Powszechna Kasa Oszczednosci Bank Polski SA

WSE:PKO

Earnings Call Transcript 2022-Q4

[Dariusz Chorylo, executive]

Good morning, ladies and gentlemen. I have the pleasure to welcome you at the presentation of PKOBP's results from 2022. My name is Dariusz Chorylo, and I'm responsible for Investor Relations. The presentations will be done by our President, Mr. Pawel Gruza, Marcin Eckert, and Mr. Piotr Mazur. Thank you very much. Ladies and gentlemen, we will be presenting our financial results, the financial results for last year. 2022 was marked by very significant events, sometimes very tragic event. I would like to remind you that it was the continuation in the aftermath of the COVID pandemic and also what happened is the aggression of Russia in Ukraine. We also had to deal with all the geopolitical and economic consequences of these tragic events.

So those factors have had a great impact on the functioning of the financial system in Europe, in the world, but also in Poland.

We've managed to tackle these challenges, thanks to our great effort, experience and our position. Thanks to that, we've managed to keep our -- maintain our position as PKOBP as a universal bank in Poland. The proof of this strong standing of our bank are numbers, which characterize our financial results. First of all, net profit at the level of PLN 3.3 billion, ROE at the level of 9.7%. We've had a very satisfactory growth of core revenues at the level of 17.6% year-on-year. We didn't implement interest -- higher interest margin. Thanks to our discipline, we also managed to maintain a good NIM and cost of risk ratio. The next slide. As regards the financial highlights, we've consolidated our leading market for this position at the level of PLN 431 billion.

We have managed to increase the number of clients within our bank. We've also had a very good Tier 1 capital result at the level of 16.65%, record low-level NPL, NPL at the level of 3.80%.

We also had a lot of achievements as regard to the development of our key businesses. What we are glad of is the increase in corporate financing and especially as regards last quarter, our share -- market share in mortgage loans, home loans and as regards our deposit offering, there has been a lot of success. So we can report good growth there too, as I said, the growth of customers to 11.7 million.

We have new deposit offering. We have a growing share of digital clients. So very good results, plus 38% as regards the increase in number of IKO transactions and a very dynamic growth of new IKO applications.

We are socially responsible within our strategic goals, we've included ESG. We have also the financing of green products, so this is part of our priorities. And those elements, we will continue developing them in the following years. I've already talked about our mobile app. Now I will move on to our new product, PKO Pay Later, "buy now, pay later", first service of this kind in Poland and fully automatic process, very customer-friendly. It's also possible to have a delayed payment with the use of [indiscernible] app.

We've also started with the implementation of a new process of creating a digital mortgage. And this is something very important to us because it allows us to create a loan process based mainly on digital elements and components. So our experience from the preparation of digital mortgage will be used in the digitalization of other elements and other elements of our offering.

AI is, of course, something which is now really important for every business. The use of new opportunities is also done and important by financial sector. We have 16 bots and a lot of million of talks and calls performed by bots. This has allowed us to have savings and also to redirect our human resources towards some other more valuable processes. Thanks to that, we freed 115 full-time jobs, and we've had robotized a lot of processes. So this is for sure, the future of banking. Now I would like to give the floor to Marcin Eckert. He will outline the key financial results.

[Marcin Eckert, executive]

Thank you very much. Good morning, ladies and gentlemen. I'm really glad that I can present in my new role, the financial results of our bank for 2022. So traditionally, net profit in 2022, it was at the level of PLN 3 333 million, a very good Q4, PLN 1 732 million in Q4, ROE reported at the level of 9.7% [indiscernible] extraordinary events, much lower. This is the result of the efforts of our teams and also the result of a -- better result as regards to our core business, both had an impact on the final result was a series of extraordinary events. And thanks to that, we've achieved more than [indiscernible]. So we can have here look at the list of significant events affecting the group. First of all, credit holidays, which had a great impact on our results. They were at the level of PLN 3 million and legal risk related to mortgage loans, PLN 1.9 billion.

What is really important is the protection of a commercial bank related to the [indiscernible] is about 1 billion. Borrowers' Support Fund 314 million. And the provision recognized for reimbursement of increased margin -- there is no mortgage guarantee. So this is at the level of PLN 46 million. In total, all these significant events and externalities account for more than PLN 5 billion, which has had a great impact, of course, on our financial results. As I already said, the core result -- core activity results were very good, and income grew by 17.6%, and they've reached more than PLN 17 billion, and assuming the effect of -- and the impact of, of course, the repayment holidays. This was generated not only by the interest profit but also by fees and commissions. On the next slide, there is the net interest income. Net interest income, considering the effect of repayment holidays, grown by 19% to PLN 12 billion, and it's thanks to a better interest margin, which increased to 3.09%.

And with disregarding the repayment holidays, it's higher. So the quarterly margin was important. It was at the level of 3.06. And in Q4, it was higher. So our loan portfolio has a bigger share of loans, which adapt to [indiscernible] ratio in a slower manner. This had a negative impact on the increase of interest rates, but now it's supporting very well our results. So we've reported also steady changes as regards bonds and collaterals. So in Q3, we've also introduced new policy in deposit financing, concentrated thing on retail deposits, we had a positive effect on financing costs and our deposit structure. On the next slide shows the retail segment.

As you know, the retail sector was under a strong pressure. The retailers were under the strong pressure, and it decreased by 4.7%. In the Q4, we saw an increase and acceleration in the tendency of growth. Our new sales grew by almost 7% quarter-to-quarter, which means we have kind of acceleration of our bank in this regard. And I believe that this retail sector under the supervision of our President, will be developing so well in next quarters. It's worth mentioning, and this is very crucial to us because we want to give loans on mortgages [indiscernible].

The significant increase in the sales of mortgage loans. In 2022, we had a share in the loan market at the level of 21%. And in the Q4, it increased up to 35%. We are very happy about this result because it shows that our products are well perceived by our consumers. And this share, our share is increasing significantly. In terms of deposits, year-on-year, it was 9% quarter-to-quarter, 6.4%. As I've said, the strong increase in the deposit -- retail deposit [indiscernible] have a stronger policy in terms of corporate deposits because we've improved the dynamics of cost of financing them and the dynamics of growth of more expensive deposits in total. Finally, investment deposits were also -- grew also by 6.4%, which also led us to the increased share of the market in this aspect.

The following slide shows the results of the corporate sector. It increased the financing environment by 13% year-on-year. This is the new sales that runs Polish economy. We are very proud of it. We would like to congratulate on the division of the strategic client as well as corporate client division managed by the Director [indiscernible]. The fourth quarter showed a certain slowdown like the rest of the market, but what we are happy about is that within the scope of the corporate client development, we've developed very much green transformation -- energy transformation.

And I believe that this area will also be a driving force in the following years in terms of our development. As I've said, corporate deposit decreased year-on-year. It was the policy that we've planned -- and it shifted our ambition towards deposits as they balance better our activities. As far as the fees and commission is concerned, it grew over 13% year-on-year, and the improvement of big aggregates, except for the stock exchange activity. It is due to the higher activity of our clients that the fourth quarter was a little bit weaker in this regard because of the activity of the capital market as the seasonal activity, the high impact of the foreign exchange. The high dynamics of the operational cost was determined by what we call in bank regulatory costs, especially the costs related with the Noble Bank resolution, as I've said before, over PLN 1 billion in our case. When we have a look on the costs that are under our influence, our Board's influence, these costs remained under the control.

They grew only by 9% year-on-year, which is much below the inflation. The cost of the fourth quarter reflect also the increase in wages of our employees that we carried out in the fourth quarter. The cost also increased with -- in the aspect of the denominated loans in foreign exchange -- the COD ratio was at 45% level and 32% for the fourth quarter. The -- the ratio freed by the loan holiday was only 35%. Now the slides regarding the risk.

[Unknown Executive]

Good morning, ladies and gentlemen. I think that we always show you the very good quality of the portfolio of PKOBP. In the macroeconomic environment, it is worth saying that we're surprised at such a good quality of our loan portfolio. What's more important, as you can see on this slide, this tendency is still positive. It's growing. Is this tendency going to stay? Well, I think that in this macroeconomic situation and high interest rates and inflation and low -- and the decrease of activity, we will see a little bit more of reserves in the loan portfolio.

However, I would like to draw your attention to kind of strange thing because with the low employment rate and the acceleration of economic development, we would rather expect more problems in the [indiscernible] segment or mid-corporate. But today, we don't see any alarming signals.

These portfolios are working very well, but we see some alarms in the detailed retail portfolio. This is not an alarm. I think that we will return to levels before the pandemic. But because we want to understand the future, we are analyzing thoroughly the operations on our accounts, and we can see that the balance of income and dynamics of income is lower comparing to the dynamics of spending, which might say a high risk on the retail portfolio, especially in the consumer loan aspect. The following slide shows that this is a good confirmation of the good loan portfolio.

You can see it is historically the lowest loan for unemployed as well as we are recuperating the reserves. In 2022, we've opened a lot of reserves for many industries of increased risk related to the higher demand for energy, construction, motor industry. So we are entering the 2023 with a lot of reserves in our portfolio, which can be seen in these slides. As far as the second -- the subsequent slide is concerned, this is one of the most important things in the financial sector plan, namely the legal risk in the portfolio of the Franc exchange loans.

So here, we can see a very good tendency, even improving tendencies because [indiscernible] the settlements, the legal settlements are increasing. We have over 20,000 settlements and as we can see in the bottom of the slide, the blue line shows that this tendency is improving. We could see the confirmation of this fact in January and February.

And what's more important, after the publication of the spokesperson publication, this tendency continues. We have more and more lawsuits and submissions, but we are signing more and more settlements. I think it's good information for our consumers because they can quickly [indiscernible] problem and also, the bank can close these risks. So we hope to continue this tendency.

In the last slide, our capital position. As we can see, the position is very solid. We have a lot of [indiscernible] over the dividend minimum.

So the bank is very well capitalized. To sum up, we don't worry about the loan risk. Maybe it will slightly grow, but we are entering this new period with a good quality of portfolio -- of risk portfolio. However, we are really preoccupied about the legal risk and not only because of the PKO position because it's very comfortable for us, but because of the entire financial sector in Poland because this risk is really one of the highest in the sector. Thank you very much.

Thank you. It is with great pleasure that I would like to sum up all the effects regarding the issuance of senior preferred bonds related to MREL. We issued EUR 750 million of bonds. The interest rate was at the level of 5.62%, which was slightly better than the previous results done by entities from our regions. So it proves that our customers trust our bank, and we are very proud of it of this issuance. I would like to remind you that this is an event which took place as of the end of January 2023. Thank you very much.

The last slide will outline our goals for 2023 and the following years. Last year, in Rotunda, we presented our strategy for the years 2023-2025. One of the main elements of this strategy was our ESG policy. We have very ambitious goals regarding not only the -- supporting the Polish economy in energy transformation, but we do not forget the remaining letters, S and G, where we also have ambitious social goals. Next slide, aspirations for 2023, of course, growth of our revenues by keeping our cost discipline at a good level and a good risk factor is going to be maintained. So to sum up our presentation.

And last here, I would like to remind you, reported net profit at the level of PLN 3.3 billion with a good ROE at the level of 9.7%, double-digit growth in NII and fee and commission income, high level of cost effectiveness with the dynamic of non-regulator costs other than regulatory one, up by 8.9% year-on-year, well below inflation. [indiscernible] balance sheet strength, cost of risk at 53 percentage points and high level of coverage ratio and solid capital base with Tier 1 at the level of 16.65%, which allows us to look at the year 2023 with optimism and also to maintain -- to keep PKOBP's very important role, which is to finance Polish economy. Thank you very much.

[Unknown Executive]

Now I would like to move on to the Q&A session. We've already got a couple of questions, which mainly concentrate on risk and on CHF loans. So let's start with the simpler things, which is the loan risk. The first one concerns our policy -- changes in our policy regarding these loans. Will this have an impact on our loan action in Q4? Mortgage loans in Q4 -- and the -- our increasing share in the market of these loans result from many factors, sales effort, our offering, but also from our capital position, which allows this kind of financing.

The second question concerns the extension of repayment holidays and the introduction of other types of repayment holidays, for example, for farmers. So repayment holidays for farmers. Well, this is not maybe a question to our bank. I think it would be good to ask the Ministry of Agriculture and the European Commission. It would be up to them to decide about the introduction of this instrument. But as regards to the rest of remaining part of the question, Piotr, it's about the risk of expanding repayment holidays. Of course, the risk is related to the fact that we will pay a specific price in terms of our provisions.

Well, another question also to Piotr. Why you freed the provisions in the mortgage loan segment? We had a quite conservative approach to those moratories and which are in place and all the loans, which had a slightly higher risk and had this trigger are now in stage 2, the risk has not materialized. We haven't seen any overdues. So we've stopped with this kind of classifications. So stage 2 in this segment was reduced, and we freed all the provisions related to this segment. At the same time, we also introduced other changes because we implemented regulatory holidays. So we had to reclassify all the positions, which are characterized by a higher level -- risk level.

So another question related to risk -- the drop in the [indiscernible] ratio, was it related to nonperforming credits, nonperforming loans [indiscernible] loans? I would say that it didn't have any impact. So it didn't have an impact on the quality of this portfolio. We sold at the level of PLN 400 million. In the balance sheet, it was reported at a level of PLN 200 million.

What level the risk would be reported if it weren't for the moratorium for mortgage loans? I think that this moratoria did not have a significant impact on this portfolio, this loan portfolio and its quality.

I have a couple of questions concerning the opinion by the European Court of Justice. And what will be the impact of this decision on our provisions? Now it's really hard to answer this question because it was published recently, and our models of creating CHF provisions are based on behavioral models. This is how we test the model. As I said during my presentation, after a dozen of days or so, we haven't seen any changes. Settlements are still being signed. The tendency is positive, but it's hard to predict really what will happen in the future and what impact it will have on court's decision.

In fact, I do hope that it will not happen, but it may be a trigger that will undermine the financial standing of Polish banks. So it's very hard to say now. It's something which will impact the finance sector, but I do hope that this decision will be taken wisely.

We have another question related to the 2023. Could you please have an outlook on the operational cost in 2023? I will answer in such a way. Of course, the operational costs, it also regards the personnel costs. We, as the board advanced the wages increase related to inflation, and we already did it in December 2022. So we expect to see growth in operational costs related to the situation of operationality of loans denominated in foreign currencies. This is a legal aspect that we, as a bank, especially in terms of settlements and also net legal operations, we bear such costs. Of course, we will be observing whether such costs [indiscernible] the costs related with inflation and the labor market will influence our operational costs in 2023.

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