Santander Bank Polska SA

WSE:SPL

Earnings Call Transcript 2020-Q1

[Agnieszka Dowzycka, executive]

So my name is Agnieszka Dowzycka. Together with me is Maciej Reluga, Michal Gajewski, Wojciech Skalski and Carlos Polaino. When it comes to technical issues, I would like to ask you for asking questions through the e-mail address or asking them via webcast. We will read out the questions either during the presentation or within the presentation.

[Michal Gajewski, executive]

Hello, ladies and gentlemen. Welcome, and I am very grateful for meeting you here also indirectly. May you live in interesting times. This is a Chinese curse, and we duly live in interesting times. The pandemic has shown us how quickly we have to redefine everything, our modus operandi. And the recent weeks have shown us the impact that pandemic has on the P&L of the bank.

The financial results show true reality. In January and February, those months were great. We kept the momentum going, while March was at the opposite extreme. We saw far lower activity of our customers. So please bear that in mind when looking at the quarterly results.

We're looking at the world before and during COVID-19, and those are 2 different realities. We have quickly adapted to the new rules of the game. I'm very proud of our people, over 6,000 of our staff switched to working from home over just a few days and that includes those employees working in our call center.

We greatly appreciate how quickly our customers switched to online banking. We were fast to implement the new regulations regarding customer service at our branches and we simplified most processes. We make sure our customers have access to everything they need online. Customers still visit our branches less -- to a lesser extent, but they still do. We also managed to implement the solution within the government aid package to help our customers deal with the adverse economic effect of the pandemic on their business.

We are now at the next stage that is more operational. We want to maintain our focus just to maintain the revenues and the financial results of the bank and to minimize the adverse effect of the pandemic. Our priority is to maximize support for our customers, our staff, the economy and society. We're working on a number of solutions to support our customers in their liquidity situation and job retention. We continue to work with the career development plans, we'll be making an announcement in that respect very soon. We've signed an agreement with BGK, and we participate in the BGK guarantee scheme. We keep introducing digital solutions to encourage our customers to switch towards online banking. We educate our customers, especially the elderly customers, how to access our electronic channels. We are actively engaged in supporting hospitals and those working in the medical field. Together with our foundation, we've started a fundraising campaign. It's called Podwojna Moc Pomagania. We matched every PLN paid. And in effect, we donated over PLN 5 million for medical equipment to 23 hospitals in Poland.

The entire Santander Group is committed to helping fight COVID. Yesterday, the group announced it's allocating EUR 100 million for solidarity initiative against the coronavirus, and we are part of that commitment.

Let's move on to the presentation. We're starting with Slide #5. At the end of March, gross loans went up almost 7% to reach PLN 153.2 billion. Customer funds went up 4% to PLN 169.7 billion. Assets up to exceed PLN 215.9 billion. At the end of the quarter, our market share in gross loans was 11.9%, while in deposits, it stood at 11.6%. Our whole group together with Santander Consumer Bank holds a portfolio of 7.21 million (sic) [ 7.24 million ] customers, including 5.1 million customers with Santander Bank Polska. We have 2.61 million digital customers.

Let's move to Slide 6, basic financial highlights. Quarter 1 saw a few one-off that impacted our results, and I'll be talking about them in detail now. The first one was the BFG contribution with impact on operating costs. The amount is PLN 287.6 million, including almost PLN 40 million to the guarantee funds and PLN 248 million to the resolution fund. It's a higher amount than what we saw last year. Another item and other making an impact is the provision for legal risk. In other operating expenses, that's over PLN 47 million worth of provisions for the partial reimbursement of fees on prepaid consumer loans. No such provision was raised in quarter 1 2019. The third impact is the cost of reimbursement related to the prepaid consumer loans of PLN 52.6 million. That's an impact on our net interest income. Another item, one-off item, is the provision for expected credit loss. That's the post-model adjustment. It arises from worst economic outlook. It's the highest item, and it amounts to PLN 119 million.

Then we have provision for employment restructuring at Santander Consumer Bank. It amounts to PLN 5.6 million. That's for provision for employment restructuring. Net interest income up 1.7%, and excluding the impact of the reimbursement of the portion of fees, it was up 5%, net interest income up 5%, and it reached PLN 1.63 billion. After quarter 1, fee income was PLN 538 million, and it was higher by 3.5% year-on-year. Totally income at the end of March went up slightly. Underlying total income went up 2.6% to reach almost PLN 2.25 billion. Profit after tax after quarter 1 reached PLN 171 million and was much lower year-on-year, almost 50% lower. Underlying result was 2% (sic) [ 2.8% ] higher compared to 2019.

Let's move to Slide #7, where we see our solid capital position exceeding the regulator's expectation. Return on equity, as you see, at 8.5%. Underlying return on equity, over 10%. Very good liquidity position and LDR at 140%. Loans to deposits at a very good level.

Let's move to Slide #8, business growth. But as I said at the very beginning, we -- this first quarter consists of 2 different reality. We must divide it. We must divide January and February from March, but we have some good news here still. The account, as I wanted, for example, we have an increase of 47% in the number of holders. That's an increase year-on-year. At the end of March, 1.9 million customers had that account. We also recorded an increase in cash loan sales by 10% year-on-year. Sales increased in remote channels. Comparing quarter 1 2020 to quarter -- all of 2019, there was a decrease. However, comparing quarter 1 2020 to quarter 1 2019, there was an increase of 10%.

March was much different to the 2 previous months. We see differences in the weeks the pandemic was kicking in. And so the difference in average daily sales between the first and the second half of the month was as much as 60%. The retail deposits, up 7%. The amount in our balance sheet is PLN 88.5 billion at the moment. Santander TFI, in March, saw an accelerating rise of redemptions, especially in corporate bonds. So the net assets under management were very much under pressure. At the end of March, we had PLN 12 billion worth of assets under management. The good news is, over the last week, we saw increasing net sales. So there is some rebound here.

Slide #9, digital channel. As I have mentioned, we're adding new functionalities. Our customers are quickly adapting to the remote channels. So there are more solutions now available in the digital offer. We serve our customers quicker, even quicker than before. We invested a lot in the fourth quarter to increase the capacity of our remote system. So we could say that though we didn't really expect the pandemic to be as heavy as it is, we are prepared to continue with the heavy traffic that we're seeing online at the moment, and we are prepared to continue like this in a longer time horizon.

At the end of March, we had almost 4.6 million customers with access to online and mobile banking. 2.6 million active digital users, that's up 9% year-on-year. This includes 1.6 million mobile users. That's up 17% year-on-year. We had 25 million mobile transactions. That's an increase of 65% versus quarter 1 2019. We see a rising share of digital channels in overall sales, not only in March but even at the beginning of the year, and this is due to primarily to personal and business accounts. 30% of all account sales happened online. Year-on-year, account sales went up over 4x. And in terms of business accounts, almost 12x. 25% of cash loans are now sold online. Those proportions have, of course, changed between February and March, but the sales were still very high at the beginning of the year.

Let's move to Slide #10, where we have information on the SME segment. Here we see a 30% growth in sales of installment loans. We recorded the highest sales in February. SME financing went up 9% year-on-year to almost PLN 14 billion. We have a new process, smart loans, and 5,700 customers have availed of this process with PLN 652 million worth of financing.

As I said at the beginning, we are showing -- I'm going to talk about it again, we're on Slide #11, how we're supporting our customers in the time of the pandemic. You see the 4 main areas here on the slide. The first is about remote communication, electronic channels. We have launched a dedicated service for our customers to help customers switch to remote banking. We provide support to individual customers, and at the end of March -- on this slide, you see the data for April also. But at the end of March, we had individual customers have about 15,500 applications to defer principal installment payment on cash loans and over 7,000 applications for the same on mortgage loans. And this trend is definitely accelerating in April as you get to see on this slide. The vast majority of those applications are approved. Also for the customers that have slight dates past due.

Support for business customers by the end of March, we had received 5,000 applications for freezing a loan repayment for 3 or 6 months. 7,500 approved applications to free lease installment repayment. For our business customers, we implemented the automatic deferment for 2 months on some products, and we offered waiver in selected credit fee.

Business and corporate banking. Here, we again have a very positive picture of the first 2 months. Transactional banking revenues, term deposits, increased as well just like factoring revenues. We are still optimizing cost of deposits also in this area and the volumes of deposits and cash and current accounts grow.

Another saying that we would like to boast about in these difficult times is that we received an award from Bank Gospodarstwa Krajowego, BGK, for the highest sales in the market of the state aid program Biznesmax for SMEs and small corporates. And here, our market share was 45%.

In Corporate & Investment Banking, trade finance revenues grew by 15% year-on-year and cash and liquidity management by 33% year-on-year. We co-arranged the first issue of green bonds in Poland with a total value of PLN 1 billion, and we also acted as sole intermediary broker and financial adviser in a public tender offer, which was the second largest tender offer in the history of Polish capital market and the biggest one in 9 years. So these are the good news.

We also took some special measures in March. We intensified our daily contacts with our customers. We -- our bank has contacted over 35,000 customers, and in order to do that, we used various digital channels, such as Skype for Business, e-mail, telephone. We also held sectorial and international webinars for customers. For these customers who wanted to find out what kind of aid they can get from us, we extended agreement from 2 months for credit facilities, which are due in the month of March to June, and this was done in a simplified credit process and involved no fee. We also implemented waivers for capital installments for credit, factoring and leasing products. These were 3 and 6 months. Also, this was done for big corporates. And last but not least, together with BGK, we launched guarantees, not only for small and medium enterprises, but we also signed an additional agreement for a guarantee for big corporates.

Now let's move to the Slide #16, and let us look at the balance sheet. Gross loans went up by 7% to PLN 153.2 billion. Mortgages up by 6% year-on-year and Swiss franc mortgages portfolio went down by 9% year-on-year. PLN loans up -- down by 7% year-on-year. Cash loans up by 21% year-on-year. And in total, in Santander Consumer Bank, gross loans went up by 7% year-on-year. Of course, we reported there a drop in mortgages, in Swiss francs, and excluding mortgages, SCB loans would have gone up by 10% year-on-year.

Slide #17. Total Customer Funds up by 6%, and of course, this was impacted by the situation in mutual funds where we reported a drop. Total deposits increased by 7% year-on-year; retail deposits, 7% up; business deposits, 6% up; and deposits grow, especially in current deposits, very significantly, 22% up in saving accounts, 18% up year-on-year.

Slide #18. Net interest income as of the end of March was PLN 1.63 billion. In quarterly terms, there was a negligible drop in that. Here, I would like to say what influenced the situation. We received supplemental re-explanation by the president of the Office of Competition and Consumer Protection, UOKik, concerning the judgment of the European Court of Justice on the early repayment on consumer loan or credit, which shows the linear method of calculating the reimbursement as the recommended one. And I would like to underline the fact that we have acted in line with this recommendation just like other banks. We also reported there was a cut in interest rates by MPC and decreased activity in customer -- of customers. And also, we had reinvestment in debt securities at lower yields.

On the other hand, taking a look at the positive elements, we see a continuing trend in interest expenses, a drop of 8.2%, and if we take a look at that year-on-year, 12.5% down.

In the first quarter, the annualized NIM was 3.32%. This was 5 bps lower versus the previous quarter. And excluding the impact of the change to the linear method, the margin would have grown.

Slide #19. Fee income up by 3.5% year-on-year, and in quarterly terms, there was a negligible drop to the level of PLN 538 million in the first quarter. This line in the P&L has been impacted by the pandemic situation and the general situation reported in the second half of March 2020. We reported lower results in credit cards. We have had a one-off transaction in the fourth quarter related to the higher cost of retail intermediary settlements. All this influenced the fee income. In terms of FX fees, this was a decent result, 14% year-on-year and 10% quarter-on-quarter. In the second half of March, in our Santander Exchange, there was a lot of turnover. And also insurance went up by 28% year-on-year. And we reported an increased activity in brokerage fees, up by 52% year-on-year. In March, we also reported some decent increases. In Santander Consumer Bank, fees went up by 11% year-on-year, and quarter-on-quarter, it dropped by 19% due to lower commissions from credit cards and higher cost of retail intermediary settlements.

Now let's look at Slide #20, income table, PLN 2.24 billion. In underlying terms, the increase was 3% year-on-year. Excluding one-offs, there was an influence by a change in fair value of VISA corporation. So this change contributed negatively, which was the impact of almost PLN 30 million. And this was included in the performance of other financial instruments. Also on the derivative market and FX markets, there was a situation that contributed to the general situation. We also booked a profit on sales of debt securities.

Now the Slide 21 -- Slide #21. Costs are under control. Year-on-year, underlying costs, excluding BFG and provisions for the verdicts in the European Court of Justice and the provision for restructuring, even down slightly year-on-year, and quarter-on-quarter, the increase would be of 2%. Administration costs at PLN 574 million, affected by the legal risk provision. We have lower administration costs if we exclude regulatory costs quarter-on-quarter. We see lower marketing and maintenance costs. At SCB, the operating costs are similar to the level observed last year. In quarter 1 2020, we booked a provision for staff restructuring at PLN 5 million back at Santander Consumer Bank.

Let's move to Slide #22, loan loss provisions and credit quality. Quarter 1 saw a much higher level of provisions compared to the previous quarters with provisions at PLN 466 million, and that includes the PLN 55 million raised by Santander Consumer Bank. There is the additional item, the largest item, PLN 119 million, that's for the expected credit loss. This is a post-model adjustment. We decided to raise this additional provision due to the high uncertainty around COVID, especially in terms of the scale and the time horizon of economic slowdown, we did -- and the impact, the uncertainty around the impact of the financial aid package from the government, the economy reopening and so on. We do not have enough data to make reliable projection.

Excluding the additional provisions, the credit portfolio behaved in line with the expectations and the risk charge would go up a few basis points, even without this additional post-model adjustment, from 85 to 88 basis points. And this is due to individual cases where the situation of a corporate -- 1 corporate customer has worsened. Nonperforming loans and coverage are at a similar level to last year.

Let's move to Slide #23. We see much higher contribution from BFG and KNF, a total of PLN 295 million for the first quarter. This includes the resolution fund. NPL sales at PLN 272 million at Santander Bank Polska and PLN 282 million at Santander Consumer Bank.

Turning now Slide 24 and 25. This quarter, as I said, present 2 different realities: before the pandemic and during the pandemic. Before the pandemic kicked in we saw very high results, and we saw the situation worsened when the pandemic started. Increase in total income for the quarter, it's 2.6%. Higher net interest and fee income, 4.6%. We will be supporting the economy, our customers. We're not changing our customer-centric strategy. We are here for our customers in the good and bad time. And so we're not changing our strategy.

Thank you very much. And now we're opening the Q&A session.

[Agnieszka Dowzycka, executive]

We have some questions already. I will start from some of them. I'd like to put them in some groups in order to grasp the gist. So a question concerning volumes. One of them comes in English, the other one comes in Polish.

At the end of the quarter, did you see a significant disbursement or slowdowns in the corporate sector because volumes seem to be strong and is this going to be that credit dynamics in 2020?

[Michal Gajewski, executive]

When it comes to the first question, the answer is positive. The activity increased and in February was quite strong when it comes to increase of loans. And when it comes to the total -- to the entire 2020, I think that the most reliable answer is that we don't know what will happen. Because this is the first time when, during the announcement of financial results, we do not provide any macro presentation. We do not know what will happen next month. When lockdown come -- finishes and what the next measures will be. How soon we will have a rebound, how long we will suffer from shocks. And from the perspective of loans, we don't know what is going to be the demand for loans, how many applications for repayment fees we will receive. We don't know how many credits with guarantees we will have. So these are all unknowns. So I wouldn't like to provide any guidance at this stage. And I hope that after the second quarter, the situation will slightly clarify, and we'll be able to tell you something more.

[Agnieszka Dowzycka, executive]

The second question, how the bank reacts to the current situation?

I think that the CEO has already covered that quite extensively. So we're going to do with customers what we are going to do now.

Another question concerns a provision for Swiss franc mortgages, and additional provisions in the first quarter, whether we have raised anything?

[Michal Gajewski, executive]

Maybe I will take this question. So in general, when it comes to the portfolio provision of the [ big suite, ] are legal risk provision under indexed loans, denominated loans. Well, the methodology of the portfolio provision has not changed versus what we contained in the annual report. As you know, this provision was at -- the value of this provision was estimated taking into consideration many assumptions that influence the amount. And we are still monitoring the ruling practice on a regular basis. At the end of the first quarter, there was no significant deviation from our assumptions. And in the next quarter, we are going to have the next review, and its results will be published in the semi-annual report.

[Agnieszka Dowzycka, executive]

The third question is quite technical, and it tells you about PLN 15 million of negative impact in the provisioning income, other operating income. This is note #8 in the report, and there was a line talking about releasing provisions for lawsuits. So the question is, what kind of lawsuits we had in order to release provisions?

[Michal Gajewski, executive]

So there was nothing like that. We have other assets in SCB. And I think that this note #8 should be read together with note #12 because there is a similar element but it is negative. So these 2 factors level off. So that's it. And the settlements were related to contract of credit installment.

[Agnieszka Dowzycka, executive]

Another question concerns provision. Asset quality, what economic assumption is the PLN 190 million provision based on? And what are your expectation for 2020 in terms of risk charge? Does it include any effect related to the borrower, the court measures? For example, moratorium, repayment moratorium and guarantees?

[Michal Gajewski, executive]

Okay. Let me take this one. Oh, no, there -- let me move to the macro assumption in the model. We did the portfolio -- analysis of the portfolio and watched the behavior of the customers, tried to project their future situation. And according to this analysis, there is much higher risk on the corporate and SME side. That's why most of this provision you're asking for actually relate to those segments. We didn't really include any GDP forecast or jobless, right?

For -- in terms of funding outlook for 2021, we're not giving you any provision. But it doesn't necessarily have to say -- it doesn't have to imply that loans are going down. We see, in fact, higher utilization for -- from some customers in preparation for those more difficult time. So projections in terms of utilization are based on the scale of data that we have, and there's so much change. So it's difficult to provide reliable projection.

[Agnieszka Dowzycka, executive]

What is your approach to mitigate the interest rate cut?

[Michal Gajewski, executive]

You see the cost of deposit and interest cost. You've probably seen in the presentation that those are going down year-on-year by almost 12%. And quarter-over-quarter, we've actually done some repricing. And there is some space, some room for maneuver. You've seen that in some positions, in some items. Fees and charges -- in fees and charges, you see significant activity of our customers. High insurance sales. There's lots of traffic there. A lot happening in terms of FX income. So we are taking advantage of all those opportunities that are coming from the customers' activity. We will be actively engaged in those financial aid schemes. They will help us improve the quality of our assets, and that relates to both BGK and their guarantee as well as the financial shield of the Polish Development Fund. Most -- it will help us, but most of all it will support our customers. In terms of BGK guarantees and the Polish Development Fund guarantee, they are subject to the banking tax, that the price takes account of that tax.

[Agnieszka Dowzycka, executive]

What about the PLL and your portfolio and the impact on the portfolio? And what about the level of lawsuit?

[Michal Gajewski, executive]

In the last few weeks, our customers have been less active. Quarter 4, 1,058; quarter 1, additional 370. So what is depreciating and that we're not saying that this -- we don't -- we're not saying this has a significant impact on the number of defaults. Polish -- it's difficult, as I said, to provide some reliable projections for the future.

For potential changes, we will have a program of cost optimization. Of course, our priority right now is to keep up the FTEs and the remuneration for our employees. But of course, we will see what the future shows. Currently, we have no plans about the reduction of staff and any potential decrease of remuneration but we see many other possibilities to optimize costs.

When it comes to additional support from the government, there is a very thriving cooperation between regulators and banks. This concerns regulatory requirements and support for businesses. And fiscal operation is developed together with the National Bank of Poland, the KNF. Twice a week, we hold meetings, where we comment all the material issues for this sector. The KNF, financial supervision authority, is very active as they are supporting us with -- in the dialogue with other regulators as well.

When it comes to any additional support, well, we are talking about the banking tax, of course. And for -- and about any potential other solutions, of course, we would like to limit the tax when it comes to new exposures and the exposures that are related to aid programs. But all in all, we think that the programs, the shield, the programs developed by BGK, have appropriate response to that situation. Of course, we are going to see what happens in the future.

These programs are targeted not only at our customers but also at us. Of course, we have to be very flexible in our reactions. We are quite fast in changing our systems, and we are fully aware of the fact that we need to be speedy here, we need to be quick, and we need to be a distributor of these aid funds. In fact, we are a transmission bond between companies and the government.

When it comes to repayment fees, I have the data already. The question was, how does the number of the applications regarding the repayment suite translate into the percentage of the portfolio? So as of the end of March, mortgages and cash loans was some 4%. And it has grown to some 10% at -- and in SMEs, currently, it is some 20%. It used to be 10%.

Coming back to provisions. The provision of PLN 119 million is related to Santander Bank Polska or SCB? This is Santander Bank Polska. It stems from the division of provision. So to a large extent, business corporate banking and SME.

[Agnieszka Dowzycka, executive]

And one more question concerning provisions. I will find it, let me find it.

And in the meantime, I will mention the question concerning that cut in interest rate and our approach to that.

[Michal Gajewski, executive]

I must say that for some time already, even prior to the pandemic, we have been conducting a research in the Santander Group, and there are several markets where we report negative interest rates. So we were looking at reactions of our colleagues on these markets where the interest rates are negative, how these markets behave. So this is not only the matter of the recent week. We already had some plans of preparing ourselves to such cuts in interest rates. Of course, all this happened faster than we had expected and the situation accelerated a little bit, but we have a plan in place. We are not beginning the situation with carte blanche. We have some experience of our colleagues, for instance, from Spain, who are acting in this environment very efficiently.

[Agnieszka Dowzycka, executive]

And there was a question that is related to risk charge? It has fees included. Even if we neglect this PLN 119 million, the costs are high and the guidance was PLN 80 million.

[Michal Gajewski, executive]

So I must say again that we are not providing a new guidance in this environment right now.

On the Slide #22, which shows risk charge, if we exclude PLN 119 million, cost of risk is up by 3 bps. And at the same time, I'd like to underline the fact that we had a one-off, big one-off, in Corporate Banking. In other lines, when it comes to the quality of the portfolio, in the first quarter, we didn't record any significant changes. Of course, the situation may change in the second quarter. So we will see what happens.

[Agnieszka Dowzycka, executive]

And coming back to questions concerning the principal, in the first quarter, has anything been included in the calculation of principal when it comes to the income of 2019? Was there any other factor that influence RWA?

[Michal Gajewski, executive]

So we were publishing everything on an ongoing basis. Recommendation of the government is to have 50% of income in the reserve principal and to leave the -- to lease the remaining part in the undistributed profit. When it comes to RWA, there was a significant impact of the FX rate because all the FX mortgages were influenced by the FX rate.

[Agnieszka Dowzycka, executive]

So there is a serious cost this additional PLN 119 million worth of provision. Does it relate to Santander Consumer Bank and Santander Bank Polska?

[Michal Gajewski, executive]

We have already said that. So the initial analysis points out to higher risk in corporate. So the majority of that provision was raised in these segments. So we've already entered how many applications we received for the repayment fees we have.

And I think I answered all the questions. Agnieszka, are there anymore?

[Agnieszka Dowzycka, executive]

Last question have just come in. The revision of model, what sort of impact will it have on the provision?

[Michal Gajewski, executive]

We will see the macro projections at the end of the second quarter. We will see what the risk is in particular accounts, and then we'll see what the impact is. I understand there are many questions that I thought driving at the same, what is the guidance for the provisioning for 2020? But we've said the scale of uncertainty, starting at macro and going to micro, is so large that we're not going to give you any guidance today.

[Agnieszka Dowzycka, executive]

Okay. So we've answered all the questions. So I think we can close the question-and-answer session.

Sorry, I think I just reread one of the questions, and I think I've provided the wrong answer. The question is whether we included profit to the capital for 2019?

[Michal Gajewski, executive]

We got kind of an approval for that, and we did. And we included that in the -- one of our current reports. So yes, affirmative. The answer to that question is affirmative.

[Agnieszka Dowzycka, executive]

Okay. So we don't have any more questions. So I think we can close this presentation. If you have any questions, any doubt, please contact us by phone or by e-mail. Thank you very much.

[Michal Gajewski, executive]

Thank you very much and stay safe. See you or hear you next time.

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