Powszechna Kasa Oszczednosci Bank Polski SA

WSE:PKO

Earnings Call Transcript 2022-Q2

[Unknown Executive]

[Interpreted] Good morning, ladies and gentlemen. I would like to read to everyone. This is the presentation of results of PKO Bank Polski after the first half of the year. Pawel Gruza, President overseeing efforts of the Board; Bartosz Drabikowski, Vice President of the Board and CFO will be presenting results.

Thank you very much, ladies and gentlemen, on the 9th of August, the Supervisory Board of the bank has appointed me to oversee efforts of PKO Bank Polski. I have the pleasure to welcome you to our performance conference for the first half of the year. My professional background that has given me this position involves both working for private companies and public administration. And I do hope that my expertise will enable me to efficiently manage efforts of the bank and follow up on its safe development.

I hope that my experience will enable me to support the dialogue of the sector with administration in a wide sense. It gives me enormous pleasure to present results for the first 6 months of the year, which makes us proud. The bank is a robust institution profitable, demonstrating high cost efficiency, well managed and controlled risks.

The priority of the bank has always been transformation, digital transformation, our remote channels used for communication with customers will be developed. We are a leader in this regard, and we are proud to have this position, but of course, what lies ahead on numerous challenges, and we have a sound position for future growth. We have always-- also achievements in automization of customer care. We're tapping into state-of-art algorithms, and I hope we'll be able to tell you more about it very soon.

Our Bank is socially responsible. We're well aware of our role in ensuring financial stability for the economy, and this is the role that we are fulfilling. And we'll be obviously demonstrating responsibility and the market to support challenges that lie ahead for the Polish economy. We'll be supporting current issues and strategic ones such as energy transition. The past 6 months brought many unforeseeable factors ranging from tragic developments that unfold in Ukraine to situation on the interest market to turmoil in supply chains, changing raw material prices.

All those factors bring uncertainty to the market, increase additional risk. And thanks to our robust capital position, thanks to the quality of our credit portfolio, our bank was able to achieve performance, which make us proud. So let me now get on with large numbers. Our net profit is PLN 1.8 billion, what translates into 11.5% of return on capital. This performance was achieved in circumstances when we were experiencing regulatory pressure, which decreased this performance by at least PLN [ 102 ] billion. This is the cost of risk of Swiss franc credits and PLN 900 million because of voluntary deposit guarantee scheme. All those factors were mitigated by very positive activities, which went up by 36% year-to-year. And I would like to thank the bank and all employees of the bank because it's thanks to them that we managed to deliver such performance.

And as a result, we were able to compensate the cost pressure, which obviously is taking its toll on the bank, on the entire economy. And on most parts of the world, I'm talking about the inflation pressure, but we have managed to keep a good cost parameters, cost-to-income ratios, hence 140%. Our assets have gone up. The number of customers have exceeded PLN 1.5 million. The cost of risk is in Czech 58 bps, capital base of the bank remains strong. Such parameter like Tier 1 16% is well above requirements. Full dividend payment.

We have delivered such performance thanks to efforts, thanks to sales business operations. We are mainly talking here about very high increase in corporate credits, which is helpful, and we are supporting the Polish economy and its development. Deposit growth. Total [ 0% ]. So these are key figures which are key influencing factors and have the biggest impact on our performance, but this result would not be possible to achieve without our development, without our digital competence. It starts to our services, it's provided by our leading app, which has the record-breaking number of installations, 6.8 million installation on mobile devices, which gives us the position of lead in the segment of mobile payment.

The tragedy in Ukraine has faced the bank with a whole new type of challenges and being a socially responsible institution, we well responded to this channel with a range of available products with amenities and facilitations for Ukrainian nationals who benefit from our hospitality. We are able to provide them with direct assistance, which involves our support for Ukrainian nationals in their country. Funds collected by our foundations distributed in Ukraine, and we have raised significant amounts of money totaling around PLN 12 million. Challenges that lay ahead. Definitely include development of a brand-new strategy, mid-term strategy and efforts have started some time ago.

Right now, under my leadership, I will be intensifying those efforts. And we look forward to contribution of our organizations, we are relying on expertise of our best employees in this area. And obviously, we are cooperating with celebrated consulting firms, which will deliver the knowledge of trends, development of the market trends in Poland, Europe and worldwide about niches that perhaps remain invisible to us to tap into those opportunities, thanks to scale that we have.

Well, obviously, and I've said it before, digitization and digital progress, these are our priorities. And so it was in the past, so it will be in the future. We have a great phase to develop in this respect, especially if we take into consideration the efficiency of PKO Bank, we'll be enhancing it to swiftly create new services and offer them to our customers. I think this is the key. It's the key for the bank to swiftly react to customer needs, to swiftly react to challenges post by competitors, and we need to maintain our leadership position.

ESG, obviously, it's a major challenge in the world markets, of course, in Poland we see it as an opportunity, a chance to develop the bank, especially the first letter of this Acronym is speaking volumes because a responsible bank like PKO Bank Polski, could become a repository of good practices. We could also demonstrate to enterprises, large and small, how to embrace energy transition, which is a huge challenge. And because of my previous role in a leading international mining company, I know very well what regulatory financial problems are covered by energy transition.

I have expertise in this area, which I gained not only in Poland, but also in other jurisdictions in which we were operating. We are a bank which will be growing sustainably embracing interests of all stakeholders. And what it means is that we'll be putting together a responsible offer for our customers, an offer which is beneficial for customers. Which obviously translates into the exception and the affluence of our customers and safety and the quality of credit portfolio that we generate. Which is why being aware all those issues, we are a responsible player, and we accept this role for the years to come. So I would like to thank you very much for being able to present this general overview of the current situation of PKO BP and its performance for the past 6 months. Of course, I'm sure you want to learn more.

And right now, I would like to ask Mr. Drabikowski to tell you more about it.

[Bartosz Drabikowski, executive]

[Interpreted] Thank you very much. Good morning, ladies and gentlemen. It is always a great plan to present the performance of PKO Bank Polski. The CEO has our plan strategic ventures and the factors that affect profitability of the bank, very strongly not only in this quarter, but over [indiscernible] as well. Let me begin a general comment where the regulators are slightly less strict, the [indiscernible] associated with performance would have been great but nonetheless we have many quarters ahead.

So I really hope the [ pressure ] and the scale of the performance will definitely improve. Let us now move to the details. The next slide presents the business performance, that is that is retail in retail banking, given the volumes, we have a very satisfactory dynamic. 2% year-on-year in terms of the loan portfolio with PLN 13 billion volume, 92.3%. risk increased in deposits, very, very good solid growth.

Now I would like to pull your attention to the [indiscernible] 6% on the [indiscernible] $1.8 million [ accounts ] and for our... Now I believe that the target of 9 million accounts is definitely within our reach. That is a box record-breaking performance not to mention the fact that it is also a confirmation that our clients want to stay with us.

We are now approaching digital transformation, the ICO application. The ICO app has really experienced great growth double-digit 20 regrowth year-on-year, PLN 6.8 million of active apps. Now we definitely want to reach 7, an exact EUR 7 million in apps over the next quarter. That is definitely something to be delivered, just keep your fingers crossed.

Now, corporate banking and investment banking, the second most important segment, it goes without say that our colleagues in that particular division really have a reason to be happy. Very strong growth in volumes, PLN 79 billion in volumes translating into loans and derivatives or bonds, instruments that we are using to cover the needs of our customers. We also have a very high dynamic double-digit dynamic, very rarely encountered over longer periods. The savings of corporate clients, 6% growth year-on-year, more than PLN 70 billion of assets collected with us.

Now the most important transactions where the leading role in terms of issues and activities on the equity market by our customers where the PKO Bank Polski was in the lead. This has been shown on the slide, which does not necessarily exhaust our corporate banking and [ activities ] or operation. Now we also have a single slide that is a slight turbulence to the solid narrative. I would like to go back to what the CEO said the banking sector is now experiencing [ abnormal ] challenges.

Now those challenges are tying in with the new nature of risk factor, the legislative risk. Until now, we have developed a credit risk management system, [ management ] risk management systems. Whereas now, we are facing a new risk factor, in-house regulatory risk as the factor. Now we have 4 fundamental issues; definitely the credit holiday or vacation in terms of what we are experiencing, well, that is PLN 3 billion, assuming that clients will be participating at [ 1063% ] in the program. That is definitely a factor of [indiscernible].

We can't assume, well, that is a one-off effect in all probability, it will be limited to just a few quarters. [ Bear ] short term, it is still an important one. It affects our performance. Now we have the legal risk associated with the mortgages specifically currency, foreign currency loans, having ratified with the auditor and consultants, we have ended up with a number of PLN1.2 billion, thanks to which our situation is very comfortable.

We have covered our loan portfolio with write-offs, with waivers. So we do have a great consolidation and [indiscernible] performance. We are very active in managing that particular factor. Last but not least, we have 2 other regulatory factors, i.e., the support of IPS in PLN 872 million in IPS and an estimated fund of borrower support approximately PLN 740 million. So we have a number of factors that are now affecting us.

We are assuming that those are one-off factors. Nonetheless, they are definitely going to affect the profitability of our bank, nonetheless, I believe they will not be any great turbulence in terms of delivering our strategy. This is something that Pawel also pointed to are definitely determined. We have decided to deliver value for stakeholders.

Now that is all in terms of factors themselves, I believe that we should now move to the very positive trend we had noticed. The net income. This is definitely the overall outcome of our efforts. Following 3 quarters of 1.2 billion box [ breaking ] first quarter of 1.4 billion. Now we also have another -- we have further factors that have, let's say, affected this very positive part, PLN 422 million. I believe that geopolitical and regulatory factors that might play in the issue.

Now let us take it a step further. We should definitely also consider our operational performance, a very strong growth, over 31% in improvement on [indiscernible] in terms of the banking performance and over 10% on quarter-on-quarter. A similar trend has been observed for the dynamics of the basic operations in terms of interest and commissions be on year nearly 42% in dynamic and nearly 12% quarter-on-quarter, respectively.

Now a deeper look at the interest performance that is definitely a base for us. We are the largest bank in Poland and in the region, a number of dimensions in terms of loans, deposits and performance. We have not yet recorded a volume effect or the increase of interest rates outcomes, in fact, but they are there. Definitely, the interest rate and increased outcome is a thing of the future. It's still a thing of the future.

We have recorded a 20% improvement in interest rate related performance. Now I believe that we are slowly going to see an evening out of that particular [indiscernible]. Nonetheless, since Q2 2021, we have overcome the interest rate performance drop. Nonetheless, last year, we were basing on volume, whereas now, we are basing on volume and interest rate performance.

Now with regard to commission performance, that is yet another slide, the absolute star of our performance, a great source of satisfaction. I cannot help but smile taking a look at the double-digit dynamic performances in terms of quarter-on-quarter and year-on-year with no price changes. We have actually delivered this particular performance by our customers not through price increases. It not certain -- It is not just a one-off, single time peak performance given due to seasonality or a single transaction.

We have leasing and credit insurance and portfolio dynamics. Nonetheless, yes, the macroeconomic factors have been pulling down, but also brokerage. Actually, brokerage is the only line that is definitely under pressure of seasonality and fund outflows. Nonetheless, it is a very specific and solid performance. I believe that this is the ultimate confirmation of quality and of the offer of PKO Bank Polski in terms of sales as well and also response to what our clients are doing. We're going to do whatever we can in order to continue the trend over the next quarters.

And last but not least, the final slide to close the presentation of our profit and loss account. Our inflation pressure, we have all experienced that as managers and as consumers. This challenge will definitely stay with us. Now with regard to the dynamic of cost claims of any regulatory effects, 8.3% with no regulatory cost in operation cost only, I believe, is at confirmation, but we are definitely sticking to our cost discipline.

The DNA -- our DNA is definitely ties in with the performance in terms of our cost. Yes, once we consider the inflation-related costs, the dynamic is different. I would like to showcase, I would like to emphasize that we are quite -- we have been quite efficient in managing the inflation challenge. Nonetheless -- yes, we are leading. But nonetheless, we have to face the immediate future of the inflation pressure. That is all I would like to say at this point. And now I will hand over to Piotr Mazur, and then I will ask our CEO to summarize.

[Piotr Mazur, executive]

[Interpreted] Good morning, ladies and gentlemen. In line with what we had promised last year. We said that Q4 last year would be carrying the burden of extra right of waivers, and this is exactly what happened given the overall estimates-- operational estimates. The third and fourth quarters have definitely carried the burden of these write-offs. We hoped that following the first quarter, we would be able to boast a good risk performance, but the war in Ukraine, meant that we had to spend PLN 200 million and PLN 100 million on Credo Bank and our performance, respectively. The latter with regard to provisions we had to set up for purposes of our clients associated with Ukraine.

Nonetheless, in the second quarter of this year, we did not expect any additional turbulence. Firstly, we had to sell our portfolio in operational assets than PLN 400 million with a net performance of PLN 60 million in the black. Moreover, we set up provisions for Swiss francs loans, which means that we could dissolve a number of provisions associated with the [indiscernible] brought another PLN 60 million.

The good quality, the sound quality of the loan portfolio and the 2 effect factors led to the good performance in the second quarter of this year. Now let me move to the next slide. We have definitely confirmed the quality of PKO Bank Polski portfolio. We are continuing to experience excellent quality of operational loan portfolios, which means that our overall portfolio has been prepared very well for purposes of stress-related situations and circumstances. Our customers are not in default.

Nonetheless, I would like to emphasize that we have proved the share of our Stage 2 operational performance with regard to hospitals, the hospital and CHP divisions, respectively, given the macroeconomics, we have decided to set up extra portfolio provisions and re-qualify them to stage 2. And the key information on this slide is the quality of the portfolio is good.

But the level of coverage with provisions is growing. And we are continuously getting ready to make sure the bank is ready to face stressful situations in the future. So it's a comfortable situation for you as investors to have a peace of mind that the bank is ready to embrace the future. And right now, a couple of words about the exposition of PKO to Credo Bank. I have to admit that I've been impressed by what our colleagues have managed to do at this subsidiary, and I dare to say that amidst such challenging circumstances, like in Ukraine, the level of write-offs in Poland would be definitely higher.

You can see that Credo Bank has mastered managing the cost of risk and blind selection is excellent. Let me just remind you that recent years so perfect quality of portfolio and the number of contracts at Credo Bank. So following the wall in Ukraine, we had to recognize more than PLN 200 million as our exposure in Ukraine and today, looking at our competitors in Ukraine, this level seems to be adequate. But on the 1st of July with new regulations, the overdue countries, new countries and new measures for write-offs are being introduced.

So definitely write-offs will be increasing in the future. The war will be taking its toll on our performance. So there are write-offs to be made in the future. We'll see what happens when the count [ term ] is launched. Right now, we are talking to customers. And our employees in Ukraine have reviewed the portfolio, they have contacted all corporate clients.

And right now, our feedback is positive, but I'm afraid what the future may hold. So let's focus now on our capital situation, which is robust. We have excessive capital in the first 6 months. The valuation of assets -- the increased operating risk related to Swiss franc loans were downside, but our capital indicators were also improving. And the last item settlements. Settlements continue in line with our assumptions. We have 28,000 applications, 4 mediations -- every day, we get several dozen new applications and our model assumes that the settlement model would lead to a decline in the number of litigation.

So that was the trend. But in the past 2 quarters, this trend has become flat and right now is slightly growing. Amid growing interest rates, there is a smaller group of customers who want to accept this settlement right now. Loans are increasing. I hope that the settlement ratio will be increasing in the future and we'll be able to diminish the credit risk. But the rise in the number of litigations have made us revise our right of model, and that's why we've decided in a very American way, we decided to set up a single provision to put this topic to an end. So to recap, we are in full turbulent times. PKO Bank Polski is ready to embrace challenges in stormy weather.

[Unknown Executive]

[Interpreted] Thank you very much. But traditionally, before Q&A session, I would like to recap our results. Net profit, PLN 1.8 billion, ROE totaling 11.5%. The driving force of such growth is high dynamics of profits from our core activities. We are demonstrating cost-effectiveness, cost to revenue ratio that stands at 36%. And BFG IPS challenges have reduced this figure to 37%. We are efficiently managing risk. The cost of risk is totaling 58 bps. Capital security Tier 1 stands at more than 16%. I would like to thank employees of the bank once again for the past 6 months, and we are hopefully looking into the future until the end of the year and the next year. So thank you very much. We can get on with our Q&A session.

[Unknown Executive]

[Interpreted] Yes, we have a handful of questions from investors and analysts, and I'll try to bundle them thematically. I think the most relevant issue is the cost of risk. So what's the expected cost of risk next year split by retail and corporate segments? And how would it look like if gas supplies to Europe were planned.

Okay. Perhaps the Deputy President will comment on gas and let me reply to the question about the cost of risk. When I'm talking to [indiscernible] every [ quarter ] term, everyone is changing the forecast and everyone is forgetting what happened in the past quarter. But when the head of risk is talking about the cost of risk for the following year, everyone is listening attentively whether the situation has changed or not.

But on a serious note, everything depends on how deep this downturn will be and whether it will take its toll on the retail segments. I'm not afraid about GDP, I'm more concerned about rising unemployment. If that happens in case of PKO Bank Polski, which is largely a retail bank, I'm afraid that it's going to take its toll on our retail portfolio and write-offs will be increasing. Right now, the temperature is rather stable. We've seen some areas, slight increases, but it's still pre-COVID level. We were pretty open about that for many years, we were bracing the bank for such stressful situation.

So all models we were developing were meant to effectively select clients and grow in many other segments, and we are growing indeed recently in the corporate segment. And this is something very positive. When we look at the profile of new sales, it's even better than the current portfolio. So we are acquiring high-quality clients.

I'm slightly optimistic about the future, if unemployment doesn't go up and if the GDP slum will be temporary, I think we will have higher provisions, but it's not going to be a dramatic event -- right now, the impact of [ clamped ] gas supply, we have made a review of our corporate tax positions, and it seems that from PLN 600 million to PLN 800 million worth of provisions provided that gas supplies are ultimately clamped from Russia, then yes, it would have an impact on our corporate portfolio.

Another group of questions concerns the mortgage loans portfolio, there was a decline in Q2 versus Q1. The question is why? Is it related to earlier payment? And what can we expect in the next quarter?

Well, thank you very much. It's a very relevant question when we analyze net interest income and the dynamics of net interest income, we need to take into account volume and interest rates. Rise in volumes has a positive contribution. But in several past quarters, the credit market has been cooled down, especially in the mortgage loan market and new sales in the sector also with our bank is not able to supplement the repayments of loans and faster repayments. This is the new factor, which has always been around.

And at our bank, it accounted for PLN 200 million a month, so not a lot compared to the value of our portfolio. So it's a very low percentage. And right now, I think it has incurred 3 or 4 fold. It's PLN 400 million to PLN 600 million. So loans are repaid faster. It is somewhat a challenge because it's more difficult to build volume, but all in all, it seems to be a rather positive factor considering challenges we are currently facing. Because the previous question concerned the quality of portfolio, and this is a veritable proof that clients have major reserves if many of them are able to pay in advance -- pay earlier.

So compared to the scale of this phenomenon it's a lot-- credit holidays, -- this trend may be increased, and it seems to be a one-off event which will be disappearing in the future. But the baseline will be slightly lower. This shows that clients are aware, which is good because they are going to opt for good offers for good deals. They understand that it may be effective for them to prepay a loan. That means they are considering alternatives, and they are wisely managing their loans. I think I wouldn't over appreciate the impact of these factors.

But one of our competitors, which was growing dynamically in recent years, right now, it's no longer growing because the volume makes it very difficult and interest rates are low. So in our case, it's much more diversified because we see the volume and the interest rate effect. There is significant cooling in mortgage loans temporarily. The same is happening in retail, but we are mildly optimistic about our business performance.

And I think our net interest income should be growing. Another series of questions about net interest income. What's the guidance? And what will be the net interest income in the next quarters. We are positively hoping for positive trajectory. In the previous quarter, it was nearly 20%, 19.9% -- right now, it's 13.7%. So it's a positive trend. And this positive trend in net interest income and higher margin will be maintained at least until the end of the year. So those questions are obvious.

This is the after effect of the structure of the balance sheet, safeguarding strategies, interest rates and the reaction of our balance to change in this parameter, which is moderate, which is gradual and is working both ways. So we are gradually increasing net interest income, and it should be stressed interest costs, new deposits, which are offered. And this is reflected by the dynamics, which is much higher than net interest income. So we are still driven by interest rates and the dynamics of net interest income will be gradually declining, but it will be up for several quarters.

The next question concerns the use of funds from the borrowers [ board fund ]. It is quite low, we are counting on its growth. We believe that it’s an instrument that may actually reach out to persons with problems, with actual financial issues. It seems that we have been quite rational in determining parameters for clients, for customer eligibility. I believe that all banks have been very responsible in their willingness to fund the instrument. Today, we have maybe less than 2,000 applications so far nonetheless, we assume that this instrument may be used in a much more broadly.

Should it be used to a limited extent only, that would be ample proof for the absence of actual .. Well, sustenance, if you will, problems in families because if people do have sufficient money to cover the loans, they are not eligible. So I believe that as of today, the use of the instrument has not been extensive. Low amount of applications that goes without saying nonetheless let us and see with the banks are ready to preserve, maintain and fund the instrument in the near future. So we are very responsible, and we want to be absolutely responsible in terms of corporate social responsibility, which is why we definitely intend to use the instrument to support clients.

Now we also have a question concerning the issue [ Metal ] instruments. We intend to meet all required eligibility requirement and so far, regulators have been extremely reasonable in the terms of their approach to banks. We have been experiencing the war and [ others ] and not to mention other factors, now Pawel is definitely nodding in what has been going on in the public and commercial sectors is a good lead to reasonable conversations of collaboration in the future.

Nothing is cast in stone. Nothing has been chiseled in stone. I believe that the future will tell. I would like to point out that the current market conditions for issue or not necessarily favorable that comes as no surprise. The war for one and the overall condition of the economy and the other is another. Nonetheless, both our bank and the banking sector are well capitalized. So we are not yet ready to do that.

Now another question concerns the strategy, specifically when will the bank or when can we reasonably expect the bank to announce its new strategy? As I said before we have reached the initial analytical stage. We are now going to be working very intensely with our analysts, with our consultants. And I believe that the strategy will be announced at the term of the-- Are we now -- The question is, what is our approach to M&A? It is our policy not to comment. And last but not least, a question to the CEO. Do you intend to join the discussion concerning the rationalization of the sector burden that is a dialogue between the banking sector and the government?

I think that this is something of a leading question. I think that our experience will allow us to join the dialogue. It goes without saying that the governmental policy with regard to the banking and other sectors all to be reactive and proactive. I believe that there are certain regulatory areas, which may well be altered, be modified and thus support the Polish economy to the purpose of developing it further. Hence I also believe that the errors of dialogue are hugely diverse and will be part of the development. Thank you very much.

No further questions. I would like to thank the Board members to -- for the present today, and we will see you next quarter. Thank you.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]