Santander Bank Polska SA

WSE:SPL

Earnings Call Analysis

Significant Growth Amid Economic Headwinds

In a challenging environment, the company saw a robust increase in gross profits to PLN 5.3 billion, despite significant regulatory costs totaling PLN 2 billion. Net profit after three quarters reached PLN 3.85 billion, a notable improvement. Customer deposits grew by 11% to over PLN 210 billion, and gross loans saw a 3% uptick. The firm reports a 36% year-on-year rise in net interest income, excluding credit holidays effects. A dynamic 14% growth in app users aligns with the company's digital push, while its capital position remains solid with a TCR of 20.61%. The company anticipates inflation to fall rapidly, and has set aside PLN 300 million for settlements related to Swiss franc mortgage loans. The management is cautiously optimistic for 2024 with disciplined cost management, expecting a positive macro environment and reduced credit risk costs.

Strong Quarter Performance with Interest Income and Business Growth

The bank shared a strong performance report for the quarter, as indicated by improved net interest income and solid income streams. The company's focus on actions that facilitate customer prosperity reflected positively on the bottom line. Upgrades to the mobile application were hinted at, signifying a commitment to enhancing customer experience and interface.

Challenges in Credit Provisioning Amid Economic Situation

The bank's provision totaled PLN 894 million, marking an increase driven by the economic climate and the condition of the loan portfolio. Key factors impacting provision lines included higher delinquencies in retail and stable levels in the SME portfolio. The NPL coverage ratio stood at 59.1%, and a sale of a portion of the non-performing portfolio beneficially impacted the bank's performance by PLN 22 million.

Dividend Distribution and Capital Surplus

The bank's substantial capital surplus of over PLN 12 billion grants it the confidence to assure investors of continued dividend distribution, although conversations with regulators are ongoing. The bank remains committed to its policy of sharing dividends with its shareholders.

Interest Rate Cuts and Net Interest Margin Sensitivity

The sensitivity of the net interest margin to interest rate movements has been communicated, with a 100 basis point change estimated to impact PLN 500 million to PLN 700 million over a 12-month horizon. Changes in fixed and floating rate loan sales, along with proactive deposit pricing in response to interest rate cuts, have been significant factors in managing this sensitivity.

Strategy for Swiss Franc Portfolios & Legal Settlements

The bank has approached settlements for Swiss franc loans proactively, aligning with recommendations from the Polish Financial Supervision Authority, KNF. Approximately one-quarter of the active Swiss franc portfolio has been covered by settlements, with a reported cost of PLN 300 million for the year. The recent rulings in favor of the bank support its settlement strategy over litigation.

Growth and Cost Control Amid Macro-economic Changes

While consumer behavior and financial spending were positively verified despite high CPI and interest rates, the bank is optimistic about 2024 due to signs of economic revival. Operating cost reviews are ongoing, with discipline exercised in this area, acknowledging rising CPI and wage pressures. The outlook for the credit risk cost is optimistic as the macro environment shows signs of improvement.

Earnings Call Transcript 2023-Q3

[Agnieszka Dowzycka, executive]

Hi, ladies and gentlemen. My name is Agnieszka Dowzycka, I'm the in-charge of Investor Relations at Santander Bank Polska. Welcome everyone to the presentation of the results of Santander Bank Polska after the third quarter of 2023. This presentation will be conducted by Michal Gajewski, CEO, and Maciej Reluga, CFO of the bank. We're here with Wojciech Skalski, Financial Controller.Before we start the presentation, please let me remind you that you can ask question online or you can also send them to me directly. The presentation is available at the website of Santander Bank Polska Investor Relations.Michal, over to you.

[Michal Gajewski, executive]

Hi again. Welcome, ladies and gentlemen to the presentation of the results of Santander Bank Polska [ of the ] third quarter of 2023. Let me start by saying that we're consistently delivering our mission, that is to help customers prosper. And as you will shortly see, this is reflected in our results. The results confirm that our business model is robust and we are delivering as planned.As at the end of September, our gross income -- our gross profit was PLN 5.3 billion. The levies over that time they're a significant item. Those levies totaled PLN 2 billion, and that includes [ CRT ] PLN 1.4 billion and banking tax, PLN 587 million. The regulatory burden was an additional PLN 203 million. After 3 quarters, our net profit is PLN 3.850 billion, and in quarter 3 itself, it was PLN 1.5 billion.Let us move on to the slides now. As a group, we serve over 7.5 million customers, out of which, 4.25 million are digital customers. In SBP itself, we have over 508 million customers that includes 305 million digital customers. And year-on-year, we see that number go up 7%. When it comes to app users, the increase is of 14%. Customer deposits over PLN 210 billion, that's up 11% year-on-year. Gross loans, up 3% year-on-year, up to PLN 164 billion; assets up 6%, up to PLN 278 billion. Customer funds, PLN 227 billion. That's up 12% year-on-year.Slide 8 now. Just very shortly, I'll be talking about the performance in detail later. So the group's net profit for the first 9 months is PLN 3.8 billion. Net interest income is over PLN 9.7 billion. That's up by 42% year-on-year. That's net of the credit holidays effect. So if we exclude the credit holidays effect in quarter 3, the increase is of 19% year-on-year.The net fee income was over PLN 2 billion. That's up 3% year-on-year. Total income was PLN 11.8 billion. That's up 33% year-on-year. Solid capital position; group's TCR, 20.61% for the bank. It was 23.96%. Tier 1 was 19.14%. For the bank itself, it was 22.25%. Very important information for the analysts. Group's return on equity was 19.3%.Going forward to slide 10 shortly about the customers, 3.5 million digitally active customers, including 3.1 million retail customers; 7% more year-on-year. We have 2.7 million customers actively using the application. The number of mobile payments is also going up.On slides 11 and 12, we're presenting the new offer and how we support our customers. Let me draw your attention to 3 highlights. The first thing is that we rolled out a new application, and in our opinion, in the feedback we get from the customers also, the app is more intuitive, more user-friendly, and as you know, we're strongly focusing on improving our customers' experience.Almost 2.6 million customers have migrated to the new app. We also implemented BLIK feature for business customers in the app. That's for sole traders. Important change for corporates; we have instant payments in euros. It takes less than 10 seconds to make them.So let's talk about the business dynamics. In retail banking, we maintain 5.8 million individual accounts. This is 6% more than last year. In quarter 3, we opened 132,000 personal accounts. That is 25% more compared to the previous quarter. Year-on-year, the number of personal accounts in PLN went up. The increase was also observed in the FX accounts.In terms of loans in the retail segment, mortgage loan sales, PLN 2.4 billion, that is 45% higher than in the previous quarter. Overall, over 9 months, we sold PLN 4.8 billion worth of mortgage loans. We clearly see customer preference in terms of the fixed rate. In the new production, the share of fixed rate loans were -- loans was 85%. That's in the third quarter. At the moment, in the total mortgage portfolio, the share of fixed rate loans at the end of September, that share was 25.6%.Cash loan sales in quarter 3 was PLN 2.4 billion. That's up 3% year-on-year. We see cash loan sales is on the rise, especially in the digital channels. So here we're observing growing dynamics. More and more customers choose that channel.TFI, net sales in the third quarter was PLN 1.2 billion. Retail assets managed by Santander TFI at the end of quarter 3 were PLN 16.7 billion. Our market share is rising, going up to 10.6%.In total, over 9 months, net sales on investment funds was PLN 3.1 billion. In SMEs, we opened 15,500 business accounts. Half of them were opened in the digital channel. More and more customers choose that way of opening accounts. We opened over 51,000 SMEs accounts. In terms of loans, we have an increase here by 11% year-on-year, more or less comparable to what we saw in the previous quarter.Business banking, good results, good performance. We see growth on the assets and deposits side, higher profitability in transactional banking. And in what refers to investment and corporate banking, we see growing revenues from trade, finance and the credit market.So we'll now be moving to talk about the balance sheet items. Gross loans. As I mentioned, we see growth here of 3% to PLN 164 billion. In -- I've talked already about retail and SME. In SMEs, that growth is 4%. For corporates, that's 18%. Leasing, that's an increase of 10% year-on-year to almost PLN 14 billion. In factory, we have a significant increase, 11%.Customer funds. 11% growth year-on-year, 10 -- PLN 210 billion plus. Quarter-on-quarter, they increased by 5% and the group can boast of excellent liquidity. The consolidated LCR was 206% for the group. For the bank alone, it was 180.45%.Let's move to slide #17, the profit and loss account. The net interest income was PLN 3.4 billion, which was 6% higher quarter-on-quarter. Quarter-on-quarter, the interest income grew by 6% while the interest expense grew by 5%. As you can see on the slide, the reported annualized net interest margin in quarter 3 was 5.37%, and as we expected, it remained flat on the previous quarter.In net fee and commission income, that's slide #18, it grew by 3% year-on-year and totaled PLN 2 billion plus. Year-on-year, we saw good performance when it comes to credit fees, insurance fees, and FX fees.In quarter 3, this net fee and commission income was only slightly lower than in the previous quarter. Quarter-on-quarter, we saw really good performance when it comes to the account fees, insurance, and re-leasing fees.Let us move to the next slide, #19, income. In total, the income was PLN 11.8 billion, which represents a growth of 33% year-on-year and 9% quarter-on-quarter. And as I've already mentioned, this is a follow-up of good performance under the interest and fee income lines.The income on other operations, well, let me tell you a couple of words about our activities taken to make settlements with the mortgage borrowers. The cost for the group of those settlements was PLN 302 million plus, and in quarter 3 alone, that was PLN 35 million. In -- actually, by September, we signed 7,300 settlements, and that represents nearly 1/4 of the active Swiss bank portfolio.And now, costs. They reduced, and the reason is because we had lower contributions to the banking guarantee fund and the fact that in 2022, we posted substantial contributions to the Institutional Protection Scheme, which were PLN 446 million. If we exclude regulatory levies, the cost increased by 13% year-on-year, driven by inflation, salary adjustments, and IT costs. Staff costs increased by 22%, which reflects the change in remuneration and the cost of long-term incentive scheme that we launched in quarter 1 this year.In Santander Consumer Bank, operating costs increased by 7% in quarter 3 year-on-year. Staff costs increased by 5% and administrative by 4%. Despite the growth in costs, the cost-to-income ratio for the group was really good. It is below 30%. Let me just remind you that last year it was 41.9%. So we can see that we take care of cost discipline all the time.Provisions. On the consolidated basis, the provisions totaled PLN 894 million on a consolidated basis, and they were higher than a year ago. This is driven by the economic situation and our condition -- and the condition of our loan portfolio. The cost of risk for 12 months after 3 quarters was 0.77%.What were the key factors impacting the provision lines? The first 1 is the continuing slightly -- our continuing slightly higher delinquencies in the retail portfolio. The other factor was the stable level of delinquencies and downgrades to the NPL in the SME portfolio. In the corporate portfolio, we saw that overall there were some downgrades of customers from stage -- to the stage 2 and 3. We also sold part of the non-performing portfolio worth PLN 125 billion in principle, and that had a positive impact on our performance of PLN 22 million.The NPL coverage ratio is a bit higher because it is 59.1% at the moment. The banking tax and regulatory costs vary [indiscernible] as I've said before. PLN 1.4 billion in corporate income tax, nearly PLN 600 million in banking tax, plus the regulatory cost of PLN 203 million.So wrapping it up, another good quarter for the bank. We improved our net interest income. We improved our income streams. We can see that our sales performance and business performance is really good and that of course translates into our bottom line. We keep focusing on taking actions to help our customers prosper, which bring financial effects. We will be continuously upgrading our mobile application that we've just introduced. So our performance confirms that our business model is sound.So thank you very much and now the floor is yours.

[Agnieszka Dowzycka, executive]

Okay, let me start with the questions we've already got. First of all, we have questions about dividends, NII, and in the impact of interest rate cuts and the impact of the new proposal for the credit holidays as well as our judgment of the post parliamentary election environment.

[Michal Gajewski, executive]

Well, we always underline that we have a significant capital surplus over PLN 12 billion. So even taking into account most negative scenario, adverse scenarios in terms of Swiss francs or in terms of growth financing, even taking into account all the risks, potential risks, our capital position is solid, and we are determined to share the dividends with the shareholders. We are in talks with the regulator at the moment. There is no newness here that we could share with you, but we are fully determined in the process. We have the capital surplus, we have the dividend fund, as you know, and we will continue the talks with the regulators.In terms of the credit holidays, I wouldn't like to talk about uncertainties. There are a lot of question marks here. There -- this is just a proposal and it was put forward by the current government. We're fully convinced that the Borrowers Support Fund, that's the way to go to help the borrowers in distress. This is a fair proposal with fair criteria in terms of remuneration and wages. As you know, a lot of those borrowers that applied for credit holidays in the past, they made overpayments. So they could have easily repaid their debt without having to avail of the credit holidays. So we want to help those borrowers who actually need help, the borrowers in distress. That's all about credit holidays.The [ most ] recent election, the environment around that, no, we don't want to enter into the political issues. I think we have proved that we can operate in any environment. I believe in the skills of my well qualified team that brings effect. We're not focusing on the expectations towards politicians.

[Maciej Reluga, executive]

There are a few other questions about net interest income, and I'll try to answer them. And there are more -- questions about Swiss francs, about the pace of making settlements and repaid loans as well. When it comes of net interest margin, and in the report, we provided the impact of the first cut by 75 bps. Now it's 100 bps. So the question is about our sensitivity.Well, let me just remind you that in the same report, we already provided the sensitivity to the movement by 100 bps over a 12-month horizon. And at that point, it was estimated from PLN 500 million to PLN 700 million. That is why after the next cut by 25 bps, we have not issued the report because we deem that we provided the figures in the report.And the other questions, what is the impact on the quarter 4 performance given the cut? And there is also a question whether the net interest income takes into account of any positive effects of hedging. Can they be quantified?So I will not quantify them, but as earlier has been said, and today we've told you that there is some information that can actually figure out how much it can be. As I said before, the sensitivity to interest rate was high when the interest rate hike cycle started. Then when the hike seized, then the sensitivity was gradually confined. So of course, the effects of that are there.Recently, I also mentioned that the share of fixed and floating rate loans changes. 2 years ago, it was floating to fixed 95 to 5, and now we have fixed rate loans roughly at 30%. So of course, all that fluctuates depending on the market conditions.This is the effect of both higher sales with the fixed rates, but also we are continuing having part of our balance sheet, and we provide the sensitivity to the movement by high -- by 100 bps on a constant balance sheet basis. And of course, you can estimate how much it can grow.We've been growing in quarter 3 and then some actions will neutralize it. How quickly are we going to reprice our asset size of the balance sheet? We've already mentioned that some time ago.On the credit side, well, we don't have many loans based on 6-month LIBOR. Usually it's 3 or 1 month LIBOR. The 3 month LIBOR is used for mortgages and that's what we are having primarily. So when it comes to loans between 1 and 3 months, this precursor even with some share of loans based on 6 month LIBOR. So there will be repricing over those time horizons.If we take the whole balance sheet, the share of the product based on 6-month LIBOR is growing. So then we will not actually be wrong if we say that this is really the reprice along with the repricing of 1 month, 3 months and 6 months products.And that's probably it. Is there anything else? When it comes to details, please ask. But I think that the details we provide led us to forecast the interest income. We do not really give any guidance from ourselves, how is this going to be in quarter 4 or in the subsequent quarter, as some questions go, but we don't do -- we do not share such figures. But we actually share information about the sensitivity on the liability side of the balance sheet.Of course, we are proactive and we are changing the deposit pricing, and we made it quite quickly in response to the interest rate cut within days, if not hours. And actually we can say that we've been expecting a cut, maybe not to such an extent. So we reversed the deposit curve before 6-month, 3-month deposits. We actually reduced the interest rate on these deposits accordingly.There is another question referring to that theme about our outlook, but there will be another meeting of the Monetary Policy Council. There will be new projections for the GDP and we think that there might be another cut till this year, in November. And then we envisage that the changes will stop for a couple of months because we think that the inflation will be declining quickly to the targeted level. So it will be more difficult to cut rates.Of course, the first step is easy when it comes to de-inflation, but then it will be more difficult. So this is our outlook for the interest rate, but of course, we take into account what the market is pricing in, and we take this into account in our operations. So let me close on that.

[Michal Gajewski, executive]

And now let me answer the questions about Switzerland. Let me remind you that we have owned 8,400 settlements signed in the group, 7,300 in the bank. And as we are writing in the report, the cost of settlements this year has been PLN 300 million. We propose the settlements to the majority of our customers, both those who filed lawsuits against us and those who have not. So we signed settlements covering nearly 1/4 of the active Swiss franc portfolio.We started the whole process in 2022, actually towards the end of 2021. And our strategy that we adopted is still being purchased, and it is based on the recommendations from the Chairman of the Polish Financial Supervision Authority, KNF. And we treat our customers the same way, whether they have zloty or Swiss franc loans. So we think that the proposal of the KNF Chairman is a fair one in social terms, and we are not changing our approach. So we are proposing what is recommended by the Chairman of the KNF.We haven't seen any major growth in lawsuits. At the same time, we can observe the first rulings, the decisions of the regional court or Supreme Court that deem banks claims warranted when it comes to the unlawful enrichment. And this is about the surplus account compared to the paid out capital. And we think these are the first positive decisions which actually destruct this ruling practice applied by common courts so far, but this will take time before common courts take notice of that.But this confirms that the statement that the banks are not entitled for any remuneration for the capital paid out say that there is a different stance that the banks might be entitled. So it's favorable. So we keep saying -- thinking that settlement is better than the court case litigation and we will be pursuing our current strategy continuously.

[Agnieszka Dowzycka, executive]

Okay, I'm looking at the questions. I'm trying to combine ones that are similar. We have more questions about the dividends that -- and about credit holidays, but we've already answered those. There's an interesting question I don't have an answer for here on paper. What is the sensitivity of credit moratoria to interest rate cut by 100 basis points? I can, however, come back with that information after I double-checked it.

[Michal Gajewski, executive]

I think it's worth saying -- I mentioned the Borrowers Support Fund. And I think that despite the fact that in the third quarter, we see an increase in the applications for the Borrowers Support Fund. And we know that because of the credit holidays, people actually decided not to apply for this fund. So if we assume the credit holidays are not introduced, the scheme is not introduced, we forecast the number of applications to the Borrowers Support Fund will go up. It offers aid to those borrowers who experience financial problems. So we hope there will be more applications for the Borrowers Support Fund than for credit holidays.

[Maciej Reluga, executive]

Net trading and revaluation income; why was this high and higher than in the second quarter? But in the second quarter was actually much higher than in the first quarter -- was much lower than in the first quarter. We see there some one-offs there and income from -- and some FX income. Operating costs, there is a question about the amount. We have one-offs there, around PLN 50 million, as far as I remember.

[Agnieszka Dowzycka, executive]

There are more questions coming in about the dividend, moratoria, the coverage in terms of number and value. We're talking about the moratorium. Not much higher than what we gave you at the beginning. Then we updated our estimates. At the end of 2020, 64.7, that's volume wise, 36.9, and then for -- no, sorry, that's 63.9. Then 64.7. The effect of the wages review. Do we see the effect? And the outlook for operating costs for 2024 and our expectations here. What can we say?

[Michal Gajewski, executive]

We'll watch the environment. We hope it will be better in terms of CPI, but as we know, in the cost, this effect is lagging. In 2023, the CPI is going up, but it's still high. So in terms of the macro environment, we expect it will be favorable. The labor market will not change; there will be wage pressure. Hence, our expectation in terms of the CPI, but we're disciplined, we're well disciplined when it comes to costs wherever we can. And the costs in 2024 will be a combination to all the factors that I've mentioned. And let's talk about it in January when we present the results after the fourth quarter of this year.

[Maciej Reluga, executive]

There is a question about the cost of credit risk, considering our macro outlook. So the disclaimer here is that what we're talking about, the credit risk cost, it had been verified positively. The financial spending of our customers was good, much better than we had predicted at the beginning of the year because we were entering recession with high CPI and high interest rates. So we can see that our customers managed the environment.And now our outlook for the macro environment is positive. We see signs of revival because of the consumption, because of rising investment. The only risk I would say that's important for the exporters is the situation in Germany and the outlook for the German economy, but the interest rate caps, lower CPI, we -- in terms of risk charge, I think taking that into consideration, we can be optimistic.I think it could actually go down. This effect could be delayed. However, as Michal said, there were a few cases in the fourth -- in the third quarter in the corporate segment that were negative, but we remain optimistic in terms of 2024, looking at our macro forecast. There was a question about the cost of settlement. We've never really provided that separately for the consumer, but we will have that checked, and we will -- the number of settlements, that's what we provide for the bank, 7,500, 8,400 for the group, but of course, we might check the other figures as well.Have you seen any growth in the cost of claims and complaints related to consumer loans and the free-of-charge loans? Claims and complaints related to consumer loans and the issue of free-of-charge loans, and the arrears that some law firms have. We haven't seen really any response from customers, but we will have that analyzed thoroughly.There is another question about the growing number of requests for support from the Borrowers Support Fund. Let me check the answer to that. Give me a second. I've mentioned that in quarter 3, there was some increase when it comes to the request for support from the Borrowers Support Fund, and this growth was from 1,663 to more than 1,700 requests. And this was up to the value of PLN 512 million. But the utilization so far has been small and we've been taking into account that once the payment holiday solution is not available, then customers who have problems with their repayment will lead to the growth in the number of requests for support from that fund.And there is a question that I don't really know an answer from the top of my head. What is the share of the loans with value over 50,000 is something that we have to check.And probably the last question, and I'm assuming that as we addressed all the previous questions. Is there any headroom for reducing the manpower? I would say that we do not envisage any downsizing, any actions like that. The staff costs, of course, represent an important element of the total cost for the group, but we've been operating very effectively as a group and including the -- our operations as a bank. So we have not been thinking about any actions like that.Agnieszka, is there anything else that we missed or...

[Agnieszka Dowzycka, executive]

There is one more question about the decline in capital ratios for the group quarter-on-quarter.

[Maciej Reluga, executive]

Well, I think this is the effect of the growth in the nominator, and it's nothing in the denominator. So these are all the questions. I haven't received any more. And I think that we might be closing our meeting today.

[Agnieszka Dowzycka, executive]

Thank you very much, and here we'll next time maybe see you in reality at the end of January. There will be a conference about our performance, about progress. Also somewhere then towards the end of February, we will issue our annual report. Goodbye.