Santander Bank Polska SA

WSE:SPL

Earnings Call Transcript 2022-Q3

[Agnieszka Dowzycka, executive]

It's 11 o'clock. So I think that we can start. I'd like to welcome you all at the conference to present the financial results after quarter 3, 2022. Today, we will present Santander Bank Polska financial results after quarter 3 this year.

Together with us, today, we have Michal Gajewski, our CEO; Maciej Reluga, CFO; Wojciech Skalski, responsible for the Financial Accounting Area; and myself, Agnieszka Dowzycka, the Head of Investor Relations at Santander Bank Polska.

Throughout the conference, you can ask questions by writing an e-mail or sending those questions to -- at the link that you have been provided with. So you can ask questions throughout the conference.

And now, let me give the floor to our CEO.

[Michal Gajewski, executive]

Thank you, Agnieszka. Good morning, once again. Welcome at the presentation of the financial results after the 3 quarters of the year. Recent months have been difficult and dynamic. But during that time, we've always been close to our customers and in line in our mission, we help them prosper.

Recently, it has been a more difficult task because the situation of the Polish economy has been very volatile, as you may know. Our product proposal and value we bring to our customers goes in the right direction. We can see that in our profit and loss account and then the balance sheet. However, our profitability has been still affected by many levies that materially impacted our results. If it were not for those additional levies, we could be more optimistic today. Ahead of us, our economic challenges, economic growth slowed down significantly, inflation has been growing and some fiscal measures have been taken on the other hand that do not help reduce the pressure on inflation.

Between January and September, we generated the gross profit of [ PLN 3.004 billion ]. After 9 months, the tax levies for the group were PLN 1.5 billion, including PLN 942 million of corporate income tax and PLN 570 million of the banking tax. Moreover, we had regulatory costs, PLN 269 million from BGF, PLN 446 million for IPS, and PLN 165 million for the Borrowers Support Fund. Altogether, this totals PLN 880 million. So, the total levies after 3 quarters were PLN 2.38 billion.

In quarter 3, our P&L was additionally burdened with the cost of the payment holidays. Initially, we estimated that cost in the group at PLN 1.358 billion. And as we have written in the report, at the end of quarter 4, we'll analyze once again the customers' participation in the program and consider an adjustment of its impact on our net interest income.

And now, let's discuss the details starting from Slide 7. We have over 7.3 million customers, out of which over 3.5 million are digital customers. The bank itself has 5.7 million customers, out of which 3.2 million are digital customers. Year-on-year, the number of digital customers grew by 11% and mobile customers by 13%. Customer deposits totaled PLN 189 billion, grew by 7%. The gross loans portfolio year-on-year also grew by 6% to over PLN 160 billion. Assets grew by 13% year-on-year to PLN 263 billion, and customer funds totaled PLN 202 billion, growing by 3% year-on-year.

Slide 8. I will discuss the results in detail in further slides, but now let me highlight the key items. The group delivered a net profit of PLN 1.896 billion after 3 quarters. And in quarter 3 alone, it was over PLN 279 million. The net interest income was SEK 6.819 billion. The fee income was SEK 1.95 billion, growing by 5% year-on-year, and the total income grew by 35% year-on-year and totaled PLN 8.9 billion.

The [ ROE ] was 9.1%. This ratio was affected by one-off events that I've mentioned. And in the denominator, it was impacted by a capital surplus that for the group was over PLN 10 billion already. The TCR for the group was 18.93% and Tier 1 was at 17%. And let me stress that our capital position is very strong, and our capital ratios are significantly higher than regulatory minimum.

Slide 10, our customers. I already mentioned while discussing Slide 7 that we have over 3.2 million active digital customers, grew by 11% in the retail segment, grew by 9% in SMEs. The number of mobile application users is also growing. Currently, it is almost [ 2.0 million ] customers. And this number grows both in the retail segment by 13% and in SMEs by 12%. And the number of transactions in mobile banking also grew materially. In the retail, we had 57 million transactions. And on September 7, we had a record high number of logins to the mobile application, namely 241,000 logins in a single hour.

And now, a few words about our new products and educational activities at the rest of our customers, Slides 11 and 12. We're developing our offering. We launched a motor insurance comparison engine. We implemented a Bank Guarantee Fund -- BGK-guaranteed home loan without down payments. And for SME customers, we also have a special offering for loans, and we started an online business account campaign. Moreover, we are the only financial institution on the market that introduced automatically renewed bleak checks for business customers. This service was also used to help refugees from Ukraine. We prepared a special solution together with the United Nations High Commissioner for Refugee. And the refugees could pay out special aid using bleak checks.

When it comes to sales, in the retail segment, we sold PLN 1.2 billion worth of mortgage loans. There's a significant decrease both when compared to the previous year and when compared to quarter 2 this year, a drop by 50%. The cash loan sales totaled PLN 2.3 billion. This means an increase by 19% year-on-year and a slight decrease versus the previous quarter. We're selling a lot through retail channel, 55% of sales of cash loan sales. Net sales of investment funds was negative. This results, of course, from volatility and uncertainty on the market, and this also results from the war in Ukraine.

In the SME segment, we can [ both the ] good level of sales of business accounts [indiscernible] were sold. In the digital channel business, deposits grew by 4% in the SME segment, but the lending activity decreased by 5% year-on-year and 11% quarter-on-quarter. And in the corporate banking, we have a high level of credit limit sales. And income from EFX platform also grew quite significantly by 32%. And the corporate and investment banking, transactional banking income grew materially as well as the income from transactions on financial markets, treasury services and trade finance.

And now Slide 15. So let's talk about the balance sheet. As I said, gross loans portfolio grew by 6% year-on-year to over PLN 160 billion. But we can see that the sales is lower, especially in the SME segment. And business banking loans grew by 12% year-on-year, while in the largest corporate segment, loans grew by 30%. The lease portfolio grew by 10% year-on-year. The net sales [indiscernible] but dropped a bit. The factoring subsidiary recorded higher turnover by 17% and its portfolio increased by 9%.

Slide 16, customer deposits grew by 7% and totaled almost PLN 190 billion. Quarter-on-quarter, deposits grew by 3%. And year-on-year, deposits grew by over PLN 12 billion. We can see growth mainly in term deposits and some decreases in current deposits. Term deposits are mainly negotiated deposits and the share of term deposits and total deposits grew to 24% at the end of September. The group can still boast excellent liquidity. The LCR was over 173% for the group. And for the bank alone, it was over 159%. And as I said, investment fund assets dropped due to negative net sales.

Slide #17, profit and loss. Let us start with the net interest income. After 3 quarters, it stood at PLN 6.8 billion. In quarter 3 alone, it was PLN 1.6 billion lower quarter-on-quarter, and I'll tell you about the reasons. One of them were payment holidays, as well the adjustments of PLN 72 million that we posted, given the need to return the [ bridging ] margin as well our fees in the case of prepaid home loans.

Having stripped that off, the net interest income would have grown by 5% quarter-on-quarter. Of course, that also -- all those factors also had an impact on our net interest margin on a quarterly basis, it declined. And let me remind you that in quarter 2, it was at 5.24% and now it decreased to 3.06%. But for those nonrecurring items, it would have grown. You have this very well described in our presentation and in the report. All those factors also were fueled by the growth in interest rates. But there was also growth in interest expense quarter-on-quarter.

Let me remind you that since the beginning of the year, we increased the deposit rate 7x. And in the second half of the year, we actually increased the interest rate on the mobile deposit and on the saving account. So, we are responding to what competitors do. The net interest margin was also impacted by the acceleration of cash loans and corporate loans in previous quarters, but also by higher yields on securities.

Net fee income. Well, we can be very proud of our performance here because we earned PLN 666 million, growing by 7.3% quarter-on-quarter. This was an organic growth because we did not do anything with our fees in the schedule of fees and charges. So, this was fueled by the growth in business purely. And this is well visible when it comes to credit fees -- debit card fees and credit card fees. We can see that reflected in the year-on-year growth, the net fee income in Santander Consumer Bank was higher by 21% quarter-on-quarter, yet year-on-year is 15% lower, driven primarily by the credit cards line.

To recap on income, Slide #19, they totaled PLN 8.9 billion, PLN 2.3 billion of which was earned in quarter 3 alone. This was driven primarily by the cost of the payment holidays posted to our net interest income. Other operating income was lower, because we also sold Aviva, and we received lower dividends, but also it was driven by lower [indiscernible] under the trading and revaluation line and negative gains on other financial instruments.

Costs, Slide #20. Year-on-year, they increased by 29%, driven by regulatory levies, contributions to BGF and Institutional Protection Scheme, Borrowers Protection Fund, inflation and the pay increases. Having stripped off those extraordinary items, the underlying costs would have grown by 6.8% year-on-year, definitely below the inflation.

Staff costs. We introduced salary increases. So, these costs increased by 10% year-on-year with the concurrent decline in the headcount by 1%. In Santander Consumer Bank, the operating costs stood at PLN 364 million, declining by 3% year-on-year. This was also driven by pay increases. So, the staff costs increased year-on-year by 3% in consumer. Of course, we've been watching the market carefully as well as the inflation, and the impact of those factors on our administrative and staff expenses in the near future. But our purpose, first of all, is to maintain our cost effectiveness. So we'll continue along those lines as we've done before.

Provisions, Slide #21. On the consolidated basis, the net balance of provisions was PLN 571 million, which is 33% lower than a year ago. In quarter 3 alone, we posted provisions of PLN 341 million, which is the growth year-on-year by 53%. And the drivers here are primarily the results by Santander Consumer Bank, which posted the net balance of provisions of PLN 90 million. And this was driven by the fact that they sold their debt portfolios in the previous quarters. The fact that we have high interest rates and record high prices of energy, this has an impact on the funding of our clients.

I mentioned already the slowdown in the sales of loans and the growing cost of credit in individual credit portfolios. The factors that impacted our net balance of provisions in quarter 3 are as follows: in the case of personal and SME customers on a quarterly basis, this was actually driven by the slight growth in delinquencies driven by the lower risk assessment after quite a number -- quite a big number of quiet months in mortgage loans, we had the growth [ this year ], however, mitigated by the support actions of the government.

After the -- we also created management provisions for economic uncertainty. And we also raised an additional provision for exposures of those customers who avail of the Borrowers Support Fund of PLN 18 million. We sold some NPL portfolios worth PLN 168 million in capital, which had a positive impact on our performance of PLN 30 million in gross terms. The coverage ratio stayed at 60% with the NPL ratio of the quarter 3 at 4.9%.

Slide #22, I've already mentioned that I outlined to you quite in detail the banking tax and other regulatory levies. And these are actually higher than our net profit for 3 quarters. So, this really gives you a reflection of what is the situation of the banks at the moment.

Slide #23. To sum up our performance, let me tell you that apart from the levies, payment holidays, costs, we also had to [indiscernible] P&L the cost of risk attached to FX mortgages of PLN 1.7 billion. So recapping, let me emphasize, as you can see at the top line, our core business grows well, we performed decently, we keep acquiring new customers. We have good net interest income and net fee income. But the current economic landscape makes us raise provisions. So these are the challenges that we will have to face also in quarter 4.

So thank you very much for your attention, and let's go to questions and answers.

[Agnieszka Dowzycka, executive]

There are a few questions. Maybe let's start with the cost of credit. There are 2 questions. When can we expect the cost of credit at the level of 100 basis points? And how long will it last? And there is a question about the reasons behind the increased cost of credit and retail, whereas in the corporate segment, this cost of credit is still low. Does it result from payment holidays or some other factors?

[Unknown Executive]

So let me reiterate what I said at our first conference, [ plus ] you may have cited that. But I repeated the guidance from the previous quarter, it does not change. So -- in the nearest quarter, the cost of credit may grow, but I cannot tell you when exactly will it happen, whether it be in the quarter 2 or 3. But because the uncertainty today is very high.

But given the economic slowdown that started quite visibly and the stagflation as well as high interest rates that are likely to grow, it is difficult to imagine that the situation of our borrowers will stay the same as in 2021. And we can see that already, so it shouldn't come as a big surprise. And yes, of course, we expect the increase in the cost of credit to about 100 basis points.

In our scenario, we assume that the slowdown will be temporary and that 2023 will see some revival and in quarter 4 2023, we'll see some revival and in quarter 4, 2023, we'll see some growth, but there are some risk factors. For example, the situation around the EU funds and so on. So, we assume that at a certain point, we will witness some growth, and the situation will improve, together with the macroeconomic situation.

So, given our macroeconomic situation today, the uncertainty, as I said, is high. And there was a question about the retail segment and the corporate segment. We have discussed that while presenting the slides, he mentioned 2 things. The first one is credit provisions at Santander Consumer Bank, because the last 2 quarters witnessed negative provisions due to the sale of a portfolio. So from that one factor, we had an increase of PLN 100 million. And as Michal said, the level of arrears is increasing due to the increased cost of living, inflation and the situation of our borrowers and businesses also are affected by inflation by higher cost of cash or energy and the Borrowers Support Fund.

As Michal said, there is an additional provision of PLN 18 million for customers who use the Borrowers Support Fund, and those customers have to be downgraded to Stage 3. So it's a long-term arrears. They are in the performing loan portfolio. We are working on a certain selection of automated downgrades of customers to certain stages, but it will take some time.

[Agnieszka Dowzycka, executive]

Well, let me take the next question about the participation in the payment holidays program. As we wrote in our communication, we assume -- based on our customer service and research that we conducted beforehand, we assume the participation rate at 50% for that period. At the moment, this ratio in quarter 3 was at this level. But of course, the period was shorter. Therefore, the question is about the risk of higher participation rate and higher provisions for that purpose. We will see how it develops.

We've done some research, some surveys, and we are in sync with what we found out in those surveys. But if customers really actually avail more of the program, we will have to revisit that. But I don't think it will be any major growth of the participation rate in the program. And I don't think it should be a major item in our profit and loss in quarter 4. If we thought the risk is there now, we would have done it, but because we think it's okay now. But once we get more data, we will decide whether to revise that or not. Can the bank [ note as ] the rebound in the sales of mortgages in recent months?

[Unknown Executive]

Well, let me answer that. There is no rebound. We changed our proposition adjusting it to the risks related to the sales of mortgage loans. But not all banks actually followed our [ tracks ], I don't want to comment on that. We have some decline in mortgages, that's true. But undoubtedly, this is becoming the product burdened with high and higher risk. And this has to be taken into account in its pricing. And we will see.

[Agnieszka Dowzycka, executive]

Of course, there is also the question of [ more stricter ] requirements imposed by the regulators. So, all these actions led to growing prices of mortgage lending and low sales. Can the banks see that the corporate customers have been saturated with the use of their operating loans, working capital loans?

[Unknown Executive]

Well, it's natural that customers at times like today avail working capital facilities, overdraft. It's natural in such -- the economic situation. So, the sales in this area is really good, especially among larger corporates. But is that well saturated market difficult to assess that. I think that in quarter 4, these products will be on sale and will sell well. Can the management board see any risk of the deposit [indiscernible] factor mentioned by the [indiscernible]. Well, for me, the war is in Ukraine. I cannot envisage anything like that. But some banks, of course, increased deposit rates more aggressively. But I wouldn't share this view of the [indiscernible].

The adjusted results show that the growth of income in quarter 3 will be only 17% quarter-on-quarter, while the cost of funding will grow by 8% quarter-on-quarter. [indiscernible] they talked about that.

[Agnieszka Dowzycka, executive]

When do we expect the pick in interest margin?

[Unknown Executive]

Well, probably that will depend on what is happening globally and in the country. Well, let me go back to what we said a quarter before when we signaled that given the part of the portfolio and assets has not been yet repriced, given the interest rate hikes and the pace that we expected for the deposits to change. We expected further growth in the net interest margin, and this is true. It crystallized in quarter 3. We are talking about [indiscernible] of one-off events and factors. Of course, there's always the impact of the payment holidays. And quarter 4.

Well, we did not have the interest rate hike in October. The September 1 was not such a big one either. So, probably there will be some further growth in net interest income, but there is also the impact of the liability size. But the growth in income and the growth in the cost of funding, this will have its impact on the net interest margin. The impact is a bit delayed. But when we come towards the end of the interest rate hikes, the trend will reverse. But all that depends, of course, on what the MPC will do in November, if they increase the rates and by how much. Assuming theoretically that the interest rates will not grow anymore, then quarter 4 will be the time when we see that peak, as I said a quarter before. But let's agree on that. There are many factors impacting this. So it is difficult to tell you when the peak is going to happen.

Was there a change in [indiscernible] charges, especially when it comes to the [ fiscal banking cards ].

We grew our net interest income quarter-on-quarter without increasing our fees organically, as I said. I would have to check if there were any changes in the banking fees, but I will have that checked and come back to you. Thus, the management board maintains outlook on the [indiscernible] has already outlined that. But the growth in NPL and banking portfolio, what was the reason? We already mentioned that.

[Agnieszka Dowzycka, executive]

How many agreements are covered with payment holidays?

[Unknown Executive]

In terms of value, more or less at the level we assumed, but there is this period shorter than 8 years. And in terms of volume, it's lower and in terms of value it's higher, then it means that payment holidays are used by customers who have more money and they make early repayments with the funds from the payment holidays. But people with lower exposure do not use payment holidays. But we do not have the exact data about that in front of our eyes, so we cannot tell right now.

[Agnieszka Dowzycka, executive]

Do we have any more questions? No. Those were all questions that we received online or via e-mail. So, I think that's it. Okay. So, thank you very much.

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