Santander Bank Polska SA

WSE:SPL

Earnings Call Transcript 2020-Q3

[Agnieszka Dowzycka, executive]

Good morning, everybody. My name is Agnieszka Dowzycka, and I am in charge of Investor Relations.

I would like to welcome you on the presentation of the financial results for the third quarter of 2020. Together with, Michal Gajewski, CEO of the Bank; Maciej Reluga, CFO; and Wojciech Skalski, responsible for the management accounting area.

Mr. President, before I hand over to you, I would like to mention one technical fact. Please send your question to my e-mail address or use the link that is published on the website. Please send your questions during the presentation.

CEO, over to you.

[Michal Gajewski, executive]

Thank you, Agnieszka.

Welcome at the presentation of financial results of the Santander Group Polska. This is yet another time when we are holding this meeting remotely, but unfortunately, again, the times continue to be extraordinary and the situation is still unusual. We will see how the pandemic has affected our behaviors and habits. Now the key aspects we focus on is safety, mobile solutions and digital channels. We are continuously adjusting our business to all that. This is why the development of digitization and business transformation will be our priorities in the upcoming months.

We want our sales processes to be safe and easy, both from the perspective of employee and customer. We are still doing our best to ensure all kinds of support in the context of the result of the pandemic. We can see -- in the third quarter, we could see that the customers again started to visit branches. In the third quarter, we reported a footfall at -- 95% of the footfall reported at the pre-pandemic times. And this is why safety of our people and customers in branches is, for us, of utmost importance.

Of course, you can find out more about our initiatives and actions related to social safety at the beginning of our presentation, so I strongly encourage you to have a look at the initial slides. But today's meeting is more about the financial performance of the first quarter. This is why I would like us to go straight to the Slide #13.

As you can see on the slide, as a group, so including Santander Consumer Bank, we are providing services to 7.2 million customers, out of which 5.2 million customers in Santander Bank Polska. Together with SCB, we have 2.9 million digital customers. Our deposit portfolio has increased by 10% year-on-year to reach PLN 167 billion. Gross loans portfolio is over PLN 148 billion. Assets stood at PLN 222.8 billion, up by 9% year-on-year.

Now Slide #14. Before I go on to comment on the financial performance in greater detail, I wish to remind you that over 3 quarters, we have had several events that affected the underlying profit, and of course, the details of that are available in the presentation and the report.

When talking about the underlying profit, we take into account the stable level of bank guarantee fund contribution, and we also exclude the following from the profit after 3 quarters: cost of returns of fees on the early repaid consumer loans; effects of the so-called small and big European Court of Justice; additional loan loss provisions that we raised in the previous quarters.

So if we take into consideration all the above, in the first 3 quarters, attributable profit stood at PLN 956 million and was 40% lower year-on-year. In underlying terms, it was 18% lower. In quarter 3 alone, net profit was at PLN 479 million, up by 57% versus quarter 2, mainly because of higher fee income, lower loan loss provision and higher income on the sales of bonds.

Net interest income after 3 quarters stood at 4.5 -- PLN 4.48 billion and was 9% lower year-on-year. The result was, of course, negatively affected by interest rate cuts and lower demand for credit. In quarter 3 alone, net interest income was at PLN 1.38 billion and it was 5% lower quarter-on-quarter due to the fully visible effect of interest rate cuts. Fee income in quarter 3 was record high and reached PLN 552.7 million. After 3 quarters, fee income was at PLN 1.58 billion and was at a similar level as the one reported the year before.

In comparison to quarter 2, fee income was up by 12%. Total net profit stood at PLN 6.46 billion, and in underlying terms, was down by 6.7% year-on-year. However, if we compare quarter 3 to quarter 2, total net profit went up by 2.5%.

Return on equity in underlying terms was 8.9%. It's worth adding that apart from the generated profit that is in the numerator, the denominator is also very important because in the denominator, we have profits retained in the previous year, in line with the KNF recommendation for the entire sector. We couldn't pay out the dividend, unfortunately. And return on assets is at the level of 1%. We have a very strong capital position. Our Tier 1 capital was at 16.76 million -- 16.76% I'm sorry, and this year at 18.7%.

Now let us go to Slide #16, our customers in numbers. On the slide, you can see the customers' activity broken down by segments. Of course, the activity of customers was on the rise in the third quarter. The volumes are on the rise, especially in digital channels, and the number of mobile app and online banking users was on the rise as well.

The number of logins to electronic banking and total banking went up by 6% versus the first quarter, and transactionality was up by 13%. In mobile only, it went up by 30% versus the pre-pandemic times. Also, in the business segment, we can see that the number of users of digital channels has been on the rise. Multichannel communication center is also as busy as it was before the outbreak of the pandemic, but we can see that the share of video calls has increased. Before the pandemic in January and February, it stood at 2%, and today, it is at 6%.

Let us move to Slide #17. We've been developing our proposition. Of course, you can see the details on the slides, but talking about new things. Parents can open an account for their children online and provide them with a card, and the whole verification process is fully remote for companies. We provided eWadia. That is a digital guarantee, thanks to which, companies can participate in tenders, auctions without extending their own funds for bid bonds.

And we also provided a solution for clients who lost their regular earnings due to the pandemic. We're actually providing them contained cancellation of card fees for 3 months. Let us move to the next slide, and let's look at the selected sales data.

Slowly but surely, we are rebounding our sales, especially as compared to the quarter 2. Of course, we are still missing volumes to be at the pre-pandemic levels, but in quarter 3, the sales of cash loans stood at PLN 1.4 billion. If we compare that to the last year, it is lower, but the quarter 3 was definitely better than quarter 2. And so the growth against the quarter 2 rose by 13.5%.

The sales over the remote channel is growing, and in quarter 3, it accounted for 45%. And this is 80% more than in quarter 1. The net sales of investment funds stood at PLN 1.6 billion at the end of September. This is 2.5x higher than a year ago. In quarter 3, the sales of net funds was the highest on the market, but we also had a lot of redemptions done. But the value of net assets increased by 21% since the close of the market in March this year.

In the segment of SMEs, we increased financing to companies by 2% year-on-year and stands at PLN 13.7 billion. And we also have 14,000 new clients and new business accounts in business banking. And as a result of the pandemic as well as a result of the support available from different sources, the demand for loans declined. The sales of loans decreased by 8% year-on-year, while the number of transactions overall compared to quarter 2 increased by 10%.

The number of FX transactions done on the e-FX platform increased by 9% year-on-year.

Corporate and investment banking. Really good performance, higher by 122% when it comes to the income from transactions in financial markets, while the income from cash management and liquidity services increased by 45%. The income from issuance and the purchase of shares increased 67%. And we actually participated in the IPO of Allegro at the Warsaw Stock Exchange, being the joint book-runner and co-offering agent.

Let us move to the balance sheet Slide #21, the details with regard to loans. The portfolio of loans in gross terms increased by 1% year-on-year for Santander Bank Polska. While for Santander Consumer Bank, it decreased by 5%. On a consolidated level, it decreased marginally, standing at PLN 148.2 million.

Both mortgage loans, cash loans and SME loans have been growing slowly but surely, and if we compare it quarter-on-quarter, there have been no major changes. But the balance of business loans is lower than in the previous year. We have not prepared the balances since the previous quarter. Some of the clients used the support they were provided with to repay their loans.

In Santander Consumer Bank, excluding mortgages, decreased by 4% year-on-year.

Slide #22, customer funds. Customer deposits went up by 10% to almost PLN 167 million. The improvement was mainly thanks to business deposits, up by 16% in quarterly terms, which was up by 2%; and retail deposits increased by 6%. Here, there were no changes quarter-on-quarter. Of course, the great majority of aid from financial sheets and other aid tool was offered after the first half of the year, and this is why in quarter 3, we no longer see a significant increase in deposits.

Assets under management went up by 10 -- by 11% year-on-year. And this was due to the outflow of funds from TFI and assets repricing at the beginning of the pandemic. In quarter 3 alone, funds went up by 11%.

Now let us go to the P&L. After 3 quarters, fee income went down to -- by 9.2% year-on-year and reached over PLN 4.47 billion. The lower income stands among others from 3 interest rate cuts. Also, the situation was affected by a slowdown in lending, especially in the SME segment. In quarter 3 alone, net interest income was at PLN 1.38 billion and went down by 5.2%. Quarterly dynamics of net interest income decreased by 12% over quarter 2.

The main reason for the decrease was the portfolio of individual and corporate receivables portfolios that have been affected by the interest rate cut. Interest costs were going down faster than revenues, and in quarterly terms, they went down by 44%. This results from the continuation of the transfer of balance of term deposits to current accounts in reaction to interest rate cuts and changes in the deposit pricing offer.

In quarterly terms, the annualized net interest margin for quarter 3 was at 2.66% and was lower than in the previous quarter when it was at 2.88%. The main factors that influenced net interest income and net interest margin in quarter 3 were interest rate cuts, decelerated lending as a result of the pandemic; flexible management of the pricing offer; and lower profitability of bonds with the concurrent increase of the portfolio.

Now the next slide. Fee income in quarter 3 alone was record high and reached PLN 553 million. This was 12% higher versus quarter 2. Fee income year-to-date stood at PLN 1.58 billion and was at the same level as last year. Taking into consideration the effects of the pandemic, this is quite a decent result, I must say.

Fees went up in almost all categories. The most visible growth was reported in brokerage fees up by 64% year-on-year, credit fees up by 12% year-on-year, debit card up by 5% year-on-year, and insurance fees up by 2% year-on-year. Fee income in Santander Consumer Bank in the first 3 quarters went up by 39% as a result of a one-off related to the adjustment of provisioning models for return of insurance fees. And we were also talking about that at the previous conference. In quarter 3 alone, the fee income went up in SCB significantly versus quarter 2.

Now Slide #25. Total income after 3 quarters stood at PLN 6.46 billion, and in underlying terms, went up by (sic) [ was down ] 6.7% year-on-year. In quarter 3 alone, total income was at PLN 2.13 billion and was higher by 2.5% over quarter 2. This increase in the quarter was related to a decent fee income and higher profit from the sales of treasury bonds.

Now Slide #26, costs. As you can see, administrative expenses are under tight control. And after excluding regulatory costs, administrative costs are at 13% lower year-on-year. Staff costs are lower than in the previous quarters, or they are not as low as in quarter 2. We continue working on a number of cost initiatives and review investment expenditures.

After 3 quarters, the loan loss provisions were PLN 1.3 billion compared to PLN 956 million a year ago. The key drivers of the net provision balance in quarter 3 were as follows. It was the fact that the NPL portfolio was close to what we saw in the previous quarter. The coverage of the nonperforming loans increased by 2% -- 2 percentage points. In quarter 3, we raised provisions worth PLN 359 million, which is a decrease by 25% quarter-on-quarter.

The share of credit exposures in areas decreased by nearly 1/4 as compared to the peak observed in this year. We keep monitoring the risk on an ongoing basis, especially when it comes to the group of clients affected by the pandemic and those clients who availed of the support programs.

When it comes to the quality of the portfolio that -- of customers that avail of the support from different sources, we will have more and more clarity with respect to that quality in the coming months and weeks when the customers return to the regular repayments. We are focusing on this part of the portfolio that has the highest risk after the expiry of the moratorium, but we've been preparing our action plans in this respect to support these clients as much as possible.

We have kept the quality of provisions as a result of the adjustment of our models, and that's PLN 151.3 million. This shows because there is still uncertainty as to the further development, especially when it comes to the scale of the slowdown, its time horizon and the impact of expiring support programs.

Let us move to Slide #28, the regulatory costs. They increased by 36% and stood at PLN 389 million. Last year, it was PLN 285 million. This year, altogether, the total charge for the bank -- on the foot of the banking tax stood at PLN 429 million. For our bank, it was PLN 470 million, while for Santander Consumer Bank, PLN 32 million. In quarter 3 alone, we saw only a small portfolio of NPLs in Santander Consumer Bank. So the good news is that this market still starts to rebound, but it was a marginal sale without any impact on our figures.

Summarizing the quarter. Despite the difficult market and challenges related to the pandemic, the varying quarters and uncertainty prevailing on the market, it seems that we've been adapting to the new normal quite well. I think that we performed in the recent 3 months quite well, especially compared to difficult quarter 2.

If we were to compare ourselves to what we yielded last year, it does not make any sense. In quarter 3 alone makes us to sing along optimistic lines going forward. This is so because we had the growth in income up to PLN 2.1 billion. We had record-high fee income. We had a decline in operating costs, and the profit after tax that stood at PLN 480 million, which is more than we earned in the entire first half of the year.

Our sales performance is rebounding. The number of transactions is on the rise. We have new solutions and processes for our clients, the digital ones. Both our branches, our multichannel communication center and the headquarters are working full steam ahead. We keep working from offices and from home, so our performance in quarter 3 make us optimistic about the upcoming future. They were really good. They make us think optimistically, yet the challenges in the last quarter of the year are definitely ahead of us. But nonetheless, I'm staying optimistic.

So now, over to you for the Q&A session.

[Agnieszka Dowzycka, executive]

There are a number of questions already that we have in our mailbox, so we'll try to take them one by one.

The first question regards the fee income under loans and whether there were any one-offs in the third quarter.

[Maciej Reluga, executive]

So I would like to comment on -- Michal has said already, in SCB, quarter-on-quarter, we have a major growth, and we -- this also stems from the increase in business quarter-on-quarter. But there is also a one-off intermediary fee and -- fee for partners. So this is some PLN 20 million.

[Agnieszka Dowzycka, executive]

Another question. It's about over-liquidity and deposits. I'm sorry for my hesitation. So the inflow of deposits and growing over liquidity and their influence on net interest margin and whether we can see any need for introducing any fees and charges.

[Maciej Reluga, executive]

So if it is inflow of deposits of our customers to whom we provide services, and we have a wide range of services, like savings and investment facilities for them, we are there to support our customers. And the influence on NIM does not mean that all this doesn't bring income. So even it's at -- deposit is at 0, the reinvestment at a low yield is okay. Even if the low -- if the yield is low, it doesn't mean that it doesn't make sense.

But one element that is significant to mention is that it's -- some big deposit balance sheet. We know that some banks have introduced fees for that in the market. And if some customers transfer their deposits to our bank just in order to avoid these fees with other banks, maybe there will be a possibility and there will be a need to react.

[Agnieszka Dowzycka, executive]

The next question refers to the payment holidays, and there are a couple of questions referring to that.

One question is, do the customers are more and more interested in the solution proposed by the government? Will they be reported as stage 3?

[Michal Gajewski, executive]

I would say that at the end of quarter 3 within the moratorium, we had a lot of that. Then there was a slight increase, but we'll see really after quarter 4. But comparing the moratorium that we propose all year, the scale was different, so the figures are different.

When it comes to stage 3, there are still discussions underway. We know that -- we can say that if somebody avails of the moratorium of the payment fees, they are losing their job. This is a sustainable loss of income than stage 3. But the question is whether that's permanent or not. And the auditors are still considering that and we will be really having to decide on that when closing quarter 4.

How does portfolio with moratoria payment fees be expiring? There are 2 aspects to that. The first thing is, within the report in the presentation, you can see the number of clients that the bank recognized in the course of the pandemic. For Santander Bank Polska, you can see that on the -- Page 27 of the report was the breakdown into individual portfolios.

To show you the scale of the support for the clients, looking at the percentage of the portfolio altogether, it was in the order of 19%, the grace periods in place in the first 3 quarters. But the expiries started for good in September. If you looked at the active grace period, now it's 6%.

But for example, for mortgage portfolio, the grace periods accounted for 11.6%, while the active grace periods account for less than 3%. So they are phasing out, and October is the month when it is really taking place. And we can see customers restoring their repayments. They're doing quite well, but we'll be giving you more details in quarter 4. But this is happening just now at the turn of quarter 3 and 4, and the restoration of repayments looks quite well.

[Agnieszka Dowzycka, executive]

And we have some questions regarding Swiss franc mortgages. This is a question in English in order to update on the current situation and the latest trends, when it comes to the number of sources and the probability and the potential verdict of the Supreme Court.

[Michal Gajewski, executive]

We will see what happens, whether the ruling of the Supreme Court will somehow unify and align the line of verdict. And when it comes to the data, the figures, the number of lawsuits, they increased PLN 689 million in quarter 3. In quarter 2, we had PLN 900 million of them. So this PLN 689 million is divided into 500 -- some PLN 500 million to the bank, and some 200 -- around PLN 200 million for Santander Consumer Bank.

In fact, when it comes to the probability and the number of cases, everything is included in the model. You can see that we haven't changed the portfolio provision. We have maintained it. And this shows that the probability regarding the line of verdict does not deviate from the number in terms of the model. The number of losses has not deviated much from the portfolio provision, and of course, there was no significant change in the interest rate -- FX rate.

And since the reality has not deviated much from the model assumptions, there was no need to update anything. But of course, in the fourth quarter, we are going to reduce the parameters, the assumptions and the model itself. So we will see what the results will be, but of course, it does not change anything. We're continuing our actions.

We are receiving individual cases, and we raised provisions for that. So we are acting in line with the methodology that we presented in the first quarter when the portfolio provision did not change and the individual provisions were raised.

We have PLN 11 million of provisions for Santander Bank Polska, and PLN 18 million for Santander Bank Polska. And the previous quarter in Santander Bank Polska, we've got PLN 34 million of provisions of individual -- for individual cases.

[Agnieszka Dowzycka, executive]

And there is a question about the cost of risk and the quality of assets. Is it possible that we will see a rebound in the cost of risk and given the pandemic and the growing restrictions? And how does it change the outlook for 2021?

So if we're reading slowly, but there are some questions in English.

[Michal Gajewski, executive]

First, I know -- I will not tell you if that changes the outlook for 2021, and we have not provided you with any guidance for 2021 at all yet. Probably, we'll give after quarter 4, but there will be definitely a lot of developments in quarter 4. Quarter 3 was positive, but we have to wait for the 1 or 2 months of full repayments to find out if the quality of the portfolio continues to be all right.

Well, but let me emphasize that quarter 4 will be still worse, especially in macroeconomic terms, than what we thought before. But quarter 2 didn't have such a decline, as expected, and quarter 3 showed quite a nice rebound, while GDP will be lower by 3% probably at the end of the year.

The question is how long this will last, and we don't have an answer. We keep watching the situation. And I think that I wouldn't provide you any guidance either for quarter 4 or next year given the level of uncertainty. We will be closing the year showing you our performance for quarter 4 in January, and then we will be able to tell you more about the next year.

[Agnieszka Dowzycka, executive]

There's also questions related to dividend.

[Michal Gajewski, executive]

Of course, it is more about the recommendation of our supervisor. We want to pay out the dividend, both from the retained profit and from the profit of this year. There is no change. We have a very visible capital surplus. All the ratios are at very good levels. And as I have said, we think that this is our obligation to distribute the profit, so we keep this strategy in place.

A question related to Swiss francs and provisions related to other banks. I don't think it's good commenting on that because the question is about low -- lack of provisions in our bank versus the other banks which report very high provisions. The portfolio provision is modified. It's the reality. This is from what has been assumed in the model. And I don't know what our peers have assumed in their models and what the results are for them, so...

[Agnieszka Dowzycka, executive]

There is a question about costs and the fluctuations in cost. Does the bank create the bonuses -- the provision for bonuses?

[Michal Gajewski, executive]

I think we explained that last quarter. We released a provision of 4 additional staff cost, and that's why the staff costs were lower. But in quarter 3, these costs are higher. We don't have such a one-off. But we can see that we have the same situation as in previous quarters, and this reflects the slowdown in business. The -- that's the bank pre-provisions for bonus for 2021, if yes, then at a lower level because the performance is worse.

[Agnieszka Dowzycka, executive]

There is also question, shall we expect more provisions for staff restructuring, headcount restructuring?

[Michal Gajewski, executive]

We confirm that no decisions have been taken. And if we take some decisions, this will be disclosed. Dividend, the outlook for costs.

I don't know if there are any other questions that we haven't answered. Any other issue, Agnieszka? Anything else that you -- that we might have skipped?

[Agnieszka Dowzycka, executive]

No. Really, everything has been covered. No more questions.

[Michal Gajewski, executive]

It happened that we skipped something because we have quite an inflow of the questions. We will be in touch, and we will provide you with answers, unless there is something really outstanding. So please let us know quickly by sending an e-mail to Agnieszka, if there is something really that cannot wait with getting the answer later than sooner.

Okay, Agnieszka, are there any other questions?

[Agnieszka Dowzycka, executive]

Yes, I just received one from Michal Konarski. The question about NIM. I'm sorry, I didn't get that. This was a question regarding NIM in the third quarter. Is there the trough in the third quarter?

[Michal Gajewski, executive]

So I would say, in general, yes, but there are many factors behind that. So it's difficult to provide a very strict guidance. Because the question is, what will be the demand right now -- demand for credit? We expected a rebound. And a rebound was reported, but only in retail, not really in the corporate segment. So we will see what happens in the fourth quarter. We will see whether the rebound continues or not.

Also, the second wave of the pandemic will -- may cause another wave of NBP, BGK and other actions. This is yet another factor that may negatively influence the situation. And on the liabilities side, as we have mentioned, we limited the financing cost. This is also visible in the third quarter already, but some effects will also be -- will only be available over the fourth quarter.

In Santander Consumer Bank, what is worth reminding is that there are longer maturity dates for term deposits, so the change is happening right now, and in some cases, in the first quarter next year. So there is repricing when it comes to mass financing. So this may influence the NIM, on the positive note.

So I think that we may risk a suggestion that we have reached the trough, and in the upcoming quarters, there may be some stabilization observed because of the NIM has already bottomed.

It was the impact of the one-off, and it comes to the fee income of Santander Consumer Bank. This was a one-off fee from the intermediary. The scale of that was several million -- roughly PLN 20 million.

[Agnieszka Dowzycka, executive]

The very last question that was asked. There are no more, so that's all.

[Michal Gajewski, executive]

Okay, then. Thank you very much for your attendance, and we'll see you next time on the publication of the performance for the next quarter. Goodbye.