our strategy.
Volumes. Retail lending up by 2% year-over-year with some increase also in the first quarter. Corporate would be down by 2%, but after including -- especially the micro business, so the PLN 10 billion more or less of loans from Idea, we're having a 10% dynamic over here. But even without Idea, the first quarter would be 1.5% up in terms of corporate volumes and that's thanks to especially MID and SME segments, which have been showing some pickup already since the third quarter or fourth quarter last year. But now the base of more or less 5% growth quarter-over-quarter is one of the proofs of both activity of our customers and their good shape and also some kind of recovery.
Deposits are growing as they have been. We have, of course, during this quarter, also focused on optimizing the cost of deposits, both the Pekao stand-alone deposits, but also the taken over from Idea.
Worth mentioning is the recovery in the level of assets under management, that grew by 25%.
Also in terms of sales, this quarter was okay, PLN 1 billion almost of sales of -- net fund sales, which, thanks to this, we have a 25% year-over-year growth in assets under management. Corporate deposits also on positive upward trend.
Fees and commissions. Now on fees, some fees categories are growing. That's especially the current account fees and also asset under management and brokerage, especially due to brokerage fees. Some are showing stabilization and especially the card fees have been falling during this pandemic period. That's an effect of lower activity of customers and less using cash, especially at ATMs. But we are -- cash -- generally fees and commission dynamics is something that is very important for us. We are planning some additional things during the next part of the year, also on repricing basis to shape up a little bit this fee dynamic.
Costs. Costs, I already mentioned. So some of the costs have recovered, I mentioned bonuses, I have also mentioned advertising. Those are the highest costs a little bit in the first quarter. But of course, on the other side, our cost optimization activities are allowing the dynamic on comparable basis to be around 2%, so way below inflation. And especially combining this with last year when costs on comparable basis went 3.5% down, I believe those are very good achievements on cost optimization activities.
Also, good news on BFG. BFG is going to be lower in the first quarter. It's going to be much lower throughout the whole year. So including the BFG costs, we are talking about even a negative dynamic despite taking over some additional charges from Idea.
Now capital stable, 16.6%. So very, very good high level of Tier 1 with giving a potential for dividend payments. We have submitted our proposal of keeping 25% and leaving 75% undivided. As we have been mentioning in the last discussions, our intention is to have a 75% payout of 2020 net profit and we will discuss with the regulator to see if that is feasible. But this is our intention.
Now cost of risk. Cost of risk in first quarter is 41 basis points, which is relatively a low number. We believe that we have returned to prepandemic levels, so that through-the-cycle level is probably a benchmark for -- is a good benchmark for the cost of risk.
We also note quite a good asset quality. Now of course, the numbers have changed a little bit after the taking over of Idea Bank. So despite the fact that the loans are guaranteed, the taken-over NPLs have caused an increase in NPL ratio and also a decrease of the coverage because of the BFG (sic) [ BGF ] guarantee on that.
But on a comparable basis, which we try to present to you on that slide, you can see that the NPL ratio is relatively stable and the coverage is also on quite decent level. So that has not changed. And I would say that the asset quality, so far so good is probably the best summary of that.
And on moratoria, everything is being fine. So they are generally below 1% of the portfolio, and they are -- majority of them are being repaid.
So summarizing, growth is an important element of our strategy and that growth in the total balance sheet even during pandemic times have been observed.
We are continuing, as planned, the optimization and efficiency and that touches both the cost, but it also touches the business efficiency, so the net interest margin.
Good trends in increasing the number of customers, almost 100,000 new customers in that first quarter with increase in mobile customers. So the digitalization is on track and we see quite good volumes and number of log-ins to our app to -- our mobile application is increasing.
And we are benefiting from the responsibility and from the responsible -- both credit policy and provisioning policy, which is giving us the potential to show good numbers this year.
Thank you very much.
Thank you very much, gentlemen. So turning now to the next part of our presentation today, we would like to open the Q&A session. We've got a number of questions already registered through our web page, but obviously, first, we would like to pass the voice to moderator and open up the Q&A for those that would like to ask questions directly.
[Operator Instructions] We have a first question. It's from Anna Marshall, Goldman Sachs.
Two questions for me, please. Firstly, on dividends, wanted to follow up. So can you give us a little bit more color on how the discussions with the regulator again on the potential dividend payment in the second half of the year? Are there any indications, for example, as to what they would like to see to allow dividends in terms of metrics and so on?
And the second question on NII first and NIM. What kind of NIM trajectory do you expect for the rest of the year? It sounded like you expect further improvement in NIM given your further planned actions, but just wanted to confirm.
And also kind of in the perspective of your strategic horizon, just wanted to confirm kind of -- I appreciate it's still a little bit vague on the possibility of rate hikes, but do you see any chance of rate hikes before the MPC term ends? Or this is more of a discussion for kind of later in the strategic horizon?
Yes. Thank you, Anna. So of course, from the regulator point of view, the most important at this stage for the sector-wise, I wouldn't name only Pekao, it's the Supreme Court decisions and the decisions of the ban of the banks how to handle this one. And second of all is also the credit quality of the lending portfolio after, let's say, the end of the support of the government programs, which is during summer and the end of April. Although we are at this stage far from conclusions, so I wouldn't say that we would name their actual preferences. It's more the unknown that is causing the lack of yet decision in this area, but we are generally optimistic, especially in our situation.
In terms of NIM trajectory, yes, we -- of course, we will be planning to further increase NIM also this year, and there are number of factors for this. Factor number one is, of course, the asset mix. Now if you see the level of consumer loan sales, for example, slightly above PLN 900 million, it's nice versus the previous quarter, but it's still far from our ambitions, what we want to -- or what we need to achieve to realize the strategy. It's still -- we -- however, January -- February has been better than January and March has been better than February in those sales. So we are, let's say, optimistic, but the asset mix component is the -- one of the elements that will be impacting the NIM.
The second is, of course, we are selling now at slightly higher levels than the stock and then prepandemic on mortgages, on corporate and so on. So over here, a second element that would push NIMs.
And the third is we are working also on that portfolio, especially on the deposit side from Idea Bank. So all those 3 elements are the ones that should shape further the NIMs.
Of course, on the other side, there will be competition. Especially when the loan growth will be there, some of the banks might lower prices and this is always that repricing risk. But so far, we see so good.
On the rate hikes, maybe I would give the voice to Ernest who has, I think, much better feeling on that.
On rate hikes, inflation is already elevated. We think it will not fall towards NBP targets by next year. We think it's a global phenomenon. Still, central bankers, they behave in a very calmly matter (sic) [ manner ] now and all of them point to transitory nature of today's elevated inflation. I think everything would be much clearer in a couple of months because now we mentioned that there is a stage at which this pent-up demand materializes, we see supply-side constraints and so on. So this is a big picture.
But we think it's prudent to think that 2022, 2023 may see higher rates already in Poland. We bet on 8, 10 consecutive quarters of above 5% GDP growth. So it's realistic to assume that rates may be higher than today's exceptionally low level.
So I don't think it's a very straight answer, but I should excuse myself. It's very tricky period and I think it's very hard even judging by the -- yesterday's statement of the Polish Monetary Policy Council. It's very hard to judge whether -- what will happen in next year time. They opened the door for discussion, but they didn't precommit, definitely.
Our next question is by Gabor Kemeny.
I have a couple of questions, please. First one is a follow-up on consumer lending, showed the increase in the new sales, but the stock has still been declining. At what stage do you think you could switch to a positive growth in consumer lending? And if you could help us scale the growth potential for the rest of the year.
The other one is on the COVID provision. You mentioned it's EUR 830 million of buffer, which was earmarked to the COVID-related development. When and under what conditions would you consider releasing some of these provisions?
Right. Consumer loans, during the pandemic times, Pekao had one of the, if not the most, conservative or maybe responsible credit policies with regards to consumer loans. We -- in a nutshell, I would name -- we count out the big tickets, so where the large volumes were coming. As a result of that, the portfolio was shrinking around 3% per quarter. In the first quarter, we were step-by-step also loosening this policy, of course, carefully. So looking at the outcome. The portfolio went down by around 1%. If the sales would be at the level of March, then the portfolio would start to recover. So to answer your question directly, in the second quarter, I expect that the loan portfolio would be rising on terms of consumer loans.
In terms of COVID provisions, it's a question -- the answer is once we know the final outcome of the impact of COVID on the asset quality. So far, the asset quality is very good. And -- but we want to wait and see how the financial -- let's say, the government programs when they are finished and when probably some small part of the customers will need to repay some part of that support, how this will impact both the standing of individual customers as well as unemployment levels. Those are -- we are optimistic, but this is the moment which we want to actually see before releasing.
And would you assume you'll be in that position towards the fourth quarter or more like next year?
I would expect next year. So we thought that this COVID final, let's say, outcome should be visible between 2021 and 2022. So okay, we will, of course, get more -- we will know more at the end of 2021, but 2022 will also be -- need to be some kind of an analysis, which doesn't mean that we will not, let's say, use this step-by-step, right, of course, looking at what's going on. But more -- I would expect more stable level of cost of risk on through-the-cycle levels.
Our next question is by Alan Webborn.
Following on Gabor's question on risk costs. Is your 50 to 60 bps guidance, which I think is the across-the-cycle amount for the next coming quarters, I presume you mean Q2 to Q4? Does that include any write-back of COVID provisions? Because clearly after 41 bps in the first quarter, if you do 50 to 60 in the remaining quarters, you're going to probably be at the low end at the very worst in terms of your across-the-cycle guidance. Is that how we should interpret what you said about the cost of risk today?
Secondly, when will you start to see a negative impact from the portfolio runoff of Idea? Do you think the 2.29% NIM that you achieved in the first quarter, is that a floor for this year? And do you expect it to increase per quarter going forward? That would be the second question.
And then, I guess, thirdly, on the fees. I appreciate that there is some element of improvement in the fees if we look at the comparison. I did wonder why the asset management fees and brokerage fees weren't actually stronger for you in the first quarter, given that there does seem to be a bit of a trend towards securities accounts and customers putting their money into different forms of savings as opposed to 0 deposits. And I just wondered what you think -- how you think you performed versus the competition in the first quarter?
Great. So COVID provisions, our cost of risk forecast. Yes, I would say this is the right way to interpret what I was saying. It's clear that this is -- from the cost of risk perspective, of course, this is the most volatile type of forecast. And this is why, let's say, I would say that we are in a good shape, meaning we have a big buffer and so far, so good. But of course, we want to be cautious looking forward.
So yes, I would say 41 basis points is probably not a representative quarter for this year. Probably some 50 basis points or maybe 50-plus is more representative for the next quarters, that's the way we see it.
The question on Idea Bank assets, maybe let me elaborate a little bit on this. So if I look more or less at the PLN 11 billion portfolio of Idea Bank assets, I would decompose this into 3 parts. There is like PLN 7 billion more or less of leasing receivables, and we are not going to continue this business. So this is an asset that has, let's say, on average, 3 years maturity and it will mature step-by-step throughout this period.
Then we have around PLN 3 billion of performing loans on micro customers. And with, let's say, majority of that, we want to continue the business, of course, in line with the credit policy.
And there is PLN 1 billion more or less of NPLs in the portfolio.
Now of course, the cost of risk for the existing portfolio will be close to 0 because it's covered by the guarantee. But in terms of stepping down of those assets, some part of this activity will not be continued, some will be. At the same time, we are -- we will be still working on the deposit side and there is still some extra funding costs that can be reduced on the existing portfolio, and we will probably see that in the second quarter.
So the effect will be, yes, some maturity of the portfolio and lower impact, but also in the -- especially in the second quarter, still some positives on the cost of funding.
In terms of fees, brokerage activity is probably the biggest driver of that line that we saw. We have not only increased by our brokerage income by close to 100% year-over-year, and that's because of the activity of the customers, of higher volatility on the market and so on. And I do believe here, we have been achieving slightly better than the market because we have increased in our market share and the turnover by more or less 1 percentage point when I saw the numbers.
In terms of mutual fund sales, we can do more than the first quarter. And despite the fact that net sales of more or less -- almost PLN 1 billion is a good number, but I believe we can reach that number in the next year, especially in the conversion of deposits to those funds.
[Operator Instructions] There are no further questions for the moment.
Okay. Thank you very much. In that case, I will take a couple of questions also that have been placed through our web page, having in mind, obviously, that some of those have been answered already.
But maybe 2 that have been reasonably common. First, with regards to M&A. And more specifically, would Pekao be interested in a takeover of the retail part of local operations of Citi.
Well, it's -- this is not the first time we are asked about this M&A case. And what is important now for us is that we present a strategy, and strategy is about organic growth, digital transformation. It is about being leading bank [indiscernible]. We see this as good to -- our lesson from Idea [indiscernible] it's -- the lesson learned from Idea is that the whole 2021 is the time of integration, but of course, it's not hampering our growth. But it is better to use time and awareness and energy on organic growth during this strategy period. That is why we don't consider this Handlowy as an important challenge for us.
Thank you very much. And the next question comes from Bloomberg Intelligence, and that comes with regards to out-of-court settlements on the CHF portfolio. And if you could share a bit more details on your progress with those out-of-court settlements? Where do you stand? And what's your strategy?
Well, it's -- yes, we -- it's a very -- it's time when we wait for the final ruling of Polish Supreme Court and this will be the answer about the final -- maybe not final, but the Supreme Court -- this ruling will be important for courts in the whole country. What is -- now this is the challenge for banks and customers, Swiss franc customers, because we are in time when European tribunal decided to leave the final ruling in the hand of the courts, the supreme courts of countries -- in European countries. And there is no easy answer what is -- what should be -- how should be treated the use of capital. That is why this is still unclear. There is no one answer from this European tribunal.
This is good for banks because there is no, no -- we don't hear that it's not possible to pay for the use of the capital, but it's still unclear what will be the final ruling of Polish Supreme Court. And it's still unclear, and this is unclear for us and it is unclear, of course, for customer if this voluntary settlement will be more beneficial than to keep this battle in the cards with banks. That is why I think it's -- we are in a situation when this is unclear how popular will be the voluntary settlement.
That is why what we do now, we wait for this -- the final Supreme Court ruling. We prepare to offer our settlement. We identify how to process this settlements with our clients. We should know if it is beneficial for our clients or not. Still, this is the -- it is based on the time when the loan was taken, the year when the loan was taken. And of course, it will be very important to see their attempts to offer settlements. That is why we are in progress, but it's still ongoing process for us.
So maybe last one question that I think have been placed more commonly is with regards to the contribution of the ex Idea portfolio to your main P&L lines and especially focused on NII fees, costs and profitability if you can elaborate.
I would say the total contribution to the net profit is more or less taking into account some of the restructuring costs attributed to this. On NII, I think on revenues, we are talking in a range of numbers of 4%, and similarly on costs, if you exclude the restructuring element of that. And of course, some banking tax-related with the assets and BFG once it will be attributable. So those are, let's say, most important numbers. Yes.
Thank you. I know we have a few technical issues throughout the call, so we wanted to apologize for it. And obviously, we'll make sure that as soon as we can, we can deliver to you the transcript as well as recording of the presentation. And obviously, we are very happy and available as soon as the call is finished to obviously speak one-on-one with yourself to answer some of the questions that maybe you haven't chance to hear properly.
So once again, apologies for it. And I would like to obviously thank all my speakers at Pekao today to deliver the quarterly results.