Powszechna Kasa Oszczednosci Bank Polski SA

WSE:PKO

Earnings Call Analysis

Positive Quarter with Strong Growth and Digital Advancements

PKO BP achieved a net profit of PLN 2.2 billion this quarter, rising to PLN 3.3 billion without legal provisions. Core income surged by nearly 21% year-over-year, and the return on equity was over 25%. Deposits increased by more than 16%, supporting overall balance sheet growth. The bank maintained a low non-performing loan ratio of 3.34% and continued its digital transformation with 8 million active IKO application users. The bank looks forward to leveraging its strong capital position for further growth in loan volumes while managing risks effectively.

Strong Financial Performance

PKO BP reported a very strong start to 2024, with a net profit of PLN 2 billion for the first quarter. This impressive figure is bolstered by extra risks and extra-legal risk provisions, pushing it to PLN 3.3 billion, which translates to a return on equity (ROE) of nearly 18%. Without these provisions, the ROE would be even higher at 25.6%. The robust performance is attributed to core income increasing by about 21% year-over-year. The net interest margin saw a slight uptick to 4.56%, indicating solid profitability from lending activities.

Expanding Customer Base and Digital Transition

The bank's total balance sheet grew by 12% to approximately PLN 500 billion, with loans seeing an 8% increase and deposits jumping by 16%. PKO BP's customer base expanded to 12 million, driven by digital adoption. The bank's IKO application is a standout, boasting over 8 million active users. Digital transformation efforts, including the use of machine learning and AI in decision-making and customer interactions, are paying off, evidenced by millions of daily logins and transactions.

Sustained Growth in Core Business

Net profit from core business operations stood at PLN 2.44 billion, showing resilience even amid legal risks. The bank's return on equity for its core business is an impressive 25% when excluding extraordinary items. PKO BP displayed a strong 23.4% year-over-year growth in business activities, combining retail and corporate customer wealth accumulation. The bank maintained a robust net interest income and improved net interest margins, benefiting from strong deposit capabilities and high interest rates.

Stable Risk Management and Capital Position

PKO BP's cost of risk remained stable below 50 basis points, with a non-performing loan (NPL) ratio well managed at 3.34%. The bank's capital situation is solid, with a Tier 1 capital ratio of 17.41%. The positive outlook is supported by a declining NPL portfolio, high provision levels, and advanced risk management technologies. Machine learning is now driving 83% of cash decisions, improving model effectiveness.

Investment in Green Transition and Digitalization

The bank is positioning itself to benefit from the recovery and resilience fund, with 60% earmarked for climate change and green transition, and 21% for digitalization. These funds are expected to help businesses transition to less human-intensive development models. PKO BP is also focused on leveraging big data and AI to optimize its deposit portfolio and risk management.

Plans for Strategic Growth

PKO BP is preparing a new strategy to increase market share profitably, leveraging its capital strength. The strategy, expected to be framed by autumn, aims to grow market shares across retail and corporate sectors without compromising profitability. The bank is also keen on expanding its energy transition financing beyond traditional methods.

Challenges and Opportunities Ahead

Despite some legal risks, particularly regarding CHF loans, which could impact profits based on customer settlement decisions, PKO BP remains optimistic. The bank aims to reduce court cases by offering attractive settlements, and it remains vigilant about regulatory changes impacting its long-term financing index. Ongoing digital transformation and strategic investments in automation and simplification of processes look to ensure continued profitability and growth.

Dividend and Capital Utilization

The Polish financial supervision authority has limited dividend payments to 75% of previous period profits. PKO BP plans to use extra capital to strengthen volumes and margins, addressing challenges such as capital adequacy and long-term liquidity. The bank's focus on boosting its common equity Tier 1 ratio aligns with its broader strategic goals.

Earnings Call Transcript 2024-Q1

[Unknown Executive]

Good morning, ladies and gentlemen. Let me welcome you at the presentation of the results of the PKO BP for the first quarter 2024. We have with us Szymon Midera, Vice President of the Management Board, managing the work of the Management Board, Piotr Mazur, Chief Risk Officer; and Krzysztof Dresler, CFO of the bank.

[Szymon Midera, executive]

Good morning, ladies and gentlemen. Let me move to the presentation. We started this year with very good results. The net profit after the first quarter is PLN 2 billion, including some extra risks and extra-legal risk provisions, PLN 3.3 billion, meaning nearly 18% in return on equity. Without extra provisions, it's 25.6%. More importantly, these results have been achieved based on core income with an increase of nearly 21% year-to-year. The net interest margin has been maintained and increased. It's at 4.56% weight, an increase of 0.12% quarter-to-quarter. We had very good cost income ratio. It's extremely good, nearly 32%. Cost of risk, very stable, below 50 bps.

Well, all those achievements have been recorded with the balance sheet total of more or less PLN 500 billion, 12% of increase. Loans and deposits are quite positive with more than 8% increase in loans, PLN 276 billion, more than 16% of increase in deposits at PLN 13 billion with a new number of customers reaching the level of 12 million after the first quarter of this year.

We also have a very good and stable capital situation, tier 1 it's 17.41%. And we do hope that the loan volumes will increase in the upcoming periods and NPL is well managed at the level of 3.34%. The bank has been undergoing a deep digital transition period. Our customers have been increasingly relying on digital solutions that we have more than 8 million active IKO applications with 6.5 million active customers using such applications and super active ones, amount to PLN 5.5 million, and we have more or less 7 million logins every day and around 3 million transactions performed in this application. 2 million tickets solved under the VAS monthly and more than 220,000 customers use the deferred payment service in our application.

Moreover, we've been streamlining our front and back office services, relying on the machine learning and artificial intelligence optimization and robotization of processes. We've been increasingly using bot, completing conversations with our customers in IKO applications. At the same time, we've been adding automatic solutions in our loan decision-making process and our CRO, will talk about it later.

Now let me move on to the financial results. More specifically, net profit, PLN 2.44 billion, and let's just have a look to the right, extraordinary items reported for some time. In core business, we have a number of possibilities to create some financial buffer to address black swans which are present on the Polish market. This net profit is the result of the improvement in the result in core business, even in the light of legal risks. Return on equity, 17.7%. But if you exclude one extraordinary item, we will have a return on equity of more than 25%.

We have a sustained dynamic on business activities, 23.4% year-to-year, when there is a positive dynamic in terms of quarter-to-quarter progression. For any CFO, this is a dream situation because we become more and more profitable and our customers, both retail and corporate ones are more and more wealthy. Net interest income, this is the key driver for our profit and loss account. Net interest margin has improved. This is not a secret that any bank suite's strong deposit capabilities are better fit to generate good interest income.

Despite of that, we've been updating the corporate deposit customers as well. We have high interest rates, and we have had the adjustment in the price policy, but we can still increase our margins quarter-to-quarter not only year-to-year. So the margin on deposits were based on the margin from the third quarter of 2023, and this is a sustained trend for us. We can keep up with the promises made before. 13% of increase in loans. It's a very good result.

As you know, the net margin profit is based on 2 elements: one, based on loans and the other based on deposits. So this dynamic needs to be upheld considering our appetite. We want to keep -- at least keep our market share. The loans stay in the same line as the deposit. We had a record sales and a safe loan in the fourth quarter of 2023. In the first quarter, 2024 for mortgage loans, we have reported a slight decrease, but there is a strong and positive dynamics year-to-year.

Also in terms of our investment funds more than 35%. That's exceptional. Corporate segment. Here, we are happy to know that extra-mile from the recovery and resilience fund will be fed into the economy. This will be an extra source of resources to help our customers. And there are some promising elements in the recovery plan, 60% of funds have been earmarked for climate change and green transition. Here, we have been doing a lot in order to provide the financing. And then 21% digitization.

In this respect, please note that businesses have a huge challenge ahead the number of machines per 1,000 of work is comparing to Germany is 4:1. So a lot needs to be done and we need this money and this funding in order to leave behind very human-intensive business development models. We are extremely happy with the 2-digit dynamics on fees and commissions, both yearly and quarterly. As you know, there are some one-off elements and not everything can be included in the quarterly reports, but we can see it in the yearly report.

And we see that the income from fees and commissions is 2 digits. We know that interest rates will not be raised all the time and forever. And that is why we know that we need to look for other drivers on the side of fees and commissions in order to keep and maintain our profitability. Cost efficiency is also impressive. We are a huge banking institution. I remember a situation where we discussed 60%, 65%. We know that we are on the increasing trend because the inflation rate is high. But if you compare that to the income from the core business, you could see that this is manageable.

And there are some other items and events. Just look at the regulatory costs compared to what we have in the fourth quarter and now. But there is an improvement in the context of inflation. We do our best to keep the cost tight.

And let me now give the floor to Piotr.

[Piotr Mazur, executive]

Good morning. Cost of risks under control. We are very happy that we still see positive trend. Quarter 4, we created additional provisions up to PLN 200 million due to the change in the model as regards mortgages cash, and we also created an extra provisions for some branches and corporations. And the confirmation of that is a good structure of our portfolio. We still see a drop in NPL portfolio. And another thing which confirms quality is a high level of provisions.

And this is the next quarter which shows its stability, and we see that it's indeed at a very high level. And we are very happy that we are able to still see the increases in market shares in our cash loans with a stable and one of the lowest risk levels in the sector. If we see new populations coming to the bank, they are of better quality as compared to those that we have in our book.

Now CHF settlements. We already have 38,000 settlements concluded. What is important, the conversion of applications for settlement is still high, which shows that our offering for the customers is still active -- is still attractive. And we see also a slight increase in the number of the settlements and request from mediation concluded and a slight drop in lawsuits.

Our goal is, so that may be not in the second, but in the third quarter to improve the trend. So to have more and more settlements and fewer and fewer court cases. So another slide that I'd like to dwell on a bit longer because I would like to preempt any questions concerning the quality of credit portfolio issues, whether we still presume that we would have maintained such good qualities. I'd like to show you risk management some details and last year, we carried out some technological transformation.

So we have a new platform for risk, a new technological platform, new engine for risk, what it doesn't give to us a precious time. Once in the past, we introduced new goal and it costs us several months to do that. Now we are doing it within 1 week, and we make several dozen or so of such changes in a year. FX that we have increase in sales or mitigation of risk. And we can do it much faster now. The second issue is now moving the analytics into the cloud.

So first of all, this gives us good tools that we didn't have earlier, which were not present on on-prem system. The second important issue is the calculating power. PKO BP has the biggest data in the whole banking sector at the moment. We are able now to use the data fully, and you may see it in these slides. So at the moment, we have 83% of decisions on cash and taken by machine learning state-of-the-art machines, which gave us a dozen or so increasing the effectiveness of the model. As Apple-SMEs, we have 67% and in mortgage, 30%.

So this is good news, and it shows that we still have space for development. We are doing it not only in the retail banking but also in the corporate sector. We've used big data to analyze large corporates as corporations, but the biggest potential we see still in deposits. There, we do have really large bonds. And I think AI may help us greatly analyze the portfolio of deposits, the stability of the portfolio and to use it as our business.

And finally, I'd like to tell you that one element is missing, sometime in the past, we made some analysis, which -- of which one shows that good customers compared with good customers. So if the profile of the customer client is good, then the transactions are really done with good clients. So the same is for the banking sector. If we could have good advisers, they are able to attract clients with a good risk profile.

So this is the case for PKO BP. So we have very much advanced technologies for risk assessment. But this is just part of the whole process. We need very good people in business, good salesperson now who are able to acquire clients of a low risk for our back and it's going on. We see it in the cash credit and we'd like loans and we'd like to thank you for that wholeheartedly.

And the last slide, a solid capital position, a very good financial results, very good risk. Management is translated into the capital position we have with capital surpluses as Szymon has already mentioned, and that gives us a good outlook for the future. Thank you so much.

[Szymon Midera, executive]

Thank you very much, gentlemen. So to sum up, this has been a very good quarter with a net profit of PLN 2.2 billion. Without any provisions for the legal risk, it would be 3.3%. And we have the continuation of dynamic core income growth. This is of huge importance for us. And volumes are growing as we expected in the context of loans and deposits. We have a very strong capital situation and cost of risk and NPL are under control. So thank you so much, and please ask us questions.

[Unknown Analyst]

[indiscernible]. So great results, congratulations. Well, that's a very good beginning. I have a general question about the strategy and because there have been some comments on the press and ambitions for growth. So part of bank managers want to increase profitability, and they don't have such ambitions for growth. So why do you have such ambitions? That's one question.

And the other, as you mentioned, there are various, I guess, traps that all the banks can do something to have bigger sales. So this is appetite for risk, the price and which tools would you use to achieve faster growth?

[Szymon Midera, executive]

Well, we are starting the process of preparing a new strategy. It would be ready, at least that kind of framework strategy would be ready in Autumn. And indeed, we would like to increase our market shares in a profitable manner without reducing profitability. The bank shows it in the annexes of this presentation you have. The summary of our market shares in the last quarter, they are growing. So after these 3 months -- not even 3 months, after my presence here, making diagnosis see really huge potential for market shares to grow.

Looking from the perspective of the 10 or 15 years. We are in the same place in some business lines, but the bank has possible potential and capital to increase market share and we show it in the cash allowance in the last month and also in the mortgage loans. So as for the drivers for results, and let me -- and for the sales, let me just mention a very simple line. That is how much we weigh in the retail and in corporate sector where there's natural room for bank's growth. And in that respect, we would like to underline our activity like that.

In addition to price, there's also the issue of the very complicated issue here, especially as regards to energy transition, it's much more complicated than in plain vanilla financing. So I see that here, volumes would be growing in financial institutions that would be able to go beyond a typical way of funding. So they will be able to kind of have this issue under control more broadly. And we would be doing our best to achieve that.

As for the appetite for risk, as you mentioned, I will respond to like that. So the systems are like that today that we want to earn at least 1 per transaction. So there is no space to grow more. But we still have a space for automation for simplifying, streamlining processes. We would like to be very active here in SMEs in that respect. And we see great potential there. And as for the retail, ladies and gentlemen, we have the basis of 12 million customers clients.

So we see that the large part of them are being self-kind cash loans outside of our bank as we want to also reach to them. So we had even more than 50% of sales, and we do hope we would have the same percentage as regards to new sales and the context of launching a new product. So we have really a huge potential for these market shares to increase at the same time, keeping our market shares.

[Unknown Analyst]

I have also a question about CHF loans and provisions. They have a gigantic influence on profits reported by PKO BP. So what about the resolution of the Supreme Court? Does it change anything? And how long would you have to live with such results.

[Szymon Midera, executive]

So Piotr, the floor is yours.

[Piotr Mazur, executive]

Yes, the resolution does not show -- does not change significantly the issue. Of course, we are still waiting for the justification, but it did not impact the value of our provisions. The fact whether we create additional provision depends on customers if they select as a simpler, faster system of our settlements, we would not have to create such provisions. But if you choose a court way, then we would have extra costs. And unfortunately, these provisions would be going up.

It all depends on the decisions of our customers. Although the analytics emphasize that we already achieved the level of outstanding balance. So we have this coverage almost 100%, 99%. So the question is in which the direction the jury's prudence will go, we will not say anything definite about it now, but we do recognize the step made as the stage of policy closing important frank policy kind of weighing, but there will be various calibrations at various levels because they are not personal decisions, but they are based on the model.

[Szymon Midera, executive]

So we are carefully observing what's going on in different resolutions, jury's prudence. And what we should note, as Piotr mentioned, we see the return, maybe it's not yet the trend, but we see that the number of settlements started to grow maybe the customers are tight of these long processes and uncertain effect. And our offering is good. So we do provisioning, taking into account the situation, which is the effect of court's decision. Any other decision in this context would be positive.

[Unknown Analyst]

[indiscernible]. I have a question about the growth perspective. For now more than for the future, what's the demand for the corporate loans? Is there any sign of improvement, tendency is on a positive side. Do you believe that we will feel the fruit of the recovery fund or the results of the recovery fund in terms of the increase in the demand for the corporate loans.

[Szymon Midera, executive]

We've had some slowdown sizes, and there's many -- at least some reasons behind it. First, the number of players has been reduced. And this, in a way, impacted the appetite for corporate loans. So on the side of the staffing of those players. Well, with the changes in the staffing levels among those players, we will have -- may have some positive results. We are now heavily preparing for the launch of the recovery and resilience fund. That will be a key factor, and we did deadline in mid-2026.

But in the short term, I cannot give you any specific answers for your questions. And regarding the demand for corporate loans, our Chief Analyst has devised some scenarios regarding the portfolio of corporate loans. We will do our best to strengthen our market share and look for this potential. In 2 key pillars digitization and green transitions are set under the recovery and resilience fund. This is necessary to keep competitiveness on the international market. And then the decarbonization is a requirement in any global supply chain and as Polish businesses are piece and parcel of those supply chains, they need to undergo this green transition and meet the milestones under the plan. We will try to strengthen this part of our business.

[Unknown Executive]

I think this is all. There are no further questions from investors in the room, let us move to the Q&A session online. I see a number of questions regarding the dividend. These questions focus on the deadlines. So when can we expect any recommendations on that topic? And then there is another set of questions. Is there a space to pay a dividend on undistributed profit from the previous years?

[Piotr Mazur, executive]

Well, maybe I will take this question. In the Polish financial supervision authority has issued a recommendation where the undivided profit from previous years requires a separate decision. The dividend payment limit has been defined at 75% of the profit from previous periods. We've paid the dividend at the beginning of this year. And right now, we are at the level of the total net profit of the bank, not the group back the bank. And that should be -- these figures should be taken into account.

But let me just repeat what Szymon has just said in the introductory remarks. The bank intends to use the extra capital and build an extra capital by strengthening the volumes and margins. I think that we need some adjustments and adaptations in terms of our profitability profile. Do not forget that we have some challenges ahead, capital adequacy, long-term liquidity. So a number of requirements that need to be addressed by the bank, thanks to its presence in the wholesale market by strengthening the common equity Tier 1 ratio.

Let me look at the next question, the mortgage loan sales in the first quarter. So what's the share of subsidized loans? Is there any number or set of applications to be processed still in the second quarter. PLN 4.6 billion out of PLN 8 billion mortgage loans sold in the first quarter, and there are still some application spending in the second quarter.

[Unknown Executive]

Next, let me -- this is about the cash loans. Have you changed the template or going to change the templates of the cash loan agreements in case the legal risks materialize. Well, we have analyzed the process, including in terms of legal risks, and we believe that it complies with regulatory requirement. But we wanted to be cautious and we made some decisions in order to be 100% sure that there are no legal risks.

[Unknown Executive]

Next question. We -- you had a higher number of settlements since quarter 3 2020, you mentioned that -- are you going to make this offer even more attractive? Is it going to impact costs?

[Szymon Midera, executive]

We are looking economy-wise on that. settlements usually entail some costs, administrative costs, first of all. But at the same time, any settlement impacts the provisions established. And next, the provisions are reversed. So settlement is always an attractive solution for the bank. And actually, we need to cover costs. And we are not a beneficiary. The beneficiaries are outside, along with the bank, there are other players involved in the settlement process.

So it will be good for us to make the whole process easier and to reduce costs. That is why we choose institutionalized amicable solutions. But this is just one of the aspects. The economic aspect is important indeed. However, don't forget the cost that needs to be paid, and we are not a beneficiary here. So because of that, we are ready to make the settlement process more attractive. In other words, we want to change the message our staff relay to our customers, together with the information on emotional costs and administrative costs as well.

[Unknown Executive]

We have some last questions concerning the long-term financing index as its impact on the bank. So we, as the financial institutions are in the vanguard of the institutions in this part of Europe. That is why we would be kind of trend setters for instrument strengthening the capital base and other instruments necessary on a regulatory basis to cope with the challenge of liquidity. So here, we are still in contact on a permanent basis with supervision -- financial provision authorities. So we are also applying for some changes or modifications in calculating this particular index.

But as professionals, we are in contact also with potential offers and institutions -- financial institutions and which would be able to buy the instruments that we are now developing for this index. So we are very active on all fronts regardless of the level, which will be necessary to be supplemented.

And well, this is not the only thing which is required for our wholesale, let's say, presence on the market, we will do it professionally. That's how we understand our role for the whole sector because we are the biggest financial institution. While showing the bank as a benchmark, we also kind of set the path so the trend for all institutions that play the same role as we do, that they are banks.

Okay. So this is the end of all the questions for today. Thank you so much, and see you next quarter.

[Unknown Executive]

Thank you so much.

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