Santander Bank Polska SA

WSE:SPL

Earnings Call Analysis

Solid Growth and Optimistic Outlook for 2024

Santander Bank Polska reported a strong Q1 2024 with a net profit of PLN 1.565 billion. The net interest income grew by 10%, and total income reached PLN 4.2 billion, up 11%. The bank saw a 7% increase in deposits, a 5% rise in loan portfolios, and a 10% growth in customer funds. The return on equity exceeded 20%. They remain optimistic for the year ahead, despite regulatory cost burdens. The guidance for cost of risk stands between 70-90 bps, with expectations of maintaining stable margins and high profitability.

Strong Profit Growth

Santander Bank Polska delivered a solid performance in Q1 2024, achieving a net profit of PLN 1.565 billion. This reflects the bank's resilient business model and effective cost management, despite significant regulatory costs of nearly PLN 950 million.

Customer Growth

The bank continues to expand its customer base, now serving over 7.5 million customers, including 5 million digital users. This growth is reinforced by a 7% year-on-year increase in deposits, reaching PLN 210 billion.

Loan and Deposit Portfolio

Mortgage loans surged by 52% quarter-over-quarter to PLN 4.4 billion. Retail banking showed strong metrics with 121,000 new personal accounts opened. On the corporate side, loans and deposits also showed healthy growth.

Income and Profitability

Net interest income grew by 10% year-on-year to PLN 3.4 billion, with net fee and commission income also increasing by 10%. Total income for the bank rose by 11%, amounting to PLN 4.2 billion.

Interest Margin Stability

The bank's net interest margin remained stable at 5.38%, reflecting effective balance sheet management despite market fluctuations. The bank has been proactive in hedging to protect against interest rate movements.

Cost Management

Operating costs increased by 8% due to inflation and regulatory contributions. Excluding regulatory costs, the cost growth would have been 7%, aided by investments in digitalization and IT.

Credit Risk

The provision for expected credit losses stood at PLN 232 million, consistent with previous quarters. The cost of credit risk was stable at 0.70%, indicating effective risk management. Non-performing loans (NPL) and their coverage ratio have shown stability.

Capital and Dividend

The bank’s capital ratio saw a slight decrease due to higher risk-weighted assets but remains solid. Santander Bank Polska continues to engage with regulators to ensure robust capital management and dividend distribution.

Legal and Regulatory Challenges

Legal risk costs in Q1 were PLN 170 million, primarily due to settlements related to FX mortgage loans. The bank has been active in negotiating settlements to manage these risks effectively.

Earnings Call Transcript 2024-Q1

[Agnieszka Dowzycka, executive]

[Interpreted]

Welcome to the presentation of results of Santander Bank Polska for the first quarter of 2024. My name is Agnieszka Dowzycka, I'm in charge of Investor Relations at the bank. This presentation will be led by Michal Gajewski, CEO, Maciej Reluga, CFO and Board member. Wojciech Skalski, Financial Controller and also a Board member. After the presentation, we'll have a Q&A that you can ask your questions throughout the presentation. You can send them to my e-mail at e-mail to [e-mail]. We will answer the questions after the presentation. Michal, over to you.

[Michal Gajewski, executive]

[Interpreted]

Hi, ladies and gentlemen, welcome to the presentation. I'll be talking about this slide I have in front of you. I'll give you the numbers so that you can follow. So again, welcome to the presentation of our results after the first 3 months of 2024. We have generated a solid net profit and this allows us to be wholly optimistic about the year going forward. This is the beginning of the journey we have embarked upon. We want to help you achieve more. I am positive that, thanks to the strategy, 2024 will be a great year for our people, our customers and our shareholders. And I mean the social and financial dimensions despite the recurring systemic challenges in the sector.

So let's start with the results in the last quarter, we generated PLN 2.1 billion gross profit. At that time, the tax burden amounted to PLN 697 million. The regulatory costs totaled PLN 280 million on top of that. So in total, we had almost PLN 950 million worth of charges. In quarter 1, we generated a net profit of PLN 1.565 billion.

And moving now to Slide 7 with the highlights. As a group, we serve over 7.5 million customers, of which over 5 million are digital customers. As Santander Bank Polska alone we have 5.9 million customers, and this includes 3.6 million digital customers. And we see those numbers going up nicely, and that includes also the number of our application users. Deposits up 7% year-on-year to reach PLN 210 billion, gross loan portfolio increased by 5% year-on-year to PLN 168 billion, assets up by 9% to PLN 280 million. Customer funds amounted to PLN 230 billion. That's up by 10%.

Slide 8 with key financial results. I will be talking about the details later in my presentation, but I'm not present presenting the highlights. Net profit, PLN 1.565 billion. Net interest income, up 10%; fee income, PLN 729 million. That's up 10% year-on-year, up 3% quarter-over-quarter. Total income to PLN 4.2 billion, that's up by 11%. TCR for the group 17.81%. Return on equity for the group is above 20%. Our capital position remains solid.

We're moving now to Slide 10 to 12. We see the novelties in our offer for our customers. So let's fast forward to Slide 13, where we are progressing selected business data. Retail Banking. We maintained 5.9 million accounts for individual customers. This is 5% more than a year ago. In quarter 1, we opened 121,000 personal customers, year-on-year PLN accounts increased by 3.8%, FX accounts by 12.9%. Loans. Mortgage loans up 52% to reach a total of PLN 4.4 billion at 52% up, as I said, compared to the previous quarter and 5x more than in the same period of 2023. What's worth mentioning the vast majority of those loans were granted based on fixed interest rate. 97% of those loans were based on fixed interest rates.

In the first quarter, we granted cash flows worth PLN 2.5 billion that's more than in the previous quarter by 3.8% and more than in the same quarter of 2023. We still observe higher loan sales through remote channels in quarter 1, it was 71% of all loans. In terms of investment funds, we observe higher number too. SME, in quarter 1, we opened nearly 17,100 business accounts. So more than in the previous quarter, the loan -- SME loans they totaled PLN 1.3 billion, so similar to the same period last year. Business Banking, double-digit growth is from FX, trade finance also in credit and leasing income, we see very good performance. Corporate and Investment Banking growth in capital market [indiscernible] and trade finance of those lines going up nicely.

Slide 15. We're moving on to the balance sheet. I've talked about the growth in loans. We have an annual growth of 5%, 2% quarter-over-quarter, leading recorded a 10% increase. Customer funds deposits going up by PLN 13.1 billion year-over-year. Most of the growth we see on the retail part. The group enjoys an excellent liquidity with LCR much above 200%.

Slide 17, net interest income and margin. The interest income was PLN 3.4 billion, growing by 10% year-on-year. Total reported interest income increased by 7% while interest expense increased by 1%. So what you can see on this slide, the net interest margin for quarter 1, annualized on a quarterly basis was 5.38% and is being stable over the recent few quarters.

Now Slide #18. Net fee and commission income, a robust growth by 10% year-on-year and 3% quarter-on-quarter. Year-on-year, we really see good performance when it comes to asset management fees by 55%, with good growth in insurance fees by 30%, FX fees exceeded by 14% and account fees growing by 5%. Quarter-on-quarter, we also saw good results when it comes to credit fees and FX fees by 11% and 4%, respectively. And we also saw the growth in fees on credit and debit costs, which reflects the activity levels of our customers.

Now Slide #19, income grew by 11% year-on-year, up to PLN 4.2 billion.

Now Slide #20, costs -- operating costs. In quarter 1, these costs were PLN 1.35 billion, growing by 8%. And this is a number as a result of the contribution to the resolution fund of PLN 202 million, and that was higher than what we posted in quarter 1 2023 because it was PLN 184 million. Let me also mention that we received the letter from the banking guarantee fund, which was communicated to the market in our current report. And that was the letter on the final amount of that contribution. We received it only at the end of April. And we -- as we said, we posted PLN 202 million of provision. And in quarter 2, we will make the adjustments to much the requirement imposed by the banking guarantee fund. And the adjustment will be roughly PLN 48 million at the consolidated level. Excluding this bank guarantee fund contributions that costs overall would have grown by 7% year-on-year, primarily driven by inflation, salary reviews and IT costs.

And this is the cost of our digitalization strategy. The staff costs increased by 6% year-on-year despite always growth, the cost-to-income ratio of the group was low at 32.6%, and that's better what we saw in quarter 1 and in the last year, which was over 5%.

Slide 21 provisions. The total provisions for expected credit losses at the consolidated level stood at PLN 232 million. And that was flat on what we saw in quarter 1 2023. The cost of credit risk was 0.70%. In quarter 1, we did not witness any major one-off event that would impact the expected credit loss and provisions for that focus. The key risk in the key is such as the cost of risk, the NPL share and the NPL coverage ratio close to what we saw at the end of 2023. So we've been also observing the stabilization in delinquencies for individual credit portfolio.

When it comes to Slide #22, let me reiterate. The banking tax and regulatory costs were huge, and that they represent a heavy levy for us and to our bottom line.

On Slide 23, when we are summing up our performance, we've already mentioned interest cost and revenue streams, but you can also see the costs related to legal risk. And in quarter 1, these costs were PLN 300 million, of which provision for legal risk represented approximately PLN 170 million and then also cost of settlements. And let me remind you, we signed nearly 10,000 settlements with regard to FX mortgage loans. And the cost of that was PLN 9 million. And the legal costs that are -- apart from that other costs represented PLN 126 million. So recounting that was a good quarter. We actually maintained good net interest income, and we increased our revenue stream. Our fee income also increased. You can see that we have the business momentum. The sales volumes are robust satisfactory, especially when it comes to mortgage loans. And when it comes to our business operations, I think -- we think the whole quarter was really good. And now let's go to questions announced.

[Maciej Reluga, executive]

[Interpreted]

This is Maciej Reluga, Hope you can hear me. Yes, we can. We have -- we've got 2 questions already. Thank you for all of them as usual, we will group them by subject. Some questions are related to Swiss francs and to the cost of risk, other to capital, dividends and the margin. Michal, can we start with Swiss francs.

[Michal Gajewski, executive]

[Interpreted]

Yes, of course.

[Maciej Reluga, executive]

[Interpreted]

I see 3 questions here. the outlook on provisions related to FX loans with cash loans. Are we now creating provisions? Are we in the cycle, what can potentially impact provisioning. And another question is similar. It relates to our expectations to provisions related to Swiss franc loans in 2024 in the modest approach. Third question related to the coverage in 2023. The main assumptions incorporated into the level of coverage.

So I've read out the questions. Let me start by answering the last one. In the annual report for 2023, we are indicating the assumptions behind the level for the calculation, how we create, how we provision those loans, what scenarios we assume what do sensitivity analysis behind the scenario is. In the first quarter of 2024, that model remained unchanged to a large extent. It was continued with the same assumptions. Of course, we have the development of last Thursday. It only happened at the end of the month. The decision of the Supreme Court, we are now analyzing this development. We have not received a justification in writing from the court. So once we receive that once we have run the analysis of that justification, when we look deeper into the previous decisions in the same respect the link between the 2.

We will then analyze our models and assumptions and verify how it impacts our assumption. We will -- only then we will make the relevant adjustment. But in the first quarter of the year, we did not have to take that into consideration. So we use the same assumptions happened in 2023. 78%, now it says here in the question provision coverage over Swiss franc mortgages now it's 80% on the portfolio of Santander Bank Polska is 84%, slightly less coverage on Santander consumer just to be more specific.

In terms of the other question, we're not giving you the guideline or the forecast till the end of the year. The situation here is dynamic. We never actually provided any intensive Swiss franc. I think I have answered both questions.

We have the fourth question in the meantime. The settlement, what are the terms and conditions of the settlement? Is that the KNF offer? Are you going to revisit the settlement terms and conditions?

Well, the KNF offer is a starting point. We have an individual approach. We talk to customers. We treat them individually. We're talking to all the customers, those who have 5 below [indiscernible] and those who haven't. We invite them to do negotiating table. Those have been negotiations between ourselves and the customers. So I can't disclose any more specific information. The KNF offer is the starting point.

Well, thank you. It seems to me that we are done with the fund issue. Of course, if you want to ask anything you still have a chance. Let's move to the next group of questions. There have been a few questions about the net interest margin, for example. Can we have seen a stable NIM for the rest of the year, provided no interest cap. This question was asked twice. There is a question about the cost of the deposits after a clear decline in quarter 1 and there was a question about the scale of hedging and the impact on the net interest margin in 2024 and the years beyond.

Well, let me answer being short, the outlook when it comes to NIM that we showed a quarter ago has not changed. And what we've been saying in previous quarters. We are saying that we try to keep it high and stable, and that's the case if you look at the previous quarters. Well, this is also our basic assumptions that there will be no interest rate hikes in 2024. Of course, there were some slight declines, but the market priced up in at a much higher level, but we think that -- we think that the cuts are rather likely only in 2025. Of course, there are many unknowns that are different scenarios. So if there are no interest costs. Well, we've been increasing our hedging level again the interest rate fluctuations and in order to decrease our sensitivity to interest rate movements. So we've been active in that.

And I'm telling you each quarter, what part of our balance sheet loans is unhedged that we did, depending on market conditions. At the end of quarter 1, the share of loans with the fixed rate increased by another few percentage points and now they account for 35%. When I'm talking about the fixed rate, I'm talking about the effect of the higher sales of such loans because our CFO already mentioned how it looks in quarter 1. So this primarily refers to mortgage loans, and we can now function with a temporary fixed rate that we are quite sensitive to interest rate movement because the vast majority of our -- all the mortgage portfolio was based on floating rate. So then we started to hedge it in terms of rate. But nonetheless, we've been operating in the world of uncertainties at that when we decided to hedge our portfolio against interest rates decline to answer interest rates peak.

So the NIM in the upcoming quarters on the asset side will depend primarily on the asset mix in the new production. Most likely, it should be close to what we saw in quarter 1, though we are counting on the rebound in corporate loans. But we would like to grow even faster than what we saw better than the market. It's probably a bit lower than what we expected before because we were thinking about even 2-digit growth since -- but quarter 1 was not that dynamic. But if there is a rebound, we hope it is also going to happen in the SME segment. And that will impact the mix of our loans and has a positive impact on our margins. When it comes to the cost of deposits we've been -- we've been operating trying to reach threefold objectives. That is a good liquidity of the bank with TCR over to 100%. We would like to offer also good rates to our customers when it comes to the whole mix of saving and investment products. And I think we managed to achieve it.

And of course, we want to keep low cost of deposits overall. And I think that we've been successful in that in quarter 1. I told you quite a lot, but it boils down to the question -- to the answer to the basic question, that most likely, the cost of deposits will be quite stable. But of course, there are many impacts -- many things that have an impact on that.

And the other question that I will answer the cost of credit risk. The outlook for the cost of risk it is realistic to assume that it will be 70 bps in upcoming periods. Well, I think that been result is the same. The outlook does not change. We are showing the cost of credit risk from 70 to 90 bps. So that's been our guidance for longer-term. This 70, 90, it's quite a wide band, but of course, subsequent on this economic cycle, the cycle looks quite good now. We are actually rebounding the standing of our condition -- spending of our customers is quite good. When it comes to corporate customers that, of course, depends whether they operate in the country or abroad. And the prices, of course, are influenced by the domestic demand, while abroad to the demand is not growing quickly.

And I think in the policy column will contribute to the performance on those operating on the Polish market. When it comes to the cost of credit risk. Well, we've quite a borrowing ratio, stable NPL -- stable NPL share coverage, stable non-new NPLs. And that was -- these were the drivers of the 70 bps and we will be actually rather closer to 7% higher. That's shortly about the cost of risk.

[Agnieszka Dowzycka, executive]

[Interpreted]

Maciej, let me now take a few questions about the interest about the 3 loans. And then let me talk about the settlement first. We offered settlements to almost all customers, and this is definitely a sign that we prefer settlement instead of going to court. We don't run business in court. So we definitely want to solve this case in an amicable manner. In terms of 3 loans and the whole case related to this is called [indiscernible] though this results to loans granted after 2011. And this instrument can be used wherever a certain element is not included in the agreement. We are the defendant in about 700 cases. We have 700 loan cases. We have won over 30. We have lost only 3. We have about 40 final and binding decisions of the court. We're seeing legal offices become more involved in the case. It's not the consumers that to the bank in the legal offices that buy claims from consumers.

So consumers we could say are used in this case. The assignment agreement signed by the consumers, give the consumer a very little profit. This law was supposed to protect consumer and absolutely doubt the consumer is not protected and gets very little benefit from that. So will that be intention of the lawmakers. We must remember, this is a national solution. We have not had any cases like this in the European Union. We have prejudicial questions about 3 now sent to the Court of Justice of the European Union. Even a slight infringement gives grants to file a lawsuit. So we are waiting for the decision of the court of justice of the European Union to air on the side of caution, we have changed the terms and conditions of our loan agreements to reduce exposure to the -- to reduce our exposure to potential lawsuits.

We have a group of questions related to capital and dividends. We have a question maybe 2 even. What impacted low capital ratio -- lower capital ratio in the first quarter.

Well nothing happened in the numerator, but into denominator, we have higher risk-weighted assets, and this derives from the higher loans and higher credit risk. We've talked about it already, and we have also a higher number in terms of op risk.

Now dividend. Okay. Before we start with the dividend. There is another question related to Swiss francs and it relates to the loans that have already been cleared, how many of those customers that have cleared along how many are going to court.

Well, the increase is marginal. It's about 5%. So it's mid-single digit definitely. Now extended moratoria. Well, remember, this is a draft bill, this is a bill that needs to be signed by the President still, I can remind you what happened in the previous years that was about PLN 1.6 billion. Looking at debt was underpinning the bill. Well, I would say the less detrimental to the banks. However, we are still running calculation. We're estimating the impact -- well, it will -- the impact will definitely be lower than previously.

[Unknown Executive]

[Interpreted]

The Borrower Support Fund, the utilization in quarter 1, an increase that was 1,900 loans that availed of that support based on the relaxed rules.

Okay. Now let's move to the dividend. But maybe let's close off with those legal issues [indiscernible] and so on. There is a question related to the risk of WIBOR being challenged. But frankly speaking, there are no detailed important issues to be commented on. We don't see that the -- publicly is being said along that the notice said about the WIBOR and the attempt to challenge that rate.

Obviously, this is a voice heard also in courts. But in none of those cases, no verdict and favorable for our bankers issues. For some banks, the verdicts were unfavorable. But the vast maturity of claims to safeguard such requests, so they are turned down by courts. So it's appreciated that WIBOR is we should buy a license entity and supervised by the Polish supervisor. So there is a clarity that is in seeing in compliance with the benchmark regulation.

And let me highlight that the KNF, the Polish supervision authority publicly confirmed in December 2022 and then in July 2023, that this benchmark is okay. And I think they actually learned the lesson from the Swiss franc case. So the public authorities say that this benchmark is fine. It's not only the KNF as the supervisor. Maciej, over to you.

[Maciej Reluga, executive]

[Interpreted]

The capital and dividend. I've already explained why the capital ratio decrease. Now there are 3 questions referring to capital and the dividend. I think there are more the questions to the regulator. The first one says that for the first time, we were allowed to pay a dividend from the dividend reserve and the retained profits. And what were the reasons for paying the special dividend? And what will be the reason said that going forward? And what is the chance for paying more than 75% in profit in upcoming years. And we also have the capital surplus of 300 basis points when this is higher than average for the European Union and what are we going to do with that.

Well, the first question should we really address to the Polish supervision authority. And of course, that will depend what will be the guidance for the years to come. But for years, we've been reiterating that our capital surplus is big and sufficient to let us grow to share it with the shareholders -- and for 2 years in a row, we paid out 100% of the profit, but we will see what the regulator set in the years to come. But there's nothing really against taking an individual approach. Different banks have different levels of surplus. And therefore, they cannot always afford the dividend payouts at the same level. Maybe it's worth stating that we've been consistently conducting the dialogue with the KNF. We've been presenting our stress test.

We are frustrating them -- and thus the payout has been quite high in recent years, and we hope that we will continue acting lives up. And the result of our professional dialogue with the KNF actually is the level of the payments that we make that we can pay out so much.

There are 2 more questions actually the same ones -- and they refer to the long-term financing indicator what it would be at the end of the year-end quarter 1.

Well, at the end of -- we do not have any indicators of the long-term financing. So we are not reporting it. But in terms of the process of consultations, one, it's completed. This ratio will be fully defined. And only then we will be able to report it and to tell you what it might be what it is. Agnieszka, is there anything else in questions.

[Agnieszka Dowzycka, executive]

[Interpreted]

I think we've exhausted all of them with this long-term financing ratios. I haven't received any other.

[Michal Gajewski, executive]

[Interpreted]

Okay, then. Thank you very much, everybody. Thank you from me as well. And let's have a nice break now. Thank you. You're the next time, and thank you for all your questions.

Just one more thing. There was just about the Total Loss Absorbing Capacity, TLAC. So taking a look at Page 29. But maybe there is something that's not really -- well, there we will check it out. There was a question also about what about the levels in the subsequent quarters.

[Maciej Reluga, executive]

[Interpreted]

Well, the decisions on dividend payment are neutral to the capital ratios -- because then value is paid out in the dividend will be the same. So it will be actually this current report we had this year. So it shouldn't have an impact on TLAC and other capital ratio. So thank you very much once again.

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