Santander Bank Polska SA

WSE:SPL

Earnings Call Transcript 2019-Q1

[Agnieszka Dowzycka, executive]

Hello, ladies and gentlemen. I would like to welcome you to the presentation of financial results for the first quarter of 2019 of Santander Bank Polska. With me, there is the CEO, Michal Gajewski; CFO, Maciej Reluga; Carlos Polaino, the Financial Controller; Wojciech Skalski, Head of the Financial Accounting Area. My name is Agnieszka Dowzycka, and I'm in charge of Investor Relations.

Now let me hand over to the CEO.

[Michal Gajewski, executive]

Good morning, ladies and gentlemen. Thank you very much for choosing this conference today, despite the fact that there is the long weekend in Poland. So I'd like to start from the award that there is ahead of us here. As we you know, we were awarded the Golden Banker, this is a very prestigious award, which comes from the survey analyzing multichannel service quality. For the very first time, such a big bank was awarded such a prize and this reflects the recognition of the markets when it comes to our efforts because we at our bank apply customer obsession. We were also awarded a prize for our Account As I Want It and for our cash loan. So I am especially proud because of these awards, show that is our strategy and the direction that we have taken are correct.

Now I'd like to pass on to the Slide #5, which shows our balance sheet. And as you can see, both gross loans portfolios and deposits have grown visibly year-on-year. Also customer funds have increased. So at the end of the first quarter, our total balance is over PLN 208 billion, which ranks as the second in terms of the largest banks in Poland. Also our market share is close to 12%, both in terms of credits and deposits, and also the number of customers who have put their trust with us, is almost 7 million customers, both in Santander Bank Polska and Santander Consumer Bank.

Out of this number 2.4 million customers, the ones who have already become digital. Now let us comment on our business performance in the first quarter. Our flagship product, Account As I Want It that also received a Golden Banker award. This account is held by almost 1.4 million customers. We are happy about the dynamic sales of cash loans in Q1. We achieved an absolute record. We sold more of those than we sold mortgage loans.

1 point -- over 1.8 billion, which is great looking at the margin generated on the product. We see higher insurance sales, and we measure it with premium allocation and this includes related and unrelated products. In related products, we have a growth of 29%, and nonrelated, by -- over 51%. So this was a very good quarter for retail banking.

I also want to mention, our black card addressed to the most affluent customers, which was considered the vast -- the best available on the market in the Forbes ranking.

Slide #7. The data here proves that customers preferences definitely gravitate towards remote channels. Over 4 million customers have access to internet and mobile banking, that is up by 20% year-on-year.

We have 2.4 million active digital users, 1.4 million mobile users. We have an increase here of 23% year-on-year. And in terms of transactions, in the first quarter alone, over 14.6 million transactions were conducted through the digital channels, that's an increase of 84% year-on-year.

We have the most extensive array of payment solutions. We are lead -- we are the leader on the market. Those solutions are powered by HCE, Google Pay, Garment Pay, Fitbit Pay, Apple Pay. Over 500,000 of our customers use the payment solutions.

What we have done -- what we have also done this quarter is, we've launched our website and app in Ukraine, as we provide services to 108,000 Ukrainian customers. We are developing a blockchain-powered solution called, Santander One Pay FX, and the number of transfers in the solution is going up. We have over 422,000 active users of our Santander Exchange.

Let's move to Slide #8. SME 1, which includes customers with turnover of up to PNL 8 million per annum. We recorded a growth in deposits and very good business loan sales, particularly sales of leasing at 17% year-on-year. We have some new solutions. One of them is the online accounting module eKsiegowosc, e-accounting. We received an award for that solution, Mobile Trend Awards, that's what we got for our mobile app and the other award is for the accounting module. And this is very important for us because this was -- we received that award in the customer vote. In April, we also launched a mobile payment terminal in the first quarter sales of terminals. In terms of acquiring business was almost 24% higher than in the same period last year.

Slide 9. Very good performance of business and corporate banking. We are focused on the strategic sectors, automotive, food and agri, chemistry, cosmetics, packaging and transport, where we generate very good returns. We generated a 25% increase in revenues. We continue our international -- with our international corridors, we continue to meet with our customers going outside the financial spectrum of our services. We organized trade mission in Germany, in the U.S. together with other banks operating within the Santander Group. In corporate and investment banking that's where we also continue with our strategy generating 2-digit growth in cash management, liquidity management and foreign trade and on capital markets, where we have very good visibility and positioning.

Let's move to Slide #10. Net interest income up by 16%, reaching over PLN 1.6 billion. Fee income, that's up 1%, PLN 520 million. Net operating income, as you can see on the slide went up 13% reaching PLN 2,002,041,000 (sic) [ 2,245,000,000 ]. Attributable profit, PLN 351 million and, of course, this was impacted by one-off costs. You're well aware that the restructuring contribution was increased. And you know that we also had to raise a provision for the collective redundancies. If we excluded those 2 one-offs then the -- we would have an increase of 8% in the attributable profit. However, they needed to be included, that's why for the first quarter, the result is, in fact, slower than it was year-on-year.

Let's move to Slide #11, and our main indicators. We have a very good capital position with Tier 1 14.63%, TCR 16.47%. Those include the N series stock issued as part of the acquisition of the core business of Deutsche Bank. And considering this very good capital position, the supervisory board approved -- allocating over PLN 2 billion for dividend payout. Return on equity and return on assets at very good level. We're definitely one of the leading indicators in the peer group. Our liquidity position is very good. For the bank it's 86.3%, for the group, it's 93.9%.

I will now hand over to our CTO, Maciej Reluga -- CFO, Maciej Reluga.

[Maciej Reluga, executive]

So in short, what we see on the next 3 slides, starting from the Slide #13, we can say that the macroeconomic situation is good, and we expected to remain as such. After our last presentation, we revised some of our projections upwards and GDP now is projected at 4.1%. Previously, we projected it at 3.8%, consumption projection has gone up. The composition of investment is better from the business perspective because we can see faster growth in private investment, which comes from the -- which stems from the fact that in 2018, the investment turn out to be better than expected. The FX projections have not been changed. They remain similar to the ones from the previous presentation. I think that's the story. Regarding inflation is getting more and more interesting because today, the data which were published were surprising because our projection was 2 and it turned out to be 2.2. And moreover, this inflation is generated by the core inflation growth, and it is in line with the fact which we were writing in our reports that inflation may be surprising.

Let us take a look at Slide #14, where we see the inflation. And inflation may be higher in 2019, which will make the base effect decreased at 2020, but it doesn't change the fact that I think that is shortly, inflation maybe within the NBP inflation target. It may exceed it even. But I think that is now relating -- regarding the interest rates remains open because I think that if you follow MPC news, you can see that's shortly, we may see a majority maybe not supporting the change in the interest rates, but maybe the interest rates will remain unchanged until the end of their term. We will see what the MPC does. Maybe in 2020, we'll face inflation projection within the target. I think that we'll ask ourselves a question whether the real interest rates should be so negative. This is why we have this economic projection assuming increases -- slight increases in interest rates starting maybe in 2020. This scenario has some risks, taking into consideration the declarations of the President of the MPC is downward. But taking into consideration the projected inflation path I think that we are not going to change this -- our scenario. When it comes to loans and deposits, here we can see a continuation of trends from the recent months. In companies, the FX adjusted to pace of loan growth is close to 8%. At the end of last year, it was at 7%, so we have a slight acceleration here, which is in line in the investment acceleration story. We are expecting the loans to grow at some similar pace. Consumer loans have decelerated slightly, but this is still at solid growth, close to 2-digit one. And as we know, the mortgage loan growth remains high. Here, amortization is lower in the first quarter due to the FX effect.

Looking at PLN mortgages, we have a solid growth here. So from the asset growth perspective, the macroeconomic environment is still good. In terms of deposits, we have a growth, especially in households. As this is 2 digit, almost 10% in total. And here, we can see that in this sector, we have no problems with liquidity. In terms of the structure, it is correct because demand deposits grow and there is a slight rebound in term deposits. And when it comes to loans and deposits with our bank, this will be commented by the CEO.

[Michal Gajewski, executive]

Yes, we have already commented on the business effects and now let us go to financial effects. I'd like to focus on the changes quarter-on-quarter because as you know, since mid-November, we have had -- we have seen the effect of acquiring the business of Deutsche Bank. The gross loans, as I have said, grew by 2% quarter on quarter. And if we take a look at business loans, this is a 1% growth, but in SME alone, this is 3%. In terms of mortgages, the growth quarter-on-quarter is 1%. But here we need to underline the fact that in terms of the balance sheet, the mortgages decreased by 2.5 -- 2.4%. I have already mentioned the very good sales of cash loans, and this is very, very visible here in the chart and in our appendix. This is Slide #30. This was a very decent and a solid quarter, especially in retail and in terms of high margin facilities.

Customer funds. Here we can see an increase of 1% quarter on quarter and because we reached the level of PLN 163 billion. Here we are talking about the Slide #18. We have a slight decrease in deposits and corporate banking, whereas in retail banking, they have grown. In terms of investment funds, we see if there are first positive signals in this quarter. We will see whether if they remain stable. We can't tell it right now. But anyway we should be satisfied with the 2-digit growth quarter-on-quarter. Net interest income up by 5% quarter-on-quarter, and it's reached over PLN 1.6 billion.

Looking at the previous quarters, this is the record high result. Net interest margin, it has decreased slightly, again which stand from new regulations IFRS 16 in leasing, where the interest costs of leasing were transferred to net interest income, this was 2 bps plus the individual deposits grew, especially in saving accounts. Another positive factor was that the cash loan sales increased and they are high margin facilities. So we are still optimizing our structure. Our structure of the balance sheet. We are doing it step-by-step gradually, and we are respecting these customers and these products that we acquired from Deutsche Bank.

We are maintaining our projection that we are going to go back to the previous level of some 3.8%, and I think that this is feasible taking into consideration, what we have done till now. When it comes to fee income, this is PLN 520 million, 5% up quarter-on-quarter. And here we can see that the credits fees and FX fees are quite decent. As I have already mentioned, these premiums from insurance that we reported in the first quarter brought about some very good results. We need to underline that this increase 5% quarter-on-quarter is very satisfactionary. On the basis of this very good net interest income 16% up. And fee income, the income as of the end of March exceeded PLN 2.2 billion, this was up by 9% quarter on quarter.

So summing up the first quarter, we are growing in business terms. We can see that in terms of customer satisfaction and customer service quality, NPS that we are perceiving as the most important ones, we are receiving numerous awards, which reflects the fact that we are able to deliver on our strategic objectives and at the same time, we can grow our business. Of course, some one-off factors, for instance, BFG and optimization of employment had some influence here. Of course, our objective for the next quarter is to be even better and better, and we will be better matching.

[Maciej Reluga, executive]

Now let us talk about operational costs. When it comes to operating expenses, Slide 22. I would like to talk about what you could have read in our current reports. So I would like to start with those. First of all, the regulatory costs related to the restructuring fund contribution BFG for Santander Polska that contribution was PLN 173 million and for SCB that was PLN 26 million. Restructuring provision related to collective redundancies PLN 81.6 million, so almost PLN 82 million. The third element mentioned by the CEO, when talking about net -- about NIM, the IFRS 16 effect. This change has triggered increase in amortization costs, and that's presented on this slide.

I'd like to elaborate on the synergy and merger costs. We mentioned that during our previous meeting, but I think we can share more details now relating to the estimates. For 2018, the cost was to be at about PLN 100 million for 2019. We mentioned about PLN 100 million of costs related to the merger, but we know that this amount will be exceeded.

We are talking about most probably PLN 120 million in -- to be incurred in 2019, and this is triggered by the need to adjust our branches to the new format. We -- the business review of branches is pending and -- but we're still calculating how much it will cost to adjust the ex DB branches to our network. The same applies to the private banking customers. So we're still analyzing. Some of it will be visible in amortization in the following years.

In 2019, we're talking about PLN 120 million. In 2020 and 2021, we're talking about amortization of about PLN 50 million per year, and this higher amount is affected by the elements I have mentioned. And on top of that higher amounts related high -- related to our licenses, laptops adjusting to the offer.

So some will have to be included in 2020. So on the whole, the total expenses might exceed what we had projected earlier. We projected PLN 260 million and looks that it might PLN 300 million. On the other hand, the synergies -- we have some positive information because the -- on the costs side, we will -- the effect will be better than we had projected.

We projected PLN 129.5 million in 2021 and I think this can be achieved already in 2020. I think we could come close to PLN 100 million in 2019. What should be highlighted here, we didn't talk about synergies in terms of revenues. We didn't really give you any amounts, and we're not going to do that. But looking at the results of Q1, we see that the integration is on the right track. DB customers trust us. Some of sales of high margin products, for example, cash loans, the success behind is -- was achieved, thanks to the trust of the ex DB customers and the new distribution network.

That includes agents from the ex DB network. We see the margin they generate, the volume are very attractive and contribute well to the overall picture. So looking at the balance sheet in Q4, PLN 11.5 billion of cash loans after the first quarter that exceeds PLN 12.1 billion. And the sales of PLN 1.8 billion in Q1, we didn't really expect as robust performance.

Let me move to Slide 29, which confirms what the CEO has said in terms of new production. We see that bar on the left-hand side.

Let's move to Slide #23, LLPs and credit quality. We see that compared to the previous quarter, the risk charge and coverage ratio NPLs remain in line with the expectations. Risk charge at 80% -- at 80 points should not come as a surprising.

I think the personal loan portfolio should be -- should represent better behavior, looking at the macro environment and how the conception was going on at the moment. And on the other hand, we're also monitoring what's happening in the enterprise sector. I'm talking about some risks that mainly were in the horizon, but our guidelines in terms of cost of risk remains unchanged.

Looking on the right of the slide, the NPL and coverage ratio. I want -- I would like to comment on this. We release data for Q4 and there was a decrease, the explanation was that there are a number of one-off factors. Then we released the annual report where we provided a more extensive justification and the effect of POCI on the 2 ratios. And because we received some questions regarding that we're showing you comparable ratios looking back to show you where this current picture came from.

This slide doesn't really show you any new information. The NPL sales didn't really have much impact. And SCB, the impact was PLN 8 million. In terms of regulatory costs, we see that PLN 228 million is the total costs of -- the total regulatory costs. I mentioned the resolution fund contribution and the quarterly contribution for the deposit guarantee fund is PLN 21.3 million.

To sum up. First of all, what the CEO has mentioned. We see a visible increase in core business, especially in net interest income, slight increase in net fees. In terms of expenses, BFG contribution and the provision are related to collective redundancy. Cost of risk in line with expectations, so the profit PLN 351 million is affected by those extraordinary costs.

In terms of taxes, we have an increase in the rate and the fact that the BFG contribution is not a tax deductible. So -- okay. So I encourage you to ask us questions at the moment if you have any.

[Unknown Analyst]

I wanted to ask about NIM because at the last conference, you've said that 3.8 would be feasible. And the fourth quarter this year, do you maintain this perspective, maybe this quarter is changing anything, maybe it will be any later? And what was the influence of IFRS 16 on the net interest income?

[Unknown Executive]

So starting from the last element. This was 2 bps, I mean, the influence of IFRS 16. And we are going to go back to 3.8 I think. I'd like to make it more precise. At the last conference, we were mentioning for the fourth quarter, I think that we said that the increase by 20 bps plus what will happen in the fourth quarter would be delivered over the year, and we were not mentioning any specific quarter. We are not giving any projection.

[Unknown Analyst]

One more question concerning net interest income. Was the first quarter surprising in any way because I thought that this milestone, this turning point would be earlier? Can you comment on that?

[Unknown Executive]

Well, I said that deposits -- retail deposits grow in the area of saving -- savings products. And as I have said, we have a plan of cost optimization in terms of deposits. We are consistently implementing that, and we are doing that also in the corporate area, where deposits have decreased slightly, and we have to pay more for them. So these are the 2 reasons we have.

[Unknown Analyst]

Also the wording that was used that the net interest income -- I mean, net interest margin because you know net interest income is growing in decent -- at decent rate. Well, I'd like to ask about the quality of assets because the volume of NPL have increased for -- from 4.1 to 4.3. What happened in the first quarter? Was there any particular element? Could you comment on that in greater detail?

[Unknown Executive]

Well, there was no particular event I must say. When we are looking at risk charge, when we are looking at the breakdown into sectors, SMEs, individual, mortgages, well, yes, but the NPL volume has grown.

[Unknown Analyst]

So was it in corporate segment, in retail segments because there were several million of zlots of an increase in NPL?

[Unknown Executive]

Well, in fact, I cannot take this question.

[Unknown Analyst]

So something has changed in terms of models?

[Unknown Executive]

No, no change in terms of models. So I'm suspected there were some corporates factors. We will have to double check.

[Unknown Analyst]

PLN 120 million costs of integration, includes the restructuring provision?

[Unknown Executive]

No.

[Unknown Analyst]

One more question. PLN 120 million is PLN 20 million more than we had before. In fact, total integration cost this year is PLN 200 million because the restructuring is the following -- is an element following the merger. So my question is, do you still think that the total of integration cost will be at PLN 250 million, as you communicated in December 2017?

[Unknown Executive]

Well, I wouldn't agree that you have to adapt PLN 120 million to PLN 80 million because had we known that there would be collective redundancies, well, we would have announced that. Collective redundancies are related to changing our business model as well you know.

[Unknown Analyst]

Does the total change?

[Unknown Executive]

Yes. I have mentioned that we will have an amount of PLN 300 million more. And this does not include the restructuring costs, right?

[Unknown Executive]

Are there any other questions?

[Unknown Analyst]

Okay. Let's make it more precise. The integration costs do not include the collective redundancies provision. But do cost synergies include the redundancy ex DB employee redundancy costs?

[Unknown Executive]

Above all, the redundancies do not refer only to ex DB employees. I'm sorry, the buzz is not receiving.

[Unknown Analyst]

So to put it in other words, what part of savings were taken into PLN 100 million and PLN 130 million of cost synergies that you are saying are feasible in 2020? Is it -- is the -- are the personnel costs, the total of that because we have no information about that. Can we get any more detail?

[Unknown Executive]

Well, I think that's a good moment for split information will be -- when we'll be showing what happens in 2019. So over 2019, we will be showing the split.

[Unknown Analyst]

Okay. And when it comes to the rebranding costs this year. Last year, we had some PLN 100 million and you said that this year some more rebranding costs will be covered?

[Unknown Executive]

No. Last year, we had PLN 60 million, PLN 70 million and this year, we said, we would have some PLN 70 million. At the very beginning of this year, maybe there was slight influencing factor, but this was quite marginal I think.

[Unknown Executive]

I have one question from the internet. Do you assume an increase in NBP reference rate in 2020 to 2%? Can you comment in greater detail on the assumed increase in interest rates and its distribution?

[Unknown Executive]

In the first half of the year and in the second half of the year, maybe the third or the fourth quarter.

[Unknown Executive]

Okay. Do you have any other questions? Okay. Thank you very much for the participation and have a nice day.

[Unknown Executive]

Thank you.

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