Powszechna Kasa Oszczednosci Bank Polski SA

WSE:PKO

Earnings Call Analysis

Company Navigates Cost Pressures and Growth

The company had good business results, selling PLN 4.3 billion in safe loans by February. It's facing cost pressures from 2023, carrying over into 2024 due to remuneration increases effective September 2023. Provisioning for payouts due to positive results is planned, but specific impacts aren't clear yet. Operating cost growth in the mid-single digits for 2024 is seen as too ambitious due to these pressures, and minimal wage increases will push costs up. The mortgage portfolio is strong, household financial conditions are improving, and no alarming signals are observed in the risk profile despite potential inflation concerns.

Hedging Strategies and Impact

PKO BP's hedging strategy has seen a substantial decline in the total nominal volume by around PLN 30 billion compared to the previous year, with most of these hedging positions being entered at lower yield rates during 2020 and 2022. As these positions mature, the bank will benefit from reduced hedging costs which subsequently will contribute positively to the Net Interest Income (NII) and Net Interest Margin (NIM) in 2024. Notably, as a part of the natural balance sheet hedging, the bank has seen an increase in initial fixed-rate mortgages to PLN 32 billion. This increase serves as a natural hedge and could potentially reduce the need for entering new hedging transactions. It's significant to point out that the bank also faces regulatory changes which might increase hedging needs.

Litigation Trends

In terms of litigation, specifically regarding Swiss franc mortgage loans, only 4% of the customers with repaid loans have engaged in lawsuits. This percentage translates to approximately 3,500 cases, which is a stark contrast to the 28% seen in similar portfolio lawsuits previously.

Investment Growth and Corporate Loans

PKO BP anticipates that investments, particularly in the council and private sectors, will bolster the bank's performance. They have observed increased agreements in factoring with significant commercial clients in Q4 2023. Additionally, the bank expects total corporate loans to grow by 4-5% in the market, driven by demand for working capital. In the mortgage sector, the bank has recorded PLN 11.6 billion in new mortgage sales, with PLN 9.4 billion taken at a 2% rate, highlighting strong sales performance.

Cost Expectations and Provisions

The bank acknowledges the pressure from monetary factors, remuneration increases, and higher minimal wages, implying that operating costs in 2024 will be influenced by carryover from 2023. Provisions in Q4 2023 were primarily for staff benefits based on the bank's performance, with actual payouts expected to occur in the subsequent quarter as part of the 2023 settlement. Keeping in mind these factors, the management hints that a high single-digit growth rate in costs for 2024 might be ambitious but not impossible to achieve.

Credit Risk and Portfolio Health

PKO BP's credit risk outlook remains stable, with the expectation of cost of risk around 50 bps for 2024. The management does not foresee significant negative trends, citing that the repayment regime is robust with no overdue. They also highlight that the macroeconomic environment is strong with household income growing at a double-digit rate, which enhances the capacity of customers to service their debt. Therefore, the bank does not anticipate a material increase in inflation in the household credit portfolio.

Capital Requirements and Bonds Issuance

Regarding the equity and Capital Requirements Regulation (CRR), the bank is monitoring updates in requirements, such as operational risks, which might lead to increased annual bond issuances. While they have provisions for Swiss franc in Q4 divided between settlement and court cases, they maintain a strong CET1 ratio, which suggests the bank's capital base is sound. Additionally, the bank is considering at least one or two transactions annually in the bond market, potentially in a non-preferred format.

Earnings Call Transcript 2023-Q4

[Unknown Executive]

Good afternoon, ladies and gentlemen, and welcome to the [ follow-on] -- following presentation of PKO BP's 2023 and Q4 '23 results. We have Piotr Mazur, our Chief Risk Officer; [ Niesluchowski Jakub ], Finance Director; Piotr Bujak, [indiscernible] Our Chief Economist. [indiscernible].[Operator Instructions]

[Unknown Executive]

I see -- [indiscernible] is the first one. [indiscernible], floor is yours.

[Unknown Analyst]

I've got actually a couple of questions. Maybe the first part will be on net interest income. I would like to learn about the -- about your forecast for 2024. Actually, where do you see -- I mean, nothing towards margin, but nothing towards income going forward. Is this the level of course adjusted for Q4? Should we expect it stable in -- going forward? [ This is ] the first thing. I noticed also that you are still expecting 50 bps rate cut in 2024. And actually, how would your forecast change if the rates would remain flattish this year? So this is second.Third, actually I would like to ask what do you think how the interest expense is going to look like in 2024? I mean, particularly looking at the deposits. If the rates will stay for longer in 2024, I was wondering if consumers will change the behavior and maybe save a little bit more and once again turn to term deposits? So this is the first, let's say part of my question.I've got also the second one. Maybe I will ask it right now. And maybe you repeated it, this will be a trouble later on, but I was just wondering what is currently the situation regarding this litigation against concerning the pre-credit sanction? We saw some notes in the annual report, but I was wondering how those cases inflow during the year? Was then a lot of the inflow in the fourth quarter, or was it spread across the year? Do you see any -- like more intensive action after one of the [ law ] company announced that it will sue banks against it? That's all from me.

[Unknown Executive]

So I would say that then the first 3 questions maybe you also will ask something about [indiscernible], our current view about it. But -- all right. So, concerning that NII, so what we also communicated, we expect that actually on the one hand [ NIM ] will be not lower than the [ NIM ] which we have in the first quarter of 2023. On the other hand, we expect on volume growth on our side, which implies then higher NII. And there's the factors which we actually see on our [ book ], which actually [ help ] us even if there will be some break. On the asset side, we already have over 30% of our mortgage book based on initial fixed rate for 5 years. And year-end was around 28%. We grew to around 32%. That's one point. We also expect that the average currency rate like euro will be higher this year than 2023. Here important average rate during the year, which also should support our [ NIM ] and NII, and we have around PLN 20 billion equivalent in our loan book [ when we ] -- in Europe. That's one point.On the interest expense [ fines ], what we already [ observed ], quarter-to-quarter will decreased the cost of deposits. Although we got increased in the deposit volume. It's due to the fact that we did [indiscernible] deposit rate accounts in -- starting September, 2023. And then we had the following cut. We also did on our side in February on the one hand great cut on the deposit. On the other hand, we withdrew the offer for our new money and it's already doubled, which usually have higher rates. So we read through this from our offer in February. So that's -- going from this point to the interest [indiscernible] side, also having lower hedging costs, which also will support our [ NIM ] and NII. It's also visible in the fourth quarter. If you compare fourth quarter with the third quarter, we get around PLN 270 million less in hedging costs, and this cost will decrease in 2024.So combining cuts on the deposit side and also lower cost of [indiscernible], we should optimize our interest expense in 2024. Of course, we can support, and you also ask about it -- assume 50 basis points rate cuts. Just to remind, we assume in our [ actually ] previous forecast that we will have cuts in March and then in November. So we estimate the impact of the -- assuming there will be no such cut, such cuts will be PLN 200 million to PLN 300 million plus of our NII.Yes, of course [indiscernible] last we did, the [indiscernible] will stay unchanged throughout 2024, [ possibly ] also well into 2025, so [indiscernible] our incomes. When we adopt the view that there will be some funding and credit cut this year after 50 basis points, it was late 2023, we wanted to be on the [ conservative ] safe side, so [ I think that's ] assumptions for rate and back then the [ multiple ] pricing came as much as [ still ] over 100 basis points [indiscernible]. So it was quite [ developmental ] approach.But now looking at what is going on in the economy, we expect -- and then given also the changing direction function of the [indiscernible], it's increasingly likely or maybe an obvious that [ NBP ] rates will stay unchanged throughout this year.When we look at the cases of the so-called free credits and within customer credits area, as you said, we made [ historic ] non-financial statement and the number is still quite limited compared with the size of the bank. What is also important in both majority of cases we're [ not ] winning. We observed some flying acceleration in Q4, but again, we've emphasized on this slide, so it's not like that it was almost nothing before and [indiscernible] after this started to be publicized by the lawyers, but clearly some -- a big high rate of new cases appears [indiscernible].And again, to reiterate, from our side we are putting this very seriously. So we're looking at this with all respect [ due ] diligence, but from the other side [indiscernible] scale is small and putting the statistics, we are winning in the [indiscernible] cases.

[Unknown Executive]

Then I think that now I would ask Lukasz Janczak. I think there are the 2, please.

[Lukasz Janczak, analyst]

I had 2 question. One was on net interest margin, but I think it's all clear here. So the second question is on dividend, but dividend from the undistributed profits from previous years. I know that we are waiting for the Management Board to be completed, but in general, what the bank would take into account when thinking about potential payment from undistributed profits you had, if I'm correct, above PLN 3 billion surplus over [ MREL ] requirements and much higher surplus over regular capital requirements? So the question is what will be the main trigger and what could be the, let's say, potential scale of this dividend, if you could quantify at this stage?

[Unknown Executive]

So on this part which is [ undistributed ] -- so for now, it's actually hard -- from my point of view hard to guide you because, well, one point, the rules for payments from 2023 on the one. On the other hand, we have the situation in which the total amount of payments will be assuming the maximum [indiscernible] was pointed out by [indiscernible], which means around 66% of 2023 profit plus 1.6% of the advanced dividend which we take in February. Then we will be adding these 2 numbers, we will reach the total net income of the bank standalone in 2023. And then we go to the Article 129 of banking law, but it's not consultation with Polish [ FSA ], but we need a formal approval if we want to pay more than this one. And in our informal discussions with [ Polish FSA ], they said that the advanced dividend you should add to the payment in the context of the article of [ law ] -- of these article of banking laws. And so we haven't discussed yet with Polish [ FSA ] if they were even willing to go with higher dividends than in total the advanced dividend plus the payment from, let's say regular dividend above this number.So it's really for now hard to declare because it will clearly depend then on the approval of Polish [ FSA ].

[Unknown Executive]

But I would say that to be fair, the questions should be asked [indiscernible] on what will be established and then the guidelines will be provided because today it's difficult to [indiscernible] what will be the strategy of the undistributed [ property ].

[Unknown Executive]

[indiscernible] understand well., We do not assume that there will be changes in the -- our approach to our dividend. We do not assume this. But at the same time, it's also difficult for us to speak in the names of the new management which will be selected within few days or few weeks. Please understand this.

[Unknown Executive]

[indiscernible].

[Unknown Analyst]

Can you walk us through how the hedging works right now and how do you expect that the hedging costs to evolve from this [indiscernible] you reported in Q4? Another question will be on the Swiss Bank litigation. If you could give us a sense of the trends of the people who repaid their loans coming back to [ seeing ] the banks?

[Unknown Executive]

So I will start with the hedging. So on the one hand, when you look from the nominal side of our total hedging higher [ end ], but also [ across ] current interest [ swaps ], they decrease during the year by around PLN 30 billion. And this allow us to [indiscernible] large share of this transaction. They were concluded in 2020 and 2021 and we [ locked ] at lower yield. So we...

[Unknown Analyst]

I'm sorry. I dropped off. Can you just repeat the last point? Sorry, my line was cut.

[Unknown Executive]

So if you compare the 2022 with 2023, the total amount from the nominal volume point of view that the hedging decreased by around PLN 30 billion. Majority of this hedging, or large share of this hedging we actually entered in 2020, 2021 and 2022 at lower yield than we have today. So with the maturity of this hedging, of course our costs are lower. And we also pointed out, if you look from the quarter perspective, the cost of hedging between the third and fourth quarter was lower by PLN 217 million. And going forward, we do have around PLN 14.5 billion maturities of hedging -- of interest rate loss, which is our main instrument maturity in 2024 and around PLN 18 billion in 2025. These transaction are actually locked at the rate between [indiscernible], which not now...

[Unknown Analyst]

Sorry?

[Unknown Executive]

Between [ 2% and 2.5% ]. So it will actually decrease in 2024, the cost of hedging, which will also support NII and NIM.

[Unknown Analyst]

And to what extent, please? So what is the interest on the new path? So is it just that it matures and kind of disappears or are you opening any new slot?

[Unknown Executive]

So on the one hand, what is happening on our balance sheet currently is sharp increase of initial [ fixed ] rate mortgages. So it's also natural hedging of the balance sheet and by the year-end, we got around PLN 28 billion of such mortgages. Currently, it's over PLN 32 billion of such mortgages. So it's -- from our point of view, it kind of substitutes for entering into hedging transactions because it's natural hedge. So we now [ were ] discussing to what extent we should renew the transaction -- IRS transaction, then take into account that we do have also natural hedging. One regulatory element which we also take into account is the new limit, which is not in place yet. It's a supervisor of client [indiscernible] for net interest income sensitivity, which is the relationship between the sensitivity of the interest rate to their own fund. And this may trigger higher hedging needs on our side. But it's not the case that what is maturing we are automatically entering into new transactions. We are rather looking on the whole position -- interest rate position on our side. And then if we have higher level of the natural hedging, then we simply do not enter into [ target ].

[Unknown Analyst]

So what is the fixed IRS that you received 2.5% interest and pay the floating like [ WIBOR ] or?

[Unknown Executive]

So the average is around 2.5%.

[Unknown Analyst]

[indiscernible] fixed, yes?

[Unknown Executive]

Yes.

[Unknown Analyst]

And you pay the floating, which is something like [ WIBOR ]?

[Unknown Executive]

Yes.

[Unknown Analyst]

And the NII tailwind -- any idea about the NII tailwind in 2024 just from the hedges, mortgages aside?

[Unknown Executive]

We do not share with such exact numbers. So -- but in general in 2024, we'll have positive -- in comparison to 2023, positive impact from the lower [indiscernible] hedges.

[Unknown Analyst]

And maybe just the other question on the Swiss Bank cases?

[Unknown Executive]

[ I understood the ] government impact how [indiscernible] customer portfolio, and of course, the repayment value is less than Polish zloty. However, most of them [indiscernible].

[Unknown Analyst]

Sorry. What I meant was those who repaid their Swiss bank loans earlier already, so they don't have an outstanding balance, are they coming to see the banks? And if yes, maybe can you give us a sense of the magnitude? How many of those cases are there?

[Unknown Executive]

Today, only 4% of the customer is going to the court with the lawsuits, compared to last [indiscernible] -- 4% and of repaid, compared with roughly 28% on [indiscernible] portfolio.

[Unknown Analyst]

And my final question -- I'm sorry for so many questions, but how many of those clients do you have passive who already repaid, just to put the color [indiscernible]?

[Unknown Executive]

So this 4%, it's roughly 3,500 cases.

[Unknown Executive]

[Alan]?

[Alan Webborn, analyst]

I think you made reference this morning, if I heard it correctly, that after the sort of [ PLN 11 billion ] of new sales on the mortgages in Q4, that it was actually higher than that to the end of February. Did that come through correctly? And I guess what I'm trying to get an idea of is that are we going to see just large numbers sitting the balance sheet until, I guess Q2 and then it just stops? And what do you think that means for the sort of underlying demand if there's nothing more -- particularly given the fact that your rate cuts aren't really coming? So I just wonder, are you going to do sort of all the mortgage production in the first half of the year and what do you think about the sort of the market outside of the subsidized lending? So a little bit of color on that would be helpful. And I also noticed in Q4 that, while overall I think the corporate book was up a little bit, it was – they're pushed by sort of leasing and bonds, whereas the sort of corporate lending was actually still down a little bit. So perhaps you could sort of give us a little bit more color on the dynamics of demand on that area and where the demand was coming from in Q4? Because clearly the market expectations are lots of nice new EU money coming in to invest, but clearly it's not there yet. So I'd just like to get an understanding of what's going on there. That would also be very helpful.

[Unknown Executive]

So as we always go, we think that for some time the P&L mortgage market will be weaker because we are in between the [indiscernible] support program and people now are waiting for a new one from the new agreement. So for [ United Street ] for the time being, but later in the year it will [ revive ] when the new government implement a new program. Even if it is not very beneficial to customer, then we would simply see that depend now on the [ lesser ] demands. That will appear regardless of any program. I think that people will have to review on what is available or not, right? So we expect that total P&L mortgages portfolio, I mean, for the market of the loan book of P&L mortgages will go up by over 10% at the end of this year -- year-on-year, right?And after that [ quarter ] results we will see quite strong performance of investment [ loans ] because investment in the economy are doing surprisingly well, and it should stay like that. So in the private sector -- in 2024 in private sector, there will some investment [ activity done ]. In the current sector investments will be strong and current investments is 80% of total investment activity. And so it is my now view, [indiscernible] overall investment in the [ council ]. Also, private ones, also [indiscernible] uncertainty, [indiscernible] different issues in the [ council ]. So we expect that it doesn't launch [ really very ] well. But at the same time we have been talking in the economy. It's likely to be continued for some time given that the [ presentation ] is continued. So there's little demand for working capital. So total corporate loans will be growing for the market like 4% or maybe 5% or not stronger.

[Unknown Analyst]

So what you're saying is that the areas like the leasing and bonds and so in Q4 were being driven by greater investment. Is that fair? Is that what you're seeing?

[Unknown Executive]

To some extent strong performance in the fourth quarter was driven by the end of the [ previous ], old [indiscernible] financial framework of the year. In our view, there was some [indiscernible] positive in the final quarter of last year related to this, but even [ without this ] there's relatively strong underlying trend after that. So if you look at National Account data, [indiscernible] data, if you will subtract the positive side all the time over the last 2 years, then it should remain like that also this year. So we've [ added ] investment loans [indiscernible] as well.

[Unknown Executive]

Yes. On the one hand, you also touch bonds because the bond is one of the sort of financial [indiscernible] of local governments, so it's substitute of loans. So that's why you also see [indiscernible] in the fourth quarter on the bond side, not on the loan side on the one hand. On the other hand, what we increased significantly on the corporate side [ factoring ] in the fourth quarter with our big clients, we get a few -- pretty substantial agreements with the big clients. So that's also the reason why we have a [indiscernible] in the fourth quarter. Concerning the mortgages on our side, I don't know if I catch the question correctly, but in the fourth quarter, we sold PLN 11.5 billion -- PLN 11.6 billion mortgages out of which PLN 9.4 billion was taken on 2%. In the first quarter of 2024, and what we commented to your answer, the PLN 16 billion -- there was number PLN 16 billion. It was total amount of say about 2% sold in 2023 and 2024. By the end of February, we sold PLN 4.3 billion of safe loan 2%. So -- And I would expect taking into account that the registration of the applications ended [ 7th ] of January and we do see that the share in the [indiscernible] of January, February of the safe loans 2% lower, very natural. So I don’t know if you...

[Unknown Analyst]

And just one last question, if I may. When you were talking about costs this morning, you talked about provision. I heard it being called provisions for benefits in Q4 because of the level of activity in the bank, but it wasn't clear how much of those you'd be using. So what was that? I mean, I understand the variable compensation that was coming in, in Q4 that you talked about something that was forward-looking. Could you just tell me -- that's what it came up across as in translation. So if you could just tell me what was being talked about there, that would be great.

[Unknown Executive]

Yes. So I was talking about kind of result of provisioning for the payouts actually, which will take place in this quarter for year-end results because we are actually -- on the one hand, we'll have loan payments for the year results for part of the staff and for the quarterly or -- sorry, quarterly or semi-annually goals, which we set for fourth quarter or second half of the year. So taking account good results of the bank, because if you look on the business results of the bank, they are good. So our HR department recalculated that payment of the bonds, might be higher. We don't know yet, but it was just preparation to actually accommodate these costs. But the payment will be in the year, but results -- as a kind of settlement for the 2023 results.

[Unknown Executive]

[indiscernible].

[Unknown Analyst]

Actually, I've got 2 more questions. One follow up on cost. What should we expect about -- regarding the pace of the operating costs actually in 2024? Should it be somewhere at the mid-single digit growth, somewhat similar to inflation, or maybe there will be some factor that will offset the growth, for example? I don't know, maybe reducing the number of agents, for example. So maybe this is the first question. And the second about the cost of risk. Actually for the last 2 years we saw cost of risk at around 50 bps, and what we expect actually in 2024? Because this higher rate environment, it seems to persist, as we already talked. And actually, is there any risk that actually we will see more and more of the customers not bearing with this situation? And should we expect something more than 50 bps or maybe less? Yes. That's the question.

[Unknown Executive]

I will take the first question. Now, it's hard to, of course give you a precise guidance. But what I can comment that definitely 2024 will be still under [indiscernible] [ monetary ] pressure because we'll have a substantial carryover effect from 2023 on the one hand. On the other hand, we also mentioned during the conference, we make a verification of the remuneration starting 1 September, 2023, which will have full impact in 2024. So this additional element -- so we will still stay with pressure, which we have in 2023.

[Unknown Executive]

In relation to the outlook of the cost of it today, I don't see any negative information. Customer pay on the time. It's fair to say that in our mortgage portfolio we have very [indiscernible] stress test related to that [indiscernible]. So our customer are ready to pay interest rate on this, so [ I'm ] not worried about this portfolio. So we think number of newly [indiscernible] [ agreements ] will provide additional PLN 200 million in the quarter 4 to be more and [indiscernible]. So I feel that also that the [ 2024 ] should be under control, and it should be [indiscernible]. And from the macro perspective, please remember the balance sheet [indiscernible] is very strong at the moment. House [ loans ] have delivered over the last 8 years. And at the moment, even the announced shape of extended credit holidays, according to our estimate of market research, households debt financing costs in relation to GP or households income will be at the lowest level in 20 years. And [indiscernible] in households income is growing like crazy, double-digit level. So [indiscernible] every quarter, financial situation of households is getting better and better, substantially better, and their ability to pay that's -- it's increasing [indiscernible]. So I wouldn't expect from -- looking from the market perspective, I wouldn't expect the [ inflation ] in [indiscernible] portfolio in the household -- especially in the household segment. Even the credits they have changed, right? At least, [indiscernible] credit have come down quite a bit by 100 basis points. So yes, considerations [ certainly ] -- it could be little bit more in the [indiscernible] segment, however, I see very positively [indiscernible]. We have very, very good repayment regime, no overdue, so it looks quite good.

[Unknown Executive]

Marta?

[Marta Jezewska-Wasilewska, analyst]

2 questions if I may. One is to follow up on the cost guidance. I mean, I appreciate you kind of give a guidance, but just a sense whether one -- like high single-digit growth rate is ambitious, but possible or completely impossible in your view in 2024? The second question is on the outlook for the equity and [ CRR ] [ 2 to 1 ] ratio considering changes in CRR, CRD for the indication. And the third one, if you could share how the provisioning for Swiss franc in fourth quarter was divided between settlement and court cases? Would be really much appreciated.

[Unknown Executive]

So I would take the first one. I would say looking from the impact of the remuneration verification, the impact of the increase of the minimal wage, which assume there will be twice the year, which will increase our costs on the one on one hand. So I would say that single-digit would be too ambitious.

[Unknown Executive]

In relation to that [indiscernible], I'd say we have still [indiscernible] CET1. I'd say [indiscernible] provide some new bonds in Q4 in relation to this and we expect 2025 some low [indiscernible], however, it's not material. We still calculate how it will behave in relation to our own funds exposure. And however you don't see [indiscernible] -- nothing here impacts [indiscernible].

[Unknown Executive]

Maybe I will answer this from the [ DCR ] point of view and current levels, it should not have an impact, even though of course, higher [indiscernible] requirements will decrease our [ DCR ]. On other hand, the balance sheet development and potentially [ CRR ] might trigger following annual issuance on our side. And as [ Piotr ] said, what we see from the CRR point of view trending book requirements, operational risk, new -- requirements are pretty clear. But the [ words ] are actually not very clear as the additional requirement for the old balance sheet exposure to the [indiscernible] risk. So we are still actually looking at this.

[Unknown Executive]

The last question was related to the [indiscernible] portfolio. So for this part, we [ started ] the court, we have PLN 7.1 billion, and this one we have agreement PLN 3.6 billion.

[Unknown Analyst]

And just to follow up on this one issue related to bonds issues, how much do you think you need to issue in 2024?

[Unknown Executive]

Actually, we will adjust our plans in respect on the one hand at dividend payment. So the final decisions concerning dividend payment, development of the volumes. We expect of course some growth of volumes on outside. And also the impact of CRR 3. So we expect to have at least one or 2 transactions -- annual transactions on the market. Most probably you will see a non-preferred format. So currently actually we are updating our perspectives on our side after publication of the results to be ready with potential issue.

[Unknown Executive]

I see no further questions. Anybody still have one, this is the moment. Okay. Thank you for participation and hope to see you on the next quarterly presentation of the PKO BP. Thank you. Bye.

[Unknown Executive]

Thank you very much. Thank you. Bye.

[Unknown Executive]

Thank you.