Bank Polska Kasa Opieki SA

WSE:PEO

Earnings Call Transcript 2024-Q1

[Operator]

Good afternoon, ladies and gentlemen. We would like to welcome you at the conference presenting the results of the Bank after the first quarter 2024. We have Leszek Skiba, Pawel Straczynski responsible for finances and [ analysts ] Chief Economist over to the CEO, Leszek.

[Leszek Skiba, executive]

Good afternoon. Very or welcome. This quarter, we have achieved very beneficial good financial results in retail banking, especially in mortgage loans and in cash loans. We continued a rapid growth of funding for small and medium enterprises. We are proud of supporting our customers in this segment. We have maintained high growth rate in digital channels. We have also introduced some improvements in our PeoPay mobile application, and we also maintained low risk cost. As regards profit dynamics in this quarter, we recorded over EUR 1.5 billion to be exact EUR 1.514 billion. Profitability as a result of high interest rates, which are likely to remain at those high levels for many quarters to come good results in retail sector and low cost, high coverage of ranking loans on Swiss franc mortgage loans. We have achieved 3.2 million active customers in mobile banking this quarter set out, and our strategy was achieved. Actually, it was set out for the entire strategy till the end of 2024, and we have already achieved ROE 19.6%, which is better than 10% in the strategy, risk cost below the strategy target, which was envisaged between 50 and 60 points. The latest result was 39 points and cost to income, 39.3. To remind you, the goal from our strategy was 42%. We are very happy about significant growth, sixfold growth in the first quarter 2024. That is actually 6x better than in the first quarter 2023, a very significant increase in cash loans, 22% up in sales, financial volumes and funding of SME 11%. Mobile customers. Here, we also recorded a growth of 13%, up year-on-year, up to the level of 3.2 million people. Digitization rate, that is our target, indicating the portion of processes that are already available for our customers in digital channels. Currently, it is at 8% and the share of cash flow so digitally up to 83%, increased by 1 percentage point. New functionalities in PeoPay application, Piggy Banks previously that was only available for kids. Now it is available to all our customers, adults as well as teenagers that allows people to do some small scale saving and customers show interest in that product available in PeoPay app and also in Pekao24.New functionalities in electronic channels. Miles and More program, which is a huge benefit in terms of acquiring new customers. We can see that this program was the driving force behind the increase in popularity of our banking services. Then we have those Piggy Banks for adults like transfers, more and more personalization options also for private customers, a new chat functionality with employees presentation of adviser data that is important from the safety perspective. We have also educational games and PeoPay kids app. Also 2 tier factor log-in to Peako24 using PeoPay app. We also have new, simpler, easier to use services like parking or ticket purchase like for public transport tickets, these are popular services. And we hope they will be liked by our customers. As for transactions this quarter, we had a few major transactions completed by our customers for the corporate segment. Eurobonds for BGK, term loan for [indiscernible] and Pol Pharma, as you can see on the slide. MRD 1-year bonds, PHN, 3-year bonds, our activity in those segments is recognized and received awards in recognition of our achievements. The quarter, of which we are particularly proud were granted by Global Finance Magazine. We are considered to be the leading corporate bank in Poland with is a major thing for us. We want to show our high-quality services in this segment. As regards to performance of our strategy and accounting for the performance of this strategy, as I have already said out, first quarter performance above 10% ROE, cost-to-income below the target from the strategy, number of active mobile banking customers already achieved digitization rate towards -- going towards 100%, which is our strategic target. We are happy to be able to pay our dividend, which we are going to pay on ahead of May 19, 0.20 PLN per share. We have a dividend paying bank. So we want to make sure that our shareholders can count on regular payment of dividend. Also as regards ESG strategy performance, everything is on track to achieve the targets set out in the ESG strategy. Over to Ernest now.

[Ernest Pytlarczyk, executive]

Good afternoon. Last year, in the second quarter, we had a low point in the business cycle and now we are on a growing curve. But this rebound is not very dynamic. I think the expectations of consensus were more optimistic. And this is probably linked to some extent with a real income path. Nominal wages grow below about 11% household income, 10% in annual dynamics. And as we look at inflows. We can see that the funds coming to Poland affect the exchange rate of PLN, but it will take some time before that translates into investment projects. There is a certain deferral here. So if you look on the graph on the right-hand side, you will that this year, we are expecting a solid growth in consumption, but it will not be a sudden leap because there is a very high tendency to make savings. And in a moment, I will dwell on the implications it has for banks. So there will be a 4% maybe increase in consumption. So a certain revival in consumption but a negative change in investment. So we expect negative changes on investments. And next year, we can expect a rebound on investments as a result of the visibility of those funds that we have received. Now the implications for the banking segment, we will be snowed under deposits. We will not have to overpay for these, and we uphold our forecast of the dynamics of corporate loans as low in single digits. So here, we deviate significantly from the consensus because it suggested a lively credit action, but nothing like that is going to happen this year. Very briefly about interest rates and this nominal targets. Now inflation is on target. Today, we looked at numbers for April, but this is a transitional temporary figure within the target range. But we can expect pay increases in electricity and gas prices. So inflation is likely to go up also this year because this path is going to get steeper and steeper. While at the same time, labor market -- or maybe not just labor market itself, but the overall increase in wages will probably mean that inflation will stay stable at about 14%, which is not favorable. Real interest rates will not have a major impact on functioning of the economy. They will translate into greater propensity to savings. Interest rates are likely to stay unchanged maybe until the end of next year, of course, in such a long-term perspective, any forecasts can greater risks. But I expect we will function in the environment in which the banking sector will thrive.

[Pawel Straczynski, executive]

Good afternoon. I am very pleased to share our numbers for Q1 2024, PLN 1,514 million. That's the net profit that has been in line with the trend when you look backward, the growth drivers are still the same. We have the high interest margin, which is all the time beyond 410 basis points, and we have positive participation as compared to the last year of the interest income. Now the interest income shows the base effect in Q1 2023. We were actually settling the transactions on derivatives that hedged our mortgage loans in foreign currencies. And the other contributors are operating costs, EUR 132 million higher compared to the same period of the past. We will discuss the operating cost later during the presentation at a greater length. All the other factors are the cost of risks and Swiss franc-related provisions also other comparative income tax at taxes, also VGF regulatory charges and the banking tax. These are the negative contributors. Now our net profit was growing at a rate of 5% compared to Q1 2023. And it was 12% down compared to Q4 2022. Now we were able to keep costs in line with the strategy. Cost income ratio was 39%. And let me remind you that during Q1, we actually have to do the one of booking and recognition of BGF charges and iron mandatory charters. If that was a regular accrued settlement, well, the cost/income ratio would be around 34%. ROE is nearly 20% for Q1 and Tier 1 was at 15.4%. Our operating income was up compared to Q1 by the previous quarter by 4% nearly. And operating costs were 11.9% higher compared to Q1 2023, and I will cover the greater length during the presentation. Now the net interest margin, that's the main growth driver, over 11%. Net interest margin, 2% 2 basis points compared -- up compared to Q1 2023 and slightly down compared to Q4 2023. As Ernest said, in 2024, our prediction is that the interest rate will continue to be high. And therefore, we believe that the net interest margin will be moving in a fairly narrow amount of over 10 basis points compared to current levels. Now the correlation to the main interest rate is still the same. So any increase or decrease of the fundamental business rate by 100 basis points has a contribution of 30%. So in other words, the overall impact is 30 bps. Now the volume situation. Retail loan volumes were up by 8.3%, and we had a major contribution of the corporate -- of the mortgage loans. And that's the impact of the so-called safe market program that continued also through quarter 1, 2024. Corporate loan values were tactically flat and around PLN 98 million. As Leszek and Ernest explained the reasons for [indiscernible]. Now what is the situation of the posit? High dynamics in the retail sector over 10% in the corporate sector over 9%. Let me just add to that. Okay. Let me stop here, and I will revisit that when we discuss the capital ratios, I think that it will be a better timing factor. We continue to see the cost of excessive liquidity, but it's at a decent level, and we have a full spectrum of deposits and products, and that's overall breakdown of deposits and parent deposits has not changed. And over the next few months, we do not expect any major changes. We are really happy to see the growing deposit base that no means undermines our interest income. Now the fees and commercial situation is similar to Q1 2023 because we were up by almost 1 percentage point. Now operating costs, 11.9% up compared to the same period of the past year. And I mentioned that already, the 2 main drivers are wages and the costs that are strictly correlated with organization rate and regulated prices, which is cost of electricity and property maintenance costs. Last year, the wages were growing at a double-digit rate over 15% per year. And that translated into a 10-month impact on our bottom line. Well, as a result of our internal regulations and the collective agreement, the new agreements come into effect on the 1, March. So 11.9% and in nominal terms, it was 15% increase in wage expenses or costs. Obviously, the increase of the minimum wage has also contributed to that. It didn't really relates to the employees of the banks, but it was definitely translated into the prices of products and services that are set on the basis of the minimum weight. Now Tier 1, we are definitely at the satisfactory level and sales to pay dividend. The total adequacy ratio of 16.9% also high level with again a very decent safety merchant compared to the regulatory minimum and compared to dividend payout criteria. Now MREL requirements. March 2024, we are at 19.8%. And that number includes retrospective recognition of the profit of 2023 after the General Shareholders Meeting. The green bar shows the issuance that was completed on 26 April for the total of PLN 500 million. So we actually recognize the issuance -- on S&P issuance on a pro forma basis. And we are still above MREL requirement by 1 percentage point. So in our Enbrel plan, we have EUR 4 billion debt that we intend to issue over the next few years. Now the cost of risks are at a stable and safe level of 39 basis points, NPL coverage ratio for [indiscernible] 123 are at a similar level, NPL ratio. So 3.9% is the pure [indiscernible] Bank, 1.3 billion is the impact of the former Idea portfolio and 0.8% is the impact of the Swiss franc portfolio. During the previous conference, we advised you that we will try to bring down the NPL ratio to the level that will help us pay out a dividend at the level of 75%. So we wanted to be -- to bring it down below 5 percentage points. We were looking at various methods like selling of the portfolios and this process is in progress all the time. But we were also planning to change the methodology but would help us reclassify the Swiss franc loan portfolio that would help us lower NPL ratio. So a short summary, excellent sales results in the retail banking, new sales in 2 main product areas had very high dynamics in tax and mortgage loans. And we do hope that the new mortgage funding program, the market for your start will actually help bridge the gap that opened up after the previous lending program was completed. So we have rapid growth in the area of financing for small and medium size enterprises and the good growth in digital channel and the most more important thing, the cost of risk are also at a low level. So beyond the corridor of 50, 60 percentage points.

[Operator]

Well, thank you. So now we are moving to questions and answers. The first question is from the retail investor. What is the participation of the bank's employees and employees' capital retirement program? Is there any trend? Are there new enrollments or dropouts?$20 million is the cost over 60% is the rate. So that's pretty stable. We don't see any major tenders here. Another question, and I want to encourage other viewers to ask questions whatever they wish. So the next question is, what would be the ratio of the long-term financing if we follow the rules suggested or proposed by the Financial Supervisory Authority. Okay, this ratio has not been mandatory yet, but we took it as a guidance for the future. which means that we have to look at the proportion between the long-term assets and long-term liabilities. And this is one of the items, but we look at whenever we want to align our issuance program for long-term bonds. If that ratio was mandatory today, it would be approximately 25%. What would be the future level that will be decided by the financial supervisory parity. Well, we will see once the consultations can to end. We are working in the process and we shall see what will be the final decision on that ratio. Well, certainly, to meet this ratio at the level of 50%, we will need several billions that will be the equivalent of the long-term bond issuance.We have a few questions regarding volumes. So maybe I will try to put those questions together. What do we expect in the market with regard to retail and corporate loans? What the dynamics can be expected until the end of the year? And in particular, with regard to retail, what can be expected after the expiry of the safe loan at 2%. And before a new support program is launched. And also, what might be the possible impact of this new support program on the results. You can find more details in our materials, low single-digit dynamics. In corporate loans, we had indeed an increase in the volumes related to this loan at 2%. That's called loan for a start. We do not know when this loan will actually become available. No fixed date has been announced yet. There were some statements made by coalition NPEs, which were quite equivocal. So we do not know any specifics. But we do expect it to be available. It might have some impact on the market, but a lesser impact than the one we have now. This new support program is more complex with a greater number of exclusions. It will also have a minor impact in terms of amounts -- so it will not trigger such an increase in housing prices as the safe loan presented. We have 2 more macroeconomic questions. One regards midterm perspective, 2025 to 2027, what might be the situation in the market taking into account the EU funds coming in. The dynamics are going to be higher because of the impact, the multiplier will be higher than 1. So once those EU funds get into our economy, there can be, for example, significant increases in the machinery of large companies -- and also, there will be companies funded strictly from those EU funds. There are also new categories of investment like critical infrastructure, arms industry. And this is something of the digital transformation energy transformation. These are all things to which the banking segment should get ready. EUR 100 billion in loans is likely to be granted by banks in connection with those lot enterprises in the economy. That is the upcoming decade. But the question remains where it will all start. In my opinion, it's likely to happen in 2025 or later. We will not see much of that this year. One more question. Everybody seems to expect great consumption. While retail sales has remained unchanged in the recent quarter. Well, basically, the economy cannot get used to high real interest rates without any consequences. Consumers notice those high interest rates. They see a real chance of rebuilding their savings, which had been depleted by the energy crisis by high inflation with the impact of the in Ukraine and by the overall environment in which we have been functioning. Which is characteristic of a great uncertainty of volatility. So in such circumstances consumers are not likely to engage in unbound consumption in Poland or in other economies with big ticket items like housing are perceived as significantly growing in prices. As a result, consumers need to save more in order to get closer to the target of, for example, buying a flat or house. So we are not surprised that the dynamics of consumption is lower than nominal income growth. But we can also see the effects on the portfolio of our deposits, where -- this dynamic is 10.9% inflow of deposits from retail sector alone. Another question was on sanctions about Swiss franc loans, how many lawsuits do you have? And what is the situation as regard? Well, we are getting lawsuits in a smaller scale than in other banks. It is indeed a certain problem. But for the time being, those lawsuits have various outcomes. In some cases, we'll win. In some cases, we lose the litigation. We assume that this is just the beginning of the time when those lawsuits are likely to come, and we are waiting for the development of the situation. If I may add something to this. As regards values, the total value of the sanctions lawsuits cases related to Swiss francs is below PLN 5 million. So that's an amount of very negligible impact. We also have a question about ratio probably in the context of our dividend capacity. This parameter improved on core business by 0.2 percentage point quarter-to-quarter. Were there any of one event? No, I think there were no off one-off events. We had 2 major factors, but none of these 2 was a one-off. That was the sale of loans that were nonperforming loans. And on the other hand, we had a fulfillment of our settlement program. We have signed over 5,000 settlements out of our entire portfolio of 18,000. And according to our studies, we have results comparable with other banks. In fact, the best compared with other banks because we have the highest or among the highest interest in signing such settlements. It doesn't go in thousands, but we have a significant number of these settlements. We also have settlements with customers who initially filed lawsuits and then they opted for settlement. We are very satisfied with the performance of the settlement program. The provision that we set up for -- among other things, this settlement program will be quite sufficient for the completion of this program. Organizationally, we are also doing very smoothly. Initially, we assumed that we would need over 1 year to come up with a draft settlement addressed all customers who are eligible for the program. And it has turned out that we have managed to send those draft settlements to over 70% of our customers. And that can be left means that within the upcoming months, all customers will receive such offers. The results are very satisfactory. You can see that this proposal of settlement was received with great interest on the part of customers. The hit rate in our bank exceeds significantly the results of our competitors, and that is palpable proof this form of settlement that we offered was received well by the customers. They consider it fair just safe relatively cheap. The conditions that we offered were considered as beneficial. So the targets, which we assumed while we launched this settlement program all have been achieved.There's one more question regarding our assessment of the trajectory of average cost of deposit. Now it was at 1.8%. Ladies and gentlemen, as I have already mentioned and also mentioned previously at our earlier conferences, to many customers, we are a settlement bank. And we do not expect small deposits come in. We do not expect deposit costs to grow for us. We maintain the market level of offer at the market level of interest. Once we notice that the cost of deposit is increasing above what we assumed. Of course, we will react accordingly. Please note that we had even last year, a few special actions which were intended to attract the attention of customers to our deposit offer. But there were always actions with a limited volume. So once we decide that our target has been achieved, such an action is closed. So I would not have any concerns that the growing deposit base might have any negative impact on net interest margin, apart from this range of 10-or-so baselines. That exhausts the list of questions. Thank you very much for the interest in our bank. On the 16 May, our General Shareholders meeting will close the year. And on the 8, August we invite you to the presentation of semiannual results. Thank you very much, and see you at our next presentation.