Santander Bank Polska SA

WSE:SPL

Earnings Call Transcript 2020-Q4

[Agnieszka Dowzycka, executive]

Hello, ladies and gentlemen. This is 11:30, so let us start. I would like to welcome you at the presentation of the financial performance of the Santander Bank Polska Group for 2020. Together with me is our CEO, Michal Gajewski; CFO, Maciej Reluga; Financial Controller, Carlos Polaino; and Wojciech Skalski from the management accounting area. My name is Agnieszka Dowzycka, and I'm in charge of Investor Relations. CEO, over to you.

[Michal Gajewski, executive]

Hello, ladies and gentlemen. Michal Gajewski here. Together with me there is Maciej Reluga. This is the first presentation of the financial results this year. We are going to present the nonaudited financial performance for 2020. We've been through a period of many hardships and challenges.

The entire banking sector, just like the economy, has adjusted quite quickly to the requirements and customers' preferences. The key elements that have become our priorities have been safety, mobile solutions and remote channels. We can say that although customers come to branches again, the footfall is definitely much lower than previously before the pandemic.

We are conducting analysis on that, and we can see that in quarter 4, the footfall in our branches was at a level of 72% of the pre-pandemic level. Of course, this is highly compensated with the use of digital channels. We are staying together with our customers, and we want to provide them with full and complete support during this difficult period of the pandemic. The details of our aid actions were covered during our previous conferences. And of course, they are presented on the slide in our presentation.

I'd like to mention the key initiatives. We took care of our customers by offering them a possibility to defer loan repayment, and we provided the customers with a wide range of products. We make sure our employees were safe, both physically and socially. And on top of that, we donated PLN 5 million to hospitals in the wake of a charity campaign that we run together and we organized with our customers. The details are presented on the subsequent slides, but now let us jump to the Slide #13.

As a group, together with Santander Consumer Bank, we provide services to over 7 million of customers, out of which over 5 million customers are service in Santander Bank Polska. Together with Santander Consumer Bank, we have almost 3 million digital customers. Deposit portfolio went up by 10% year-on-year to reach over PLN 170 billion. Gross loans, I would say that this is flat year-on-year as it stood at over PLN 114.3 billion. The trends within loans and deposits at our bank reflected what was happening in the market in 2020. The assets went up to over PLN 229 billion, up by 9% year-on-year.

Now let us go to the next slide, Slide #14. Just like in the previous quarters, we had several one-offs that influence the underlying result, you might find the details in the presentation and in the report. When talking about the underlying, we take into account 2 factors. We need to consider the contribution paid to bank guarantee fund, and excluding from the profits, the effects of the small and big Court of Justice of the European Union and additional provisions for the expected credit loss and legal risk.

After 4 quarters, the attributable profit was PLN 1.037 million in underlying terms, it was 21.7% percent lower. In quarter 4, net profit stood at PLN 81.5 million and was affected by higher provisions for legal risk and restructuring provision. Net interest income stood close to PLN 5.9 billion and was some 10% lower year-on-year.

Of course, this was negatively affected by the interest rate cut and lower demand for credit. After 4 quarters, net fee income was PLN 2.16 billion and was at a similar level year-on-year, which bearing in mind the pandemic situation should be perceived as a decent result. In quarter 4 alone, net fee income was exceptional and stood at almost PLN 570 million. Net total income was up PLN 8.6 billion, and in underlying terms went down by 7.6% year-on-year. Quarter-on-quarter, total net income was 2.2% higher. Return on equity was 8.1% in underlying terms. It's worth mentioning that apart from the profit this year that we have in the numerator is that denominator is also what counts here because this represents the profit retained in the last year, which was in line with the KNF recommendation, and it's considered the entire sector.

Return on assets in underlying terms was at 0.9%. We have a very strong capital position, much above the expected levels. Our Tier 1 capital was above 18% and TCR, over 20%. The minimum levels here are 11.2% for CAR and 9.2% for Tier 1. So we can see that we have high excess here.

Now let us go to the Slide 16. And on this slide, you can see customer activity in the specific segment. Customers are more and more eager to use remote channels as I have mentioned at the very beginning. The transaction volumes here are on the rise, and the number of users of remote channels is also rising. When we see the number of logins to mobile and online banking, it is continuously going up. Last year, it went up by 19%. And in the mobile app alone by 30%. Transactionality in remote channels went up by 18% year-on-year. We can see that our helpline reports an increased number of calls. In quarter 4 alone, the number of calls went up by 11% of -- on quarter 3.

Now let us comment on the Slide #17. As I've said, we do a lot of things to improve our proposition. We launched the process of opening the personal icon based on a selfie. There is a new insurance Spokojna Hipoteka. The companies can use a new method of authenticating the payments on the Internet that is strong authentication. And corporate clients can use the new version of iBiznes24 and they can use also the qualified signature in many different processes, not only to sign loan agreements, leasing.

Slide #19. If you look at our business and sales in quarter 4, we can see that slowly but surely, we are rebuilding the volumes that we saw prior to the pandemic. In retail banking, the sales of mortgage loans was on the rise for another quarter in a row. In quarter 4, we sold loans worth PLN 1.2 billion. When it comes to sales of cash loans, we sold to the volume of PLN 1.4 billion. Comparing that year-on-year, of course, there is a decline, but quarter-on-quarter, it is improving and rebuilding. It's an 8% growth compared to quarter 2.

We can also see that the sales via remote channels are on the rise, reaching 44% in quarter 4. Investment funds. The sales stood at PLN 1.2 billion in quarter 4, which is nearly 2.5x more than a year ago. If we look at the market, the sales in quarter 4 was one of the highest on the market. In the SME segment, the lending level was similar, just like in the previous quarter and the year before. It was more than PLN 13.6 billion.

In this case, we saw a nice growth in business account by 14,000. We also saw a really good sales of leasing, which increased by 17%. In business and corporate banking the sales of loans increased by 10%. We had really good performance when it comes services for exporters. The turnovers on the FX platform increased by 30%. And trade finance saw the growth in sales by 21%. In investment banking, the income on transactions in financial markets also increased. Income from cash management and liquidity services increased by 64%. The income from services related to share issues and purchases nearly doubled.

Let us move to the balance sheet, Slide 21, the loan portfolio. As we know, the demand for loans started to decline starting from quarter 2. The portfolio loans for banks increased by 1% year-on-year and, it slightly improved quarter-on-quarter. So sometimes consumer decreased by 8%. So on a consolidated level, at the end of December, it was unchanged, standing at PLN 148 billion. What we've observed in quarter 4 also the low usage of credit lines, especially in the business corporate segment. Customers are quite active when it comes to raising financing from support program, so the demand for lending for the bank loans were much lower. What makes me optimistic is that some companies are already asking about new financing, especially from such sectors as manufacturing, sales or services for industries.

So we can see that some business people are starting to think about investments. We can see a strong growth in the portfolios of our leasing manufacturing companies. The portfolio of the leasing company grew by 6% year-on-year and stood at over PLN 10 billion. The value of net sales was PLN 5.4 billion, 30% of that was related to SME sector that increased by 30%. The factoring company also saw the growth in the turnover and its portfolio increased by 10% to PLN 6.1 billion.

Our forecast for 2021 indicate that the loan portfolio is going to rebound, and the forecast for the growth in the sector, over 4% is something that we are willing to support and share the view that this is going to happen. Now deposits, a slightly different story because they went up by 10% year-on-year to reached PLN 170.5 billion and the improvement to the growing number of retail deposits, up by 7% year-on-year, 2% quarter-on-quarter, and business deposits up by 13% year-on-year and 4% quarter-on-quarter. In quarter 4 alone, the number of deposits went up by PLN 5 million in current deposits, up by 14% quarter-on-quarter, while term deposits went down even by as much as 21%.

Investment funds went down, year-on-year by almost 4%. This stems from the outflow of funds from TFI and discount on assets in March and April. And despite the drop, we managed to retrieve our position, and we are currently at the level that we had at the beginning of the year. Since March last year, net assets went up by 34%. In quarter 4 alone, mutual funds went up by 11%, and a lion's share of that comes from a new production and 1/3 of that from the changes of valuation.

Now let us comment on the P&L. Net interest income after 4 quarters, it went down by over 10% year-on-year and stood at PLN 5.88 billion. Lower income stands here for instance, from the interest rate cuts and decelerated lending, especially in the segment of business loans. In quarter 4 alone, net interest income was PLN 1.4 billion, 2% up quarter-on-quarter, in line with what we said at the last conference. It seems that net interest income reached its bottom in quarter 3 and should report an upward trend in the upcoming quarters.

Here, I would like to mention that the quarterly dynamics of net interest income decelerated a little bit, but at the same time, interest costs went down 22% quarter-on-quarter. The annualized net interest margin for quarter 4 remained at the previous level and stood at 2.66%. When compared to the previous year, it was 71 bps lower. In quarterly terms, NIM was flat, but we reported different tendencies on those sides of the balance sheet. Of course, we had further drop in financing costs, slightly more in Santander Consumer Bank than in Santander Bank Polska due to the profile of maturity of TAM deposits.

Also, the credit margin went up by several basis points. The third element that I wish to mention is that these positive trends in terms of NIM were accompanied by a drop in the margin on the remaining assets, mainly the treasury bonds because we held much more of the latter due to the over liquidity that we have already mentioned.

Now let us go to Slide #24. Fee income. This stood at PLN 2.152 billion, which is, I think, a decent result, taking into consideration we operated in the pandemic environment. In quarter 4 alone, it was also good and stood at almost PLN 570 million. Quarter 4 turned out to be 3% better quarter-on-quarter and 5% better year-on-year. The increase in fees was reported in all the lines, especially on capital markets. Also brokerage fees went up visibly, credit fees up by 6% year-on-year, and debit card fees up by 10% year-on-year. In quarterly terms, at a consolidated level, the only drop we reported was related to insurance which was because in quarter 3, we had several one-offs in Santander Consumer Bank and I had commented on before at the last meeting.

Total income, Slide #25. After 4 quarters, it stood at PLN 8.65 billion and decreased by 8.6% year-on-year. On a comparative basis, total income went down by 7.6% year-on-year. In quarter 4 alone, income was at PLN 2.2 billion and was higher by 2% on quarter 3. And here, the increase in the quarter was related to a decent fee income and a better net interest income as well as higher income on the sales of treasury bonds.

Now let us see the cost. Here in the quarter, we can see the costs went up by some PLN 400 million. This is not because of the increase in our fixed cost basis, but it stems from several extraordinary factors that include costs related to a restructuring provision for severance pay for employees covered with collective redundancy, this is the amount of PLN 153.6 million. The other factor is the increase in other operating costs in quarter 4 in relation to a raising provision for legal risks linked to FX mortgages, PLN 209 million. And the third element is the legal risk related to the return of a part of fees for consumer loans in the amount of PLN 69 million. Underlying costs down by 8.8% year-on-year. And this was the result of savings in the selected cost items. After excluding the regulatory costs that went up in 2020 by 40%, administrative expenses were 13% lower year-on-year. Staff costs, after excluding restructuring provision related to the announced collective redundancies, went down by 10%. And we are continuing, of course, our work on a number of cost initiatives, and we are constantly reviewing the investment spendings.

Provisions. Slide 27. The net loan loss provisions for expected losses after the fourth quarter stood at PLN 1.763 billion. Compared to 2019, when it was PLN 1.2 billion. Of course, the growth was driven by the pandemic. In the quarter 4, the net balance of provisions stood at PLN 456 million. The main drivers impacting this balance are as follows: first of all, the additional provision created due to some post model adjustment. As you might remember, for banking was nearly PLN 120 million in quarter 1. At the end of this year, this charge is PLN 88 million.

So actually, it was maintained. Of course, the reason is uncertainty as to the development, the scale of the slowdown, its time line and the impact of expiring stimulus packages. But of course, the adjustment refers to the corporate loan portfolio. And in this case, we reflected the deterioration in the current standing in stage 2 provisions, and this refers to the most vulnerable sectors to the pandemic.

The second driver was the periodic update of provisioning parameters, which led to the growth in provisions by PLN 45 million. The first thing is the moratoria and there are 2 aspects to that. We refer to that both in our report and in the presentation, where you can find more details. The first aspect of the nonlegislative moratoria that were provided for the portfolio were PLN 21.6 billion. At the end of 2020, meaning 90% of that support expired. Today, at the beginning of February, it's nearly fully expired. When it comes to the quality of that portfolio, the overdue payments, more than 30 days, I observed for less than 5% of the portfolio.

This is a clear growth in the risk product part of the portfolio, but the portfolio not covered by the moratoria discloses better risk than a year ago. The other element on non -- our legislative moratoria, sorry, under the so-called Shield 4.0 And today credit portfolio were PLN 250 million. At the end of the year, it counted only 10% -- at the end of the year, only 10% of those moratoria were expired. They will be coming to an end in the upcoming months and weeks, and we will be able to tell you more about that at the next presentation.

At the moment, we've created roughly PLN 90 million worth of provisions for that portfolio, in line with the regulatory rules. We can say that the majority of that portfolio, more than 90% was a continuation of the private nonlegislative moratoria. At the moment, our activities focus on the portfolio with expired moratoria and on the sectors which were most impacted by the pandemic and lockdown.

Let us move to Slide #28. As I've already mentioned, the regulatory costs increased by 40% and stood at PLN 436 million. The bank impact, PLN 602 million. Corporate income tax PLN 644 million. So we can see that this charge is huge across the banking sector. We also sold the NPL portfolio in quarter 4, both in the bank and in Santander Consumer. These transactions refer to both the retail portfolio and the corporate portfolio.

Summarizing, it's quite an obvious thing, and it is obvious that it was difficult, but we adjust ourselves to the new reality quite well. If I was to summarize the whole year, which was characterized by difference in quarters, I could put it this way. We -- I think that we really adjusted ourselves quickly to the difficult situations. We introduced new digital solutions and we definitely fast-tracked the digitalization plans of ours, which is probably the only good thing about the pandemic.

It is worth emphasizing that both us and the entire banking sector helped clients by providing them with the public and private moratoria. We improved the distribution of public aid for our electronic banking channel. We also were very active when it comes to the PFR's and BGK's bonds auction. Of course, the performance shows of our expectations. There were many developments beyond our control. There were deep interest rate cuts. There was an increase in regulatory cost contributions to the BFG and we had higher provisions. It was really a difficult year with many challenges.

But on the upside, we can see that the sales is growing nicely. The number of transactions is on the rise, more and more of clients use the remote channels. This makes us optimistic when it comes to the upcoming periods. We think that with each next quarter, the economic situation will stabilize while the experience that we gained in this period will help us to build our competitive advantage and even better relationships with our clients. Thank you very much, the floor is yours. Now it's time for questions and answers.

[Agnieszka Dowzycka, executive]

We have already received some questions. I have tried to group them somehow, and I will try to start some questions regarding the risk. Some about capital, dividends, cost of financing and then the hot subject that is Swiss francs.

[Maciej Reluga, executive]

So cost of risk. There are several questions about that, either the details from the quarter 4, while the release is the provision of the causes from the COVID-19, the model adjustment whether the release stems from the fact that the situation is better than we had expected or some other factors. There are some questions regarding the expectations for 2021. When it comes to risk, cost of risk. So there are several similar questions. I think that Michal has already mentioned, but I will try to clarify certain things.

A part is that COVID-19 provision has been released, but the adjustment has been visible in the segment of the corporate customers.

The weakened situation of the corporate customers has been reflected in the provision. And this all has been related to the COVID-19 pandemic because some sectors have been affected by the pandemic. Some parts of the provision have been released indeed, but another part has been allocated to the cases, let's say, COVID ones. So these are the customers that have been severely affected by the COVID-19 pandemic.

When it comes to guidance, of course, nothing -- not much has changed versus what we had been saying previously in the previous quarters because there are many uncertainties and unknowns. We are monitoring our actions. And we are focusing on moratoria that are going to expire soon and the sectors that have been affected by the pandemic. If we were to provide our guidance regarding cost of risk in 2021, we would say that this may be lower, but as they are not going to rebound to the pre-pandemic levels. I think that the pre-pandemic levels are more likely to be reached in 2022. I think that's it. And when it comes to the questions regarding cost of risk, there is a question whether our ambition is to grow faster than the market. I think that in some segments, we are likely to grow faster.

[Agnieszka Dowzycka, executive]

A few questions about capital and the growth of the capital ratio quarter-on-quarter.

[Maciej Reluga, executive]

Okay. Let me start from the beginning. What was the reason for the growth quarter-on-quarter?

First of all, I think I should refer you to the annual report that will have the Pillar 3 disclosures. The detail informing you about the capital. It will be published quite soon in a mere 3 weeks. And I think this is quite a quick disclosure of the annual report. Because some banks were only published in the quarter 4 results. It is worth saying that when it comes the allocations of profits from 2020, half of the single profit for half 1 of Santander Bank Polska, that's PLN 192 million to be taken to the capital ratio at the year-end.

There is also a question about capital requirement. When it comes to the total capital ratio, Tier 1 is 9.2%. And there is also a question about the dividend. And the question about the likelihood of us paying the dividend in the second half of the year. While we can't say anything more because we are waiting for the decisions of the regulator and that will be issued only in the middle of the year, and then we will be able to find out whether we can pay it out or not. But as you might remember, we still have the retained profits from 2018 and 2019 that potentially could be distributed if the regulator permits them.

If they will apply the sectoral solution or the individual solutions and that will depend on the standing on the individual banks and on the capital position of theirs. It is also worth vetting that we are in a dialogue with the regulator. We meet with them. And we are talking about our wish to execute our dividend strategy. So if only the KNF agrees to that then in quarter 2 we will want to pay the dividend.

[Agnieszka Dowzycka, executive]

Another question regarding the net interest margin and the potential will for lowering cost of financing.

[Maciej Reluga, executive]

I think that net interest income and net interest margin should improve, as Michal has said, in quarter 3 2020, the interest income reached its bottom. And I think that all this will be influenced by the improvement in the credit margin, but all that assuming the revival in lending. The cost of financing are still low, and there, the room is quite limited.

I was mentioning that a quarter ago that in SCB, we have longer maturity and the process may be postponed to the first quarter 2021. And this is also reflected in quarter 4 2020. When it comes to NIM, the most important [ unknowns ] remain unchanged. The scale of demand for credit or the scale of actions regarding the PFR, all that influences the liquidity. The demand for credit influences net interest margin. And this is what Michal has said in the context of the performance of the quarter 4.

[Agnieszka Dowzycka, executive]

Now about the Swiss franc. Michal, will you outline this?

[Michal Gajewski, executive]

Well, we are at the table, and we are talking about it. Our representative take part in the work of all the streams. Of course, the key risks relate to legal aspect. This is a portfolio, which in the case of our bank, has been repaying nicely. It's of good quality, but we realize and appreciate the legal risks in place. There are also legal risks attached to the KNF proposal. That's why we are in the dialogue and an attempt to find solutions, which would mitigate the risks as much as possible. We are at the table. We are in the course of talks. We are trying to find a solution.

Definitely, we have to run a survey among our clients so that we know exactly what we can and what we are going to propose. We're going to also run a pilot. Just like other banks, we think that the decision is serious enough. And if we decide for that, we would like to have a decision of our annual general meeting for that. Today, it's premature to talk about us joining the program.

We have to have the results of the survey of the pilot. And finally, we have to have the decision of the Supreme Court. And we need the decisions of the experts towards deciding on that. Once we have the 3 elements, we will be able to make our calculations on the individual scenarios. And depending on the outcome and the impact, then we will be able to decide whether we would like to recommend it to shareholders or not. But it's -- but we need time before we take this decision.

When it comes to lawsuits, in Swiss franc cases, as Maciej has mentioned, we would like to refer you to the annual financial statements and the report. We have some provisions there, which stems from the general situation in the market. I don't know whether there is anything else.

[Agnieszka Dowzycka, executive]

There is a question regarding the risk of charge. The risk charge. The question is whether -- what influenced the increase in credit provisions?

[Michal Gajewski, executive]

We need to remember that the COVID provision is the post-model adjustment. There is no doubt about the fact that COVID and the economic situation influenced the level of provisions. If we exclude the extra provision that is out of the model, it does not mean that the remaining provisions are not influenced by the pandemic. The factors that have been affected most severely, I think that it is easy to say that this was hotels, property, and these were the most affected ones.

[Agnieszka Dowzycka, executive]

When it comes to moratoria, how many -- how many of provisions are there under the statutory?

[Maciej Reluga, executive]

This was PLN 250 million of Shield 4.0. And I think that it will be key to see what will happen in the nearest future. When it comes to non legislative element, on the small part of the portfolio, we have a high rate increase in risk. But looking at the entire share of loans, the overdues exceeding 30 days per due, excluding the exposures that were under moratoria are lower than last -- last year. So which means that the scale is similar on the entire portfolio.

[Michal Gajewski, executive]

There is also a question referring to the SCB provision for collective redundancies. And about the answer -- and the question is about whether this is another restructuring stage? Yes. When it comes to the detailed data for Swiss franc cases and the provisions for that that's already been covered. There is the question about the criteria per dividend. Well, we've already mentioned that. But we said that just like for the sector is about the value.

[Maciej Reluga, executive]

Well, are there any other questions about operating costs? Yes, there was a question about operating costs. Well, of course, we continue our saving programs. But they are not so wide scaling as to put on hold our growth. Of course, we are more focused on further development of remote channels. But when it comes to operating cost, we have some ideas and we've learned some lessons this year during pandemic. When it comes to the space -- office space we use and how we can optimize it and also the hybrid work of model. I don't want to go into details now, but all that makes up for better cost efficiency. And we expect that in 2021, we will be able to see effects of that.

[Agnieszka Dowzycka, executive]

There's also a question when the effects of manpower restructuring will be visible in 2021 or '22?

[Maciej Reluga, executive]

Well, in '22, we will see more effects, but in 2021, we'll see some results. Talking about costs, apart from all these things that we will continue our cost-saving initiatives. We also know that there are a couple of elements impacting the cost that are difficult to forecast like BFG or the uncertainty related to foreign currency loans. Excluding that, the guidance could be that cost in 2021 should be lower than in 2020, excluding these additional elements that I have mentioned.

We've been working on improving our mortgage process. We sell more and more loans at the fixed rate. And when it comes to the market share, we are maintaining it. We can see that when it comes to the new sales, it is a little bit under pressure, but it is a very important product for us. As I said, we have more and more of these loans sold at a fixed rate.

[Michal Gajewski, executive]

Agnieszka, is there any -- anything else?

[Agnieszka Dowzycka, executive]

Yes, I have just received some questions. Outlook, the key income in 2022 -- fee income. Then a question regarding Swiss francs in the Supreme Court, why do we have to accelerate the decision?

The date provided by the Supreme Court makes us accelerate our work. This is the quotation from

press agency.

Next question, what is your objective regarding the branch network? And these are all the questions.

[Michal Gajewski, executive]

Okay. So we are still optimizing the branch network. We are monitoring the trends. We are monitoring what is happening on a high street. We are monitoring the number of customers and what is happening in big cities.

We also have franchise programs in place and they have been launched. They are already in place. So this is something that we continuously have on our agenda. We are optimizing our works. So we have many initiatives in the pipeline. We have many digital end-to-end processes. The customer is very rarely needed to come to the branch. Everything, almost everything is possible to be done digitally. So it will influence the footfall at branches.

Our strategy is an omnichannel strategy. Of course, we want to keep our market share at branches, but not necessarily at that high scale. When it comes to the quotation of press agency, this is about the acceleration of launching the survey accelerating works in this scenario and the conclusion of works within streams because we have to have the data in order to be able to make some decisions.

I was not mentioning acceleration of the decision-making process, but acceleration of collecting the data that is necessary to be able to do that, to recommend the certain scenarios. We know that is there are certain banks that have already prepared their survey. They have previously made some calculations because they had access to some data earlier than us. We still don't have this data that we need. And we need this data to be able to offer some solution to the shareholders, but we are working on that.

[Agnieszka Dowzycka, executive]

There was Swiss francs branches and fees. Okay. So what is the guidance for the increase on in fees?

[Michal Gajewski, executive]

If we were to offer something, this would be mid-single-digit growth.

[Agnieszka Dowzycka, executive]

Okay. I have no more questions. All right. We don't have any questions as well. So thank you for the presentation. Thank you for the attendance. And remember that we're always happy to take any questions. Please send any questions to my email box. The annual report will be published on the 23rd of February. So in almost 3 weeks this time. Thank you for the attendance, and talk to you next time.