Bank Polska Kasa Opieki SA

WSE:PEO

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, ladies and gentlemen. A very warm welcome at the presentation of the results of Pekao Group after 9 months of 2024. Thank you very much for arriving here in such large numbers. Maybe we should focus on Q&A in today's presentation given such a large audience. We have Mr. Stypulkowski, CEO; Dagmara Wojnar, our CFO; Marcin Gadomski; Chief Economist, Marcin Jablczynski.

Over to the CEO.

[Cezary Stypulkowski, executive]

I have already acquainted myself with what you have already published and came to this revolutionary conclusion that we are not going to make any big presentation. Of course, the presentation is available. Instead, we will focus on answering your questions because I think it's going to be more constructive and will probably better reflect the area of your interest that poses a certain risk, mostly to myself. Because among those people present here, I'm the least acquainted to the inner workings of the banks.

But I do have some general vision. Nevertheless, I think as an overall standard, it would be good to do this experiment. Marcin will probably put together some opinions and maybe we will set a new benchmark in the market, okay? Let's proceed like this. The only thing I would suggest, because I think it's quite important, maybe Ernest would tell you what our vision of 2025 is, what our vision of the prospects for the upcoming months is because that is always the backbone of what we, as a manager and the team, have to take into consideration in the context of certain intentions that we want to pursue in the upcoming 12 months or the entire 2025.

Also in the context of the need to develop a midterm strategy, because I believe that nowadays going beyond the horizon of 2 or 3 years is not very productive, except for vast infrastructural investments where you have a different vision of distribution prospects that is long-term investment.

Ernest, over to you.

[Ernest Pytlarczyk, executive]

All right. I think next year is not going to differ so dramatically from the environment in which banks are operating right now. Dramatically means there will probably be reductions in interest rates, probably not very deep productions. For the time being, we think about 100 points, possibly even fewer than 100, maybe some more, it's hard to say.

If we look at the profile of economic growth, the economy is likely to slowly rebound and next year is going to be about 4% GDP. If you look at inflation, especially base inflation, it's softening out on a not very good level. On the other hand, the interest rates, diverge from the European [ arms ] and RPP, which had 100 points in 2023 made a break of year -- over a year in its movement up or down. Now the rates are positive. We are waiting how the cycle develops. But the projection that has been released so far does not suggest any need for urgent action here.

The first point, when we may consider changes in interest rates will come in March. Probably, we will look at what the Fed is doing rather than what European Central Bank is doing for a variety of reasons, that is going to be the benchmark. And Fed is going to follow the fiscal policy, especially in the context of what happened yesterday, that is the winning of Donald Trump in the presidential elections, will contribute the fiscal policy becoming much more expensive. So we will have some factors which are of different nature from the ones that we experienced.

Previously, the effect of Trump will be visible in monetary policy, as for PLN, we all believe that PLN was going to strengthen, but now weakening of PLN might also come up, in particular, in the context of geopolitical developments. But as I have said for banks, and I have been using this description for quite a while now, it's going to be an El Dorado. We have another elephant in the room, where we see minus interest rates due to the deposit part of the portfolio. It might turn out that next year, we will see the beginnings of what we refer to as the new 5 years of investments.

It's going to be dominated by large transformational projects. Not even infrastructure, but energy transformation, green transformation. That's what we have calculated, and there will be indeed a lot of that. At some point, the dynamics are going to be in 2 digits. If we look at sectors, we have taken a very close look at this based on reports, based on a variety of strategies and expertise of people we have on board. And it seems that the accumulation of the greatest dynamics will come in 2026, 2027. That might see a squeeze in the construction settle, which is now in red numbers. Squeeze because we will do things that have not been done previously in energy grids, power grids.

What is important here is that we will look at energy modernization of the Army, transportation by railway and air, energy efficiency in building installation. And not each class of those investments will result to commercial loans. The largest part, that will be the case in energy transformation. But it will also spill over into industrial processing, minerals, petrochemicals that will be concrete development of machine parts.

And part of the industry will be obliged to adjust to client guidelines of the European Union. We are strongly convinced that these investments will materialize because, for Poland, that is about make or break in terms of functioning within the European Union. At some point the demand for investment loans might be so significant as to double the output in 2026, 2027. For banks, that is the area of interest. Depending on who prepares the resources, capital, internal procedures and processes to reach for those projects, will be able to replenish any gaps in the results as a consequence of lower interest rates.

A lot of banks see this energy transformation coming. I think we will stand out in the market because we already have the required competencies on board. And we are capable of providing funding -- or large, with large being the operative word here, large investment, large product. That is the background in which we are going to operate for even longer than just 2 years, it's going to get the pace over time. As 2 years will not be very different in terms of quality from the level of what we are doing right now.

We will not have any problem with generating the results. What will matter is where this result will come from and which industries will we bet on. Okay, we're all yours now.

[Cezary Stypulkowski, executive]

Let's start with our guests present in the room, and then we will add questions asked online.

[Dariusz Gorski, analyst]

Dariusz Gorski, Santander Bank. You have been very modest about saying you are not very well familiar with the bank, but from the media coverage it follows that some diagnosis has already been made. So the question to you is, would you be kind enough to share with us your diagnosis of the bank or highlight the points where low-hanging fruit can be picked up? And out of those topics that came up in news reports, I'm most interested in Alior because I'm responsible for valuating banks. I know that Alior valuation is a very delicate point. But maybe the CEO or somebody else from the Management Board would be kind enough to comment on this more broadly.

[Cezary Stypulkowski, executive]

Well, I will answer like this. A letter was sent on September 7, if you write -- October 7. Well, if you write a letter to 7 people, you expect that it might reach more. It was 15 pages long. Everybody said it was too long, but as it turns out some people had it. And that was probably an overview based on what you were also -- or aligned to what you are commenting on and so on. I've been here 4 weeks. 3 realistically speaking.

I believe that what I could add to the -- to what was written there. I think these are things that are based on the contact with the real world rather than what has been read. Firstly, I believe that as concerns to my expectations, the degree of expectation as to the bank's digitization and the thinking of the management is greater than I expected. In other words, the efforts for the last 2, 3 years, I believe, has brought some results.

I mean, PKO was actually delayed, but I think it's catching up. And based on some apps that I have in domestic ones, I should say that there's no reason to be ashamed off. And if I were to be ambitious, I should say some people should actually take us as a role model by and by. And it's quite positive, because I think there's some [ favoritism ] about it. And from this point of view, it makes me kind of optimistic.

Another thing is that -- I mean, what's a bank? A bank, as I've been saying for a long time, it's a bit of capital, but a bit of equity, decent procedures and good people. We have some capital. So some coming from an institution that has -- that was struggling with more significant problems. Let's say that I'm more comfortable here, and the challenges have a totally different dimension. It also seems to me that as for the ambitions and the quality of the expertise available at the bank, I think it's also at a very high level.

The -- we cast aside if we were to move around the triangle are procedures, a level of bureaucratization and perhaps smaller openness than we might expect. So in this area, I should say, are the factors make a difference. The bank definitely has expertise when it comes to corporate banking. I think it's the toughest in the market. I mean there might be some pockets where that are better or worse shaped. But when it comes to the product coverage, it's good. The expertise level was good. Marketing is decent.

Perhaps what's missing -- but it also stems from -- probably from the bank's historical model and probably from 2 weak Italian investment projects. Well, let me just put briefly, at the Italian period, it wasn't invested into enough. And this translates into the fact that considering the bank's historical position, and I have been observing PKO SA, especially towards the end of the 1990s, I believe that this was a wasted chance. Maybe not -- maybe not wasted, it was underweighted when it comes to a micro or SME and micro.

Of course, if you don't have a bank on the go today, then the level of customer coverage, especially when it comes to small customers, self-employed, is smaller because they're reluctant to go and visit the bank branch, spend the time and expect to park the car in the main street. No, that's not a bank for a small entrepreneur. So that's where we are underweighted, shall I say, and to a greater degree than I was expecting that I was expecting. I thought that the branches had done a better job. This also stems from the geography where the activity is greater, where the bank is physically present.

So in capsule following the letter, I don't know that. And when it comes to the latter part of the question, the answer is much more complex for regulatory reasons, I should say, both yourselves as well as myself, myself probably to a greater degree, have been announcing the annunciations of the -- of PKO's main shareholders, principal shareholder, that faces a problem. No discussion about that. We know that from the PZU's point of view.

I could say, coming back to my previous incarnations, I believe that for PZU to have holding in 2 publicly quoted banks does not defend itself. It's not the best option. And we have to do something about it. One of the options discussed -- and I've subconsciously feel that you and your comments, also alluding to that, one of the options is a potential merger between PKO and Alior, which has been attempted several times historically and it never came into fruition for reasons that I can only infer.

That's all I can tell you about at this moment, about it at this moment. And there have been no events that would make me prone to tell you that something is on the horizon. Would you like to deepen that question? Or is it sufficient?

[Dariusz Gorski, analyst]

I'd like to continue along those lines. And you as the bank CEO, would you favor that merger? I mean it might be initiated by the shareholder, but also PKO as -- I mean, you as PKO's CEO, would you favor that merger? Or would you actively persuade the shareholders that it's a good move?

[Cezary Stypulkowski, executive]

I believe there are two dimensions to that. One of them is more generic. And I've talked about it. So merger is the peak of your own challenge. You have to be prepared for this, have the capacity and expertise to enable you to make sure that the business combination process does not take years. And mergers happen into circumstances. One of the circumstances is that either one person is on their knees or they're just absolutely rolling down on the floor.

And that's where it takes place at excessively low prices or it follows some industry logic. And generically, I would say that there are reasons that all this underweighting that PKO SA has consumer finance, micro entrepreneurs, SME and what's going around it, give price to some industry logic. But it would be too early to talk about it. We have to do our homeworks.

Specifically speaking, we have to reach out to what has been done so far. I believe that what had been done previously was less connected with logic and more with ambitions. I believe that's what it looked like at that time. So definitely, in this process, I mean it's never the case where you can abstract the CEO's views from the institution's overall picture. You can't do it. You have to take into account the realities of the group functioning, the entity functioning and what would have to come out of the transaction.

And to some extent these types of transaction also serve a certain revitalization of the organization. I think there was earlier a question from the audience about brand? No. No, that was somewhere online. Any further questions from the room?

[Unknown Analyst]

Yes. Taking the advantage of having this long Q&A, I will not ask you about what kind of bank you are because that would be unfair. What Pekao SA should be like in 3 years? I don't want to extend this horizon to 5 years. What bank would you like to manage in 3 years from now?

[Cezary Stypulkowski, executive]

I would very much like to talk about this at the end of the first quarter. I'm now at the stage of making an active diagnosis with components I have already enumerated. As of today, for sure, Pekao S.A. has one great advantage. It is a classical, non-biased universal bank. While in the corporate part, it is not really more of the same, but more of the better.

On the retail side, it has to redefine itself. And probably at this stage, I would leave this -- the manner for distinguishing ourselves from the rest because that always matters. Given certain circumstances that I have described in the letter, it's not easy, because it's a drag with inflation. Inflation in general is bad, but it has some charms. At certain level, it allows leveling of peaks and troughs. It allows you to restructure costs, to restructure, so it does have advantages.

And a view of the bank from this perspective in the upcoming 3 years, because I do not want to go beyond this horizon, plus the ability to answer the question whether there is any next big thing maybe, but opportunities of reaching for solutions that will allow the bank to some extent -- well, we cannot expect miracles, will allow the bank to leapfrog. Because the largest problem of retail part is the demographic structure we're all aware that it is not something that's going to happen overnight. My professional career will not be enough to see this structure change. So from this point of view, there is an element of generic thinking about the logic underlying mergers.

So it's appealing in the way that the ability of searching for new customers, to some extent, transactionally to some extent, by age group, all those things do play a role. So please give me some time at the end of the first quarter. Not worse than others with serious ambitions, we'll present ourselves appropriately.

[Unknown Analyst]

I have a question to Mr. Ernest. Those high capital expenditures in your forecast -- I will put it differently. Do you assume in this model that with such high CapEx something will happen? For example, better deficit will all of a sudden become lower, and as a result, with this scenario we'll have a chance to see a decrease in interest rates to the levels the minister would like them to drop? Or is it a danger for the banks? Or do you think that El Dorado should continue in the view of inflationary pressures and...

[Ernest Pytlarczyk, executive]

Well, rates have to be lower so that some of those investments can happen at market terms. Apart from that, there might be more assistance programs that reduce the cost of credit. Because we are doing also the mix of funding. Part will come from PKO, part will come from the budget. As of today, the cost for the budget are quite high. And the fact that the deficit is so high to a large extent is about redirecting funds to local governments. And that is the prerequisite for those investments to happen, because this improves the ability of local governments to fund those investments.

As of now cutting the deficit would entail cutting investments. And if we admit the deficit, we make the investments more likely to happen. Of course, from the perspective of the demand for investments loans, lower interest rates would come in handy. We know that they will be lower, although we do not know yet at what scale. For the time being, this is already becoming a burden for companies. There might be questions about NPLs, there might be questions about financial results. The results are definitely lower than in the previous 3 years, which saw the Eldorado for the Polish industry. And we have this impact of corporate income tax. So it seems that interest rates should be lower.

[Marcin Jablczynski, executive]

We have a few questions asked online. Well, of course, that does not mean that you cannot ask any further questions. If you point about -- what do those classified Phase 3 come from? Will we be able to reduce NPL to be below 5% to meet the requirement for the higher 75% and dividend?

[Dagmara Wojnar, executive]

As regards the third quarter and this classification, we are talking mainly about classified -- transport and chemicals, transportation and chemicals industries. And to move on to the second part, we believe that we have already passed the trough as a sector, not just Pekao SA, in terms of cost of risk, the past years were historically the lowest cost of risk over the past 2 decades. And for sure, in long term, it's very hard to predict when those costs will go up, and we continue to be surprised by costs being low.

But if we look at the first 2 quarters, the cost of risk in the corporate part might be somewhat higher, plus probably some additional reclassification will take place. But I still think that in Pekao S.A. that will be more or less within the boundaries of the strategy we have announced. Maybe in some individual quarter, we will slightly go beyond those frameworks. But now we are below those assumptions, and we have been in this situation for quite some time now. In this context, in P&L is a certain challenge. But we, as a bank, have a whole range of steps that we can take in order to reduce NPL. And we assume that at the end of the year, it will be quite significantly below the 5% unless something surprises us.

[Marcin Jablczynski, executive]

There is also a question which will probably keep recurring every quarter. Do we meet the certain NII?

[Cezary Stypulkowski, executive]

And I would link it to what we are saying about our sensibility to interest rate. We are talking about 25, 30 bps here to 100 in rates. I will later hand over to Dagmara. But to answer this briefly, yes, we are now at 4% with current assumptions. The requirement is 5% of Tier 1. Would you like to add anything to the second question?

[Dagmara Wojnar, executive]

Would we add anything to the rate sensitivity to the interest rates? Let me just say that as communicated earlier, our sensitivity to interest rates out of 100 points means sensitivity is 20, 30 NIM points, to NIM lowering. Of course, we are taking action to minimize that sensitivity. On the one hand, it's the construction both of assets and liabilities on our balance sheet. On the other hand, equity and liabilities on our balance sheet. We have two lines but we'll be compensating those lines. This is the revenue -- or actually, the commission result -- the result from commissions and the P&L item connected with costs, which means that we're trying to manage that actively.

[Marcin Jablczynski, executive]

When it comes also in the press part, it was a similar question asked this year. We've also had rate decrease by 90 bps. So it's not a purely mathematical question, mathematical exercise. May I just ask this is a little bit connected with our sensitivity to interest rate decreases. But there's also the elephant in the room that PKO SA is paying very low for deposits. I understand that you don't need the deposits, you don't need to compete for a customer. But if the volume grows, there are players in the market who have the way but to do something, we have examples of name countries where despite the huge liquidity, the investment costs were unintuitively high. I'm talking about Czech Republic.

Now the question is, once the volume growth starts, the projects -- investment projects start in the economy. So question number one, how would you explain such a low share of term deposits in the mix as compared to what the Polish banking sector has seen historically? And where do you see the inflection point when it comes to the cost in the sector? How much room do you still have for banks to be able to provide funding for themselves at such a low cost?

[Ernest Pytlarczyk, executive]

There's two phenomena, actually. Let me start with the Czech Republic. In Czech Republic, the Czechs have had 60%, 70% of that ratio ever since I remember. And this stems from the fact that I've been to two meetings in a month with the then, I think, President Klaus. It was at the beginning of the 2000s. It was in Prague first and then some place in Italy. I was sitting at a table with 10 people in Prague, and he repeated that in Italy some place. And he said that the Czechs were quite an idiosyncratic society.

When they hear the word prosperity, they save because there's -- they have something to economize on. And when they hear it loud, they save because they're afraid. It's a different culture. It's basically historically a different culture than in Poland. Poles like to do everything quick. We are more consumption driven. So that's how I explain that cross-border divergence. But the level that we have today, it has created a large buffer when it comes to the expansion. I mean how much extra credit can the banking sector emit PLN 70 billion a year, that would be a lot. And what's the surplus? It's huge. Massive.

So either if things were starting to look up. The process of reaching that will take some time. I mean it's like dynamic balance. One thing is already working at the level of 13%, 14% and the other one is the low single digits. So it takes like 2, 3 years. When it comes to term deposits, it's -- indeed, it's interesting because historically speaking, it was 50-50. The Level 4, when it comes to interest rates, people should be fighting for term deposits, but I think there's a lot of deposits below PLN 20,000. So on a nominal basis, doesn't make much of a difference. If I have PLN 10,000, PLN 20,000, it doesn't make any difference whether I have a transaction deposit or ready access, will have online trade.

I mean this might be the factor given the relatively low amount, we are less prone to reduce our liquidity. Unfortunately, the speaker is not using the mic.

[Dagmara Wojnar, executive]

To continue, I should say, as Ernest was saying, there is a certain different depreciation when it comes to term deposits and the structure of the balance sheet. In another institution I was working for, I was explaining to myself that it was that transactionality was so convenient that it kept people from depositing. It was true to some extent. But if you take a look at the -- on a cross industry basis, it's hard to explain.

So to answer the question, these are realistic things against the backdrop of what we used as an argument. I don't perceive it as an imminent danger. This will come, and banks will probably adopt to that and adjust to that, once more demand for loans appear, especially investment loans, then liquidity ratios, to the extent we have deposits, will start making a difference on the quasi regulatory reporting factor. As far as LCR is concerned and so on, might also kick in and impact pricing.

There's one more thing in the context of our deposit base and customers. As you will know, the CEO has been mentioning that those customers are mature, shall we call them that way, both on the active. Whereas on the active side, it's a challenge. On the deposit side, it's a positive component of course, compared to the competition.

[Cezary Stypulkowski, executive]

The next 2 questions is whether we perceive the topic of participation in the reconstruction of Ukraine. We've seen it. We've even had a report on this. It's on the website. I mean, it was so hypothetical an exercise that we indicated to the industries, only Poland is not going to be involved. We don't even have the workforce. We just have expertise in some sectors. On the other hand, our companies are small. We will be like a backyard. Like for instance, prefabricated -- when it comes to buildings, the prefabricated buildings some of the industry -- agri and food industry. I don't remember the details. We have a report on our website. It's a purely hypothetical exercise.

[Marcin Jablczynski, executive]

Given that you've unlocked the microphone, there's a couple of questions on the volumes. When do we expect the acceleration of the corporate loan stock?

[Ernest Pytlarczyk, executive]

2025 is when it should start. But we're not capable of defining the timing. It's all being delayed. But some place in 2025, we should be able to see the beginning. These are the first large larger amount. So we're talking about this repower Europe project, it's offshore, among others. It's among the major projects.

[Marcin Jablczynski, executive]

One more question, perhaps we were -- just before the new strategy. The question is whether the bank's new strategy will be favoring ESG goals to a great extent and whether the bank is going to increase the sustainable or green bond issuance?

[Cezary Stypulkowski, executive]

This pause of mine means something. I would put it this way. It seems to me that the pan-European focus on ESG and climate change and so on and so forth should be viewed somewhat differently before the war in Ukraine and nowadays. Therefore, it seems to me that the scale of emphasizing the greenness must slow down. It doesn't mean that this theme will disappear. In my opinion, it will continue to be important, but it has to be calibrated to the reality of the economy. It is impossible for the economy 100% reliable on coal to suddenly transform into green economy. And if we do anything unreasonable, we'll lose competitiveness.

So we have to find ourselves as a bank that can find the right balance. There's a slide in our presentation showing that a lot of projects that we have completed are indeed green projects. There is no intention of abandoning this path. But the reality and the structure of our customers forces us to learn how to help those customers. But where the expertise is on their side, in order to maintain competitiveness, we need to rely to a greater extent on sources that are promising to have some future ahead of them.

So for sure, ESG will not be the centerpiece of our strategy. I want to say explicitly. The bank cannot afford this. Polish economy as it is, cannot afford this. And we have real customers to whom we need to be helpful, and we will not do anything unreasonable. We will leave that to other foreign banks in Poland. Industries, large industries like energy, which not only for climate reasons, but for business or security reasons, will be engaging in large investments. In this respect, we for sure have the ambition to fund them. And the scale of those investments will be so large, but some of it has to take place by supporting our customers. Any questions from the room?

[Marcin Jablczynski, executive]

There were a few more questions about Alior, but please do understand us, that all three parts of PKO Group are listed.

[Unknown Analyst]

Maybe I would like to ask the President for your assessment of an increase in the risk of legal issues or tax issues in the coming periods compared to the situation today.

[Cezary Stypulkowski, executive]

I think that for sure, the regulatory regime will ease up. I've read this is report. I have just watched the YouTube an interview with those still voice, Macron speaking in Berlin at some conference that's available online. And in both cases, there is a clear message of overregulation. I sometimes refer to this, please forgive me at some age people likely to tell you a lot of anecdotes.

Just ago, there was a footnote referring to an article in Newsweek in 1980 something, it described the regulation. And the example quoted there was that in 1933, America had a new deal and there were regulations. National register had 3,000 pages, while during Reaganomics, it has 67,000 pages, which was nowadays, it is about 100,000 pages. So it seems to me that thinking about this should be on several levels. I think Europe has definitely exaggerated with regard to GDRP.

If we take into consideration the poverty in raw materials in Europe, its drive towards everything being clean and quickly so probably was a bit too rushed with no consistency between ambitions and actions. Then there is consumer protection that also affects the whole area of environment. I have already spoken on that on a number of opportunities. I'm thinking about an article, lawyers attack on banks. Because I think that's teetering on the brink of immorality and dishonesty.

Forward and educated people are speculating at the expense of the entire society, that the attempts that are being made by lawyers in commensurate with all these deeds of the banks. The peak of aggressiveness and regulatory requirements that expect the banking sector to be the key driver of climate change are exaggerated. We do not have this expertise. Building this and being the policemen for step functions under the bank regulatory regime is conflictory with our mission. Our mission is to safely collect deposits and safely convert them into profits for customers. All those other functions are completely new.

For the first time, we have ever mentioned credit risk. In the last years, we have mainly focused on legal risk. That signals something very wrong going on in the whole domain of law. I think this balance has tipped over. The discussion about LIBOR is a good example here. The attempts to undermine the LIBOR, where there are contracts for PLN 10 trillion, 3x GDP. While there are various methods of committing suicide, but this doesn't seem very intelligent to me.

[Marcin Jablczynski, executive]

There are a lot of other detailed questions, but I will answer them. I will return with the answers directly to those asking them. We will have another meeting to which we invite you cordially, the President, to talk about strategy. So see you at the next conference. Thank you very much.

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