Santander Bank Polska SA

WSE:SPL

Earnings Call Transcript 2023-Q1

[Agnieszka Dowzycka, executive]

Good morning, everyone. Agnieszka Dowzycka, speaking. I'm the Director for Investor Relations in Santander Bank Poland. I'd like to welcome you at the presentation of the financial results after Q1 2023.Together with me, we have Michal Gajewski, our CEO; Maciej Reluga, our CFO; Wojciech Skalski, Head of Financial Accounting area. And feel free to ask questions during our presentation so that we could answer them after the presentation is over. And you can ask questions via the link provided to you or by sending the questions directly to me via e-mail.And now let me hand over to our CEO, Michal Gajewski.

[Michal Gajewski, executive]

Good morning. Michal Gajewski speaking. Welcome at the presentation of the financial results after the first quarter of the year. We can be optimistic after that period, but we should remember that economic, geopolitical and systemic risks still remain with us. And as a sector, we must focus on building our capital that could be used for development of the economy and financing key projects like those connected with energy transformation.Despite the challenges, I'd like to highlight that we conduct our business based on sound foundations, effectively delivering our mission of helping our customers prosper. We have proved on many levels that our business model works well and brings the desired effect, which is visible in our performance after Q1.At the end of March, we recorded a gross profit of PLN1.656 billion. At the same time, the tax burden was PLN635 million, whereas the total regulatory costs amounted to additional PLN48 million. We closed Q1 with a solid net profit of PLN1,192 million.So let's go to Slide 7. As a group, we provide services to over 7.4 million customers, out of which over 4 million are digital customers. The bank itself has 5.7 million customers, out of which 3.4 million are digital customers. Year-on-year, the number of digital customers grew by over 7% and mobile customers by 10%.Customer deposits totaled PLN197 billion, grew by 5% year-on-year. The gross loans portfolio grew by 3% to over PLN161 billion. Assets grew by 5% year-on-year. Customer funds totaled PLN211 billion, growing by 5% year-on-year as well.On Slide 8, we can see a few pieces of information about key financial results. I would like to highlight the key items. The net profit after Q1 was PLN1.192 billion. Net interest income was PLN3.092 billion. Net fee income was PLN662 million and remained at a similar level when compared to the previous year. Total income was PLN3.7 billion.TCR for the group was over 21%. Tier 1 was 19.39%. Those are retrospective indicators, meaning they are showed in line with the EBA reporting standard. The return on equity for the group was 12.4%. Our capital position is very strong. The surplus at the bank level is PLN14 billion. This allows us to continue our growth and address different risk factors that could occur in the quarters to come.On Slide 10, I will briefly present our figures about customers. We have 3.4 million active digital customers. We recorded growth in every segment. And currently, we have over 2.5 million digital customers. The number of customers also translates into the growth in mobile banking transactions. In Q1, we had almost 64 million transactions in retail. This means a growth by 31% year-on-year.We are developing our product proposal. You can see that on slides 11 and 12. We also support education of our customers. And the key highlights from those slides, for individual customers we introduced a fully remote process of applying for a mortgage and providing mortgage statements. For SMEs, we implemented an option of checking the cost of photovoltaic investments at a dedicated website and we introduced new functions in the CLD lending tool for corporate customers.Let's now go to Slide 13, growth in lending. Let's start with retail banking. In Q1, we sold mortgage loans worth PLN780 million. When compared to the previous quarter, this means a significant growth by 20% and especially since March, we have seen a rebound in the market. Cash loan sales totaled PLN2.3 billion. On an annual basis, this translates to an increase by 8%. We can see a growing popularity of remote channels in Q1, along the remote channels accounted for 63% of sales.We recorded some activity in terms of investment funds. Santander TFI assets totaled PLN13.4 billion. In the SME segment, we sold over 19,000 business accounts and the majority was sold via digital channels. Quarter-on-quarter loan sales grew by 13%, but year-on-year loan sales dropped by 1%. In Business Banking, we had very good performance in the factoring and trade finance. And we also recorded a significant growth in credit limit sales and EFX platform. And in Corporate & Investment Banking, we recorded a material growth of income from productions in credit markets and income from trade finance services.Let's go to Slide 15, gross loans. As I said, we recorded a growth by 3%. On a stand-alone basis in the bank, it grew by 2%. And in Santander Consumer, grew by 5%. I have already mentioned retail and SME segments. And in Business Banking, loans grew by 6%, while under largest company segment, the loans grew by 11% year-on-year. The lease portfolio grew by 10%, a very good level. The value of net sales was PLN1.8 billion.We recorded a good performance in factoring, and our factoring subsidiary recorded a growth in the turnover by 21%. Customer deposits grew by 5% year-on-year and totaled over PLN187 billion.Year-on-year deposits grew by almost PLN10 billion. We can see a growth in term deposits and a decrease in current deposits. But overall, we are recording a growth. The group can still boast excellent liquidity. The consolidated LCR was over 190% at the end of March. So very strong liquidity position.Slide #17, net interest income and margin. Net interest income in Q1 was PLN3.1 billion, 9% better than in the previous quarter. But let us remember that there were some one-off factors included, first of all, the cost of payment holidays in Q4 of PLN186 million. Looking on these one-offs, the net interest income in Q1 increased by 2.4% compared to Q4 2022.As you can see on the slide, the reported annualized interest margin total value was 5.4%, growing by 12 basis points compared to the adjusted margin for Q4 adjusted by those one-offs that I mentioned. And the key focus that impacted the net interest margin, first of all, the posting of one-offs and the growth of interest income by 7% quarter-on-quarter and [ slower ] growth in interest expense of 3%.Now let's talk about fees, Slide #18. The net fee income, PLN652 million, just like a year ago. Year-on-year, we've had really good growth in fees succession and credit fees, up 21%. Debit card fees up 35% and credit card fees 3% up year-on-year. So compared to the previous quarter that net fee income increased by 7%. Santander Consumer Bank saw the decline in the fee income compared to the previous quarter and year. And this was primarily driven by the credit card line and the introduction of a new limit for noninterest expense.Slide #19. Total income grew by 25% year-on-year, 7% quarter-on-quarter. Of course, this was determined by a really good performance under interest fee income lines. When it comes to income on other operations, we had lower outturn because we were posting the cost of settlements with customers. And in Q1, this was PLN186 million. Of course, these were the settlements with customers who had FX mortgage loans.Stripping it off, other income stood at PLN175 million and were driven by the good trading results and revaluation that increased, thanks to our higher activity on the international market -- interbank market, sorry. And this was also driven by higher gains on other financial instruments and other operating costs -- other operating income.And now costs. Total costs year-on-year increased by 6%, driven primarily by the estimated cost of contributions to the resolution fund. And we posted PLN184.5 million of the group for that purpose. In Q1, 2022, it was PLN222 million. Without those salaries, the costs of operations for the group increased by 20%, driven primarily by the cost of using IT systems, third-party services and high inflation. Staff costs increased by 24% year-on-year, driven by the salary adjustments and the bonuses we paid for good performance recorded in 2022.The overall operating costs grew by 3% year-on-year and 12% quarter-on-quarter. And this was driven primarily by the cost of telecommunication fees, IT costs and third-party services. In Santander Consumer Bank, operating costs in Q1 stood at PLN148 million, growing by 4% year-on-year and 31% quarter-on-quarter. Staff costs in Santander Consumer increased by 7% year-on-year and by 13% quarter-on-quarter. The cost of operations and Santander Consumer Bank decreased by 2%.The costs paid to BFG by Santander Consumer Bank totaled PLN22 million. In the first quarter last year, it was nearly PLN30 million. But of course, we -- now that we are aware of what is happening on the market, we know what's the impact on the inflation, and we realize that this will continue to exert pressure on the administrative expenses and staff costs. Of course, we would like to keep our cost income ratios at sound levels, but also to offer our people competitive pay and to attract the best talent.Let us move to Slide #21, provisions. In Q1, the net balance of provisions on consolidated level was PLN233 million, and it was nearly twice as high as in Q1 2022 compared to Q4 2022, the net balance of provisions decreased by 28%. Amidst high interest rate environment and high inflation, we saw the impact on that on our customers spending. In Q1, we observed further slowdown in the growth of the loan portfolio and the growing cost of risk in individual portfolios.When it comes to the retail customers' portfolio, we saw the growth in past due payments compared to the previous quarter. In the mortgage portfolio, the risk of new entries to the NPLs was in part mitigated by the available support to the customers. Additionally, we updated the LTV parameter for mortgage loans, which had a positive impact on the net balance of provisions of PLN5.5 million.When it comes to the SME portfolio, we had a stable level of past due payments and downgrades to the NPLs. And the corporate portfolio, there were no major downgrades to the NPL portfolio, but we were gradually topping our provisions because of the deteriorating ratings and risk parameters in the performing portfolio.We sold the NPL portfolio worth PLN279 million in principal, which had a positive impact on our bottom line at PLN39 million. And in Santander Consumer Bank, we sold the portfolio worth PLN195 million with positive impact of PLN40 million. We have a safe NPL coverage ratio which is 58%, while the NPL level at the end of March was 4.8%.Slide #22, I've already mentioned the banking tax and regulatory costs. Well, PLN634 million in tax gathered in Q1, PLN439 million of that is corporate income tax and PLN195 million in banking tax, regulatory cost PLN198 million.So summing up our performance on Slide #23. I think that this is really good performance. But of course, they are impacted by the costs related to legal risk attached to FX mortgage loans. Apart from the cost of set of banks that I've already mentioned before, the burden related legal risk for that portfolio was PLN287 million. But let me emphasize that our core business goes very well. It's really sound. We are pursuing our mission. We are gaining new customers, supporting the existing ones. And even though the current economic landscape does not make us overly optimistic, our business model is working well and this brings the expected results. So let's go to the questions-and-answer session.

[Unknown Executive]

Yes. We have some questions already. Does the bank take any actions to reduce sensitivity of net interest income before the interest rate cuts? So let me share our view on interest rate cuts because the scale of interest rate cuts projection changes. Now it's even -- the current even shows 150 basis points for 2 years. So this is a relatively flat -- slope curve. And we believe that this valuation is quite aggressive given the fact that -- the core inflation as it is. And at the end of the year, we project it to be at around 10%. So the projections for 1 digit inflation are not valid because the cumulative inflation in the first month is about 5% already. So we believe that the inflation will persist. And there may be some slight economic revival during the year. So there is no headroom for inflation to drop and no headroom for interest rate cuts. Nevertheless, we know that there is the risk of interest rate cuts that will come sooner or later. And then the report for Q4, we could see first activities in this area, and we continue hedging our balance sheet and reducing the sensitivity to interest rate cuts. And we believe that this strategy will be continued depending on the situation on the market. There was a second question about the active number. The number of active home loan agreements to Swiss francs exchange rate. We can answer that because we have 23,800 agreements for the bank and 12,400 for SCB. So altogether, this is [ 36,230 ] exactly. And the rest of the question or the other question is, what is the volume of paid off loan -- home loan agreement, titles they have? And what is the legal risk attached. I don't think we provided that information earlier. And what's the percentage of those agreements have been brought to call, how many lawsuits we have? Well, I'm not ready to tell you how many inactive agreements have been paid in Swiss francs. Frankly speaking, I cannot tell you.And in the meantime, we'll try to find out when we will be answering the subsequent questions. The number of losses 9,600 and how many of these refer to the loans that have been paid off? Okay. We will look for the answer, and we have another question. What is the outlook for the cost of risk across the year, across 2023? Well, let me start with the outlook that we provided to you before, indicated the gradual growth in the cost of risk across the area, with the risk that it might even go up to 100 basis points. After Q1, what is the situation? We have a growth year-on-year. That's quite obvious. Quarter-on-quarter, we have a decline, but let us remember that this was the effect of the sales of the NPL portfolio. And this impact was bigger than in the previous quarters, and the slides are presented on Slide 22. And we saw the bigger portfolio with the bigger impact on the bottom line.We keep our opinion that the delayed effects of the slowdown in the economy of high interest rates and high inflation that has been materializing. And as a result, there will be a growth in the cost of risk in the upcoming quarters, and that's our view. But the fact is that in Q1, irrespective of the sales of the loan -- of the debt portfolio, we saw quite a good situation even though we entered the recession. And taking into account the figures for the first quarter, we can actually reduce our indicative cost of risk. Probably it would not be 100 basis points, maybe closer to 90 bps, and we will see how it develops in Q2.We've been monitoring it quite closely. And we will see how other risks will materialize. So all in all, we expect some growth in credit -- the cost of credit risk. But its scale most likely is to be slower than we thought before. Coverage by provision fee is 50%, 48.4%. And for the bank -- for the bank alone, it is a little bit over 50%. What happened with the cost of card fees in Q1? Michal, I think that you referred to that while discussing the slide about fees. This is due to the SCB mainly.Those are all the questions I received. We have 2 more questions. So let me read them out. Does the management Board thinks that a provision for Swiss franc loans may be raised one-off if the European Court of Justice takes a relevant decision? And does the bank expect another issue for MREL? So far, we have received the opinion of the advocate general, and this is not a binding opinion. The judgment made after that opinion in the case of getting shows that judges take a different approach than the one presented in the opinion of the advocate general. So of course, this is a very theoretical thinking. We cannot say that this nonbinding opinion will be followed by all judges. So we cannot refer to that at that moment because it is too early.And the second question, as regards to the MREL issue, we have a surplus over PLN12 billion or so, not only in the case of MREL, but also TLAC. And this is -- this applies to the call option for securities that are rolled over sooner than in 1 year. We had EUR500 million, and we exercised the call option and issuing senior nonpreferred securities of PLN2 billion at 990 basis points. This is quite a good result given the situation in the market.Another security that matures in November is EUR750 million. And we will decide whether we will roll it over or not. It depends on the balance sheet growth and what happens with the capital and so on. But of course, we are ready to do this issue and to replace those securities with a new one. Well, our margin, I think for quarter is we adjusted off the effect of payment holidays, and we are within the band of 30 basis point fluctuations whether the deposit basis was better and depending on the expense to which we sell new portfolio or rollover cash loans at a higher rate. This is also driven by the level of growing over the bonds, which have been maturing at higher maturities.Somebody had meeting with the journalist [Indiscernible] on NIM plateau. And this is -- well, of course, the plateau is not just flat. There are some ups and downs. But so in the middle of the year, we might see some peaks, but we can say that peak was in Q3, but we'll really see how it goes. It will depend on 2 things, the sales of new loan volumes and the situation on the sector. And when it comes to deposits, but our liquidity position lets us to stick to our strategy and active management of our reliability staff.And that is -- let me go back to this question that was asked that we could not answer straightforward and -- inactive portfolio. Information I will see that -- maybe it will not make you happy. But if you look at the number of the lawsuits and it's provided in the report somewhat, the inactive portfolio accounts for some 10% of that. So we can say that the rates of [ seats ] for the other portfolio is very low.

[Wojciech Skalski, executive]

It's Wojciech Skalski here. Let me add that we have some information only from Santander Bank Polska without Santander Consumer, the number of such agreements, and this is indicative. You have to give us some room for tolerance. [ 52,000 ] agreements are inactive. And that's the value of roughly PLN7 billion, so to add to that. And as I've said, this is just Santander Bank Polska. The percentages, as I mentioned, were only deferring to Santander Bank Polska.

[Unknown Executive]

Thank you, Wojciech. Agnieszka, I can't see any other questions. Can you see any other?

[Agnieszka Dowzycka, executive]

No. I don't think there are any more questions. And I think that we can close off. But of course, if there are any other questions, I encourage you to send us e-mails, so we will clarify and explain things as required on an ongoing basis. Thank you very much. Goodbye.[Statements in English on this transcript were spoken by an interpreter present on the live call.]