Santander Bank Polska SA

WSE:SPL

Earnings Call Transcript 2021-Q3

[Agnieszka Dowzycka, executive]

Good morning. It's 11:00. My name is Agnieszka Dowzycka. I'm responsible for Investor Relations in Santander Bank Polska. I'd like to welcome you today at the presentation of the financial results '21. Together with us today Michal Gajewski, CEO; Maciej Reluga, CFO; and Wojciech Skalski responsible for the financial accounting area.

During the presentation, you can ask questions via the Internet or you can send the questions to my e-mail, [e-mail]. And after the presentation, we will answer the questions. And now let me hand over to Michal Gajewski.

Welcome at the presentation of the financial results after 3 quarters of the year. From the point of view of the core banking business, I can say that this period was successful. There are a few challenges in the sector, but we stay optimistic. We expect that in the next quarters, business loan volumes will still grow, especially in the corporate segment. But before I go to the results, I would like to most with some success. Yesterday, we received 2 awards. We have been running success, and the business friendly bank by Forbes and we are also ranked third in friendly bank ranking by Newsweek in the traditional banking category. It is very important for us that we recognize and that our activities and services for retail and SME customers are visible on the market. Recently, we have also received a Financial Provider of the year award. And now let's discuss Slide #7 with the results.

As a group, we provide services to over 7 million customers, out of which PLN 5.4 million is serviced by Santander Bank Polska. Together with Santander Consumer, we have over 3 million digital customers. The deposits portfolio grew by 6% year-on-year in total PLN 177 billion. The gross loan portfolio grew by 2% year-on-year to nearly PLN 152 billion. Assets grew by 5% year-on-year and totaled nearly PLN 234 billion. Customer funds grew by 9% year-on-year, and this is currently PLN 197 billion.

And now Slide #8. In quarter 3 alone, we generated a net profit of PLN 544 million. That is twice as much as in the previous quarter when compared to quarter 3 of the previous year, the net profit grew by 13%. After 3 quarters year-to-date, the profit attributable to shareholders was over PLN 918 million. On comparative basis, so excluding a few factors, assuming a fixed level of DGF contribution, the attributable profit grew by 22% year-on-year. You may find the details about comparative data in the presentation and in the report. The net interest income in quarter 3 alone was PLN 1.44 billion. And when compared to quarter 3 of the previous year it was better by 4%. It was PLN 4.2 billion year-to-date and was lower by 5% year-on-year.

The net fee income in quarter 3 was PLN 635 million. It grew by 15% when compared to the quarter 3 last year and by 6% quarter-on-quarter. Year-to-date, the net fee income was PLN 1.85 billion, it increased by 17% year-on-year, which is a very solid result. Total income of the 3 quarters was PLN 6.6 billion. It increased by 3% year-on-year and slightly dropped on a quarterly basis. When compared to quarter 3 last year, the income grew by 5.4%. ROA was 4.1% and on a comparative basis, 8.4%. And the group has a significant capital surplus of PLN 12 billion while the bank has got over PLN 13 billion, which of course, significantly impact ROA. At the end of September, we had a very strong capital position much above the requirement. Our Tier 1 was over 18% and TCR was over 20%.

Slide 10. Let's talk about our customers now. The number of digital customers is growing. As you can see, we already have 2.6 million digital customers. And 327,000 among SMEs and 20,000 among large corporates. The number of mobile users is also on the rise, currently over 2 million. The number of mobile banking transactions is also growing. In quarter 3, we had over 40 million of retail transactions and 3.5 million SME transactions.

[Unknown Executive]

We have been continuing expanding our offerings and that's reflected on Slide 11 and 12. Let me just mention a couple of new things. The first thing is that since July, we have been issuing ecofriendly cards made in 85% of recycled plastic. We already issued mainly [ 400,000 ] such cards. We also launched a module in our mobile application that enables easy savings called My goals after 2 months, the number of the registered users was more than 100,000. We also launched the AutoPay service for individual and business clients. For SMEs, we introduced the text message authorization of the product. We've been actively supporting batch corporate focus on international expansion.

We keep organizing webinars for clients interested in exports to U.K. and our Santander Trade Portal expansion is Bank of China and Dubai Islamic Banks joins the trade Alliance.

Now let's discuss Slide #13. Let's talk about retail banking. Here, we posted mortgage loan sales, reaching an all-time high after 3 quarters. After 3 quarters, we sold mortgages growth of PLN 6.4 billion growth and in the quarter 3 alone, it was PLN 0.8 billion. Compared to quarter 3 2020, we sold 5 as many mortgage loans as before. In quarter 3, in September alone, it was nearly PLN 1 billion, and this is the best monthly outturn in the history. After 3 quarters, we sold PLN 5.3 billion worth of cash loans and quarter fee loan, it was PLN 2 billion. And so far, this has been the best result.

On a year-on-year basis, this is more by 37% and quarter-on-quarter by 8%. We keep posting high sales through digital remote channels. And after 3 quarters this reached 44%. The sales flow buy-by-click accounted for 16% of the total sales of cash flow. The net sales of investment fund at the end of September stood at PLN 2.9 billion, in the quarter fee alone, it was PLN 338 million, which was one of the highest on the market. The assets of managed by Santander TFI at the end of quarter 3 totaled PLN 19.2 billion. In the SME segment, first of all, we saw really good sales of leasing as their sales increased here by 21% quarter-on-quarter, totaling PLN 915 million. In quarter fee alone, the sales of credit products stayed flat as before.

In Business Banking, we posted 32% higher sales of credit limit. We also posted good results when it comes to services for exports. The turnover on the FX platform increased by 41%, while the utilization of the trade finance limits increased by 43%. In Corporate and Investment Banking, we saw robust growth in the capital market revenues. We also posted higher revenues from advisory at the time of mergers and acquisitions. We are also actively participating in transforming the energy sector by financing photovoltaic funds.

[Agnieszka Dowzycka, executive]

Now let's talk about balance sheet, Slide 15. Gross loan portfolio grew by 3% for us in Santander Consumer, it dropped by 5%. As a result, at the consolidated level, as I said, we have a 2% increase year-on-year. That is almost PLN 152 billion. I have already talked about loans in the retail segment, while and the SME segment, we recorded a growth in the loan portfolio by 6% year-on-year, which results to a large extent from higher drawdown of existing credit lines and business banking loans have been at a similar level as in the previous year for us. And the largest company segment, the loans grew by 6% year-on-year. And I mentioned the good performance of leasing, we have a growth by 12% in the leasing portfolio. The net sales was PLN 5 billion, and it grew by 34% year-on-year. The Factoring subsidiary recorded also good results, its portfolio increased by 23% year-on-year, up to PLN 6.4 billion. We are optimistic about the upcoming months.

In the retail segment, the double-digit growth in mortgage loans is likely to continue while in the consumer loans, we will continue this positive trend observed in previous quarters. When it comes to business loans, we can see further improvement, new sales of loans is already at the prepandemic level. Weak growth in the balance sheet in this segment results from higher repayments than usually. According to our current macroeconomic projections, total loans in the sector will grow by 4.9%, including by 3% for businesses.

Slide 16, customer deposits grew by 6% year-on-year. This results from annual growth in retail deposits by 6% and business deposits by 7%. At the end of September, this was over PLN 177 billion. Year-on-year deposits grew by over PLN 10 billion. We can see material growth in savings accounts and current accounts and at the same time, the term deposits are on the decrease. At the end of quarter 3, investment fund budgets were higher by 1/3 year-on-year. And in quarter 3 alone, there was an increase by 3% quarter-on-quarter.

Slide 17, net interest income and net interest margin. The net interest income in quarter 3 alone was PLN 1.44 billion. And when compared to quarter 3 of the previous year, it was better by 4%. Year-to-date, it was PLN 4.2 billion and was lower by 5% year-on-year. In quarter 3, the dynamics of interest income was 1.9%. Whereas interest expenses dropped by 4.8%. Annualized net interest margin at the end of September grew by 5 basis points to 2.64%. This results from 3 factors: a decrease in interest expenses on deposits due to further decreasing the volume of time deposits. Secondly, acceleration in the cash loan, mortgage loan and corporate loan sales and also a decrease in the value of investments in debt securities, which mitigated the negative impact of this portfolio on the net interest margin.

As we said before, when it comes to the net interest margin and net interest income, quarter 1 has been the weakest so far, but there has been a progress. And we hope that the interest margin will improve in next quarters as well if we refer to our current report after the Monetary Policy Council's decision on interest rate hike. We published a report, and we've stated that the impact of the interest rate hike on our net interest income can range from PLN 300 million to PLN 350 million in our bank and from PLN 35 million to PLN 45 million in Santander Consumer. Of course, this is -- those are the figures for the next 12 months assuming a steady balance sheet.

Net fee income, we can say that we have been successful in this line. In quarter 3, we had a growth by 15% to PLN 635 million when compared to quarter 3. And year-to-date, the net fee income was 1.85 billion. It increased by 17%. The good news is that higher fees are visible across all business lines, both in retail and business banking.

[Unknown Executive]

Total income of the 3 quarters stayed at PLN 6.3 billion, increasing by 3% year-on-year. On a quarterly basis, they slightly declined. In the quarter fee alone, the total income totaled PLN 2.25 billion and as compared to the [ third ] quarter last year, they increased by 5.4%. We are happy with the fact that the higher income results from the higher activity of our business clients.

Slide #20, operating costs. In quarter 3, total cost declined by 25% compared to quarter 2 and by 16% as compared to the third quarter last year. So cost those compared to the previous quarter and to the first quarter last year remained flat. Administrative expenses increased by 16% as compared to quarter 2 and by 2.2% as compared to quarter 3 last year, given the higher business activity.

Other operating costs declined by 65% quarter-on-quarter. One of the reasons were lower provisions for legal risk related to FX mortgages. As you know, in quarter 3, we created provisions for that [indiscernible] reports are available in the report. Another reason impacting that level were the FX differences.

Now let's discuss Slide #21. Net balance of provisions on the consolidated basis was lower by 38% year-on-year and totaled PLN 224 million. Altogether, since the beginning of the year, the net balance of provisions was PLN 850 million, which is lower by 35%. This is the effect of the stabilization and lower cost of risk in individual loan portfolios, including retail and SME. The key reasons that impacting the good balance of provisions are as follows: One of them is the stable share of past-due credit exposures and the low level of existing NPLs. Another reason after a lot of uncertainty related to economic situation of the corporate clients, we observed the improvement in the rating.

Thanks to that, we actually decreased our allowances for the performing portfolio. On the other hand, we have to reclassify some cases to the NPL portfolio and thus increase our provisions by PLN 56 million. Additionally, in quarter 3, we sold the NPL portfolios from the retail and business segments. The total amount was PLN 330 million worth of principal. And this has quarter-on-quarter, we've been performing better and better, and this is just reflected in the growth in the net interest income by 2.3% quarter-on-quarter, solid net balance of -- solid fee income higher by 6% quarter-on-quarter and the growth in the net profit by 13% as compared to quarter 3 2020. We've been building consistently our business with lots of determination, and we do hope to see higher pace of lending growth in particular. The some macroeconomic data are good in our opinion, which makes us optimistic when it comes to the upcoming quarter and about good prospects. So the floor is yours and you're welcome to ask questions.

[Agnieszka Dowzycka, executive]

I currently have no questions. I would say, an unusual situation. Let's wait a moment, maybe we will get some questions. We are happy that the content of the presentation and the CEOs speech clarify everything. But let's wait a moment. Yes, there is 1 question, I will read it out. Marta Jezewska ask a question. What Santander's ambition and consumer loan and mortgage loan sales are the levels from quarter 3 sustainable or they resulted from less active players on the market?

So what's the outlook for 2021? What's the outlook on the cost of risk for the next year? And what's the Santander's opinion on keeping the cost of risk for the 9 months? And what will be the impact of all of this on the payment of dividends? What are Santander's plan on settlements in FX mortgages? Are you planning to taking into account the KNF proposal? And the costs seem to not be under pressure if it's possible to keep the level of cost at the same level in next year?

And there were no questions and suddenly, we must discuss the entire P&L account. So that's my set of questions.

So maybe let's start with settlement then cost and then Maciej will discuss the rest. So as a settlement, of course, we are working on that issue. And we are also taking into account the KNF proposal. We are developing our technological solutions together with the KNF, we have a team of IT specialists that works on the process. And if shareholders agree with us, agree to our participation in the program. We want to make sure that everything will run smoothly and the main issue is the connection with the arbitrary court. We have very advanced work on that, but we have not taken the final decision yet. We must have certainty in terms of legal matters because there are a few unknowns.

And there is also this issue whether the settlement should be tax deductible or not. This is a very important aspect in terms of our performance. We are also in an ongoing dialogue with our customers. And we also wait for the decision of the Supreme Court. We also take into account the verdict of the EU Court of Justice, and for example, in the Hungarian case, in our opinion this has not been publicly debated on and off, but in our opinion the first instance court should take into account those 2 recent decisions of the Court of Justice of the European Union.

And this is about the first question, then the cost. Of course, we are looking at the market regularly, we know the pressure on staff costs. We are competing with other companies, especially in the area of technology. We are competing not only against other players in our sector, but we are also competing against fintechs in order to keep our talent within our organization and get new talent from the market. But we think that regulation of staff cost is our business as usual and salary reviews, we are researching every area of staff cost. We have always had very good cost discipline, and we would like to keep that next quarter.

[Unknown Executive]

When it comes to dynamics of the sales of mortgages and consumer loans, well, we would like to maintain it. We would like to keep winning new market shares and to expand our market shares in this area. We can see that we have a good proposition because we've been acquiring more and more customers, new ones for the bank.

So we don't always service products to our internal customers. So we would like to continue this really good upward trend that we saw in the previous quarter. The rest of questions if CFO could take it over. But once we see our -- when we look at the sales of our loans in the prepandemic times, we mainly can see that we can still grow it even more as compared to that period. Now other questions from that...

The outlook for the fee income in the next -- for the next year. We mentioned that a couple of times that in 2021, we actually have witnessed a couple of trends that is the economic revival, which is followed by the growth in net fee income. And the other element impacting that is also the review of our schedules and charges, and that is reflected in our year-to-date net fee income.

Looking at 2022, we should change that this is going to continue, and we believe this is realistic. When it comes to the other element, we will not see so big double-digit growth, but we hope to continue the growth. And we hope for continuing the trends.

Next question. The first is [indiscernible], we maintained at the level it is. We've also mentioned that before, that in 2022, we expect the dividend to the prepandemic level and '21 really goes well for us. Although we will be really to come back to the prepandemic levels, you will see that -- we can see that the quality of loan portfolio is quite good. The first quarter was a bit negative in the sense that this was due to one based loan loss provision created [indiscernible]. If we assume the continuation of the macroeconomic scenario, the provisions should be under control.

And of course, there are a few risk factors. We also have high inflation. So we know that the businesses are capable to transfer the higher cost on to the price of their goods and services. We see the growth in the cost of wages, energy and so on. So we should really take this into account and visit the some growth in higher sensitivity. But all in all, the situation was quite good but I cannot give you any specific figure when it comes to cost of risk. So what we've been saying that -- after that and we should implement that. Next question.

[Agnieszka Dowzycka, executive]

We expect that the lack of offering our mortgage on the customers will impact the dividend payment. The CEO refers to that with respect to the mortgage loans, but the dividend, well, every bank should be approached individually because the Swiss franc mortgage loan portfolio is not so significant because what's more important is the ability to absorb risk and the level of capital. We are able to take into account various risks and still be able to pay the dividend. We are awaiting the supervisory guidelines.

And we discussed the rest of the cost. We received one more question in the meantime. But we've already talked about that the turmoil and the logistics sector, the increase of the energy prices. I think that I discussed that, and we must take that into account, we must take into account sensitivity of individual customers. Expected loss provisions. But there will be more provisions for FX loans. We are analyzing the situation each quarter, and we take a lot of decisions. But in quarter 3, we raised a provision for individual cases. And we plan to review of the model for the next quarter.

And we have a lot of questions in English. So I will translate that. What's the sensitivity on interest rate hike?

So at the bank level, 40 basis points, as we said in the next 12 months, the net interest income would grow by about PLN 300 million. In order to keep that steady balance sheet, we need to change the pricing of deposits because some customers may be more sensitive. But when we look at LCR at about 200, it may be not so easy to keep the balance sheet at the current level and everything depends on the market situation. In our opinion, the key issue is to provide customers with full investment and savings offering.

And next week, the -- maybe -- there may be the next interest rate hike or maybe some time further in the future. so with the next --each next interest rate hike, it is more likely to change deposit pricing, at least at some point. Currently, we're not at that point. And since the interest rate hike, what was the change in the product pricing? There was no change in the product pricing. But on the asset side, if we are talking about the impact of 40 bps on the net interest income in the next 12 months. The number of assets under new pricing was 3 months and 6 months.

[Unknown Executive]

Well, first of all, it's already mentioned. There is 1 more question. What is the current level of provisions for FX mortgage portfolio. Now let me answer this question.

When it comes to the individual provisions, at the end of September, we had PLN 979 million in provisions for that purpose with the breakdown between Santander Bank Polska with PLN 180 million in Santander Consumer. When it comes to the collective provisions for these losses, we had PLN 464 million at the end of September. So altogether, it was PLN 1.2 billion altogether in provisions, though for -- when summing up individual and collective provisions. And continuing on one more issue.

And there was a question about the cost of risk. That was outlined during the presentation, but let me add to that. Provisions raised for the legal risks related to FX mortgage loan portfolio, we had PLN 97 million in quarter 3 alone, PLN 73 million of debt in the bank and PLN 24 million in Santander Consumer. Moreover, the net balance of provision was impacted also by FX differences, and that impacted this level negatively by roughly PLN 40 million.

The net balance of these provisions for the FX mortgage portfolio for the legal risk and the advance net balance of this provision when it comes to FX risk is hedged. So this negative impact of PLN 14 million is mitigated under the FX conversion cost. That is also a question about the partial lease of provisions. While it is a bit more complex, we released provisions. We always released some provisions. This quarter we show it in a higher amount because we released provisions for the denominated loans, both under the collective and individual provisions line after the decision of the Supreme Court. That means that there were no abusive answer clauses. And that was a very important element.

That's not explain the whole issue. But actually here, you can imagine a number of different situations. First of all, closed claims, shifts between individual and transactions. There also might have been some loan repayments. But the main element increasing that -- explaining that increase is that release of provision for those denominated loss. Now we don't have any more questions. That's all what we can see, yes.

Okay then. Thank you very much. And we are available to you if you had any more questions. So have a good day.