Santander Bank Polska SA

WSE:SPL

Earnings Call Transcript 2019-Q3

[Agnieszka Dowzycka, executive]

I would like to welcome everybody at our meeting at which we discuss the financial performance over 3 quarters in 2019. Together with me is Michal Gajewski, CEO; Maciej Reluga, CFO; Carlos Polaino-Izquierdo, the Key Financial Controller of the group; and Wojciech Skalski, who is in charge of the reporting in the bank. My name is Agnieszka Dowzycka, and I'm in charge of Investor Relations.

Michal, over to you.

[Michal Gajewski, executive]

Before we start discussing financial performance, let me outline briefly some other developments since our last meeting that is in quarter 3.

Let me start with saying that at the Extraordinary General Meeting of Shareholders, we approved the division plan of Santander Securities, and we plan to complete the process in quarter 4 this year. This way, we will integrate and harmonize our brokerage business in one entity that is the bank. For customers, that will translate into a better proposition, access to new products and services, investment advisory, international markets; and it will facilitate them to place orders via the mobile application. At this EGM, we were also given consent to sell the separate part of the enterprise, that is our transfer agent services that had a positive impact on our performance in quarter 3.

In September, we also introduced the regulatory part of the PSD2, that is the requirements related to strong authentication. As one of the few banks, we proposed to our customers the so-called trusted device. More than 0.5 million of our customers have already availed of this solution. The next step is to propose the account aggregation service. Next month, we will start the pilot for this solution. And then in quarter 4, we are going to propose a solution to all the customers.

We've also opened the first work of a Santander in Poland. That is a modern branch with co-working space and with a cafe. That's the solution that Santander has across the globe and is in sync with our omnichannel approach and is quite an innovative solution for online distribution.

We are also happy with our victories when it comes to customer service quality. We came first in Newsweek as the most friendly bank for the customer. As the first bank in Poland, we won the Newsweek award [ as what a banker ] within 1 week. We are also happy with the second-place rankings by Forbes. And in Newsweek, that's the first time our bank was awarded so much for our customer service.

Apart from that, there are the developments that raised the emotions that is the judgment of the European Court of Justice of the 3rd of October. Let me just remind you shortly that it refers to Dziubak versus Raiffeisen case in the case. But as we understand it, it does not apply automatically to other court cases on currency indexed loans. In our opinion, our lawyers -- what would be important here would be the stance of the domestic Supreme Court in the extended composition or the stance of the Civil Chamber. And only this will impact the decisions of the Polish Court, not only the European Court of Justice judgment. The cases have been pending or completed after that judgment differ from one another. There's no one interpretation by lawyers or charges. The decisions made are different. So defining the likelihood of losing cases in such proceedings and defining the numbers is practically impossible at this stage. Just like to date, we will monitor the court decision on an ongoing basis and raise provisions accordingly as required under the law, both for the cases with the risk of default or this which can be subject to disputable cases.

When it comes to the small judgment of the European Court of Justice when it -- that is the one on the cost of prepayments made by the customers. Well, there are two things to be said. There are 2 banks in the group that is us and Consumer Bank. So we keep talking. We want to have one approach, so we're discussing with the auditors, the President of the Polish Competition and Consumer Protection Authority. And because we are still in the talks, I can just tell you that the estimates that we've made for quarter 4 are -- refer to the provisions to be created from PLN 100 million to PLN 150 million. That's by way of introduction and development. So let me go to the presentation.

Slide #5. Our balance sheet keeps growing by 22% on the credit side and 21% on the deposit side. Customer funds increased by 19%. As you can see, the assets grew to more than PLN 204 billion. Our market share in the market of loans and deposits is nearly 12%. The number of our customers are growing. Together in the group, we have more than 7 million customers. And that number grows quarter-on-quarter. The branch network keeps shrinking. We sell more and more via electronic channels, and I will tell you more about that in a minute.

On Slide #6. We have financial information. Net interest income after 9 months totaled PLN 4,932,000,000, which represents the growth by more than 17% year-on-year and, thus, thanks to the bigger net balances of interest-bearing assets, and that is also driven by deposits. But I will tell you more about that later.

After 3 quarters, the net fee income totaled PLN 1,586,000,000. On a quarterly basis, that represents the growth of 2%. Total net income at the end of September were more than PLN 7 billion. In quarter 3 alone, we generated PLN 2.4 billion. So the net profit for 3 quarters was PLN 1,584,000,000. And on the underlying basis, the growth was by 10.6%.

We keep our strong capital position. It's well above regulatory requirements. The figures here are still shown before the decision of the KNF, which we received on the 11th of October. And in this decision, the KNF agreed to take some of the profits from the first half of 2019 to the Tier 1. Therefore, the ratio showing here are before that. And the decision was to take to Tier 1, to the bank's profit, PLN 589 million, and that will be shown only next quarter. The return on equity and assets both improved as compared to the previous quarter. Really safe position in terms of liquidity, both for the group, because the loan-to-deposit ratio is 95.2%; and for the bank alone is more than 85%.

Not -- now let me tell you about the business growth, Slide #8. Retail Banking, very clear double-digit growth. In terms of cash loans year-on-year, 78% year-on-year; and quarter-to-quarter only, that's 20%. This year, we have sold PLN 6.4 billion of cash loans. In the other type of activity, which was favorable for us, which is not consumer acquiring sales of insurance, very clear double-digit growth, 44% up year-on-year. Gross written premium in quarter 3 only as high as PLN 152 million. Sales of mutual funds, as you see, this has reached PLN 16.3 million as at the end of September, which is 8% up versus previous year.

Customers have been investing into sub funds of corporate bonds and treasuries. I will talk a couple of words on this. Most of this is done through electronic channels, not through the traditional channels. In respect of electronic channels, 4.3 of million of customers has access to these, 2.5 active users of digital channels. That's increase of 13% year-on-year, including 1.5 million of users of mobile banking, 22 -- 23% up year-on-year. A huge number increase in terms of number of transactions, 84% up year-on-year. We have had very satisfactory sales in online channels last year in terms of cash loans, that was 14%; and in 2019, that's 24%.

Also, after integration with Deutsche Bank, we have promoted the new distribution channel sales through agents. So that's also resulting from the activity. There has been several new solutions in electronic channels, 1 single login for individual and company. That was new solution. Also, a facility to set up your own login for Internet and mobile banking. In SME, that's a segment with a turnover up to PLN 10 million of -- up to PLN 8 million turnover per annum. That's PLN 4.7 billion this year. PLN 13.2 million -- PLN 13.2 billion, 2% up versus the previous quarter.

What we have made available to customers -- and that's not only a financial product. So each [indiscernible], there has been a clear increase in customers' interest. So customers appreciate that they have the service available. Also, smart loan process, a new process available -- made available to customers in the second half of the year where time to cash is shortened significantly. So we have had a lot of positive feedback from customers on this.

Business and corporate banking. We have continued our strategy based on selected sectors. Food and agri, automotive, chemicals, logistics, furniture, packaging, there is also significant increase here. Assets of the segment went up by 16%, that's over PLN 32 billion. Deposits, PLN 27.4 billion, very nice increase in terms of transactions, 23% year-on-year. Transactional banking also posted 5% growth, 5% year-on-year. In global corporate and investment banking, so the highest segment where we've got international companies, we've got Global Heroes, the largest corporations in Poland. Also, double-digit growth with trade financing, 39% year-on-year. Revenues on cash management in syndicated lending, 13% up year-on-year.

We were also a leader of the first consortium of 5 banks who signed the first ESG loan agreement. I'll just remind you that terms and conditions depend on customers' involvement into a sustainable banking. That's the first loan like this in Poland. So we are a responsible bank, and we are environment-friendly bank.

That's the first part of the presentation. So now Maciej will talk about macroeconomic environment.

[Maciej Reluga, executive]

A few slides about macroeconomic environment. I think that I will be short because not much changed when it comes to scenarios that we have expected. The first chart on the top left-hand side, GDP, our outlook remains unchanged. There are negative signals from abroad, and we can see how it impacts our industrial production and exports. But that was a base scenario for us after a strong beginning, roughly around 5%. We -- there will be a decline to 3.3%. That's what we maintain. And we maintain our outlook for upcoming years. Probably at the turn of 2019, it will be below 4%. The average for the year is 3.3%. So slower than in previous year, but still quite decent around the actual potential economic growth.

On the next slide, I'm showing the structure of that growth. Consumption stays strong. The financial condition of consumer is really quite good, a lot of disposable income. And we expect that this will be reflected in the quick growth on consumption and the growth in deposits of households also in 2020. Let us remember that GDP and consumption, the pace of growth in real terms -- are shown in real terms why inflation will actually accelerate a bit. So the nominal growth will be higher. The growth in investments, some slowdown both this year and next year. This year, driven primarily by the public investment. But we are also optimistic about the revival in the private sector that we witnessed at the beginning of this year. Of course, the investments are the follow-up of utilization of the EU subsidies and grants. While the peak of them is in 2020.

Going back to the previous slide and inflation outlook. The outlook is here from our recent report from the beginning of the October. But today, most likely, the food inflation will be a bit lower. And there is a question mark about any potential freeing of electricity prices for retail customers. We assume that it will not be the case. But if it's the case, it will grow the inflation nearly to 4%. This is reflected here. With that taken off, it will be 0.5 percentage point lower. Irrespective whether the inflation be a bit higher or lower, most likely it will not have an impact on interest rates. The base CPI will be in the upward trend. But MPC sends some signals, mixed ones. But nonetheless, we can conclude that irrespective of the request for increasing, cutting and hiking interest rates, the midstream, including the chairman, are for keeping the recent change. That's why our outlook shows the raise this year; and next year and '21 and in '22, most likely remaining unchanged.

Now a couple of words about loans and the deposits in the banking sector. When it comes to loans, well, of course, there is some volatility quarter-on-quarter, month-on-month. And that's driven by FX effect. Having stripped that off, we have a stable 7% growth in loans year-on-year with the quick growth in cash loans, which is reflected in our performance as well with continuing quick growth in mortgage loans, 12% in terms of Polish zloty loans only. In the corporate sector, some slowdown because the growth is around 4%. Next year, we expect that the pace of growth remains as it is, at a 6%, 7% when it comes to the growth in loans overall.

We also expect this year trends to continue next year in deposits because the demand deposits are going to grow by 15.5% and term deposits by 0.5%.

And now about loans and credits in our case. Slide #19, loans and customer funds, a growth by 19% year-on-year. Net assets investment funds growth in the quarter by 3%, but the majority of them are sold in e-channels. This year, the sales volumes are more than PLN 1 billion. PLN 877 million of which was sold via e-channels. Customers prefer e-channels. Deposits alone increased by 21% year-on-year. But the biggest pace of growth was in savings accounts, 42% growth year-on-year. Retail deposits increased by 24%, business ones by 17%. When it comes to term deposits, we can see that they remain stable year-on-year. The growth is noted, first of all, in current accounts and savings accounts.

When it comes to loans, Slide #20 -- no, Slide #18. I lost a slide on loans. Sorry for misleading you. As I've said at the beginning, 22% growth in loans year-on-year. First of all, with the impressive growth in personal loans. When it comes to mortgage loans, they increased by 31%, and there was, at the same time, a decline in the portfolio of Swiss loans by 9%. The cash loans increased by 66%. In the quarter 3 alone, they increased by 7%. In consumer -- Santander Consumer Bank, the growth noted was 11% year-on-year. This is nearly PLN 19 billion. If we take loans -- the growth in loans in Santander Consumer, except for mortgages, it's 16%.

Customer fund is mentioned. How does it translate into net interest margin and net interest income? Slide #20. This is a 17% growth after 9 months, which is PLN 4.93 billion primarily, thanks to higher balances of assets and the growth in current accounts of retail customers. In quarter 3 alone, the net interest income was PLN 1.7 billion and was up 4.8% quarter-on-quarter. It is important that the interest expense keeps growing. That was 5.6% in this quarter while the interest income increased by 2.3%. And we show the improvement in our interest margin by 10 basis points, and that's what we advocated before primarily in the case of our universal bank.

On the asset side, of course, the mix of growth in loans was conducive. We have to remember that the decline in the yields on bonds did not actually contribute positively, but it has impact on our other business activities. When it comes to Santander Consumer Bank, the margin decreased. They're primarily driven by the growth in the sales of car loans, the so-called stock loans, which are bearing very low margins. Despite all that, we had the growth in interest margin by 10 basis points across the group.

Net fees, Slide #21. Quarter-on-quarter, that's 4% up quarter-on-quarter. Capital markets recorded growth fees for management of assets, 3% up quarter-on-quarter. Credit card fees, 8% up. And of course, loan fees, 18% up quarter-on-quarter. So finally, we have reached PLN 544 million in quarter 3.

Now gross income, very good results, 17% up quarter-on-quarter. This translated the gross income stands -- exceeded PLN 7 billion, which is 14% quarter-on-quarter and 2% quarter-on-quarter. That's the sixth quarter in a row where we have recorded over PLN 2 billion quarterly. As you can see, every quarter, we have grown in terms of business. Net interest income for the first time exceeded PLN 1.7 billion in the quarter, which means that the business activity translate into the results. Fee income, the third quarter in a row, exceeded PLN 52 million. Group's results were impacted by one-off events. I have mentioned this permission to the sale of the organized part of the enterprise, Investment Services Centre, that had impact of our result, that increased by PLN 50 million. As I said at the previous meeting, we have had ambition to close the year with even better results in quarter 4.

Next slide, I will hand over to Michal.

[Michal Gajewski, executive]

Thank you very much. I will talk about operating expenses.

As you can see, there is this declining trend. This continues in terms of staff costs of the previous quarters. The dynamics year-on-year with the same period of the previous year was double digits. Now you can see that we are going to 3% year-on-year. In quarterly terms, a decline of 4%.

Administration costs and depreciation. The dynamics is distorted by a IFRS 16, but you can see that this declining trend is persisting. That is 2% down administration costs quarter-on-quarter. As I mentioned previously, cost synergies and cost of integration, this is in line with our expectations. We should reach the levels that we had mentioned for the whole year.

Loan loss provisions and quality of the credit portfolio. Loan loss provisions saw a decline that's minor, PLN 20 million only. In terms of annualized cumulative ratio, this is PLN 250 million down. So this involves a cost of 4 basis points in quarterly terms that the key -- a key driver would be customer -- corporate customers because we've got one-off events here which contributed to the increase. It should be stressed that despite this -- these one-off events, the quality of the credit portfolio in the corporate segment and cost of risk in the segment is still relatively low.

In the remaining segments, in nominal terms, we have had increases, which is resulting from the fact that portfolio is growing. Relatively, there were no significant changes when it comes to other elements.

On the next slide, we show it as a standard despite the fact that in quarter 3, we did not have any NPL sales and no real impact on performance of that when it comes to the banking tax.

Let's probably take a look at the next slide, and you can see a bit higher line for that in quarter 3 because of the provision of PLN 72 million for the banking tax created in quarter 3, which stems from the fact that by the end of closing quarter 3, we were analyzing some selected transactions from the previous periods that might have an impact on the tax liability we have. That was a one-off factor. That was an important element. Another one-off was what the CEO mentioned. That is the sale of our transfer agent services and PLN 50 million are taken from that to the profit and loss account. We are adjusting our performance to make it comparable over the 3 quarters because we have a restructuring provision for collective redundancies and BFG levies. And on that basis, the comparable profit noted a 2-digit growth. And we should emphasize a really good growth of income on core business, both in terms of interest income and fee income, and we can see the declining trend in operating costs quarter-on-quarter.

Okay. The floor is yours.

[Unknown Executive]

Anyone, operator?

[Agnieszka Dowzycka, executive]

No questions?

[Unknown Analyst]

The impact of the small judgment of the Court of Justice of the European Union and the impact on the interest income, the paper headlines were talking about PLN 70 million. What methodology is adopted by the bank in line with the principal use or line on the flow of time? Not the straight-line amortization.

[Unknown Executive]

Well, at the previous meeting with journalists, and that's what we are talking about here, we've been saying that a good indicator or the approximation of that is breaking that, the big figure from PLN 100 million to PLN 150 million. Of course, that's a total historical level of returns and the current ones. If we took into account the quarter 4 alone when we have some uncertainty, but smaller than before, in the quarter 4 alone, we are talking about the PLN 63 million, roughly PLN 20 million in Santander Bank Polska and PLN 40-plus million in Santander Consumer. And that's the breakdown.

[Unknown Analyst]

What would be the sensitivity if we took the line method over time?

[Unknown Executive]

But we have not adopted this approach. We have adopted our method, and we stick to that. And that's what we've had agreed. And it seems we are the only one on the market to have adopted it.

[Unknown Analyst]

Let me reiterate the question referring to the position of the competition and consumer protection authority in small brochure, they pointed to 1 point from the Court of Justice judgment because the court was talking about the proportionality over time.

[Unknown Executive]

We've been talking to the President of the Consumer -- Competition and Consumer Protection Authority. We are discussing the different business models applied in both our banks. And thus, we mentioned that this is the range we adopt for quarter 4. And that's why we think that our methodology is the right one. We might have a difference of opinion, of course.

[Unknown Analyst]

Maybe. Well, let me ask about the cost of risk. Is -- do you upheld your guidance for 80 basis points or maybe some estimations for the next year? What are your expectations?

[Unknown Executive]

Well, the estimations for the next year -- well, maybe we'll give you more details in January. I'll tell you about the risks first. If we assume that in quarter 4, the quarterly growth in the portfolio will be similar to quarter 3. To reach 80 basis points, we would need PLN 150 million as a net balance of provisions, which would be historical low. So the 80 basis points might be a challenge. But from 80 to 85, that is closer to 80, is possible because 85 is PLN 250 million in net balance of provisions for quarter 4, and it's quite realistic.

Talking about the next year, there is some slowdown in economy. And that might be an element that will impact the risk that triggers additional risks. For now, 80 plus to 85, that might be a very indicative guidance.

[Unknown Analyst]

So maybe let me ask a question on very good sales of new cash loans, which was recorded in quarter 3. The CEO mentioned that you have launched a new distribution channel in the form of agents. Can you share the information? What part of this better sales comes through this channel through agents? And the profitability of the channel versus the competitor seems to be lower versus the existing channel.

[Unknown Executive]

Obviously, that was new to us because we didn't use to have this. So this enriched our existing distribution channel. This went through rigorous review, which was done by our risk team. And we came to conclusion that there is some value there. And that the process that we made available to customers, which is also about detailed verification of the leads introduced, that it's proving to work well. The profitability is -- yes, it's lower because we need to share our profit. But as you know, that's one of the product where we have a lot to share. And it's not a significant channel to us, but it brings some -- it adds value because this is a source of introduction of new customers to the bank.

These are not our existing customers. And this is how we make settlements with the network. So I'm not able to say exactly, but we will provide the answer in terms of percentage. This is not material. I just mentioned it as an example, as a benefit, which we got on top of our existing know-how, which we didn't use to have so far as a business benefit after the merger with Deutsche Bank. So we make sure we've got good quality, and this complies with our criteria.

[Unknown Analyst]

Let me ask you about net interest margin and cost of financing that is clear decline in quarter 3. Do you see a new room to even go down? Or is it your target level?

[Unknown Executive]

I said that it would have been even better, I mean NIM overall in total, if it wasn't the stock vehicle loans from Santander Consumer Bank. And we still see the room for improvement there. I'll just add some information.

[Agnieszka Dowzycka, executive]

We've got a question from our listeners, those who watch us from -- participants of this conference who watch us on the Internet.

[Unknown Attendee]

After this 10% bps increase, is there a room for improvement? When would we reach this 80 bps that we mentioned earlier?

[Unknown Executive]

From the point of view -- on one hand, cost of financing and deposits, there is room because the room stems from the fact that there is some maturity profile of the term deposits, and the pricing changes over the time. So not everything took place in quarter 3. So here, there is room for improvement. But on the side of mix of loans, I think, yes. Because I think the mix suggests that there can be improvement in the margin. We should also note one element which impacts asset structure. That's rapid decline in profitability of bonds. So today, they're at -- with lower profitability, lower years than at the beginning of the year than we thought they would be. And the second element which will be impacting starting from quarter 4 and in 2020, this will be the effect of the so-called smaller [indiscernible], which will be adjusted through net interest income.

So this can distort -- so taking into account tendencies, trends in loans and deposit, we think the trends will continue plus SCB. What Michal mentioned, there will be some improvement if it wasn't for the factor in quarter 3.

[Unknown Attendee]

In the context of the small judgment of the EU Court of Justice and the bank's offering, it turns out that the product will not be as profitable as it used to be, as everybody expected. And what is your approach to pricing in this case? Because the expectations are that it will be actually offset by pricing.

[Unknown Executive]

To -- at least to some extent, we've been working on that together with Santander Consumer bank. Of course, our ambition is to bridge that gap. The loss emerging, the gap on the profitability side, of course, we have some ideas. We know how to do it, at least, in part. So we will not leave it as it is.

[Unknown Attendee]

One more question about the banking tax. This provision of PLN 72 million, does it mean that the tax will be higher going forward? What is it? The [ period is for a week. ]

[Unknown Executive]

Well, the estimate for quarter 3 is for the period -- from the beginning of the period when the banking tax was introduced until now. And so it will not be recurring. And what can I say? Most likely that prior to 2019, this effect will be reflected in capitals. And in quarter 3, it will be taken to the profit and loss account. At least in that part, that will refer to 2019. But I think that today, it's too early to talk about that exactly.

[Agnieszka Dowzycka, executive]

Any other questions? There is one question from the Internet.

[Unknown Attendee]

Could you please comment on the relative priorities of organic and inorganic growth going forward? Once the Deutsche Bank core integration is completed, in particular, would you consider looking into the mBank acquisition? Do you see risk to your competitive position if a top 5 bank acquires it?

[Unknown Executive]

Let me answer this like that. I'm always saying that we are not running in the race for the level of assets, but for the financial performance ratios and the satisfaction of our shareholders, customers and employees. That's the race we are in. The strategy of our bank is the one of organic growth. And I think that there is a huge potential for further growth. If we took the number of clients we have, the number of active customers, what are the possibility of cross-sell and growing the relationships we have? What are the possibilities of acquiring customers from other institutions? That's what we focus on. And that's what we want to do, which does not mean that we will not take a look at the emerging opportunities on the market as it was the case for Deutsche Bank because we view that an opportunity. At the moment, we are not considering the purchase mBank.

If there are no more questions, then I would like to thank you very much for coming, and I invite you to the offline, off-site part.

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