Bank Polska Kasa Opieki SA
WSE:PEO
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Earnings Call Analysis
Q2-2024 Analysis
Bank Polska Kasa Opieki SA
In the first half of 2024, Pekao Bank reported a 4% increase in recurring profit year-on-year. This growth was primarily driven by high volumes in both loans and deposits. Loans saw an increase of 6%, while deposits grew by 13%. Additionally, the bank's interest margin improved by 6 basis points despite a year-over-year difference of about 100 basis points in interest rates. These factors led to a 10% growth in net interest income, excluding the effects of loan moratoria.
Despite the positive growth, Pekao Bank faced several challenges that impacted its profit growth dynamics. The cost of legal risks associated with foreign currency loans amounted to approximately PLN 240 million, most of which was recognized in the second quarter. Additionally, loan moratoria had a negative effect of about PLN 110 million in the second quarter, and personnel-related costs, including a new bonus system, also contributed to higher expenses.
Pekao Bank's loan portfolio grew by 6% to reach PLN 180 billion by the end of Q2 2024. Notably, cash loans increased by 7% year-on-year, and mortgage loans saw significant growth, supported by a government program, resulting in an 11% increase. The bank also introduced a unique product for financing medical studies, with over 3,000 loans totaling PLN 620 million. Furthermore, the customer acquisition rate for retail and SME loans increased by 15% year-on-year.
Aligned with its strategy, Pekao Bank has been investing in digital transformation, resulting in an 11% year-on-year increase in active mobile banking customers, reaching 3.3 million by the end of Q2 2024. The digitization rate, representing the share of business processes handled through digital channels, improved from 50% to 89%. The bank continues to enhance its product offerings and digital interfaces, like Piggy Bank and the Pekao24 panel for parents, to better meet customer needs.
Pekao Bank maintains a strong capital position with significant buffers above the minimum requirements. The bank's NPL ratio fell below 5%, enabling it to continue paying dividends in line with its strategy. The bank plans to pay out between 50% and 75% of net profit as dividends. Additionally, Pekao expects its buffer to accommodate potential increases in anti-cyclical buffers in the coming years.
Pekao Bank projects a 3% GDP growth for Poland in 2024, though risks are trending downward due to slow recovery in Western Europe, particularly Germany. Despite increasing deposits, investment demand remains sluggish. The bank anticipates interest rate cuts to be delayed until at least the second half of 2025, given the persistence of inflation above target levels. This outlook suggests a stable yet challenging economic environment for Pekao Bank's operations.
The bank's operating costs grew 13% year-on-year, driven mainly by personnel-related expenses and inflation-related remuneration adjustments. Despite these cost increases, the cost-to-income ratio remained relatively healthy at 36.7%. Pekao Bank continues to invest in internal capabilities, particularly in AML and business support units, to support future growth and efficiency.
Pekao Bank remains committed to its ESG strategy established in 2021, focusing on sustainable growth and supporting the wider economy through financing SMEs and major corporations. The bank aims to maintain leadership in various sectors while broadening its product spectrum to meet evolving customer needs. Such efforts are integral to Pekao's long-term strategy and its ambition to be a reliable dividend-paying institution.
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Good afternoon, ladies and gentlemen. Welcome at the conference for the presentation of financial performance for the first six months of 2024, Pekao Bank. Mr. Jablczynski-san and the Vice President responsible for Finance, Dagmara Wojnar; Marcin Gadomski, responsible for the risk VP; and Ernest Pytlarczyk, our Chief Economist. We will start with a short presentation and Q&A session will follow. We invite you to ask questions. Thank you, everyone, who decided to join us on site. You may also ask questions on our webcast or you may send an e-mail to myself or our Investor Relations.
Over to Robert Sochacki.
Let me briefly walk you through the introduction to our presentation. I will focus on the main highlights. And further details will be provided by Dagmara, Marcin and Ernest. So let me start with key developments. Well, first of all, we have yet another period of net profit growth. This is clean of any one-off events. We were up 4% on a year-to-year basis. And the second highlight is that the lending has rebounded, and we've seen a good performance across all the segments of our operations. Our loan portfolio was growing at the rate of 6% year-on-year. We have a stable and safe capital position and has -- there has been steady improvement. And NPL, so nonperforming loan ratio dropped below 5%. That gives us a fairly comfortable position when we approach the dividend and the dividend rate.
Now let me turn to our net profit. During the first six months of 2024, when we take the net profit that was cleans up any one of events such as loan moratoria and Swiss Bank mortgage loans provisions. Well, it was to PLN 2,936 million Obviously, there is a major reason for that, namely the high interest rate that are still pervasive, but the rates have been going down. So this is not the sole driver. In addition to that, we have excellent business performance in the retail sector and in corporate sector likewise, and that was a positive boost to our financial performance.
And if we turn to a more detailed data, as I said, our loan portfolio was up by 6%. And at the end of Q2, we were at PLN 180 billion. We are particularly happy with the new tax that was up by 25% compared to Q2 2023 this is really important message because we believe that there is a huge potential there. And we are somewhat below the capacity that we could reach given our overall standing. And when it comes to the SME financing, our growth rate was at 2 digits compared to Q2 2023. But this growth has been visible for the year. And I think that has become a in the sense of signature for us.
If we move to the retail. According to our strategy, we've been acquiring new active mobile banking customers at the end of Q2 2024, we were at 3.3 million customers. So we were up by 11% year-on-year, which is a very decent result. Compared to the beginning of the strategy period, 2021 -- beginning of 2021, our digitization rate, which is that share of the business processes that can be handled by retail customers through the digital channels. It was up from 50% to 89%, which is again an important rate to look at for us.
We are coming up with new products and the products that have been on the market are continuously improved and aligned to the needs of our customers. We added Piggy Bank, we also have a panel for parents and your products in Pekao24. We are broadening the spectrum of possible personnel alignments in our mobile applications so that customers are able to make them very much in line with their needs. We have a leadership position in corporate banking. And hence, we are present at all important financing projects where funding is raised for the corporations, but also for financial sectors and for public sector entities.
Selected examples are shown on the slide, but this has been recognized by the market. And hence, we've been rewarded for our efforts and the strong leading position. And we are #1 bank in the payments category. We are best in the Central and Eastern Europe and in the category of custodian banks, we are #1 in Poland. So these awards were given to us by Global Finance. And the final thing that I wanted to mention here is that we continue to deliver our strategy from 2021 through 2024, we are focused on delivering the goals and objectives that were adopted with that spirit, it is our intent to increase the number of customers who use mobile channels further banking events.
We improved our digitization rate. We continue to provide funding to the economy, both SMEs and also major corporations. Basically, we cover the entire spectrum of the customer market, and we are either fighting for the leadership position or we are working to retain it. Going back to our ESG strategy of 2021. Well, this is still with us, and we continue to deliver that strategy. And I think that the important message is that our bank has been and intends to be the dividend paying bank.
So perhaps now I will turn the floor over to Ernest.
This is a brief update of our overall macroeconomic outlook with a specific emphasis on the Polish macroeconomic outlook. We keep our forecast of 3% GDP growth for this year, probably the risks were turning downwards. At the beginning of the year, the recovery was kind of slow. And the main reason for the batch was fairly poor situation in the Western Europe, especially in the German market. We know that our export results and orders are not impressive. We see that there is pressure on companies to improve their performance and profitability. We actually have a report where this pressure on performance and profitability. And given all these factors, there is a low appetite for investments. At the beginning of the year, we were sort of outliners with our forecast. We are saying that we are going to see the recovery, but with no frills.
There will be the rebound in consumption, but there will be no consumption boom, and there will be higher propensity for saving amongst households. And we see that in the banking sector across the board since there is a growing rate of new deposits. We were one of the few banks that was highlighting the declining investment and declining industrial output. So that's happening as we speak. And the quality of growth will change next year. The recovery funding coming from the EU will actually boost us next year. And we see that the economy is accelerating but at a slow rate. It's definitely not a dynamic acceleration.
Now moving on. Since the recovery is rather weak, we don't have high inflation pressure. This is the global theme that inflation has been declining, and therefore, some central banks decided to cut rates. And recently, we've seen a major drop and sell up in the markets. And we also had new forecasts for the interest rate. So the projections have been made and we also have a production for Poland. We believe that in case of Poland, the interest rates will remain high longer than elsewhere. And there's a number of reasons for that. When you look at the macroeconomic scenarios, including ours, well, it is quite possible that the economy is going to pick up. The labor market holds strong and the pay is raising. And therefore, the inflation, including [ car ] inflation is not able to go down to 2.5% to the target.
So we do see the turnaround with the rhetorics of monetary policy council, and we see that now they are very much eager to get on the inflation target. So it is realistic that the interest rate cuts are not to be expected anytime soon. There is a consensus that in mid-2025 that may change. Some time ago, people believed that we see first cuts this year. But now we are talking about the second half of 2025. So this is a long horizon for interest rate projections. The risks, if they materialize themselves, they will keep the interest rates at the higher level. And obviously, that will impact the banks and the environment for the bank's operation. And as we were saying, this is the prosperity prospect. The banks are actually earning money on deposits. As I said, the investment demand is very sluggish. But overall, when you look at the performance and the numbers shown by the banks, you can tell that this is a very interesting sector. And it will be interesting to see what bets will be taken on strategic projects and technology that they want to deploy.
So that would be all from me and over to Dagmara.
Thank you very much. now a few slides regarding our results. The first thing I would like to bring to your attention as has already been shadowed by the CEO. We have a 4% increase in recurring profit year-on-year if we look at the result of the first half of this year. And the two elements should be highlighted here. The first thing is high volumes, both in loans and the deposits. In loans, that is 6% up and deposits 13%. That is highly relevant to us and is a great joy to us is that we recorded growth in practically all business sectors. The second important element is 6 basis points higher margin. And this greater margin was achieved in the environment of lower interest rates, half year to half year difference is about 100 basis points.
Those two elements were the key drivers behind the higher results on interest, 10% growth year-on-year, excluding the effect of loan moratorium. If we talk about net profit, there are a few elements that I would like to comment on. Elements, which had a negative impact on growth dynamics in the profit. Loan moratoria with the impact of about PLN 110 million was the total effect recognized in the second quarter. The second element is the cost of legal risk of foreign currency loans. Here, the amount is about PLN 240 million, net spread over two quarters with the majority of this amount falling in the second quarter this year. And the third driver loss variable cost of remuneration costs impact of about PLN 100 million, and I will dwell a little bit more discussing the following slides.
To sum up briefly. I would like to say that we have ROE higher almost [ 200% ] and almost 37% cost to income. And a few words now about our interest results. As I have already signaled net interest income year-on-year was up 10% with a 6 basis points higher margin. Also, this margin was achieved thanks to higher volumes, but also thanks to our product structure. Cash loans grew 7% year-on-year and loans to business, SME and midsized prices. And on loan side, we are active in managing our pricing policy, which is also reflected in our interest margin.
To continue our discussion, let's have a look at volumes. We have recorded an increase in retail volumes and those for small and medium enterprises. Well, a little bit more on retail loans. There are three elements worth noting. One is cash loan. Here, year-on-year sales were higher by 24%, and that translates into 7% growth in volumes of cash loans. The second element is the mortgage loans. Here, we recorded a significant growth in mortgage loans. Please bear in mind that we support the governmental program of the same loan and that translates into 11% growth in mortgage loans. And the third element is the loan in financing medical studies. Let me remind you that we are the only bank in the market offering this kind of a product. And in June, we had slightly over 3,000 loans of this kind and PLN 620 million in volume.
A brief comment on corporate loans. Altogether, they were up by 2%, of which mid and SME were up by 8%. There are two factors worth stressing here. One is growing acquisition of clients, 15% year-on-year and enhanced product offer, including ecological loan and investment loan for funding biogas plants. On the deposit side, we recorded a 13% growth in the total deposit base, both in retail and corporate deposits. The amounts are the same. That growth was by 13%. In the retail market, we have recorded certain willingness of retail customers to invest in investment funds and treasury bonds. In spite of the growth of the deposit base, we have noted interest cost lower by 3% year-on-year. And this was achieved thanks to efficient pricing policy and management of liquidity needs.
There are two ratios worth mentioning here while we are talking about this LCR at 223% and deposits -- loans to deposits and the second -- the end of the second quarter was slightly over 67%. If we look at both assets and liabilities in our balance sheet, we can say that the safe liquidity level and a strong capital position, which Marcin will talk you through in greater detail, allow us to continue to fund the activities of our customers, including the upcoming projects, on the KPO program.
A few words about commissions. Here we recorded year-on-year growth by 1%. Line, which contributes very much to this is product related to asset management and brokerage services here, the growth of 16%. Our commissions on loans are lower year-on-year, and this is linked to the slowdown in the loan market for particular loan enterprises. Due to a significant growth in market rates, economic environment and a decline in investments in view of the cycle of using EU funds. And the slide presenting our income and costs. They both are below the strategy target.
On costs, operating costs grew 13% year-on-year. And I need to comment here on three elements. The first is cost of fixed assets and depreciation. They were higher by 13%. And the main factor driving costs was personnel-related costs. These were variable and fixed personnel-related costs. As for variable costs, we have inflation-related adjustment of remuneration. Here, we were at about 7%. And we believe that owing to the declining inflation in the following years. So this should slow down. And the second element was the increase in employment. We involve the strategy of developing our own capacities within the bank. And this development was particularly related to units related to AML and business support units.
And if we talk about variable personnel costs. There are three factors here. One is linking of motivation systems in the bank with target achieved. It actually exceeded the business requirements and expectations. So the second was revaluation of the provision for unused holiday leave entitlement, we expect this to be reduced after the holiday season. And the third element which contributed to variable personnel costs was the one-off payment of bonuses for the results achieved in 2023. It was paid out in May 2024 based on an agreement concluded in April this year. To recapitulate, in spite of those one-off events, cost-to-income ratio was at 36.7%.
And now over to Marcin.
Thank you very much, Dagmara. We have already heard about our robust capital position. We maintain significant buffers as compared to the minimum capital requirements above 5%, which means that in terms of capital requirements, we are able to fulfill our dividend strategy, and that is to pay out between 50% and 75% of net profit. What is -- those buffers is sufficient to accommodate a possible increase in anti-cyclical buffer. According to the announcements made, we expect this might be about 1% growth of this buffer next year and another 1% up in two years' time.
As for MREL requirements, the total requirement is at 18.9% assets weighed by risk and at the end of June, we fulfilled this requirement with a buffer of 0.4%. Importantly here, we expect that at the end of July, well, that's actually quite sure now. This result will be 1 percentage point higher because bond issue for PLN 650 million was completed. On the other hand, we intend to apply for recognition of 25% of our results for the first half of the year as our equity. And then there was also this transitional period related to the lack of the need to recognize the losses of [ ATCL ] portfolio. So altogether, we will have about 1.5% buffer on the MREL requirement level.
As per risk costs, in the first half of the year, they were at 46 basis points which means that we state between the strategy goal of the bank, that is set between 50 and 60 basis points. In our opinion, the lowest point in the banking sector with regard to risk cost is already behind us and the growth in risk can be seen in some sectors. There is a portfolio of PLN 7.5 billion of selected business sectors for which we established additional provisions of about PLN 220 million to reflect this elevated risk.
For the time being, we've had experienced some individual restructuring proceedings. On the other hand, we also experienced situations of companies coping quite well with the financial situation. So we do not have an investment book on the one hand. But on the other hand, we do not see any picture of gloom either. NPL ratio, as you can see, has been gradually decreasing about 0.8 percentage points, and that is the result of our activities on debt collection and acquisition as well.
NPL change by 1.2 percentage points, which was a major change was due to a modification and accounting rules. With regard to Swiss franc settlement, we are now adjusting to the rules valid for the interior sector. So that is a gross balance sheet value rather than a revaluation. And that was why we had this one-off major change. So now our recognition and the presentation of the results is comparable with other banks. Another portion of NPL decrease results from a different approach to recognition of the guarantees that we had for the portfolio taking over from Idea Bank. And that was quite some time ago. But now we are considering a change of approach here. We previously treated differently receivables and payables under this portfolio taken off from Idea. But now when we set off those to values, we think we will have a better way of presenting an impact of that portfolio on our results.
And so we're moving towards the summary. We have an increase in recurring net result. We are satisfied with the increase in retail loans, SME loans we maintain a safe capital position and NPL ratio that allows us to pay out dividends in line with our strategy, that is between 50% and 75%. And obviously, our intention is to maintain NPL ratio below 5% at the end of the year. Thank you very much, and over to Marcin.
Now, it's time for a Q&A session. You're invited to ask questions either on-site or through the remote channels. I think that some questions were answered during the presentation. For instance, operating costs have been covered in details. So I encourage you to ask questions, but let's try to group them by topic. First, group is the macro questions, then we will speak about the interest income. And then there are questions about Swiss franc mortgage loans and the cost of risk, NPL and the dividend and also the long-term financing ratios or regulatory requirements. And I think that MREL has been explained in detail. So let us start with the group of macro questions.
We assume that the interest rates will remain stable given situation in the market? Or is there any additional factor we should look at?
Well, through the presentation, I mentioned that there is quite a lot going on in the markets globally. And actually, when we enter 2024, we expect that interest rate cuts in the U.S. and in Europe. But we know that Poland is idiosyncratic in many aspects, like pay was raising at a high rate. And everyone believes that the next year will be actually more -- showing more dynamic growth in the current year with such macro trajectory, the interest rate cuts are not to be expected anytime soon.
And we see that the monetary policy council is actually now very much focused on reaching the inflation target. And it seems that the council has doubts whether we are able to bring the inflation down to 2%. And until they see that they are not likely to reduce the inflation rate, they are not going to cut rates. So we are looking at what's happening, and we are holding on to our projection.
In terms of interest income, I think that well, we need to just say that we are sensitive to the interest rate differentials and changes. And there's also a question about hedging and the proportions between variable rate and the fixed rate and how hedging may impact our results. And there is also a question that we may take later on about EWD, whether it may impact our future interest income.
So let me start that. Well, in terms of our sensitivity, it's like any cut of interest rate by 100 basis points with the current balance sheet, it means that our NIM goes down by 25 to 30 basis points. And another question was about the breakdown of our balance sheet. So if we look at the structure of the balance sheet, we see the fixed asset contribution -- so this is the natural collateral plus hedging. This is PLN 110 billion assets that are at the fixed rate. Last year, will the interest rate management in the bank has said that we have liabilities at the fixed rate. We have our own funds, and we have a stable portion of deposits. And we have a very detailed limiting system, where for individual tenors, we have limits for [ BPD ].
And recently, interest rate management was very active, mostly in the mortgage loans portfolio. The loans that are at the fixed rate because this portfolio was up by PLN 10 billion over the past year. On top of that, we have over PLN 60 billion government bonds with a 3-year duration, and this is a fixed coupon. And we have years portfolio that is like PLN 27 billion with the fixed rate again and the average maturity is 3.5 years. So these three contributors not only determine how the profile of our interest rate in the balance sheet.
Well, yes, another question is also about interest income, and this is cost of payment moratory that was extended until 2024. So the question is why we changed our position and why it's going to cost less?
So let me answer this question. Looking at the participation of eligible customers in June, it was 21% of the volume of our market loans. In the past, the estimates were more conservative, like 35% of eligible customers. So when we look at this differential, we are aligning our estimates to the actual data that we get, and hence, the difference.
So let's move to the Swiss francs. This is also like a sensitive thing in the banking sector. Perhaps it doesn't affect us to such and extend these areas, but let's split it in two main areas. First of all, our new accounting approach and how the sector is approaching that? And what is the possible impact. And on the pivot, are we able to make any comments about the future developments in terms of the settlements. So active loan agreements and those that were paid up. So what is the situation of what were the most recent developments?
Well, okay, let me start with the new accounting approach. Well, we aligned our position to remarket practice. In the past, in the previous periods, Swiss franc mortgages were classified as credit risk. And therefore, they were part of the ECL calculation. However, currently, they are presented as an adjustment of the gross asset value. So when we look at the market practice, I think that now we are better aligned with whatever is done in the market. And at the same time, this is more consistent with our portfolio. When we look at the jurisprudence, so we see that many times that the loan agreement is annulled. So it's more of the legal risk than the credit risk and our new approach to the Swiss franc mortgage loans provisions triggered adjustments, and that was a positive impact on our gross result that was for the past year.
And this year, it is a negative impact,PLN 240 million that will be charged to this year result. And there are two elements that we have to be mindful of. The first element has to do with the provisioning. And when we look at the number of court cases that are lost, in the previous estimate we were at 96%. But now we are up to 99% after the review of the external legal opinions and because of that, the charge of the provision. And if we are forward looking, I believe that we will have to respond to the evolving situation, the topic continues to be very active in the sector. And depending on how things will develop, our results will reflect better accordingly.
Well, in terms of income -- interest income, there was a question whether we've sought and we are within the European limit.
Yes, this is 4% and the limit for Tier 1 capital is 5%. So we are under the threshold.
Okay. There is a number of other regulatory questions about the new impact of directives and no long-term financing. So how that may impact our future operations?
As far as the new regulations and capital requirements are concerned, we are implementing that. We have simulations. The final numbers will be known once we fully implement our solution, and we will be able to correct numbers for each loan. Now the difference between the current capital requirements and the new ones is not material. So from quarter-to-quarter, it's in line with the differentials that we see between quarter and quarter. So that will -- the impact on our portfolio will be similar to that. And in terms of long-term funding rate, I think that 40% is our target. Currently, it is like 33% at the end of six months, 2024. And that means that next year, a few billion zloty will have to be arranged to meet the target. It could be an issuance or some of deposit products that can be placed on the market. But we believe that we should be easily meeting the target.
Yes. I promised but the next topic will be improvement of our NPL. Obviously, the question is about the dividend given the rules that we had in place last year. So are we able to comment our dividend paying capacity for the current year?
Well, this is about the NPL, right?
Right?
Obviously, kind of financial services authority is defining the requirements. The new requirement was introduced in December 2023, and it can be modified in 2024. But looking for the past year, NPL for dividend requirements was slightly different from the requirement that we had in the financial reporting system. This is mostly about not including the [ repo ] transactions. And if we follow kind of guidelines, we would go -- we would -- it would have changed from 4.7% to 4.6%.
There is also a question whether the current state of development of the bank is considering foreign expansion.
Well, the strategy that we had for 2021 to 2024 is coming to its end. We have already started some analytical preparations to develop a new strategy. And probably, we will have to first deal with the strategy. And only then we will be able to say whether such a direction as foreign expansion will be included among our strategy directions. As of now, I cannot tell you anything more than that.
As of now, we do not have any more questions. Oh, yes, there is something. Coming [indiscernible] Santander.
I would like to touch upon those two major surprises this quarter. Personnel costs and cost of risk. My question is about the cost related to the new bonus system or motivation system. How does this new system differ from the previous one and whether it significantly increases the multiplier in the calculation of the bonus is that the same multiplier and just the base changes?
Let me take this question. As we know personnel costs, there are two elements to take into account One is linking of the bonus system with the results achieved by the bank. Here, we were above our business targets. And this is an element that will keep recurring. Then there are two material one-off factors, which together had the impact on the result of about PLN 100 million. One was the adjustment of the provision for unused holiday entitlement and the other was payment of bonus. This payment was made in May based on an agreement concluded in April. So this holiday provision and payment of bonuses were two one-off events that happened this quarter. Historically, in this bank, if you look at your sales network, the evaluation was quality based. Now the bank has moved to a more market model, mainly commission-based model. So the amount of bonuses is correlated to a great increase in income.
That makes me think of the cost of risk, we show a slightly higher cost risk and corporate sector. You've talked about selected businesses that involve a slightly higher risk. Can you talk us through that?
Mainly transport also construction, which relies on investments that have not rebounded yet. And exports. In particular, wood-based, wood processing and wood products industry.
Thank you so much for following our presentation. The results for the third quarter will be presented on the 7th of November, but before that day we will be present in numerous investor conferences. We know that the disclosures were quite demanding. Thank you very much for your attention. See you next time.