Santander Bank Polska SA

WSE:SPL

Earnings Call Analysis

Strong Growth in Income and Profitability Despite Market Challenges

Santander Bank Poland reported a solid third quarter with net profit reaching PLN 1.939 billion, contributing to PLN 4.3 billion year-to-date. Total income increased by 7% year-on-year to PLN 12.7 billion, driven by a 9% rise in net fee income. Net interest income grew 6% to PLN 10.249 billion. Retail deposits climbed 4% to PLN 218 billion, while gross loans rose 8% to PLN 198 billion. The net interest margin remained stable at 5.37%. The bank expects continued growth, aiming for a 100 basis point interest rate cut in 2025, potentially impacting net interest margins by 10-20 basis points.

Growth in Key Financial Metrics

In the latest earnings call, Santander Bank Poland highlighted a strong performance with net income reaching PLN 4.3 billion after three quarters, showing a year-on-year increase. The net profit for Q3 alone stood at PLN 1.939 billion. Total income for the bank was PLN 12.7 billion, marking a 7% growth from the previous year. This growth is attributed to a solid net interest income of PLN 10.249 billion, which increased by 6% year-on-year, driven by higher customer engagement and credit activity.

Steady Increase in Deposits and Loans

Deposits also grew significantly, rising by 4% year-on-year to more than PLN 218 billion, with retail deposits increasing by nearly PLN 10 billion. On the lending side, the gross loan portfolio saw a year-on-year growth of 8%, reaching PLN 198 billion. In Q3, the bank sold PLN 2.2 billion worth of mortgage loans, contributing to total sales of PLN 9.3 billion for the year-to-date.

Resilient Fee Income Performance

Net fee income stood strong at PLN 2.184 billion after three quarters, reflecting a 9% year-on-year growth. This revenue increase stemmed from robust customer activity, particularly in FX, brokerage, and asset management fees, which saw impressive growth rates of 20% and 22%, respectively. The bank's ability to grow fee income in a competitive market is a positive indicator of customer engagement.

Cost Management and Operational Efficiency

Despite the growth in income, operating costs rose by 9% to over PLN 3 billion, largely due to higher contributions to the banking guarantee fund, which increased from PLN 175 million to PLN 250 million. Excluding these contributions, total operational costs increased by 8%, driven mainly by inflation and salary reviews. The cost-to-income ratio improved, remaining at a healthy 30%, indicating strong operational efficiency in managing resources relative to income.

Stable Loan Quality and Risk Management

The bank maintained a stable credit risk profile with credit provisions totaling PLN 908 million after three quarters. The non-performing loan (NPL) ratio increased slightly but remained under 5%, which is considered a safe level. The bank expects this ratio to remain stable as the quality of the loan portfolio is deemed sound. Additionally, the bank reported a consistent cost of credit risk around 70 basis points, providing assurance against potential downturns.

Outlook and Guidance for Future Performance

Looking ahead, Santander Bank Poland anticipates the first interest rate cuts might occur around mid-2025, which could impact margins. They forecast that the net interest margin, currently stable at 5.37%, may see fluctuations between 10 to 20 basis points due to anticipated interest rate cuts. Nonetheless, the bank remains optimistic about maintaining growth in loan volumes and income, citing continued overall momentum in both retail and corporate banking segments.

Emerging Areas of Growth

Retail and SME segments showed remarkable growth, with personal accounts up by 5% and new business accounts increasing significantly by 18% year-on-year. The bank's focus on digital solutions and customer experience enhancements is expected to sustain this growth trajectory. Moreover, the bank is positioned to benefit from potential public investments in the economy, which could further stimulate credit demand.

Earnings Call Transcript 2024-Q3

[Agnieszka Dowzycka, executive]

Good morning. My name is Agnieszka Dowzycka. I'm responsible for Investor Relations at Santander Bank Poland. I'd like to welcome you at the presentation of our financial results after the third quarter of 2024. Today's presentation will be delivered by our CEO, Michal Gajewski; Maciej Reluga, CFO; and Wojciech Skalski, Head of Accounting and Financial Control Division. [Operator Instructions]

And now let me give the floor to the CEO.

[Michal Gajewski, executive]

Thank you, Agnieszka. Good morning, once again, welcome at the presentation of our financial results. However, let me start with a short comment on our right addressed to customers affected by the flood in the south of Poland. As I have always highlighted, we treat our mission of helping our customers in important matters seriously. That is why we launched support to customers as one of the first banks, both in the form of sectorial moratoria and request to the borrower support fund, which -- let me tell you as a reminder, is financed by banks.

We are also ready to launch nonstandard solutions tailored to situations of individual businesses. We also donated PLN 1.5 million on the equipments needed for recovery from flood, including PLN 1 million plus from the bank and PLN 0.5 million from donations. This has been our second charity campaign this quarter.

We have also donated over PLN 1.5 million plus to support pediatric oncology centers, including PLN 1 million as a donation from the bank. We can see that the scale of losses caused by the flood among our customers is lower than we initially assumed. And we received 75 requests for moratorium from individual customers, 3 requests from business customers and 56 requests under the borrower support fund. So the impact on the provisions related to that will be minor.

Going back to our performance. Briefly speaking, after 3 quarters, we generated a gross profit of PLN 5.8 billion. And in quarter 3 alone, the gross profit was PLN 2.6 billion. At the same time, the tax burden after 3 quarters was PLN 2.3 billion and the regulatory costs amounted to PLN 284 million. So in total, it's over PLN 2.6 billion. And if you look at our gross profit, the burden equals to our performance in quarter 3.

So let's move on to Slide 7. In this slide, you can see the general operational data, the number of digital customers has been growing. Currently, we have 4.5 million digital customers in the group, including 3.5 million mobile banking customers. The number of digital customers in the bank grew by almost 7% year-on-year and mobile banking customers by 12%. Customer deposits grew by 4% and the gross loans portfolio year-on-year grew by 8% to all -- to nearly PLN 200 billion, PLN 198 million to be exact. Assets grew by 5%, customer funds totaled PLN 241 million growing by 6% year-on-year.

Slide 8 refers to key financial results. So after 3 quarters, the net profit was PLN 4.3 billion. And in quarter 3 alone, the net profit was PLN 1.939 billion. Net interest income after 3 quarters was PLN 10.249 billion and increased by 6% year-on-year. Excluding the impact of the payment holidays, the pace of growth was 7%. In quarter 3 alone, the net interest income was PLN 3.6 billion, grew by 5% versus the same period a year ago. The net fee income was PLN 2.184 billion and grew by 9% year-on-year. In quarter 3, it was PLN 727 million and was higher by 9% when compared to the same period of 2023.

Total income was PLN 12.7 billion and grew by 7% year-on-year. You can see our capital position, which remains high. Return on equity for the group is 20.5%. We can boast excellent liquidity with the LCR at 206%.

Slide 10 to 12 show general information about individual segments and new products for our customers. So maybe let's go to Slide 13, which includes selected business data. So let's start with the retail. We have 4.7 million accounts for individual customers, up by 5% year-on-year. In quarter 3, we opened 125,000 personal accounts in Polish zloty, which is a good pace of growth when compared to quarter 2. So the growth was 13%.

During 3 quarters, we sold mortgage loans worth PLN 9.3 billion and in the quarter 3 alone, we sold mortgage loans worth PLN 2.2 billion. 95% of the portfolio was based on an adjustable fixed rate, so the total share of loans with adjustable fixed year rate for 5 years and the entire PLN mortgage loan portfolio grew to nearly 40%, 39.5% to be exact.

In quarter 3, granted cash loans worth PLN 3 billion, up by 2.5% versus the previous quarter and 27% more than in quarter 3 2023. So we can see that we are growing steadily also when it comes to our remote channels. Net investment fund sales was PLN 1.5 billion, and retail assets of Santander TFI at the end of quarter 2 were PLN 22.7 billion.

Our market share increased to 10.8%. In the SME segment, we have also excellent performance. We opened 18,300 on business accounts in quarter 3, much more than quarter 2, and by 18% more than in quarter 3 2023. And this year, we have opened over 50,000 accounts for SMEs already.

When it comes to loans to SMEs, the total amount of loans was PLN 1.3 billion. After 3 quarters, the total amount of loans granted is PLN 4 billion. So the sales in this segment is very good. Also when it comes to leasing products, PLN 3.1 billion, up by 11% year-on-year. In Business and Corporate Banking, thanks to development of our digital solutions, the number of our mobile customers grew. And we have a very good growth when it comes to credit income, up by 7% year-on-year and very good FX income growing by 13%.

In Corporate and Business Banking, we have a double-digit very strong growth in the M&A segment. And income from capital market services also grew trade finance as well, we recorded a growth of 26% year-on-year. So that's a very good quarter for our CIB segment.

So now the balance sheet and gross loans, Slide 15, at the consolidated level, 8% growth year-on-year and 2% growth quarter-on-quarter.

Slide #16. As I already mentioned the growth in deposits by 4% to more than PLN 218 billion. Year-on-year, the deposits grew by PLN 7.7 billion. In this case, we saw a clear growth in retail deposits, nearly PLN 10 billion while we saw a decline in corporate deposits by over PLN 2 billion.

Profit and loss account, Slide 17. Net interest income and margin. PLN 3.6 billion in net interest income in the quarter. That's a growth by 9% compared to the previous quarter. Year-on-year, the net interest income increased by 3%, while interest expense declined by 3%. Net interest margin for quarter 3 was 5.37%. As we were actually announcing before, the previous publications of the result, our margin has been stable.

Now let's move to Slide #18, net fee income. Over 3 quarters, the net fee income totaled PLN 2.2 billion, growing by 9% year-on-year. This growth was primarily fueled by the increased activity levels of our customers and -- and this -- so we saw the growth in FX fees, brokerage fees, asset management fees.

Year-on-year, we also saw good growth in asset management fees and insurance fees, which grew by 22% year-on-year, and brokerage fees, which grew by 20%. Quarter-on-quarter, really sound performance when it comes to credit fees, which grew by 9%. Card fees which grew 3%. And in insurance fees, which grew by 4%. So good solid performance driven by higher activity levels of our customers. And that's reflected here in the net fee income.

Slide 19, income. After 3 quarters, total income was PLN 12.7 billion, growing by 7% year-on-year. If we exclude the so-called payment holidays, the total income would have grown by 8% year-on-year and 4% in quarter 3 compared to quarter 2.

Slide #20, operating costs. After 3 quarters, they totaled over PLN 3 billion, growing by 9%. And the key growth drivers were banking guarantee fund contributions. Let me remind you that we paid PLN 250 million in those contributions. Compared to the last year, that was a big growth because last year, it was PLN 175 million.

Excluding the contribution -- the cost of contributions to the banking guarantee funds, total costs increased by 8% comparing to the previous year driven primarily by inflation, salaries' review and IT costs. Staff cost increased by 9% year on year, and this is the result of the salaries' review and what is happening on the market when it comes to the staff cost pressure.

As we emphasized a number of times, we -- our salary review is not a one-off exercise. This is a benchmarking exercise that we do every year, we compare our salaries to the sectors for banks or services.

Administrative expenses, excluding the regulatory costs, grew by 8% year-on-year. The operational effectiveness ratio that is the cost-to-income ratio after 3 quarters was 30%.

Slide #21, credit provisions. The net balance of provisions after 3 quarters totaled PLN 908 million. And in quarter 3 alone, it was PLN 297 million. The cost of credit risk has been stable, oscillating around 70 basis points.

The net balance of provisions after 3 quarters is close to what we saw in the corresponding period last year. In quarter 3, we didn't witness any major important events when it comes to changes in methodology models or parameters used to calculate provisions. In September, downgraded a major corporate exposure to the nonperforming portfolio.

It impacted the share of NPLs in the total portfolio, but this share is still under 5%. The quality of our portfolios, in my opinion, is sound and the key risk factor have been stable.

Slide #22, banking tax. Regulatory costs and the regulatory levels, levies were big. And on top of that, we had the cost of legal risk of PLN 1.6 billion.

Slide 23, summary. As I said, we are showing here also the cost of legal risk. And after 3 quarters, as I said, it was PLN 1.6 billion. But of course, summing up this quarter from the business perspective, sales perspective, it was a really good quarter. We met our targets. And I think that this quarter and all the 3 quarters were really good for us.

After quarter 2, there were many question marks when it comes to the credit volumes and continued growth. But this quarter confirmed that this is a trend. We are growing faster than the market. We are developing our business model. We improve customer experience, and the quality that we offer is something that our customers like. So we can see good results. Now the floor is yours. Let's go to the questions-and-answer session.

[Agnieszka Dowzycka, executive]

We have already received a couple of questions so I group them. Maybe Swiss francs first or margins? Let's start with margins maybe, and you can answer this question, and I will refer to Swiss francs. Okay. So we have a few questions about net interest margin.

So we could see an excellent growth in net interest margin. So can it be sustained in the next period? And there was a question about sensitivity of net interest margin and the general outlook on interest rate cuts, given the speech of the NBP governor that signaled interest rate cuts in quarter 2, 2025. So 4 questions about that.

[Michal Gajewski, executive]

So let's start with the outlook maybe. Well, it's a matter of time when the first interest rate cuts take place. We have certain scenarios of net interest margin. We can expect the first interest rate cuts even in March after the forecast.

But given the growing inflation, and also retail sales data because we have some signals of solid economic growth and then some data saying otherwise. So the GDP will be 3.5% and the first interest rate cuts will take place rather in the middle of the year. But we cannot exclude any scenario. So if we are offering certain deposit rates for longer [ tenures ], we should take all the risks into account and we expect 100 basis point cut next year.

And as we communicated before, the impact on margins and hedged interest rates, that share grew by 6 percentage basis points. So the impact on net interest margin is between 10 and 20 basis points, and that's it, I think. Of course, we assume that the interest rate effect will be offset by the growth in volume, which was quite solid recently. And there are also questions about that.

Okay. Swiss francs now. Why we have such a low level? What parts of our portfolio will require more provisions. In our opinion, this level is adequate. I think that -- I don't think it's low. It's just adequate. This is actually a follow-up of our models. The additional provisions we created this quarter were related to legal costs and settlements which we made because we've nearly made 12,000 settlements with our clients.

If I understand the question well, we split the portfolio into the active and nonactive part. The nonactive part is the paid back portfolio, and there is a small percentage of lawsuits when it comes to this part of the mortgage portfolio. So as I said, there is just a fraction of people fighting lawsuits from their agreements have been paid back. Of course, we will have a review in quarter 4, and we will see how the situation evolves. And depending on that, we will adjust our provisions.

[Agnieszka Dowzycka, executive]

There is also a question but PKO BP and its strategy assumed a very aggressive growth in the number of clients. How are you going to defend your customers to fight for them?

[Michal Gajewski, executive]

I am a bit confused because I don't know whether you really listened to what I've been saying. We are not defending ourselves against anything. We are growing. We, of course, have to compete hard, but we do not expect any declines in the number of our customers.

Our business model, as you can see, our strategy works. Of course, we will be adjusting and aligning it to customer needs on an ongoing basis. We think that our edge is the customer experience that we offer, the value that we offer to customers. And we think that business model and the solutions will actually bring us sustainable growth, both in terms of the number of customers we have, and the growth in our profitability of our bank.

[Agnieszka Dowzycka, executive]

Do we see any possibility to extend the so-called payment holidays? To operate it to the customers who are distressed.

[Michal Gajewski, executive]

Well, of course, this is my opinion, but I think this is quite that there will be no -- so these actions will not be continued. I'm talking about state interference in the contractual relationship with banks. Together with -- as a sector, together with the Polish Bank Association, we will be actually talking to regulators about that payment holidays.

This is something offered by all the banks as a product. And this is something that when the borrower support fund is used. And this is the adequate solution for those customers who expect support.

[Agnieszka Dowzycka, executive]

What was the impact of the program stimulating the sales of mortgage loans, it was very low.

[Michal Gajewski, executive]

The weaker sales in quarter 3 is also the follow-up of customers' expectations when it comes to the new support program. As you might know, the program is still being under discussions, and there are differences of -- different views in the coalition.

And that is why customers are also waiting for the final solution to be announced to find out how much support they can get when they are buying real estate. But in quarter 3, indeed, the sales was weaker, and we can see that there is uncertainty on the market. This is also reflected in the actions taken by developers. Let me remind you the data for the previous quarters.

On Slide #25, you can see the sales quarter-on-quarter of mortgages. In quarter 1, the share of the 2% Safe Mortgage loans accounted for 76% of sales. In quarter 2, it accounted for 23.3%. And in quarter 3, it was nil.

[Agnieszka Dowzycka, executive]

So overall, it was not major. Continuing on volumes, the growth in Corporate segment. Can it be continued in subsequent quarters on 2025?

[Michal Gajewski, executive]

Well, we are optimistic here. Our momentum is on the roll. Last year, we invested a lot also in the digital solutions for that customer segment. We invested in developing the skills of our bankers when it comes to products, for example. And we built the value that is now being leveraged. And that's reflected both in our growth, in the number of our customers and in the acquisition of new customers. So we are very happy with this.

As we were saying before, we do not compromise on the risk of our returns when it comes to sales of these loans. We really have a good offer on the market, and that's appreciated by the customer because we really resolved their issues. Now we respond to their needs. And we can see that we are growing faster than the market.

And our ambition is to grow more in this segment. And of course, the recovery funds, well -- and all those investments that we hope would kick off and the public investments will also trigger the growth in private investments. So we would rather expect the acceleration in that growth.

[Agnieszka Dowzycka, executive]

And there is one more question about our strategy on the settlements in Swiss francs, but I believe that we referred to that at the beginning. And there is a group of questions about NPLs. So why the growth in NPL in quarter 3 by 30 basis points? And will the NPL ratio remain below 5%?

[Michal Gajewski, executive]

And the reason, well, we had a downgrade in the Corporate segment and that's why the growth in NPLs. And that exposure is on lower coverage. But we are at the safe level, below 5%, and we think that it will stay at that level. Yes, it will stay at that level, meaning that we will not exceed 5%.

Okay. So I think that we referred to all the questions unless we missed something. But I don't think so. No, I think that those were all the questions, so we answered to all of them. If you have any more questions in the meantime, please contact us. Thank you.