Bank Polska Kasa Opieki SA

WSE:PEO

Earnings Call Transcript 2023-Q1

[Unknown Executive]

Good afternoon, ladies and gentlemen, a heartly welcome to the presentation of Pekao's results after Q1 '23. With us are CEO, Leszek Skiba; CFO -- and the COO and the Director of Analysis and Transactions. Over to Mr. President.

[Leszek Skiba, executive]

Heartly welcome, ladies and gentlemen. Today, we are presenting the results of Q1. We're very happy that not only can we display a net profit at a good level, but we have also maintained a fast pace of growth in the corporate segment in terms of the volumes and this high dynamic -- these high dynamics show that we are becoming that we're growing and that we are becoming a bank, which is providing more and more loans to our customers, especially in the corporate segment.

When it comes to enterprises, we are also growing in digital channels. The mobile application is being very successful. It's changing. My colleague will tell you more about it. But retail sales as also sales of the new accounts and the popularity of remote channels. We're very happy that there is investments in it are bringing results and enabling as they used to be to attract customers what is always important to us. The cost of risk is remaining at a low level despite seeing an unfavorable economic environment in Q1.

The result presented is PLN 1,446 million. The growth is significant, attributable to several factors. As I said, this quarter, we didn't have any untypical situations such as vacations or write-downs or impairment. So this is a result, which is connected with strong growth in interest revenues. We're also keeping the costs in check through low cost of risk. So these are the components with regard to [indiscernible], that makes us very happy.

The volumes are growing. This is -- it's significant. But despite the high interest rates, we can show that we have been growing. When it comes to our strategy, it is based on 4 significant pillars, customer -- the pillar called customer means that we are maintaining a high pace of growth of active mobile banking customers to 2.9 million. Our goal is of 3.2 million. We're on the good track when it comes to ROE. We have 10% year-to-date, I mean, on a cumulative basis for the last 4 quarters, and we hope to be able to achieve our goal by 2024 -- of 2024.

And also when it comes to efficiency, we are at 37.2%, which is better than the target of 42%. And when it comes to the scale of our activities -- responsibility likewise. We're increasing the scale of our business, the growth in the corporate loan volume by 7%, that's the mid-sector -- MID and SME sector, we're growing about 14%. And importantly, when it comes to individual clients, new current accounts, we have 24% more new accounts as we compare Q1 '22 to Q1 '24.

Let me remind you that last year, we had over 500,000 new accounts. It's important to keep showing our individual banking tool as broad a base of customers as possible. In the active mobile banking customers, we have a growth of 13%. The digitization rate, it's important. That's the percentage of processes and services that the customer can perform at our bank that are offered in the digital channels.

And the third bar on the right, that's a growth when it comes to tax digital sales to 82%. This shows how much digital channels are enabling us to grow.

Over to Blazej.

[Blazej Szczecki, executive]

Ladies and gentlemen, as the CEO has said, we are consistent in pursuing our digital transformation. One of the aspects that we're especially sensitive to and we pay special attention to it is security. There are some activities by the banks that are not visible to the customer, and some of them are visible. And this is, among others, the activity [indiscernible] cyber vary.

This is also to identify cybercrime, to minimize the risk of spoofing during the focus with our consultants or direct center. The customer will be able to request that they send their business card. And through PeoPay, they'll be able to get a push to make sure that they are talking to the bank employees.

As you can see, we're paying close attention to the security aspect in the digital transformation. Another aspect that we pay special attention to is customer experience. So this is the change of user experience in offer, so that the navigation in our app could be even more intuitive, even friendly or simpler so that the information on all the most important products are in one place and available to the customer.

Therefore, the totality of our digital transformation is aimed at sharing as great a number of services and making them available through functional remote channels. These are implementations both for individuals as well as corporate customers. And I'd like to draw special attention to the expansion of nonbanking proposals by delivering auto -- motor insurance, both TPG and Costco.

Another aspect that I would like to draw attention to is personalization, both in the aspect of delivering valuable information to the customer. This information is processed online in the cloud and through the analytical CRM system, which obviously uses AI components. We deliver personalized individual information to the customer.

Another aspect of the personalization relates to making the application even friendlier for the user so they can just use be it the skin background, the [indiscernible] in such a way that are most visible to them.

When it comes to business clients, we're not forgetting about them. It's also important to expand the scale of self-service there, but also ensure nonbanking components. So first, as we have digitalized PB24 into accounting with a vision -- and also, we are talking about the efficiency -- cost efficiency that -- we are also happy that our investments in robotization are yielding measurable effects and making the work of our employees easier.

And the rate of loan growth is significantly accelerating. As the CEO has said, when it comes to our activities connected at the expansion of the app functionalities are being perceived and accepted by our customers. We are happy that we have grown from 2.5 million to 2.9 million. But just as important is the appreciation of experts. And here, as you can see, we are very proud and happy that our application has been considered one of the top 15 banking applications per Deloitte's survey -- digital banking maturity covering 41 countries, not only -- which didn't only cover the availability, but also the friendliness of using the applications.

So we're happy that this -- those difficult splits between the depth and functionality as well as ease and functionality has been noticed, and we are among the digital leaders on a global scale. We're keeping watch. We're not resting on our laurels. We have plans to keep working. And these are examples of several implementations planned for 2023.

We will be launching the wealth management platform, expanding the PeoPay functionalities and other aspects contributing to the digitalization ratio. So we'll be adding, for instance, BLIK for business clients, new functionalities or support of New MUREX treasury central system or a new operational CRM for SMEs, MID and Corporate segments based on the cloud.

We are also expanding our cloud competencies. And this year, we will be migrating the first modules of PeoPay to the public cloud. As you can see, we're among the 15 best global apps. And we are aspiring and it's our ambition to even to expand even more to be among the top 10 banking apps globally.

Thank you very much, and over to the CEO.

[Leszek Skiba, executive]

Thank you very much. In this slide, we're presenting our achievements when it comes to corporate customers, it's also important. ESG is also important to us. We have issued ESG bonds. And among them, there was -- along with us was the Polsat PG. We are organizers of the issuance of EIB, but this is also the time of Global Finance Awards and Global Finance has given us the title of the Best Investment Bank in Poland. We're very happy to be able to support our customers that the corporate bank profile is still with us.

To wrap up our strategy, what we have presented in Q1 '23 confirms that we are on the right track to meet our goals connected with ROE to maintain the low C/I ratio to -- it's also the time to promote the bank and increase in the number of mobile customers and to make sure that we have the transformation at a full rate. We're increasing the digitization rate. We have also announced there's a dividend payment that's going to be PLN 3.6 per share. The details will be shared by Pawel Straczynski, over to him.

[Pawel Straczynski, executive]

Indeed it is my turn. I will say a few words about macroeconomic conditions. There were some minuses in our monthly results for March. And now we are presenting the entire first quarter. In general, the data very close to our rough and ready pre-estimate and we uphold our statement that the first quarter can be better than the market expected, thanks to services.

Consumption of goods and the general mood in the market are not the best. We know this whole story of concerns about what might happen to heat, to energy sources and possible rationing of energy during winter. Nothing like that really materialized and now we see the previous optimism is coming back.

But we do see a real negative change in remuneration. And that will change in the following months. We'll see deinflation, to which I will return in a moment and which is stronger than the weakening of pay growth, which would be good news to the consumer. Additionally, we have tax returns, and these will be factors that combined with a good labor market situation, will reanimate the position in the second half of the year.

We do not expect anything very euphoric. Probably, we will be able to avoid recession, but the revival will be slow and the dynamic will change. There will be more public role in the market. It is an electoral year. So -- and also this year with the previous year budget perspective is coming to an end. But we can see an improvement in terms of trade. We can see significant euphoric attitude to PLN, and that translates into the real context that we can see the inflow of currencies into Poland.

And that should be conducive to disinflation. Disinflation should be motto of 2023. And probably when we look back at the whole year from the perspective of December 2023, it will become clearer that the inflation went down. It might not be so easy to get to a lower inflation number. It might be significant, especially in services.

We can see some delay in the changes, but probably this market will drive inflation. We think that in a month or 2, we will see the first signals of market changes, interest rates. The market expects certain adjustment this year to be possible. We will not exclude that, but a certain move upward could happen. If it turns out that the interest rates are positive, that will be a signal that they can be normalized. That's it for me.

Over to you, [indiscernible].

[Unknown Executive]

As we announced at our conference with a presentation of the results for 2022, all the main risks that we were aware of then and that we are aware of now reflected in the results of 2022, the effect of credit holidays, credit moratoria and mortgage loans and foreign currencies, for which we established provisions back in 2022. And today, the cost of those operations is covered from the provisions. So the first quarter 2023 is free from one-off events, which significantly improved the result by over 60% year-on-year to PLN 1,446 million.

And there are 2 key factors. The first result on interest participated to the total result and over PLN 700 million, the noninterest result, less than PLN 100 million is something that we treat as the greater stability in the income and operating costs had a negative impact to the tune of over PLN 150 million. The other standard cost of risk, PLN 6 million up provisions for swiss francs related only to the adjustment of the model to the current market parameters, another PLN 30 million and derivatives on the result that this corporate income tax and contributions to the bank guarantee plans to the amount of PLN 71 million.

As I have mentioned, year-on-year dynamics, 60% compared with the fourth quarter growth by 63%. Operating profit year-on-year up by over 31% to over PLN 2,400 million with slightly lower dynamics of operating income. That dynamic was less than 26%. And the growth was slightly over PLN 3.5 billion. And I will mention in greater detail operating costs, a 15.5% year-on-year growth based similar to inflation changes and compared to the fourth quarter by less than 9%.

Net profit on interest, 44% increase year-on-year with higher net year-on-year margin, 71 basis points. At the previous conference, we informed that we would expect a gradual reduction of net interest margin. And what we see today, that is basically the level from 3 months ago, again, 400 basis points is something that we see as a shift of the effect of net interest margin rather than a change in the trend as such in the face of inflation prediction and the situation of interest rates that [indiscernible] mentioned and also in the context of the current transformation of current deposits to term deposits, all that means that the deposit offer for our clients is a market of an attractive one.

And all these factors added up to the overall interest profit in the first quarter. And we uphold what we said at our presentation of '22 results that in the following quarters, we would expect a reduction in net interest margin and a slight decrease in interest profit. We do not expect such high dynamics as can be shown for the last quarter.

Retail loans volume down by over 7%, especially in the area of mortgage loans. The other loan products for retail market are at a stable level. As regards corporate loans, year-on-year, we have a growth of around 3.5% and quarter-to-quarter, this level is basically stable.

14% dynamic of loan portfolio was recorded in small and medium enterprises sector. One of our objectives -- the objectives of the Management Board and also of the Vice President, who is absent today, Magdalena Zmitrowicz is to consolidate the position of the bank in this area. Hence, such dynamic. And we hope this 2-digit dynamic in the segment of small and medium enterprises will continue.

As for loans of big companies and corporations, the dynamic is at one digit, around 7%. And further growth on the portfolio of such loans in this segment will depend above all on the pace at which major infrastructure investments are started, especially investments related to energy transformation.

Here, we also have to keep in mind the concentration limits that we have for our major customers. Our bank will try to offer such attractive financial conditions of funding those investments so as to be a co-funder, co-lender to this type of loans.

As regards savings, increase in retail and in corporate segment, almost 12% growth in retail. And in corporate segment, the growth was at over 7%. At the moment, the liquidity situation of the bank, it's not that we have multibillion excess liquidity. In our assessment, that all happens while maintaining acceptable reasonable cost of keeping up this excess liquidity, which eventually, we hope, will be used to finance credit action in the following quarters.

And I mean here, above all the major investment that I have already mentioned as well as the big hopes that we are pinning on reviving, stimulating the segment of mortgage loans and plans to introduce the safe loan with interest rate of 2%.

In this project, as we have mentioned in our press release, we would like to participate as one of the first banks. Stabilization of noninterest profit year-on-year, there was a 2.7% decrease. But compared with the fourth quarter, the growth was at 2%. These changes in absolute values continue to contribute positively to the overall profit. We have stable noninterest income.

Increase in operating costs year-on-year, 15.5%. That's something I have already mentioned. Personnel cost dynamics year-on-year is at about 10%. It is obviously linked to the adjustment of remuneration for our employees to the current market situation. We completed negotiations and we signed an agreement with most trade unions active in our bank, and the effect of this agreement will be visible in the second quarter.

For sure, I can say that these stocks and this agreement that we signed constitute a compromise between the expectations of the social partners, the expectations of our employees and the possibilities of financing pay rises by the bank. The second very important factor contributing to the growth of operating costs were the cost of maintaining our real estate. And I mean by this above all the cost of electricity, heat energy as well as minimum wages. This has a major impact on the price of services that are offered to maintain our real estate.

We keep maintaining a very robust capital position. T1 at 15.7% above 6 pp above the minimum requirements and also higher than the criterion qualifying for the dividend payout. And also the TCAR is of 17.5%, 6 percentage points above the minimum requirements.

Let me stick to the slide perhaps. The Board has passed a resolution recommending the dividend payout at the level of 50% of the net profit of the year for 2023. We made this decision based on 2 basic criterion, the first criterion -- actually 3 criterions, the first criterion, which is obvious, is our dividend policy, which assumes an annual dividend payout at the level between 50% to 75% of the profit earned.

The second criterion we took into account was obviously the KNF Polish FSA recommendation, enabling the dividend payout at the level between 50% to 75% of the profit. And the third very important criterion was, of course, meeting the MREL requirements, and let me just pass on right away to the next slide.

At the beginning of April, we issued MREL bonds. And we could theoretically say that we have almost met of PLN 750 million. And we can see that the MREL is 17.7% as compared to 18.9% that we should achieve by the end of the financial year. We're just past Q1, still -- there's still a lot unknown ahead of us. We still believe that 2023 is a year of tremendous uncertainty, especially due to the international situation contributing to the macroeconomic situation of the EU of the entire globe and our country.

Therefore, we were rather prone to accept the version where we should maintain some buffer for possible extraordinary events that could cause for the MREL requirement not to be met. We assume that we will be able to issue around PLN 6 billion of debt to meet the MREL requirement, but we also -- we've also mentioned that our MREL strategy consists in meeting that requirement with a surplus for all sorts of events that we might not be able to identify directly, but that could impact the bank's situation.

On the other hand, that MREL surplus could be used to fund the loan activities. And here, I hope that in the ensuing months, both in the mortgage segment as well as businesses and corporations, the loan activity will hopefully accelerate. So these are exactly the criteria that we took into account when we presented our recommendation to the general meeting via the Supervisory Board in explaining why this dividend level.

In Q1 '23, we had very low cost of risk at the level of 30 bps. When we look at the NPL coverage ratio, please pay attention to the fact that excepting the already small exit loan portfolio that are covered by the guaranteed fund, the NPL has dropped from 4.6 to 4.4 percentage points. The NPL coverage ratio, if we abstract from the BFG and CDR portfolio, we have it at a level of 94%. This is nothing new.

The loan policy of the bank is directed towards a prudential approach. And this with regard to both the coverage ratios, NPLs and debt coverage ratio prove that we pursue that very type of policy to wrap up. We have maintained a fast pace of growth, especially in the Business and Corporate segment. We have continued accounting for higher dynamics in -- especially in the digital channels. We have new accounts and the cost of risk at a very low level despite the unfavorable market situation. Thank you very much.

[Unknown Executive]

We're passing on to the Q&A session. Please ask your questions. A lot of them have already being sent to us. Thank you very much for all them. I believe the questions on the dividend and MREL have already been addressed, both the Board's recommendation as to the dividend and our view of the MREL situation. A lot of emotion is aroused by the 2% loan. What sort of market revival do you expect and the impact of the government subsidies to the mortgage market.

[Unknown Executive]

If I may -- I'm going to start at least. We estimate that the demand represents roughly 30,000, 40,000 such loans on top of what we provide. We can see that the revival in the mortgage market has already started, and the property prices have stopped dropping. So definitely, the impact of that program is already palpable. The deferred demand is already -- has started growing.

We issued -- we recently issued a report on the real estate market that is going to be a significant factor. Of course, we intend to run for that piece of the mortgage pie. It is attractive from the bank's point of view in calculating the creditworthiness. You have to take adequate measures to this, but obviously, the criteria will be more favorable to the borrowers who meet the criteria vis-a-vis the alternative program that we have in place right now.

So it will definitely have a significant impact on the market, and it will also be a major game changer to [indiscernible] who comes with it, we'll be able to grasp a major part of the pie.

[Unknown Executive]

The second question is that our headcount has increased slightly by 1%, which departments did we employ people in?

[Unknown Executive]

Yes, we have had an increase in the head count by 190 FTEs I believe. But mind you that as a bank, we wish to build our strategic resources based on our own employees rather than outsourcers. And a major proportion of those 190 FTEs represents a change of the employment format. That's precisely the way I said. So we have hired people based on labor contract. Those are people who had previously cooperated with us on a B2B basis.

Therefore, funding -- the funding for their employment also means the decrease in external service expenditures. We have performed numerous analyses prior to making this decision, not only financial analysis, but also strategic analysis, market analysis, and we believe that for the bank, there are some areas especially when it comes to IT, AML and digital transformation, where the Board has uniformly expressed its standpoint that we wish to build those competencies in our bank based on our insourced -- our own employees, where we have observed increases in absolute numbers.

First of all, the call center and the most important factor behind that was the quality increase speeding up the claim settlement process because we also like to improve the quality of claim processing, complaint processing as soon as possible.

And the rest of the proportion of the increased headcount were FTEs connected with no regulatory requirements. There was no possibility of interesting new responsibilities to the bank's existing employees.

[Unknown Executive]

We have 2 more questions, shall I call technological ones. The first one is about cyber attacks, it's quite detailed. I'm not sure if we will be all that outspoken when it comes to the cost of compensations to individuals affected by cyber attacks, how much they are and where are they accounted for? These are other operating costs. Let me just tell you well, you can see that these are not significant amounts, but how would we like to comment on this?

And the other one was this buy now, pay later. We have several banks. So in fact, what do we think about it?

[Unknown Executive]

Let me start with the cyber attacks. Indeed, we don't provide such data, nor do we comment on them. The factor that cyber attacks do happen should not be ignored. We keep reinforcing ourselves in terms of personnel and technologies. And we definitely don't ignore the facts such as spoofing; therefore, the investment to provide comfort to our employees by identity checking. Such activities are performed both from the cybersecurity point of view as well as technology. We can also observe the number of claims and complaints from our customers.

And over the last 12 months, it has been at a comparable level. We don't observe an increased number of claims and complaints. But definitely, we wish to counteract such activities.

When it comes to the second question on buy now, pay later, it's likely -- it's been presented on the implementations that we've been able to pursue. We have recently implemented [indiscernible] as we call it. So -- so it's like [indiscernible] what we call it [indiscernible] for the e-commerce date.

We're now considering the implementation of the buy now pay later solution. However, no major decision has been made on that.

[Unknown Executive]

Our interest profit is much better than the market expected on our careful guidance. And we have numerous questions regarding this topic. First of all, in the environment of declining interest rates, are we considering increasing the scale of hedging -- our current scale of hedging seen in the interest profit?

Look, if you look at the scale of hedging instruments, it is not so significant in our bank. And I recommend analyzing this in longer-term perspective, the bank did not overhead. So I would combine this question with hedging. How do we see the trend and the changes of customer deposits from current deposits to term deposits? And secondly, there is this trend of [indiscernible] profit being positive or jumping up and down.

[Unknown Executive]

Ladies and gentlemen, we presented our results on deposits, which, in our opinion, show that today's deposit of the bank is aligned with market expectations with the expectation of our clients. We offer various types of products. And only our customers are the ones who choose which products out of our offer. They want to choose -- they want to select. I must admit that we had expected a faster transformation than what we could see of current deposits to term deposits. But this did not materialize. We did not see this happen.

As a result, our net interest margin in the first quarter 2023 is similar to what we had in the fourth quarter last year. And as I have mentioned, for us, the trend continues, but we are dealing with a certain shift in the effect. I would like to add to this. The client chooses what kind of product they want to use. And this switch to term deposits is lesser than what we might expect, but it only reflects the fact that customers are more transaction-oriented than what we had expected because current deposits normally means that customers treat us as the bank, which they do transactions. So those current transactions are more important than earning interest from deposits.

Another question concerns costs. I do not know whether we want to be even more precise regarding the scale of pay rises we can offer in the bank. I will just remind you that from March, we will offer remuneration adjustments. Yes, I can say on this, that we expect year-on-year growth in personnel costs roughly at the level of inflation. So that is this order of magnitude.

[Unknown Executive]

We have an interesting question that had not been used before. We are a big player of the commercial real estate market with a significant portfolio even though it is a bit stagnant and that even had been declining recently. How do we see the safety of this portfolio because the problems in this commercial real estate market have been evolved recently?

[Unknown Executive]

We do not see any major problems in this segment. Indeed, there are relatively few new initiatives. As Marcin said a few moments ago, this portfolio is declining. Our volume is diminishing, but Poland is a country where developers and the market are stable. Maybe the dynamics are not very impressive, but we do not see any major changes.

Well, of course, that will depend on the condition of banks. In the Eurozone, especially any term turbulence in real estate market can affect Eurozone more than Poland.

[Unknown Executive]

There are a few questions concerning our activities in the first quarter with regard to our approach to the Swiss franc portfolio. We had 3x of impacts here. One was additional provisions to be established over the repaid loans, certain adjustments to the models and the foreign currency effect. Was the total effect positive as a reversal of a trend?

[Unknown Executive]

No, there was no reversal of the trend at all. When presenting the results for 2022, I mentioned that by identifying the factors of which we are aware as of now, we consider that the level of provisions for foreign currency mortgage loans is sufficient.

And individual quarters, we might in my assessment, expect some cosmetic negligible changes due to updates of model parameters. And this model sets the level of the required provision. So that will include exchange rates, the number of lawsuits, all the information that we collect on an ongoing basis contribute to the updates of the provision. But there is no major change in the trend. And our position regarding the foreign currency mortgage loans remain unchanged.

[Unknown Executive]

Basically, that would be all. There are very few technical questions, so I will get back to the people asking them offline. Thank you very much, on the 3rd of August present the results for the first half of the year. Thank you very much for today. See you at the next conference.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]